INVESTMENT MANAGER
Legg Mason Fund Adviser, Inc. REPORT TO SHAREHOLDERS
Baltimore, MD FOR THE YEAR ENDED
DECEMBER 31, 1995
INVESTMENT ADVISER
Western Asset Management Company
Pasadena, CA
BOARD OF DIRECTORS THE
John F. Curley, Jr., Chairman LEGG MASON
Edmund J. Cashman, Jr., Vice Chairman U.S.
Edward A. Taber, III, President GOVERNMENT
Richard G. Gilmore INTERMEDIATE
Charles F. Haugh PORTFOLIO
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
TRANSFER AND SHAREHOLDER SERVICING AGENT
Boston Financial Data Services
Boston, MA
CUSTODIAN
State Street Bank & Trust Company
Boston, MA
COUNSEL
Kirkpatrick & Lockhart LLP
Washington, D.C.
INDEPENDENT ACCOUNTANTS PUTTING YOUR FUTURE FIRST
Coopers & Lybrand L.L.P.
Baltimore, MD
THIS REPORT IS NOT TO BE DISTRIBUTED UNLESS PRECEDED OR
ACCOMPANIED BY A PROSPECTUS.
LEGG MASON WOOD WALKER, INCORPORATED
111 South Calvert Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 (Bullet) 539 (Bullet) 0000
(recycled logo) PRINTED ON RECYCLED PAPER
LMF-026 (Legg Mason Funds Logo)
<PAGE>
TO OUR SHAREHOLDERS,
The Legg Mason U.S. Government Intermediate-Term Portfolio's
objective is to earn an attractive total return for shareholders by
investing in high quality securities with an average maturity of 10
years or less.
On December 31, 1995, the fund had an annualized 30-day SEC yield
of 5.6%, an average life of 5.8 years and net assets per share of
$10.47. Over the twelve months through December 31, the fund's total
return was 13.9%, reflecting gains in the prices of fixed income
securities during the year. Total return in the prior calendar year,
when prices of fixed income securities generally declined, was -1.9%.
(Total return measures how well your investment has performed in terms
of both appreciation or depreciation in the fund's net asset value per
share plus capital gain distributions and dividends. It assumes that
capital gain distributions and dividends were reinvested in the fund
at the times they were paid.)
We believe that the U.S. Government Intermediate-Term Portfolio's
emphasis on portfolio quality and intermediate-term maturities
continues to be an attractive investment combination for conservative
investors as well as for more aggressive investors who want a portion
of their assets invested on a conservative basis.
We hope you will consider using the U.S. Government
Intermediate-Term Portfolio for investment of additional funds as they
become available. You may add to your account by automatic transfer
from your bank account or Legg Mason money market fund (your
Investment Executive will be happy to supply an authorization form) or
by mailing a check for $100 or more (payable to "Legg Mason U.S.
Government Intermediate Portfolio") to:
Legg Mason U.S. Government Intermediate Portfolio
P.O. Box 1476
Baltimore, Maryland 21203-1476
Sincerely,
(John F. Curley, Jr. Signature)
John F. Curley, Jr.
Chairman
February 9, 1996
<PAGE>
PORTFOLIO MANAGERS' COMMENTS
On the back of declining interest rates, and with investment
strategies rewarded by favorable developments in the market, the
Legg Mason U.S. Government Intermediate-Term Portfolio registered
good nominal and relative performance in 1995, with a 13.9% total
return, as compared to its benchmark's (the Salomon Brothers
Medium Term Treasury/Government-Sponsored Index) return of 14.4%.
Short- and intermediate-term interest rates fell sharply last
year, reversing a good portion of their dramatic rise the year
before. Whereas the Federal Reserve led the way to higher rates in
1994, it cut rates only modestly in 1995. The major driver to
lower rates was the growing perception among market participants
that the Fed's monetary tightening had been sufficient to slow the
pace of economic growth, and that therefore inflation prospects
were much better than had been feared early in the year.
Expectations swung dramatically, as the market went into 1995
expecting the Federal Reserve to raise the Fed funds rate to 8% by
the end of the year. Instead, the Fed lowered the funds rate from
5.75% to 5.5%, and the market expected further reductions to 4.75%
by the end of the year. Thus, forward short-term interest rates
fell by more than 300 basis points (100 basis points = 1%) over
the course of the year, far outpacing the 200 basis point decline
in long-term interest rates, and causing a dramatic steepening of
the yield curve.
In the belief that interest rates would likely decline, and in
keeping with the fund's conservative mandate, we kept the
portfolio's interest rate exposure somewhat longer than that of
its benchmark for most of the year, so declining interest rates
were a major source of positive relative returns. The portfolio
was correctly positioned for a steepening of the yield curve early
in the year, and this also contributed to returns. For the balance
of the year, however, the portfolio held a barbell exposure to
maturities, and this detracted somewhat from performance as the
short and intermediate area of the yield curve continued to
steepen.
Though the bulk of the portfolio was invested in high-quality
government securities, the fund held a moderate exposure to
high-quality corporate and mortgage-backed securities in order to
enhance the portfolio's overall yield.
Corporate holdings contributed to relative returns for the
year as spreads narrowed, but this was largely offset by a trend
to wider spreads on mortgage-backed issues as lower interest rates
increased prepayment risks.
Western Asset Management Company
February 9, 1996
2
<PAGE>
PERFORMANCE INFORMATION
LEGG MASON INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
Performance Comparison of a $10,000 Investment as of December 31, 1995
Average Annual Total Return
1 Year 5 Years Life of Fund*
13.88% 7.68% 8.18%
[Graph here]
Salomon Brothers
U.S. Government Medium-Term Treasury/
Intermediate Government-Sponsored
Primary Class Index(1)
1986.5 10,000 10,000
1987 10,222 10,305
1988 10,880 10,971
1989 12,272 12,362
1990 13,382 13,554
1991 15,304 15,471
1992 16,261 16,546
1993 17,342 17,904
1994 17,008 17,594
1995 19,368 20,126
* August 7, 1987 - December 31, 1995
(1) The Salomon Brothers Medium-Term Treasury/Government-Sponsored
Index is an all-inclusive universe of institutionally traded
U.S. Treasury and Government-Sponsored securities. The Index
is market-capitalization weighted and includes fixed-rate
bonds with maturities between 1 and 10 years.
The fund has two classes of shares: Primary Class and Navigator Class.
The Navigator Class, offered only to certain institutional investors, pays
fund expenses similar to those paid by the Primary Class, except that
transfer agency fees are determined separately for each class and the
Navigator Class does not have Rule 12b-1 distribution fees.
Annualized total return for Navigator shares for the period December 1,
1994 (inception of class) to December 31, 1995 was 13.81%, and for the one
year ended December 31, 1995 was 14.45%.
The returns shown are based on historical results and are not intended
to indicate future performance. The investment return and principal value
of an investment in the fund will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Average
annual returns tend to smooth out variations in the fund's return, so they
differ from actual year-to-year results. No adjustment has been made for
any income taxes payable by shareholders.
3
<PAGE>
STATEMENT OF NET ASSETS
LEGG MASON INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 49.7%
Federal Home Loan Bank
4.9% 2/23/98 $15,600 $ 15,422
7.87% 4/19/00 5,550 5,589
21,011
Federal Home Loan Mortgage
Corporation
6.775% 5/28/98 15,000 15,087
Federal National Mortgage
Association
3%(D) 7/13/98 15,000 15,508
Guaranteed Export Trust
6.28% 6/15/04 19,000 19,331
Tennessee Valley Authority
6.75% 11/1/25 8,000 8,417
6.235% 7/15/45 5,000 5,178
13,595
United States Treasury Notes
5.625% 10/31/97 300 302
7.75% 12/31/99 10,700 11,611
5.625% 11/30/00 1,500 1,514
5.875% 11/15/05 18,900 19,325
32,752
Total U.S. Government and Agency
Obligations
(Identified Cost -- $113,532) 117,284
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES -- 19.9%
Fixed-rate Securities -- 16.8%
Federal Home Loan Mortgage
Corporation
10.75% 7/1/00 13 15
8.75% 2/1/01 1,162 1,196
8.75% 8/1/01 263 273
8.75% 10/1/01 165 172
5.5% 11/25/05 5,441 5,241
9% 1/1/17 128 136
9% 5/1/20 554 589
9% 9/1/20 2,168 2,302
9% 1/1/21 1,850 1,966
8.5% 6/1/21 1,788 1,881
7% 1/1/26 6,600 6,660
20,431
Federal National Mortgage
Association
9.5% 7/1/14 $1,037 $ 1,117
9% 11/1/21 3,802 4,048
6.5% 4/1/24 34 34
5,199
Government National Mortgage
Association
7% 4/20/25 1,875 1,920
6% 5/20/25 3,052 3,102
7% 5/20/25 2,846 2,915
7,937
United States Department of
Veteran Affairs Vendee Mortgage
Trust
7.25% 10/15/10 6,056 6,190
Stripped Security (B) -- 0.5%
Federal National Mortgage
Association
152% 11/25/20 137 1,207
Variable-rate Security (C) -- 2.6%
Federal National Mortgage
Association
7.62% 5/25/22 5,904 6,021
Total U.S. Government Agency
Mortgage-backed Securities
(Identified Cost -- $46,481) 46,985
ASSET-BACKED SECURITIES -- 4.1%
AFC Home Equity Loan Trust
7.75% 12/15/06 2,763 2,840
ContiMortgage Home Equity
Loan Trust
8.6% 6/15/25 3,000 3,077
Olympic Automobile Receivables
Trust
7.875% 7/15/01 3,559 3,650
Total Asset-backed Securities
(Identified Cost -- $9,476) 9,567
CORPORATE BONDS AND NOTES -- 6.8%
Ford Motor Credit Company
6.42% 2/4/98 2,150 2,186
Lehman Brothers Holdings
Incorporated
7.375% 5/15/07 3,100 3,253
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Principal
(Amounts in Thousands) Amount Value
<S> <C> <C> <C>
Philip Morris Companies Inc.
9.25% 2/15/00 $2,000 $ 2,240
TCI Communications, Inc.
6.82%(E) 9/15/10 5,000 5,080
United Airlines, Inc.
11.21% 5/1/14 2,500 3,309
Total Corporate Bonds and Notes
(Identified Cost -- $15,393) 16,068
MORTGAGE-BACKED SECURITIES -- 8.7%
Fixed-rate Securities -- 2.8%
FBC Mortgage Securities Trust
9.5% 8/1/16 2,909 2,955
Resolution Trust Corporation
10% 5/25/22 3,725 3,762
Variable-rate Securities (C) --5.9%
Resolution Trust Corporation
6.19% 5/25/19 2,246 2,184
8.77% 3/25/21 6,000 6,169
11.01% 1/25/25 1,915 1,988
8.14% 9/25/29 3,395 3,506
13,847
Total Mortgage-backed Securities
(Identified Cost -- $20,612) 20,564
YANKEE BOND (A) -- 1.5%
YPF Sociedad Anonima
7.5% 10/26/02
(Identified Cost -- $3,425) 3,436 3,478
SHORT-TERM INVESTMENTS -- 11.1%
Asset-backed Security -- 0.2%
Chemical Grantor Trust 1989-B
8.9% 12/15/96 434 441
U.S. Government Obligations -- 0.4%
United States Treasury Bill
5.395% 1/18/96 1,000 997
United States Treasury Notes
7.375% 5/15/96 4 4
1,001
U.S. Government Agency
Mortgage-backed Securities -- 8.7%
Federal Home Loan Mortgage
Corporation
9% 8/1/96 $ 277 $ 282
7.88% 12/20/96 10,000 10,235
Federal National Mortgage
Association
5.91% 8/19/96 10,000 10,035
20,552
Repurchase Agreement -- 1.8%
Merrill Lynch Government
Securities, Inc.
5.75% dated 12/29/95, to be
repurchased at $4,311 on
1/2/96 (Collateral: $4,050
Federal National Mortgage
Association Mortgage-backed
securities, 7.7% due 8/10/04,
value $4,519) 4,308 4,308
Actual
Contracts
Option Purchased -- N.M.
Eurodollar Future Puts
Jan. 96 Strike Price $94.25 200 8
Total Short-term Investments
(Identified Cost -- $26,062) 26,310
Total Investments -- 101.8%
(Identified Cost -- $234,981) 240,256
Other Assets Less Liabilities -- (1.8%) (4,186)
NET ASSETS -- 100.0% $236,070
</TABLE>
5
<PAGE>
STATEMENT OF NET ASSETS -- CONTINUED
LEGG MASON INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
DECEMBER 31, 1995
<TABLE>
<CAPTION>
(Amount in Thousands)
<S> <C> <C> <C>
NET ASSETS CONSISTING OF:
Accumulated paid-in capital
applicable to:
22,140 Primary shares
outstanding $235,352
399 Navigator shares
outstanding 3,928
Accumulated net realized loss on
investments, options and
futures (8,485)
Unrealized appreciation of
investments, options and
futures 5,275
NET ASSETS -- 100.0% $236,070
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $10.47
NAVIGATOR CLASS $10.47
</TABLE>
(A) YANKEE BOND -- DOLLAR-DENOMINATED BOND ISSUED IN THE U.S. BY FOREIGN
ENTITIES.
(B) STRIPPED SECURITY -- A SECURITY WITH INTEREST-ONLY OR PRINCIPAL-ONLY
PAYMENT STREAMS. FOR INTEREST-ONLY SECURITIES, THE AMOUNT SHOWN AS
PRINCIPAL IS THE NOTIONAL BALANCE USED TO CALCULATE THE AMOUNT OF
INTEREST DUE.
(C) THE COUPON RATES SHOWN ON VARIABLE RATE SECURITIES ARE THE RATES AT
DECEMBER 31, 1995. THESE RATES VARY WITH THE WEIGHTED AVERAGE COUPON
OF THE UNDERLYING LOANS.
(D) THE INTEREST RATE ON THIS SECURITY IS FIXED AT 3% UNTIL 1/13/96,
THEREAFTER 7% UNTIL MATURITY.
(E) THE INTEREST RATE ON THIS SECURITY IS FIXED AT 6.82% UNTIL 9/15/98,
THEREAFTER, THE COUPON WILL BE DETERMINED BY AUCTION.
N.M. NOT MEANINGFUL.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
STATEMENT OF OPERATIONS
LESS MASON INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
(Amounts in Thousands)
<S> <C> <C>
INVESTMENT INCOME:
Interest $15,257
EXPENSES:
Management fee $ 1,287
Distribution and service fees 1,153
Transfer agent and shareholder servicing expense 163
Custodian fee 88
Legal and audit fees 78
Reports to shareholders 49
Registration fees 28
Directors' fees 8
Other expenses 27
2,881
Less fees waived (713)
Total expenses, net of waivers 2,168
NET INVESTMENT INCOME 13,089
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain on investments, options and futures 5,579
Change in unrealized appreciation of investments, options and futures 11,818
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 17,397
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $30,486
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
LEGG MASON INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
<TABLE>
<CAPTION>
For the Years Ended December 31,
(Amounts in Thousands) 1995 1994
<S> <C> <C>
CHANGE IN NET ASSETS:
Net investment income $ 13,089 $ 13,938
Net realized gain (loss) on investments, options and futures 5,579 (12,981)
Change in unrealized appreciation of investments, options and futures 11,818 (6,568)
Change in net assets resulting from operations 30,486 (5,611)
Distributions to shareholders from net investment income:
Primary Class (12,882) (13,918)
Navigator Class (207) (20)
Change in net assets from Fund share transactions:
Primary Class (16,511) (48,725)
Navigator Class (95) 4,024
Change in net assets 791 (64,250)
NET ASSETS:
Beginning of year 235,279 299,529
End of year $236,070 $235,279
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
FINANCIAL HIGHLIGHTS
LEGG MASON INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net
assets and other supplemental data. This information has been derived from
information provided in the financial statements.
<TABLE>
<CAPTION>
Primary Class Navigator Class
For the Years Ended December 31,
1995 1994 1993 1992 1991 1995 1994(C)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 9.72 $10.43 $10.70 $10.77 $10.29 $ 9.72 $ 9.72
Net investment income 0.57(A) 0.51(A) 0.53(A) 0.60(A) 0.72(A) 0.62(B) 0.05(B)
Net realized and unrealized gain
(loss) on investments 0.75 (0.71) 0.17 0.05 0.70 0.75 --
Total from investment operations 1.32 (0.20) 0.70 0.65 1.42 1.37 0.05
Distributions to shareholders:
Net investment income (0.57) (0.51) (0.53) (0.60) (0.72) (0.62) (0.05)
Net realized gain -- -- (0.39) (0.12) (0.22) -- --
In excess of net realized gain on
investments -- -- (0.05) -- -- -- --
Total distributions (0.57) (0.51) (0.97) (0.72) (0.94) (0.62) (0.05)
Net asset value, end of year $10.47 $ 9.72 $10.43 $10.70 $10.77 $10.47 $9.72
Total return 13.9% -1.9% 6.6% 6.3% 14.4% 14.5% 0.50%(D)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses 0.9%(A) 0.9%(A) 0.9%(A) 0.9%(A) 0.8%(A) 0.4%(B) 0.4%(B,E)
Net investment income 5.6%(A) 5.1%(A) 4.8%(A) 5.5%(A) 6.7%(A) 6.1%(B) 6.4%(B,E)
Portfolio turnover rate 289.9% 315.7% 490.2% 512.6% 642.8% 289.9% 315.7%
Net assets, end of year
(in thousands) $231,886 $231,255 $299,529 $307,320 $211,627 $ 4,184 $ 4,024
</TABLE>
(A) NET OF FEES WAIVED BY THE MANAGER FOR EXPENSES IN EXCESS OF VOLUNTARY
LIMITATIONS OF: 0.75% UNTIL APRIL 30, 1991; 0.8% UNTIL DECEMBER 31,
1991; 0.85% UNTIL AUGUST 31, 1992; 0.9% UNTIL APRIL 30, 1995; AND
0.95% UNTIL APRIL 30, 1996.
(B) NET OF FEES WAIVED BY THE MANAGER FOR EXPENSES IN EXCESS OF VOLUNTARY
LIMITATIONS OF: 0.4% UNTIL APRIL 30, 1995; AND 0.45% UNTIL APRIL 30,
1996.
(C) FOR THE PERIOD DECEMBER 1 (COMMENCEMENT OF SALE OF NAVIGATOR CLASS) TO
DECEMBER 31, 1994.
(D) NOT ANNUALIZED
(E) ANNUALIZED
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LEGG MASON INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
(Amounts in Thousands)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Legg Mason Income Trust, Inc. ("Trust"), consisting of the U.S.
Government Intermediate-Term Portfolio ("Fund"), Investment Grade Income
Portfolio, U.S. Government Money Market Portfolio and the High Yield
Portfolio is registered under the Investment Company Act of 1940, as
amended, as an open-end, diversified investment company. The financial
statements of the other portfolios of the Trust are included in separate
reports to shareholders.
The U.S. Government Intermediate-Term Portfolio consists of two
classes of shares: the Primary Class, offered since 1987, and the
Navigator Class, offered to certain institutional investors since December
1, 1994. Expenses of the Fund are allocated proportionately to the two
classes of shares except for 12b-1 distribution fees, which are charged
only on the Primary shares, and transfer agent and shareholder servicing
expenses which are determined separately for each class.
Security Valuation
Portfolio securities are valued based upon market quotations. When
market quotations are not readily available, securities are valued based
on prices received from recognized broker-dealers in the same or similar
securities. The amortized cost method of valuation is used for debt
obligations with 60 days or less remaining to maturity.
Investment Income and Dividends to Shareholders
Income and expenses are recorded on the accrual basis. Dividends are
declared daily and paid monthly. Dividends payable are recorded on the
dividend record date. Bond premiums are amortized for financial reporting
and tax purposes. Bond discounts, other than original issue and
zero-coupon bonds, are not amortized. At December 31, 1995, dividends
payable of $85 were accrued.
Security Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis. At December 31, 1995, $6,561 was payable for investments purchased
but not yet received.
Options and Futures
The current market value of a traded option is the last sales price
or, in the absence of a sale, the mean between the closing bid and asked
price. Futures contracts are marked to market daily using the closing
price on the principal exchange where the contracts are traded. Payments
(variation margin) are made or received daily in relation to market
fluctuations.
Repurchase Agreements
All repurchase agreements are fully collateralized by obligations
issued by the U.S. government or its agencies and such collateral is in
the possession of the Fund's custodian. The value of such collateral
includes accrued interest. Risks arise from the possible delay in recovery
or potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially.
Federal Income Taxes
No provision for federal income or excise taxes is required since the
Fund intends to continue to qualify as a regulated investment company and
distribute all of its taxable income to its shareholders.
2. INVESTMENT TRANSACTIONS:
Investment transactions for the year ended December 31, 1995
(excluding short-term securities) were as follows:
<TABLE>
<S> <C>
Purchases $ 650,185
Proceeds from sales 656,442
</TABLE>
Purchases and sales of U.S. Government securities aggregated $574,602
and $577,534, respectively, for the year ended December 31, 1995, and are
included in the above totals.
At December 31, 1995, the cost of securities for federal income tax
purposes was $234,981. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $5,559
and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $284. The Fund has unused
capital loss carryforwards for federal income tax purposes of $8,489 which
expire in 2002.
10
<PAGE>
(Amounts in Thousands)
3. OPTIONS AND FUTURES:
As part of the Fund's investment program, the Fund may utilize options
and futures. The nature and risk of these financial instruments and the
reasons for using them are set forth more fully in the Trust's Prospectus
and Statement of Additional Information.
A written call option gives the option holder the right to purchase
the underlying security at a specified price until a specified date. A
written put option gives the option holder the right to sell the
underlying security at a specified price until a specified date. Risks
arise from the possible illiquidity of the options market and from
movements in security values. Call and put options written by the Fund and
related premiums received during the year were as follows:
<TABLE>
<CAPTION>
Calls Puts
Actual Actual
Contracts Premiums Contracts Premiums
<S> <C> <C> <C> <C>
Options outstanding
December 31, 1994 9,500 $ 232 -- $ --
Options written 15,868 482 15,480 197
Options closed (25,290) (682) (15,480) (197 )
Options exercised (78) (32) -- --
Options outstanding
December 31, 1995 -- -- -- --
</TABLE>
The Fund enters into futures contracts as a hedge against anticipated
changes in interest rates. Risks arise from the possible illiquidity of
the futures market and from the possibility that a change in the value of
a contract may not correlate with changes in interest rates.
At December 31, 1995 there were no open long or short futures
positions.
4. REALIZED GAIN:
The components of net realized gain on investments, options and
futures for the year ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Amount
<S> <C>
Investments $5,941
Options (178)
Futures (184)
Net realized gain $5,579
</TABLE>
5. FUND SHARE TRANSACTIONS:
At December 31, 1995 there were 1,000,000 shares authorized at $.001
par value for all portfolios of the Trust (including the Fund).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
1995 1994
Primary Class Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 4,951 $ 50,397 8,767 $ 88,640
Reinvestment of
distributions 1,135 11,583 1,207 12,041
Repurchased (7,735) (78,491) (14,902) (149,406)
Net change (1,649) $(16,511) (4,928) $ (48,725)
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
1995 1994(dagger)
Navigator Class Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 133 $ 1,366 419 $4,071
Reinvestment of
distributions 20 203 2 20
Repurchased (168) (1,664) (7) (67)
Net change (15) $ (95) 414 $4,024
</TABLE>
(dagger) FOR THE PERIOD DECEMBER 1, 1994 (COMMENCEMENT OF SALE OF
NAVIGATOR CLASS) TO DECEMBER 31, 1994.
6. TRANSACTIONS WITH AFFILIATES:
The Fund has a management agreement with Legg Mason Fund Adviser, Inc.
("Manager"), a corporate affiliate of Legg Mason Wood Walker, Incorporated
("Legg Mason"), a member of the New York Stock Exchange and the
distributor for the Fund. Under this agreement, the Manager provides the
Fund with management and administrative services for which the Fund pays a
fee at an annual rate of 0.55% of average daily net assets of the Fund.
The agreement with the Manager provides that expense reimbursements be
made to the Fund for expenses which in any month are in excess of annual
rates, based on average daily net assets, of 0.95% until April 30, 1996 or
when the Fund reaches net assets of $400,000, whichever occurs first. For
the year ended December 31, 1995, management fees of $713 were waived. At
December 31, 1995, $46 was due to the Manager.
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NOTES TO FINANCIAL STATEMENTS -- CONTINUED
LEGG MASON INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
(Amounts in Thousands)
Western Asset Management Company ("Adviser"), a corporate affiliate of
the Manager and Legg Mason, serves as investment adviser to the Fund. The
Adviser is responsible for the actual investment activity of the Fund. The
Manager pays the Adviser a fee, computed daily and payable monthly, at an
annual rate of 40% of the Management fee without regard to fee waivers.
Legg Mason, as distributor of the Fund, receives an annual
distribution fee of 0.25% and an annual service fee of 0.25% of the
average daily net assets of Primary shares, calculated daily and payable
monthly. At December 31, 1995, distribution and service fees of $98 were
due to the distributor. Legg Mason also has an agreement with the Fund's
transfer agent to assist with certain of its duties. For this assistance,
Legg Mason was paid $53 by the transfer agent for the year ended December
31, 1995.
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND DIRECTORS OF LEGG MASON INCOME TRUST, INC.:
We have audited the accompanying statement of net assets of the Legg
Mason U.S. Government Intermediate-Term Portfolio (one of the portfolios
comprising the Legg Mason Income Trust, Inc.) as of December 31, 1995, and
the related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then
ended and financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1995 by correspondence
with the custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the Legg Mason U.S. Government Intermediate-Term Portfolio of
Legg Mason Income Trust, Inc. as of December 31, 1995, and the results of
its operations, changes in its net assets, and financial highlights for
each of the respective periods stated in the first paragraph, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
February 1, 1996
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