Semi-Annual Report
June 30, 1999
Legg Mason Income Trust, Inc.
U.S. Government Intermediate
Investment Grade
High Yield
U.S. Government Money Market
Primary Class
LEGG
MASON
FUNDS
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
<PAGE>
To Our Shareholders,
We are pleased to provide you with this report covering operations of the
Legg Mason U.S. Government Intermediate Portfolio, Investment Grade Income
Portfolio, High Yield Portfolio and U.S. Government Money Market Portfolio for
the period ended June 30, 1999.
The following table summarizes key statistics for each Fund, as of June 30,
1999:
<TABLE>
<CAPTION>
Net Asset Value
SEC Yield(1) Average Life Per Share
---------- -------------- ----------------
<S> <C> <C> <C>
Government Intermediate 4.96% 8.49 years $10.10
Investment Grade 6.04% 12.20 years $ 9.96
High Yield 5.95% 4.38 years $15.56
Government Money Market 4.20% 75 days $ 1.00
</TABLE>
Net asset values per share of Government Intermediate and Investment Grade
declined from their December 31, 1998 levels, reflecting the rise in interest
rates which occurred over the six-month period. Despite generally higher
interest rates, High Yield's net asset value per share rose during the six
months, reflecting gains in the value of its portfolio holdings. Total
returns(2) for the Primary Class of shares of Government Intermediate,
Investment Grade and High Yield during the six-month period were -1.5%, -2.3%
and +8.6%, respectively.
For each of our Funds, historical performance is not indicative of future
results, and the principal value of our holdings will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.(3)
During 1998 and into 1999, focus on the Year 2000 issue increased
significantly. As you 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 our 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 are
in place to ensure that
- --------------------------------------------------------------------------------
(1)SEC yields reported for the U.S. Government Intermediate, Investment Grade
and High Yield Portfolios are for the 30 days ended June 30, 1999. U.S.
Government Money Market Portfolio's SEC yield is for the 7 days ended June 30,
1999.
(2)Total return measures investment performance in terms of appreciation or
depreciation in 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.
(3)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 Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
<PAGE>
functions critical to the Funds' operations will continue without interruption.
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.
For several operational reasons, we have changed the capital gain
distribution payment schedule for the Funds. Our new schedule is to make capital
gain distributions, if any, in June and December. As a result, on June 18,
Investment Grade paid a long-term capital gain distribution of $0.03 per share
to shareholders of record on June 16. No capital gain distributions were paid by
the other Funds.
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
August 6, 1999
2
<PAGE>
Portfolio Managers' Comments
Legg Mason Income Trust, Inc.
MARKET OVERVIEW
Events in the fixed-income markets so far this year have been dominated by
the continued robust strength of the U.S. economy and fears that this strength
may create inflationary pressures in the future. Although measured inflation did
jump in April as a result of sharply higher energy prices, most other sensitive
indicators of inflation remained subdued and the dollar registered impressive
gains against most currencies. Nevertheless, the Federal Reserve made inflation
concerns official by deciding to raise interest rates in June, citing as the
primary reason tight labor markets and supposedly "above-trend" economic growth.
The net result of these developments was a sharp increase in interest rates,
with intermediate-term rates rising somewhat more than long-term rates,
reflecting the fact that concerns over further Fed tightening were greater than
concerns over any significant rise in future inflation. The strength of the
economy served to bolster the outlook for earnings, resulting in a narrowing of
high yield and corporate credit spreads, but volatile interest rates kept
mortgage spreads fairly wide. With the Fed eager to take out insurance against a
potential rise in inflation and the bond market upping the ante with much higher
interest rates, signs began emerging in recent months that tight monetary policy
was taking the edge off the economy's strength. Payroll employment growth has
slowed this year, and the interest-sensitive housing and construction sectors
have experienced a noticeable slowdown in activity.
US. GOVERNMENT INTERMEDIATE AND INVESTMENT GRADE PORTFOLIOS
Results for both Funds were somewhat disappointing, but dominated by the
sharp rise in interest rates, which ran counter to the Funds' positioning for
declining interest rates. The negative impact of higher yields was somewhat
offset, however, by a barbell emphasis on longer-maturity bonds, as these
suffered relatively less in a flattening yield curve environment. An overweight
exposure to corporate bonds and emerging market debt made a moderate
contribution to performance, but this was offset to a degree by an emphasis on
discount coupon mortgages, as these underperformed other sectors of the mortgage
market as interest rates rose. A moderate exposure to inflation-indexed bonds
contributed to performance for the period, as real yields rose by much less than
the rise in nominal yields, and the brief acceleration of inflation added to
their total returns.
Government Intermediate produced a total return of -1.54% for the six-month
period, versus the Salomon Bros. Medium-Term Treasury/Government-Sponsored Index
return of -0.5%. Investment Grade generated a total return of -2.3% versus the
Salomon Bros. Broad Investment Grade Index return of -1.39%.
HIGH YIELD PORTFOLIO
The High Yield portfolio benefited during the period from the general
narrowing of credit spreads, but strong overall performance was primarily driven
by the Fund's warrant-acquired equity exposure to Global Crossing, whose shares
soared in the first quarter. Also contributing to performance was a return to
more normal conditions in the high yield market, since this benefited in
particular the Fund's exposure to the lower quality sectors which had
underperformed in the prior period. In addition, a dimunition of Fund
redemptions, which had adversely impacted performance in the prior period,
provided a more stable backdrop for returns in this period as it reduced the
need to hold precautionary levels of cash.
3
<PAGE>
Portfolio Managers' Comments-Continued
For the six-month period, High Yield posted a total return of 8.64% versus
the Lehman Bros. High Yield Index return of 2.2%
MARKET COMMENTARY AND OUTLOOK
Despite recent concerns, core inflation (ex-energy) has been in a steady
descent for almost 10 years, and now sits at its lowest level in 35 years. Yet
inflation and Fed tightening hysteria have risen even as the dollar continues
its climb to a ten-year high against the vast majority of the world's
currencies: this defies a reasoned explanation. Inflation is defined as the loss
of purchasing power of one's unit of account, so the dollar can't be gaining
purchasing power worldwide but also suffering from inflation. In addition,
historical evidence shows a strong link between a rising currency and falling
inflation: since 1970, the U.S. inflation rate has only trended down during
periods of a stable or strong dollar. Weak commodity prices also bolster the
dollar's value. Despite the sizeable gains in oil and lumber this year, most
commodity prices are trading at historically depressed levels, with the average
commodity having fallen some 20% in the past three years.
Meanwhile, the U.S. stock market has reached new highs on the back of the
economy's strength, and even most global stock markets have been moving up of
late. But the corporate bond market has taken credit spreads to recessionary
levels, apparently out of fear that the good times won't last. Plus, the world's
capital markets assign such a high probability to the imminent demise and
default of emerging market countries that their bond spreads are trading at
eye-popping levels of 1,000 basis points.(1) It is more than challenging to
reconcile the strength of world equity markets with the fear embodied in spreads
throughout the world credit markets.
Behind the scenes, the main engine driving the dynamic U.S. economy is the
fabulous high-tech revolution. It continues to offer its boon to mankind in the
form of ever-cheaper and ever-more- powerful computational and productivity
tools. So far this has been a virtuous growth cycle, because the incentives to
invest in U.S. productivity have been enormous. With low inflation and even
deflation the new norm, the only investments that pay off are those which can
reduce costs and/or increase the productivity of labor (as opposed to the
speculative investments that paid off in the inflationary 1970s). It is no
wonder that labor is becoming scarce and real wages are rising, with so much new
capital chasing the average worker. More importantly, it is not hard to see why
low inflation is a stimulus to growth, since productive investments are the only
game in town.
Nevertheless, the Fed appears determined to slow down this engine of growth
that is the U.S. economy. To date their efforts to tighten monetary policy have
proved beneficial, because they result in lower inflation and a stronger dollar
and that attracts more new investment. But at some point tighter monetary policy
and sharply higher interest rates are likely to take a toll on growth, and there
is a growing body of evidence to suggest that this is occurring. Wide credit
spreads begin to make sense in this context, because you don't want a lot of
debt when tight money and the prospect of slowing growth are in the air. Still,
it is hard to imagine that the Fed would risk an outright deflation or recession
scenario. After all, they were quick to ease when the going got rough last year,
and they have plenty of room to ease should deflation risks get out of hand
tomorrow.
- ------------
(1)100 basis points = 1%.
4
<PAGE>
STRATEGY
The great difficulty we face today is balancing our belief that the inflation
fundamentals (e.g., a strong dollar, weak gold and commodity prices, high real
interest rates and a flat yield curve) remain very bullish for bonds, with the
recognition that healthy economic growth fundamentals have become antagonistic.
The near-term direction of rates will depend on whether the U.S. economy grows
by more than the Federal Reserve feels comfortable with, but the long-term
direction should be dictated by the continuing evidence of tight money and low
inflation. It may turn out that the economy slows by enough to allay the Fed's
concerns, but even if it doesn't, the bond market cannot forever ignore the
reality of continued low inflation. In the meantime, deflation risks remain more
of a concern than reflation risks.
This leaves us with a desire to remain long duration, but with a barbelled
exposure to maturities to hedge the near-term risk of continued strength in the
economy. Still, we will look for opportunities to reduce the barbell in
anticipation of an eventual move by the Fed to ease credit conditions. Credit
spreads and mortgage spreads appear wide enough to warrant holding overweight
exposures to these sectors, but economic slowdown risks call for some defensive
measures in the form of higher credit quality, broad diversification and lower
coupon mortgages to minimize prepayment exposure. On balance and over time, we
expect that the portfolios will benefit handsomely from a decline in interest
rates to levels that are more commensurate with today's benign inflation
environment. In addition, we believe that today's relatively wide spreads in
corporate, emerging market and mortgage debt are unlikely to persist, and that
they also will return to levels more commensurate with what appears to be
reasonably healthy economic fundamentals.
Western Asset Management Company
July 30, 1999
5
<PAGE>
Performance Information
Legg Mason Income Trust, Inc.
Total Return for One, Five and Ten Years and Life of Class, as of June 30, 1999
The returns shown 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 that they differ from actual year-to-year results. No adjustment has
been made for any income taxes payable by shareholders.
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.
The Fund's total returns as of June 30, 1999, were as follows:
<TABLE>
<CAPTION>
U.S. Government Investment Grade High
Intermediate Income Yield
Portfolio Portfolio Portfolio
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average Annual Total Return
Primary Class:
One Year +1.75% +1.20% -1.83%
Five Years +5.99 +7.67 +10.82
Ten Years +6.83 +7.66 N/A
Life of Class(A) +7.13 +8.00 +9.42
Cumulative Total Return
Primary Class:
One Year +1.75% +1.20% -1.83%
Five Years +33.76 +44.71 +67.14
Ten Years +93.55 +109.27 N/A
Life of Class(A) +127.06 +150.05 +62.78
- ------------------------------------------------------------------------------------------
</TABLE>
(A)Primary Class inception dates are:
U.S. Government Intermediate-Term Portfolio -- August 7, 1987
Investment Grade Income Portfolio -- August 7, 1987
High Yield Portfolio -- February 1, 1994
6
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 1999 (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
U.S. Government Intermediate-Term Portfolio
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government and Agency Obligations -- 34.7%
Fixed-rate Securities -- 26.1%
United States Treasury Bonds 5.25% 11/15/28 $ 4,320 $ 3,829
United States Treasury Notes 5.25% 5/15/04 4,700 4,618
United States Treasury Notes 7.50% 2/15/05 1,810 1,949
United States Treasury Notes 6.875% 5/15/06 37,800 39,796
United States Treasury Notes 6.50% 10/15/06 31,830 32,864
United States Treasury Notes 6.125% 8/15/07 6,670 6,742
United States Treasury Notes 5.50% 5/15/09 60 59
-----------
89,857
-----------
Indexed Securities -- 8.6%
United States Treasury Inflation-
Indexed Security 3.375% 1/15/07 6,399 6,135(A)
United States Treasury Inflation-
Indexed Security 3.625% 1/15/08 2,798 2,719(A)
United States Treasury Inflation-
Indexed Security 3.875% 4/15/29 21,099 20,809(A)
-----------
29,663
-----------
Total U.S. Government and Agency Obligations (Identified Cost-- $121,221) 119,520
- ----------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-backed Securities -- 50.4%
Fixed-rate Securities -- 48.0%
Fannie Mae 11.50% 4/1/04 634 654
Fannie Mae 8.50% 6/1/10 to 8/1/11 1,877 1,941
Fannie Mae 6.50% 11/1/10 to 4/1/29 41,676 40,539
Fannie Mae 12.50% 11/1/12 to 4/1/18 2,062 2,242
Fannie Mae 7% 1/1/13 to 6/1/29 45,887 45,377
Fannie Mae 7% 7/1/13 5,000 4,942(B)
Fannie Mae 9.50% 7/1/14 547 580
Fannie Mae 11% 12/1/15 481 521
Fannie Mae 9% 11/1/21 1,285 1,360
Fannie Mae 6% 11/1/27 to 4/1/29 3,410 3,203
Freddie Mac 10.75% 7/1/00 2 2
Freddie Mac 8.75% 2/1/01 to 10/1/01 270 276
Freddie Mac 9% 2/1/02 to 1/1/21 2,014 2,122
Freddie Mac 8.25% 2/1/08 251 258
Freddie Mac 8.50% 12/1/08 to 6/1/21 1,275 1,325
Freddie Mac 9.75% 11/1/09 to 11/1/14 301 316
Freddie Mac 5.50% 2/1/14 197 187
Freddie Mac 6.25% 11/15/18 12,000 11,981
Freddie Mac 6.50% 4/1/29 32,846 31,706
Government National Mortgage Association 9% 7/15/04 to 9/15/22 2,789 2,918
</TABLE>
7
<PAGE>
Statement of Net Assets-Continued
Legg Mason Income Trust, Inc.
<TABLE>
<CAPTION>
U.S. Government Intermediate-Term Portfolio-Continued
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed-rate Securities --Continued
Government National Mortgage Association 6% 5/15/14 to 3/15/29 $ 8,969 $ 8,406
Government National Mortgage Association 6.50% 7/15/28 to 3/15/29 4,954 4,764
-----------
165,620
-----------
Indexed Securities(C) -- 1.4%
Government National Mortgage Association 6.125% 12/20/21 1,705 1,735
Government National Mortgage Association 6.875% 6/20/22 2,899 2,925
-----------
4,660
-----------
Variable-rate Securities(D) -- 1.0%
Government National Mortgage Association 6.125% 10/20/17 482 490
Government National Mortgage Association 6.625% 7/20/22 to 8/20/22 2,865 2,902
-----------
3,392
-----------
Total U.S. Government Agency Mortgage-backed Securities (Identified Cost-- $177,152) 173,672
- ----------------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes -- 2.9%
Banking and Finance -- 2.9%
Crestar Capital Trust I 8.16% 12/15/26 10,000 10,025
-----------
Total Corporate Bonds and Notes (Identified Cost-- $11,032) 10,025
- ----------------------------------------------------------------------------------------------------------------------
Yankee Bonds(E)-- 0.9%
Fixed-rate Securities -- 0.9%
Petrozuata Finance, Inc. 7.63% 4/1/09 3,910 3,286(F)
-----------
Total Yankee Bonds (Identified Cost-- $4,011) 3,286
- ----------------------------------------------------------------------------------------------------------------------
Short-term Investments -- 12.2%
Corporate Bonds and Notes -- 0.6%
US West Capital Funding Incorporated 5.818% 6/15/00 2,200 2,199(F)
-----------
U. S. Government and Agency Obligations -- 0.3%
Freddie Mac 4.72% 11/12/99 1,000 983(G)
-----------
Repurchase Agreement -- 11.3%
Merrill Lynch Government Securities, Inc.
4.95%, dated 6/30/99, to be repurchased at
$38,835 on 7/1/99 (Collateral: $39,660 Federal Home Loan
Bank Medium-Term Notes,5.12%, due 5/17/00, value $39,853) 38,830 38,830
-----------
Total Short-Term Investments (Identified Cost-- $42,012) 42,012
- ----------------------------------------------------------------------------------------------------------------------
Total Investments-- 101.1% (Identified Cost-- $355,428) 348,515
Other assets less liabilities-- (1.1)% (3,785)
-----------
Net assets-- 100.0% $344,730
-----------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS CONSISTING OF:
Accumulated paid-in capital applicable to:
33,301 Primary Class shares outstanding $353,045
835 Navigator Class shares outstanding 8,527
Accumulated net realized loss on investments, options and futures (9,282)
Unrealized depreciation of investments (7,560)
--------
NET ASSETS-- 100.0% $344,730
--------
NET ASSET VALUE PER SHARE:
PRIMARY CLASS $10.10
--------
NAVIGATOR CLASS $10.10
</TABLE>
<TABLE>
<CAPTION>
Expiration Actual Appreciation/
Date Contracts (Depreciation)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options Written(H)
U.S. Treasury Bond Futures Put, strike price $114 August 99 103 $ (7)
-------
Futures Contracts Purchased(H)
U.S. Treasury Note Futures September 99 50 $ 48
Eurodollar Futures June 02 450 (331)
-------
$(283)
-------
Futures Contracts Written(H)
U.S. Treasury Note Futures September 99 474 $(496)
Eurodollar Futures June 00 450 139
-------
$(357)
-------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) United States Treasury Inflation-Indexed Security -- U.S. Treasury security
whose principal value is adjusted daily in accordance with changes to the
Consumer Price Index. Interest is calculated on the basis of the current
adjusted principal value.
(B) When-Issued Security -- Security purchased on a delayed delivery basis.
Final settlement amount and maturity date have not yet been announced.
(C) Indexed Security -- The rate of interest earned on these securities is tied
to the Cost of Funds Index (COFI), the One-Year Treasury Constant Maturity
Rate, or the London Interbank Offered Rate (LIBOR). The coupon rates shown
are the rates at June 30, 1999.
(D) The coupon rates shown on variable-rate securities are the rates at June 30,
1999. These rates vary with the weighted average coupon of the underlying
loans.
(E) Yankee Bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
(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 1.6% of net
assets.
(G) Collateral to cover futures contracts.
(H) Options and futures are described in more detail in the notes to financial
statements.
See notes to financial statements.
9
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 1999 (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Investment Grade Income Portfolio
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Corporate Bonds and Notes -- 30.7%
Automotive -- 1.1%
Ford Motor Company 7.70% 5/15/97 $ 1,000 $ 1,004
Lear Corporation 7.96% 5/15/05 270 263(A)
Lear Corporation 8.11% 5/15/09 740 714(A)
----------
1,981
----------
Banking and Finance -- 3.2%
Associates Corporation, North America 8.15% 8/1/09 1,000 1,073
Dresdner Funding Trust I 8.151% 6/30/31 400 384(A)
General Motors Acceptance Corporation 0% 6/15/15 2,700 858(B)
IBJ Preferred Capital Corp. LLC 8.79% 12/29/49 1,560 1,303(A)
SB Treasury Company LLC 9.40% 12/29/49 1,790 1,758(A)
Socgen Real Estate Co. LLC 7.64% 12/29/49 180 170(A)
Tokai Preferred Capital Company LLC 9.98% 12/29/49 480 443(A)
----------
5,989
----------
Chemicals -- 1.1%
Lyondell Chemical Company 9.875% 5/1/07 30 31(A)
Rohm and Haas Company 7.85% 7/15/29 2,000 1,998(A)
----------
2,029
----------
Construction and Building Materials -- N.M.
Nortek, Inc. 8.875% 8/1/08 100 99(A)
----------
Food, Beverage and Tobacco -- 4.3%
Archer-Daniels-Midland Company 6.625% 5/1/29 360 330
J. Seagram & Sons 6.40% 12/15/03 700 685
J. Seagram & Sons 6.80% 12/15/08 500 477
J. Seagram & Sons 7.50% 12/15/18 490 474
J. Seagram & Sons 7.60% 12/15/28 210 202
Loews Corporation 7.625% 6/1/23 2,000 1,924
Pepsi Bottling Group Inc. 7% 3/1/29 1,800 1,690(A)
R.J. Reynolds Tobacco Holdings Inc. 7.75% 5/15/06 1,280 1,268(A)
R.J. Reynolds Tobacco Holdings Inc. 7.875% 5/15/09 860 836(A)
----------
7,886
----------
Gaming -- 0.1%
Horseshoe Gaming Holdings, Inc. 8.625% 5/15/09 69 67(A)
International Game Technology 8.375% 5/15/09 70 68(A)
----------
135
----------
Media and Entertainment -- 5.9%
Century Communications Corp. 8.875% 1/15/07 39 39
Chancellor Media Corporation 8% 11/1/08 63 62(A)
Liberty Media Group 7.875% 7/15/09 2,000 1,988(A)
10
<PAGE>
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------------------------------
Media and Entertainment -- Continued
News America Holdings Incorporated 8.875% 4/26/23 $ 500 $ 552
News America Holdings Incorporated 8.25% 10/17/96 200 197
News America Incorporated 7.625% 11/30/28 1,000 972
TCI Communications Inc. 6.375% 5/1/03 240 240
TCI Communications Inc. 7.875% 2/15/26 2,950 3,109
TCI Communications Inc. 9.65% 3/31/27 1,650 1,867
TCI Communications Inc. 7.125% 2/15/28 540 522
Walt Disney Company 5.62% 12/1/08 1,550 1,430
----------
10,978
----------
Gas and Pipeline Utilities -- 3.3%
CMS Panhandle Holding Company 6.125% 3/15/04 400 390(A)
Conoco Inc. 6.95% 4/15/29 1,800 1,685
Louis Dreyfus Natural Gas Corporation 9.25% 6/15/04 1,000 1,063
Union Oil Company of California 7.35% 6/15/09 3,000 3,026
----------
6,164
----------
Manufacturing -- 0.2%
American Axle and Manufacturing Incorporated 9.75% 3/1/09 70 70
American Standard Companies Inc. 8.25% 6/1/09 37 37
American Standard Companies Inc. 7.625% 2/15/10 25 23
J. L. French Automotive Casting 11.50% 6/1/09 100 103(A)
Terex Corporation 8.875% 4/1/08 132 127(A)
----------
360
----------
Retail -- 1.1%
Kmart Corporation 7.95% 2/1/23 2,000 2,020
----------
Services -- 0.1%
Safety-Kleen Corp. 9.25% 5/15/09 122 123(A)
----------
Telecommunications -- 2.6%
AT&T Corporation 6.50% 3/15/29 1,270 1,146
Charter Communications Holdings 8.625% 4/1/09 75 72(A)
Crown Castle International Corp. 0% 5/15/11 84 49(C)
Crown Castle International Corp. 9% 5/15/11 22 21
GTE Corporation 6.94% 4/15/28 1,700 1,609
Lucent Technologies Incorporated 5.50% 11/15/08 1,860 1,713
NEXTLINK Communications Inc. 10.75% 6/1/09 96 99
----------
4,709
----------
Transportation -- 2.0%
Conrail Inc. 7.875% 5/15/43 600 599
Norfolk Southern Corporation 7.70% 5/15/17 3,100 3,183
----------
3,782
----------
11
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
Rate Maturity Date Par/Shares Value
- -------------------------------------------------------------------------------------------------------------------
Utilities -- 5.7%
AES Corporation 9.50% 6/1/09 $ 500 $ 516
Calpine Corporation 7.75% 4/15/09 49 46
Cleveland Electric Illumination Co. 7.88% 11/1/17 850 866
Connecticut Light and Power Company 7.875% 6/1/01 1,750 1,787
Edison Mission Energy 7.73% 6/15/09 2,000 2,030(A)
Gulf States Utilities Corp. 8.25% 4/1/04 1,800 1,902
Niagara Mohawk Power Corporation 7.25% 10/1/02 630 634
Niagara Mohawk Power Corporation 7.75% 10/1/08 1,010 1,043
Niagara Mohawk Power Corporation 0% 7/1/10 720 533(C)
North Atlantic Energy Corporation 9.05% 6/1/02 564 580
System Energy Resources, Inc. 7.43% 1/15/11 690 672
----------
10,609
----------
Total Corporate Bonds and Notes (Identified Cost-- $57,722) 56,864
- ----------------------------------------------------------------------------------------------------------------------
Asset-backed Securities -- 0.5%
Green Tree Financial Corporation 7.85% 7/15/04 905 910
----------
Total Asset-backed Securities (Identified Cost-- $914) 910
- ----------------------------------------------------------------------------------------------------------------------
Mortgage-backed Securities -- 4.2%
Fixed-rate Securities -- 3.9%
Asset Securitization Corporation 6.92% 2/14/29 1,121 1,119
Nationslink Funding Corporation 5.805% 2/10/01 1,319 1,315
Nomura Asset Securities Corporation 8.15% 3/4/20 600 632
Nomura Asset Securities Corporation 6.59% 3/17/28 2,000 1,945
Nomura Asset Securities Corporation 7.12% 4/13/36 680 687
Oakdale Mall Trust 94-1 Class (A) 7.95% 5/1/06 1,000 1,029(A)
PSB Financial Corporation II 11.05% 12/1/15 363 388
----------
7,115
----------
Variable-rate Securities(D) -- 0.3%
Resolution Trust Corporation 6.78% 4/25/28 414 412(A)
Resolution Trust Corporation 7.93% 9/25/29 210 214
----------
626
----------
Total Mortgage-backed Securities (Identified Cost-- $7,806) 7,741
- ----------------------------------------------------------------------------------------------------------------------
U.S. Government and Agency Obligations -- 15.2%
Fixed-rate Securities -- 8.3%
United States Treasury Bonds 0% 2/15/23 1,500 352(B)
United States Treasury Bonds 6.375% 8/15/27 5,280 5,410
United States Treasury Bonds 6.125% 11/15/27 8,510 8,453
United States Treasury Notes 5.625% 12/31/02 600 599
United States Treasury Notes 5.50% 1/31/03 500 497
----------
15,311
----------
12
<PAGE>
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------------------------------
Indexed Securities -- 6.9%
United States Treasury Inflation-
Indexed Security 3.625% 1/15/08 to 4/15/28 $11,196 $ 10,713(E)
United States Treasury Inflation-
Indexed Security 3.875% 4/15/29 2,143 2,114(E)
----------
12,827
----------
Total U.S. Government and Agency Obligations (Identified Cost-- $29,877) 28,138
- ----------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-backed Securities -- 31.5%
Fixed-rate Securities -- 29.7%
Fannie Mae 8% 4/25/06 to 3/1/10 929 952
Fannie Mae 6% 9/1/25 to 4/1/29 2,150 2,024
Fannie Mae 6.50% 8/1/28 to 4/1/29 15,778 15,221
Freddie Mac 8.75% 10/1/01 to 10/1/08 377 391
Freddie Mac 5% 1/15/04 1,000 954
Freddie Mac 8.50% 2/1/04 to 11/1/09 320 329
Freddie Mac 6% 2/1/14 1,916 1,828
Freddie Mac 7.50% 6/1/24 to 9/1/24 1,434 1,450
Freddie Mac 7% 8/1/24 to 4/1/29 7,869 7,794
Freddie Mac 8% 7/1/26 714 734
Freddie Mac 7% 7/1/29 1,300 1,286(F)
Freddie Mac 6.50% 7/1/29 3,200 3,090(F)
Government National Mortgage Association 6% 4/15/14 to 3/15/29 3,315 3,136
Government National Mortgage Association 9% 7/15/16 to 6/15/17 753 803
Government National Mortgage Association 7% 2/15/23 to 8/15/25 7,373 7,301
Government National Mortgage Association 7.50% 2/15/23 to 7/15/28 6,465 6,535
Government National Mortgage Association 8% 12/15/26 1,166 1,199
----------
55,027
----------
Indexed Securities(G) -- 1.3%
Government National Mortgage Association 6.875% 6/20/23 2,402 2,421
----------
Variable-rate Securities(D) -- 0.5%
Freddie Mac 7.171% 9/1/24 508 527
Government National Mortgage Association 6.125% 10/20/22 361 367
----------
894
----------
Total U.S. Government Agency Mortgage-backed Securities (Identified Cost-- $59,184) 58,342
- ----------------------------------------------------------------------------------------------------------------------
Yankee Bonds(H) -- 16.4%
Fixed-rate Securities -- 15.9%
Imperial Tobacco Group plc 7.125% 4/1/09 1,820 1,736
Korea Development Bank 6.75% 12/1/05 1,020 948
PDVSA Finance LTD1999-I 9.75% 2/15/10 4,000 3,902(A)
PDVSA Finance LTD1999-K 9.95% 2/15/20 800 760(A)
13
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
Investment Grade Income Portfolio -- Continued
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------------------------------
Fixed-rate Securities -- Continued
Petroleos Mexicanos 8.85% 9/15/07 $ 1,260 $ 1,134(A)
Petroleos Mexicanos 9.50% 9/15/27 360 340
Petroliam Nasional Berhad 7.625% 10/15/26 450 384
Pohang Iron & Steel Company Ltd. 7.375% 5/15/05 3,000 2,860
Province of Manitoba 9.50% 9/15/18 1,080 1,349
Republic of Argentina 11.75% 4/7/09 2,630 2,380
Republic of Brazil 11.625% 4/15/04 290 270
Republic of Panama 9.375% 4/1/29 200 189
Rothmans Nederland Holdings BV 6.875% 5/6/08 700 677
Tata Electric Company 8.50% 8/19/17 2,000 1,708(A)
Telefonica de Argentina 11.875% 11/1/04 4,000 4,080
United Mexican States 10.375% 2/17/09 410 413
United Mexican States 6.25% 12/31/19 300 219
United Mexican States 11.50% 5/15/26 1,900 2,080
YPF Sociedad Anonima 7.50% 10/26/02 812 799(A)
YPF Sociedad Anonima 9.125% 2/24/09 3,000 3,065
ZSC Specialty Chemicals plc 11% 7/1/09 129 130(A)
----------
29,423
----------
Indexed Securities(G) -- 0.5%
Republic of Argentina 5.9375% 3/31/05 977 833
----------
Total Yankee Bonds (Identified Cost-- $31,140) 30,256
- ----------------------------------------------------------------------------------------------------------------------
Common Stocks and Equity Interests -- 0.3%
News Corporation Limited 10 shs 641
----------
Total Common Stocks and Equity Interests (Identified Cost-- $650) 641
- ----------------------------------------------------------------------------------------------------------------------
Warrants -- N.M.
Republic of Argentina 1 wt 1
----------
Total Warrants (Identified Cost-- $18) 1
- ----------------------------------------------------------------------------------------------------------------------
Short-term Investments -- 2.9%
Corporate Bonds and Notes -- 0.6%
US West Capital Funding Incorporated 5.818% 6/15/00 $ 1,100 1,099(A,G)
----------
U. S. Government and Agency Obligations -- 0.8%
Freddie Mac 4.72% 11/12/99 1,000 983(I)
United States Treasury Notes 5.50% 2/29/00 500 501
----------
1,484
----------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Par/Shares Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Repurchase Agreement -- 1.5%
Merrill Lynch Government Securities, Inc.
4.95%, dated 6/30/99, to be repurchased at $2,691 on 7/1/99 (Collateral:
$2,830 Federal Home Loan Bank Medium-Term Notes, 5.125%, due 11/15/03,
value $2,787) $ 2,691 $ 2,691
----------
Total Short-Term Investments (Identified Cost-- $5,273) 5,274
- ----------------------------------------------------------------------------------------------------------------------
Total Investments-- 101.7% (Identified Cost-- $192,584) 188,167
Other assets less liabilities-- (1.7)% (3,203)
----------
Net assets consisting of:
Accumulated paid-in capital applicable to:
18,554 Primary Class shares outstanding $193,118
24 Navigator Class shares outstanding 252
Undistributed net investment income 72
Accumulated net realized loss on investments, options and futures (4,038)
Unrealized depreciation of investments (4,440)
----------
Net assets-- 100.0% $184,964
----------
Net asset value per share:
Primary Class $9.96
----------
Navigator Class $9.96
----------
Expiration Actual Appreciation/
Date Contracts (Depreciation)
- ---------------------------------------------------------------------------------------------------------------------------
Futures Contracts Purchased(J)
U.S. Treasury Note Futures March 00 6 $ (23)
----------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) 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 14.6% of net
assets.
(B) 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.
(C) 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.
(D) The coupon rates shown on variable-rate securities are the rates at June 30,
1999. These rates vary with the weighted average coupon of the underlying
loans.
(E) United States Treasury Inflation-Indexed Security -- U.S. Treasury security
whose principal value is adjusted daily in accordance with changes to the
Consumer Price Index. Interest is calculated on the basis of the current
adjusted principal value.
(F) When-Issued Security -- Security purchased on a delayed delivery basis.
Final settlement amount and maturity date have not yet been announced.
(G) Indexed Security -- The rate of interest earned on these securities is tied
to the Cost of Funds Index (COFI), the One-Year Treasury Constant Maturity
Rate, or the London Interbank Offered Rate (LIBOR). The coupon rates shown
are the rates at June 30, 1999.
(H) Yankee Bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
(I) Collateral to cover futures contracts.
(J) Options and futures are described in more detail in the notes to financial
statements.
N.M. -- Not meaningful.
See notes to financial statements.
15
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 1999 (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
High Yield Portfolio
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Corporate Bonds and Notes -- 54.9%
Cable and Media -- 12.4%
Adelphia Communications Corporation 7.75% 1/15/09 $ 4,000 $ 3,750
Adelphia Communications Corporation 7.875% 5/1/09 2,700 2,524
Big Flower Press Holdings Incorporated 8.625% 12/1/08 4,000 3,720
Brill Media Company, LLC 7.50% 12/15/07 3,000 2,430(A)
Chancellor Media Corporation 8% 11/1/08 4,500 4,410
Charter Communications Holdings 8.625% 4/1/09 4,500 4,331
Echostar Communications 9.375% 2/1/09 3,500 3,579(B)
Garden State Newspaper 8.625% 7/1/11 2,000 1,880
Lenfest Communications, Inc. 8.375% 11/1/05 2,000 2,089
Loral Space and Communications, Ltd. 9.50% 1/15/06 6,000 5,250
Mediacom, LLC 7.875% 2/15/11 4,000 3,750(B)
Mentus Media Corporation 12% 2/1/03 8,940 5,811
Pegasus Communications Corporation 9.75% 12/1/06 2,000 2,058
Radio Unica Corporation 0% 8/1/06 9,000 5,197(A,B)
Source Media Inc. 12% 11/1/04 3,000 2,415(C)
---------
53,194
---------
Chemicals -- 1.3%
Huntsman Corporation 9.50% 7/1/07 4,000 3,840
Lyondell Chemical Company 9.625% 5/1/07 250 258(B)
Lyondell Chemical Company 9.875% 5/1/07 1,375 1,401(B)
---------
5,499
---------
Computer Software -- 1.5%
Diva Systems Corporation 0% 3/1/08 4,750 1,609(A)
PSINet Incorporated 10% 2/15/05 3,000 2,985
Verio Incorporated 10.375% 4/1/05 2,000 2,020
---------
6,614
---------
Construction and Building Materials -- 2.2%
American Architectural Products Corp. 11.75% 12/1/07 4,500 3,420
DeGeorge Home Alliance 12% 4/1/01 3,500 280(D)
Falcon Building Products, Inc. 0% 6/15/07 2,500 1,675(A)
Fortress Group 13.75% 5/15/03 5,000 3,700
Nortek, Inc. 8.875% 8/1/08 290 298(B)
---------
9,373
---------
Energy -- 3.4%
Calpine Corporation 7.75% 4/15/09 4,000 3,830
Nuevo Energy Company 9.50% 4/15/06 3,000 3,000
Ocean Energy Incorporated 8.375% 7/1/08 4,000 3,860
Plains Resources Incorporated 10.25% 3/15/06 4,000 4,040
---------
14,730
---------
16
<PAGE>
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------------------------------
Entertainment and Leisure -- 4.0%
AMC Entertainment Incorporated 9.50% 2/1/11 $ 4,000 $ 3,820
Booth Creek Ski Holdings Incorporated 12.50% 3/15/07 8,750 7,787
HMH Properties Incorporated 8.45% 12/1/08 6,000 5,700
---------
17,307
---------
Financial Services -- 1.1%
Willis Corroon Corporation 9% 2/1/09 4,750 4,608(B)
---------
Food Services -- 0.5%
International Fast Foods Corporation 11% 10/31/07 6,884 2,065(B,C,E)
---------
Gaming -- 2.7%
Hollywood Park Incorporated 9.25% 2/15/07 3,000 2,970
Horseshoe Gaming Holdings, Inc. 8.625% 5/15/09 2,033 1,985(B)
International Game Technology 8.375% 5/15/09 1,700 1,666(B)
Isle of Capri Casinos Inc. 8.75% 4/15/09 3,000 2,827(B)
Manning Real Estate Associates LLC 15% 2/28/01 767 0(B,C,D,F,G)
Maritime Gaming L P 15% 2/28/01 1,151 0(B,C,D,F,G)
Mohegan Tribal Gaming Authority 8.75% 1/1/09 2,000 1,980(B)
---------
11,428
---------
Gas/Pipeline -- 2.5%
CMS Energy Corporation 6.75% 1/15/04 1,000 954(B)
CMS Energy Corporation 7.50% 1/15/09 3,750 3,496
Forest Oil Corporation 10.50% 1/15/06 5,500 5,734
Pride Petroleum Services, Inc. 9.375% 5/1/07 500 495
---------
10,679
---------
Industrial -- 0.9%
AMSC Acquisition Incorporated 12.25% 4/1/08 1,500 1,170
Chatwins Group, Inc. 13% 5/1/03 1,500 1,507
The Scott's Company 8.625% 1/15/09 1,250 1,241(B)
---------
3,918
---------
Manufacturing -- 7.2%
AK Steel Corporation 7.875% 2/15/09 2,250 2,183(B)
American Axle and Manufacturing Incorporated 9.75% 3/1/09 4,500 4,522
American Standard Companies, Inc. 7.375% 2/1/08 500 470
American Standard Companies, Inc. 7.625% 2/15/10 4,000 3,760
Cambridge Industries Incorporated 10.25% 7/15/07 1,500 1,230
Decora Industries Incorporated 11% 5/1/05 2,500 2,413
17
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------------------------------
Manufacturing -- Continued
Federal Mogul Corporation 7.50% 1/15/09 $ 4,000 $ 3,703(B)
Hayes Lemmerz International Inc. 8.25% 12/15/08 2,000 1,890
J. L. French Automotive Castings 11.50% 6/1/09 2,400 2,430(B)
Packaging Corporation of America 9.625% 4/1/09 3,000 3,030(B)
SBA Communications Corporation 0% 3/1/08 3,000 1,740(A,C)
Terex Corporation 8.875% 4/1/08 3,000 2,936(B)
United Industries Corporation 9.875% 4/1/09 500 475
---------
30,782
---------
Retail -- 1.8%
Pour Le Bebe, Inc. 20% 6/30/99 3,461 564(D,G)
Pour Le Bebe, Inc. 13% 8/9/01 1,964 250(G)
Relax the Back Corporation 11% 5/22/03 4,000 3,400(B,F,G)
Relax the Back Corporation 13% 5/22/03 4,531 3,398(B,C,F,G)
---------
7,612
---------
Retail Grocery -- 0.6%
Big V Supermarkets, Incorporated 11% 2/15/04 2,500 2,550
---------
Services -- 8.6%
AES Corporation 9.50% 6/1/09 3,750 3,863
Allied Waste North America Incorporated 7.875% 1/1/09 4,500 4,179(B)
Avis RentACar Incorporated 11% 5/1/09 4,500 4,562(B)
COMFORCE Corporation 12% 12/1/07 3,200 3,040
Convergent Communications Incorporated 13% 4/1/08 2,000 1,860
Hermes Europe RailTel 10.375% 1/15/09 4,000 4,050
Intermedia Communications, Inc. 0% 7/15/07 5,000 3,550(A,B)
IT Group, Inc. 11.25% 4/1/09 2,000 1,925(B)
Safety-Kleen Corp. 9.25% 5/15/09 2,100 2,105(B)
TV Guide Incorporated 8.125% 3/1/09 4,500 4,275(B)
United Rentals Incorporated 9.25% 1/15/09 3,500 3,439
---------
36,848
---------
Shipping -- 0.5%
Global Ocean Carriers, Ltd. 10.25% 7/15/07 4,000 1,480
Golden Ocean Group, Ltd. 10% 8/31/01 4,750 760(B)
---------
2,240
---------
Telecommunications -- 2.5%
Dial Call Communications Incorporated 10.25% 12/15/05 2,000 2,030(A)
Level 3 Communications Incorporated 0% 12/1/08 3,000 1,852(A)
NTL Communications Corporation 0% 10/1/08 4,500 3,094(A)
18
<PAGE>
Rate Maturity Date Par/Shares Value
- ----------------------------------------------------------------------------------------------------------------------
Telecommunications-- Continued
NTL Incorporated 0% 4/1/08 $ 2,000 $ 1,340(A)
Winstar Equipment II Corp. 12.50% 3/15/04 2,500 2,619(B)
---------
10,935
---------
Textiles -- 0.7%
Westpoint Stevens Incorporated 7.875% 6/15/05 3,000 2,933
---------
Transportation -- 0.5%
Railworks Corporation 11.50% 4/15/09 1,500 1,485(B)
Trans World Airlines, Inc. 11.375% 3/1/06 1,500 773
---------
2,258
---------
Total Corporate Bonds and Notes (Identified Cost-- $271,520) 235,573
- ----------------------------------------------------------------------------------------------------------------------
Yankee BondsH -- 6.1%
Chemicals -- 1.1%
ZSC Specialty Chemical Company 11% 7/1/09 4,750 4,780
---------
Entertainment and Leisure -- 1.4%
V2 Music Holdings PLC 14% 4/15/08 7,000 2,441(I)
V2 Music Holdings PLC 14% 4/15/08 6,000 3,310
---------
5,751
---------
Finance -- 0.4%
Petrozuata Finance Inc. 8.22% 4/1/17 2,000 1,545(B)
---------
Industrial -- 0.3%
Cathay International Ltd. 13% 4/15/08 3,450 1,397(B)
---------
Real Estate -- 0.3%
Trizec Finance Corporation Ltd. 10.875% 10/15/05 1,340 1,402
---------
Services -- 0.3%
ESAT Holdings Ltd. 0% 2/1/07 2,000 1,420(A)
---------
Telecommunications -- 1.8%
PTC International Finance 0% 7/1/07 1,700 1,241(A,B)
Telewest PLC 0% 10/1/07 5,500 4,895(A)
Tricom SA 11.375% 9/1/04 2,000 1,700
---------
7,836
---------
Transportation -- 0.5%
Canadian Airlines Corporation 12.25% 8/1/06 5,350 2,247
---------
Total Yankee Bonds (Identified Cost-- $34,624) 26,378
- ----------------------------------------------------------------------------------------------------------------------
19
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
Rate Par/Shares Value
- --------------------------------------------------------------------------------------------------
Preferred Stocks -- 6.3%
Cable and Media -- 2.8%
Paxson Communications Corporation 12.50% 2 shs $ 1,608
Paxson Communications Corporation 13.25% 1 8,118
Source Media, Inc. 13.50% 122 2,196(B,C)
---------
11,922
---------
Industrial -- 1.0%
High Voltage Engineering Corporation 14.25% 5 3,702(B,C)
Morris Material Handling 12% 3 519
---------
4,221
---------
Retail -- 0.4%
Relax the Back Corporation 10% 1,702 1,600(C,G)
---------
Services -- 1.4%
Clark Material Handling Company 12% 7 5,807
---------
Shipping -- 0.1%
Pegasus Shipping Hellas 11.875% 1,000 600
---------
Telecommunications -- 0.6%
IXC Communications Incorporated 14% N.M. 3(B,C)
NEXTLINK Communications, LLC 14% 55 2,767(B,C)
Viasystems Group Inc. 10.75% N.M. 1(C)
---------
2,771
---------
Total Preferred Stocks (Identified Cost-- $34,829) 26,921
- --------------------------------------------------------------------------------------------------
Common Stocks -- 26.9%
Food Services -- N.M.
International Fast Foods Corporation 51 22(J)
---------
Gaming --N.M.
Fitzgeralds Gaming Corporation 63 0(J)
---------
Medical Supplies/Services -- 0.1%
Unigene Labs, Inc. 528 495(J)
---------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Par/Shares Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Telecommunications -- 26.8%
Global Crossing Limited 2,773 shs $105,343(B,G,J)
MGC Communications Inc. 22 533(K)
Price Communications Corporation 172 2,587(J)
Spanish Broadcasting Systems Incorporated 6 3,178(J)
Verio Inc. 12 860(J)
Winstar Communications Incorporated 47 2,289(J)
----------
114,790
----------
Total Common Stocks (Identified Cost-- $6,026) 115,307
- -----------------------------------------------------------------------------------------------------
Warrants(J) -- 0.2%
American Mobile Satellite Corporation 2 wts 0
Convergent Communications Incorporated 8 0
Diva Systems Corporation 14 185
Firstworld Communications Incorporated 4 0
Golden Ocean Group Ltd. 7 0
Mentus Media Corporation 22 0
MMH Holdings Incorporated N.M. 0
Pegasus Communications Corporation 4 24
Primus Telecommunications Group 3 60
Relax the Back Corporation 654 0
Source Media Inc. 56 467
Splitrock Services Incorporated 2 100
Star Choice Communications 93 224
Unigene Labs, Inc.- C 125 0
Unigene Labs, Inc.- D 125 0
V2 Music Holdings 7 0
V2 Music Holdings PLC 6 0
----------
Total Warrants (Identified Cost-- $966) 1,060
- -----------------------------------------------------------------------------------------------------
Short-term Investments -- 7.1%
Repurchase Agreements -- 7.1%
Merrill Lynch Government Securities, Inc.
4.95%, dated 6/30/99, to be repurchased at $30,401
on 07/01/99 (Collateral: $30,970 Federal Home Loan
Bank Bonds, 5% due 4/05/00, value $32,149) $30,397 30,397
----------
Options Purchased -- N.M.
Global Crossing Limited Put, August 99, strike price $25.31 1,250(M) 140
----------
Total Short-Term Investments (Identified Cost-- $35,397) 30,537
- -----------------------------------------------------------------------------------------------------
21
<PAGE>
Statement of Net Assets -- Continued
Legg Mason Income Trust, Inc.
High Yield Portfolio -- Continued
- -----------------------------------------------------------------------------------------------------------------------
Total Investments-- 101.5% (Identified Cost-- $383,362) $435,776
Other assets less liabilities-- (1.5)% (6,577)
----------
NET ASSETS CONSISTING OF:
Accumulated paid-in capital applicable to:
27,537 Primary Class shares outstanding $428,258
43 Navigator Class shares outstanding 685
Undistributed net investment income 1,137
Accumulated net realized loss on investments (44,379)
Unrealized appreciation of investments 43,498
----------
NET ASSETS-- 100.0% $429,199
----------
NET ASSET VALUE PER SHARE
PRIMARY CLASS $15.56
----------
NAVIGATOR CLASS $15.56
----------
Expiration Actual Appreciation/
Date Contracts (Depreciation)
- -----------------------------------------------------------------------------------------------------------------------
Options Written
Global Crossing Limited Call, strike price $32.28 August 99 1,250 $ (8,916)
----------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) 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.
(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 investors. These securities represent 45.8% of
the portfolio.
(C) 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.
(D) Bond is in default as of June 30, 1999.
(E) Convertible bond -- Bond may be converted into common stock by the company.
(F) Private placement.
(G) Illiquid security valued at fair value under procedures adopted by the Board
of Directors. These securities represent 26.7% of the portfolio.
(H) Yankee Bond -- Dollar-denominated bond issued in the U.S. by foreign
entities.
(I) Bond is denominated in GBP.
(J) Non-income producing.
(K) Rule 144 security -- A security purchased pursuant to Rule 144 under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified institutional investors. These securities represent 0.1% of the
portfolio.
(M) This represents the actual number of contracts.
N.M. -- Not meaningful.
See notes to financial statements.
22
<PAGE>
Statement of Net Assets
Legg Mason Income Trust, Inc.
June 30, 1999 (Unaudited)
(Amounts in Thousands)
<TABLE>
<CAPTION>
U.S. Government Money Market Portfolio
Rate Maturity Date Par/Shares Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and Agency Obligations -- 82.7%
Fannie Mae 4.72% to 5.92% 7/7/99 to 11/12/99 $108,000 $107,535
Federal Agricultural Mortgage Corporation
(Farmer Mac) 4.77% to 4.86% 7/6/99 to 7/20/99 28,500 28,461
Federal Farm Credit Bank 4.80% to 5.85% 7/26/99 to 4/3/00 31,000 30,953
Federal Home Loan Bank 4.73% to 7.51% 7/15/99 to 7/7/00 91,000 90,945
Freddie Mac 4.775% to 7.125% 7/6/99 to 11/12/99 55,102 54,756
Sallie Mae 4.845% to 4.93% 2/8/00 to 2/10/00 10,000 9,996
Tennessee Valley Authority 8.375% 10/1/99 3,000 3,027
----------
Total U.S. Government and Agency Obligations (Identified Cost-- $325,673) 325,673
- -----------------------------------------------------------------------------------------------------------------------
Repurchase Agreements -- 17.9%
Lehman Brothers, Inc.
4.95%, dated 6/30/99, to be repurchased at $70,634 on 7/1/99
(Collateral: $71,775 Fannie Mae Medium-Term Notes,
5.34%, due 1/24/02, value $72,036) (Identified Cost-- $70,624) 70,624 70,624
- -----------------------------------------------------------------------------------------------------------------------
Total Investments, at amortized cost and value-- 100.6% 396,297
Other assets less liabilities-- (0.6)% (2,548)
----------
NET ASSETS APPLICABLE TO 393,746 SHARES OUTSTANDING -- 100.0% $393,749
----------
NET ASSET VALUE PER SHARE $1.00
----------
- -----------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
23
<PAGE>
Statements of Operations
Legg Mason Income Trust, Inc.
(Amounts in Thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended 6/30/99
- ---------------------------------------------------------------------------------------------------------------------------
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 $10,565 $5,901 $14,950 $10,210
Dividends 31 -- 2,054 --
------- ------- --------- -----------
Total income 10,596 5,901 17,004 10,210
------- ------- --------- -----------
Expenses:
Management fee 958 530 1,502 1,033
Distribution and service fees 852 441 1,154 206
Transfer agent and shareholder servicing expense 71 47 98 143
Audit and legal fees 37 20 94 21
Custodian fee 81 74 74 53
Directors' fees 5 3 5 5
Registration fees 18 19 42 26
Reports to shareholders 20 18 29 16
Other expenses 11 40 5 46
------- ------- --------- -----------
2,053 1,192 3,003 1,549
Less fees waived (331) (309) -- --
------- ------- --------- -----------
Total expenses, net of waivers 1,722 883 3,003 1,549
------- ------- --------- -----------
Net Investment Income 8,874 5,018 14,001 8,661
------- ------- --------- -----------
Net Realized and Unrealized Gain (Loss) on Investments:
Realized gain (loss) on:
Investments (3,760) (3,022) (5,779) 2
Options (7) 243 -- --
Futures 770 (1,120) -- --
------- ------- --------- -----------
(2,997) (3,899) (5,779) 2
------- ------- --------- -----------
Change in unrealized appreciation (depreciation)
of investments, options and futures (10,992) (5,352) 31,457 --
------- ------- --------- -----------
Net Realized and Unrealized Gain (Loss)
on Investments (13,989) (9,251) 25,678 2
- ---------------------------------------------------------------------------------------------------------------------------
Change in Net Assets Resulting
from Operations $ (5,115) $(4,233) $39,679 $8,663
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
24
<PAGE>
Statements of Changes in Net Assets
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
<TABLE>
<CAPTION>
U.S. Government Investment Grade High U.S. Government
Intermediate-Term Income Yield Money Market
Portfolio Portfolio Portfolio Portfolio
-------------------- -------------------- -------------------- ------------------------
Six Months Year Six Months Year Six Months Year Six Months Year
Ended Ended Ended Ended Ended Ended Ended Ended
6/30/99 12/31/98 6/30/99 12/31/98 6/30/99 12/31/98 6/30/99 12/31/98
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Change in Net Assets:
Net investment income $ 8,874 $ 17,751 $ 5,018 $ 8,128 $ 14,001 $ 38,145 $ 8,661 $ 16,875
Net realized gain (loss)
on investments,
options and futures (2,997) 4,714 (3,899) 3,805 (5,779) (38,643) 2 (3)
Change in unrealized
appreciation (depreciation)
of investments,
options and futures (10,992) (1,083) (5,352) (2,304) 31,457 (13,340) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Change in net assets
resulting from operations (5,115) 21,382 (4,233) 9,629 39,679 (13,838) 8,663 16,872
Distributions to shareholders:
From net investment income:
Primary Class (8,655) (16,959) (5,011) (8,112) (12,908) (38,214) (8,661) (16,875)
Navigator Class (219) (462) (7) ( 16) (15) (10) -- --
From net realized gain
on investments -- -- (569) (2,851) -- (359) -- --
In excess of net investment
income:
Primary Class -- (323) -- -- -- -- -- --
Navigator Class -- (7) -- -- -- -- -- --
Change in net assets from
Fund share transactions:
Primary Class (2,745) 48,243 25,399 48,378 (32,098) 104,134 4,281 64,773
Navigator Class 1,395 (671) 1 4 594 91 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Change in net assets (15,339) 51,203 15,580 47,032 (4,748) 51,804 4,283 64,770
Net Assets:
Beginning of period 360,069 308,866 169,384 122,352 433,947 382,143 389,466 324,696
- -----------------------------------------------------------------------------------------------------------------------------
End of period $344,730 $360,069 $184,964 $169,384 $429,199 $433,947 $393,749 $389,466
- -----------------------------------------------------------------------------------------------------------------------------
Undistributed net
investment income $ -- $ -- $ 72 $ 72 $ 1,137 $ 59 $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
25
<PAGE>
Financial Highlights
Legg Mason Income Trust, Inc.
Contained below is per share operating performance data for a Primary Class
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 Period (Loss) and Futures Operations Income Income Investments Distributions
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Intermediate-Term Portfolio
Six Months Ended
June 30, 1999* $10.51 $ .24(A) $ (.41) $ (.17) $ (.24) $ -- $ -- $ (.24)
Years Ended Dec. 31,
1998 10.40 .56(A) .11 .67 (.55) (.01) -- (.56)
1997 10.31 .60(A) .09 .69 (.59) (.01) -- (.60)
1996 10.47 .61(A) (.16) .45 (.60) (.01) -- (.61)
1995 9.72 .57(A) .75 1.32 (.57) -- -- (.57)
1994 10.43 .51(A) (.71) (.20) (.51) -- -- (.51)
Investment Grade Income Portfolio
Six Months Ended
June 30, 1999* $10.52 $ .26(B) $ (.53) $ (.27) $ (.26) $ -- $ (.03) $ (.29)
Years Ended Dec. 31,
1998 10.59 .60(B) .12 .72 (.60) -- (.19) (.79)
1997 10.22 .65(B) .37 1.02 (.65) -- -- (.65)
1996 10.44 .64(B) (.22) .42 (.64) -- -- (.64)
1995 9.27 .65(B) 1.17 1.82 (.65) -- -- (.65)
1994 10.40 .60(B) (1.09) (.49) (.60) -- (.04) (.64)
High Yield Portfolio
Six Months Ended
June 30, 1999* $14.72 $ .48 $ .80 $ 1.28 $ (.44) $ -- $ -- $ (.44)
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)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
--------------------------------------------------------------
Net
Net Asset Investment Net Assets,
Value, Expenses Income(Loss) Portfolio End of
End of Total to Average to Average Turnover Period
Period Return Net Assets Net Assets Rate (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Intermediate-Term Portfolio
Six Months Ended
June 30, 1999* $10.10 (1.54)%(D) 1.00%(A,E) 5.08%(A,E) 797%(E) $336,299
Years Ended Dec. 31,
1998 10.51 6.56% 1.00%(A) 5.30%(A) 356% 352,729
1997 10.40 6.95% 1.00%(A) 5.84%(A) 252% 300,952
1996 10.31 4.47% .98%(A) 5.91%(A) 354% 293,846
1995 10.47 13.88% .93%(A) 5.59%(A) 290% 231,886
1994 9.72 (1.93)% .90%(A) 5.11%(A) 316% 231,255
Investment Grade Income Portfolio
Six Months Ended
June 30, 1999* $ 9.96 (2.31)%(D) 1.00%(B,E) 5.68%(B,E) 213%(E) $184,722
Years Ended Dec. 31,
1998 10.52 6.99% 1.00%(B) 5.68%(B) 279% 169,129
1997 10.59 10.31% 1.00%(B) 6.28%(B) 259% 122,100
1996 10.22 4.31% .97%(B) 6.42%(B) 383% 91,928
1995 10.44 20.14% .88%(B) 6.49%(B) 221% 85,633
1994 9.27 (4.82)% .85%(B) 6.09%(B) 200% 66,196
High Yield Portfolio
Six Months Ended
June 30, 1999* $15.56 8.64%(D) 1.30%(E) 6.06%(E) 76%(E) $428,530
Years Ended Dec. 31,
1998 14.72 (1.79)% 1.30% 8.17% 107% 433,947
1997 16.29 15.86% 1.30% 8.60% 116% 382,143
1996 15.37 14.91% 1.35% 9.05% 77% 234,108
1995 14.62 18.01% 1.47% 9.28% 47% 108,417
1994C 13.57 (2.90)%(D) 1.60%(E) 8.40%(E) 67%(E) 53,424
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<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 Period (Loss) and Futures Operations Income Income Investments Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Money Market Portfolio
Six Months Ended
June 30, 1999* $ 1.00 $ .02 Nil $ .02 $ (.02) $-- $-- $ (.02)
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 Period
Period Return Net Assets Net Assets Rate (in thousands)
---------------------------------------------------------------------------
$ 1.00 4.21%(D) .75%(E) 4.19%(E) $-- $393,749
1.00 4.83% .75%(I) 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 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: 1999, 1.19%; 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 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: 1999, 1.35%; 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.
* Unaudited.
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.
Information about the Navigator Class is contained in a separate report to
its shareholders. 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 of Directors
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 June
30, 1999, $114,555, or 26.69%, 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 for financial reporting and federal income tax purposes.
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 the 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 federal income
tax regulations, which may differ from those determined in accordance with
generally accepted accounting principles; accordingly, periodic
reclassifications are made within the Fund's capital accounts to reflect
income and gains available for distribution under federal income tax
regulations. At June 30, 1999, accrued dividends payable were as follows:
Government Intermediate, $833; Investment Grade, $500; High Yield, $0; and
Government Money Market, $680. There were no capital gain distributions
payable at June 30, 1999.
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
June 30, 1999, 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 $180,668 $185,575
Investment Grade 8,270 13,391
High Yield 647 --
Government Money Market -- 4,000
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 substantially all of its taxable income to its
shareholders.
Use of Estimates
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 six months ended June 30, 1999, 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 $1,253,534 $ 54,235 $1,240,408 $105,755
Investment Grade 146,216 68,870 159,115 26,124
High Yield -- 165,396 2,810 201,545
</TABLE>
At June 30, 1999, 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 $355,428 $ 516 $ (7,429) $(6,913)
Investment Grade 192,584 1,730 (6,147) (4,417)
High Yield 383,362 113,480 (61,066) 52,414
Government Money Market 396,297 -- -- --
</TABLE>
Unused capital loss carryforwards for federal income tax purposes at June
30, 1999, were as follows: Government Intermediate, $4,790 which expires in 2002
and $699 which expires in 2003; High Yield, $10,825 which expires in 2006; and
Government Money Market, $4 which expires in 2006. Investment Grade has no
capital loss carryforwards.
29
<PAGE>
Notes to Financial Statements-Continued
Legg Mason Income Trust, Inc.
(Amounts in Thousands)
- --------------------------------------------------------------------------------
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> <C> <C> <C> <C> <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 that
by the option purchaser 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 security
by the option purchaser 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 underly-
30
<PAGE>
ing 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.
Activity in call and put options during the period was as follows:
<TABLE>
<CAPTION>
Calls Puts
-------------------------------------------------------------------------
Actual Actual
Government Intermediate Contracts Premiums Contracts Premiums
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Options outstanding, December 31, 1998 -- $ -- 182 $127
Options written 696 461 128 87
Options closed (635) (435) (131) (91)
Options expired (61) (26) -- --
Options exercised -- -- (76) (53)
- -------------------------------------------------------------------------------------------------------------------
Options outstanding, June 30, 1999 -- $ -- 103 $ 70
- -------------------------------------------------------------------------------------------------------------------
Calls Puts
-------------------------------------------------------------------------
Actual Actual
Investment Grade Contracts Premiums Contracts Premiums
- -------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1998 17 $ 16 48 $ 76
Options written 2,360 438 216 148
Options closed (463) (349) (201) (204)
Options expired (374) (49) (21) (6)
Options exercised (1,540) (56) (42) (14)
- -------------------------------------------------------------------------------------------------------------------
Options outstanding, June 30, 1999 -- $ -- -- $ --
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Upon entering into a futures contract, the Fund is required to
deposit with the broker cash or cash equivalents in an amount 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 June 30, 1999, are listed at the end of Government Intermediate's and
Investment Grade's respective Statements of Net Assets.
31
<PAGE>
Notes to Financial Statements-Continued
Legg Mason Income Trust, Inc.
- --------------------------------------------------------------------------------
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 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 June 30, 1999, High Yield had no open forward currency exchange
contracts.
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 in any month (exclusive of taxes,
interest, brokerage and extraordinary expenses) as shown in the following
chart:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 At June 30, 1999
--------------------------------------
Management Management
Management Expense Expense Limitation Fees Fee
Fund Fee Limitation Expiration Date Waived Payable
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government Intermediate August 1, 1999, or until net $331 $108
Primary 0.55% 1.00% assets reach $400 million
Navigator 0.55% 0.50%
Investment Grade August 1, 1999, or until net 309 38
Primary 0.60% 1.00% assets reach $250 million
Navigator 0.60% 0.50%
High Yield -- -- 235
Primary 0.65% None
Navigator 0.65% None
Government Money Market 0.50% None -- -- 166
</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 Government Intermediate, LMFA pays the Adviser a fee,
computed daily and payable monthly at 0.20% of its average daily net
assets, not to exceed the fee received by LMFA.
32
<PAGE>
- --------------------------------------------------------------------------------
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's average daily net assets, computed daily and
payable monthly as follows:
At June 30, 1999
------------------------
Distribution Service Distribution and Service
Fund Fee Fee Fees Payable
- --------------------------------------------------------------------------------
Government Intermediate 0.25% 0.25% $139
Investment Grade 0.25% 0.25% 75
High Yield 0.25% 0.25% 180
Government Money Market -- 0.10% 33
Legg Mason has agreed that it will not request payment of more than
0.10% annually from Government Money Market indefinitely. If this
voluntary limit is terminated, the Fund may pay Legg Mason a Rule 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, the transfer agent
paid Legg Mason the following amounts for the six months ended June 30,
1999: Government Intermediate, $19; Investment Grade, $19; High Yield,
$33; and Government Money Market, $42.
LMFA, the Adviser and Legg Mason are corporate affiliates and are
wholly owned subsidiaries of Legg Mason, Inc.
7. Line of Credit:
The Funds, except for Government Money Market, but including certain
other Legg Mason Funds, participate in a $200 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 six months ended June 30, 1999, the
Funds had no borrowings under the line of credit.
33
<PAGE>
Notes to Financial Statements-Continued
Legg Mason Income Trust, Inc.
- --------------------------------------------------------------------------------
8. Fund Share Transactions:
At June 30, 1999, 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
Six Months Ended June 30, 1999 6,398 $ 66,071 673 $ 6,932 (7,320) $ (75,748) (249) $ (2,745)
Year Ended December 31, 1998 15,614 163,688 1,455 15,230 (12,470) (130,675) 4,599 48,243
--Navigator Class
Six Months Ended June 30, 1999 255 $ 2,633 16 $ 163 (134) $ (1,401) 137 $ 1,395
Year Ended December 31, 1998 270 2,820 40 420 (373) (3,911) (63) (671)
Investment Grade
--PrimaryClass
Six Months Ended June 30, 1999 4,733 $ 48,536 456 $ 4,645 (2,715) $ (27,782) 2,474 $25,399
Year Ended December 31, 1998 7,596 80,707 948 10,055 (3,991) (42,384) 4,554 48,378
--Navigator Class
Six Months Ended June 30, 1999 -- -- N.M. $ 1 -- -- N.M. $ 1
Year Ended December 31, 1998 -- -- N.M. 4 -- -- N.M. 4
High Yield
--Primary Class
Six Months Ended June 30, 1999 6,119 $ 96,558 647 $10,390 (8,706) $ (139,046) (1,940) $(32,098)
Year Ended December 31, 1998 26,232 427,977 1,936 30,859 (22,148) (354,702) 6,020 104,134
--Navigator Class
Six Months Ended June 30, 1999 42 $ 648 1 $ 15 (4) $ (69) 39 $ 594
Year Ended December 31, 1998 23 393 N.M. 6 (19) (308) 4 91
Government Money Market
Six Months Ended
June 30, 1999 843,538 $ 843,538 7,572 $ 7,572 (846,829) $ (846,829) 4,281 $ 4,281
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
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
