ANNUAL REPORT
DECEMBER 31, 1998
LEGG MASON
INCOME TRUST, INC.
U.S. GOVERNMENT INTERMEDIATE
INVESTMENT GRADE
HIGH YIELD
U.S. GOVERNMENT MONEY MARKET
PRIMARY CLASS
[LEGG MASON FUNDS LOGO APPEARS HERE]
HOW TO INVEST(SM)
Investment Manager
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Investment Adviser
Western Asset Management Company
Pasadena, CA
Board of Directors
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., Vice Chairman
Richard G. Gilmore
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Boston, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel
Kirkpatrick & Lockhart LLP Washington, D.C.
Independent Accountants
PricewaterhouseCoopers LLP
Baltimore, MD
This report is not to be distributed unless preceded or accompanied by a
prospectus.
LEGG MASON WOOD WALKER, INCORPORATED
- --------------------------------------------------------------------------------
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000
LMF-056
<PAGE>
To Our Shareholders,
We are pleased to provide you with Legg Mason Income Trust's annual report,
combining reports for the Legg Mason U.S. Government Intermediate-Term
Portfolio, Investment Grade Income Portfolio, High Yield Portfolio and the U.S.
Government Money Market Portfolio.
The following table summarizes key statistics for the Primary Class of each
portfolio, as of December 31, 1998:
Net Asset Value
SEC Yield* Average Life Per Share
---------- ------------ ---------
Government Intermediate 4.58% 7.6 years $10.51
Investment Grade 5.03% 12.9 years $10.52
High Yield 7.85% 5.8 years $14.72
Government Money Market+ 4.28% 72 days $ 1.00
In calendar 1998, total returns for the Primary Class of shares of the
Government Intermediate, Investment Grade and High Yield Portfolios were 6.56%,
6.99% and -1.79%, respectively. (Total return measures investment performance in
terms of appreciation or depreciation in a portfolio's net asset value per
share, plus dividends and any capital gain distributions). Beginning on page 3,
portfolio managers responsible for the Income Trust discuss recent results and
the investment outlook. The Funds' total returns in various periods since their
inceptions are shown on subsequent pages of the report.
For each of our Funds, historical performance is not indicative of future
results, and the principal value of our holdings will continue to fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
The Board of Directors recently approved a long-term capital gain of $0.096
and $0.012 per share to Primary Class shareholders of Investment Grade and High
Yield, respectively, and a short-term capital gain of $0.09 per share to Primary
Class shareholders of Investment Grade, payable on December 10, 1998 to
shareholders of record on December 9, 1998.
During 1998, attention increasingly focused on the Year 2000 issue. As you may
know, the Year 2000 issue is a computer programming problem that affects the
ability of computers to correctly process dates of January 1, 2000, and beyond.
The Funds' Year 2000 project is well underway, and is designed to ensure that
the Year 2000 date change will have no adverse impact on our ability to service
our shareholders. The Funds are committed to taking those steps necessary to
protect Fund investors including efforts to determine that the Year 2000 problem
will not affect such vital service functions as shareholder transaction
processing and recordkeeping. In addition, we are continuously monitoring the
Year 2000 efforts of our vendors, and will perform tests with our critical
vendors throughout 1999. Although the Funds are taking steps to ensure that all
of their systems will function properly before, during, and after the Year 2000,
the Funds could be adversely affected by computer related problems associated
with the Year 2000. Contingency plans to ensure that functions critical to the
Funds' operations will continue without interruption are under development. We
are on target to complete this important project and look forward to continuing
extensive testing (including industry-wide testing) with our industry peers,
regulators and vendors throughout 1999.
<PAGE>
Many of our shareholders regularly add to their Fund holdings by authorizing
automatic, monthly transfers from their bank checking or Legg Mason accounts.
Your Legg Mason Financial Advisor will be happy to help you make these
arrangements if you would like to purchase shares in this convenient way.
Sincerely,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
Chairman
February 9, 1999
- --------------
*SEC yields reported for the U.S. Government Intermediate, Investment Grade and
High Yield Portfolios are for the 30 days ended December 31, 1998. For the U.S.
Government Money Market Portfolio the SEC yield is for the 7 days ended
December 31, 1998.
+An investment in the U.S. Government Money Market Portfolio is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although the U.S. Government Money Market Portfolio seeks to preserve
the value of your investment at $1.00 per share, it is possible to lose money
by investing in the Fund.
2
<PAGE>
PORTFOLIO MANAGERS' COMMENTS
Legg Mason Income Trust, Inc.
Market Overview
Fixed-income markets were roiled in the second half of 1998 by both the
devaluation of the Russian ruble and Russia's decision to default on some of its
loan obligations. Leveraged hedge funds were severely impacted, and their
unwinding operations contributed to produce a severe shortage of liquidity and
flight to quality. By the time the dust settled, non-Treasury sectors had
experienced the sharpest and most dramatic widening of spreads in the history of
the bond market. Following the Federal Reserve's move to ease monetary policy
three times in quick succession, some calm was restored to the markets by year
end, particularly in the corporate and emerging market sectors. Long-term
Treasury yields fell about 50 basis points1 for the period, with shorter-term
yields falling almost 90 basis points, thus continuing the rally that began in
the first half of the year. Overall, the US economy remained remarkably healthy
despite the ongoing global turmoil, and inflation remained low and stable.
U.S. Government Intermediate and Investment Grade Portfolios
Given that both Funds traditionally emphasize non-Treasury sectors, it is not
surprising that performance suffered during the six months ended December 31,
1998, as spreads widened. On the positive side, both Funds were well-positioned
for declining interest rates and we had shifted their emphasis to benefit from a
steepening of the yield curve early in the period; both of these strategies were
rewarded. Both Funds were also insulated from the full brunt of wider spreads by
our relatively cautious approach to overweighting both corporate and
mortgage-backed securities. We had generally upgraded the quality of domestic
credits, preferring to take higher levels of credit risk only in the emerging
market area where spreads appeared much more attractive. Even so, our
overweighting to credit risk was modest compared to previous periods, and we
emphasized shorter maturity sovereign debt from major emerging market countries
to minimize systemic risk. In the mortgage sector our overweighting was more
aggressive, but also balanced by a heavy emphasis on current and discount
coupons in order to minimize prepayment risk in a falling interest rate
environment, and this strategy was rewarded with better relative performance. As
before, both Funds were negatively impacted by a moderate exposure to
inflation-indexed bonds, since real interest rates rose even as nominal rates
fell.
For the six months ended December 31, Government Intermediate produced a total
return of 3.3%, versus the Salomon Brothers Medium
Term-Treasury/Government-Sponsored Index return of 4.9%. Investment Grade
generated a total return of 3.6% versus the Salomon Brothers Broad
Investment-Grade Index return of 4.6%.
High Yield Portfolio
Due to the significant widening of credit spreads discussed above, the high
yield sector of the bond market sharply underperformed the investment grade
sector during the period. The High Yield Portfolio in particular suffered from
several adverse developments. To begin with, its sensitivity to lower quality
credits was somewhat higher than that of the high yield market as a whole,
despite our earlier efforts to upgrade its quality. Consequently, it
underperformed as quality spreads widened dramatically. An overweighting to the
telecommunications sector also detracted from performance, as
- ----------
(1) 100 basis points = 1%
3
<PAGE>
PORTFOLIO MANAGERS' COMMENTS -- CONTINUED
this proved to be the most volatile and illiquid sector. A fairly significant
level of Fund redemptions during the height of the Russian deleveraging crisis
proved to be the most difficult factor to deal with, as a severe lack of
liquidity at the time forced the Fund to incur substantial transaction costs
when selling securities to raise cash. Furthermore, our efforts to anticipate
redemptions resulted in holding cash during the latter part of the period when
prices recovered unexpectedly.
For the six months ended December 31, High Yield posted a total return of
- -9.6% versus the Lehman Brothers High Yield Index return of -2.8%.
Market Commentary and Outlook
Following numerous moves by the world's central banks to reduce interest rates
in the past several months, the key question today is whether monetary policy
has eased sufficiently to ensure trouble-free economic growth going forward. The
willingness of central banks to relax monetary policy in the face of serious
threats to global financial stability is encouraging, and has clearly reduced
the risk of a serious financial meltdown, deflation or recession. However, in
our view the moves to date do not appear to have eliminated extant deflationary
risks, and they do not rule out the risk of a slowdown in the US economy.
Despite three Fed moves to lower nominal rates, the yield curve is still
relatively flat, commodity prices are uniformly weak, and credit spreads remain
at distressed levels--all classic signs of tight money. The tight money squeeze
has been felt the most by emerging market and Asian economies, being heavily
dependent on commodity exports and indebted in dollars. The current level of
emerging market spreads is punishingly high, bringing inexorable pressure on
those economies to slow. This has already caused a slowdown in US exports, which
in turn helps explain the sharp drop in US manufacturing activity.
Since tight money means firms on balance cannot pass along higher labor costs
to consumers, an earnings squeeze is the inevitable result. This explains a
noticeable slowdown in the growth of payroll employment over the course of the
past year, just as a significant erosion of corporate profitability and cash
flows is working to slow the pace of capital investment. Moreover, tighter
fiscal policy in the US is slowly eroding the underpinnings of consumer demand.
Prosperity has pushed consumers into higher marginal tax brackets, leading to a
significant increase in tax burdens and a decline in discretionary income. We
believe these factors will combine to result in a noticeable slowdown in GDP
growth in the next 6-9 months, while at the same time inflation pressures remain
very low, nonexistent or even negative.
Strategy
Whether this slowdown is mild or recessionary is the critical question, as is
the degree to which deflation persists. If accompanied by Fed ease, mild
deflation and a mild slowdown likely would be fertile ground for all financial
assets. If the Fed is slow to ease, however, a more pronounced deflation or
recession is not out of the question. Since either scenario would imply lower
yields, with short-term rates likely leading the way, we will continue to be
long our duration benchmarks, with a bulleted exposure to the yield curve in
anticipation of lower short-term rates over time.
4
<PAGE>
Although the corporate bond market has largely discounted the possibility of a
recession in 1999, the reality of one would likely cause credit spreads to widen
further as Treasury yields fell. Though we are cognizant of these risks, we
think the inherent dynamism of the US economy and the Fed's willingness and
ability to ease policy make a doomsday scenario unlikely. Consequently, we are
overweight corporate bonds--in light of their historically attractive
spreads--but cautiously so, keeping average quality higher than usual in light
of our view that the economy is likely to slow and deflation risks remain high.
In the emerging markets area, where spreads appear to more than compensate for
risk given the impressive structural reforms that many countries have
undertaken, our caution takes the form of an emphasis on shorter maturities and
major sovereign issuers to minimize systemic risk. We believe mortgage-backed
securities are still attractive since they offer very attractive spreads and
very high quality. Moreover, we believe that mortgage spreads will narrow as
interest rate volatility subsides and the yield curve steepens. Finally, we also
remain overweight in inflation-adjusted bonds, in the belief that their yields
are very attractive at current levels and should decline -- producing price
gains -- as the Fed eventually engineers a reduction in real interest rates.
Western Asset Management Company
February 9, 1999
5
<PAGE>
PERFORMANCE INFORMATION
Legg Mason Income Trust, Inc.
Performance Comparison of a $10,000 Investment as of December 31, 1998
The returns shown on these pages are based on historical results and are not
intended to indicate future performance. Total return measures investment
performance in terms of appreciation or depreciation in a Fund's net asset value
per share, plus dividends and any capital gain distributions. It assumes that
dividends and distributions were reinvested at the time they were paid. The
investment return and principal value of an investment in each of these Funds
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost. Average annual returns tend to smooth out
variations in a Fund's return, so they differ from actual year-to-year results.
No adjustment has been made for any income taxes payable by shareholders.
The following graphs compare each Fund's total returns against that of the
most closely matched broad-based securities market index. The lines illustrate
the cumulative total return of an initial $10,000 investment for the periods
indicated. The line for each Fund represents the total return after deducting
all Fund investment management and other administrative expenses and the
transaction costs of buying and selling securities. The line representing the
securities market index does not include any transaction costs associated with
buying and selling securities in the index or other administrative expenses.
The Government Intermediate, Investment Grade and High Yield Portfolios each
have two classes of shares: Primary Class and Navigator Class. Information about
the Navigator Class, offered only to certain institutional investors, is
contained in a separate report to its shareholders. The U.S. Government Money
Market Portfolio is excluded from this performance information because it does
not have a variable share price.
U.S. Government Intermediate-Term Portfolio
CUMULATIVE AVERAGE ANNUAL
TOTAL RETURN TOTAL RETURN
------------ ------------
One Year +6.56% +6.56%
Five Years +32.98 +5.87
Ten Years +111.96 +7.80
<TABLE>
<CAPTION>
Years Ended December 31,
1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Intermediate $10,000 $11,000 $12,299 $14,066 $14,946 $15,939
Salomon Brothers Medium-Term
Treasury/Government-Sponsored Index(1) 10,000 11,266 12,351 14,094 15,074 16,312
Years Ended December 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
U.S. Government Intermediate $15,632 $17,802 $18,597 $19,890 $21,196
Salomon Brothers Medium-Term
Treasury/Government-Sponsored Index(1) 16,030 18,336 19,082 20,568 22,318
</TABLE>
(1) The Salomon Brothers Medium-Term Treasury/Government-Sponsored Index is an
all-inclusive universe of institutionally traded U.S. Treasury and
Government-Sponsored securities. The Index is market-capitalization weighted
and includes fixed-rate bonds with maturities between 1 and 10 years.
6
<PAGE>
INVESTMENT GRADE INCOME PORTFOLIO
CUMULATIVE AVERAGE ANNUAL
TOTAL RETURN TOTAL RETURN
------------ ------------
One Year +6.99% +6.99%
Five Years +40.77 +7.08
Ten Years +131.75 +8.77
<TABLE>
<CAPTION>
Years Ended December 31,
1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Investment Grade $10,000 $11,296 $11,951 $13,863 $14,801 $16,463
Salomon Brothers Broad Investment-Grade 10,000 11,443 12,483 14,478 15,575 17,120
Bond Index(2)
Years Ended December 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Investment Grade $15,669 $18,826 $19,637 $21,661 $23,175
Salomon Brothers Broad Investment-Grade 16,632 19,714 20,427 22,396 24,347
Bond Index(2)
</TABLE>
(2) The Salomon Brothers Broad Investment-Grade Bond Index is a market-weighted
index that contains approximately 4,700 individually priced investment grade
bonds rated BBB or better. The Index includes U.S. Treasury/agency issues,
mortgage pass-through securities and corporate issues.
HIGH YIELD PORTFOLIO
CUMULATIVE AVERAGE ANNUAL
TOTAL RETURN TOTAL RETURN
------------ ------------
One Year -1.79% -1.79%
Life of Fund+ +49.84 +8.57
+ Inception Date -- February 1, 1994
<TABLE>
<CAPTION>
2/1/94 6/94 12/94 6/95 12/95
<S> <C> <C> <C> <C> <C>
High Yield $10,000 $9,739 $9,710 $10,611 $11,460
Lehman High Yield Index(3) 10,000 9,656 9,686 10,892 11,545
6/96 12/96 6/97 12/97 6/98 12/98
High Yield $12,241 $13,169 $14,085 $15,257 $16,581 $14,984
Lehman High Yield Index(3) 11,943 12,855 13,603 14,495 15,148 14,728
</TABLE>
(3) The Lehman Brothers High Yield Index is comprised of approximately 760
publicly traded below-investment grade U.S. corporate bonds.
7
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
December 31, 1998
(Amounts in Thousands)
U.S. Government Intermediate-Term Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and Agency Obligations -- 47.8%
Fixed-rate Securities -- 38.3%
Federal Farm Credit Bank 6.66% 12/26/06 $ 5,850 $ 6,347
Freddie Mac 6% 12/15/09 9,000 8,986
Overseas Private Investment Corporation 6.93% 12/15/08 15,000 16,372
Private Export Funding Corporation 5.82% 6/15/03 5,000 5,048
Private Export Funding Corporation 7.03% 10/31/03 4,000 4,329
Private Export Funding Corporation 5.31% 11/15/03 15,000 15,302F
Tennessee Valley Authority 6.235% 7/15/45 5,000 5,239
United States Treasury Bonds 6.375% 8/15/27 1,320 1,517
United States Treasury Notes 6.25% 1/31/02 2,020 2,110
United States Treasury Notes 5.625% 12/31/02 32,590 33,674
United States Treasury Notes 5.50% 1/31/03 12,180 12,540
United States Treasury Notes 5.75% 8/15/03 6,120 6,391
United States Treasury Notes 7.50% 2/15/05 1,810 2,072
United States Treasury Notes 7% 7/15/06 12,540 14,278
United States Treasury Notes 6.125% 8/15/07 2,770 3,025
United States Treasury Notes 5.625% 5/15/08 640 683
-------
137,913
-------
Inflation-indexed Securities -- 9.3%
United States Treasury Inflation -
Indexed Security 3.375% 1/15/07 10,724 10,365E
United States Treasury Inflation -
Indexed Security 3.625% 1/15/08 10,963 10,755E
United States Treasury Inflation -
Indexed Security 3.625% 4/15/28 12,928 12,540E
-------
33,660
-------
Stripped Securities D -- 0.2%
United States Treasury Bonds 0% 5/15/99 600 590(2)
-------
Total U.S. Government and Agency Obligations (Identified Cost-- $170,366) 172,163
- ------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-backed Securities -- 32.3%
Fixed-rate Securities -- 28.7%
Agriculture Mortgage (Farmer Mac) 7.92% 1/25/12 1,461 1,580
Fannie Mae 11.50% 4/1/04 1,072 1,100
Fannie Mae 5.75% 6/15/05 8,000 8,260
Fannie Mae 7.23% 3/30/06 8,000 8,034
Fannie Mae 8.50% 6/1/10 to 8/1/11 2,250 2,339
Fannie Mae 6.50% 11/1/10 to 7/1/13 19,507 19,779
Fannie Mae 7% 1/1/13 to 8/1/13 1,707 1,744
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed-rate Securities -- Continued
Fannie Mae 9.50% 7/1/14 to 6/25/18 $ 1,402 $ 1,495
Fannie Mae 11% 12/1/15 567 617
Fannie Mae 9% 11/1/21 1,602 1,704
Fannie Mae 6.50% 4/1/24 22 22
Fannie Mae 7% 12/1/26 to 2/1/27 1,517 1,547
Fannie Mae 6% 11/1/27 10 10
Freddie Mac 10.75% 7/1/00 2 2
Freddie Mac 8.75% 2/1/01 to 10/1/01 335 344
Freddie Mac 9% 2/1/02 187 189
Freddie Mac 8.25% 2/1/08 284 294
Freddie Mac 8.50% 12/1/08 217 227
Freddie Mac 9.75% 11/1/09 206 219
Freddie Mac 9.75% 11/1/14 148 157
Freddie Mac 8.50% 1/1/17 594 618
Freddie Mac 9% 1/1/17 to 9/1/20 1,447 1,534
Freddie Mac 9.30% 4/15/19 2,541 2,695
Freddie Mac 5.50% 11/25/20 940 940
Freddie Mac 9% 1/1/21 839 895
Freddie Mac 8.50% 6/1/21 738 775
Government National Mortgage Association 9% 7/15/04 to 8/15/06 3,070 3,200
Government National Mortgage Association 7.50% 3/15/17 20 20
Government National Mortgage Association 9% 3/15/20 to 9/15/22 59 62
Government National Mortgage Association 7.50% 2/15/22 to 3/15/23 12,336 12,728
Government National Mortgage Association 7.50% 2/15/28 to 3/15/28 12,928 13,340
Government National Mortgage Association 6% 3/15/28 11,730 11,627A
Government National Mortgage Association 6.50% 3/15/28 3,988 4,028A
Government National Mortgage Association 7% 3/15/28 200 205A
Government National Mortgage Association 6.50% 7/15/28 1,000 1,010
- ------------------------------------------------------------------------------------------------
103,340
- ------------------------------------------------------------------------------------------------
Stripped Securities D -- 0.3%
Fannie Mae 152% 11/25/20 156 1,168(1)
- ------------------------------------------------------------------------------------------------
Indexed Security G -- 1.5%
Government National Mortgage Association 7% 12/20/21 1,952 1,983
Government National Mortgage Association 6.875% 6/20/22 3,219 3,276
- ------------------------------------------------------------------------------------------------
5,259
- ------------------------------------------------------------------------------------------------
Variable-rate Securities C -- 1.8%
Fannie Mae 7.687% 5/25/22 2,719 2,770
Government National Mortgage Association 7% 10/20/17 530 541
</TABLE>
9
<PAGE>
Statement of Net Assets - Continued
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio - Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable-rate Securities C -- Continued
Government National Mortgage Association 6.625% 7/20/22 to 8/20/22 $ 3,237 $ 3,287
- -----------------------------------------------------------------------------------------------------
6,598
- -----------------------------------------------------------------------------------------------------
Total U.S. Government Agency Mortgage-backed Securities (Identified Cost -- $115,440) 116,365
- -----------------------------------------------------------------------------------------------------
Asset-backed Securities -- 0.2%
AFC Home Equity Loan Trust 7.75% 12/15/06 850 868
- -----------------------------------------------------------------------------------------------------
Total Asset-backed Securities (Identified Cost -- $861) 868
- -----------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- 13.5%
Banking and Finance -- 3.4%
Donaldson Lufkin & Jenrette 6.50% 6/1/08 6,000 6,170
NationsBank Capital Trust III 5.898% 1/15/27 1,100 1,045
NationsBank Corporation 6.375% 5/15/05 5,000 5,197
- ----------------------------------------------------------------------------------------------------
12,412
- ----------------------------------------------------------------------------------------------------
Food and Beverage -- 0.6%
Philip Morris Companies Inc. 9.25% 2/15/00 2,000 2,083
- ----------------------------------------------------------------------------------------------------
Healthcare -- 1.5%
Columbia/HCA Healthcare Corporation 8.85% 1/1/07 5,000 5,262
- ----------------------------------------------------------------------------------------------------
Industrial -- 2.2%
Postal Square L.P. 6.50% 6/15/22 4,905 5,121
Raytheon Company 6% 12/15/10 3,020 2,997F
- ----------------------------------------------------------------------------------------------------
8,118
- ----------------------------------------------------------------------------------------------------
Media and Entertainment -- 2.3%
News America Holdings, Incorporated 7.43% 10/1/26 2,300 2,393
Time Warner, Inc. 7.25% 10/15/17 3,330 3,620
TCI Communications, Inc. 8% 8/1/05 2,000 2,252
- ----------------------------------------------------------------------------------------------------
8,265
- ----------------------------------------------------------------------------------------------------
Transportation -- 3.5%
Burlington Northern Santa Fe Corporation 6.375% 12/15/05 310 320
CSX Corporation 5.85% 12/1/03 4,500 4,488
CSX Corporation 6.25% 10/15/08 600 608
Norfolk Southern Corporation 7.35% 5/15/07 1,670 1,834
Union Pacific Corporation 5.78% 10/15/01 2,000 2,001
Union Pacific Corporation 7.25% 11/1/08 3,000 3,220
- ----------------------------------------------------------------------------------------------------
12,471
- ----------------------------------------------------------------------------------------------------
Total Corporate Bonds and Notes (Identified Cost -- $47,612) 48,611
- ----------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed Securities -- 1.7%
Fixed-rate Securities -- 0.7%
Metropolitan Asset Funding, Inc. 6.85% 8/20/05 $ 2,437 $ 2,427
- -------------------------------------------------------------------------------------------------
Variable-rate Securities C -- 1.0%
Resolution Trust Corporation 8.741% 3/25/21 2,034 2,052
Resolution Trust Corporation 7.782% 9/25/29 1,721 1,739
- -------------------------------------------------------------------------------------------------
3,791
- -------------------------------------------------------------------------------------------------
Total Mortgage-backed Securities (Identified Cost -- $6,251) 6,218
- -------------------------------------------------------------------------------------------------
Yankee Bonds B -- 3.4%
Cable & Wireless Communications 6.375% 3/6/03 3,850 3,852
Petrozuata Finance 7.63% 4/1/09 3,910 3,578F
YPF Sociedad Anonima 7% 10/26/02 2,565 2,553
YPF Sociedad Anonima 7.50% 10/26/02 2,136 2,146
- -------------------------------------------------------------------------------------------------
Total Yankee Bonds (Identified Cost -- $12,566) 12,129
- -------------------------------------------------------------------------------------------------
COMMON STOCK -- 1.2%
Blackrock 2001 Term Trust Inc. 489 shs 4,404
- -------------------------------------------------------------------------------------------------
Total Common Stock (Identified Cost -- $4,285) 4,404
- -------------------------------------------------------------------------------------------------
Short-term Investments -- 3.6%
U.S. Government Agency -- 0.3%
Fannie Mae 5.20% 2/17/99 $ 1,000 993J
- -------------------------------------------------------------------------------------------------
Repurchase Agreements -- 3.2%
Merrill Lynch Government Securities, Inc.
5.10%, dated 12/31/98, to be repurchased at
$11,596 on 1/4/99 (Collateral: $11,605
Fannie Mae Medium-term Notes, 5.56%
due 9/15/00, value $12,013) 11,589 11,589
Options Purchased H -- 0.1%
Eurodollar Future Call, January 99, Strike Price $95.00 12I 2
Eurodollar Future Call, April 99, Strike Price $94.50 16I 22
Eurodollar Future Call, April 99, Strike Price $95.25 127I 13
Eurodollar Future Call, June 99, Strike Price $94.50 117I 173
U.S. Treasury Bond Future Put, March 99, Strike Price $120 48I 8
- -------------------------------------------------------------------------------------------------
218
- -------------------------------------------------------------------------------------------------
Total Short-term Investments (Identified Cost -- $12,817) 12,800
- -------------------------------------------------------------------------------------------------
Total Investments-- 103.7% (Identified Cost-- $370,198) 373,558
Other Assets Less Liabilities-- (3.7%) (13,489)
- -------------------------------------------------------------------------------------------------
Net assets-- 100% $360,069
- -------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
<TABLE>
<CAPTION>
U.S. Government Intermediate-Term Portfolio--Continued
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets consisting of:
Accumulated paid-in-capital applicable to:
33,550 Primary Shares outstanding $355,790
698 Navigator Shares outstanding 7,132
Accumulated net realized loss on investments, options and futures (6,285)
Unrealized appreciation of investments, options and futures 3,432
- -------------------------------------------------------------------------------------------------
Net assets-- 100.0% $360,069
- -------------------------------------------------------------------------------------------------
Net asset value per share:
Primary Class $10.51
- -------------------------------------------------------------------------------------------------
Expiration Actual Appreciation/
Date Contracts (Depreciation)
- -------------------------------------------------------------------------------------------------------
Options Written H
U.S. Treasury Bond Future Put, Strike Price $124 February 99 106 $ 7
U.S. Treasury Bond Future Put, Strike Price $126 February 99 76 (33)
- -------------------------------------------------------------------------------------------------------
$ (26)
- -------------------------------------------------------------------------------------------------------
Futures Contracts Purchased H
U.S. Treasury Note Future March 99 13 $ (13)
- -------------------------------------------------------------------------------------------------------
Futures Contracts Written H
U.S. Treasury Note Future March 99 237 $ 111
- -------------------------------------------------------------------------------------------------------
</TABLE>
A When-issued security -- Security purchased on a delayed-delivery basis.
Final settlement amount and maturity date have not yet been announced.
B Yankee bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
C The coupon rates shown on variable-rate securities are the rates at December
31, 1998. These rates vary with the weighted average coupon of the
underlying loans.
D Stripped security -- Securities with interest-only or principal-only payment
streams as denoted by superscript 1 or 2, respectively.
E United States Treasury Inflation-indexed Security -- U.S. Treasury security
whose principal value is adjusted daily in accordance with changes in the
Consumer Price Index. Interest is calculated on the basis of the current
adjusted principal value.
F Rule 144a security -- A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified institutional buyers. These securities represent 6.08% of net
assets.
G Indexed security -- The rate of interest earned on these securities is tied
to the London Interbank Offered Rate (LIBOR), the Cost of Funds Index
(COFI), the One Year Treasury Constant Maturity Rate or a similar index. The
coupon rate shown is the rate at December 31, 1998.
H Options and futures are described in more detail in the notes to financial
statements.
I This represents the actual number of contracts.
J Collateral to cover futures contracts written.
See notes to financial statements.
12
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
December 31, 1998
(Amounts in Thousands)
Investment Grade Income Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds and Notes -- 20.3%
Banking and Finance -- 3.7%
Associates Corporation, North America 8.15% 8/1/09 $ 1,000 $ 1,188
Donaldson Lufkin & Jenrette 6.50% 6/1/08 500 514
General Motors Acceptance Corporation 0% 6/15/15 2,700 879A
IBJ Preferred Capital Company LLC 8.79% 12/29/49 1,560 1,368B
SB Treasury Company LLC 9.40% 12/29/49 1,790 1,763B
Socgen Real Estate Company LLC 7.64% 12/29/49 180 166B
Tokai Preferred Cap Company LLC 9.98% 12/29/49 480 405B
- -------------------------------------------------------------------------------------------------
6,283
- -------------------------------------------------------------------------------------------------
Food and Beverage -- 2.3%
J. Seagram & Sons 6.40% 12/15/03 700 692
J. Seagram & Sons 6.80% 12/15/08 500 498
J. Seagram & Sons 7.50% 12/15/18 1,390 1,398
RJR Nabisco, Inc. 8.75% 4/15/04 200 203
RJR Nabisco, Inc. 8.75% 7/15/07 1,110 1,119
- -------------------------------------------------------------------------------------------------
3,910
- -------------------------------------------------------------------------------------------------
Industrial -- 2.2%
Ford Motor Company 7.70% 5/15/97 1,000 1,154
Keystone Owner Trust 6.62% 11/25/08 529 529
Loews Corporation 7.625% 6/1/23 2,000 2,018
- -------------------------------------------------------------------------------------------------
3,701
- -------------------------------------------------------------------------------------------------
Media and Entertainment -- 3.4%
News America Holdings Incorporated 8.875% 4/26/23 500 606
News America Holdings Incorporated 8.25% 10/17/96 200 219
News America Incorporated 7.625% 11/30/28 1,000 1,070B
TCI Communications Incorporated 6.375% 5/1/03 240 248
TCI Communications Incorporated 9.65% 3/31/27 1,650 2,037
Walt Disney Company 5.62% 12/1/08 1,550 1,526
- -------------------------------------------------------------------------------------------------
5,706
- -------------------------------------------------------------------------------------------------
Gas and Pipeline Utilities -- 0.6%
Louis Dreyfus Natural Gas Corporation 9.25% 6/15/04 1,000 1,032
- -------------------------------------------------------------------------------------------------
Retail -- 1.2%
Kmart Corporation 7.95% 2/1/23 2,000 2,005
- -------------------------------------------------------------------------------------------------
Telecommunications -- 1.8%
Lucent Technologies Incorporated 5.50% 11/15/08 1,860 1,881
MCI WorldCom Inc. 9.375% 1/15/04 610 632
Sprint Capital Corporation 6.125% 11/15/08 480 491
- -------------------------------------------------------------------------------------------------
3,004
- -------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Statement of Net Assets - Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio - Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Utilities -- 5.2%
Cleveland Electric Ilumination Co. 7.88% 11/1/17 $ 850 $ 879B
Connecticut Light and Power Company 7.875% 6/1/01 1,750 1,809
Gulf States Utilities Corp. 8.25% 4/1/04 1,800 1,997
Niagara Mohawk Power Corporation 7.25% 10/1/02 630 637
Niagara Mohawk Power Corporation 7.75% 5/15/06 1,200 1,318
Niagara Mohawk Power Corporation 7.75% 10/1/08 530 579
North Atlantic Energy Corporation 9.05% 6/1/02 756 785
System Energy Resources, Inc. 7.43% 1/15/11 713 742
- -------------------------------------------------------------------------------------------------
8,746
- -------------------------------------------------------------------------------------------------
Total Corporate Bonds and Notes (Identified Cost -- $32,651) 34,387
- -------------------------------------------------------------------------------------------------
Asset-backed Securities - 1.0%
Advanta Home Equity Loan Trust 5.95% 3/25/09 588 579
Green Tree Financial Corp. 7.85% 7/15/04 1,032 1,045
- -------------------------------------------------------------------------------------------------
Total Asset-backed Securities (Identified Cost -- $1,613) 1,624
- -------------------------------------------------------------------------------------------------
Mortgage-backed Securities -- 3.5%
Fixed-rate Securities -- 3.0%
Asset Securitization Corporation 6.92% 2/14/29 1,139 1,185
Chevy Chase Home Loan Trust 7.15% 5/15/15 984 1,001
Nomura Asset Securities Corporation 8.15% 3/4/20 600 656
Nomura Asset Securities Corporation 7.12% 4/13/36 680 716
Oakdale Mall Trust 94-1 Class A 7.95% 5/1/06 1,000 1,036B
PSB Financial Corporation II 11.05% 12/1/15 436 472
- -------------------------------------------------------------------------------------------------
5,066
- -------------------------------------------------------------------------------------------------
Variable-rate Securities C -- 0.5%
Resolution Trust Corporation 6.837% 4/25/28 534 538B
Resolution Trust Corporation 8.078% 9/25/29 232 240
- -------------------------------------------------------------------------------------------------
778
- -------------------------------------------------------------------------------------------------
Total Mortgage-backed Securities (Identified Cost -- $5,708) 5,844
- -------------------------------------------------------------------------------------------------
U.S. Government and Agency Obligations -- 33.3%
Fixed-rate Securities -- 20.5%
United States Treasury Bonds 0% 2/15/23 1,500 403A
United States Treasury Bonds 6.375% 8/15/27 19,530 22,447
United States Treasury Notes 5.50% 2/29/00 1,500 1,514
United States Treasury Notes 5.75% 11/30/02 200 208
United States Treasury Notes 5.625% 12/31/02 600 620
United States Treasury Notes 5.50% 1/31/03 1,500 1,544
United States Treasury Notes 5.25% 8/15/03 7,550 7,742
United States Treasury Notes 4.75% 11/15/08 280 282
- -------------------------------------------------------------------------------------------------
34,760
- -------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Inflation-indexed Securities -- 12.8%
United States Treasury Inflation-
Indexed Security 3.375% 1/15/07 $10,931 $ 10,566G
United States Treasury Inflation-
Indexed Security 3.625% 1/15/08 5,238 5,138G
United States Treasury Inflation-
Indexed Security 3.625% 4/15/28 6,185 6,000G
21,704
- --------------------------------------------------------------------------------------------------
Total U.S. Government and Agency Obligations (Identified Cost-- $56,438) 56,464
- --------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-backed Securities -- 29.0%
Fixed-rate Securities -- 26.8%
Fannie Mae 5.75% 6/15/05 1,000 1,033
Fannie Mae 8% 4/25/06 610 630
Fannie Mae 8% 8/1/09 to 3/1/10 536 557
Fannie Mae 6% 9/1/25 to 11/1/27 950 940
Fannie Mae 6.50% 10/1/28 600 604E
Freddie Mac 8.75% 10/1/01 16 17
Freddie Mac 8.50% 2/1/04 149 152
Freddie Mac 8.75% 1/1/08 to 10/1/08 429 448
Freddie Mac 8.50% 11/1/09 229 240
Freddie Mac 6% 2/1/14 1,964 1,962
Freddie Mac 7% 8/1/24 to 5/1/26 8,775 8,947
Freddie Mac 8% 7/1/26 870 901
Freddie Mac 5.50% 8/1/26 1,100 1,087E
Freddie Mac 9% 9/1/26 600 627E
Government National Mortgage Association 9% 7/15/16 to 6/15/17 894 961
Government National Mortgage Association 7% 2/15/23 to 8/15/25 8,109 8,299
Government National Mortgage Association 7.50% 2/15/23 to 11/15/23 5,332 5,505
Government National Mortgage Association 6.875% 6/20/23 2,803 2,848
Government National Mortgage Association 8% 12/15/26 1,589 1,652
Government National Mortgage Association 7.50% 6/15/28 to 7/15/28 2,978 3,072
Government National Mortgage Association 7.50% 7/15/28 1,500 1,546E
Government National Mortgage Association 6% 9/15/28 3,450 3,420E
- --------------------------------------------------------------------------------------------------
45,448
- --------------------------------------------------------------------------------------------------
Variable-rate Securities C -- 2.2%
Freddie Mac 7.468% 9/1/24 604 617
Government National Mortgage Association 7% 10/20/22 412 418
Sallie Mae 5.352% 4/25/06 2,627 2,595
- --------------------------------------------------------------------------------------------------
3,630
- --------------------------------------------------------------------------------------------------
Total U.S. Government Agency Mortgage-backed Securities (Identified Cost -- $48,275) 49,078
- --------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Yankee Bonds F -- 8.2%
Fixed-rate Securities -- 6.6%
Korea Development Bank 6.75% 12/1/05 $ 1,020 $ 881
Manitoba Province, Canada 9.50% 9/15/18 750 1,043
Petroleos Mexicanos 8.85% 9/15/07 1,300 1,157B
Petroliam Nasional Berhad 7.125% 8/15/05 to 10/18/06 490 383B
Petroliam Nasional Berhad 7.625% 10/15/26 700 479B
Republic of Argentina 11% 12/4/05 1,600 1,602
Republic of Brazil 8% 4/15/14 2,820 1,668H
Russian Ministry of Finance 12.75% 6/24/28 370 118B
Tata Electric Company 8.50% 8/19/17 2,000 1,515B
United Mexican States 6.25% 12/31/19 300 234
United Mexican States 11.50% 5/15/26 1,020 1,095
YPF Sociedad Anonima 7.50% 10/26/02 917 922
- -------------------------------------------------------------------------------------------------
11,097
- -------------------------------------------------------------------------------------------------
Indexed Securities D -- 1.6%
Republic of Argentina 6.1875% 3/31/05 2,012 1,720
Republic of Brazil 6.125% 4/15/06 1,642 1,052
- -------------------------------------------------------------------------------------------------
2,772
- -------------------------------------------------------------------------------------------------
Total Yankee Bonds (Identified Cost -- $15,475) 13,869
- -------------------------------------------------------------------------------------------------
Common Stock -- 1.0%
Blackrock 2001 Term Trust Inc. 189 shs 1,698
- -------------------------------------------------------------------------------------------------
Total Common Stock (Identified Cost -- $1,653) 1,698
- -------------------------------------------------------------------------------------------------
Warrants -- N.M.
Republic of Argentina 1 wt 44
- -------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost-- $26) 44
- -------------------------------------------------------------------------------------------------
Short-term Investments -- 11.0%
U.S. Government Agency -- 0.6%
Fannie Mae 5.20% 2/17/99 $ 1,000 993I
- -------------------------------------------------------------------------------------------------
Repurchase Agreements-- 10.3%
Merrill Lynch Government Securities, Inc.
5.10%, dated 12/31/98, to be repurchased
at $17,541 on 1/4/99
(Collateral: $17,885 Federal Home Loan Bank
Notes, 4.66% due 10/15/01, value $18,061) 17,531 17,531
- -------------------------------------------------------------------------------------------------
Options Purchased K -- 0.1%
Eurodollar Future Call, January 99, Strike Price $95.00 76J 12
Eurodollar Future Call, April 99, Strike Price $94.50 89J 122
Eurodollar Future Call, April 99, Strike Price $95.25 110J 11
- -------------------------------------------------------------------------------------------------
145
- -------------------------------------------------------------------------------------------------
Total Short-term Investments (Identified Cost -- $18,697) 18,669
- -------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investments -- 107.3% (Identified Cost -- $180,536) $181,677
Other Assets Less Liabilities-- (7.3%) (12,293)
- -------------------------------------------------------------------------------------------------
Net assets consisting of:
Accumulated paid in capital applicable to:
16,080 Primary Shares outstanding $167,719
24 Navigator Shares outstanding 251
Undistributed net investment income 72
Undistributed net realized gain on investments, options and futures 430
Unrealized appreciation of investments, options and futures 912
- -------------------------------------------------------------------------------------------------
Net assets-- 100.0% $169,384
- -------------------------------------------------------------------------------------------------
Net asset value per share:
Primary Class $10.52
- -------------------------------------------------------------------------------------------------
Expiration Actual Appreciation/
Date Contracts (Depreciation)
- -------------------------------------------------------------------------------------------------------
Options Written K
U.S. Treasury Bond Future Put, Strike Price $124.00 February 99 37 $ 35
U.S. Treasury Bond Future Put, Strike Price $128.00 February 99 11 (5)
U.S. Treasury Note Future Call, Strike Price $114.50 February 99 17 9
- -------------------------------------------------------------------------------------------------------
$ 39
- -------------------------------------------------------------------------------------------------------
Futures Contracts Purchased K
U.S. Treasury Bond Futures March 99 91 $(131)
U.S. Treasury Note Futures March 99 170 (156)
- -------------------------------------------------------------------------------------------------------
$(287)
- -------------------------------------------------------------------------------------------------------
Futures Contracts Written K
U.S. Treasury Note Futures March 99 17 $ 19
- -------------------------------------------------------------------------------------------------------
</TABLE>
A Zero-coupon bond -- A bond with no periodic interest payments which is sold
at such a discount as to produce a current yield to maturity.
B Rule 144a security -- A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified institutional buyers. These securities represent 6.42% of net
assets.
C The coupon rates shown on variable-rate securities are the rates at December
31, 1998. These rates vary with the weighted average coupon of the
underlying loans.
D Indexed security -- The rate of interest earned on these securities is tied
to the London Interbank Offered Rate (LIBOR), the Cost of Funds Index
(COFI), the One Year Treasury Constant Maturity Rate or a similar index. The
coupon rate shown is the rate at December 31, 1998.
E When-issued security -- Security purchased on a delayed-delivery basis.
Final settlement amount and maturity date have not yet been announced.
F Yankee bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
G United States Treasury Inflation-indexed Security -- U.S. Treasury security
whose principal value is adjusted daily in accordance with changes in the
Consumer Price Index. Interest is calculated on the basis of the current
adjusted principal value.
H Front Loaded Interest Reduction Bond (FLIRB) -- Security pays a portion of
the coupon in cash and a portion is capitalized as an increase in par value.
I Collateral to cover futures contracts written.
J This represents the actual number of contracts.
K Options and Futures are described in more detail in the notes to financial
statements.
N.M. Not meaningful
See notes to financial statements.
17
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
December 31, 1998
(Amounts in Thousands)
High Yield Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS -- 57.8%
Cable and Media -- 7.8%
Advanced Radio Telecom Corporation 14% 2/15/07 $ 2,000 $ 1,440
Big Flowers Press Holdings Incorporated 8.625% 12/1/08 4,000 4,015
Brill Media Company, LLC 7.50% 12/15/07 3,000 2,730F
Chancellor Media Corporation 8% 11/1/08 4,000 4,080
Mentus Media Corporation 12% 2/1/03 8,434 8,181
Pegasus Communications Corporation 9.75% 12/1/06 2,000 2,008
Radio Unica Corporation 0% 8/1/06 9,000 4,871C,D,F
Sinclair Broadcasting Group Incorporated 9% 7/15/07 1,000 1,020
Source Media Inc. 12% 11/1/04 3,000 2,265G
Star Choice Communications, Inc. 13% 12/15/05 3,000 2,985
- -------------------------------------------------------------------------------------------------
33,595
- -------------------------------------------------------------------------------------------------
Chemicals -- 0.9%
Huntsman Corporation 9.50% 7/1/07 4,000 4,010
- -------------------------------------------------------------------------------------------------
Computer Software --2.6%
Diva Systems Corporation 0% 3/1/08 3,750 1,575F
PSINet Incorporated 10% 2/15/05 3,000 2,940
Verio Incorporated 10.375% 4/1/05 2,000 1,950
Verio Incorporated 13.50% 6/15/04 4,500 4,860
11,325
- -------------------------------------------------------------------------------------------------
Construction and Building Material -- 2.9%
American Architectural Products Corp. 11.75% 12/1/07 5,500 4,180
DeGeorge Home Alliance 12% 4/1/01 3,500 2,905
Fortress Group 13.75% 5/15/03 5,000 5,487
- -------------------------------------------------------------------------------------------------
12,572
- -------------------------------------------------------------------------------------------------
Energy -- 3.9%
Grant Geophysical Corporation 9.75% 2/15/08 2,500 1,600
Nuevo Energy Company 9.50% 4/15/06 3,000 2,925
Ocean Energy Incorporated 8.375% 7/1/08 4,000 3,740
Plains Resources Incorporated 10.25% 3/15/06 4,000 4,000
Queen Sand Resources Incorporated 12.50% 7/1/08 6,000 4,822
- -------------------------------------------------------------------------------------------------
17,087
- -------------------------------------------------------------------------------------------------
Entertainment & Leisure -- 3.4%
Booth Creek Ski Holdings Incorporated 12.50% 3/15/07 8,750 8,684
HMH Properties Incorporated 8.45% 12/1/08 6,000 6,023
- -------------------------------------------------------------------------------------------------
14,707
- -------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Services -- 1.0%
SB Treasury Company LLC 9.40% 12/29/49 $ 2,000 $ 1,969
Tokai Preferred Capital Company LLC 9.98% 12/29/49 2,500 2,131
- -------------------------------------------------------------------------------------------------
4,100
- -------------------------------------------------------------------------------------------------
Food Services -- 0.7%
International Fast Foods Corporation 11% 10/31/07 6,884 3,167C,D,G
- -------------------------------------------------------------------------------------------------
Gaming -- 1.3%
Harrah's Operating Incorporated 7.875% 12/15/05 4,500 4,523
Trump Hotels & Casino Resorts, Inc. 15.50% 6/15/05 1,000 1,040
- -------------------------------------------------------------------------------------------------
5,563
- -------------------------------------------------------------------------------------------------
Industrial -- 2.6%
AMSC Acquisition Incorporated 12.25% 4/1/08 2,000 1,280
Chatwins Group, Inc. 13% 5/1/03 3,000 3,015
Clark Material Handling Company 10.75% 11/15/06 1,500 1,545
Geneva Steel, Inc. 9.50% 1/15/04 2,500 437
Norcal Waste Systems, Inc. 13.50% 11/15/05 1,500 1,665
United Auto Group Incorporated 11% 7/15/07 4,000 3,520D
- -------------------------------------------------------------------------------------------------
11,462
- -------------------------------------------------------------------------------------------------
Manufacturing -- 3.4%
Decora Industries Incorporated 11% 5/1/05 3,000 2,865
FWT, Inc. 9.875% 11/15/07 2,300 932
Hayes Lemmerz International Incorporated 8.25% 12/15/08 4,000 4,000
HDA Parts Systems Incorporated 12% 8/1/05 2,500 2,262C,D
SBA Communications Corporation 0% 3/1/08 5,000 2,900F,G
Zilog, Inc. 9.50% 3/1/05 2,000 1,650
- -------------------------------------------------------------------------------------------------
14,609
- -------------------------------------------------------------------------------------------------
Retail -- 2.9%
Pacific Apparel, LLC 9.50% 3/31/08 4,043 2,031C,D,I
Pour le Bebe, Inc. 0% 6/30/99 3,461 3,167E,I
Relax the Back Corporation 11% 5/22/03 4,000 3,737C,D,I
Relax the Back Corporation 13% 5/22/03 4,000 3,665C,D,I
- -------------------------------------------------------------------------------------------------
12,600
- -------------------------------------------------------------------------------------------------
Retail Grocery -- 1.8%
Big V Supermarkets Incorporated 11% 2/15/04 4,500 4,410
Fred Meyer Incorporated 7.45% 3/1/08 3,000 3,237
- -------------------------------------------------------------------------------------------------
7,647
- -------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
<TABLE>
<CAPTION>
High Yield Portfolio -- Continued
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Services -- 9.2%
Allied Waste North America 7.875% 1/1/09 $ 3,000 $ 3,049D
American Standard Incorporated 7.625% 2/15/10 2,500 2,525
California Recreation, LLC 9% 7/8/07 3,670 1,412C,D,I
Cendant Corporation 7.75% 12/1/03 4,000 4,042
COMFORCE Corporation 12% 12/1/07 3,200 3,240
Convergent Communications Incorporated 13% 4/1/08 3,000 1,440
Hermes Europe Railtel B V 10.375% 1/15/09 4,000 4,060
Interamericas Communications 14% 10/27/07 2,500 1,300
Intermedia Communications, Inc. 0% 7/15/07 5,000 3,400D,F
MCMS Incorporated 9.75% 3/1/08 4,000 3,180
Splitrock Services Incorporated 11.75% 7/15/08 5,000 4,325
United Rentals Incorporated 9.25% 1/15/09 8,000 8,080
- -------------------------------------------------------------------------------------------------
40,053
- -------------------------------------------------------------------------------------------------
Shipping -- 1.6%
Global Ocean Carriers, Ltd. 10.25% 7/15/07 5,000 2,750
Golden Ocean Group, Ltd. 10% 8/31/01 9,750 2,730D
Statia Terminals International 11.75% 11/15/03 1,500 1,515
- -------------------------------------------------------------------------------------------------
6,995
- -------------------------------------------------------------------------------------------------
Telecommunications -- 8.1%
Covad Communications Group Incorporated 0% 3/15/08 5,750 3,162F
Dial Call Communications Incorporated 10.25% 12/15/05 2,000 1,970F
Level 3 Communications Incorporated 0% 12/1/08 3,000 1,755F
NTL Incorporated 0% 4/1/08 2,000 1,220D,F
NTL Incorporated 0% 10/1/08 4,500 2,841F
Phonetel Technologies, Inc. 12% 12/15/06 3,500 1,435H
Price Communications Cellular Holdings 11.25% 8/15/08 2,000 1,900C,D
Telewest PLC 0% 10/1/07 5,500 4,579F
Teligent Incorporated 0% 3/1/08 5,000 2,450F
Triton Communications, LLC 0% 5/1/08 5,000 2,250F
Winstar Communications, Inc. 0% 10/15/05 6,500 9,100D,F
Winstar Equipment II Corp. 12.50% 3/15/04 2,500 2,550D
- -------------------------------------------------------------------------------------------------
35,212
- -------------------------------------------------------------------------------------------------
Textiles -- 0.7%
Westpoint Stevens Incorporated 7.875% 6/15/05 3,000 3,045
- -------------------------------------------------------------------------------------------------
Transportation -- 3.0%
Aircraft Funding Units 12% 7/15/99 5,000 4,350
Aircraft Service International Group
Incorporated 11% 8/15/05 3,000 2,985C,D
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transportation -- Continued
Trans World Airlines, Inc. 12% 4/1/02 $ 1,500 $ 1,372
Trans World Airlines, Inc. 11.50% 12/15/04 4,000 3,435
Trans World Airlines, Inc. 11.375% 3/1/06 1,000 824
- -------------------------------------------------------------------------------------------------
12,966
- -------------------------------------------------------------------------------------------------
Total Corporate Bonds and Notes (Identified Cost -- $281,939) 250,715
- -------------------------------------------------------------------------------------------------
Yankee Bonds A -- 9.7%
Cable and Media -- 1.0%
Globo Communicacoes e Participacoes S.A. 10.625% 11/1/07 1,500 964
Multicanal Participacoes S.A. 12.625% 6/18/04 2,000 1,730
Tevecap S.A. 12.625% 11/26/04 3,000 1,710
- -------------------------------------------------------------------------------------------------
4,404
- -------------------------------------------------------------------------------------------------
Energy -- 0.2%
Northern Offshore ASA 10% 5/15/05 2,000 1,040C,D
- -------------------------------------------------------------------------------------------------
Entertainment & Leisure -- 1.8%
V2 Music Holdings PLC 14% 4/15/08 13,000 8,021
- -------------------------------------------------------------------------------------------------
Foreign Government -- 0.8%
Republic of South Korea 8.875% 4/15/08 3,500 3,578
- -------------------------------------------------------------------------------------------------
Industrial -- 0.6%
Cathay International Ltd. 13% 4/15/08 6,450 2,370C,D
- -------------------------------------------------------------------------------------------------
Real Estate -- 0.3%
Trizec Finance Corporation Ltd. 10.875% 10/15/05 1,340 1,407
- -------------------------------------------------------------------------------------------------
Retail Grocery -- 0.4%
Disco S.A. 9.875% 5/15/08 2,000 1,700
- -------------------------------------------------------------------------------------------------
Services -- 0.9%
ESATHoldings Ltd. 0% 2/1/07 6,000 3,960F
- -------------------------------------------------------------------------------------------------
Shipping -- 0.2%
Pegasus Shipping Hellas 11.875% 11/15/04 1,000 870
- -------------------------------------------------------------------------------------------------
Telecommunications -- 1.1%
Netia Holdings 10.25% 11/1/07 2,000 1,700
PTC International Finance 0% 7/1/07 1,700 1,156D,F
Tricom S.A. 11.375% 9/1/04 2,000 1,645
- -------------------------------------------------------------------------------------------------
4,501
- -------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
<TABLE>
<CAPTION>
High Yield Portfolio -- Continued
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transportation -- 2.4%
Canadian Airlines Corporation 10% 5/1/05 $ 4,000 $ 3,400C,D
Canadian Airlines Corporation 12.25% 8/1/06 9,000 6,840
- -------------------------------------------------------------------------------------------------
10,240
- -------------------------------------------------------------------------------------------------
Total Yankee Bonds (Identified Cost -- $53,921) 42,091
- -------------------------------------------------------------------------------------------------
Common Stocks -- 15.5%
Medical Supplies/Services -- 0.3%
Interferon Sciences, Inc. 96 shs 42B
Unigene Labs, Inc. 1,180 1,401B
1,443
Telecommunications -- 15.2%
Global Crossing Limited 1,555 65,757B
- -------------------------------------------------------------------------------------------------
Total Common Stocks (Identified Cost -- $3,994) 67,200
- -------------------------------------------------------------------------------------------------
Preferred Stock -- 9.0%
Cable and Media -- 3.1%
CSC Holdings Inc. 11.125% 1 56G
Paxson Communications Corporation (Voting)12.50% 3 3,252
Paxson Communications Corporation 13.25% 1 7,579
Source Media, Inc. 13.50% 110 1,072C,D,G
Spanish Broadcasting System 14.25% 1 1,307G
- -------------------------------------------------------------------------------------------------
13,266
- -------------------------------------------------------------------------------------------------
Gaming -- 0.1%
Fitzgeralds Gaming Corporation 15% 50 250D,G
- -------------------------------------------------------------------------------------------------
Industrial -- 2.7%
Clark Material Handling Company 12% 6 6,253
Geneva Steel Company 14% 10 175
High Voltage Engineering Corporation 14.25% 4 3,485C,D,G
Morris Material Handling 12% 2 1,835
- -------------------------------------------------------------------------------------------------
11,748
- -------------------------------------------------------------------------------------------------
Media -- N.M.%
Liberty Group Publishing 14.75% 4 92
- -------------------------------------------------------------------------------------------------
Retail -- 0.9%
Relax the Back Corporation 10% 1,702 4,000I
- -------------------------------------------------------------------------------------------------
Services -- 0.9%
Intermedia Communications, Inc. 0% 4 3,958C,D,F,G
- -------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telecommunications -- 1.3%
E. Spire Communications Incorporated 14.75% 4 shs $ 3,000C,D
Nextlink Communications, LLC 14% 51 2,711D,G
Viasystems Group Incorporated 10.75% 2 37 G
- --------------------------------------------------------------------------------------------------
5,748
- --------------------------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost -- $46,800) 39,062
- --------------------------------------------------------------------------------------------------
Warrants B -- 0.9%
Advanced Radio Telecom Corporation 30 wts 210
American Mobile Satellite Corporation 2 0
Apparel Ventures, Inc. 3 0
Brill Media Company LLC 86 3
Convergent Communications Incorporated 12 0
Covad Communication Group Incorporated 6 29
Diva Systems Corporation 12 0
Firstcom Corporation 88 0
Firstworld Communications Incorporated 4 0
Global Telesystems Group, Inc. 5 0
Globalstar Telecommunications 3 75
Golden Ocean Group Ltd. 7 0
MGC Communications Incorporated 4 0
Mentus Media Corporation 22 0
Pegasus Communications Corporation 4 10
Primus Telecommunications Group 3 0
Relax the Back Corporation 654 6
Source Media Inc. 56 542
Spanish Broadcasting System 14 2,160
Splitrock Services Incorporated 5 55
Star Choice Communications 93 162
Unigene Labs, Inc.-D 125 0
Unigene Labs, Inc.-C 125 0
V2 Music Holdings 7 0
Verio Incorporated 36 792
- --------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost-- $4,407) 4,044
- --------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
<TABLE>
<CAPTION>
Par/Shares Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements -- 6.0%
Lehman Brothers, Inc.
5.10%, dated 12/31/98, to be repurchased at $25,989 on 1/4/99
(Collateral: $25,000 Federal Home Loan Bank Notes, 7.01% due 1/29/18,
value $26,396; $835Freddie Mac Medium-term Notes, 5.90% due 12/02/05,
value $839)
(Identified Cost-- $25,974) $ 25,974 $25,974
- -------------------------------------------------------------------------------------------------
Total Investments -- 98.9% (Identified Cost -- $417,045) 429,086
Other Assets Less Liabilities-- 1.1% 4,861
- -------------------------------------------------------------------------------------------------
Net assets consisting of:
Accumulated paid-in capital applicable to:
29,477 Primary Shares outstanding $460,356
4 Navigator Shares outstanding 91
Undistributed net investment income 59
Accumulated net realized loss on investments (38,600)
Unrealized appreciation of investments 12,041
Net assets-- 100.0% $433,947
- -------------------------------------------------------------------------------------------------
Net asset value per share:
Primary Class $14.72
- -------------------------------------------------------------------------------------------------
</TABLE>
A Yankee bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
B Non-income producing
C Private placement
D Rule 144a security -- A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified institutional buyers. These securities represent 17.06% of net
assets.
E Zero-coupon security -- A bond or preferred stock with no periodic interest
payments or dividends which is sold at such a discount as to produce a
current yield to maturity.
F Stepped coupon security -- A bond or preferred stock which amortizes to par
by a specified date at which time it begins to accrue interest or pay
dividends.
G Payment-in-kind ("PIK") security -- A bond or preferred stock in which
interest during the initial years is paid in additional PIK bonds or
preferred stock rather than in cash.
H Indexed security -- The rate of interest on this type of security is tied to
the London Interbank Offer Rate (LIBOR). The coupon rate shown is the rate
as of December 31, 1998.
I Illiquid security valued at fair value under procedures adopted by the Board
of Directors.
N.M. Not meaningful
See notes to financial statements.
24
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
December 31, 1998
(Amounts in Thousands)
U.S. Government Money Market Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government and Agency Obligations -- 83.9%
Fannie Mae 4.77 to 8.70% 1/7/99 to 8/20/99 $114,250 $113,270
Federal Farm Credit Bank 4.85 to 5.85% 2/1/99 to 10/6/99 21,000 20,879
Federal Home Loan Bank 4.75 to 7.51% 1/13/99 to 10/26/99 97,000 96,728
Freddie Mac 4.64 to 7.125% 1/6/99 to 11/5/99 73,000 72,839
Sallie Mae 4.75 to 5.40% 2/10/99 to 4/1/99 20,000 19,940
Tennessee Valley Authority 8.375% 10/1/99 3,000 3,080
- ------------------------------------------------------------------------------------------------
Total U.S. Government and Agency Obligations (Identified Cost-- $326,736) 326,736
- ------------------------------------------------------------------------------------------------
Repurchase Agreements -- 15.1%
Lehman Brothers, Inc.
5.10%, dated 12/31/98, to be repurchased at $57,887 on 1/4/99
(Collateral: $25,425 Federal Home Loan Bank Medium-term Notes,
6.645% due 7/7/08,value $25,955; $32,429 Fannie Mae Medium-term
Notes, 6.21% due 11/7/07, value $33,056) 57,854 57,854
State Street Bank & Trust Company
3.50%, dated 12/31/98, to be repurchased at $1,000 on 1/4/99
(Collateral: $670 U.S. Treasury Notes, 10.375% - 13.25%
due 8/15/03 to 8/15/14, value $1,082) 1,000 1,000
- ------------------------------------------------------------------------------------------------
Total Repurchase Agreements (Identified Cost--$58,854) 58,854
- ------------------------------------------------------------------------------------------------
Total Investments, at amortized cost and value -- 99.0% 385,590
Other Assets Less Liabilities-- 1.0% 3,876
- ------------------------------------------------------------------------------------------------
Net assets applicable to 389,465 shares outstanding -- 100.0% $389,466
- ------------------------------------------------------------------------------------------------
Net asset value per share $1.00
- ------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
25
<PAGE>
Statements of Operations
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended 12/31/98
- -----------------------------------------------------------------------------------------------------------
U.S. Government Investment Grade High U.S. Government
Intermediate-Term Income Yield Money Market
Portfolio Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income:
Interest $20,968 $9,444 $38,965 $19,552
Dividends 78 112 5,272 --
- -----------------------------------------------------------------------------------------------------------
Total income 21,046 9,556 44,237 19,552
- -----------------------------------------------------------------------------------------------------------
Expenses:
Management fee 1,836 858 3,036 1,785
Distribution and service fees 1,629 714 2,329 357
Transfer agent and shareholder servicing expense 164 100 239 259
Audit and legal fees 66 41 59 49
Custodian fee 154 129 151 82
Directors' fees 12 6 12 12
Registration fees 35 27 92 73
Reports to shareholders 39 35 54 44
Other expenses 28 19 120 16
- -----------------------------------------------------------------------------------------------------------
3,963 1,929 6,092 2,677
Less fees waived (668) (501) -- --
- -----------------------------------------------------------------------------------------------------------
Total expenses, net of waivers 3,295 1,428 6,092 2,677
- -----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 17,751 8,128 38,145 16,875
- -----------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments:
Realized gain (loss) on:
Investments 4,293 2,619 (38,643) (3)
Options 920 691 -- --
Futures (499) 495 -- --
- -----------------------------------------------------------------------------------------------------------
4,714 3,805 (38,643) (3)
- -----------------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
of investments, options and futures (1,083) (2,304) (13,340) --
- -----------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 3,631 1,501 (51,983) (3)
- -----------------------------------------------------------------------------------------------------------
CHANGE IN NET ASSETS RESULTING
FROM OPERATIONS $21,382 $9,629 $(13,838) $16,872
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
U.S. Government Investment Grade High U.S. Government
Intermediate-Term Income Yield Money Market
Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- ---------
Years Ended Years Ended Years Ended Years Ended
----------- ----------- ----------- -----------
12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Change in Net Assets:
Net investment income $ 17,751 $ 17,534 $ 8,128 $ 6,380 $ 38,145 $ 26,378 $ 16,875 $ 15,916
Net realized gain (loss)
on investments,
options and futures 4,714 (465) 3,805 1,468 (38,643) 4,465 (3) 23
Change in unrealized
appreciation (depreciation)
of investments,
options and futures (1,083) 2,985 (2,304) 2,295 (13,340) 14,202 -- --
- --------------------------------------------------------------------------------------------------------------------
Change in net assets
resulting from operations 21,382 20,054 9,629 10,143 (13,838) 45,045 16,872 15,939
Distributions to shareholders:
From net investment income:
Primary Class (16,959) (16,688) (8,112) (6,363) (38,214) (26,212) (16,875) (15,916)
Navigator Class (462) (460) (16) (17) (10) -- -- --
From net realized gain
on investments -- -- (2,851) -- (359) (1,943) -- --
In excess of net investment
income:
Primary Class (323) (376) -- -- -- -- -- --
Navigator Class (7) (10) -- -- -- -- -- --
Change in net assets from
Fund share transactions:
Primary Class 48,243 4,674 48,378 26,418 104,134 131,145 64,773 (537)
Navigator Class (671) (256) 4 -- 91 -- -- --
- --------------------------------------------------------------------------------------------------------------------
Change in net assets 51,203 6,938 47,032 30,181 51,804 148,035 64,770 (514)
Net Assets:
Beginning of year 308,866 301,928 122,352 92,171 382,143 234,108 324,696 325,210
- --------------------------------------------------------------------------------------------------------------------
End of year $ 360,069 $308,866 $ 169,384 $122,352 $433,947 $382,143 $389,466 $324,696
- --------------------------------------------------------------------------------------------------------------------
Undistributed net
investment income $ -- $ -- $ 72 $ 72 $ 59 $ 198 $ -- $ --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
27
<PAGE>
Financial Highlights
Legg Mason Income Trust, Inc.
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net assets
and other supplemental data. This information has been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
Investment Operations Distributions
-------------------------------------- -----------------------------------------------------
Net Realized
and Unrealized From
Net Asset Net Gain (Loss) on Total From In Excess Net
Value, Investment Investments, From Net of Net Realized
Beginning Income Options Investment Investment Investment Gain on Total
of Year (Loss) and Futures Operations Income Income Investments Distributions
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Intermediate-Term Portfolio
--Primary Class
Years Ended Dec. 31,
1998 $10.40 $ .56A $ .11 $ .67 $ (.55) $ (.01) $ -- $ (.56)
1997 10.31 .60A .09 .69 (.59) (.01) -- (.60)
1996 10.47 .61A (.16) .45 (.60) (.01) -- (.61)
1995 9.72 .57A .75 1.32 (.57) -- -- (.57)
1994 10.43 .51A (.71) (.20) (.51) -- -- (.51)
Investment Grade Income Portfolio
--Primary Class
Years Ended Dec. 31,
1998 $10.59 $ .60B $ .12 $ .72 $ (.60) $ -- $ (.19) $ (.79)
1997 10.22 .65B .37 1.02 (.65) -- -- (.65)
1996 10.44 .64B (.22) .42 (.64) -- -- (.64)
1995 9.27 .65B 1.17 1.82 (.65) -- -- (.65)
1994 10.40 .60B (1.09) (.49) (.60) -- (.04) (.64)
High Yield Portfolio
--Primary Class
Years Ended Dec. 31,
1998 $16.29 $ 1.32 $ (1.56) $ (.24) $(1.32) $ -- $ (.01) $(1.33)
1997 15.37 1.35 .99 2.34 (1.34) -- (.08) (1.42)
1996 14.62 1.33 .76 2.09 (1.34) -- -- (1.34)
1995 13.57 1.29 1.05 2.34 (1.29) -- -- (1.29)
1994C 15.00 1.02 (1.44) (.42) (1.01) -- -- (1.01)
U.S. Government Money Market Portfolio
Years Ended Dec. 31,
1998 $1.00 $ .05 $ (Nil) $ .05 $ (.05) $ -- $ -- $ (.05)
1997 1.00 .05 Nil .05 (.05) -- -- (.05)
1996 1.00 .05 Nil .05 (.05) -- -- (.05)
1995 1.00 .05 Nil .05 (.05) -- -- (.05)
1994 1.00 .04 (Nil) .04 (.04) -- -- (.04)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Ratios/Supplemental Data
-----------------------------------------------------------------------------
Net
Net Asset Investment Net Assets,
Value, Expenses Income (Loss) Portfolio End of
End of Total to Average to Average Turnover Year
Year Return Net Assets Net Assets Rate (in thousands)
- ----------------------------------------------------------------------------
$10.51 6.56% 1.00%A 5.30%A 356% $352,729
10.40 6.95% 1.00%A 5.84%A2 252% 300,952
10.31 4.47% .98%A 5.91%A 354% 293,846
10.47 13.88% .93%A 5.59%A 290% 231,886
9.72 (1.93)% .90%A 5.11%A 316% 231,255
$10.52 6.99% 1.00%B 5.68%B 279% $169,129
10.59 10.31% 1.00%B 6.28%B 259% 122,100
10.22 4.31% .97%B 6.42%B 383% 91,928
10.44 20.14% .88%B 6.49%B 221% 85,633
9.27 (4.82)% .85%B 6.09%B 200% 66,196
$14.72 (1.79)% 1.30% 8.17% 107% $433,947
16.29 15.86% 1.30% 8.60% 116% 382,143
15.37 14.91% 1.35% 9.05% 77% 234,108
14.62 18.01% 1.47% 9.28% 47% 108,417
13.57 (2.90)%D 1.60%E 8.40%E 67%E 53,424
$ 1.00 4.83% .75% 4.73% -- $389,466
1.00 4.86% .75% 4.77% -- 324,696
1.00 4.81% .66% 4.71% -- 325,210
1.00 5.31% .67% 5.17% -- 316,646
1.00 3.66% .69% 3.66% -- 214,576
- ----------------------------------------------------------------------------
A Net of fees waived by LMFA for expenses in excess of voluntary expense
limitations of: 0.9% until April 30, 1995; 0.95% until April 30, 1996; and
1.00% until May 1, 1999. If no fees had been waived by LMFA, the annualized
ratio of expenses to average daily net assets for each period would have
been as follows: 1998, 1.20%; 1997, 1.21%; 1996, 1.26%; 1995, 1.24%; and
1994, 1.19%.
B Net of fees waived by LMFA for expenses in excess of voluntary expense
limitations of: 0.85% until April 30, 1995; 0.9% until April 30, 1996; and
1.00% until May 1, 1999 . If no fees had been waived by LMFA, the annualized
ratio of expenses to average daily net assets for each period would have
been as follows: 1998, 1.35%; 1997, 1.39%; 1996, 1.43%; 1995, 1.38%; and
1994, 1.40%.
C For the period February 1, 1994 (commencement of operations) to December 31,
1994.
D Not annualized
E Annualized
See notes to financial statements.
28
<PAGE>
Notes to Financial Statements
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Income Trust, Inc. ("Corporation"), consisting of the
U.S. Government Intermediate-Term Portfolio ("Government Intermediate"),
the Investment Grade Income Portfolio ("Investment Grade"), the High Yield
Portfolio ("High Yield"), and the U.S. Government Money Market Portfolio
("Government Money Market") (each a "Fund"), is registered under the
Investment Company Act of 1940, as amended, as an open-end, diversified
investment company.
The Government Intermediate, Investment Grade and High Yield Portfolios
consist of two classes of shares: Primary Class, offered since 1987, and
Navigator Class, offered to certain institutional investors since December
1, 1994, December 1, 1995, and May 5, 1998, respectively. The income and
expenses of each of these Funds are allocated proportionately to the two
classes of shares based on daily net assets, except for Rule 12b-1
distribution fees, which are charged only on Primary Class shares, and
transfer agent and shareholder servicing expenses, which are determined
separately for each class.
Security Valuation
Securities owned by Government Intermediate, Investment Grade and High
Yield for which market quotations are readily available are valued at
current market value. In determining fair value, the Board and management
consider all relevant qualitative and quantitative information available.
These factors are subject to change over time and are reviewed
periodically. The values assigned to fair value investments are based on
available information and do not necessarily represent amounts that might
ultimately be realized, since such amounts depend on future developments
inherent in long-term investments. Further, because of the inherent
uncertainty of valuation, those estimated values may differ significantly
from the values that would have been used had a ready market of the
investments existed, and the differences could be material. At December 31,
1998, $18,012 or 4.2% of the High Yield Portfolio's net assets, were valued
by management in accordance with the procedures adopted by the Board of
Directors. Securities with remaining maturities of 60 days or less are
valued at amortized cost by each Fund.
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 Fund's adviser to be the primary
market. The Fund will value its foreign securities in U.S. dollars on the
basis of the then-prevailing exchange rates.
The investments of Government Money Market are valued on the basis of
amortized cost so long as the Fund's Board of Directors determines that
this method constitutes fair value. Under this method, securities are
valued at cost when purchased and, thereafter, a constant proportionate
accretion or amortization of any discount or premium is recorded until
maturity of the security.
Investment Income and Distributions to Shareholders
Interest income and expenses are recorded on the accrual basis. Bond
premiums are amortized for financial reporting and federal income tax
purposes. Bond discounts, other than original issue and zero-coupon bonds,
are not amortized. Dividend income and distributions to shareholders are
allocated at the class level and are recorded on the ex-dividend date.
Dividends from net investment income will be declared daily and paid
monthly for each Fund except High Yield which will declare and pay
dividends monthly. Net capital gain distributions, which are calculated at
a Fund level, are declared and paid after the end of the tax year in which
the gain is realized. Distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles; accordingly, periodic reclassifications are made within the
Fund's capital accounts to reflect income and gains available for
distribution under income tax regulations. At December 31, 1998, accrued
dividends payable were as follows: Government Intermediate, $79; Investment
Grade, $33; High Yield, $231; and Government Money Market, $21. There were
no capital gain distributions payable at December 31, 1998.
29
<PAGE>
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc.
- --------------------------------------------------------------------------------
Security Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis for both financial reporting and federal income tax purposes. At
December 31, 1998, receivables for securities sold and payables for
securities purchased for each Fund were as follows:
Receivable for Payable for
Securities Sold Securities Purchased
- ----------------------------------------------------------------------
Government Intermediate $5,088 $21,906
Investment Grade 3,675 22,449
High Yield -- 3,840
Government Money Market -- 14,827
Federal Income Taxes
No provision for federal income or excise taxes is required since each
Fund intends to continue to qualify as a regulated investment company and
distribute all of its taxable income to its shareholders.
Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
2. Investment Transactions:
For the year ended December 31, 1998, investment transactions
(excluding short-term investments) were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds from Sales
---------------------------------- ---------------------------------
U.S. Gov't. Securities Other U.S. Gov't. Securities Other
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Intermediate $1,115,936 $ 116,952 $1,108,202 $ 58,357
Investment Grade 381,379 48,594 345,592 43,600
High Yield -- 564,616 -- 468,781
</TABLE>
At December 31, 1998, cost, gross unrealized appreciation and gross
unrealized depreciation based on the cost of securities for federal income
tax purposes for each Fund were as follows:
<TABLE>
<CAPTION>
Net Appreciation/
Cost Appreciation (Depreciation) (Depreciation)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Intermediate $370,407 $ 5,696 $ (2,545) $ 3,151
Investment Grade 180,663 3,884 (2,870) 1,014
High Yield 417,424 72,713 (61,051) 11,662
Government Money Market 385,590 -- -- --
</TABLE>
Unused capital loss carryforwards for federal income tax purposes
at December 31, 1998 were as follows: Government Intermediate, $4,790 which
expires 2002 and $699 which expires 2003; High Yield, $10,825 which expires
2006 and Government Money Market, $4 which expires 2006. Investment Grade
has no capital loss carryforwards.
30
<PAGE>
- --------------------------------------------------------------------------------
3. Repurchase Agreements:
All repurchase agreements are fully collateralized by obligations issued
by the U.S. government or its agencies and such collateral is in the
possession of the Funds' custodian. The value of such collateral includes
accrued interest. Risks arise from the possible delay in recovery or
potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially. The Funds' investment adviser,
acting under the supervision of the Board of Directors, reviews the value
of the collateral and the creditworthiness of those banks and dealers with
which the Funds enter into repurchase agreements to evaluate potential
risks.
4. Options and Futures:
As part of their investment programs, Government Intermediate and
Investment Grade may utilize options and futures. Options may be written
(sold) or purchased by these Funds. When a Fund purchases a put or call
option, the premium paid is recorded as an investment and its value is
marked-to-market daily. When a Fund writes a call or put option, an amount
equal to the premium received by the Fund is recorded as a liability and
its value is marked-to-market daily.
When options, whether written or purchased, expire, are exercised or
are closed (by entering into a closing purchase or sale transaction), the
Fund realizes a gain or loss as described in the chart below.
<TABLE>
<CAPTION>
<S> <C>
PURCHASED OPTION: IMPACT ON THE FUND:
The option expires Realize a loss in the amount of the cost of the option.
- ----------------------------------------------------------------------------------------------------------------------------
The option is closed through a Realize a gain or loss depending on whether the proceeds from the closing sale
closing sale transaction transaction are greater or less than the cost of the option.
- ----------------------------------------------------------------------------------------------------------------------------
The Fund exercises a call option The cost of the security purchased through the exercise of the option will be
increased by the premium originally paid to purchase the option.
- ----------------------------------------------------------------------------------------------------------------------------
The Fund exercises a put option Realize a gain or loss from the sale of the underlying security. The proceeds of that
sale will be reduced by the premium originally paid to purchase the put option.
============================================================================================================================
WRITTEN OPTION: IMPACT ON THE FUND:
The option expires Realize a gain equal to the amount of the premium received.
- ----------------------------------------------------------------------------------------------------------------------------
The option is closed through a Realize a gain or loss without regard to any unrealized gain or loss on the
closing purchase transaction underlying security and eliminate the option liability. The Fund will realize a
loss in this transaction if the cost of the closing purchase exceeds the premium
received when the option was written.
- ----------------------------------------------------------------------------------------------------------------------------
A written call option is exercised Realize a gain or loss from the sale of the underlying security. The proceeds of
by the option purchaser that sale will be increased by the premium originally received when the option
was written.
- ----------------------------------------------------------------------------------------------------------------------------
A written put option is exercised The amount of the premium originally received will reduce the cost of the
by the option purchaser security that the Fund purchased when the option was exercised.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The risk associated with purchasing options is limited to the premium
originally paid. Options written by a Fund involve, to varying degrees,
risk of loss in excess of the option value reflected in the Statement of
Net Assets. The risk in writing a covered call option is that a Fund may
forego the opportunity of profit if the market price of the underlying
security increases and the option is exercised. The risk in writing a put
option is that a Fund may incur a loss if the market price of the
underlying security decreases and the option is exercised. In addition,
there is the risk a Fund may not be able to enter into a closing
transaction because of an illiquid secondary market or, for
over-the-counter options, because of the counterparty's inability to
perform.
31
<PAGE>
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc.
- --------------------------------------------------------------------------------
Call and put options written by the Funds and related premiums received
during the period were as follows:
Calls Puts
- --------------------------------------------------------------------------------
Actual Actual
Government Intermediate Contracts Premiums Contracts Premiums
- --------------------------------------------------------------------------------
Options outstanding, December 31,
1997 60 $ 7 -- $ --
Options written 1,544 746 1,702 800
Options closed (1,454) (703) (1,233) (625)
Options expired (150) (50) (229) (23)
Options exercised -- -- (58) (25)
- --------------------------------------------------------------------------------
Options outstanding, December 31,
1998 -- $ -- 182 $ 127
- --------------------------------------------------------------------------------
Calls Puts
- --------------------------------------------------------------------------------
Actual Actual
Investment Grade Contracts Premiums Contracts Premiums
- --------------------------------------------------------------------------------
Options outstanding, December 31,
1997 -- $ -- 22 $ 19
Options written 2,551 494 654 476
Options closed (654) (389) (477) (352)
Options expired (1,820) (55) (125) (60)
Options exercised (60) (34) (26) (7)
- --------------------------------------------------------------------------------
Options outstanding, December 31,
1998 17 $ 16 48 $ 76
- --------------------------------------------------------------------------------
Upon entering into a futures contract, the Fund is required to deposit
with the broker an amount of cash or cash equivalents equal to a certain
percentage of the contract amount. This is known as the "initial margin."
Subsequent payments ("variation margin") are made or received by the Fund
each day, depending on the daily fluctuation in the value of the contract.
The daily changes in contract value are recorded as unrealized gains or
losses and the Fund recognizes a realized gain or loss when the contract is
closed. Futures contracts are valued daily at the settlement price
established by the board of trade or exchange on which they are traded.
The Funds enter into futures contracts as a hedge against anticipated
changes in interest rates. There are several risks in connection with the
use of futures contracts as a hedging device. Futures contracts involve, to
varying degrees, risk of loss in excess of the amounts reflected in the
financial statements. The change in the value of futures contracts
primarily corresponds with the value of their underlying instruments, which
may not correlate with the change in the value of the hedged instruments.
In addition, there is the risk that a Fund may not be able to enter into a
closing transaction because of an illiquid secondary market.
The open futures positions and related appreciation or depreciation at
December 31, 1998 are listed at the end of U.S. Government Intermediate's
and Investment Grade's respective "Statement of Net Assets."
5. Financial Instruments:
Forward Currency Exchange Contracts
As part of its investment program, High Yield may utilize forward
currency exchange contracts. The nature and risks of these financial
instruments and the reasons for using them are set forth more fully in the
Corporation's Prospectus and Statement of Additional Information.
Forward foreign currency contracts are marked-to-market daily using
foreign currency exchange rates supplied by an independent pricing service.
The change in a contract's market value is recorded by High Yield as an
unrealized gain or loss. When the contract is closed or delivery is taken,
the Fund records a realized gain or loss equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed.
The use of forward foreign currency contracts does not eliminate
fluctuations in the underlying prices of the Fund's securities, but it does
establish a rate of exchange that can be achieved in the future. These
forward foreign currency contracts involve market risk in excess of amounts
reflected in the Financial Statements. Although forward foreign currency
contracts used for hedging purposes limit the risk of loss due to a decline
in the value of the hedged currency, they also limit any potential gain
that might result should the value of the currency increase. In addition,
the
32
<PAGE>
- --------------------------------------------------------------------------------
Fund could be exposed to risks if the counterparties to the contracts
are unable to meet the terms of their contracts. The Fund's adviser will
enter into forward foreign currency contracts only with parties approved by
the Board of Directors because there is a risk of loss to the Fund if the
counterparties do not complete the transaction.
At December 31, 1998, there were no open forward currency exchange
contracts in High Yield.
6. Transactions with Affiliates:
Each Fund has a management agreement with Legg Mason Fund Adviser, Inc.
("LMFA"). Pursuant to their respective agreements, LMFA provides the Funds
with management and administrative services for which each Fund pays a fee,
computed daily and payable monthly, at annual rates of each Fund's average
daily net assets.
LMFA has agreed to waive its fees to the extent each Fund's expenses
(exclusive of taxes, interest, brokerage and extraordinary expenses) exceed
during any month certain annual rates. The following chart shows the annual
rate of management fees; expense limits and their expiration dates; total
management fees waived; and management fees payable for each Fund:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998 AT DECEMBER 31, 1998
----------------------------------------
MANAGEMENT MANAGEMENT
MANAGEMENT EXPENSE EXPENSE LIMITATION FEES FEE
FUND FEE LIMITATION EXPIRATION DATE WAIVED PAYABLE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government Intermediate 0.55% 1.00% May 1, 1999, or until net $668 $106
assets reach $400 million
Investment Grade 0.60% 1.00% May 1, 1999, or until net 501 35
assets reach $150 million
High Yield 0.65% None -- -- 240
Government Money Market 0.50% None -- -- 163
</TABLE>
Western Asset Management Company ("Adviser") serves as investment
adviser to the Funds. The Adviser is responsible for the actual investment
activity of each Fund. LMFA pays the Adviser a fee, computed daily and
payable monthly, at an annual rate of: 40% of the management fee received
by LMFA for Investment Grade; 77% for High Yield; and 30% for Government
Money Market. For U.S. Government Intermediate, LMFA pays the Adviser a
fee, computed daily and payable monthly, of 0.20% of its average daily net
assets, not to exceed the fee received by LMFA.
Legg Mason Wood Walker, Incorporated ("Legg Mason"), a member of the
New York Stock Exchange, serves as distributor of the Funds. Legg Mason
receives an annual distribution fee and an annual service fee based on each
Fund's Primary Class' average daily net assets, computed daily and payable
monthly, as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-------------------------
DISTRIBUTION SERVICE DISTRIBUTION AND SERVICE
FEE FEE FEES PAYABLE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Intermediate 0.25% 0.25% $149
Investment Grade 0.25% 0.25% 70
High Yield 0.25% 0.25% 185
Government Money Market -- 0.10% 33
</TABLE>
Legg Mason has agreed that it will not request payment of more than
0.10% annually from Government Money Market until April 30, 1999. If this
voluntary limit is not extended beyond April 30, 1999, the Fund may pay
Legg Mason a 12b-1 service fee in an amount not to exceed an annual rate of
0.20% of its average daily net assets.
Legg Mason also has an agreement with the Funds' transfer agent to
assist it with some of its duties. For this assistance, Legg Mason was paid
the following amounts by the transfer agent for the year ended December 31,
1998: Government Intermediate, $41; Investment Grade, $34; High Yield, $65
and Government Money Market, $84.
LMFA, the Adviser and Legg Mason are corporate affiliates and are
wholly owned subsidiaries of Legg Mason, Inc.
33
<PAGE>
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc.
- --------------------------------------------------------------------------------
7. Line of Credit:
The Funds, except for Government Money Market, but including certain
other Legg Mason Funds, participate in a $150 million line of credit
("Credit Agreement") to be utilized as an emergency source of cash in the
event of unanticipated, large redemption requests by shareholders. Pursuant
to the Credit Agreement, each participating Fund is liable only for
principal and interest payments related to borrowings made by that Fund.
Borrowings under the line of credit bear interest at prevailing short-term
interest rates. For the year ended December 31, 1998, the Funds, other than
High Yield, had no borrowings under the line of credit. High Yield utilized
$15,000 during the month of September. The loan remained outstanding for
fourteen days and had an average daily balance of $13,571. The weighted
average rate of interest on the loan was 6.03% resulting in interest
expense of $32.
8. Fund Share Transactions:
At December 31, 1998, there were 1,000,000 shares authorized at $.001
par value for all portfolios of the Corporation. Share transactions were as
follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
------------------ ------------------ -------------------- ------------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government Intermediate
--Primary Class
Year Ended December 31, 1998 15,614 $163,688 1,455 $15,230 (12,470) $ (130,675) 4,599 $ 48,243
Year Ended December 31, 1997 7,011 72,238 1,458 15,020 (8,029) (82,584) 440 4,674
Investment Grade
--Primary Class
Year Ended December 31, 1998 7,596 80,707 948 10,055 (3,991) (42,384) 4,554 48,378
Year Ended December 31, 1997 4,258 44,149 547 5,662 (2,271) (23,393) 2,534 26,418
High Yield
--Primary Class
Year Ended December 31, 1998 26,232 427,977 1,936 30,859 (22,148) (354,702) 6,020 104,134
Year Ended December 31, 1997 15,869 253,216 1,464 23,407 (9,107) (145,478) 8,226 131,145
Government Money Market
Year Ended December 31, 1998 1,438,767 1,438,767 16,128 16,128 (1,390,122) (1,390,122) 64,773 64,773
Year Ended December 31, 1997 1,269,493 1,269,493 15,246 15,246 (1,285,276) (1,285,276) (537) (537)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of Legg Mason Income Trust, Inc.:
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
U.S. Government Intermediate-Term Portfolio, Investment Grade Income Portfolio,
High Yield Portfolio, and U.S. Government Money Market Portfolio (comprising
Legg Mason Income Trust, Inc., hereafter referred to as the "Funds") at December
31, 1998, and the results of each of their operations, the changes in each of
their net assets and the financial highlights for each of the fiscal periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998, by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 26, 1999
35
<PAGE>
Annual Report
December 31, 1998
Legg Mason
Income Trust, Inc.
U.S. Government Intermediate
Investment Grade
High Yield
Navigator Class
(LEGG MASON FUNDS LOGO)
HOW TO INVEST(SM)
<PAGE>
To Our Shareholders,
We are pleased to provide you with Legg Mason Income Trust's annual report,
combining reports for the Navigator Classes of Legg Mason U.S. Government
Intermediate-Term Portfolio, Investment Grade Income Portfolio and High Yield
Portfolio.
The following table summarizes key statistics for Navigator Shares of each
portfolio, as of December 31, 1998:
Net Asset Value
SEC Yield* Average Life Per Share
---------- ------------ ---------
Government Intermediate 5.13% 7.6 years $10.51
Investment Grade 5.59% 12.9 years $10.52
High Yield 8.31% 5.8 years $14.67
In calendar 1998, total returns for the Navigator Class of shares of the
Government Intermediate and Investment Grade Portfolios were 7.16% and 7.57%,
respectively. Since its inception on May 5, 1998, the High Yield Navigator Class
of Shares has had a return of -6.91%. (Total return measures investment
performance in terms of appreciation or depreciation in a portfolio's net asset
value per share, plus dividends and any capital gain distributions). Beginning
on the following page, portfolio managers responsible for the Income Trust
discuss recent results and the investment outlook. The Funds' total returns in
various periods since their inceptions are shown on subsequent pages of the
report.
For each of our Funds, historical performance is not indicative of future
results, and the principal value of our holdings will continue to fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
The Board of Directors recently approved a long-term capital gain of $0.096
and $0.012 per share to Navigator Class shareholders of Investment Grade and
High Yield, respectively, and a short-term capital gain of $0.09 per share to
Navigator Class shareholders of Investment Grade, payable on December 10, 1998
to shareholders of record on December 9, 1998.
During 1998, attention increasingly focused on the Year 2000 issue. As you may
know, the Year 2000 issue is a computer programming problem that affects the
ability of computers to correctly process dates of January 1, 2000, and beyond.
The Funds' Year 2000 project is well underway, and is designed to ensure that
the Year 2000 date change will have no adverse impact on our ability to service
our shareholders. The Funds are committed to taking those steps necessary to
protect Fund investors including efforts to determine that the Year 2000 problem
will not affect such vital service functions as shareholder transaction
processing and recordkeeping. In addition, we are continuously monitoring the
Year 2000 efforts of our vendors, and will perform tests with our critical
vendors throughout 1999. Although the Funds are taking steps to ensure that all
of their systems will function properly before, during, and after the Year 2000,
the Funds could be adversely affected by computer related problems associated
with the Year 2000. Contingency plans to ensure that functions critical to the
Funds' operations will continue without interruption are under development. We
are on target to complete this important project and look forward to continuing
extensive testing (including industry-wide testing) with our industry peers,
regulators and vendors throughout 1999.
Sincerely,
/s/ John F. Curley, Jr.
John F. Curley, Jr.
Chairman
February 9, 1999
- ----------
*SEC yields reported for the U.S. Government Intermediate, Investment Grade and
High Yield Portfolios are for the 30 days ended December 31, 1998.
<PAGE>
Portfolio Managers' Comments
Legg Mason Income Trust, Inc.
Market Overview
Fixed-income markets were roiled in the second half of 1998 by both the
devaluation of the Russian ruble and Russia's decision to default on some of its
loan obligations. Leveraged hedge funds were severely impacted, and their
unwinding operations contributed to produce a severe shortage of liquidity and
flight to quality. By the time the dust settled, non-Treasury sectors had
experienced the sharpest and most dramatic widening of spreads in the history of
the bond market. Following the Federal Reserve's move to ease monetary policy
three times in quick succession, some calm was restored to the markets by year
end, particularly in the corporate and emerging market sectors. Long-term
Treasury yields fell about 50 basis points(1) for the period, with shorter-term
yields falling almost 90 basis points, thus continuing the rally that began in
the first half of the year. Overall, the US economy remained remarkably healthy
despite the ongoing global turmoil, and inflation remained low and stable.
U.S. Government Intermediate and Investment Grade Portfolios
Given that both Funds traditionally emphasize non-Treasury sectors, it is not
surprising that performance suffered during the six months ended December 31,
1998, as spreads widened. On the positive side, both Funds were well-positioned
for declining interest rates and we had shifted their emphasis to benefit from a
steepening of the yield curve early in the period; both of these strategies were
rewarded. Both Funds were also insulated from the full brunt of wider spreads by
our relatively cautious approach to overweighting both corporate and
mortgage-backed securities. We had generally upgraded the quality of domestic
credits, preferring to take higher levels of credit risk only in the emerging
market area where spreads appeared much more attractive. Even so, our
overweighting to credit risk was modest compared to previous periods, and we
emphasized shorter maturity sovereign debt from major emerging market countries
to minimize systemic risk. In the mortgage sector our overweighting was more
aggressive, but also balanced by a heavy emphasis on current and discount
coupons in order to minimize prepayment risk in a falling interest rate
environment, and this strategy was rewarded with better relative performance. As
before, both Funds were negatively impacted by a moderate exposure to
inflation-indexed bonds, since real interest rates rose even as nominal rates
fell.
For the six months ended December 31, Government Intermediate produced total
returns of 3.3% and 3.5% for the Primary and Navigator classes, respectively,
versus the Salomon Brothers Medium-Term Treasury/Government-Sponsored Index
return of 4.9%. Investment Grade generated total returns of 3.6% and 3.9% for
the Primary and Navigator classes, respectively, versus the Salomon Brothers
Broad Investment-Grade Index return of 4.6%.
High Yield Portfolio
Due to the significant widening of credit spreads discussed above, the high
yield sector of the bond market sharply underperformed the investment grade
sector during the period. The High Yield Portfolio in particular suffered from
several adverse developments. To begin with, its sensitivity to lower quality
credits was somewhat higher than that of the high yield market as a whole,
despite our earlier efforts to upgrade its quality. Consequently, it
underperformed as quality spreads widened
- ----------------
(1) 100 basis points = 1%
3
<PAGE>
Portfolio Manager's Comments--Continued
dramatically. An overweighting to the telecommunications sector also detracted
from performance, as this proved to be the most volatile and illiquid sector. A
fairly significant level of Fund redemptions during the height of the Russian
deleveraging crisis proved to be the most difficult factor to deal with, as a
severe lack of liquidity at the time forced the Fund to incur substantial
transaction costs when selling securities to raise cash. Furthermore, our
efforts to anticipate redemptions resulted in holding cash during the latter
part of the period when prices recovered unexpectedly.
For the six months ended December 31, High Yield posted a total return of
- -9.6% for the Primary class and -9.3% for the Navigator class, versus the Lehman
Brothers High Yield Index return of -2.8%.
Market Commentary and Outlook
Following numerous moves by the world's central banks to reduce interest rates
in the past several months, the key question today is whether monetary policy
has eased sufficiently to ensure trouble-free economic growth going forward. The
willingness of central banks to relax monetary policy in the face of serious
threats to global financial stability is encouraging, and has clearly reduced
the risk of a serious financial meltdown, deflation or recession. However, in
our view the moves to date do not appear to have eliminated extant deflationary
risks, and they do not rule out the risk of a slowdown in the US economy.
Despite three Fed moves to lower nominal rates, the yield curve is still
relatively flat, commodity prices are uniformly weak, and credit spreads remain
at distressed levels--all classic signs of tight money. The tight money squeeze
has been felt the most by emerging market and Asian economies, being heavily
dependent on commodity exports and indebted in dollars. The current level of
emerging market spreads is punishingly high, bringing inexorable pressure on
those economies to slow. This has already caused a slowdown in US exports, which
in turn helps explain the sharp drop in US manufacturing activity.
Since tight money means firms on balance cannot pass along higher labor costs
to consumers, an earnings squeeze is the inevitable result. This explains a
noticeable slowdown in the growth of payroll employment over the course of the
past year, just as a significant erosion of corporate profitability and cash
flows is working to slow the pace of capital investment. Moreover, tighter
fiscal policy in the US is slowly eroding the underpinnings of consumer demand.
Prosperity has pushed consumers into higher marginal tax brackets, leading to a
significant increase in tax burdens and a decline in discretionary income. We
believe these factors will combine to result in a noticeable slowdown in GDP
growth in the next 6-9 months, while at the same time inflation pressures remain
very low, nonexistent or even negative.
Strategy
Whether this slowdown is mild or recessionary is the critical question, as is
the degree to which deflation persists. If accompanied by Fed ease, mild
deflation and a mild slowdown likely would be fertile ground for all financial
assets. If the Fed is slow to ease, however, a more pronounced deflation or
recession is not out of the question. Since either scenario would imply lower
yields, with short-term rates likely leading the way, we will continue to be
long our duration benchmarks, with a bulleted exposure to the yield curve in
anticipation of lower short-term rates over time.
4
<PAGE>
Although the corporate bond market has largely discounted the possibility of a
recession in 1999, the reality of one would likely cause credit spreads to widen
further as Treasury yields fell. Though we are cognizant of these risks, we
think the inherent dynamism of the US economy and the Fed's willingness and
ability to ease policy make a doomsday scenario unlikely. Consequently, we are
overweight corporate bonds--in light of their historically attractive
spreads--but cautiously so, keeping average quality higher than usual in light
of our view that the economy is likely to slow and deflation risks remain high.
In the emerging markets area, where spreads appear to more than compensate for
risk given the impressive structural reforms that many countries have
undertaken, our caution takes the form of an emphasis on shorter maturities and
major sovereign issuers to minimize systemic risk. We believe mortgage-backed
securities are still attractive since they offer very attractive spreads and
very high quality. Moreover, we believe that mortgage spreads will narrow as
interest rate volatility subsides and the yield curve steepens. Finally, we also
remain overweight in inflation-adjusted bonds, in the belief that their yields
are very attractive at current levels and should decline -- producing price
gains -- as the Fed eventually engineers a reduction in real interest rates.
Western Asset Management Company
February 9, 1999
5
<PAGE>
Performance Information
Legg Mason Income Trust, Inc.
Performance Comparison of a $10,000 Investment as of December 31, 1998
The returns shown on these pages are based on historical results and are
not intended to indicate future performance. Total return measures
investment performance in terms of appreciation or depreciation in a Fund's
net asset value per share, plus dividends and any capital gain
distributions. It assumes that dividends and distributions were reinvested
at the time they were paid. The investment return and principal value of an
investment in each of these Funds will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Average annual returns tend to smooth out variations in a Fund's return, so
they differ from actual year-to-year results. No adjustment has been made
for any income taxes payable by shareholders.
The following graphs compare each Fund's total returns against that of
the most closely matched broad-based securities market index. The lines
illustrate the cumulative total return of an initial $50,000 investment for
the periods indicated. The line for each Fund represents the total return
after deducting all Fund investment management and other administrative
expenses and the transaction costs of buying and selling securities. The
line representing the securities market index does not include any
transaction costs associated with buying and selling securities in the
index or other administrative expenses.
The Government Intermediate, Investment Grade and High Yield Portfolios
each have two classes of shares: Primary Class and Navigator Class.
Information about the Primary Class, offered to retail investors, is
contained in a separate report to its shareholders.
U.S. Government Intermediate-Term Portfolio -- Navigator Class
- -------------------------------------------------------
Cumulative Average Annual
Total Return Total Return
- -------------------------------------------------------
One Year + 7.16% +7.16%
Life of Class+ +39.18 +8.43
- -------------------------------------------------------
+ Inception Date -- December 1, 1994
- -------------------------------------------------------
(A graph appears here with the following plot points.)
<TABLE>
<CAPTION>
12/1/94 12/94 6/95 12/95 6/96 12/96 6/97 12/97 6/98 12/98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Intermediate--
Navigator Class 50,000 50,251 54,831 57,512 57,633 60,439 62,041 64,940 67,224 69,590
Salomon Brothers Medium-Term
Treasury/Government-
Sponsored Index(1) 50,000 50,184 54,706 57,402 57,397 59,739 61,397 64,391 66,591 69,867
</TABLE>
(1) The Salomon Brothers Medium-Term Treasury/Government-Sponsored Index is an
all-inclusive universe of institutionally traded U.S. Treasury and
Government-Sponsored securities. The Index is market-capitalization weighted and
includes fixed-rate bonds with maturities between 1 and 10 years.
6
<PAGE>
Investment Grade Income Portfolio -- Navigator Class
- ---------------------------------------------------------
Cumulative Average Annual
Total Return Total Return
- ---------------------------------------------------------
One Year + 7.57% +7.57%
Life of Class+ +26.96 +8.17
- ---------------------------------------------------------
+ Inception Date -- December 1, 1995
(A graph appears here with the following plot points.)
<TABLE>
<CAPTION>
12/1/95 12/95 6/95 12/96 6/97 12/97 6/98 12/98
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Grade--
Navigator Class 50,000 50,711 50,211 53,188 55,226 59,012 61,110 63,480
Salomon Brothers Broad
Investment-Grade -
Bond Index(2) 50,000 50,690 50,050 52,525 54,135 57,585 59,870 62,605
</TABLE>
(2) The Salomon Brothers Broad Investment-Grade Bond Index is a market-weighted
index that contains approximately 4,700 individually priced investment grade
bonds rated BBB or better. The Index includes U.S. Treasury/agency issues,
mortgage pass-through securities and corporate issues.
High Yield Portfolio -- Navigator Class
- ---------------------------------------------
Cumulative Average Annual
Total Return Total Return
- ---------------------------------------------
Life of Class+ -6.91% N/A
- ---------------------------------------------
+ Inception Date -- May 5, 1998
(A graph appears here with the following plot points.)
<TABLE>
<CAPTION>
5/5/98 6/98 9/98 12/98
<S> <C> <C> <C> <C>
High Yield--
Navigator Class 50,000 51,321 46,509 46,545
Lehman High Yield Index (3) 50,000 50,355 48,065 48,960
</TABLE>
(3) The Lehman Brothers High Yield Index is comprised of approximately 760
publicly traded below-investment grade U.S. corporate bonds. Index Returns are
for the periods beginning April 30, 1998.
7
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
December 31, 1998
(Amounts in Thousands)
U.S. Government Intermediate-Term Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government and Agency Obligations -- 47.8%
Fixed-rate Securities -- 38.3%
Federal Farm Credit Bank 6.66% 12/26/06 $ 5,850 $ 6,347
Freddie Mac 6% 12/15/09 9,000 8,986
Overseas Private Investment Corporation 6.93% 12/15/08 15,000 16,372
Private Export Funding Corporation 5.82% 6/15/03 5,000 5,048
Private Export Funding Corporation 7.03% 10/31/03 4,000 4,329
Private Export Funding Corporation 5.31% 11/15/03 15,000 15,302(F)
Tennessee Valley Authority 6.235% 7/15/45 5,000 5,239
United States Treasury Bonds 6.375% 8/15/27 1,320 1,517
United States Treasury Notes 6.25% 1/31/02 2,020 2,110
United States Treasury Notes 5.625% 12/31/02 32,590 33,674
United States Treasury Notes 5.50% 1/31/03 12,180 12,540
United States Treasury Notes 5.75% 8/15/03 6,120 6,391
United States Treasury Notes 7.50% 2/15/05 1,810 2,072
United States Treasury Notes 7% 7/15/06 12,540 14,278
United States Treasury Notes 6.125% 8/15/07 2,770 3,025
United States Treasury Notes 5.625% 5/15/08 640 683
--------
137,913
--------
Inflation-indexed Securities -- 9.3%
United States Treasury Inflation -
Indexed Security 3.375% 1/15/07 10,724 10,365(E)
United States Treasury Inflation -
Indexed Security 3.625% 1/15/08 10,963 10,755(E)
United States Treasury Inflation -
Indexed Security 3.625% 4/15/28 12,928 12,540(E)
--------
33,660
--------
Stripped Securities(D)-- 0.2%
United States Treasury Bonds 0% 5/15/99 600 590(2)
--------
Total U.S. Government and Agency Obligations (Identified Cost-- $170,366) 172,163
- ------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-backed Securities -- 32.3%
Fixed-rate Securities -- 28.7%
Agriculture Mortgage (Farmer Mac) 7.92% 1/25/12 1,461 1,580
Fannie Mae 11.50% 4/1/04 1,072 1,100
Fannie Mae 5.75% 6/15/05 8,000 8,260
Fannie Mae 7.23% 3/30/06 8,000 8,034
Fannie Mae 8.50% 6/1/10 to 8/1/11 2,250 2,339
Fannie Mae 6.50% 11/1/10 to 7/1/13 19,507 19,779
Fannie Mae 7% 1/1/13 to 8/1/13 1,707 1,744
8
<PAGE>
Rate Maturity Date Par/Shares Value
- ---------------------------------------------------------------------------------------------------
Fixed-rate Securities -- Continued
Fannie Mae 9.50% 7/1/14 to 6/25/18 $ 1,402 $ 1,495
Fannie Mae 11% 12/1/15 567 617
Fannie Mae 9% 11/1/21 1,602 1,704
Fannie Mae 6.50% 4/1/24 22 22
Fannie Mae 7% 12/1/26 to 2/1/27 1,517 1,547
Fannie Mae 6% 11/1/27 10 10
Freddie Mac 10.75% 7/1/00 2 2
Freddie Mac 8.75% 2/1/01 to 10/1/01 335 344
Freddie Mac 9% 2/1/02 187 189
Freddie Mac 8.25% 2/1/08 284 294
Freddie Mac 8.50% 12/1/08 217 227
Freddie Mac 9.75% 11/1/09 206 219
Freddie Mac 9.75% 11/1/14 148 157
Freddie Mac 8.50% 1/1/17 594 618
Freddie Mac 9% 1/1/17 to 9/1/20 1,447 1,534
Freddie Mac 9.30% 4/15/19 2,541 2,695
Freddie Mac 5.50% 11/25/20 940 940
Freddie Mac 9% 1/1/21 839 895
Freddie Mac 8.50% 6/1/21 738 775
Government National Mortgage Association 9% 7/15/04 to 8/15/06 3,070 3,200
Government National Mortgage Association 7.50% 3/15/17 20 20
Government National Mortgage Association 9% 3/15/20 to 9/15/22 59 62
Government National Mortgage Association 7.50% 2/15/22 to 3/15/23 12,336 12,728
Government National Mortgage Association 7.50% 2/15/28 to 3/15/28 12,928 13,340
Government National Mortgage Association 6% 3/15/28 11,730 11,627(A)
Government National Mortgage Association 6.50% 3/15/28 3,988 4,028(A)
Government National Mortgage Association 7% 3/15/28 200 205(A)
Government National Mortgage Association 6.50% 7/15/28 1,000 1,010
--------
103,340
--------
Stripped Securities(D) -- 0.3%
Fannie Mae 152% 11/25/20 156 1,168(1)
--------
Indexed Security(G) -- 1.5%
Government National Mortgage Association 7% 12/20/21 1,952 1,983
Government National Mortgage Association 6.875% 6/20/22 3,219 3,276
--------
5,259
--------
Variable-rate Securities(C) -- 1.8%
Fannie Mae 7.687% 5/25/22 2,719 2,770
Government National Mortgage Association 7% 10/20/17 530 541
9
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio--Continued
Rate Maturity Date Par/Shares Value
- -------------------------------------------------------------------------------------------------
Variable-rate Securities(C) -- Continued
Government National Mortgage Association 6.625% 7/20/22 to 8/20/22 $ 3,237 $ 3,287
--------
6,598
--------
Total U.S. Government Agency Mortgage-backed Securities
(Identified Cost -- $115,440) 116,365
- ------------------------------------------------------------------------------------------------
Asset-backed Securities -- 0.2%
AFC Home Equity Loan Trust 7.75% 12/15/06 850 868
--------
Total Asset-backed Securities (Identified Cost -- $861) 868
- ------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- 13.5%
Banking and Finance -- 3.4%
Donaldson Lufkin & Jenrette 6.50% 6/1/08 6,000 6,170
NationsBank Capital Trust III 5.898% 1/15/27 1,100 1,045
NationsBank Corporation 6.375% 5/15/05 5,000 5,197
--------
12,412
--------
Food and Beverage -- 0.6%
Philip Morris Companies Inc. 9.25% 2/15/00 2,000 2,083
--------
Healthcare -- 1.5%
Columbia/HCA Healthcare Corporation 8.85% 1/1/07 5,000 5,262
--------
Industrial -- 2.2%
Postal Square L.P. 6.50% 6/15/22 4,905 5,121
Raytheon Company 6% 12/15/10 3,020 2,997(F)
--------
8,118
--------
Media and Entertainment -- 2.3%
News America Holdings, Incorporated 7.43% 10/1/26 2,300 2,393
Time Warner, Inc. 7.25% 10/15/17 3,330 3,620
TCI Communications, Inc. 8% 8/1/05 2,000 2,252
--------
8,265
--------
Transportation -- 3.5%
Burlington Northern Santa Fe Corporation 6.375% 12/15/05 310 320
CSX Corporation 5.85% 12/1/03 4,500 4,488
CSX Corporation 6.25% 10/15/08 600 608
Norfolk Southern Corporation 7.35% 5/15/07 1,670 1,834
Union Pacific Corporation 5.78% 10/15/01 2,000 2,001
Union Pacific Corporation 7.25% 11/1/08 3,000 3,220
--------
12,471
--------
Total Corporate Bonds and Notes (Identified Cost -- $47,612) 48,611
- ------------------------------------------------------------------------------------------------
10
<PAGE>
Rate Maturity Date Par/Shares Value
- --------------------------------------------------------------------------------------------------
Mortgage-backed Securities -- 1.7%
Fixed-rate Securities -- 0.7%
Metropolitan Asset Funding, Inc. 6.85% 8/20/05 $ 2,437 $ 2,427
--------
Variable-rate Securities(C) -- 1.0%
Resolution Trust Corporation 8.741% 3/25/21 2,034 2,052
Resolution Trust Corporation 7.782% 9/25/29 1,721 1,739
--------
3,791
--------
Total Mortgage-backed Securities (Identified Cost -- $6,251) 6,218
- -------------------------------------------------------------------------------------------------
Yankee Bonds(B) -- 3.4%
Cable & Wireless Communications 6.375% 3/6/03 3,850 3,852
Petrozuata Finance 7.63% 4/1/09 3,910 3,578(F)
YPF Sociedad Anonima 7% 10/26/02 2,565 2,553
YPF Sociedad Anonima 7.50% 10/26/02 2,136 2,146
--------
Total Yankee Bonds (Identified Cost -- $12,566) 12,129
- -------------------------------------------------------------------------------------------------
Common Stock -- 1.2%
Blackrock 2001 Term Trust Inc. 489 shs 4,404
--------
Total Common Stock (Identified Cost -- $4,285) 4,404
- ------------------------------------------------------------------------------------------------
Short-term Investments -- 3.6%
U.S. Government Agency -- 0.3%
Fannie Mae 5.20% 2/17/99 $ 1,000 993(J)
--------
Repurchase Agreements -- 3.2%
Merrill Lynch Government Securities, Inc.
5.10%, dated 12/31/98, to be repurchased at
$11,596 on 1/4/99 (Collateral: $11,605
Fannie Mae Medium-term Notes, 5.56%
due 9/15/00, value $12,013) 11,589 11,589
Options Purchased(H) -- 0.1%
Eurodollar Future Call, January 99, Strike Price $95.00 12(I) 2
Eurodollar Future Call, April 99, Strike Price $94.50 16(I) 22
Eurodollar Future Call, April 99, Strike Price $95.25 127(I) 13
Eurodollar Future Call, June 99, Strike Price $94.50 117(I) 173
U.S. Treasury Bond Future Put, March 99, Strike Price $120 48(I) 8
--------
218
--------
Total Short-term Investments (Identified Cost -- $12,817) 12,800
- ------------------------------------------------------------------------------------------------
Total Investments-- 103.7% (Identified Cost-- $370,198) 373,558
Other Assets Less Liabilities-- (3.7%) (13,489)
--------
Net assets-- 100% $360,069
- -------------------------------------------------------------------------------------------------
11
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
U.S. Government Intermediate-Term Portfolio--Continued
- -------------------------------------------------------------------------------------------------------
Net assets consisting of:
Accumulated paid-in-capital applicable to:
33,550 Primary Shares outstanding $355,790
698 Navigator Shares outstanding 7,132
Accumulated net realized loss on investments, options and futures (6,285)
Unrealized appreciation of investments, options and futures 3,432
----------
Net assets-- 100.0% $360,069
--------
Net asset value per share:
Navigator Class $10.51
--------
Expiration Actual Appreciation/
Date Contracts (Depreciation)
- -------------------------------------------------------------------------------------------------------
Options Written(H)
U.S. Treasury Bond Future Put, Strike Price $124 February 99 106 $ 7
U.S. Treasury Bond Future Put, Strike Price $126 February 99 76 (33)
-------
$ (26)
-------
Futures Contracts Purchased(H)
U.S. Treasury Note Future March 99 13 $ (13)
-------
Futures Contracts Written(H)
U.S. Treasury Note Future March 99 237 $ 111
-------
- ----------------------------------------------------------------------------------------------------
</TABLE>
(A) When-issued security -- Security purchased on a delayed-delivery basis.
Final settlement amount and maturity date have not yet been announced.
(B) Yankee bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
(C) The coupon rates shown on variable-rate securities are the rates at
December 31, 1998. These rates vary with the weighted average coupon of the
underlying loans.
(D) Stripped security -- Securities with interest-only or principal-only
payment streams as denoted by superscript 1 or 2, respectively.
(E) United States Treasury Inflation-indexed Security -- U.S. Treasury security
whose principal value is adjusted daily in accordance with changes in the
Consumer Price Index. Interest is calculated on the basis of the current
adjusted principal value.
(F) Rule 144a security -- A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified institutional buyers. These securities represent 6.08% of net
assets.
(G) Indexed security -- The rate of interest earned on these securities is tied
to the London Interbank Offered Rate (LIBOR), the Cost of Funds Index
(COFI), the One Year Treasury Constant Maturity Rate or a similar index.
The coupon rate shown is the rate at December 31, 1998.
(H) Options and futures are described in more detail in the notes to financial
statements.
(I) This represents the actual number of contracts.
(J) Collateral to cover futures contracts written.
See notes to financial statements.
12
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
December 31, 1998
(Amounts in Thousands)
Investment Grade Income Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Corporate Bonds and Notes -- 20.3%
Banking and Finance -- 3.7%
Associates Corporation, North America 8.15% 8/1/09 $ 1,000 $ 1,188
Donaldson Lufkin & Jenrette 6.50% 6/1/08 500 514
General Motors Acceptance Corporation 0% 6/15/15 2,700 879(A)
IBJ Preferred Capital Company LLC 8.79% 12/29/49 1,560 1,368(B)
SB Treasury Company LLC 9.40% 12/29/49 1,790 1,763(B)
Socgen Real Estate Company LLC 7.64% 12/29/49 180 166(B)
Tokai Preferred Cap Company LLC 9.98% 12/29/49 480 405(B)
-------
6,283
-------
Food and Beverage -- 2.3%
J. Seagram & Sons 6.40% 12/15/03 700 692
J. Seagram & Sons 6.80% 12/15/08 500 498
J. Seagram & Sons 7.50% 12/15/18 1,390 1,398
RJR Nabisco, Inc. 8.75% 4/15/04 200 203
RJR Nabisco, Inc. 8.75% 7/15/07 1,110 1,119
-------
3,910
-------
Industrial -- 2.2%
Ford Motor Company 7.70% 5/15/97 1,000 1,154
Keystone Owner Trust 6.62% 11/25/08 529 529
Loews Corporation 7.625% 6/1/23 2,000 2,018
-------
3,701
-------
Media and Entertainment -- 3.4%
News America Holdings Incorporated 8.875% 4/26/23 500 606
News America Holdings Incorporated 8.25% 10/17/96 200 219
News America Incorporated 7.625% 11/30/28 1,000 1,070(B)
TCI Communications Incorporated 6.375% 5/1/03 240 248
TCI Communications Incorporated 9.65% 3/31/27 1,650 2,037
Walt Disney Company 5.62% 12/1/08 1,550 1,526
-------
5,706
-------
Gas and Pipeline Utilities -- 0.6%
Louis Dreyfus Natural Gas Corporation 9.25% 6/15/04 1,000 1,032
-------
Retail -- 1.2%
Kmart Corporation 7.95% 2/1/23 2,000 2,005
-------
Telecommunications -- 1.8%
Lucent Technologies Incorporated 5.50% 11/15/08 1,860 1,881
MCI WorldCom Inc. 9.375% 1/15/04 610 632
Sprint Capital Corporation 6.125% 11/15/08 480 491
-------
3,004
- -------------------------------------------------------------------------------------------------
13
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio - Continued
Rate Maturity Date Par/Shares Value
- -------------------------------------------------------------------------------------------------
Utilities -- 5.1%
Cleveland Electric Ilumination Co. 7.88% 11/1/17 $ 850 $ 879(B)
Connecticut Light and Power Company 7.875% 6/1/01 1,750 1,809
Gulf States Utilities Corp. 8.25% 4/1/04 1,800 1,997
Niagara Mohawk Power Corporation 7.25% 10/1/02 630 637
Niagara Mohawk Power Corporation 7.75% 5/15/06 1,200 1,318
Niagara Mohawk Power Corporation 7.75% 10/1/08 530 579
North Atlantic Energy Corporation 9.05% 6/1/02 756 785
System Energy Resources, Inc. 7.43% 1/15/11 713 742
-------
8,746
-------
Total Corporate Bonds and Notes (Identified Cost -- $32,651) 34,387
- -------------------------------------------------------------------------------------------------
Asset-backed Securities -- 1.0%
Advanta Home Equity Loan Trust 5.95% 3/25/09 588 579
Green Tree Financial Corp. 7.85% 7/15/04 1,032 1,045
-------
Total Asset-backed Securities (Identified Cost -- $1,613) 1,624
- -------------------------------------------------------------------------------------------------
Mortgage-backed Securities -- 3.5%
Fixed-rate Securities -- 3.0%
Asset Securitization Corporation 6.92% 2/14/29 1,139 1,185
Chevy Chase Home Loan Trust 7.15% 5/15/15 984 1,001
Nomura Asset Securities Corporation 8.15% 3/4/20 600 656
Nomura Asset Securities Corporation 7.12% 4/13/36 680 716
Oakdale Mall Trust 94-1 Class A 7.95% 5/1/06 1,000 1,036(B)
PSB Financial Corporation II 11.05% 12/1/15 436 472
-------
5,066
-------
Variable-rate Securities(C) -- 0.5%
Resolution Trust Corporation 6.837% 4/25/28 534 538(B)
Resolution Trust Corporation 8.078% 9/25/29 232 240
-------
778
-------
Total Mortgage-backed Securities (Identified Cost -- $5,708) 5,844
- ------------------------------------------------------------------------------------------------
U.S. Government and Agency Obligations -- 33.3%
Fixed-rate Securities -- 20.5%
United States Treasury Bonds 0% 2/15/23 1,500 403(A)
United States Treasury Bonds 6.375% 8/15/27 19,530 22,447
United States Treasury Notes 5.50% 2/29/00 1,500 1,514
United States Treasury Notes 5.75% 11/30/02 200 208
United States Treasury Notes 5.625% 12/31/02 600 620
United States Treasury Notes 5.50% 1/31/03 1,500 1,544
United States Treasury Notes 5.25% 8/15/03 7,550 7,742
United States Treasury Notes 4.75% 11/15/08 280 282
-------
34,760
-------
14
<PAGE>
Rate Maturity Date Par/Shares Value
- --------------------------------------------------------------------------------------------------
Inflation-indexed Securities -- 12.8%
United States Treasury Inflation-
Indexed Security 3.375% 1/15/07 $10,931 $ 10,566(G)
United States Treasury Inflation-
Indexed Security 3.625% 1/15/08 5,238 5,138(G)
United States Treasury Inflation-
Indexed Security 3.625% 4/15/28 6,185 6,000(G)
-------
21,704
-------
Total U.S. Government and Agency Obligations (Identified Cost-- $56,438) 56,464
- -------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-backed Securities -- 29.0%
Fixed-rate Securities -- 26.8%
Fannie Mae 5.75% 6/15/05 1,000 1,033
Fannie Mae 8% 4/25/06 610 630
Fannie Mae 8% 8/1/09 to 3/1/10 536 557
Fannie Mae 6% 9/1/25 to 11/1/27 950 940
Fannie Mae 6.50% 10/1/28 600 604(E)
Freddie Mac 8.75% 10/1/01 16 17
Freddie Mac 8.50% 2/1/04 149 152
Freddie Mac 8.75% 1/1/08 to 10/1/08 429 448
Freddie Mac 8.50% 11/1/09 229 240
Freddie Mac 6% 2/1/14 1,964 1,962
Freddie Mac 7% 8/1/24 to 5/1/26 8,775 8,947
Freddie Mac 8% 7/1/26 870 901
Freddie Mac 5.50% 8/1/26 1,100 1,087(E)
Freddie Mac 9% 9/1/26 600 627(E)
Government National Mortgage Association 9% 7/15/16 to 6/15/17 894 961
Government National Mortgage Association 7% 2/15/23 to 8/15/25 8,109 8,299
Government National Mortgage Association 7.50% 2/15/23 to 11/15/23 5,332 5,505
Government National Mortgage Association 6.875% 6/20/23 2,803 2,848
Government National Mortgage Association 8% 12/15/26 1,589 1,652
Government National Mortgage Association 7.50% 6/15/28 to 7/15/28 2,978 3,072
Government National Mortgage Association 7.50% 7/15/28 1,500 1,546(E)
Government National Mortgage Association 6% 9/15/28 3,450 3,420(E)
-------
45,448
-------
Variable-rate Securities(C) -- 2.2%
Freddie Mac 7.468% 9/1/24 604 617
Government National Mortgage Association 7% 10/20/22 412 418
Sallie Mae 5.352% 4/25/06 2,627 2,595
-------
3,630
-------
Total U.S. Government Agency Mortgage-backed Securities
(Identified Cost -- $48,275) 49,078
- -------------------------------------------------------------------------------------------------
15
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
Rate Maturity Date Par/Shares Value
- -------------------------------------------------------------------------------------------------
Yankee Bonds(F) -- 8.2%
Fixed-rate Securities -- 6.6%
Korea Development Bank 6.75% 12/1/05 $ 1,020 $ 881
Manitoba Province, Canada 9.50% 9/15/18 750 1,043
Petroleos Mexicanos 8.85% 9/15/07 1,300 1,157(B)
Petroliam Nasional Berhad 7.125% 8/15/05 to 10/18/06 490 383(B)
Petroliam Nasional Berhad 7.625% 10/15/26 700 479(B)
Republic of Argentina 11% 12/4/05 1,600 1,602
Republic of Brazil 8% 4/15/14 2,820 1,668(H)
Russian Ministry of Finance 12.75% 6/24/28 370 118(B)
Tata Electric Company 8.50% 8/19/17 2,000 1,515(B)
United Mexican States 6.25% 12/31/19 300 234
United Mexican States 11.50% 5/15/26 1,020 1,095
YPF Sociedad Anonima 7.50% 10/26/02 917 922
-------
11,097
-------
Indexed Securities(D) -- 1.6%
Republic of Argentina 6.1875% 3/31/05 2,012 1,720
Republic of Brazil 6.125% 4/15/06 1,642 1,052
-------
2,772
-------
Total Yankee Bonds (Identified Cost -- $15,475) 13,869
- -------------------------------------------------------------------------------------------------
Common Stock -- 1.0%
Blackrock 2001 Term Trust Inc. 189 shs 1,698
-------
Total Common Stock (Identified Cost -- $1,653) 1,698
- -------------------------------------------------------------------------------------------------
Warrants -- N.M.
Republic of Argentina 1 wt 44
-------
Total Warrants (Identified Cost-- $26) 44
- -------------------------------------------------------------------------------------------------
Short-term Investments -- 11.0%
U.S. Government Agency -- 0.6%
Fannie Mae 5.20% 2/17/99 $ 1,000 993(I)
-------
Repurchase Agreements-- 10.3%
Merrill Lynch Government Securities, Inc.
5.10%, dated 12/31/98, to be repurchased
at $17,541 on 1/4/99
(Collateral: $17,885 Federal Home Loan Bank
Notes, 4.66% due 10/15/01, value $18,061) 17,531 17,531
-------
Options Purchased(K) -- 0.1%
Eurodollar Future Call, January 99, Strike Price $95.00 76(J) 12
Eurodollar Future Call, April 99, Strike Price $94.50 89(J) 122
Eurodollar Future Call, April 99, Strike Price $95.25 110(J) 11
-------
145
-------
Total Short-term Investments (Identified Cost -- $18,697) 18,669
- ------------------------------------------------------------------------------------------------
16
<PAGE>
- ------------------------------------------------------------------------------------------------
Total Investments -- 107.3% (Identified Cost -- $180,536) $181,677
Other Assets Less Liabilities-- (7.3%) (12,293)
-------
Net assets consisting of:
Accumulated paid in capital applicable to:
16,080 Primary Shares outstanding $167,719
24 Navigator Shares outstanding 251
Undistributed net investment income 72
Undistributed net realized gain on investments, options and futures 430
Unrealized appreciation of investments, options and futures 912
-------
Net assets-- 100.0% $169,384
-------
Net asset value per share:
Navigator Class $10.52
-------
Expiration Actual Appreciation/
Date Contracts (Depreciation)
- -------------------------------------------------------------------------------------------------------
Options Written(K)
U.S. Treasury Bond Future Put, Strike Price $124.00 February 99 37 $ 35
U.S. Treasury Bond Future Put, Strike Price $128.00 February 99 11 (5)
U.S. Treasury Note Future Call, Strike Price $114.50 February 99 17 9
-------
$ 39
-------
Futures Contracts Purchased(K)
U.S. Treasury Bond Futures March 99 91 $(131)
U.S. Treasury Note Futures March 99 170 (156)
-------
$(287)
-------
Futures Contracts Written(K)
U.S. Treasury Note Futures March 99 17 $ 19
-------
- ------------------------------------------------------------------------------------------------
</TABLE>
(A) Zero-coupon bond -- A bond with no periodic interest payments which is sold
at such a discount as to produce a current yield to maturity.
(B) Rule 144a security -- A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified institutional buyers. These securities represent 6.42% of net
assets.
(C) The coupon rates shown on variable-rate securities are the rates at
December 31, 1998. These rates vary with the weighted average coupon of the
underlying loans.
(D) Indexed security -- The rate of interest earned on these securities is tied
to the London Interbank Offered Rate (LIBOR), the Cost of Funds Index
(COFI), the One Year Treasury Constant Maturity Rate or a similar index.
The coupon rate shown is the rate at December 31, 1998.
(E) When-issued security -- Security purchased on a delayed-delivery basis.
Final settlement amount and maturity date have not yet been announced.
(F) Yankee bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
(G) United States Treasury Inflation-indexed Security -- U.S. Treasury security
whose principal value is adjusted daily in accordance with changes in the
Consumer Price Index. Interest is calculated on the basis of the current
adjusted principal value.
(H) Front Loaded Interest Reduction Bond (FLIRB) -- Security pays a portion of
the coupon in cash and a portion is capitalized as an increase in par
value.
(I) Collateral to cover futures contracts written.
(J) This represents the actual number of contracts.
(K) Options and Futures are described in more detail in the notes to financial
statements.
N.M. Not meaningful
See notes to financial statements.
17
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
December 31, 1998
(Amounts in Thousands)
High Yield Portfolio
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- 57.8%
<S> <C>
Cable and Media -- 7.8%
Advanced Radio Telecom Corporation 14% 2/15/07 $ 2,000 $ 1,440
Big Flowers Press Holdings Incorporated 8.625% 12/1/08 4,000 4,015
Brill Media Company, LLC 7.50% 12/15/07 3,000 2,730(F)
Chancellor Media Corporation 8% 11/1/08 4,000 4,080
Mentus Media Corporation 12% 2/1/03 8,434 8,181
Pegasus Communications Corporation 9.75% 12/1/06 2,000 2,008
Radio Unica Corporation 0% 8/1/06 9,000 4,871(C),(D),(F)
Sinclair Broadcasting Group Incorporated 9% 7/15/07 1,000 1,020
Source Media Inc. 12% 11/1/04 3,000 2,265(G)
Star Choice Communications, Inc. 13% 12/15/05 3,000 2,985
------
33,595
------
Chemicals -- 0.9%
Huntsman Corporation 9.50% 7/1/07 4,000 4,010
------
Computer Software --2.6%
Diva Systems Corporation 0% 3/1/08 3,750 1,575(F)
PSINet Incorporated 10% 2/15/05 3,000 2,940
Verio Incorporated 10.375% 4/1/05 2,000 1,950
Verio Incorporated 13.50% 6/15/04 4,500 4,860
------
11,325
------
Construction and Building Material -- 2.9%
American Architectural Products Corp. 11.75% 12/1/07 5,500 4,180
DeGeorge Home Alliance 12% 4/1/01 3,500 2,905
Fortress Group 13.75% 5/15/03 5,000 5,487
------
12,572
------
Energy -- 3.9%
Grant Geophysical Corporation 9.75% 2/15/08 2,500 1,600
Nuevo Energy Company 9.50% 4/15/06 3,000 2,925
Ocean Energy Incorporated 8.375% 7/1/08 4,000 3,740
Plains Resources Incorporated 10.25% 3/15/06 4,000 4,000
Queen Sand Resources Incorporated 12.50% 7/1/08 6,000 4,822
------
17,087
------
Entertainment & Leisure -- 3.4%
Booth Creek Ski Holdings Incorporated 12.50% 3/15/07 8,750 8,684
HMH Properties Incorporated 8.45% 12/1/08 6,000 6,023
------
14,707
------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ------------------------------------------------------------------------------------------------
Financial Services -- 1.0%
<S> <C> <C> <C> <C> <C>
SB Treasury Company LLC 9.40% 12/29/49 $ 2,000 $ 1,969
Tokai Preferred Capital Company LLC 9.98% 12/29/49 2,500 2,131
------
4,100
------
Food Services -- 0.7%
International Fast Foods Corporation 11% 10/31/07 6,884 3,167(C),(D),(G)
------
Gaming -- 1.3%
Harrah's Operating Incorporated 7.875% 12/15/05 4,500 4,523
Trump Hotels & Casino Resorts, Inc. 15.50% 6/15/05 1,000 1,040
------
5,563
------
Industrial -- 2.6%
AMSC Acquisition Incorporated 12.25% 4/1/08 2,000 1,280
Chatwins Group, Inc. 13% 5/1/03 3,000 3,015
Clark Material Handling Company 10.75% 11/15/06 1,500 1,545
Geneva Steel, Inc. 9.50% 1/15/04 2,500 437
Norcal Waste Systems, Inc. 13.50% 11/15/05 1,500 1,665
United Auto Group Incorporated 11% 7/15/07 4,000 3,520(D)
------
11,462
------
Manufacturing -- 3.4%
Decora Industries Incorporated 11% 5/1/05 3,000 2,865
FWT, Inc. 9.875% 11/15/07 2,300 932
Hayes Lemmerz International Incorporated 8.25% 12/15/08 4,000 4,000
HDA Parts Systems Incorporated 12% 8/1/05 2,500 2,262(C),(D)
SBA Communications Corporation 0% 3/1/08 5,000 2,900(F),(G)
Zilog, Inc. 9.50% 3/1/05 2,000 1,650
------
14,609
------
Retail -- 2.9%
Pacific Apparel, LLC 9.50% 3/31/08 4,043 2,031(C),(D),(I)
Pour le Bebe, Inc. 0% 6/30/99 3,461 3,167(E),(I)
Relax the Back Corporation 11% 5/22/03 4,000 3,737(C),(D),(I)
Relax the Back Corporation 13% 5/22/03 4,000 3,665(C),(D),(I)
------
12,600
------
Retail Grocery -- 1.8%
Big V Supermarkets Incorporated 11% 2/15/04 4,500 4,410
Fred Meyer Incorporated 7.45% 3/1/08 3,000 3,237
------
7,647
------
</TABLE>
19
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
<TABLE>
<CAPTION>
High Yield Portfolio -- Continued
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------
<S> <C>
Services -- 9.2%
Allied Waste North America 7.875% 1/1/09 $ 3,000 $ 3,049(D)
American Standard Incorporated 7.625% 2/15/10 2,500 2,525
California Recreation, LLC 9% 7/8/07 3,670 1,412(C),(D),(I)
Cendant Corporation 7.75% 12/1/03 4,000 4,042
COMFORCE Corporation 12% 12/1/07 3,200 3,240
Convergent Communications Incorporated 13% 4/1/08 3,000 1,440
Hermes Europe Railtel B V 10.375% 1/15/09 4,000 4,060
Interamericas Communications 14% 10/27/07 2,500 1,300
Intermedia Communications, Inc. 0% 7/15/07 5,000 3,400(D),(F)
MCMS Incorporated 9.75% 3/1/08 4,000 3,180
Splitrock Services Incorporated 11.75% 7/15/08 5,000 4,325
United Rentals Incorporated 9.25% 1/15/09 8,000 8,080
------
40,053
------
Shipping -- 1.6%
Global Ocean Carriers, Ltd. 10.25% 7/15/07 5,000 2,750
Golden Ocean Group, Ltd. 10% 8/31/01 9,750 2,730(D)
Statia Terminals International 11.75% 11/15/03 1,500 1,515
------
6,995
------
Telecommunications -- 8.1%
Covad Communications Group Incorporated 0% 3/15/08 5,750 3,162(F)
Dial Call Communications Incorporated 10.25% 12/15/05 2,000 1,970(F)
Level 3 Communications Incorporated 0% 12/1/08 3,000 1,755(F)
NTL Incorporated 0% 4/1/08 2,000 1,220(D),(F)
NTL Incorporated 0% 10/1/08 4,500 2,841(F)
Phonetel Technologies, Inc. 12% 12/15/06 3,500 1,435(H)
Price Communications Cellular Holdings 11.25% 8/15/08 2,000 1,900(C),(D)
Telewest PLC 0% 10/1/07 5,500 4,579(F)
Teligent Incorporated 0% 3/1/08 5,000 2,450(F)
Triton Communications, LLC 0% 5/1/08 5,000 2,250(F)
Winstar Communications, Inc. 0% 10/15/05 6,500 9,100(D),(F)
Winstar Equipment II Corp. 12.50% 3/15/04 2,500 2,550(D)
------
35,212
------
Textiles -- 0.7%
Westpoint Stevens Incorporated 7.875% 6/15/05 3,000 3,045
------
Transportation -- 3.0%
Aircraft Funding Units 12% 7/15/99 5,000 4,350
Aircraft Service International Group
Incorporated 11% 8/15/05 3,000 2,985(C),(D)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------
Transportation -- Continued
<S> <C> <C> <C> <C> <C>
Trans World Airlines, Inc. 12% 4/1/02 $ 1,500 $ 1,372
Trans World Airlines, Inc. 11.50% 12/15/04 4,000 3,435
Trans World Airlines, Inc. 11.375% 3/1/06 1,000 824
------
12,966
------
Total Corporate Bonds and Notes (Identified Cost -- $281,939) 250,715
- -------------------------------------------------------------------------------------------------
Yankee Bonds(A) -- 9.7%
Cable and Media -- 1.0%
Globo Communicacoes e Participacoes S.A. 10.625% 11/1/07 1,500 964
Multicanal Participacoes S.A. 12.625% 6/18/04 2,000 1,730
Tevecap S.A. 12.625% 11/26/04 3,000 1,710
------
4,404
------
Energy -- 0.2%
Northern Offshore ASA 10% 5/15/05 2,000 1,040(C),(D)
------
Entertainment & Leisure -- 1.8%
V2 Music Holdings PLC 14% 4/15/08 13,000 8,021
------
Foreign Government -- 0.8%
Republic of South Korea 8.875% 4/15/08 3,500 3,578
------
Industrial -- 0.6%
Cathay International Ltd. 13% 4/15/08 6,450 2,370(C),(D)
------
Real Estate -- 0.3%
Trizec Finance Corporation Ltd. 10.875% 10/15/05 1,340 1,407
------
Retail Grocery -- 0.4%
Disco S.A. 9.875% 5/15/08 2,000 1,700
------
Services -- 0.9%
ESAT Holdings Ltd. 0% 2/1/07 6,000 3,960(F)
------
Shipping -- 0.2%
Pegasus Shipping Hellas 11.875% 11/15/04 1,000 870
------
Telecommunications -- 1.1%
Netia Holdings 10.25% 11/1/07 2,000 1,700
PTC International Finance 0% 7/1/07 1,700 1,156(D),(F)
Tricom S.A. 11.375% 9/1/04 2,000 1,645
------
4,501
------
</TABLE>
21
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
<TABLE>
<CAPTION>
High Yield Portfolio -- Continued
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------
<S> <C>
Transportation -- 2.4%
Canadian Airlines Corporation 10% 5/1/05 $ 4,000 $ 3,400(C),(D)
Canadian Airlines Corporation 12.25% 8/1/06 9,000 6,840
------
10,240
------
Total Yankee Bonds (Identified Cost -- $53,921) 42,091
- ------------------------------------------------------------------------------------------------
Common Stocks -- 15.5%
Medical Supplies/Services -- 0.3%
Interferon Sciences, Inc. 96 shs 42(B)
Unigene Labs, Inc. 1,180 1,401(B)
------
1,443
------
Telecommunications -- 15.2%
Global Crossing Limited 1,555 65,757(B)
------
Total Common Stocks (Identified Cost -- $3,994) 67,200
- ------------------------------------------------------------------------------------------------
Preferred Stock -- 9.0%
Cable and Media -- 3.1%
CSC Holdings Inc. 11.125% 1 56(G)
Paxson Communications Corporation (Voting) 12.50% 3 3,252
Paxson Communications Corporation 13.25% 1 7,579
Source Media, Inc. 13.50% 110 1,072(C),(D),(G)
Spanish Broadcasting System 14.25% 1 1,307(G)
------
13,266
------
Gaming -- 0.1%
Fitzgeralds Gaming Corporation 15% 50 250(D),(G)
------
Industrial -- 2.7%
Clark Material Handling Company 12% 6 6,253
Geneva Steel Company 14% 10 175
High Voltage Engineering Corporation 14.25% 4 3,485(C),(D),(G)
Morris Material Handling 12% 2 1,835
------
11,748
------
Media -- N.M.%
Liberty Group Publishing 14.75% 4 92
------
Retail -- 0.9%
Relax the Back Corporation 10% 1,702 4,000(I)
------
Services -- 0.9%
Intermedia Communications, Inc. 0% 4 3,958(C),(D),(F),(G)
------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Rate Par/Shares Value
- ----------------------------------------------------------------------------------------------
Telecommunications -- 1.3%
<S> <C> <C> <C>
E. Spire Communications Incorporated 14.75% 4 shs $ 3,000(C),(D)
Nextlink Communications, LLC 14% 51 2,711(D),(G)
Viasystems Group Incorporated 10.75% 2 37(G)
------
5,748
------
Total Preferred Stocks (Identified Cost -- $46,800) 39,062
- ------------------------------------------------------------------------------------------------
Warrants(B) -- 0.9%
Advanced Radio Telecom Corporation 30 wts 210
American Mobile Satellite Corporation 2 0
Apparel Ventures, Inc. 3 0
Brill Media Company LLC 86 3
Convergent Communications Incorporated 12 0
Covad Communication Group Incorporated 6 29
Diva Systems Corporation 12 0
Firstcom Corporation 88 0
Firstworld Communications Incorporated 4 0
Global Telesystems Group, Inc. 5 0
Globalstar Telecommunications 3 75
Golden Ocean Group Ltd. 7 0
MGC Communications Incorporated 4 0
Mentus Media Corporation 22 0
Pegasus Communications Corporation 4 10
Primus Telecommunications Group 3 0
Relax the Back Corporation 654 6
Source Media Inc. 56 542
Spanish Broadcasting System 14 2,160
Splitrock Services Incorporated 5 55
Star Choice Communications 93 162
Unigene Labs, Inc.-D 125 0
Unigene Labs, Inc.-C 125 0
V2 Music Holdings 7 0
Verio Incorporated 36 792
------
Total Warrants (Identified Cost-- $4,407) 4,044
- ------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
<TABLE>
<CAPTION>
High Yield Portfolio -- Continued
Par/Shares Value
- ------------------------------------------------------------------------------------------------
Repurchase Agreements -- 6.0%
Lehman Brothers, Inc.
5.10%, dated 12/31/98, to be repurchased at $25,989 on 1/4/99
(Collateral: $25,000 Federal Home Loan Bank Notes, 7.01% due 1/29/18,
value $26,396; $835 Freddie Mac Medium-term Notes, 5.90% due 12/02/05,
value $839)
<S> <C> <C> <C>
(Identified Cost-- $25,974) $ 25,974 $25,974
- ------------------------------------------------------------------------------------------------
Total Investments -- 98.9% (Identified Cost -- $417,045) 429,086
Other Assets Less Liabilities-- 1.1% 4,861
------
Net assets consisting of:
Accumulated paid-in capital applicable to:
29,477 Primary Shares outstanding $460,356
4 Navigator Shares outstanding 91
Undistributed net investment income 59
Accumulated net realized loss on investments (38,600)
Unrealized appreciation of investments 12,041
------
Net assets-- 100.0% $433,947
--------
Net asset value per share:
Navigator Class $14.67
------
- -----------------------------------------------------------------------------------
</TABLE>
(A) Yankee bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
(B) Non-income producing
(C) Private placement
(D) Rule 144a security -- A security purchased pursuant to Rule 144a under
the Securities Act of 1933 which may not be resold subject to that rule
except to qualified institutional buyers. These securities represent
17.06% of net assets.
(E) Zero-coupon security -- A bond or preferred stock with no periodic
interest payments or dividends which is sold at such a discount as to
produce a current yield to maturity.
(F) Stepped coupon security -- A bond or preferred stock which amortizes to
par by a specified date at which time it begins to accrue interest or pay
dividends.
(G) Payment-in-kind ("PIK") security -- A bond or preferred stock in which
interest during the initial years is paid in additional PIK bonds or
preferred stock rather than in cash.
(H) Indexed security -- The rate of interest on this type of security is tied
to the London Interbank Offer Rate (LIBOR). The coupon rate shown is the
rate as of December 31, 1998.
(I) Illiquid security valued at fair value under procedures adopted by the
Board of Directors.
N.M. Not meaningful
See notes to financial statements.
24
<PAGE>
Statements of Operations
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended 12/31/98
- ----------------------------------------------------------------------------------------------
U.S. Government Investment Grade High
Intermediate-Term Income Yield
Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------------
Investment Income:
<S> <C> <C> <C>
Interest $20,968 $9,444 $38,965
Dividends 78 112 5,272
------- ------ -------
Total income 21,046 9,556 44,237
------- ------ -------
Expenses:
Management fee 1,836 858 3,036
Distribution and service fees 1,629 714 2,329
Transfer agent and shareholder servicing expense 164 100 239
Audit and legal fees 66 41 59
Custodian fee 154 129 151
Directors' fees 12 6 12
Registration fees 35 27 92
Reports to shareholders 39 35 54
Other expenses 28 19 120
------- ------ -------
3,963 1,929 6,092
Less fees waived (668) (501) --
------- ------ -------
Total expenses, net of waivers 3,295 1,428 6,092
------- ------ -------
Net Investment Income 17,751 8,128 38,145
------- ------ -------
Net Realized and Unrealized Gain (Loss) on Investments:
Realized gain (loss) on:
Investments 4,293 2,619 (38,643)
Options 920 691 --
Futures (499) 495 --
------- ------ -------
4,714 3,805 (38,643)
------- ------ -------
Change in unrealized appreciation (depreciation)
of investments, options and futures (1,083) (2,304) (13,340)
------- ------ -------
Net Realized and Unrealized Gain (Loss)
on Investments 3,631 1,501 (51,983)
- -----------------------------------------------------------------------------------------------
Change in Net Assets Resulting
from Operations $21,382 $9,629 $(13,838)
- -----------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
25
<PAGE>
Statements of Changes in Net Assets
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
<TABLE>
<CAPTION>
U.S. Government Investment Grade High
Intermediate-Term Income Yield
Portfolio Portfolio Portfolio
---------------------- ------------------- -------------------
Years Ended Years Ended Years Ended
12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97
- ----------------------------------------------------------------------------------------------------
Change in Net Assets:
<S> <C> <C> <C> <C> <C> <C>
Net investment income $ 17,751 $ 17,534 $ 8,128 $ 6,380 $ 38,145 $ 26,378
Net realized gain (loss)
on investments,
options and futures 4,714 (465) 3,805 1,468 (38,643) 4,465
Change in unrealized
appreciation (depreciation)
of investments,
options and futures (1,083) 2,985 (2,304) 2,295 (13,340) 14,202
- ----------------------------------------------------------------------------------------------------
Change in net assets
resulting from operations 21,382 20,054 9,629 10,143 (13,838) 45,045
Distributions to shareholders:
From net investment income:
Primary Class (16,959) (16,688) (8,112) (6,363) (38,214) (26,212)
Navigator Class (462) (460) (16) (17) (10) --
From net realized gain
on investments -- -- (2,851) -- (359) (1,943)
In excess of net investment
income:
Primary Class (323) (376) -- -- -- --
Navigator Class (7) (10) -- -- -- --
Change in net assets from
Fund share transactions:
Primary Class 48,243 4,674 48,378 26,418 104,134 131,145
Navigator Class (671) (256) 4 -- 91 --
- ----------------------------------------------------------------------------------------------------
Change in net assets 51,203 6,938 47,032 30,181 51,804 148,035
Net Assets:
Beginning of year 308,866 301,928 122,352 92,171 382,143 234,108
- ----------------------------------------------------------------------------------------------------
End of year $360,069 $308,866 $169,384 $122,352 $433,947 $382,143
- ----------------------------------------------------------------------------------------------------
Undistributed net
investment income $ -- $ -- $ 72 $ 72 $ 59 $ 198
- ----------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
26
<PAGE>
Financial Highlights
Legg Mason Income Trust, Inc.
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net assets
and other supplemental data. This information has been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
Investment Operations
------------------------------------------
Net Realized
and Unrealized
Net Asset Net Gain (Loss) on Total
Value, Investment Investments, From
Beginning Income Options Investment
of Year (Loss) and Futures Operations
- -------------------------------------------------------------------------------------------------------------
U.S. Government Intermediate-Term Portfolio
--Navigator Class
Years Ended Dec. 31,
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 $10.40 $ .61(A) $ .11 $ .72
1997 10.31 .65(A) .09 .74
1996 10.47 .67(A) (.16) .51
1995 9.72 .62(A) .75 1.37
1994(C) 9.72 .05(A) -- .05
Investment Grade Income Portfolio
--Navigator Class
Years Ended Dec. 31,
1998 $10.59 $ .66(B) $ .12 $ .78
1997 10.22 .71(B) .37 1.08
1996 10.44 .70(B) (.22) .48
1995(D) 10.32 .03(B) .12 .15
High Yield Portfolio
--Navigator Class
Period Ended Dec. 31,
- -------------------------------------------------------------------------------------------------------------
1998(E) $16.85 $ .86 $(1.98) $(1.12)
- -------------------------------------------------------------------------------------------------------------------------
Distributions
-------------------------------------------------------
From
From In Excess Net Net Asset
Net of Net Realized Value,
Investment Investment Gain on Total End of
Income Income Investments Distributions Year
- -------------------------------------------------------------------------------------------------------------------------
U.S. Government Intermediate-Term Portfolio
--Navigator Class
Years Ended Dec. 31,
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 $ (.60) $(.01) $-- $ (.61) $10.51
1997 (.64) (.01) -- (.65) 10.40
1996 (.66) (.01) -- (.67) 10.31
1995 (.62) -- -- (.62) 10.47
1994(C) (.05) -- -- (.05) 9.72
Investment Grade Income Portfolio
--Navigator Class
Years Ended Dec. 31,
1998 $ (.66) $-- $(.19) $ (.85) $10.52
1997 (.71) -- -- (.71) 10.59
1996 (.70) -- -- (.70) 10.22
1995(D) (.03) -- -- (.03) 10.44
High Yield Portfolio
--Navigator Class
Period Ended Dec. 31,
- -------------------------------------------------------------------------------------------------------------------------
1998(E) $(1.05) $ -- $(.01) $(1.06) $14.67
- --------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
----------------------------------------------------------------------
Net
Investment Net Assets,
Expenses Income (Loss) Portfolio End of
Total to Average to Average Turnover Year
Return Net Assets Net Assets Rate (in thousands)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Government Intermediate-Term Portfolio
--Navigator Class
Years Ended Dec. 31,
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 7.16% .46%(A) 5.85%(A) 356% $ 7,340
1997 7.45% .45%(A) 6.40%(A) 252% 7,914
1996 5.09% .42%(A) 6.47%(A) 354% 8,082
1995 14.45% .44%(A) 6.08%(A) 290% 4,184
1994(C) .50%(F) .40%(A),(G) 6.44%(A),(G) 316%(G) 4,024
Investment Grade Income Portfolio
--Navigator Class
Years Ended Dec. 31,
1998 7.57% .45%(B) 6.24%(B) 279% $ 255
1997 10.95% .43%(B) 6.87%(B) 259% 252
1996 4.88% .41%(B) 6.99%(B) 383% 243
1995(D) 1.42%(F) .40%(B),(G) 6.73%(B),(G) 221%(G) 249
High Yield Portfolio
--Navigator Class
Period Ended Dec. 31,
- -------------------------------------------------------------------------------------------------------------------------
1998(E) (6.91)% .79%(G) 8.68%(G) 107%(G) $ 65
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Net of fees waived by LMFA for expenses in excess of voluntary
limitations of: 0.4% until April 30, 1995; 0.45% until April 30, 1996;
and 0.50% until May 1, 1999. If no fees had been waived by LMFA, the
annualized ratio of expenses to average daily net assets for each period
would have been as follows: 1998, .65%; 1997, .66%; 1996, .69%; 1995,
.74%; and 1994, .66%.
(B) Net of fees waived by LMFA for expenses in excess of voluntary
limitations of: 0.4% until April 30, 1996 and 0.50% until May 1, 1999. If
no fees had been waived by LMFA, the annualized ratio of expenses to
average daily net assets for each period would have been as follows:
1998, .80%; 1997, .82%; 1996, .88%; and 1995, .82%.
(C) For the period December 1, 1994 (commencement of sale of Navigator
Shares) to December 31, 1994.
(D) For the period December 1, 1995 (commencement of sale of Navigator
Shares) to December 31, 1995.
(E) For the period February 1, 1994 (commencement of sale of Navigator
Shares) to December 31, 1994.
(F) Not annualized
(G) Annualized
See notes to financial statements.
27
<PAGE>
Notes to Financial Statements
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
The Legg Mason Income Trust, Inc. ("Corporation"), consisting of the
U.S. Government Intermediate-Term Portfolio ("Government Intermediate"),
the Investment Grade Income Portfolio ("Investment Grade"), the High Yield
Portfolio ("High Yield"), and the U.S. Government Money Market Portfolio
("Government Money Market") (each a "Fund"), is registered under the
Investment Company Act of 1940, as amended, as an open-end, diversified
investment company.
The Government Intermediate, Investment Grade and High Yield Portfolios
consist of two classes of shares: Primary Class, offered since 1987, and
Navigator Class, offered to certain institutional investors since December
1, 1994, December 1, 1995, and May 5, 1998, respectively. The income and
expenses of each of these Funds are allocated proportionately to the two
classes of shares based on daily net assets, except for Rule 12b-1
distribution fees, which are charged only on Primary Class shares, and
transfer agent and shareholder servicing expenses, which are determined
separately for each class.
Security Valuation
Securities owned by Government Intermediate, Investment Grade and High
Yield for which market quotations are readily available are valued at
current market value. In determining fair value, the Board and management
consider all relevant qualitative and quantitative information available.
These factors are subject to change over time and are reviewed
periodically. The values assigned to fair value investments are based on
available information and do not necessarily represent amounts that might
ultimately be realized, since such amounts depend on future developments
inherent in long-term investments. Further, because of the inherent
uncertainty of valuation, those estimated values may differ significantly
from the values that would have been used had a ready market of the
investments existed, and the differences could be material. At December 31,
1998, $18,012 or 4.2% of the High Yield Portfolio's net assets, were valued
by management in accordance with the procedures adopted by the Board of
Directors. Securities with remaining maturities of 60 days or less are
valued at amortized cost by each Fund.
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 Fund's adviser to be the primary
market. The Fund will value its foreign securities in U.S. dollars on the
basis of the then-prevailing exchange rates.
Investment Income and Distributions to Shareholders
Interest income and expenses are recorded on the accrual basis. Bond
premiums are amortized for financial reporting and federal income tax
purposes. Bond discounts, other than original issue and zero-coupon bonds,
are not amortized. Dividend income and distributions to shareholders are
allocated at the class level and are recorded on the ex-dividend date.
Dividends from net investment income will be declared daily and paid
monthly for each Fund except High Yield which will declare and pay
dividends monthly. Net capital gain distributions, which are calculated at
a Fund level, are declared and paid after the end of the tax year in which
the gain is realized. Distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles; accordingly, periodic reclassifications are made within the
Fund's capital accounts to reflect income and gains available for
distribution under income tax regulations. At December 31, 1998, accrued
dividends payable were as follows: Government Intermediate, $79; Investment
Grade, $33; and High Yield, $231. There were no capital gain distributions
payable at December 31, 1998.
28
<PAGE>
- --------------------------------------------------------------------------------
Security Transactions
Security transactions are recorded on the trade date. Realized gains
and losses from security transactions are reported on an identified cost
basis for both financial reporting and federal income tax purposes. At
December 31, 1998, receivables for securities sold and payables for
securities purchased for each Fund were as follows:
Receivable for Payable for
Securities Sold Securities Purchased
---------------------------------------------------------------
Government Intermediate $5,088 $21,906
Investment Grade 3,675 22,449
High Yield -- 3,840
Federal Income Taxes
No provision for federal income or excise taxes is required since each
Fund intends to continue to qualify as a regulated investment company and
distribute all of its taxable income to its shareholders.
Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
2. Investment Transactions:
For the year ended December 31, 1998, investment transactions
(excluding short-term investments) were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds from Sales
U.S. Gov't. Securities Other U.S. Gov't. Securities Other
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Intermediate $1,115,936 $ 116,952 $1,108,202 $ 58,357
Investment Grade 381,379 48,594 345,592 43,600
High Yield -- 564,616 -- 468,781
</TABLE>
At December 31, 1998, cost, gross unrealized appreciation and gross
unrealized depreciation based on the cost of securities for federal income
tax purposes for each Fund were as follows:
<TABLE>
<CAPTION>
Net Appreciation/
Cost Appreciation (Depreciation) (Depreciation)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Intermediate $370,407 $ 5,696 $ (2,545) $ 3,151
Investment Grade 180,663 3,884 (2,870) 1,014
High Yield 417,424 72,713 (61,051) 11,662
</TABLE>
Unused capital loss carryforwards for federal income tax purposes at
December 31, 1998 were as follows: Government Intermediate, $4,790 which
expires 2002 and $699 which expires 2003 and High Yield, $10,825 which
expires 2006. Investment Grade has no capital loss carryforwards.
29
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc.
- --------------------------------------------------------------------------------
3. Repurchase Agreements:
All repurchase agreements are fully collateralized by obligations issued
by the U.S. government or its agencies and such collateral is in the
possession of the Funds' custodian. The value of such collateral includes
accrued interest. Risks arise from the possible delay in recovery or
potential loss of rights in the collateral should the issuer of the
repurchase agreement fail financially. The Funds' investment adviser,
acting under the supervision of the Board of Directors, reviews the value
of the collateral and the creditworthiness of those banks and dealers with
which the Funds enter into repurchase agreements to evaluate potential
risks.
4. Options and Futures:
As part of their investment programs, Government Intermediate and
Investment Grade may utilize options and futures. Options may be written
(sold) or purchased by these Funds. When a Fund purchases a put or call
option, the premium paid is recorded as an investment and its value is
marked-to-market daily. When a Fund writes a call or put option, an amount
equal to the premium received by the Fund is recorded as a liability and
its value is marked-to-market daily.
When options, whether written or purchased, expire, are exercised or
are closed (by entering into a closing purchase or sale transaction), the
Fund realizes a gain or loss as described in the chart below.
<TABLE>
<CAPTION>
<S> <C>
Purchased option: Impact on the Fund:
The option expires Realize a loss in the amount of the cost of the option.
------------------------------------------------------------------------------------------
The option is closed through Realize a gain or loss depending on whether the proceeds
a closing sale transaction from the closing sale transaction are greater or less than
the cost of the option.
------------------------------------------------------------------------------------------
The Fund exercises a call The cost of the security purchased through the exercise of
option the option will be increased by the premium originally paid
to purchase the option.
------------------------------------------------------------------------------------------
The Fund exercises a put Realize a gain or loss from the sale of the underlying
option security. The proceeds of that sale will be reduced by the
premium originally paid to purchase the put option.
------------------------------------------------------------------------------------------
Written option: Impact on the Fund:
The option expires Realize a gain equal to the amount of the premium received.
------------------------------------------------------------------------------------------
The option is closed through Realize a gain or loss without regard to any unrealized gain
a closing purchase or loss on the underlying security and eliminate the option
transaction liability. The Fund will realize a loss in this transaction
if the cost of the closing purchase exceeds the premium
received when the option was written.
------------------------------------------------------------------------------------------
A written call option is Realize a gain or loss from the sale of the underlying
exercised by the option security. The proceeds of that sale will be increased by the
purchaser premium originally received when the option was written.
------------------------------------------------------------------------------------------
A written put option is The amount of the premium originally received will reduce
exercised by the option the cost of the security that the Fund purchased when the
purchaser option was exercised.
------------------------------------------------------------------------------------------
</TABLE>
The risk associated with purchasing options is limited to the premium
originally paid. Options written by a Fund involve, to varying degrees,
risk of loss in excess of the option value reflected in the Statement of
Net Assets. The risk in writing a covered call option is that a Fund may
forego the opportunity of profit if the market price of the underlying
security increases and the option is exercised. The risk in writing a put
option is that a Fund may incur a loss if the market price of the
underlying security decreases and the option is exercised. In addition,
there is the risk a Fund may not be able to enter into a closing
transaction because of an illiquid secondary market or, for
over-the-counter options, because of the counterparty's inability to
perform.
30
<PAGE>
- --------------------------------------------------------------------------------
Call and put options written by the Funds and related premiums received
during the period were as follows:
<TABLE>
<CAPTION>
Calls Puts
--------------------------------------------
Actual Actual
Government Intermediate Contracts Premiums Contracts Premiums
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, December 31, 1997 60 $ 7 -- $ --
Options written 1,544 746 1,702 800
Options closed (1,454) (703) (1,233) (625)
Options expired (150) (50) (229) (23)
Options exercised -- -- (58) (25)
- -------------------------------------------------------------------------------------
Options outstanding, December 31, 1998 -- $-- 182 $ 127
- -------------------------------------------------------------------------------------
Calls Puts
- -------------------------------------------------------------------------------------
Actual Actual
Investment Grade Contracts Premiums Contracts Premiums
- -------------------------------------------------------------------------------------
Options outstanding, December 31, 1997 -- $ -- 22 $ 19
Options written 2,551 494 654 476
Options closed (654) (389) (477) (352)
Options expired (1,820) (55) (125) (60)
Options exercised (60) (34) (26) (7)
- -------------------------------------------------------------------------------------
Options outstanding, December 31, 1998 17 $ 16 48 $ 76
- -------------------------------------------------------------------------------------
</TABLE>
Upon entering into a futures contract, the Fund is required to deposit
with the broker an amount of cash or cash equivalents equal to a certain
percentage of the contract amount. This is known as the "initial margin."
Subsequent payments ("variation margin") are made or received by the Fund
each day, depending on the daily fluctuation in the value of the contract.
The daily changes in contract value are recorded as unrealized gains or
losses and the Fund recognizes a realized gain or loss when the contract is
closed. Futures contracts are valued daily at the settlement price
established by the board of trade or exchange on which they are traded.
The Funds enter into futures contracts as a hedge against anticipated
changes in interest rates. There are several risks in connection with the
use of futures contracts as a hedging device. Futures contracts involve, to
varying degrees, risk of loss in excess of the amounts reflected in the
financial statements. The change in the value of futures contracts
primarily corresponds with the value of their underlying instruments, which
may not correlate with the change in the value of the hedged instruments.
In addition, there is the risk that a Fund may not be able to enter into a
closing transaction because of an illiquid secondary market.
The open futures positions and related appreciation or depreciation at
December 31, 1998 are listed at the end of U.S. Government Intermediate's
and Investment Grade's respective "Statement of Net Assets."
5. Financial Instruments:
Forward Currency Exchange Contracts
As part of its investment program, High Yield may utilize forward
currency exchange contracts. The nature and risks of these financial
instruments and the reasons for using them are set forth more fully in the
Corporation's Prospectus and Statement of Additional Information.
Forward foreign currency contracts are marked-to-market daily using
foreign currency exchange rates supplied by an independent pricing service.
The change in a contract's market value is recorded by High Yield as an
unrealized gain or loss. When the contract is closed or delivery is taken,
the Fund records a realized gain or loss equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed.
The use of forward foreign currency contracts does not eliminate
fluctuations in the underlying prices of the Fund's securities, but it does
establish a rate of exchange that can be achieved in the future. These
forward foreign currency contracts involve market risk in excess of amounts
reflected in the Financial Statements. Although forward foreign currency
contracts used for hedging purposes limit the risk of loss due to a decline
in the value of the hedged currency, they also limit any potential gain
that might result should the value of the currency increase. In addition,
the
31
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc.
- --------------------------------------------------------------------------------
Fund could be exposed to risks if the counterparties to the contracts
are unable to meet the terms of their contracts. The Fund's adviser will
enter into forward foreign currency contracts only with parties approved by
the Board of Directors because there is a risk of loss to the Fund if the
counterparties do not complete the transaction.
At December 31, 1998, there were no open forward currency exchange
contracts in High Yield.
6. Transactions with Affiliates:
Each Fund has a management agreement with Legg Mason Fund Adviser, Inc.
("LMFA"). Pursuant to their respective agreements, LMFA provides the Funds
with management and administrative services for which each Fund pays a fee,
computed daily and payable monthly, at annual rates of each Fund's average
daily net assets.
LMFA has agreed to waive its fees to the extent each Fund's expenses
(exclusive of taxes, interest, brokerage and extraordinary expenses) exceed
during any month certain annual rates. The following chart shows the annual
rate of management fees; expense limits and their expiration dates; total
management fees waived; and management fees payable for each Fund:
<TABLE>
<CAPTION>
Year Ended
December 31, 1998 At December 31, 1998
---------------------------------------
Management Management
Management Expense Expense Limitation Fees Fee
Fund Fee Limitation Expiration Date Waived Payable
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government Intermediate 0.55% 0.50% May 1, 1999, or until net $668 $106
assets reach $400 million
Investment Grade 0.60% 0.50% May 1, 1999, or until net 501 35
assets reach $150 million
High Yield 0.65% None -- -- 240
</TABLE>
Western Asset Management Company ("Adviser") serves as investment
adviser to the Funds. The Adviser is responsible for the actual investment
activity of each Fund. LMFA pays the Adviser a fee, computed daily and
payable monthly, at an annual rate of: 40% of the management fee received
by LMFA for Investment Grade and 77% for High Yield. For U.S. Government
Intermediate, LMFA pays the Adviser a fee, computed daily and payable
monthly, of 0.20% of its average daily net assets, not to exceed the fee
received by LMFA.
Legg Mason Wood Walker, Incorporated ("Legg Mason"), a member of the
New York Stock Exchange, serves as distributor of the Funds. Legg Mason is
obligated to pay certain expenses in connection with the offering of shares
of the funds.
Legg Mason also has an agreement with the Funds' transfer agent to
assist it with some of its duties. For this assistance, Legg Mason was paid
the following amounts by the transfer agent for the year ended December 31,
1998: Government Intermediate, $41; Investment Grade, $34 and High Yield,
$65.
LMFA, the Adviser and Legg Mason are corporate affiliates and are
wholly owned subsidiaries of Legg Mason, Inc.
32
<PAGE>
- --------------------------------------------------------------------------------
7. Line of Credit:
The Funds, along with certain other Legg Mason Funds, participate in a
$150 million line of credit ("Credit Agreement") to be utilized as an
emergency source of cash in the event of unanticipated, large redemption
requests by shareholders. Pursuant to the Credit Agreement, each
participating Fund is liable only for principal and interest payments
related to borrowings made by that Fund. Borrowings under the line of
credit bear interest at prevailing short-term interest rates. For the year
ended December 31, 1998, the Funds, other than High Yield, had no
borrowings under the line of credit. High Yield utilized $15,000 during the
month of September. The loan remained outstanding for fourteen days and had
an average daily balance of $13,571. The weighted average rate of interest
on the loan was 6.03% resulting in interest expense of $32.
8. Fund Share Transactions:
At December 31, 1998, there were 150,000 shares authorized at $.001 par
value for the Navigator Class of shares of the Corporation. Share
transactions were as follows:
<TABLE>
<CAPTION>
Reinvestment
Sold of Distributions Repurchased Net Change
--------------- ---------------- --------------- -------------
Shares Amount Shares Amount Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government Intermediate
--Navigator Class
Year Ended December 31, 1998 270 2,820 40 420 (373) (3,911) (63) (671)
Year Ended December 31, 1997 444 4,554 44 454 (511) (5,264) (23) (256)
Investment Grade
--Navigator Class
Year Ended December 31, 1998 -- -- N.M. 4 -- -- N.M. 4
Year Ended December 31, 1997 -- -- -- -- -- -- -- --
High Yield
--Navigator Class
Period Ended December 31, 1998(A) 23 393 N.M. 6 (19) (308) 4 91
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(A) For the period May 5, 1998 (Commencement of sale of Navigator Shares)
to December 31, 1998.
N.M. Not meaningful
33
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Directors of Legg Mason Income Trust, Inc.:
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
U.S. Government Intermediate-Term Portfolio, Investment Grade Income Portfolio
and High Yield Portfolio (three of the four Portfolios comprising Legg Mason
Income Trust, Inc., hereafter referred to as the "Funds") at December 31, 1998,
and the results of each of their operations, the changes in each of their net
assets and the financial highlights for each of the fiscal periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998, by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 26, 1999
34
<PAGE>
Investment Manager
Legg Mason Fund Adviser, Inc.
Baltimore, MD
Investment Adviser
Western Asset Management Company
Pasadena, CA
Board of Directors
John F. Curley, Jr., Chairman
Edmund J. Cashman, Jr., Vice Chairman
Richard G. Gilmore
Arnold L. Lehman
Dr. Jill E. McGovern
T. A. Rodgers
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Boston, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel
Kirkpatrick & Lockhart LLP Washington, D.C.
Independent Accountants
PricewaterhouseCoopers LLP
Baltimore, MD
This report is not to be distributed unless preceded or accompanied by a
prospectus.
Legg Mason Wood Walker, Incorporated
----------------------------------------
100 Light Street
P.O. Box 1476, Baltimore, MD 21203-1476
410 o 539 o 0000
LMF-228
