As filed with the Securities and Exchange Commission on April 30, 1997.
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: 26 [X]
----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No: 25
----
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:
[ ] immediately upon filing pursuant to Rule 485(b)
[X] on May 1 , 1997 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on , 1997 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on , 1997 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 27, 1997.
<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 7
Investment Objectives and Policies 8
How You Can Invest in the Funds 20
How Your Shareholder Account is Maintained 22
How You Can Redeem Your Primary Shares 22
How Net Asset Value is Determined 24
Dividends and Other Distributions 25
Tax Treatment of Dividends and Other Distributions 26
Shareholder Services 26
The Corporation's Board of Directors, Manager and
Investment Adviser 27
The Funds' Distributor 29
Description of the Corporation and its Shares 29
Appendix 31
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, 1997
[Legg Mason Logo]
FUNDS
<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, 1997 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, 1997
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
fluctuate 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 fixed-income 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 total 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 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 27.
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, 1996, adjusted for current expense and fee waiver levels.
ANNUAL FUND OPERATING EXPENSES -- PRIMARY SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
GOVERNMENT
GOVERNMENT INVESTMENT HIGH MONEY
INTERMEDIATE(A) GRADE(A) YIELD MARKET
___________________________________________________
Management fees
(after fee
waivers) 0.28% 0.14% 0.65% 0.50%
12b-1 fees 0.50% 0.50% 0.50% 0.10%(B)
Other expenses 0.20% 0.33% 0.20% 0.16%
___________________________________________________
Total operating
expenses
(after fee
waivers) 0.98% 0.97% 1.35% 0.76%(C)
===================================================
(A) 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, until the earlier of December 31, 1997, 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. If
Government Intermediate's assets total $400 million before December 31,
1997, the Manager has agreed not to increase this "cap" by more than 10
basis points. The Manager does not anticipate that Government
Intermediate's assets will total $400 million before December 31, 1997,
although there can be no assurance that this will be the case. In the
absence of such waivers, the expected management fees, 12b-1 fees, other
expenses and total operating expenses would be as follows: for
Government Intermediate: 0.55%, 0.50%, 0.20% and 1.25%; and for
Investment Grade, 0.60%, 0.50%, 0.33% and 1.43%.
(B) Effective January 10, 1997, Government Money Market began compensating
Legg Mason for distribution costs and services. The fee shown reflects
determination by Legg Mason to request payment of, and determination by
the Board to pay, less than the full amount of the authorized 12b-1 fee.
If the full amount of the fee was paid, 12b-1 fees would be 0.20% and
total operating expenses would be 0.86%.
(C) The expense information in the table has been restated to reflect
current fees.
Because each Fund 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
27.
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. The Funds charge no redemption fees of any kind.
GOVERNMENT
GOVERNMENT INVESTMENT HIGH MONEY
INTERMEDIATE GRADE YIELD MARKET
____________________________________________________
1 Year $ 10 $ 10 $ 14 $ 8
3 Years $ 31 $ 31 $ 43 $ 24
5 Years $ 54 $ 54 $ 74 $ 42
10 Years $120 $119 $ 162 $ 94
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 EXAMPLE 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, to
clients of Bartlett & Co. ("Bartlett") who, as of December 19, 1996, were
shareholders of Bartlett Short Term Bond Fund or Bartlett Fixed Income Fund
and for whom Bartlett acts as ERISA fiduciary, 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 information in the table that follows has been audited by
Coopers & Lybrand L.L.P., independent accountants. Each Fund's financial
statements for the year ended December 31, 1996 and the report of Coopers &
Lybrand L.L.P. thereon are included in the Corporation'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 financial advisor
or Legg Mason's Funds Marketing Department at 800-822-5544.
<TABLE>
<CAPTION>
Investment Operations Distributions From:
_____________________________________ _________________________________________________
Net Realized
and Unrealized In Excess
Net Asset Net Gain (Loss) on Total In Excess Net of Net
Value, Investment Investments, From Net of Net Realized Realized
Beginning Income Options Investment Investment Investment Gain on Gain on
of Year (Loss) and Futures Operations Income Income Investments Investments
__________________________________________________________________________________________________________________________________
<S> <C>
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
-- Primary Class
Years Ended Dec. 31,
1996 $ 10.47 $ .61(A) $ (.16) $ .45 $ (.60) $ (.01) $ -- $ --
1995 9.72 .57(A) .75 1.32 (.57) -- -- --
1994 10.43 .51(A) (.71) (.20) (.51) -- -- --
1993 10.70 .53(A) .17 .70 (.53) -- (.39) (.05)
1992 10.77 .60(A) .05 .65 (.60) -- (.12) --
1991 10.29 .72(A) .70 1.42 (.72) -- (.22) --
1990 10.20 .78(A) .09 .87 (.78) -- -- --
1989 9.79 .80(A) .41 1.21 (.80) -- -- --
1988 9.92 .74(A) (.12) .62 (.74) -- (.01) --
Aug. 7(H)-Dec. 31, 1987 10.00 .30(A) (.08) .22 (.30) -- -- --
-- Navigator Class
Years Ended Dec. 31,
1996 $ 10.47 $ .67(B) $ (.16) $ .51 $ (.66) $ (.01) $ -- $ --
1995 9.72 .62(B) .75 1.37 (.62) -- -- --
Dec. 1(C)-31, 1994 9.72 .05(B) -- .05 (.05) -- -- --
INVESTMENT GRADE INCOME PORTFOLIO
-- Primary Class
Years Ended Dec. 31,
1996 $ 10.44 $ .64(F) $ (.22) $ .42 $ (.64) $ -- $ -- $ --
1995 9.27 .65(F) 1.17 1.82 (.65) -- -- --
1994 10.40 .60(F) (1.09) (.49) (.60) -- (.04) --
1993 10.71 .62(F) .33 .95 (.62) -- (.63) (.01)
1992 10.71 .66(F) .25 .91 (.66) -- (.25) --
1991 9.97 .76(F) .77 1.53 (.76) -- (.03) --
1990 10.29 .84(F) (.28) .56 (.84) -- (.04) --
1989 9.88 .82(F) .41 1.23 (.82) -- -- --
1988 9.94 .78(F) (.035) .745 (.78) -- (.025) --
Aug. 7(H)-Dec. 31, 1987 10.00 .31(F) (.06) .25 (.31) -- -- --
-- Navigator Class
Years Ended Dec. 31,
1996 $ 10.44 $ .70(G) $ (.22) $ .48 $ (.70) $ -- $ -- $ --
Dec. 1(C)-31, 1995 10.32 .03(G) .12 .15 (.03) -- -- --
<CAPTION>
Ratios/Supplemental Data
_________________________________________________________________
Net
Net Asset Investment Net Assets
Value Expenses Income (Loss) Portfolio End of
Total End of Total to Average to Average Turnover Year
Distributions Year Return Net Assets Net Assets Rate (in thousands)
___________________________________________________________________________________________
<S> <C>
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
-- Primary Class
Years Ended Dec. 31,
1996 $ (.61) $ 10.31 4.47% .98%(A) 5.91%(A) 354% $293,846
1995 (.57) 10.47 13.88% .93%(A) 5.59%(A) 290% 231,886
1994 (.51) 9.72 (1.93)% .90%(A) 5.11%(A) 316% 231,255
1993 (.97) 10.43 6.64% .90%(A) 4.84%(A) 490% 299,529
1992 (.72) 10.70 6.26% .87%(A) 5.54%(A) 513% 307,320
1991 (.94) 10.77 14.40% .80%(A) 6.70%(A) 643% 211,627
1990 (.78) 10.29 9.10% .60%(A) 7.70%(A) 67% 74,423
1989 (.80) 10.20 12.80% .80%(A) 7.90%(A) 57% 43,051
1988 (.75) 9.79 6.40% 1.00%(A) 7.40%(A) 133% 27,087
Aug. 7(H)-Dec. 31, 1987 (.30) 9.92 2.20%(D) 1.00%(A,E) 7.40%(A,E) 66%(E) 16,617
-- Navigator Class
Years Ended Dec. 31,
1996 $ (.67) $ 10.31 5.09% .42%(B) 6.47%(B) 354% $ 8,082
1995 (.62) 10.47 14.45% .44%(B) 6.08%(B) 290% 4,184
Dec. 1(C)-31, 1994 (.05) 9.72 .50%(D) .40%(B,E) 6.44%(B,E) 316%(E) 4,024
INVESTMENT GRADE INCOME PORTFOLIO
-- Primary Class
Years Ended Dec. 31,
1996 $ (.64) $ 10.22 4.31% .97%(F) 6.42%(F) 383% $ 91,928
1995 (.65) 10.44 20.14% .88%(F) 6.49%(F) 221% 85,633
1994 (.64) 9.27 (4.82)% .85%(F) 6.09%(F) 200% 66,196
1993 (1.26) 10.40 11.22% .85%(F) 5.62%(F) 348% 68,781
1992 (.91) 10.71 6.77% .85%(F) 6.11%(F) 317% 48,033
1991 (.79) 10.71 16.00% .71%(F) 7.30%(F) 213% 36,498
1990 (.88) 9.97 5.80% .50%(F) 8.30%(F) 55% 22,994
1989 (.82) 10.29 13.00% .82%(F) 8.10%(F) 92% 13,891
1988 (.805) 9.88 7.70% 1.00%(F) 7.70%(F) 146% 9,913
Aug. 7(H)-Dec. 31, 1987 (.31) 9.94 2.60%(D) 1.00%(F,E) 7.80%(F,E) 72%(E) 5,661
-- Navigator Class
Years Ended Dec. 31,
1996 $ (.70) $ 10.22 4.88% .41%(G) 6.99%(G) 383% $ 243
Dec. 1(C)-31, 1995 (.03) 10.44 1.42%(D) .40%(G,E) 6.73%(G,E) 221%(E) 249
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Investment Operations Distributions From:
_____________________________________ _________________________________________________
Net Realized
and Unrealized In Excess
Net Asset Net Gain (Loss) on Total In Excess Net of Net
Value, Investment Investments, From Net of Net Realized Realized
Beginning Income Options Investment Investment Investment Gain on Gain on
of Year (Loss) and Futures Operations Income Income Investments Investments
___________________________________________________________________________________________________________________________________
<S> <C>
HIGH YIELD PORTFOLIO
Years Ended Dec. 31,
1996 $ 14.62 $ 1.33 $ .76 $ 2.09 $(1.34) $ -- $ -- $ --
1995 13.57 1.29 1.05 2.34 (1.29) -- -- --
Feb. 1(H)-Dec. 31, 1994 15.00 1.02 (1.44) (.42) (1.01) -- -- --
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
Years Ended Dec. 31,
1996 $ 1.00 $ .05 $ Nil $ .05 $ (.05) $ -- $ -- $ --
1995 1.00 .05 Nil .05 (.05) -- -- --
1994 1.00 .04 (Nil) .04 (.04) -- -- --
1993 1.00 .03 -- .03 (.03) -- -- --
1992 1.00 .03 -- .03 (.03) -- -- --
1991 1.00 .05 Nil .05 (.05) -- (Nil) --
1990 1.00 .07 -- .07 (.07) -- -- --
Jan. 30(H)-Dec. 31, 1989 1.00 .08 -- .08 (.08) -- -- --
<CAPTION>
Ratios/Supplemental Data
________________________
Net
Net Asset Investment Net Assets
Value Expenses Income (Loss) Portfolio End of
Total End of Total to Average to Average Turnover Year
Distributions Year Return Net Assets Net Assets Rate (in thousands)
____________________________________________________________________________________________________________________________
<S> <C>
HIGH YIELD PORTFOLIO
Years Ended Dec. 31,
1996 $ (1.34) $ 15.37 14.91% 1.35% 9.05% 77% $234,108
1995 (1.29) 14.62 18.01% 1.47% 9.28% 47% 108,417
Feb. 1(H)-Dec. 31, 1994 (1.01) 13.57 (2.90)%(D) 1.6%(E) 8.4%(E) 67%(E) 53,424
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
Years Ended Dec. 31,
1996 $ (.05) $ 1.00 4.81% .66% 4.71% -- $325,210
1995 (.05) 1.00 5.31% .67% 5.17% -- 316,646
1994 (.04) 1.00 3.66% .69% 3.66% -- 214,576
1993 (.03) 1.00 2.80% .71% 2.76% -- 172,533
1992 (.03) 1.00 3.49% .73% 3.45% -- 170,910
1991 (.05) 1.00 5.87% .73% 5.36% -- 180,733
1990 (.07) 1.00 7.56% .81% 7.29% -- 132,408
Jan. 30(H)-Dec. 31, 1989 (.08) 1.00 8.68% .80%(E) 8.35%(E) -- 87,958
</TABLE>
(A) NET OF FEES WAIVED BY THE MANAGER FOR EXPENSES IN EXCESS OF VOLUNTARY
LIMITATIONS OF: 1.0% UNTIL SEPTEMBER 10, 1989; 0.5% UNTIL MARCH 30, 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, 1997.
(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, 1997.
(C) COMMENCEMENT OF SALE OF NAVIGATOR SHARES.
(D) NOT ANNUALIZED.
(E) ANNUALIZED
(F) 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 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 1.0% UNTIL DECEMBER 31, 1997.
(G) NET OF FEES WAIVED BY THE MANAGER FOR EXPENSES IN EXPENSES IN EXCESS OF
VOLUNTARY EXPENSE LIMITATIONS OF 0.4% UNTIL APRIL 30, 1996 AND 0.5% UNTIL
DECEMBER 31, 1997.
(H) COMMENCEMENT OF OPERATIONS.
6
<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 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, 1996 were as follows:
GOVERNMENT INVESTMENT HIGH
CUMULATIVE TOTAL RETURN INTERMEDIATE GRADE YIELD
______________________________________________________________________
Primary Class:
One Year +4.47% +4.31% +14.91%
Five Years +32.22% +41.65% N/A
Life of Class +102.34%(A) +116.89%(A) +31.69%(B)
Navigator Class:
One Year +5.09% +4.88% N/A
Life of Class +20.88%(C) +6.38%(D) N/A
AVERAGE ANNUAL
TOTAL RETURN
________________________________________________________________________
Primary Class:
One Year +4.47% +4.31% +14.91%
Five Years +5.74% +7.21% N/A
Life of Class +7.78%(A) +8.58%(A) +9.89%(B)
Navigator Class:
One Year +5.09% +4.88% N/A
Life of Class +9.52%(C) +6.13%(D) N/A
(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, 1996.
(D) For the period December 1, 1995 (commencement of sale of Navigator
Shares) to December 31, 1996.
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 1996.
Further information about each Fund's performance is contained in the
Annual Report to Shareholders, which may be obtained without charge by
calling your Legg Mason or affiliated financial advisor 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, 1996 was
4.77%. The effective yield for the same period was 4.88%.
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,
all of 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 fixed-income 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.
(4) preferred stocks (including step down preferred securities), rated
no lower than Baa by Moody's or, if unrated by Moody's, judged by the
Adviser to be of comparable quality.
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; and (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).
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
8
<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
objectives of the Fund 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, securities 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 (Rule 144A permits large institutions to trade certain
securities even though they are not registered 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
9
<PAGE>
include (1) U.S. Treasury obligations, which differ only in their interest
rates, maturities and times of issuance, and (2) obligations issued or
guaranteed by U.S. government agencies and instrumentalities which are
supported by any of the following: (a) the full faith and credit of the
U.S. Government (such as certificates of the Government National Mortgage
Association), (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 Fannie Mae 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
10
<PAGE>
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 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.
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.
11
<PAGE>
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, 1996, 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.
Aaa/
MOODY'S Aa/A Baa Ba B Caa Ca C NR
_______________________________________________________________________________
Investment
Grade 67.5 % 15.3% 14.2% 3.0% -- -- -- --
High Yield 4.1 % -- 5.0% 70.8% 4.8% -- 0.4% 14.9%
AAA/
S&P AA/A BBB BB B CCC CC/C D NR
_______________________________________________________________________________
Investment
Grade 67.5% 18.7% 8.9% 4.9% -- -- -- --
High Yield 4.1 % -- 15.2% 54.1% 3.4% -- 0.4% 22.8%
Investment Grade held no unrated debt securities during the fiscal
year. The dollar-weighted average of debt securities not rated by either
Moody's or S&P amounted to 12.3% 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., Fannie Mae ("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.
INFLATION-INDEXED SECURITIES
The Funds may also invest in U.S. Treasury securities whose principal
value is adjusted daily in accordance with changes to the Consumer Price
Index (also known as "Treasury Inflation-Protection Securities"). Interest
is calculated on the basis of the adjusted principal value on the payment
date. The principal value of inflation-indexed securities declines in
periods of deflation, but holders at maturity receive no less than par. If
inflation is lower than expected during the period a Fund holds the
security, the Fund may earn less on it than on a conventional bond. Any
increase in principal value is taxable in the year the increase occurs,
even though holders do not receive cash representing the increase at that
time. Changes in market interest rates from causes other than inflation
will likely affect the market prices of inflation-indexed securities in
the same manner as conventional bonds.
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.
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.
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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 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. 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.
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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 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.
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
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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 market price can reflect a premium or
discount, in addition to the original issue discount, reflecting the
market's judgment as to the issuer's creditworthiness, the interest rate
or other similar factors. The original issue 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.
STRIPPED MORTGAGE-BACKED SECURITIES
The Funds 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 Funds 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 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, a
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 each Fund's 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 likely to respond to changes in interest
rates to a greater degree than the prices of securities paying interest
currently. 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 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
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order to generate cash to satisfy these distribution requirements.
PREFERRED STOCK
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.
TRUST ORIGINATED PREFERRED SECURITIES
The Funds may also invest in trust originated preferred securities, a
new type of security issued by financial institutions such as banks and
insurance companies. Trust originated preferred securities represent
interests in a trust formed by a financial institution. The trust sells
preferred shares and invests the proceeds in notes issued by the financial
institution. These notes may be subordinated and unsecured. Distributions
on the trust originated preferred securities match the interest payments
on the notes; if no interest is paid on the notes, the trust will not make
current payments on its preferred securities. Trust originated preferred
securities currently enjoy favorable tax treatment. If the tax
characterization of these securities were to change adversely, they could
be redeemed by the issuers, which could result in a loss to a Fund. In
addition, some trust originated preferred securities are restricted
securities available only to qualified institutional buyers under Rule
144A.
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, although there are other risks as set forth below.
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 currency
movements will not be accurately predicted causing the Fund to sustain
losses on these contracts.
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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 (including those denominated in U.S.
dollars) 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 (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 a custodian bank 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 net 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 appropriate
liquid 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
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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 does 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 or appropriate liquid securities 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 or 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
securities or currencies to the Fund 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"). Each day the Fund pays or receives cash ("variation margin")
equal to the daily change in value of the futures contract. 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
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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 a 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,
futures contracts or options thereon, or 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, or forward currency contract 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 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, defined
as securities that cannot be sold within 7 days at approximately the price
they are valued 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. 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 under which two parties exchange interest rate obligations,
one of which typically is an interest rate fixed until the maturity of the
obligation, while the other typically 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
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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, 1996, Government Intermediate's
portfolio turnover rate was 354%, Investment Grade's portfolio turnover
rate was 383% and High Yield's portfolio turnover rate was 77%. Each Fund
anticipates that 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 may
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 Mason or with an affiliate that has a dealer agreement
with Legg Mason. Your Legg Mason or affiliated financial advisor 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 financial
advisor 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"),
Savings Incentive Match Plan for Employees ("SIMPLE") or other qualified
retirement plan. Investors who are considering establishing an IRA, Keogh
Plan, SEP, SIMPLE or other qualified retirement plan may wish to consult
their attorneys or other tax advisers with respect to individual tax
questions. The option of investing in these accounts and plans through
regular payroll deductions may be arranged with Legg Mason and your
employer. Additional information with respect to these accounts and plans
is available upon request from any Legg Mason or affiliated financial
advisor.
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 and investments in an IRA or similar plan, 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. The minimum amount for
subsequent investments in an IRA or similar plan will be waived if an
investment would 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
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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 FINANCIAL ADVISOR
Shares may be purchased through any Legg Mason or affiliated financial
advisor. A financial advisor 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 financial advisor 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 transfer funds each month from
your checking account. Please contact any Legg Mason or affiliated
financial advisor 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 shares. Persons interested in establishing such automatic
investment programs should contact the Funds through any Legg Mason or
affiliated financial advisor.
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 may also purchase
shares by telephone, using 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
financial advisor for further information. Wire transfers may be subject
to a service charge by your bank.
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 financial advisor 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
financial advisor 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
financial advisor 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
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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
financial advisor 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, or on days the
Exchange is closed, the shares will be purchased at the next determined
net asset value and will earn dividends on the next day the Exchange is
open. 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. See "How Net Asset Value is Determined," page 24.
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. Shares may not be held in, or transferred to, an
account with any brokerage firm other than Legg Mason or its affiliates.
The Funds no longer issue share certificates.
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 financial advisor 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 financial advisor 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 financial advisor
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 financial
advisor 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. 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 10 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
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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:
1. Redemption by Telephone
Telephone redemptions may be made by calling your Legg Mason or
affiliated financial advisor. 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. Wire transfers of
proceeds to you from your Legg Mason or affiliated brokerage account will
normally be transmitted the same day.
To make a telephone redemption, you should call your Legg Mason or
affiliated financial advisor 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 financial advisor 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 financial advisor 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 financial advisor 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
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<PAGE>
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 financial advisor 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 financial advisor
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 financial advisor.
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 financial advisor
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 financial advisor or Legg Mason Client Services in Baltimore,
Maryland. Upon receipt of your form, your shares will be redeemed at the
net asset value per share determined as of the next close of the Exchange.
To the extent permitted by law, each Fund reserves the right to take
up to seven days 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.)
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
24
<PAGE>
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 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 financial advisor.
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, SIMPLE 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 financial advisor 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.
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<PAGE>
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, SIMPLEs, 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 other 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 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 other 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 other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other 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;
26
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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 financial advisor 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 preferred customer VISA Gold
debit card, a Legg Mason brokerage account with margin borrowing
availability and unlimited checks with 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 financial advisor.
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.
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 financial advisor. To effect an exchange by telephone,
please call your Legg Mason or affiliated financial advisor with the
information described in the section "How You Can Redeem Your Primary
Shares," page 22. 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.
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., 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 management fee equal to the
following annual
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rates of its average daily net assets: 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, 1997 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. If the Fund's assets total $400 million
before December 31, 1997, the Manager has agreed not to increase this
"cap" by more than 10 basis points. The Manager does not anticipate that
the Fund's assets will total $400 million before December 31, 1997,
although there can be no assurance that this will be the case. After
reimbursement by the Manager of certain expenses, the Fund's total
operating expenses for the year ended December 31, 1996 were 0.98% of
average daily net assets. The Manager has also agreed that until December
31, 1997 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, 1996 were 0.97% 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,
1996, total operating expenses of High Yield and Government Money Market
were 1.35% and 0.66% of average daily net assets, respectively.
The Manager acts as investment adviser, manager or consultant to
eighteen investment company portfolios which had aggregate assets under
management of over $7.0 billion as of March 31, 1997. The Manager's
address is 111 South Calvert Street, Baltimore, Maryland 21202.
INVESTMENT ADVISER
Western Asset Management Company 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: 0.20% of Government Intermediate's average daily net
assets, not to exceed the fee paid to the Manager; 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 renders investment advice to sixteen open-end investment
companies and one closed-end investment company, which together had
aggregate assets under management of approximately $4.3 billion as of
March 31, 1997. The Adviser also renders investment advice to private
accounts with fixed income assets under management of approximately $22.6
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.
28
<PAGE>
THE FUNDS' DISTRIBUTOR
Legg Mason is the distributor of the Funds' shares pursuant to
separate Underwriting Agreements with each Fund. 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
financial advisors, 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.
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. With respect to Government Money Market, Legg Mason may
receive payments at an annual rate of up to 0.20% of its average daily net
assets. However, Legg Mason has agreed that it will not request payment of
more than 0.10% annually from the Fund during the first two years
following implementation of the Plan. Effective January 10, 1997,
Government Money Market began compensating Legg Mason for distribution
costs and services at this 0.10% annual rate. 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. The offering of
shares normally is continuous.
NASD rules limit the amount of annual distribution and service 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.
Legg Mason is a wholly owned subsidiary of Legg Mason, Inc., which is
also the parent of the Manager and Adviser. Legg Mason receives a fee from
BFDS for assisting it with its transfer agent and shareholder servicing
functions; for the year ended December 31, 1996, Legg Mason received
$46,000, $20,000, $29,000 and $85,000 for performing such services in
connection with Government Intermediate, Investment Grade, High Yield and
Government Money Market, respectively.
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 $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.
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 investment management
responsibility, to
29
<PAGE>
qualified retirement plans managed on a discretionary basis and having net
assets of at least $200 million, to clients of Bartlett who, as of
December 19, 1996, were shareholders of Bartlett Short Term Bond Fund or
Bartlett Fixed Income Fund and for whom Bartlett acts as ERISA fiduciary,
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
financial advisors 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.
30
<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 S&P 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
31
<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.
32
<PAGE>
THE
NAVIGATOR
CLASS
OF THE
LEGG MASON
TAXABLE
INCOME FUNDS
Putting Your Future First
Taxable Income Funds
Navigator Class of U.S.
Government Intermediate-
Term Portfolio
Navigator Class of Investment
Grade Income Portfolio
Navigator Class of
High Yield Portfolio
Prospectus
May 1, 1997
This wrapper is not part of the prospectus.
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
Authorized Dealer:
Fairfield Group, Inc.
200 Gibraltar Road
Horsham, PA 19044
Transfer and Shareholder Servicing Agent:
Boston Financial Data Services
P.O. Box 953
Boston, MA 02103
Counsel:
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, DC 20036-1800
Independent Accountants:
Coopers & Lybrand L.L.P. [Legg Mason Logo]
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.
<PAGE>
NAVIGATOR TAXABLE INCOME FUNDS
PROSPECTUS
DATED: MAY 1, 1997
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, 1997 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 fixed-income 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.
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 Institutional 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,
to clients of Bartlett & Co. ("Bartlett") who, as of December 19, 1996, were
shareholders of Bartlett Short Term Bond Fund or Bartlett Fixed Income Fund and
for whom Bartlett acts as ERISA fiduciary, 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 6
Investment Objectives and Policies 7
How to Purchase and Redeem Shares 17
How Shareholder Accounts are Maintained 18
How Net Asset Value Is Determined 19
Dividends and Other Distributions 19
Tax Treatment of Dividends and Other
Distributions 19
Shareholder Services 20
The Corporation's Board of Directors, Manager and
Investment Adviser 21
The Funds' Distributor 22
Description of the Corporation and its Shares 22
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 Classes of Government Intermediate and Investment Grade for the year
ended December 31, 1996 and are based on estimated expenses for the initial
period of operations of the Navigator Class of High Yield.
ANNUAL FUND OPERATING EXPENSES -- NAVIGATOR SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
GOVERNMENT INVESTMENT HIGH
INTERMEDIATE(A) GRADE(A) YIELD
_____________________________________
Management fees
(after fee
waivers) 0.28% 0.14% 0.65%
12b-1 fees None None None
Other expenses 0.14% 0.27% 0.20%
---------------------------------
Total operating
expenses (after
fee waivers) 0.42% 0.41% 0.85%
=================================
(A) The Manager has agreed to continue to waive fees 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, until the earlier of December
31, 1997, 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.
If Government Intermediate's assets total $400 million before December 31,
1997, the Manager has agreed not to increase this "cap" by more than 10
basis points. The Manager does not anticipate that Government Intermediate's
assets will total $400 million before December 31, 1997, although there can
be no assurance that this will be the case. In the absence of such waivers,
the expected management fees, other expenses and total operating expenses
would be as follows: for Government Intermediate, 0.55%, 0.14% and 0.69%;
and for Investment Grade, 0.60%, 0.27% and 0.87%.
For further information concerning Fund expenses, see "The Corporation's
Board of Directors, Manager and Investment Adviser," page 21.
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.
The Funds charge no redemption fees of any kind.
GOVERNMENT INVESTMENT HIGH
INTERMEDIATE GRADE YIELD
___________________________________
1 Year $ 4 $ 4 $ 9
3 Years $ 13 $ 13 $ 27
5 Years $ 24 $ 23 $ 47
10 Years $ 53 $ 52 $105
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 information in the table that follows has been audited by
Coopers & Lybrand L.L.P., independent accountants. Each Fund's financial
statements for the year ended December 31, 1996 and the report of Coopers &
Lybrand L.L.P. thereon are included in the Corporation's Annual Report to
Shareholders and are incorporated by reference into the Statement of
Additional Information. The annual report is available to shareholders
without charge by calling a financial advisor at Fairfield, Legg Mason or
Legg Mason's Funds Marketing Department at 800-822-5544.
<TABLE>
<CAPTION>
Investment Operations Distributions From:
______________________________________ _________________________________________________
Net Realized
and Unrealized In Excess
Net Asset Net Gain (Loss) on Total In Excess Net of Net
Value, Investment Investments, From Net of Net Realized Realized
Beginning Income Options Investment Investment Investment Gain on Gain on
of Year (Loss) and Futures Operations Income Income Investments Investments
__________________________________________________________________________________________________________________________________
<S> <C>
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
-- Primary Class
Years Ended Dec. 31,
1996 $ 10.47 $ .61(A) $ (.16) $ .45 $ (.60) $ (.01) $ -- $ --
1995 9.72 .57(A) .75 1.32 (.57) -- -- --
1994 10.43 .51(A) (.71) (.20) (.51) -- -- --
1993 10.70 .53(A) .17 .70 (.53) -- (.39) (.05)
1992 10.77 .60(A) .05 .65 (.60) -- (.12) --
1991 10.29 .72(A) .70 1.42 (.72) -- (.22) --
1990 10.20 .78(A) .09 .87 (.78) -- -- --
1989 9.79 .80(A) .41 1.21 (.80) -- -- --
1988 9.92 .74(A) (.12) .62 (.74) -- (.01) --
Aug. 7(H)-Dec. 31, 1987 10.00 .30(A) (.08) .22 (.30) -- -- --
-- Navigator Class
Years Ended Dec. 31,
1996 $ 10.47 $ .67(B) $ (.16) $ .51 $ (.66) $ (.01) $ -- $ --
1995 9.72 .62(B) .75 1.37 (.62) -- -- --
Dec. 1(C)-31, 1994 9.72 .05(B) -- .05 (.05) -- -- --
INVESTMENT GRADE INCOME PORTFOLIO
-- Primary Class
Years Ended Dec. 31,
1996 $ 10.44 $ .64(F) $ (.22) $ .42 $ (.64) $ -- $ -- $ --
1995 9.27 .65(F) 1.17 1.82 (.65) -- -- --
1994 10.40 .60(F) (1.09) (.49) (.60) -- (.04) --
1993 10.71 .62(F) .33 .95 (.62) -- (.63) (.01)
1992 10.71 .66(F) .25 .91 (.66) -- (.25) --
1991 9.97 .76(F) .77 1.53 (.76) -- (.03) --
1990 10.29 .84(F) (.28) .56 (.84) -- (.04) --
1989 9.88 .82(F) .41 1.23 (.82) -- -- --
1988 9.94 .78(F) (.035) .745 (.78) -- (.025) --
Aug. 7(H)-Dec. 31, 1987 10.00 .31(F) (.06) .25 (.31) -- -- --
-- Navigator Class
Years Ended Dec. 31,
1996 $ 10.44 $ .70(G) $ (.22) $ .48 $ (.70) $ -- $ -- $ --
Dec. 1(C)-31, 1995 10.32 .03(G) .12 .15 (.03) -- -- --
<CAPTION>
Ratios/Supplemental Data
________________________________________________________________
Net
Net Asset Investment Net Assets
Value Expenses Income (Loss) Portfolio End of
Total End of Total to Average to Average Turnover Year
Distributions Year Return Net Assets Net Assets Rate (in thousands)
________________________________________________________________________________________________________________________
<S> <C>
U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
-- Primary Class
Years Ended Dec. 31,
1996 $ (.61) $ 10.31 4.47% .98%(A) 5.91%(A) 354% $293,846
1995 (.57) 10.47 13.88% .93%(A) 5.59%(A) 290% 231,886
1994 (.51) 9.72 (1.93)% .90%(A) 5.11%(A) 316% 231,255
1993 (.97) 10.43 6.64% .90%(A) 4.84%(A) 490% 299,529
1992 (.72) 10.70 6.26% .87%(A) 5.54%(A) 513% 307,320
1991 (.94) 10.77 14.40% .80%(A) 6.70%(A) 643% 211,627
1990 (.78) 10.29 9.10% .60%(A) 7.70%(A) 67% 74,423
1989 (.80) 10.20 12.80% .80%(A) 7.90%(A) 57% 43,051
1988 (.75) 9.79 6.40% 1.00%(A) 7.40%(A) 133% 27,087
Aug. 7(H)-Dec. 31, 1987 (.30) 9.92 2.20%(D) 1.00%(A,E) 7.40%(A,E) 66%(E) 16,617
-- Navigator Class
Years Ended Dec. 31,
1996 $ (.67) $ 10.31 5.09% .42%(B) 6.47%(B) 354% $ 8,082
1995 (.62) 10.47 14.45% .44%(B) 6.08%(B) 290% 4,184
Dec. 1(C)-31, 1994 (.05) 9.72 .50%(D) .40%(B,E) 6.44%(B,E) 316%(E) 4,024
INVESTMENT GRADE INCOME PORTFOLIO
-- Primary Class
Years Ended Dec. 31,
1996 $ (.64) $ 10.22 4.31% .97%(F) 6.42%(F) 383% $ 91,928
1995 (.65) 10.44 20.14% .88%(F) 6.49%(F) 221% 85,633
1994 (.64) 9.27 (4.82)% .85%(F) 6.09%(F) 200% 66,196
1993 (1.26) 10.40 11.22% .85%(F) 5.62%(F) 348% 68,781
1992 (.91) 10.71 6.77% .85%(F) 6.11%(F) 317% 48,033
1991 (.79) 10.71 16.00% .71%(F) 7.30%(F) 213% 36,498
1990 (.88) 9.97 5.80% .50%(F) 8.30%(F) 55% 22,994
1989 (.82) 10.29 13.00% .82%(F) 8.10%(F) 92% 13,891
1988 (.805) 9.88 7.70% 1.00%(F) 7.70%(F) 146% 9,913
Aug. 7(H)-Dec. 31, 1987 (.31) 9.94 2.60%(D) 1.00%(F,E) 7.80%(F,E) 72%(E) 5,661
-- Navigator Class
Years Ended Dec. 31,
1996 $ (.70) $ 10.22 4.88% .41%(G) 6.99%(G) 383% $ 243
Dec. 1(C)-31, 1995 (.03) 10.44 1.42%(D) .40%(G,E) 6.73%(G,E) 221%(E) 249
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Investment Operations Distributions From:
______________________________________ ________________________________________________
Net Realized
and Unrealized In Excess
Net Asset Net Gain (Loss) on Total In Excess Net of Net
Value, Investment Investments, From Net of Net Realized Realized
Beginning Income Options Investment Investment Investment Gain on Gain on
of Year (Loss) and Futures Operations Income Income Investments Investments
_________________________________________________________________________________________________________________________________
<S> <C>
HIGH YIELD PORTFOLIO
Years Ended Dec. 31,
1996 $ 14.62 $ 1.33 $ .76 $ 2.09 $(1.34) $ -- $ -- $ --
1995 13.57 1.29 1.05 2.34 (1.29) -- -- --
Feb. 1(H)-Dec. 31, 1994 15.00 1.02 (1.44) (.42) (1.01) -- -- --
<CAPTION>
Ratios/Supplemental Data
_______________________________________________________________
Net
Net Asset Investment Net Assets
Value Expenses Income (Loss) Portfolio End of
Total End of Total to Average to Average Turnover Year
Distributions Year Return Net Assets Net Assets Rate (in thousands)
________________________________________________________________________________________________________________________
HIGH YIELD PORTFOLIO
Years Ended Dec. 31,
1996 $ (1.34) $ 15.37 14.91% 1.35% 9.05% 77% $234,108
1995 (1.29) 14.62 18.01% 1.47% 9.28% 47% 108,417
Feb. 1(H)-Dec. 31, 1994 (1.01) 13.57 (2.90)%(D) 1.6%(E) 8.4%(E) 67%(E) 53,424
</TABLE>
(A) NET OF FEES WAIVED BY THE MANAGER FOR EXPENSES IN EXCESS OF VOLUNTARY
LIMITATIONS OF: 1.0% UNTIL SEPTEMBER 10, 1989; 0.5% UNTIL MARCH 30, 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, 1997.
(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, 1997.
(C) COMMENCEMENT OF SALE OF NAVIGATOR SHARES.
(D) NOT ANNUALIZED.
(E) ANNUALIZED
(F) 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 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 1.0% UNTIL DECEMBER 31, 1997.
(G) NET OF FEES WAIVED BY THE MANAGER FOR EXPENSES IN EXPENSES IN EXCESS OF
VOLUNTARY EXPENSE LIMITATIONS OF 0.4% UNTIL APRIL 30, 1996 AND 0.5% UNTIL
DECEMBER 31, 1997.
(H) COMMENCEMENT OF OPERATIONS.
5
<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, 1996 were as follows:
GOVERNMENT INVESTMENT HIGH
CUMULATIVE TOTAL RETURN INTERMEDIATE GRADE YIELD
_____________________________________________________________________________
Primary Class:
One Year +4.47% +4.31% +14.91%
Five Years +32.22% +41.65% N/A
Life of Class +102.34%(A) +116.89%(A) +31.69%(B)
Navigator Class:
One Year +5.09% +4.88% N/A
Life of Class +20.88%(C) +6.38%(D) N/A
AVERAGE ANNUAL
TOTAL RETURN
______________________________________________________________________________
Primary Class:
One Year +4.47% +4.31% +14.91%
Five Years +5.74% +7.21% N/A
Life of Class +7.78%(A) +8.58%(A) +9.89%(B)
Navigator Class:
One Year +5.09% +4.88% N/A
Life of Class +9.52%(C) +6.13%(D) N/A
(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, 1996.
(D) FOR THE PERIOD DECEMBER 1, 1995 (COMMENCEMENT OF SALE OF NAVIGATOR SHARES)
TO DECEMBER 31, 1996.
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 1996. 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 the
Corporation's annual report to shareholders, which may be obtained without
charge by calling a financial advisor at Fairfield, Legg Mason or Legg Mason's
Funds Marketing Department at 800-822-5544.
6
<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,
all of 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 fixed-income 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.
(4) preferred stocks (including step down preferred securities), rated
no lower than Baa by Moody's or, if unrated by Moody's, judged by the
Adviser to be of comparable quality.
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; and (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).
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 circum-
7
<PAGE>
stances, 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
objectives of the Fund 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, securities 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, (Rule 144A permits large institutions to trade certain
securities even though they are not registered 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-
8
<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 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.
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-
9
<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, 1996, 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.
Aaa/
MOODY'S Aa/A Baa Ba B Caa Ca C NR
________________________________________________________________________________
Investment
Grade 67.5 % 15.3% 14.2% 3.0% -- -- -- --
High Yield 4.1 % -- 5.0% 70.8% 4.8% -- 0.4% 14.9%
AAA/
S&P AA/A BBB BB B CCC CC/C D NR
________________________________________________________________________________
Investment
Grade 67.5% 18.7% 8.9% 4.9% -- -- -- --
High Yield 4.1 % -- 15.2% 54.1% 3.4% -- 0.4% 22.8%
Investment Grade held no unrated debt securities during the fiscal
year. The dollar-weighted average of debt securities not rated by either
Moody's or S&P amounted to 12.3% 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., Fannie Mae ("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.
Inflation-Indexed Securities
The Funds may also invest in U.S. Treasury securities whose principal
value is adjusted daily in accordance with changes to the Consumer Price
Index (also known as "Treasury Inflation-Protection Securities"). Interest
is calculated on the basis of the adjusted principal value on the payment
date. The principal value of inflation-indexed securities declines in
periods of deflation, but holders at maturity receive no less than par. If
inflation is lower than expected during the period a Fund holds the
security, the Fund may earn less on it than on a conventional bond. Any
increase in principal value is taxable in the year the increase occurs,
even though holders do not receive cash representing the increase at that
time. Changes in market interest rates from causes other than inflation
will likely affect the market prices of inflation-indexed securities in
the same manner as conventional bonds.
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.
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
10
<PAGE>
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 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. 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
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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 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.
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 market price can reflect a premium or
discount, in addition to the original issue discount, reflecting the
market's judgment as to the issuer's creditworthiness, the interest rate
or other similar factors. The original issue 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
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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
The Funds 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 Funds 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 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, a
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 each Fund's 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 likely to respond to changes in interest
rates to a greater degree than the prices of securities paying interest
currently. 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 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
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.
Trust Originated Preferred Securities
The Funds may also invest in trust originated preferred securities, a
new type of security issued by financial institutions such as banks and
insurance companies. Trust originated preferred securities represent
interests in a trust formed by a financial institution. The trust sells
preferred shares and invests the proceeds in notes issued by the financial
institution. These notes may be subordinated and unsecured. Distributions
on the trust originated preferred securities match the interest payments
on the notes; if no interest is paid on the notes, the trust will not make
current payments on its preferred securities. Trust originated preferred
securities currently enjoy favorable tax treatment. If the tax
characterization of these securities were to change adversely, they could
be redeemed by the issuers, which could result in a loss to a Fund. In
addition, some trust originated preferred securities are restricted
securities available only to qualified institutional buyers under Rule
144A.
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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, although there are other risks as set forth below.
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 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 (including those denominated in U.S.
dollars) 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 a custodian bank 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.
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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 net 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 appropriate
liquid 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 does not expect that
their commitments to purchase when-issued securities will at any time
exceed, in the aggregate, 20% of their 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 or appropriate liquid securities 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
securities or currencies to the Fund 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
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"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"). Each day the Fund pays or receives cash ("variation margin")
equal to the daily change in value of the futures contract. 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 a 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,
futures contracts or options thereon, or forward currency contracts 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, or forward
currency contract 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 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, defined
as securities that cannot be sold within 7 days at approximately the price
they are valued, 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. 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 under which two parties exchange interest rate obligations,
one of which typically is an interest rate fixed until the maturity of the
obligation, while the other typically 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
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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, 1996, Government Intermediate's
portfolio turnover rate was 354%, Investment Grade's portfolio turnover
rate was 383% and High Yield's portfolio turnover rate was 77%. Each Fund
anticipates that 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 may
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 TO PURCHASE AND REDEEM SHARES
Institutional Clients of Fairfield 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.
Customers of certain Institutional Clients that maintain omnibus
accounts with the Funds' transfer agent may obtain shares through those
Institutions. Such Institutional Clients may receive payments from the
Funds' distributor for account servicing, and may receive payments from
their Customers for other services performed. Investors otherwise eligible
to purchase Navigator Shares can purchase them from Legg Mason without
receiving or paying for such other services.
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.
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
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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
financial advisors 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 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.
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 10 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.
To the extent permitted by law, each Fund reserves the right to take
up to seven days 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 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 financial advisor 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. Fund shares may not be held in, or
transferred to, an account with any brokerage firm other than Fairfield,
Legg Mason or their affiliates. The Funds no longer issue share
certificates.
Navigator Shares sold to Institutional Clients acting in a fiduciary,
advisory, custodial, or other similar capacity on behalf of persons
maintaining
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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.
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.
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 financial advisor. 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 a financial advisor 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 and/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 and other tax-exempt
investors) as ordinary income to the
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<PAGE>
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 other
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 Fund 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 that loss will not be
deductible and instead will increase the basis of the newly purchased
shares.
A dividend or other 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 other distribution could cause the investor to incur tax
liabilities and should not be made solely for the purpose of receiving the
dividend or other 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
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.
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 the
corresponding class of shares of any of the Legg Mason Funds, the Legg
Mason Cash Reserve Trust, the Navigator Money Market Fund, Inc. and the
Navigator Tax-Free Money Market Fund, Inc., provided that such shares are
eligible for sale under applicable state securities laws.
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 financial
advisor. To effect an exchange by telephone, please call your financial
advisor with the information described in the section "How to Purchase and
Redeem Shares," page
20
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17. 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.
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. 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, 1997 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. If the Fund's assets total $400 million before December 31,
1997, the Manager has agreed not to increase this "cap" by more than 10
basis points. The Manager does not anticipate that the Fund's assets will
total $400 million before December 31, 1997, although there can be no
assurance that this will be the case. After reimbursement by the Manager
of certain expenses, the Fund's total operating expenses for the year
ended December 31, 1996 were 0.42% of average daily net assets. The
Manager has also agreed that until December 31, 1997 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. After reimbursement by the Manager of certain expenses, the Fund's
total operating expenses for the year ended December 31, 1996 were 0.41%
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.
The Manager acts as manager, investment adviser or investment
consultant to eighteen investment company portfolios which had aggregate
assets under management of over $7.0 billion as of March 31, 1997. The
Manager's address is 111 South Calvert Street, Baltimore, Maryland 21202.
INVESTMENT ADVISER
Western Asset Management Company 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: 0.20% of Government Intermediate's average daily net
assets, not to exceed the fee paid to the Manager; 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 renders investment advice to sixteen open-end
investment companies and one closed-end investment company, which together
had aggregate assets under management of approximately $4.3 billion as of
March 31, 1997. The Adviser also renders investment advice to private
accounts with fixed income assets under management of approximately $22.6
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.
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<PAGE>
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
financial advisors, 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 receives a fee from BFDS for assisting it with its transfer
agent and shareholder servicing functions; for the year ended December 31,
1996, Legg Mason received from BFDS $46,000, $20,000 and $29,000, for
performing such services in connection with Government Intermediate,
Investment Grade and High Yield, respectively.
Legg Mason and Fairfield are wholly owned subsidiaries of Legg Mason,
Inc., which is also the parent of the Manager and the Adviser. Fairfield
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 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 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 financial advisor, 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, 1997 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
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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. If Government Intermediate's assets total $400
million before December 31, 1997, the Manager has agreed not to increase
this "cap" by more than 10 basis points. The Manager does not anticipate
that Government Intermediate's assets will total $400 million before
December 31, 1997, although there can be no assurance that this will be
the case. 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 S&P 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
risk of dividend impairment within the universe of preferred stocks.
A-1
<PAGE>
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.
A-2
<PAGE>
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, 1997, which have been filed with the
Securities and Exchange Commission ("SEC"). Copies of the Prospectuses are
available without charge from the 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, an investment in this Fund 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
<PAGE>
agreements collateralized by such instruments. The Fund 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, to clients of Bartlett &
Co. ("Bartlett") who, as of December 19, 1996, were shareholders of Bartlett
Short Term Bond Fund or Bartlett Fixed Income Fund and for whom Bartlett acts as
ERISA fiduciary, 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") is 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 pay a 12b-1 distribution and
service fees, but Navigator Shares pay no distribution fees. See "The Funds'
Distributor."
Dated: May 1, 1997
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 25% or more 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;
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;
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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;
12. Purchase or sell interests in oil and gas or other mineral
exploration or development programs;
or
13. Issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended ("1940 Act").
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 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. 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);
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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;
9. Purchase or sell interests in oil and gas or other mineral
exploration or development programs;
10. Issue senior securities, except as permitted under the 1940 Act;
11. 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. 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.
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 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 interests in 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;
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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"), Moody's Investors
Service, Inc. ("Moody's") and other nationally recognized statistical rating
organizations ("NRSROs") 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.
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 than an issuer's current financial condition
may be better or worse than the rating indicates. Subsequent to its purchase by
a Fund, an issue of obligations may cease to be rated or its rating may be
reduced 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 condition 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:
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<PAGE>
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 wishes 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 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. A Fund may not use these instruments for
speculation or leverage.
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
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<PAGE>
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 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 appropriate liquid 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 has 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.
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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 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 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 and
not for speculation or leverage. 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. A Fund is not required to make
futures margin payments when it purchases an option on an interest rate futures
contract.
Compared to the 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
probability of loss than selling a futures
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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.
Although the Adviser will purchase 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.
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 underlying securities or, in the case of options on certain
U.S. government securities, the Fund maintains with its custodian in a
segregated account cash or appropriate liquid 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 or
appropriate liquid 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 premium
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 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, covered call options will be
written on those portfolio securities which the Adviser does not expect to have
significant short-term capital appreciation.
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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, it 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, does 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.
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
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<PAGE>
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 net 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 fluctuations in 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.
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 or appropriate liquid securities in a
segregated account with its custodian equivalent in value to
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<PAGE>
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. Straddles involving currencies are subject to the same
risks as other foreign currency options.
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. 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 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 in 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
foreign 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.
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<PAGE>
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 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 securities
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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<PAGE>
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 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 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 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. 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 sell a put option on a foreign currency to partially
offset an increase in 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 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 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 or appropriate 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.
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. 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
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<PAGE>
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 other than for bona fide hedging purposes 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 net 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 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 options is subject to the maintenance of a liquid secondary market.
There is no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Consequently, it may
not be possible
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<PAGE>
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 (in the case
of futures and options written thereon). 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 level 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, index, 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.
(5) 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.
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<PAGE>
(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) 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 but 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.
(8) 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.
(9) 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. 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 or appropriate liquid 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.
(10) 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
- -------------------------------------------
18
<PAGE>
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 may
be required to 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 in 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 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, but 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.
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Forward Contracts
- -----------------
The Fund may use forward currency exchange contracts ("forward
contracts") to hedge against uncertainty in the level of future exchange rates.
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 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 currency movements
will not be accurately predicted, causing the 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 or appropriate
liquid securities in a segregated account with the Fund's
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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 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
21
<PAGE>
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.
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
appropriate liquid 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 appropriate liquid securities in a
segregated account with its custodian in the amount prescribed, as marked-
to-market daily. Securities, currencies or other options, futures or forward
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.
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 and forward contracts. See "Additional Tax
Information."
Other Investment Policies
- -------------------------
The following investment policies apply only to Government Intermediate,
Investment Grade and High Yield unless otherwise stated:
ILLIQUID SECURITIES SEC Rule 144A permits 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 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
22
<PAGE>
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 collateral 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 a custodian bank 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. 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
23
<PAGE>
maintain cash, U.S. Government securities (or other appropriate liquid
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 "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 a 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"). Fannie Mae ("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
24
<PAGE>
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 a 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 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.
STEP DOWN PREFERRED SECURITIES Some of the securities purchased by
--------------------------------
Investment Grade and High Yield may also include step down perpetual preferred
securities. These securities are issued by a real estate investment trust
("REIT") making a mortgage loan to a single borrower. The dividend rate paid by
these securities is initially relatively high, but steps down yearly. The stock
is subject to call if the REIT suffers an unfavorable tax event, and to tender
by the issuer's equity holder in the 10th year; both events could be on terms
unfavorable to the holder of the preferred stock. The value of this security
will be affected by changes in the value of the underlying mortgage loan. The
REIT is not diversified, and the value of the mortgaged property may not cover
its obligations. Step down perpetual preferred securities are considered
restricted securities under the Securities Act of 1933.
ASSET-BACKED SECURITIES Asset-backed securities are structurally
-------------------------
similar to mortgage-backed securities, but are secured by an 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
25
<PAGE>
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.
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 appropriate liquid
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.
26
<PAGE>
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 correlation
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 apply 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 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
27
<PAGE>
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, capital
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 each taxable year will be required to be "marked-to-market" for
federal income tax purposes (that is, treated as having been 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.
28
<PAGE>
The following will qualify as permissible 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 a 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 and foreign
currency positions 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 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
29
<PAGE>
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 distribution" 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 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, to clients
of Bartlett who, as of December 19, 1996, were shareholders of Bartlett Short
Term Bond Fund or Bartlett Fixed Income Fund and for whom Bartlett acts as ERISA
fiduciary, 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 transfer funds
30
<PAGE>
to be used to buy Primary Shares at the per share net asset value determined on
the day the funds are 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:
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"), Savings Incentive Match Plan for Employees ("SIMPLE") 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 Primary Shares' 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.
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<PAGE>
The following information applies only 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") 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 preferred customer VISA Gold debit card, a Legg
Mason Brokerage Account and unlimited checkwriting with no minimum check amount.
Premier is offered as an exclusive preferred customer service for shareholders
of certain Legg Mason funds.
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
margin 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.
BancOne Columbus ("BancOne"), 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
BancOne's rules and regulations governing VISA accounts, including the right of
BancOne 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.
Preferred Customer 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 BancOne collect after hours at 1-614-248-4242.
Those shareholders who subscribe to the Premier VISA account privilege may be
liable for the unauthorized use of their VISA Gold debit card in amounts up to
$50.
32
<PAGE>
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 Legg Mason to
execute both a Premier Agreement with Legg Mason and a VISA Account Application
with BancOne. 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 BancOne reserve
the right to terminate or modify any shareholder's Premier services at their
discretion.
You may request Premier Account Status by filling out the Premier Asset
Management Account Agreement and Check Application which can be obtained from
your financial advisor. You will receive your VISA Gold debit card (if
applicable) from BancOne. 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 financial
advisor or Legg Mason's Premier Client Services.
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.
33
<PAGE>
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:
n
P(1+T) = 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:
34
<PAGE>
6
Yield = 2 [(a-b +1) - 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 interest 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 call date 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, Investment
Grade and High Yield for the 30-day period ended December 31, 1996 was 5.79%,
6.29% and 10.28%, respectively. The 30-day yield for Navigator Shares of
Government Intermediate and Investment Grade for the same period was 6.31% and
6.86%, respectively. 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 realized 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 Fund'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
- -----------------
35
<PAGE>
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
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.
36
<PAGE>
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.
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 $43 billion as of March 31,
1997.
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 ($15,000 for High Yield) 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:
Primary Shares
--------------
Value of Original Shares Plus
Shares Obtained Through Value of Shares Acquired
Fiscal Year Reinvestment of Capital Gain Through Reinvestment of Total
Distributions Income Dividends Value
- ------------- ----------------------------- ------------------------ -------
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
37
<PAGE>
Value of Original Shares Plus
Shares Obtained Through Value of Shares Acquired
Fiscal Year Reinvestment of Capital Gain Through Reinvestment of Total
Distributions Income Dividends Value
- ------------- ----------------------------- ------------------------ -------
1993 11,607 5,735 17,342
1994 10,829 6,179 17,008
1995 11,652 7,716 19,368
1996 15,262 10,109 25,371
*August 7, 1987 (commencement of operations) to December 31, 1987.
Navigator Shares
----------------
Value of Original Shares Plus
Shares Obtained Through Value of Shares Acquired
Fiscal Year Reinvestment of Capital Gain Through Reinvestment of Total
Distributions Income Dividends Value
- ------------- ----------------------------- ------------------------ ------
1994* $9,720 $49 $9,769
1995 10,470 710 11,180
1996 10,310 1,439 11,749
*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, 1996 would have been $10,310, and the investor
would have received a total of $6,731 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, 1996 would have been $10,310, and the investor would have received a
total of $1,337 in distributions. Returns would have been lower if the
Manager had not waived/reimbursed certain Fund expenses during the fiscal
years 1987 through 1996.
Investment Grade:
Primary Shares
--------------
Value of Original Shares Plus
Shares Obtained Through Value of Shares Acquired
Reinvestment of Capital Gain Through Reinvestment of Total
Fiscal Year Distributions Income Dividends Value
- ------------- ----------------------------- ------------------------ -------
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
38
<PAGE>
Value of Original Shares Plus
Shares Obtained Through Value of Shares Acquired
Reinvestment of Capital Gain Through Reinvestment of Total
Fiscal Year Distributions Income Dividends Value
- ------------- ----------------------------- ------------------------ -------
1994 10,717 6,590 17,307
1995 12,069 8,724 20,793
1996 11,815 9,874 21,689
*August 7, 1987 (commencement of operations) to December 31, 1987.
Navigator Shares
----------------
Value of Original Shares Plus
Shares Obtained Through Value of Shares Acquired
Fiscal Year Reinvestment of Capital Gain Through Reinvestment of Total
Distributions Income Dividends Value
- ------------- ------------------------------ ------------------------ -------
1995* $10,440 $27 $10,467
1996 10,220 758 10,978
*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, 1996 would have been $10,220, and the investor
would have received a total of $7,705 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, 1996 would have been $10,220, and the investor would have received a
total of $726 in distributions. Returns would have been lower if the
Manager had not waived/reimbursed certain Fund expenses during the fiscal
years 1987 through 1996.
High Yield:
Value of Original Shares Plus
Shares Obtained Through Value of Shares Acquired
Fiscal Year Reinvestment of Capital Gain Through Reinvestment of Total
Distributions Income Dividends Value
- ------------- ----------------------------- ------------------------ -------
1994* $13,560 $1,006 $14,566
1995 14,620 2,570 17,190
1996 15,370 4,383 19,753
*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, 1996 would
have been $15,370, and the investor would have received a total of $3,640 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.
VALUATION OF FUND SHARES
For Government Intermediate, Investment Grade and High Yield:
39
<PAGE>
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.
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 NRSRO 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 days can be purchased by the
Fund; except that the Fund may hold
40
<PAGE>
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, SIMPLEs 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 financial advisor and your employer. Additional information
with respect to these plans is available upon request from any Legg Mason or
affiliated financial advisor.
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, each of 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 $4,000 to the two IRAs, provided that neither
contribution exceeds $2,000. 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
other 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.
41
<PAGE>
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.
Savings Incentive Match Plan for Employees - SIMPLE
- ----------------------------------------------------
Although a salary reduction SEP, or SARSEP, may no longer be
established after December 31, 1996, an employer with no more than 100 employees
that does not maintain another retirement plan instead may establish a SIMPLE
either as separate IRAs or as part of a Code section 401(k) plan. A SIMPLE,
which is not subject to the complicated nondiscrimination rules that generally
apply to qualified retirement plans, will allow certain employees to make
elective contributions of up to $6,000 per year and will require the employer to
make matching contributions up to 3% of each such employee's salary.
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.
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 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.*, [07/24/39] 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.*, [08/31/36] 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*, [08/25/43] President and Director; Senior
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-
42
<PAGE>
Fleming International, Inc. (1986-1992) and Director of the Taxable Fixed Income
Division at T. Rowe Price Associates, Inc. (1973-1992).
RICHARD G. GILMORE, [06/09/27] 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, [12/27/25] 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, [07/18/44] 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, [08/29/44] 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 1991 - March 1993).
T. A. RODGERS, [10/22/34] 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*, [01/01/49] 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.
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 an annual
retainer and a per meeting fee based on average net assets of each Fund at
December 31, as follows:
DECEMBER 31 ANNUAL PER MEETING
AVG. NET ASSETS RETAINER FEE
--------------- -------- -----------
Up to $250 million $ 600 $150
$250 million - $1 billion $1,200 $300
Over $1 billion $2,000 $400
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.
43
<PAGE>
At March 31, 1997, the directors and officers of the Corporation
beneficially owned, in the aggregate, less than 1% of each Fund's outstanding
Shares.
Set forth below is a table which contains the name, address and
percentage ownership of each person who is known by each Fund to own
beneficially and/or of record five percent or more of its outstanding shares as
of April 24, 1997:
<TABLE>
<CAPTION>
===========================================================================================
Navigator U.S. Government Navigator Investment Grade
Name and Address Intermediate Portfolio Portfolio
- -------------------------------------------------------------------------------------------
<S><C>
Legg Mason Wood Walker, Inc. 76.5% --
P.O. Box 1476
Baltimore, MD 21203-1476
(record)
- -------------------------------------------------------------------------------------------
Cincinnati Inc. Employee 6.65% --
Retirement Pension Plan
P.O. Box 11111
Cincinnati, Ohio 45211-0111
(record and beneficial)
- -------------------------------------------------------------------------------------------
Robert Maltz MD Inc. 5.91% --
Retirement Trust
10496 Montgomery Road
Cincinnati, OH 45242-5220
(record and beneficial)
- -------------------------------------------------------------------------------------------
Legg Mason Trust Company -- 100.00%
(record)
Cora B. Coolick Revocable Trust
(beneficial)
7 East Redwood Street
Baltimore, MD 21202
===========================================================================================
</TABLE>
The following table provides certain information relating to the
compensation of the Corporation's directors for the fiscal year ended December
31, 1996. None of the Legg Mason funds has any retirement plan for its directors
and officers.
COMPENSATION TABLE
<TABLE>
<CAPTION>
=======================================================================================================
Aggregate Total Compensation From
Compensation From Corporation and Fund Complex Paid
Name of Person and Position Corporation* to Directors**
- -------------------------------------------------------------------------------------------------------
<S> <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 - 6,000 25,100
Director
- -------------------------------------------------------------------------------------------------------
Charles F. Haugh - 6,000 25,600
Director
- -------------------------------------------------------------------------------------------------------
Arnold L. Lehman - 6,000 25,600
Director
- -------------------------------------------------------------------------------------------------------
Jill E. McGovern - 6,000 25,600
Director
- -------------------------------------------------------------------------------------------------------
T. A. Rodgers - 6,000 25,100
Director
=======================================================================================================
</TABLE>
* Represents fees paid to each director during the fiscal year ended
December 31, 1996.
** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1996. There are nine open-end
investment companies in the Legg Mason complex (with a total of
seventeen funds).
MANAGEMENT AGREEMENT
44
<PAGE>
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.
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 Manager has agreed to waive its fees and reimburse Government
Intermediate and Investment Grade if and to the extent either Fund's expenses
(exclusive of taxes, interest, brokerage and extraordinary expenses) exceed
during any month annual rates of the 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, 1997 $400 million
0.95% April 30, 1996 $400 million
0.90% April 30, 1995 $400 million
0.90% October 31, 1994 $400 million
0.90% August 31, 1993 $400 million
0.85% August 31, 1992 $300 million
Navigator Shares
----------------
Rate Expiration Date Asset Level
---- --------------- -----------
0.50% December 31, 1997 $400 million
45
<PAGE>
Rate Expiration Date Asset Level
---- --------------- -----------
0.45% April 30, 1996 $400 million
0.40% April 30, 1995 $400 million
For the years ended December 31, 1996, 1995 and 1994, the Manager
received management fees of $1,271,172, $1,287,089 and $1,496,733, respectively
(prior to fees waived of $626,029, $713,346 and $788,260, respectively), for
Government Intermediate.
Investment Grade:
Primary Shares
--------------
Rate Expiration Date Asset Level
---- --------------- -----------
1.00% December 31, 1997 $100 million
0.90% April 30, 1996 $100 million
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, 1997 $100 million
0.40% April 30, 1996 $100 million
For the years ended December 31, 1996, 1995 and 1994, the Manager
received management fees of $519,989, $453,028 and $406,981, respectively (prior
to fees waived of $400,971, $374,130 and $370,500, respectively), for Investment
Grade.
For the years ended December 31, 1996 and 1995 and for the period
February 1, 1994 (commencement of operations) to December 31, 1994, High Yield
paid management fees of $1,093,156, $488,993 and $253,100, respectively, to the
Manager.
During the fiscal years ended December 31, 1996, 1995 and 1994,
Government Money Market paid management fees of $1,658,682, $1,353,415 and
$1,006,789, 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
46
<PAGE>
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.
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 Fund)
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 .20%*
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, 1996, 1995 and 1994, the Manager paid
the following fees to the Adviser on behalf of the Funds:
Fund: 1996 1995 1994
- ----- ---- ---- ----
Government Intermediate ........... $462,253 $466,977 $342,829
Investment Grade .................. $ 47,237 $ 32,296 $ 14,593
High Yield ........................ $842,642 $376,525 $194,887
Government Money Market ........... $497,604 $406,025 $302,037
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 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
47
<PAGE>
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: 1996 1995
- ----- ------ ------
Government Intermediate .............. 354% 290%
Investment Grade ..................... 383% 221%
High Yield ........................... 77% 47%
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 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. On the other hand,
research and analysis received by the Adviser from broker-dealers executing
orders for clients other than the Funds may be used for the Fund's benefit. 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.
Fund: 1996 1995 1994
- ----- ---- ---- ----
Government Intermediate $25,230 $33,698 $381,650
Investment Grade $39,683 $28,885 $112,930
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.
48
<PAGE>
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 financial advisors. 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, 1996, Legg Mason incurred the following
expenses with respect to Primary Shares of each Fund:
Government Investment Grade
Intermediate High Yield
------------ ---------------- -----------
Compensation to sales $771,000 $293,000 $541,000
personnel
Printing and mailing of 37,000 72,000 58,000
prospectuses to
prospective shareholders
Advertising 7,000 17,000 12,000
Other 655,000 357,000 478,000
------------ ---------------- -----------
Total expenses $1,470,000 $739,000 $1,089,000
============ ================ ===========
The foregoing are estimated and do not include all expenses fairly
allocable to Legg Mason's or its affiliates' efforts to distribute Primary
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 Funds 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 November 15, 1996, 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 directors noted
49
<PAGE>
that, to the extent the Plan results in additional sales of Primary Shares of a
Fund, the Plan may enable the Fund to achieve economies of scale that could
reduce expenses and to minimize the prospects that the Fund will experience net
redemptions and the accompanying disruption of portfolio management. 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 each equivalent to 0.25% of
each Fund's average daily net assets (other than Government Money Market which
has a fee of 0.10%) 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, 1996, 1995 and 1994, each Fund paid distribution
and service fees to Legg Mason, pursuant to the Underwriting Agreement from
assets attributable to Primary Shares as follows:
Government Intermediate paid $1,135,296, $1,153,298 and $1,344,353,
respectively, to Legg Mason; Investment Grade paid $432,122, $377,479 and
$339,151, respectively to Legg Mason; and High Yield paid $840,822, $376,148 and
$194,692 to Legg Mason for the years ended December 31, 1996 and 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 not to exceed an annual rate of 0.20% of its
average daily net assets. Legg Mason has agreed that it will not request payment
of more than 0.10% annually from the Fund during the first two years following
implementation of the Plan. Effective January 10, 1997, the Fund began
compensating Legg Mason for distribution costs and shareholder services at this
0.10% annual rate.
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.
50
<PAGE>
THE CORPORATION'S INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 217 East Redwood Street, Baltimore, MD 21202,
has been selected by the Directors to serve as the Corporation's independent
accountants.
FINANCIAL STATEMENTS
The Statement of Net Assets as of December 31, 1996; the Statement of
Operations for the year ended December 31, 1996; the Statement of Changes in Net
Assets for the years ended December 31, 1996 and 1995; 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, 1996, are hereby
incorporated by reference in this Statement of Additional Information.
51
<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.
52
<PAGE>
Table of Contents
Page
----
Additional Information About Investment
Limitations and Policies
Additional Tax Information
Additional Purchase and Redemption Information
Performance Information
Valuation of Fund Shares
Tax-Deferred Retirement Plans
The Corporation's Directors and Officers
Management Agreement
Investment Advisory Agreement
Portfolio Transactions and Brokerage
The Fund's Distributor
The Fund's Custodian and Transfer
and Dividend-Disbursing Agent
The Corporation's Legal Counsel
The Corporation's Independent Accountants
Financial Statements
Appendix A
- --------------------------------------------------------------------------------
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, 1996 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 27.011
through 27.04.
(b) Exhibits
(1) (a) Articles of Incorporation -- filed herewith
(b) Articles Supplementary -- filed herewith
(c) Articles Supplementary -- filed herewith
(d) Articles Supplementary -- filed herewith
(e) Articles Supplementary -- filed herewith
(2) (a) Amended By-Laws -- filed herewith
(b) Amendment to By-Laws (effective May 10, 1991 -- filed
herewith
(3) Voting Trust Agreement - none
(4) Specimen Security -- not applicable
(5) (a) Management Agreement
(i) U.S. Government Intermediate-Term Portfolio --
filed herewith
(ii) Investment Grade Income Portfolio -- filed
herewith
(iii) U.S. Government Money Market Portfolio -- filed
herewith
(iv) High Yield Portfolio -- filed herewith
(b) Investment Advisory Agreement
(i) U.S. Government Intermediate-Term Portfolio --
filed herewith
(ii) Investment Grade Income Portfolio -- filed herewith
(iii) U.S. Government Money Market Portfolio -- filed
herewith
(iv) High Yield Portfolio -- filed herewith
(6) Underwriting Agreement
(a) (i) U.S. Government Intermediate-Term and Investmen
Grade Income Portfolios -- filed herewith
(ii) U.S. Government Intermediate-Term and Investment
Grade Income Portfolios(3)
(b) (i) U.S. Government Money Market Portfolio -- filed
herewith
(ii) U.S. Government Money Market Portfolio(3)
(c) Dealer Contract with respect to Navigator Shares(1)
(d) (i) High Yield Portfolio -- filed herewith
(ii) High Yield Portfolio(3)
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement -- filed herewith
(i) Amendment to Custodian Agreement -- filed herewith
<PAGE>
(ii) Amendment to Custodian Agreement -- filed herewith
(iii) Amendment to Custodian Agreement -- filed herewith
(9) Transfer Agent Agreement -- filed herewith
(10) Opinion of Counsel
(a) Investment Grade Income and U.S. Government
Intermediate-Term Portfolios -- filed herewith
(b) U.S. Government Money Market Portfolio -- filed herewith
(c) High Yield Portfolio -- filed herewith
(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 capital -- filed herewith
(14) (a) Prototype IRA Plan(2)
(b) Prototype Keogh Plan(2)
(15) Plan pursuant to Rule 12b-1
(a) (i) Investment Grade Income and U.S. Government
Intermediate-Term Portfolios -- filed herewith
(ii) Investment Grade Income and U.S. Government
Intermediate-Term Portfolios(3)
(b) (i) U.S. Government Money Market Portfolio -- filed
herewith
(ii) U.S. Government Money Market Portfolio(3)
(c) (i) High Yield Portfolio -- filed herewith
(ii) High Yield Portfolio(3)
(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) (27) Financial Data Schedules (filed herewith)
(18) Plan Pursuant to Rule 18f-3 -- none
(1) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 24 to the Registration Statement, SEC File No. 33-12092,
filed May 1, 1996.
(2) 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.
(3) Incorporated herein by reference to corresponding Exhibit of Post-Effective
Amendment No. 25 to the Registration Statement, SEC File No. 33-12092,
filed February 28, 1997.
Item 25. Persons Controlled By or Under Common Control with Registrant
None
<PAGE>
Item 26. Number of Holders of Securities
-------------------------------
Number of Record Holders
Title of Class (as of April 18, 1997)
- -------------- ------------------------
Shares of Capital Stock,
($.001 par value)
U.S. Government Intermediate-Term Portfolio:
Primary Shares 12,439
Navigator Shares 12
Investment Grade Income Portfolio
Primary Shares 5,792
Navigator Shares 4
U.S. Government Money Market Portfolio 14,154
High Yield Portfolio 13,613
Item 27. Indemnification
---------------
This item is incorporated by reference to Item 27 of Part C of
Post-Effective Amendment No. 25 to the Registration Statement, SEC File No.
33-12092 filed February 28, 1997.
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 seventeen 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 filed on June 30, 1996 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 November 26, 1996
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.
<PAGE>
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
of the Board Board and Director
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive Vice Chairman and
Vice President and Director
Director
Richard J. Himelfarb Senior Executive Vice None
President and
Director
Edward A. Taber III Senior Executive Vice President
President and
Director
Robert A. Frank Executive Vice None
President and
Director
Robert G. Sabelhaus Executive Vice None
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
<PAGE>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ----------------- ------------------ ----------
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
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
<PAGE>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ----------------- ------------------ ----------
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
Seth J. Lehr Senior Vice None
1735 Market St. President
Philadelphia, PA 19103
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
John A. Pliakas Senior Vice None
99 Summer Street President
Boston, MA 02101
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
Cheryl Allen Vice President None
221 West Sixth St.
Austin, TX 78701
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
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
<PAGE>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ----------------- ------------------ ----------
John R. Gilner Vice President None
Terrence R. Duvernay Vice President None
1100 Poydras St.
New Orleans, LA 70163
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Edward W. Lister, Jr. Vice President None
Marie K. Karpinski Vice President Vice President
and Treasurer
Anne S. Morse Vice President None
1735 Market St.
Philadelphia, PA 19103
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Jonathan M. Pearl Vice President None
1777 Reisterstown Rd.
Pikesville, MD 21208
Douglas F. Pollard Vice President None
Carl W. Riedy, Jr. Vice President None
Robert W. Schnakenberg Vice President None
1111 Bagby St.
Houston, TX 77002
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
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
F. James Tennies Vice President, None
Asst. Secretary &
Asst. General Counsel
<PAGE>
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
- ----------------- ------------------ ----------
Robert S. Trio Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
Lewis T. Yeager Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Joseph F. Zunic Vice President None
* 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
------------
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. 26 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 28th day of
April, 1997.
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. 26 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 28, 1997
- ------------------------- and Director
John F. Curley, Jr.
/s/Edmund J. Cashman, Jr. Vice Chairman of the April 28, 1997
- ------------------------- Board and Director
Edmund J. Cashman, Jr.
/s/Edward A. Taber, III President and Director April 28, 1997
- -------------------------
Edward A. Taber, III
/s/Richard G. Gilmore Director April 28, 1997
- -------------------------
Richard G. Gilmore*
/s/Charles F. Haugh Director April 28, 1997
- -------------------------
Charles F. Haugh*
/s/Arnold L. Lehman Director April 28, 1997
- -------------------------
Arnold L. Lehman*
/s/Jill E. McGovern Director April 28, 1997
- -------------------------
Jill E. McGovern*
/s/T.A. Rodgers Director April 28, 1997
- -------------------------
T.A. Rodgers*
/s/Marie K. Karpinski Vice President April 28, 1997
- ------------------------- and Treasurer
Marie K. Karpinski
*Signatures affixed by Marie K. Karpinski pursuant to powers of attorney, dated
May 18, 1992, incorporated herein by reference to Post-Effective Amendment No.
25, filed February 28, 1997.
ARTICLES OF INCORPORATION
OF
LEGG MASON INCOME TRUST, INC.
FIRST: The undersigned, ARTHUR J. BROWN, whose post office address is
South Lobby-Ninth Floor, 1800 M Street, N.W., Washington, D.C. 20036, being at
least eighteen years of age, under and by virtue of the General Laws of the
State of Maryland authorizing the formation of corporations, is acting as sole
incorporator with the intention of forming a corporation.
SECOND: The name of the Corporation is LEGG MASON INCOME TRUST, INC.
(the "Corporation").
THIRD: The purposes for which the Corporation is formed are to act as
an open-end management investment company under the Investment Company Act of
1940, as amended ("1940 Act"), and to exercise and enjoy all of the powers,
rights and privileges granted to, or conferred upon, corporations of a similar
character by the General Laws of the State of Maryland now or hereafter in
force, including, but not limited to, the following:
(a) To hold, invest and reinvest its funds, and in connection
therewith to hold part of all of its funds in cash, and to
purchase, subscribe for or otherwise acquire, hold for
investment or otherwise, to trade and deal in, write, sell,
assign, negotiate, transfer, exchange, lend, pledge or
otherwise dispose of or turn to account or realize upon,
securities (which term "securities" shall, for the purposes of
these Articles of Incorporation, without limiting the
generality thereof, be deemed to include any stocks, shares,
bonds, debentures, bills, notes, mortgages or other
obligations or evidences of indebtedness, and any options,
certificates, receipts, warrants or other instruments
representing rights to receive, purchase or subscribe for the
same, or evidencing of representing any other rights or
interests therein, or in any property or assets; and any
negotiable or non-negotiable instruments and money market
instruments, including bank certificates of deposit, finance
paper, commercial paper, bankers' acceptances and all kinds of
repurchase or reverse repurchase agreements) created or issued
by any United States or foreign issuer (which term "issuer"
shall, for the purpose of these Articles of Incorporation,
without limiting the generality thereof, be deemed to include
any persons, firms, associations, partnerships, corporations,
syndicates, combinations, organizations, governments or
subdivisions, agencies or instrumentalities of any
government); and to exercise, as owner or holder of any
securities, all rights, powers and privileges in respect
thereof; and to do any and all acts and things for the
preservation, protection, improvement and enhancement in value
of any and all such securities.
(b) To acquire all or any part of the goodwill, rights, property,
and business of any person, firm, association or corporation
heretofore or hereafter engaged in any
<PAGE>
business similar to any business which the Corporation has the
power to conduct, and to hold, utilize, enjoy and in any
manner dispose of the whole or any part of the rights,
property and business so acquired, and to assume in connection
therewith any liabilities of any such person, firm,
association or corporation.
(c) To apply for, obtain, purchase or otherwise acquire, any
patents, copyrights, licenses, trademarks, trade names and the
like, which may be capable of being used for any of the
purposes of the Corporation; and to use, exercise, develop,
grant licenses in respect of, sell and otherwise turn to
account, the same.
(d) To issue and sell shares of its own capital stock and
securities convertible into such capital stock in such amounts
and on such terms and conditions, for such purposes and for
such amount or kind of consideration (including without
limitation thereto, securities) now or hereafter permitted by
the laws of the State of Maryland, by the Investment Company
Act of 1940 (the "1940 Act") and by these Articles of
Incorporation, as its Board of Directors may determine.
(e) To purchase or otherwise acquire, hold, dispose of, resell,
transfer, reissue or cancel (all without the vote or consent
of the stockholders of the Corporation) shares of its capital
stock in any manner and to the extent now or hereafter
permitted by the laws of the State of Maryland, by the 1940
Act and by these Articles of Incorporation.
(f) To conduct its business in all its branches at one or more
offices in Maryland and elsewhere in any part of the world,
without restriction or limit as to extent.
(g) To exercise and enjoy, in Maryland and in any other states,
territories, districts and United States dependencies and in
foreign countries, all of the powers, rights and privileges
granted to, or conferred upon, corporations by the General
Laws of the State of Maryland now or hereafter in force.
(h) In general to carry on any other business in connection with
or incidental to its corporate purposes, to do everything
necessary, suitable or proper for the accomplishment of such
purposes or for the attainment of any object or the
furtherance of any power hereinbefore set forth, either alone
or in association with others, to do every other act or thing
incidental or appurtenant to or growing out of or connected
with its business or purposes, objects or powers, and, subject
to the foregoing, to have and exercise all the powers, rights
and privileges conferred upon corporations by the laws of the
State of Maryland as in force from time to time.
The foregoing objects and purposes shall, except as otherwise expressly
provided, be in no way limited or restricted by reference to, or inference from,
the terms of any other clause of this or any other Article of these Articles of
Incorporation, and shall each be regarded as independent and construed as a
power as well as an object and a purpose, and the enumeration of specific
purposes, objects and powers shall not be construed to limit or restrict in any
manner the meaning of general terms or the general powers of the Corporation now
or hereafter conferred by the laws of Maryland, nor shall the expression of one
thing be deemed to exclude another though it be of like nature, not expressed;
provided however, that the Corporation shall not have power to carry on within
the State of Maryland any business
<PAGE>
whatsoever the carrying on of which would preclude it from being classified as
an ordinary business corporation under the laws of said State; nor shall it
carry on any business, or exercise any powers, in any other state, territory,
district or country except to the extent that the same may lawfully be carried
on or exercised under the laws thereof.
Incident to meeting the purposes specified above, the Corporation also
shall have the power:
(1) To acquire (by purchase, lease or otherwise) and to hold, use,
maintain, develop and dispose (by sale or otherwise) of any property, real or
personal, and any interest therein.
(2) To borrow money and, in this connection, issue notes or other
evidence of indebtedness.
(3) Subject to any applicable provisions of law, to buy, hold, sell,
and otherwise deal in and with foreign exchange.
FOURTH: The post office address of the principal office of the
Corporation in the State of Maryland is 7 East Redwood Street, Baltimore,
Maryland 21202. The name of the resident agent of the Corporation in the State
of Maryland is Charles A. Bacigalupo and the post office address of the resident
agent is 7 East Redwood Street, Baltimore, Maryland 21202. Said resident agent
is a citizen of the State of Maryland and actually resides therein.
FIFTH: Section 5.1. CAPITAL STOCK The total number of shares of capital
stock of all classes which the Corporation shall have authority to issue is one
hundred million (100,000,000) shares, of the par value of one-tenth of one cent
($.001) (the "Shares"), and of the aggregate par value of one hundred thousand
dollars ($100,000). The Shares may be issued by the Board of Directors in such
separate and distinct series ("Series") as the Board of Directors shall from
time to time create and establish. The Board of Directors shall have full power
and authority, in its sole discretion, to create and establish Shares having
such preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption as shall be
fixed and determined from time to time by resolution or resolutions providing
for the issuance of such Shares adopted by the Board of Directors. In addition,
the Board of Directors is hereby expressly granted authority to increase or
decrease the number of Shares of any class, but the number of Shares of any
class shall not be decreased by the Board of Directors below the number of
Shares thereof then outstanding.
The Board of Directors of the Corporation is authorized, from time to
time, to classify or to reclassify, as the case may be, any unissued Shares of
the Corporation in separate series. The shares of said series of stock shall
have such preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption as shall be
fixed and determined from time to time by the Board of Directors. The
Corporation may hold as treasury Shares, reissue for such consideration and on
such terms as the Board of Directors may determine, or cancel, at their
discretion from time to time, any Shares reacquired by the Corporation. No
holder of any of the Shares of any class shall be entitled as of right to
subscribe for, purchase, or otherwise acquire any Shares of the Corporation
which the Corporation proposes to issue or reissue.
<PAGE>
Without limiting the authority of the Board of Directors set forth
herein to establish and designate any further Series, and to classify and
reclassify any unissued Shares, there is hereby established and classified, one
Series of stock comprised of fifty million shares to be known as the "Legg Mason
Investment Grade Income Portfolio" and a second Series of stock comprised of
fifty million Shares to be known as the "Legg Mason U.S. Government
Intermediate-Term Portfolio."
The Corporation shall have authority to issue any additional shares
hereafter authorized and any shares redeemed or repurchased by the Corporation.
All Shares of any class when properly issued in accordance with these Articles
of Incorporation shall be fully paid and nonassessable.
Section 5.2. ESTABLISHMENT OF SERIES The establish-
ment of any Series in addition to those established in Section 5.1 hereof shall
be effective upon the adoption of a resolution by a majority of the then
Directors setting forth such establishment and designation and the relative
rights and preferences of the Shares of such Series. At any time that there are
no Shares outstanding of any particular Series previously established and
designated, the Directors may by a majority vote abolish that Series and the
establishment and designation thereof.
Section 5.3. DIVIDENDS Dividends and distributions
on Shares may be declared and paid with such frequency, in such form and in such
amount as the Board of Directors may from time to time determine. Dividends may
be declared daily or otherwise pursuant to a standing resolution or resolutions
adopted only once or with such frequency as the Board of Directors may
determine.
The Board of Directors shall have the power, in its sole discretion, to
distribute in any fiscal year as dividends (including dividends designated in
whole or in part as capital gain distributions,), amounts sufficient, in the
opinion of the Board of Directors, to enable each Series of the Corporation to
qualify as a regulated investment company under the Internal Revenue Code of
1986, as amended, or any successor or comparable statute thereto, and
regulations promulgated thereunder, and to avoid liability of each Series of the
Corporation for Federal income tax in respect of that year. However, nothing in
the foregoing shall limit the authority of the Board of Directors to make
distributions greater than or less than the amount necessary to qualify as a
regulated investment company and to avoid liability of the Corporation for such
tax.
Dividends and distributions may be paid in cash, property or Shares, or
a combination thereof, as determined by the Board of Directors or pursuant to
any program that the Board of Directors may have in effect at the time. Any such
dividend or distribution paid in Shares will be paid at the current net asset
value thereof as defined in Section 5.7.
Section 5.4. ASSETS AND LIABILITIES OF SERIES All
consideration received by the Corporation for the issue or sale of Shares of a
particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits, and
<PAGE>
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall be
referred to as "assets belonging to" that Series. In addition, any assets,
income, earnings, profits, and proceeds thereof, funds, or payments which are
not readily identifiable as belonging to any particular Series shall be
allocated by the Board of Directors between and among one or more of the Series
in such manner as the Board of Directors, in its sole discretion, deems fair and
equitable. Each such allocation shall be conclusive and binding upon the
Stockholders of all Series for all purposes, and shall be referred to as assets
belonging to that Series. The assets belonging to a particular Series shall be
so recorded upon the books of the Corporation. The assets belonging to each
particular Series shall be charged with the liabilities of the Series and all
expenses, costs, charges and reserves attributable to that Series. Any general
liabilities, expenses, costs, charges or reserves of the Corporation which are
not readily identifiable as belonging to any particular Series shall be
allocated and charged by the Board of Directors between or among any one or more
of the Series in such a manner as the Board of Directors in its sole discretion
deems fair and equitable. Each such allocation shall be conclusive and binding
upon the Stockholders of all Series for all purposes.
Section 5.5. VOTING On each matter submitted to a vote of the
Stockholders, each holder of a Share shall be entitled to one vote for each
Share and fractional votes for fractional Shares standing in his name on the
books of the Corporation; provided, however, that when required by the 1940 Act
or rules thereunder or when the Board of Directors has determined that the
matter affects only the interests of one Series, matters may be submitted to a
vote of the Stockholders of a particular Series, and each holder of Shares
thereof shall be entitled to votes equal to the full and fractional Shares of
the Series standing in his name on the books of the Corporation. The presence in
person or by proxy of the holders of one-third of the shares of capital stock of
the Corporation outstanding and entitled to vote thereat shall constitute a
quorum for the transaction of business at a Stockholders' meeting, except that
where any provision of law or of these Articles of Incorporation permit or
require that holders of any Series shall vote as a Series, then one-third of the
aggregate number of shares of capital stock of that Series outstanding and
entitled to vote shall constitute a quorum for the transaction of business of
that Series.
Section 5.6. REDEMPTION BY SHAREHOLDER Each holder of Shares
shall have the right at such times as may be permitted by the Corporation to
require the Corporation to redeem all or any part of his Shares at a redemption
price per share equal to the net asset value per Share as of such time as the
Board of Directors shall have prescribed by resolution. In the absence of such
resolution, the redemption price per share shall be the net asset value next
determined (in accordance with Section 5.7) after receipt by the Corporation of
a request for redemption in proper form less such charges as are determined by
the Board of Directors and described in the Corporation's registration statement
under the Securities Act of 1933. The Board of Directors may specify conditions,
prices, and places or redemption, and may specify binding requirements for the
proper form or forms of requests for redemption. Payment of the redemption price
may be wholly or partly in securities or other assets at the value of such
securities or assets used in such determination of net asset value, or may be in
<PAGE>
cash. Notwithstanding the foregoing, the Board of Directors may postpone payment
of the redemption price and may suspend the right of the holders of Shares to
require the Corporation to redeem Shares of that class during any period or at
any time when and to the extent permissible under the 1940 Act.
Section 5.7. NET ASSET VALUE PER SHARE The net asset value of
each Share of each Series shall be the quotient obtained by dividing the value
of the net assets of the Series (being the value of the assets of the Series
less its actual and accrued liabilities exclusive of Capital Stock and Surplus)
by the total number of Shares of the Series outstanding. The Board of Directors
shall have the power and duty to determine from time to time the net asset value
per Share at such times and by such methods as it shall determine subject to any
restrictions or requirements under the 1940 Act and the rules, regulations and
interpretations thereof promulgated or issued by the Securities and Exchange
Commission or insofar as permitted by any order of the Securities and Exchange
Commission applicable to the Corporation. The Board of Directors may delegate
such power and duty to any one or more of the directors and officers of the
Corporation, to the Corporation's manager or investment adviser, to the
custodian or depository of the Corporation's assets, or to another agent of the
Corporation.
Section 5.8. REDEMPTION BY THE CORPORATION The Board of
Directors may cause the Corporation to redeem at current net asset value all
Shares owned or held by any one Stockholder having an aggregate current net
asset value of less than five hundred dollars ($500). No such redemption shall
be effected unless the Corporation has given the Stockholder at least sixty (60)
days' notice of its intention to redeem the Shares and an opportunity to
purchase a sufficient number of additional Shares to bring the aggregate current
net asset value of his Shares to five hundred dollars ($500). Upon redemption of
Shares pursuant to this Section, the Corporation shall promptly cause payment of
the full redemption price to be made to the holder of Shares so redeemed.
SIXTH: Section 6.1. ISSUANCE OF NEW STOCK The Board of Directors is
authorized to issue and sell or cause to be issued and sold from time to time
(without the necessity of offering the same or any part thereof to existing
shareholders) all or any portion or portions of the entire authorized but
unissued Shares of the Corporation, and all or any portion or portions of the
Shares of the Corporation from time to time in its treasury, for cash or for any
other lawful consideration or considerations and on or for any terms,
conditions, or prices consistent with the provisions of law and of the Articles
of Incorporation at the time in force; provided, however, that in no event shall
Shares of the Corporation having a par value be issued or sold for a
consideration or considerations less in amount or value than the par value of
the Shares so issued or sold, and provided further that in no event shall any
Shares of the Corporation be issued or sold, except as a stock dividend
distributed to shareholders, for a consideration (which shall be net to the
Corporation after underwriting discounts or commissions) less in amount or value
than the net asset value of the Shares so issued or sold determined as of such
time as the Board of Directors shall have by resolution prescribed. In the
absence of such a resolution, such net asset value shall be that next determined
after an unconditional order in proper form to purchase such Shares is accepted,
except that Shares may be sold to an underwriter at (a) the net asset value
determined next after such orders are
<PAGE>
received by a dealer with whom such underwriter has a sales agreement or (b) the
net asset value determined at a later time.
Section 6.2. FRACTIONAL SHARES The Corporation ma
issue and sell fractions of Shares having pro rata all the rights of full
Shares, including, without limitation, the right to vote and to receive
dividends, and wherever the words "Share" or "Shares" are used in these Articles
or in the Bylaws they shall be deemed to include fractions of Shares, where the
context does not clearly indicate that only full Shares are intended.
SEVENTH: Notwithstanding any provision of law requiring a greater
proportion than a majority of the votes of all classes (or of any class entitled
to vote thereon as a separate class) to take or authorize any action, in
accordance with the authority granted by Section 2- 104(b)(5) of the Maryland
General Corporation Law, the Corporation is hereby authorized to take such
action upon the concurrence of a majority of the aggregate number of Shares
entitled to vote thereon (or a majority of the aggregate number of Shares of a
class entitled to vote thereon as a separate class). The right to cumulate votes
in the election of directors is expressly prohibited.
EIGHTH: Section 8.1. BOARD OF DIRECTORS All corporate powers and
authority of the Corporation (except as otherwise provided by statute, by these
Articles of Incorporation, or by the By-Laws of the Corporation) shall be vested
in and exercised by the Board of Directors. The number of directors constituting
the Board of Directors shall be such number as may from time to time be fixed in
or in accordance with the By-Laws of the Corporation, provided that after stock
is issued to more than one stockholder, such number shall not be less than
three. Except as provided in the By-Laws, the election of directors may be
conducted in any way approved at the meeting (whether of stockholders or
directors) at which the election is held, provided that such election shall be
by ballot whenever requested by any person entitled to vote. The name of the
person who shall act as initial director until stock is issued to more than one
stockholder or the first meeting of stockholders, whichever shall occur earlier,
and until his successor(s) has been duly chosen and qualified is John F. Curley,
Jr.
Section 8.2. BY-LAWS Except as may otherwise be
provided in the By-Laws, the Board of Directors of the Corporation is expressly
authorized to make, alter, amend and repeal By-Laws or to adopt new By-Laws of
the Corporation, without any action on the part of the Stockholders; but the
By-Laws made by the Board of Directors and the power so conferred may be altered
or repealed by the Stockholders.
NINTH: Section 9.1. The Board of Directors may in its discretion from
time to time enter into an exclusive or non-exclusive distribution contract or
contracts providing for the sale of Shares whereby the Corporation may either
agree to sell Shares to the other party to the contract or appoint such other
party its sales agent for such shares (such other party being herein sometimes
called the "underwriter"), and in either case on such terms and conditions as
may be prescribed in the By-Laws, if any, and such further terms and conditions
as the Board of Directors may in its discretion determine not inconsistent with
the provisions of these Articles of Incorporation and such contract may also
provide for the repurchase of
<PAGE>
Shares of the Corporation by such other party as agent of the Corporation. The
Board of Directors may also in its discretion from time to time enter into an
investment advisory or management contract or contracts whereby the other party
to such contract shall undertake to furnish to the Board of Directors such
management, investment advisory, statistical and research facilities and
services and such other facilities and services, if any, and all upon such terms
and conditions as the Board of Directors may in its discretion determine.
Section 9.2. Any contract of the character describe
in Section 9.1 or for services as administrator, custodian, transfer agent or
disbursing agent or related services may be entered into with any corporation,
firm, trust or association, although any one or more of the directors or
officers of the Corporation may be an officer, director, trustee, shareholder or
member of such other party to the contract, and no such contract shall be
invalidated or rendered voidable by reason of the existence of any such
relationship be liable merely by reason of such relationship for any loss or
expense to the Corporation under or by reason of said contract or accountable
for any profit realized directly or indirectly therefrom, provided that the
contract when entered into was reasonable and fair and not inconsistent with the
provisions of this Article NINTH. The same person (including a firm,
corporation, trust, or association) may be the other party to contracts entered
into pursuant to Section 9.1 above, and any individual may be financially
interested or otherwise affiliated with persons who are parties to any or all of
the contracts mentioned in this Section 9.2.
TENTH: The Corporation shall indemnify its present and past directors,
officers, employees, and agents, and persons who are serving or have served at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or enterprise, to the
maximum extent permitted by applicable law, in such manner as may be provided in
the By-Laws; provided, that no director, officer, investment adviser or
principal underwriter of the Corporation shall be indemnified in violation of
Section 17(h) or (i) of the 1940 Act. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability.
ELEVENTH: The Corporation reserves the right from time to time to make
any amendment of these Articles of Incorporation, now or hereafter authorized by
law, including any amendment which alters contract rights, as expressly set
forth in these Articles of Incorporation, of any outstanding Share. Any
amendment to these Articles of Incorporation may be adopted at a meeting of the
stockholders upon receiving an affirmative majority vote of a majority of all
votes entitled to be cast thereon.
IN WITNESS WHEREOF, the undersigned incorporator of LEGG MASON INCOME
TRUST, INC., has executed the foregoing Articles of Incorporation and hereby
acknowledges the same to be his act and further acknowledges that, to the best
of his knowledge,
<PAGE>
information and belief, the matters and facts set forth therein are true in all
material respects under the penalties of perjury.
On the 28th day of April, 1987.
/s/ Arthur J. Brown
-----------------------------
Arthur J. Brown
ARTICLES SUPPLEMENTARY TO
ARTICLES OF INCORPORATION OF
LEGG MASON INCOME TRUST, INC.
FIRST: The Board of Directors of Legg Mason Income Trust, Inc., a
Maryland Corporation ("Corporation") organized on April 28, 1987, has, by action
on August 30, 1988, increased the aggregate number of shares of capital stock
that the Corporation has authority to issue from one hundred million
(100,000,000) shares to three hundred million (300,000,000) shares. Of the one
hundred million (100,000,000) shares of capital stock that the Corporation
previously was authorized to issue, fifty million (50,000,000) shares were
classified as the Legg Mason Investment Grade Income Portfolio and remain so
classified; and fifty million (50,000,000) shares were classified as the Legg
Mason U.S. Government Intermediate-Term Portfolio and remain so classified.
The two hundred million (200,000,000) shares that the Corporation is
newly authorized to issue are classified as a newly created series, known as
Legg Mason U.S. Government Money Market Portfolio. The par value of the shares
of capital stock remains 1/10th of one cent ($0.001) per share. Immediately
before the increase in the aggregate number of authorized shares, the aggregate
par value of all of the shares was one hundred thousand (100,000) dollars; as
increased the aggregate par value of all of the shares is three hundred thousand
(300,000) dollars. The par value of the shares of each of the Legg Mason
Investment Grade Income Portfolio and the Legg Mason U.S. Government
Intermediate-Term Portfolio was fifty thousand (50,000) dollars before the
increase in the Corporation's authorized shares and so remains. The par value of
the shares of the Legg Mason U.S. Government Money Market Portfolio is two
hundred thousand (200,000) dollars.
SECOND: The Corporation is registered with the U.S. Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940.
THIRD: The total number of shares of capital stock that the Corporation
has authority to issue has been increased by the Board of Directors in
accordance with Section 2-105(c) of the Maryland General Corporation Law.
IN WITNESS WHEREOF, the undersigned President of Legg Mason Income
Trust, Inc. hereby executes these Articles Supplementary on behalf of the
Corporation, and hereby acknowledges these Articles Supplementary to be the act
of the Corporation and further states under the penalties for perjury that, to
the best of his knowledge, information and belief, the matters and facts set
forth herein are true in all material respects.
Date: August 30, 1988
/s/Edmund J. Cashman, Jr. Attest: /s/Barbara Diehl
- -------------------------- --------------------------
Edmund J. Cashman, Jr. Barbara Diehl
President Assistant Secretary
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
LEGG MASON INCOME TRUST, INC.
FIRST: The Board of Directors of Legg Mason Income Trust, Inc., a
Maryland Corporation ("Corporation") organized on April 28, 1987, has, by action
on May 12, 1989, increased the aggregate number of shares of capital stock that
the Corporation has authority to issue from three hundred million (300,000,000)
shares to one billion (1,000,000,000) shares. Of the three hundred million
(300,000,000) shares of capital stock that the Corporation previously was
authorized to issue, fifty million (50,000,000) shares were classified as the
Legg Mason Investment Grade Income Portfolio and remain so classified; fifty
million (50,000,000) shares were classified as the Legg Mason U.S. Government
Intermediate-Term Portfolio and remain so classified; and two hundred million
(200,000,000) shares were classified as the Legg Mason U.S. Government Money
Market Portfolio and remain so classified.
The seven hundred million (700,000,000) shares that the Corporation is
newly authorized to issue are classified as shares of the Legg Mason U.S.
Government Money Market Portfolio. The par value of the shares of capital stock
remains 1/10th of one cent ($0.001) per share. Immediately before the increase
in the aggregate number of authorized shares, the aggregate par value of all of
the shares was three hundred thousand (300,000) dollars; as increased, the
aggregate par value of all of the shares is one million (1,000,000) dollars. The
par value of the shares of each of the Legg Mason Investment Grade Income
Portfolio and the Legg Mason U.S. Government Intermediate-Term Portfolio was
fifty thousand (50,000) dollars before the increase in the Corporation's
authorized shares and so remains. The par value of the shares of the Legg Mason
U.S. Government Money Market Portfolio was two hundred thousand (200,000)
dollars before the increase in the Corporation's authorized shares; as
increased, the par value of the shares of the Legg Mason U.S. Government Money
Market Portfolio is nine hundred thousand (900,000) dollars.
SECOND: The Corporation is registered with the U.S. Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940.
THIRD: The total number of shares of capital stock that the Corporation
has authority to issue has been increased by the Board of Directors in
accordance with Section 2-105(c) of the Maryland General Corporation Law.
IN WITNESS WHEREOF, the undersigned President of Legg Mason Income
Trust, Inc. hereby executes these Articles Supplementary on behalf of the
Corporation, and hereby acknowledges these Articles Supplementary to be the act
of the Corporation and further states under the penalties for perjury that, to
the best of his knowledge, information and belief, the matters and facts set
forth herein are true in all material respects.
<PAGE>
Date: May 31, 1989
/s/Edmund J. Cashman, Jr. Attest: /s/Barbara Diehl
- --------------------------- ----------------------------
Edmund J. Cashman, Jr. Barbara Diehl
President Assistant Secretary
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
LEGG MASON INCOME TRUST, INC.
FIRST: The Board of Directors of Legg Mason Income Trust, Inc., a
Maryland Corporation ("Corporation") organized on April 28, 1987, has, by action
on September 7, 1993, reclassified one hundred million (100,000,000) unissued
shares of capital stock that the Corporation has authority to issue. Of the one
billion (1,000,000,000) shares of capital stock that the Corporation has
authority to issue:
(1) fifty million (50,000,000) shares previously were classified as the
Legg Mason Investment Grade Income Portfolio and remain so classified;
(2) fifty million (50,000,000) shares previously were classified as the
Legg Mason U.S. Government Intermediate-Term Portfolio and remain so
classified;
(3) nine hundred million (900,000,000) shares previously were classified as
the Legg Mason U.S. Government Money Market Portfolio, of which eight
hundred million (800,000,000) remain so classified; and
(4) one hundred million (100,000,000) unissued shares of the nine hundred
million (900,000,000) shares previously classified as the Legg Mason
U.S. Government Money Market Portfolio have been reclassified as shares
of the Legg Mason High Yield Portfolio;
The par value of the shares of capital stock of the Corporation remains
1/10th of one cent ($0.001) per share. Before the reclassification described
herein, the aggregate par value of all of the authorized shares was one million
(1,000,000) dollars and so remains. The par value of the shares of each of the
Legg Mason Investment Grade Income Portfolio and the Legg Mason U.S. Government
Intermediate-Term Portfolio was fifty thousand (50,000) dollars before the
reclassification and so remains. Prior to the reclassification described herein,
the par value of the shares of the Legg Mason U.S. Government Money Market
Portfolio was nine hundred thousand (900,000) dollars; after the
reclassification described herein, the par value of the shares of the Legg Mason
U.S. Government Money Market Portfolio is eight hundred thousand (800,000)
dollars. After the reclassification described herein, the par value of the
shares of the Legg Mason High Yield Portfolio is one hundred thousand (100,000)
dollars.
SECOND: The Corporation is registered with the U.S. Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940.
THIRD: The total number of shares of capital stock that the Corporation
has authority to issue remains unchanged.
<PAGE>
FOURTH: The preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption of the shares of stock reclassified as the Legg Mason
High Yield Portfolio are those of a Series of shares of capital stock, as set
forth in the Corporation's charter.
FIFTH: The reclassification described herein was effected by the board
of directors of the Corporation pursuant to a power contained in Articles 5.1
and 5.2 of the Corporation's charter.
IN WITNESS WHEREOF, the undersigned President of Legg Mason Income
Trust, Inc. hereby executes these Articles Supplementary on behalf of the
Corporation, and hereby acknowledges these Articles Supplementary to be the act
of the Corporation and further states under the penalties for perjury that, to
the best of his knowledge, information and belief, the matters and facts set
forth herein are true in all material respects.
Date: September 23, 1993 /s/Edmund J. Cashman, Jr.
-------------------------
Edmund J. Cashman, Jr.
President
Attest: /s/Stefanie L. Wong
-----------------------
Stefanie L. Wong
Secretary
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
LEGG MASON INCOME TRUST, INC.
FIRST: The Board of Directors ("Board") of Legg Mason Income Trust,
Inc., a Maryland Corporation ("Corporation") organized on April 28, 1987, has,
by action on May 13, 1994, reclassified three hundred million (300,000,000)
shares of capital stock of the Corporation. Of the one billion (1,000,000,000)
shares of capital stock that the Corporation has authority to issue:
(1) fifty million (50,000,000) shares, which were previously classified as
the U.S. Government Intermediate-Term Portfolio, including all of those
outstanding at the time these Articles Supplementary become effective,
have been designated as shares of the U.S. Government Intermediate-Term
Portfolio, Class A;
(2) fifty million (50,000,000) shares which were previously classified as
the Investment Grade Income Portfolio, including all of those
outstanding at the time these Articles Supplementary become effective,
have been designated as shares of the Investment Grade Income
Portfolio, Class A;
(3) fifty million (50,000,000) shares, previously classified as shares of
the High Yield Portfolio, including all of those outstanding at the
time these Articles Supplementary become effective, have been
designated as shares of the High Yield Portfolio, Class A;
(4) fifty million (50,000,000) unissued shares, previously classified as
shares of the High Yield Portfolio, have been reclassified as shares of
the High Yield Portfolio, Class Y;
(5) fifty million (50,000,000) unissued shares, previously classified as
shares of the U.S. Government Money Market Portfolio, have been
reclassified as shares of the U.S. Government Intermediate-Term
Portfolio, Class Y;
(6) fifty million (50,000,000) unissued shares, previously classified as
shares of the U.S. Government Money Market Portfolio, have been
reclassified as shares of the Investment Grade Income Portfolio, Class
Y;
(7) seven hundred million (700,000,000) shares, previously classified as
the Legg Mason U.S. Government Money Market Portfolio, including all
shares of the Legg Mason U.S. Government Money Market Portfolio
outstanding at the time these Articles Supplementary become effective,
remain so classified.
The par value of the shares of capital stock of the Corporation remains
one tenth of one cent ($0.001) per share. Before the designation and
reclassification described herein, the aggregate par value of all of the
authorized shares was one million (1,000,000) dollars and so remains.
The Class A and Class Y shares of each Portfolio shall represent
investment in the same pool
<PAGE>
of assets and shall have the same preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption, except as provided in the Corporation's
Articles of Incorporation and as set forth below:
(1) The net asset values of Class A shares and Class Y shares shall be
calculated separately. In calculating the net asset values,
(a) Each class shall be charged with the transfer agency fees and
Rule 12b-1 fees (or equivalent fees by any other name)
attributable to that class, and not with the transfer agency
fees and Rule 12b-1 (or equivalent fees by any other name)
attributable to any other class;
(b) Each class shall be charged separately with such other
expenses as may be permitted by SEC rule or order and as the
board of directors shall deem appropriate;
(c) All other fees and expenses shall be charged to both classes,
in the proportion that the net asset value of the Portfolio,
except as the Securities and Exchange Commission may otherwise
require;
(2) Dividends and other distributions shall be paid on Class A shares and
Class Y shares at the same time. The amounts of all dividends and other
distributions shall be calculated separately for Class A shares and
Class Y shares. In calculating the amount of any dividend or other
distribution,
(a) Each class shall be charged with the transfer agency fees and
Rule 12b-1 fees (or equivalent fees by any other name)
attributable to that class, and not with the transfer agency
fees and Rule 12b-1 (or equivalent fees by any other name)
attributable to any other class;
(b) Each class shall be charged separately with such other
expenses as may be permitted by SEC rule or order and as the
board of directors shall deem appropriate;
(c) All other fees and expenses shall be charged to both classes,
in the proportion that the net asset value of the Portfolio,
except as the Securities and Exchange Commission may otherwise
require;
(3) Each class shall vote separately on matters pertaining only to that
class, as the directors shall from time to time determine. On all other
matters, all classes shall vote together, and every share, regardless
of class, shall have an equal vote with every other share.
SECOND: The Corporation is registered with the U.S. Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940.
THIRD: The total number of shares of capital stock that the Corporation
has authority to issue remains unchanged.
<PAGE>
FOURTH: The reclassification described herein was effected by the Board
of Directors of the Corporation pursuant to a power contained in Sections 5.1
and 5.2 of the Corporation's Articles of Incorporation.
IN WITNESS WHEREOF, the undersigned President of Legg Mason Income
Trust, Inc. hereby executes these Articles Supplementary on behalf of the
Corporation, and hereby acknowledges these Articles Supplementary to be the act
of the Corporation and further states under the penalties for perjury that, to
the best of his knowledge, information and belief, the matters and facts set
forth herein are true in all material respects.
Date: July , 1994
/s/Edmund J. Cashman, Jr. Attest: /s/Blanche P. Roche
- ------------------------------- ----------------------------------
Edmund J. Cashman, Jr. Blanche P. Roche
President Assistant Vice President
Baltimore, Maryland (ss)
Subscribed and sworn to before me this _______ day of __________________, 1994.
/s/Melody N. McFaddin
- ----------------------
Notary Public
EXHIBIT 2
LEGG MASON INCOME TRUST, INC.
A Maryland Corporation
AMENDED
BY-LAWS
<PAGE>
May 13, 1988
ARTICLE I
---------
NAME OF CORPORATION, LOCATION OF OFFICES
----------------------------------------
AND SEAL
--------
Section 1.01. Name: The name of the Corporation is Legg Mason Income
Trust, Inc.
Section 1.02. Principal Offices: The principal office of the
Corporation in the State of Maryland shall be located at 7 East Redwood Street,
Baltimore, Maryland 21202. The Corporation may establish and maintain such other
offices and places of business as the board of directors may, from time to time,
determine.
Section 1.03. Seal: The corporate seal of the Corporation shall be
circular in form and shall bear the name of the Corporation, the year of its
incorporation, and the words "Corporate Seal, Maryland." The form of the seal
shall be subject to alteration by the board of directors and the seal may be
used by causing it or a facsimile to be impressed or affixed or printed or
otherwise reproduced. Any officer or director of the Corporation shall have
authority to affix the corporate seal of the Corporation to any document
requiring the same.
ARTICLE II
----------
STOCKHOLDERS
------------
Section 2.01. Annual Meetings: There shall be no stockholders' meetings
for the election of directors and the transaction of other proper business
except as required by law or as hereinafter provided.
Section 2.02. Special Meetings: Special meetings of the stockholders
may be called at any time by the chairman of the board, the president, or by a
majority of the board of directors. Special meetings of the stockholders shall
be called by the secretary upon the written request of the holders of shares
entitled to vote not less than 25% of all the shares entitled to be voted at
such meeting, provided that (a) such request shall state the purposes of such
meeting and the matters proposed to be acted on, and (b) the stockholders
requesting such meeting shall have paid to the Corporation the reasonable
estimated cost of preparing and mailing the notice thereof, which the secretary
shall determine and specify to such stockholders. No special meeting need be
called upon the request of the holders of shares entitled to vote less than a
majority of all the shares entitled to be voted at such meeting to consider any
matter which is substantially the same as a matter voted upon at any special
meeting of the stockholders held during the preceding 12 months.
Section 2.03. Place of Meetings: All stockholders' meetings shall be
held at the principal office of the Corporation, except that the board of
directors may fix a different place of meeting, have one or more offices, and
keep the books of the Corporation at any other place within the United States as
they may from time to time determine, or, in the case of meetings
2
<PAGE>
as shall be specified in each notice or waiver of notice of the meeting.
Section 2.04. Notice of Meetings: The secretary or an assistant
secretary shall cause notice of the place, date and hour, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called, to be
mailed, not less than 10 nor more than 90 days before the date of the meeting,
to each stockholder entitled to vote at such meeting, at his address as it
appears on the records of the Corporation at the time of such mailing. Notice of
any stockholders' meeting need not be given to any stockholder who shall sign a
written waiver of such notice whether before or after the time of such meeting,
which waiver shall be filed with the record of such meeting, or to any
stockholder who shall attend such meeting in person or by proxy. Notice of
adjournment of a stockholders' meeting to another time or place need not be
given, if such time and place are announced at the meeting.
Section 2.05. Voting - In General: At every stockholders' meeting each
stockholder shall be entitled to one vote for each share and a fractional vote
for each fraction of a share of stock of the Corporation validly issued and
outstanding and held by such stockholder, except that no shares held by the
Corporation shall be entitled to a vote. Except as otherwise specifically
provided in the Articles of Incorporation or these By-Laws or as required by
provisions of the Investment Company Act of 1940, as amended from time to time,
all matters shall be decided by a vote of the majority of the votes validly
cast. The vote upon any question shall be by ballot whenever requested by any
person entitled to vote, but, unless such a request is made, voting may be
conducted in any way approved by the meeting.
Section 2.06. Stockholders Entitled to Vote: If, pursuant to Section
8.05 hereof, a record date has been fixed for the determination of stockholders
entitled to notice of or to vote at any stockholders' meeting, each stockholder
of the Corporation shall be entitled to vote, in person or by proxy, each share
of stock and fraction of a share of stock standing in his name on the books of
the Corporation on such record date and outstanding at the time of the meeting.
If no record date has been fixed for the determination of stockholders, the
record date for the determination of stockholders entitled to notice of or to
vote at a meeting of stockholders shall be (a) at the close of business (i) on
the day ten days before the day on which notice of the meeting is mailed or (ii)
on the day 90 days before the meeting, whichever is the closer date to the
meeting; or, (b) if notice is waived by all stockholders, at the close of
business on the tenth day next preceding the day on which the meeting is held.
Section 2.07. Voting - Proxies: The right to vote by proxy shall exist
only if the instrument authorizing such proxy to act shall have been executed in
writing by the stockholder himself or by his attorney thereunto duly authorized
in writing. No proxy shall be voted after eleven months from its date unless it
provides for a longer period. Each proxy shall be in writing subscribed by the
stockholder or his duly authorized attorney and shall be dated, but need not be
sealed, witnessed or acknowledged. Proxies shall be delivered to the secretary
before being voted. A proxy with respect to stock held in the name of two or
more persons shall be valid if executed by one of them unless at or prior to
exercise of such proxy the Corporation receives a specific written notice to the
contrary from any one of them. A proxy purporting to be executed by or on behalf
of a stockholder shall be deemed valid unless challenged at or prior to its
exercise.
3
<PAGE>
Section 2.08. Quorum: Except as otherwise provided in the Articles of
Incorporation, the presence at any stockholders' meeting, in person or by proxy,
of stockholders entitled to cast one third of the votes thereat shall be
necessary and sufficient to constitute a quorum for the transaction of business.
Section 2.09. Absence of Quorum: In the absence of a quorum, the
holders of one-third of the shares entitled to vote at the meeting and present
thereat in person or by proxy, or, if no stockholder entitled to vote is present
thereat in person or by proxy, any officer present thereat entitled to preside
or act as secretary of such meeting, may adjourn the meeting sine die or from
time to time. Any business that might have been transacted at the meeting
originally called may be transacted at any such adjourned meeting at which a
quorum is present.
Section 2.10. Stock Ledger and List of Stockholders: It shall be the
duty of the secretary or assistant secretary of the Corporation to cause an
original or duplicate stock ledger to be maintained at the office of the
Corporation's transfer agent. Such stock ledger may be in written form or any
other form capable of being converted into written form within a reasonable time
for visual inspection. Any one or more persons, each of whom has been a
stockholder of record of the Corporation for more than six months next preceding
such request, who owns in the aggregate 5% or more of the outstanding capital
stock of the Corporation, may submit (unless the Corporation at the time of the
request maintains a duplicate stock ledger at its principal office in Maryland)
a written request to any officer of the Corporation or its resident agent in
Maryland for a list of the stockholders of the Corporation. Within 20 days after
such a request, there shall be prepared and filed at the Corporation's principal
office in Maryland a list containing the names and addresses of all stockholders
of the Corporation and the number of shares of each class held by each
stockholder, certified as correct by an officer of the Corporation, by its stock
transfer agent, or by its registrar.
Section 2.11. Action Without Meeting: Any action to be taken by
stockholders may be taken without a meeting if all stockholders entitled to vote
on the matter consent to the action in writing and the written consents are
filed with the records of the meetings of stockholders. Such consents shall be
treated for all purposes as a vote at a meeting.
ARTICLE III
-----------
BOARD OF DIRECTORS
------------------
Section 3.01. Number and Term of Office: The board of directors shall
consist of six directors, which number may be increased or decreased by a
resolution of a majority of the entire board of directors; provided that the
number of directors shall not be less than three nor more than fifteen; and
further provided that if there is no stock outstanding the number of directors
may be less than three but not less than one, and if there is stock outstanding
and so long as there are less than three, the number of directors may be less
than three but not less than the number of stockholders. Each director (whenever
selected) shall hold office until his successor is elected and qualified or
until his earlier death, resignation or removal.
4
<PAGE>
Section 3.02. Qualification of Directors: Except for the initial board
of directors, at least one of the members of the board of directors shall be a
person who is not an interested person of the Corporation, as defined in the
Investment Company Act of 1940, as amended.
Section 3.03. Election of Directors: Initially the director or
directors of the Corporation shall be that person or those persons named as such
in the Articles of Incorporation. Thereafter, except as otherwise provided in
Section 3.04 and 3.05 hereof, the directors shall be elected by the stockholders
on a date fixed by the Board of Directors. The candidates, equal in number to
the number of directorships as established by the Board pursuant to Section
3.01, receiving the largest number of the eligible votes cast by the
shareholders shall be elected to the Board.
Section 3.04. Removal of Directors: At any stockholders' meeting duly
called, provided a quorum is present, any director may be removed (either with
or without cause) by the vote of the holders of a majority of the shares
represented at the meeting, and at the same meeting a duly qualified person may
be elected in his stead by a majority of the votes validly cast.
Section 3.05. Vacancies and Newly Created Directorships: If any
vacancies shall occur in the board of directors by reason of death, resignation,
removal or otherwise, or if the authorized number of directors shall be
increased, the directors then in office shall continue to act, and such
vacancies (if not previously filled by the stockholders) may be filled by a
majority of the directors then in office, although less than a quorum, except
that a newly created directorship may be filled only by a majority vote of the
entire board of directors, provided that in either case immediately after
filling such vacancy, at least two-thirds of the directors then holding office
shall have been elected to such office by the stockholders of the Corporation.
In the event that at any time, other than the time preceding the first
stockholders' meeting, less than a majority of the directors of the Corporation
holding office at that time were so elected by the stockholders, a meeting of
the stockholders shall be held promptly and in any event within 60 days for the
purpose of electing directors to fill any exiting vacancies in the board of
directors unless the Securities and Exchange Commission shall by order extend
such period.
Section 3.06. General Powers:
(a) The property, affairs and business of the Corporation shall be
managed by or under the direction of the board of directors, which may exercise
all the powers of the Corporation except those powers vested solely in the
stockholders of the Corporation by statute, by the Articles of Incorporation, or
by these By-Laws.
(b) All acts done by any meeting of the directors or by any person
acting as a director, so long as his successor shall not have been duly elected
or appointed, shall, notwithstanding that it be afterwards discovered that there
was some defect in the election of the directors or of such person acting as
aforesaid or that they or any of them were disqualified, be as valid as if the
directors or such other person, as the case may be, had been duly elected and
were or was qualified to be directors or a director of the Corporation.
Section 3.07. Power to Issue and Sell Stock: The board of directors may
from time to
5
<PAGE>
time issue and sell or cause to be issued and sold any of the Corporation's
authorized shares to such person and for such consideration as the board of
directors shall deem advisable, subject to the provisions of Article Sixth of
the Articles of Incorporation.
Section 3.08. Power to Declare Dividends:
(a) The board of directors, from time to time as they may deem
advisable, may declare and pay dividends in stock, cash or other property of the
Corporation, out of any source available for dividends, to the stockholders
according to their respective rights and interests in accordance with the
provisions of the Articles of Incorporation.
(b) The board of directors shall cause to be accompanied by a written
statement any dividend payment wholly or partly from any source other than:
(i) the Corporation's accumulated undistributed net income (determined
in accordance with good accounting practice and the rules and
regulations of the Securities and Exchange Commission then in effect)
and not including profits or losses realized upon the sale of
securities or other properties; or
(ii) the Corporation's net income so determined for the current or
preceding fiscal year. Such statement shall adequately disclose the
source or sources of such payment and the basis of calculation, and
shall be in such form as the Securities and Exchange Commission may
prescribe.
Section 3.09. Annual and Regular Meetings: The annual meeting of the
board of directors for choosing officers and transacting other proper business
shall be held at such time and place as the Board may determine. The board of
directors from time to time may provide by resolution for the holding regular
meetings and fix their time and place within or outside the State of Maryland.
Notice of such annual and regular meetings need not be given, provided that
notice of any change in the time or place of such meetings shall be sent
promptly to each director not present at the meeting at which such change was
made in the manner provided for notice of special meetings. Members of the board
of directors or any committee designated thereby may participate in a meeting of
such board or committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time; and participation by such means
shall constitute presence in person at a meeting.
Section 3.10. Special Meetings: Special meetings of the board of
directors shall be held whenever called by the chairman of the board, the
president (or, in the absence or disability of the president, by any vice
president), the treasurer, or two or more directors, at the time and place
within or outside the State of Maryland specified in the respective notices or
waivers of notice of such meetings.
Section 3.11. Notice: Notice of special meetings, stating the time and
place, shall be mailed to each director at his residence or regular place of
business at least five days before
6
<PAGE>
the day on which a special meeting is to be held or caused to be delivered to
him personally or to be transmitted to him by telegraph, cable or wireless at
least one day before the meeting.
Section 3.12. Waiver of Notice: No notice of any meeting need be given
to any director who attends such meeting in person or to any director who waives
notice of such meeting in writing (which waiver shall be filed with the records
of such meeting), whether before or after the time of the meeting.
Section 3.13. Quorum and Voting: At all meetings of the board of
directors the presence of one-half or more of the number of directors then in
office shall constitute a quorum for the transaction of business, provided that
there shall be present no less than two directors except when there is no stock
outstanding, at which time the initial director will constitute a quorum. In the
absence of a quorum, a majority of the directors present may adjourn the
meeting, from time to time, until a quorum shall be present. The action of a
majority of the directors present at a meeting at which a quorum is present
shall be the action of the board of directors unless the concurrence of a
greater proportion is required for such action by law, by the Articles of
Incorporation or by these By-Laws.
Section 3.14. Compensation: Each director may receive such remuneration
for his services as shall be fixed from time to time by resolution of the board
of directors.
Section 3.15. Action Without a Meeting: Any action required or
permitted to be taken at any meeting of the board of directors may be taken
without a meeting if written consents thereto are signed by all members of the
board and such written consents are filed with the records of the meetings of
the board.
ARTICLE IV
----------
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
----------------------------------------
Section 4.01. How Constituted: By resolution adopted by the board of
directors, the board may designate one or more committees, including an
executive committee, each consisting of at least two directors. Each member of a
committee shall be a director and shall hold office during the pleasure of the
board. The chairman of the board, if any, and the president shall be members of
the executive committee.
Section 4.02. Powers of the Executive Committee: Unless otherwise
provided by a resolution of the board of directors, when the board of directors
is not in session the executive committee shall have and may exercise all powers
of the board of directors in the management of the business and affairs of the
Corporation that may lawfully be exercised by an executive committee, except the
power to declare a dividend, to authorize the issuance of stock, to recommend to
stockholders any matter requiring stockholders' approval, to amend the By-Laws,
or to approve any merger or share exchange which does not require shareholder
approval.
Section 4.03. Proceedings, Quorum and Manner of Acting: In the absence
of an appropriate resolution of the board of directors, each committee may adopt
such rules and
7
<PAGE>
regulations governing its proceedings, quorum and manner of acting as it shall
deem proper and desirable, provided that the quorum shall not be less than two
directors. In the absence of any member of any such committee, the members
thereof present at any meeting, whether or not they constitute a quorum, may
appoint a member of the board of directors to act in the place of such absent
member.
Section 4.04. Other Committees: The board of directors may appoint
other committees, each consisting of one or more persons, who need not be
directors. Each such committee shall have such powers and perform such duties as
may be assigned to it from time to time by the board of directors, but shall not
exercise any power which may lawfully be exercised only by the board of
directors or a committee thereof.
ARTICLE V
---------
OFFICERS
--------
Section 5.01. General: The officers of the Corporation shall be a
president, a secretary and a treasurer, and may include one or more vice
presidents, assistant secretaries or assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 5.11
hereof. The board of directors may elect, but shall not be required to elect, a
chairman of the board.
Section 5.02. Election, Term of Office and Qualifications: The officers
of the Corporation (except those appointed pursuant to Section 5.11 hereof)
shall be chosen by the board of directors at its first meeting or such
subsequent meetings as shall be held prior to its first annual meeting, and
thereafter annually at its annual meeting. If any officers are not chosen at any
annual meeting, such officers may be chosen at any subsequent regular or special
meeting of the board. Except as provided in Sections 5.03, 5.04 and 5.05 hereof,
each officer chosen by the board of directors shall hold office until the next
annual meeting of the board of directors and until his successor shall have been
chosen and qualified. Any person may hold one or more offices of the Corporation
except that the president may not hold the office of secretary, and provided
further that a person who holds more than one office may not act in more than
one capacity to execute, acknowledge or verify an instrument required by law to
be executed, verified or acknowledged by more than one officer. The chairman of
the board shall be chosen from among the directors of the Corporation and may
hold such office only so long as he continues to be a director. No other officer
need be a director.
Section 5.03. Resignation: Any officer may resign his office at any
time by delivering a written resignation to the board of directors, the
president, the secretary, or any assistant secretary. Unless otherwise specified
therein, such resignation shall take effect upon delivery.
Section 5.04. Removal: Any officer may be removed from office whenever
in the board's judgement the best interest of the Corporation will be served
thereby, by the vote of a majority of the board of directors given at the
regular meeting or any special meeting called for such purpose. In addition, any
officer or agent appointed in accordance with the provisions of Section 5.11
hereof may be removed, either with or without cause, by any officer upon
8
<PAGE>
whom such power of removal shall have been conferred by the board of directors.
Section 5.05. Vacancies and Newly Created Offices: If any vacancy shall
occur in any office by reason of death, resignation, removal, disqualification
or other cause, or if any new office shall be created, such vacancies or newly
created offices may be filled by the board of directors at any regular or
special meeting or, in the case of any office created pursuant to Section 5.11
hereof, by any officer upon whom such power shall have been conferred by the
board of directors.
Section 5.06. Chairman of the Board: The chairman of the board, if
there be such an officer, shall be the senior officer of the Corporation, shall
preside at all stockholders' meetings and at all meetings of the board of
directors and may be ex officio a member of all committees of the board of
directors. He shall have such other powers and perform such other duties as may
be assigned to him from time to time by the board of directors.
Section 5.07. President: The president shall be the chief executive
officer of the Corporation and, in the absence of the chairman of the board or
if no chairman of the board has been chosen, he shall preside at all
stockholders' meetings and at all meetings of the board of directors and shall
in general exercise the powers and perform the duties of the chairman of the
board. Subject to the supervision of the board of directors, he shall have
general charge of the business, affairs and property of the Corporation and
general supervision over its officers, employees and agents. Except as the board
of directors may otherwise order, he may sign in the name and on behalf of the
Corporation all deeds, bonds, contracts or agreements. He shall exercise such
other powers and perform such other duties as from time to time may be assigned
to him by the board of directors.
Section 5.08. Vice President: The board of directors may from time to
time designate and elect one or more vice presidents who shall have such powers
and perform such duties as from time to time may be assigned to them by the
board of directors or the president. At the request or in the absence of
disability of the president, the vice president (or, if there are two or more
vice presidents, then the senior of the vice presidents present and able to act)
may perform all the duties of the president and, when so acting, shall have all
the powers of and be subject to all the restrictions upon the president.
Section 5.09. Treasurer and Assistant Treasurers: The treasurer shall
be the principal financial and accounting officer of the Corporation and shall
have general charge of the finances and books of account of the Corporation.
Except as otherwise provided by the board of directors, he shall have general
supervision of the funds and property of the Corporation and of the performance
by the custodian of its duties with respect thereto. He shall render to the
board of directors, whenever directed by the board, an account of the financial
condition of the Corporation and of all his transactions as treasurer; and as
soon as possible after the close of each financial year he shall make and submit
to the board of directors a like report for such financial year. He shall
perform all the acts incidental to the office of treasurer, subject to the
control of the board of directors.
9
<PAGE>
Any assistant treasurer may perform such duties of the treasurer as the
treasurer or the board of directors may assign, and, in the absence of the
treasurer, may perform all the duties of the treasurer.
Section 5.10. Secretary and Assistant Secretaries: The secretary shall
attend to the giving and serving of all notices of the Corporation and shall act
as secretary at, and record all proceedings of, the meetings of the stockholders
and directors in the books to be kept for that purpose. He shall keep in safe
custody the seal of the Corporation, and shall have charge of the records of the
Corporation, including the stock books an such other books and papers as the
board of directors may direct and such books, reports, certificates and other
documents required by law to be kept, all of which shall at all reasonable times
be open to inspection by any director. At every meeting of the stockholders, he
shall receive and take charge of and/or canvass all proxies and/or ballots, and
shall decide all questions touching the qualification of voters, the validity of
proxies and the acceptance or rejection of votes. He shall perform such other
duties as appertain to his office or as may be required by the board of
directors.
Any assistant secretary may perform such duties of the secretary as the
secretary or the board of directors may assign, and, in the absence of the
secretary, may perform all the duties of the secretary.
Section 5.11. Subordinate Officers: The board of directors from time to
time may appoint such other officers or agents as it may deem advisable, each of
whom shall have such title, hold office for such period, have such authority and
perform such duties as the board of directors may determine. The board of
directors from time to time may delegate to one or more officers or agents the
power to appoint any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities and duties.
Section 5.12. Remuneration: The salaries or other compensation of the
officers of the Corporation shall be fixed from time to time by resolution of
the board of directors, except that the board of directors may by resolution
delegate to any person or group of persons the power to fix the salaries or
other compensation of any subordinate officers or agents appointed in accordance
with the provisions of Section 5.11 hereof.
Section 5.13. Surety Bonds: The board of directors may require any
officer or agent of the Corporation to execute a bond (including, without
limitation, any bond required by the Investment Company act of 1940, as amended,
and the rules and regulations of the Securities and Exchange Commission) to the
Corporation in such sum and with such surety or sureties as the board of
directors may determine, conditioned upon the faithful performance of his duties
to the Corporation, including responsibility for negligence and for the
accounting of any of the Corporation's property, funds or securities that may
come into his hands.
ARTICLE VI
----------
CUSTODY OF SECURITIES
---------------------
Section 6.01. Employment of a Custodian: The Corporation shall place
and at all times
10
<PAGE>
maintain in the custody of a custodian (including any sub-custodian for the
custodian) all funds, securities and similar investments owned by the
Corporation. The custodian (and any sub-custodian) shall be a bank or similar
financial institution having not less than $2,000,000 aggregate capital, surplus
and undivided profits and shall be appointed from time to time by the board of
directors, which shall fix its remuneration.
Section 6.02. Action Upon Termination of Custodian Agreement: Upon
termination of a custodian agreement or inability of the custodian to continue
to serve, the board of directors shall promptly appoint a successor custodian,
but in the event that no successor custodian can be found who has the required
qualifications and is willing to serve, the board of directors shall call as
promptly as possible a special meeting of the stockholders to determine whether
the corporation shall function without a custodian or shall be liquidated. If so
directed by vote of the holders of a majority of the outstanding shares of stock
of the Corporation, the custodian shall deliver and pay over all property of the
Corporation held by it as specified in such vote.
Section 6.03. Provisions of Custodian Contract: The following
provisions shall apply to the employment of a custodian and to any contract
entered into with the custodian so employed:
The board of directors shall cause to be delivered to the
custodian all securities owned by the Corporation or to which
it may become entitled, and shall order the same to be
delivered by the custodian only in completion of a sale,
exchange, transfer, pledge, or other disposition thereof, all
as the board of directors may generally or from time to time
require or approve or to a successor custodian; and the board
of directors shall cause all funds owned by the Corporation or
to which it may become entitled to be paid to the custodian,
and shall order the same disbursed only for investment against
delivery of the securities acquired, or in payment of
expenses, including management compensation, and liabilities
of the Corporation, including distributions to shareholders,
or to a successor custodian.
Section 6.04. Other Arrangements: The Corporation may make such other
arrangements for the custody of its assets (including deposit arrangements) as
may be required by any applicable law, rule or regulation.
ARTICLE VII
-----------
EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES
----------------------------------------------
Section 7.01. General: Subject to the provisions of Sections 5.07, 6.02
and 8.03 hereof, all deeds, documents, transfers, contracts, agreements and
other instruments requiring execution by the Corporation shall be signed by the
president or a vice president and by the treasurer or secretary or an assistant
treasurer or an assistant secretary, or as the board of directors may otherwise,
from time to time, authorize. Any such authorization may be general
11
<PAGE>
or confined to specific instances.
Section 7.02. Checks, Notes, Drafts, Etc.: So long as the Corporation
shall employ a custodian to keep custody of the cash and securities of the
Corporation, all checks and drafts for the payment of money by the Corporation
may be signed in the name of the Corporation by the custodian. Except as
otherwise authorized by the board of directors, all requisitions or orders for
the assignment of securities standing in the name of the custodian or its
nominee, or for the execution of powers to transfer the same, shall be signed in
the name of the Corporation by the president or a vice president and by the
treasurer or an assistant treasurer. Promissory notes, checks or drafts payable
to the Corporation may be endorsed only to the order of the custodian or its
nominee and only by the treasurer or president or a vice president or by such
other person or persons as shall be authorized by the board of directors.
Section 7.03. Voting of Securities: Unless otherwise ordered by the
board of directors, the president or any vice president shall have full power
and authority on behalf of the Corporation to attend and to act and to vote, or
in the name of the Corporation to execute proxies to vote, at any meeting of
stockholders of any company in which the Corporation may hold stock. At any such
meeting such officer shall possess and may exercise (in person or by proxy) any
and all rights, powers and privileges incident to the ownership of such stock.
The board of directors may by resolution from time to time confer like powers
upon any other person or persons.
ARTICLE VIII
------------
CAPITAL STOCK
-------------
Section 8.01. Certificates of Stock:
(a) Certificates of each series of stock ("Series") of the Corporation
shall be in the form approved by the board of directors, signed in the name of
the Corporation by the president or any vice president and by the treasurer or
any assistant treasurer or the secretary or any assistant secretary, sealed with
the seal of the Corporation and certifying the number and kind of shares owned
by him in the Corporation. Such signatures and seal may be a facsimile and may
be mechanically reproduced thereon. The certificates containing such facsimiles
shall be valid for all intents and purposes.
(b) In case any officer who shall have signed any such certificate, or
whose facsimile signature has been placed thereon, shall cease to be such an
officer (because of death, resignation or otherwise) before such certificate is
issued, such certificate may be issued and delivered by the Corporation with the
same effect as if he were such officer at the date of issue.
(c) The number of each certificate issued, the name of the person
owning the shares represented thereby, the number of such shares and the date of
issuance shall be entered upon the stock books of the Corporation at the time of
issuance.
12
<PAGE>
(d) Every certificate exchanged, surrendered for redemption or
otherwise returned to the Corporation shall be marked "Canceled" with the date
of cancellation.
Section 8.02. Transfer of Capital Stock:
(a) Transfers of shares of any Series of the Corporation shall be made
on the books of the Corporation by the holder of record thereof (in person or by
his attorney thereunto duly authorized by a power of attorney duly executed in
writing and filed with the secretary of the Corporation) (i) if a certificate or
certificates have been issued, upon the surrender of the certificate or
certificates, properly endorsed or accompanied by proper instruments of
transfer, representing such shares, or (ii) as otherwise prescribed by the board
of directors.
(b) The Corporation shall be entitled to treat the holder of record of
any share of stock as the absolute owner thereof for all purposes, and
accordingly shall not be bound to recognize any legal, equitable or other claim
or interest in such share on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise expressly
provided by the statutes of the State of Maryland.
Section 8.03. Transfer Agents and Registrars: The board of directors
may, from time to time, appoint or remove transfer agents or registrars of
transfers of shares of any Series of the Corporation, and it may appoint the
same person as both transfer agent and registrar. Upon any such appointment
being made, all certificates representing shares of any Series of the
Corporation thereafter issued shall be countersigned by one of such transfer
agents or by one of such registrars of transfers or by both and shall not be
valid unless so countersigned. If the same person shall be both transfer agent
and registrar, only one countersignature by such person shall be required.
Section 8.04. Transfer Regulations: Except as provided in the Articles
of Incorporation, the shares of any Series of the Corporation may be freely
transferred, subject to the charging of customary transfer fees, and the board
of directors may, from time to time, adopt rules and regulations with reference
to the method of transfer of the shares of any Series of the Corporation.
Section 8.05. Fixing of Record Date: The board of directors may fix in
advance a date as a record date for the determination of the stockholders
entitled to notice of or to vote at any stockholders' meeting or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or to receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any change, conversion or
exchange of stock, or for the purpose of any other lawful action; provided that
such record date shall be a date not more than 90 nor less than 10 days prior to
the date on which the particular action requiring such determination of
stockholders of record will be taken.
Section 8.06. Lost, Stolen or Destroyed Certificates: Before issuing a
new certificate for stock of the Corporation alleged to have been lost, stolen
or destroyed, the board of directors or any officer authorized by the board may,
in its discretion, require the owner of the lost, stolen or destroyed
certificate (or his legal representative) to give the Corporation a bond
13
<PAGE>
or other indemnity, in such form and in such amount as the board or any such
officer may direct and with such surety or sureties as may be satisfactory to
the board or any such officer, sufficient to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.
ARTICLE IX
----------
FISCAL YEAR, ACCOUNTANT
-----------------------
Section 9.01 Fiscal Year: The fiscal year of the Corporation shall,
unless otherwise ordered by the board of directors, be twelve calendar months
beginning on the 1st day of January in each year and ending on the 31st day of
the following December.
Section 9.02. Accountant:
(a) The Corporation shall employ an independent certified public
accountant or firm of independent certified public accountants as its accountant
to examine the accounts of the Corporation and to sign and certify financial
statements filed by the Corporation. The accountant's certificates and reports
shall be addressed both to the board of directors and to the stockholders.
(b) A majority of the members of the board of directors who are not
interested persons (as such term is defined in the Investment Company Act of
1940, as amended) of the Corporation shall select the accountant at any meeting
held within 30 days before or after the beginning of the fiscal year of the
Corporation or before the annual stockholders' meeting in that year. Such
selection shall be submitted for ratification or rejection at the next
succeeding stockholders' meeting, when and if such meeting is held. If such
meeting shall reject such selection, the accountant shall be selected by
majority vote of the Corporation's outstanding voting securities, either at the
meeting at which the rejection occurred or at a subsequent meeting of
stockholders called for the purpose.
(c) Any vacancy occurring between meetings, due to the death or
resignation of the accountant, may be filled by a majority of the members of the
board of directors who are not such interested persons.
ARTICLE X
---------
INDEMNIFICATION AND INSURANCE
-----------------------------
Section 10.01 Indemnification of Officers, Directors, Employees and
Agents. (a) Subject to the exceptions and limitations contained in subsection
(b) of this Section 10.01:
(i) every person who is, or has been a director, officer,
employee or agent of the Corporation or who is serving, or has
served at the request of the Corporation as a director,
officer, employee or
14
<PAGE>
agent of another corporation, partnership, joint venture,
trust, or enterprise (hereinafter referred to as a "Covered
Person") shall be indemnified by the appropriate Series to the
fullest extent permitted by law against liability and against
all expenses reasonably incurred or paid by him in connection
with any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or
having been a Covered Person and against amounts paid or
incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings
(civil, criminal or other, including appeals), actual or
threatened while in office or thereafter, and the words
"liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Covered Person:
(i) who shall have been adjudicated by a court or
body before which the proceeding was brought (A) to be liable
to the Corporation or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office or (B) not
to have acted in good faith in the reasonable belief that his
action was in the best interest of the Corporation; or
(ii) in the event of a settlement, unless there has
been a determination that such Covered Person did not engage
in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of
his office,
(A) by the court or other body approving
the settlement;
(B) by at least a majority of those
Directors who are neither interested persons of the
Corporation nor are parties to the matter based upon
a review of readily available facts (as opposed to a
full trial-type inquiry); or
(C) by written opinion of independent legal
counsel based upon a review of readily available
facts (as opposed to a full trial-type inquiry);
provided, however, that any stockholder may, by appropriate
legal
15
<PAGE>
proceedings, challenge any such determination by the
Directors, or by independent counsel.
Section 10.02. Insurance of Officers, Directors, Employees and Agents:
The Corporation may purchase and maintain insurance on behalf of any Covered
Person against any liability asserted against him and incurred by him in any
such capacity or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability.
The Corporation may not acquire or obtain a contract for insurance that
protects or purports to protect any Covered Person against any liability to the
Corporation or its shareholder to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
Section 10.03. Advancing of Expenses: Expenses in connection with the
preparation and presentation of a defense to any claim, action, suit or
proceeding of the character described in paragraph (a) of Section 10.01 may be
paid by the appropriate Series from time to time prior to final disposition
thereof upon receipt of an undertaking by or on behalf of such Covered Person
that such amount will be paid over by him to the appropriate Series if it is
ultimately determined that he is not entitled to indemnification under Section
10.01; provided, however that either (a) such covered Person shall have provided
appropriate security for such undertaking, (b) the Corporation is insured
against losses arising out of any such advance payments or (c) either a majority
of the Directors who are neither interested persons of the Corporation nor
parties to the matter, or independent legal counsel in a written opinion, shall
have determined, based upon a review of readily available facts (as opposed to a
full trial-type inquiry), that there is reason to believe that such Covered
Person will be found entitled to indemnification under Section 10.01.
ARTICLE XI
----------
AMENDMENTS
----------
Section 11.01. General: Except as provided in Section 11.02 hereof, all
By-Laws of the Corporation, whether adopted by the board of directors or the
stockholders, shall be subject to amendment, alteration or repeal, and new
By-Laws may be made, by the affirmative vote of a majority of either:
(a) the holders of record of the outstanding shares of stock of the
Corporation entitled to vote, at any meeting, the notice or waiver of notice of
which shall have specified or summarized the proposed amendment, alteration,
repeal or new By-Law; or
(b) the directors, at any regular or special meeting the notice or
waiver of notice of which shall have specified or summarized the proposed
amendment, alteration, repeal or new By-Law.
Section 11.02. By Stockholders Only:
16
<PAGE>
(a) No amendment of any section of these By-laws shall be made except
by the stockholders of the Corporation if the By-laws provide that such section
may not be amended, altered or repealed except by the stockholders.
(b) From and after the issue of any shares of the Capital Stock of the
Corporation, no amendment of this Article XI shall be made except by the
stockholders of the Corporation.
END OF BY-LAWS
17
AMENDMENT TO BY-LAWS
OF
LEGG MASON INCOME TRUST, INC.
(effective May 10, 1991)
Section 10. Indemnification of Officers, Directors, Employees and
Agents:
(a) The Corporation shall indemnify its present and past directors,
officers, employees and agents, and any persons who are serving or have served
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, or enterprise ("Covered
Persons"), to the full extent provided and allowed by Section 2-418 of the
Annotated Corporations and Associations Code of Maryland concerning
corporations, as amended from time to time or any other applicable provisions of
laws. Notwithstanding anything herein to the contrary, no director, officer,
investment adviser or principal underwriter of the Corporation shall be
indemnified in violation of Sections 17(h) or (i) of the 1940 Act. The directors
of the Corporation may provide such liability insurance to the persons named
herein as is authorized by the Corporation's Articles of Incorporation.
(b) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding may be paid by the Corporation
from time to time prior to final disposition thereof upon receipt of an
undertaking by or on behalf of such Covered Person that such amount will be paid
over by him to the Corporation if it is ultimately determined that he is not
entitled to indemnification under this Section 10; provided, however, that
either (a) such Covered Person shall have provided appropriate security for such
undertaking, (b) the Corporation is insured against losses arising out of any
such advance payments or (c) either a majority of the directors who are neither
Interested Persons of the Corporation, as defined in the 1940 Act, nor parties
to the matter, or independent legal counsel in a written opinion, shall have
determined, based upon a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that such Covered Person
will be found entitled to indemnification under this Section 10.
(c) For purposes of subsection (b) above, the words "claim," "action,"
"suit," or "proceeding" shall apply to all claims, actions, suits or proceedings
(civil, criminal, or other, including appeals), actual or threatened while in
office or thereafter.
MANAGEMENT AGREEMENT
LEGG MASON U.S. GOVERNMENT INTERMEDIATE TERM PORTFOLIO
This MANAGEMENT AGREEMENT, made this 19th day of June, 1987, by and
between Legg Mason Income Trust, Inc. (the "Corporation"), a Maryland
corporation, on behalf of the Legg Mason U.S. Government Intermediate-Term
Portfolio ("Fund"), and Legg Mason Fund Adviser, Inc. (the "Manager"), a
Maryland corporation, having its principal place of business at 7 East Redwood
Street, Baltimore, Maryland 21202.
WHEREAS, the Corporation has filed a Registration Statement with the
Securities and Exchange Commission for the purpose of registering as a series
type, open-end diversified investment company under the Investment Company Act
of 1940 (the "1940 Act") and for the purpose of registering the shares of common
stock of the Corporation for sale to the public under the Securities Act of
1933; and
WHEREAS, the Corporation wishes to retain the Manager to provide
investment advisory, management, and administrative services to the Fund; and
WHEREAS, the Manager is willing 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. The Corporation hereby appoints Legg Mason Fund Adviser, Inc. as
Manager of the Fund for the period and on the terms set forth in this Agreement.
The Manager accepts such appointment and agrees to render the services herein
set forth, for the compensation herein provided.
2. The Fund shall at all times keep the Manager fully informed with
regard to the securities owned by it, its funds available, or to become
available, for investment, and generally as to the condition of its affairs. It
shall furnish the Manager with such other documents and information with regard
to its affairs as the Manager may from time to time reasonably request.
3. (a) Subject to the supervision of the Corporation's Board of
Directors, the Manager shall regularly provide the Fund with investment
research, advice, management and supervision and shall furnish a continuous
investment program for the Fund's portfolio of securities consistent with the
Fund's investment objective, policies, and limitations as stated in the Fund's
current Prospectus and Statement of Additional Information. The Manager shall
determine from time to time what securities will be purchased, retained or
<PAGE>
sold by the Fund, and shall implement those decisions, all subject to the
provisions of the Corporation's Articles of Incorporation and By-laws, the 1940
Act, the applicable rules and regulations of the Securities and Exchange
Commission, and other applicable federal and state law, as well as the
investment objective, policies, and limitations of the Fund. The Manager will
place orders pursuant to its investment determinations for the Fund either
directly with the issuer or with any broker or dealer. In placing orders with
brokers and dealers, the Manager will attempt to obtain the best net price and
the most favorable execution of its orders; however, the Manager may, in its
discretion, purchase and sell portfolio securities from and to brokers and
dealers, who provide the Fund with research, analysis, advice and similar
services, and the Manager may pay to these brokers, in return for research and
analysis, a higher commission than may be charged by other brokers. In no
instance will portfolio securities be purchased from or sold to the Manager, or
any affiliated person thereof promulgated by the Securities and Exchange
Commission pursuant to the 1940 Act. The Manager shall also provide advice and
recommendations with respect to other aspects of the business and affairs of the
Fund, and shall perform such other functions of management and supervision as
may be directed by the Corporation's Board of Directors.
(b) The Manager will oversee the maintenance of all books and records
with respect to the securities transactions of the Fund and the Fund's books of
account in accordance with all applicable federal and state laws and
regulations, and will furnish the Board of Directors of the Corporation with
such periodic and special reports as the Board reasonably may request.
(c) The Fund authorizes the Manager and any entity or person associated
with the Manager which is a member of a national securities exchange to effect
any transaction on the exchange for the account of the Fund which is permitted
by Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T)
thereunder, and the Fund hereby consents to the retention of compensation by
such entity for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv).
4. The Manager may enter into a contract ("Investment Advisory
Agreement") with an investment adviser in which the Manager delegates to such
investment adviser any or all its duties specified in Paragraph 3 hereunder,
provided that such Investment Advisory Agreement imposes on the investment
adviser bound thereby all duties and conditions to which the Manager is subject
hereunder, and further provided that such Investment Advisory Agreement meets
all requirements of the 1940 Act and rules thereunder.
5. (a) The Manager, at its expense, shall supply the Board of Directors
and officers of the Corporation with all statistical information and reports
reasonably required by them and reasonably available to the Manager and shall
furnish the Fund with office facilities, including space, furniture and
equipment and all personnel reasonably necessary for the operation of the Fund.
- 2 -
<PAGE>
(b) In compliance with the requirements of Rule 31a-3 under
the 1940 Act, the Manager hereby agrees that all books and records which it
maintains for the Fund are the property of the Fund, and further agrees to
surrender promptly to the Fund or its agents any of such records upon the Fund's
request. The Manager further agrees to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act and any such records required to be maintained by
Rule 31a-1 under the 1940 Act.
(c) Other than as herein specifically indicated, the Manager
shall not be responsible for the Fund's expenses. Specifically, the Manager will
not be responsible, except to the extent of the reasonable compensation of
employees of the Fund whose services may be used by the Manager hereunder, for
any of the following expenses of the Fund, which expenses shall be borne by the
Fund: legal expenses; interest; taxes; governmental fees; fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; the cost (including brokerage commissions or
charges, if any) of securities purchased or sold by the Fund and any losses
incurred in connection therewith; fees of custodians, transfer agents,
registrars or other agents; expenses of preparing share certificates; expenses
relating to the redemption or repurchase of the Fund's shares; expenses of
registering and qualifying Fund shares for sale under applicable federal and
state law and maintaining such registrations and qualifications; expenses of
preparing, setting in print, printing and distributing prospectuses, proxy
statements, reports, notices and dividends to Fund shareholders; cost of
stationery; costs of shareholders' and other meetings of the Fund; traveling
expenses of officers, directors and employees of the Corporation, if any;
expenses for fidelity bonds and other insurance covering the Corporation and its
officers and directors; distribution expenses; costs of indemnification and any
extraordinary expenses.
(d) The Manager shall authorize and permit any of its
directors, officers and employees, who may be elected as directors or officers
of the Corporation, to serve in the capacities in which they are elected, and
shall bear their salary or other compensation and expenses, if any.
6. No director, officer or employee of the Corporation shall receive
from the Corporation any salary or other compensation as such director, officer
or employee while he is at the same time a director, officer, or employee of the
Manager or any affiliated company of the Manager.
7. As compensation for the services performed and the facilities
furnished and expenses assumed by the Manager, including the services of any
sub-advisers or agents retained by the Manager, the Fund shall pay the Manager
monthly, as promptly as possible after the last day of each month, a fee,
computed daily of 0.55% annually of the average daily net assets of the Fund. If
this Agreement is terminated as of any date not the last day of a month, such
fee shall be paid as promptly as possible after such date of termination, shall
be based on the average daily net assets of the Fund in that period from the
beginning
- 3 -
<PAGE>
of such month to such date of termination, and shall be that proportion of such
average daily net assets as the number of business days in such period bears to
the number of business days in such month. The average daily net assets of the
Fund shall in all cases be based only on business days and be computed as of the
time of the regular close of business of the New York Stock Exchange, or such
other time as may be determined by the Board of Directors of the Corporation.
Each such payment shall be accompanied by a report of the prepared either by the
Fund or by a reputable firm of independent accountants, which shall show the
amount properly payable to the Manager under this Agreement and the detailed
computation thereof.
8. The Manager shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Fund in connection with the performance
of this 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 and duties hereunder.
9. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Manager who may also be a director,
officer, or employee of the Corporation, to engage in any other business or to
devote his time and attention in part to the management or other aspects of any
other business, whether of a similar nature or a dissimilar nature, or limit or
restrict the right of the Manager to engage in any other business or to render
services of any kind, including investment advisory and management services, to
any other corporation, firm, individual or association.
10. As used in this Agreement, the terms "securities" and "net assets"
shall have the meanings ascribed to them in the Articles of Incorporation of the
Corporation; and the terms "assignment", "interested persons", 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 and interpretations as
may be granted by the Securities and Exchange Commission by any rule, regulation
or order.
11. This Agreement will become effective June 19, 1987, provided that
it shall have been approved by the Corporation's Board of Directors and by the
shareholders of the Fund in accordance with the requirements of the 1940 Act
and, unless sooner terminated as provided herein, will continue in effect until
June 19, 1989. Thereafter, if not terminated, this Agreement shall continue in
effect for successive annual periods, 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 (as defined in the 1940 Act) of the
outstanding voting securities of the Fund , 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 the Corporation or of
the Manager, by vote cast in person at a meeting called for the purpose of
voting on such approval. This Agreement is terminable
- 4 -
<PAGE>
without penalty, by vote of the Corporation's Board of Directors, by vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Fund , or by the Manager, on not less than 60 days' notice to the other
party and may be terminated immediately upon the mutual written consent of the
Manager and the Fund. Termination of this Agreement with respect to the Fund
shall in no way affect continued performance with regard to any other portfolio
of the Corporation. This Agreement will automatically and immediately terminate
in the event of its assignment.
12. In the event this Agreement is terminated by either party or upon
written notice from the Manager at any time, the Fund hereby agrees that it will
eliminate from its corporate name any reference to the name of "Legg Mason." The
Fund shall have the non-exclusive use of the name "Legg Mason" in whole or in
part so long as this Agreement is effective or until such notice is given.
13. No provision of this Agreement may be 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, and no material amendment of this Agreement shall be effective until
approved by vote of the holders of a majority of the Fund's outstanding voting
securities.
14. 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.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON INCOME TRUST, INC.
By: /s/ Mary C. Curry By: /s/ John F. Curley, Jr.
----------------------------- -------------------------------
Attest: LEGG MASON FUND ADVISER, INC.
By: /s/ Mary C. Curry By: /s/ Ernest C. Kiehne
----------------------------- -------------------------------
-5-
MANAGEMENT AGREEMENT
LEGG MASON INVESTMENT GRADE INCOME PORTFOLIO
This MANAGEMENT AGREEMENT, made this 19th day of June, 1987, by and
between Legg Mason Income Trust, Inc. (the "Corporation"), a Maryland
corporation, on behalf of the Legg Mason Investment Grade Income Portfolio
("Fund"), and Legg Mason Fund Adviser, Inc. (the "Manager"), a Maryland
corporation, having its principal place of business at 7 East Redwood Street,
Baltimore, Maryland 21202.
WHEREAS, the Corporation has filed a Registration Statement with the
Securities and Exchange Commission for the purpose of registering as a series
type, open-end diversified investment company under the Investment Company Act
of 1940 (the "1940 Act") and for the purpose of registering the shares of common
stock of the Corporation for sale to the public under the Securities Act of
1933; and
WHEREAS, the Corporation wishes to retain the Manager to provide
investment advisory, management, and administrative services to the Fund; and
WHEREAS, the Manager is willing 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. The Corporation hereby appoints Legg Mason Fund Adviser, Inc. as
Manager of the Fund for the period and on the terms set forth in this Agreement.
The Manager accepts such appointment and agrees to render the services herein
set forth, for the compensation herein provided.
2. The Fund shall at all times keep the Manager fully informed with
regard to the securities owned by it, its funds available, or to become
available, for investment, and generally as to the condition of its affairs. It
shall furnish the Manager with such other documents and information with regard
to its affairs as the Manager may from time to time reasonably request.
3. (a) Subject to the supervision of the Corporation's Board of
Directors, the Manager shall regularly provide the Fund with investment
research, advice, management and supervision and shall furnish a continuous
investment program for the Fund's portfolio of securities consistent with the
Fund's investment objective, policies, and limitations as stated in the Fund's
current Prospectus and Statement of Additional Information. The Manager shall
determine from time to time what securities will be purchased, retained or
<PAGE>
sold by the Fund, and shall implement those decisions, all subject to the
provisions of the Corporation's Articles of Incorporation and By-laws, the 1940
Act, the applicable rules and regulations of the Securities and Exchange
Commission, and other applicable federal and state law, as well as the
investment objective, policies, and limitations of the Fund. The Manager will
place orders pursuant to its investment determinations for the Fund either
directly with the issuer or with any broker or dealer. In placing orders with
brokers and dealers, the Manager will attempt to obtain the best net price and
the most favorable execution of its orders; however, the Manager may, in its
discretion, purchase and sell portfolio securities from and to brokers and
dealers, who provide the Fund with research, analysis, advice and similar
services, and the Manager may pay to these brokers, in return for research and
analysis, a higher commission than may be charged by other brokers. In no
instance will portfolio securities be purchased from or sold to the Manager, or
any affiliated person thereof promulgated by the Securities and Exchange
Commission pursuant to the 1940 Act. The Manager shall also provide advice and
recommendations with respect to other aspects of the business and affairs of the
Fund, and shall perform such other functions of management and supervision as
may be directed by the Corporation's Board of Directors.
(b) The Manager will oversee the maintenance of all books and records
with respect to the securities transactions of the Fund and the Fund's books of
account in accordance with all applicable federal and state laws and
regulations, and will furnish the Board of Directors of the Corporation with
such periodic and special reports as the Board reasonably may request.
(c) The Fund authorizes the Manager and any entity or person associated
with the Manager which is a member of a national securities exchange to effect
any transaction on the exchange for the account of the Fund which is permitted
by Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T)
thereunder, and the Fund hereby consents to the retention of compensation by
such entity for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv).
4. The Manager may enter into a contract ("Investment Advisory
Agreement") with an investment adviser in which the Manager delegates to such
investment adviser any or all its duties specified in Paragraph 3 hereunder,
provided that such Investment Advisory Agreement imposes on the investment
adviser bound thereby all duties and conditions to which the Manager is subject
hereunder, and further provided that such Investment Advisory Agreement meets
all requirements of the 1940 Act and rules thereunder.
5. (a) The Manager, at its expense, shall supply the Board of Directors
and officers of the Corporation with all statistical information and reports
reasonably required by them and reasonably available to the Manager and shall
furnish the Fund with office facilities, including space, furniture and
equipment and all personnel reasonably necessary for the operation of the Fund.
- 2 -
<PAGE>
(b) In compliance with the requirements of Rule 31a-3 under
the 1940 Act, the Manager hereby agrees that all books and records which it
maintains for the Fund are the property of the Fund, and further agrees to
surrender promptly to the Fund or its agents any of such records upon the Fund's
request. The Manager further agrees to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act and any such records required to be maintained by
Rule 31a-1 under the 1940 Act.
(c) Other than as herein specifically indicated, the Manager
shall not be responsible for the Fund's expenses. Specifically, the Manager will
not be responsible, except to the extent of the reasonable compensation of
employees of the Fund whose services may be used by the Manager hereunder, for
any of the following expenses of the Fund, which expenses shall be borne by the
Fund: legal expenses; interest; taxes; governmental fees; fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; the cost (including brokerage commissions or
charges, if any) of securities purchased or sold by the Fund and any losses
incurred in connection therewith; fees of custodians, transfer agents,
registrars or other agents; expenses of preparing share certificates; expenses
relating to the redemption or repurchase of the Fund's shares; expenses of
registering and qualifying Fund shares for sale under applicable federal and
state law and maintaining such registrations and qualifications; expenses of
preparing, setting in print, printing and distributing prospectuses, proxy
statements, reports, notices and dividends to Fund shareholders; cost of
stationery; costs of shareholders' and other meetings of the Fund; traveling
expenses of officers, directors and employees of the Corporation, if any;
expenses for fidelity bonds and other insurance covering the Corporation and its
officers and directors; distribution expenses; costs of indemnification and any
extraordinary expenses.
(d) The Manager shall authorize and permit any of its
directors, officers and employees, who may be elected as directors or officers
of the Corporation, to serve in the capacities in which they are elected, and
shall bear their salary or other compensation and expenses, if any.
6. No director, officer or employee of the Corporation shall receive
from the Corporation any salary or other compensation as such director, officer
or employee while he is at the same time a director, officer, or employee of the
Manager or any affiliated company of the Manager.
7. As compensation for the services performed and the facilities
furnished and expenses assumed by the Manager, including the services of any
sub-advisers or agents retained by the Manager, the Fund shall pay the Manager
monthly, as promptly as possible after the last day of each month, a fee,
computed daily of 0.60% annually of the average daily net assets of the Fund. If
this Agreement is terminated as of any date not the last day of a month, such
fee shall be paid as promptly as possible after such date of termination, shall
be based on the average daily net assets of the Fund in that period from the
beginning
- 3 -
<PAGE>
of such month to such date of termination, and shall be that proportion of such
average daily net assets as the number of business days in such period bears to
the number of business days in such month. The average daily net assets of the
Fund shall in all cases be based only on business days and be computed as of the
time of the regular close of business of the New York Stock Exchange, or such
other time as may be determined by the Board of Directors of the Corporation.
Each such payment shall be accompanied by a report of the prepared either by the
Fund or by a reputable firm of independent accountants, which shall show the
amount properly payable to the Manager under this Agreement and the detailed
computation thereof.
8. The Manager shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Fund in connection with the performance
of this 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 and duties hereunder.
9. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Manager who may also be a director,
officer, or employee of the Corporation, to engage in any other business or to
devote his time and attention in part to the management or other aspects of any
other business, whether of a similar nature or a dissimilar nature, or limit or
restrict the right of the Manager to engage in any other business or to render
services of any kind, including investment advisory and management services, to
any other corporation, firm, individual or association.
10. As used in this Agreement, the terms "securities" and "net assets"
shall have the meanings ascribed to them in the Articles of Incorporation of the
Corporation; and the terms "assignment", "interested persons", 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 and interpretations as
may be granted by the Securities and Exchange Commission by any rule, regulation
or order.
11. This Agreement will become effective June 19, 1987, provided that
it shall have been approved by the Corporation's Board of Directors and by the
shareholders of the Fund in accordance with the requirements of the 1940 Act
and, unless sooner terminated as provided herein, will continue in effect until
June 19, 1989. Thereafter, if not terminated, this Agreement shall continue in
effect for successive annual periods, 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 (as defined in the 1940 Act) of the
outstanding voting securities of the Fund , 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 the Corporation or of
the Manager, by vote cast in person at a meeting called for the purpose of
voting on such approval. This Agreement is terminable
- 4 -
<PAGE>
without penalty, by vote of the Corporation's Board of Directors, by vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Fund , or by the Manager, on not less than 60 days' notice to the other
party and may be terminated immediately upon the mutual written consent of the
Manager and the Fund. Termination of this Agreement with respect to the Fund
shall in no way affect continued performance with regard to any other portfolio
of the Corporation. This Agreement will automatically and immediately terminate
in the event of its assignment.
12. In the event this Agreement is terminated by either party or upon
written notice from the Manager at any time, the Fund hereby agrees that it will
eliminate from its corporate name any reference to the name of "Legg Mason." The
Fund shall have the non-exclusive use of the name "Legg Mason" in whole or in
part so long as this Agreement is effective or until such notice is given.
13. No provision of this Agreement may be 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, and no material amendment of this Agreement shall be effective until
approved by vote of the holders of a majority of the Fund's outstanding voting
securities.
14. 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.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON INCOME TRUST, INC.
By: /s/ Mary C. Curry By: /s/ John F. Curley, Jr.
--------------------------- -----------------------------
Attest: LEGG MASON FUND ADVISER, INC.
By: /s/ Mary C. Curry By: /s/ Ernest C. Kiehne
--------------------------- ----------------------------
- 5 -
MANAGEMENT AGREEMENT
LEGG MASON U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MANAGEMENT AGREEMENT ("Agreement"), made this 1st day of November,
1988, by and between Legg Mason Income Trust, Inc. (the "Corporation"), a
Maryland corporation, on behalf of the Legg Mason U.S. Government Money Market
Portfolio ("Fund"), and Legg Mason Fund Adviser, Inc. (the "Manager"), a
Maryland corporation, having its principal place of business at 111 South
Calvert Street, Baltimore, Maryland 21202.
WHEREAS, the Corporation is a registered, open-end management
investment company currently consisting of three portfolios; and
WHEREAS, the Corporation wishes to retain the Manager to provide
investment advisory, management, and administrative services to the Fund; and
WHEREAS, the Manager is willing 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. Appointment. The Corporation hereby appoints Legg Mason Fund
Adviser, Inc. as Manager of the Fund for the period and on the terms set forth
in this Agreement. The Manager accepts such appointment and agrees to render the
services herein set forth, for the compensation herein provided.
2. Delivery of Documents. The Fund shall at all times keep the Manager
fully informed with regard to the securities owned by it, its funds available,
or to become available, for investment, and generally as to the condition of its
affairs. It shall furnish the Manager with such other documents and information
with regard to its affairs as the Manager may from time to time reasonably
request.
3. Management Services. (a) Subject to the supervision of the
Corporation's Board of Directors, the Manager shall regularly provide the Fund
with investment research, advice, management and supervision and shall furnish a
continuous investment program for the Fund's portfolio of securities consistent
with the Fund's investment objective, policies, and limitations as stated in the
Fund's current prospectus and statement of additional information. The Manager
shall determine from time to time what securities will be purchased, retained or
sold by the Fund, and shall implement those decisions, all subject to the
provisions of the Corporation's Articles of Incorporation and
<PAGE>
By-laws, the Investment Company Act of 1940, as amended ("the 1940 Act"), the
applicable rules and regulations of the Securities and Exchange Commission, and
other applicable federal and state law, as well as the investment objective,
policies, and limitations of the Fund. The Manager will place orders pursuant to
its investment determinations for the Fund either directly with the issuer or
with any broker or dealer. In placing orders with brokers and dealers, the
Manager will attempt to obtain the best net price and the most favorable
execution of its orders; however, the Manager may, in its discretion, purchase
and sell portfolio securities from and to brokers and dealers, who provide the
Fund with supplemental investment and market research, securities and economic
analyses, advice and similar services, and the Manager may pay to these brokers
and dealers, in return for research and analysis, a higher brokerage commission
or spread than may be charged by other brokers and dealers. In no instance will
portfolio securities be purchased from or sold to the Manager, or any affiliated
person thereof except in accordance with the 1940 Act or the rules, regulations
or orders promulgated thereunder by the Securities and Exchange Commission. The
Manager shall also provide advice and recommendations with respect to other
aspects of the business and affairs of the Fund, and shall perform such other
functions of management and supervision as may be directed by the Corporation's
Board of Directors.
(b) The Manager will oversee the maintenance of all books and records
with respect to the securities transactions of the Fund and the Fund's books of
account in accordance with all applicable federal and state laws and
regulations, and will furnish the Board of Directors of the Corporation with
such periodic and special reports as the Board reasonably may request.
(c) The Fund authorizes the Manager and any entity or person associated
with the Manager which is a member of a national securities exchange to effect
any transaction on the exchange for the account of the Fund which is permitted
by Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T)
thereunder, and the Fund hereby consents to the retention of compensation by
such entity for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv).
4. Delegation of Duties. The Manager may enter into a contract
("Investment Advisory Agreement") with an investment adviser in which the
Manager delegates to such investment adviser any or all its duties specified in
Paragraph 3 hereunder, provided that such Investment Advisory Agreement imposes
on the investment adviser bound thereby all duties and conditions to which the
Manager is subject hereunder, and further provided that such Investment Advisory
Agreement meets all requirements of the 1940 Act and rules thereunder.
5. (a) Other Services. The Manager, at its expense, shall supply the
Board of Directors and officers of the Corporation with information and reports
reasonably required by them and reasonably available to the Manager and shall
furnish the Fund with
- 2 -
<PAGE>
office facilities, including space, furniture and equipment and all personnel
reasonably necessary for the operation of the Fund.
(b) Books and Records. In compliance with the requirements of
Rule 31a-3 under the 1940 Act, the Manager hereby agrees that all books and
records which it maintains for the Fund are the property of the Fund, and
further agrees to surrender promptly to the Fund or its agents any of such
records upon the Fund's request. The Manager further agrees to preserve for the
periods prescribed by Rule 31a-2 under the 1940 Act and any such records
required to be maintained by Rule 31a-1 under the 1940 Act.
(c) Expenses. Other than as herein specifically indicated, the
Manager shall not be responsible for the Fund's expenses. Specifically, the
Manager will not be responsible, except to the extent of the reasonable
compensation of employees of the Fund whose services may be used by the Manager
hereunder, for any of the following expenses of the Fund, which expenses shall
be borne by the Fund: legal expenses; audit expenses; interest; taxes;
governmental fees; fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations; the cost
(including brokerage commissions or charges, if any) of securities purchased or
sold by the Fund and any losses incurred in connection therewith; fees of
custodians, transfer agents, registrars or other agents; expenses of preparing
share certificates; expenses relating to the redemption or repurchase of the
Fund's shares; expenses of registering and qualifying Fund shares for sale under
applicable federal and state law and maintaining such registrations and
qualifications; expenses of preparing, setting in print, printing and
distributing prospectuses, proxy statements, reports, notices and dividends to
Fund shareholders; cost of stationery; costs of shareholders' and other meetings
of the Fund; traveling expenses of officers, directors and employees of the
Corporation, if any; expenses for fidelity bonds and other insurance covering
the Corporation and its officers and directors; distribution expenses; costs of
indemnification and any extraordinary expenses.
(d) Service as Officers of the Corporation. The Manager shall
authorize and permit any of its directors, officers and employees, who may be
elected as directors or officers of the Corporation, to serve in the capacities
in which they are elected, and shall bear their salary or other compensation and
expenses, if any.
6. Compensation of Individuals. No director, officer or employee of the
Corporation shall receive from the Corporation any salary or other compensation
as such director, officer or employee while he is at the same time a director,
officer, or employee of the Manager or any affiliated company of the Manager.
7. Manager's Compensation. As compensation for the services performed,
the facilities furnished and the expenses assumed by the Manager, including the
services of any investment advisers or agents retained by the Manager, the Fund
shall pay the
- 3 -
<PAGE>
Manager monthly, as promptly as possible after the last day of each month, a
fee, calculated daily, at an annual rate equal to 0.50% of the average daily net
assets of the Fund. If this Agreement is terminated as of any date not the last
day of a month, such fee shall be paid as promptly as possible after such date
of termination, shall be based on the average daily net assets of the Fund in
that period from the beginning of such month to such date of termination, and
shall be that proportion of such average daily net assets as the number of
business days in such period bears to the number of business days in such month.
The average daily net assets of the Fund shall in all cases be based only on
calendar days and be computed as of the time of the regular close of business of
the New York Stock Exchange, or such other time as may be determined by the
Corporation's Board of Directors. Each such payment shall be accompanied by a
report of the Fund, prepared either by the Fund or by a reputable firm of
independent accountants, which shall show the amount properly payable to the
Manager under this Agreement and the detailed computation thereof.
8. Limitation of Liability. The Manager shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of this 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 and duties hereunder.
9. Services Not Exclusive. Nothing in this Agreement shall limit or
restrict the right of any director, officer, or employee of the Manager who may
also be a director, officer, or employee of the Corporation, to engage in any
other business or to devote his time and attention in part to the management or
other aspects of any other business, whether of a similar nature or a dissimilar
nature, or limit or restrict the right of the Manager to engage in any other
business or to render services of any kind, including investment advisory and
management services, to any other corporation, firm, individual or association.
10. Definitions. As used in this Agreement, the terms "securities" and
"net assets" shall have the meanings ascribed to them in the Articles of
Incorporation of the Corporation; and the terms "assignment", "interested
persons", 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 and interpretations as may be granted by the Securities and Exchange
Commission by any rule, regulation or order.
11. Duration and Term. This Agreement will become effective on November
1, 1988, provided that it shall have been approved by the Corporation's Board of
Directors, including a majority of the directors who are not "interested
persons" of the Corporation or the Manager, by vote cast in person at a meeting
called for the purpose of voting on such approval, and by the shareholders of
the Fund in accordance with the requirements of the
- 4 -
<PAGE>
1940 Act and, unless sooner terminated as provided herein, will continue in
effect until November 1, 1990. Thereafter, if not terminated, this Agreement
shall continue in effect for successive annual periods, 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 , provided that in either event the continuance is also
approved by a majority of the Corporation's Directors who are not "interested
persons" of the Corporation or of the Manager, by vote cast in person at a
meeting called for the purpose of voting on such approval.
This Agreement is terminable without penalty, by vote of the
Corporation's Board of Directors, by vote of a majority of the outstanding
voting securities of the Fund or by the Manager, on not less than 60 days'
notice to the other party and may be terminated immediately upon the mutual
written consent of the Manager and the Corporation. Termination of this
Agreement with respect to the Fund shall in no way affect continued performance
with regard to any other portfolio of the Corporation. This Agreement will
automatically and immediately terminate in the event of its assignment.
12. Applicable to Series Only. Manager hereby acknowledges and agrees
that it may not look to the assets of any series of the Corporation other than
the Fund for satisfaction of any obligation or liability arising under this
Agreement.
13. Use of "Legg Mason" Name. In the event this Agreement is terminated
by either party or upon written notice from the Manager at any time, the Fund
hereby agrees that it will eliminate from its corporate name any reference to
the name of "Legg Mason." The Fund shall have the non-exclusive use of the name
"Legg Mason" in whole or in part so long as this Agreement is effective or until
such notice is given.
14. Amendment and Termination. No provision of this Agreement may be
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, and no material amendment of this Agreement
shall be effective until approved by vote of the holders of a majority of the
Fund's outstanding voting securities.
15. Miscellaneous. 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.
- 5 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON INCOME TRUST, INC.
By: /s/ Barbara W. Diehl By: /s/ Edmund J. Cashman, Jr.
---------------------------- -----------------------------
Attest: LEGG MASON FUND ADVISER, INC.
By: /s/ Barbara W. Diehl By: /s/ Charles A. Bacigalupo
---------------------------- -----------------------------
- 6 -
MANAGEMENT AGREEMENT
This MANAGEMENT AGREEMENT, made this 1st day of February, 1994, by and
between Legg Mason Income Trust, Inc., a Maryland corporation (the
"Corporation"), on behalf of the Legg Mason High Yield Portfolio ("Fund"), and
Legg Mason Fund Adviser, Inc., a Maryland corporation (the "Manager").
WHEREAS, the Corporation is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act")
currently consisting of four portfolios; and
WHEREAS, the Corporation wishes to retain the Manager to provide
investment advisory, management, and administrative services to the Fund; and
WHEREAS, the Manager is willing 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. The Corporation hereby appoints Legg Mason Fund Adviser, Inc. as
Manager of the Fund for the period and on the terms set forth in this Agreement.
The Manager accepts such appointment and agrees to render the services herein
set forth, for the compensation herein provided.
2. The Fund shall at all times keep the Manager fully informed with
regard to the securities owned by it, its funds available, or to become
available, for investment, and generally as to the condition of its affairs. It
shall furnish the Manager with such other documents and information with regard
to its affairs as the Manager may from time to time reasonably request.
3. (a) Subject to the supervision of the Corporation's Board of
Directors, the Manager shall regularly provide the Fund with investment
research, advice, management and supervision and shall furnish a continuous
investment program for the Fund's portfolio of securities consistent with the
Fund's investment goals and policies. The Manager shall determine from time to
time what securities will be purchased, retained or sold by the Fund, and shall
implement those decisions, all subject to the provisions of the Corporation's
Articles of Incorporation and By-laws, the 1940 Act, the applicable rules and
regulations of the Securities and Exchange Commission, and other applicable
federal and state law, as well as the investment goals and policies of the Fund.
The Manager will place orders pursuant to its investment determinations for the
Fund either directly with the issuer
<PAGE>
or with any broker or dealer. In placing orders with brokers and dealers, the
Manager will attempt to obtain the best net price and the most favorable
execution of its orders; however, the Manager may, in its discretion, purchase
and sell portfolio securities through brokers who provide the Fund with
research, analysis, advice and similar services, and the Manager may pay to
these brokers, in return for research and analysis, a higher commission or
spread than may be charged by other brokers. The Manager shall also provide
advice and recommendations with respect to other aspects of the business and
affairs of the Fund, and shall perform such other functions of management and
supervision as may be directed by the Board of Directors of the Corporation.
(b) The Fund hereby authorizes any entity or person associated with the
Manager which is a member of a national securities exchange to effect any
transaction on the exchange for the account of the Fund which is permitted by
Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T)
thereunder, and the Fund hereby consents to the retention of compensation by
such entity for such transactions in accordance with Rule 11a2-2(T)(a)(2)(iv).
4. The Manager may enter into a contract ("Investment Advisory
Agreement") with an investment adviser in which the Manager delegates to such
investment adviser any or all its duties specified in Paragraph 3 hereunder,
provided that such Investment Advisory Agreement imposes on the investment
adviser bound thereby all duties and conditions to which the Manager is subject
hereunder, and further provided that such Investment Advisory Agreement meets
all requirements of the 1940 Act and rules thereunder.
5. (a) The Manager, at its expense, shall supply the Board of Directors
and officers of the Corporation with all statistical information and reports
reasonably required by them and reasonably available to the Manager and shall
furnish the Fund with office facilities, including space, furniture and
equipment and all personnel reasonably necessary for the operation of the Fund.
The Manager shall oversee the maintenance of all books and records with respect
to the Fund's securities transactions and the keeping of the Fund's books of
account in accordance with all applicable federal and state laws and
regulations.In compliance with the requirements of Rule 31a-3 under the 1940
Act, the Manager hereby agrees that all books and records which it maintains for
the Fund are the property of the Corporation, and further agrees to surrender
promptly to the Fund or its agents any of such records upon the Fund's request.
The Manager further agrees to arrange for the preservation of the records
required to be maintained by Rule 31a-2 under the 1940 Act. The Manager shall
authorize and permit any of its directors, officers and employees, who may be
elected as directors or officers of the Fund, to serve in the capacities in
which they are elected.
(b) Other than as herein specifically indicated, the Manager
shall not be responsible for the Fund's expenses. Specifically, the Manager will
not be responsible, except to the extent of the reasonable compensation of
employees of the Fund whose
- 2 -
<PAGE>
services may be used by the Manager hereunder, for any of the following expenses
of the Fund, which expenses shall be borne by the Fund: advisory fees;
distribution fees; interest; taxes; governmental fees; fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; the cost (including brokerage commissions or
charges, if any) of securities purchased or sold by the Fund and any losses
incurred in connection therewith; fees of custodians, transfer agents,
registrars or other agents; legal expenses; expenses of preparing share
certificates; expenses relating to the redemption or repurchase of the Fund's
shares; expenses of registering and qualifying Fund shares for sale under
applicable federal and state law and maintaining such registrations and
qualifications; expenses of preparing, setting in print, printing and
distributing prospectuses, proxy statements, reports, notices and dividends to
Fund shareholders; cost of stationery; costs of stockholders' and other meetings
of the Fund; directors' fees; audit fees; travel expenses of officers, directors
and employees of the Corporation, if any; and the Corporation's pro rata portion
of premiums on any fidelity bond or other insurance covering the Corporation and
its officers and directors.
6. No director, officer or employee of the Corporation or Fund shall
receive from the Corporation any salary or other compensation as such director,
officer or employee while he is at the same time a director, officer, or
employee of the Manager or any affiliated company of the Manager. This paragraph
shall not apply to directors, executive committee members, consultants and other
persons who are not regular members of the Manager's or any affiliated company's
staff.
7. As compensation for the services performed and the facilities
furnished and expenses assumed by the Manager, including the services of any
consultants or sub- advisers retained by the Manager, the Fund shall pay the
Manager, as promptly as possible after the last day of each month, a fee,
computed daily at an annual rate of 0.65% of the average daily net assets of the
Fund. The first payment of the fee shall be made as promptly as possible at the
end of the month succeeding the effective date of this Agreement. If this
Agreement is terminated as of any date not the last day of a month, such fee
shall be paid as promptly as possible after such date of termination, shall be
based on the average daily net assets of the Fund in that period from the
beginning of such month to such date of termination, and shall be that
proportion of such average daily net assets as the number of business days in
such period bears to the number of business days in such month. The average
daily net assets of the Fund shall in all cases be based only on business days
and be computed as of the time of the regular close of business of the New York
Stock Exchange, or such other time as may be determined by the Board of
Directors of the Corporation. Each such payment shall be accompanied by a report
prepared either by the Fund or by a reputable firm of independent accountants,
which shall show the amount properly payable to the Manager under this Agreement
and the detailed computation thereof.
- 3 -
<PAGE>
8. The Manager assumes no responsibility under this Agreement other
than to render the services called for hereunder, in good faith, and shall not
be responsible for any action of the Board of Directors of the Corporation in
following or declining to follow any advice or recommendations of the Manager;
provided, that nothing in this Agreement shall protect the Manager against any
liability to the Fund or its shareholders to which it 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 hereunder.
9. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Manager who may also be a director,
officer, or employee of the Corporation, to engage in any other business or to
devote his time and attention in part to the management or other aspects of any
other business, whether of a similar nature or a dissimilar nature, or limit or
restrict the right of the Manager to engage in any other business or to render
services of any kind, including investment advisory and management services, to
any other corporation, firm, individual or association.
10. As used in this Agreement, the terms "assignment", "interested
persons", 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 and interpretations as may be granted by the Securities and Exchange
Commission by any rule, regulation or order.
11. This Agreement will become effective with respect to the Fund on
the date first written above, provided that it shall have been approved by the
Corporation's Board of Directors and by the shareholders of the Fund in
accordance with the requirements of the 1940 Act and, unless sooner terminated
as provided herein, will continue in effect for two years 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.
12. This Agreement is terminable with respect to the Fund without
penalty by vote of 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 Manager, on not less than 60 days' notice to the other party and will
be terminated upon the mutual written consent of the Manager and the
Corporation. This Agreement shall terminate automatically in the event of its
assignment by the Manager and shall not be assignable by the Corporation without
the consent of the Manager.
- 4 -
<PAGE>
13. In the event this Agreement is terminated by either party or upon
written notice from the Manager 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 so long as this Agreement is effective or until such
notice is given.
14. The Manager agrees that for services rendered to the Fund, or
indemnity due in connection with service to the Fund, it shall look only to
assets of the Fund for satisfaction and that it shall have no claim against the
assets of any other fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: LEGG MASON INCOME TRUST, INC.
By: /s/ Kathi D. Glenn By: /s/ John F. Curley, Jr.
-------------------------- ---------------------------
Attest: LEGG MASON FUND ADVISER, INC.
By: /s/ Kathi D. Glenn By: /s/ Marie K. Karpinski
-------------------------- --------------------------
- 5 -
INVESTMENT ADVISORY AGREEMENT
LEGG MASON U.S. GOVERNMENT INTERMEDIATE-TERM PORTFOLIO
AGREEMENT made this 19th day of June, 1987 by and between Legg Mason
Fund Adviser, Inc. ("Manager"), a Maryland corporation, and Western Asset
Management Company ("WAMC"), a California corporation, each of which is
registered as an investment adviser under the Investment Advisers Act of 1940.
WHEREAS, Manager is the manager of Legg Mason Income Trust, Inc. (the
"Corporation"), an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), and
WHEREAS, Manager wishes to retain WAMC to provide it with certain
investment advisory services in connection with Manager's management of the Legg
Mason U.S. Government Intermediate-Term Portfolio ("Fund"), a series of shares
of the Corporation; and
WHEREAS, WAMC is willing 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. Appointment. Manager hereby appoints WAMC investment adviser for the
Fund for the period and on the terms set forth in this Agreement. WAMC accepts
such appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
2. Delivery of Documents. Manager has furnished WAMC with copies
properly certified or authenticated of each of the following:
(a) The Corporation's Articles of Incorporation, as filed with
the State Department of Assessments and Taxation of the State of
Maryland on April 28, 1987 and all amendments thereto (such Articles of
Incorporation, as presently in effect and as they shall from time to
time be amended, are herein called the "Articles");
(b) The Corporation's By-Laws and all amendments thereto (such
By-Laws, as presently in effect and as they shall from time to time be
amended, are herein called the "By-Laws");
(c) Resolutions of the Corporation's Board of Directors
authorizing the appointment of Manager as the manager and WAMC as
investment adviser and approving the Management Agreement between
Manager and the Fund dated June 19, 1987 (the "Management Agreement")
and this Agreement;
(d) The Corporation's Notification of Registration on Form
N-8A under the 1940 Act as filed with the Securities and Exchange
Commission on February 18, 1987 and all amendments thereto;
(e) The Corporation's Registration Statement on Form N-1A
under the Securities Act of 1933, as amended, and the 1940 Act (File
No. 33-12092) as filed with the Securities and Exchange Commission on
February 18, 1987, including all exhibits thereto, relating to shares
of common stock of the Fund, par value $.001 per share (herein called
"Shares") and all amendments thereto;
<PAGE>
(f) The Fund's most recent prospectus (such prospectus, as
presently in effect and all amendments and supplements thereto are
herein called the "Prospectus"). Manager will furnish WAMC from time to
time with copies of all amendments of or supplements to the foregoing;
and
(g) The Fund's most recent statement of additional information
(such statement of additional information, as presently in effect and
all amendments and supplements thereto are herein called the "Statement
of Additional Information").
Manager will furnish WAMC from time to time with copies of all amendments of or
supplements to the foregoing.
3. Investment Advisory Services. (a) Subject to the supervision of the
Corporation's Board of Directors and the Manager, WAMC shall regularly provide
the Fund with investment research, advice, management and supervision and shall
furnish a continuous investment program for the Fund's portfolio of securities
consistent with the Fund's investment objective, policies, and limitations as
stated in the Fund's current Prospectus and Statement of Additional Information.
WAMC shall determine from time to time what securities will be purchased,
retained or sold by the Fund, and shall implement those decisions, all subject
to the provisions of the Corporation's Articles of Incorporation and By-Laws,
the 1940 Act, the applicable rules and regulations of the Securities and
Exchange Commission, and other applicable federal and state law, as well as the
investment objective, policies, and limitations of the Fund. WAMC will place
orders pursuant to its investment determinations for the Fund either directly
with the issuer or with any broker or dealer. In placing orders with brokers and
dealers, WAMC will attempt to obtain the best net price and the most favorable
execution of its orders; however, WAMC may, in its discretion, purchase and sell
portfolio securities from and to brokers and dealers who provide the Fund with
research, analysis, advice and similar services, and WAMC may pay to these
brokers, in return for research and analysis, a higher commission than may be
charged by other brokers. In no instance will portfolio securities be purchased
from or sold to WAMC or any affiliated person thereof except in accordance with
the rules, regulations or orders promulgated by the Securities and Exchange
Commission pursuant to the 1940 Act. WAMC shall also perform such other
functions of management and supervision as may be requested by the Manager and
agreed to by WAMC.
(b) WAMC will oversee the maintenance of all books and records with
respect to the securities transactions of the Fund in accordance with all
applicable federal and state laws and regulations, and will furnish the Board of
Directors of the Corporation with such periodic and special reports as the Board
or the Manager reasonably may request.
4. Services Not Exclusive. WAMC's services hereunder are not deemed to
be exclusive, and WAMC shall be free to render similar services to others. It is
understood that persons employed by WAMC to assist in the performance of its
duties hereunder might not devote their full time to such service. Nothing
herein contained shall be deemed to limit or restrict the right of WAMC or any
affiliate of WAMC to engage in and devote time and attention to other businesses
or to render services of whatever kind or nature.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, WAMC hereby agrees that all books and records which it
maintains for the Fund are property of the Fund and further agrees to surrender
promptly to the Fund or its agents any of such records upon the Fund's request.
WAMC further agrees to preserve for the periods prescribed by Rule 31a-2 under
the 1940 Act, any such records required to be maintained by Rule 31a-1 under the
1940 Act.
- 2 -
<PAGE>
6. Expenses. During the term of this Agreement, WAMC will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities (including brokerage commissions, if any)
purchased for the Fund.
7. Compensation. For the services which WAMC will render to Manager and
the Fund under this Agreement, Manager will pay WAMC a fee, computed daily and
paid monthly, at an annual rate equal to 40% of the fee received by the Manager
from the Fund. Fees due to WAMC hereunder shall be paid promptly to WAMC by the
Manager following its receipt of fees from the Fund. If this Agreement is
terminated as of any date not the last day of a calendar month, a final fee
shall be paid promptly after the date of termination and shall be based on the
percentage of days of the month during which the contract was still in effect.
8. Limitation of Liability. WAMC will not be liable for any error of
judgment or mistake of law or for any loss suffered by Manager or by the Fund in
connection with the performance of this 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 under this Agreement.
9. Definitions. As used in this Agreement, the terms "securities" and
"net assets" shall have the meanings ascribed to them in the Articles of
Incorporation of the Corporation; and 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.
10. Duration and Termination. This Agreement will become effective June
19, 1987, provided that it shall have been approved by the Corporation's Board
of Directors and by the shareholders of the Fund in accordance with the
requirements of the 1940 Act and, unless sooner terminated as provided for
herein, shall continue in effect until June 19, 1989. Thereafter, if not
terminated, this Agreement shall continue in effect for successive annual
periods, 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 (as defined in the 1940 Act) of the outstanding voting securities of
the Fund, 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 the Corporation or of any party to this Agreement,
by vote cast in person at a meeting called for the purpose of voting on such
approval. This Agreement is terminable without penalty, by vote of the
Corporation's Board of Directors, by vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Fund, by the Manager or by
WAMC, on not less than 60 days' notice to the Fund and/or the other party(ies)
and will be terminated immediately upon any termination of the Management
Agreement with respect to the Fund or upon the mutual written consent of WAMC,
the Manager, and the Fund. Termination of this Agreement with respect to the
Fund shall in no way affect continued performance with regard to any other
portfolio of the Corporation. This Agreement will automatically and immediately
terminate in the event of its assignment.
11. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
12. Amendments. No provision of this Agreement may be 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, and no material amendment of this Agreement shall be
effective until approved by vote of the holders of a majority of the Fund's
outstanding voting securities.
- 3 -
<PAGE>
13. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. 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. Should any part of this Agreement 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 and shall inure to the
benefit of the parties hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
[SEAL] LEGG MASON FUND ADVISER, INC.
Attest:
By: /s/Mary C. Curry By: /s/Ernest C. Kiehne
[SEAL] WESTERN ASSET MANAGMENT COMPANY
Attest:
By: By: /s/ W. Curtis Livingston, III
- 4 -
INVESTMENT ADVISORY AGREEMENT
LEGG MASON INVESTMENT GRADE INCOME PORTFOLIO
AGREEMENT made this 19th day of June, 1987 by and between Legg Mason
Fund Adviser, Inc. ("Manager"), a Maryland corporation, and Western Asset
Management Company ("WAMC"), a California corporation, each of which is
registered as an investment adviser under the Investment Advisers Act of 1940.
WHEREAS, Manager is the manager of Legg Mason Income Trust, Inc. (the
"Corporation"), an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), and
WHEREAS, Manager wishes to retain WAMC to provide it with certain
investment advisory services in connection with Manager's management of the Legg
Mason Investment Grade Income Portfolio ("Fund"), a series of shares of the
Corporation; and
WHEREAS, WAMC is willing 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. Appointment. Manager hereby appoints WAMC investment adviser for the
Fund for the period and on the terms set forth in this Agreement. WAMC accepts
such appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
2. Delivery of Documents. Manager has furnished WAMC with copies
properly certified or authenticated of each of the following:
(a) The Corporation's Articles of Incorporation, as filed with
the State Department of Assessments and Taxation of the State of
Maryland on April 28, 1987 and all amendments thereto (such Articles of
Incorporation, as presently in effect and as they shall from time to
time be amended, are herein called the "Articles");
(b) The Corporation's By-Laws and all amendments thereto (such
By-Laws, as presently in effect and as they shall from time to time be
amended, are herein called the "By-Laws");
(c) Resolutions of the Corporation's Board of Directors
authorizing the appointment of Manager as the manager and WAMC as
investment adviser and approving the Management Agreement between
Manager and the Fund dated June 19, 1987 (the "Management Agreement")
and this Agreement;
(d) The Corporation's Notification of Registration on Form
N-8A under the 1940 Act as filed with the Securities and Exchange
Commission on February 18, 1987 and all amendments thereto;
(e) The Corporation's Registration Statement on Form N-1A
under the Securities Act of 1933, as amended, and the 1940 Act (File
No. 33-12092) as filed with the Securities and Exchange Commission on
February 18, 1987, including all exhibits thereto, relating to shares
of common stock of the Fund, par value $.001 per share (herein called
"Shares") and all amendments thereto;
<PAGE>
(f) The Fund's most recent prospectus (such prospectus, as
presently in effect and all amendments and supplements thereto are
herein called the "Prospectus"). Manager will furnish WAMC from time to
time with copies of all amendments of or supplements to the foregoing;
and
(g) The Fund's most recent statement of additional information
(such statement of additional information, as presently in effect and
all amendments and supplements thereto are herein called the "Statement
of Additional Information").
Manager will furnish WAMC from time to time with copies of all amendments of or
supplements to the foregoing.
3. Investment Advisory Services. (a) Subject to the supervision of the
Corporation's Board of Directors and the Manager, WAMC shall regularly provide
the Fund with investment research, advice, management and supervision and shall
furnish a continuous investment program for the Fund's portfolio of securities
consistent with the Fund's investment objective, policies, and limitations as
stated in the Fund's current Prospectus and Statement of Additional Information.
WAMC shall determine from time to time what securities will be purchased,
retained or sold by the Fund, and shall implement those decisions, all subject
to the provisions of the Corporation's Articles of Incorporation and By-Laws,
the 1940 Act, the applicable rules and regulations of the Securities and
Exchange Commission, and other applicable federal and state law, as well as the
investment objective, policies, and limitations of the Fund. WAMC will place
orders pursuant to its investment determinations for the Fund either directly
with the issuer or with any broker or dealer. In placing orders with brokers and
dealers, WAMC will attempt to obtain the best net price and the most favorable
execution of its orders; however, WAMC may, in its discretion, purchase and sell
portfolio securities from and to brokers and dealers who provide the Fund with
research, analysis, advice and similar services, and WAMC may pay to these
brokers, in return for research and analysis, a higher commission than may be
charged by other brokers. In no instance will portfolio securities be purchased
from or sold to WAMC or any affiliated person thereof except in accordance with
the rules, regulations or orders promulgated by the Securities and Exchange
Commission pursuant to the 1940 Act. WAMC shall also perform such other
functions of management and supervision as may be requested by the Manager and
agreed to by WAMC.
(b) WAMC will oversee the maintenance of all books and records with
respect to the securities transactions of the Fund in accordance with all
applicable federal and state laws and regulations, and will furnish the Board of
Directors of the Corporation with such periodic and special reports as the Board
or the Manager reasonably may request.
4. Services Not Exclusive. WAMC's services hereunder are not deemed to
be exclusive, and WAMC shall be free to render similar services to others. It is
understood that persons employed by WAMC to assist in the performance of its
duties hereunder might not devote their full time to such service. Nothing
herein contained shall be deemed to limit or restrict the right of WAMC or any
affiliate of WAMC to engage in and devote time and attention to other businesses
or to render services of whatever kind or nature.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, WAMC hereby agrees that all books and records which it
maintains for the Fund are property of the Fund and further agrees to surrender
promptly to the Fund or its agents any of such records upon the Fund's request.
WAMC further agrees to preserve for the periods prescribed by Rule 31a-2 under
the 1940 Act, any such records required to be maintained by Rule 31a-1 under the
1940 Act.
- 2 -
<PAGE>
6. Expenses. During the term of this Agreement, WAMC will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities (including brokerage commissions, if any)
purchased for the Fund.
7. Compensation. For the services which WAMC will render to Manager and
the Fund under this Agreement, Manager will pay WAMC a fee, computed daily and
paid monthly, at an annual rate equal to 40% of the fee received by the Manager
from the Fund. Fees due to WAMC hereunder shall be paid promptly to WAMC by the
Manager following its receipt of fees from the Fund. If this Agreement is
terminated as of any date not the last day of a calendar month, a final fee
shall be paid promptly after the date of termination and shall be based on the
percentage of days of the month during which the contract was still in effect.
8. Limitation of Liability. WAMC will not be liable for any error of
judgment or mistake of law or for any loss suffered by Manager or by the Fund in
connection with the performance of this 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 under this Agreement.
9. Definitions. As used in this Agreement, the terms "securities" and
"net assets" shall have the meanings ascribed to them in the Articles of
Incorporation of the Corporation; and 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.
10. Duration and Termination. This Agreement will become effective June
19, 1987, provided that it shall have been approved by the Corporation's Board
of Directors and by the shareholders of the Fund in accordance with the
requirements of the 1940 Act and, unless sooner terminated as provided for
herein, shall continue in effect until June 19, 1989. Thereafter, if not
terminated, this Agreement shall continue in effect for successive annual
periods, 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 (as defined in the 1940 Act) of the outstanding voting securities of
the Fund, 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 the Corporation or of any party to this Agreement,
by vote cast in person at a meeting called for the purpose of voting on such
approval. This Agreement is terminable without penalty, by vote of the
Corporation's Board of Directors, by vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Fund, by the Manager or by
WAMC, on not less than 60 days' notice to the Fund and/or the other party(ies)
and will be terminated immediately upon any termination of the Management
Agreement with respect to the Fund or upon the mutual written consent of WAMC,
the Manager, and the Fund. Termination of this Agreement with respect to the
Fund shall in no way affect continued performance with regard to any other
portfolio of the Corporation. This Agreement will automatically and immediately
terminate in the event of its assignment.
11. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
12. Amendments. No provision of this Agreement may be 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, and no material amendment of this Agreement shall be
effective until approved by vote of the holders of a majority of the Fund's
outstanding voting securities.
- 3 -
<PAGE>
13. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. 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. Should any part of this Agreement 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 and shall inure to the
benefit of the parties hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
[SEAL] LEGG MASON FUND ADVISER, INC.
Attest:
By: /s/Mary C. Curry By: /s/Ernest C. Kiehne
[SEAL] WESTERN ASSET MANAGMENT COMPANY
Attest:
By: By: /s/ W. Curtis Livingston, III
- 4 -
INVESTMENT ADVISORY AGREEMENT
LEGG MASON U.S. GOVERNMENT MONEY MARKET PORTFOLIO
AGREEMENT made this 1st day of November, 1988 by and between Legg Mason
Fund Adviser, Inc. ("Manager"), a Maryland corporation, and Western Asset
Management Company ("Western"), a California corporation, each of which is
registered as an investment adviser under the Investment Advisers Act of 1940.
WHEREAS, Manager is the manager of Legg Mason U.S. Government Money
Market Portfolio ("Fund") of Legg Mason Income Trust, Inc. (the "Corporation"),
an open-end, diversified management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), and
WHEREAS, Manager wishes to retain Western to provide it with certain
investment advisory services in connection with Manager's management of the
Fund; and
WHEREAS, Western is willing 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. Appointment. Manager hereby appoints Western investment adviser for
the Fund for the period and on the terms set forth in this Agreement. Western
accepts such appointment and agrees to furnish the services herein set forth for
the compensation herein provided.
2. Delivery of Documents. Manager has furnished Western with copies
properly certified or authenticated of each of the following:
(a) The Corporation's Articles of Incorporation, as filed with
the State Department of Assessments and Taxation of the State of
Maryland on April 28, 1987, all amendments thereto and Articles
Supplementary filed with such Department (such Articles of
Incorporation and Articles Supplementary, as presently in effect and as
they shall from time to time be amended, are herein called the
"Articles");
(b) The Corporation's By-Laws and all amendments thereto (such
By-Laws, as presently in effect and as they shall from time to time be
amended, are herein called the "By-Laws");
(c) Resolutions of the Corporation's Board of Directors
authorizing the appointment of Manager as the manager and Western as
investment adviser with respect to the Fund and approving the
Management Agreement between Manager and the Corporation with respect
to the Fund dated November 1, 1988 (the "Management Agreement") and
this Agreement;
(d) The Corporation's Notification of Registration on Form
N-8A under the 1940 Act as filed with the Securities and Exchange
Commission on February 18, 1987 and all amendments thereto;
(e) The Corporation's post-effective amendments to its
Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, and the 1940 Act (File No. 33-12092) as filed with the
Securities and Exchange Commission on September 2, 1988 and October __,
<PAGE>
1988, including all exhibits thereto, relating to shares of common
stock of the Fund, par value $.001 per share (herein called "Shares");
(f) The Fund's most recent prospectus (such prospectus, as
presently in effect and all amendments and supplements thereto are
herein called the "Prospectus"); and
(g) The Fund's most recent statement of additional information
(such statement of additional information, as presently in effect and
all amendments and supplements thereto are herein called the "Statement
of Additional Information").
Manager will furnish Western from time to time with copies of all amendments of
or supplements to the foregoing.
3. Investment Advisory Services. (a) Subject to the supervision of the
Corporation's Board of Directors and the Manager, Western shall regularly
provide the Fund with investment research, advice, management and supervision
and shall furnish a continuous investment program for the Fund's portfolio of
securities consistent with the Fund's investment objective, policies, and
limitations as stated in the Fund's current Prospectus and Statement of
Additional Information. Western shall determine from time to time what
securities will be purchased, retained or sold by the Fund, and shall implement
those decisions, all subject to the provisions of the Corporation's Articles of
Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of
the Securities and Exchange Commission, and other applicable federal and state
law, as well as the investment objective, policies, and limitations of the Fund.
Western will place orders pursuant to its investment determinations for the Fund
either directly with the issuer or with any broker or dealer. In placing orders
with brokers and dealers, Western will attempt to obtain the best net price and
the most favorable execution of its orders; however, Western may, in its
discretion, purchase and sell portfolio securities from and to brokers and
dealers who provide the Fund with supplemental investment market research,
securities and economic analyses, advice and similar services, and Western may
pay these brokers and dealers, in return for research and analysis, a higher
brokerage commission or spread than may be charged by other brokers and dealers.
In no instance will portfolio securities be purchased from or sold to Western or
any affiliated person thereof except in accordance with the 1940 Act or the
rules, regulations or orders promulgated thereunder by the Securities and
Exchange Commission. Western shall also perform such other functions of
management and supervision as may be requested by the Manager and agreed to by
Western.
(b) Western will oversee the maintenance of all books and records with
respect to the securities transactions of the Fund in accordance with all
applicable federal and state laws and regulations, and will furnish the Board of
Directors of the Corporation with such periodic and special reports as the Board
or the Manager reasonably may request.
4. Services Not Exclusive. Western's services hereunder are not deemed
to be exclusive, and Western shall be free to render similar services to others.
It is understood that persons employed by Western to assist in the performance
of its duties hereunder might not devote their full time to such service.
Nothing herein contained shall be deemed to limit or restrict the right of
Western or any affiliate of Western to engage in and devote time and attention
to other businesses or to render services of whatever kind or nature.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, Western hereby agrees that all books and records which it
maintains for the Fund are property of the Fund and further agrees to surrender
promptly to the Fund or its agents any of such records upon the
- 2 -
<PAGE>
Fund's request. Western further agrees to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act, any such records required to be maintained by
Rule 31a-1 under the 1940 Act.
6. Expenses. During the term of this Agreement, Western will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities (including brokerage commissions, if any)
purchased for the Fund.
7. Compensation. For the services which Western will render to Manager
and the Fund under this Agreement, Manager will pay Western a fee, computed
daily and paid monthly, at an annual rate equal to 30% of the fee received by
the Manager from the Fund pursuant to the Management Agreement. Fees due to
Western hereunder shall be paid promptly to Western by the Manager following its
receipt of fees from the Fund. If this Agreement is terminated as of any date
not the last day of a calendar month, a final fee shall be paid promptly after
the date of termination and shall be based on the fee payable to Fund Adviser by
the fund for the period from the beginning of such month to the date of
termination.
8. Limitation of Liability. Western will not be liable for any error of
judgment or mistake of law or for any loss suffered by Manager or by the Fund in
connection with the performance of this 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 on Western's part in the performance of its duties or from reckless
disregard by it of its obligations or duties under this Agreement.
9. Definitions. As used in this Agreement, the terms "securities,"
"series" and "net assets" shall have the meanings ascribed to them in the
Articles of Incorporation of the Corporation; and 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.
10. Duration and Termination. This Agreement will become effective on
November 1, 1988, provided that it shall have been approved by the Corporation's
Board of Directors , including a majority of the Directors who are not
"interested persons" of the Corporation, Western or the Manager, by vote cast in
person at a meeting called for the purpose of voting on such approval and by the
shareholders of the Fund in accordance with the requirements of the 1940 Act
and, unless sooner terminated as provided for herein, shall continue in effect
until November 1, 1990. Thereafter, if not terminated, this Agreement shall
continue in effect for successive annual periods, 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, provided that in either event the continuance is also approved by a
majority of the Corporation's Directors who are not "interested persons" of the
Corporation, Western or the Manager, by vote cast in person at a meeting called
for the purpose of voting on such approval. This Agreement is terminable without
penalty, by vote of the Corporation's Board of Directors, by vote of a majority
of the outstanding voting securities of the Fund, by the Manager or by Western,
on not less than 60 days' notice to the Fund and/or the other party(ies) and
will be terminated immediately upon any termination of the Management Agreement
with respect to the Fund or upon the mutual written consent of Western, the
Manager, and the Corporation. Termination of this Agreement with respect to the
Fund shall in no way affect continued performance of Western with regard to any
other portfolio of the Corporation. This Agreement will automatically and
immediately terminate in the event of its assignment.
11. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
- 3 -
<PAGE>
12. Amendments. No provision of this Agreement may be 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, and no material amendment of this Agreement shall be
effective until approved by vote of the holders of a majority of the Fund's
outstanding voting securities.
13. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. 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. Should any part of this Agreement 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 and shall inure to the
benefit of the parties hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
[SEAL] LEGG MASON FUND ADVISER, INC.
Attest:
By: /s/Barbara W. Diehl By: /s/ Charles A. Bacigalupo
[SEAL] WESTERN ASSET MANAGMENT COMPANY
Attest:
By:/s/ Pamela Thomas-Cox By: /s/ W. Curtis Livingston, III
- 4 -
INVESTMENT ADVISORY AGREEMENT
LEGG MASON INCOME TRUST, INC.
AGREEMENT made this 1st day of February, 1994 by and between Legg Mason
Fund Adviser, Inc. ("Manager"), a Maryland corporation, and Western Asset
Management Company ("Adviser"), a California corporation, each of which is
registered as an investment adviser under the Investment Advisers Act of 1940.
WHEREAS, Manager is the manager of Legg Mason Income Trust, Inc. (the
"Corporation"), an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), and
WHEREAS, Manager wishes to retain the Adviser to provide it with
certain investment advisory services in connection with Manager's management of
the Legg Mason High Yield Portfolio ("Fund"), a series of shares of the
Corporation; and
WHEREAS, Adviser is willing 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. Appointment. Manager hereby appoints Western Asset Management
Company as investment adviser for the Fund for the period and on the terms set
forth in this Agreement. The Adviser accepts such appointment and agrees to
furnish the services herein set forth for the compensation herein provided.
2. Delivery of Documents. Manager has furnished the Adviser with
copies properly certified or authenticated of each of the following:
(a) The Corporation's Articles of Incorporation, as filed with
the State Department of Assessments and Taxation of the State of
Maryland on April 28, 1987 and all amendments thereto (such Articles of
Incorporation, as presently in effect and as they shall from time to
time be amended, are herein called the "Articles");
(b) The Corporation's By-Laws and all amendments thereto (such
By-Laws, as presently in effect and as they shall from time to time be
amended, are herein called the "By-Laws");
(c) Resolutions of the Corporation's Board of Directors
authorizing the appointment of Manager as the manager and Western Asset
Management Company as investment adviser and approving the Management
Agreement between Manager and the Fund dated January 24, 1994 (the
"Management Agreement") and this Agreement;
(d) The Corporation's Registration Statement on Form N-1A
under the Securities Act of 1933, as amended, and the 1940 Act (File
No. 33-12092) as filed with the Securities and Exchange Commission on
December 30, 1993, including all exhibits thereto, relating to shares
of common stock of the Fund, par value $.001 per share (herein called
"Shares") and all amendments thereto;
(e) The Fund's most recent prospectus (such prospectus, as
presently in effect and all amendments and supplements thereto are
herein called the "Prospectus"); and
<PAGE>
(g) The Fund's most recent statement of additional information
(such statement of additional information, as presently in effect and
all amendments and supplements thereto are herein called the "Statement
of Additional Information").
Manager will furnish the Adviser from time to time with copies of all amendments
of or supplements to the foregoing.
3. Investment Advisory Services. (a) Subject to the supervision of the
Corporation's Board of Directors and the Manager, the Adviser shall regularly
provide the Fund with investment research, advice, management and supervision
and shall furnish a continuous investment program for the Fund's portfolio of
securities consistent with the Fund's investment objective, policies, and
limitations as stated in the Fund's current Prospectus and Statement of
Additional Information. The Adviser shall determine from time to time what
securities will be purchased, retained or sold by the Fund, and shall implement
those decisions, all subject to the provisions of the Corporation's Articles of
Incorporation and By-Laws, the 1940 Act, the applicable rules and regulations of
the Securities and Exchange Commission, and other applicable federal and state
law, as well as the investment objective, policies, and limitations of the Fund.
The Adviser will place orders pursuant to its investment determinations for the
Fund either directly with the issuer or with any broker or dealer. In placing
orders with brokers and dealers, the Adviser will attempt to obtain the best net
price and the most favorable execution of its orders; however, the Adviser may,
in its discretion, purchase and sell portfolio securities from and to brokers
and dealers who provide the Fund with research, analysis, advice and similar
services, and the Adviser may pay to these brokers, in return for research and
analysis, a higher commission than may be charged by other brokers. In no
instance will portfolio securities be purchased from or sold to the Adviser or
any affiliated person thereof except in accordance with the rules, regulations
or orders promulgated by the Securities and Exchange Commission pursuant to the
1940 Act. The Adviser shall also perform such other functions of management and
supervision as may be requested by the Manager and agreed to by the Adviser.
(b) The Adviser will oversee the maintenance of all books and records
with respect to the securities transactions of the Fund in accordance with all
applicable federal and state laws and regulations, and will furnish the Board of
Directors of the Corporation with such periodic and special reports as the Board
or the Manager reasonably may request.
(c) The Corporation hereby authorizes any entity or person associated
with the Adviser which is a member of a national securities exchange to effect
any transaction on the exchange for the account of the Corporation which is
permitted by Section 11(a) of the Securities Exchange Act of 1934 and Rule
11a2-2(T) thereunder, and the Corporation hereby consents to the retention by
such person associated with the Adviser of compensation for such transactions in
accordance with Rule 11a2-2(T)(a)(2)(iv).
4. Services Not Exclusive. The Adviser's services hereunder are not
deemed to be exclusive, and the Adviser shall be free to render similar services
to others. It is understood that persons employed by the Adviser to assist in
the performance of its duties hereunder might not devote their full time to such
service. Nothing herein contained shall be deemed to limit or restrict the right
of the Adviser or any affiliate of the Adviser to engage in and devote time and
attention to other businesses or to render services of whatever kind or nature.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Adviser hereby agrees that all books and records which
it maintains for the Fund are property of the Fund and further agrees to
surrender promptly to the Fund or its agents any of such records upon the Fund's
request. The Adviser further agrees to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act, any such records required to be maintained by
Rule 31a-1 under the 1940 Act.
- 2 -
<PAGE>
6. Expenses. During the term of this Agreement, the Adviser will pay
all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities (including brokerage commissions, if
any) purchased for the Fund.
7. Compensation. For the services which the Adviser will render to
Manager and the Fund under this Agreement, Manager will pay the Adviser a fee,
computed daily and paid monthly, at an annual rate equal to 77% of the fee
received by the Manager from the Fund. Fees due to the Adviser hereunder shall
be paid promptly to the Adviser by the Manager following its receipt of fees
from the Fund. If this Agreement is terminated as of any date not the last day
of a calendar month, a final fee shall be paid promptly after the date of
termination and shall be based on the percentage of days of the month during
which the contract was still in effect.
8. Limitation of Liability. The Adviser will not be liable for any
error of judgment or mistake of law or for any loss suffered by Manager or by
the Fund in connection with the performance of this 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 under this Agreement.
9. Definitions. As used in this Agreement, the terms "securities" and
"net assets" shall have the meanings ascribed to them in the Articles of
Incorporation of the Corporation; and 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.
10. Duration and Termination. This Agreement will become effective
February 1, 1994, provided that it shall have been approved by the Corporation's
Board of Directors and by the shareholders of the Fund in accordance with the
requirements of the 1940 Act and, unless sooner terminated as provided for
herein, shall continue in effect until February 1, 1996. Thereafter, if not
terminated, this Agreement shall continue in effect for successive annual
periods, 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 (as defined in the 1940 Act) of the outstanding voting securities of
the Fund, 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 the Corporation or of any party to this Agreement,
by vote cast in person at a meeting called for the purpose of voting on such
approval. This Agreement is terminable without penalty, by vote of the
Corporation's Board of Directors, by vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Fund, by the Manager or by the
Adviser, on not less than 60 days' notice to the Fund and/or the other
party(ies) and will be terminated immediately upon any termination of the
Management Agreement with respect to the Fund or upon the mutual written consent
of the Adviser, the Manager, and the Fund. Termination of this Agreement with
respect to the Fund shall in no way affect continued performance with regard to
any other portfolio of the Corporation. This Agreement will automatically and
immediately terminate in the event of its assignment.
11. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
12. Amendments. No provision of this Agreement may be 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, and no material amendment of this Agreement shall be
effective until approved by vote of the holders of a majority of the Fund's
outstanding voting securities.
- 3 -
<PAGE>
13. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. 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. Should any part of this Agreement 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 and shall inure to the
benefit of the parties hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
[SEAL] LEGG MASON FUND ADVISER, INC.
Attest:
By: /s/ Kathi D. Glenn By: /s/Marie K. Karpinski
[SEAL] WESTERN ASSET MANAGMENT COMPANY
Attest:
By:/s/ Kathi D. Glenn By: /s/ W. Curtis Livingston, III
- 4 -
UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this 19th day of June, 1987, by and
between Legg Mason Income Trust, Inc., a Maryland corporation ("Corporation")
and Legg Mason Wood Walker, Incorporated, a Maryland corporation (the
"Distributor").
WHEREAS, the Corporation has filed a registration statement with the
Securities and Exchange Commission for the purpose of registering as a series
type open-end, diversified investment company under the Investment Company Act
of 1940, as amended (the "1940 Act"), and for the purpose of registering the
shares of common stock of the Corporation (the "Shares") for sale to the public
under the Securities Act of 1933 (the "1933 Act"); and will register the Shares
in accordance with the provisions of various state securities laws; and
WHEREAS, the Corporation intends to offer for public sale distinct
series of Shares ("Series"), each corresponding to a distinct portfolio; 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 Shares and to furnish certain other services to the Series
as specified in this Agreement; and
WHEREAS, this Agreement has been approved by a vote of the
Corporation's Board of Directors and certain disinterested directors in
conformity with 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. The Corporation hereby appoints the Distributor as principal
underwriter in connection with the offering and sale of the Series. The
Corporation authorizes the Distributor, as exclusive agent for the Corporation,
upon the commencement of operations of any Series and subject to applicable
federal and state law and the Articles of Incorporation and By-Laws of the
Corporation: (a) to promote the Series; (b) to solicit orders for the purchase
of the Shares of the Series subject to such terms and conditions as the
Corporation may specify; and (c) to accept orders for the purchase of the Shares
on behalf of the Corporation. The Distributor shall comply with all applicable
federal and
<PAGE>
state laws and offer the Shares of each Series on an agency or "best efforts"
basis under which the Corporation shall issue only such Shares as are actually
sold.
2. The public offering price of the Shares of each Series shall be the
net asset value per share (as determined by the Corporation) of the outstanding
Shares of the Series. The Corporation shall furnish the Distributor with a
statement of each computation of net asset value and of the details entering
into such computation.
3. As compensation for the services performed and the expenses assumed
by the Distributor under this Agreement including, but not limited to, any
commissions paid for sales of Shares, each Series shall pay the Distributor
monthly, as promptly as possible after the last day of each month, a fee,
calculated daily, at an annual rate of 0.5% of the Series' daily net assets. If
this Agreement is terminated as of any date not the last day of a month, such
fee shall be paid as promptly as possible after such date of termination, shall
be based on the average daily net assets of the Series in that period from the
beginning of such month to such date of termination, and shall be that
proportion of such average daily net assets as the number of business days in
such period bears to the number of business days in such month. The daily net
assets of a Series shall in all cases be based only on business days and be
computed as of the time of the regular close of business of the New York Stock
Exchange, or such other time as may be determined by the Corporation's Board of
Directors. Each such payment shall be accompanied by a report of the Corporation
prepared either by the Corporation or by a reputable firm of independent
accountants which shall show the amount properly payable to the Distributor
under this Agreement and the detailed computation thereof.
4. 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, respectively, the form of prospectus and statement of
additional information with respect to the Series filed by the Corporation as
part of the Registration Statement.
5. The Distributor, at no expense to the Corporation, 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 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
- 2 -
<PAGE>
Distributor or its 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.
6. 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 Series 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 Series'
communications with persons who are shareholders of the Series.
7. 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.
8. 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, 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.
- 3 -
<PAGE>
9. The Corporation reserves the right at any time to withdraw all
offerings of the Shares of any or all Series by written notice to the
Distributor at its principal office.
10. 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.
11. The Distributor may at its sole discretion repurchase Shares
offered for sale by the shareholders. 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 other than the fee set forth in paragraph 3 hereof. 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 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 and transmit
promptly to the Corporation's transfer agent shareholder requests for redemption
of Shares.
12. The Distributor is an independent contractor and shall be agent for
the Corporation only in respect to the sale and redemption of the Shares.
13. 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.
14. 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.
15. As used in this Agreement, the terms "securities" and "net assets"
shall have the meanings ascribed to them in the Articles of Incorporation of the
Corporation; and the terms "assignment", "interested persons", 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.
- 4 -
<PAGE>
16. Subject to the provisions of paragraphs 17 and 18 below, this
Agreement will remain in effect for one year from the date of its execution and
from year to year thereafter.
17. This Agreement shall automatically terminate in the event of its
assignment and may be terminated at any time without the payment of any penalty
by the Corporation or by the Distributor on sixty (60) days' written notice to
the other party. The Corporation may effect such termination by a vote of (i) a
majority of the Corporation's Board of Directors, (ii) a majority of the
directors who are not interested persons of the Corporation and who have no
direct or indirect financial interest in the operation of the Corporation's
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act, in this Agreement
or in any agreement related to the Corporation's Distribution Plan (the "Rule
12b-1 Directors"), or (iii) a majority of the outstanding voting securities of
the Corporation.
18. This Agreement shall be submitted for approval to the Corporation's
Board of Directors annually and shall continue in effect only so long as
specifically approved annually (i) by a majority vote of the Corporation's Board
of Directors, and (ii) by the vote of a majority of the Rule 12b-1 Directors,
cast in person at a meeting called for the purpose of voting on such approval.
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: Mary C. Curry By: John F. Curley, Jr.
---------------------------- ------------------------------
Attest: LEGG MASON WOOD WALKER, INCORPORATED
By: Mary C. Curry By: Edmund J. Cashman, Jr.
---------------------------- ------------------------------
- 5 -
UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this 1st day of November, 1988, by
and between Legg Mason Income Trust, Inc., a Maryland corporation
("Corporation"), on behalf of the Legg Mason U.S. Government Money Market
Portfolio (the "Fund"), and Legg Mason Wood Walker, Incorporated, a Maryland
corporation (the "Distributor").
WHEREAS, the Corporation intends to offer the shares of common stock of
the Fund (the "Shares") for public sale; and
WHEREAS, the Corporation wishes to retain the Distributor to serve as
the principal underwriter in connection with the offering and sale of the Shares
and to furnish certain other services to the Fund as specified in this
Agreement; and
WHEREAS, this Agreement has been approved by a vote of the
Corporation's Board of Directors and by certain disinterested directors who are
not interested persons in conformity with paragraph (b)(2) of Rule 12b-1 under
the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Distributor is willing to act as principal underwriter of
the Shares of the Fund 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. The Corporation hereby appoints the Distributor as principal
underwriter in connection with the offering and sale of the Fund's Shares. The
Corporation authorizes the Distributor, as 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: (a)
to promote the Fund; (b) to solicit orders for the purchase of the Shares of the
Fund subject to such terms and conditions as the Corporation may specify; and
(c) to accept orders for the purchase of the Shares of the Fund on behalf of the
Corporation. 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 as are actually sold. The
Distributor shall have the right to use any list of shareholders of 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.
<PAGE>
2. 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. The Corporation shall furnish the Distributor with a
statement of each computation of net asset value and of the details entering
into such computation.
3. 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 the
Securities Act of 1933 ("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.
4. The Distributor, at no expense to the Corporation, 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 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 or its representatives or agents.
5. The Corporation agrees to register the Shares, at its own expense,
with the SEC, 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 such
registrations. 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 the Fund's communications with persons who are
shareholders of the Fund.
6. 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
- 2 -
<PAGE>
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.
7. 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, 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 any
employee of such a corporate entity, unless such person is otherwise an employee
of the Corporation.
8. 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.
9. 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.
10. The Distributor may at its sole discretion repurchase Shares
offered for sale by the shareholders. 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 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
and transmit promptly to the Corporation's transfer agent shareholder requests
for redemption of Shares.
11. The Distributor is an independent contractor and shall be agent for
the Corporation only in respect to the sale and redemption of the Shares.
12. 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.
13. 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.
14. As used in this Agreement, the terms "securities" and "net assets"
shall have the meanings ascribed to them in the Articles of Incorporation of the
Corporation; and the terms "assignment", "interested persons", 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.
15. The Distributor hereby acknowledges and agrees that it may not look
to the assets of any series of the Corporation other than the Fund for
satisfaction of any obligation or liability arising under this Agreement.
16. Subject to the provisions of paragraphs 17 and 18 below, this
Agreement will remain in effect for one year from the date of its execution and
from year to year thereafter.
17. This Agreement shall automatically terminate in the event of its
assignment and may be terminated at any time without the payment of any penalty
by the Corporation or by the Distributor on sixty (60) days' written notice to
the other party. The Corporation may effect such termination by a vote of (i) a
majority of the Corporation's Board of Directors, (ii) a majority of the
directors who are not interested persons of the Corporation and who have no
direct or indirect financial interest in the operation of the Corporation's
Distribution Plan pursuant to Rule 12b-1 under the 1940 Act, in this Agreement
or in any agreement related to the Corporation's Distribution Plan (the "Rule
12b-1 Directors"), or (iii) a majority of the outstanding voting securities of
the Corporation.
18. This Agreement shall be submitted for approval to the Corporation's
Board of Directors annually and shall continue in effect only so long as
specifically approved annually (i) by a majority vote of the Corporation's Board
of Directors, and (ii) by the vote
- 4 -
<PAGE>
of a majority of the Rule 12b-1 Directors, cast in person at a meeting called
for the purpose of voting on such approval.
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: Barbara W. Diehl By: Edmund J. Cashman, Jr.
------------------------------ --------------------------------
Attest: LEGG MASON WOOD WALKER,
INCORPORATED
By: Barbara W. Diehl By: Charles A. Baciagalupo
------------------------------- --------------------------------
- 5 -
UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this 1st day of February, 1994, 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 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
<PAGE>
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, the form thereof to be as mutually agreed upon and
approved by the Corporation and the Distributor. In making arrangements with
such dealers, the Distributor shall act only as principal and not as agent for
the Corporation. No dealer 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 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
- 2 -
<PAGE>
"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 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 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
- 3 -
<PAGE>
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 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.
- 4 -
<PAGE>
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 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.
- 5 -
<PAGE>
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: Kathi D. Glenn By: John F. Curley, Jr.
----------------------------- -------------------------------
Attest: LEGG MASON WOOD WALKER, INCORPORATED
By: Kathi D. Glenn By: Marie K. Karpinski
------------------------------ -------------------------------
- 6 -
CUSTODIAN CONTRACT
Between
LEGG MASON INCOME TRUST, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. Employment of Custodian and Property to be Held By
It...................................................................1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian....................................1
2.1 Holding Securities..........................................1
2.2 Delivery of Securities......................................1
2.3 Registration of Securities..................................4
2.4 Bank Accounts...............................................4
2.5 Payments for Shares.........................................4
2.6 Investment and Availability of Federal Funds................5
2.7 Collection of Income........................................5
2.8 Payment of Fund Monies......................................5
2.9 Liability for Payment in Advance of
Receipt of Securities Purchased.............................6
2.10 Payments for Repurchases or Redemptions
of Shares of the Fund.......................................6
2.11 Appointment of Agents.......................................7
2.12 Deposit of Fund Assets in Securities System.................7
2.13 Segregated Account..........................................8
2.14 Ownership Certificates for Tax Purposes.....................9
2.15 Proxies.....................................................9
2.16 Communications Relating to Fund
Portfolio Securities........................................9
2.17 Proper Instructions.........................................9
2.18 Actions Permitted Without Express Authority................10
2.19 Evidence of Authority......................................10
3. Duties of Custodian With Respect to the Books
of Account and Calculation of Net Asset Value
and Net Income......................................................10
4. Records.............................................................11
5. Opinion of Corporation's Independent Certified Public Accountants...11
6. Reports to Corporation by Independent Certified Public Accountants..11
7. Compensation of Custodian...........................................11
8. Responsibility of Custodian.........................................12
9. Effective Period, Termination and Amendment.........................12
<PAGE>
10. Successor Custodian.................................................13
11. Interpretive and Additional Provisions..............................13
12. Massachusetts Law to Apply..........................................14
13. Additional Funds....................................................14
14. Prior Contracts.....................................................14
15. Headings............................................................14
16. Notices.............................................................15
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between Legg Mason Income Trust, Inc., a Maryland
corporation having its principal place of business at 7 East Redwood Street,
Baltimore, Maryland 21202 ("Corporation'), on behalf of Legg Mason U.S.
Government Intermediate-Term Portfolio and Legg Mason Investment Grade Income
Portfolio (collectively, the "Funds"), and State Street Bank and Trust Company,
a Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110 ("Custodian"),
WITNESSETH, that in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Corporation hereby employs the Custodian as the custodian of its
assets of each Fund pursuant to the provisions of the Corporation's Articles of
Incorporation and By-Laws and the terms and conditions hereof. Each Fund agrees
to deliver to the Custodian all securities and cash owned by the Fund, and all
payments of income, payments of principal or capital distributions received by
the Fund with respect to all securities owned by the Fund from time to time, and
the cash consideration received by the Fund for such new or treasury shares of
the common
<PAGE>
stock ("Shares") of the Fund as may be issued or sold from time to time. The
Custodian shall not be responsible for any property of the Fund held or received
by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section
2.17), the Custodian shall from time to time employ one or more sub-custodians,
but only after the prior express written consent of the Corporation in
accordance with an applicable vote by the Board of Directors of the Corporation,
and provided that the Custodian shall have no more or less responsibility or
liability to the Fund on account of any actions or omissions of any
sub-custodian so employed than any such sub-custodian has to the Custodian.
2. Duties of the Custodian with Respect to Property of the Fund Held By
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the Custodian
-------------
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Fund all non-cash property, including all
securities owned by the Fund, other than securities which are
maintained pursuant to Section 2.12 in a clearing agency registered
with the Securities and Exchange Commission under Section 17A of the
Securities Exchange Act of 1934 ("Exchange Act") which acts as a
securities depository or in a book-entry system authorized
- 2 -
<PAGE>
by the U.S. Department of the Treasury and certain federal agencies,
collectively referred to herein as a "Securities System."
2.2 Delivery of Securities. The Custodian shall release and deliver
securities owned by each Fund held by the Custodian or in a Securities
System account of the Custodian only upon receipt of Proper
Instructions, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of full payment in connection with any
repurchase agreement related to such securities entered into
by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.12 hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
- 3 -
<PAGE>
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.11 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or
for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in such case, the Custodian shall have no
responsibility or liability for any loss arising from such
delivery of such securities prior to
- 4 -
<PAGE>
receiving payment for such securities except as may arise from
the Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, options, rights or similar
securities, the surrender thereof in the exercise of such
warrants, options, rights or similar securities or the
surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the
new securities and cash, if any, are to be delivered to the
Custodian;
10) For delivery in connection with any loans of securities made
by a Fund, but only against receipt of adequate collateral as
agreed upon from time to time by the Custodian and the
Corporation,
- 5 -
<PAGE>
which may be in the form of cash or obligations issued by the
United States government, its agencies or instrumentalities,
except that in connection with any loans for which collateral
is to be credited to the Custodian's account in the book-entry
system authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the
delivery of securities owned by the Fund prior to the receipt
of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Corporation on behalf of a Fund, the
Custodian and a broker-dealer registered under the Exchange
Act and a member of the National Association of Securities
Dealers, Inc. ("NASD"), relating to compliance with the rules
of The Options Clearing Corporation and of any registered
national securities exchange, or of any similar organization
or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund;
- 6 -
<PAGE>
13) For delivery in accordance with the provisions of any
agreement among the Corporation on behalf of the Fund, the
Custodian, and a Futures Commission Merchant registered under
the Commodity Exchange Act, relating to the compliance with
the rules of the Commodity Futures Trading Commission and/or
any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Fund;
14) For release of securities to designated brokers under covered
call options; provided however, that such securities shall be
released only upon payment to the Custodian of monies for the
premium due and a receipt for the securities which are to be
held in escrow. Upon the exercise of the option, or at
expiration, the Custodian will receive from brokers the
securities previously deposited. The Custodian will act
strictly in accordance with Proper Instructions in the
delivery of securities to be held in escrow and will have no
responsibility or liability for any such securities which are
not returned promptly when due other than to make proper
request for such return;
- 7 -
<PAGE>
15) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the Fund's currently effective prospectus and statement of
additional information ("prospectus"), in satisfaction of
requests by holders of Shares for repurchase or redemption;
and
16) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors or of the Executive
Committee signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary, specifying the
securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose to
be a proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Securities held by the Custodian on behalf
of a Fund (other than bearer securities) shall be registered in the
name of the Fund or in the name of any nominee of the Fund or of any
nominee of the
- 8 -
<PAGE>
Custodian which nominee shall be assigned exclusively to the Fund,
unless the Corporation has authorized in writing as to a Fund the
appointment of a nominee to be used in common with other registered
investment companies having the same investment adviser as the Fund, or
in the name or nominee name of any agent appointed pursuant to Section
2.11 or in the name or nominee name of any sub-custodian appointed
pursuant to Article 1. All securities accepted by the Custodian on
behalf of a Fund under the terms of this Contract shall be in "street
name" or other good delivery form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the name of each Fund, subject only to draft or
order by the Custodian acting pursuant to the terms of this Contract,
and shall hold in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account of the Fund,
other than cash maintained by the Fund in a bank account established
and used in accordance with Rule 17f-3 under the Investment Company Act
of 1940, as amended (the "1940 Act"). Funds held by the Custodian for a
Fund may be deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies
as it may in its discretion deem necessary or desirable; provided,
however, that every such bank or trust company shall be qualified to
act as a custodian under the 1940 Act
- 9 -
<PAGE>
and that each such bank or trust company and the funds to be deposited
with each such bank or trust company shall be approved by vote of a
majority of the Board of Directors of the Corporation. Such funds shall
be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Payments for Shares. The Custodian shall receive from the distributor
for each Fund's Shares or from the Transfer Agent for the Fund and
deposit into such Fund's account such payments as are received for
Shares of the Fund issued or sold from time to time by the Fund. The
Custodian will provide timely notification to the Corporation with
respect to each Fund and the Transfer Agent of any receipt by it of
payments for Shares of the Fund.
2.6 Investment and Availability of Federal Funds. Upon mutual agreement
between the Corporation on behalf of the Fund and the Custodian, the
Custodian shall, upon the receipt of Proper Instructions:
1) invest, in such instruments as may be set forth in such
instructions on the same day as received, all federal funds
received prior to the time agreed upon between the Custodian
and the Corporation; and
- 10 -
<PAGE>
2) make federal funds available to the Fund as of specified times
agreed upon from time to time by the Corporation and the
Custodian in the amount of checks received in payment for
Shares of the Fund which are deposited into the Fund's
account.
2.7 Collection of Income. The Custodian shall collect on a timely basis all
income and other payments with respect to registered securities held
hereunder to which the Fund shall be entitled either by law or pursuant
to custom in the securities business, and shall collect on a timely
basis all income and other payments with respect to bearer securities
if, on the date of payment by the issuer, such securities are held by
the Custodian or its agent thereof and shall credit such income, as
collected, to such Fund's custodian account. Without limiting the
generality of the foregoing, the Custodian shall detach and present for
payment all coupons and other income items requiring presentation as
and when they become due and shall collect interest when due on
securities held hereunder. Income due a Fund on securities loaned
pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Corporation on behalf of such Fund. The Custodian
will have no duty or responsibility in connection therewith, other than
to provide the Corporation with such information
- 11 -
<PAGE>
or data as may be necessary to assist the Fund in arranging for the
timely delivery to the Custodian of the income to which the Fund is
properly entitled.
2.8 Payment of Fund Monies. Upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of a Fund in the following cases only:
1) Upon the purchase of securities, options, futures contracts or
options for the account of the Fund but only (a) against the
delivery of such securities to the Custodian or evidence of
title to options, future contracts or options on future
contracts, to the Custodian (or any bank, banking firm or
trust company doing business in the United States or abroad
which is qualified under the Investment Fund Act of 1940, as
amended, to act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth
in Section 2.12 hereof; (c) in the case of repurchase
agreements entered into between the
- 12 -
<PAGE>
Fund and the Custodian, or another bank, or a broker-dealer
which is a member of NASD, (i) against delivery of the
securities either in certificate form or through an entry
crediting the Custodian's account at the Federal Reserve Bank
with such securities (notwithstanding that the written
agreement to repurchase will be received subsequently) or (ii)
if the agreement is with the Custodian, against delivery of
the receipt evidencing purchase by the Fund of securities
owned by the Custodian along with written evidence of the
agreement by the Custodian to repurchase such securities from
the Fund;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares of the Fund issued
by the Corporation as set forth in Section 2.10 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal
- 13 -
<PAGE>
fees, and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as
deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Corporation;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors or of the Executive
Committee of the Corporation signed by an officer of the Fund
and certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or
persons to whom such payment is to be made.
2.9 Liability for Payment in Advance of Receipt of Securities Purchased. In
any and every case where payment for purchase of securities for the
account of a Fund is made by the Custodian in advance of receipt of the
securities purchased
- 14 -
<PAGE>
in the absence of specific written instructions from the Fund to so pay
in advance, the Custodian shall be absolutely liable to the Fund for
such securities to the same extent as if the securities had been
received by the Custodian.
2.10 Payments for Repurchases or Redemptions of Shares of the Fund. From
such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation and By-Laws of the
Corporation and any applicable votes of the Board of Directors pursuant
thereto, the Custodian shall, upon receipt of instructions from the
Transfer Agent, make funds available for payment to holders of Shares
or their authorized agents who have delivered to the Transfer Agent a
request for redemption or repurchase of their Shares and for payment to
the distributor of the Fund's Shares for its repurchase of Shares as
agent for the Fund. In connection with the redemption or repurchase of
Shares of the Fund, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a
commercial bank designated by the redeeming shareholders or by the
distributor of the Fund's Shares. In connection with the redemption or
repurchase of Shares of the Fund, the Custodian shall honor checks
drawn on the Custodian by a holder of Shares, which checks have been
furnished by the Fund to the holder of Shares, which checks have been
furnished by a holder of Shares, when
- 15 -
<PAGE>
presented to the Custodian in accordance with such procedures and
controls as are mutually agreed upon from time to time between the
Corporation and the Custodian.
2.11 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the 1940 Act to act as a
custodian, as its agent to carry out such of the provisions of this
Article 2 as the Custodian may from time to time direct; provided,
however, that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.
2.12 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
and/or maintain securities owned by a Fund in a Securities System in
accordance with applicable rules and regulations, if any, of the
Federal Reserve Board, Securities and Exchange Commission and U.S.
Department of the Treasury and subject to the following provisions:
1) The Custodian may keep securities of the Fund in a Securities
System provided that such securities are represented in an
account ("Account") of the Custodian in the Securities System
which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for
customers;
- 16 -
<PAGE>
2) The records of the Custodian with respect to securities of a
Fund which are maintained in a Securities System shall
identify by book-entry those securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the
account of a Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer securities
sold for the account of a Fund upon (i) receipt of advice from
the Securities System that payment for such securities has
been transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such transfer
and payment for the account of a Fund. Copies of all advices
from the Securities System of transfers of securities for the
account of a Fund shall identify the Fund, be maintained for
the Fund by the Custodian and be provided to the Corporation
at its request. Upon request, the Custodian shall furnish the
Corporation confirmation of each transfer to or from the
account of the Fund in the form of a written advice or notice
and shall furnish to the
- 17 -
<PAGE>
Corporation copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the account of
the Fund, on the next business day.
4) The Custodian shall provide the Corporation with any report
obtained by the Custodian on the Securities System's
accounting system, internal accounting control and procedures
for safeguarding securities deposited in the Securities
System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 9 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to a Fund for any loss or damage to
the Fund resulting from use of the Securities System by reason
of any negligence, misfeasance or misconduct of the Custodian
or any of its agents or of any of its or their employees or
from failure of the Custodian or any such agent to enforce
effectively such rights as it may have against the Securities
System; at the election of the Corporation, a Fund shall be
entitled to be subrogated to the rights of the Custodian with
respect to any claim against
- 18 -
<PAGE>
the Securities System or any other person which the Custodian
may have as a consequence of any such loss or damage if and to
the extent that the Fund has not been made whole for any such
loss or damage.
2.13 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts
for and on behalf of each Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.12 hereof, (i) in
accordance with the provisions of any agreement among the Corporation
on behalf of the Fund, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures
commission merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract
market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold by the
Fund, (iii) for the purposes of compliance by the
- 19 -
<PAGE>
Corporation with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for
other proper corporate purposes, but only, in the case of clause (iv),
upon receipt of, in addition to Proper Instructions, a certified copy
of a resolution of the Board of Directors or of the Executive Committee
signed by an officer of the Corporation and certified by the Secretary
or an Assistant Secretary, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be proper
corporate purposes.
2.14 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to securities of a Fund held by it and in
connection with transfers of securities.
2.15 Proxies. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in the
name of a Fund or a nominee of the Fund, all proxies, without
indication of the manner
- 20 -
<PAGE>
in which such proxies are to be voted, and shall promptly deliver to
the Corporation such proxies, all proxy soliciting materials and all
notices relating to such securities.
2.16 Communications Relating to Fund Portfolio Securities. The Custodian
shall transmit promptly to the Corporation all written information
(including, without limitation, pendency of calls and maturities of
securities and expirations of rights in connection therewith and
notices of exercise of call and put options written by the Fund and the
maturity of futures contracts purchased or sold by the Fund) received
by the Custodian from issuers of the securities being held for the
Fund. With respect to tender or exchange offers, the Custodian shall
transmit promptly to the Corporation as to each Fund all written
information received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or his agents)
making the tender or exchange offer. If the Corporation desires to take
action with respect to any tender offer, exchange offer or any other
similar transaction, it shall notify the Custodian at least three
business days prior to the date on which the Custodian is to take such
action.
2.17 Proper Instructions. Proper Instructions as used throughout this
Article 2 means a writing signed or initialed by one or more person or
persons as the Board of Directors shall
- 21 -
<PAGE>
have from time to time authorized. Each such writing shall set forth
the specific transaction or type of transaction involved, including a
specific statement of the purpose for which such action is requested.
Oral instructions will be considered Proper Instructions if the
Custodian reasonably believes them to have been given by a person
authorized to give such instructions with respect to the transaction
involved. Each Fund shall cause all oral instructions to be confirmed
in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary of the Corporation as to the authorization by the
Board of Directors of the Corporation accompanied by a detailed
description of procedures approved by the Board of Directors, Proper
Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Board of
Directors and the Custodian are satisfied that such procedures afford
adequate safeguards for each Fund's assets.
2.18 Actions Permitted without Express Authority. The Custodian may in its
discretion, without express authority from the Corporation with respect
to a Fund:
- 22 -
<PAGE>
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Board of
Directors of the Corporation.
2.19 Evidence of Authority. The Custodian shall be protected in acting upon
any instructions, notice, request, consent, certificate or other
instrument or paper believed by it to be genuine and to have been
properly executed by or on behalf of a Fund. The Custodian may receive
and accept a certified copy of a vote of the Board of Directors of the
Corporation as conclusive evidence (a) of the authority of
- 23 -
<PAGE>
any person to act in accordance with such resolution (b) of any
determination or of any action by the Board of Directors pursuant to
the Articles of Incorporation or By-Laws of the Corporation as
described in such vote or resolution, and such vote or resolution may
be considered as in full force and effect until receipt by the
Custodian of written notice to the contrary.
3. Duties of Custodian with Respect to the Books of Account and
-----------------------------------------------------------------------
Calculation of Net Asset Value and Net Income
---------------------------------------------
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Directors of the Corporation to
keep the books of account of each Fund and/or compute the net asset value per
share of the outstanding shares of each Fund or, if directed in writing to do so
by the Corporation, shall itself keep such books of account and/or compute such
net asset value per share of the Funds. If so directed, the Custodian shall also
calculate daily the net income of each Fund including the calculation of
distribution and advisory fees, all as described in the Fund's currently
effective Prospectus and Statement of Additional Information and shall advise
the Fund and the Transfer Agent daily of the total amounts of such fees and net
income and, if instructed in writing by an officer of the Corporation to do so,
shall advise the Transfer Agent periodically of the division of such net income
among its various components. The calculations of the net asset value per
- 24 -
<PAGE>
share and the daily income of each Fund shall be made at the time or times
described from time to time in the Fund's currently effective Prospectus and
Statement of Additional Information and in accordance with the requirements of
the 1940 Act and the rules thereunder.
4. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of each Fund under the 1940 Act, with particular attention to
Section 31 thereof and Rules 31a-1 and 31a-2 thereunder applicable federal and
state tax laws and any other law or administrative rules or procedures which may
be applicable to the Funds. All such records shall be the property of the Fund
and shall at all times during the regular business hours of the Custodian be
open for inspection by duly authorized officers, employees or agents of the
Corporation and employees and agents of the Securities and Exchange Commission.
The Custodian shall, at the Corporation's request, supply a Fund with a
tabulation of securities owned by the Fund and held by the Custodian and shall,
when requested to do so by or on behalf of the Fund and for such compensation as
shall be agreed upon between the Corporation and the Custodian, include
certificate numbers in such tabulations.
- 25 -
<PAGE>
5. Opinion of Corporation's Independent Certified Public Accountant
----------------------------------------------------------------
The Custodian shall take all reasonable action, as the Corporation may
from time to time request, to obtain from year to year favorable opinions from
the Corporation's independent certified public accountants with respect to its
activities hereunder in connection with the preparation of the Corporation's
Form N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
6. Reports to Corporation by Independent Certified Public Accountants
------------------------------------------------------------------
The Custodian shall provide the Corporation, at such times as the
Corporation may reasonably require, with reports by independent certified public
accountants on the accounting system, internal accounting control and procedures
for safeguarding securities including securities deposited and/or maintained in
a Securities System, relating to the services provided by the Custodian under
this Contract; such reports, shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Corporation, and shall provide
reasonable
- 26 -
<PAGE>
assurance that any material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, the reports shall so state.
7. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation from each
Fund for its services and expenses as Custodian for such Fund, as agreed upon
from time to time between the Corporation and the Custodian.
8. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties.
The Custodian shall be held to the exercise of reasonable care in carrying out
the provisions of this Contract, but shall be kept indemnified by and shall be
without liability to the Corporation for any action taken or omitted by it in
good faith without negligence. It shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Corporation) on all matters, and
shall be without
- 27 -
<PAGE>
liability for any action reasonably taken or omitted pursuant to such advice.
Notwithstanding the foregoing the responsibility of the Custodian with respect
to redemptions effected by check shall be in accordance with a separate
Agreement entered into between the Custodian and the Corporation.
If the Corporation requires the Custodian to take any action with
respect to securities of a Fund, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund being liable for the payment of money or
incurring liability of some other form, the Corporation, as a prerequisite to
requiring the Custodian to take such action, shall provide indemnity to the
Custodian in an amount and form satisfactory to it.
If the Corporation requires the Custodian to advance cash or securities
with respect to a Fund for any purpose or in the event that the Custodian or its
nominee shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the performance of this Contract,
except such as may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct, it shall be reimbursed by the
Fund for such advances or other costs within a reasonable time after the receipt
of written notice requesting reimbursement and any property at any time held for
the account of the Fund shall be security therefor and should the Fund fail
- 28 -
<PAGE>
to repay the Custodian within a reasonable time after receipt of written notice,
the Custodian shall be entitled to utilize available cash and to dispose of Fund
assets to the extent necessary to obtain reimbursement.
9. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the Custodian and the Corporation
and may be terminated by either party by an instrument in writing delivered or
mailed, postage prepaid to the other party, such termination to take effect not
sooner than thirty (30) days after the date of such delivery or mailing;
provided, however that the Custodian shall not act under Section 2.12 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary of the Corporation that the Board of Directors of the
Corporation has approved the initial use of a particular Securities System and
the receipt of an annual certificate of such Secretary or an Assistant Secretary
that the Board of Directors has reviewed the use of each Fund of such Securities
System, as required by Rule 17f-4 under the 1940 Act; provided further, however,
that the Corporation shall not amend or terminate this Contract in contravention
of any applicable federal or state regulations, or any provision of the Articles
of Incorporation or By-Laws of the Corporation, and
- 29 -
<PAGE>
further provided, that a Fund may at any time by action of its Board of
Directors of the Corporation (i) substitute another bank or trust company for
the Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Contract, a Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements as
contemplated by this Contract.
10. Successor Custodian
-------------------
If a successor custodian for a Fund shall be appointed by the Board of
Directors of the Corporation, the Custodian shall, upon termination, deliver to
such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities then held by it hereunder and shall
transfer to an account of the successor custodian all of the Fund's securities
held in a Securities System.
- 30 -
<PAGE>
If this Contract is terminated with respect to a Fund and no such
successor custodian shall be appointed, the Custodian shall, in like manner, as
directed by vote of the holders of a majority of the outstanding Shares of the
Fund or upon receipt of a certified copy of a vote or resolution of the Board of
Directors of the Corporation, deliver at the office of the Custodian and
transfer such securities, funds and other properties of the Fund then held by it
hereunder and in accordance with such vote or resolution.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the 1940 Act, doing business in Boston,
Massachusetts, of its own selection, having an aggregate capital, surplus, and
undivided profits, as shown by its last published report, of not less than
$25,000,000, all securities, funds and other properties held by the Custodian
and all instruments held by the Custodian relative thereto and all other
property held by it under this Contract and to transfer to an account of such
successor custodian all of the Fund's securities held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Contract.
- 31 -
<PAGE>
In the event that securities, funds and other properties of a Fund
remain in the possession of the Custodian after the date of termination hereof
owing to failure of the Corporation to deliver to the Custodian the written
order or certified copy referred to above, or of the Corporation's Board of
Directors to appoint a successor custodian, the Custodian shall be entitled to
fair compensation for its services during such period as the Custodian retains
possession of such securities, funds and other properties and the provisions of
this Contract relating to the duties and obligations of the Custodian shall
remain in full force and effect.
11. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and
the Corporation may from time to time agree on such provisions interpretive of
or in addition to the provisions of this Contract as may in their joint opinion
be consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation or By-Laws of the Corporation. No interpretive or
additional provisions made as provided in the preceding sentence shall be deemed
to be an amendment of this Contract.
- 32 -
<PAGE>
12. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
13. Additional Funds
----------------
In the event that the Corporation establishes series of Shares other
than the Funds, it shall so notify the Custodian in writing, and if the
Custodian agrees in writing to provide such services, each such additional
series of Shares shall become a Fund hereunder.
14. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Corporation and the Custodian relating to the
custody of the Fund's assets. This Contract may not be assigned by the
Custodian, except as expressly provided in Section 10 hereof, without the prior
written consent of the Corporation.
- 33 -
<PAGE>
15. Headings
--------
The headings of the sections of this Contract are inserted for
reference and convenience only, and shall not affect the construction of this
Contract.
16. Notices
-------
Any notices shall be sufficiently given when sent by overnight,
registered or certified mail to the other party at the address of such party set
forth above or at such other address as such party may from time to time specify
in writing to the other party.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 19th day of June, 1987.
ATTEST LEGG MASON INCOME TRUST, INC.
/s/ Mary C. Curry /s/ Marie K. Karpinski
_____________________________ By ________________________________
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ P. McClure /s/ E.D. Hawkes, Jr.
_____________________________ By ________________________________
Assistant Secretary Vice President
- 34 -
AMENDMENT TO THE CUSTODIAN CONTRACT
-----------------------------------
AGREEMENT made by and between State Street Bank and Trust Company (the
"Custodian") and Legg Mason Income Trust, Inc. (the "Fund")
WHEREAS, the Custodian and the Fund are parties to a custodian contract
dated June 19, 1987 (the "Custodian Contract") governing the terms and
conditions under which the Custodian maintains custody of the securities and
other assets of the Fund; and
WHEREAS, the Custodian and the Fund desire to amend the Custodian
Contract to provide for the maintenance of the Fund's foreign securities, and
cash incidental to transactions in such securities, in the custody of certain
foreign banking institutions and foreign securities depositories acting as
sub-custodians in conformity with the requirements of Rule 17f-5 under the
Investment Company Act of 1940;
NOW THEREFORE, in consideration of the premises and covenants contained
herein, the Custodian and the Fund hereby amend the Custodian Contract by the
addition of the following terms and conditions;
1. Appointment of Foreign Sub-Custodians
-------------------------------------
The Fund hereby authorizes and instructs the Custodian to employ as
sub-custodians for the Fund's securities and other assets maintained outside the
United States the foreign banking institutions and foreign securities
depositories designated on Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions", as defined in Section 2.17 of the Custodian
Contract, together with a certified resolution of the Fund's Board of Directors,
the Custodian and the Fund may agree to amend Schedule A hereto from time to
time to designate additional foreign banking institutions and foreign securities
depositories to act as sub-custodian. Upon receipt of Proper Instructions, the
Fund may instruct the Custodian to cease the employment of any one or more of
such sub-custodians for maintaining custody of the Fund's assets.
2. Assets to be Held
-----------------
The Custodian shall limit the securities and other assets maintained in
the custody of the foreign sub-custodians to: (a) "foreign securities", as
defined in paragraph (c)(l) of Rule 17f-5 under the Investment Company Act of
1940, and (b) cash and cash equivalents in such amounts as the Custodian or the
Fund may determine to be reasonably necessary to effect the Fund's foreign
securities transactions.
3. Foreign Securities Depositories
-------------------------------
Except as may otherwise be agreed upon in writing by the Custodian and
the Fund, assets of the Fund shall be maintained in foreign securities
depositories only through arrangements implemented by the foreign banking
institutions serving as sub-custodians pursuant to the terms
<PAGE>
hereof. Where possible, such arrangements shall include entry into agreements
containing the provisions set forth in Section 5 and Section 9 hereof.
4. Segregation of Securities
-------------------------
The Custodian shall identify on its books as belonging to the Fund, the
foreign securities of the Fund held by each foreign sub-custodian. Each
agreement pursuant to which the Custodian employs a foreign banking institution
shall require that such institution establish a custody account for the
Custodian on behalf of the Fund and physically segregate in that account,
securities and other assets of the Fund, and, in the event that such institution
deposits the Fund's securities in a foreign securities depository, that it shall
identify on its books as belonging to the Custodian, as agent for the Fund, the
securities so deposited.
5. Agreements with Foreign Banking Institutions
--------------------------------------------
Each agreement with a foreign banking institution shall be
substantially in the form set forth in Exhibit 1 hereto and shall provide that:
(a) the Fund's assets will not be subject to any right, charge, security
interest, lien or claim of any kind in favor of the foreign banking institution
or its creditors or agents, except a claim of payment for their safe custody or
administration; (b) beneficial ownership for the Fund's assets will be freely
transferable without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the assets
as belonging to the Fund; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent permitted under
applicable law the independent public accountants for the Fund, will be given
access to the books and records of the foreign banking institution relating to
its actions under its agreement with the Custodian; (e) the foreign banking
institutions will retain all books and records relating to its actions under its
agreement with the Custodian for the periods required by Rule 31a-2; and (f)
assets of the Fund held by the foreign sub-custodian will be subject only to the
instructions of the Custodian or its agents.
6. Access of Independent Accountants of the Fund
---------------------------------------------
Upon request of the Fund, the Custodian will use its best efforts to
arrange for the independent accountants of the Fund to be afforded access to the
books and records of any foreign banking institution employed as a foreign
sub-custodian insofar as such books and records relate to the performance of
such foreign banking institution under its agreement with the Custodian.
7. Reports by Custodian
--------------------
The Custodian will supply to the Fund from time to time, as mutually
agreed upon, statements in respect of the securities and other assets of the
Fund held by foreign sub-custodians, including but not limited to an
identification of entities having possession of the Fund's securities and other
assets and advices or notifications of any transfers of securities to or from
each custodial account maintained by a foreign banking institution for the
Custodian on behalf of the Fund indicating, as to securities acquired for the
Fund, the identity of the entity having physical possession of such securities.
<PAGE>
8. Transactions in Foreign Custody Account
---------------------------------------
(a) Except as otherwise provided in paragraph (b) of this Section 8,
the provisions of Sections 2.2 and 2.8 of the Custodian Contract shall apply,
mutatis mutandis to the foreign securities of the Fund held outside the United
States by foreign sub-custodians.
(b) Notwithstanding any provision of the Custodian Contract to the
contrary, settlement and payment for securities received for the account of the
Fund and delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading or
securities processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer therefor (or an agent for
such purchaser or dealer) against a receipt with the expectation of receiving
later payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may
be maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of the Custodian Contract, and the Fund agrees to hold any
such nominee harmless from any liability as a holder of record of such
securities.
9. Liability of Foreign Sub-Custodians
-----------------------------------
Each agreement pursuant to which the Custodian employs a foreign
banking institution as a foreign sub-custodian shall require the institution to
exercise reasonable care in the performance of its duties and to indemnify, and
hold harmless, the custodian and each Fund from and against, or to insure its
assets against, any loss, damage, cost, expense, liability or claim arising out
of or in connection with the institution's performance of such obligations. At
the election of the Fund, it shall be entitled to be subrogated to the rights of
the Custodian with respect to any claims against a foreign banking institution
as a consequence of any such loss, damage, cost, expense, liability or claim if
and to the extent that the Fund has not been made whole for any such loss,
damage, cost, expense, liability or claim.
10. Liability of Custodian
----------------------
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to
sub-custodians generally in the Custodian Contract and, regardless of whether
assets are maintained in the custody of a foreign banking institution, a foreign
securities depository or a branch of a U.S. bank as contemplated by paragraph 13
hereof, the Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from nationalization, expropriation, currency
restrictions, or acts of war or terrorism or any loss where the sub-custodian
has otherwise exercised reasonable care. Notwithstanding the foregoing
provisions of this paragraph 10, in delegating custody duties to State Street
London Ltd., the Custodian shall not be relieved of any responsibility to the
Fund for any loss due to such delegation, except such loss as may result from
(a) political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection, civil
strife or armed hostilities) or (b) other losses (excluding a bankruptcy or
insolvency of State Street London Ltd. not caused by political risk)
<PAGE>
due to Acts of God, nuclear incident or other losses under circumstances where
the Custodian and State Street London Ltd. have exercised reasonable care.
11. Reimbursement for Advances
--------------------------
If the Fund requires the Custodian to advance cash or securities for
any purpose including the purchase or sale of foreign exchange or of contracts
for foreign exchange, or in the event that the Custodian or its nominee shall
incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except such as
may arise from its or its nominee's own negligent action, negligent failure to
act or willful misconduct, any property at any time held for the account of the
Fund shall be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of the Fund assets to the extent necessary to obtain reimbursement.
12. Monitoring Responsibilities
---------------------------
The Custodian shall furnish annually to the Fund, during the month of
June, information concerning the foreign sub-custodians employed by the
Custodian. Such information shall be similar in kind and scope to that furnished
to the Fund in connection with the initial approval of this amendment to the
Custodian Contract. In addition, the Custodian will promptly inform the Fund in
the event that the Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or any material loss of the
assets of the Fund or in the case of any foreign sub-custodian not the subject
of an exemptive order from the Securities and Exchange Commission is notified by
such foreign sub-custodian that there appears to be a substantial likelihood
that its shareholders' equity will decline below S200 million (U.S. dollars or
the equivalent thereof) or that its shareholders' equity has declined below S200
million (in each case computed in accordance with generally accepted U.S.
accounting principles).
13. Branches of U.S. Banks
----------------------
(a) Except as otherwise set forth in this amendment to the Custodian
Contract, the provisions hereof shall not apply where the custody of the Fund
assets is maintained in a foreign branch of a banking institution which is a
"bank" as defined by Section 2(a)(5) of the Investment Company Act of 1940
meeting the qualification set forth in Section 26(a) of said Act. The
appointment of any such branch as a sub-custodian shall be governed by paragraph
1 of the Custodian Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in
an interest bearing account established for the Fund with the Custodian's London
Branch, which account shall be subject to the direction of the Custodian, State
Street London Ltd. or both.
14. Applicability of Custodian Contract
-----------------------------------
Except as specifically superseded or modified herein, the terms and
provisions of the Custodian Contract shall continue to apply with full force and
effect.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 6th day of April , 1993.
ATTEST: LEGG MASON INCOME TRUST, INC.
__________________________ By:________________________________
(Title) (Title)
ATTEST: STATE STREET BANK AND TRUST COMPANY
__________________________ By:________________________________
Assistant Secretary Senior Vice President
<PAGE>
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Directors of Legg Mason Income
Trust, Inc. for use as sub-custodians for the Fund's securities and other
assets.
<insert banks and securities depositories>
Euroclear
State Street Bank, London Limited
Certified:
- -----------------------
Fund's Authorized Officer
Dated:__4/5/93___________
AMENDMENT TO CUSTODIAN CONTRACT
Agreement made by and between State Street Bank and Trust Company (the
"Custodian") and Legg Mason Income Trust, Inc. (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a custodian contract
dated June 19, 1987 as amended, February 9, 1988 February 25,1988 and April 6,
1993(the "Custodian Contract") governing the terms and conditions under which
the Custodian maintains custody of the securities and other assets of the Fund;
and
WHEREAS, the Custodian and the Fund desire to amend the terms and
conditions under which the Custodian maintains the Fund's securities and other
non-cash property in the custody of certain foreign sub-custodians in conformity
with the requirements of Rule 17f-5 under the Investment Company Act of 1940, as
amended;
NOW THEREFORE, in consideration of the premises and covenants contained
herein, the Custodian and the Fund hereby amend the Custodian Contract by the
addition of the following terms and provisions;
1. Notwithstanding any provisions to the contrary set forth in the
Custodian Contract, the Custodian may hold securities and other non-cash
property for all of its customers, including the Fund, with a foreign
sub-custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
records of the Custodian with respect to securities and other non-cash property
of the Fund which are maintained in such account shall identify by book-entry
those securities and other non-cash property belonging to the Fund and (ii) the
Custodian shall require that securities and other non-cash property so held by
the foreign sub-custodian be held separately from any assets of the foreign
sub-custodian or of others.
2. Except as specifically superseded or modified herein, the terms and
provisions of the Custodian Contract shall continue to apply with full force and
effect.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed as a sealed instrument in its name and behalf by its duly authorized
representative this 28th day of May, 1996.
LEGG MASON INCOME TRUST, INC.
.
/s/ Marie K. Karpinski
By:________________________________
Vice President and Treasurer
Title:_____________________________
STATE STREET BANK AND TRUST COMPANY
/s/ M. L. Summers
By:________________________________
Vice President
Title:_____________________________
AMENDMENT TO CUSTODIAN CONTRACT
Amendment to Custodian Contract between Legg Mason Income Trust, Inc.a
regulated investment company organized and existing under the laws of Maryland
having a principal place of business at 111 S. Calvert Street Baltimore, MD
21202 (hereinafter called the "Fund"), and State Street Bank and Trust Company,
a Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston .Massachusetts 02110 (hereinafter called the
"Custodian").
WHEREAS: The Fund and the Custodian are parties to a Custodian Contract
dated June 19, 1987 (the "Custodian Contract");
WHEREAS: The Fund desires that the Custodian issue a letter of credit
(the "Letter of Credit") on behalf of the Fund for the benefit of ICI Mutual
Insurance Company (the "Company") in accordance with the Continuing Letter of
Credit and Security Agreement and that the Fund's obligations to the Custodian
with respect to the Letter of Credit shall be fully collateralized at all times
while the Letter of Credit is outstanding by, among other things, segregated
assets of the Fund equal to 125% of the face amount to the amount of the Letter
of Credit;
WHEREAS: the Custodian Contract provides for the establishment of
segregated account for proper Fund purposes upon Proper Instructions (as defined
in the Custodian Contract); and
WHEREAS: The Fund and the Custodian desire to establish a segregated
account to hold the collateral for the Fund's obligations to the Custodian with
respect to the Letter of Credit and to amend the Custodian Contract to provide
for the establishment and maintenance thereof:
WITNESSETH: That in consideration of the mutual covenants and agreement
hereinafter contained, the parties hereto hereby amend the Custodian Contract as
follows:
1. Capitalized terms used herein without definition shall have the
meanings ascribed to them in the Custodian Contract.
2. The Fund hereby instructs the Custodian to establish and maintain a
segregated account (the "Letter of Credit Custody Account") for and in
behalf of the Fund as contemplated by Section 2.13(iv) for the purpose
of collateralizing the Fund's obligations under this Amendment to the
Custodian Contract.
3. The Fund shall deposit with the Custodian and the Custodian shall hold
in the Letter of Credit Custody Account cash. U.S. government
securities and other high-grade debt securities owned by the Fund
acceptable to the Custodian (collectively "Collateral Securities")
equal to 125% of the face amount to the amount which the Company may
draw under the Letter of Credit. Upon receipt of such Collateral
Securities in the Letter of Credit Custody Account, the Custodian shall
issue the Latter of Credit to the Company.
4. The fund hereby grants to the Custodian a security interest in the
Collateral Securities from time to time in the Letter of Credit Custody
Account (the "Collateral") to secure the performance of the Fund's
obligations to the Custodian with respect to the Letter of Credit,
<PAGE>
including, without limitation, under Section 5-114(3) of the Uniform
Commercial Code. The Fund shall register the pledge of Collateral and
execute and deliver to the Custodian such powers and instruments of
assignment as may be requested by the Custodian to evidence and perfect
the limited interest in the Collateral granted hereby.
5. The Collateral Securities in the Letter of Credit Custody Account may
be substituted or exchanged (including substitution or exchange which
increase or decrease the aggregate value of the Collateral) only
pursuant to Proper Instruction from the Fund after the Fund notifies
the Custodian of the contemplated substitution or exchange and the
Custodian agrees that such substitution or exchange is acceptable to
the Custodian.
6. Upon any payment made pursuant to the Letter of Credit by the Custodian
to the Company, the Custodian may withdraw from the Letter of Credit
Custody Account Collateral Securities in an amount equal in value to
the amount actually so paid. The Custodian shall have with respect to
the Collateral so withdrawn all of the rights of a secured creditor
under the Uniform Commercial Code as adopted in the Commonwealth of
Massachusetts at the time of such withdrawal and all other rights
granted or permitted to it under law.
7. The Custodian will transfer upon receipt all income earned on the
Collateral to the Fund custody account unless the Custodian receives
Proper Instructions from the Fund to the contrary.
8. Upon the drawing by the Company of all amounts which may become payable
to it under the Letter of Credit and the withdrawal of all Collateral
Securities with respect thereto by the Custodian pursuant to Section 6
hereof, or upon the termination of the Letter of Credit by the Fund
with the written consent of the Company, the Custodian shall transfer
any Collateral Securities then remaining in the Letter of Credit
Custody Account to another fund custody account.
9. Collateral held in the Letter of Credit Custody Account shall be
released only in accordance with the provisions of this Amendment to
Custodian Contract. The Collateral shall at all times until withdrawn
pursuant to Section 6 hereof remain the property of the Fund, subject
only to the extent of the interest granted herein to the Custodian.
10. Notwithstanding any other termination of the Custodian Contract, the
Custodian Contract shall remain in full force and effect with respect
to the Letter of Credit Custody Account until transfer of all
Collateral Securities pursuant to Section 8 hereof.
11. The Custodian shall be entitled to reasonable compensation for its
issuance of the Letter of Credit and for its services in connection
with the Letter of Credit Custody Account as agreed upon from time to
time between the Fund and the Custodian.
12. The Custodian Contract as amended hereby, shall be governed by, and
construed and interpreted under, the laws of the Commonwealth of
Massachusetts.
<PAGE>
13. The parties agree to execute and deliver all such further documents and
instruments and to take such further action as may be required to carry
out the purposes of the Custodian Contract:, as amended hereby.
14. Except as provided in this Amendment to Custody Contract, the Custodian
Contract shall remain in full force and effect, without amendment or
modification, and all applicable provisions of the Custodian Contract,
as amended hereby, including, without limitation, Section 8 thereof,
shall govern the Letter of Credit Custody Account and the rights and
obligations of the Fund and the Custodian under this Amendment to
Custodian Contract. No provision of this Amendment to Custodian
Contract shall be deemed to constitute a waiver of any rights of the
Custodian under the Custodian Contract or under law.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to
Custodian Contract to be executed in its name and behalf by its duly autharized
representatives and it seal to be hereunder affixed as of the 25th day of
February, 1988
ATTEST:
Legg Mason Income Trust, Inc.
/s/ Susan T. Lind /s/ Marie K. Karpinski
By:____________________ By: _________________________
ATTEST: STATE STREET BANK AND TRUST
COMPANY
/s/ J. Farrell /s/ E. D. Hawkes, Jr.
By:_______________________ By:__________________________
030387-2
TRANSFER AGENCY AND SERVICE AGREEMENT
between
LEGG MASON INCOME TRUST, INC.
and
STATE STREET BANK AND TRUST COMPANY
SA2 5/86
WP0052c
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
Article 1 Terms of Appointment; Duties of the Bank.........................2
Article 2 Fees and Expenses................................................5
Article 3 Representations and Warranties of the Bank.......................6
Article 4 Representations and Warranties of the Fund.......................7
Article 5 Indemnification..................................................7
Article 6 Covenants of the Fund and the Bank..............................ll
Article 7 Termination of Agreement........................................13
Article 8 Additional Funds................................................13
Article 9 Assignment......................................................14
Article 10 Amendment.......................................................14
Article 11 Massachusetts Law to Apply......................................15
Article 12 Merger of Agreement.............................................15
Article 13 Miscellaneous...................................................15
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made as of the 19th day of June 1987, by and between LEGG
MASON INCOME TRUST, INC., a Maryland corporation, having its principal office
and place of business at 7 East Redwood Street, Baltimore, Maryland 21202 (the
"Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company
having its principal office and place of business at 225 Franklin Street,
Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate Portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer Shares in two series, the
Legg Mason Investment Grade Income Portfolio and Legg Mason U.S. Government
Intermediate-Term Portfolio (such series, together with all other series
subsequently established by the Fund and made subject to this Agreement in
accordance with Article 8, being herein referred to, as a Portfolio, and
collectively as the "Portfolios);
WHEREAS, the Fund, on behalf of the Portfolios desires to appoint the
Bank as its transfer agent, dividend disbursing agent and agent in connection
with certain other activities, and the Bank desires to accept such appointment;
WHEREAS, Legg Mason Wood Walker, Incorporated ("Legg Mason") may
provide certain Shareholder and Record-Keeping Services (collectively
"Shareholder and Record-Keeping Services") in connection with the Portfolios and
such Shareholder and Record-Keeping Services shall be separate and distinct from
<PAGE>
services provided by the Bank and the Fund shall indemnify and hold the Bank
harmless for the acts and omissions of Legg Mason.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of the Bank
----------------------------------------
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund, on behalf of the Portfolios, hereby employs and appoints
the Bank to act as, and the Bank agrees to act as its transfer agent for the
authorized and issued shares of beneficial interest of the Fund representing
interests in each of the respective Portfolios ("Shares"), dividend disbursing
agent and agent in connection with any accumulation, open-account or similar
plans provided to the Shareholders of each of the respective Portfolios of the
Fund ("Shareholders") and set out in the currently effective Prospectuses and
Statement of Additional Information ("Prospectuses") of the Fund on behalf of
the applicable Portfolio, including without limitation any periodic investment
plan or periodic withdrawal program.
1.02 The Bank agrees that it will perform the following
services:
(a) In accordance with the Prospectuses and procedures
established from time to time by agreement between the Fund on behalf of each of
the Portfolios, as applicable, and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase of
Shares, and promptly deliver payment and appropriate
documentation therefor to the Custodian of the Fund
(the "Custodian);
- 2 -
<PAGE>
(ii) Pursuant to purchase orders, issue the appropriate
number of Shares and hold such Shares in the
appropriate Shareholder account;
(iii) Receive for acceptance, redemption requests and
redemption directions and deliver the appropriate
documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives
monies paid to it by the Custodian with respect to
any redemption, pay over or cause to be paid over in
the appropriate manner such monies as instructed
directly or indirectly by the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and
distributions declared by the Fund on behalf of -the
applicable Portfolio; and
(vii) Maintain records of account for and advise the Fund
and its Shareholders as to the foregoing; and
(viii) Record the issuance of Shares and maintain pursuant
to Rule 17Ad-10(e) under the Securities Exchange Act
of 1934 a record of the total number of Shares which
are authorized, based upon data provided to it by the
Fund, and issued and outstanding. Bank shall also
provide the Fund on a regular basis with the total
number of Shares which are authorized and issued and
outstanding
- 3 -
<PAGE>
and shall have no obligation, when recording the
issuance of Shares, to monitor the issuance of such
Shares or to take cognizance of any laws relating to
the issue or sale of such Shares, which functions
shall be the sole responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth
in the above paragraph (a), the Bank shall: (i) perform the customary services
of a transfer agent, dividend disbursing agent and, as relevant, agent in
connection with accumulation, open account or similar plans (including without
limitation any periodic investment plan or periodic withdrawal program);
including but not limited to: maintaining all Shareholder accounts, preparing
Shareholder record date lists for special meetings and for mailings to
Shareholders; addressing and mailing proxies, receiving and tabulating proxies,
and doing all other things necessary in connection with proxy solicitation,
addressing and mailing Shareholder reports, prospectuses and other materials to
current Shareholders; withholding, and paying to the appropriate federal and
state authorities, taxes on U.S. resident and non-resident alien accounts;
preparing, filing and mailing to Shareholders U.S. Treasury Department Forms
1099 and other appropriate forms required with respect to dividends and
distributions by federal and state authorities for all registered Shareholders;
preparing and mailing purchase and sale confirmation forms and statements of
account to Shareholders for all purchases and redemptions of Shares and other
confirmable transactions in Shareholder accounts, preparing and mailing
- 4 -
<PAGE>
activity statements for Shareholders, providing Shareholder account information
and (ii) provide a system which will enable the Fund to monitor the total number
of Shares sold in each State.
(c) The Fund shall (i) identify to the Bank in writing those
transactions and assets to be treated as exempt from blue sky reporting for each
State and (ii) verify the establishment of transactions for each State on the
system prior to activation and thereafter monitor the daily activity for each
State. The responsibility of the Bank for the Fund's blue sky State registration
status is solely limited to the initial establishment of transactions subject to
blue sky compliance by the Fund and the reporting of such transactions to the
Fund as provided above.
(d) In reference to services set forth above, the Bank shall
not provide some of the customary duties of a transfer agent which shall consist
of Shareholder and Record-Keeping Services provided by Legg Mason, which include
preparing and mailing purchase and sale confirmation forms and statements of
account to Shareholders for all purchases and redemptions of Shares and other
confirmable transactions in Shareholder accounts, and preparing and mailing
activity statements for Shareholders.
Procedures applicable to certain of these services described
in paragraphs (a) and (b) and (c) may be established from time to time by
agreement between the Fund and the Bank and shall be subject to the review and
approval of the Fund. The failure of the Fund to establish such procedures with
respect to any service shall not in any way diminish the duty and obligations of
the Bank to perform such service hereunder.
- 5 -
<PAGE>
Article 2 Fees and Expenses
-----------------
2.01 For the performance by the Bank pursuant to this
Agreement, the Fund agrees on behalf of each of the Portfolios, to pay the Bank
an annual maintenance fee for each Shareholder account as set out in the initial
fee schedule attached hereto. Such fees and out-of-pocket expenses and advances
identified under Section 2.02 below may be changed from time to time subject to
mutual written agreement between the Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above, the
Fund agrees on behalf of the Portfolios, to reimburse the Bank for out-of-pocket
expenses or advances incurred by the Bank for the items set out in the fee
schedule attached hereto. In addition, any other expenses incurred by the Bank
at the request or with the consent of the Fund which are not properly borne by
the Bank as part of its duties and obligations under this Agreement will be
reimbursed by the Fund on behalf of the applicable Portfolio. Postage for
mailing of dividends, proxies, Fund reports and other mailings to all
Shareholder accounts shall be advanced to the Bank by the Fund at least seven
(7) days prior to the mailing date of such materials.
Article 3 Representations and Warranties of the Bank
------------------------------------------
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and in
good standing under the laws of The Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in The
Commonwealth of Massachusetts.
3.03 It is empowered under applicable laws and by its charter
and by-laws to enter into and perform this Agreement.
- 6 -
<PAGE>
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to the Bank that;
4.01 It is a Maryland corporation duly organized and existing
and in good standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles
of Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
4.04 It is an open-end and diversified investment company
registered under the Investment Company Act of 1940.
4.05 A registration statement under the Securities Act of 1933
and the Investment Company Act of 1940 is currently effective and will remain
effective, and appropriate state securities law filings have been made and will
continue to be made, with respect to all Shares being offered for sale.
Article 5 Indemnification
---------------
5.01 The Bank shall not be responsible for, and the Fund shall
on behalf of the applicable Portfolio, indemnify and hold the Bank harmless from
and against, any and all losses, damages, costs, charges, counsel fees,
payments, expenses and liability arising out of or attributable to:
- 7 -
<PAGE>
(a) All actions of the Bank or its agent or subcontractors
required to be taken pursuant to this Agreement, provided such actions are taken
in good faith and without negligence or willful misconduct.
(b) The Fund's lack of good faith, negligence or willful
misconduct or which arise out of the breach of any representation or warranty of
the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors on information, records and documents which (i) are received by
the Bank or its agents or subcontractors and furnished to it by or on behalf of
the Fund, and (ii) have been prepared and/or maintained by the Fund or any other
person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by the Bank or its
agents or subcontractors of any instructions or requests of the Fund on behalf
of the applicable Portfolio. "Written Instructions" means written instructions
delivered by mail, tested telegram-cable, telex or facsimile sending device and
received by the Bank, or its agent or subcontractors, signed by authorized
persons.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any state that such Shares be registered in such state or
in violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of such Shares in such
state.
5.02 The Fund shall not be responsible for, and the Bank shall
indemnify and hold the Fund harmless from and against
- 8 -
<PAGE>
any and all losses, damages, and any and all reasonable cost, charges, counsel
fees, payments, expenses and liability arising out of or attributed to any
action or failure or omission to act by the Bank as a result of the lack of good
faith, negligence or willful misconduct of the Bank or any of its agents or
subcontractors referred to in Article 9.03 (i) and (ii) or which arise out of
the breach of any representation or warranty of the Bank hereunder.
5.03 At any time the Bank may apply to any authorized officer
of the Fund for instructions, and may consult with experienced securities
counsel with respect to any matter arising in connection with the services to be
performed by the Bank under this Agreement, and the Bank and its agents and
subcontractors shall not be liable and shall be indemnified by the Fund on
behalf of the applicable Portfolio for any action taken or omitted by it in good
faith in reliance upon such instructions or upon the opinion of such counsel
that such actions or omissions comply with the terms of this Agreement or with
all applicable laws. The Bank, its agents and subcontractors shall be protected
and indemnified in acting upon any paper or document furnished by or on behalf
of the Fund, reasonably believed by the Bank to be genuine and to have been
signed by the proper person or persons, or upon any instruction, information,
data, records or documents provided the Bank or its agents or subcontractors by
machine readable input, telex, CRT data entry or other similar means authorized
by the Fund, and shall not be held to have notice of any change. of authority of
any person, until receipt of written notice thereof from the Fund. The Bank, its
agents and
- 9 -
<PAGE>
subcontractors shall also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officers of the Fund, and the proper
countersignature of any former transfer agent or registrar, or of a co-transfer
agent or co-registrar.
5.04 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes. In addition, the Bank shall make reasonable
provisions for emergency use of electronic data processing equipment to the
extent appropriate equipment is available, and the Bank shall further use
reasonable care to minimize the likelihood of such damage, loss of data, delays
and/or errors and should such damage, loss of data, delays and/or errors occur,
the Bank shall use its best efforts to mitigate the effects of such occurrence.
5.05 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement or
for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in
this Article 5 shall apply, upon the assertion of a claim for which either party
may be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim.
- 10 -
<PAGE>
The party who may be required to indemnify shall have the option to participate
with the party seeking indemnification in the defense of such claim. The party
seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it
except with the other party's prior written consent.
Article 6 Covenants of the Fund and the Bank
----------------------------------
6.01 The Fund shall, on behalf of the Portfolios promptly
furnish to the Bank the following:
(a) A certified copy of the resolution of the Board of
Directors of the Fund authorizing the appointment of the Bank and the execution
and delivery of this Agreement.
(b) A copy of the Articles of Incorporation and By-Laws of the
Fund and all amendments thereto.
6.02 The Bank hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to the Fund for safekeeping of
stock certificates, check forms and facsimile signature imprinting devices, if
any; and for the preparation or use, and for keeping account of, such
certificates, forms and devices.
6.03 The Bank shall keep records relating to the services to
be performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Coopany Act of 1940, as amended,
and the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such
- 11 -
<PAGE>
Section and Rules, and will be surrendered to the Fund on and in accordance with
its request.
6.04 The Bank and the Fund agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be required by law.
6.05 In case of any requests or demands for the inspection of
the Shareholder records of the Fund, the Bank will endeavor to notify the Fund
and to secure instructions from an authorized officer of the Fund as to such
inspection. The Bank reserves the right, however, to exhibit the Shareholder
records to any person whenever it i8 advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
------------------------
7.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material will
be borne by the Portfolio to which such expenses relate. Additionally, the Bank
reserves the right to charge for any other reasonable expenses associated with
such termination. In the event that the Corporation designates a successor to
any of the Bank's obligations hereunder, the Bank shall, at the expense and
direction of each Fund, transfer to such successor a certified list of the
Shareholders of such Fund,
- 12 -
<PAGE>
a complete record of the account of each Shareholder, and all other relevant
books, records and other data established or maintained by the Bank hereunder.
Article 8 Additional Funds
----------------
8.01 In the event that the Fund establishes one or more series
of Shares in addition to Legg Mason Investment Grade Income Portfolio and Legg
Mason U.S. Government Intermediate-Term Portfolio with respect to which it
desires to have the Bank render services as transfer agent under the terms
hereof, it shall 90 notify the Bank in writing, and if the Bank agrees in
writing to provide such services, such series of Shares shall become a Portfolio
hereunder.
Article 9 Assignment
----------
9.01 Except as provided in Section 9.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by the Bank
without the written consent of the other party.
9.02 This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and assigns.
9.03 The Bank may, without further consent on the part of the
Fund, subcontract for the performance hereof with (i) Boston Financial Data
Services, Inc., a Massachusetts corporation ("BFDS") which is duly registered as
a transfer agent pursuant to Section 17A(c)(l) of the Securities Exchange Act of
1934 ("Section 17A(c)(l)"), (ii) a BFDS subsidiary duly registered as a transfer
agent pursuant to Section 17A(c)(l), (iii) a BFDS affiliate or (iv) Legg Mason,
for the performance of Shareholder
- 13 -
<PAGE>
and Record-Keeping Services described herein; provided, however that the Bank
shall be as fully responsible to the Fund for the acts and omissions of any
subcontractor as it is for its own acts and omissions except for Legg Mason
where the Fund shall indemnify and hold the Bank harmless for the act and
omissions of Legg Mason.
Article 10 Amendment
---------
10.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.
Article 11 Massachusetts Law to Apply
--------------------------
11.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
Article 12 Merger of Agreement
-------------------
12.01 This Agreement constitutes the entire agreement between
the parties hereto and supersedes any prior agreement with respect to the
subject matter hereof whether oral or written.
Article 13 Miscellaneous
-------------
13.01 The Fund authorizes the Bank to provide Legg Mason any
information it provides or makes available to the Fund in connection with this
Agreement.
13.02 The Bank agrees to treat all records and other
information relative to the Fund and its prior, present or potential
Shareholders confidentially and the Bank on behalf of itself and its employees
agrees to keep confidential all such information, except after prior
notification to and approval in writing by the Fund, which approval shall not be
unreasonably
- 14 -
<PAGE>
withheld and may not be withheld where the Bank may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Fund.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their behalf under their seals by
and through their duly authorized officers, as of the day and year first above
written.
LEGG MASON INCOME TRUST, INC.
/s/ Marie K. Karpinski
BY: ____________________________________
ATTEST:
/s/ C. Gregory Kallmyer
BY:________________________________
STATE STREET BANK AND TRUST COMPANY
/s/ E.D. Hawkes, Jr.
BY:______________________________________
Vice President
ATTEST:
/s/ J. Farrell
BY:__________________________
Assistant Secretary
- 15 -
[KIRKPATRICK & LOCKHART LETTERHEAD HERE]
June 16, 1987
Legg Mason Income Trust, Inc.
7 East Redwood Street
Baltimore, Maryland 21202
Dear Sirs:
You have requested our opinion regarding certain matters in connection
with the issuance of shares by Legg Mason Income Trust, Inc. ("Corporation"). We
have examined the Corporation's Articles of Incorporation and other corporate
documents relating to the authorization and issuance of the capital stock of the
Corporation. Based upon this examination, we are of the opinion that:
1. All legal requirements have been complied with in the organization of
the Corporation and that it is now a validly existing corporation in
good standing under the laws of the State of Maryland;
2. The authorized capital stock of the Corporation consists of 100,000,000
shares of a par value of $.001 each;
3. The unlimited number of unissued shares which are currently being
registered under the Securities Act of 1933 may be legally and validly
issued from time to time in accordance with the Corporation's Articles
of Incorporation and By-Laws, and subject to compliance with the
Securities Act of 1933, the Investment Company Act of 1940, and
applicable state laws regulating the sale of securities; and
4. When so issued, the Corporation's shares will be fully paid and
nonassessable.
We hereby consent to the filing of this opinion in connection with
Pre-Effective Amendment No. 2 to the Registration Statement on Form N-1A (File
No. 33-12092) which you are about to
<PAGE>
KIRKPATRICK & LOCKHART
Legg Mason Income Trust, Inc.
June 16, 1987
Page 2
file with the Securities and Exchange Commission. We also consent to the
reference to our firm under the caption "The Corporation's Legal Counsel" in the
Registration Statement.
Very truly yours,
/s/Arthur J. Brown
------------------------------
Arthur J. Brown
Exhibit 10(b)
KIRKPATRICK & LOCKHART
South Lobby - 9th Floor
1800 M Street, N.W.
Washington, D. C. 20036-5891
(202)778-9000
October 31, 1988
Legg Mason Income Trust
111 South Calvert Street
Baltimore, Maryland 21202
Dear Sirs:
You have requested our opinion regarding certain matters in connection
with the issuance of shares of the U.S. Government Money Market Portfolio
("Portfolio") by Legg Mason Income Trust, Inc. ("Corporation"). We have examined
the Corporation's Articles of Incorporation, as amended, and other corporate
documents relating to the authorization and issuance of the capital stock of the
Corporation. Based upon this examination, we are of the opinion that:
1. All legal requirements have been complied with in the
organization of the Corporation, and it is a validly
existing corporation in good standing under the laws of
the State of Maryland;
2. The authorized capital stock of the Corporation
consists of 300,000,000 shares, of a par value of $.001
each, of which 200,000,000 shares are classified as
shares of the Portfolio;
<PAGE>
Legg Mason Income Trust, Inc.
October 31, 1988
Page 2
3. The unlimited number of unissued shares of the
Portfolio which are currently being registered under
the Securities Act of 1933 may be legally and validly
issued from time to time in accordance with the
Corporation's Articles of Incorporation and By-Laws,
and subject to compliance with the Securities Act of
1933, the Investment Company Act of 1940, and
applicable state laws regulating the sale of
securities; and
4. When so issued, the Corporation's shares will be fully
paid and nonassessable.
We hereby consent to the filing of this opinion in connection with
Post-Effective Amendment No. 4 to the Registration Statement on Form N-1A (File
No. 33-12092) which you are about to file with the Securities and Exchange
Commission. We also consent to the reference to our firm under the caption "The
Corporation's Legal Counsel" in the Registration Statement.
Very truly yours,
/s/ Arthur J. Brown
----------------------------
Arthur J. Brown
KIRKPATRICK & LOCKHART
Exhibit 10(c)
KIRKPATRICK & LOCKHART
South Lobby - 9th Floor
1800 M Street, N.W.
Washington, D. C. 10036-5891
(202) 778-9000
December 30, 1993
Legg Mason Income Trust, Inc.
111 South Calvert Street
Baltimore, Maryland 21202
Dear Sirs:
Legg Mason Income Trust, Inc. (the "Company") is a corporation
organized under the laws of the State of Maryland by Articles of Incorporation
dated April 28, 1987. We understand that the Company is about to file
Post-Effective Amendment No. 14 to its Registration Statement on Form N-1A, for
the purpose of registering a new series of shares of its capital stock, to be
known as Legg Mason High Yield Portfolio.
We have, as counsel, participated in various corporate and other
matters relating to the Company. We have examined copies of the Articles of
Incorporation and By-Laws, as now in effect, and the minutes of meetings of the
directors and other documents relating to the organization and operation of the
Company, and we are generally familiar with its affairs. Based upon the
foregoing, it is our opinion that the shares of capital stock of the company
that are the subject of Post-Effective Amendment No. 14, if sold now, would be
legally issued, fully paid and non-assessable. We express no opinion as to
compliance with the Securities Act of 1933, the Investment Company Act of 1940
or applicable state securities laws in connection with the sale of shares of
capital stock.
<PAGE>
Legg Mason Income Trust, Inc.
December 30, 1993
Page 2
We hereby consent to this opinion accompanying Post-Effective Amendment
No. 14. We also consent to the reference to our firm under the caption "The
Corporation's Legal Counsel" in the statement of additional information, which
is incorporated by reference into the prospectus of the High Yield Portfolio and
filed as part of the Company's registration statement.
Sincerely,
KIRKPATRICK & LOCKHART
By: /s/ Arthur C. Delibert
----------------------------
Arthur C. Delibert
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. 26 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 5, 1997 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 year ended December 31, 1996, which is
incorporated by reference in the Registration Statement. We also consent to the
reference to our Firm under the caption "Financial Highlights" in the
prospectus and "The Corporation's Independent Accountants" in the Statement of
Additional Information.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
April 30, 1997
June 9, 1987
Legg Mason Income Trust, Inc.
7 East Redwood Street
Baltimore, Maryland 21202
Gentlemen:
Please be advised that the 10,000 shares of Legg Mason Income Trust,
Inc. which we have today purchased as an investment with no present intention of
redeeming or selling such shares and we do not have any intention of redeeming
or selling such shares.
Very truly yours,
LEGG MASON WOOD WALKER, INC.
/s/ John F. Curley
____________________
John F. Curley, Jr.
Vice Chairman
DISTRIBUTION PLAN
OF
LEGG MASON INCOME TRUST, INC.
WHEREAS, Legg Mason Income Trust, Inc. (the "Corporation") intends to
engage in business as a series type, open-end management investment company and
has filed a Registration Statement with the Securities and Exchange Commission
for the purpose of registering as such under the Investment Company Act of 1940,
as amended (the "1940 Act") and intends to offer for public sale distinct series
of shares of common stock ("Series"), each corresponding to a distinct
portfolio; and
WHEREAS, the Corporation desires to adopt a Distribution Plan pursuant
to Rule 12b-1 under the 1940 Act and the Board of Directors has determined that
there is a reasonable likelihood that adoption of this Distribution Plan will
benefit the Corporation and its shareholders; and
WHEREAS, the Corporation intends to employ Legg Mason Wood Walker,
Incorporated ("Legg Mason") as underwriter of the shares of each of the Series;
NOW, THEREFORE, the Corporation hereby adopts this Distribution Plan
(the "Plan") in accordance with Rule 12b-1 under the 1940 Act of the following
terms and conditions:
1. Each Series shall pay to Legg Mason a distribution fee for expenses
related to distribution of its shares at the rate of 0.5% per annum of the
Series' average daily net assets, such fee to be calculated daily and paid
monthly.
2. The amount set forth in paragraph 1 of this Plan shall be paid for
Legg Mason's services as underwriter of the shares of each Series in accordance
with an Underwriting Agreement between Legg Mason and the Corporation and may be
spent by Legg Mason on any activities or expenses related to the sale of the
Series' shares, including, but not limited to, commissions and other
compensation to persons who engage in or support distribution of shares,
printing of prospectuses and reports for other than existing shareholders,
advertising, preparation and distribution of sales literature, and overhead,
travel and telephone expenses.
3. This Plan shall not take effect 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 the Corporation.
4. This Plan shall not take effect with respect to any Series until it
has been approved, 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 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 an such
related agreements.
5. This Plan 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 in the manner provided for approval of this Plan in paragraph
4.
<PAGE>
6. 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.
7. 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.
8. This Plan may not be amended to increase materially the amount of
distribution expenses provided for in paragraph 1 hereof unless such amendment
is approved in the manner provided for initial approval in paragraph 3 hereof,
and no material amendment to the Plan shall be made unless such amendment is
approved in the manner provided for initial approval in paragraph 4 hereof.
9. 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 the directors who are
themselves not interested persons.
10. The Corporation shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 6 hereof for a period of
not less than six years from the date of execution of this Plan, or of the
agreements or of such reports, as the case may be, 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: June 19, 1987 LEGG MASON INCOME TRUST, INC.
Attest: By: /s/John F. Curley, Jr.
/s/ Mary C. Curry
DISTRIBUTION PLAN
OF
LEGG MASON INCOME TRUST, INC.
FOR
LEGG MASON U.S. GOVERNMENT MONEY MARKET PORTFOLIO
WHEREAS, Legg Mason Income Trust, Inc. (the "Corporation") is engaged
in business as an open-end management investment company registered under the
Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Corporation's shares of common stock, par value $.001 per
share, are currently divided into three separate series ("Series");
WHEREAS, the Corporation, on behalf of one of its three portfolios, the
Legg Mason U.S. Government Money Market Portfolio (the "Fund"), desires to adopt
a distribution Plan pursuant to Rule 12b-1 under the 1940 Act and the Board of
Directors of the Corporation has determined that there is a reasonable
likelihood that adoption of this Distribution Plan will benefit the Fund and its
shareholders; and
WHEREAS, the Corporation intends to enter into an agreement, on behalf
of the Fund, whereby Legg Mason Wood Walker, Incorporated ("Legg Mason") will
serve as underwriter of the Fund's shares (the "Underwriting Agreement");
NOW, THEREFORE, the Corporation, on behalf of the Fund, hereby adopts
this Distribution Plan (the "Plan") in accordance with Rule 12b-1 under the 1940
Act on the following terms and conditions:
1. The Board of Directors of the Corporation is hereby authorized, at
its sole discretion, to authorize the Corporation to pay to Legg Mason, on
behalf of the Fund, for distribution services, a fee not to exceed an annual
rate of .20% of the Fund's average daily net assets. Upon said authorization by
the Board of Directors, such fee is to be calculated daily and paid monthly.
Activities for which such payments may be made include, but are not limited to,
compensation to persons who engage in or support distribution of shares and 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.
2. This Plan shall not take effect until it has been approved by a vote
of at least a majority of the outstanding voting securities of the Fund, as
defined in the 1940 Act.
3. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Board of
Directors of the Corporation and (b) those directors of the Corporation 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
<PAGE>
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.
4. This Plan shall continue in effect for successive periods of one
year from the date of its execution so long as such continuance is specifically
approved at least annually by the Board of Directors, including the Rule 12b-1
Directors, in the manner provided for initial approval of this Plan in Paragraph
3 hereof.
5. Any person authorized to direct the disposition of monies paid or
payable by the Fund 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.
6. This Plan may be terminated 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 the Fund, as defined in the 1940 Act.
7. This Plan may not be amended to increase materially the amount of
distribution expenses authorized hereby unless such amendment is approved by the
Fund's shareholders in the manner provided for initial approval of the Plan in
Paragraph 2 hereof, and no material amendment to the Plan shall be made unless
such amendment is approved by the Board of Directors, and by the Rule 12b-1
Directors, in the manner provided for initial approval of the Plan in paragraph
3 hereof.
8. While this Plan is in effect, the selection and nomination of
directors who are not interested persons, as defined in the 1940 Act, of the
Fund shall be committed to the discretion of the directors who are themselves
not interested persons.
9. The Fund shall preserve copies of this Plan and any related
agreements and all reports made pursuant to Paragraph 5 hereof for a period of
not less than six years from the date of execution of this Plan, or of the
agreements or of such reports, as the case may be, the first two years in an
easily accessible place.
IN WITNESS WHEREOF, the Corporation has executed this Distribution Plan
on behalf of the Fund as of the day and year set forth below:
Date: November 1, 1988 LEGG MASON INCOME TRUST, INC.
----------------
Attest: By: /s/Edmund J. Cashman, Jr.
----------------------------------
By: /s/Barbara W. Diehl
--------------------------------
Barbara W. Diehl
Assistant Secretary
- 2 -
<PAGE>
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By:/s/ John F. Curley, Jr.
- 3 -
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 intends to offer for public sale
shares of common stock of a series to be known as the Legg Mason High Yield
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 or expected to be made effective in the near future;
WHEREAS, the desires to adopt a Distribution Plan pursuant to Rule
12b-1 under the 1940 Act and the Board of Directors has determined that there is
reasonable likelihood that adoption of the Distribution Plan will benefit the
Corporation and its shareholders;
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 Distribution Plan
(the "Plan") in accordance with Rule 12b-1 under the 1940 Act on the following
terms and conditions:
1. A. Legg Mason High Yield Portflio shall pay to Legg Mason, as
compensation for Legg Mason's services as principal underwriter of the Fund
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 Corporation 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
<PAGE>
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 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 Fund and/or the
servicing and maintenance of shareholder accounts, including, but not limited
to, compensation to employees of Legg Mason; compensation to Legg Mason and
other broker-dealers that engage in or support the distribution of shares or who
service shareholder accounts; expenses of Legg Mason and such other
broker-dealers, 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 take effect on February 1, 1994 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.
4. Any person authorized to direct the disposition of monies paid or
payable by any Fund 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 4, to the Board in support of the distribution fee payable hereunder
and shall submit only information regarding amounts expended for
- 2 -
<PAGE>
"service activities," as defined in this paragraph 4, 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 February 1, 1994, by and
between the Corporation and Legg Mason, that are not deemed "service
activities." "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 became 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.
5. This Plan may be terminated with respect to the Fund 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 the Fund.
6. 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 4 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:
- 3 -
<PAGE>
Date: February 1, 1994 LEGG MASON INCOME TRUST, INC.
Attest: By: /s/John F. Curley, Jr.
By: /s/Kathi D. Glenn
Agreed and assented to by
LEGG MASON WOOD WALKER, INCORPORATED
By:/s/Marie K. Karpinski
- 4 -
LEGG MASON US GOVERNMENT INTERMEDIATE PORTFOLIO
-----------------------------------------------
Primary Shares
--------------
January 1, 1996 - December 31, 1996 (one year)
- ----------------------------------------------
Cumulative Total Return:
------------------------
ERV= (10.31 x 1.962539) - (10.47 x 1.849851) x 1000 + 1000 = 1044.70
----------------------------------------
(10.47 x 1.849851)
P = 1000
C = 1044.7 - 1 = .044704 = 4.47%
------ -----
1000
Average Annual Return: Same
----------------------
January 1, 1992 - December 31, 1996 (five years)
- ------------------------------------------------
Cumulative Total Return:
------------------------
ERV= (10.31 x 1.962539) - (10.77 x 1.420945) x 1000 + 1000 = 1322.16
----------------------------------------
(10.77 x 1.420945)
P = 1000
C = 1322.16 - 1 = 0.3221599 = 32.22%
------- -----
1000
Average Annual Return:
- ----------------------
1
-
5
(0.3222 + 1) - 1 = 0.0574 = 5.74%
-----
August 7, 1987 - December 31, 1996 (life of fund)
- -------------------------------------------------
Cumulative Total Return:
------------------------
ERV = (10.31 X 1.962539) - (10.00 x 1.0) x 1000 + 1000 = 2023.38
--------------------------------------
(10.00 x 1.0)
P = 1000
C = 2023.38 - 1 = 0.93679 = 102.34%
------- ------
1000
Average Annual Return:
----------------------
1
------
9.4055
(1.02337 + 1) - 1 = 0.0778 = 7.78%
----
<PAGE>
LEGG MASON US GOVERNMENT INTERMEDIATE PORTFOLIO
-----------------------------------------------
Navigator Shares
----------------
January 1, 1996 - December 31, 1996 (one year)
Cumulative Total Return:
ERV= (10.31 x 1.139612) - (10.47 x 1.067838) x 1000 + 1000 = 1050.91
----------------------------------------
(10.47 x 1.067838)
P = 1000
C = 1050.91 - 1 = .050905 = 5.09%
------- -----
1000
Average Annual Return: Same
----------------------
December 1, 1994 - December 31, 1996 (life of fund)
- ---------------------------------------------------
Cumulative Total Return:
------------------------
ERV = (10.31 X 1.139612) - (9.72 x 1.0) x 1000 + 1000 = 1208.79
-------------------------------------
(9.72 x 1.0)
P = 1000
C = 1208.79 - 1 = 0.2087859 = 20.88%
------- -----
1000
Average Annual Return:
----------------------
1
-------
2.08493
(0.2087859 + 1) - 1 = 0.0952 = 9.52%
----
<PAGE>
LEGG MASON INVESTMENT GRADE INCOME PORTFOLIO
--------------------------------------------
Primary Shares
--------------
January 1, 1996 - December 31, 1996 (one year)
- ----------------------------------------------
Cumulative Total Return
-----------------------
(10.22 x 2.122211) - (10.44 x 1.991702) x 1000 + 1000 = 1043.07
---------------------------------------
(10.44 x 1.991702)
P = 1000
C = 1043.07 - 1 = 0.04307 = 4.31%
------- ----
1000
Average Annual Return: Same
January 1, 1992 - December 31, 1996 (5 years)
- ---------------------------------------------
Cumulative Total Return:
------------------------
ERV = (10.22 X 2.122211) - (10.71 x 1.429624) x 1000 + 1000 = 1416.54
------------------------------------------
(10.71 x 1.429624)
P = 1000
C = 1416.54 - 1 = 0.416537 = 41.65%
------- -----
1000
Average Annual Return:
1
-
5
(0.416537 + 1) - 1 = 0.0721 = 7.21%
----
August 7, 1987 - December 31, 1996 (life of fund)
- -------------------------------------------------
Cumulative Total Return
-----------------------
ERV = (10.22 X 2.122211) - (10.00 x 1.0) x 1000 + 1000 = 2168.90
-------------------------------------
(10.00 x 1.0)
P = 1000
C = 2168.90 - 1 = 1.16890 = 116.89%
------- ------
1000
Average Annual Return:
----------------------
1
------
9.4055
(1.16890 + 1) - 1 = 0.0858 = 8.58%
----
<PAGE>
LEGG MASON INVESTMENT GRADE INCOME PORTFOLIO
--------------------------------------------
Navigator Shares
----------------
January 1, 1996 - December 31, 1996 (one year)
- ----------------------------------------------
Cumulative Total Return:
------------------------
ERV= (10.22 x 1.074167) - (10.44 x 1.002565) x 1000 + 1000 = 1048.84
----------------------------------------
(10.44 x 1.002565)
P = 1000
C = 1048.84 - 1 = .048841 = 4.88%
------- -----
1000
Average Annual Return: Same
December 18, 1995 - December 31, 1996 (life of fund)
Cumulative Total Return
ERV = (10.22 X 1.074167) - (10.32 x 1.0) x 1000 + 1000 = 1063.76
--------------------------------------
(10.32 x 1.0)
P = 1000
C = 1063.76 - 1 = 0.063758 = 6.38%
------- ----
1000
Average Annual Return:
----------------------
1
-------
1.03836
(1.063758 + 1) - 1 = 0.0613 = 6.13%
----
<PAGE>
U.S. GOVERNMENT MONEY MARKET YIELD CALCULATIONS:
------------------------------------------------
1. 7 day yield at 12/31/96 annualized:
[7 days dividends ended 12/31/96 / 7 x 366] =
-------------------------------------------
$1.00 (NAV)
(.000911602 / 7 x 366) = 4.77%
----------------------
1.00
2. Effective yield:
366
---
7
[base period return + 1] -1 =
366
---
7
(.000911602 + 1) - 1 = 4.88%
<PAGE>
LEGG MASON HIGH YIELD PORTFOLIO
-------------------------------
January 1, 1996 - December 31, 1996 (one year)
- ----------------------------------------------
Cumulative Total Return
-----------------------
(15.37 x 1.285181) - (14.62 x 1.175759) x 1000 + 1000 = 1149.14
----------------------------------------
(14.62 x 1.175759)
P = 1000
C = 1149.14 - 1 = 0.149139 = 14.91%
------- -----
1000
Average Annual Return: Same
February 1, 1994 - December 31, 1996 (life of fund)
- ---------------------------------------------------
Cumulative Total Return
-----------------------
ERV = (15.37 X 1.2851810) - (15.00 x 1.0) x 1000 + 1000 = 1316.88
---------------------------------------
(15.00 x 1.0)
P = 1000
C = 1316.88 - 1 = 0.316882 = 31.69%
------- ------
1000
Average Annual Return:
----------------------
1
--------
2.915068
(0.316882 + 1) - 1 = 0.0989 = 9.89%
----
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000810868
<NAME> LEGG MASON INCOME TRUST, INC.
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<NUMBER> 011
<NAME> US GOVERNMENT INTERMEDIATE PORTFOLIO - PRIMARY SHARES
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<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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<INVESTMENTS-AT-VALUE> 300,103
<RECEIVABLES> 4,020
<ASSETS-OTHER> 18
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 304,141
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<NET-CHANGE-FROM-OPS> 9,529
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 13,083
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 323
<NUMBER-OF-SHARES-SOLD> 12,900
<NUMBER-OF-SHARES-REDEEMED> (7,697)
<SHARES-REINVESTED> 1,168
<NET-CHANGE-IN-ASSETS> 65,858
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (8,485)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,271
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,879
<AVERAGE-NET-ASSETS> 227,072
<PER-SHARE-NAV-BEGIN> 10.47
<PER-SHARE-NII> .61
<PER-SHARE-GAIN-APPREC> (.16)
<PER-SHARE-DIVIDEND> (.60)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (.01)
<PER-SHARE-NAV-END> 10.31
<EXPENSE-RATIO> .98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
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<SERIES>
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<NAME> US GOVERNMENT INTERMEDIATE PORTFOLIO - NAVIGATOR SHARES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
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<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 298,672
<INVESTMENTS-AT-VALUE> 300,103
<RECEIVABLES> 4,020
<ASSETS-OTHER> 18
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 304,141
<PAYABLE-FOR-SECURITIES> 0
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<OTHER-ITEMS-LIABILITIES> 2,213
<TOTAL-LIABILITIES> 2,213
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 311,648
<SHARES-COMMON-STOCK> 784
<SHARES-COMMON-PRIOR> 399
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,530)
<NET-ASSETS> 301,928
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<NET-CHANGE-FROM-OPS> 9,529
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 253
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 9
<NUMBER-OF-SHARES-SOLD> 795
<NUMBER-OF-SHARES-REDEEMED> (435)
<SHARES-REINVESTED> 25
<NET-CHANGE-IN-ASSETS> 65,858
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (8,485)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,271
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,879
<AVERAGE-NET-ASSETS> 4,055
<PER-SHARE-NAV-BEGIN> 10.47
<PER-SHARE-NII> .67
<PER-SHARE-GAIN-APPREC> (.16)
<PER-SHARE-DIVIDEND> (.66)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (.01)
<PER-SHARE-NAV-END> 10.31
<EXPENSE-RATIO> .42
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
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