Investment Manager
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Investment Adviser
Western Asset Management Company Report to Shareholders
Pasadena, CA For the Six Months Ended
June 30, 1996
Board of Directors
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., Vice Chairman
Edward A. Taber, III, President
Richard G. Gilmore
Charles F. Haugh
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Transfer and Shareholder Servicing Agent THE
Boston Financial Data Services LEGG MASON
Boston, MA U.S.
GOVERNMENT
Custodian INTERMEDIATE
State Street Bank & Trust Company PORTFOLIO
Boston, MA
Counsel Putting Your Future First
Kirkpatrick & Lockhart LLP
Washington, D.C.
Independent Accountants [Legg Mason Logo]
Coopers & Lybrand L.L.P. FUNDS
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
<PAGE>
To Our Shareholders,
On June 30, 1996, the Legg Mason U.S. Government Intermediate-Term
Portfolio had an annualized 30-day SEC yield of 5.88%, an average life of 5.82
years, and net assets per share of $10.17. Net assets per share were down from
$10.47 on December 31, 1995, reflecting declines in the value of our portfolio
holdings in response to generally rising interest rates. Total return for the
six-month period (not annualized) was (0.01)% compared to 8.82% in the same
period last year (Total return measures investment performance in terms of
appreciation or depreciation in the Portfolio's net assets per share, plus
dividends and any capital gain distributions). The Portfolio's total return in
various periods since its inception is shown on page 3. As in the case of all
bond funds, historical performance is not indicative of future results, and the
principal value of our holdings will continue to fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
We believe that the U.S. Government Intermediate-Term Portfolio's emphasis
on portfolio quality and intermediate-term maturities continues to be a sensible
investment combination for many investors.
Many fund shareholders regularly add to their fund holdings by authorizing
automatic, monthly transfers from their bank checking or Legg Mason accounts.
Your Investment Executive will be happy to help you make these arrangements if
you would like to purchase fund shares in this convenient way.
Sincerely,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
Chairman
August 15, 1996
<PAGE>
Portfolio Managers' Comments
In a continuation of the extraordinarily volatile conditions experienced by
the bond market in recent years, interest rates soared in the first half of
1996, reversing over half the decline in rates which occurred over the course of
1995. Despite these very inhospitable market conditions, the fund posted a total
return of -0.01%, matching its benchmark return of -0.01% (the Salomon Brothers
Medium Term Treasury/Government Sponsored Index). This was achieved through the
use of multiple strategies and moderate exposure to interest rate risk. Although
the fund had a modest bias toward falling interest rates, the negative impact of
sharply higher rates was more than offset by the fund's barbell exposure to
maturities and its emphasis on mortgage-backed issues.
Ever since the Fed tightened policy in 1994 in order to slow the economy,
the bond market has been obsessed by growth. Rates rose sharply in 1996 as
evidence mounted that the economy had picked up enough to cause the Federal
Reserve to tighten monetary policy. Early in the year, market expectations
centered around further reductions in short-term rates by the Fed, but this soon
reversed as market participants came to anticipate a series of tightenings on
the part of the central bank. Short-term interest rates rose more than
intermediate-term rates in this environment, as fears of Fed tightening
outweighed fears of a serious deterioration in the long-term inflation
fundamentals. This produced one of the sharpest selloffs in the history of the
bond market, but also led to a situation where, on a risk-adjusted basis,
longer-term bonds actually outperformed shorter-term bonds. By tilting its
interest rate risk to longer-term bonds, the fund suffered relatively less than
its benchmark as yields rose.
By the end of the period, the fund remained positioned for declining
interest rates, but had restructured its maturity exposure to emphasize bonds of
shorter maturities, in the expectation that intermediate-term rates were likely
to decline more than longer-term rates as yields fell. Though the bulk of the
portfolio was invested in high-quality government securities, the fund held a
substantial overweighting to mortgage-backed securities and a modest exposure to
high-quality corporate issues in order to enhance the portfolio's overall yield.
Mortgage-backed holdings contributed to relative returns since spreads narrowed
as higher interest rates reduced prepayment risk.
Although the economic data confirm that the economy has strengthened this
year, it is far from clear that it is on a path to overheating. For the past six
months, housing starts and auto sales have reached a plateau. More recently, the
growth rates of retail sales, consumer credit and the monetary aggregates have
slowed. To be sure, employment growth has picked up moderately, as have wages.
Yet capacity utilization is below critical levels, and worldwide manufacturing
activity is less than robust. For its part, fiscal policy continues to be
restrictive, since spending growth has been restrained and tax burdens have
reached post-war highs.
In our view sound monetary fundamentals are still in place, and higher
interest rates will likely act to at least avert an overheating economy. This
contrasts distinctly with market expectations, since forward interest rates
currently assume the economy will grow fast enough to cause the Fed to raise
short-term rates several times by the end of the year. If moderate growth and
subdued inflation instead prevail, then Fed tightening expectations will fade,
and short- and intermediate-term interest rates should decline more than
long-term rates.
Western Asset Management Company
August 15, 1996
2
<PAGE>
Performance Information
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio
Total Return for One, Five, Seven Years and Life of Fund, as of
June 30, 1996
The returns shown on this page 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.
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 and shareholder servicing expenses are determined separately for each class
and the Navigator Class does not incur Rule 12b-1 distribution fees.
The fund's total returns as of June 30, 1996 were as follows:
Cumulative Average Annual
Total Return Total Return
- --------------------------------------------------------------------------------
Primary Class:
One Year +4.64% +4.64%
Five Years +39.64 +6.91
Seven Years +65.07 +7.42
Life of Class(dagger) +93.66 +7.71
Navigator Class:
One Year +5.11% +5.11%
Life of Class(double dagger) +15.27 +9.40
- -------------
(dagger) Primary Class inception -- August 7, 1987.
(double dagger) Navigator Class inception -- December 1, 1994
3
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio
June 30, 1996 (Unaudited)
Principal
(Amounts in Thousands) Amount Value
- --------------------------------------------------------------------------------
U.S. Government and Agency Obligations -- 50.8%
Guaranteed Export Trust
6.28% 6/15/04 $17,882 $ 17,516
Private Export Funding Corporation
7.03% 10/31/03 6,500 6,574
Tennessee Valley Authority
6.235% 7/15/45 5,000 4,923
United States Treasury Bonds
10.75% 8/15/05 7,350 9,331
United States Treasury Notes
6.375% 5/15/99 5,900 5,913
6.875% 3/31/00 37,570 38,116
6.25% 4/30/01 5,000 4,952
6.5% 5/31/01 1,220 1,221
6.5% 5/15/05 24,000 23,685
6.875% 5/15/06 2,800 2,831
76,718
Total U.S. Government and
Agency Obligations
(Identified Cost-- $115,974) 115,062
- --------------------------------------------------------------------------------
U.S. Government Agency Mortgage-Backed
Securities -- 20.0%
Fixed-rate Securities -- 17.2%
Federal Home Loan Mortgage
Corporation
10.75% 7/1/00 12 13
8.75% 2/1/01 997 1,023
8.75% 8/1/01 154 159
8.75% 10/1/01 147 151
6.5% 7/1/11(E) 8,000 7,661
9% 1/1/17 117 122
9.3% 4/15/19 4,698 4,898
9% 5/1/20 473 497
9% 9/1/20 1,981 2,080
9% 1/1/21 1,652 1,735
8.5% 6/1/21 1,598 1,657
19,996
Federal National Mortgage Association
9.5% 7/1/14 935 1,003
9.5% 6/25/18 1,645 1,743
9% 11/1/21 3,255 3,420
6.5% 4/1/24 33 31
6,197
Principal
(Amounts in Thousands) Amount Value
- --------------------------------------------------------------------------------
Government National Mortgage
Association
9% 6/15/06 $3,217 $ 3,324
9% 7/15/06 733 757
9% 8/15/06 1,529 1,580
7% 4/20/25 1,604 1,630
6% 5/20/25 2,879 2,924
7% 5/20/25 2,494 2,536
12,751
Stripped Security(B) -- 0.6%
Federal National Mortgage Association
152% 11/25/20 144 1,286
Variable-rate Security(C) -- 2.2%
Federal National Mortgage Association
7.616% 5/25/22 5,138 5,119
Total U.S. Government Agency
Mortgage-backed Securities
(Identified Cost--$45,646) 45,349
- --------------------------------------------------------------------------------
Asset-Backed Securities -- 3.5%
AFC Home Equity Loan Trust
7.75% 12/15/06 2,284 2,297
ContiMortgage Home Equity Loan Trust
8.6% 2/15/10 2,798 2,830
Olympic Automobile Receivables Trust
7.875% 7/15/01 2,821 2,867
Total Asset-backed Securities
(Identified Cost--$8,032) 7,994
- --------------------------------------------------------------------------------
Corporate Bonds and Notes -- 5.2%
Ford Motor Credit Company
6.42% 2/4/98 2,150 2,156
News America Holdings Incorporated
8.45% 8/1/34 2,300 2,441
Philip Morris Companies Inc.
9.25% 2/15/00 2,000 2,144
TCI Communications, Inc.
6.82%(D) 9/15/10 5,000 4,974
Total Corporate Bonds and Notes
(Identified Cost--$11,541) 11,715
- --------------------------------------------------------------------------------
Mortgage-Backed Securities -- 8.3%
Fixed-rate Securities -- 2.6%
FBC Mortgage Securities Trust
9.5% 8/1/16 2,651 2,673
Resolution Trust Corporation
10% 5/25/22 3,105 3,132
5,805
4
<PAGE>
Principal
(Amounts in Thousands) Amount Value
- --------------------------------------------------------------------------------
Variable-rate Securities(C) -- 5.7%
Resolution Trust Corporation
7.603% 5/25/19 $ 2,119 $ 2,023
8.756% 3/25/21 6,000 6,114
11.091% 1/25/25 1,694 1,745
8.002% 9/25/29 3,072 3,084
12,966
Total Mortgage-backed Securities
(Identified Cost-- $19,019) 18,771
- --------------------------------------------------------------------------------
Yankee Bond(A) -- 1.4%
YPF Sociedad Anonima
7.5% 10/26/02
(Identified Cost--$3,230) 3,240 3,213
- --------------------------------------------------------------------------------
Short-Term Investments -- 16.7%
Asset-backed Security -- 0.2%
Chemical Grantor Trust 1989-B
8.9% 12/15/96 357 359
U.S. Government and Agency
Obligations -- 7.1%
Federal Farm Credit Bank
5.6% 6/3/97 15,000 14,966
United States Treasury Bill
4.865% 7/11/96 1,000 998
15,964
U.S. Government Agency
Mortgage-backed Securities -- 4.5%
Federal Home Loan Mortgage
Corporation
9% 8/1/96 230 233
Federal National Mortgage Association
5.91 % 8/19/96 10,000 10,008
10,241
Principal
(Amounts in Thousands) Amount Value
- --------------------------------------------------------------------------------
Repurchase Agreement -- 4.9%
J.P. Morgan Securities, Inc.
5.47% dated 6/28/96, to be
repurchased at $11,186 on
7/1/96 (Collateral: $11,391
Federal Home Loan Mortgage
Corporation, 6.655% due 5/20/99,
value $12,030) $ 11,181 $ 11,181
Total Short-term Investments
(Identified Cost--$37,751) 37,745
- --------------------------------------------------------------------------------
Total Investments-- 105.9%
(Identified Cost-- $241,193) 239,849
Other Assets Less Liabilities -- (5.9%) (13,313)
Net assets consisting of:
Accumulated paid-in capital
applicable to:
21,910 Primary Class shares
outstanding 233,121
362 Navigator Class shares
outstanding 3,548
Accumulated net realized loss on
investments, options and
futures (8,820)
Unrealized depreciation of
investments, options and
futures (1,313)
Net assets-- 100.0% $226,536
Net asset value per share:
Primary Class $10.17
Navigator Class $10.17
Date Appreciation
- --------------------------------------------------------------------------------
Futures Contracts Purchased
Treasury Note Futures Sept. 96 37(F) $31
(A) Yankee Bond - Dollar-denominated bond issued in the U.S. by foreign
entities.
(B) Stripped Security - Security with interest-only or principal-only payment
streams. For this interest-only security, 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 June
30, 1996. These rates vary with the weighted average coupon of the
underlying loans.
(D) The interest rate on this security is fixed at 6.82% until 9/15/98,
thereafter, the coupon will be determined by auction.
(E) When-issued Security - Security purchased on a delayed delivery basis.
Final settlement amount and maturity date have not yet been announced.
(F) Actual number of contracts purchased.
See notes to financial statements.
5
<PAGE>
Statement of Operations
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio
For the Six Months Ended June 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
(Amounts in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest $ 7,862
Expenses:
Management fee $ 638
Distribution and service fees 570
Transfer agent and shareholder servicing expense 103
Custodian fee 52
Legal and audit fees 49
Reports to shareholders 29
Registration fees 9
Directors' fees 4
Other expenses 9
1,463
Less fees waived (351)
Total expenses, net of waivers 1,112
Net Investment Income 6,750
Net Realized and Unrealized Loss on Investments:
Realized loss on investments, options and futures (335)
Change in unrealized appreciation of investments, options and futures (6,588)
Net Realized and Unrealized Loss on Investments (6,923)
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in Net Assets Resulting from Operations $ (173)
</TABLE>
See notes to financial statements.
6
<PAGE>
Statement of Changes in Net Assets
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio
<TABLE>
<CAPTION>
For the For the
Six Months Ended Year Ended
(Amounts in Thousands) June 30, 1996 December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C>
Change in Net Assets:
Net investment income $ 6,750 $ 13,089
Net realized gain (loss) on investments, options and futures (335) 5,579
Change in unrealized appreciation of investments, options and futures (6,588) 11,818
Change in net assets resulting from operations (173) 30,486
Distributions to shareholders from net investment income:
Primary Class (6,622) (12,882)
Navigator Class (128) (207)
Change in net assets from Fund share transactions:
Primary Class (2,231) (16,511)
Navigator Class (380) (95)
Change in net assets (9,534) 791
Net Assets:
Beginning of period 236,070 235,279
- ---------------------------------------------------------------------------------------------------------------------------
End of period $226,536 $236,070
</TABLE>
See notes to financial statements.
7
<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 Six For the Six
Months Ended For the Years Ended December 31, Months Ended
--------------------------------------------------
June 30, 1996 1995 1994 1993 1992 1991 June 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C>
Per Share Operating Performance:
Net asset value, beginning
of period $10.47 $ 9.72 $10.43 $10.70 $10.77 $10.29 $10.47
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income 0.30(A) 0.57(A) 0.51(A) 0.53(A) 0.60(A) 0.72(A) 0.32(B)
Net realized and unrealized
gain (loss) on investments (0.30) 0.75 (0.71) 0.17 0.05 0.70 (0.30)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment
operations -- 1.32 (0.20) 0.70 0.65 1.42 0.02
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
Net investment income (0.30) (0.57) (0.51) (0.53) (0.60) (0.72) (0.32)
Net realized gain -- -- -- (0.39) (0.12) (0.22) --
In excess of net realized gain
on investments -- -- -- (0.05) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (0.30) (0.57) (0.51) (0.97) (0.72) (0.94) (0.32)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.17 $10.47 $ 9.72 $10.43 $10.70 $10.77 $10.17
Total return -0.01%(C) 13.9% -1.9% 6.6% 6.3% 14.4% 0.2%(C)
Ratio/Supplemental Data:
Ratios to average net assets:
Expenses 0.97(A,D) 0.9%(A) 0.9%(A) 0.9%(A) 0.9%(A) 0.8%(A) 0.47%(B,D)
Net investment income 5.8%(A,D) 5.6%(A) 5.1%(A) 4.8%(A) 5.5%(A) 6.7%(A) 6.3%(B,D)
Portfolio turnover rate 356.1% 289.9% 315.7% 490.2% 512.6% 642.8% 356.1%
Net assets, end of period
(in thousands) $222,858 $231,886 $231,255 $299,529 $307,320 $211,627 $3,678
</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; 0.95% until April
30, 1996; and 1.00% until December 31, 1996.
(B) Net of fees waived by the manager for expenses in excess of voluntary
limitations of: 0.4% until April 30, 1995; 0.45% until April 30, 1996; and
0.50% until December 31, 1996.
(C) Not annualized
(D) Annualized
See notes to financial statements.
8
<PAGE>
Notes to Financial Statements
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio
(Amounts in Thousands) (Unaudited)
- --------------------------------------------------------------------------------
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 Port-folio 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 allo-cated proportionately to the two
classes of shares except for 12b-1 distribution fees, which are charged
only on 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. Bond premiums
are amortized for financial reporting and tax purposes. Bond discounts,
other than original issue and zero-coupon bonds, are not amortized.
Dividends are declared daily and paid monthly. Dividends payable are
recorded on the dividend record date. At June 30, 1996, dividends payable
of $507 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 June 30, 1996, $2,576 was receivable for securities sold but not
yet delivered and $16,825 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
(known as 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:
For the six months ended June 30, 1996, purchases and sales of U.S.
Government securities aggregated $380,922 and $388,594, respectively, and
purchases and sales of other securities (excluding short-term securities)
totaled $23,946 and $31,229, respectively.
At June 30, 1996, the cost of securities for federal income tax
purposes was $241,193. Aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $710
and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $2,054. The Fund has unused
capital loss carryforwards for federal income tax purposes of $8,824 which
expire in 2004.
9
<PAGE>
Notes to Financial Statements--Continued
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio
(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 period were as follows:
Calls Puts
- --------------------------------------------------------------------------------
Actual Actual
Contracts Premiums Contracts Premiums
- --------------------------------------------------------------------------------
Options outstanding
December 31, 1995 -- $ -- -- $ --
Options written 598 299 420 353
Options closed (598) (299) (420) (353)
- --------------------------------------------------------------------------------
Options outstanding
June 30, 1996 -- $ -- -- $ --
- --------------------------------------------------------------------------------
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.
The long futures and related appreciation at June 30, 1996 are
described at the end of the "Statement of Net Assets," page 5.
4. Realized Gain (Loss):
The components of net realized gain (loss) on investments, options
and futures for the six months ended June 30, 1996 were as follows:
Amount
- --------------------------------------------------------------------------------
Investments $(458)
Options (173)
Futures 296
- --------------------------------------------------------------------------------
Net realized gain (loss) $(335)
- --------------------------------------------------------------------------------
5. Fund Share Transactions:
At June 30, 1996 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:
For the Six For the
Months Ended Year Ended
June 30, 1996 December 31, 1995
- --------------------------------------------------------------------------------
Primary Class Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Sold 2,926 $ 30,223 4,951 $ 50,397
Reinvestment of
distributions 538 5,517 1,135 11,583
Repurchased (3,694) (37,971) (7,735) (78,491)
- --------------------------------------------------------------------------------
Net change (230) $ (2,231) (1,649) $(16,511)
- --------------------------------------------------------------------------------
For the Six For the
Months Ended Year Ended
June 30, 1996 December 31, 1995
- --------------------------------------------------------------------------------
Navigator Class Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Sold 21 $ 216 133 $ 1,366
Reinvestment of
distributions 12 116 20 203
Repurchased (70) (712) (168) (1,664)
- --------------------------------------------------------------------------------
Net change (38) $(380) (15) $ (95)
- --------------------------------------------------------------------------------
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,
Incor-porated ("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 an
annual rate, based on average daily net assets, of 1.00% until December
31, 1996 or when the Fund reaches net assets of $400,000, whichever occurs
first. For the six months ended June 30, 1996, management fees of $351
were waived. At June 30, 1996, $43 was due to the Manager.
10
<PAGE>
(Amounts in Thousands) (Unaudited)
- --------------------------------------------------------------------------------
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 up to 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 June 30, 1996,
distribution and service fees of $92 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 $27 by the transfer agent
for the six months ended June 30, 1996.
11
