As filed with the Securities and Exchange Commission on May 1, 1996.
1933 Act File No. 33-12092
1940 Act File No. 811-5029
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No: [ ]
Post-Effective Amendment No: 24 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 23
LEGG MASON INCOME TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
111 South Calvert Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO ARTHUR C. DELIBERT, ESQ.
111 South Calvert Street Kirkpatrick & Lockhart LLP
Baltimore, Maryland 21202 1800 Massachusetts Ave., N.W.
(Name and Address of Second Floor
Agent for Service) Washington, D.C. 20036-1800
It is proposed that this filing will become effective:
[X] immediately upon filing pursuant to Rule 485(b)
[ ] on May 1, 1996 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on , 1996 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on , 1996 pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment
Company Act of 1940 and filed the notice required by such Rule for its most
recent fiscal year on February 29, 1996.
<PAGE>
Legg Mason Income Trust, Inc.
Contents of Registration Statement
This registration statement consists of the following papers and documents.
Cover Sheet
Table of Contents
Cross Reference Sheets
Legg Mason U. S. Government Intermediate-Term Portfolio - Primary Shares
Legg Mason Investment Grade Income Portfolio -- Primary Shares
Legg Mason High Yield Portfolio -- Primary Shares
Legg Mason U.S. Government Money Market Portfolio -- Primary Shares
Part A - Prospectus
Navigator U.S. Government Intermediate-Term Portfolio
Navigator Investment Grade Income Portfolio
Navigator High Yield Portfolio
Part A - Prospectus
Legg Mason U. S. Government Intermediate-Term Portfolio
Legg Mason Investment Grade Income Portfolio
Legg Mason High Yield Portfolio
(Primary Shares and Navigator Shares)
Legg Mason U.S. Government Money Market Portfolio
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
Legg Mason Income Trust, Inc.
Legg Mason U. S. Government Intermediate-Term Portfolio - Primary Shares
Legg Mason Investment Grade Income Portfolio - Primary Shares
Legg Mason High Yield Portfolio - Primary Shares
Legg Mason U.S. Government Money Market Portfolio - Primary Shares
Form N-1A Cross Reference Sheet
Part A Item No. Prospectus Caption
1 Cover Page
2 Prospectus Highlights;
Expenses
3 Financial Highlights;
Performance Information
4 Investment Objectives and Policies;
Description of the Corporation and Its Shares
5 Expenses;
Dividends and Other Distributions;
The Corporation's Board of Directors, Manager
and Investment Adviser;
The Funds' Distributor
6 Prospectus Highlights;
Dividends and Other Distributions;
Shareholder Services;
Tax Treatment of Dividends and Other
Distributions;
How Your Shareholder Account Is Maintained;
Description of the Corporation and Its Shares
7 How You Can Invest In the Funds;
How Your Shareholder Account Is Maintained;
How Net Asset Value Is Determined;
The Funds' Distributor;
Investing Through Tax-Deferred Retirement Plans
8 How You Can Redeem Your Primary Shares
9 Not Applicable
<PAGE>
Legg Mason Income Trust, Inc.
Navigator U. S. Government Intermediate-Term Portfolio
Navigator Investment Grade Income Portfolio
Navigator High Yield Portfolio
Form N-1A Cross Reference Sheet
Part A Item No. Prospectus Caption
1 Cover Page
2 Expenses
3 Financial Highlights;
Performance Information
4 Investment Objectives and Policies;
Description of the Corporation and Its Shares
5 Expenses;
Dividends and Other Distributions;
The Corporation's Board of Directors, Manager
and Investment Adviser;
The Funds' Distributor
6 Dividends and Other Distributions;
Shareholder Services;
Tax Treatment of Dividends and Other
Distributions;
How Shareholder Accounts are Maintained;
Description of the Corporation and Its Shares
7 How To Purchase and Redeem Shares;
How Shareholder Accounts are Maintained;
How Net Asset Value Is Determined;
The Funds' Distributor;
8 How To Purchase and Redeem Shares
9 Not Applicable
<PAGE>
Legg Mason Income Trust, Inc.
Legg Mason U. S. Government Intermediate-Term Portfolio
Legg Mason Investment Grade Income Portfolio
Legg Mason High Yield Portfolio
(Primary Shares and Navigator Shares)
Legg Mason U.S. Government Money Market Portfolio
Form N-1A Cross Reference Sheet
Statement of Additional
Part B Item No. Information Caption
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Additional Information About Investment
Limitations and Policies;
Portfolio Transactions and Brokerage
14 The Corporation's Directors and Officers
15 The Corporation's Directors and Officers
16 Management Agreement;
Investment Advisory Agreement;
The Funds' Distributor;
The Corporation's Independent Accountants;
The Funds' Custodian and Transfer and
Dividend-Disbursing Agent
17 Portfolio Transactions and Brokerage
18 Not Applicable
19 Valuation of Fund Shares;
Additional Purchase and Redemption Information
20 Additional Tax Information;
Tax-Deferred Retirement Plans
21 Portfolio Transactions and Brokerage;
The Funds' Distributor;
The Funds' Custodian and Transfer and
Dividend-Disbursing Agent
22 Performance Information
23 Financial Statements
<PAGE>
TABLE OF CONTENTS
Prospectus Highlights 2
Expenses 4
Financial Highlights 5
Performance Information 9
Investment Objectives and Policies 10
How You Can Invest in the Funds 21
How Your Shareholder Account is Maintained 23
How You Can Redeem Your Primary Shares 24
How Net Asset Value is Determined 26
Dividends and Other Distributions 26
Tax Treatment of Dividends and Other Distributions 27
Shareholder Services 28
Investing Through Tax-Deferred Retirement Plans 30
The Corporation's Board of Directors, Manager and
Investment Adviser 30
The Funds' Distributor 31
Description of the Corporation and its Shares 32
Appendix 34
ADDRESSES
DISTRIBUTOR:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000 800 (Bullet) 822 (Bullet) 5544
TRANSFER AND SHAREHOLDER SERVICING AGENT:
Boston Financial Data Services
P.O. Box 953
Boston, MA 02103
COUNSEL:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, DC 20036-1800
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P.
217 East Redwood Street, Baltimore, MD 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 ANY FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY ANY FUND OR BY THE PRINCIPAL UNDERWRITER IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
(Recycled Logo) PRINTED ON RECYCLED PAPER
LMF-025
LEGG MASON
INCOME
TRUST, INC.
GOVERNMENT INTERMEDIATE
INVESTMENT GRADE
HIGH YIELD
GOVERNMENT MONEY MARKET
PRIMARY SHARES
PUTTING YOUR FUTURE FIRST
PROSPECTUS
May 1, 1996
(Legg Mason Logo)
<PAGE>
LEGG MASON INCOME TRUST, INC. -- PRIMARY SHARES
LEGG MASON U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
LEGG MASON INVESTMENT GRADE INCOME PORTFOLIO
LEGG MASON HIGH YIELD PORTFOLIO
LEGG MASON U.S. GOVERNMENT MONEY MARKET PORTFOLIO
This Prospectus sets forth concisely the information about the funds
that a prospective investor ought to know before investing. It should be
read and retained for future reference. A Statement of Additional
Information about the funds dated May 1, 1996 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 the
funds' distributor, Legg Mason Wood Walker, Incorporated ("Legg Mason")
(address and telephone numbers listed below).
LEGG MASON U.S. GOVERNMENT MONEY MARKET PORTFOLIO IS A MONEY MARKET
FUND; LEGG MASON U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO, LEGG MASON
INVESTMENT GRADE INCOME PORTFOLIO AND LEGG MASON HIGH YIELD PORTFOLIO ARE
BOND FUNDS. A MAJORITY OF LEGG MASON HIGH YIELD PORTFOLIO'S TOTAL ASSETS
WILL BE INVESTED IN LOWER-RATED, FIXED-INCOME SECURITIES (INCLUDING THOSE
COMMONLY KNOWN AS "JUNK BONDS"). IN ADDITION TO OTHER RISKS, THESE BONDS
ARE SUBJECT TO GREATER FLUCTUATIONS IN VALUE AND RISK OF LOSS OF INCOME AND
PRINCIPAL DUE TO DEFAULT BY THE ISSUER THAN ARE HIGHER-RATED BONDS;
THEREFORE, INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THIS FUND.
LEGG MASON U.S. GOVERNMENT MONEY MARKET PORTFOLIO ATTEMPTS TO STABILIZE
THE VALUE OF ITS SHARES AT $1.00. AN INVESTMENT IN THIS FUND IS NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE
THAT THIS FUND WILL ALWAYS BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE.
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.
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.
PROSPECTUS
May 1, 1996
Legg Mason Wood Walker, Inc.
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
<PAGE>
PROSPECTUS HIGHLIGHTS
The following summary is qualified in its entirety by the more
detailed information appearing in the body of this Prospectus and in the
Statement of Additional Information.
The Legg Mason Income Trust, Inc. ("Corporation") is a diversified
open-end management investment company which currently has four
portfolios: The Legg Mason U.S. Government Intermediate-Term Portfolio
("Government Intermediate"), The Legg Mason Investment Grade Income
Portfolio ("Investment Grade"), The Legg Mason High Yield Portfolio (
"High Yield") and The Legg Mason U.S. Government Money Market Portfolio
("Government Money Market") (each separately referred to as a "Fund" and
collectively referred to as the "Funds").
GOVERNMENT INTERMEDIATE is a professionally managed portfolio seeking
to provide investors with high current income consistent with prudent
investment risk and liquidity needs. In seeking to achieve the Fund's
objective, the Corporation'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 Adviser believes that shares of the Fund may be appropriate both
for direct investment and for investment by Individual Retirement Accounts
and other qualified retirement plans. The value of the debt instruments
held by the Fund, and thus the net asset value of Fund shares, generally
fluctuates inversely with movements in market interest rates. Certain
investment-grade debt securities in which the Fund invests may have
speculative characteristics. The Fund's participation in hedging and
option income strategies also involves certain investment risks and
transaction costs.
INVESTMENT GRADE is a professionally managed portfolio seeking to
provide investors with a high level of current income through investment
in a diversified portfolio of debt securities. In seeking to achieve the
Fund's objective, the Adviser, under normal circumstances, invests
primarily in debt securities which the Adviser considers to be of
investment grade, i.e., securities rated within the four highest grades by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's ("S&P"),
securities comparably rated by another nationally recognized statistical
rating organization ("NRSRO"), or unrated securities judged by the Adviser
to be of comparable quality.
The Adviser believes that shares of the Fund may be appropriate both
for direct investment and for investment in Individual Retirement Accounts
and other qualified retirement plans.
The value of the debt instruments held by the Fund, and thus the net
asset value of Fund shares, generally fluctuates inversely with movements
in market interest rates. Certain investment grade debt securities in
which the Fund invests may have specualtive characteristics. The Fund may
invest up to 25% of its assets in debt securities rated below
investment-grade, commonly known as "junk bonds." Such securities are
considered speculative and involve increased risk of exposure to adverse
business and economic conditions. The Fund's participation in hedging and
option income strategies also involves certain investment risks and
transaction costs.
HIGH YIELD is a professionally managed portfolio seeking to provide
investors with a high level of current income. As a secondary objective,
the Fund seeks capital appreciation. In seeking to achieve the Fund's
objectives, the Adviser, under normal circumstances, invests at least 65%
of the Fund's total assets in high yield, fixed-income securities
(including those commonly known as "junk bonds"). Such securities are
considered speculative and involve increased risk of exposure to adverse
business and economic conditions. The value of debt instruments held by
the Fund, and thus the net asset value of Fund shares, also generally
fluctuate inversely with movements in market interest rates.
The Fund may invest up to 25% of its total assets in foreign
securities. Investment in foreign securities entails certain additional
risks, including risks arising from currency fluctuation, accounting
systems and disclosure regulations that differ from those in the U.S., and
political and economic changes in foreign countries. The Fund may have
2
<PAGE>
limited recourse against a foreign governmental issuer in the event of a
default. The Fund's participation in hedging and option income strategies
also involves certain risks. See page 20.
The Fund may invest up to 25% of its total assets in securities
restricted as to their disposition, which may include securities for which
the Fund believes there is a liquid market. No more than 15% of the Fund's
net assets will be invested in securities deemed by the Fund to be
illiquid.
An investment in the Fund does not constitute a complete investment
program and is not appropriate for persons unwilling or unable to assume a
high degree of risk.
GOVERNMENT MONEY MARKET is a professionally managed portfolio seeking
to obtain high current income consistent with liquidity and conservation
of principal. In seeking to achieve the Fund's objective, the Adviser
invests the Fund's assets in debt obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, and in repurchase
agreements secured by such instruments.
The Adviser believes that shares of the Fund may be appropriate both
for direct investment and for investment through Individual Retirement
Accounts and qualified retirement plans.
Of course, there can be no assurance that any Fund will achieve its
objective. See "Investment Objectives and Policies," page 10.
Government Intermediate, Investment Grade and High Yield each offers
two classes of shares -- Primary Class ( "Primary Shares") and Navigator
Class ("Navigator Shares"). Government Money Market offers only one class
of shares.
Primary Shares offered in this Prospectus are available to all
investors except certain institutions (see page 5). No initial sales
charge is payable on purchases, and no redemption charge is payable on
sales of the Funds' shares. Each Fund pays management fees to its Manager,
Legg Mason Fund Adviser, Inc. ("Manager"), and each Fund except Government
Money Market pays distribution fees with respect to Primary Shares to its
Distributor, Legg Mason, as described on pages 30-32 of this Prospectus.
DISTRIBUTOR:
Legg Mason Wood Walker, Incorporated
MANAGER AND ADVISER:
Legg Mason Fund Adviser, Inc. serves as each Fund's manager, and
Western Asset Management Company serves as investment adviser to each
Fund.
INITIAL PURCHASE:
$1,000 minimum, generally.
SUBSEQUENT PURCHASES:
$100 minimum, generally, except for Government Money Market which has
a $500 minimum, generally.
PURCHASE METHODS:
Send bank/personal check or wire federal funds. See "How You Can
Invest in the Funds," page 21.
PUBLIC OFFERING PRICE PER SHARE:
Net asset value. Government Money Market seeks to maintain its net
asset value at $1.00 per share.
CHECKWRITING:
Available to qualified shareholders of Government Money Market upon
request. Unlimited number of checks. Minimum amount per check: $500.
EXCHANGE PRIVILEGE:
All funds in the Legg Mason Family of Funds. See "Exchange Privilege,"
page 29.
DIVIDENDS:
Declared daily and paid monthly for Government Intermediate,
Investment Grade and Government Money Market. Declared and paid monthly
for High Yield.
REINVESTMENT:
All dividends and/or other distributions are automatically reinvested
unless cash payments are requested.
3
<PAGE>
EXPENSES
The purpose of the following table is to assist an investor in
understanding the various costs and expenses that an investor in Primary
Shares of a Fund will bear directly or indirectly. The expenses and fees
set forth in the table are based on average net assets and annual Fund
operating expenses related to Primary Shares for the year ended December
31, 1995, adjusted for current expense and fee waiver levels.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES -- PRIMARY SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
GOVERNMENT
GOVERNMENT INVESTMENT HIGH MONEY
INTERMEDIATE(A) GRADE(A) YIELD MARKET
<S> <C> <C> <C> <C>
Management fees 0.29% 0.19% 0.65% 0.50%
12b-1 fees 0.50% 0.50% 0.50% None
Other expenses 0.19% 0.28% 0.32% 0.17%
Total operating
expenses 0.98%(B) 0.97%(B) 1.47% 0.67%
</TABLE>
(A) The expense ratio at December 31, 1995 for Primary Shares of Government
Intermediate and Investment Grade would have been 1.24% and 1.38%,
respectively, had the Funds' Manager not agreed to waive fees. The
reimbursement agreement, wherein the Manager has agreed to continue to
waive fees and/or assume other expenses to the extent the expenses
attributable to Primary Shares (exclusive of taxes, interest, brokerage
and extraordinary expenses) exceed during any month an annual rate of
1.00% of average daily net assets for such month, will remain in effect
until the earlier of December 31, 1996, or, with respect to Government
Intermediate, until its net assets reach $400 million, and with respect
to Investment Grade, until its net assets reach $100 million, and
unless extended will terminate on that date.
(B) The expense information in the table has been restated to reflect
current fees.
Because each Fund (except Government Money Market) pays a 12b-1 fee
with respect to Primary Shares, long-term shareholders in Primary Shares
may pay more in distribution expenses than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. ("NASD"). For further information concerning the
Funds' expenses, see "The Corporation's Board of Directors, Manager and
Investment Adviser," page 30.
EXAMPLE
The following example illustrates the expenses that you would pay on a
$1,000 investment in Primary Shares 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 prior table, the Funds charge no redemption fees
of any kind.
<TABLE>
<CAPTION>
GOVERNMENT
GOVERNMENT INVESTMENT HIGH MONEY
INTERMEDIATE GRADE YIELD MARKET
<S> <C> <C> <C> <C>
1 Year $ 10 $ 10 $ 15 $ 7
3 Years $ 31 $ 31 $ 46 $21
5 Years $ 54 $ 54 $ 80 $37
10 Years $120 $119 $176 $83
</TABLE>
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under "Annual Fund
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 PRIMARY SHARES OF THE FUNDS. THE
ABOVE TABLES AND EXAMPLES SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. The actual expenses attributable to Primary Shares will depend
upon, among other things, the level of average net assets, the levels of
sales and redemptions of shares, the extent to which the Manager and/or
Legg Mason waive their fees and reimburse all or a portion of a Fund's
expenses and the extent to which Primary Shares incur variable expenses,
such as transfer agency costs.
4
<PAGE>
FINANCIAL HIGHLIGHTS
Government Intermediate, Investment Grade and High Yield each offers
two classes of shares, Primary Shares and Navigator Shares. Government
Money Market offers only one class of shares. Navigator Shares are
currently offered for sale only to institutional clients of the Fairfield
Group, Inc. ("Fairfield") for investment of their own monies and monies for
which they act in a fiduciary capacity, to clients of Legg Mason Trust
Company ("Trust Company") for which Trust Company exercises discretionary
investment management responsibility, 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 pay
no 12b-1 distribution fees and may pay lower transfer agency fees. The
information for Primary Shares reflects the 12b-1 fees paid by that Class.
The financial highlights tables that follow have been derived from each
Fund's financial statements which have been audited by Coopers & Lybrand
L.L.P., independent accountants. Each Fund's financial statements for the
year ended December 31, 1995 and the report of Coopers & Lybrand L.L.P.
thereon are included in each respective Fund's Annual Report to
Shareholders and are incorporated by reference in the Statement of
Additional Information. The annual report is available to shareholders
without charge by calling your Legg Mason or affiliated investment
executive or Legg Mason's Funds Marketing Department at 800-822-5544.
GOVERNMENT INTERMEDIATE
<TABLE>
<CAPTION>
NAVIGATOR
CLASS PRIMARY CLASS
Years Ended December 31, 1995 1994(B) 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of period $9.72 $9.72 $9.72 $10.43 $10.70 $10.77
Net investment income 0.62(C) 0.05(C) 0.57(D) 0.51(D) 0.53(D) 0.60(D)
Net realized and unrealized
gain (loss) on
investments, options and
futures 0.75 -- 0.75 (0.71) 0.17 0.05
Total from investment
operations 1.37 0.05 1.32 (0.20) 0.70 0.65
Distributions to
shareholders:
Net investment income (0.62) (0.05) (0.57) (0.51) (0.53) (0.60)
Net realized gain -- -- -- -- (0.39) (0.12)
In excess of net realized
gain on investments -- -- -- -- (0.05) --
Total distributions (0.62) (0.05) (0.57) (0.51) (0.97) (0.72)
Net asset value, end of
period $10.47 $9.72 $10.47 $9.72 $10.43 $10.70
Total return(E) 14.5% 0.50% 13.9% (1.9)% 6.6% 6.3%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net
assets:
Expenses 0.4%(C) 0.4%(C,F) 0.9%(D,G) 0.9%(D,G) 0.9(D,G) 0.9%(D,G)
Net investment income 6.1%(C) 6.4%(C,F) 5.6%(D) 5.1%(D) 4.8%(D) 5.5%(D)
Portfolio turnover rate 289.9% 315.7% 289.9% 315.7% 490.2% 512.6%
Net assets, end of period
(in thousands) $4,184 $4,024 $231,886 $231,255 $299,529 $307,320
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1991 1990 1989 1988 1987(A)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of period $10.29 $10.20 $9.79 $9.92 $10.00
Net investment income 0.72(D) 0.78(D) 0.80(D) 0.74(D) 0.30(D)
Net realized and unrealized
gain (loss) on
investments, options and
futures 0.70 0.09 0.41 (0.12) (0.08)
Total from investment
operations 1.42 0.87 1.21 0.62 0.22
Distributions to
shareholders:
Net investment income (0.72) (0.78) (0.80) (0.74) (0.30)
Net realized gain (0.22) -- -- (0.01) --
In excess of net realized
gain on investments -- -- -- -- --
Total distributions (0.94) (0.78) (0.80) (0.75) (0.30)
Net asset value, end of
period $10.77 $10.29 $10.20 $9.79 $9.92
Total return(E) 14.4% 9.1% 12.8% 6.4% 2.2%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net
assets:
Expenses 0.8%(D,G) 0.6%(D,G) 0.8%(D,G) 1.0%(D,G) 1.0%(D,F,G)
Net investment income 6.7%(D) 7.7%(D) 7.9%(D) 7.4%(D) 7.4%(D,F)
Portfolio turnover rate 642.8% 67.0% 57.3% 132.5% 66.3%(F)
Net assets, end of period
(in thousands) $211,627 $74,423 $43,051 $27,087 $16,617
</TABLE>
(A) FOR THE PERIOD AUGUST 7, 1987 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1987.
(B) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR
SHARES) TO DECEMBER 31, 1994.
(C) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE MANAGER FOR EXPENSES IN
EXCESS OF VOLUNTARY LIMITATIONS AS FOLLOWS: 0.4% UNTIL APRIL 30, 1995;
0.45% UNTIL APRIL 30, 1996; AND 0.50% UNTIL DECEMBER 31, 1996.
(D) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE MANAGER FOR EXPENSES IN
EXCESS OF VOLUNTARY 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; 0.9% UNTIL APRIL 30, 1995; 0.95% UNTIL APRIL 30, 1996; AND
1.00% UNTIL DECEMBER 31, 1996.
(E) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(F) ANNUALIZED.
(G) INCLUDES DISTRIBUTION FEE OF 0.5%.
5
<PAGE>
INVESTMENT GRADE
<TABLE>
<CAPTION>
NAVIGATOR
CLASS PRIMARY CLASS
Years Ended December 31,
1995(B) 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of period $10.32 $9.27 $10.40 $10.71 $10.71 $9.97 $10.29
Net investment income 0.03(C) 0.65(D) 0.60(D) 0.62(D) 0.66(D) 0.76(D) 0.84(D)
Net realized and unrealized
gain (loss) on investments,
options and futures 0.12 1.17 (1.09) 0.33 0.25 0.77 (0.28)
Total from investment
operations 0.15 1.82 (0.49) 0.95 0.91 1.53 0.56
Distributions to shareholders
from:
Net investment income (0.03) (0.65) (0.60) (0.62) (0.66) (0.76) (0.84)
Net realized gain on
investments -- -- (0.04) (0.63) (0.25) (0.03) (0.04)
In excess of net realized
gain on investments -- -- -- (0.01) -- -- --
Total distributions (0.03) (0.65) (0.64) (1.26) (0.91) (0.79) (0.88)
Net asset value, end of
period $10.44 $10.44 $9.27 $10.40 $10.71 $10.71 $9.97
Total return(E) 1.4% 20.1% (4.8)% 11.2% 6.8% 16.0% 5.8%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 0.4%(C,F) 0.88%(D,G) 0.85%(D,G) 0.85%(D,G) 0.85%(D,G) 0.71%(D,G) 0.50%(D,G)
Net investment income 6.7%(C,F) 6.5%(D) 6.1%(D) 5.6%(D) 6.1%(D) 7.3%(D) 8.3%(D)
Portfolio turnover rate 221.1% 221.1% 200.1% 348.2% 316.7% 212.5% 54.9%
Net assets, end of
period (in thousands) $249 $85,633 $66,196 $68,781 $48,033 $36,498 $22,994
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1989 1988 1987(A)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of period $9.88 $9.94 $10.00
Net investment income 0.82(D) 0.78(D) 0.31(D)
Net realized and unrealized
gain (loss) on investments,
options and futures 0.41 (0.035) (0.06)
Total from investment
operations 1.23 0.745 0.25
Distributions to shareholders
from:
Net investment income (0.82) (0.78) (0.31)
Net realized gain on
investments -- (0.025) --
In excess of net realized
gain on investments -- -- --
Total distributions (0.82) (0.805) (0.31)
Net asset value, end of
period $10.29 $9.88 $9.94
Total return(E) 13.0% 7.7% 2.6%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 0.82%(D,G) 1.00%(D,G) 1.00%(D,F,G)
Net investment income 8.1%(D) 7.7%(D) 7.8%(D,F)
Portfolio turnover rate 92.4% 146.3% 72.4%(F)
Net assets, end of
period (in thousands) $13,891 $9,913 $5,661
</TABLE>
(A) FOR THE PERIOD AUGUST 7, 1987 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1987.
(B) FOR THE PERIOD DECEMBER 1, 1995 (COMMENCEMENT OF SALE OF NAVIGATOR
SHARES) TO DECEMBER 31, 1995.
(C) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE MANAGER FOR EXPENSES IN
EXCESS OF VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: 0.40% UNTIL APRIL 30,
1996; AND 0.50% UNTIL DECEMBER 31, 1996.
(D) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE MANAGER FOR EXPENSES IN
EXCESS OF VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: 1.0% UNTIL SEPTEMBER
10, 1989; 0.5% UNTIL DECEMBER 31, 1990; 0.65% UNTIL APRIL 30, 1991; 0.7%
UNTIL OCTOBER 31, 1991; 0.8% UNTIL DECEMBER 31, 1991; 0.85% UNTIL APRIL
30, 1995; 0.9% UNTIL APRIL 30, 1996 AND 1.00% UNTIL DECEMBER 31, 1996.
(E) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(F) ANNUALIZED.
(G) INCLUDES DISTRIBUTION FEE OF 0.5%.
6
<PAGE>
HIGH YIELD
<TABLE>
<CAPTION>
PRIMARY CLASS
Years Ended December 31, 1995 1994(A)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $13.57 $15.00
Net investment income 1.29 1.02
Net realized and unrealized gain (loss) on investments 1.05 (1.44)
Total from investment operations 2.34 (.42)
Distributions to shareholders from net investment income (1.29) (1.01)
Net asset value, end of period $14.62 $13.57
Total return(B) 18.01% (2.90)%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 1.5% 1.6%(C)
Net investment income 9.3% 8.4%(C)
Portfolio turnover rate 47.4% 67.4%(C)
Net assets, end of period (in thousands) $108,417 $53,424
</TABLE>
(A) FOR THE PERIOD FEBRUARY 1, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1994.
(B) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(C) ANNUALIZED.
7
<PAGE>
GOVERNMENT MONEY MARKET
<TABLE>
<CAPTION>
PRIMARY CLASS
Years Ended December 31, 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income .05 .04 .03 .03 .05
Net realized gain (loss) on
investments NIL (NIL) -- -- NIL
Total from investment
operations .05 .04 .03 .03 .05
Dividends paid from:
Net investment income (.05) (.04) (.03) (.03) (.05)
Realized gain on investments -- -- -- -- (NIL)
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
Total return 5.31% 3.66% 2.80% 3.49% 5.87%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses .67% .69% .71% .73% .73%
Net investment income 5.17% 3.66% 2.76% 3.45% 5.36%
Net assets, end of period (in
thousands) $316,646 $214,576 $172,533 $170,910 $180,733
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1990 1989(A)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $1.00 $1.00
Net investment income .07 .08(B)
Net realized gain (loss) on
investments -- --
Total from investment
operations .07 .08
Dividends paid from:
Net investment income (.07) (.08)
Realized gain on investments -- --
Net asset value, end of period $1.00 $1.00
Total return 7.56% 8.68%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses .81% .80%(B,C)
Net investment income 7.29% 8.35%(C)
Net assets, end of period (in
thousands) $132,408 $87,958
</TABLE>
(A) FOR THE PERIOD JANUARY 31, 1989 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1989.
(B) NET OF FEES WAIVED BY THE MANAGER FOR EXPENSES IN EXCESS OF THE FOLLOWING
ANNUAL RATES: 0.50% THROUGH MARCH 28, 1989; 0.75% THROUGH JUNE 30, 1989;
AND 0.85% THROUGH DECEMBER 31, 1989.
(C) ANNUALIZED.
8
<PAGE>
PERFORMANCE INFORMATION
From time to time each bond 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 performances only 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 as of December 31, 1995 were as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL GOVERNMENT INVESTMENT HIGH
RETURN INTERMEDIATE GRADE YIELD
<S> <C> <C> <C>
Primary Class:
One Year +13.88% +20.14% +18.01%
Five Years +44.74% +57.52% N/A
Life of Class +93.68%(A) +107.93%(A)+14.60%(B)
Navigator Class:
One Year +14.45% N/A N/A
Life of Class +15.02%(C) +1.42%(D) N/A
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL GOVERNMENT INVESTMENT HIGH
TOTAL RETURN INTERMEDIATE GRADE YIELD
<S> <C> <C> <C>
Primary Class:
One Year +13.88% +20.14% +18.01%
Five Years +7.68% +9.51% N/A
Life of Class +8.18%(A) +9.10%(A) +7.38%(B)
Navigator Class:
One Year +14.45% N/A N/A
Life of Class +13.81%(C) N/A N/A
</TABLE>
(A) Inception of Government Intermediate and Investment Grade -- August 7,
1987.
(B) Inception of High Yield -- February 1, 1994.
(C) For the period December 1, 1994 (commencement of sale of Navigator
Shares) to December 31, 1995.
(D) For the period December 1, 1995 (commencement of sale of Navigator
Shares) to December 31, 1995.
No adjustment has been made for any income taxes payable by
shareholders. The investment return of each Fund will fluctuate. The
principal value of an investment in each Fund (except Government Money
Market) will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Returns of Government
Intermediate and Investment Grade would have been lower if the Manager had
not waived/reimbursed certain fees and expenses during the fiscal years
1987 through 1995.
Further information about each Fund's performance is contained in the
respective Annual Report to Shareholders, which may be obtained without
charge by calling your Legg Mason or affiliated investment executive or
Legg Mason's Funds Marketing Department at 800-822-5544.
GOVERNMENT INTERMEDIATE, INVESTMENT GRADE AND HIGH YIELD:
Each 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.
GOVERNMENT MONEY MARKET:
From time to time, the Fund may quote its yield, including a compound
effective yield, in advertisements or in reports or other communications
to shareholders. The Fund's "yield" refers to the income generated by an
investment in the Fund over a stated seven-day period. This income is then
"annualized." That is, the average daily net income generated by the
investment during that week is assumed to be generated each day over a
365-day period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but assumes that the income
earned by an investment is reinvested. The Fund's effective yield will be
slightly higher than the Fund's yield because of the compounding effect of
this assumed reinvestment.
Yield information may be useful in reviewing the Fund's performance
and providing a basis for comparison with other investment alternatives.
However, the Fund's yield may change in response to fluctuations in
interest rates and Fund expenses. Past performance is not a guarantee of
future performance.
The Fund's yield for the seven-day period ended December 31, 1995 was
4.95%. The effective yield for the same period was 5.07%.
9
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Corporation's
Board of Directors without a shareholder vote. There can be no assurance
that any Fund will achieve its investment objective.
GOVERNMENT INTERMEDIATE'S investment objective is to provide investors
with high current income consistent with prudent investment risk and
liquidity needs. 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. 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 as market interest rates change. Investments in
mortgage-related securities issued by governmental or government-related
entities, as described on page 15, 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 S&P (AAA, AA, A or
BBB) or Moody's (Aaa, Aa, A or Baa), securities comparably rated by
another NRSRO, 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 ratings is included in the Appendix to this Prospectus.
INVESTMENT GRADE'S investment objective is to provide investors with a
high level of current income through investment in a diversified portfolio
of debt securities. In seeking to achieve its objective, the Fund invests
primarily in debt securities which the Adviser considers to be of
investment grade, of which some may be privately placed and some may have
equity features.
In pursuing its objective, under normal circumstances, the Fund
invests at least 75% of its total assets in the following types of
investment-grade interest-bearing debt securities:
(1) debt securities which are rated at the time of purchase within the
four highest grades assigned by Moody's or S&P, or, if unrated by Moody's
or S&P, judged by the Adviser to be of comparable quality.
(2) securities of, or guaranteed by, the U.S. government, its agencies
or instrumentalities.
(3) commercial paper and other money market instruments which are
rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's at the date of
investment, or if unrated by Moody's or S&P, judged by the Adviser to have
investment quality comparable to securities which may be purchased under
item (1); bank certificates of deposit; and bankers' acceptances.
The remainder of the Fund's assets, not in excess of 25% of its total
assets, may be invested in: (1) debt securities of issuers which are rated
at the time of purchase below Moody's and S&P's four highest grades, but
rated B or better by Moody's or S&P, or if unrated by Moody's or S&P,
judged by the Adviser to be of comparable quality; (2) securities which
may be convertible into or exchangeable for, or carry warrants to
purchase, common stock or other equity interests (such securities may
offer attractive income opportunities, and the debt securities of certain
issuers may not be available without such features); and (3) preferred
stocks, rated no lower than Ba by Moody's or, if unrated by Moody's,
judged by the Adviser to be of comparable quality.
The Fund currently invests in debt securities with maturities ranging
from short-term (including overnight) up to forty years and anticipates
that it will continue to do so. The Fund expects to maintain its portfolio
of securities so as to have an
10
<PAGE>
average dollar-weighted maturity of between five and twenty years.
HIGH YIELD'S investment objective is to provide investors with a high
level of current income. As a secondary objective, the Fund seeks capital
appreciation. In seeking to achieve the Fund's objectives, the Adviser,
under normal circumstances, invests at least 65% of the Fund's total
assets in high yield, fixed-income securities, that is, income producing
debt securities and preferred stocks of all types, including corporate
debt securities and preferred stock, convertible securities, zero coupon
securities, deferred interest securities, mortgage-backed securities and
asset-backed securities. The Fund's remaining assets may be held in cash
or money market instruments, or invested in common stocks and other equity
securities when these types of investments are consistent with the primary
objective of high current income or are acquired as part of a unit
consisting of a combination of fixed-income securities and equity
investments. Such remaining assets may also be invested in fixed-income
securities rated above BBB by S&P or Baa by Moody's, comparably rated by
another NRSRO, or unrated securities deemed by the Adviser to be of
equivalent quality. Moreover, the Fund may hold cash or money market
instruments without limit for temporary defensive purposes or pending
investment. Current yield is the primary consideration used by the Adviser
in the selection of portfolio securities, although consideration may also
be given to the potential for capital appreciation.
Higher yields are generally available from securities rated BBB or
lower by S&P, Baa or lower by Moody's, securities comparably rated by
another NRSRO, or unrated securities of equivalent quality, and the Fund
may invest all or a substantial portion of its assets in such securities.
Debt securities rated below investment grade (i.e., below BBB/Baa) are
deemed by these agencies to be predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal and may involve
major risk or exposure to adverse conditions. The Fund may invest in
securities rated as low as "C" by Moody's or "D" by S&P, which ratings
indicate that the obligations are highly speculative and may be in default
or in danger of default as to principal and interest. Ratings are only the
opinions of the agencies issuing them and are not absolute guarantees as
to quality. The Adviser does not rely solely on the ratings of rated
securities in making investment decisions but also evaluates other
economic and business factors affecting the issuer. The Appendix to this
Prospectus describes Moody's and S&P's rating categories of securities in
which the Fund may invest.
Fixed-income securities in which the Fund may invest include preferred
stocks and all types of debt obligations of both domestic and foreign
issuers, commercial paper, and obligations issued or guaranteed by the
U.S. Government, foreign governments or of any of their respective
political subdivisions, agencies, or instrumentalities, including
repurchase agreements secured by such instruments.
The Fund may invest up to 25% of its total assets in private
placements, securities traded pursuant to Rule 144A under the Securities
Act of 1933, or securities which, though not registered at the time of
their initial sale, are issued with registration rights. Some of these
securities may be deemed by the Adviser to be liquid, under guidelines
adopted by the Corporation's Board of Directors pursuant to SEC
regulations. The Fund will not invest more than 5% of its total assets in
any one issuer, except for issues of the U.S. Government, its agencies and
instrumentalities or repurchase agreements collateralized by such
securities; however, up to 25% of the Fund's total assets may be invested
in securities issued by Canadian provinces or by Crown Corporations whose
obligations are guaranteed by either the Canadian federal government or a
provincial government. No more than 25% of the Fund's total assets may be
invested in issuers having their principal business activity in the same
industry.
GOVERNMENT MONEY MARKET'S investment objective is to obtain high
current income consistent with liquidity and conservation of principal.
The Fund invests only in U.S. government obligations and repurchase
agreements secured by such instruments. U.S. government obligations
include (1) U.S. Treasury obligations, which differ only in their interest
rates, maturities and times of issuance, and (2) obligations issued or
guaranteed
11
<PAGE>
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),
(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 Bank), (c) the discretionary authority of the U.S. Treasury to
lend to the issuer (such as Federal National Mortgage Association
securities) or (d) only the credit of the instrumentality (such as the
Federal Home Loan Mortgage Corporation). In the case of obligations not
backed by the full faith and credit of the United States, the Fund must
look 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 insure or guarantee the market value of the Fund's shares.
The Fund attempts to stabilize the net asset value of a Fund share at
$1.00. To maintain that net asset value, the Fund pursues several
practices intended to minimize the effect of interest rate fluctuations.
It invests in a portfolio of money market instruments with remaining
maturities of 397 days or less; it maintains the dollar-weighted average
maturity of the portfolio at 90 days or less; and it buys only high
quality securities which the Adviser believes present minimal credit risk.
The Fund, of course, cannot guarantee a net asset value of $1.00 per
share. The Fund may invest in variable rate U.S. government obligations
that have stated maturities in excess of 397 days if such obligations
comply with conditions established by the SEC. Also, securities held by
the Fund as collateral for repurchase agreements and other collateralized
transactions may have remaining maturities in excess of 397 days.
GENERAL
The market value of the interest-bearing debt securities held by a
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 a 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.
Each Fund has adopted certain fundamental investment limitations that,
like its investment objective, may not be changed without the approval of
its shareholders. A full description of these investment limitations is
included in the Statement of Additional Information.
INVESTMENT TECHNIQUES AND RISKS
The following investment techniques and risks apply to Government
Intermediate, Investment Grade and High Yield unless otherwise stated.
CORPORATE DEBT SECURITIES
Corporate debt securities may pay fixed or variable rates of interest,
or interest at a rate contingent upon some other factor, such as the price
of some commodity. These securities may be convertible into preferred or
common equity, or may be bought as part of a unit containing common stock.
In selecting corporate debt securities for a Fund, the Adviser reviews and
monitors the creditworthiness of each issuer and issue. The
12
<PAGE>
Adviser also analyzes interest rate trends and specific developments which
it believes may affect individual issuers.
CALLABLE DEBT SECURITIES
A debt security may be callable, i.e., subject to redemption at the
option of the issuer at a price established in the security's governing
instrument. If a debt security held by a Fund is called for redemption,
that Fund will be required to permit the issuer to redeem the security or
sell it to a third party. Either of these actions could have an adverse
effect on a Fund's ability to achieve its investment objectives.
RISKS OF LOWER RATED DEBT SECURITIES
Debt securities rated Baa and preferred stock rated Ba are deemed by
Moody's to have speculative characteristics. Debt securities rated B by
Moody's "generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other
terms of the contract over any long period of time may be small." S&P
states that debt rated B "has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial or economic conditions will likely
impair capacity or willingness to pay interest and repay principal."
High yield bonds offer a higher yield to maturity than bonds with
higher ratings, as compensation for holding an obligation that is subject
to greater risk. The principal risks of high yield securities include: (i)
limited liquidity and secondary market support, (ii) substantial market
price volatility resulting from changes in prevailing interest rates,
(iii) the fact that such obligations are often unsecured and are
subordinated to the claims of banks and other senior lenders in bankruptcy
proceedings, (iv) the operation of mandatory sinking fund or
call/redemption provisions during periods of declining interest rates,
whereby the holder might receive redemption proceeds at times when only
lower-yielding portfolio securities are available for investment, (v) the
possibility that earnings of the issuer may be insufficient to meet its
debt service, (vi) the issuer's low creditworthiness and potential for
insolvency during periods of rising interest rates and economic downturn,
(vii) the fact that the issuers are often highly leveraged and may not
have access to more traditional methods of financings and (viii) the
possibility of adverse publicity and investor perceptions, whether or not
due to fundamental analysis, which may result in widespread sales and
declining market prices. If the Fund is required to seek recovery upon a
default in the payment of principal or interest, it may incur additional
expenses and may have limited legal recourse in the event of a default.
As a result of the limited liquidity of high yield securities, their
prices have at times experienced significant and rapid decline when a
significant number of holders of high yield securities simultaneously
decided to sell them. A decline is also likely in the high yield bond
market during an economic downturn. An economic downturn or an increase in
interest rates could severely disrupt the market for high yield securities
and adversely affect the value of outstanding securities and the ability
of the issuers to repay principal and interest. Yields on lower rated debt
securities may rise dramatically in such periods, reflecting the risk that
holders of such securities could lose a substantial portion of their value
as a result of the issuers' financial restructuring or default. There can
be no assurance that such declines will not recur. Because the market for
high yield securities is less liquid, the valuation of these securities
may require greater judgment than is necessary with respect to securities
having more active markets.
Although the prices of lower-rated bonds are generally less sensitive
to interest rate changes than are higher-rated bonds, the prices of lower-
rated bonds may be more sensitive to adverse economic changes and
developments regarding the individual issuer. Although the market for
lower-rated debt securities is not new, and the market has previously
weathered economic downturns, there has been in recent years a substantial
increase in the use of such securities to fund corporate acquisitions and
restructurings. Accordingly, the past performance of the market for such
securities may not be an accurate indication of its performance during
future economic downturns or periods of rising interest rates.
If an investment-grade security purchased by Investment Grade is
subsequently given a rating
13
<PAGE>
below investment-grade, the Adviser will consider that fact in determining
whether to retain that security in the Fund's portfolio.
The table below provides a summary of ratings assigned to debt
holdings in the portfolios of Investment Grade and High Yield. These
figures are dollar-weighted averages of month-end portfolio holdings
during the fiscal year ended December 31, 1995, presented as a percentage
of total investments. These percentages are historical and are not
necessarily indicative of the quality of current or future portfolio
holdings, which may vary.
<TABLE>
<CAPTION>
AAA/
MOODY'S AA/A BAA BA B CAA CA C NR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
Grade 65.0% 19.1% 8.6% 5.6% -- -- -- 1.7%
High Yield --% 2.3% 16.1% 65.6% 2.3% 0.7% 0.1% 12.9%
</TABLE>
<TABLE>
<CAPTION>
AAA/
S&P AA/A BBB BB B CCC CC/C D NR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
Grade 66.8% 15.9% 13.0% 4.3% -- -- -- --
High Yield --% 1.4% 22.4% 59.3% 8.9% -- 0.2% 7.8%
</TABLE>
There were no debt securities not rated by either Moody's or S&P for
Investment Grade. The dollar-weighted average of debt securities not rated
by either Moody's or S&P amounted to 7.7% for High Yield. This may include
securities rated by other NRSROs, as well as unrated securities. Unrated
securities are not necessarily lower-quality securities, but may not be
attractive to as many investors.
U.S. GOVERNMENT SECURITIES (THE FOLLOWING APPLIES TO GOVERNMENT MONEY
MARKET ALSO)
U.S. government securities include direct obligations of the U.S.
Treasury and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by: (1) the
full faith and credit of the United States (e.g., certificates of the
Government National Mortgage Association ("GNMA")); (2) the right of the
issuer to borrow from the U.S. Treasury (e.g., Federal Home Loan Banks
securities); (3) the discretionary authority of the U.S. Treasury to lend
to the issuer (e.g., Federal National Mortgage Association ("FNMA")
securities); and (4) solely the creditworthiness of the issuer (e.g.,
Federal Home Loan Mortgage Corporation ("FHLMC") securities). Neither the
U.S. Government nor any of its agencies or instrumentalities guarantees
the market value of the securities they issue. Therefore, the market value
of such securities can be expected to fluctuate in response to changes in
interest rates.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities represent interests in pools of mortgages.
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, mortgage
bankers and other secondary market issuers.
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. Some mortgage-related 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.
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 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. When interest rates are
declining, such prepayments usually increase. On the other hand, a
decrease in the rate of prepayments, resulting from an increase in market
interest rates, among other causes, may extend the effective
14
<PAGE>
maturities of mortgage-related securities, increasing their sensitivity to
changes in market interest rates. The volume of prepayments of principal
on a pool of mortgages underlying a particular mortgage-related security
will influence the yield of that security. Increased prepayment of
principal may limit a 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 a Fund to incur a
loss on a mortgage-related security that was purchased at a premium. In
determining a Fund's average maturity, the Adviser must apply certain
assumptions and projections about the maturity and prepayment of
mortgage-related securities; actual prepayment rates may differ.
A Fund may enter into mortgage "dollar roll" transactions with
selected banks and broker-dealers pursuant to which that Fund sells
mortgage-backed securities for delivery in the future (generally within 30
days) and simultaneously contracts to repurchase substantially similar
securities on a specified future date.
RESTRICTIONS: Government Intermediate and Investment Grade normally
may invest up to 50% of their total assets in mortgage-related securities,
including those issued by the governmental or government-related entities
referred to above. No more than 25% of Government Intermediate's or
Investment Grade's total assets normally are invested in mortgage-related
securities issued by non-governmental entities. Mortgage dollar roll
transactions may be considered borrowings and, if so, will be subject to
each Fund's investment limitation that, except for temporary purposes, a
Fund will not borrow money in excess of 5% of its total assets at the time
of borrowing.
GOVERNMENT MORTGAGE-RELATED SECURITIES
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 a Fund's GNMA securities can be expected to
fluctuate in response to changes in interest rate levels.
FHLMC, a corporate instrumentality of the U.S. Government, 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.
FNMA is a government-sponsored corporation owned entirely by private
stockholders that purchases residential mortgages from a list of approved
seller/servicers, including savings and loan associations, savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
certificates issued by FNMA ("FNMA certificates") 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.
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
15
<PAGE>
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.
The market for conventional pools is smaller and less liquid than the
market for the government and government-related mortgage pools.
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. The value of such securities depends in part
on loan repayments by individuals, which may be adversely affected during
general downturns in the economy.
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
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 a Fund's ability to achieve its investment objective.
Government Intermediate and Investment Grade do not intend to exercise
conversion rights for any convertible security they own and do not intend
to hold any security which has been subject to conversion.
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
16
<PAGE>
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 make periodic interest payments, their
prices can be very volatile when market interest rates change.
The original issue discount on zero coupon bonds must be included in a
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, a 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 a 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 that Fund and when
that Fund would not otherwise choose to dispose of the assets.
STRIPPED MORTGAGE-BACKED SECURITIES (HIGH YIELD ONLY)
High Yield may also invest in stripped mortgage-backed securities,
which are derivative securities usually structured with two classes that
receive different proportions of the interest and principal distributions
from an underlying pool of mortgage assets. The Fund may purchase
securities representing only the interest payment portion of the
underlying mortgage pools (commonly referred to as "IOs") or only the
principal portion of the underlying mortgage pools (commonly referred to
as "POs"). Stripped mortgage-backed securities are more sensitive to
changes in prepayment and interest rates and the market for such
securities is less liquid than is the case for traditional debt securities
and mortgage-backed securities. The yield on such IOs is extremely
sensitive to the rate of principal payments (including prepayments) on the
underlying mortgage assets, and a rapid rate of repayment may have a
material adverse effect on such securities' yield to maturity. If the
underlying mortgage assets experience greater than anticipated prepayments
of principal, the Fund will fail to recoup fully its initial investment in
these securities, even if they are rated high quality. Most IOs and POs
are regarded as illiquid and will be included in the Fund's 15% limit on
illiquid securities. U.S. government-issued IOs and POs backed by
fixed-rate mortgages may be deemed liquid by the Adviser, following
guidelines and standards established by the Corporation's Board of
Directors.
PAY-IN-KIND BONDS (HIGH YIELD ONLY)
Pay-in-kind bonds pay "interest" through the issuance of additional
bonds, thereby adding debt to the issuer's balance sheet. The market
prices of these securities are generally more volatile than the market
prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than the prices
of securities paying interest currently and having similar maturities and
credit quality. Pay-in-kind bonds carry additional risk in that, unlike
bonds that pay interest throughout the period to maturity, the Fund will
realize no cash until the cash payment date unless a portion of such
securities is sold and the Fund may obtain no return at all on its
investment if the issuer defaults.
The holder of a pay-in-kind bond must accrue income with respect to
these securities prior to the receipt of cash payments thereon. To avoid
liability for federal income and excise taxes, the Fund most likely will
be required to distribute income accrued with respect to these securities,
even though the Fund has not received that income in cash, and may be
required to dispose of portfolio securities under disadvantageous
circumstances in order to generate cash to satisfy these distribution
requirements.
PREFERRED STOCK (HIGH YIELD ONLY)
Preferred stock may be purchased as a substitute for debt securities
of the same issuer when, in the opinion of the Adviser, the preferred
stock is more attractively priced in light of the risks involved.
Preferred stock pays dividends at a specified rate and generally has
preference over common stock in the payment of dividends and the
liquidation of the issuer's assets but is junior to the debt securities of
the issuer in those same respects. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors,
17
<PAGE>
and shareholders may suffer a loss of value if dividends are not paid.
Preferred shareholders generally have no legal recourse against the issuer
if dividends are not paid. The market prices of preferred stocks are
subject to changes in interest rates and are more sensitive to changes in
the issuer's creditworthiness than are the prices of debt securities.
Under ordinary circumstances, preferred stock does not carry voting
rights.
FOREIGN SECURITIES
GOVERNMENT INTERMEDIATE AND INVESTMENT GRADE:
The Funds may invest in U.S. dollar-denominated debt securities issued
by foreign companies and governments. The foreign government securities in
which a Fund invests generally consist of obligations supported by
national, state or provincial governments or similar political
subdivisions. The Funds 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. Because the foreign securities in which the
Funds invest are U.S. dollar-denominated, there is no risk of currency
fluctuation.
HIGH YIELD:
High Yield may invest up to 25% of its total assets in securities of
domestic and foreign issuers that are denominated in currencies other than
the U.S. dollar. To facilitate investment in foreign securities, the Fund
may hold positions in foreign currencies. In addition, for hedging
purposes, the Fund may purchase and write either listed or
over-the-counter put and call options on foreign currencies or may enter
into forward foreign currency contracts ("forward currency contracts").
Forward currency contracts involve obligations to purchase or sell a
specific amount of a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. By entering into a
forward currency contract, the Fund "locks in" the exchange rate between
the currency it will deliver and the currency it will receive for the
duration of the contract. The Fund may enter into these contracts for the
purpose of hedging against risk arising from its investment or anticipated
investment in securities denominated in foreign currencies. Forward
currency contracts involve certain risks, including the risk that
anticipated currency movements will not be accurately predicted causing
the Fund to sustain losses on these contracts.
The Fund may invest in fixed-income and other debt securities of
issuers based in emerging markets (including countries in Latin America,
Eastern Europe, Asia and Africa).
RISKS OF FOREIGN SECURITIES
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 income and withholding taxes. Additional
risks associated with investing in foreign securities include the
possibility of nationalization, expropriation or confiscatory taxation;
adverse changes in investment or exchange control regulations (which may
include suspension of the ability to transfer currency out of a country);
and political instability. Changes in foreign exchange rates will affect
the value of securities denominated or quoted in currencies other than the
U.S. dollar irrespective of the performance of the underlying instrument.
Some foreign governments have defaulted on principal and/or interest
payments; in such cases, a Fund would have limited recourse to enforce its
rights under the instruments it holds. The risks of foreign investment,
described above, are greater for investments in emerging markets. Debt
securities of issuers in such countries will typically be rated below
investment grade or be of comparable quality.
18
<PAGE>
REPURCHASE AGREEMENTS (THE FOLLOWING APPLIES TO GOVERNMENT MONEY MARKET
ALSO)
Repurchase agreements are agreements under which U.S. government
obligations (or, with respect to Government Intermediate, Investment Grade
and High Yield, other high-quality, liquid debt securities) are acquired
from a securities dealer or bank subject to resale at an agreed-upon price
and date. The securities are held for the Funds by State Street Bank and
Trust Company ("State Street"), the Funds' 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. A Fund bears a risk of loss in the event that the
other party to a repurchase agreement defaults on its obligations and that
Fund is delayed or prevented from exercising its right to dispose of the
collateral securities, which may decline in value in the interim. A 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.
RESTRICTIONS: A Fund will not enter into repurchase agreements of more
than seven days' duration if more than 10% (15% in the case of High Yield)
of its total assets would be invested in such agreements and other
illiquid investments.
WHEN-ISSUED SECURITIES (THE FOLLOWING APPLIES TO GOVERNMENT MONEY MARKET
ALSO)
Each Fund may enter into commitments to purchase U.S. government
securities or other securities on a when-issued basis. A 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 a 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, a Fund does not have to pay for the obligations until they are
delivered to it, 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, that Fund will set aside cash or liquid,
high-quality debt securities in an account with its custodian equal to the
payment that will be due. Depending on market conditions, a Fund's
when-issued purchases could cause its net asset value to be more volatile,
because they will increase the amount by which that Fund's total assets,
including the value of the when-issued securities held by it, exceed its
net assets. A Fund may sell the securities subject to a when-issued
purchase, which may result in a gain or loss.
Government Intermediate, Investment Grade and Government Money Market
each do not expect that commitments to purchase when-issued securities
will at any time exceed, in the aggregate, 20% of its total assets.
FUTURES AND OPTIONS TRANSACTIONS
GOVERNMENT INTERMEDIATE AND INVESTMENT GRADE:
In an effort to protect against the effect of adverse changes in
interest rates, a 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 a Fund to buy or sell securities at a specified date and
price. The purchase of a put option on a futures contract allows a Fund,
at its option, to enter into a particular futures contract to sell
securities at any time up to the option's expiration date.
A Fund may seek to enhance its income or hedge the portfolio by
writing (selling) covered call options (i.e., a Fund will own the
underlying instrument while the call is outstanding) and covered put
options (i.e., a 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).
RESTRICTIONS: A Fund will not enter into any futures contracts and
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 that Fund's total assets. A Fund
will not purchase futures contracts or related options if, as a result,
more than 33-1/3% of that Fund's total assets would be so invested.
19
<PAGE>
HIGH YIELD:
The Fund may write (sell) or purchase put and call options on domestic
and foreign securities, securities indices and foreign currencies. Call
options written by the Fund give the holder the right to buy the
underlying securities or currencies from the Fund at a fixed exercise
price up to a stated expiration date, or in the case of certain options,
on such date. Put options give the holder the right to sell the underlying
security or currencies to the Fund during the term of the option at a
fixed exercise price up to a stated expiration date, or in the case of
certain options, on such date.
The Fund may also enter into options on the yield "spread"or yield
differential between two fixed-income securities, a transaction referred
to as a "yield curve" option, for hedging and non-hedging purposes.
The Fund may purchase and sell futures contracts on foreign
currencies, securities, or indices of securities, including indices of
fixed-income securities which may become available for trading. The Fund
may also purchase and write options on such futures contracts.
RISKS OF FUTURES, OPTIONS AND FORWARD CURRENCY CONTRACTS
Many options on debt securities are traded primarily on the
over-the-counter ("OTC") market. OTC options differ from exchange-traded
options in that the former are two-party contracts with price and other
terms negotiated between buyer and seller and generally do not have as
much market liquidity as exchange-traded options. Thus, when a Fund
purchases an OTC option, it relies on the dealer from which it has
purchased the option to make or take delivery of the securities underlying
the option. Failure by the dealer to do so would result in the loss of the
premium paid by a Fund as well as the loss of the expected benefit of the
transaction. OTC options may be considered "illiquid securities" for
purposes of the Funds' investment limitations.
When a Fund purchases or sells a futures contract, the Fund is
required to deposit with its custodian (or a broker, if legally permitted)
a specified amount of cash or U.S. government securities ("initial
margin"). The use by a Fund of futures contracts or commodities option
positions for other than bona fide hedging purposes is restricted by
government regulations. (See the Statement of Additional Information.) If
a Fund writes an option or sells a futures contract and is not able to
close out that position prior to settlement date, the Fund may be required
to deliver cash or securities substantially in excess of these amounts.
The use of options, futures and forward currency contracts involves
certain investment risks and transaction costs to which the Fund might not
be subject if it did not use such instruments. These risks include (1)
dependence on the Adviser's ability to predict movements in the prices of
individual securities, fluctuations in the general securities markets or
in market sectors and movements in interest rates and currency markets;
(2) imperfect correlation between movements in the price of options,
currencies, futures contracts, forward currency contracts or options
thereon and movements in the price of the securities or currencies hedged
or used for cover; (3) the fact that skills and techniques needed to trade
options, futures contracts and options thereon or to use forward currency
contracts are different from those needed to select the securities in
which the Fund invests; (4) lack of assurance that a liquid secondary
market will exist for any particular option, futures contract or option
thereon at any particular time which may result in unanticipated losses;
(5) the possibility that the use of cover or segregation involving a large
percentage of a Fund's assets could impede portfolio management or the
Fund's ability to meet redemption requests or other short-term
obligations; (6) the possible need to defer closing out certain options,
futures contracts and options thereon and forward currency contracts in
order to continue to qualify for the beneficial tax treatment afforded
"regulated investment companies" under the Internal Revenue Code of 1986,
as amended ("Code") (see "Additional Tax Information" in the Statement of
Additional Information); and (7) the fact that, although use of these
instruments for hedging purposes can reduce the risk of loss, they can
also reduce the opportunity for gain, or even result in losses, by
offsetting favorable price movements in hedged instruments. The use of
options for speculative purposes, i.e., to enhance income or to increase a
Fund's exposure to a particular security or foreign currency, subjects the
Fund to additional risk. The use of futures or forward currency
20
<PAGE>
contracts to hedge an anticipated purchase (other than a when-issued or
delayed delivery purchase), also subjects a Fund to additional risk until
the purchase is completed or the position is closed out.
The Statement of Additional Information contains a more detailed
description of futures, options and forward strategies.
RESTRICTED AND ILLIQUID SECURITIES
Restricted securities are securities subject to legal or contractual
restrictions on their resale, such as private placements. Such
restrictions might prevent the sale of restricted securities at a time
when sale would otherwise be desirable. Repurchase agreements maturing in
more than seven days are considered illiquid. Illiquid securities may be
difficult to value, and a Fund may have difficulty disposing of such
securities promptly.
RESTRICTIONS: No more than 15% of High Yield's net assets will be
invested in securities which are deemed illiquid, defined as securities
that cannot be sold within 7 days at approximately the price they are
valued. No more than 10% of Government Intermediate's or Investment
Grade's net assets will be invested in illiquid securities.
INTEREST RATE SWAPS (HIGH YIELD ONLY)
The Fund may enter into interest rate swaps. An interest rate swap is
an agreement between two parties which transfers interest rate
obligations, one of which is an interest rate fixed until the maturity of
the obligation, while the other is a rate which changes with the changes
in some other rate, such as the prime rate or the London Interbank Offered
Rate (LIBOR). Such swaps will be used when the Fund wishes to effectively
convert a floating rate asset into a fixed rate asset, or vice versa.
LOAN PARTICIPATIONS AND ASSIGNMENTS (HIGH YIELD ONLY)
The Fund may also invest in "loan participations or assignments." In
purchasing a loan participation or assignment, the Fund acquires some or
all of the interest of a bank or other lending institution in a loan to a
corporate borrower. Many such loans are secured and most impose
restrictive covenants which must be met by the borrower and which are
generally more stringent than the covenants available in publicly traded
debt securities. However, interests in some loans may not be secured, and
the Fund will be exposed to a risk of loss if the borrower defaults. Loan
participations may also be purchased by the Fund when the borrowing
company is already in default.
In purchasing a loan participation, the Fund may have less protection
under the federal securities laws than it has in purchasing traditional
types of securities. The Fund's ability to assert its rights against the
borrower will also depend on the particular terms of the loan agreement
among the parties.
RESTRICTIONS: Many of the interests in loans purchased by the Fund
will be illiquid and therefore subject to the Fund's 15% limit on illiquid
investments.
LENDING
Each Fund may loan its portfolio securities to qualified borrowers who
deposit and maintain with the Fund cash collateral equal to at least 100%
of the market value of the securities loaned.
PORTFOLIO TURNOVER
For the year ended December 31, 1995, Government Intermediate's
portfolio turnover rate was 289.9%, Investment Grade's portfolio turnover
rate was 221.1% and High Yield's portfolio turnover rate was 47.4%. Each
Fund anticipates that in the future its annual portfolio turnover rate may
exceed 300%. The Funds may sell fixed-income securities and buy similar
securities to obtain yield and take advantage of market anomalies, a
practice which will increase the reported turnover rate of the Funds. A
portfolio turnover rate in excess of 100% will involve correspondingly
greater transaction costs which will be borne directly by a Fund. It may
also increase the amount of net short-term capital gains, if any, realized
by a 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. Each Fund will take these possibilities into
account as part of its investment strategy.
HOW YOU CAN INVEST IN THE FUNDS
You may purchase Primary Shares of the Funds through a brokerage
account with Legg
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Mason or with an affiliate that has a dealer agreement with Legg Mason
(Legg Mason is a wholly owned subsidiary of Legg Mason, Inc., a financial
services holding company). Your Legg Mason or affiliated investment
executive will be pleased to explain the shareholder services available
from the Funds and answer any questions you may have. Documents available
from your Legg Mason or affiliated investment executive should be
completed if you invest in shares of the Funds through an Individual
Retirement Account ("IRA"), Self-Employed Individual Retirement Plan
("Keogh Plan"), Simplified Employee Pension Plan ("SEP") or other
qualified retirement plan.
Clients of certain institutions that maintain omnibus accounts with
the Funds' transfer agent may obtain shares through those institutions.
Such institutions may receive payments from the Funds' distributor for
account servicing, and may receive payments from their clients for other
services performed. Investors can purchase Fund shares from Legg Mason
without receiving or paying for such other services.
The minimum initial investment in Primary Shares for each Fund
account, including investments made by exchange from other Legg Mason
funds, is $1,000, and the minimum investment for each purchase of
additional shares is $100 for Government Intermediate, Investment Grade
and High Yield and $500 for Government Money Market, except as noted
below. Initial and subsequent investments in an IRA account established on
behalf of a nonworking spouse of a shareholder who has an IRA invested in
the Funds require a minimum amount of only $250. However, once an account
is established, the minimum amount for subsequent investments will be
waived if an investment in an IRA or similar plan will bring the
investment for the year to the maximum amount permitted under the Code.
Cash held in Legg Mason brokerage accounts of Fund shareholders may be
invested in Government Money Market during regularly scheduled "sweeps" of
such accounts made twice each month. (Brokerage accounts participating in
the Premier Asset Management Account described on page 28 are swept daily
for free credit balances of $100 or more and weekly for free credit
balances of less than $100.) For purchases of shares through payroll
deduction plans, a Fund's Future First Systematic Investment Plan and
plans involving automatic payment of funds from financial institutions or
automatic investment of dividends from certain unit investment trusts,
minimum initial and subsequent investments are lower. Each Fund may change
these minimum amount requirements at its discretion. You should always
furnish your shareholder account number when making additional purchases
of shares.
There are three ways you can invest in Primary Shares:
1. THROUGH YOUR LEGG MASON OR AFFILIATED INVESTMENT EXECUTIVE
Shares may be purchased through any Legg Mason or affiliated
investment executive. An investment executive will be pleased to open an
account for you, explain to you the shareholder services available from
the Funds and answer any questions you may have. After you have
established a Legg Mason or affiliated account, you can order shares from
your investment executive in person, by telephone or by mail.
If you want to purchase shares by mail, send a check for $100 or more
($500 or more for Government Money Market), payable to:
[insert complete Fund name]
c/o Legg Mason Funds Processing
P.O. Box 1476
Baltimore, Maryland 21203-1476
2. THROUGH THE FUTURE FIRST SYSTEMATIC INVESTMENT PLAN
You may also buy shares through the Future First Systematic Investment
Plan. Under this plan, you may arrange for automatic monthly investments
in the Fund of $50 or more by authorizing Boston Financial Data Services
("BFDS"), the Funds' transfer agent, to prepare a check each month drawn
on your checking account. Please contact any Legg Mason or affiliated
investment executive for further information.
3. THROUGH AUTOMATIC INVESTMENTS
Arrangements may be made with some employers and financial
institutions, such as banks or credit unions, for regular automatic
monthly investments of $50 or more in shares. In addition, it may be
possible for dividends from certain unit investment trusts to be invested
automatically in
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shares. Persons interested in establishing such automatic investment
programs should contact the Funds through any Legg Mason or affiliated
investment executive.
In addition to the above, you may also use the following method to
invest in Government Money Market:
BY TELEPHONE OR WIRE TRANSFER OF FUNDS
Once you have opened an account with the Fund you can also purchase
shares by telephone from available cash balances in your Legg Mason or
affiliated brokerage account or by wire transfer of funds from your bank
directly to Legg Mason. Please contact any Legg Mason or affiliated
investment executive for further information. Wire transfers may be
subject to a service charge by your bank. Purchases made by telephone from
available cash balances in your Legg Mason or affiliated brokerage account
or wire payments representing federal funds will normally be completed on
the same or the next business day.
Any order for which your investment executive has submitted a purchase
by 12:00 noon, Eastern time, and for which wired funds have been received,
will earn dividends on shares purchased that day.
Primary Shares purchased on behalf of an IRA, Keogh Plan, SEP or other
qualified retirement plan will be processed at the net asset value next
determined after Legg Mason's Funds Processing receives a check for the
amount of the purchase. Other Primary Share purchases of Government
Intermediate, Investment Grade or High Yield will be processed at the net
asset value next determined after your Legg Mason or affiliated investment
executive has received your order; payment must be made within three
business days to Legg Mason. Orders for one of those Funds, received by
your Legg Mason or affiliated investment executive before the close of
regular trading on the New York Stock Exchange ("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 for one of those Funds, received by
your Legg Mason or affiliated investment executive 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.
Shares of Government Money Market are issued at the net asset value
next determined after receipt of a purchase order and payment in proper
form. Many instruments in which the Fund invests must be paid for in
immediately available money called "federal funds." Therefore, payments
received from you for the purchase of shares in other than federal funds
form will require conversion into federal funds before your purchase order
may be executed. For checks, this normally will take two days but may take
up to nine days. All checks are accepted subject to collection at full
face value in federal funds and must be drawn in U.S. dollars on a
domestic bank. If an order for shares of Government Money Market and
payment in federal funds is received by your Legg Mason or affiliated
investment executive prior to 12:00 noon, Eastern time, on any day that
the Exchange is open, the shares will be purchased and earn dividends on
that day; if such an order is received at 12:00 noon or later, the shares
will be purchased at the next determined net asset value and will earn
dividends on the next day the Exchange is open. See "How Net Asset Value
is Determined," page 26.
Each Fund reserves the right to reject any order for its shares or to
suspend the offering of shares for a period of time.
HOW YOUR SHAREHOLDER ACCOUNT IS MAINTAINED
When you initially purchase shares, a shareholder account is
automatically established for you. Any shares that you purchase or receive
as a dividend will be credited directly to your account at the time of
purchase or receipt. No certificates are issued unless you specifically
request 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 of any Fund 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. Shares may not be held in, or
transferred to, an account with any
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brokerage firm other than Legg Mason or its affiliates.
HOW YOU CAN REDEEM YOUR PRIMARY SHARES
THE FOLLOWING REDEMPTION INFORMATION APPLIES TO GOVERNMENT INTERMEDIATE,
INVESTMENT GRADE AND HIGH YIELD:
There are two ways you can redeem your Primary Shares of Government
Intermediate, Investment Grade or High Yield. First, you may give your
Legg Mason or affiliated investment executive an order for repurchase of
your shares. Please have the following information ready when you call:
the name of the Fund, the number of shares to be redeemed and your
shareholder account number. Second, you may send a written request for
redemption to: [insert complete Fund name], c/o Legg Mason Funds
Processing, P.O. Box 1476, Baltimore, Maryland 21203-1476.
Requests for redemption in "good order," as described below, received
by your Legg Mason or affiliated investment executive before the close of
the Exchange on any day when the Exchange is open, will be transmitted to
BFDS, transfer agent for the Funds, 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 your Legg Mason or affiliated investment
executive after the close of the Exchange will be executed at the net
asset value determined as of the close of the Exchange on its next trading
day. A redemption request received by your Legg Mason or affiliated
investment executive 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.
Proceeds from your redemption normally will settle in your Legg Mason
brokerage account two business days after trade date. However, each Fund
reserves the right to take longer (up to seven days in some cases) to make
payment upon redemption if, in the judgment of the Adviser, the respective
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 will not be
disbursed unless the Fund can be reasonably assured that the check has
been collected.
A redemption request will be considered to be received in "good order"
only if:
1. You have indicated in writing the number of Primary Shares to be
redeemed, the complete Fund name and your shareholder account number;
2. The written request is signed by you and by any co-owner of the
account with exactly the same name or names used in establishing the
account;
3. The written request is accompanied by any certificates representing
the shares that have been issued to you, and you have endorsed the
certificates for transfer or an accompanying stock power exactly as the
name or names appear on the certificates; and
4. The signatures on the written redemption request and on any
certificates for your shares (or an accompanying stock power) have been
guaranteed without qualification by a national bank, a state bank, a
member firm of a principal stock exchange or other entity described in
Rule 17Ad-15 under the Securities Exchange Act of 1934.
THE FOLLOWING REDEMPTION INFORMATION APPLIES TO GOVERNMENT MONEY MARKET:
All redemptions will be made in cash at the net asset value per share
next determined after the receipt by the Fund of a redemption request in
proper form either in writing or by telephone as described below. Requests
for redemption received after 12:00 noon, Eastern time, will be executed
on the next day the Exchange is open, at the net asset value next
determined. However, payment of redemption proceeds for shares purchased
by check and shares acquired through reinvestment of dividends on such
shares may be delayed for up to 10 days after receipt of the check in
order to allow time for the check to clear. Any of the following methods
may be used to redeem shares of Government Money Market:
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1. REDEMPTION BY TELEPHONE
Telephone redemptions may be made by calling your Legg Mason or
affiliated investment executive. However, you may not redeem shares by
telephone for which certificates have been issued. The minimum amount for
telephone redemptions is $100 unless you require a lesser amount to
complete a transaction in your Legg Mason or affiliated brokerage account.
Proceeds of redemptions requested by telephone will be transmitted only to
you. They may be transferred by mail or wire, at your direction (see
below). Proceeds of redemptions authorized by telephone will be credited
directly to your Legg Mason or affiliated brokerage account the same day.
Checks representing redemption proceeds normally will be mailed within
three business days of redemption but may take longer (up to seven days in
some cases) if the Adviser believes that immediate payment could adversely
affect the Fund. (The Statement of Additional Information describes
several other circumstances in which the date of payment may be postponed
or the right of redemption suspended.) Wire transfers of proceeds to you
from your Legg Mason or affiliated brokerage account will normally be
transmitted within two business days.
To make a telephone redemption, you should call your Legg Mason or
affiliated investment executive and provide your name, the Fund's name,
your Fund account number and the number of shares or dollar amount you
wish to redeem. In the event that you are unable to reach your Legg Mason
or affiliated investment executive by telephone, you may make a redemption
request by mail. There is no fee for telephone redemptions with the
exception of wire redemptions by telephone, as described below.
You may request by telephone that your shares be redeemed and the
proceeds wired to your account at a commercial bank in the United States.
In order to initiate a wire redemption by telephone, you must inform your
Legg Mason or affiliated investment executive of the name and address of
your bank and your bank account number. If your designated bank is not a
member of the Federal Reserve System, the proceeds will be wired to a
member bank that has a correspondent relationship with your bank. The
failure of the member bank immediately to notify your bank of the wire
transfer could delay the crediting of redemption proceeds to your bank. An
$18 fee for using the wire redemption service will be deducted by Legg
Mason or its affiliate from the redemption proceeds that are wired to your
bank.
2. REDEMPTION BY CHECK
The Fund offers a free checkwriting service that permits you to write
checks to anyone in amounts of $500 or more. The checks will be paid at
the time they are received by BFDS for payment by redeeming the
appropriate number of shares in your account; the shares will earn
dividends until the check clears BFDS for payment. Please contact your
Legg Mason or affiliated investment executive for further information
regarding this service.
3. REDEMPTION BY MAIL
You may request the redemption of your shares by sending a letter
signed by all of the registered owners of the account to: "Legg Mason U.S.
Government Money Market Portfolio, c/o Legg Mason Funds Processing, P.O.
Box 1476, Baltimore, Maryland 21203-1476." Any stock certificates issued
for the shares must be surrendered at the same time. For your protection,
certificates, if any, should be sent by registered mail. On all requests
for the redemption of shares valued at $10,000 or more, or when the
proceeds of the redemption are to be paid to someone other than you, your
signature must have been guaranteed without qualification by a national
bank, a state bank, a member firm of a principal stock exchange, or other
entity described in Rule 17Ad-15 under the Securities Exchange Act of
1934. Legg Mason or its affiliates may request further documentation from
corporations, executors, partnerships, administrators, trustees or
custodians. Checks normally will be mailed within three business days of
receipt of a proper redemption request to your address of record or, in
accordance with your written request, to some other person.
4. REDEMPTION TO PAY FOR SECURITIES PURCHASES AT LEGG MASON
Legg Mason has established special redemption procedures for Fund
shareholders who wish to purchase stocks, bonds or other securities at
Legg Mason. You may place an order to buy securities through your Legg
Mason or affiliated
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<PAGE>
investment executive and, in the absence of any indication that you wish
to make payment in another manner, Fund shares will be redeemed on the
settlement date for the amount due. Fund shares may also be redeemed by
Legg Mason to cover debit balances in your brokerage account. Contact your
Legg Mason or affiliated investment executive for details.
FOR EACH FUND:
Other supporting legal documents may be required from corporations or
other organizations, fiduciaries or persons other than the shareholder of
record making the request for redemption or repurchase. If you have a
question concerning the redemption of shares, contact your Legg Mason or
affiliated investment executive.
The Funds will not be responsible for the authenticity of redemption
instructions received by telephone, provided they follow reasonable
procedures to identify the caller. The Funds may request identifying
information from callers or employ identification numbers. The Funds may
be liable for losses due to unauthorized or fraudulent instructions if
they do 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 Legg Mason or affiliated investment executive
for further instructions.
To redeem your Legg Mason retirement account, a Distribution Request
Form must be completed and returned to Legg Mason Client Services for
processing. This form can be obtained through your Legg Mason or
affiliated investment executive or Legg Mason Client Services in
Baltimore, Maryland.
Because of the relatively high cost of maintaining small accounts,
each 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 you. However, the Funds will not redeem accounts that fall
below $500 solely as a result of a reduction in net asset value per share.
If a Fund elects to redeem the shares in your account, you will be
notified that your account is below $500 and will be allowed 60 days in
which to make an additional investment in order to avoid having your
account closed.
HOW NET ASSET VALUE IS DETERMINED
FOR GOVERNMENT INTERMEDIATE, INVESTMENT GRADE AND HIGH YIELD:
Net asset value per Primary 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 Primary Shares from the total assets
attributable to such shares and dividing the result by the number of
Primary Shares outstanding. Securities owned by the Funds 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. With
respect to High Yield, where a security is traded on more than one market,
which may include foreign markets, the securities are generally valued on
the market considered by the Adviser to be the primary market. Securities
with remaining maturities of 60 days or less are valued at amortized cost.
The Fund will value its foreign securities in U.S. dollars on the basis of
the then-prevailing exchange rates.
FOR GOVERNMENT MONEY MARKET:
Net asset value per Fund share is determined twice daily, as of 12:00
noon, Eastern time, and the close of business of the Exchange, on every
day that the Exchange is open, by subtracting the Fund's liabilities from
its total assets and dividing the result by the number of shares
outstanding. The Fund attempts to maintain a per share net asset value of
$1.00 by using the amortized cost method of valuation. The Fund cannot
guarantee that net asset value will always remain at $1.00 per share.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund declares dividends to holders of Primary Shares out of its
investment company taxable income attributable to those shares, which
consists of net investment income and net short-term capital gain. With
respect to Government Intermediate, Investment Grade and Government Money
Market, dividends from net investment
26
<PAGE>
income are declared daily and paid monthly. For High Yield, dividends from
net investment income are declared and paid monthly. Shareholders of
Government Intermediate, Investment Grade and High Yield begin to earn
dividends on their Fund shares as of settlement date, which is normally
the third business day after their orders are placed with their Legg Mason
or affiliated investment executive. With respect to Government
Intermediate, Investment Grade and High Yield, 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) and, in the case of High Yield, net realized gains from foreign
currency transactions 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. Since Government Money Market's
policy is, under normal circumstances, to hold portfolio securities to
maturity and to value portfolio securities at amortized cost, it does not
expect to realize any capital gain or loss. If the Fund does realize any
net short-term capital gains, it will distribute them at least once every
12 months.
Dividends and other distributions, if any, on Primary Shares of a Fund
held in an IRA, Keogh Plan, SEP or other qualified retirement plan and by
shareholders maintaining a Systematic Withdrawal Plan generally are
reinvested in Primary Shares of that Fund on the payment dates. Other
shareholders may elect to:
1. Receive both dividends and other distributions in Primary Shares of
the distributing Fund;
2. Receive dividends in cash and other distributions in Primary Shares
of the distributing Fund;
3. Receive dividends in Primary Shares of the distributing Fund and
other distributions in cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, shareholders may reinvest dividends and other
distributions in the corresponding class of shares of another Legg Mason
fund. Please contact your Legg Mason or affiliated investment executive
for additional information about this option.
If no election is made, both dividends and other distributions are
credited to your account in Primary 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 are credited to your account at that net asset value.
If you elect to receive dividends and/or other distributions in cash, you
will be sent a check or will have your Legg Mason account credited after
the payment date. You may elect at any time to change your option by
notifying the applicable Fund in writing at: [insert complete Fund name],
c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476. Your election must be received at least 10 days before the
record date in order to be effective for dividends and other distributions
paid to shareholders as of that date.
TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
Each 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 a Fund's investment company taxable income (whether
paid in cash or reinvested in Primary Shares) are taxable to its
shareholders (other than IRAs, Keogh Plans, SEPs, other qualified
retirement plans and other tax-exempt investors) as ordinary income to the
extent of the Fund's earnings and profits. Distributions of a Fund's net
capital gain (whether paid in cash or reinvested in Primary 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.
Each Fund sends its shareholders a notice following the end of each
calendar year specifying, among other things, the amounts of all dividends
and capital gain distributions paid (or deemed paid) during that year.
Each Fund is required to withhold 31% of all dividends, and each Fund
other than Government Money Market is required to withhold 31% of all
capital gain distributions
27
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and redemption proceeds, payable to any individuals and certain other
noncorporate shareholders who do not provide the Fund with a certified
taxpayer identification number. Each Fund also is required to withhold 31%
of all dividends, and each Fund other than Government Money Market is
required to withhold 31% of all capital gain distributions, payable to
such shareholders who otherwise are subject to backup withholding.
FOR GOVERNMENT INTERMEDIATE, INVESTMENT GRADE AND HIGH YIELD:
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
generally will have similar tax consequences. If Fund shares are purchased
within 30 days before or after redeeming at a loss other shares of the
same Fund (regardless of class), 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 each 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 Funds, depending on the laws of your home
state and locality, though the portion of the dividends paid by each Fund
attributable to direct U.S. government obligations is not subject to state
and local income taxes in most jurisdictions. Each 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
You will receive from Legg Mason a confirmation after each transaction
involving Primary Shares of Government Intermediate, Investment Grade and
High Yield (except a reinvestment of dividends, capital gain distributions
and shares purchased through the Future First Systematic Investment Plan
or through automatic investments).
An account statement will be sent to you monthly unless there has been
no activity in the account or you are purchasing shares through the Future
First Systematic Investment Plan or through automatic investments, in
which case an account statement will be sent quarterly. Reports will be
sent to each Fund's shareholders at least semiannually showing its
portfolio and other information; the annual report will contain financial
statements audited by the Corporation's independent accountants.
Shareholder inquiries should be addressed to: [insert complete Fund
name], c/o Legg Mason Funds Processing, P.O. Box 1476, Baltimore, Maryland
21203-1476.
SYSTEMATIC WITHDRAWAL PLAN
You may elect to make systematic withdrawals from your Fund account of
a minimum of $50 on a monthly basis if you are purchasing or already own
shares with a net asset value of $5,000 or more. Shareholders should not
purchase shares of a Fund while they are participating in the Systematic
Withdrawal Plan with respect to that Fund. Please contact your Legg Mason
or affiliated investment executive for further information.
LEGG MASON PREMIER ASSET MANAGEMENT ACCOUNT
(FOR GOVERNMENT MONEY MARKET)
Shareholders may participate in Legg Mason's Premier Asset Management
Account, which combines the Fund account, a VISA Gold debit card and a
Legg Mason brokerage account with margin borrowing availability and
unlimited checks with
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<PAGE>
no minimum check amount. Other services include automatic transfer of free
credit balances in a participant's brokerage account to the Fund account
and automatic redemption of Fund shares to offset debit balances in the
participant's brokerage account. Legg Mason charges an annual fee for the
Premier Asset Management Account, which is currently $85 for individuals
and $100 for corporations and businesses. For further information, contact
your Legg Mason or affiliated investment executive.
EXCHANGE PRIVILEGE
As a Fund shareholder, you are entitled to exchange your Primary
Shares of a Fund for the corresponding class of shares of any of the Legg
Mason Funds, provided that such shares are eligible for sale in your state
of residence:
Legg Mason Cash Reserve Trust
A money market fund seeking stability of principal and current income
consistent with stability of principal.
Legg Mason Tax Exempt Trust, Inc.
A money market fund seeking high current income exempt from federal
income tax, preservation of capital, and liquidity.
Legg Mason U.S. Government Money Market Portfolio
A money market fund seeking high current income consistent with
liquidity and conservation of principal.
Legg Mason Value Trust, Inc.
A mutual fund seeking long-term growth of capital.
Legg Mason Special Investment Trust, Inc.
A mutual fund seeking capital appreciation by investing principally in
issuers with market capitalizations of less than $2.5 billion.
Legg Mason Total Return Trust, Inc.
A mutual fund seeking capital appreciation and current income in order
to achieve an attractive total investment return consistent with
reasonable risk.
Legg Mason American Leading Companies Trust
A mutual fund seeking long-term capital appreciation and current
income consistent with prudent investment risk.
Legg Mason International Equity Trust
A mutual fund seeking maximum long-term total return, by investing
primarily in common stocks of companies located in at least three
different countries other than the United States.
Legg Mason Emerging Markets Trust
A mutual fund seeking long-term capital appreciation, by investing
primarily in equity securities of companies based in or doing business in
emerging markets countries.
Legg Mason U.S. Government Intermediate-Term Portfolio
A mutual fund seeking high current income consistent with prudent
investment risk and liquidity needs, primarily by investing in debt
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, while maintaining an average dollar-weighted maturity
of between three and ten years.
Legg Mason Investment Grade Income Portfolio
A mutual fund seeking a high level of current income, through
investment in a diversified portfolio consisting primarily of investment
grade debt securities.
Legg Mason High Yield Portfolio
A mutual fund seeking primarily a high level of current income and
secondarily, capital appreciation, by investing principally in
lower-rated, fixed-income securities.
Legg Mason Global Government Trust
A mutual fund seeking capital appreciation and current income by
investing principally in debt securities issued or guaranteed by foreign
governments, the U.S. Government, their agencies, instrumentalities and
political subdivisions.
Legg Mason Maryland Tax-Free Income Trust(A)
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal
29
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and Maryland state and local income taxes, consistent with prudent
investment risk and preservation of capital.
Legg Mason Pennsylvania Tax-Free Income Trust (A)
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax and Pennsylvania personal income
tax, consistent with prudent investment risk and preservation of capital.
Legg Mason Tax-Free Intermediate-Term Income Trust (A,B)
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax, consistent with prudent investment
risk.
(A) Shares of these funds are sold with an initial sales charge.
(B) Effective August 1, 1995 through July 31, 1996, the sales charge will be
waived for all new accounts and subsequent investments into existing
accounts. After July 31, 1996, any exchanges of these shares will be
subject to the full sales charge, if any, since no sales charge will
have been paid on shares purchased during this period.
Investments by exchange into the Legg Mason funds sold without an
initial sales charge 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. 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
applicable sales charge, determined on the same business day as redemption
of the Fund shares you wish to redeem; except that no sales charge will be
imposed upon proceeds from the redemption of Fund shares to be exchanged
that were originally purchased by exchange from a fund on which the same
or higher initial sales charge previously was paid. There is no charge for
the exchange privilege, but each Fund reserves the right to terminate or
limit the exchange privilege of any shareholder who makes more than four
exchanges from that Fund in one calendar year. To obtain further
information concerning the exchange privilege and prospectuses of other
Legg Mason funds, or to make an exchange, please contact your Legg Mason
or affiliated investment executive. To effect an exchange by telephone,
please call your Legg Mason or affiliated investment executive with the
information described in the section "How You Can Redeem Your Primary
Shares," page 24. Please read the prospectus for the other fund(s)
carefully before you invest by exchange. Each Fund reserves the right to
modify or terminate the exchange privilege upon 60 days' notice to
shareholders.
There is no assurance 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.
INVESTING THROUGH TAX-DEFERRED RETIREMENT PLANS
Investors who are considering establishing an IRA, Keogh Plan, SEP or
other qualified retirement plan may wish to consult their attorneys or
other tax advisers with respect to individual tax questions. Your Legg
Mason or affiliated investment executive can make available to you forms
of plans. The option of investing in these plans through regular payroll
deductions may be arranged with Legg Mason and your employer. Additional
information with respect to these plans is available upon request from any
Legg Mason or affiliated investment executive.
THE CORPORATION'S BOARD OF DIRECTORS, MANAGER AND INVESTMENT ADVISER
BOARD OF DIRECTORS
The business and affairs of each Fund are managed under the direction
of the Corporation's Board of Directors.
MANAGER
Pursuant to separate management agreements with each Fund (each a
"Management Agreement"), which were approved by the Corporation's Board of
Directors, Legg Mason Fund Adviser, Inc., a wholly owned subsidiary of
Legg Mason, Inc., serves as each Fund's manager. The Manager manages the
noninvestment affairs of each Fund, directs all matters related to the
operation of the Funds and provides office space and administrative staff
for the Funds. Each Fund pays the Manager, pursuant to the Management
Agreement, a management fee equal to the following annual rates of its
average daily net assets attributable to
30
<PAGE>
Primary Shares: Government Intermediate, 0.55%; Investment Grade, 0.60%;
High Yield, 0.65%; and Government Money Market, 0.50%. The Manager has
agreed that until December 31, 1996 or when Government Intermediate
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 attributable to Primary Shares (exclusive of taxes,
interest, brokerage and extraordinary expenses) exceed during any month an
annual rate of 1.00% of the Fund's average daily net assets for such
month. After reimbursement by the Manager of certain expenses, the Fund's
total operating expenses for the year ended December 31, 1995 were 0.94%
of average daily net assets. The Manager has also agreed that until
December 31, 1996 or when Investment Grade reaches net assets of $100
million, whichever occurs first, it will continue to reimburse fees and/or
assume other expenses to the extent the Fund's expenses attributable to
Primary Shares (exclusive of taxes, interest, brokerage and extraordinary
expenses) exceed during any month an annual rate of 1.00% of the Fund's
average daily net assets for such month. After reimbursement by the
Manager of certain expenses, the Fund's total operating expenses for the
year ended December 31, 1995 were 0.88% of average daily net assets. These
reimbursement agreements are voluntary and may or may not be renewed by
the Manager. Reimbursement by the Manager reduces a Fund's expenses and
increases its yield and total return. For the year ended December 31,
1995, total operating expenses of High Yield and Government Money Market
were 1.5% and 0.67% of average daily net assets, respectively.
The Manager acts as investment adviser, manager or consultant to
sixteen investment company portfolios which had aggregate assets under
management of over $5.5 billion as of March 31, 1996. The Manager's
address is 111 South Calvert Street, Baltimore, Maryland 21202.
INVESTMENT ADVISER
Western Asset Management Company, another wholly owned subsidiary of
Legg Mason, Inc., serves as investment adviser to each 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
investment and other affairs of each Fund and directs the investments of
each Fund in accordance with its investment objective, policies and
limitations. For these services, the Manager (not the Funds) pays the
Adviser a fee, computed daily and payable monthly, at an annual rate equal
to: 40-100% of the fee received by the Manager depending on the amount the
Manager receives, or up to 0.22% of Government Intermediate's average
daily net assets; 40% of the fee received by the Manager, or 0.24% of
Investment Grade's average daily net assets; 77% of the fee received by
the Manager, or 0.50% of High Yield's average daily net assets; and 30% of
the fee received by the Manager, or 0.15% of Government Money Market's
average daily net assets.
An investment committee has been responsible for the day-to-day
management of each Fund since its inception.
The Adviser also renders investment advice to sixteen open-end
investment companies and one closed-end investment company, which together
had aggregate assets under management of approximately $3.3 billion as of
March 31, 1996. The Adviser also renders investment advice to private
accounts with fixed income assets under management of approximately $16.6
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 FUNDS' DISTRIBUTOR
Legg Mason is the distributor of the Funds' shares pursuant to an
Underwriting Agreement
31
<PAGE>
with the Corporation. The Underwriting Agreement obligates Legg Mason to
pay certain expenses in connection with the offering of shares of each
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 year ended
December 31, 1995, Legg Mason received $53,079, $22,184, $16,529 and
$77,378 for performing such services in connection with Government
Intermediate, Investment Grade, High Yield and Government Money Market,
respectively.
The Board of Directors of the Corporation has adopted Distribution and
Shareholder Services Plans (each a "Plan") pursuant to Rule 12b-1 under
the Investment Company Act of 1940 ("1940 Act") for each Fund. The Plans
provide that as compensation for Legg Mason's ongoing services to
investors in Primary Shares and its activities and expenses related to the
sale and distribution of Primary Shares, Government Intermediate,
Investment Grade and High Yield each pay Legg Mason, from the assets
attributable to Primary Shares, an annual distribution fee and an annual
service fee, each of which is equal to 0.25% of that Fund's average daily
net assets. The distribution fee and the service fee are computed daily
and paid monthly. The fees received by Legg Mason during any year may be
more or less than its costs of providing distribution and shareholder
services for Primary Shares.
Government Money Market may pay Legg Mason a fee for its distribution
services in an amount not to exceed an annual rate of 0.20% of the Fund's
average daily net assets. Legg Mason has no current intention of
requesting any such payments from the Fund, but may do so in the future.
Payments may not be made pursuant to the Plan, however, until the Board of
Directors has approved its implementation.
Activities for which such payments could be made if the Plan is
implemented include, but are not limited to, compensation to persons,
including Legg Mason investment executives, who engage in or support
distribution of shares or who provide shareholder services, printing of
prospectuses and reports for persons other than existing shareholders,
advertising, preparation and distribution of sales literature, overhead,
travel and telephone expenses. In any given year, such expenses might
exceed or be less than the fee payable to Legg Mason under the Plan. Legg
Mason may also receive payments for shareholder services from the Manager
out of fees paid to the Manager, its past profits or other source of funds
available to it.
NASD rules limit the amount of annual distribution fees that may be
paid by mutual funds and impose a ceiling on the cumulative distribution
fees paid. Each Fund's Plan complies with those rules.
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. 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 $0.001 per share. Government Intermediate, Investment Grade and High
Yield currently offer two Classes of Shares -- Class A (known as "Primary
Shares") and Class Y (known as "Navigator Shares"). The two Classes
represent interests in the same pool of assets. A separate vote is taken
by a Class of Shares of a Fund if a matter affects just that Class of
Shares. Each Class of Shares may bear certain 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.
32
<PAGE>
Navigator Shares are currently offered for sale only to institutional
clients of Fairfield for investment of their own funds and funds for which
they act in a fiduciary capacity, to clients of Trust Company for which
Trust Company exercises discretionary invesment management responsibility,
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. The initial and subsequent investment minimums for
Navigator Shares are $50,000 and $100, respectively. Investments in
Navigator Shares may be made through investment executives of Fairfield
Group, Inc., Horsham, Pennsylvania, or Legg Mason.
Each Fund pays no Rule 12b-1 fee with respect to Navigator Shares.
With respect to the Navigator Class of High Yield, the per share net asset
value of Navigator Shares, and dividends paid to Navigator shareholders,
are generally expected to be higher than those of Primary Shares, because
of the lower expenses attributable to Navigator Shares. The per share net
asset value of the classes of shares of High Yield will tend to converge,
however, immediately after the payment of ordinary income dividends.
Navigator Shares of a Fund may be exchanged for the corresponding class of
shares of certain other Legg Mason funds. Investments by exchange into the
other Legg Mason funds are made at the per share net asset value,
determined on the same business day as redemption of the Navigator Shares
the investors wish to redeem.
The Board of Directors of the Corporation 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 Boards will
consider whether any such conflict exists and, if so, take appropriate
action.
Shareholders of the Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' 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 their respective Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
33
<PAGE>
APPENDIX
RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND
RATINGS:
AAA -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered upper-medium-grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa -- Bonds which are rated Baa are considered medium-grade
obligations, (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered well-assured. Often the
protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time
may be small.
Caa -- Bonds which are rated Caa are of poor standing and may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree and are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
DESCRIPTION OF STANDARD & POOR'S ("S&P") CORPORATE BOND RATINGS:
AAA -- This is the highest rating assigned by Standard & Poor's to an
obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small
degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal , although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in
higher rated categories.
BB, B, CCC, CC -- Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominately speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms
of the obligation. BB indicates the lowest degree of speculation and CC
the highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
34
<PAGE>
uncertainties or major risk exposures to adverse conditions.
C -- Bonds on which no interest is being paid are rated C.
D -- Bonds rated D are in payment default and payment of interest
and/or repayment of principal is in arrears.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS:
aaa -- An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a reasonable
assurance that earnings and asset protection will remain relatively
well-maintained in the foreseeable future.
a -- An issue which is rated "a" is considered to be an
upper-medium-grade preferred stock. While risks are judged to be somewhat
greater than in the "aaa" and "aa" classification, earnings and asset
protection are, nevertheless, expected to be maintained at adequate
levels.
baa -- An issue which is rated "baa" is considered to be a
medium-grade preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be
questionable over any great length of time.
ba -- An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and
asset protection may be very moderate and not well safeguarded during
adverse periods. Uncertainty of position characterizes preferred stocks in
this class.
b -- An issue which is rated "b" generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time may be small.
caa -- An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate
the future status of payments.
ca -- An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payments.
c -- This is the lowest rated class of preferred stock or preference
stock. Issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
35
<PAGE>
ADDRESSES
THE
NAVIGATOR
CLASS DISTRIBUTOR:
OF THE Legg Mason Wood Walker, Inc.
111 South Calvert Street
LEGG MASON P.O. Box 1476, Baltimore, MD 21203-1476
TAXABLE 410(bullet)539(bullet)0000
INCOME FUNDS 800(bullet)822(bullet)5544
AUTHORIZED:
Putting Your Future First Fairfield Group, Inc.
200 Gibraltar Road
Horsham, PA 19044
Taxable Income Funds
Navigator Class of U.S. TRANSFER AND SHAREHOLDER SERVICING
Government Intermediate- AGENT
Term Portfolio Boston Financial Data Services
P.O. Box 953
Navigator Class of Investment Boston, MA 02103
Grade Income Portfolio
Navigator Class of COUNSEL:
High Yield Portfolio Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Prospectus Washington, DC 20036
May 1, 1996
INDEPENDENT ACCOUNTANTS:
Coopers & Lybrand L.L.P.
217 East Redwood Street
Baltimore, MD 21202
This wrapper is not part of the prospectus. (Legg Mason Logo)
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 any Fund or its distributor. The Prospectus does not
constitute an offering by any Fund or by the principal underwriter in any
jurisdiction in which such offering may not lawfully be made.
<PAGE>
NAVIGATOR TAXABLE INCOME FUNDS
PROSPECTUS
DATED: MAY 1, 1996
<R/>
LEGG MASON U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
LEGG MASON INVESTMENT GRADE INCOME PORTFOLIO
LEGG MASON HIGH YIELD PORTFOLIO
Shares of Navigator U.S. Government Intermediate-Term Portfolio, Navigator
Investment Grade Income Portfolio and Navigator High Yield Portfolio
(collectively referred to as "Navigator Shares") represent separate classes
("Navigator Classes") of interest in the Legg Mason U.S. Government
Intermediate-Term Portfolio ("Government Intermediate"), Legg Mason Investment
Grade Income Portfolio ("Investment Grade") and Legg Mason High Yield Portfolio
("High Yield"), respectively. Government Intermediate, Investment Grade and High
Yield (each separately referred to as a "Fund" and collectively referred to as
the "Funds") are separate, professionally managed portfolios of Legg Mason
Income Trust, Inc. ("Corporation"), a diversified open-end management investment
company.
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 Funds that a
prospective investor ought to know before investing. It should be retained for
future reference. A Statement of Additional Information about the Funds dated
May 1, 1996 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 the Funds' distributor, Legg Mason Wood Walker, Incorporated
("Legg Mason") (address and telephone numbers listed below).
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.
GOVERNMENT INTERMEDIATE seeks to provide investors with high current income
consistent with prudent investment risk and liquidity needs. In seeking to
achieve the Fund's objective, the Corporation'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.
INVESTMENT GRADE seeks to provide investors with a high level of current
income through investment in a diversified portfolio of debt securities. In
seeking to achieve the Fund's objective, the Adviser, under normal
circumstances, invests primarily in debt securities which the Adviser considers
to be of investment grade, i.e., securities rated within the four highest grades
by Moody's Investors Service, Inc. ("Moody's) or Standard & Poor's Ratings Group
("S&P"), securities comparably rated by another nationally recognized
statistical rating organization ("NRSRO"), or unrated securities judged by the
Adviser to be of comparable quality.
HIGH YIELD seeks to provide investors with a high level of current income.
As a secondary objective, the Fund seeks capital appreciation. IN SEEKING TO
ACHIEVE THE FUND'S OBJECTIVES, THE ADVISER, UNDER NORMAL CIRCUMSTANCES, INVESTS
AT LEAST 65% OF THE FUND'S TOTAL ASSETS IN HIGH YIELD, FIXED-INCOME SECURITIES
(COMMONLY KNOWN AS "JUNK BONDS"); THAT IS, INCOME-PRODUCING DEBT SECURITIES AND
PREFERRED STOCKS OF ALL TYPES, INCLUDING CORPORATE DEBT SECURITIES AND PREFERRED
STOCK. IN ADDITION TO OTHER RISKS, THESE BONDS ARE SUBJECT TO GREATER
FLUCTUATIONS IN VALUE AND RISK OF LOSS OF INCOME AND PRINCIPAL DUE TO DEFAULT BY
THE ISSUER THAN ARE HIGHER-RATED BONDS; THEREFORE, INVESTORS SHOULD CAREFULLY
ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THIS FUND. SEE "INVESTMENT
TECHNIQUES AND RISKS" ON PAGE 10. The Fund may invest up to 25% of its total
assets in securities restricted as to their disposition, which may include
securities for which the Fund believes there is a liquid market. No more than
15% of the Fund's net assets will be invested in securities deemed by the Fund
to be illiquid. An investment in the Fund does not constitute a complete
investment program and is not appropriate for persons unwilling to assume a high
degree of risk.
The Navigator Classes of Shares, described in this Prospectus, are currently
offered for sale only to institutional clients of the Fairfield Group, Inc.
("Fairfield") for investment of their own monies and monies for which they act
in a fiduciary capacity, to clients of Legg Mason Trust Company ("Trust
Company") for which Trust
<PAGE>
Company exercises discretionary investment management responsibility (such
institutional investors are referred to collectively as "Institutional Clients"
and accounts of the customers with such Clients ("Customers") 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 Funds, 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." Each Fund pays
management fees to Legg Mason Fund Adviser, Inc., but Navigator Classes pay no
distribution fees.
TABLE OF CONTENTS
Expenses 3
Financial Highlights 4
Performance Information 7
Investment Objectives and Policies 8
How to Purchase and Redeem Shares 18
How Shareholder Accounts are Maintained 19
How Net Asset Value Is Determined 19
Dividends and Other Distributions 20
Tax Treatment of Dividends and Other
Distributions 20
Shareholder Services 21
The Corporation's Board of Directors, Manager and
Investment Adviser 22
The Funds' Distributor 23
Description of the Corporation and its Shares 23
Appendix A-1
Legg Mason Wood Walker, Incorporated
111 South Calvert Street
P.O. Box 1476
Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
800 (Bullet) 822 (Bullet) 5544
2
<PAGE>
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 of a Fund
will bear directly or indirectly. The expenses and fees set forth in the table
are based on average net assets and annual Fund operating expenses of the
Navigator Class of Government Intermediate for the year ended December 31, 1995
and are based on estimated expenses for the initial period of operations of the
Navigator Classes of Investment Grade and High Yield.
ANNUAL FUND OPERATING EXPENSES -- NAVIGATOR SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
GOVERNMENT INVESTMENT HIGH
INTERMEDIATE(A) GRADE(A) YIELD
<S> <C> <C> <C>
Management fees 0.29% 0.19% 0.65%
12b-1 fees None None None
Other expenses 0.19% 0.28% 0.32%
Total operating
expenses 0.48%(B) 0.47%(B) 0.97%
<CAPTION>
</TABLE>
(A) The expense ratio at December 31, 1995 for Navigator Shares of Government
Intermediate and Investment Grade would have been 0.74% and 0.88%,
respectively, had the Funds' Manager not agreed to waive management fees and
reimburse other expenses. The reimbursement agreement, wherein the Manager
has agreed to continue to waive fees and/or assume other expenses to the
extent the expenses attributable to Navigator Shares (exclusive of taxes,
interest, brokerage and extraordinary expenses) exceed during any month an
annual rate of 0.50% of average daily net assets for such month, will remain
in effect until the earlier of December 31, 1996, or, with respect to
Government Intermediate, until its net assets reach $400 million, and with
respect to Investment Grade, until its net assets reach $100 million,
and unless extended will terminate on that date.
(B) The expense information in the table has been restated to reflect current
fees.
For further information concerning Fund expenses, see "The Corporation's
Board of Directors, Manager and Investment Adviser," page 22.
EXAMPLE
The following example illustrates the expenses that you would pay on a
$1,000 investment in Navigator Shares 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 Funds charge no redemption fees of any kind.
<TABLE>
<CAPTION>
GOVERNMENT INVESTMENT HIGH
INTERMEDIATE GRADE YIELD
<S> <C> <C> <C>
1 Year $ 5 $ 5 $ 10
3 Years $ 15 $ 15 $ 31
5 Years $ 27 $ 26 $ 54
10 Years $ 60 $ 59 $119
</TABLE>
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund 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 OF THE FUNDS. THE ABOVE TABLES AND EXAMPLE 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, whether the Manager reimburses
all or a portion of a Fund's expenses, and the extent to which Navigator Shares
incur variable expenses, such as transfer agency costs.
3
<PAGE>
FINANCIAL HIGHLIGHTS
Government Intermediate, Investment Grade and High Yield each offers
two classes of shares, Primary Shares and 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 tables that follow have been derived from each
Fund's financial statements which have been audited by Coopers & Lybrand
L.L.P., independent accountants. Each Fund's financial statements for the
year ended December 31, 1995 and the report of Coopers & Lybrand L.L.P.
thereon are included in that Fund's Annual Report to Shareholders and are
incorporated by reference into the Statement of Additional Information. The
annual report for each Fund is available to shareholders without charge by
calling an investment executive at Fairfield, Legg Mason or Legg Mason's
Funds Marketing Department at 800-822-5544.
GOVERNMENT INTERMEDIATE
<TABLE>
<CAPTION>
NAVIGATOR CLASS PRIMARY CLASS
Years Ended December 31, 1995 1994(B) 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 9.72 $9.72 $ 9.72 $10.43 $10.70 $10.77 $10.29 $10.20
Net investment income 0.62(C) 0.05(C) 0.57(D) 0.51(D) 0.53(D) 0.60(D) 0.72(D) 0.78(D)
Net realized and
unrealized gain (loss)
on investments 0.75 -- 0.75 (0.71) 0.17 0.05 0.70 0.09
Total from investment
operations 1.37 0.05 1.32 (0.20) 0.70 0.65 1.42 0.87
Distributions to
shareholders:
Net investment income (0.62) (0.05) (0.57) (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) -- -- --
Total distributions (0.62) (0.05) (0.57) (0.51) (0.97) (0.72) (0.94) (0.78)
Net asset value, end of
period $ 10.47 $9.72 $ 10.47 $ 9.72 $10.43 $10.70 $10.77 $10.29
Total return(E) 14.5% 0.50% 13.9% (1.9)% 6.6% 6.3% 14.4% 9.1%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net
assets:
Expenses 0.4%(C) 0.4%(C,F) 0.9%(D,G) 0.9%(D,G) 0.9%(D,G) 0.9%(D,G) 0.8%(D,G) 0.6%(D,G)
Net investment income 6.1%(C) 6.4%(C,F) 5.6%(D) 5.1%(D) 4.8%(D) 5.5%(D) 6.7%(D) 7.7%(D)
Portfolio turnover rate 289.9% 315.7% 289.9% 315.7% 490.2% 512.6% 642.8% 67.0%
Net assets, end of
period (in thousands) $4,184 $4,024 $231,886 $231,255 $299,529 $307,320 $211,627 $74,423
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1989 1988 1987(A)
<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(D) 0.74(D) 0.30(D)
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 -- -- --
Total distributions (0.80) (0.75) (0.30)
Net asset value, end of
period $10.20 $9.79 $ 9.92
Total return(E) 12.8% 6.4% 2.2%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net
assets:
Expenses 0.8%(D,G)1.0%(D,G) 1.0%(D,F,G)
Net investment income 7.9%(D) 7.4%(D) 7.4%(D,F)
Portfolio turnover rate 57.3% 132.5% 66.3%(F)
Net assets, end of
period (in thousands) $43,051 $27,087 $16,617
</TABLE>
(A) FOR THE PERIOD AUGUST 7, 1987 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1987.
(B) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR
SHARES) TO DECEMBER 31, 1994.
(C) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE MANAGER FOR EXPENSES IN
EXCESS OF VOLUNTARY LIMITATION AS FOLLOWS: 0.40% UNTIL APRIL 30, 1995;
0.45% UNTIL APRIL 30, 1996; AND 0.50% UNTIL DECEMBER 31, 1996.
(D) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE MANAGER 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; 0.90% UNTIL APRIL 30, 1995; 0.95% UNTIL APRIL 30, 1996; AND
1.00% UNTIL DECEMBER 31, 1996.
(E) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(F) ANNUALIZED.
(G) INCLUDES DISTRIBUTION FEE OF 0.5%.
4
<PAGE>
INVESTMENT GRADE
<TABLE>
<CAPTION>
NAVIGATOR
CLASS PRIMARY CLASS
Years Ended December 31, 1995(B) 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $ 10.32 $ 9.27 $10.40 $10.71 $10.71 $ 9.97 $10.29 $ 9.88
Net investment income 0.03(C) 0.65(D) .60(D) .62(D) .66(D) .76(D) .84(D) .82(D)
Net realized and unrealized
gain (loss) on investments,
options and futures 0.12 1.17 (1.09) .33 .25 .77 (.28) .41
Total from investment
operations 0.15 1.82 (.49) .95 .91 1.53 .56 1.23
Distributions to shareholders
from:
Net investment income (0.03) (0.65) (.60) (.62) (.66) (.76) (.84) (.82)
Net realized gain on
investments -- -- (.04) (.63) (.25) (.03) (.04) --
In excess of net realized
gain on investments -- -- -- (.01) -- -- -- --
Total distributions (0.03) (0.65) (0.64) (1.26) (0.91) (0.79) (0.88) (0.82)
Net asset value, end of
period $ 10.44 $ 10.44 $ 9.27 $10.40 $10.71 $10.71 $ 9.97 $10.29
Total return(E) 1.4% 20.1% (4.8)% 11.2 % 6.8 % 16.0 % 5.8 % 13.0%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 0.4%(C,F) 0.88%(D,G) 0.85%(D,G) 0.85%(D,G) 0.85%(D,G) 0.71%(D,G) 0.50%(D,G) 0.82%(D,G)
Net investment income 6.7%(C,F) 6.5%(D) 6.1%(D) 5.6%(D) 6.1%(D) 7.3%(D) 8.3%(D) 8.1%(D)
Portfolio turnover rate 221.1% 221.1% 200.1% 348.2% 316.7% 212.5% 54.9% 92.4%
Net assets, end of period (in
thousands) $249 $85,633 $66,196 $68,781 $48,033 $36,498 $22,994 $13,891
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1988 1987(A)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $ 9.94 $10.00
Net investment income .78(D) .31(D)
Net realized and unrealized
gain (loss) on investments,
options and futures (.035) (.06)
Total from investment
operations .745 .25
Distributions to shareholders
from:
Net investment income (.78) (.31)
Net realized gain on
investments (.025) --
In excess of net realized
gain on investments -- --
Total distributions (0.805) (0.31)
Net asset value, end of
period $ 9.88 $ 9.94
Total return(E) 7.7% 2.6%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 1.00%(D,G) 1.00(D,F,G)
Net investment income 7.7%(D) 7.8%(D,F)
Portfolio turnover rate 146.3% 72.4%(F)
Net assets, end of period (in
thousands) $9,913 $5,661
</TABLE>
(A) FOR THE PERIOD AUGUST 7, 1987 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1987.
(B) FOR THE PERIOD DECEMBER 1, 1995 (COMMENCEMENT OF SALE OF NAVIGATOR
SHARES) TO DECEMBER 31, 1995.
(C) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE MANAGER FOR EXPENSES IN
EXCESS OF VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: 0.40% UNTIL APRIL 30,
1996; AND 0.50% UNTIL DECEMBER 31, 1996.
(D) NET OF FEES WAIVED AND REIMBURSEMENTS MADE BY THE ADVISER IN EXCESS OF
VOLUNTARY EXPENSE LIMITATIONS AS FOLLOWS: 1.0% UNTIL SEPTEMBER 10, 1989;
0.5% UNTIL DECEMBER 31, 1990; 0.65% UNTIL APRIL 30, 1991; 0.7% UNTIL
OCTOBER 31, 1991; 0.8% UNTIL DECEMBER 31, 1991; 0.85% UNTIL APRIL 30,
1995; 0.9% UNTIL APRIL 30, 1996 AND 1.00% UNTIL DECEMBER 31, 1996.
(E) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(F) ANNUALIZED.
(G) INCLUDES DISTRIBUTION FEE OF 0.5%.
5
<PAGE>
HIGH YIELD
<TABLE>
<CAPTION>
PRIMARY CLASS
Years Ended December 31, 1995 1994(A)
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 13.57 $15.00
Net investment income 1.29 1.02
Net realized and unrealized gain (loss) on investments 1.05 (1.44)
Total from investment operations 2.34 (.42)
Distributions to shareholders from net investment income (1.29) (1.01)
Net asset value, end of period $ 14.62 $13.57
Total return(B) 18.01% (2.90)%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 1.5% 1.6%(C)
Net investment income 9.3% 8.4%(C)
Portfolio turnover rate 47.4% 67.4%(C)
Net assets, end of period (in thousands) $108,417 $53,424
</TABLE>
(A) FOR THE PERIOD FEBRUARY 1, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1994.
(B) NOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
(C) ANNUALIZED.
6
<PAGE>
PERFORMANCE INFORMATION
From time to time each 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 only 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 as of December 31, 1995 were as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL GOVERNMENT INVESTMENT HIGH
RETURN INTERMEDIATE GRADE YIELD
<S> <C> <C> <C>
Primary Class:
One Year +13.88% +20.14% +18.01%
Five Years +44.74% +57.52% N/A
Life of Class +93.68%(A) +107.93%(A) +14.60%(B)
Navigator Class:
One Year +14.45% N/A N/A
Life of Class +15.02%(C) +1.42(D) N/A
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL GOVERNMENT INVESTMENT HIGH
TOTAL RETURN INTERMEDIATE GRADE YIELD
<S> <C> <C> <C>
Primary Class:
One Year +13.88% +20.14% +18.01%
Five Years +7.68% +9.51% N/A
Life of Class +8.18%(A) +9.10%(A) +7.38%(B)
Navigator Class:
One Year +14.45% N/A N/A
Life of Class +13.81%(C) N/A N/A
</TABLE>
(A) INCEPTION OF GOVERNMENT INTERMEDIATE AND INVESTMENT GRADE -- AUGUST 7, 1987.
(B) INCEPTION OF HIGH YIELD -- FEBRUARY 1, 1994.
(C) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF NAVIGATOR SHARES)
TO DECEMBER 31, 1995.
(D) FOR THE PERIOD DECEMBER 1, 1995 (COMMENCEMENT OF SALE OF NAVIGATOR SHARES)
TO DECEMBER 31, 1995.
No adjustment has been made for any income taxes payable by shareholders.
The investment return of each Fund will fluctuate. The principal value of an
investment in each Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Returns of
Government Intermediate and Investment Grade would have been lower if the
Manager had not waived/reimbursed certain fees and expenses during the fiscal
years 1987 through 1995. Because Navigator Shares have lower total expenses,
they will generally have a higher return than Primary Shares.
Each 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 each Fund's performance is contained in that
Fund's annual report to shareholders, which may be obtained without charge by
calling an investment executive at Fairfield, Legg Mason or Legg Mason's Funds
Marketing Department at 800-822-5544.
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective may not be changed without
shareholder approval; however, except as otherwise noted, the investment
policies of each Fund described below may be changed by the Corporation's
Board of Directors without a shareholder vote. There can be no assurance
that any Fund will achieve its investment objective.
GOVERNMENT INTERMEDIATE'S investment objective is to provide investors
with high current income consistent with prudent investment risk and
liquidity needs. 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. 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 as market interest rates change. Investments in
mortgage-related securities issued by governmental or government-related
entities, as described on page 12, 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 S&P (AAA, AA, A or
BBB) or Moody's (Aaa, Aa, A or Baa), securities comparably rated by
another NRSRO, 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 ratings is included in the Appendix to this Prospectus.
INVESTMENT GRADE'S investment objective is to provide investors with a
high level of current income through investment in a diversified portfolio
of debt securities. In seeking to achieve its objective, the Fund invests
primarily in debt securities which the Adviser considers to be of
investment grade, of which some may be privately placed and some may have
equity features.
In pursuing its objective, under normal circumstances, the Fund
invests at least 75% of its total assets in the following types of
investment-grade interest-bearing debt securities:
(1) debt securities which are rated at the time of purchase within the
four highest grades assigned by Moody's or S&P, or, if unrated by Moody's
or S&P, judged by the Adviser to be of comparable quality.
(2) securities of, or guaranteed by, the U.S. government, its agencies
or instrumentalities.
(3) commercial paper and other money market instruments which are
rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's at the date of
investment, or if unrated by Moody's or S&P, judged by the Adviser to have
investment quality comparable to securities which may be purchased under
item (1); bank certificates of deposit; and bankers' acceptances.
The remainder of the Fund's assets, not in excess of 25% of its total
assets, may be invested in: (1) debt securities of issuers which are rated
at the time of purchase below Moody's and S&P's four highest grades, but
rated B or better by Moody's or S&P, or if unrated by Moody's or S&P,
judged by the Adviser to be of comparable quality; (2) securities which
may be convertible into or exchangeable for, or carry warrants to
purchase, common stock or other equity interests (such securities may
offer attractive income opportunities, and the debt securities of certain
issuers may not be available without such features); and (3) preferred
stocks, rated no lower than Ba by Moody's or, if unrated by Moody's,
judged by the Adviser to be of comparable quality.
The Fund currently invests in debt securities with maturities ranging
from short-term (including overnight) up to forty years and anticipates
that it will continue to do so. The Fund expects to maintain its portfolio
of securities so as to have an average dollar-weighted maturity of between
five and twenty years.
HIGH YIELD'S investment objective is to provide investors with a high
level of current income. As a secondary objective, the Fund seeks capital
appreciation. In seeking to achieve the Fund's objectives, the Adviser,
under normal circumstances, invests at least 65% of the Fund's total
assets in high yield, fixed-income securities, that is,
8
<PAGE>
income producing debt securities and preferred stocks of all types,
including corporate debt securities and preferred stock, convertible
securities, zero coupon securities, deferred interest securities,
mortgage-backed securities and asset-backed securities. The Fund's
remaining assets may be held in cash or money market instruments, or
invested in common stocks and other equity securities when these types of
investments are consistent with the primary objective of high current
income or are acquired as part of a unit consisting of a combination of
fixed-income securities and equity investments. Such remaining assets may
also be invested in fixed-income securities rated above BBB by S&P or Baa
by Moody's, comparably rated by another NRSRO, or unrated securities
deemed by the Adviser to be of equivalent quality. Moreover, the Fund may
hold cash or money market instruments without limit for temporary
defensive purposes or pending investment. Current yield is the primary
consideration used by the Adviser in the selection of portfolio
securities, although consideration may also be given to the potential for
capital appreciation.
Higher yields are generally available from securities rated BBB or
lower by S&P, Baa or lower by Moody's, securities comparably rated by
another NRSRO, or unrated securities of equivalent quality, and the Fund
may invest all or a substantial portion of its assets in such securities.
Debt securities rated below investment grade (i.e., below BBB/Baa) are
deemed by these agencies to be predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal and may involve
major risk or exposure to adverse conditions. The Fund may invest in
securities rated as low as "C" by Moody's or "D" by S&P, which ratings
indicate that the obligations are highly speculative and may be in default
or in danger of default as to principal and interest. Ratings are only the
opinions of the agencies issuing them and are not absolute guarantees as
to quality. The Adviser does not rely solely on the ratings of rated
securities in making investment decisions but also evaluates other
economic and business factors affecting the issuer. The Appendix to this
Prospectus describes Moody's and S&P's rating categories of securities in
which the Fund may invest.
Fixed-income securities in which the Fund may invest include preferred
stocks and all types of debt obligations of both domestic and foreign
issuers, commercial paper, and obligations issued or guaranteed by the
U.S. Government, foreign governments or of any of their respective
political subdivisions, agencies, or instrumentalities, including
repurchase agreements secured by such instruments.
The Fund may invest up to 25% of its total assets in private
placements, securities traded pursuant to Rule 144A under the Securities
Act of 1933, or securities which, though not registered at the time of
their initial sale, are issued with registration rights. Some of these
securities may be deemed by the Adviser to be liquid, under guidelines
adopted by the Corporation's Board of Directors pursuant to SEC
regulations. The Fund will not invest more than 5% of its total assets in
any one issuer, except for issues of the U.S. Government, its agencies and
instrumentalities or repurchase agreements collateralized by such
securities; however, up to 25% of the Fund's total assets may be invested
in securities issued by Canadian provinces or by Crown Corporations whose
obligations are guaranteed by either the Canadian federal government or a
provincial government. No more than 25% of the Fund's total assets may be
invested in issuers having their principal business activity in the same
industry.
GENERAL
The market value of the interest-bearing debt securities held by a
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 a 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 lever-
9
<PAGE>
age; 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.
Each Fund has adopted certain fundamental investment limitations that,
like its investment objective, may not be changed without the approval of
its shareholders. A full description of these investment limitations is
included in the Statement of Additional Information.
INVESTMENT TECHNIQUES AND RISKS
The following investment techniques and risks apply to each of the
Funds unless otherwise stated.
Corporate Debt Securities
Corporate debt securities may pay fixed or variable rates of interest,
or interest at a rate contingent upon some other factor, such as the price
of some commodity. These securities may be convertible into preferred or
common equity, or may be bought as part of a unit containing common stock.
In selecting corporate debt securities for a Fund, the Adviser reviews and
monitors the creditworthiness of each issuer and issue. The Adviser also
analyzes interest rate trends and specific developments which it believes
may affect individual issuers.
Callable Debt Securities
A debt security may be callable, i.e., subject to redemption at the
option of the issuer at a price established in the security's governing
instrument. If a debt security held by a Fund is called for redemption,
that Fund will be required to permit the issuer to redeem the security or
sell it to a third party. Either of these actions could have an adverse
effect on a Fund's ability to achieve its investment objectives.
Risks of Lower Rated Debt Securities
Debt securities rated Baa and preferred stock rated Ba are deemed by
Moody's to have speculative characteristics. Debt securities rated B by
Moody's "generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other
terms of the contract over any long period of time may be small." S&P
states that debt rated B "has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial or economic conditions will likely
impair capacity or willingness to pay interest and repay principal."
High yield bonds offer a higher yield to maturity than bonds with
higher ratings, as compensation for holding an obligation that is subject
to greater risk. The principal risks of high yield securities include: (i)
limited liquidity and secondary market support, (ii) substantial market
price volatility resulting from changes in prevailing interest rates,
(iii) the fact that such obligations are often unsecured and are
subordinated to the claims of banks and other senior lenders in bankruptcy
proceedings, (iv) the operation of mandatory sinking fund or
call/redemption provisions during periods of declining interest rates,
whereby the holder might receive redemption proceeds at times when only
lower-yielding portfolio securities are available for investment, (v) the
possibility that earnings of the issuer may be insufficient to meet its
debt service, (vi) the issuer's low creditworthiness and potential for
insolvency during periods of rising interest rates and economic downturn,
(vii) the fact that the issuers are often highly leveraged and may not
have access to more traditional methods of financings and (viii) the
possibility of adverse publicity and investor perceptions, whether or not
due to fundamental analysis, which may result in widespread sales and
declining market prices. If the Fund is required to seek recovery upon a
default in the payment of principal or interest, it may incur additional
expenses and may have limited legal recourse in the event of a default.
As a result of the limited liquidity of high yield securities, their
prices have at times experienced significant and rapid decline when a
significant number of holders of high yield securities simultaneously
decided to sell them. A decline is also likely in the high yield bond
market during an economic downturn. An economic downturn or an increase in
interest rates could severely disrupt the market for high yield securities
and adversely affect the value of outstanding securities and the ability
of the issuers to repay principal and interest. Yields on lower rated debt
securities may rise dramatically in such periods, reflecting the risk that
holders of such securities could lose a substantial portion of their value
as a result of the issuers' financial restructuring or default. There can
be no assurance that such declines will not recur. Because the market for
high yield securities is less liquid, the valuation of these securities
may require greater judgment than is necessary with respect to securities
having more active markets.
Although the prices of lower-rated bonds are generally less sensitive
to interest rate changes than are higher-rated bonds, the prices of lower-
10
<PAGE>
rated bonds may be more sensitive to adverse economic changes and
developments regarding the individual issuer. Although the market for
lower-rated debt securities is not new, and the market has previously
weathered economic downturns, there has been in recent years a substantial
increase in the use of such securities to fund corporate acquisitions and
restructurings. Accordingly, the past performance of the market for such
securities may not be an accurate indication of its performance during
future economic downturns or periods of rising interest rates.
If an investment-grade security purchased by Investment Grade is
subsequently given a rating below investment-grade, the Adviser will
consider that fact in determining whether to retain that security in the
Fund's portfolio.
The table below provides a summary of ratings assigned to debt
holdings in the portfolios of Investment Grade and High Yield. These
figures are dollar-weighted averages of month-end portfolio holdings
during the fiscal year ended December 31, 1995, presented as a percentage
of total investments. These percentages are historical and are not
necessarily indicative of the quality of current or future portfolio
holdings, which may vary.
<TABLE>
<CAPTION>
Aaa/
MOODY'S Aa/A Baa Ba B Caa Ca C NR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
Grade 65.0% 19.1% 8.6% 5.6% -- -- -- 1.7%
High Yield --% 2.3% 16.1% 65.6% 2.3% 0.7% 0.1% 12.9%
</TABLE>
<TABLE>
<CAPTION>
AAA/
S&P AA/A BBB BB B CCC CC/C D NR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
Grade 66.8% 15.9% 13.0% 4.3% -- -- -- --
High Yield --% 1.4% 22.4% 59.3% 8.9% -- 0.2% 7.8%
</TABLE>
There were no debt securities not rated by either Moody's or S&P for
Investment Grade. The dollar-weighted average of debt securities not rated
by either Moody's or S&P amounted to 7.7% for High Yield. This may include
securities rated by other NRSROs, as well as unrated securities. Unrated
securities are not necessarily lower-quality securities, but may not be
attractive to as many investors.
U.S. Government Securities
U.S. government securities include direct obligations of the U.S.
Treasury and obligations issued by U.S. government agencies and
instrumentalities, including securities that are supported by: (1) the
full faith and credit of the United States (e.g., certificates of the
Government National Mortgage Association ("GNMA")); (2) the right of the
issuer to borrow from the U.S. Treasury (e.g., Federal Home Loan Banks
securities); (3) the discretionary authority of the U.S. Treasury to lend
to the issuer (e.g., Federal National Mortgage Association ("FNMA")
securities); and (4) solely by the creditworthiness of the issuer (e.g.,
Federal Home Loan Mortgage Corporation ("FHLMC") securities). Neither the
U.S. Government nor any of its agencies or instrumentalities guarantees
the market value of the securities they issue. Therefore, the market value
of such securities can be expected to fluctuate in response to changes in
interest rates.
Mortgage-Related Securities
Mortgage-related securities represent interests in pools of mortgages.
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, mortgage
bankers and other secondary market issuers.
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. Some mortgage-related 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.
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 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. When interest rates are
declining, such prepayments usually increase. On the other hand, a
decrease in the rate of prepayments, resulting from an increase in market
interest rates, among other causes, may extend the effective maturities of
mortgage-related securities, increasing their sensitivity to changes in
market interest rates. The volume of prepayments of principal on
11
<PAGE>
a pool of mortgages underlying a particular mortgage-related security will
influence the yield of that security. Increased prepayment of principal
may limit a 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 a Fund to incur a loss on
a mortgage-related security that was purchased at a premium. In
determining a Fund's average maturity, the Adviser must apply certain
assumptions and projections about the maturity and prepayment of
mortgage-related securities; actual prepayment rates may differ.
A Fund may enter into mortgage "dollar roll" transactions with
selected banks and broker-dealers pursuant to which that Fund sells
mortgage-backed securities for delivery in the future (generally within 30
days) and simultaneously contracts to repurchase substantially similar
securities on a specified future date.
RESTRICTIONS: Government Intermediate and Investment Grade normally
may invest up to 50% of their total assets in mortgage-related securities,
including those issued by the governmental or government-related entities
referred to above. No more than 25% of Government Intermediate's or
Investment Grade's total assets normally are invested in mortgage-related
securities issued by non-governmental entities. Mortgage dollar roll
transactions may be considered borrowings and, if so, will be subject to
each Fund's investment limitation that, except for temporary purposes, a
Fund will not borrow money in excess of 5% of its total assets at the time
of borrowing.
Government Mortgage-Related Securities
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 a Fund's GNMA securities can be expected to
fluctuate in response to changes in interest rate levels.
FHLMC, a corporate instrumentality of the U.S. Government, 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.
FNMA is a government-sponsored corporation owned entirely by private
stockholders that purchases residential mortgages from a list of approved
seller/servicers, including savings and loan associations, savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through
certificates issued by FNMA ("FNMA certificates") 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.
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. The market for conventional pools is smaller and less
12
<PAGE>
liquid than the market for the government and government-related mortgage
pools.
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. The value of such securities depends in part
on loan repayments by individuals, which may be adversely affected during
general downturns in the economy.
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
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 a Fund's ability to achieve its investment objective.
Government Intermediate and Investment Grade do not intend to exercise
conversion rights for any convertible security they own and do not intend
to hold any security which has been subject to conversion.
Stripped Mortgage-Backed Securities (High Yield only)
High Yield may also invest in stripped mortgage-backed securities,
which are derivative securities usually structured with two classes that
receive different proportions of the interest and principal distributions
from an underlying pool of mortgage assets. The Fund may purchase
securities representing only the interest payment portion of the
underlying mortgage pools (commonly referred to as "IOs") or only the
principal portion of the underlying mortgage pools (commonly referred to
as "POs"). Stripped mortgage-backed securities are more sensitive to
changes in prepayment and interest rates and the market for such
securities is less liquid than is the case for traditional debt securities
and mortgage-backed securities. The yield on such IOs is extremely
sensitive to the rate of principal payments (including prepayments) on the
underlying mortgage assets, and a rapid rate of repayment may have a
material adverse effect on such securities' yield to maturity. If the
underlying mortgage assets experience greater than anticipated prepayments
of principal, the Fund will fail to recoup fully its initial investment in
these securities, even if they are rated high quality. Most IOs and POs
are regarded as illiquid and will be included in the Fund's 15% limit on
illiquid securities. U.S. government-issued IOs and POs backed by
fixed-rate mortgages may be deemed liquid by the Adviser, following
guidelines and standards established by the Corporation's Board of
Directors.
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
13
<PAGE>
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 make periodic interest payments, their prices can be very
volatile when market interest rates change.
The original issue discount on zero coupon bonds must be included in a
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, a 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 a 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 that Fund and when
that Fund would not otherwise choose to dispose of the assets.
Pay-In-Kind Bonds (HIGH YIELD ONLY)
Pay-in-kind bonds pay "interest" through the issuance of additional
bonds, thereby adding debt to the issuer's balance sheet. The market
prices of these securities are generally more volatile than the market
prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than the prices
of securities paying interest currently and having similar maturities and
credit quality. Pay-in-kind bonds carry additional risk in that, unlike
bonds that pay interest throughout the period to maturity, the Fund will
realize no cash until the cash payment date unless a portion of such
securities is sold and the Fund may obtain no return at all on its
investment if the issuer defaults.
The holder of a pay-in-kind bond must accrue income with respect to
these securities prior to the receipt of cash payments thereon. To avoid
liability for federal income and excise taxes, the Fund most likely will
be required to distribute income accrued with respect to these securities,
even though the Fund has not received that income in cash, and may be
required to dispose of portfolio securities under disadvantageous
circumstances in order to generate cash to satisfy these distribution
requirements.
Preferred Stock (HIGH YIELD ONLY)
Preferred stock may be purchased as a substitute for debt securities
of the same issuer when, in the opinion of the Adviser, the preferred
stock is more attractively priced in light of the risks involved.
Preferred stock pays dividends at a specified rate and generally has
preference over common stock in the payment of dividends and the
liquidation of the issuer's assets but is junior to the debt securities of
the issuer in those same respects. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors, and shareholders may suffer
a loss of value if dividends are not paid. Preferred shareholders
generally have no legal recourse against the issuer if dividends are not
paid. The market prices of preferred stocks are subject to changes in
interest rates and are more sensitive to changes in the issuer's
creditworthiness than are the prices of debt securities. Under ordinary
circumstances, preferred stock does not carry voting rights.
Foreign Securities
GOVERNMENT INTERMEDIATE AND INVESTMENT GRADE:
The Funds may invest in U.S. dollar-denominated debt securities issued
by foreign companies and governments. The foreign government securities in
which a Fund invests generally consist of obligations supported by
national, state or provincial governments or similar political
subdivisions. The Funds 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. Because the foreign securities in which the
Funds invest are U.S. dollar-denominated, there is no risk of currency
fluctuation.
HIGH YIELD:
High Yield may invest up to 25% of its total assets in securities of
domestic and foreign issuers that are denominated in currencies other than
the U.S. dollar. To facilitate investment in foreign securities, the Fund
may hold positions in foreign currencies. In addition, for hedging
purposes, the Fund may purchase and write either listed or
over-the-counter put and call options on foreign currencies or may enter
into forward foreign currency contracts ("forward currency contracts").
Forward currency contracts involve obligations to purchase or sell a
specific amount of a specific currency at a future date, which may be any
fixed number of days from the date of the
14
<PAGE>
contract agreed upon by the parties, at a price set at the time of the
contract. By entering into a forward currency contract, the Fund "locks
in" the exchange rate between the currency it will deliver and the
currency it will receive for the duration of the contract. The Fund may
enter into these contracts for the purpose of hedging against risk arising
from its investment or anticipated investment in securities denominated in
foreign currencies. Forward currency contracts involve certain risks,
including the risk that anticipated currency movements will not be
accurately predicted causing the Fund to sustain losses on these
contracts.
The Fund may invest in fixed-income and other debt securities of
issuers based in emerging markets (including countries in Latin America,
Eastern Europe, Asia and Africa).
Risks of Foreign Securities
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 income and withholding taxes. Additional
risks associated with investing in foreign securities include the
possibility of nationalization, expropriation or confiscatory taxation;
adverse changes in investment or exchange control regulations (which may
include suspension of the ability to transfer currency out of a country);
and political instability. Changes in foreign exchange rates will affect
the value of securities denominated or quoted in currencies other than the
U.S. dollar irrespective of the performance of the underlying instrument.
Some foreign governments have defaulted on principal and/or interest
payments; in such cases, a Fund would have limited recourse to enforce its
rights under the instruments it holds. The risks of foreign investment,
described above, are greater for investments in emerging markets. Debt
securities of issuers in such countries will typically be rated below
investment grade or be of comparable quality.
Repurchase Agreements
Repurchase agreements are agreements under which U.S. government
obligations or other high-quality, liquid debt securities are acquired
from a securities dealer or bank subject to resale at an agreed-upon price
and date. The securities are held for the Funds by State Street Bank and
Trust Company ("State Street"), the Funds' 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. A Fund bears a risk of loss in the event that the
other party to a repurchase agreement defaults on its obligations and that
Fund is delayed or prevented from exercising its right to dispose of the
collateral securities, which may decline in value in the interim. A 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.
RESTRICTIONS: A Fund will not enter into repurchase agreements of more
than seven days' duration if more than 10% (15% in the case of High Yield)
of its total assets would be invested in such agreements and other
illiquid investments.
When-Issued Securities
Each Fund may enter into commitments to purchase U.S. government
securities or other securities on a when-issued basis. A 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 a 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, a Fund does not have to pay for the obligations until they are
delivered to it, 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, that Fund will set aside cash or liquid,
high-quality debt securities in an account with its custodian equal to the
payment that will be due. Depending on market conditions, a Fund's
when-issued purchases could cause its net asset value to be more volatile,
because they will increase the amount by which that Fund's total assets,
including the value of the when-issued securities held by it, exceed its
net assets. A Fund may sell the securities subject to a when-issued
purchase, which may result in a gain or loss.
Government Intermediate and Investment Grade each do not expect that
their commitments to purchase when-issued securities will at any time
exceed, in the aggregate, 20% of their total assets.
15
<PAGE>
Futures and Options Transactions
GOVERNMENT INTERMEDIATE AND INVESTMENT GRADE:
In an effort to protect against the effect of adverse changes in
interest rates, a 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 a Fund to buy or sell securities at a specified date and
price. The purchase of a put option on a futures contract allows a Fund,
at its option, to enter into a particular futures contract to sell
securities at any time up to the option's expiration date.
A Fund may seek to enhance its income or hedge the portfolio by
writing (selling) covered call options (i.e., a Fund will own the
underlying instrument while the call is outstanding) and covered put
options (i.e., a 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).
RESTRICTIONS: A 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 that Fund's total assets. A Fund
will not purchase futures contracts or related options if, as a result,
more than 33-1/3% of that Fund's total assets would be so invested.
HIGH YIELD:
The Fund may write (sell) or purchase put and call options on domestic
and foreign securities, securities indices and foreign currencies. Call
options written by the Fund give the holder the right to buy the
underlying securities or currencies from the Fund at a fixed exercise
price up to a stated expiration date, or in the case of certain options,
on such date. Put options give the holder the right to sell the underlying
security or currencies to the Fund during the term of the option at a
fixed exercise price up to a stated expiration date, or in the case of
certain options, on such date.
The Fund may also enter into options on the yield "spread" or yield
differential between two fixed-income securities, a transaction referred
to as a "yield curve" option, for hedging and non-hedging purposes.
The Fund may purchase and sell futures contracts on foreign
currencies, securities, or indices of securities, including indices of
fixed-income securities which may become available for trading. The Fund
may also purchase and write options on such futures contracts.
Risks of Futures, Options and Forward Currency Contracts
Many options on debt securities are traded primarily on the
over-the-counter ("OTC") market. OTC options differ from exchange-traded
options in that the former are two-party contracts with price and other
terms negotiated between buyer and seller and generally do not have as
much market liquidity as exchange-traded options. Thus, when a Fund
purchases an OTC option, it relies on the dealer from which it has
purchased the option to make or take delivery of the securities underlying
the option. Failure by the dealer to do so would result in the loss of the
premium paid by a Fund as well as the loss of the expected benefit of the
transaction. OTC options may be considered "illiquid securities" for
purposes of the Funds' investment limitations.
When a Fund purchases or sells a futures contract, the Fund is
required to deposit with its custodian (or a broker, if legally permitted)
a specified amount of cash or U.S. government securities ("initial
margin"). The use by a Fund of futures contracts or commodities option
positions for other than bona fide hedging purposes is restricted by
government regulations. (See the Statement of Additional Information.) If
a Fund writes an option or sells a futures contract and is not able to
close out that position prior to settlement date, the Fund may be required
to deliver cash or securities substantially in excess of these amounts.
The use of options, futures and forward currency contracts involves
certain investment risks and transaction costs to which the Fund might not
be subject if it did not use such instruments. These risks include (1)
dependence on the Adviser's ability to predict movements in the prices of
individual securities, fluctuations in the general securities markets or
in market sectors and movements in interest rates and currency markets;
(2) imperfect correlation between movements in the price of options,
currencies, futures contracts, forward currency contracts or options
thereon and movements in the price of the securities or currencies hedged
or used for cover; (3) the fact that skills and techniques needed to trade
options, futures contracts and options thereon or to use forward currency
contracts are different from those needed to select the securities in
which the Fund invests; (4) lack of assurance that a liquid secondary
market will exist for any particular option, futures contract or option
thereon at any particular time which may result in unanticipated losses;
(5) the possibility that the use of cover or segregation involving a
16
<PAGE>
large percentage of a Fund's assets could impede portfolio management or
the Fund's ability to meet redemption requests or other short-term
obligations; (6) the possible need to defer closing out certain options,
futures contracts and options thereon and forward currency contracts in
order to continue to qualify for the beneficial tax treatment afforded
"regulated investment companies" under the Internal Revenue Code of 1986,
as amended ("Code") (see "Additional Tax Information" in the Statement of
Additional Information); and (7) the fact that, although use of these
instruments for hedging purposes can reduce the risk of loss, they can
also reduce the opportunity for gain, or even result in losses, by
offsetting favorable price movements in hedged investments. The use of
options for speculative purposes, i.e., to enhance income or to increase a
Fund's exposure to a particular security or foreign currency, subjects the
Fund to additional risk. The use of futures or forward currency contracts
to hedge an anticipated purchase (other than a when-issued or delayed
delivery purchase), also subjects a Fund to additional risk until the
purchase is completed or the position is closed out.
The Statement of Additional Information contains a more detailed
description of futures, options and forward strategies.
Restricted and Illiquid Securities
Restricted securities are securities subject to legal or contractual
restrictions on their resale, such as private placements. Such
restrictions might prevent the sale of restricted securities at a time
when sale would otherwise be desirable. Repurchase agreements maturing in
more than seven days are considered illiquid. Illiquid securities may be
difficult to value, and a Fund may have difficulty disposing of such
securities promptly.
RESTRICTIONS: No more than 15% of High Yield's net assets will be
invested in securities which are deemed illiquid, defined as securities
that cannot be sold within 7 days at approximately the price they are
valued. No more than 10% of Government Intermediate's or Investment
Grade's net assets will be invested in illiquid securities.
Interest Rate Swaps (HIGH YIELD ONLY)
The Fund may enter into interest rate swaps. An interest rate swap is
an agreement between two parties which transfers interest rate
obligations, one of which is an interest rate fixed until the maturity of
the obligation, while the other is a rate which changes with the changes
in some other rate, such as the prime rate or the London Interbank Offered
Rate (LIBOR). Such swaps will be used when the Fund wishes to effectively
convert a floating rate asset into a fixed rate asset, or vice versa.
Loan Participations and Assignments (HIGH YIELD ONLY)
The Fund may also invest in "loan participations or assignments." In
purchasing a loan participation or assignment, the Fund acquires some or
all of the interest of a bank or other lending institution in a loan to a
corporate borrower. Many such loans are secured and most impose
restrictive covenants which must be met by the borrower and which are
generally more stringent than the covenants available in publicly traded
debt securities. However, interests in some loans may not be secured, and
the Fund will be exposed to a risk of loss if the borrower defaults. Loan
participations may also be purchased by the Fund when the borrowing
company is already in default.
In purchasing a loan participation, the Fund may have less protection
under the federal securities laws than it has in purchasing traditional
types of securities. The Fund's ability to assert its rights against the
borrower will also depend on the particular terms of the loan agreement
among the parties.
RESTRICTIONS: Many of the interests in loans purchased by the Fund
will be illiquid and therefore subject to the Fund's 15% limit on illiquid
investments.
Lending
Each Fund may loan its portfolio securities to qualified borrowers who
deposit and maintain with the Fund cash collateral equal to at least 100%
of the market value of the securities loaned.
PORTFOLIO TURNOVER
For the year ended December 31, 1995, Government Intermediate's
portfolio turnover rate was 289.9%, Investment Grade's portfolio turnover
rate was 221.1% and High Yield's portfolio turnover rate was 47.4%. Each
Fund anticipates that in the future its annual portfolio turnover rate may
exceed 300%. The Funds may sell fixed-income securities and buy similar
securities to obtain yield and take advantage of market anomalies, a
practice which will increase the reported turnover rate of the Funds. A
portfolio turnover rate in excess of 100% will involve correspondingly
greater transaction costs which will be borne directly by a Fund. It may
also increase the amount of net short-term capital gains, if any, realized
by a 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.
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Each Fund will take these possibilities into account as part of its
investment strategy.
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. (Legg Mason and Fairfield are wholly owned subsidiaries
of Legg Mason, Inc., a financial services holding company.)
Clients of certain institutions that maintain omnibus accounts with
the Funds' transfer agent may obtain shares through those institutions.
Such institutions may receive payments from the Funds' distributor for
account servicing, and may receive payments from their clients for other
services performed. Investors can purchase Fund shares from Legg Mason
without receiving or paying for such other services.
PURCHASE OF SHARES
The minimum investment is $50,000 for the initial purchase of
Navigator Shares of each Fund and $100 for each subsequent investment.
Each Fund may 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 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 ("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 19.
Each Fund reserves the right to reject any order for its shares, 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 any of the Funds 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 a 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 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 Funds, 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 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
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and address in which the shareholder's account is registered with the
respective Fund. Such payments will normally be transmitted on the next
business day following receipt of a valid request for redemption. However,
each Fund reserves the right to take longer (up to seven days in some
cases) to make payment upon redemption if, in the judgment of the Adviser,
the respective 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 redemption or repurchase may be more or less
than the 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 that Fund can be reasonably assured that the check
has been collected.
The Funds will not be responsible for the authenticity of redemption
instructions received by telephone, provided they follow reasonable
procedures to identify the caller. The Funds may request identifying
information from callers or employ identification numbers. A 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,
each 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 Funds will not redeem accounts that
fall below $500 solely as a result of a reduction in net asset value per
share. If a 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
shareholder. Any shares the shareholder 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 of any Fund prior to 15 business days after purchase of such shares
by check unless that 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 a 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 each Fund on a timely basis.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per Navigator Share of each Fund 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 each 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. With respect to High Yield, where a security is traded on more
than one market, which may include foreign markets, the securities are
generally valued on the market considered by the Adviser to be the primary
market. Securities with remaining maturities of 60 days or less are valued
at amortized cost. The Fund will value its foreign securities in U.S.
dollars on the basis of the then-prevailing exchange rates.
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DIVIDENDS AND OTHER DISTRIBUTIONS
Each 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
for Government Intermediate and Investment Grade and are declared and paid
monthly for High Yield. Shareholders begin to earn dividends on their Fund
shares as of settlement date, which is normally the third business day
after their 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) and, in the case of High Yield, net realized
gains from foreign currency transactions 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:
1. Receive both dividends and other distributions in Navigator Shares
of the distributing Fund;
2. Receive dividends in cash and other distributions in Navigator
Shares of the distributing Fund;
3. Receive dividends in Navigator Shares of the distributing Fund and
other distributions in cash; or
4. Receive both dividends and other distributions in cash.
In certain cases, shareholders may reinvest dividends and other
distributions in the corresponding class of shares of another Navigator
fund. Please contact an investment executive for additional information
about 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 are
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 are 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 applicable Fund in writing at: [insert complete Fund name],
c/o Fairfield Group, Inc., 200 Gibraltar Road, Horsham, Pennsylvania
19044. Those purchasing through Legg Mason should write to: [insert
complete Fund name], 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
other distributions paid to shareholders as of that date.
TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
Each 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 a 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 that Fund's earnings and profits. Distributions of a 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 Funds send 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. Each Fund is
required to withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to any individuals and certain other
noncorporate shareholders who do not provide the Funds with a certified
taxpayer identification number. Each 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 at a loss other shares of the
same Fund (regardless of class), all or part of
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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 each 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 Funds, depending on the laws of your home
state and locality, though the portion of the dividends paid by each Fund
attributable to direct U.S. government obligations is not subject to state
and local income taxes in most jurisdictions. Each 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
Confirmations for each purchase and redemption transaction (except a
reinvestment of dividends or capital gain distributions) of Navigator
Shares made by Institutional Clients acting in a fiduciary, advisory,
custodial, or other similar capacity on behalf of persons maintaining
Customer Accounts at Institutional Clients will be sent to the
Institutional Client by the transfer agent. 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.
Reports will be sent to each Fund's shareholders at least semiannually
showing its portfolio and other information; the annual report for each
Fund will contain financial statements audited by the Corporation's
independent accountants.
Shareholder inquiries should be addressed to: "[insert complete Fund
name], 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.
Navigator American Leading Companies Trust
A mutual fund seeking long-term capital appreciation and current
income consistent with prudent investment risk.
Navigator International Equity Trust
A mutual fund seeking maximum long-term total return, by investing
primarily in common stocks of companies located in at least three
different countries other than the United States.
Navigator Emerging Markets Trust
A mutual fund seeking long-term capital appreciation, by investing
primarily in equity securities of companies based in or doing business in
emerging markets countries.
Navigator U.S. Government Intermediate-Term Portfolio
A mutual fund seeking high current income consistent with prudent
investment risk and liquidity needs, primarily by investing in debt
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, while
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maintaining an average dollar-weighted maturity of between three and ten
years.
Navigator Investment Grade Income Portfolio
A mutual fund seeking a high level of current income, through
investment in a diversified portfolio consisting primarily of investment
grade debt securities.
Navigator High Yield Portfolio
A mutual fund primarily seeking a high level of current income and
secondarily, capital appreciation, by investing principally in
lower-rated, fixed-income securities.
Navigator Global Government Trust
A mutual fund seeking capital appreciation and current income by
investing principally in debt securities issued or guaranteed by foreign
governments, the U.S. Government, their agencies, instrumentalities and
political subdivisions.
Navigator Maryland Tax-Free Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal and Maryland state and local income taxes,
consistent with prudent investment risk and preservation of capital.
Navigator Pennsylvania Tax-Free Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax and Pennsylvania personal income
tax, consistent with prudent investment risk and preservation of capital.
Navigator Tax-Free Intermediate-Term Income Trust
A tax-exempt municipal bond fund seeking a high level of current
income exempt from federal income tax, consistent with prudent investment
risk.
Legg Mason Cash Reserve Trust
A money market fund seeking stability of principal and current income
consistent with stability of principal.
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 18. The other factors relating to telephone
redemptions described in that section apply also to telephone exchanges.
Please read the prospectus for the other fund(s) carefully before you
invest by exchange. Each 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 CORPORATION'S BOARD OF DIRECTORS, MANAGER AND INVESTMENT ADVISER
BOARD OF DIRECTORS
The business and affairs of each Fund are managed under the direction
of the Corporation's Board of Directors.
MANAGER
Pursuant to a separate management agreement with each 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 each Fund's manager. The Manager manages the
non-investment affairs of each Fund, directs all matters related to the
operation of the Funds and provides office space and administrative staff
for the Funds. Each Fund pays the Manager, pursuant to its Management
Agreement, a fee equal to the following annual percentage of its average
daily net assets: Government Intermediate, 0.55%; Investment Grade, 0.60%;
and High Yield, 0.65%.
The Manager has agreed that until December 31, 1996 or when Government
Intermediate 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 relating to Navigator Shares (exclusive of
taxes, interest, brokerage and extraordinary expenses) exceed during any
month an annual rate of 0.50% of the Fund's average daily net assets for
such month. The Manager has also agreed that until December 31, 1996 or
when Investment Grade reaches net assets of $100 million, whichever occurs
first, it will continue to reimburse fees and/or assume other expenses to
the extent the Fund's expenses relating to Navigator Shares (exclusive of
taxes, interest, brokerage and extraordinary expenses) exceed during any
month an annual rate of 0.50% of the Fund's average daily net assets for
such month. These reimbursement agreements are voluntary and may or
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may not be renewed by the Manager. Reimbursement by the Manager reduces a
Fund's expenses and increases its yield and total return.
The Manager acts as manager, investment adviser or investment
consultant to sixteen investment company portfolios which had aggregate
assets under management of over $5.5 billion as of March 31, 1996. The
Manager's address is 111 South Calvert Street, Baltimore, Maryland 21202.
INVESTMENT ADVISER
Western Asset Management Company, another wholly owned subsidiary of
Legg Mason, Inc., serves as investment adviser to each 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
investment and other affairs of each Fund and directs the investments of
each 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: for Government Intermediate, 40-100% of the fee received by the
Manager depending on the amount the Manager receives, or up to 0.22% of
average daily net assets; for Investment Grade, 40% of the fee received by
the Manager, or 0.24% of average daily net assets; and for High Yield, 77%
of the fee received by the Manager, or 0.50% of average daily net assets.
An investment committee has been responsible for the day-to-day
management of each Fund since its inception.
The Adviser also renders investment advice to sixteen open-end
investment companies and one closed-end investment company, which together
had aggregate assets under management of approximately $3.3 billion as of
March 31, 1996. The Adviser also renders investment advice to private
accounts with fixed income assets under management of approximately $16.6
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 FUNDS' DISTRIBUTOR
Legg Mason is the distributor of each Fund's shares pursuant to a
separate Underwriting Agreement with each Fund. The Underwriting Agreement
obligates Legg Mason to pay certain expenses in connection with the
offering of shares of the Funds, 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 each 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 year ended
December 31, 1995, Legg Mason received from BFDS $53,079, $22,184 and
$16,529, for performing such services in connection with Government
Intermediate, Investment Grade and High Yield, respectively. Fairfield
Group, Inc., a wholly owned subsidiary of Legg Mason, Inc., is a
registered broker-dealer with principal offices located at 200 Gibraltar
Road, Horsham, Pennsylvania 19044. Fairfield sells Navigator Shares
pursuant to a Dealer Agreement with the Funds' 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 may issue separate classes of
shares. There are currently four portfolios of the Corporation. 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. Government Intermediate, Investment Grade and High
Yield currently offer two classes of shares -- Class Y (known as
"Navigator Shares") and Class A (known as "Primary Shares"). The two
classes
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represent interests in the same pool of assets. A separate vote is taken
by a class of shares of a Fund if a matter affects just that class of
shares. Each class of shares may bear certain 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 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 a 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.
The Manager has agreed that until the earlier of December 31, 1996 or,
with respect to Government Intermediate, net assets reach $400 million
and, with respect to Investment Grade, net assets reach $100 million, it
will continue to reimburse management fees and/or assume other expenses to
the extent the expenses attributable to Primary Shares (exclusive of
taxes, interest, brokerage and extraordinary expenses) exceed during any
month an annual rate of 1.00% 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 Corporation 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 Funds are entitled to one vote per share and
fractional votes for fractional shares held. Voting rights are not
cumulative. All shares of the Funds are fully paid and nonassessable and
have no preemptive or conversion rights.
Shareholders' 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 their respective Fund at 111 South Calvert
Street, Baltimore, Maryland 21202, stating the purpose of the proposed
meeting and the matters to be acted upon. The address of BFDS is P.O. Box
953, Boston, MA 02103.
Each Fund acknowledges that it is solely responsible for the
information or any lack of information about it in this joint Prospectus
and in the joint Statement of Additional Information, and no other Fund is
responsible therefor. There is a possibility that one Fund might be deemed
liable for misstatements or omissions regarding another Fund in this
Prospectus or in the joint Statement of Additional Information; however,
the Funds deem this possibility slight.
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APPENDIX
RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND
RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered upper-medium-grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa -- Bonds which are rated Baa are considered medium-grade
obligations, (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered well-assured. Often the
protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time
may be small.
Caa -- Bonds which are rated Caa are of poor standing and may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree and are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
DESCRIPTION OF STANDARD & POOR'S ("S&P") CORPORATE BOND RATINGS:
AAA -- This is the highest rating assigned by Standard & Poor's to an
obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small
degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in
higher rated categories.
BB, B, CCC, CC -- Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominately speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms
of the obligation. BB indicates the lowest degree of speculation and CC
the highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C -- Bonds on which no interest is being paid are rated C.
D -- Bonds rated D are in payment default and payment of interest
and/or repayment of principal is in arrears.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS:
AAA -- An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
A-1
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risk of dividend impairment within the universe of preferred stocks.
aa -- An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a reasonable
assurance that earnings and asset protection will remain relatively
well-maintained in the foreseeable future.
a -- An issue which is rated "a" is considered to be an
upper-medium-grade preferred stock. While risks are judged to be somewhat
greater than in the "aaa" and "aa" classification, earnings and asset
protection are, nevertheless, expected to be maintained at adequate
levels.
baa -- An issue which is rated "baa" is considered to be a
medium-grade preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be
questionable over any great length of time.
ba -- An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and
asset protection may be very moderate and not well safeguarded during
adverse periods. Uncertainty of position characterizes preferred stocks in
this class.
b -- An issue which is rated "b" generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time may be small.
caa -- An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate
the future status of payments.
ca -- An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payments.
c -- This is the lowest rated class of preferred stock or preference
stock. Issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
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THE LEGG MASON INCOME TRUST, INC.:
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
INVESTMENT GRADE PORTFOLIO
HIGH YIELD PORTFOLIO
(Primary Shares and Navigator Shares)
AND
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
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 Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectuses for Primary Shares and for
Navigator Shares, both dated May 1, 1996, which have been filed with the
Securities and Exchange Commission ("SEC"). Copies of the Prospectuses are
available without charge from the Corporation's distributor, Legg Mason Wood
Walker, Incorporated ("Legg Mason") (address and telephone numbers listed
below).
Legg Mason U.S. Government Intermediate-Term Portfolio ("Government
Intermediate"), Legg Mason Investment Grade Income Portfolio ("Investment
Grade"), Legg Mason High Yield Portfolio ("High Yield") and Legg Mason U.S.
Government Money Market Portfolio ("Government Money Market") (each separately
referred to as a "Fund" and collectively referred to as the "Funds") are
separate series of Legg Mason Income Trust, Inc. ("Corporation"), an open-end
diversified management investment company.
Government Intermediate seeks to provide investors with high current
income consistent with prudent investment risk and liquidity needs. In
attempting to achieve this objective, the Funds' investment adviser, Western
Asset Management Company ("Adviser"), under normal circumstances, invests at
least 75% of Government Intermediate's assets in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. Government
Intermediate expects to maintain an average dollar-weighted maturity of between
three and ten years. The Fund seeks to provide income higher than that of money
market funds and greater price stability than funds with longer average
maturities.
Investment Grade seeks to provide investors with a high level of
current income through investment in a diversified portfolio of debt securities.
In attempting to achieve Investment Grade's objective, the Adviser, under normal
circumstances, invests primarily in debt securities which it considers to be
investment grade. Investment Grade expects to maintain an average
dollar-weighted maturity of between five and twenty years. The Fund's current
yield is expected to be higher than the current yields of mutual funds that own
debt securities with shorter average maturities.
High Yield seeks to provide investors with a high level of current
income. As a secondary objective, the Fund seeks capital appreciation. In
attempting to achieve High Yield's objectives, the Adviser, under normal
circumstances, invests not less than 65% of its total assets in high-yield,
fixed-income securities (including those commonly known as "junk bonds"); that
is, income-producing debt securities and preferred stocks of all types,
including (but not limited to) corporate debt securities and preferred stock,
convertible securities, zero coupon securities, deferred interest securities,
mortgage-backed securities and asset-backed securities. In addition to other
risks, these bonds are subject to greater fluctuations in value and risk of loss
of income and principal due to default by the issuer than are lower-yielding,
higher-rated bonds. Therefore, these investments may not be suitable for all
investors.
Government Money Market seeks to obtain high current income consistent
with liquidity and conservation of principal. In attempting to achieve this
objective, the Adviser invests only in debt obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, and in repurchase
agreements collateralized by such instruments. The Adviser attempts to maintain
a stable net asset value of $1.00 per share, although there can be no assurance
that it will always be able to do so.
Shares of Navigator Government Intermediate, Navigator Investment Grade
and Navigator High Yield ("Navigator Shares"), described in this Statement of
Additional Information, represent interests in Government Intermediate,
Investment Grade and High Yield that are 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 Trust Company
exercises discretionary investment management responsibility (such institutional
investors are referred to collectively as "Institutional Clients" and accounts
of the customers with such Clients ("Customers") 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. The Navigator Class of Shares may not be
purchased by individuals directly, but Institutional Clients may purchase shares
for Customer Accounts maintained for individuals.
The Primary Class of shares of Government Intermediate, Investment
Grade, High Yield and Government Money Market ("Primary Shares") are offered for
sale to all other investors and may be purchased directly by individuals.
Navigator Shares and Primary Shares are sold and redeemed without any
purchase or redemption charge imposed by the Funds, although Institutional
Clients may charge their Customer Accounts for services provided in connection
with the purchase or redemption of shares. Each Fund will pay management fees to
Legg Mason Fund Adviser, Inc. Primary Shares (other than Government Money
Market) pay a 12b-1 distribution fee, but Navigator Shares pay no distribution
fees. See "The Funds' Distributor."
Dated: May 1, 1996
LEGG MASON WOOD WALKER,
INCORPORATED
- -------------------------------------------------------------------------------
111 South Calvert Street
Baltimore, Maryland 21202
(410) 539-0000 (800) 822-5544
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND
POLICIES
The following information supplements the information concerning each
Fund's investment objectives, policies and limitations found in the
Prospectuses. Each Fund has adopted certain fundamental investment limitations
that cannot be changed except by vote of a majority of each Fund's outstanding
voting securities.
Government Intermediate and Investment Grade each may not:
1. Borrow money, except for temporary purposes in an aggregate amount
not to exceed 5% of the value of its total assets at the time of borrowing;
2. Invest more than 5% of its total assets (taken at market value) in
securities of any one issuer, other than the U.S. Government, its agencies and
instrumentalities, or buy more than 10% of the voting securities or more than
10% of all the securities of any issuer;
3. Mortgage, pledge or hypothecate any of its assets, except to
collateralize permitted borrowings up to 5% of the value of its total assets at
the time of borrowing; provided, that the deposit in escrow of underlying
securities in connection with the writing of call options is not deemed to be a
pledge; and provided further, that deposit of initial margin or the payment of
variation margin in connection with the purchase or sale of futures contracts or
of options on futures contracts shall not be deemed to constitute pledging
assets;
4. Purchase securities on "margin," except that each Fund may make
margin deposits in connection with its use of options, interest rate futures
contracts and options on interest rate futures contracts;
5. Make short sales of securities unless at all times while a short
position is open the Fund maintains a long position in the same security in an
amount at least equal thereto; provided, however, that the Fund may purchase or
sell futures contracts, and may make initial and variation margin payments in
connection with purchases or sales of futures contracts or of options on futures
contracts;
6. Invest more than 25% of its total assets (taken at market value) in
any one industry;
7. Invest in securities issued by other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization or by
purchase in the open market of securities of closed-end investment companies
where no underwriter or dealer commission or profit, other than a customary
brokerage commission, is involved and only if immediately thereafter not more
than 10% of a Fund's total assets (taken at market value) would be invested in
such securities;
8. Purchase or sell commodities and commodity contracts, except that
each Fund may purchase or sell options, interest rate futures contracts and
options on interest rate futures contracts;
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<PAGE>
9. Underwrite the securities of other issuers, except to the extent
that in connection with the disposition of restricted securities or the purchase
of securities either directly from the issuer or from an underwriter for an
issuer, each Fund may be deemed to be an underwriter;
10. Make loans, except loans of portfolio securities and except to the
extent the purchase of a portion of an issue of publicly distributed notes,
bonds or other evidences of indebtedness or deposits with banks and other
financial institutions may be considered loans;
11. Purchase or sell real estate, except that each Fund may invest in
securities collateralized by real estate or interests therein or in securities
issued by companies that invest in real estate or interests therein; or
12. Purchase or sell interests in oil and gas or other mineral
exploration or development programs.
High Yield may not:
1. Borrow money, except from banks or through reverse repurchase
agreements or dollar rolls for temporary purposes in an aggregate amount not to
exceed 5% of the value of its total assets at the time of borrowing;
2. Issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended ("1940 Act");
3. Engage in the business of underwriting the securities of other
issuers except insofar as the Fund may be deemed an underwriter under the
Securities Act of 1933, as amended ("1933 Act"), in disposing of a portfolio
security;
4. Buy or hold any real estate; provided, however, that instruments
secured by real estate or interests therein are not subject to this limitation;
5. With respect to 75% of its total assets, invest more than 5% of its
total assets (taken at market value) in securities of any one issuer, other than
the U.S. Government, its agencies and instrumentalities, or purchase more than
10% of the voting securities of any one issuer;
6. Purchase or sell any commodities or commodities contracts, except
that the Fund may purchase or sell currencies, interest rate and currency
futures contracts, options on currencies, securities, and securities indexes and
options on interest rate and currency futures contracts, and may enter into swap
agreements;
7. Make loans, except loans of portfolio securities and except to the
extent the purchase of notes, bonds or other evidences of indebtedness, the
entry into repurchase agreements, or deposits with banks and other financial
institutions may be considered loans;
8. Purchase any security if, as a result thereof, 25% or more of its
total assets would be invested in the securities of issuers having their
principal business activities in the same industry.
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<PAGE>
This limitation does not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and repurchase agreements with
respect thereto.
High Yield interprets fundamental investment limitation (4) to prohibit
investment in real estate limited partnerships.
Government Money Market may not:
1. Borrow money, except for temporary purposes in an aggregate amount
not to exceed 5% of the value of its total assets at the time of borrowing.
(Although not a fundamental policy subject to shareholder approval, the Fund
intends to repay any money borrowed before any additional portfolio securities
are purchased);
2. Mortgage, pledge or hypothecate any of its assets, except to
collateralize permitted borrowings up to 5% of the value of its total assets at
the time of borrowing;
3. Purchase securities on "margin" except that the Fund may obtain such
credits as may be necessary for clearing the purchases and sales of securities;
4. Make short sales of securities unless at all times while a short
position is open the Fund maintains a long position in the same security in an
amount at least equal thereto;
5. Purchase or sell commodities and commodity contracts;
6. Underwrite the securities of other issuers, except to the extent
that in connection with the disposition of restricted securities or the purchase
of securities either directly from the issuer or from an underwriter for an
issuer, the Fund may be deemed to be an underwriter;
7. Make loans, except loans of portfolio securities and except to the
extent the purchase of a portion of an issue of publicly distributed notes,
bonds or other evidences of indebtedness, entry into repurchase agreements or
deposits with banks and other financial institutions may be considered loans;
8. Purchase or hold real estate, except that the Fund may invest in
securities collateralized by real estate or interests therein; and
9. Purchase or sell interests in oil and gas or other mineral
exploration or development programs.
As noted above, the fundamental investment limitations of each Fund,
along with its investment objective, may not be changed without the vote of a
majority of the Fund's outstanding voting securities. Under the 1940 Act, a
"vote of a majority of the outstanding voting securities" of a Fund means the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
the Fund or (2) 67% or more of the shares present at a shareholders' meeting if
more than 50% of the outstanding shares are represented at the meeting in person
or by proxy. If a percentage restriction described above is complied with at the
time an investment is made, a later increase in percentage resulting from
changing values of portfolio securities or in the amount of assets of the
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<PAGE>
Fund will not be considered a violation of any of those restrictions. Except as
otherwise noted, the investment policies and limitations described in this
Statement of Additional Information are non- fundamental and may be changed
without a shareholder vote.
The following are some of the non-fundamental limitations which High
Yield currently observes. High Yield may not:
1. Purchase or sell any oil, gas or mineral exploration or development
programs, including leases;
2. Buy securities on "margin," except for short-term credits necessary
for clearance of portfolio transactions and except that the Fund may make margin
deposits in connection with the use of permitted currency futures contracts and
options on currency futures contracts;
3. Make short sales of securities or maintain a short position, except
that the Fund may (a) make short sales and maintain short positions in
connection with its use of options, futures contracts and options on futures
contracts and (b) sell short "against the box" (the Fund does not intend to make
short sales against the box in excess of 5% of its net assets during the coming
year);
4. Purchase or retain the securities of an issuer if, to the knowledge
of the Fund's management, those officers and directors of the Fund, of Legg
Mason Fund Adviser, Inc. and of Western Asset Management Company who
individually own beneficially more than 0.5% of the outstanding securities of
that issuer own in the aggregate more than 5% of the securities of that issuer;
5. Purchase any security if, as a result, more than 5% of the Fund's
total assets would be invested in securities of companies that together with any
predecessors have been in continuous operation for less than three years;
6. Acquire securities of other open-end investment companies, except in
connection with a merger, consolidation, reorganization or acquisition.
7. Hold more than 10% of the outstanding voting securities of any one
issuer.
Yield Factors and Ratings Standard & Poor's ("S&P") and Moody's
Investors Service, Inc. ("Moody's") are private services that provide ratings of
the credit quality of obligations. Investment grade bonds are generally
considered to be those bonds rated at the time of purchase within one of the
four highest grades assigned by S&P or Moody's. A Fund may use these ratings in
determining whether to purchase, sell or hold a security. These ratings
represent Moody's and S&P's opinions as to the quality of the obligations which
they undertake to rate. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Consequently, obligations
with the same maturity, interest rate and rating may have different market
prices. Subsequent to its purchase by a Fund, an issue of obligations may cease
to be rated or its rating may be reduced
6
<PAGE>
below the minimum rating required for purchase by that Fund. The Adviser will
consider such an event in determining whether a Fund (other than Government
Money Market) should continue to hold the obligation, but is not required to
dispose of it. Government Money Market will consider disposing of the obligation
in accordance with Rule 2a-7 under the 1940 Act.
In addition to ratings assigned to individual bond issues, the Adviser
will analyze interest rate trends and developments that may affect individual
issuers, including factors such as liquidity, profitability and asset quality.
The yields on bonds and other debt securities in which a Fund invests are
dependent on a variety of factors, including general money market conditions,
general conditions in the bond market, the financial conditions of the issuer,
the size of the offering, the maturity of the obligation and its rating. There
may be a wide variation in the quality of bonds, both within a particular
classification and between classifications. A bond issuer's obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of bond holders or other creditors of an issuer; litigation
or other conditions may also adversely affect the power or ability of bond
issuers to meet their obligations for the payment of interest and principal.
The following information about futures and options applies to Government
Intermediate and Investment Grade:
INTEREST RATE FUTURES CONTRACTS Interest rate futures contracts, which
are traded on commodity futures exchanges, provide for the sale by one party and
the purchase by another party of a specified type and amount of financial
instruments (or an index of financial instruments) at a specified future date.
Interest rate futures contracts currently exist covering such financial
instruments as U.S. Treasury bonds, notes and bills, Government National
Mortgage Association ("GNMA") certificates, bank certificates of deposit and
90-day commercial paper. An interest rate futures contract may be held until the
underlying instrument is delivered and paid for on the delivery date, but most
contracts are closed out before then by taking an offsetting position on a
futures exchange.
A Fund may purchase an interest rate futures contract (that is, enter
into a futures contract to purchase an underlying financial instrument) when it
intends to purchase fixed-income securities but has not yet done so. This
strategy is sometimes called an anticipatory hedge. This strategy is intended to
minimize the effects of an increase in the price of the securities the Fund
intends to purchase (but may also reduce the effects of a decrease in price),
because the value of the futures contract would be expected to rise and fall in
the same direction as the price of the securities the Fund intends to purchase.
The Fund could purchase the intended securities either by holding the contract
until delivery and receiving the financial instrument underlying the futures
contract, or by purchasing the securities directly and closing out the futures
contract position. If the Fund no longer wished to purchase the securities, the
Fund would close out the futures contract before delivery.
A Fund may sell a futures contract (that is, enter into a futures
contract to sell an underlying financial instrument) to offset price changes of
securities it already owns. This strategy is intended to minimize any price
changes in the securities the Fund owns (whether increases or decreases) caused
by interest rate changes, because the value of the futures contract would be
expected to move in the opposite direction from the value of the securities
owned by the Fund. Each Fund does not expect ordinarily to hold futures
contracts it has sold until delivery or to use securities it
7
<PAGE>
owns to satisfy delivery requirements. Instead, each Fund expects to close out
such contracts before the delivery date.
The prices of interest rate futures contracts depend primarily on the
value of the instruments on which they are based, the price changes of which, in
turn, primarily reflect changes in current interest rates. Because there are a
limited number of types of interest rate futures contracts, it is likely that
the standardized futures contracts available to each Fund will not exactly match
the securities that Fund wishes to hedge or intends to purchase, and
consequently will not provide a perfect hedge against all price fluctuation.
Because fixed-income instruments all respond similarly to changes in interest
rates, however, a futures contract the underlying instrument of which differs
from the securities that Fund wishes to hedge or intends to purchase may still
provide protection against changes in interest rate levels. To compensate for
differences in historical volatility between positions a Fund wishes to hedge
and the standardized futures contracts available to it, a Fund may purchase or
sell futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase.
FUTURES TRADING If a Fund does not wish to hold a futures contract
position until the underlying instrument is delivered and paid for on the
delivery date, it may attempt to close out the contract by entering into an
offsetting position on a futures exchange that provides a secondary market for
the contract. A futures contract is closed out by entering into an opposite
position in an identical futures contract (for example, by purchasing a contract
on the same instrument and with the same delivery date as a contract the Fund
had sold) at the current price as determined on the futures exchange. A Fund's
gain or loss on closing out a futures contract depends on the difference between
the price at which the Fund entered into the contract and the price at which the
contract is closed out. Transaction costs in opening and closing futures
contracts must also be taken into account. There can be no assurance that a Fund
will be able to offset a futures position at the time it wishes to, or at a
price that is advantageous. If a Fund were unable to enter into an offsetting
position in a futures contract, it might have to continue to hold the contract
until the delivery date, in which case it would continue to bear the risk of
price fluctuation in the contract until the underlying instrument was delivered
and paid for.
At the time a Fund enters into an interest rate futures contract, it is
required to deposit with its custodian, in the name of the futures broker (known
as a futures commission merchant, or "FCM"), a percentage of the contract's
value. This amount, which is known as initial margin, generally equals 5% or
less of the value of the futures contract. Initial margin is in the nature of a
good faith deposit or performance bond, and is returned to the Fund when the
futures position is terminated, after all contractual obligations have been
satisfied. Futures margin does not represent a borrowing by a Fund, unlike
margin extended by a securities broker, and depositing initial margin in
connection with futures positions does not constitute purchasing securities on
margin for the purposes of each Fund's investment limitations. Initial margin
may be maintained either in cash or in liquid, high-quality debt securities such
as U.S. government securities.
As the contract's value fluctuates, payments known as variation margin
or maintenance margin are made to or received from the FCM. If the contract's
value moves against a Fund (i.e., the Fund's futures position declines in
value), the Fund may be required to make payments to the FCM, and, conversely,
the Fund may be entitled to receive payments from the FCM if the value of
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<PAGE>
its futures position increases. This process is known as "marking to market"
and takes place on a daily basis.
In addition to initial margin deposits, the Fund will instruct its
custodian to segregate additional cash and liquid debt securities to cover its
obligations under futures contracts it has purchased and to ensure that the
contracts are unleveraged. The value of the assets held in the segregated
account will be equal to the daily market value of all outstanding futures
contracts purchased by the Fund, less the amount deposited as initial margin.
Where a Fund enters into positions that substantially offset one another, it may
segregate assets equal to only one side of the transaction, consistent with SEC
staff interpretive positions. When a Fund has sold futures contracts to hedge
securities it owns, it will not sell those securities (or lend them to another
party) while the contracts are outstanding, unless it substitutes other similar
securities for the securities sold or lent. Each Fund will not sell futures
contracts with a value exceeding the value of securities it owns, except that a
Fund may do so to the extent necessary to adjust for differences in historical
volatility between the securities owned and the contracts used as a hedge.
RISKS OF INTEREST RATE FUTURES CONTRACTS By purchasing an interest
rate futures contract, a Fund in effect becomes exposed to price fluctuations
resulting from changes in interest rates, and by selling a futures contract a
Fund neutralizes those fluctuations. If interest rates fall, a Fund would expect
to profit from an increase in the value of the instrument underlying a futures
contract it had purchased, and if interest rates rise, a Fund would expect to
offset the resulting decline in the value of the securities it owns by profits
in a futures contract it has sold. If interest rates move in the direction
opposite that which was contemplated at the time of purchase, however, a Fund's
positions in futures contracts could have a negative effect on that Fund's net
asset value. If interest rates rise when a Fund has purchased futures contracts,
that Fund could suffer a loss in its futures positions. Similarly, if interest
rates fall, losses in a futures contract that Fund has sold could negate gains
on securities the Fund owns, or could result in a net loss to the Fund. In this
sense, successful use of interest rate futures contracts by a Fund will depend
on the Adviser's ability to hedge the Fund in an advantageous way at the
appropriate time.
Other than the risk that interest rates will not move as expected, the
primary risk in employing interest rate futures contracts is that the market
value of the futures contracts may not move in concert with the value of the
securities a Fund wishes to hedge or intends to purchase. This may result from
differences between the instrument underlying the futures contracts and the
securities a Fund wishes to hedge or intends to purchase, as would be the case,
for example, if a Fund hedged U.S. Treasury bonds by selling futures contracts
on U.S. Treasury notes.
Even if the securities which are the objects of a hedge are identical
to those underlying the futures contract, there may not be perfect price
correlation between the two. Although the value of interest rate futures
contracts is primarily determined by the price of the underlying financial
instruments, the value of interest rate futures contracts is also affected by
other factors, such as current and anticipated short-term and long-term interest
rates, the time remaining until expiration of the futures contract, and
conditions in the futures markets, which may not affect the current market price
of the underlying financial instruments in the same way. In addition, futures
exchanges establish daily price limits for interest rate futures contracts, and
may halt trading in the contracts if their prices move up or down more than a
specified daily limit on a given day. This could distort the relationship
between the price of the underlying instrument and the futures
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<PAGE>
contract, and could prevent prompt liquidation of unfavorable futures positions.
The value of a futures contract may also move differently from the price of the
underlying financial instrument because of inherent differences between the
futures and securities markets, including variations in speculative demand for
futures contracts and for debt securities, the differing margin requirements for
futures contracts and debt securities, and possible differences in liquidity
between the two markets.
PUT OPTIONS ON INTEREST RATE FUTURES CONTRACTS A 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 risk of fluctuations in its share value. A
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 that Fund intends to purchase. A Fund
may not use these instruments for speculation or leverage. Purchasing a put
option on an interest rate futures contract gives a Fund the right to assume a
seller's position in the contract at a specified exercise price at any time up
to the option's expiration date. In return for this right, the Fund pays the
current market price for the option (known as the option premium), as determined
on the commodity futures exchange where the option is traded.
Each Fund may purchase put options on interest rate futures contracts
to hedge against a decline in the market value of securities that Fund owns.
Because a put option is based on a contract to sell a financial instrument at a
certain price, its value will tend to move in the opposite direction from the
price of the financial instrument underlying the futures contract; that is, the
put option's value will tend to rise when prices fall, and fall when prices
rise. By purchasing a put option on an interest rate futures contract, a Fund
would attempt to offset potential depreciation of securities it owns by
appreciation of the put option. This strategy is similar to selling the
underlying futures contract directly.
A Fund's position in a put option on an interest rate futures contract
may be terminated either by exercising the option (and assuming a seller's
position in the underlying futures contract at the option's exercise price) or
by closing out the option at the current price as determined on the futures
exchange. If the put option is not exercised or closed out before its expiration
date, the entire premium paid will be lost by that Fund. The Fund could profit
from exercising a put option if the current market value of the underlying
futures contract were less than the sum of the exercise price of the put option
and the premium paid for the option (because the Fund would, in effect, be
selling the futures contract at a price higher than the current market price).
The Fund could also profit from closing out a put option if the current market
price of the option is greater than the premium the Fund paid for the option.
Transaction costs must also be taken into account in these calculations. The
Fund may close out an option it has purchased by selling an identical option
(that is, an option on the same futures contract, with the same exercise price
and expiration date) in a closing transaction on a futures exchange that
provides a secondary market for the option. Each Fund is not required to make
futures margin payments when it purchases an option on an interest rate futures
contract.
Compared to the purchase or sale of an interest rate futures contract,
the purchase of a put option on an interest rate futures contract involves a
smaller potential risk to a Fund, because the maximum amount at risk is the
premium paid for the option (plus related transaction costs). If prices of debt
securities remain stable, however, purchasing a put option may involve a greater
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probability of loss than selling a futures contract, even though the amount of
the potential loss is limited. The Adviser will consider the different risk and
reward characteristics of options and futures contracts when selecting hedging
instruments.
RISKS OF TRANSACTIONS IN OPTIONS ON INTEREST RATE FUTURES CONTRACTS
Options on interest rate futures contracts are subject to risks similar to those
described above with respect to interest rate futures contracts. These risks
include the risk that the Adviser may not hedge a Fund in an advantageous way at
the appropriate time, the risk of imperfect price correlation between the option
and the securities being hedged, and the risk that there may not be an active
secondary market for the option. There is also a risk of imperfect price
correlation between the option and the underlying futures contract.
Although the Adviser will purchase and write only those options for
which there appears to be a liquid secondary market, there can be no assurance
that such a market will exist for any particular option at any particular time.
If there were no liquid secondary market for a particular option, a Fund might
have to exercise an option it had purchased in order to realize any profit, and
might continue to be obligated under an option it had written until the option
expired or was exercised.
OPTIONS WRITING ON DEBT SECURITIES Each Fund may from time to time
write (sell) covered call options and covered put options on certain of its
portfolio securities. A Fund may write call options on securities in its
portfolio in an attempt to realize, through the premium that Fund receives, a
greater current return than would be realized on the securities alone. A 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. A 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.
When it writes a covered call option, a Fund obligates itself to sell the
underlying security to the purchaser of the option at a fixed price if the
purchaser exercises the option during the option period. A call is "covered" if
the Fund owns the optioned securities or, in the case of options on certain U.S.
government securities, the Fund maintains with its custodian in a segregated
account cash, U.S. government securities or other high-grade, liquid debt
securities with a value sufficient to meet its obligations under the call. When
a Fund writes a call option, it receives a premium from the purchaser. During
the option period, the Fund forgoes the opportunity to profit from any increase
in the market price of the security above the exercise price of the option, but
retains the risk that the price of the security may decline.
Each Fund may also write covered put options. When a Fund writes a put
option, it receives a premium and gives the purchaser of the put the right to
sell the underlying security to the Fund at the exercise price at any time
during the option period. A put is "covered" if the Fund maintains cash, U.S.
government securities or other high-grade, liquid debt securities with a value
equal to the exercise price in a segregated account. The risk in writing puts is
that the market price of the underlying security may decline below the exercise
price (less the premiums received).
Each Fund may seek to terminate its obligations as a writer of a put or
call option prior to its expiration by entering into a "closing purchase
transaction." A closing purchase transaction is the purchase of an option
covering the same underlying security and having the same exercise
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price and expiration date as an option previously written by the Fund on which
it wishes to terminate its obligation.
Although not a fundamental policy subject to shareholder vote, each
Fund presently does not intend to write options on portfolio securities
exceeding 25% of its total assets. Normally, options will be written on those
portfolio securities which the Adviser does not expect to have significant
short-term capital appreciation.
RISKS OF WRITING OPTIONS ON DEBT SECURITIES When a Fund writes an
option, it assumes the risk of fluctuations in the value of the underlying
security in return for a fixed premium and must be prepared to satisfy exercise
of the option at any time until the expiration date. The writing of options
could also result in an increase in the Fund's turnover rate, particularly in
periods of appreciation in the market price of the underlying securities. In
addition, writing options on portfolio securities involves a number of other
risks, including the risk that the Adviser may not correctly predict interest
rate movement and the risk that there may not be a liquid secondary market for
the option, as a result of which the Fund might be unable to effect a closing
transaction.
If a Fund is unable to close out an option it has written, it must
continue to bear the risks associated with the option, and must continue to hold
cash or securities to cover the option until the option is exercised or expires.
Each Fund may engage in options on securities which are not traded on national
exchanges ("unlisted options"). Because unlisted options may be closed out only
with the other party to the option transaction, it may be more difficult to
close out unlisted options than listed options.
REGULATORY NOTIFICATION OF FUTURES AND OPTIONS STRATEGIES The
Corporation has filed on behalf of each Fund a notice of eligibility for
exclusion from the definition of the term "commodity pool operator" with the
Commodity Futures Trading Commission ("CFTC") and the National Futures
Association, which regulate trading in the futures markets. Under Section 4.5 of
the regulations under the Commodity Exchange Act, the notice of eligibility must
include representations that each Fund will use futures contracts and related
options solely for bona fide hedging purposes within the meaning of the CFTC
regulations, provided that each Fund may hold futures contracts and related
options that do not fall within the definition of bona fide hedging transactions
if, with respect to such non-hedging transactions, the sum of initial margin
deposits on futures contracts and related options and premiums paid for related
options, after taking into account unrealized profits and losses on such
contracts, do not exceed 5% of that Fund's net assets; and provided further that
each Fund may exclude the amount by which an option is "in the money" in
computing such 5%. Each Fund will not purchase futures contracts or related
options if as a result more than 33 1/3% of that Fund's total assets would be so
invested. Where a Fund enters into two positions that substantially offset each
other, it determines compliance with the foregoing limitation by considering its
net exposure to changes in the underlying instrument or market. These limits on
a Fund's investments in futures contracts are not fundamental and may be changed
by the Board of Directors as regulatory agencies permit. Each Fund will not
modify these limits to increase its permissible futures and related options
activities without supplying additional information in a supplement to a current
Prospectus or Statement of Additional Information that has been distributed or
made available to each Fund's shareholders.
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The following information about futures and options applies to High Yield:
The Fund may purchase call options on securities that the Adviser
intends to include in the Fund's investment portfolio in order to fix the cost
of a future purchase. Purchased options also may be used as a means of
participating in an anticipated price increase of a security on a more limited
risk basis than would be possible if the security itself were purchased. In the
event of a decline in the price of the underlying security, use of this strategy
would serve to limit the Fund's potential loss to the option premium paid;
conversely, if the market price of the underlying security increases above the
exercise price and the Fund either sells or exercises the option, any profit
realized will be reduced by the premium.
The Fund may purchase put options in order to hedge against a decline
in the market value of securities held in its portfolio or to enhance income.
The put option enables the Fund to sell the underlying security at the
predetermined exercise price; thus the potential for loss to the Fund below the
exercise price is limited to the option premium paid. If the market price of the
underlying security is higher than the exercise price of the put option, any
profit the Fund realizes on the sale of the security would be reduced by the
premium paid for the put option less any amount for which the put option may be
sold.
The Fund may write covered call options on securities in which it is
authorized to invest. Because it can be expected that a call option will be
exercised if the market value of the underlying security increases to a level
greater than the exercise price, the Fund might write covered call options on
securities generally when its Adviser believes that the premium received by the
Fund will exceed the extent to which the market price of the underlying security
will exceed the exercise price. The strategy may be used to provide limited
protection against a decrease in the market price of the security, in an amount
equal to the premium received for writing the call option less any transaction
costs. Thus, in the event that the market price of the underlying security held
by the Fund declines, the amount of such decline will be offset wholly or in
part by the amount of the premium received by the Fund. If, however, there is an
increase in the market price of the underlying security and the option is
exercised, the Fund would be obligated to sell the security at less than its
market value. The Fund would give up the ability to sell the portfolio
securities used to cover the call option while the call option was outstanding.
Such securities would also be considered illiquid in the case of
over-the-counter ("OTC") options written by the Fund, and therefore subject to
the Fund's limitation on investing no more than 15% of its total assets in
illiquid securities. In addition, the Fund could lose the ability to participate
in an increase in the value of such securities above the exercise price of the
call option because such an increase would likely be offset by an increase in
the cost of closing out the call option (or could be negated if the buyer chose
to exercise the call option at an exercise price below the securities' current
market value).
The sale of a put option on a security by the Fund also serves to
partially offset the cost of a security that the Fund anticipates purchasing. If
the price of the security rises, the increased cost to the Fund of purchasing
the security will be offset, in whole or in part, by the premium received. In
the event, however, that the price of the security falls below the exercise
price of the option and the option is exercised, the Fund will be required to
purchase the security from the holder of the option at a price in excess of the
current market price of the security. The Fund's loss on this transaction will
be offset, in whole or in part, to the extent of the premium received by the
Fund for writing the option.
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The Fund may purchase put and call options and write put and covered
call options on bond indices in much the same manner as securities options,
except that bond index options may serve as a hedge against overall fluctuations
in the debt securities markets (or a market sector) rather than anticipated
increases or decreases in the value of a particular security. A bond index
assigns a value to the securities included in the index and fluctuates with
changes in such values. Settlements of bond index options are effected with cash
payments and do not involve the delivery of securities. Thus, upon settlement of
a bond index option, the purchaser will realize, and the writer will pay, an
amount based on the difference between the exercise price and the closing price
of the bond index. The effectiveness of hedging techniques using bond index
options will depend on the extent to which price movements in the bond index
selected correlate with price movements of the securities in which the Fund
invests.
The Fund may purchase and write covered straddles on securities,
currencies or bond indices. A long straddle is a combination of a call and a put
option purchased on the same security, index or currency where the exercise
price of the put is less than or equal to the exercise price of the call. The
Fund would enter into a long straddle when the Adviser believes that it is
likely that interest rates or currency exchange rates will be more volatile
during the term of the options than the option pricing implies. A short straddle
is a combination of a call and a put written on the same security, index or
currency where the exercise price of the put is less than or equal to the
exercise price of the call. In a covered short straddle, the same issue of
security or currency is considered cover for both the put and the call that the
Fund has written. The Fund would enter into a short straddle when the Adviser
believes that it is unlikely that interest rates or currency exchange rates will
be as volatile during the term of the options as the option pricing implies. In
such case, the Fund will set aside cash and/or liquid, high grade debt
securities in a segregated account with its custodian equivalent in value to the
amount, if any, by which the put is in-the-money, that is, the amount by which
the exercise price of the put exceeds the current market value of the underlying
security.
Foreign Currency Options and Related Risks
The Fund may purchase and write (sell) options on foreign currencies in
order to hedge against the risk of foreign exchange rate fluctuation on foreign
securities the Fund holds or which it intends to purchase. For example, if the
Fund enters into a contract to purchase securities denominated in a foreign
currency, it could effectively fix the maximum U.S. dollar cost of the
securities by purchasing call options on that foreign currency. Similarly, if
the Fund held securities denominated in a foreign currency and anticipated a
decline in the value of that currency against the U.S. dollar, it could hedge
against such a decline by purchasing a put option on the currency involved. The
purchase of an option on foreign currency may be used to hedge against
fluctuations in exchange rates although, in the event of exchange rate movements
adverse to the Fund's options position, it may forfeit the entire amount of the
premium plus related transaction costs. In addition, the Fund may purchase call
options on foreign currency to enhance income when its Adviser anticipates that
the currency will appreciate in value, but the securities denominated in that
currency do not present attractive investment opportunities.
If the Fund writes an option on foreign currency, it will constitute
only a partial hedge, up to the amount of the premium received, and the Fund
could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The Fund may use
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options on currency to cross-hedge, which involves writing or purchasing options
on one currency to hedge against changes in exchange rates of a different, but
related, currency. If the Fund uses cross-hedging, it may experience losses on
both the currency in which it has invested and the currency used for hedging, if
the two currencies do not vary with the expected degree of correlation.
The Fund's ability to establish and close out positions on such options
is subject to the maintenance of a liquid secondary market. Although many
options on foreign currencies are exchange traded, the majority are traded on
the OTC market. The Fund will not purchase or write such options unless, in the
opinion of the Adviser, the market for them has developed sufficiently. There
can be no assurance that a liquid secondary market will exist for a particular
option at any specific time. In addition, options on foreign currencies are
affected by all of those factors that influence foreign exchange rates and
investments generally. These OTC options also involve credit risks that may not
be present in the case of exchange-traded currency options.
Futures Contracts and Options on Futures Contracts
The Fund will limit its use of futures contracts and options on futures
contracts to hedging transactions or other circumstances permitted by regulatory
authorities. For example, the Fund might use futures contracts to attempt to
hedge against anticipated changes in interest rates that might adversely affect
either the value of the Fund's securities or the price of the securities that
the Fund intends to purchase. The Fund's hedging may include sales of futures
contracts as an offset against the effect of expected increases in interest
rates, and purchases of futures contracts as an offset against the effect of
expected declines in interest rates. Although other techniques could be used to
reduce exposure to interest rate fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost by using futures contracts
and options on futures contracts.
The Fund may also purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign exchange rate at limited risk. The
Fund may purchase a call option on a foreign currency futures contract to hedge
against a rise in the foreign exchange rate while intending to invest in a
foreign security of the same currency. The Fund may purchase put options on
foreign currency futures contracts as a hedge against a decline in the foreign
exchange rates or the value of its foreign portfolio securities. The Fund may
write a call option on a foreign currency futures contract as a partial hedge
against the effects of declining foreign exchange rates on the value of foreign
securities. The Fund may sell a put option on a foreign currency to partially
offset the cost of a security denominated in that currency that the Fund
anticipates purchasing; however, the cost will only be offset to the extent of
the premium received by the Fund for writing the option.
The Fund also may use futures contracts on fixed income instruments and
options thereon to hedge its investment portfolio against changes in the general
level of interest rates. A futures contract on a fixed income instrument is a
bilateral agreement pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of the specified type of fixed income security
called for in the contract at a specified future time and at a specified price.
The Fund may purchase a futures contract on a fixed income security when it
intends to purchase fixed income securities but has not yet done so. This
strategy may minimize the effect of all or part of an
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increase in the market price of the fixed income security that the Fund intends
to purchase in the future. A rise in the price of the fixed income security
prior to its purchase may be either offset by an increase in the value of the
futures contract purchased by the Fund or avoided by taking delivery of the
fixed income securities under the futures contract. Conversely, a fall in the
market price of the underlying fixed income security may result in a
corresponding decrease in the value of the futures position. The Fund may sell a
futures contract on a fixed income security in order to continue to receive the
income from a fixed income security, while endeavoring to avoid part or all of
the decline in the market value of that security that would accompany an
increase in interest rates.
The Fund may purchase a call option on a futures contract to hedge
against a market advance in debt securities that the Fund plans to acquire at a
future date. The purchase of a call option on a futures contract is analogous to
the purchase of a call option on an individual fixed income security that can be
used as a temporary substitute for a position in the security itself. The Fund
also may write covered call options on futures contracts as a partial hedge
against a decline in the price of fixed income securities held in the Fund's
investment portfolio, or purchase put options on futures contracts in order to
hedge against a decline in the value of fixed income securities held in the
Fund's investment portfolio. The Fund may write a put option on a security that
the Fund anticipates purchasing to partially offset the cost of purchasing that
security; however, the cost will only be offset to the extent of the premium the
Fund receives for writing the option.
The Fund may sell securities index futures contracts in anticipation of
a general market or market sector decline that could adversely affect the market
value of its investments. To the extent that a portion of the Fund's investments
correlate with a given index, the sale of futures contracts on that index could
reduce the risks associated with a market decline and thus provide an
alternative to the liquidation of securities positions. For example, if the Fund
correctly anticipates a general market decline and sells securities index
futures to hedge against this risk, the gain in the futures position should
offset some or all of the decline in the value of the portfolio. The Fund may
purchase securities index futures contracts if a significant market or market
sector advance is anticipated. Such a purchase of a futures contract would serve
as a temporary substitute for the purchase of individual securities, which
securities may then be purchased in an orderly fashion. This strategy may
minimize the effect of all or part of an increase in the market price of
securities that the Fund intends to purchase. A rise in the price of the
securities should be partly or wholly offset by gains in the futures position.
As in the case of a purchase of a securities index futures contract,
the Fund may purchase a call option on a securities index futures contract to
hedge against a market advance in securities that the Fund plans to acquire at a
future date. The Fund may write put options on securities index futures as a
partial anticipatory hedge and may write covered call options on securities
index futures as a partial hedge against a decline in the prices of bonds held
in its portfolio. This is analogous to writing covered call options on
securities. The Fund also may purchase put options on securities index futures
contracts. The purchase of put options on securities index futures contracts is
analogous to the purchase of protective put options on individual securities
where a level of protection is sought below which no additional economic loss
would be incurred by the Fund.
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The Fund may also purchase and sell futures contracts on a foreign
currency. The Fund may sell a foreign currency futures contract to hedge against
possible variations in the exchange rate of the foreign currency in relation to
the U.S. dollar. In addition, the Fund may sell a foreign currency futures
contract when the Adviser anticipates a general weakening of the foreign
currency exchange rate that could adversely affect the market values of the
Fund's foreign securities holdings. In this case, the sale of futures contracts
on the underlying currency may reduce the risk to the Fund caused by foreign
currency variations and, by so doing, provide an alternative to the liquidation
of securities positions in the Fund and resulting transaction costs. When the
Adviser anticipates a significant foreign exchange rate increase while intending
to invest in a security denominated in a foreign currency, the Fund may purchase
a foreign currency futures contract to hedge against a rise in foreign exchange
rates pending completion of the anticipated transaction. Such a purchase would
serve as a temporary measure to protect the Fund against any rise in the foreign
exchange rate that may add additional costs to acquiring the foreign security
position.
The Fund may also purchase call or put options on foreign currency
futures contracts to obtain a fixed foreign exchange rate at limited risk. The
Fund may purchase a call option or write a put option on a foreign currency
futures contract to hedge against a rise in the foreign exchange rate while
intending to invest in a foreign security of the same currency. The Fund may
purchase put options on foreign currency futures contracts as a partial hedge
against a decline in the foreign exchange rates or the value of its foreign
portfolio securities. It may also write a call option on a foreign currency
futures contract as a partial hedge against the effects of declining foreign
exchange rates on the value of foreign securities.
The Fund may also write put options on interest rate, securities index
or foreign currency futures contracts while, at the same time, purchasing call
options on the same interest rate, securities index or foreign currency futures
contract in order synthetically to create a long interest rate, securities index
or foreign currency futures contract position. The options will have the same
strike prices and expiration dates. The Fund will engage in this strategy only
when its Adviser believes it is more advantageous to the Fund to do so as
compared to purchasing the futures contract.
The Fund may also purchase and write covered straddles on interest
rate, foreign currency or securities index futures contracts. A long straddle is
a combination of a call and a put purchased on the same futures contract where
the exercise price of the put option is less than the exercise price of the call
option. The Fund would enter into a long straddle when it believes that it is
likely that interest rates or foreign currency exchange rates will be more
volatile during the term of the options than the option pricing implies. A short
straddle is a combination of a call and put written on the same futures contract
where the exercise price of the put option is less than the exercise price of
the call option. In a covered short straddle, the same futures contract is
considered "cover" for both the put and the call that the Fund has written. The
Fund would enter into a short straddle when it believes that it is unlikely that
interest rates or foreign currency exchange rates will be as volatile during the
term of the options as the option pricing implies. In such case, the Fund will
set aside cash and/or liquid, high grade debt securities in a segregated account
with its custodian equal in value to the amount, if any, by which the put is
"in-the-money", that is, the amount by which the exercise price of the put
exceeds the current market value of the underlying futures contract.
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When a purchase or sale of a futures contract is made by the Fund, the
Fund is required to deposit with its custodian (or a broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract, which is returned to the Fund upon
termination of the contract assuming all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial margin
payment. Additionally, initial margin requirements may be increased generally in
the future by regulatory action. The Fund expects to earn interest income on its
initial margin deposits. A futures contract held by the Fund is valued daily at
the official settlement price of the exchange on which it is traded. Each day
the Fund pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking-to-market." Variation margin does not represent a borrowing or loan by
the Fund but is instead settlement between the Fund and the broker of the amount
one would owe the other if the futures contract had expired on that date. In
computing daily net asset value, the Fund will mark-to-market its open futures
positions.
The Fund is also required to deposit and maintain margin with respect
to put and call options on futures contracts and on certain foreign currencies
written by it. Such margin deposits will vary depending on the nature of the
underlying futures contract or currency (and the related initial margin
requirements), the current market value of the option and other options and
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally futures contracts are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(involving the same currency, index or underlying security and delivery month).
If an offsetting purchase price is less than the original sale price, the Fund
realizes a gain, or if it is more, the Fund realizes a loss. If an offsetting
sale price is more than the original purchase price, the Fund realizes a gain,
or if it is less, the Fund realizes a loss. The Fund will also bear transaction
costs for each contract, which must be considered in these calculations.
The Fund will not enter into futures contracts or commodities option
positions if, immediately thereafter, the initial margin deposits plus premiums
paid by it, less the amount by which any such options positions are
"in-the-money" at the time of purchase, would exceed 5% of the fair market value
of the Fund's total assets. A call option is "in-the-money" if the value of the
futures contract that is the subject of the option exceeds the exercise price. A
put option is "in-the-money" if the exercise price exceeds the value of the
futures contract that is the subject of the option. Foreign currency options
traded on a commodities exchange are considered commodity options for this
purpose.
Risks Associated with Futures and Options
In considering the Fund's use of futures contracts and options,
particular note should be taken of the following:
(1) Positions in futures contracts may be closed out only on an
exchange or board of trade that provides a secondary market for such futures
contracts. Futures exchanges may limit
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the amount of fluctuation permitted in certain futures contract prices during a
single trading day. The daily limit establishes the maximum amount that the
price of a futures contract may vary either up or down from the previous day's
settlement price at the end of the current trading session. Once the daily limit
has been reached in a futures contract subject to the limit, no more trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movements during a particular trading day and therefore does not limit
potential losses because the limit may work to prevent the liquidation of
unfavorable positions. For example, futures prices have occasionally moved to
the daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting some holders
of futures contracts to substantial losses.
(2) The ability to establish and close out positions in either futures
contracts or exchange-listed options is also subject to the maintenance of a
liquid secondary market. Consequently, it may not be possible for the Fund to
close a position and, in the event of adverse price movements, the Fund would
have to make daily cash payments of variation margin (except in the case of
purchased options). However, in the event futures contracts or options have been
used to hedge portfolio securities, such securities will not be sold until the
contracts can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, there is no guarantee that the price of the securities will,
in fact, correlate with the price movements in the contracts and thus provide an
offset to losses on the contracts.
(3) Successful use by the Fund of futures contracts and options will
depend upon the Adviser's ability to predict movements in the direction of the
overall securities, currency and interest rate markets, which may require
different skills and techniques than predicting changes in the prices of
individual securities. Moreover, futures contracts relate not to the current
level of the underlying instrument but to the anticipated levels at some point
in the future. There is, in addition, the risk that the movements in the price
of the futures contract will not correlate with the movements in prices of the
securities or currencies being hedged. For example if the price of the futures
contract moves less than the price of the securities or currencies that are
subject to the hedge, the hedge will not be fully effective; however, if the
price of securities or currencies being hedged has moved in an unfavorable
direction, the Fund would be in a better position than if it had not hedged at
all. If the price of the securities or currencies being hedged has moved in a
favorable direction, this advantage may be partially offset by losses in the
futures position. In addition, if the Fund has insufficient cash, it may have to
sell assets from its investment portfolio to meet daily variation margin
requirements. Any such sale of assets may or may not be made at prices that
reflect the rising market; consequently, the Fund may need to sell assets at a
time when such sales are disadvantageous to the Fund. If the price of the
futures contract moves more than the price of the underlying securities or
currencies, the Fund will experience either a loss or a gain on the futures
contract that may or may not be completely offset by movements in the price of
the securities or currencies that are the subject of the hedge.
(4) The value of an option position will reflect, among other things,
the current market price of the underlying security, futures contract or
currency, the time remaining until expiration, the relationship of the exercise
price to the market price, the historical price volatility of the underlying
security, index, futures contract or currency and general market conditions. For
this
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reason, the successful use of options as a hedging strategy depends upon the
Adviser's ability to forecast the direction of price fluctuations in the
underlying market or market sector.
(5) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the futures
position and the securities or currencies being hedged, movements in the prices
of futures contracts may not correlate perfectly with movements in the prices of
the hedged securities or currencies due to price distortions in the futures
market. There may be several reasons unrelated to the value of the underlying
securities or currencies that cause this situation to occur. First, as noted
above, all participants in the futures market are subject to initial and
variation margin requirements. If, to avoid meeting additional margin deposit
requirements or for other reasons, investors choose to close a significant
number of futures contracts through offsetting transactions, distortions in the
normal price relationship between the securities or currencies and the futures
markets may occur. Second, because the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market, there may be increased participation by speculators in the futures
market; such speculative activity in the futures market also may cause temporary
price distortions. Third, participants could make or take delivery of the
underlying securities or currencies instead of closing out their contracts. As a
result, a correct forecast of general market trends may not result in successful
hedging through the use of futures contracts over the short term. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage and other investment strategies may result in temporary price
distortions.
(6) Options normally have expiration dates of up to three years. The
exercise price of the options may be below, equal to or above the current market
value of the underlying security, index, futures contract or currency. Purchased
options that expire unexercised have no value, and the Fund will realize a loss
in the amount paid plus any transaction costs.
(7) Like options on securities and currencies, options on futures
contracts have a limited life. The ability to establish and close out options on
futures will be subject to the development and maintenance of liquid secondary
markets on the relevant exchanges or boards of trade. There can be no certainty
that liquid secondary markets for all options on futures contracts will develop.
(8) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase. This amount and the transaction costs are all that is at
risk. Sellers of options on futures contracts, however, must post an initial
margin and are subject to additional margin calls that could be substantial in
the event of adverse price movements. In addition, although the maximum amount
at risk when the Fund purchases an option is the premium paid for the option and
the transaction costs, there may be circumstances when the purchase of an option
on a futures contract would result in a loss to the Fund when the use of a
futures contract would not, such as when there is no movement in the value of
the securities or currencies being hedged.
(9) The Fund's activities in the futures and options markets may result
in a higher portfolio turnover rate and additional transaction costs in the form
of added brokerage commissions; however, the Fund also may save on commissions
by using such contracts as a hedge rather than buying or selling individual
securities or currencies in anticipation or as a result of market movements.
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(10) The Fund may purchase and write both exchange-traded options and
OTC options. The ability to establish and close out positions on the exchanges
is subject to the maintenance of a liquid secondary market. Although the Fund
intends to purchase or write only those exchange-traded options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market will exist for any particular option at any specific time.
Closing transactions may be effected with respect to options traded in the OTC
markets (currently the primary markets for options on debt securities and
foreign currencies) only by negotiating directly with the other party to the
option contract, or in a secondary market for the option if such market exists.
Although the Fund will enter into OTC options only with dealers that agree to
enter into, and that are expected to be capable of entering into, closing
transactions with the Fund, there can be no assurance that the Fund will be able
to liquidate an OTC option at a favorable price at any time prior to expiration.
In the event of insolvency of the contra-party, the Fund may be unable to
liquidate an OTC option. Accordingly, it may not be possible to effect closing
transactions with respect to certain options, with the result that the Fund
would have to exercise those options that it has purchased in order to realize
any profit. With respect to options written by the Fund, the inability to enter
into a closing transaction may result in material losses to the Fund. For
example, because the Fund must maintain a covered position with respect to any
call option it writes on a security, futures contract or currency, the Fund may
not sell the underlying security, futures contract or currency or invest any
cash, U.S. Government securities or liquid high quality debt securities used as
cover during the period it is obligated under such option. This requirement may
impair the Fund's ability to sell a portfolio security or make an investment at
a time when such a sale or investment might be advantageous.
(11) Securities index options are settled exclusively in cash. If the
Fund purchases a put or call option on an index, the Fund will not know in
advance the difference, if any, between the closing value of the index on the
exercise date and the exercise price of the option itself. Thus, if the Fund
exercises a securities index option before the closing index value for that day
is available, the Fund runs the risk that the level of the underlying index may
subsequently change.
Special Risks Related to Foreign Currency Futures Contracts and Options on Such
Contracts and Options on Foreign Currencies
Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use as a
hedging device similar to those associated with options on foreign currencies
described below. Further, settlement of a foreign currency futures contract must
occur within the country issuing the underlying currency. Thus, the Fund must
accept or make delivery of the underlying foreign currency in accordance with
any U.S. or foreign restrictions or regulations regarding the maintenance of
foreign banking arrangements by U.S. residents and may be required to pay any
fees, taxes or charges associated with such delivery that are assessed in the
issuing country.
Options on foreign currency futures contracts may involve certain
additional risks. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. To reduce
this risk, the Fund will not purchase or write options on foreign currency
futures contracts unless and until, in the opinion of the Adviser, the market
for such options has developed sufficiently that the risks in connection with
such options are not greater
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than the risks in connection with transactions in the underlying foreign
currency futures contracts. Compared to the purchase or sale of foreign currency
futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to the Fund because the maximum amount at risk is
the premium paid for the option (plus transaction costs). However, there may be
circumstances when the purchase of a call or put option on a foreign currency
futures contract would result in a loss, such as when there is no movement in
the price of the underlying currency or futures contract, when the purchase of
the underlying futures contract would not result in a loss.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the options markets until
they reopen.
Additional Risks of Options on Securities, Futures Contracts, Options on Futures
and Forward Currency Exchange Contracts and Options Thereon Traded on Foreign
Exchanges
Options on securities, futures contracts, options on futures contracts,
currencies and options on currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States, may not involve a clearing mechanism and related guarantees and
are subject to the risk of governmental actions affecting trading in, or the
price of, foreign securities. The value of such positions also could be
adversely affected by (1) other complex foreign political, legal and economic
factors, (2) lesser availability than in the United States of data on which to
make trading decisions, (3) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (5) lesser
trading volume.
Forward Contracts
The Fund may use forward currency exchange contracts ("forward
contracts") to hedge against uncertainty in the level of future exchange rates.
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The Fund may enter into forward contracts with respect to specific
transactions. For example, when the Fund anticipates purchasing or selling a
security denominated in a foreign currency, or when it anticipates the receipt
in a foreign currency of dividend or interest payments on a security that it
holds, the Fund may desire to "lock in" the U.S. dollar price of the security or
the U.S. dollar equivalent of such payment, as the case may be, by entering into
a forward contract for the purchase or sale, for a fixed amount of U.S. dollars
or foreign currency, of the amount of foreign currency involved in the
underlying transaction. The Fund will thereby attempt to protect itself against
a possible loss resulting from an adverse change in the relationship between the
currency exchange rates during the period between the date on which the security
is purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.
The Fund also may use forward contracts to "lock in" the U.S. dollar
value of its portfolio positions, to increase the Fund's exposure to foreign
currencies that the Adviser believes may rise in value relative to the U.S.
dollar or to shift the Fund's exposure to foreign currency fluctuations from one
country to another. For example, when the Adviser believes that the currency of
a particular foreign country may suffer a substantial decline relative to the
U.S. dollar or another currency, it may enter into a forward contract to sell
the amount of the former foreign currency approximating the value of some or all
of the Fund's securities denominated in such foreign currency. These investment
practices generally are referred to as "cross-currency hedging" when two foreign
currencies are involved.
At or before the maturity date of a forward contract requiring the Fund
to sell a currency, the Fund may either sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, the Fund
may close out a forward contract requiring it to purchase a specified currency
by entering into a second contract entitling it to sell the same amount of the
same currency on the maturity date of the first contract. The Fund would realize
a gain or loss as a result of entering into such an offsetting forward contract
under either circumstance to the extent the exchange rate or rates between the
currencies involved moved between the execution dates of the first contract and
the offsetting contract.
The precise matching of the forward contract amount and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the
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Fund to sustain losses on these contracts and transaction costs. The Fund may
enter into forward contracts or maintain a net exposure to such contracts only
if (1) the consummation of the contracts would not obligate the Fund to deliver
an amount of foreign currency in excess of the value of the Fund's portfolio
securities or other assets denominated in that currency or (2) the Fund
maintains cash, U.S. Government securities or other liquid, high-grade debt
securities in a segregated account with the Fund's custodian, marked-to-market
daily, in an amount not less than the value of the Fund's total assets committed
to the consummation of the contract. Under normal circumstances, consideration
of the prospect for currency parities will be incorporated into the longer-term
investment decisions made with regard to overall diversification strategies.
However, the Adviser believes that it is important to have the flexibility to
enter into such forward contracts when it determines that the best interests of
the Fund will be served.
The cost to the Fund of engaging in forward contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved. The use
of forward contracts does not eliminate fluctuations in the prices of the
underlying securities the Fund owns or intends to acquire, but it does fix a
rate of exchange in advance. In addition, although forward contracts limit the
risk of loss due to a decline in the value of the hedged currencies, at the same
time,they limit any potential gain that might result should the value of the
currencies increase.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
Foreign Currency Warrants
Foreign currency warrants entitle the holder to receive from their
issuer an amount of cash (generally, for warrants issued in the United States,
in U.S. dollars) that is calculated pursuant to a predetermined formula and
based on the exchange rate between a specified foreign currency and the U.S.
dollar as of the exercise date of the warrant. Foreign currency warrants
generally are exercisable upon their issuance and expire as of a specified date
and time. Foreign currency warrants have been issued in connection with U.S.
dollar-denominated debt offerings by major corporate issuers in an attempt to
reduce the foreign currency exchange risk that is inherent in the international
fixed income/debt marketplace. The formula used to determine the amount payable
upon exercise of a foreign currency warrant may make the warrant worthless
unless the applicable foreign currency exchange rate moves in a particular
direction.
Foreign currency warrants are severable from the debt obligations with
which they may be offered and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any
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exercise of warrants, there may be a time delay between the time a holder of
warrants gives instructions to exercise and the time the exchange rate relating
to exercise is determined, during which time the exchange rate could change
significantly, thereby affecting both the market and cash settlement values of
the warrants being exercised.
The expiration date of the warrants may be accelerated if the warrants
are delisted from an exchange or if their trading is suspended permanently,
which would result in the loss of any remaining "time value" of the warrants
(i.e., the difference between the current market value and the exercise value of
the warrants) and, in the case where the warrants were "out-of-the-money," in a
total loss of the purchase price of the warrants. Warrants are generally
unsecured obligations of their issuers and are not standardized foreign currency
options issued by the Options Clearing Corporation ("OCC"). Unlike foreign
currency options issued by OCC, the terms of foreign currency warrants generally
will not be amended in the event of governmental or regulatory actions affecting
exchange rates or in the event of the imposition of other regulatory controls
affecting the international currency markets. The initial public offering price
of foreign currency warrants is generally considerably in excess of the price
that a commercial user of foreign currencies might pay in the interbank market
for a comparable option involving significantly larger amounts of foreign
currencies. Foreign currency warrants are subject to significant foreign
exchange risk, including risks arising from complex political and economic
factors.
The requirements for qualification as a regulated investment company
also may limit the extent to which a Fund may engage in transactions in options,
futures, options on futures or forward contracts. See "Additional Tax
Information."
Cover for Strategies Involving Options, Futures and Forward Contracts
The Fund will not use leverage in its options, futures and forward
contract strategies. The Fund will not enter into an options, futures or forward
currency strategy that exposes it to an obligation to another party unless it
owns either (1) an offsetting ("covering") position in securities, currencies or
other options, futures or forward contracts or (2) cash, receivables and liquid
high quality debt securities with a value sufficient to cover its potential
obligations. The Fund will comply with guidelines established by the SEC with
respect to coverage of these strategies by mutual funds, and, if the guidelines
so require, will set aside cash and/or liquid, high-grade debt securities in a
segregated account with its custodian in the amount prescribed, as
marked-to-market daily. Securities, currencies or other options or futures
positions used for cover and securities held in a segregated account cannot be
sold or closed out while the strategy is outstanding, unless they are replaced
with similar assets. As a result, there is a possibility that the use of cover
or segregation involving a large percentage of the Fund's assets could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
Other Investment Policies
The following investment policies apply only to Government Intermediate,
Investment Grade and High Yield unless otherwise stated:
ILLIQUID SECURITIES SEC regulations permit the sale of certain
restricted securities to qualified institutional buyers. The Adviser, acting
pursuant to guidelines established by the Board of Directors, may determine that
certain restricted securities qualified for trading on this newly
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developing market are liquid. If the market does not develop as anticipated, it
may adversely affect each Fund's liquidity.
PRIVATE PLACEMENTS Each Fund may acquire restricted securities in
private placement transactions, directly from the issuer or from security
holders, frequently at higher yields than comparable publicly traded securities.
Privately-placed securities can be sold by each Fund only (1) pursuant to SEC
Rule 144A or other exemption; (2) in privately negotiated transactions to a
limited number of purchasers; or (3) in public offerings made pursuant to an
effective registration statement under the 1933 Act. Private or public sales of
such securities by a Fund may involve significant delays and expense. Private
sales require negotiations with one or more purchasers and generally produce
less favorable prices than the sale of comparable unrestricted securities.
Public sales generally involve the time and expense of preparing and processing
a registration statement under the 1933 Act and may involve the payment of
underwriting commissions; accordingly, the proceeds may be less than the
proceeds from the sale of securities of the same class which are freely
marketable.
Restrictions: Restricted securities will not be purchased by either Government
Intermediate or Investment Grade if, as a result, more than 5% of that Fund's
assets would consist of restricted securities.
SECURITIES LENDING (APPLIES TO ALL OF THE FUNDS) Each Fund may lend
portfolio securities to brokers or dealers in corporate or U.S. government
securities (U.S. government securities only, with respect to Government
Intermediate and Government Money Market), banks or other recognized
institutional borrowers of securities, provided that the borrower maintains cash
or equivalent collateral, equal to at least 100% of the market value of the
securities loaned with the Funds' custodian. During the time portfolio
securities are on loan, the borrower will pay the lending Fund an amount
equivalent to any interest paid on such securities, and the Fund may invest the
cash collateral and earn income, or it may receive an agreed upon amount of
interest income from the borrower who has delivered equivalent collateral. These
loans are subject to termination at the option of the Fund or the borrower. Each
Fund may pay reasonable administrative and custodial fees in connection with a
loan and may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. In the event of the
bankruptcy of the other party to a securities loan, a Fund could experience
delays in recovering the securities lent. To the extent that, in the meantime,
the value of the securities purchased had decreased or the securities lent
increased, the Fund could experience a loss. Each Fund will enter into
securities loan transactions only with financial institutions which the Adviser
believes to present minimal risk of default during the term of the loan. Each
Fund does not have the right to vote securities on loan, but would terminate the
loan and regain the right to vote if that were considered important with respect
to the investment. Each Fund presently does not intend to loan more than 5% of
its portfolio securities at any given time.
REPURCHASE AGREEMENTS (APPLIES TO ALL OF THE FUNDS) Repurchase
agreements are usually for periods of one week or less, but may be for longer
periods. Repurchase agreements maturing in more than seven days may be
considered illiquid. In a repurchase agreement, the securities are held for each
Fund by State Street Bank and Trust Company ("State Street"), the Funds'
custodian, as collateral until resold and are supplemented by additional
collateral if necessary to maintain a total value equal to or in excess of the
value of the repurchase agreement.
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Each Fund bears a risk of loss in the event that the other party to a repurchase
agreement defaults on its obligations and a Fund is delayed or prevented from
exercising its rights to dispose of the collateral securities. Each Fund enters
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. Each Fund
currently intends to invest in repurchase agreements only when cash is
temporarily available or for temporary defensive purposes.
REVERSE REPURCHASE AGREEMENTS (APPLIES TO ALL OF THE FUNDS) A reverse
repurchase agreement is a portfolio management technique in which a Fund
temporarily transfers possession of a portfolio instrument to another person,
such as a financial institution or broker-dealer, in return for cash. At the
same time, the Fund agrees to repurchase the instrument at an agreed upon time
(normally within seven days) and price, including interest payment. Each Fund
(other than Government Money Market) may also enter into dollar rolls, in which
a Fund sells a fixed income security for delivery in the current month and
simultaneously contracts to repurchase a substantially similar security (same
type, coupon and maturity) on a specified future date. During the roll period,
that Fund would forgo principal and interest paid on such securities. The Fund
would be compensated by the difference between the current sales price and the
forward price for the future purchase, as well as by any interest earned on the
proceeds of the initial sale.
Each Fund may engage in reverse repurchase agreements and (with the
exception of Government Money Market) dollar rolls as a means of raising cash to
satisfy redemption requests or for other temporary or emergency purposes without
the necessity of selling portfolio instruments. There is a risk that the
contraparty to either a reverse repurchase agreement or a dollar roll will be
unable or unwilling to complete the transaction as scheduled, which may result
in losses to a Fund.
When a Fund reinvests the proceeds of a reverse repurchase agreement in
other securities, any fluctuations in the market value of either the securities
transferred to another party or the securities in which the proceeds are
invested would affect the market value of that Fund's assets. If a Fund
reinvests the proceeds of the agreement at a rate lower than the cost of the
agreement, engaging in the agreement will lower that Fund's yield. While
engaging in reverse repurchase agreements and dollar rolls, each Fund will
maintain cash, U.S. Government securities (or other high-grade, liquid debt
securities, with respect to Investment Grade and High Yield) in a segregated
account at its custodian bank with a value at least equal to that Fund's
obligation under the agreements.
Restrictions: The ability of a Fund to engage in reverse repurchase agreements
and/or dollar rolls is subject to each Fund's fundamental investment limitation
concerning borrowing, i.e., that borrowing may be for temporary purposes only
and in an amount not to exceed 5% of a Fund's total assets.
WARRANTS Although not a fundamental policy subject to shareholder
vote, as long as each Fund's Shares continue to be registered in certain states,
each Fund may not invest more than 5% of the value of its net assets, taken at
the lower of cost or market value, in warrants or invest more than 2% of the
value of such net assets in warrants not listed on the New York or American
Stock Exchanges. With respect to High Yield, this restriction does not apply
to warrants attached to, or sold as a unit with, other securities. For purposes
of this restriction, the term
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"warrants" does not include options on securities, stock or bond indices,
foreign currencies or futures contracts.
MORTGAGE-RELATED SECURITIES Mortgage-related securities represent an
ownership interest in a pool of residential mortgage loans. These securities are
designed to provide monthly payments of interest, and in most instances,
principal to the investor. The mortgagor's monthly payments to his/her lending
institution are "passed-through" to investors such as the Fund. Most issuers or
poolers provide guarantees of payments, regardless of whether or not the
mortgagor actually makes the payment. The guarantees made by issuers or poolers
are backed by various forms of credit, insurance and collateral. They may not
extend to the full amount of the pool.
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of one- to four-family homes. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, a Fund may purchase pools of variable-rate mortgages,
growing-equity mortgages, graduated-payment mortgages and other types.
All poolers apply standards for qualification to lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
The majority of mortgage-related securities currently available are
issued by governmental or government-related organizations formed to increase
the availability of mortgage credit. The largest government-sponsored issuer of
mortgage-related securities is GNMA. GNMA certificates ("GNMAs") are interests
in pools of loans insured by the Federal Housing Administration or by the
Farmer's Home Administration ("FHA"), or guaranteed by the Veterans
Administration ("VA"). The Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC") each issue pass-through
securities which are guaranteed as to principal and interest by FNMA and FHLMC,
respectively.
The average life of mortgage-related securities varies with the
maturities and the nature of the underlying mortgage instruments. For example,
GNMAs tend to have a longer average life than FHLMC participation certificates
("PCs") because there is a tendency for the conventional and privately-insured
mortgages underlying FHLMC PCs to repay at faster rates than the FHA and VA
loans underlying GNMAs. In addition, the term of a security may be shortened by
unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage pre-payments is affected by various
factors, including the level of interest rates, general economic conditions, the
location and age of the mortgaged property and other social and demographic
conditions.
In determining the dollar-weighted average maturity of the Fund's
portfolio, the Adviser will follow industry practice in assigning an average
life to the mortgage-related securities of the Fund unless the interest rate on
the mortgages underlying such securities is such that a different prepayment
rate is likely. For example, where a GNMA has a high interest rate relative to
the market, that GNMA is likely to have a shorter overall maturity than a GNMA
with a market rate
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coupon. Moreover, the Adviser may deem it appropriate to change the projected
average life for a Fund's mortgage-related security as a result of fluctuations
in market interest rates and other factors.
Quoted yields on mortgage-related securities are typically based on the
maturity of the underlying instruments and the associated average life
assumption. Actual prepayment experience may cause the yield to differ from the
average life yield. Reinvestment of the prepayments may occur at higher or lower
interest rates than the original investment, thus affecting the yield of the
Fund. The compounding effect from the reinvestments of monthly payments received
by the Fund will increase the yield to shareholders compared to bonds that pay
interest semi-annually.
Like other debt securities, the value of mortgage-related securities
will tend to rise when interest rates fall, and fall when rates rise. The value
of mortgage-related securities may also change because of changes in the
market's perception of the creditworthiness of the organization that issued or
guaranteed them. In addition, the mortgage securities market in general may be
adversely affected by changes in governmental regulation or tax policies.
ASSET-BACKED SECURITIES Asset-backed securities are structurally
similar to mortgage-backed securities, but are secured by interest in a
different type of receivable. Asset-backed securities therefore present certain
risks that are not presented by mortgage-related debt securities or other
securities in which a Fund may invest. Primarily, these securities do not have
the benefit of the same security interest in the related collateral.
Asset-backed securities represent direct or indirect participations in, or are
secured by and payable from, pools of 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 agreements. Credit card
receivables, for example, are generally unsecured and the debtors are entitled
to the protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
automobile receivables. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have proper
security interest in all of the obligations backing such receivables. Therefore,
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on these securities. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.
RATINGS OF DEBT OBLIGATIONS Moody's , S&P and other nationally
recognized statistical rating organizations ("NRSROs") are private organizations
that provide ratings of the credit quality of debt obligations. Each Fund may
consider these ratings in determining whether to purchase, sell or hold a
security.
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Ratings are not absolute assurances of quality. Consequently,
securities with the same maturity, interest rate and rating may have different
market prices. Credit rating agencies attempt to evaluate the safety of
principal and interest payments and do not evaluate the risks of fluctuations in
market value. Also, rating agencies may fail to make timely changes in credit
ratings in response to subsequent events, so that an issuer's current financial
condition may be better or worse than the rating indicates.
The following investment policies apply only to High Yield:
FOREIGN SECURITIES Since the Fund may invest in securities
denominated in currencies other than the U.S. dollar, the Fund may be affected
favorably or unfavorably by exchange control regulations or changes in the
exchange rates between such currencies and the U.S. dollar. Changes in the
currency exchange rates may influence the value of the Fund's shares, and
also may affect the value of dividends and interest earned by the Fund and gains
and losses realized by the Fund. Exchange rates are determined by the forces of
supply and demand in the foreign exchange markets. These forces are affected
by the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors.
Foreign securities transactions could be subject to settlement
procedures different from those followed in the United States, where delivery is
made versus payment. The settlement procedures in some foreign markets expose
investors to the creditworthiness of an intermediary, such as a bank or
brokerage firm, for a period of time during settlement.
SWAPS, CAPS, FLOORS AND COLLARS The Fund may enter into interest rate
swaps, and may purchase and sell caps, floors, and collars for hedging purposes
or in an effort to increase overall return. An interest rate swap is an exchange
of interest payment streams of differing character between counterparties with
respect to a "notional amount" of principal. Index swaps link one of the
payments to the total return of a market portfolio. A cap enables an investor,
in return for a fee, to receive payments if a predetermined interest rate,
currency rate or index value exceeds a particular level. A floor entitles the
investor to receive payments if the interest rate, currency rate or index value
falls below a predetermined level. A collar is a combination of a cap and a
floor and protects a return within a range of values.
Restrictions: The Fund does not intend to purchase swaps, caps, collars, or
floors if, as a result, more than 5% of the Fund's net assets would thereby be
placed at risk. Swaps, caps, collars and floors can be highly volatile
instruments. The value of these agreements is dependent on the ability of the
counterparty to perform and is therefore linked to the counterparty's
creditworthiness. The Fund may also suffer a loss if it is unable to terminate
an outstanding swap agreement.
The Fund will enter into swaps, caps, collars and floors only with
parties deemed by the Adviser to present a minimal risk of default during the
period of agreement. When the Fund enters into a swap, cap, collar or floor, it
will maintain a segregated account containing cash and high-quality liquid debt
securities equal to the payment, if any, due to the other party; where contracts
are on a net basis, only the net payment will be segregated. The Fund regards
caps, collars and floors as illiquid, and therefore subject to the Fund's 15%
limit on illiquid securities. There can be no assurance that the Fund will be
able to terminate a swap at the appropriate time. The Fund will sell caps,
collars and floors only to close out its positions in such instruments.
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As with options and futures transactions, successful use of swap
agreements depends on the Adviser's ability to predict movements in the
direction of overall interest rate markets. There might be imperfect
correlations between the value of a swap, cap, collar or floor agreement and
movements in the underlying interest rate markets. While swap agreements can
offset the potential for loss on a position, they can also limit the opportunity
for gain by offsetting favorable price movements.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. Caps, collars and floors are
more recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps. The market for all of these
instruments is largely unregulated. Swaps, caps, collars and floors are
generally considered "derivatives."
LOAN PARTICIPATIONS AND ASSIGNMENTS The Fund may purchase an interest
in loans originated by banks and other financial institutions. Policies of the
Fund limit the percentage of the Fund's assets that can be invested in the
securities of any one issuer, or in issuers primarily involved in one industry.
Legal interpretations by the SEC staff may require the Fund, in some instances,
to treat both the lending bank and the borrower as "issuers" of a loan
participation by the Fund. In combination, the Fund's policies and the SEC
staff's interpretations may limit the amount the Fund can invest in loan
participations.
Although some of the loans in which the Fund invests may be secured,
there is no assurance that the collateral can be liquidated in particular cases,
or that its liquidation value will be equal to the value of the debt. Borrowers
that are in bankruptcy may pay only a small portion of the amount owed, if they
are able to pay at all. Where the Fund purchases a loan through an assignment,
there is a possibility that the Fund will, in the event the borrower is unable
to pay the loan, become the owner of the collateral. This involves certain risks
to the Fund as a property owner.
Loans are often administered by a lead bank, which acts as agent for
the lenders in dealing with the borrower. In asserting rights against the
borrower, the Fund may be dependent on the willingness of the lead bank to
assert these rights, or upon a vote of all the lenders to authorize the action.
Assets held by the lead bank for the benefit of the Fund may be subject to
claims of the lead bank's creditors.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax
considerations affecting each Fund and its shareholders. Investors are urged to
consult their own tax advisers for more detailed information regarding any
federal, state or local taxes that may be applicable to them.
GENERAL For federal tax purposes, each Fund is treated as a separate
corporation. In order to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
("Code"), each Fund must distribute annually to its shareholders at least 90% of
its investment company taxable income (generally, net investment
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income plus any net short-term capital gain) ("Distribution Requirement") and
must meet several additional requirements. These requirements include the
following: (1) The Fund must derive at least 90% of its gross income each
taxable year must be derived from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of securities (or
foreign currencies with respect to High Yield), or other income (including gains
from options or futures contracts (or forward contracts with respect to High
Yield)) derived with respect to its business of investing in securities (or
those currencies with respect to High Yield)("Income Requirement"); (2) a Fund
must derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities or any of the following, held for less than
three months -- options or futures contracts (with respect to Government
Intermediate and Investment Grade); with respect to High Yield: options, futures
or forward contracts (other than those on foreign currencies), foreign
currencies (or options, futures or forward contracts thereon) that are not
directly related to High Yield's principal business of investing in securities
(or options and futures with respect thereto) ("Short-Short Limitation"); (3) at
the close of each quarter of a Fund's taxable year, at least 50% of the value of
its total assets must be represented by cash and cash items, U.S. government
securities, securities of other RICs and other securities, with those other
securities limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Fund's total assets; and (4) at the close of each
quarter of a Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts. For this and other purposes, dividends and other distributions
declared by a Fund in December of any year and payable to shareholders of record
on a date in that month will be deemed to have been paid by that Fund and
received by the shareholders on December 31 if the distributions are paid by the
Fund during the following January. Accordingly, those dividends and other
distributions will be taxed to the shareholders for the year in which that
December 31 falls.
The following additional tax information applies only to Government
Intermediate, Investment Grade and High Yield:
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as a long-term, instead of a short-term, loss to
the extent of any capital gain distributions received on those shares. Investors
also should be aware that if shares are purchased shortly before the record date
for any dividend or other distribution, the investor will pay full price for the
shares and receive some portion of the price back as a taxable distribution.
HEDGING INSTRUMENTS The use of hedging instruments, such as writing
(selling) and purchasing options, futures contracts and, in the case of High
Yield, entering into forward contracts, involves complex rules that will
determine for income tax purposes the character and timing of recognition of the
gains and losses a Fund will realize in connection therewith.
Regulated futures contracts and options that are subject to Section
1256 of the Code (collectively, "Section 1256 contracts") and are held by a Fund
at the end of its taxable year will be required to be "marked-to-market" for
federal income tax purposes (that is, treated as having been
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sold at that time at market value). Any unrealized gain or loss recognized under
this mark-to-market rule will be added to any realized gains and losses on
Section 1256 contracts actually sold by that Fund during the year, and the
resulting gain or loss will be treated (without regard to the holding period) as
60% long-term capital gain or loss and 40% short-term capital gain or loss.
These rules may operate to increase the amount of dividends, which will be
taxable to shareholders, that must be distributed to meet the Distribution
Requirement and avoid imposition of the Excise Tax, without providing the cash
with which to make the distributions. A Fund may elect to exclude certain
transactions from Section 1256, although doing so may have the effect of
increasing the relative proportion of net short-term capital gain (taxable as
ordinary income when distributed to that Fund's shareholders).
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for federal income tax purposes. Because application of the straddle
rules may affect the character of gains or losses, defer the recognition of
losses and/or accelerate the recognition of gains from the affected straddle
positions, and may require the capitalization of interest expense associated
therewith, the amount that must be distributed to shareholders (and the
character of the distribution as ordinary income or long-term capital gain) may
be increased or decreased substantially as compared to a fund that did not
engage in such hedging transactions.
The following will qualify as permissable income under the Income
Requirement: (1) gains from the disposition of foreign currencies (except
certain gains that may be excluded by certain regulations) by High Yield and (2)
gains from options and futures contracts (in the case of Government Intermediate
and Investment Grade) and from options, futures and forward contracts (in the
case of High Yield) derived by such a Fund with respect to its business of
investing in securities (or, in the case of High Yield, foreign currencies).
However, income from the disposition of options and futures contracts (other
than those on foreign currencies with respect to High Yield) will be subject to
the Short-Short Limitation if they are held for less than three months. With
respect to High Yield: income from the disposition of foreign currencies, and
options, futures and forward contracts thereon, that are not directly related to
the Fund's principal business of investing in securities (or options and futures
with respect thereto), also will be subject to the Short-Short Limitation if
they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether that Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of this limitation. Each
Fund intends to qualify for this treatment when it engages in hedging
transactions but at the present time it is not clear whether this treatment will
be available for, or that each Fund will elect to have this treatment apply to,
all hedging transactions undertaken by that Fund. To the extent this treatment
is not available, a Fund may be forced to defer the closing out of certain
options and futures contracts (and forward contracts with respect to High Yield)
beyond the time when it otherwise would be advantageous to do so, in order for
the Fund to continue to qualify as a RIC.
ZERO COUPON AND PAY-IN-KIND BONDS Each Fund may acquire zero coupon
bonds or other debt securities issued with original issue discount. As a holder
of those securities, a Fund must include in its income the original issue
discount that accrues on the securities during the
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taxable year, even if it receives no corresponding payment on the securities
during the year. Similarly, High Yield must include in its gross income
securities it receives as "interest" on pay-in- kind securities. Because each
Fund annually must distribute substantially all of its investment company
taxable income, including any earned original issue discount and other non-cash
income, to satisfy the Distribution Requirement and avoid imposition of the
Excise Tax, it may be required in a particular year to distribute as a dividend
an amount that is greater than the total amount of cash it actually receives.
Those distributions will be made from a Fund's cash assets or from the proceeds
of sales of portfolio securities, if necessary. A Fund may realize capital gains
or losses from those sales, which would increase or decrease its investment
company taxable income and/or net capital gain (the excess of net long-term
capital gain over net short-term capital loss). In addition, any such gains may
be realized on the disposition of securities held for less than three months.
Because of the Short-Short Limitation, any such gains would reduce a Fund's
ability to sell other securities (or certain options, futures, forward contracts
or foreign currencies), held for less than three months that it might wish to
sell in the ordinary course of its portfolio management.
The following additional tax information applies only to High Yield:
Interest and dividends received by High Yield may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries to not impose taxes on capital gains in
respect of investments by foreign investors.
PASSIVE FOREIGN INVESTMENT COMPANIES The Fund may invest in the stock
of "passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under certain
circumstances, the Fund will be subject to federal income tax on a portion of
any "excess distri bution" received on the stock of a PFIC or of any gain on
disposition of that stock (collectively "PFIC income"), plus interest thereon,
even if the Fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent that income is distributed to its shareholders.
Pursuant to proposed regulations, open-end RICs, such as the Fund,
would be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of each
such PFIC's stock over the adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
FOREIGN CURRENCIES Gains or losses attributable to fluctuations in
exchange rates that occur between the time the Fund accrues dividends, interest
or other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time the Fund actually collects the receivables or pays
the liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of a debt security denominated in a foreign currency
or of a forward contract on a foreign currency, gains or losses attributable to
fluctuations in the value of the foreign
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currency between the date of acquisition of the security or contract and the
date of disposition also are treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders.
MISCELLANEOUS If the Fund invests in shares of common stock or
preferred stock or otherwise holds dividend-paying securities as a result of
exercising a conversion privilege, a portion of the dividends from its
investment company taxable income (whether paid in cash or reinvested in
additional Fund shares) may be eligible for the dividends-received deduction
allowed to corporations. The eligible portion may not exceed the aggregate
dividends received by the Fund from U.S. corporations. However, dividends
received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the alternative minimum
tax.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Government Intermediate, Investment Grade and High Yield each offers
two classes of shares, known as Primary Shares and Navigator Shares. Primary
Shares are available from Legg Mason and certain of its affiliates. Navigator
Shares are currently offered for sale only to Institutional Clients, to clients
of Trust Company for which Trust Company exercises discretionary investment
management responsibility, 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. Primary Shares are available to
all other investors. Government Money Market offers only one class of shares
which corresponds to the Primary Class of other Legg Mason funds.
Future First Systematic Investment Plan and Transfer of Funds from Financial
Institutions
If you invest in Primary Shares, the Prospectus for those shares
explains that you may buy additional Primary Shares through the Future First
Systematic Investment Plan. Under this plan you may arrange for automatic
monthly investments in Primary Shares of $50 or more by authorizing Boston
Financial Data Services ("BFDS"), the Funds' transfer agent, to prepare a check
each month drawn on your checking account. Each month the transfer agent will
send a check to your bank for collection, and the proceeds of the check will be
used to buy Primary Shares at the per share net asset value determined on the
day the check is sent to your bank. You will receive a quarterly account
statement. You may terminate the Future First Systematic Investment Plan at any
time without charge or penalty. Forms to enroll in the Future First Systematic
Investment Plan are available from any Legg Mason or affiliated office.
Investors in Primary Shares may also buy additional Primary Shares
through a plan permitting transfers of funds from a financial institution.
Certain financial institutions may allow the investor, on a pre-authorized
basis, to have $50 or more automatically transferred monthly for investment in
shares of a Fund to:
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Legg Mason Wood Walker, Incorporated
Funds Processing
P.O. Box 1476
Baltimore, Maryland 21203-1476
If the investor's check is not honored by the institution it is drawn
on, the investor may be subject to extra charges in order to cover collection
costs. These charges may be deducted from the investor's shareholder account.
Systematic Withdrawal Plan
If you own Primary Shares with a net asset value of $5,000 or more, you
may also elect to make systematic withdrawals from your Fund account of a
minimum of $50 on a monthly basis. The amounts paid to you each month are
obtained by redeeming sufficient Primary Shares from your account to provide the
withdrawal amount that you have specified. The Systematic Withdrawal Plan is not
currently available for shares held in an Individual Retirement Account ("IRA"),
Self-Employed Individual Retirement Plan ("Keogh Plan"), Simplified Employee
Pension Plan ("SEP") or other qualified retirement plan. You may change the
monthly amount to be paid to you without charge not more than once a year by
notifying Legg Mason or the affiliate with which you have an account.
Redemptions will be made at the Primary Shares' net asset value per share
determined as of the close of regular trading on the New York Stock Exchange
("Exchange") on the first day of each month. If the Exchange is not open for
business on that day, the shares will be redeemed at the per share net asset
value determined as of the close of regular trading on the Exchange on the
preceding business day. The check for the withdrawal payment will usually be
mailed to you on the next business day following redemption. If you elect to
participate in the Systematic Withdrawal Plan, dividends and other distributions
on all Primary Shares in your account must be automatically reinvested in
Primary Shares. You may terminate the Systematic Withdrawal Plan at any time
without charge or penalty. Each Fund, its transfer agent, and Legg Mason also
reserve the right to modify or terminate the Systematic Withdrawal Plan at any
time.
Withdrawal payments are treated as a sale of shares rather than as a
dividend or other distribution. These payments are taxable to the extent that
the total amount of the payments exceeds the tax basis of the shares sold. If
the periodic withdrawals exceed reinvested dividends and other distributions,
the amount of your original investment may be correspondingly reduced.
Ordinarily, you should not purchase additional shares of the Fund in
which you have an account if you maintain a Systematic Withdrawal Plan because
you may incur tax liabilities in connection with such purchases and withdrawals.
Each Fund will not knowingly accept purchase orders from you for additional
shares if you maintain a Systematic Withdrawal Plan unless your purchase is
equal to at least one year's scheduled withdrawals. In addition, if you maintain
a Systematic Withdrawal Plan you may not make periodic investments under the
Future First Systematic Investment Plan.
The following information applies to Government Money Market:
Conversion to Federal Funds
A cash deposit made after the daily cashiering deadline of the Legg
Mason office in which the deposit is made will be credited to your Legg Mason
brokerage account ("Brokerage Account")
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on the next business day following the day of deposit, and the resulting free
credit balance will be invested on the second business day following the day of
receipt.
Legg Mason Premier Asset Management Account/VISA Account
Shareholders of the Fund who have cash or negotiable securities
(including Government Money Market shares) valued at $20,000 or more in accounts
with Legg Mason may subscribe to Legg Mason's Premier Asset Management Account
("Premier"). This program provides a direct link between a shareholder's
Government Money Market account and his or her Brokerage Account. Premier
provides shareholders with a convenient method to invest in the Fund through
their Brokerage Account, which includes automatic daily investment of free
credit balances of $100 or more and automatic weekly investment of free credit
balances of less than $100 into your designated money market fund.
Premier is a comprehensive financial service which combines a
shareholder's Fund account, a VISA Gold debit card, a Legg Mason Brokerage
Account and unlimited check writing with no minimum check amount.
The VISA Gold debit card may be used to purchase merchandise or
services from merchants honoring VISA or to obtain cash advances (which a bank
may limit to $5,000 or less, per account per day) from any bank honoring VISA.
Checks, VISA charges and cash advances are posted to the shareholder's
account and create automatic same day redemptions if shares are available
in the Fund. If Fund shares have been exhausted, the debits will remain in the
margin account, reducing the cash available. The shareholder will receive one
consolidated monthly statement which details all Fund transactions, securities
activity, check writing activity and VISA Gold purchases and cash advances.
BankOne Columbus ("BankOne"), 757 Carolyn Avenue, Columbus, Ohio 43271,
is the Fund's agent for processing payment of VISA Gold debit card charges and
clearance of checks written on the Premier Account. Shareholders are subject to
BankOne's rules and regulations governing VISA accounts, including the right of
BankOne not to honor VISA drafts in amounts exceeding the authorization limit of
the shareholder's account at the time the VISA draft is presented for payment.
The authorization limit is determined daily by taking the shareholder's Fund
account balance and subtracting (1) all shares purchased by other than federal
funds wired within 15 days; (2) all shares for which certificates have been
issued; and (3) any previously authorized VISA transaction.
Premier Card Services
Unlike some other investment programs which offer the VISA card
privilege, Premier also includes travel/accident insurance at no added cost when
shareholders purchase travel tickets with their Premier VISA Gold debit card.
Coverage is provided through VISA and extends up to $250,000.
If a VISA Gold debit card is lost or stolen, the shareholder should
report the loss immediately by contacting Legg Mason directly between the hours
of 8:30 a.m. and 5:00 p.m., or BankOne collect after hours at 1-614-248-4242.
Those shareholders who subscribe to the Premier
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VISA account privilege may be liable for the unauthorized use of their VISA Gold
debit card in amounts up to $50.
Legg Mason is responsible for all Premier VISA Gold debit card
inquiries as well as billing and account resolutions. Simply call Legg Mason
Premier Client Services directly between 8:30 a.m. and 5:00 p.m., Eastern time,
at 1-800-253-0454 or 1-410-528-2066 with your account inquiries.
Automatic Purchases of Fund Shares
For shareholders participating in the Premier program who sell shares
held in their Brokerage Account, any free credit balances of $100 or more
resulting from any such sale will automatically be invested in shares of the
Fund on the same business day the proceeds of sale are credited to the Brokerage
Account. Free credit balances of less than $100 will be invested in Fund shares
weekly.
Free credit balances arising from sales of Brokerage Account shares for
cash (i.e., same day settlement), redemption of debt securities, dividend and
interest payments and cash deposits of $100 or more will be invested
automatically in Fund shares on the next business day following the day the
transaction is credited to the Brokerage Account.
Fund shares will receive the next dividend declared following purchase
(normally 12:00 noon, Eastern time, on the following business day). A purchase
order will not become effective until cash in the form of federal funds is
received by the Fund.
How to Open a Premier Account
To subscribe to Premier services, clients must contact their Legg
Mason investment executive to execute a Premier Asset Management Account
Agreement with Legg Mason. Legg Mason charges a fee for the Premier service,
which is currently $85 per year for individuals and $100 per year for businesses
and corporations. Legg Mason reserves the right to alter or waive the conditions
upon which a Premier Account may be opened. Both Legg Mason and BankOne reserve
the right to terminate or modify any shareholder's Premier services at their
discretion.
You will receive your VISA Gold debit card (if applicable) from
BankOne. The Premier VISA Gold debit card may be used at over 8 million
locations, including 23,000 ATMs, in 24 countries around the world. Premier
checks will be sent to you directly. There is no limit to the number of checks
you may write against your Premier account.
Shareholders should be aware that the various features of the Premier
program are intended to provide easy access to assets in their accounts and that
the Premier Account is not a bank account. Additional information about the
Premier program is available by calling your Legg Mason or affiliated investment
executive or Legg Mason's Premier Client Services.
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Other Information Regarding Redemption
Government Money Market reserves the right to modify or terminate the
check, wire, telephone or VISA Gold card redemption services described in the
Prospectus and this Statement of Additional Information at any time.
You may request Government Money Market's checkwriting service by
sending a written request to Legg Mason. State Street will supply you with
checks which can be drawn on an account of Government Money Market maintained
with State Street. When honoring a check presented for payment, the Fund will
cause State Street to redeem exactly enough full and fractional shares from your
account to cover the amount of the check. Canceled checks will be returned to
you.
Check redemption is subject to State Street's rules and regulations
governing checking accounts. Checks should not be used to close a Government
Money Market account because when the check is written you will not know the
exact value of the account, including accrued dividends, on the day the check
clears. Persons obtaining certificates for their shares may not use the
checkwriting service.
For all of the Funds:
The date of payment for a redemption may not be postponed for more than
seven days, and the right of redemption may not be suspended, except (i) for any
period during which the Exchange is closed (other than for customary weekend and
holiday closings), (ii) when trading in markets a Fund normally utilizes is
restricted, or an emergency, as defined by rules and regulations of the SEC,
exists, making disposal of that Fund's investments or determination of its net
asset value not reasonably practicable, or (iii) for such other periods as the
SEC by regulation or order may permit for protection of a Fund's shareholders.
In the case of any such suspension, you may either withdraw your request for
redemption or receive payment based upon the net asset value next determined
after the suspension is lifted.
Each Fund reserves the right, under certain conditions, to honor any
request or combination of requests for redemption from the same shareholder in
any 90-day period, totaling $250,000 or 1% of the net assets of the Fund,
whichever is less, by making payment in whole or in part by securities valued in
the same way as they would be valued for purposes of computing that Fund's net
asset value per share. If payment is made in securities, a shareholder should
expect to incur brokerage expenses in converting those securities into cash and
will be subject to fluctuation in the market price of those securities until
they are sold. Each Fund does not redeem "in kind" under normal circumstances,
but would do so where the Adviser determines that it would be in the best
interests of the shareholders as a whole.
PERFORMANCE INFORMATION
For Government Intermediate, Investment Grade and High Yield:
Total Return Calculations Average annual total return quotes used in
a Fund's advertising and other promotional materials ("performance
advertisements") are calculated separately for each Class according to the
following formula:
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<PAGE>
P(1+T)n = ERV
where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of that period.
Under the foregoing formula, the time periods used in performance
advertisements will be based on rolling calendar quarters, updated at least to
the last day of the most recent quarter prior to submission of the performance
advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000
investment over the period. In calculating the redeeming value, all dividends
and other distributions by a Fund are assumed to have been reinvested at net
asset value on the reinvestment dates during the period.
YIELD Yields used in a Fund's performance advertisements for each
Class of Shares are calculated by dividing a Fund's net investment income for a
30-day period ("Period") attributable to that Class, by the average number of
shares in that Class entitled to receive dividends during the Period, and
expressing the result as an annualized percentage (assuming semi-annual
compounding) of the maximum offering price per share at the end of the Period.
Yield quotations are calculated according to the following formula:
Yield = 2 [(a-b +1)6 - 1]
------
cd
where: a = interest earned during the Period
b = expenses accrued for the Period (net of reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the Period.
Except as noted below, in determining net investment income earned
during the Period (variable "a" in the above formula), a Fund calculates
interest earned on each debt obligation held by it during the Period by (1)
computing the obligation's yield to maturity based on the market value of the
obligation (including actual accrued interest) on the last business day of the
Period or, if the obligation was purchased during the Period, the purchase price
plus accrued interest and (2) dividing the yield to maturity by 360, and
multiplying the resulting quotient by the market value of the obligation
(including actual accrued interest). Once interest earned is calculated in this
fashion for each debt obligation held by the Fund, interest earned during the
Period is then determined by totalling the interest earned on all debt
obligations. For the purposes of these calculations, the maturity of an
obligation with one or more call provisions is assumed to be the next on which
the obligation reasonably can be expected to be called or, if none, the maturity
date.
With respect to the treatment of discount and premium on
mortgage-backed and other asset-backed obligations that are expected to be
subject to monthly payments of principal and interest ("paydowns"): (1) a Fund
accounts for gain or loss attributable to actual paydowns as an increase or
decrease to interest income during the period and (2) a Fund accrues the
discount and amortizes the premium on the remaining obligation, based on the
cost of the obligation, to the weighted average maturity date or, if weighted
average maturity information is not available, to the remaining term of the
obligation. The yield for Primary Shares of Government Intermediate,
40
<PAGE>
Investment Grade and High Yield for the 30-day period ended December 31, 1995
was 5.65%, 6.17% and 10.02%, respectively. The 30-day yield for Navigator Shares
of Government Intermediate for the same period was 5.60%. As of the date of this
Statement of Additional Information, Navigator Shares of High Yield have no
performance record. Yields of Government Intermediate and Investment Grade would
have been lower if the Manager had not waived a portion of those Funds'
expenses.
For Government Money Market:
YIELD The current annualized yield for the Fund is based upon a
seven-day period and is computed by determining the net change in the value of a
hypothetical account in the Fund. The net change in the value of the account
includes the value of dividends and of additional shares purchased with
dividends, but does not include gains and losses or unrealized appreciation and
depreciation. In addition, the Fund may use a compound effective annualized
yield quotation which is calculated as prescribed by SEC regulations, by adding
one to the base period return (calculated as described above), raising the sum
to a power equal to 365 divided by 7, and subtracting one.
The Fund's yield may fluctuate daily depending upon such factors as the
average maturity of its securities, changes in investments, changes in interest
rates and variations in operating expenses. Therefore, current yield does not
provide a basis for determining future yields. The fact that the Fund's current
yield will fluctuate and that shareholders' principal is not guaranteed or
insured should be considered in comparing the Portfolio's yield with yields on
fixed-income investments, such as insured savings certificates. In comparing the
yield of the Fund to other investment vehicles, consideration should be given to
the investment policies of each, including the types of investments owned,
lengths of maturities of the portfolio, the method used to compute the yield and
whether there are any special charges that may reduce the yield.
Other Information
In performance advertisements each Fund may compare the total return of
a class of shares with data published by Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Wiesenberger Investment
Companies Service ("Wiesenberger"), or Morningstar Mutual Funds ("Morningstar"),
or with the performance of U.S. Treasury securities of various maturities,
recognized stock, bond and other indexes, including (but not limited to) the
Salomon Brothers Bond Index, Shearson Lehman Bond Index, Shearson Lehman
Government/Corporate Bond Index, the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), the Dow Jones Industrial Average ("Dow Jones"), and changes
in the Consumer Price Index as published by the U.S. Department of Commerce.
Each Fund also may refer in such materials to mutual fund performance rankings
and other data, such as comparative asset, expense and fee levels, published by
Lipper, CDA, Wiesenberger or Morningstar. Performance advertisements also may
refer to discussions of a Class of a Fund and comparative mutual fund data and
ratings reported in independent periodicals, including THE WALL STREET JOURNAL,
MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE and
THE NEW YORK TIMES.
Each Fund invests primarily in the fixed-income securities described in
its Prospectus, and does not invest in the equity securities that make up the
S&P 500 or the Dow Jones indices. Comparison with such indices is intended to
show how an investment in a class of shares behaved as compared to indices that
are often taken as a measure of performance of the equity market as a whole. The
indices, like the total return of a class of shares, assume reinvestment of all
41
<PAGE>
dividends and other distributions. They do not take account of the costs or the
tax consequences of investing.
Each Fund may include discussions or illustrations of the effects of
compounding in performance advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on an investment in a Fund are
reinvested in additional shares, any future income or capital appreciation of
the Fund would increase the value, not only of the original Fund investment, but
also of the additional shares received through reinvestment. As a result, the
value of the Fund investment would increase more quickly than if dividends or
other distributions had been paid in cash.
Each Fund may also compare the performance of a Class of shares with
the performance of bank certificates of deposit (CDs) as measured by the CDA
Investment Technologies, Inc. Certificate of Deposit Index and the Bank Rate
Monitor National Index. In comparing the performance of a Class to CD
performance, investors should keep in mind that bank CDs are insured in whole or
in part by an agency of the U.S. Government and offer fixed principal and fixed
or variable rates of interest, and that bank CD yields may vary. Fund shares are
not insured or guaranteed by the U.S. Government and returns and net asset value
will fluctuate. The securities held by a Fund generally have longer maturities
than most CDs and may reflect interest rate fluctuations for longer-term
securities.
Fund advertisements may reference the history of the distributor and
its affiliates, and the education and experience of the portfolio manager.
Advertisements may also describe techniques the Adviser employs in selecting
among the sectors of the fixed-income market and may focus on the technique of
"value investing." With value investing, the Adviser invests in those securities
it believes to be undervalued in relation to the long-term earning power or
asset value of their issuers. Securities may be undervalued because of many
factors, including market decline, poor economic conditions, tax-loss selling or
actual or anticipated unfavorable developments affecting the issuer of the
security.
In advertising, each Fund may illustrate hypothetical investment plans
designed to help investors meet long-term financial goals, such as saving for a
child's college education or for retirement. Sources such as the Internal
Revenue Service, the Social Security Administration, the Consumer Price Index
and Chase Global Data and Research may supply data concerning interest rates,
college tuitions, the rate of inflation, Social Security benefits, mortality
statistics and other relevant information. Each Fund may use other recognized
sources as they become available.
Each Fund may use data prepared by Ibbotson Associates of Chicago,
Illinois ("Ibbotson") to compare the returns of various capital markets and to
show the value of a hypothetical investment in a capital market. Ibbotson relies
on different indices to calculate the performance of common stocks, corporate
and government bonds and Treasury bills.
Each Fund may illustrate and compare the historical volatility of
different portfolio compositions where the performance of stocks is represented
by the performance of an appropriate market index, such as the S&P 500 and the
performance of bonds is represented by a nationally recognized bond index, such
as the Lehman Brothers Long-Term Government Bond Index.
Each Fund may also include in advertising biographical information on
key investment and managerial personnel.
42
<PAGE>
Each Fund may advertise examples of the potential benefits of periodic
investment plans, such as dollar cost averaging, a long-term investment
technique designed to lower average cost per share. Under such a plan, an
investor invests in a mutual fund at regular intervals a fixed dollar amount
thereby purchasing more shares when prices are low and fewer shares when prices
are high. Although such a plan does not guarantee profit or guard against loss
in declining markets, the average cost per share could be lower than if a fixed
number of shares were purchased at the same intervals. Investors should consider
their ability to purchase shares through low price levels.
Each Fund may discuss Legg Mason's tradition of service. Since 1899,
Legg Mason and its affiliated companies have helped investors meet their
specific investment goals and have provided a full spectrum of financial
services. Legg Mason affiliates serve as investment advisors for private
accounts and mutual funds with assets of more than $31 billion as of December
31, 1995.
In advertising, each Fund may discuss the advantages of saving through
tax-deferred retirement plans or accounts, including the advantages and
disadvantages of "rolling over" a distribution from a retirement plan into an
IRA, factors to consider in determining whether you qualify for such a rollover,
and the other options available. These discussions may include graphs or other
illustrations that compare the growth of a hypothetical tax-deferred investment
to the after-tax growth of a taxable investment.
The following tables show the value, as of the end of each fiscal year,
of a hypothetical investment of $10,000 made in each Fund at commencement of
operations of each class of Fund shares. The tables assume that all dividends
and other distributions are reinvested in each respective Fund. They include the
effect of all charges and fees applicable to the respective class of shares the
Fund has paid. (There are no fees for investing or reinvesting in the Funds, and
there are no redemption fees.) They do not include the effect of any income
taxes that an investor would have to pay on distributions.
Government Intermediate:
<TABLE>
<CAPTION>
Primary Shares
Value of Original Shares
Plus Shares Obtained Value of Shares Acquired
Fiscal Through Reinvestment of Through Reinvestment of Total
Year Capital Gain Distributions Income Dividends Value
- ---------------- -------------------------------------- ---------------------------------- ----------------------
<S> <C> <C> <C>
1987* $9,920 $ 302 $10,222
1988 9,990 1,080 10,880
1989 10,210 2,062 12,272
1990 10,301 3,081 13,382
1991 11,087 4,217 15,304
1992 11,180 5,081 16,261
1993 11,607 5,735 17,342
1994 10,829 6,179 17,008
1995 11,652 7,716 19,368
</TABLE>
43
<PAGE>
*August 7, 1987 (commencement of operations) to December 31, 1987.
<TABLE>
<CAPTION>
Navigator Shares
Value of Original Shares
Plus Shares Obtained Value of Shares Acquired
Fiscal Through Reinvestment of Through Reinvestment of Total
Year Capital Gain Distributions Income Dividends Value
- ---------------- -------------------------------------- ---------------------------------- ----------------------
<S> <C> <C> <C>
1994* $ 9,720 $ 49 $9,769
1995 10,470 710 11,180
</TABLE>
*December 1, 1994 (commencement of operations) to December 31, 1994.
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of December 31, 1995 would have been $10,470, and the investor
would have received a total of $6,912 in distributions. With respect to
Navigator Shares, if the investor had not reinvested dividends and other
distributions, the total value of the hypothetical investment as of December 31,
1995 would have been $10,470, and the investor would have received a total of
$710 in distributions. Returns would have been lower if the Manager had not
waived/reimbursed certain Fund expenses during the fiscal years 1987 through
1995.
Investment Grade:
<TABLE>
<CAPTION>
Primary Shares
Value of Original Shares
Plus Shares Obtained Value of Shares Acquired
Through Reinvestment of Through Reinvestment of Total
Fiscal Year Capital Gain Distributions Income Dividends Value
- ---------------------- ----------------------------------- ----------------------------------- ------------------
<S> <C> <C> <C>
1987* $ 9,940 $ 320 $10,260
1988 9,908 1,137 11,045
1989 10,319 2,158 12,477
1990 10,046 3,154 13,200
1991 10,835 4,476 15,311
1992 10,893 5,456 16,349
1993 11,940 6,244 18,184
1994 10,717 6,590 17,307
1995 12,069 8,724 20,793
</TABLE>
44
<PAGE>
*August 7, 1987 (commencement of operations) to December 31, 1987.
<TABLE>
<CAPTION>
Navigator Shares
Value of Original Shares
Plus Shares Obtained Value of Shares Acquired
Fiscal Through Reinvestment of Through Reinvestment of Total
Year Capital Gain Distributions Income Dividends Value
- ---------------- -------------------------------------- ---------------------------------- ----------------------
<S> <C> <C> <C>
1995* $10,440 $27 $10,467
</TABLE>
*December 1, 1995 (commencement of operations) to December 31, 1995.
With respect to Primary Shares, if the investor had not reinvested
dividends and other distributions, the total value of the hypothetical
investment as of December 31, 1995 would have been $10,440, and the investor
would have received a total of $7,062 in distributions. With respect to
Navigator Shares, if the investor had not reinvested dividends and other
distributions, the total value of the hypothetical investment as of December 31,
1995 would have been $10,440, and the investor would have received a total of
$27 in distributions. Returns would have been lower if the Manager had not
waived/reimbursed certain Fund expenses during the fiscal years 1987 through
1995.
High Yield:
<TABLE>
<CAPTION>
Value of Original Shares
Plus Shares Obtained Value of Shares Acquired
Fiscal Through Reinvestment of Through Reinvestment of Total
Year Capital Gain Distributions Income Dividends Value
- ---------------- -------------------------------------- ---------------------------------- ----------------------
<S> <C> <C>
1994* $13,560 $1,006 $14,566
1995 14,620 2,570 17,190
</TABLE>
*February 1, 1994 (commencement of operations) to December 31, 1994.
If the investor had not reinvested dividends and other distributions,
the total value of the hypothetical investment as of December 31, 1995 would
have been $14,620, and the investor would have received a total of $2,300 in
distributions.
The table above for High Yield is based only on Primary Shares. As of
the date of this Statement of Additional Information, Navigator Shares of High
Yield have no performance history of their own.
45
<PAGE>
VALUATION OF FUND SHARES
For Government Intermediate, Investment Grade and High Yield:
Net asset value of a Fund share is determined daily for each Class as
of the close of the Exchange, on every day that the Exchange is open, by
subtracting liabilities attributable to that Class, from total assets
attributable to that Class, and dividing the result by the number of shares of
that Class, outstanding. Pricing will not be done on days when the Exchange is
closed. The Exchange currently observes the following holidays: New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. When market quotations for institutional size
positions are readily available portfolio securities are valued based upon
market quotations. Where such market quotations are not readily available,
securities are valued based upon appraisals received from a pricing service
using a computerized matrix system or based upon appraisals derived from
information concerning the security or similar securities received from
recognized dealers in those securities. The methods used by the pricing service
and the quality of the valuations so established are reviewed by the Adviser
under the general supervision of the Corporation's Board of Directors. The
amortized cost method of valuation is used with respect to obligations with 60
days or less remaining to maturity unless the Adviser determines that this does
not represent fair value. All other assets are valued at fair value as
determined in good faith, by or under the direction of the Corporation's Board
of Directors. Premiums received on the sale of put and call options are included
in net asset value of each class, and the current market value of options sold
by the Fund will be subtracted from net assets of each class.
For Government Money Market:
Government Money Market attempts to stabilize the value of a share at
$1.00. Net asset value will not be calculated on days when the Exchange is
closed.
USE OF THE AMORTIZED COST METHOD The directors have determined that
the interests of shareholders are best served by using the amortized cost method
for determining the value of portfolio instruments. Under this method, portfolio
instruments are valued at the acquisition cost, as adjusted for amortization of
premium or accumulation of discount, rather than at current market value. The
Board of Directors continually assesses the appropriateness of this method of
valuation.
The Fund's use of the amortized cost method of valuing portfolio
instruments depends on its compliance with Rule 2a-7 under the 1940 Act. Under
that Rule, the directors must establish procedures reasonably designed to
stabilize the net asset value per share, as computed for purposes of
distribution and redemption, at $1.00 per share, taking into account current
market conditions and the Fund's investment objective.
MONITORING PROCEDURES The Fund's procedures include monitoring the
relationship between the amortized cost value per share and the net asset value
per share based upon available indications of market value. If there is a
difference of more than 0.5% between the two, the directors will take any steps
they consider appropriate (such as shortening the dollar-weighted average
portfolio maturity) to minimize any material dilution or other unfair results
arising from differences between the two methods of determining net asset value.
46
<PAGE>
Investment Restrictions Rule 2a-7 requires the Fund to limit its
investments to instruments that, (i)in the opinion of the Adviser, present
minimal credit risk and (ii) (a) are rated in one of the two highest rating
categories by at least two NRSROs (or one, if only one rating service has rated
the security) or, (b) if unrated, are determined to be of comparable quality by
the Adviser, all pursuant to procedures determined by the Board of Directors
("Eligible Securities"). The Fund may invest no more than 5% of its total assets
in securities that are Eligible Securities but have not been rated in the
highest short-term ratings category by at least two NRSROs (or by one NRSRO, if
only one NRSRO has assigned the obligation a short-term rating) or, if the
obligations are unrated, determined by the Adviser to be of comparable quality
("Second Tier Securities"). In addition, the Fund will not invest more than 1%
of its total assets or $1 million (whichever is greater) in the Second Tier
Securities of a single issuer. The Rule requires the Fund to maintain a
dollar-weighted average portfolio maturity appropriate to the objective of
maintaining a stable net asset value of $1.00 per share and in any event not
more than 90 days. In addition, under the Rule, no instrument with a remaining
maturity (as defined in the Rule) of more than 397 can be purchased by the Fund;
except that the Fund may hold securities with remaining maturities greater than
397 days as collateral for repurchase agreements and other collateralized
transactions of short duration.
Should the disposition of a portfolio security result in a
dollar-weighted average portfolio maturity of more than 90 days, the Fund will
invest its available cash to reduce the average maturity to 90 days or less as
soon as possible.
It is the Fund's usual practice to hold portfolio securities to
maturity and realize par, unless the Adviser determines that sale or other
disposition is appropriate in light of the Fund's investment objective. Under
the amortized cost method of valuation, neither the amount of daily income nor
the net asset value is affected by any unrealized appreciation or depreciation
of the portfolio.
In periods of declining interest rates, the indicated daily yield on
shares of the Fund, computed by dividing the annualized daily income on the
Fund's investment portfolio by the net asset value computed as above, may tend
to be higher than a similar computation made by using a method of valuation
based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on
shares of the Fund computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market prices and
estimates.
TAX-DEFERRED RETIREMENT PLANS
Investors may invest in shares of a Fund through IRAs, Keogh Plans,
SEPs and other qualified retirement plans. In general, income earned through the
investment of assets of qualified retirement plans is not taxed to the
beneficiaries thereof until the income is distributed to them. Investors who are
considering establishing such a plan should consult their attorneys or other tax
advisers with respect to individual tax questions. The option of investing in
these plans through regular payroll deductions may be arranged with a Legg Mason
or affiliated investment executive and your employer. Additional information
with respect to these plans is available upon request from any Legg Mason or
affiliated investment executive.
47
<PAGE>
Individual Retirement Account -- IRA
Certain Primary Share investors may obtain tax advantages by
establishing an IRA. Specifically, if neither you nor your spouse is an active
participant in a qualified employer or government retirement plan, or if either
you or your spouse is an active participant and your adjusted gross income does
not exceed a certain level, you may deduct cash contributions made to an IRA in
an amount for each taxable year not exceeding the lesser of 100% of your earned
income or $2,000. In addition, if your spouse is not employed and you file a
joint return, you may establish a separate IRA for your spouse and contribute up
to a total of $2,250 to the two IRAs, provided that the contribution to either
does not exceed $2,000. If you and your spouse are both employed and neither of
you is an active participant in a qualified employer or government retirement
plan and you establish separate IRAs, you each may contribute all of your earned
income, up to $2,000 each, and thus may together receive tax deductions of up to
$4,000 for contributions to your IRAs. If your employer's plan qualifies as a
SEP, permits voluntary contributions and meets certain requirements, you may
make voluntary contributions to that plan that are treated as deductible IRA
contributions.
Even if you are not in one of the categories described in the preceding
paragraph, you may find it advantageous to invest in Primary Shares through
nondeductible IRA contributions, up to certain limits, because all dividends and
capital gain distributions on your Primary Shares are then not immediately
taxable to you or the IRA; they become taxable only when distributed to you. To
avoid penalties, your interest in an IRA must be distributed, or start to be
distributed, to you not later than the end of the taxable year in which you
attain age 70 1/2. Distributions made before age 59 1/2, in addition to being
taxable, generally are subject to a penalty equal to 10% of the distribution,
except in the case of death or disability or where the distribution is rolled
over into another qualified plan or certain other situations.
Self-Employed Individual Retirement Plan -- Keogh Plan
Legg Mason makes available to self-employed individuals a Plan and
Trustee Agreement for a Keogh Plan through which Primary Shares may be
purchased. You have the right to use a bank of your own choice to provide these
services at your own cost. There are penalties for distributions from a Keogh
Plan prior to age 59 1/2, except in the case of death or disability.
Simplified Employee Pension Plan -- SEP
Legg Mason makes available to corporate and other employers a SEP for
investment in Primary Shares.
Withholding at the rate of 20% is required for federal income tax
purposes on certain distributions (excluding, for example, certain periodic
payments) from the foregoing retirement plans (except IRAs and SEPs), unless the
recipient transfers the distribution directly to an "eligible retirement plan"
(including IRAs and other qualified plans) that accepts those distributions.
Other distributions generally are subject to regular wage withholding at the
rate of 10% (depending on the type and amount of the distribution), unless the
recipient elects not to have any withholding apply. Primary Share investors
should consult their plan administrator or tax adviser for further information.
48
<PAGE>
THE CORPORATION'S DIRECTORS AND OFFICERS
The Corporation's officers are responsible for the operation of the
Corporation under the direction of the Board of Directors. The officers and
directors of the Corporation and their principal occupations during the past
five years are set forth below. An asterisk (*) indicates those officers and/or
directors who are interested persons of the Corporation as defined by the
Investment Company Act of 1940, as amended ("1940 Act"). The business address of
each officer and director is 111 South Calvert Street, Baltimore, Maryland
21202, unless otherwise indicated.
JOHN F. CURLEY, JR.*, [57] Chairman of the Board and Director; Vice
Chairman and Director of Legg Mason Wood Walker, Inc. and Legg Mason, Inc.;
Director of Legg Mason Fund Adviser, Inc. and Western Asset Management Company;
Officer and/or Director of various other affiliates of Legg Mason, Inc.;
Chairman of the Board and Director of three Legg Mason funds; President and
Director of three Legg Mason funds; Chairman of the Board, President and Trustee
of one Legg Mason fund and Chairman of the Board and Trustee of one Legg Mason
fund.
EDMUND J. CASHMAN, JR.*, [60] Vice Chairman and Director; Senior
Executive Vice President and Director of Legg Mason, Inc.; Officer and/or
Director of various other affiliates of Legg Mason, Inc.; President and Director
of one Legg Mason fund; President and Trustee of one Legg Mason fund; Director
of Worldwide Value Fund, Inc.
EDWARD A. TABER, III*, [53] President; Executive Vice President of Legg
Mason, Inc. and Legg Mason Wood Walker, Inc.; Vice Chairman and Director of Legg
Mason Fund Adviser, Inc.; Director of three Legg Mason funds; President and
Director of two Legg Mason funds; Trustee of one Legg Mason fund; Vice President
of Worldwide Value Fund, Inc. Formerly: Executive Vice President of T. Rowe
Price-Fleming International, Inc. (1986-1992) and Director of the Taxable Fixed
Income Division at T. Rowe Price Associates, Inc. (1973-1992).
RICHARD G. GILMORE, [69] Director; 948 Kennett Way, West Chester,
Pennsylvania. Independent Consultant. Director of CSS Industries, Inc.
(diversified holding company engaged in manufacture and sale of decorative paper
products, business forms, and specialty metal packaging); Director of PECO
Energy Company (formerly Philadelphia Electric Company); Director of six Legg
Mason funds; Trustee of two Legg Mason funds. Formerly: Senior Vice President
and Chief Financial Officer of Philadelphia Electric Company (now PECO Energy
Company); Executive Vice President and Treasurer, Girard Bank, and Vice
President of its parent holding company, the Girard Company (bank holding
company) and Director of Finance, City of Philadelphia.
CHARLES F. HAUGH, [71] Director; 14201 Laurel Park Drive, Laurel,
Maryland. Real Estate Developer and Investor; President and Director of Resource
Enterprises, Inc. (real estate brokerage); Chairman of Resource Realty LLC
(management of retail and office space); Partner in Greater Laurel Health Park
Ltd. Partnership (real estate investment and development); Director of six Legg
Mason funds; Trustee of two Legg Mason funds.
ARNOLD L. LEHMAN, [53] Director; The Baltimore Museum of Art, Art
Museum Drive, Baltimore, Maryland. Director of the Baltimore Museum of Art;
Director of six Legg Mason funds;
Trustee of two Legg Mason funds.
JILL E. McGOVERN, [52] Director; 1500 Wilson Boulevard, Arlington,
Virginia. Chief Executive Officer of the Marrow Foundation; Director of six
Legg Mason funds; Trustee of two Legg Mason funds. Formerly: Executive Director
of the Baltimore International Festival (January
49
<PAGE>
1991 - March 1993); Senior Assistant to the President of The Johns Hopkins
University (1986- 1991).
T. A. RODGERS, [62] Director; 2901 Boston Street, Baltimore, Maryland.
Principal, T. A. Rodgers & Associates (management consulting); Director of six
Legg Mason funds; Trustee of two Legg Mason funds. Formerly: Director and Vice
President of Corporate Development, Polk Audio,
Inc. (manufacturer of audio components) (1991-1992).
The executive officers of the Corporation, other than those who also
serve as directors, are:
MARIE K. KARPINSKI*, [47] Vice President and Treasurer; Treasurer of
Legg Mason Fund Adviser, Inc.; Vice President and Treasurer of eight Legg Mason
funds; and Secretary/Treasurer of Worldwide Value Fund, Inc.; Vice President of
Legg Mason.
STEFANIE L. WONG*, [28] Secretary; Secretary of one other Legg Mason
fund; employee of Legg Mason.
BLANCHE P. ROCHE*, [47] Assistant Secretary and Assistant Vice
President; Assistant Secretary and Assistant Vice President of seven Legg Mason
funds; employee of Legg Mason since 1991. Formerly: Manager of Consumer
financial services, Primerica Corporation (1989-1991).
Officers and directors of the Corporation who are "interested persons"
of the Corporation, as defined in the 1940 Act, receive no salary or fees from
the Corporation. Independent directors of the Corporation receive a fee of $400
annually for serving as a director, and a fee of $400 for each meeting of the
Board of Directors attended by him or her.
The Nominating Committee of the Board of Directors is responsible for
the selection and nomination of disinterested directors. The Committee is
composed of Messrs. Haugh, Gilmore, Lehman and Dr. McGovern, each of whom is a
disinterested director as that term is defined in the 1940 Act.
At March 31, 1996, the directors and officers of the Corporation
beneficially owned, in the aggregate, less than 1% of each Fund's outstanding
Shares.
At March 31, 1996, the Legg Mason Profit Sharing Plan and Trust, 7 East
Redwood Street, Baltimore, MD 21202 owned of record and beneficially 97.6% of
the outstanding shares of the Navigator Class of U.S. Government
Intermediate-Term Portfolio. As of the same date, Fairfield Group, Inc. owned of
record and beneficially 100% of the outstanding shares of the Navigator Class of
Investment Grade Portfolio.
The following table provides certain information relating to the
compensation of the Corporation's directors for the fiscal year ended December
31, 1995.
50
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Total Compensation From
Compensation From Corporation and Fund Complex
Name of Person and Position Corporation* Paid to Directors**
<S> <C> <C>
John F. Curley, Jr. -
Chairman of the Board and Director None None
Edward A. Taber, III -
President and Director None None
Edmund J. Cashman, Jr.
Vice Chairman and Director None None
Richard G. Gilmore -
Director $6,000 $21,600
Charles F. Haugh -
Director $6,000 $23,600
Arnold L. Lehman -
Director $6,000 $23,600
Jill E. McGovern -
Director $6,000 $23,600
T. A. Rodgers -
Director $6,000 $21,600
</TABLE>
* Represents fees paid to each director during the fiscal year ended December
31, 1995.
** Represents aggregate compensation paid to each director during the calendar
year ended December 31, 1995.
MANAGEMENT AGREEMENT
Legg Mason Fund Adviser, Inc. ("Manager"), 111 South Calvert Street,
Baltimore, MD 21202, is a wholly owned subsidiary of Legg Mason, Inc., which is
also the parent of Legg Mason Wood Walker, Incorporated. The Manager serves as
the manager for each Fund under separate management agreements dated June 19,
1987 for Government Intermediate and Investment Grade, November 1, 1988 for
Government Money Market and January 24, 1994 for High Yield (each a "Management
Agreement"). Each Management Agreement provides that, subject to overall
direction by the Board of Directors, the Manager will manage the investment and
other affairs of each Fund. Under the Management Agreement, the Manager is
responsible for managing each Fund's portfolio of securities and for making
purchases and sales of securities consistent with the investment objectives and
policies described in each Fund's Prospectus and this Statement of Additional
Information. The Manager is obligated to furnish each Fund with office space and
certain administrative services as well as executive and other personnel
necessary for the operation of the Funds. The Manager and its affiliates also
are responsible for the compensation of directors and officers of the
Corporation who are employees of the Manager and/or its affiliates. The Manager
has delegated the portfolio management functions for each Fund to the Adviser,
Western Asset Management Company.
51
<PAGE>
As explained in the Funds' Prospectuses, the Manager receives for its
services a management fee, calculated daily and payable monthly, at annual rates
of each Fund's average daily net assets according to the following:
Management Fee:
Government Intermediate 0.55%
Investment Grade 0.60%
High Yield 0.65%
Government Money Market 0.50%
The management fee paid by each Fund may be reduced under regulations
in various states where shares of each Fund are qualified for sale that impose
limitations on the annual expense ratio of each Fund. The most restrictive
annual expense limitation currently requires that the Manager reimburse each
Fund for certain expenses, including the management fees received by it (but
excluding interest, taxes, brokerage fees and commissions, distribution fees and
certain extraordinary charges), in any fiscal year in which a Fund's expenses
exceed 2.5% of the first $30 million, 2.0% of the next $70 million, and 0.5% of
the balance over $100 million in net assets. No reimbursements have been made
nor have any been required to be made pursuant to this undertaking. In addition,
the Manager has agreed to waive its fees and reimburse Government Intermediate
and Investment Grade if and to the extent the expenses of each (exclusive of
taxes, interest, brokerage and extraordinary expenses) exceed during any month
annual rates of each Fund's average daily net assets for such month, or certain
asset levels are achieved, whichever occurs first, in accordance with the
following schedule:
Government Intermediate:
Primary Shares
Rate Expiration Date Asset Level
---- --------------- -----------
1.00% December 31, 1996 $400 million
0.95% April 30, 1996 $400 million
0.95% April 30, 1995 $400 million
0.90% October 31, 1994 $400 million
0.90% August 31, 1993 $400 million
0.85% October 31, 1992 $300 million
Navigator Shares
Rate Expiration Date Asset Level
0.50% December 31, 1996 $400 million
0.45% April 30, 1996 $400 million
0.40% April 30, 1995 $400 million
For the years ended December 31, 1995, 1994 and 1993, the Manager
received management fees of $1,287,089, $1,496,733 and $1,700,594, respectively
(prior to fees waived of $713,346, $788,260 and $860,095, respectively), for
Government Intermediate.
Investment Grade:
Primary Shares
Rate Expiration Date Asset Level
1.00% December 31, 1996 $100 million
0.90% April 30, 1996 $100 million
52
<PAGE>
0.85% April 30, 1995 $100 million
0.85% October 31, 1994 $100 million
0.85% August 31, 1993 $75 million
0.85% October 31, 1992 $75 million
Navigator Shares
Rate Expiration Date Asset Level
0.50% December 31, 1996 $100 million
For the years ended December 31, 1995, 1994 and 1993, the Manager
received management fees of $453,028, $406,981 and $362,659, respectively (prior
to fees waived of $374,130, $370,500 and $361,254, respectively), for Investment
Grade.
For the year ended December 31, 1995 and for the period February 1,
1994 (commencement of operations) to December 31, 1994, High Yield paid
management fees of $488,993 and $253,100, respectively, to the Manager.
During the fiscal years ended December 31, 1995, 1994 and 1993,
Government Money Market paid management fees of $1,353,415, $1,006,789 and
$898,826, respectively, to the Manager.
Under each Management Agreement, the Manager will not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the performance of the respective Management Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or losses resulting from willful misfeasance, bad
faith or gross negligence in the performance of its duties or from reckless
disregard of its obligations or duties thereunder.
Each Management Agreement terminates automatically upon assignment and
is terminable at any time without penalty by vote of the Corporation's Board of
Directors, by vote of a majority of the outstanding voting securities of that
Fund or by the Manager, on not less than 60 days' written notice to the other
party, and may be terminated immediately upon the mutual written consent of the
Manager and the respective Fund.
Each Fund pays all of its expenses which are not expressly assumed by
the Manager. These expenses include, among others, interest expense, taxes,
brokerage fees and commissions, expenses of preparing and printing prospectuses,
statements of additional information, proxy statements and reports and of
distributing them to existing shareholders, custodian charges, transfer agency
fees, organizational expenses, distribution fees to the Funds' distributor,
compensation of the independent directors, legal, accounting and audit expenses,
insurance expenses, expenses of registering and qualifying shares of each Fund
for sale under federal and state law, governmental fees and expenses incurred in
connection with membership in investment company organizations. Each Fund also
is liable for such nonrecurring expenses as may arise, including litigation to
which a Fund may be a party. Each Fund may also have an obligation to indemnify
the directors and officers of the Corporation with respect to any such
litigation.
53
<PAGE>
Under each Management Agreement, each Fund has the non-exclusive right
to use the name "Legg Mason" until that Agreement is terminated, or until the
right is withdrawn in writing by the Manager.
INVESTMENT ADVISORY AGREEMENT
The Adviser, Western Asset Management Company, 117 East Colorado
Boulevard, Pasadena, CA 91105, an affiliate of Legg Mason, serves as investment
adviser to each Fund under separate Investment Advisory Agreements, dated June
19, 1987 for Government Intermediate and Investment Grade; November 1, 1988 for
Government Money Market and January 24, 1994 for High Yield, between the Adviser
and the Manager (each an "Advisory Agreement").
Under the Advisory Agreement, the Adviser is responsible, subject to
the general supervision of the Manager and the Corporation's Board of Directors,
for the actual management of each Fund's assets, including the responsibility
for making decisions and placing orders to buy, sell or hold a particular
security. For the Adviser's services to each Fund, the Manager (not the Funds)
pays the Adviser a fee, computed daily and payable monthly, at an annual rate
(of the fee received by the Manager) equal to the following:
Fund Advisory Fee:
Government Intermediate 40%*
Investment Grade 40%
Government Money Market 30%
High Yield 77%
* Effective October 1, 1994, the Adviser agreed to waive payments by the Manager
with respect to Government Intermediate in excess of 0.20% annually of
Government Intermediate's average daily net assets. This does not affect the
fee paid by the Fund.
For the fiscal years ended December 31, the Manager paid the following fees to
the Adviser on behalf of the Funds:
Fund: 1995 1994 1993
- ----- ---- ---- ----
Government Intermediate $466,977 $342,829 $336,400
Investment Grade $32,296 $14,593 $560
High Yield $376,525 $194,887 N/A
Government Money Market $406,025 $302,037 $269,648
Under each Advisory Agreement, the Adviser will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Manager or
by a Fund in connection with the performance of the Advisory Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties thereunder.
Each Advisory Agreement terminates automatically upon assignment and is
terminable at any time without penalty by vote of the Corporation's Board of
Directors, by vote of a majority of
54
<PAGE>
each Fund's outstanding voting securities, by the Manager or by the Adviser, on
not less than 60 days' notice to the respective Fund and/or the other
party(ies). The Advisory Agreement terminates immediately upon any termination
of the Management Agreement or upon the mutual written consent of the Adviser,
the Manager and each Fund.
To mitigate the possibility that a Fund will be affected by personal
trading of employees, the Corporation, the Manager and the Adviser have adopted
policies that restrict securities trading in the personal accounts of portfolio
managers and others who normally come into advance possession of information on
portfolio transactions. These policies comply, in all material respects, with
the recommendations of the Investment Company Institute.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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. For the years ended December 31, each Fund's (other than
Government Money Market) portfolio turnover rates were as follows:
Fund: 1995 1994
- ----- ------ ------
Government Intermediate 289.9% 315.7%
Investment Grade 221.1% 200.1%
High Yield 47.4% 67.4%*
*Annualized
Under each Advisory Agreement, the Adviser is responsible for the
execution of portfolio transactions. Corporate and government debt securities
are generally traded on the over-the-counter market on a "net" basis without a
stated commission, through dealers acting for their own account and not as
brokers. Prices paid to a dealer in debt securities will generally include a
"spread", which is the difference between the price at which the dealer is
willing to purchase and sell the specific security at the time, and includes the
dealer's normal profit. Some portfolio transactions may be executed through
brokers acting as agent. In selecting brokers or dealers, the Adviser must seek
the most favorable price (including the applicable dealer spread) and execution
for such transactions, subject to the possible payment as described below of
higher brokerage commissions for agency transactions or spreads to
broker-dealers who provide research and analysis. A Fund may not always pay the
lowest commission or spread available. Rather, in placing orders on behalf of a
Fund, the Adviser also takes into account such factors as size of the order,
difficulty of execution, efficiency of the executing broker's facilities
(including the services described below) and any risk assumed by the executing
broker.
Consistent with the policy of most favorable price and execution, the
Adviser may give consideration to research, statistical and other services
furnished by brokers or dealers to the Adviser for its use, may place orders
with broker-dealers who provide supplemental investment and market research and
securities and economic analysis, and may, for agency transactions, pay to these
broker-dealers a higher brokerage commission than may be charged by other
broker-dealers. Such research and analysis may be useful to the Adviser in
connection with services to clients other than the Funds. The Adviser's fee is
not reduced by reason of its receiving such brokerage and research services. For
the years ended December 31, the following Funds paid commissions to
broker-dealers who acted as agents in executing options and futures trades.
55
<PAGE>
Fund: 1995 1994 1993
- ----- ---- ---- ----
Government Intermediate $33,698 $381,650 $526,090
Investment Grade $28,885 $112,930 $152,260
No Fund may buy securities from, or sell securities to, Legg Mason or
its affiliated persons as principal. However, the Corporation's Board of
Directors has adopted procedures in conformity with Rule 10f-3 under the 1940
Act whereby a Fund may purchase securities that are offered in underwritings in
which Legg Mason or any of its affiliated persons is a participant.
Investment decisions for each Fund are made independently from those of
other funds and accounts advised by the Adviser. However, the same security may
be held in the portfolios of more than one fund or account. When two or more
accounts simultaneously engage in the purchase or sale of the same security, the
prices and amounts will be equitably allocated to each account. In some cases,
this procedure may adversely affect the price or quantity of the security
available to a particular account. In other cases, however, an account's ability
to participate in large-volume transactions may produce better executions and
prices.
THE FUNDS' DISTRIBUTOR
Legg Mason acts as distributor of each 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
a Fund's shares, including compensation to its investment executives. Legg Mason
also pays for the printing and distribution of prospectuses and periodic reports
used in connection with the offering to prospective investors, after the
prospectuses and reports have been prepared, set in type and mailed to
shareholders at each Fund's expense, and for supplementary sales literature and
advertising costs.
For the year ended December 31, 1995, Legg Mason incurred the following
expenses with respect to Primary Shares of each Fund:
<TABLE>
<CAPTION>
Government Investment
Intermediate Grade High Yield
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Compensation to sales
personnel $805,000 $259,000 $244,000
Printing and mailing of
prospectuses to
prospective
shareholders 45,000 75,000 45,000
Advertising 20,000 25,000 18,000
Other 448,000 273,000 191,000
-------------------- -------------------- --------------------
Total expenses $1,318,000 $632,000 $498,000
==================== ==================== ====================
56
<PAGE>
The foregoing are estimated and do not include all expenses fairly
allocable to Legg Mason's or its affiliates' efforts to distribute Shares.
Fairfield Group, Inc., a wholly owned subsidiary of Legg Mason, Inc.,
with principal offices at 200 Gibraltar Road, Horsham, Pennsylvania, acts as a
dealer for Navigator Shares pursuant to a Dealer Agreement with Legg Mason.
Neither Legg Mason nor Fairfield receives any compensation from the Fund for its
activities in selling Navigator Shares.
The Corporation has adopted a Distribution and Shareholder Services
Plan ("Plan") which, among other things, permits it to pay Legg Mason fees for
its services related to sales and distribution of Primary Shares and for the
provision of ongoing services to Primary Class shareholders. Payments are made
only from assets attributable to Primary Shares. The Plan was adopted, as
required by Rule 12b-1 under the 1940 Act, by a vote of the Board of Directors
on May 8, 1987 (for Government Intermediate and Investment Grade), October 27,
1988 (for Government Money Market) and October 22, 1993 (for High Yield),
including a majority of the directors who are not "interested persons" of the
Corporation as that term is defined in the 1940 Act and who have no direct or
indirect financial interest in the operation of the Plan or the Underwriting
Agreement ("12b-1 directors"). Continuation of the Plan was most recently
approved by the Board of Directors on October 27, 1995, including a majority of
the 12b-1 directors. In approving the continuance of the Plan, in accordance
with the requirements of Rule 12b-1, the directors considered various factors,
including the amount of the distribution fee. The directors determined that
there is a reasonable likelihood that the Plan will continue to benefit each
Fund and its present and future Primary Class shareholders. The Plan was also
approved by the vote of a majority of Government Intermediate's and Investment
Grade's outstanding Primary Shares on April 22, 1988.
The Plan continues in effect only so long as it is approved at least
annually by the vote of a majority of the Board of Directors, including a
majority of the 12b-1 directors, cast in person at a meeting called for the
purpose of voting on the Plan. The Plan may be terminated with respect to each
Fund by vote of a majority of the 12b-1 directors, or by vote of a majority of
the outstanding voting Primary Class securities of a Fund. Any change in the
Plan that would materially increase the distribution cost to a Fund requires
Primary Class shareholder approval. Otherwise, the Plan may be amended by the
directors, including a majority of the 12b-1 directors, as previously described.
Rule 12b-1 requires that any person authorized to direct the
disposition of monies paid or payable by a Fund, pursuant to the Plan or any
related agreement, shall provide to the Corporation's Board of Directors, and
the directors shall review, at least quarterly, a written report of the amounts
so expended and the purposes for which the expenditures were made. Rule 12b-1
also provides that a Fund may rely on that Rule only if, while the Plan is in
effect, the nomination and selection of the Corporation's independent directors
is committed to the discretion of such independent directors.
As compensation for its services and expenses, Legg Mason receives from
the Corporation annual distribution and service fees equivalent to 0.25% of each
Fund's average daily net assets attributable to Primary Shares in accordance
with the Plan. The distribution and service fees are computed daily and paid
monthly. For the fiscal years ended December 31, 1995, 1994 and 1993, each Fund
paid distribution and service fees to Legg Mason, pursuant to the Underwriting
Agreement from assets attributable to Primary Shares as follows:
57
<PAGE>
Government Intermediate paid $1,153,298, $1,344,353 and $1,533,030,
respectively, to Legg Mason; Investment Grade paid $377,479, $339,151and
$302,213, respectively to Legg Mason; and High Yield paid $376,148 and $194,692
to Legg Mason for the year ended December 31, 1995 and the period February 1,
1994 (commencement of operations) to December 31, 1994.
Pursuant to the Plan, Government Money Market is authorized to pay Legg
Mason distribution and service fees for its distribution and shareholder
services not to exceed an annual rate of 0.20% of its average daily net assets.
Legg Mason has no present intention of requesting such a fee, but may do so in
the future.
THE FUNDS' CUSTODIAN AND TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston,
Massachusetts 02105, serves as custodian of each Fund's assets. Boston Financial
Data Services P.O. Box 953, Boston, Massachusetts 02103, serves as transfer and
dividend-disbursing agent, and administrator of various shareholder services.
BFDS has contracted with Legg Mason for the latter to assist it with certain of
its duties as transfer agent, for which BFDS compensates Legg Mason.
Shareholders who request an historical transcript of their account will be
charged a fee based upon the number of years researched. Each Fund reserves the
right, upon 60 days' written notice, to make other charges to investors to cover
administrative costs.
THE CORPORATION'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W.,
Washington, D.C. 20036- 1800, serves as counsel to the Corporation.
THE CORPORATION'S INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 217 East Redwood Street, Baltimore, MD 21202,
have been selected by the Directors to serve as the Corporation's independent
accountants.
FINANCIAL STATEMENTS
The Statement of Net Assets as of December 31, 1995; the Statement of
Operations for the year ended December 31, 1995; the Statement of Changes in Net
Assets for the years ended December 31, 1995 and 1994 (for Government
Intermediate, Investment Grade and Government Money Market); the Statement of
Changes in Net Assets for the year ended December 31, 1995 and the period
February 1, 1994 (commencement of operations) to December 31, 1994 (for High
Yield); the Financial Highlights for the periods presented; the Notes to
Financial Statements and the Report of the Independent Accountants, all of which
are included in each Fund's Annual Report to Shareholders for the year ended
December 31, 1995, are hereby incorporated by reference in this Statement of
Additional Information.
58
<PAGE>
APPENDIX A
The following are descriptions of hedging instruments which may be used
by Government Intermediate, Investment Grade or High Yield:
Options on Securities and Foreign Currencies--A call option is a
short-term contract pursuant to which the purchaser of the option, in return for
a premium, has the right to buy the security or currency underlying the option
at a specified price at any time during the term of the option. The writer of
the call option, who receives the premium, has the obligation, upon exercise of
the option during the option term, to deliver the underlying security or
currency against payment of the exercise price. A put option is a similar
contract that gives its purchaser, in return for a premium, the right to sell
the underlying security or currency at a specified price during the option term.
The writer of the put option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to buy the underlying security or
currency at the exercise price.
Option on a Securities Index--An option on a securities index is
similar to an option on a security or foreign currency, except that settlement
of an index option is effected with a cash payment based on the value of the
index and does not involve the delivery of the securities included in the index.
Thus, upon settlement of an index option, the purchaser will realize, and the
writer will pay, an amount based on the difference between the exercise price of
the option and the closing price of the index.
Interest Rate and Foreign Currency Futures Contracts--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of debt securities or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. An index futures contract is similar to any other futures contract
except that settlement of an index futures contract is effected with a cash
payment based on the value of the index and does not involve the delivery of the
securities included in the index.
Options on Futures Contracts--Options on futures contracts are similar
to options on securities or currency, except that an option on a futures
contract gives the purchaser the right, in return for the premium, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell a
security or currency, at a specified price at any time during the option term.
Upon exercise of the option, the delivery of the futures position to the holder
of the option will be accompanied by delivery of the accumulated balance that
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the future. The writer of an option, upon exercise, will assume
a short position in the case of a call and a long position in the case of a put.
An option on a bond index futures contract is similar to any other option on a
futures contract except that the purchaser has the right, in return for the
premium, to assume a position in a bond index futures contract at a specified
price at any time during the option term.
Forward Currency Contracts--A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
59
<PAGE>
Table of Contents
Page
Additional Information About Investment
Limitations and Policies 2
Additional Tax Information 30
Additional Purchase and Redemption Information 33
Performance Information 38
Valuation of Fund Shares 44
Tax-Deferred Retirement Plans 45
The Corporation's Directors and Officers 47
Management Agreement 50
Investment Advisory Agreement 52
Portfolio Transactions and Brokerage 53
The Fund's Distributor 54
The Fund's Custodian and Transfer
and Dividend-Disbursing Agent 56
The Corporation's Legal Counsel 56
The Corporation's Independent Accountants 56
Financial Statements 56
Appendix A 57
No person has been authorized to give any information or to make any
representations not contained in the Prospectuses or this Statement of
Additional Information in connection with the offerings made by the Prospectuses
and, if given or made, such information or representations must not be relied
upon as having been authorized by a Fund or its distributor. The Prospectuses
and this Statement of Additional Information do not constitute offerings by the
Funds or by the distributor in any jurisdiction in which such offering may not
lawfully be made.
<PAGE>
Legg Mason Income Trust, Inc.
Part C. Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements: The financial statements of each of the U.S.
Government Intermediate-Term Portfolio, Investment Grade Income
Portfolio, High Yield Portfolio and U.S. Government Money Market
Portfolio for the year ended December 31, 1995 and the report
thereon of the independent accountants are incorporated into the
Statement of Additional Information of the respective Portfolios
by reference to each Portfolio's Annual Report to Shareholders for
the same period.
Each Fund's Financial Data Schedule appears as Exhibit 27.1
through 27.6.
(b) Exhibits
(1) (a) Articles of Incorporation1/
(b) Articles Supplementary2/
(c) Articles Supplementary9/
(d) Articles Supplementary11/
(e) Articles Supplementary12/
(2) (a) Amended By-Laws2/
(b) Amendment to By-Laws (effective May 10, 1991)8/
(3) Voting Trust Agreement - none
(4) Specimen Security
(a) U.S. Government Intermediate-Term Portfolio3/
(b) Investment Grade Income Portfolio3/
(c) U.S. Government Money Market Portfolio4/
(d) High Yield Portfolio11/
(5) (a) Management Agreement
(i) U.S. Government Intermediate-Term Portfolio5/
(ii) Investment Grade Income Portfolio5/
(iii) U.S. Government Money Market Portfolio4/
(iv) High Yield Portfolio12/
(b) Investment Advisory Agreement
(i) U.S. Government Intermediate-Term Portfolio6/
(ii) Investment Grade Income Portfolio6/
(iii) U.S. Government Money Market Portfolio4/
(iv) High Yield Portfolio12/
(6) Underwriting Agreement
(a) (i) U.S. Government Intermediate-Term and Investment Grade Income
Portfolios5/
(ii) U.S. Government Intermediate-Term and Investment Grade Income
Portfolios -- (form of) (filed herewith)
(b) (i) U.S. Government Money Market Portfolio4/
(ii) U.S. Government Money Market Portfolio -- (form of) (filed herewith)
(c) Dealer Contract with respect to Navigator Shares (filed herewith)
(d) (i) High Yield Portfolio12/
<PAGE>
(ii) High Yield Portfolio -- (form of) (filed herewith)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement5/
(9) Transfer Agent Agreement5/
(10) Opinion of Counsel
(a) Investment Grade Income and U.S. Government Intermediate-Term
Portfolios3/
(b) U.S. Government Money Market Portfolio4/
(c) High Yield Portfolio11/
(11) Consent of Independent Accountants with regard to the:
(a) U.S. Government Intermediate-Term Portfolio (filed herewith)
(b) Investment Grade Income Portfolio (filed herewith)
(c) U. S. Government Money Market Portfolio (filed herewith)
(d) High Yield Portfolio (filed herewith)
(12) Financial statements omitted from Item 23 - none
(13) Agreements for providing initial capital3/
(14) (a) Prototype IRA Plan7/
(b) Prototype Keogh Plan7/
(15) Plan pursuant to Rule 12b-1
(a) (i) Investment Grade Income and U.S. Government Intermediate-Term
Portfolios5/
(ii) Investment Grade Income and U.S. Government Intermediate-Term
Portfolios -- (form of) (filed herewith)
(b) (i) U.S. Government Money Market Portfolio4/
(ii) U.S. Government Money Market Portfolio -- (form of) (filed herewith)
(c) (i) High Yield Portfolio12/
(ii) High Yield Portfolio -- (form of) (filed herewith)
(16) Schedule for Computation of Performance Quotations for:
(a) U.S. Government Intermediate-Term Portfolio (filed herewith)
(b) Investment Grade Income Portfolio (filed herewith)
(c) U.S. Government Money Market Portfolio (filed herewith)
(d) High Yield Portfolio (filed herewith)
(17) Financial Data Schedules (filed herewith)
(18) Plan Pursuant to Rule 18f-3 -- none
1/ Incorporated herein by reference to corresponding Exhibit of Pre-Effective Amendment No.
1 to the Registration Statement, SEC File No. 33-12092, filed April 28, 1987.
2/ Incorporated herein by reference to corresponding Exhibit of Post-Effective Amendment No.
3 to the Registration Statement, SEC File No. 33-12092, filed September 2, 1988.
3/ Incorporated herein by reference to corresponding Exhibit of Pre-Effective Amendment No.
2 to the Registration Statement, SEC File No. 33-12092, filed June 15, 1987.
4/ Incorporated herein by reference to corresponding Exhibit of Post-Effective Amendment No.
4 to the Registration Statement, SEC File No. 33-12092, filed November 1, 1988.
5/ Incorporated herein by reference to corresponding Exhibit of Post-Effective Amendment No.
1 to the Registration Statement, SEC File No. 33-12092, filed March 3, 1988.
<PAGE>
6/ Incorporated herein by reference to corresponding Exhibit of Post-Effective Amendment No.
2 to the Registration Statement, SEC File No. 33-12092, filed April 28, 1988.
7/ Incorporated herein by reference to corresponding Exhibit of Post-Effective Amendment No.
8 to the Registration Statement, SEC File No. 33-12092, filed April 28, 1991.
8/ Incorporated herein by reference to corresponding Exhibit of Post-Effective Amendment No.
10 to the Registration Statement, SEC File No. 33-12092, filed April 30, 1992.
9/ Incorporated herein by reference to corresponding Exhibit of Post-Effective Amendment No.
11 to the Registration Statement, SEC File No. 33-12092, filed April 16, 1993.
10/ Incorporated herein by reference to corresponding Exhibit of Post-Effective Amendment No.
12 to the Registration Statement, SEC File No. 33-12092, filed April 30, 1993.
11/ Incorporated herein by reference to corresponding Exhibit of Post-Effective Amendment No.
15 to the Registration Statement, SEC File No. 33-12092, filed December 30, 1993.
12/ Incorporated herein by reference to corresponding Exhibit of Post-Effective Amendment No.
20 to the Registration Statement, SEC File No. 33-12092, filed September 20, 1994.
Item 25. Persons Controlled By or Under Common Control with Registrant
None
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class (as of March 31, 1996)
- -------------- -------------------------
Shares of Capital Stock,
($.001 par value)
U.S. Government Intermediate-Term Portfolio:
Primary Shares 12,360
Navigator Shares 2
Investment Grade Income Portfolio
Primary Shares 5,604
Navigator Shares 1
U.S. Government Money Market Portfolio 14,584
High Yield Portfolio 8,364
Item 27. Indemnification
<PAGE>
This item is incorporated by reference to Item 27 of Part C of Pre-Effective Amendment No.
2 to the Registration Statement, SEC File No. 33-12092 filed June 15, 1987.
Item 28. Business and Connections of Manager and Investment Adviser
I. Legg Mason Fund Adviser, Inc. ("Fund Adviser"), the Registrant's
manager, is a registered investment adviser incorporated on January 20, 1982.
Fund Adviser is engaged primarily in the investment advisory business. Fund
Adviser also serves as manager or investment adviser for fifteen open-end
investment companies and as investment consultant for one closed-end investment
company. Information as to the officers and directors of Fund Adviser is
included in its Form ADV-S filed on June 30, 1995 with the Securities and
Exchange Commission (registration number 801-16958) and is incorporated herein
by reference.
II. Western Asset Management Company ("Western"), the Registrant's
investment adviser, is a registered investment adviser incorporated on October
5, 1971. Western is primarily engaged in the investment advisory business.
Western also serves as investment adviser for sixteen open-end investment
companies and one closed-end investment company. Information as to the officers
and directors of Western is included in its Form ADV filed on May 17, 1995 with
the Securities and Exchange Commission (registration number 801-08162) and is
incorporated herein by reference.
Item 29. Principal Underwriters
(a) Legg Mason Cash Reserve Trust
Legg Mason Special Investment Trust, Inc.
Legg Mason Value Trust, Inc.
Legg Mason Tax-Exempt Trust, Inc.
Legg Mason Income Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Tax-Free Income Fund
Legg Mason Global Trust, Inc.
Legg Mason Investors Trust, Inc.
Western Asset Trust, Inc.
(b) The following table sets forth information concerning each director
and officer of the Registrant's principal underwriter, Legg Mason
Wood Walker, Incorporated
("LMWW").
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
Raymond A. Mason Chairman of the None
Board
John F. Curley, Jr. Vice Chairman Chairman of the
Board and Director
<PAGE>
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive Vice Chairman of
Vice President and the Board
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Richard J. Himelfarb Executive Vice None
President and
Director
Edward A. Taber III Executive Vice President
President and
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
Thomas M. Daly, Jr. Senior Vice None
President and
Director
Jerome M. Dattel Senior Vice None
President and
Director
Robert G. Donovan Senior Vice None
President and
Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market Street President and
Philadelphia, PA 19103 Director
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice None
1747 Pennsylvania President and
<PAGE>
Avenue, N.W. Director
Washington, D.C. 20006
Laura L. Lange Senior Vice None
President and
Director
Marvin H. McIntyre Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Mark I. Preston Senior Vice None
President and
Director
F. Barry Bilson Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
Harry M. Ford, Jr. Senior Vice None
President
William F. Haneman, Jr. Senior Vice None
One Battery Park Plaza President
New York, New York 10005
Theodore S. Kaplan Senior Vice None
President and
General Counsel
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
William H. Miller, III Senior Vice None
President
Douglas C. Petty, Jr. Senior Vice None
1747 Pennsylvania President
Avenue, N.W.
Washington, D.C. 20006
John A. Pliakas Senior Vice None
99 Summer Street President
Boston, MA 02101
<PAGE>
E. Robert Quasman Senior Vice None
President
Gail Reichard Senior Vice None
7 E. Redwood St. President
Baltimore, MD 21202
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Joseph Sullivan Senior Vice None
President
Peter J. Biche Vice President None
1735 Market Street
Philadelphia, PA 19103
John C. Boblitz Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
Robert Dickey, IV Vice President None
One World Trade Center
New York, NY 10048
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Seth J. Lehr Vice President None
1735 Market St.
Philadelphia, PA 19103
Edward W. Lister, Jr. Vice President None
Eileen M. O'Rourke Vice President None
and Controller
<PAGE>
Marie K. Karpinski Vice President Vice President
and Treasurer
Jonathan M. Pearl Vice President None
1777 Reisterstown Rd.
Pikesville, MD 21208
Douglas F. Pollard Vice President None
Chris Scitti Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
Lewis T. Yeager Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Joseph F. Zunic Vice President None
Charles R. Spencer, Jr. Vice President None
600 Thimble Shoals Blvd.
Newport News, VA 23606
* All addresses are 111 South Calvert Street, Baltimore, Maryland
21202, unless otherwise indicated.
(c) The Registrant has no principal underwriter which is not an
affiliated person of the Registrant or an affiliated person
of such an affiliated person.
Item 30. Location of Accounts and Records
State Street Bank and Trust Company
P. O. Box 1713
Boston, Massachusetts 02105
Item 31. Management Services
None
Item 32. Undertakings
<PAGE>
Registrant hereby undertakes to provide each person to whom a
prospectus is delivered with a copy of its latest annual
report to shareholders upon request and without charge.
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Legg Mason Income Trust, Inc.
certifies that it meets all the requirements for effectiveness in this
Post-Effective Amendment No. 24 to its Regsitration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Baltimore and State of Maryland, on the 29th day of
April, 1996.
LEGG MASON INCOME TRUST, INC.
by:/s/John F. Curley, Jr.
John F. Curley, Jr.
Chairman of the Board and Director
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 24 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated:
Signature Title Date
/s/ John F. Curley, Jr. Chairman of the Board April 29, 1996
John F. Curley, Jr. and Director
/s/Edmund J. Cashman, Jr. Vice Chairman of the April 29, 1996
Edmund J. Cashman, Jr. Board and Director
/s/Edward A. Taber, III President and Director April 29, 1996
Edward A. Taber, III
/s/Richard G. Gilmore Director April 29, 1996
Richard G. Gilmore*
/s/Charles F. Haugh Director April 29, 1996
Charles F. Haugh*
/s/Arnold L. Lehman Director April 29, 1996
Arnold L. Lehman*
/s/Jill E. McGovern Director April 29, 1996
Jill E. McGovern*
/s/T.A. Rodgers Director April 29, 1996
T.A. Rodgers*
/s/Marie K. Karpinski Vice President April 29, 1996
Marie K. Karpinski and Treasurer
*Signatures affixed by Marie K. Karpinski pursuant to powers of attorney, dated January 3,
1991, incorporated herein by reference to Post-Effective Amendment No. 9 filed March 2,
1992.
</TABLE>
Exhibit (6)(a)(ii)
UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this ____ day of February, 1996,
by and between Legg Mason Income Trust, Inc., a Maryland corporation
("Corporation") on behalf of the Legg Mason U.S. Government Intermediate-
Term Portfolio and the Legg Mason Investment Grade Portfolio ("Funds"), and
Legg Mason Wood Walker, Incorporated, a Maryland corporation (the
"Distributor").
WHEREAS, the Corporation is registered with the Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and has registered shares
of common stock of the Funds for sale to the public under the Securities
Act of 1933 (the "1933 Act") and various state securities laws; and
WHEREAS, the Corporation wishes to retain the Distributor as the
principal underwriter in connection with the offering and sale of the
shares of common stock of the Funds ("Shares") and to furnish certain other
services to the Corporation as specified in this Agreement; and
WHEREAS, this Agreement has been approved by separate votes of the
Corporation's Board of Directors and of certain disinterested directors in
conformity with Section 15 of, and paragraph (b)(2) of Rule 12b-1 under,
the 1940 Act; and
WHEREAS, the Distributor is willing to act as principal
underwriter and to furnish such services on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein contained, it is agreed as follows:
1. (a) The Corporation hereby appoints the Distributor as
principal underwriter in connection with the offering and sale of shares of
the Funds. The Distributor, as exclusive agent for the Corporation, upon
the commencement of operations of the Funds and subject to applicable
federal and state law and the Articles of Incorporation and By-Laws of the
Corporation, shall: (i) promote the Funds; (ii) solicit orders for the
purchase of the Shares subject to such terms and conditions as the
Corporation may specify; and (iii) accept orders for the purchase of the
Shares on behalf of the Corporation (collectively, "Distribution
Services"). The Distributor shall comply with all applicable federal and
state laws and offer the Shares of the Funds on an agency or "best efforts"
basis under which the Corporation shall issue only such Shares of the Funds
as are actually sold. The Distributor shall have the right to use any list
of shareholders of the Corporation or the Fund or any other list of
investors which it obtains in connection with its provision of services
under this Agreement; provided, however, that the Distributor
<PAGE>
shall not sell or knowingly provide such list or lists to any unaffiliated
person without the consent of the Corporation's Board of Directors.
(b) The Distributor shall provide ongoing shareholder liaison
services, including responding to shareholder inquiries, providing
shareholders with information on their investments, and any other services
now or hereafter deemed to be appropriate subjects for the payments of
"service fees" under Article III, Section 26 of the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. (collectively,
"Shareholder Services").
2. The Distributor may enter into dealer agreements with
registered and qualified securities dealers it may select for the
performance of Distribution and Shareholder Services, and may enter into
agreements with qualified dealers and other qualified entities to perform
recordkeeping and sub-accounting services, the form of such agreements to
be as mutually agreed upon and approved by the Corporation and the
Distributor. In making such arrangements, the Distributor shall act only as
principal and not as agent for the Corporation. No such dealer or other
entity is authorized to act as agent for the Corporation in connection with
the offering or sale of Shares to the public or otherwise.
3. The public offering price of the Shares of each Fund shall be
the net asset value per share (as determined by the Corporation) of the
outstanding Shares of that Fund plus any applicable sales charge as
described in the Registration Statement of the Corporation. The Corporation
shall furnish the Distributor with a statement of each computation of
public offering price and of the details entering into such computation.
4. As compensation for providing Distribution Services under this
Agreement, the Distributor shall retain the sales charge, if any, on
purchases of Shares as set forth in the Registration Statement. The
Distributor is authorized to collect the gross proceeds derived from the
sale of the Shares, remit the net asset value thereof to the Corporation
upon receipt of the proceeds and retain the sales charge, if any. The
Distributor shall receive from the Funds a distribution fee and a service
fee at the rates and under the terms and conditions of the Plan of
Distribution ("Plan") adopted by the Corporation with respect to the Fund,
as such Plan is in effect from time to time, and subject to any further
limitations on such fees as the Corporation's Board of Directors may
impose. The Distributor may reallow any or all of the sales charge,
distribution fee and service fee that it has received under this Agreement
to such dealers or sub-accountants as it may from time to time determine;
provided, however, that the Distributor may not reallow to any dealer for
Shareholder Services an amount in excess of .25% of the average annual net
asset value of the shares with respect to which said dealer provides
Shareholder Services.
5. As used in this Agreement, the term "Registration
Statement" shall mean the registration statement most recently filed by
the Corporation with the Securities and Exchange Commission and effective
- 2 -
<PAGE>
under the 1940 Act and 1933 Act, as such Registration Statement is amended
by any amendments thereto at the time in effect, and the terms "Prospectus"
and "Statement of Additional Information" shall mean, respectively, the
form of prospectus and statement of additional information with respect to
the Funds filed by the Corporation as part of the Registration Statement,
or as they may be amended from time to time.
6. The Distributor shall print and distribute to prospective
investors Prospectuses, and shall print and distribute, upon request, to
prospective investors Statements of Additional Information, and may print
and distribute such other sales literature, reports, forms and
advertisements in connection with the sale of the Shares as comply with the
applicable provisions of federal and state law. In connection with such
sales and offers of sale, the Distributor and any dealer or sub- accountant
shall give only such information and make only such statements or
representations as are contained in the Prospectus, Statement of Additional
Information, or in information furnished in writing to the Distributor by
the Corporation, and the Corporation shall not be responsible in any way
for any other information, statements or representations given or made by
the Distributor, any dealer or sub- accountant, or their representatives or
agents. Except as specifically provided in this Agreement, the Corporation
shall bear none of the expenses of the Distributor in connection with its
offer and sale of the Shares.
7. The Corporation agrees at its own expense to register the
Shares with the Securities and Exchange Commission, state and other
regulatory bodies, and to prepare and file from time to time such
Prospectuses, Statements of Additional Information, amendments, reports and
other documents as may be necessary to maintain the Registration Statement.
Each Fund shall bear all expenses related to preparing and typesetting such
Prospectuses, Statements of Additional Information, and other materials
required by law and such other expenses, including printing and mailing
expenses, related to such Fund's communications with persons who are
shareholders of that Fund.
8. The Corporation agrees to indemnify, defend and hold the
Distributor, its several officers and directors, and any person who
controls the Distributor within the meaning of Section 15 of the 1933 Act,
free and harmless from and against any and all claims, demands, liabilities
and expenses (including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection
therewith) which the Distributor, its officers or directors, or any such
controlling person may incur, under the 1933 Act or under common law or
otherwise, arising out of or based upon any alleged untrue statement of a
material fact contained in the Registration Statement or arising out of or
based upon any alleged omission to state a material fact required to be
stated or necessary to make the Registration Statement not misleading,
provided that in no event shall anything contained in this Agreement be
construed so as to protect the Distributor against any liability to the
Corporation or its shareholders to which the Distributor would otherwise be
subject by reason of willful misfeasance, bad faith, or
- 3 -
<PAGE>
gross negligence in the performance of its duties, or by reason of its
reckless disregard of its obligations and duties under this Agreement, and
further provided that the Corporation shall not indemnify the Distributor
for conduct set forth in paragraph 9.
9. The Distributor agrees to indemnify, defend and hold the
Corporation, its several officers and directors, and any person who
controls the Corporation within the meaning of Section 15 of the 1933 Act,
free and harmless from and against any and all claims, demands, liabilities
and expenses (including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection
therewith) which the Corporation, its officers or directors, or any such
controlling person may incur, under the 1933 Act or under common law or
otherwise, on account of any wrongful act of the Distributor or any of its
employees or arising out of or based upon any alleged untrue statement of a
material fact contained in information furnished in writing by the
Distributor to the Corporation for use in the Registration Statement or
arising out of or based upon any alleged omission to state a material fact
in connection with such information required to be stated in the
Registration Statement or necessary to make such information not
misleading. As used in this paragraph, the term "employee" shall not
include a corporate entity under contract to provide services to the
Corporation or the Fund, or any employee of such a corporate entity, unless
such person is otherwise an employee of the Corporation.
10. The Corporation reserves the right at any time to
withdraw all offerings of the Shares of the Funds by written notice to the
Distributor at its principal office.
11. The Corporation shall not issue certificates representing
Shares unless requested by a shareholder. If such request is transmitted
through the Distributor, the Corporation will cause certificates evidencing
the Shares owned to be issued in such names and denominations as the
Distributor shall from time to time direct, provided that no certificates
shall be issued for fractional Shares.
12. The Distributor may at its sole discretion, directly or
through dealers, repurchase Shares offered for sale by the shareholders or
dealers. Repurchase of Shares by the Distributor shall be at the net asset
value next determined after a repurchase order has been received. The
Distributor will receive no commission or other remuneration for
repurchasing Shares. At the end of each business day, the Distributor shall
notify by telex or in writing, the Corporation and State Street Bank and
Trust Company, the Corporation's transfer agent, of the orders for
repurchase of Shares received by the Distributor since the last such
report, the amount to be paid for such Shares, and the identity of the
shareholders or dealers offering Shares for repurchase. Upon such notice,
the Corporation shall pay the Distributor such amounts as are required by
the Distributor for the repurchase of such Shares in cash or in the form of
a credit against moneys due the Corporation from the Distributor as
proceeds from the sale of Shares. The Corporation reserves the right to
suspend such repurchase right upon written notice to the Distributor. The
- 4 -
<PAGE>
Distributor further agrees to act as agent for the Corporation to receive
and transmit promptly to the Corporation's transfer agent shareholder and
dealer requests for redemption of Shares.
13. The Distributor is an independent contractor and shall be
agent for the Corporation only in respect to the sale and redemption of
the Shares.
14. The services of the Distributor to the Corporation under this
Agreement are not to be deemed exclusive, and the Distributor shall be free
to render similar services or other services to others so long as its
services hereunder are not impaired thereby.
15. The Distributor shall prepare reports for the Corporation's
Board of Directors on a quarterly basis showing such information concerning
expenditures related to this Agreement as from time to time shall be
reasonably requested by the Board of Directors.
16. As used in this Agreement, the terms "assignment", "interested
person", and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by
any rule, regulation or order.
17. This Agreement will become effective with respect to each Fund
on the date first written above and, unless sooner terminated as provided
herein, will continue in effect for one year from the above written date.
Thereafter, if not terminated, this Agreement shall continue in effect with
respect to each Fund for successive annual periods ending on the same date
of each year, provided that such continuance is specifically approved at
least annually (i) by the Corporation's Board of Directors or (ii) by a
vote of a majority of the outstanding voting securities of that Fund (as
defined in the 1940 Act), provided that in either event the continuance is
also approved by a majority of the Corporation's Directors who are not
interested persons (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval.
18. This Agreement is terminable with respect to each Fund or in
its entirety without penalty by the Corporation's Board of Directors, by
vote of a majority of the outstanding voting securities of such Fund (as
defined in the 1940 Act), or by the Distributor, on not less than 60 days'
notice to the other party and will be terminated upon the mutual written
consent of the Distributor and the Corporation. This Agreement will also
automatically and immediately terminate in the event of its assignment.
19. No provision of this Agreement may be changed, waived,
discharged or terminated orally, except by an instrument in writing signed
by the party against which enforcement of the change, waiver, discharge or
termination is sought.
- 5 -
<PAGE>
20. In the event this Agreement is terminated by either party or
upon written notice from the Distributor at any time, the Corporation
hereby agrees that it will eliminate from its corporate name any reference
to the name of "Legg Mason." The Corporation shall have the non-exclusive
use of the name "Legg Mason" in whole or in part only so long as this
Agreement is effective or until such notice is given.
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON INCOME TRUST, INC.
By:___________________ By:_________________________________
Attest: LEGG MASON WOOD WALKER, INCORPORATED
By:___________________ By:_________________________________
- 6 -
Exhibit (6)(b)(ii)
UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this ____ day of February, 1996,
by and between Legg Mason Income Trust, Inc., a Maryland corporation
("Corporation") on behalf of the Legg Mason U.S. Government Money Market
Portfolio ("Fund"), and Legg Mason Wood Walker, Incorporated, a Maryland
corporation (the "Distributor").
WHEREAS, the Corporation is registered with the Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and has registered shares
of common stock of the Fund for sale to the public under the Securities Act
of 1933 (the "1933 Act") and various state securities laws; and
WHEREAS, the Corporation wishes to retain the Distributor as the
principal underwriter in connection with the offering and sale of the
shares of common stock of the Fund ("Shares") and to furnish certain other
services to the Corporation as specified in this Agreement; and
WHEREAS, this Agreement has been approved by separate votes of the
Corporation's Board of Directors and of certain disinterested directors in
conformity with Section 15 of, and paragraph (b)(2) of Rule 12b-1 under,
the 1940 Act; and
WHEREAS, the Distributor is willing to act as principal
underwriter and to furnish such services on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein contained, it is agreed as follows:
1. (a) The Corporation hereby appoints the Distributor as
principal underwriter in connection with the offering and sale of shares of
the Fund. The Distributor, as exclusive agent for the Corporation, upon the
commencement of operations of the Fund and subject to applicable federal
and state law and the Articles of Incorporation and By-Laws of the
Corporation, shall: (i) promote the Fund; (ii) solicit orders for the
purchase of the Shares subject to such terms and conditions as the
Corporation may specify; and (iii) accept orders for the purchase of the
Shares on behalf of the Corporation (collectively, "Distribution
Services"). The Distributor shall comply with all applicable federal and
state laws and offer the Shares of the Fund on an agency or "best efforts"
basis under which the Corporation shall issue only such Shares of the Fund
as are actually sold. The Distributor shall have the right to use any list
of shareholders of the Corporation or the Fund or any other list of
investors which it obtains in connection with its provision of services
under this Agreement; provided, however, that the Distributor shall not
sell or knowingly provide such list or lists to any unaffiliated person
without the consent of the Corporation's Board of Directors.
<PAGE>
(b) The Distributor shall provide ongoing shareholder liaison
services, including responding to shareholder inquiries, providing
shareholders with information on their investments, and any other services
now or hereafter deemed to be appropriate subjects for the payments of
"service fees" under Article III, Section 26 of the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. (collectively,
"Shareholder Services").
2. The Distributor may enter into dealer agreements with
registered and qualified securities dealers it may select for the
performance of Distribution and Shareholder Services, and may enter into
agreements with qualified dealers and other qualified entities to perform
recordkeeping and sub-accounting services, the form of such agreements to
be as mutually agreed upon and approved by the Corporation and the
Distributor. In making such arrangements, the Distributor shall act only as
principal and not as agent for the Corporation. No such dealer or other
entity is authorized to act as agent for the Corporation in connection with
the offering or sale of Shares to the public or otherwise.
3. The public offering price of the Shares of the Fund shall be
the net asset value per share (as determined by the Corporation) of the
outstanding Shares of the Fund plus any applicable sales charge as
described in the Registration Statement of the Corporation. The Corporation
shall furnish the Distributor with a statement of each computation of
public offering price and of the details entering into such computation.
4. As compensation for providing Distribution Services under this
Agreement, the Distributor shall retain the sales charge, if any, on
purchases of Shares as set forth in the Registration Statement. The
Distributor is authorized to collect the gross proceeds derived from the
sale of the Shares, remit the net asset value thereof to the Corporation
upon receipt of the proceeds and retain the sales charge, if any. The
Distributor shall receive from the Fund a distribution fee and a service
fee at the rates and under the terms and conditions of the Plan of
Distribution ("Plan") adopted by the Corporation with respect to the Fund,
as such Plan is in effect from time to time, and subject to any further
limitations on such fees as the Corporation's Board of Directors may
impose. The Distributor may reallow any or all of the sales charge,
distribution fee and service fee that it has received under this Agreement
to such dealers or sub-accountants as it may from time to time determine;
provided, however, that the Distributor may not reallow to any dealer for
Shareholder Services an amount in excess of .25% of the average annual net
asset value of the shares with respect to which said dealer provides
Shareholder Services.
5. As used in this Agreement, the term "Registration Statement"
shall mean the registration statement most recently filed by the
Corporation with the Securities and Exchange Commission and effective under
the 1940 Act and 1933 Act, as such Registration Statement is amended by any
amendments thereto at the time in effect, and the terms "Prospectus" and
"Statement of Additional Information" shall mean,
- 2 -
<PAGE>
respectively, the form of prospectus and statement of additional
information with respect to the Fund filed by the Corporation as part of
the Registration Statement, or as they may be amended from time to time.
6. The Distributor shall print and distribute to prospective
investors Prospectuses, and shall print and distribute, upon request, to
prospective investors Statements of Additional Information, and may print
and distribute such other sales literature, reports, forms and
advertisements in connection with the sale of the Shares as comply with the
applicable provisions of federal and state law. In connection with such
sales and offers of sale, the Distributor and any dealer or sub- accountant
shall give only such information and make only such statements or
representations as are contained in the Prospectus, Statement of Additional
Information, or in information furnished in writing to the Distributor by
the Corporation, and the Corporation shall not be responsible in any way
for any other information, statements or representations given or made by
the Distributor, any dealer or sub- accountant, or their representatives or
agents. Except as specifically provided in this Agreement, the Corporation
shall bear none of the expenses of the Distributor in connection with its
offer and sale of the Shares.
7. The Corporation agrees at its own expense to register the
Shares with the Securities and Exchange Commission, state and other
regulatory bodies, and to prepare and file from time to time such
Prospectuses, Statements of Additional Information, amendments, reports and
other documents as may be necessary to maintain the Registration Statement.
The Fund shall bear all expenses related to preparing and typesetting such
Prospectuses, Statements of Additional Information, and other materials
required by law and such other expenses, including printing and mailing
expenses, related to such Fund's communications with persons who are
shareholders of the Fund.
8. The Corporation agrees to indemnify, defend and hold the
Distributor, its several officers and directors, and any person who
controls the Distributor within the meaning of Section 15 of the 1933 Act,
free and harmless from and against any and all claims, demands, liabilities
and expenses (including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection
therewith) which the Distributor, its officers or directors, or any such
controlling person may incur, under the 1933 Act or under common law or
otherwise, arising out of or based upon any alleged untrue statement of a
material fact contained in the Registration Statement or arising out of or
based upon any alleged omission to state a material fact required to be
stated or necessary to make the Registration Statement not misleading,
provided that in no event shall anything contained in this Agreement be
construed so as to protect the Distributor against any liability to the
Corporation or its shareholders to which the Distributor would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence in
the performance of its duties, or by reason of its reckless disregard of
its obligations and duties under this Agreement, and
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<PAGE>
further provided that the Corporation shall not indemnify the Distributor
for conduct set forth in paragraph 9.
9. The Distributor agrees to indemnify, defend and hold the
Corporation, its several officers and directors, and any person who
controls the Corporation within the meaning of Section 15 of the 1933 Act,
free and harmless from and against any and all claims, demands, liabilities
and expenses (including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection
therewith) which the Corporation, its officers or directors, or any such
controlling person may incur, under the 1933 Act or under common law or
otherwise, on account of any wrongful act of the Distributor or any of its
employees or arising out of or based upon any alleged untrue statement of a
material fact contained in information furnished in writing by the
Distributor to the Corporation for use in the Registration Statement or
arising out of or based upon any alleged omission to state a material fact
in connection with such information required to be stated in the
Registration Statement or necessary to make such information not
misleading. As used in this paragraph, the term "employee" shall not
include a corporate entity under contract to provide services to the
Corporation or the Fund, or any employee of such a corporate entity, unless
such person is otherwise an employee of the Corporation.
10. The Corporation reserves the right at any time to
withdraw all offerings of the Shares of the Fund by written notice to the
Distributor at its principal office.
11. The Corporation shall not issue certificates representing
Shares unless requested by a shareholder. If such request is transmitted
through the Distributor, the Corporation will cause certificates evidencing
the Shares owned to be issued in such names and denominations as the
Distributor shall from time to time direct, provided that no certificates
shall be issued for fractional Shares.
12. The Distributor may at its sole discretion, directly or
through dealers, repurchase Shares offered for sale by the shareholders or
dealers. Repurchase of Shares by the Distributor shall be at the net asset
value next determined after a repurchase order has been received. The
Distributor will receive no commission or other remuneration for
repurchasing Shares. At the end of each business day, the Distributor shall
notify by telex or in writing, the Corporation and State Street Bank and
Trust Company, the Corporation's transfer agent, of the orders for
repurchase of Shares received by the Distributor since the last such
report, the amount to be paid for such Shares, and the identity of the
shareholders or dealers offering Shares for repurchase. Upon such notice,
the Corporation shall pay the Distributor such amounts as are required by
the Distributor for the repurchase of such Shares in cash or in the form of
a credit against moneys due the Corporation from the Distributor as
proceeds from the sale of Shares. The Corporation reserves the right to
suspend such repurchase right upon written notice to the Distributor. The
Distributor further agrees to act as agent for the Corporation to receive
- 4 -
<PAGE>
and transmit promptly to the Corporation's transfer agent shareholder and
dealer requests for redemption of Shares.
13. The Distributor is an independent contractor and shall be
agent for the Corporation only in respect to the sale and redemption of
the Shares.
14. The services of the Distributor to the Corporation under this
Agreement are not to be deemed exclusive, and the Distributor shall be free
to render similar services or other services to others so long as its
services hereunder are not impaired thereby.
15. The Distributor shall prepare reports for the Corporation's
Board of Directors on a quarterly basis showing such information concerning
expenditures related to this Agreement as from time to time shall be
reasonably requested by the Board of Directors.
16. As used in this Agreement, the terms "assignment", "interested
person", and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by
any rule, regulation or order.
17. This Agreement will become effective with respect to the Fund
on the date first written above and, unless sooner terminated as provided
herein, will continue in effect for one year from the above written date.
Thereafter, if not terminated, this Agreement shall continue in effect with
respect to the Fund for successive annual periods ending on the same date
of each year, provided that such continuance is specifically approved at
least annually (i) by the Corporation's Board of Directors or (ii) by a
vote of a majority of the outstanding voting securities of the Fund (as
defined in the 1940 Act), provided that in either event the continuance is
also approved by a majority of the Corporation's Directors who are not
interested persons (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval.
18. This Agreement is terminable with respect to the Fund or in
its entirety without penalty by the Corporation's Board of Directors, by
vote of a majority of the outstanding voting securities of the Fund (as
defined in the 1940 Act), or by the Distributor, on not less than 60 days'
notice to the other party and will be terminated upon the mutual written
consent of the Distributor and the Corporation. This Agreement will also
automatically and immediately terminate in the event of its assignment.
19. No provision of this Agreement may be changed, waived,
discharged or terminated orally, except by an instrument in writing signed
by the party against which enforcement of the change, waiver, discharge or
termination is sought.
20. In the event this Agreement is terminated by either party
or upon written notice from the Distributor at any time, the Corporation
- 5 -
<PAGE>
hereby agrees that it will eliminate from its corporate name any reference
to the name of "Legg Mason." The Corporation shall have the non-exclusive
use of the name "Legg Mason" in whole or in part only so long as this
Agreement is effective or until such notice is given.
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON INCOME TRUST, INC.
By:___________________ By:_________________________________
Attest: LEGG MASON WOOD WALKER, INCORPORATED
By:___________________ By:_________________________________
Exhibit (6)(c)(ii)
DEALER AGREEMENT
NAVIGATOR CLASS OF THE LEGG MASON FUNDS
AGREEMENT made as of August 1, 1995, between Legg Mason Wood
Walker, Inc. ("Legg Mason") and Fairfield Group, Inc. ("Fairfield").
WHEREAS each of the entities listed on Schedule A hereto is a
corporation or business trust (each referred to herein as a "Company")
registered under the Investment Company Act of 1940, as amended ("1940
Act"), as an open-end management investment company;
WHEREAS each Company has established one or more separate series
of shares, the assets and liabilities associated with which are maintained
separately from the assets and liabilities associated with any other
series;
WHEREAS the board of directors/trustees of each Company ("Board")
has established in one or more of its series a class of shares of common
stock known as the Navigator Shares ("Navigator Shares");
WHEREAS Legg Mason has entered into a Distribution Contract with
respect to each such series ("Distribution Contract") pursuant to which
Legg Mason serves as principal underwriter in connection with the offering
and sale of the Navigator Shares of the series;
WHEREAS Legg Mason is acting as an underwriter within the meaning
of Article III, Section 26 of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc.; and
WHEREAS Legg Mason is offering to sell to Fairfield Navigator
Shares of each series listed on Schedule B (each such series referred to
herein as a "Fund"), on the terms set forth below;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein, Legg Mason and Fairfield agree as follows with
respect to each Fund:
(a) Fairfield will offer and sell Navigator Shares only at
the regular public offering price currently determined by the Fund in the
manner described in its Registration Statement.
(b) Any order received by Fairfield for the purchase of
Navigator Shares through Legg Mason shall be accepted at the time it is
received by Fairfield (or any clearinghouse agency that Legg Mason may
designate from time to time), and at the offering and sale price next
determined, unless rejected by Legg Mason or the Fund. Any order received
by Fairfield for the redemption or repurchase of Navigator Shares through
Legg Mason shall be accepted at the time it is received by Fairfield, and
at the redemption price next determined. In addition to the right to reject
any purchase order, the Fund has reserved the right to withhold Navigator
Shares from sale temporarily or permanently. Fairfield agrees not to accept
any order which is placed on a conditional basis or subject to any delay or
contingency prior to execution, and Legg Mason will not
<PAGE>
accept such orders from Fairfield. The procedure relating to the handling
of orders shall be subject to instructions which Legg Mason shall forward
from time to time to Fairfield. The Navigator Shares purchased will be
issued by the Fund only against receipt of the purchase price, in collected
New York Clearinghouse funds. If payment for the Navigator Shares purchased
is not received within three business days after the date of confirmation,
the sale may be canceled forthwith, by Legg Mason or by the Fund, without
any responsibility or liability on the part of Legg Mason or on the part of
the Fund, and Legg Mason and/or the Fund may hold Fairfield responsible for
any loss, expense, liability or damage, including loss of profit suffered
by Legg Mason and/or the Fund resulting from Fairfield's delay or failure
to make payment as aforesaid.
(c) Fairfield is obliged to date and time stamp all
purchase and redemption orders received by Fairfield and promptly transmit
all orders to Legg Mason in time to provide for processing at the price
next determined after receipt by Fairfield, in accordance with the Fund's
Registration Statement. Fairfield is not to withhold placing with Legg
Mason any purchase or redemption orders received from any customers for
Navigator Shares so as to profit itself as a result of such withholding.
Fairfield shall not purchase Navigator Shares through Legg Mason except for
the purpose of covering purchase orders already received by Fairfield, or
for its bona fide investment.
(d) Legg Mason shall furnish Fairfield without charge
reasonable quantities of Prospectuses, with any supplements currently in
effect, copies of current shareholder reports of the Fund, and sales
materials issued by Legg Mason from time to time. In the purchase of
Navigator Shares through Legg Mason, Fairfield is entitled to rely only on
the information contained in the Registration Statement.
(e) This Agreement is in all respects subject to
statements regarding the sale and repurchase or redemption of Navigator
Shares made in the Registration Statement of the Fund, and to the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.,
which shall control and override any provision to the contrary in this
Agreement.
(f) Fairfield shall make available Navigator Shares of the
Fund only through Legg Mason. In no transaction (whether of purchase or
sale) shall Fairfield have any authority to act as agent for, partner of,
or participant in a joint venture with, Legg Mason or with the Fund or any
other entity having any other Agreement with Legg Mason.
(g) Legg Mason acts solely as agent for the Fund, and is
not responsible for qualifying the Fund or its shares for sale in any
jurisdiction. Legg Mason also is not responsible for the issuance, form,
validity, enforceability or value of shares of the Fund.
(h) All communications to Legg Mason should be sent to the
address below. Any notice to Fairfield shall be duly given if mailed or
telegraphed to Fairfield at the address specified by Fairfield below.
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<PAGE>
(i) Fairfield shall not be obligated to sell any certain
number of Navigator Shares.
(j) To facilitate redemption of Navigator Shares by
shareholders directly or through dealers, Fairfield is authorized but not
required to repurchase Navigator Shares presented to it by shareholders and
other dealers at the price determined in accordance with, and in the manner
set forth in, the Registration Statement.
(k) Fairfield shall not, if acting as principal, purchase
any Navigator Shares of the Fund from a recordholder at a price lower than
the net asset value next determined by or for the Fund's Shares. Fairfield
shall, however, be permitted to sell any Navigator Shares for the account
of a shareholder of the Fund at the net asset value currently quoted by or
for the Fund's Shares.
(l) Fairfield represents and warrants that: (i) it is a
member in good standing of the National Association of Securities Dealers,
Inc. ("NASD") and agrees to abide by the NASD Rules of Fair Practice; (ii)
it is registered as a broker-dealer with the Securities and Exchange
Commission; (iii) it will maintain any filings and licenses required by
federal and state laws to conduct the business contemplated under this
Agreement; (iv) it will notify Legg Mason immediately if it ceases to be so
registered or licensed or a member in good standing of the NASD; and (v) it
will comply with all federal and state laws and regulations applicable to
the offer and sale of Navigator Shares.
(m) Fairfield shall not permit any employee or agent to
offer or sell Navigator Shares unless such person is duly licensed under
applicable federal and state laws and regulations.
(n) Fairfield shall not incur any debts or obligations on behalf
of Legg Mason or the Fund. Fairfield shall bear all costs that it incurs in
selling Navigator Shares and in complying with the terms and conditions of
this Agreement as more specifically set forth in paragraph 8, except as may
be agreed between Legg Mason and Fairfield.
(o) Fairfield shall not (i) furnish any information or
make any representations concerning the Fund or Navigator Shares other than
those contained in the Registration Statement or in sales literature or
advertising that has been prepared or approved by Legg Mason as provided in
paragraph 6 or (ii) offer or sell Navigator Shares in jurisdictions in
which they have not been approved for offer and sale.
3. Services Not Exclusive. The services furnished by
Fairfield hereunder are not to be deemed exclusive, and Fairfield shall be
free to furnish similar services to others so long as its services under
this Agreement are not impaired thereby.
4. Compensation. Legg Mason shall not be obligated to pay
any compensation to Fairfield hereunder nor to reimburse any of
- 3 -
<PAGE>
Fairfield's expenses incurred hereunder, except as Legg Mason and the Fund
otherwise agree.
5. Duties of Legg Mason.
(a) Legg Mason shall keep Fairfield adequately informed of
the Fund's affairs and shall make available to Fairfield copies of all
information, financial statements and other papers which Fairfield may
reasonably request for use in connection with the distribution of Navigator
Shares, including, without limitation, certified copies of any financial
statements prepared for the Fund by its independent accountants and such
reasonable number of copies of the most current prospectus, statement of
additional information, and annual and interim reports of the Fund as
Fairfield may request, and Legg Mason shall cooperate fully in the efforts
of Fairfield to sell and arrange for the sale of the Navigator Shares and
in the performance of Fairfield under this Agreement.
(b) Legg Mason shall comply with all state and federal
laws and regulations applicable to it as distributor of Navigator Shares.
6. Advertising. Legg Mason agrees to make available such sales and
advertising materials relating to Navigator Shares as Legg Mason in its
discretion determines appropriate. Fairfield agrees to submit all sales and
advertising materials developed by it relating to the Fund or Navigator
Shares to Legg Mason for approval. Fairfield agrees not to publish or
distribute such materials without first receiving such approval in writing,
as well as any advance regulatory approval that may be required. Legg Mason
shall assist Fairfield in obtaining any regulatory approvals of such
materials that may be required or reasonably desired by Fairfield.
7. Records. Fairfield agrees to maintain all records
required by applicable state and federal laws and regulations relating to
the offer and sale of Navigator Shares. Legg Mason and its
representatives shall have access to such records for review and copying
during normal business hours.
8. Expenses of Fairfield. Except as the parties may otherwise
agree, Fairfield shall bear all costs and expenses of (i) preparing,
printing, and distributing any materials not prepared by the Fund or Legg
Mason and other materials used by Fairfield in connection with its offering
of Navigator Shares for sale; (ii) any expenses of advertising incurred by
Fairfield in connection with such offering; (iii) the expenses of
registration and qualification of Fairfield as a dealer and/or broker under
federal and state laws and the expenses of continuing such registration or
qualification; and (iv) all compensation paid to Fairfield's investment
executives or other employees and others for selling Navigator Shares, and
all expenses of Fairfield, its investment executives and employees and
others who engage in or support the sale of Navigator Shares. Fairfield
shall bear such additional costs and expenses
- 4 -
<PAGE>
as it and Legg Mason may agree upon, such agreement to be evidenced in a
writing signed by both parties.
9. Indemnification.
(a) Legg Mason agrees to indemnify, defend, and hold
Fairfield, its officers and directors, and any person who controls
Fairfield within the meaning of Section 15 of the 1933 Act, free and
harmless from and against any and all claims, demands, liabilities, and
expenses (including the cost of investigating or defending such claims,
demands, or liabilities and any counsel fees incurred in connection
therewith) which Fairfield, its officers, directors, or any such
controlling person may incur under the 1933 Act, under common law or
otherwise, arising out of or based upon any alleged untrue statement of a
material fact contained in the Registration Statement; arising out of or
based upon any alleged omission to state a material fact required to be
stated in the Registration Statement thereof or necessary to make the
statements in the Registration Statement thereof not misleading; or arising
out of any sales or advertising materials with respect to the Navigator
Shares provided by Legg Mason to Fairfield. However, this indemnity
agreement shall not apply to any claims, demands, liabilities, or expenses
that arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in
conformity with information furnished in writing by Fairfield to Legg Mason
or the Fund for use in the Registration Statement or in any sales or
advertising material; and further provided, that in no event shall anything
contained herein be so construed as to protect Fairfield against any
liability to Legg Mason or the Fund or to the shareholders of the Fund to
which Fairfield would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations under
this Agreement.
(b) Fairfield agrees to indemnify, defend, and hold Legg
Mason and its officers and directors, the Fund, its officers and directors,
and any person who controls Legg Mason or the Fund within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and
any counsel fees incurred in connection therewith) which Legg Mason or its
officers or directors or the Fund, its officers or directors, or any such
controlling person may incur under the 1933 Act, under common law, or
otherwise, arising out of or based upon Fairfield's activities in offering
or selling Navigator Shares; arising out of or based upon any alleged
untrue statement of a material fact contained in information furnished in
writing by Fairfield to Legg Mason or the Fund for use in the Registration
Statement; arising out of or based upon any alleged omission to state a
material fact in connection with such information required to be stated in
the Registration Statement or necessary to make such information not
misleading; arising out of any agreement between Fairfield and any retail
dealer; or arising out of any sales or advertising material used by
Fairfield in connection with its duties under this Agreement.
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<PAGE>
10. Duration and Termination.
(a) This Agreement shall become effective with respect to
a Fund upon the date written above, provided that this Agreement has first
been approved by vote of a majority of the Board of the Company of which
said Fund is part.
(b) Notwithstanding the foregoing, this Agreement may be
terminated at any time, without the payment of any penalty, by either
party, upon the giving of 30 days' written notice. Such notice shall be
deemed to have been given on the date it is received in writing by the
other party or any officer thereof. This Agreement may also be terminated
at any time with respect to a Fund, without the payment of any penalty, by
vote of the Board of the Company of which said Fund is a part.
(c) This Agreement may be terminated immediately in the
event of its assignment or in the event that the Distribution Agreement is
terminated.
11. Amendment of this Agreement. No provision of this Agreement
may be amended, changed, waived, discharged or terminated orally, but only
by an instrument in writing signed by the party against which enforcement
of the change, waiver, discharge or termination is sought.
12. Use of Fairfield Name. Fairfield hereby authorizes Legg Mason
to use the name "Fairfield Group, Inc." or any name derived therefrom in
any prospectus, statement of additional information, registration
statement, sales or advertising materials prepared and/or used by Legg
Mason in connection with its duties as distributor of Navigator Shares, but
only for so long as this Agreement or any extension, renewal or amendment
hereof remains in effect, including any similar agreement with any
organization which shall have succeeded to the business of Fairfield.
13. Governing Law. This Agreement shall be construed in
accordance with the laws of the State of Maryland and the 1940 Act. To
the extent that the applicable laws of the State of Maryland conflict with
the applicable provisions of the 1940 Act, the latter shall control.
14. Notices. Any notices required or permitted hereunder shall
be considered as having been sent when transmitted via first class mail,
guaranteed delivery service, or verified telecopier, to the other party as
follows:
If to Legg Mason:
Legg Mason Wood Walker, Inc.
111 South Calvert Street
Baltimore, Md 21202
Attention: Edward Taber
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<PAGE>
If to Fairfield:
Fairfield Group, Inc.
200 Gibraltar Road
Horsham, Pa 19044
Attention: Robert Walker
15. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall
not be affected thereby. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors;
this Agreement is for the benefit of and enforceable by each of Fairfield,
Legg Mason and the Fund. As used in this Agreement, the terms "majority of
the outstanding voting securities," "interested person" and "assignment"
shall have the same meaning as such terms have in the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their officers designated as of the day and year first
written above.
LEGG MASON WOOD WALKER, INC.
Attest: /s/Kathi D. Bair By: /s/Edward A. Taber
----------------- -------------------------
Kathi D. Bair Edward A. Taber
FAIRFIELD GROUP, INC.
Attest: /s/Marilyn Holdren By: /s/R. J. Walker
------------------- -------------------------
Marilyn Holdren R. J. Walker
- 7 -
<PAGE>
SCHEDULE A
COMPANIES SUBJECT TO DEALER AGREEMENT
WITH RESPECT TO THE
NAVIGATOR CLASS OF THE LEGG MASON FUNDS
Legg Mason Value Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason Income Trust, Inc.
Legg Mason Global Trust Inc.
Legg Mason Investors Trust, Inc.
Legg Mason Tax-Free Income Fund
- 8 -
<PAGE>
SCHEDULE B
FUNDS SUBJECT TO DEALER AGREEMENT
WITH RESPECT TO THE
NAVIGATOR CLASS OF THE LEGG MASON FUNDS
Legg Mason Value Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Special Investment Trust, Inc.
Legg Mason U.S. Government Intermediate-Term Portfolio (a series of
Legg Mason Income Trust, Inc.)
Legg Mason Investment Grade Income Portfolio (a series of Legg Mason
Income Trust, Inc.)
Legg Mason High Yield Portfolio (a series of Legg Mason Income
Trust, Inc.)
Legg Mason Global Government Trust (a series of Legg Mason Global
Trust Inc.)
Legg Mason Global Equity Trust (a series of Legg Mason Global
Trust, Inc.)
Legg Mason American Leading Companies Trust (a series of Legg Mason
Investors Trust, Inc.)
Legg Mason Maryland Tax-Free Income Trust (a series of Legg Mason
Tax-Free Income Fund)
Legg Mason Pennsylvania Tax-Free Income Trust (a series of Legg
Mason Tax-Free Income Fund)
Legg Mason Tax-Free Intermediate-Term Income Trust (a series of
Legg Mason Tax-Free Income Fund)
- 9 -
Exhibit (6)(d)(ii)
UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this ____ day of February, 1996,
by and between Legg Mason Income Trust, Inc., a Maryland corporation
("Corporation") on behalf of the Legg Mason High Yield Portfolio ("Fund"),
and Legg Mason Wood Walker, Incorporated, a Maryland corporation (the
"Distributor").
WHEREAS, the Corporation is registered with the Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and has registered shares
of common stock of the Fund for sale to the public under the Securities Act
of 1933 (the "1933 Act") and various state securities laws; and
WHEREAS, the Corporation wishes to retain the Distributor as the
principal underwriter in connection with the offering and sale of the
shares of common stock of the Fund ("Shares") and to furnish certain other
services to the Corporation as specified in this Agreement; and
WHEREAS, this Agreement has been approved by separate votes of the
Corporation's Board of Directors and of certain disinterested directors in
conformity with Section 15 of, and paragraph (b)(2) of Rule 12b-1 under,
the 1940 Act; and
WHEREAS, the Distributor is willing to act as principal
underwriter and to furnish such services on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein contained, it is agreed as follows:
1. (a) The Corporation hereby appoints the Distributor as
principal underwriter in connection with the offering and sale of shares of
the Fund. The Distributor, as exclusive agent for the Corporation, upon the
commencement of operations of the Fund and subject to applicable federal
and state law and the Articles of Incorporation and By-Laws of the
Corporation, shall: (i) promote the Fund; (ii) solicit orders for the
purchase of the Shares subject to such terms and conditions as the
Corporation may specify; and (iii) accept orders for the purchase of the
Shares on behalf of the Corporation (collectively, "Distribution
Services"). The Distributor shall comply with all applicable federal and
state laws and offer the Shares of the Fund on an agency or "best efforts"
basis under which the Corporation shall issue only such Shares of the Fund
as are actually sold. The Distributor shall have the right to use any list
of shareholders of the Corporation or the Fund or any other list of
investors which it obtains in connection with its provision of services
<PAGE>
under this Agreement; provided, however, that the Distributor shall not
sell or knowingly provide such list or lists to any unaffiliated person
without the consent of the Corporation's Board of Directors.
(b) The Distributor shall provide ongoing shareholder liaison
services, including responding to shareholder inquiries, providing
shareholders with information on their investments, and any other services
now or hereafter deemed to be appropriate subjects for the payments of
"service fees" under Article III, Section 26 of the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. (collectively,
"Shareholder Services").
2. The Distributor may enter into dealer agreements with
registered and qualified securities dealers it may select for the
performance of Distribution and Shareholder Services, and may enter into
agreements with qualified dealers and other qualified entities to perform
recordkeeping and sub-accounting services, the form of such agreements to
be as mutually agreed upon and approved by the Corporation and the
Distributor. In making such arrangements, the Distributor shall act only as
principal and not as agent for the Corporation. No such dealer or other
entity is authorized to act as agent for the Corporation in connection with
the offering or sale of Shares to the public or otherwise.
3. The public offering price of the Shares of the Fund shall be
the net asset value per share (as determined by the Corporation) of the
outstanding Shares of the Fund plus any applicable sales charge as
described in the Registration Statement of the Corporation. The Corporation
shall furnish the Distributor with a statement of each computation of
public offering price and of the details entering into such computation.
4. As compensation for providing Distribution Services under this
Agreement, the Distributor shall retain the sales charge, if any, on
purchases of Shares as set forth in the Registration Statement. The
Distributor is authorized to collect the gross proceeds derived from the
sale of the Shares, remit the net asset value thereof to the Corporation
upon receipt of the proceeds and retain the sales charge, if any. The
Distributor shall receive from the Fund a distribution fee and a service
fee at the rates and under the terms and conditions of the Plan of
Distribution ("Plan") adopted by the Corporation with respect to the Fund,
as such Plan is in effect from time to time, and subject to any further
limitations on such fees as the Corporation's Board of Directors may
impose. The Distributor may reallow any or all of the sales charge,
distribution fee and service fee that it has received under this Agreement
to such dealers or sub-accountants as it may from time to time determine;
provided, however, that the Distributor may not reallow to any dealer for
Shareholder Services an amount in excess of .25% of the average annual net
asset value of the shares with respect to which said dealer provides
Shareholder Services.
5. As used in this Agreement, the term "Registration
Statement" shall mean the registration statement most recently filed by
- 2 -
<PAGE>
the Corporation with the Securities and Exchange Commission and effective
under the 1940 Act and 1933 Act, as such Registration Statement is amended
by any amendments thereto at the time in effect, and the terms "Prospectus"
and "Statement of Additional Information" shall mean, respectively, the
form of prospectus and statement of additional information with respect to
the Fund filed by the Corporation as part of the Registration Statement, or
as they may be amended from time to time.
6. The Distributor shall print and distribute to prospective
investors Prospectuses, and shall print and distribute, upon request, to
prospective investors Statements of Additional Information, and may print
and distribute such other sales literature, reports, forms and
advertisements in connection with the sale of the Shares as comply with the
applicable provisions of federal and state law. In connection with such
sales and offers of sale, the Distributor and any dealer or sub- accountant
shall give only such information and make only such statements or
representations as are contained in the Prospectus, Statement of Additional
Information, or in information furnished in writing to the Distributor by
the Corporation, and the Corporation shall not be responsible in any way
for any other information, statements or representations given or made by
the Distributor, any dealer or sub- accountant, or their representatives or
agents. Except as specifically provided in this Agreement, the Corporation
shall bear none of the expenses of the Distributor in connection with its
offer and sale of the Shares.
7. The Corporation agrees at its own expense to register the
Shares with the Securities and Exchange Commission, state and other
regulatory bodies, and to prepare and file from time to time such
Prospectuses, Statements of Additional Information, amendments, reports and
other documents as may be necessary to maintain the Registration Statement.
The Fund shall bear all expenses related to preparing and typesetting such
Prospectuses, Statements of Additional Information, and other materials
required by law and such other expenses, including printing and mailing
expenses, related to such Fund's communications with persons who are
shareholders of the Fund.
8. The Corporation agrees to indemnify, defend and hold the
Distributor, its several officers and directors, and any person who
controls the Distributor within the meaning of Section 15 of the 1933 Act,
free and harmless from and against any and all claims, demands, liabilities
and expenses (including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection
therewith) which the Distributor, its officers or directors, or any such
controlling person may incur, under the 1933 Act or under common law or
otherwise, arising out of or based upon any alleged untrue statement of a
material fact contained in the Registration Statement or arising out of or
based upon any alleged omission to state a material fact required to be
stated or necessary to make the Registration Statement not misleading,
provided that in no event shall anything contained in this Agreement be
construed so as to protect the Distributor against any liability to the
Corporation or its shareholders to which the Distributor
- 3 -
<PAGE>
would otherwise be subject by reason of willful misfeasance, bad faith, or
gross negligence in the performance of its duties, or by reason of its
reckless disregard of its obligations and duties under this Agreement, and
further provided that the Corporation shall not indemnify the Distributor
for conduct set forth in paragraph 9.
9. The Distributor agrees to indemnify, defend and hold the
Corporation, its several officers and directors, and any person who
controls the Corporation within the meaning of Section 15 of the 1933 Act,
free and harmless from and against any and all claims, demands, liabilities
and expenses (including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection
therewith) which the Corporation, its officers or directors, or any such
controlling person may incur, under the 1933 Act or under common law or
otherwise, on account of any wrongful act of the Distributor or any of its
employees or arising out of or based upon any alleged untrue statement of a
material fact contained in information furnished in writing by the
Distributor to the Corporation for use in the Registration Statement or
arising out of or based upon any alleged omission to state a material fact
in connection with such information required to be stated in the
Registration Statement or necessary to make such information not
misleading. As used in this paragraph, the term "employee" shall not
include a corporate entity under contract to provide services to the
Corporation or the Fund, or any employee of such a corporate entity, unless
such person is otherwise an employee of the Corporation.
10. The Corporation reserves the right at any time to
withdraw all offerings of the Shares of the Fund by written notice to the
Distributor at its principal office.
11. The Corporation shall not issue certificates representing
Shares unless requested by a shareholder. If such request is transmitted
through the Distributor, the Corporation will cause certificates evidencing
the Shares owned to be issued in such names and denominations as the
Distributor shall from time to time direct, provided that no certificates
shall be issued for fractional Shares.
12. The Distributor may at its sole discretion, directly or
through dealers, repurchase Shares offered for sale by the shareholders or
dealers. Repurchase of Shares by the Distributor shall be at the net asset
value next determined after a repurchase order has been received. The
Distributor will receive no commission or other remuneration for
repurchasing Shares. At the end of each business day, the Distributor shall
notify by telex or in writing, the Corporation and State Street Bank and
Trust Company, the Corporation's transfer agent, of the orders for
repurchase of Shares received by the Distributor since the last such
report, the amount to be paid for such Shares, and the identity of the
shareholders or dealers offering Shares for repurchase. Upon such notice,
the Corporation shall pay the Distributor such amounts as are required by
the Distributor for the repurchase of such Shares in cash or in the form of
a credit against moneys due the Corporation from the Distributor as
proceeds from the sale of Shares. The Corporation reserves the right to
- 4 -
<PAGE>
suspend such repurchase right upon written notice to the Distributor. The
Distributor further agrees to act as agent for the Corporation to receive
and transmit promptly to the Corporation's transfer agent shareholder and
dealer requests for redemption of Shares.
13. The Distributor is an independent contractor and shall be
agent for the Corporation only in respect to the sale and redemption of
the Shares.
14. The services of the Distributor to the Corporation under this
Agreement are not to be deemed exclusive, and the Distributor shall be free
to render similar services or other services to others so long as its
services hereunder are not impaired thereby.
15. The Distributor shall prepare reports for the Corporation's
Board of Directors on a quarterly basis showing such information concerning
expenditures related to this Agreement as from time to time shall be
reasonably requested by the Board of Directors.
16. As used in this Agreement, the terms "assignment", "interested
person", and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by
any rule, regulation or order.
17. This Agreement will become effective with respect to the Fund
on the date first written above and, unless sooner terminated as provided
herein, will continue in effect for one year from the above written date.
Thereafter, if not terminated, this Agreement shall continue in effect with
respect to the Fund for successive annual periods ending on the same date
of each year, provided that such continuance is specifically approved at
least annually (i) by the Corporation's Board of Directors or (ii) by a
vote of a majority of the outstanding voting securities of the Fund (as
defined in the 1940 Act), provided that in either event the continuance is
also approved by a majority of the Corporation's Directors who are not
interested persons (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval.
18. This Agreement is terminable with respect to the Fund or in
its entirety without penalty by the Corporation's Board of Directors, by
vote of a majority of the outstanding voting securities of the Fund (as
defined in the 1940 Act), or by the Distributor, on not less than 60 days'
notice to the other party and will be terminated upon the mutual written
consent of the Distributor and the Corporation. This Agreement will also
automatically and immediately terminate in the event of its assignment.
19. No provision of this Agreement may be changed, waived,
discharged or terminated orally, except by an instrument in writing signed
by the party against which enforcement of the change, waiver, discharge or
termination is sought.
- 5 -
<PAGE>
20. In the event this Agreement is terminated by either party or
upon written notice from the Distributor at any time, the Corporation
hereby agrees that it will eliminate from its corporate name any reference
to the name of "Legg Mason." The Corporation shall have the non-exclusive
use of the name "Legg Mason" in whole or in part only so long as this
Agreement is effective or until such notice is given.
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON INCOME TRUST, INC.
By:___________________ By:_________________________________
Attest: LEGG MASON WOOD WALKER, INCORPORATED
By:___________________ By:_________________________________
- 6 -
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Legg Mason Income Trust, Inc.:
We consent to the incorporation by reference in Post-Effective
Amendment No. 24 to the Registration Statement of Legg Mason Income Trust, Inc.
(the "Corporation") on Form N-1A (File No. 33-12092) of our report dated
February 1, 1996 on our audit of the financial statements and financial
highlights of the U.S. Government Intermediate-Term Portfolio, U. S. Government
Money Market Portfolio, Investment Grade Income Portfolio, and the High Yield
Portfolio, the four portfolios in the Corporation, which report is included in
the Annual Report to Shareholders for the period ended December 31, 1995, which
is incorporated by reference in the Registration Statement. We also consent to
the reference to our Firm under the caption "Corporation's Independent
Accountants" in the Statement of Additional Information.
/s/ Coopers & Lybrand, L.L.P.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
April 29, 1996
Exhibit 15(a)(ii)
AMENDED
DISTRIBUTION PLAN OF
LEGG MASON INCOME TRUST, INC.
WHEREAS, Legg Mason Income Trust, Inc. (the "Corporation") is an
open-end management investment company registered under the Investment
Company Act of 1940, as amended ("1940 Act"), and has offered, and intends
to continue offering, for public sale distinct series of shares of common
stock ("Series"), each corresponding to a distinct portfolio;
WHEREAS, the Corporation has registered the offering of its shares
of common stock under a Registration Statement filed with the Securities
and Exchange Commission and that Registration Statement is in effect as of
the date hereof;
WHEREAS, the Corporation's Board of Directors has established
Series of shares of common stock of the Corporation known as: Legg Mason
Investment Grade Income Portfolio and Legg Mason U.S. Government
Intermediate-Term Portfolio ("Funds");
WHEREAS, the Corporation's Distribution Plan was adopted by the
Board of Directors on June 19, 1987 and was approved by shareholders on
_________________, 19__;
WHEREAS, the Corporation has employed Legg Mason Wood Walker,
Incorporated ("Legg Mason") as principal underwriter of the shares of the
Corporation;
NOW, THEREFORE, the Corporation hereby adopts this Amended
Distribution Plan (the "Plan") in accordance with Rule 12b-1 under the 1940
Act on the following terms and conditions:
1. A. Each of the Funds shall pay to Legg Mason, as compensation
for Legg Mason's services as principal underwriter of each Fund's shares, a
distribution fee at the rate of 0.25% on an annualized basis of the average
daily net assets of that Fund's shares, such fee to be calculated and
accrued daily and paid monthly or at such other intervals as the Board
shall determine.
B. Each of the Funds shall pay to Legg Mason, as compensation
for ongoing services provided to each Fund's shareholders, a service fee at
the rate of 0.25% on an annualized basis of the average daily net assets of
that Fund's shares, such fee to be calculated and accrued daily and paid
monthly or at such other intervals as the Board shall determine.
C. The Corporation may pay a distribution or service
fee to Legg Mason at a lesser rate than the fees specified in paragraphs
1.A. and 1.B., respectively, of this Plan, in either case as agreed upon
by the Board and Legg Mason and as approved in the manner specified in
paragraph 4 of this Plan. The distribution and service fees payable
<PAGE>
hereunder are payable without regard to the aggregate amount that may be
paid over the years, provided that, so long as the limitations set forth in
Article III, Section 26(d) of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") remain in effect and apply
to distributors or dealers in the Corporation's shares, the amounts paid
hereunder shall not exceed those limitations, including permissible
interest.
2. As principal underwriter of the Corporation's shares, Legg
Mason may spend such amounts as it deems appropriate on any activities or
expenses primarily intended to result in the sale of the shares of the
Series and/or the servicing and maintenance of shareholder accounts,
including, but not limited to, compensation to employees of Legg Mason;
compensation to Legg Mason, other broker-dealers and other entities that
engage in or support the distribution of shares or who service shareholder
accounts or provide sub-accounting and recordkeeping services; expenses of
Legg Mason and such other broker-dealers and other entities, including
overhead and telephone and other communication expenses; the printing of
prospectuses, statements of additional information, and reports for other
than existing shareholders; and preparation and distribution of sales
literature and advertising materials.
3. This Plan shall not take effect with respect to any additional
Series until it has been approved by a vote of at least a majority of the
outstanding voting securities, as defined in the 1940 Act, of that Series.
4. This Amended Plan shall take effect on _______________ and
shall continue in effect for successive periods of one year from its
execution for so long as such continuance is specifically approved at least
annually together with any related agreements, by votes of a majority of
both (a) the Board of Directors of the Corporation and (b) those Directors
who are not "interested persons" of the Corporation, as defined in the 1940
Act, and who have no direct or indirect financial interest in the operation
of this Plan or any agreements related to it (the "Rule 12b-1 Directors"),
cast in person at a meeting or meetings called for the purpose of voting on
this Plan and such related agreements; and only if the Directors who
approve the Plan taking effect have reached the conclusion required by Rule
12b-1(e) under the 1940 Act.
5. Any person authorized to direct the disposition of monies paid
or payable by any Series pursuant to this Plan or any related agreement
shall provide to the Corporation's Board of Directors and the Board shall
review, at least quarterly, a written report of the amounts so expended and
the purposes for which such expenditures were made. Legg Mason shall submit
only information regarding amounts expended for "distribution activities,"
as defined in this paragraph 5, to the Board in support of the distribution
fee payable hereunder and shall submit only information regarding amounts
expended for "service activities," as defined in this paragraph 5, to the
Board in support of the service fee payable hereunder.
- 2 -
<PAGE>
For purposes of this Plan, "distribution activities" shall
mean any activities in connection with Legg Mason's performance of its
obligations under the underwriting agreement, dated _______________, by and
between the Corporation and Legg Mason, that are not deemed "service
activities." As used herein, "distribution activities" also includes
subaccounting or recordkeeping services provided by an entity if the entity
is compensated, directly or indirectly, by the Fund or Legg Mason for such
services. Such entity may also be paid a service fee if it provides
appropriate services. Nothing in the foregoing is intended to or shall
cause there to be any implication that compensation for such services must
be made only pursuant to a plan of distribution under Rule 12b-1. "Service
activities" shall mean activities covered by the definition of "service
fee" contained in amendments to Article III, Section 26(d) of the NASD's
Rules of Fair Practice that are currently scheduled to become effective
July 7, 1993, including the provision by Legg Mason of personal, continuing
services to investors in the Corporation's shares. Overhead and other
expenses of Legg Mason related to its "distribution activities" or "service
activities," including telephone and other communications expenses, may be
included in the information regarding amounts expended for such
distribution or service activities, respectively.
6. This Plan may be terminated with respect to any Series at any
time by vote of a majority of the Rule 12b-1 Directors or by vote of a
majority of the outstanding voting securities of that Series.
7. This Plan may not be amended to increase materially the amount
of distribution fees provided for in paragraph 1.A. hereof or the amount of
service fees provided for in paragraph 1.B. hereof unless such amendment is
approved by a vote of at least a majority of the outstanding securities, as
defined in the 1940 Act, of the Corporation, and no material amendment to
the Plan shall be made unless such amendment is approved in the manner
provided for continuing approval in paragraph 4 hereof.
8. While this Plan is in effect, the selection and nomination of
directors who are not interested persons of the Corporation, as defined in
the 1940 Act, shall be committed to the discretion of directors who are
themselves not interested persons.
9. The Corporation shall preserve copies of this Plan and any
related agreements for a period of not less than six years from the date of
expiration of the Plan or agreement, as the case may be, the first two
years in an easily accessible place; and shall preserve copies of each
report made pursuant to paragraph 5 hereof for a period of not less than
six years from the date of such report, the first two years in an easily
accessible place.
- 3 -
<PAGE>
IN WITNESS WHEREOF, the Corporation has executed this Distribution
Plan as of the day and year set forth below:
Date: LEGG MASON INCOME TRUST, INC.
Attest: By:
By:
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By:________________________________
- 4 -
Exhibit 15(b)(ii)
AMENDED
DISTRIBUTION PLAN OF
LEGG MASON INCOME TRUST, INC.
WHEREAS, Legg Mason Income Trust, Inc. (the "Corporation") is an
open-end management investment company registered under the Investment
Company Act of 1940, as amended ("1940 Act"), and has offered, and intends
to continue offering, for public sale distinct series of shares of common
stock ("Series"), each corresponding to a distinct portfolio;
WHEREAS, the Corporation has registered the offering of its shares
of common stock under a Registration Statement filed with the Securities
and Exchange Commission and that Registration Statement is in effect as of
the date hereof;
WHEREAS, the Corporation's Board of Directors has established a
Series of shares of common stock of the Corporation known as: Legg Mason
U.S. Government Money Market Portfolio ("Fund");
WHEREAS, the Corporation's Distribution Plan was adopted by the
Board of Directors on November 1, 1988, and was approved by shareholders on
______________, 19__;
WHEREAS, the Corporation has employed Legg Mason Wood Walker,
Incorporated ("Legg Mason") as principal underwriter of the shares of the
Corporation;
NOW, THEREFORE, the Corporation hereby adopts this Amended
Distribution Plan (the "Plan") in accordance with Rule 12b-1 under the 1940
Act on the following terms and conditions:
1. A. The Fund shall pay to Legg Mason, as compensation for Legg
Mason's services as principal underwriter of the Fund's shares and, for
ongoing services provided to the Fund's shareholders, a distribution and
shareholder services fee at the rate of 0.20% on an annualized basis of the
average daily net assets of the Fund's shares, such fee to be calculated
and accrued daily and paid monthly or at such other intervals as the Board
shall determine.
B. The Corporation may pay a distribution or service fee
to Legg Mason at a lesser rate than the fee specified paragraph 1.A. of
this Plan, as agreed upon by the Board and Legg Mason and as approved in
the manner specified in paragraph 4 of this Plan. The distribution and
service fee payable hereunder are payable without regard to the aggregate
amount that may be paid over the years, provided that, so long as the
limitations set forth in Article III, Section 26(d) of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. ("NASD")
remain in effect and apply to distributors or dealers in the Corporation's
shares, the amounts paid hereunder shall not exceed those limitations,
including permissible interest.
<PAGE>
2. As principal underwriter of the Corporation's shares, Legg
Mason may spend such amounts as it deems appropriate on any activities or
expenses primarily intended to result in the sale of the shares of the
Series and/or the servicing and maintenance of shareholder accounts,
including, but not limited to, compensation to employees of Legg Mason;
compensation to Legg Mason, other broker-dealers and other entities that
engage in or support the distribution of shares or who service shareholder
accounts or provide sub-accounting and recordkeeping services; expenses of
Legg Mason and such other broker-dealers and other entities, including
overhead and telephone and other communication expenses; the printing of
prospectuses, statements of additional information, and reports for other
than existing shareholders; and preparation and distribution of sales
literature and advertising materials.
3. This Plan shall not take effect with respect to any additional
Series until it has been approved by a vote of at least a majority of the
outstanding voting securities, as defined in the 1940 Act, of that Series.
4. This Amended Plan shall take effect on _______________ and
shall continue in effect for successive periods of one year from its
execution for so long as such continuance is specifically approved at least
annually together with any related agreements, by votes of a majority of
both (a) the Board of Directors of the Corporation and (b) those Directors
who are not "interested persons" of the Corporation, as defined in the 1940
Act, and who have no direct or indirect financial interest in the operation
of this Plan or any agreements related to it (the "Rule 12b-1 Directors"),
cast in person at a meeting or meetings called for the purpose of voting on
this Plan and such related agreements; and only if the Directors who
approve the Plan taking effect have reached the conclusion required by Rule
12b-1(e) under the 1940 Act.
5. Any person authorized to direct the disposition of monies paid
or payable by any Series pursuant to this Plan or any related agreement
shall provide to the Corporation's Board of Directors and the Board shall
review, at least quarterly, a written report of the amounts so expended and
the purposes for which such expenditures were made. Legg Mason shall submit
only information regarding amounts expended for "distribution activities,"
as defined in this paragraph 5, to the Board in support of the distribution
fee payable hereunder and shall submit only information regarding amounts
expended for "service activities," as defined in this paragraph 5, to the
Board in support of the service fee payable hereunder.
For purposes of this Plan, "distribution activities" shall
mean any activities in connection with Legg Mason's performance of its
obligations under the underwriting agreement, dated _______________, by and
between the Corporation and Legg Mason, that are not deemed "service
activities." As used herein, "distribution activities" also includes
subaccounting or recordkeeping services provided by an entity if the entity
is compensated, directly or indirectly, by the Fund or Legg Mason for such
services. Such entity may also be paid a service fee if it
- 2 -
<PAGE>
provides appropriate services. Nothing in the foregoing is intended to or
shall cause there to be any implication that compensation for such services
must be made only pursuant to a plan of distribution under Rule 12b-1.
"Service activities" shall mean activities covered by the definition of
"service fee" contained in amendments to Article III, Section 26(d) of the
NASD's Rules of Fair Practice that are currently scheduled to become
effective July 7, 1993, including the provision by Legg Mason of personal,
continuing services to investors in the Corporation's shares. Overhead and
other expenses of Legg Mason related to its "distribution activities" or
"service activities," including telephone and other communications
expenses, may be included in the information regarding amounts expended for
such distribution or service activities, respectively.
6. This Plan may be terminated with respect to any Series at any
time by vote of a majority of the Rule 12b-1 Directors or by vote of a
majority of the outstanding voting securities of that Series.
7. This Plan may not be amended to increase materially the amount
of distribution fees provided for in paragraph 1.A. hereof or the amount of
service fees provided for in paragraph 1.B. hereof unless such amendment is
approved by a vote of at least a majority of the outstanding securities, as
defined in the 1940 Act, of the Corporation, and no material amendment to
the Plan shall be made unless such amendment is approved in the manner
provided for continuing approval in paragraph 4 hereof.
8. While this Plan is in effect, the selection and nomination of
directors who are not interested persons of the Corporation, as defined in
the 1940 Act, shall be committed to the discretion of directors who are
themselves not interested persons.
9. The Corporation shall preserve copies of this Plan and any
related agreements for a period of not less than six years from the date of
expiration of the Plan or agreement, as the case may be, the first two
years in an easily accessible place; and shall preserve copies of each
report made pursuant to paragraph 5 hereof for a period of not less than
six years from the date of such report, the first two years in an easily
accessible place.
IN WITNESS WHEREOF, the Corporation has executed this Distribution
Plan as of the day and year set forth below:
Date: LEGG MASON INCOME TRUST, INC.
Attest: By:
By:
- 3 -
<PAGE>
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By:________________________________
- 4 -
Exhibit 15(c)(ii)
AMENDED
DISTRIBUTION PLAN OF
LEGG MASON INCOME TRUST, INC.
WHEREAS, Legg Mason Income Trust, Inc. (the "Corporation") is an
open-end management investment company registered under the Investment
Company Act of 1940, as amended ("1940 Act"), and has offered, and intends
to continue offering, for public sale distinct series of shares of common
stock ("Series"), each corresponding to a distinct portfolio;
WHEREAS, the Corporation has registered the offering of its shares
of common stock under a Registration Statement filed with the Securities
and Exchange Commission and that Registration Statement is in effect as of
the date hereof;
WHEREAS, the Corporation's Board of Directors has established a
Series of shares of common stock of the Corporation known as: Legg Mason
High Yield Portfolio ("Fund");
WHEREAS, the Corporation's Distribution Plan was adopted by the
Board of Directors on _____________, 199_, and was approved by shareholders
on _____________, 199_;
WHEREAS, the Corporation has employed Legg Mason Wood Walker,
Incorporated ("Legg Mason") as principal underwriter of the shares of the
Corporation;
NOW, THEREFORE, the Corporation hereby adopts this Amended
Distribution Plan (the "Plan") in accordance with Rule 12b-1 under the 1940
Act on the following terms and conditions:
1. A. The Fund shall pay to Legg Mason, as compensation for Legg
Mason's services as principal underwriter of the Series' shares, a
distribution fee at the rate of 0.25% on an annualized basis of the average
daily net assets of the Fund's shares, such fee to be calculated and
accrued daily and paid monthly or at such other intervals as the Board
shall determine.
B. The Fund shall pay to Legg Mason, as compensation for
ongoing services provided to the Fund's shareholders, a service fee at the
rate of 0.25% on an annualized basis of the average daily net assets of the
Fund's shares, such fee to be calculated and accrued daily and paid monthly
or at such other intervals as the Board shall determine.
C. The Corporation may pay a distribution or service fee
to Legg Mason at a lesser rate than the fees specified in paragraphs 1.A.
and 1.B., respectively, of this Plan, in either case as agreed upon by the
Board and Legg Mason and as approved in the manner specified in paragraph 4
of this Plan. The distribution and service fees payable hereunder are
payable without regard to the aggregate amount that may be paid over the
years, provided that, so long as the limitations set forth in Article III,
Section 26(d) of the Rules of Fair Practice of the
<PAGE>
National Association of Securities Dealers, Inc. ("NASD") remain in effect
and apply to distributors or dealers in the Corporation's shares, the
amounts paid hereunder shall not exceed those limitations, including
permissible interest.
2. As principal underwriter of the Corporation's shares, Legg
Mason may spend such amounts as it deems appropriate on any activities or
expenses primarily intended to result in the sale of the shares of the
Series and/or the servicing and maintenance of shareholder accounts,
including, but not limited to, compensation to employees of Legg Mason;
compensation to Legg Mason, other broker-dealers and other entities that
engage in or support the distribution of shares or who service shareholder
accounts or provide sub-accounting and recordkeeping services; expenses of
Legg Mason and such other broker-dealers and other entities, including
overhead and telephone and other communication expenses; the printing of
prospectuses, statements of additional information, and reports for other
than existing shareholders; and preparation and distribution of sales
literature and advertising materials.
3. This Plan shall not take effect with respect to any additional
Series until it has been approved by a vote of at least a majority of the
outstanding voting securities, as defined in the 1940 Act, of that Series.
4. This Amended Plan shall take effect on _______________ and
shall continue in effect for successive periods of one year from its
execution for so long as such continuance is specifically approved at least
annually together with any related agreements, by votes of a majority of
both (a) the Board of Directors of the Corporation and (b) those Directors
who are not "interested persons" of the Corporation, as defined in the 1940
Act, and who have no direct or indirect financial interest in the operation
of this Plan or any agreements related to it (the "Rule 12b-1 Directors"),
cast in person at a meeting or meetings called for the purpose of voting on
this Plan and such related agreements; and only if the Directors who
approve the Plan taking effect have reached the conclusion required by Rule
12b-1(e) under the 1940 Act.
5. Any person authorized to direct the disposition of monies paid
or payable by any Series pursuant to this Plan or any related agreement
shall provide to the Corporation's Board of Directors and the Board shall
review, at least quarterly, a written report of the amounts so expended and
the purposes for which such expenditures were made. Legg Mason shall submit
only information regarding amounts expended for "distribution activities,"
as defined in this paragraph 5, to the Board in support of the distribution
fee payable hereunder and shall submit only information regarding amounts
expended for "service activities," as defined in this paragraph 5, to the
Board in support of the service fee payable hereunder.
For purposes of this Plan, "distribution activities" shall
mean any activities in connection with Legg Mason's performance of its
obligations under the underwriting agreement, dated _______________,
- 2 -
<PAGE>
by and between the Corporation and Legg Mason, that are not deemed "service
activities." As used herein, "distribution activities" also includes
subaccounting or recordkeeping services provided by an entity if the entity
is compensated, directly or indirectly, by the Fund or Legg Mason for such
services. Such entity may also be paid a service fee if it provides
appropriate services. Nothing in the foregoing is intended to or shall
cause there to be any implication that compensation for such services must
be made only pursuant to a plan of distribution under Rule 12b-1. "Service
activities" shall mean activities covered by the definition of "service
fee" contained in amendments to Article III, Section 26(d) of the NASD's
Rules of Fair Practice that are currently scheduled to become effective
July 7, 1993, including the provision by Legg Mason of personal, continuing
services to investors in the Corporation's shares. Overhead and other
expenses of Legg Mason related to its "distribution activities" or "service
activities," including telephone and other communications expenses, may be
included in the information regarding amounts expended for such
distribution or service activities, respectively.
6. This Plan may be terminated with respect to any Series at any
time by vote of a majority of the Rule 12b-1 Directors or by vote of a
majority of the outstanding voting securities of that Series.
7. This Plan may not be amended to increase materially the amount
of distribution fees provided for in paragraph 1.A. hereof or the amount of
service fees provided for in paragraph 1.B. hereof unless such amendment is
approved by a vote of at least a majority of the outstanding securities, as
defined in the 1940 Act, of the Corporation, and no material amendment to
the Plan shall be made unless such amendment is approved in the manner
provided for continuing approval in paragraph 4 hereof.
8. While this Plan is in effect, the selection and nomination of
directors who are not interested persons of the Corporation, as defined in
the 1940 Act, shall be committed to the discretion of directors who are
themselves not interested persons.
9. The Corporation shall preserve copies of this Plan and any
related agreements for a period of not less than six years from the date of
expiration of the Plan or agreement, as the case may be, the first two
years in an easily accessible place; and shall preserve copies of each
report made pursuant to paragraph 5 hereof for a period of not less than
six years from the date of such report, the first two years in an easily
accessible place.
IN WITNESS WHEREOF, the Corporation has executed this Distribution
Plan as of the day and year set forth below:
Date: ______________________ LEGG MASON INCOME TRUST, INC.
- 3 -
<PAGE>
Attest: By: ____________________________
By: ________________________
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By:________________________________
- 4 -
LEGG MASON US GOVERNMENT INTERMEDIATE PORTFOLIO
Primary Shares
January 1, 1995 - December 31, 1995 (one year)
Cumulative Total Return:
ERV= (10.47 x 1.849851) - (9.72 x 1.749762) x 1000 + 1000 = 1138.78
---------------------------------------
(9.72 x 1.749762)
P = 1000
C = 1138.78 - 1 = .138775 = 13.88%
------- ------
1000
Average Annual Return: Same
January 1, 1991 - December 31, 1995 (five years)
Cumulative Total Return:
ERV= (10.47 x 1.849851) - (10.29 x 1.300446) x 1000 + 1000 = 1447.36
----------------------------------------
(10.29 x 1.300446)
P = 1000
C = 1447.36 - 1 = 0.447357 = 44.74%
------- -----
1000
Average Annual Return:
1
---
5
(0.4474 + 1) - 1 = 0.0768 = 7.68%
-----
August 7, 1987 - December 31, 1995 (life of fund)
Cumulative Total Return:
ERV = (10.47 X 1.849851) - (10.00 x 1.0) x 1000 + 1000 = 1936.79
--------------------------------------
(10.00 x 1.0)
P = 1000
C = 1936.79 - 1 = 0.93679 = 93.68%
------- -----
1000
Average Annual Return:
1
------
8.4055
(0.93679 + 1) - 1 = 0.0818 = 8.18%
----
<PAGE>
LEGG MASON US GOVERNMENT INTERMEDIATE PORTFOLIO
Navigator Shares
January 1, 1995 - December 31, 1995 (one year)
Cumulative Total Return:
ERV= (10.47 x 1.067838) - (9.72 x 1.005029) x 1000 + 1000 = 1144.48
---------------------------------------
(9.72 x 1.005029)
P = 1000
C = 1144.48 - 1 = .144477 = 14.45%
------- ------
1000
Average Annual Return: Same
December 1, 1994 - December 31, 1995 (life of fund)
Cumulative Total Return:
ERV = (10.47 X 1.067838) - (9.72 x 1.0) x 1000 + 1000 = 1150.23
-------------------------------------
(9.72 x 1.0)
P = 1000
C = 1150.23 - 1 = 0.150232 = 15.02%
------- -----
1000
Average Annual Return:
1
-------
1.08493
(0.150232 + 1) - 1 = 0.1381 = 13.81%
-----
<PAGE>
LEGG MASON INVESTMENT GRADE INCOME PORTFOLIO
Primary Shares
January 1, 1995 - December 31, 1995 (one year)
Cumulative Total Return
(10.44 x 1.991702) - (9.27 x 1.866996) x 1000 + 1000 = 1201.44
---------------------------------------
(9.27 x 1.866996)
P = 1000
C = 1201.44 - 1 = 0.201439 = 20.14%
------- -----
1000
Average Annual Return: Same
January 1, 1991 - December 31, 1995 (5 years)
Cumulative Total Return:
ERV = (10.44 X 1.991702)-(9.97 x 1.323984) x 1000 + 1000 = 1575.24
--------------------------------------
(9.97 x 1.323984)
P = 1000
C = 1575.24 - 1 = 0.57524 = 57.52%
------- -----
1000
Average Annual Return:
1
---
5
(0.57524 + 1) - 1 = 0.0951 = 9.51%
----
August 7, 1987 - December 31, 1995 (life of fund)
Cumulative Total Return
ERV = (10.44 X 1.991702) - (10.00 x 1.0) x 1000 + 1000 = 2079.34
--------------------------------------
(10.00 x 1.0)
P = 1000
C = 2079.34 - 1 = 1.07934 = 107.93%
------- ------
1000
Average Annual Return:
1
------
8.4055
(1.07934 + 1) - 1 = 0.0910 = 9.10%
----
<PAGE>
LEGG MASON INVESTMENT GRADE INCOME PORTFOLIO
Navigator Shares
December 18, 1995 - December 31, 1995 (life of fund)
Cumulative Total Return
ERV = (10.44 X 1.002565) - (10.32 x 1.0) x 1000 + 1000 = 1014.22
--------------------------------------
(10.32 x 1.0)
P = 1000
C = 1014.22 - 1 = 0.01422 = 1.42%
------- ----
1000
<PAGE>
U.S. GOVERNMENT MONEY MARKET YIELD CALCULATIONS:
1. 7 day yield at 12/31/95 annualized:
[7 days dividends ended 12/31/95 / 7 x 365] =
-------------------------------------------
$1.00 (NAV)
(.000949484 / 7 x 365) = 4.95%
----------------------
1.00
2. Effective yield:
365
---
7
[base period return + 1] - 1 =
365
---
7
(.000949484 + 1) - 1 = 5.07%
<PAGE>
LEGG MASON HIGH YIELD PORTFOLIO
January 1, 1995 - December 31, 1995 (one year)
Cumulative Total Return
(14.62 x 1.1757611) - (13.56 x 1.074167) x 1000 + 1000 = 1180.55
-----------------------------------------
(13.56 x 1.074167)
P = 1000
C = 1180.55 - 1 = 0.18014 = 18.01%
------- -----
1000
Average Annual Return: Same
February 1, 1994 - December 31, 1995 (life of fund)
Cumulative Total Return
ERV = (14.62 X 1.1757611) - (15.00 x 1.0) x 1000 + 1000 = 1145.98
---------------------------------------
(15.00 x 1.0)
P = 1000
C = 1145.98 - 1 = 0.145975 = 14.60%
------- ------
1000
Average Annual Return:
1
--------
1.915068
(0.1460 + 1) - 1 = 0.0738 = 7.38%
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> U.S. GOVERNMENT INTERMEDIATE PORTFOLIO - PRIMARY SHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
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<INVESTMENTS-AT-VALUE> 240,256
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 243,441
<PAYABLE-FOR-SECURITIES> 6,561
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<OTHER-ITEMS-LIABILITIES> 810
<TOTAL-LIABILITIES> 7,371
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 239,280
<SHARES-COMMON-STOCK> 22,140
<SHARES-COMMON-PRIOR> 23,789
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8,485)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,275
<NET-ASSETS> 236,070
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,257
<OTHER-INCOME> 0
<EXPENSES-NET> 2,168
<NET-INVESTMENT-INCOME> 13,089
<REALIZED-GAINS-CURRENT> 5,579
<APPREC-INCREASE-CURRENT> 11,818
<NET-CHANGE-FROM-OPS> 30,486
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,882)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,951
<NUMBER-OF-SHARES-REDEEMED> (7,735)
<SHARES-REINVESTED> 1,135
<NET-CHANGE-IN-ASSETS> 791
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (14,180)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,287
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,881
<AVERAGE-NET-ASSETS> 230,611
<PER-SHARE-NAV-BEGIN> 9.72
<PER-SHARE-NII> .57
<PER-SHARE-GAIN-APPREC> .75
<PER-SHARE-DIVIDEND> (.57)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.47
<EXPENSE-RATIO> 0.9
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> U.S. GOVERNMENT INTERMEDIATE PORTFOLIO - NAVIGATOR SHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 234,981
<INVESTMENTS-AT-VALUE> 240,256
<RECEIVABLES> 3,173
<ASSETS-OTHER> 12
<OTHER-ITEMS-ASSETS> 0
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<PAYABLE-FOR-SECURITIES> 6,561
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 810
<TOTAL-LIABILITIES> 7,371
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 239,280
<SHARES-COMMON-STOCK> 399
<SHARES-COMMON-PRIOR> 414
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8,485)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,275
<NET-ASSETS> 236,070
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,257
<OTHER-INCOME> 0
<EXPENSES-NET> 2,168
<NET-INVESTMENT-INCOME> 13,089
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<APPREC-INCREASE-CURRENT> 11,818
<NET-CHANGE-FROM-OPS> 30,486
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (207)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 133
<NUMBER-OF-SHARES-REDEEMED> (168)
<SHARES-REINVESTED> 20
<NET-CHANGE-IN-ASSETS> 791
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (14,180)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,287
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,881
<AVERAGE-NET-ASSETS> 3,405
<PER-SHARE-NAV-BEGIN> 9.72
<PER-SHARE-NII> .62
<PER-SHARE-GAIN-APPREC> .75
<PER-SHARE-DIVIDEND> (.62)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.47
<EXPENSE-RATIO> 0.4
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> INVESTMENT GRADE INCOME PORTFOLIO - PRIMARY SHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
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<INVESTMENTS-AT-COST> 85,359
<INVESTMENTS-AT-VALUE> 88,563
<RECEIVABLES> 4,314
<ASSETS-OTHER> 4
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 92,881
<PAYABLE-FOR-SECURITIES> 6,788
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 211
<TOTAL-LIABILITIES> 6,999
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 85,130
<SHARES-COMMON-STOCK> 8,201
<SHARES-COMMON-PRIOR> 7,141
<ACCUMULATED-NII-CURRENT> 53
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,542)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,241
<NET-ASSETS> 85,882
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,566
<OTHER-INCOME> 0
<EXPENSES-NET> 666
<NET-INVESTMENT-INCOME> 4,900
<REALIZED-GAINS-CURRENT> 969
<APPREC-INCREASE-CURRENT> 7,813
<NET-CHANGE-FROM-OPS> 13,682
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,899)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,728
<NUMBER-OF-SHARES-REDEEMED> (2,090)
<SHARES-REINVESTED> 422
<NET-CHANGE-IN-ASSETS> 19,686
<ACCUMULATED-NII-PRIOR> 82
<ACCUMULATED-GAINS-PRIOR> (3,540)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 453
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,040
<AVERAGE-NET-ASSETS> 75,496
<PER-SHARE-NAV-BEGIN> 9.27
<PER-SHARE-NII> .65
<PER-SHARE-GAIN-APPREC> 1.17
<PER-SHARE-DIVIDEND> (.65)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.44
<EXPENSE-RATIO> .88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> INVESTMENT GRADE INCOME PORTFOLIO - NAVIGATOR SHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> DEC-18-1995
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<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,566
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<EXPENSES-NET> 666
<NET-INVESTMENT-INCOME> 4,900
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<DISTRIBUTIONS-OF-INCOME> (1)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 24
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<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 19,686
<ACCUMULATED-NII-PRIOR> 82
<ACCUMULATED-GAINS-PRIOR> (3,540)
<OVERDISTRIB-NII-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,040
<AVERAGE-NET-ASSETS> 247
<PER-SHARE-NAV-BEGIN> 10.32
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> .12
<PER-SHARE-DIVIDEND> (.03)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.44
<EXPENSE-RATIO> 0.4
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> U.S. GOVERNMENT MONEY MARKET PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 332,704
<INVESTMENTS-AT-VALUE> 332,704
<RECEIVABLES> 4,139
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 337,047
<PAYABLE-FOR-SECURITIES> 20,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 401
<TOTAL-LIABILITIES> 20,401
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 316,707
<SHARES-COMMON-PRIOR> 214,872
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 316,646
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,853
<OTHER-INCOME> 0
<EXPENSES-NET> 1,824
<NET-INVESTMENT-INCOME> 14,029
<REALIZED-GAINS-CURRENT> 65
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 14,094
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,029)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 170
<NUMBER-OF-SHARES-SOLD> 1,165
<NUMBER-OF-SHARES-REDEEMED> (1,077)
<SHARES-REINVESTED> 14
<NET-CHANGE-IN-ASSETS> 102
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,353
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,824
<AVERAGE-NET-ASSETS> 270,691
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> HIGH YIELD PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 102,687
<INVESTMENTS-AT-VALUE> 105,266
<RECEIVABLES> 3,454
<ASSETS-OTHER> 47
<OTHER-ITEMS-ASSETS> 1
<TOTAL-ASSETS> 108,768
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 351
<TOTAL-LIABILITIES> 351
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 107,628
<SHARES-COMMON-STOCK> 7,417
<SHARES-COMMON-PRIOR> 3,938
<ACCUMULATED-NII-CURRENT> 9
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,799)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,579
<NET-ASSETS> 108,417
<DIVIDEND-INCOME> 125
<INTEREST-INCOME> 7,959
<OTHER-INCOME> 0
<EXPENSES-NET> 1,104
<NET-INVESTMENT-INCOME> 6,980
<REALIZED-GAINS-CURRENT> (628)
<APPREC-INCREASE-CURRENT> 5,683
<NET-CHANGE-FROM-OPS> 12,035
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,993)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,821
<NUMBER-OF-SHARES-REDEEMED> (1,755)
<SHARES-REINVESTED> 413
<NET-CHANGE-IN-ASSETS> 54,993
<ACCUMULATED-NII-PRIOR> 11
<ACCUMULATED-GAINS-PRIOR> (1,161)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 489
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,104
<AVERAGE-NET-ASSETS> 75,230
<PER-SHARE-NAV-BEGIN> 13.57
<PER-SHARE-NII> 1.29
<PER-SHARE-GAIN-APPREC> 1.05
<PER-SHARE-DIVIDEND> (1.29)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.62
<EXPENSE-RATIO> 1.5
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
