Navigator Taxable Income Funds
Navigator Class of Legg Mason U.S. Government Intermediate-Term Portfolio
Navigator Class of Legg Mason Investment Grade Income Portfolio
Navigator Class of Legg Mason High Yield Portfolio
NAVIGATOR SHARES PROSPECTUS MAY 3, 1999
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HOW TO INVEST(SM)
As with all mutual funds, the Securities and Exchange Commission has not passed
upon the adequacy of this prospectus, nor has it approved or disapproved these
securities. It is a criminal offense to state otherwise.
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T A B L E O F C O N T E N T S
A b o u t t h e f u n d s:
xx Investment objectives
xx Risks
xx Performance
xx Fees and expenses of the funds
xx Management
A b o u t y o u r i n v e s t m e n t:
xx How to invest
xx How to sell your shares
xx Account policies
xx Services for investors
xx Dividends and taxes
xx Financial highlights
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LEGG MASON INCOME TRUST, INC.
[icon] I N V E S T M E N T O B J E C T I V E S
The Legg Mason Income Trust, Inc. offers four series, three of which are offered
through this Prospectus: Legg Mason U.S. Government Intermediate-Term Portfolio,
Legg Mason Investment Grade Income Portfolio and Legg Mason High Yield
Portfolio.
Western Asset's approach in managing these three funds revolves around an
investment outlook developed by its Investment Strategy Group, a team of senior
professionals that meets at least twice a week to review developments in the
economy and the markets. Based on their consensus view of the economic outlook
for the following six months, this group arrives at a recommended portfolio
structure, including targets for duration, yield curve exposure, and sector
allocation. Western's Portfolio Management Group implements the strategy in a
manner consistent with the investment policies of each fund, using information
on the relative credit strength, liquidity, issue structure, event risk,
convenant protection and market valuation of available securities developed by
the Research Group. Each fund is managed in accordance with the investment
objective and policies described below.
U.S. Government Intermediate-Term Portfolio
Investment Objective: high current income consistent with prudent investment
risk and liquidity needs
Principal Investment Strategies:
The fund, under normal circumstances, invests at least 75% of its total assets
in obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or instruments secured by such securities including
repurchase agreements. Investments in mortgage-related securities issued by
governmental or government-related entities will be included in the 75%
limitation.
The balance of the fund, up to 25% of its total assets, may be invested in
commercial paper and investment grade debt securities rated within one of the
four highest grades assigned by Standard & Poor's or Moody's Investors Service,
Inc., securities comparably rated by another nationally recognized statistical
rating organization, or unrated securities judged by the adviser to be of
comparable quality.
Although the fund can invest in securities of any maturity, it expects to
maintain a dollar-weighted average maturity of between three and ten years.
The fund may hold cash or money market instruments without limit for temporary
defensive purposes or pending investment.
Investment Grade Income Portfolio
Investment Objective: high level of current income through investment in a
diversified portfolio of debt securities
Principal Investment Strategies:
The fund invests primarily in fixed-income securities which the adviser
considers to be investment grade. Although the fund can invest in securities of
any maturity, it expects to maintain a dollar-weighted average maturity of
between five and twenty years.
The fund invests, under normal circumstances, at least 75% of its total assets
in the following types of investment grade fixed-income securities:
o debt securities which are rated at the time of purchase within the four
highest grades assigned by Moody's or S&P, or, if unrated by Moody's or S&P,
judged by the adviser to be of comparable quality;
o securities of, or guaranteed by, the U.S. Government, it agencies or
instrumentalities;
o commercial paper and other money market instruments which are rated A-1 or A-2
by S&P or Prime-1 or Prime-2 by Moody's at the date of investment, or if unrated
by Moody's or S&P, judged by the adviser to have investment quality comparable
to securities which may be purchased under the first item above; bank
certificates of deposit; and bankers' acceptances; and
o preferred stocks (including step down preferred securities) rated no lower
than Baa by Moody's or, if unrated by Moody's, judged by the adviser to be of
comparable quality.
The remainder of the fund's assets, not in excess of 25% of its total assets,
may be invested in:
o debt securities of issuers which are rated at the time of purchase below
Moody's and S&P's four highest grades, but rated B or better by Moody's or S&P,
or if unrated by Moody's or S&P, judged by the adviser to be of comparable
quality; and
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o securities which may be convertible into or exchangeable for, or carry
warrants to purchase, common stock or other equity interests.
Securities purchased by the fund may be privately placed. The fund may hold cash
or money market instruments without limit for temporary defensive purposes or
pending investment.
High Yield Portfolio
Investment Objectives: high current income and, secondarily, capital
appreciation
Principal Investment Strategies:
The fund's adviser, under normal circumstances, invests at least 65% of the
fund's total assets in high yield, fixed-income securities, including those
commonly known as "junk bonds". Such securities include, but are not limited to:
foreign and domestic corporate debt securities and debt securities of other
issuers, preferred stocks, convertible securities, zero coupon securities,
deferred interest securities, mortgage-backed securities, asset-backed
securities, commercial paper and obligations issued or guaranteed by the U.S.
Government, foreign governments or any of their respective political
subdivisions, agencies or instrumentalities, including repurchase agreements
secured by such instruments. Most fixed-income securities in which the fund
invests are rated BBB/Baa or lower, or are unrated but deemed by the adviser to
be of equivalent quality.
The fund's remaining assets may be held in cash or money market instruments, or
invested in common stocks and other equity securities when these types of
investments are consistent with the objectives of the fund or are acquired as
part of a unit consisting of a combination of fixed-income securities and equity
investments. Such remaining assets may also be invested in fixed income
securities rated above BBB by S&P or Baa by Moody's, securities comparably rated
by another nationally recognized statistical rating organization, or unrated
securities deemed by the adviser to be of equivalent quality.
The fund may invest up to 25% of its total assets in private placements and
securities which, though not registered at the time of their initial sale, are
issued with registration rights. This limitation does not apply to securities
purchased pursuant to Rule 144A.
The fund may invest up to 25% of its total assets in securities denominated in
foreign currencies, including securities of issuers based in emerging markets.
The fund may hold cash or, money market instruments without limit for temporary
defensive purposes or pending investment.
U.S. Government Money Market Portfolio
Investment Objective: high current income consistent with liquidity and
conservation of principal
Principal Investment Strategies:
The fund is a money market fund that seeks to maintain a net asset value of
$1.00 per share. To achieve its objective, the fund adheres to the following
practices:
o it invests only in U.S. government obligations, repurchase agreements secured
by such instruments, and securities issued or guaranteed by multi-national
development banks of which the U.S. is a member, such as the World Bank.
o it invests at least 65% of its total assets in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and in
repurchase agreements secured by such securities.
o it buys money market securities maturing in 397 days or less (It can also
buy certain variable and floating rate securities the adviser believes will
act as though they have maturities of 397 days or less.)
o it maintains a dollar-weighted average portfolio maturity of 90 days or less
o it buys only high-quality money market securities which the adviser
determines to present minimal credit risk
The fund may hold cash or money market instruments without limit for temporary
defensive purposes or pending investment.
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[icon] R I S K S
In general -
As with all mutual funds, an investment in any of these funds is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency; investors can lose money by investing in the funds. Although Government
Money Market seeks to maintain a net asset value of $1.00 per share, there can
be no assurance that the fund will always be able to do so. There is no
guarantee that any fund will achieve its objective.
Interest rate risk -
Each fund is subject to interest rate risk, which is the possibility that the
market prices of the funds' investments may decline due to an increase in market
interest rates. Generally, the longer the maturity of a fixed-income security,
the greater is the effect on its value when rates increase.
Certain securities pay interest at variable or floating rates. Variable rate
securities reset at specified intervals, while floating rate securities reset
whenever there is a change in a specified index rate. In most cases, these reset
provisions reduce the effect of market interest rates on the value of the
security. However, some securities do not track the underlying index directly,
but reset based on formulas that can produce an effect similar to leveraging;
others may provide for interest payments that vary inversely with market rates.
The market prices of these securities may fluctuate significantly when interest
rates change.
Credit risk -
Each fund is also subject to credit risk, i.e., the risk that an issuer of
securities will be unable to pay principal and interest when due, or that the
value of the security will suffer because investors believe the issuer is less
able to pay. This is broadly gauged by the credit ratings of the securities in
which each fund invests. However, ratings are only the opinions of the agencies
issuing them and are not absolute guarantees as to quality.
Moody's considers debt securities rated Baa to have speculative characteristics.
Debt securities rated below Baa/BBB are deemed by the ratings agencies to be
speculative and may involve major risk or exposure to adverse conditions. High
Yield may invest in securities rated as low as C by Moody's or D by S&P. These
ratings indicate that the securities are highly speculative and may be in
default or in danger of default as to principal and interest.
Not all government securities are backed by the full faith and credit of the
United States. Some are backed only by the credit of the issuing agency or
instrumentality. Accordingly, there is at least a chance of default on these
securities.
Call risk -
Many fixed income securities, especially those issued at high interest rates,
provide that the issuer may repay them early. Issuers often exercise this right
when interest rates are low. Accordingly, holders of callable securities may not
benefit fully from the increase in value that other fixed-income securities
experience when rates decline. Furthermore, the fund reinvests the proceeds of
the payoff at current yields, which are lower than those paid by the security
that was paid off.
Special risks of high yield securities -
Securities rated below Baa/BBB are subject to greater fluctuations in value and
risk of loss of income and principal due to default by the issuer, than are
higher rated securities. These securities may be less liquid than higher-rated
securities, which means the fund may have difficulty selling them at times, and
may have to apply a greater degree of judgment in establishing a price. These
securities constitute the primary focus of the High Yield Portfolio.
Investment Grade Portfolio can invest in them to a limited extent.
Special risks of mortgage-backed securities -
Mortgage-backed securities represent an interest in a pool of mortgages. When
market interest rates decline, many mortgages are refinanced, and
mortgage-backed securities are paid off earlier than expected. The effect on the
fund's return is similar to that discussed above for call risk.
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When market interest rates increase, the market values of mortgage-backed
securities decline. At the same time, however, mortgage refinancing slows, which
lengthens the effective maturities of these securities. As a result, the
negative effect of the rate increase on the market value of mortgage securities
is usually more pronounced than it is for other types of fixed-income
securities.
Other risks -
The use of certain derivatives to hedge interest rate or other risks could
affect fund performance if the derivatives do not perform as expected.
The values of foreign securities are subject to economic and political
developments in the countries and regions where the companies operate, such as
changes in economic or monetary policies, and to changes in exchange rates. In
general, less information is publicly available about foreign companies than
about U.S. companies. Some foreign governments have defaulted on principal and
interest payments.
The investment strategies employed by the funds (except Government Money Market)
often involve high turnover rates. This results in higher trading costs and
could cause a fund to realize higher levels of taxable gains.
Year 2000 -
Like other mutual funds (and most organizations around the world), the funds
could be adversely affected by computer problems related to the year 2000. These
could interfere with operations of the funds, their manager, distributor or
adviser, or could impact companies in which the funds invest.
While no one knows if these problems will have any impact on the funds or on
financial markets in general, the manager and its affiliates are taking steps to
protect fund investors. These include efforts to determine that the problem will
not directly affect the systems used by major service providers.
Whether these steps will be effective can only be known for certain in the year
2000.
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[icon] P E R F O R M A N C E
The information below provides an indication of the risks of investing in a fund
by showing changes in the fund's performance from year to year. Annual returns
assume reinvestment of dividends and distributions. Historical performance of a
fund does not necessarily indicate what will happen in the future. A fund's
yield is its net income over a recent 30-day period, expressed as an annualized
rate of return. For a fund's current yield, call toll-free 1-800-822-5544.
The Navigator Class of Shares of High Yield commended operations on May 5, 1998.
The returns presented for High Yield are for the fund's Primary Shares, which
are not offered in this prospectus. Annual returns for Primary Shares and
Navigator Shares differ only to the extent that Navigator shares pay lower
expenses, and therefore have higher returns.
U.S. Government Intermediate-Term Portfolio -- Navigator Shares
Year by year total return as of December 31 of each year (%):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
16%
14.45
14%
12%
10%
8%
7.45
6%
5.09
4%
2%
.50
0%
1994(A) 1995 1996 1997 1998
</TABLE>
During the life of the class:
<TABLE>
<CAPTION>
Quarter Ended Total Return
- ------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Best quarter:
- ------------------------------------- ----------------------------------- -----------------------------------
Worst quarter:
- ------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
In the following table, average annual total returns as of December 31, 1998 are
compared with the Salomon Brothers Medium-Term Treasury/Government-Sponsored
Index.
<TABLE>
<CAPTION>
1 Year Life of
Class (B)
<S> <C> <C>
U.S Government Intermediate-Term Portfolio
Salomon Brothers Medium-Term Treasury/Government-Sponsored Index -8.51%
</TABLE>
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any. By comparing the bar chart with the average
annual total returns, you can see that average returns smooth out year-to-year
variations and that annual returns are more volatile than total returns.
- -----------------
(A) December 1, 1994 (commencement of operations) to December 31, 1994.
(B) December 1, 1994 (commencement of operations) to December 31, 1998.
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P E R F O R M A N C E
Investment Grade Income Portfolio - Navigator Shares
Year by year total return as of December 31 of each year (%):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
12%
10.95
10%
8%
6%
4.88
4%
2%
1.42
0%
1995(A) 1996 1997 1998
</TABLE>
During the life of the class:
<TABLE>
<CAPTION>
Quarter Ended Total Return
- ------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Best quarter:
- ------------------------------------- ----------------------------------- -----------------------------------
Worst quarter:
- ------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
In the following table, average annual total returns as of December 31, 1998 are
compared with the Salomon Brothers Broad Investment-Grade Bond Index.
1 Year Life of
Class (B)
Investment Grade Income Portfolio 8.71%
Salomon Brothers Broad Investment-Grade Bond Index
These figures include changes in principal value, reinvested dividends and
capital gain distributions, if any. By comparing the bar chart with the average
annual total returns, you can see that average returns smooth out year-to-year
variations and that annual returns are more volatile than total returns.
- ----------------
(A) December 1, 1995 (commencement of operations) to December 31, 1995.
(B) December 1, 1995 (commencement of operations) to December 31, 1998.
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P E R F O R M A N C E
High Yield Portfolio - Primary Shares
Year by year total return as of December 31 of each year (%):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
25%
20%
18.01
15.86
15%
14.91
10%
5%
0%
-2.90
- -5%
1994* 1995 1996 1997 1998
</TABLE>
*The fund commenced operations on February 1, 1994.
During the life of the Class (a):
<TABLE>
<CAPTION>
Quarter Ended Total Return
- ------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Best quarter:
- ------------------------------------- ----------------------------------- -----------------------------------
Worst quarter:
- ------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
In the following table, average annual total returns as of December 31, 1998 are
compared with the Lehman High Yield Index.
1 Year Life of Class
High Yield Portfolio - Primary Shares % % (a)
High Yield Portfolio - Navigator Shares N/A % (b)
Lehman High Yield Index
These figures include changes in principal value, reinvested dividends and
capital-gain distributions, if any. By comparing the bar chart with the average
annual total returns, you can see that average returns smooth out year-to-year
variations and that annual returns are more volatile than average returns.
(a) February 1, 1994 (commencement of operations) to December 31, 1998.
(b) May 5, 1998 (commencement of operations) to December 31, 1998. The
cumulative return presented in the table is based only on an eight month period
and therefore is not necessarily representative of how the fund will perform
over time.
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[icon] F E E S A N D E X P E N S E S O F T H E F U N D S
The table below describes the fees and expenses you will incur directly or
indirectly as an investor in a fund. Each fund pays operating expenses directly
out of its assets so they lower that fund's share price and dividends. Other
expenses include transfer agency, custody, professional and registration fees.
The funds have no sales charge or redemption fee and are not subject to a 12b-1
fee.
The fees and expenses shown are for the fiscal year ended December 31, 1998 and
are calculated as a percentage of average net assets.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
----------------------------------------------- ------------------- ----------------- ----------
Government Investment Grade High
Intermediate Yield
----------------------------------------------- ------------------- ----------------- ----------
<S> <C> <C> <C>
Management fees 0.55%(A) 0.60 %(A) 0.65 %
----------------------------------------------- ------------------- ----------------- ----------
Distribution and/or Service (12b-1) fees None None None
----------------------------------------------- ------------------- ----------------- ----------
Other Expenses 0.11 % 0.20 % 0.14 %
----------------------------------------------- ------------------- ----------------- ----------
Total Annual Fund Operating Expenses 0.66 %(A) 0.80%(A) 0.79 %
----------------------------------------------- ------------------- ----------------- ----------
</TABLE>
(A) The manager has a voluntary agreement to waive fees so that Navigator
Share expenses (exclusive of taxes, interest, brokerage and extraordinary
expenses) do not exceed an annual rate of .50% of average daily net assets
attributable to Navigator Shares during any month for Government
Intermediate or until its net assets reach $500 million, and for Investment
Grade, or until its net assets reach $250 million. These voluntary waivers
will continue until August 1, 1999 but may be terminated at any time. With
these waivers, management fees and total annual fund operating expenses
would have been 0.35% and 0.46% for Government Intermediate and 0.25% and
0.45% for Investment Grade for the fiscal year ended December 31, 1998.
Example:
This example helps you compare the cost of investing in a fund with the cost of
investing in other mutual funds. Although your actual costs may be higher or
lower, you would pay the following expenses on a $10,000 investment in a fund,
assuming (1) a 5% return each year, (2) the fund's operating expenses remain the
same as shown in the table above, and (3) you redeem all of your shares at the
end of the time periods shown. Actual returns may be higher or lower than 5% per
year.
- --------------------------------- --------- ----------- ------------ ---------
1 Year 3 Years 5 Years 10 Years
- --------------------------------- --------- ----------- ------------ ---------
Government Intermediate $ 67 $ 211 $ 368 $ 822
Investment Grade $ 82 $ 255 $ 444 $ 990
High Yield $ 81 $ 252 $ 439 $ 978
- --------------------------------- --------- ----------- ------------ ---------
Under the fee waiver arrangements described above, your costs for the one,
three, five and ten year periods would be: for Government Intermediate, $47,
$148, $258 and $579; and for Investment Grade, $46, $144, $252 and $567.
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[icon] M A N A G E M E N T
Management and Adviser:
Legg Mason Fund Adviser, Inc., 100 Light Street, Baltimore, Maryland 21202, is
the funds' manager. The manager is responsible for the non-investment affairs of
the funds, providing office space and administrative staff for the funds and
directing all matters related to the operation of the funds. The manager acts as
adviser or manager to twenty investment company portfolios which had aggregate
assets under management of approximately $[ ] billion as of March 31, 1999.
For it services during the fiscal year ended December 31, 1998, each fund paid
the manager a percentage of its average daily net assets as follows:
Government Intermediate 0.35%
Investment Grade 0.25%
High Yield 0.65%
Western Asset Management Company, 117 East Colorado Boulevard Pasadena,
California 91105, is the funds' investment adviser. The adviser is responsible
for the actual investment management of the funds, which includes making
investment decisions and placing orders to buy, sell or hold a particular
security. The adviser acts as investment adviser to investment companies and
private accounts with aggregate assets of $[ ]billion as of March 31, 1999. An
investment committee has been responsible for the day-to-day management of each
fund since its inception.
For its services, the manager paid the adviser a fee, which is calculated daily
and payable monthly, at annual rates of each fund's average daily net assets as
follows, for the fiscal year ended December 31, 1998:
<TABLE>
<CAPTION>
------------------------------------------ --------------------------------------------------------------
<S> <C>
Government Intermediate 0.20%, not to exceed the fee paid to the manager (after any
fee waivers)
------------------------------------------ --------------------------------------------------------------
Investment Grade 0.24%, or 40% of the fee received by the manager
------------------------------------------ --------------------------------------------------------------
High Yield 0.50%, or 77% of the fee received by the manager
------------------------------------------ --------------------------------------------------------------
</TABLE>
Distributor of the funds' shares:
Legg Mason Wood Walker, Incorporated, 100 Light Street, Baltimore, Maryland,
distributes the funds' shares under separate Underwriting Agreements with each
fund. Each Underwriting Agreement obligates Legg Mason to pay certain expenses
in connection with offering fund shares, including compensation to its financial
advisors, the printing and distribution of prospectuses, statements of
additional information and shareholder reports (after these have been printed
and mailed to existing shareholders at the funds' expense), supplementary sales
literature and advertising materials.
Fairfield Group, Inc., 721 Dresher Road, Horsham, Pennsylvania, is a registered
broker/dealer that sells Navigator Shares pursuant to a Dealer Agreement with
Legg Mason. Legg Mason and the manager may pay Fairfield or others out of their
own assets to support the distribution of Navigator Shares and shareholder
servicing.
The manager, adviser, distributor and Fairfield are wholly owned subsidiaries of
Legg Mason, Inc., a financial services holding company.
Government Intermediate, Investment Grade and High Yield currently offer two
classes of shares - Class A (known as "Primary Shares") and Class Y (known as
"Navigator Shares"). The two classes represent interests in the same pool of
assets. A separate vote is taken by a class of shares if a matter affects just
that class of shares. Each class of shares may bear certain differing
class-specific expenses. Salespersons and others entitled to receive
compensation for selling or servicing fund shares may receive more with respect
to one class than another.
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[icon] H O W T O I N V E S T
Navigator Shares are currently offered for sale only to:
o Institutional Clients of the Fairfield Group, Inc. for investment of their
own monies and monies for which they act in a fiduciary capacity
o Institutional Clients of Legg Mason Trust Company for which they exercise
discretionary investment management responsibility and accounts of the
customers with such Institutional Clients ("Customers").
o qualified retirement plans managed on a discretionary basis and having net
assets of at least $200 million
o clients of Bartlett & Co. who, as of December 19, 1996, were shareholders of
Bartlett Short Term Bond Fund or Bartlett Fixed Income Fund and for whom
Bartlett acts as an ERISA fiduciary
o any qualified retirement plan of Legg Mason, Inc. or of any of its affiliates
Eligible investors may purchase Navigator Shares through Fairfield or through a
brokerage account at Legg Mason. The minimum initial investment is $50,000 and
the minimum for each purchase of additional shares is $100. Institutional
Clients may set different minimums for their Customers' investments in accounts
invested in Navigator Shares.
Customers of certain Institutional Clients that have omnibus accounts with the
funds' transfer agent can purchase shares through those Institutions. The
distributor may pay such Institutional Clients for account servicing.
Institutional Clients may charge their Customers for services provided in
connection with the purchase and redemption of shares. Information concerning
these services and any applicable charges will be provided by the Institutional
Clients. This Prospectus should by read by Customers in connection with any such
information received by Institutional Clients. Any such fees, charges or
requirements imposed by Institutional Clients will be in addition to the fees
and requirements of this Prospectus.
Certain institutions that have agreements with Legg Mason or the funds may be
authorized to accept purchase and redemption orders on their behalf. Once the
authorized institution accepts the order, your order will be processed at the
next determined net asset value. You should consult with your institution to
determine the time by which it must receive your order to get that day's share
price. It is the institution's responsibility to transmit your order to the fund
in a timely fashion.
Purchase orders received by Legg Mason or Fairfield before the close of the New
York Stock Exchange (normally 4:00 p.m., Eastern time) will be processed at the
fund's net asset value as of the close of the exchange on that day. Orders
received after the close of the exchange will be processed at the fund's net
asset value as of the close of the exchange on the next day. Payment must be
made within three business days to the selling organization.
You will begin to earn dividends as of settlement date, which is normally the
third business day after your order is placed.
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[icon] H O W T O S E L L Y O U R S H A R E S
To redeem your shares by telephone:
o Fairfield clients may call 1-800-441-3885
o Legg Mason clients may call 1-800-822-5544
Please have available the number of shares (or dollar amount) to be redeemed and
the account number.
The fund will follow reasonable procedures to ensure the validity of any
telephone redemption request, such as requesting identifying information from
callers or employing identification numbers. Unless you specify that you do not
wish to have telephone redemption privileges, you may be held responsible for
any fraudulent telephone order.
Customers of Institutional Clients may redeem only in accordance with
instructions and limitations pertaining to their account at the Institution.
Redemption orders received by Legg Mason or Fairfield before the close of the
exchange will be transmitted to the funds' transfer agent. Your order will be
processed at that day's net asset value. Redemption orders received by Legg
Mason or Fairfield after the close of the exchange will be processed at the
closing net asset value on the next day the exchange is open.
Your order will be processed promptly and you will generally receive the
proceeds by mail to the name and address on the account registration within a
week. You may also have your telephone redemption requests paid by a direct wire
to a previously designated domestic commercial bank account
Redemptions of shares that were recently purchased by check or acquired through
reinvestment of dividends on such shares may be delayed for up to 10 days from
the purchase date in order to allow for the check to clear.
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[icon] A C C O U N T P O L I C I E S
Net asset value per Navigator Share is determined daily, as of the close of the
New York Stock Exchange, on every day the exchange is open. To calculate each
fund's Navigator Share price, the fund's assets attributable to Navigator Shares
are valued and totaled, liabilities are subtracted, and the resulting net assets
are divided by the number of Navigator Shares outstanding. Each fund's
securities are valued on the basis of market quotations or, lacking such
quotations, at fair value as determined under the guidance of the Board of
Directors. Securities with remaining maturities of 60 days or less are valued at
amortized cost.
Where a security is traded on more than one market, which may include foreign
markets, the securities are generally valued on the market considered by the
adviser to be the primary market. The fund will value its foreign securities in
U.S. dollars on the basis of the then-prevailing exchange rates.
Fund shares may not be held in, or transferred to, an account with any firm that
does not have an agreement with Legg Mason, Fairfield or their affiliates.
If your account falls below $500, the fund may ask you to increase your balance.
If, after 60 days, your account is still below $500, the fund may close your
account and send you the proceeds.
Each fund reserves the right to:
o reject any order for shares or suspend the offering of shares for a period of
time
o change its minimum investment amounts
o delay sending out redemption proceeds for up to seven days. This generally
applies only in cases of very large redemptions, excessive trading or during
unusual market conditions. The funds may delay redemptions beyond seven days,
or suspend redemptions, only as permitted by the SEC.
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[icon] S E R V I C E S F O R I N V E S T O R S
Confirmations and Account Statements:
Confirmations will be sent to Institutional Clients after each transaction
involving Navigator Shares which will include the total number of shares being
held in safekeeping by the transfer agent. The transfer agent will send
confirmations of each purchase and redemption transaction (except a reinvestment
of dividends or capital gain distributions). Beneficial ownership of shares by
Customer accounts will be recorded by the Institutional Client and reflected in
their regular account statements.
Exchange Privilege:
Navigator Shares of a fund may be exchanged for Navigator Shares of any of the
other Legg Mason funds or the Legg Mason Cash Reserve Trust, provided these
funds are eligible for sale in your state of residence. You can request an
exchange in writing or by phone. Be sure to read the current prospectus for any
fund into which you are exchanging.
There is currently no fee for exchanges. An exchange of a fund's shares will be
treated as a sale of the shares and any gain on the transaction may be subject
to tax.
Each fund reserves the right to:
o terminate or limit the exchange privilege of any shareholder who makes more
than four exchanges from a fund in one calendar year
o terminate or modify the exchange privilege after 60 days' notice to
shareholders
Some Institutional Clients may not offer all of the Navigator Funds for
exchange.
15
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[icon] D I V I D E N D S A N D T A X E S
Government Intermediate and Investment Grade each declares dividends from its
net investment income daily and pays them monthly. High Yield declares and pays
these dividends monthly.
Each fund declares and pays dividends from net short-term capital gain and
distributions of substantially all net capital gain (the excess of net long-term
capital gain over net short-term capital loss) and, in the case of High Yield,
net realized gains from foreign currency transactions after the end of the
taxable year in which the gain is realized. A second distribution of net capital
gain may be necessary in some years to avoid imposition of a federal excise tax.
Your dividends and distributions will be automatically reinvested in additional
shares of the distributing fund. If you wish to receive dividends and/or
distributions in cash, you must notify Legg Mason or Fairfield at least 10 days
before the next dividend or distribution is to be paid. You may also request
that your dividends and distributions be reinvested in Navigator Shares of
another Legg Mason fund. Qualified retirement plans that obtained Navigator
Shares through exchange generally receive dividends and distributions in
additional shares of the distributing fund.
If the postal or other delivery service is unable to deliver your check, your
distribution option will automatically be converted to having all dividends and
other distributions reinvested in fund shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
Fund dividends and distributions are taxable to investors (other than qualified
retirement plans and other tax exempt investors) whether received in cash or
reinvested in additional Navigator Shares of the fund. Dividends of net
investment income and any net short-term capital gains will be taxable as
ordinary income. Distributions of a fund's net capital gain will be taxable as
long-term capital gain, regardless of how long you have held your fund shares.
The sale or exchange of fund shares may result in a taxable gain or loss,
depending on whether the proceeds are more or less than the cost of your shares.
A tax statement is sent to each investor at the end of each year detailing the
tax status of your distributions.
Each fund will withhold 31% of all dividends, capital gains distributions and
redemption proceeds payable to individuals and certain other non-corporate
shareholders who do not provide the fund with a valid taxpayer identification
number. The funds will also withhold 31% of all dividends and capital gain
distributions and payable to such shareholders who are otherwise subject to
backup withholding.
Because each investor's tax situation is different, please consult your tax
advisor about federal, state and local tax considerations.
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[icon] F I N A N C I A L H I G H L I G H T S
The financial highlights table is intended to help you understand each fund's
financial performance for the past 5 years. Total return represents the rate
that an investor would have earned (or lost) on an investment in a fund,
assuming reinvestment of all dividends and distributions. This information has
been audited by the funds' independent accountants, [xxxx], whose report, along
with the funds' financial statements, is incorporated by reference into the
Statement of Additional Information (see back cover) and is included in the
annual report. The annual report is available upon request by calling toll-free
1-800-822-5544.
U.S. Government Intermediate
Navigator Shares
<TABLE>
<CAPTION>
---------------------------------------- ---------------------------------------------------------------
Income from Investment Distributions
Operations
- ---------- ------------ ------------ ------------- ----------- ----------- ------------ ------------ ------------ -------------
For the Net Net Net Total From net In excess From net Total Net
years asset investment realized & from investment of net realized distributions asset
ended value, income unrealized investment income investment gain on value,
Dec. 31, beginning gain (loss) operations income investments end of
of year on year
investments,
options and
futures
- ---------- ------------ ------------ ------------- ----------- ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998
- ---------- ------------ ------------ ------------- ----------- ----------- ------------ ------------ ------------ -------------
1997 $10.31 $.65 (B) $ .09 $ .74 $(.64) $(.01) -- $(.65) $10.40
- ---------- ------------ ------------ ------------- ----------- ----------- ------------ ------------ ------------ -------------
1996 $10.47 $.67 (B) $(.16) $ .51 $(.66) $(.01) -- $(.67) $10.31
- ---------- ------------ ------------ ------------- ----------- ----------- ------------ ------------ ------------ -------------
1995 $ 9.72 $.62 (B) $ .75 $1.37 $(.62) -- -- $(.62) $10.47
- ---------- ------------ ------------ ------------- ----------- ----------- ------------ ------------ ------------ -------------
1994 (A) $ 9.72 $.05 (B) -- $ .05 $(.05) -- -- $(.05) $ 9.72
- ---------- ------------ ------------ ------------- ----------- ----------- ------------ ------------ ------------ -------------
</TABLE>
Ratios/Supplemental Data:
<TABLE>
<CAPTION>
- ---------- -------------- ------------- ---------------------- --------------- ---------------------------------
For the Total Return Ratio of Net Investment Portfolio Net Assets,
year (%) Expenses Income (Loss) Turnover Rate End of Year
ended to Average to Average Net (%) (thousands - $)
Dec. 31, Net Assets Assets (%)
(%)
- ---------- -------------- ------------- ---------------------- ---------------- --------------------------------
<S> <C> <C> <C> <C> <C>
1998
- ---------- -------------- ------------- ---------------------- ---------------- --------------------------------
1997 7.45 .45 (B) 6.40 (B) 252 7,914
- ---------- -------------- ------------- ---------------------- ---------------- --------------------------------
1996 5.09 .42 (B) 6.47 (B) 354 8,082
- ---------- -------------- ------------- ---------------------- ---------------- --------------------------------
1995 14.45 .44 (B) 6.08 (B) 290 4,184
- ---------- -------------- ------------- ---------------------- ---------------- --------------------------------
1994 (A) .50(C) .40 (B,D) 6.44 (B,D) 316 (D) 4,024
- ---------- -------------- ------------- ---------------------- ---------------- --------------------------------
</TABLE>
<TABLE>
<CAPTION>
Investment Grade
Navigator Shares
---------------------------------------- ---------------------------------------------------------------
Income from Investment Distributions
Operations
- ---------- ------------ ------------ ------------- ----------- ----------- ------------ ------------ ------------ -------------
For the Net Net Net Total From net In excess From net Total Net
years asset investment realized & from investment of net realized distributions asset
ended value, income unrealized investment income investment gain on value,
Dec. 31, beginning gain (loss) operations income investments end of
of year on year
investments,
options and
futures
- ---------- ------------ ------------ ------------- ----------- ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998
- ---------- ------------ ------------ ------------- ----------- ----------- ------------ ------------ ------------ -------------
1997 $10.22 $.71(F) $.37 $1.08 $(.71) -- -- $(.71) $10.59
- ---------- ------------ ------------ ------------- ----------- ----------- ------------ ------------ ------------ -------------
1996 $10.44 $.70(F) $(.22) $.48 $(.70) -- -- $(.70) $10.22
- ---------- ------------ ------------ ------------- ----------- ----------- ------------ ------------ ------------ -------------
1995 (E) $10.32 $.03(F) $.12 $.15 $(.03) -- -- $(.03) $10.44
- ---------- ------------ ------------ ------------- ----------- ----------- ------------ ------------ ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
- ------------ ------------ ----------------- ---------------- ---------------------- ----------------------------
For the Total Ratio of Net Investment Portfolio Net Assets,
years Return Expenses Income (Loss) Turnover Rate End of Year
ended Dec. (%) to Average Net to Average Net (%) (thousands - $)
31, Assets (%) Assets (%)
- ------------ ------------ ----------------- ---------------- ---------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1998
- ------------ ------------ ----------------- ---------------- ---------------------- ----------------------------
1997 10.95 .43 (F) 6.87 (F) 259 252
- ------------ ------------ ----------------- ---------------- ---------------------- ----------------------------
1996 4.88 .41 F, (D) 6.99 F, (D) 383 243
- ------------ ------------ ----------------- ---------------- ---------------------- ----------------------------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ------------ ------------ ----------------- ---------------- ---------------------- ----------------------------
1995 (E) 1.42 (C) .40 (F, D) 6.73 (F, D) 221 (D) 249
- ------------ ------------ ----------------- ---------------- ---------------------- ----------------------------
</TABLE>
<TABLE>
<CAPTION>
High Yield
Navigator Shares
------------------------------------------ -----------------------------------------------------------------
Income from Investment Distributions
Operations
- ----------- ------------ ------------ ------------- ------------ ------------ ----------- ------------- ------------- -------------
For the Net Net Net Total From net In excess From net Total Net
year asset investment realized & from investment of net realized distributions asset
ended value, income unrealized investment income investment gain on value,
Dec. 31, beginning gain (loss) operations income investments end of
of year on year
investments,
options and
futures
- ----------- ------------ ------------ ------------- ------------ ------------ ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 (G)
- ----------- ------------ ------------ ------------- ------------ ------------ ----------- ------------- ------------- -------------
</TABLE>
Ratios/Supplemental Data
<TABLE>
<CAPTION>
- ----------- -------------- --------------- -------------------- ----------------------- -----------------------------
For the Total Return Ratio of Net Investment Portfolio Net Assets,
year (%) Expenses Income (Loss) Turnover Rate End of Year
ended to Average to Average Net (%) (thousands - $)
Dec. 31, Net Assets (%) Assets (%)
- ----------- -------------- --------------- -------------------- ----------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
1998 (G)
- ----------- -------------- --------------- -------------------- ----------------------- -----------------------------
</TABLE>
- ---------------------
A December 1, 1994 (commencement of sale of Navigator Shares) to December 31,
1994
B Net of fees waived by the manager for expenses exceeding the following
expense limitations: 0.4% until April 30, 1995; 0.45% until April 30, 1996;
and 0.50% until August 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, [xx]; 1997, .66%, .69%; 1995, .74%; and
1994, .66%.
C Not annualized
D Annualized
E December 1, 1995 (commencement of sale of Navigator Shares) to December 31,
1995
F Net of fees waived by the manager for expenses exceeding the following
expense limitations: 0.4% until April 30, 1996; and 0.50% until August 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, [xx]%; 1997, .82%; 1996, .88%; and 1995, .82%.
G May 5, 1998 (commencement of operations) to December 31, 1998
17
<PAGE>
L e g g M a s o n I n c o m e T r u s t, I n c.
The following additional information about the funds is available upon request
and without charge:
Statement of Additional Information (SAI) - the SAI is filed with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
considered part of) the prospectus. The SAI provides additional details about
each fund and its policies.
Annual and Semiannual Reports - additional information about each fund's
investments is available in the funds' annual and semiannual reports to
shareholders. These reports provide detailed information about each fund's
portfolio holdings and operating results.
To request the SAI or any reports to shareholders, or to obtain more
information:
o call toll-free 1-800-822-5544
o visit us on the Internet via http://www.leggmason.com
o write to us at: Legg Mason Wood Walker, Incorporated
100 Light Street, P.O. Box 1476
Baltimore, Maryland 21203-1476
Information about the funds, including the SAI, can be reviewed and copied at
the SEC's public reference room in Washington, DC. (phone 1-800-SEC-0330).
Reports and other information about the funds are available on the SEC's
Internet site at http://www.sec.gov. Investors may also write to: SEC, Public
Reference Section, Washington, DC 20549-6009. A fee will be charged for making
copies.
SEC file number 811-5029
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