UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-5029
Name of Fund: Legg Mason Income Trust, Inc.
Fund Address: 100 Light Street
Baltimore, MD 21202
Name and address of agent for service:
Mark R. Fetting, President, Legg Mason Income Trust, Inc.
100 Light Street
Baltimore, MD 21202
Registrant's telephone number, including area code: (410) 539-0000
Date of fiscal year end: December 31, 2003
Date of reporting period: December 31, 2003
Item 1 - Report to Shareholders
Annual Report to Shareholders
December 31, 2003
Legg Mason Income Trust, Inc.
High Yield
Investment Grade
U.S. Government Intermediate
U.S. Government Money Market
(THIS PAGE INTENTIONALLY LEFT BLANK)
Annual Report to Shareholders
1
To Our Shareholders,
We are pleased to provide you with Legg Mason Income Trust's annual report,
combining reports for the Legg Mason High Yield Portfolio, Investment Grade
Income Portfolio, U.S. Government Intermediate-Term Portfolio and the U.S.
Government Money Market Portfolio.
The following table summarizes key statistics for the Primary Class of each
portfolio, as of December 31, 2003:
Net Asset Value
SEC Yield(A) Average Life Per Share
- -----------------------------------------------------------------------------
High Yield 5.76% 5.59 years $ 9.10
Investment Grade 3.87% 10.41 years $10.88
U.S. Government Intermediate 2.93% 4.26 years $10.54
U.S. Government Money
Market(B) 0.39% 68 days $ 1.00
In calendar 2003, total returns for the Primary Class of shares of the High
Yield, Investment Grade and Government Intermediate Portfolios were +23.03%,
+10.16%, and +1.11%, respectively. Total returns for the Institutional Class of
shares were +23.54%, +10.71%, and +1.71%, respectively. (Total return measures
investment performance in terms of appreciation or depreciation in a portfolio's
net asset value per share, plus dividends and any capital gain distributions.)
PricewaterhouseCoopers LLP, Income Trust's independent accountants, has
completed its annual examination, and audited financial statements for the
fiscal year ended December 31, 2003, are included in this report.
For each of our Funds, historical performance is not indicative of future
results, and the principal value of the High Yield, Investment Grade and
Government Intermediate Portfolios will continue to fluctuate so that shares,
when redeemed, may be worth more or less than their original cost. The U.S.
Government Money Market Portfolio seeks to preserve the value of your investment
at $1.00 per share; however, it is possible to lose money by investing in the
Fund.
- ---------------
(A) SEC yields reported for the High Yield, Investment Grade and U.S. Government
Intermediate Portfolios are for the 30 days ended December 31, 2003. For the
U.S. Government Money Market Portfolio, the SEC yield is for the 7 days
ended December 31, 2003.
(B) 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.
Annual Report to Shareholders
2
Many of our shareholders regularly add to their Primary Class 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 additional shares in this convenient
way.
Sincerely,
/s/ JOHN F. CURLEY, JR. /s/ MARK R. FETTING
John F. Curley, Jr. Mark R. Fetting
Chairman President
January 30, 2004
Annual Report to Shareholders
3
Management's Discussion of Fund Performance
High Yield Portfolio
Average annual total returns for the High Yield Portfolio and its benchmark
for various periods ended December 31, 2003, are presented below:
Since Five Three One
Inception(A) Years Years Year
- --------------------------------------------------------------------------
High Yield(B)
Primary Class +4.76% +1.14% +5.19% +23.03%
Institutional Class 0.00% +1.44% +5.46% +23.54%
Lehman High Yield Index(C) +6.72% +5.23% +10.21% +28.97%
For the year ended December 31, 2003, the Primary Class of the Fund returned
23.03% versus 28.97% for the Fund's benchmark, the Lehman High Yield Index. The
option-adjusted-spread of the Index narrowed 437 basis points(D) (bps) on the
year from +851 bps on December 31, 2002, to +394 bps on December 31, 2003. The
portfolio's underperformance is attributable to the manager's focus on companies
in the high yield arena that have a below-market probability of default due to
the companies' quantifiable asset base and sufficient free cash flow. The
manager's investment style is based on the view that, over the long term,
returns in the high yield sector are more a function of income (coupon) than
price appreciation. This bias for higher quality high yield hurt relative
performance, as the distressed and lower quality sectors of the market
contributed a disproportionate share to the asset class's total return. CCC
rated and below issues in the Index returned more than 60% for the period,
versus 20% for BB rated issues and 26.50% for B rated issues. The average price
of the CCC rated portion of the Index, which on December 31, 2002, was
approximately $64 (a bond priced below $65 is often referred to as distressed)
had risen to $94 by December 31, 2003.
- ---------------
(A) The inception date of the Primary Class is August 7, 1987. The inception
date of the Institutional Class is May 5, 1998. Index returns are for
periods beginning July 31, 1987.
(B) Past performance does not guarantee future results. The investment return
and principal value of the Fund will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than the original cost.
Calculations assume reinvestment of dividends and capital gain
distributions. Returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
(C) A market value-weighted index that tracks the daily price-only, coupon, and
total return performance of non- investment grade, fixed rate, publicly
placed, dollar-denominated, and non-convertible debt registered with the
U.S. Securities and Exchange Commission.
(D) 100 basis points = 1%.
Management's Discussion of Fund
Performance -- Continued
Annual Report to Shareholders
4
Investment Grade Income Portfolio
Average annual total returns for the Investment Grade Income Portfolio and its
benchmark for various periods ended December 31, 2003, are presented below:
Since Ten Five One
Inception(E) Years Years Year
- --------------------------------------------------------------------------
Investment Grade(F)
Primary Class +8.07% +6.98% +6.87% +10.16%
Institutional Class +7.59% N/A +7.43% +10.71%
Lehman Credit Bond Index(G) +8.45% +7.19% +7.22% +6.91%
For the year ended December 31, 2003, the Primary Class of the Fund returned
10.16% versus 6.91% for the Fund's benchmark, the Lehman Credit Bond Index. The
option-adjusted-spread of the Index narrowed from +169 bps to similar duration
treasuries on December 31, 2002, to +89 bps on December 31, 2003. The
portfolio's outperformance is attributable to the manager's decision to
overweight BBB rated issues, which returned 11.81% for the year, as well as
overweight and underweight subsector and issue selection decisions. Overweights
to industrials, particularly in the auto space, which returned 12.74% for the
period, helped relative performance. An underweight in the portfolio to
sovereigns and Yankees, which returned 4.78% in 2003, also helped relative
performance. The portfolio's term structure hurt relative performance as the
fund was positioned throughout the year for a flatter yield curve.
- ---------------
(E) The inception date of the Primary Class is August 7, 1987. The inception
date of the Institutional Class is December 1, 1995. Index returns are for
periods beginning July 31, 1987.
(F) Past performance does not guarantee future results. The investment return
and principal value of the Fund will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than the original cost.
Calculations assume reinvestment of dividends and capital gain
distributions. Returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
(G) This index includes all publicly issued, fixed rate, non-convertible,
investment grade, domestic corporate debt. It also includes Yankee bonds,
which are dollar-denominated, SEC-registered public, non-convertible debt
issued or guaranteed by foreign sovereign governments, municipalities,
governmental agencies, and international agencies.
Annual Report to Shareholders
5
U.S. Government Intermediate-Term Portfolio
Average annual total returns for the U.S. Government Intermediate-Term
Portfolio and its benchmark for various periods ended December 31, 2003, are
presented below:
Since Ten Five One
Inception(H) Years Years Year
- --------------------------------------------------------------------------
U.S. Government Intermediate(I)
Primary Class +6.73% +5.32% +4.76% +1.11%
Institutional Class +6.72% N/A +5.33% +1.71%
Lehman Intermediate Government
Bond Index(J) +7.53% +6.32% +6.18% +2.29%
The Fund was challenged by this environment, lagging the performance of its
benchmark, the Lehman Intermediate Government Bond Index, with a Primary Class
total return of 1.11% versus 2.29% for the year ended December 31, 2003. The
Fund's duration posture had little impact on returns, but a steeper curve worked
against the portfolio's barbelled exposure to maturities, which was structured
to benefit from a flatter yield curve. Overweight exposure to mortgage-backed
securities was also a drag on performance, since their higher yield was not
sufficient to compensate for unprecedented prepayment speeds as interest rates
fell.
- ---------------
(H) The inception date of the Primary Class is August 7, 1987. The inception
date of the Institutional Class is December 1, 1994. Index returns are for
periods beginning July 31, 1987.
(I) Past performance does not guarantee future results. The investment return
and principal value of the Fund will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than the original cost.
Calculations assume reinvestment of dividends and capital gain
distributions. Returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
(J) A total return index consisting of investment grade corporate debt issues as
well as U.S. government securities. The debt issues all maintain maturities
within a range of 1 to 10 years.
Annual Report to Shareholders
6
Performance Information
High Yield Portfolio
The following graphs compare the Fund's total returns against that of a
closely matched broad-based securities market index. The graphs illustrate the
cumulative total return of an initial $10,000 investment in the Primary Class
and a $1,000,000 investment in the Institutional Class of the Fund, for the
periods indicated. The line for the Fund represents the total return after
deducting all Fund investment management and other administrative expenses and
the transaction costs of buying and selling securities. The line representing
the securities market index does not include any transaction costs associated
with buying and selling securities in the index or other administrative
expenses. Both the Fund's results and the index's results assume reinvestment of
all dividends and distributions.
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 the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Average annual
returns tend to smooth out variations in a fund's return, so that they differ
from actual year-to-year results. Performance would have been lower if fees had
not been waived in various periods.
Annual Report to Shareholders
7
Growth of a $10,000 Investment -- Primary Class
[VALUE TRUST GRAPH]
High Yield Portfolio - Primary Class Lehman High Yield Index
------------------------------------ -----------------------
2/1/1994 10000.00 10000.00
3/31/1994 9863.00 9597.00
6/30/1994 9740.00 9566.00
9/30/1994 9779.00 9716.00
12/31/1994 9711.00 9687.00
3/31/1995 10060.00 10264.00
6/30/1995 10612.00 10889.00
9/30/1995 11102.00 11197.00
12/31/1995 11461.00 11544.00
3/31/1996 11917.00 11749.00
6/30/1996 12241.00 11943.00
9/30/1996 12705.00 12421.00
12/31/1996 13170.00 12855.00
3/31/1997 13451.00 12998.00
6/30/1997 14086.00 13602.00
9/30/1997 14780.00 14221.00
12/31/1997 15258.00 14495.00
3/31/1998 15993.00 14982.00
6/30/1998 16582.00 15148.00
9/30/1998 15003.00 14458.00
12/31/1998 14985.00 14766.00
3/31/1999 16684.00 15039.00
6/30/1999 16279.00 15091.00
9/30/1999 15143.00 14876.00
12/31/1999 16307.00 15119.00
3/31/2000 15966.00 14766.00
6/30/2000 15778.00 14936.00
9/30/2000 15210.00 15020.00
12/31/2000 13628.00 14233.00
3/31/2001 14053.00 15138.00
6/30/2001 13688.00 14792.00
9/30/2001 12976.00 14166.00
12/31/2001 13610.00 14985.00
3/31/2002 13682.00 15326.00
6/30/2002 12530.00 14259.00
9/30/2002 12076.00 13841.00
12/31/2002 12891.00 14774.00
3/31/2003 13724.00 15898.00
6/30/2003 14781.00 17505.00
9/30/2003 15052.00 17990.00
12/31/2003 15860.00 19054.00
Cumulative Average Annual
Total Return Total Return
One Year +23.03% +23.03%
Five Years +5.84% +1.14%
Life of Class* +58.60% +4.76%
*Inception date: February 1, 1994
The graph and table do not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of Fund shares.
Past performance does not predict future performance.
- ---------------
(A) A market value-weighted index that tracks the daily price-only, coupon, and
total return performance of non-investment grade, fixed rate, publicly
placed, dollar-denominated, and non-convertible debt registered with the
U.S. Securities and Exchange Commission. Index returns are for periods
beginning January 31, 1994.
Performance Information -- Continued
Annual Report to Shareholders
8
Growth of a $1,000,000 Investment -- Institutional Class
[VALUE TRUST GRAPH]
High Yield Portfolio - Institutional
Class Lehman High Yield Index (B)
------------------------------------ ---------------------------
5/5/1998 1000000.00 1000000.00
6/30/1998 1026430.00 1007100.00
9/30/1998 930176.00 961300.00
12/31/1998 930903.00 981700.00
3/31/1999 1035270.00 999900.00
6/30/1999 1010780.00 1003300.00
9/30/1999 941175.00 989000.00
12/31/1999 1014850.00 1005200.00
3/31/2000 994652.00 981700.00
6/30/2000 984731.00 993000.00
9/30/2000 949633.00 998600.00
12/31/2000 852607.00 946300.00
3/31/2001 877924.00 1006500.00
6/30/2001 855416.00 983400.00
9/30/2001 813346.00 941800.00
12/31/2001 852086.00 996200.00
3/31/2002 857298.00 1013000.00
6/30/2002 785425.00 948000.00
9/30/2002 757698.00 920200.00
12/31/2002 809466.00 982200.00
3/31/2003 860873.00 1057000.00
6/30/2003 929595.00 1163800.00
9/30/2003 948262.00 1196100.00
12/31/2003 1000100.00 1266800.00
Cumulative Average Annual
Total Return Total Return
One Year +23.54% +23.54%
Five Years +7.42% +1.44%
Life of Class* +0.01% +0.00%
*Inception date: May 5, 1998
The graph and table do not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of Fund shares.
Past performance does not predict future performance.
- ---------------
(B) Index returns are for periods beginning April 30, 1998.
Annual Report to Shareholders
9
Statement of Net Assets
High Yield Portfolio
December 31, 2003
(Amounts in Thousands)
Maturity
Rate Date Par Value
- ------------------------------------------------------------------------------
Long-Term Securities -- 94.2%
Corporate Bonds and Notes -- 85.3%
Advertising -- 0.8%
Vertis Inc. 9.750% 4/1/09 $ 490 $ 532
Vertis Inc. 10.875% 6/15/09 1,220 1,296
--------
1,828
--------
Aerospace/Defense -- 1.6%
Armor Holdings Incorporated 8.250% 8/15/13 950 1,016(A)
Esterline Technologies
Corporation 7.750% 6/15/13 1,063 1,143(A)
Hexcel Corporation 9.875% 10/1/08 1,146 1,292
Hexcel Corporation 9.750% 1/15/09 350 367
--------
3,818
--------
Animal Hospitals -- 0.4%
Vicar Operating, Inc. 9.875% 12/1/09 915 1,016
--------
Apparel -- 1.5%
Oxford Industries, Inc. 8.875% 6/1/11 1,181 1,292(A)
Russell Corporation 9.250% 5/1/10 1,038 1,076
The William Carter Company 10.875% 8/15/11 887 1,024
--------
3,392
--------
Auto and Automotive Parts -- 1.6%
Cummins Inc. 9.500% 12/1/10 992 1,141(A)
Keystone Automotive Operations
Inc. 9.750% 11/1/13 1,030 1,107(A)
TRW Automotive 9.375% 2/15/13 425 486
TRW Automotive 11.000% 2/15/13 904 1,064
--------
3,798
--------
Building Materials -- 3.8%
Atrium Companies, Inc. 10.500% 5/1/09 1,460 1,562
Atrium Companies, Inc. 10.500% 5/1/09 520 556(A)
Collins & Aikman Floor Cover 9.750% 2/15/10 825 883
Interface, Inc. 7.300% 4/1/08 553 528
Statement of Net Assets -- Continued
High Yield Portfolio -- Continued
Annual Report to Shareholders
10
Maturity
Rate Date Par Value
- ------------------------------------------------------------------------------
Corporate Bonds and Notes --
Continued
Building Materials --
Continued
Interface, Inc. 10.375% 2/1/10 $ 1,263 $ 1,336
Koppers Inc. 9.875% 10/15/13 1,490 1,643(A)
Nortek Holdings, Inc. 9.125% 9/1/07 700 723
Nortek Holdings, Inc. 0.000% 5/15/11 1,910 1,380(A,B)
Nortek Holdings, Inc. 9.875% 6/15/11 251 277
--------
8,888
--------
Cable -- 2.5%
Charter Communications
Holdings, LLC 9.625% 11/15/09 1,890 1,663
Charter Communications, Inc. 10.250% 9/15/10 1,200 1,260(A)
CSC Holdings Inc. 7.875% 12/15/07 299 315
Insight Communications Company,
Inc. 0.000% 2/15/11 1,581 1,352(B)
LodgeNet Entertainment
Corporation 9.500% 6/15/13 1,022 1,119
--------
5,709
--------
Casino Resorts -- 2.3%
Harrah's Operating Company,
Inc. 7.875% 12/15/05 1,121 1,219
Inn of the Mountain Gods 12.000% 11/15/10 220 234(A)
Mandalay Resort Group 9.500% 8/1/08 332 388
MGM MIRAGE 9.750% 6/1/07 274 312
Mirage Resorts, Incorporated 7.250% 10/15/06 355 383
Park Place Entertainment
Corporation 7.875% 12/15/05 959 1,027
Station Casinos, Inc. 9.875% 7/1/10 846 931
Wynn Las Vegas LLC 12.000% 11/1/10 729 858
--------
5,352
--------
Chemicals -- 6.1%
Equistar Chemicals LP 10.625% 5/1/11 566 625
Equistar Chemicals LP 10.625% 5/1/11 490 542(A)
FMC Corporation 10.250% 11/1/09 524 613
Annual Report to Shareholders
11
Maturity
Rate Date Par Value
- ------------------------------------------------------------------------------
Corporate Bonds and Notes --
Continued
Chemicals -- Continued
Georgia Gulf Corporation 7.125% 12/15/13 $ 490 $ 510(A)
Hercules Incorporated 11.125% 11/15/07 510 611
Huntsman International Holdings
LLC 0.000% 12/31/09 1,826 881(C)
Huntsman International LLC 9.875% 3/1/09 732 801
Huntsman International LLC 10.125% 7/1/09 1,067 1,099
IMC Global Inc. 10.875% 6/1/08 596 656
IMC Global Inc. 11.250% 6/1/11 281 309
IMC Global Inc. 10.875% 8/1/13 210 230(A)
Lyondell Chemical Company 9.625% 5/1/07 453 480
MacDermid, Incorporated 9.125% 7/15/11 1,597 1,789
Millennium America Inc. 7.000% 11/15/06 96 98
Millennium America Inc. 9.250% 6/15/08 1,262 1,376
Nalco Company 7.750% 11/15/11 450 482(A)
Nalco Company 8.875% 11/15/13 640 678(A)
Rockwood Specialties, Inc. 10.625% 5/15/11 840 936(A)
Westlake Chemical Corporation 8.750% 7/15/11 1,230 1,347(A)
--------
14,063
--------
Commercial/Industrial Services -- 0.4%
NationsRent, Inc. 9.500% 10/15/10 870 935(A)
--------
Containers and Packaging -- 0.7%
Ball Corporation 7.750% 8/1/06 250 269
Graphic Packaging International
Corp. 9.500% 8/15/13 1,160 1,282(A)
--------
1,551
--------
Diversified Services -- 0.2%
SPX Corporation 7.500% 1/1/13 432 470
--------
Statement of Net Assets -- Continued
High Yield Portfolio -- Continued
Annual Report to Shareholders
12
Maturity
Rate Date Par Value
- ------------------------------------------------------------------------------
Corporate Bonds and Notes --
Continued
Electric -- 3.7%
Orion Power Holdings, Inc. 12.000% 5/1/10 $ 2,488 $ 3,023
The AES Corporation 10.000% 7/15/05 361 367(A)
The AES Corporation 8.375% 8/15/07 360 364
The AES Corporation 8.500% 11/1/07 513 521
The AES Corporation 8.750% 6/15/08 619 664
The AES Corporation 9.500% 6/1/09 929 1,030
The AES Corporation 8.875% 2/15/11 14 15
The AES Corporation 9.000% 5/15/15 2,143 2,422(A)
--------
8,406
--------
Electronics -- 2.0%
Amkor Technology, Inc. 9.250% 2/15/08 900 1,021
BRL Universal Equipment 2001
A., L.P. 8.875% 2/15/08 300 322
Fairchild Semiconductor
International, Inc. 10.500% 2/1/09 1,090 1,215
Rayovac Corporation 8.500% 10/1/13 860 912
Viasystems Inc. 10.500% 1/15/11 1,030 1,100(A)
--------
4,570
--------
Energy -- 3.0%
Calpine Corporation 7.625% 4/15/06 880 779
Calpine Corporation 7.750% 4/15/09 27 21
Calpine Corporation 8.625% 8/15/10 2,725 2,126
Calpine Corporation 8.500% 2/15/11 544 430
Calpine Corporation 8.750% 7/15/13 1,550 1,511(A)
PG&E Corporation 6.875% 7/15/08 1,850 2,002(A)
--------
6,869
--------
Environmental Services -- 1.1%
Allied Waste North America
Incorporated 7.625% 1/1/06 69 73
Annual Report to Shareholders
13
Maturity
Rate Date Par Value
- ------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Environmental Services -- Continued
Allied Waste North America
Incorporated 8.500% 12/1/08 $ 1,984 $ 2,207
Safety-Kleen Corp. 9.250% 5/15/09 3,894 195(D)
--------
2,475
--------
Food, Beverage and Tobacco -- 1.5%
Cott Beverages Incorporated 8.000% 12/15/11 1,090 1,177
DIMON Incorporated 9.625% 10/15/11 1,171 1,306
Smithfield Foods, Inc. 8.000% 10/15/09 250 264
Smithfield Foods, Inc. 7.750% 5/15/13 759 789
--------
3,536
--------
Gaming -- 2.2%
Argosy Gaming Company 9.000% 9/1/11 1,082 1,198
Horseshoe Gaming Holding Corp. 8.625% 5/15/09 1,636 1,728
Mohegan Tribal Gaming Authority 6.375% 7/15/09 1,110 1,146
Pinnacle Entertainment, Inc. 9.250% 2/15/07 1,010 1,046
--------
5,118
--------
Gas and Pipeline Utilities -- 7.5%
ANR Pipeline, Inc. 8.875% 3/15/10 362 407
ANR Pipeline, Inc. 9.625% 11/1/21 1,007 1,197
Colorado Interstate Gas Company 10.000% 6/15/05 1,090 1,158
Dynegy Holdings Inc. 8.750% 2/15/12 673 679
Dynegy Holdings Inc. 10.125% 7/15/13 980 1,127(A)
GulfTerra Energy Partners, L.P. 10.625% 12/1/12 406 503
Northwest Pipelines Corporation 8.125% 3/1/10 254 282
Pride International, Inc. 9.375% 5/1/07 555 572
Sonat Inc. 6.875% 6/1/05 990 975
Southern Natural Gas Company 8.875% 3/15/10 768 864
Southern Natural Gas Company 8.000% 3/1/32 1,480 1,528
The Williams Companies, Inc. 9.250% 3/15/04 1,154 1,169
Statement of Net Assets -- Continued
High Yield Portfolio -- Continued
Annual Report to Shareholders
14
Maturity
Rate Date Par Value
- ------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Gas and Pipeline Utilities -- Continued
The Williams Companies, Inc. 6.750% 1/15/06 $ 1,520 $ 1,573
The Williams Companies, Inc. 8.625% 6/1/10 762 855
The Williams Companies, Inc. 8.125% 3/15/12 540 599
The Williams Companies, Inc. 7.500% 1/15/31 334 338
The Williams Companies, Inc. 8.750% 3/15/32 852 963
Transcontinental Gas Pipeline
Corporation 7.000% 8/15/11 352 375
Transcontinental Gas Pipeline
Corporation 8.875% 7/15/12 729 862
Western Gas Resources, Inc. 10.000% 6/15/09 1,060 1,140
--------
17,166
--------
Health Care -- 1.5%
Equinox Holdings Inc. 9.000% 12/15/09 710 733(A)
Genesis HealthCare Corporation 8.000% 10/15/13 520 542(A)
Tenet Healthcare Corporation 5.375% 11/15/06 102 100
Tenet Healthcare Corporation 5.000% 7/1/07 555 537
Tenet Healthcare Corporation 6.375% 12/1/11 181 174
Tenet Healthcare Corporation 7.375% 2/1/13 1,422 1,429
--------
3,515
--------
Homebuilding -- 0.5%
Schuler Homes, Inc. 9.375% 7/15/09 265 298
Schuler Homes, Inc. 10.500% 7/15/11 640 743
--------
1,041
--------
Insurance -- 0.5%
Willis Corroon Corporation 9.000% 2/1/09 1,000 1,050
--------
Annual Report to Shareholders
15
Maturity
Rate Date Par Value
- ------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Lodging/Hotels -- 2.9%
Extended Stay America, Inc. 9.150% 3/15/08 $ 629 $ 655
Extended Stay America, Inc. 9.875% 6/15/11 800 896
Felcor Lodging LP 10.000% 9/15/08 1,058 1,143
Hilton Hotels Corporation 7.950% 4/15/07 133 147
Host Marriott Corporation 7.875% 8/1/08 1,440 1,498
Host Marriott Corporation 8.450% 12/1/08 52 54
ITT Corporation 6.750% 11/15/05 280 294
La Quinta Inns, Inc. 7.400% 9/15/05 610 636
Meristar Hospitality Operating
Partnership, L.P. 10.500% 6/15/09 510 553
Starwood Hotels & Resorts
Worldwide, Inc. 7.375% 5/1/07 720 778
Starwood Hotels & Resorts
Worldwide, Inc. 7.875% 5/1/12 100 112
--------
6,766
--------
Machinery -- 4.1%
AGCO Corporation 9.500% 5/1/08 1,503 1,646
Case New Holland Incorporated 9.250% 8/1/11 1,520 1,702(A)
Case New Holland Incorporated 9.250% 8/1/11 540 605(A)
Grant Prideco, Inc. 9.000% 12/15/09 697 768
Hanover Compressor Company 8.625% 12/15/10 680 707
Joy Global Inc. 8.750% 3/15/12 1,005 1,121
NMHG Holdings Co. 10.000% 5/15/09 1,141 1,261
Terex Corporation 10.375% 4/1/11 935 1,047
Terex Corporation 9.250% 7/15/11 440 484
--------
9,341
--------
Statement of Net Assets -- Continued
High Yield Portfolio -- Continued
Annual Report to Shareholders
16
Maturity
Rate Date Par Value
- ------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Manufacturing (Diversified) -- 1.4%
Jacuzzi Brands Incorporated 9.625% 7/1/10 $ 1,714 $ 1,885(A)
Transdigm Funding Corp. 8.375% 7/15/11 990 1,053
--------
2,938
--------
Media -- 1.9%
Brill Media Company, LLC 12.000% 12/15/07 3,000 1,500(D)
Emmis Communications
Corporation 8.125% 3/15/09 907 951
Paxson Communications
Corporation 10.750% 7/15/08 645 704
Paxson Communications
Corporation 0.000% 1/15/09 25 22(B)
Sinclair Broadcast Group, Inc. 8.750% 12/15/11 990 1,099
--------
4,276
--------
Medical Care Facilities -- 2.4%
Ardent Health Services
Incorporated 10.000% 8/15/13 1,120 1,221(A)
Extendicare Health Services,
Inc. 9.350% 12/15/07 673 693
Extendicare Health Services,
Inc. 9.500% 7/1/10 260 288
HCA Inc. 6.910% 6/15/05 49 52
HCA Inc. 8.750% 9/1/10 136 162
HCA Inc. 7.875% 2/1/11 510 582
HCA Inc. 6.300% 10/1/12 324 334
HCA Inc. 9.000% 12/15/14 550 665
Triad Hospitals, Inc. 8.750% 5/1/09 1,385 1,501
--------
5,498
--------
Medical Products -- 0.4%
Fresenius Medical Care Capital
Trust II 7.875% 2/1/08 950 1,016(E)
--------
Medical Supplies and Services -- 0.4%
AmeriPath Inc. 10.500% 4/1/13 913 972
--------
Annual Report to Shareholders
17
Maturity
Rate Date Par Value
- ------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Metals -- 0.8%
IMCO Recycling Inc. 10.375% 10/15/10 $ 1,250 $ 1,284(A)
Kaiser Aluminum & Chemical 12.750% 2/1/49 2,500 550(D)
--------
1,834
--------
Oil and Gas -- 3.9%
Amerigas Partners LP 8.875% 5/20/11 696 766
Chesapeake Energy Corporation 8.375% 11/1/08 140 154
Chesapeake Energy Corporation 9.000% 8/15/12 683 785
El Paso CGP Co. 7.750% 6/15/10 1,090 1,029
El Paso Corporation 6.950% 12/15/07 1,088 1,046
El Paso Corporation 7.750% 1/15/32 250 213
El Paso Energy Partners 8.500% 6/1/11 173 195
Nuevo Energy Company 9.375% 10/1/10 320 351
Parker Drilling Company 10.125% 11/15/09 1,030 1,092
Pride International, Inc. 10.000% 6/1/09 1,065 1,142
Suburban Propane Partners LP 6.875% 12/15/13 710 717(A)
Vintage Petroleum, Inc. 7.875% 5/15/11 592 624
Vintage Petroleum, Inc. 8.250% 5/1/12 250 272
Westport Resources Corporation 8.250% 11/1/11 174 191
Westport Resources Corporation 8.250% 11/1/11 324 357(A)
--------
8,934
--------
Paper and Forest Products -- 1.6%
Georgia-Pacific Corp. 7.500% 5/15/06 170 180
Georgia-Pacific Corp. 8.875% 2/1/10 13 15
Georgia-Pacific Corp. 8.125% 5/15/11 1,214 1,335
Georgia-Pacific Corp. 9.500% 12/1/11 912 1,058
Georgia-Pacific Corp. 7.700% 6/15/15 9 9
Georgia-Pacific Corp. 8.250% 3/1/23 201 204
Statement of Net Assets -- Continued
High Yield Portfolio -- Continued
Annual Report to Shareholders
18
Maturity
Rate Date Par Value
- ------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Paper and Forest Products -- Continued
Georgia-Pacific Corp. 7.750% 11/15/29 $ 6 $ 6
Georgia-Pacific Corp. 8.875% 5/15/31 749 824
--------
3,631
--------
Publishing -- 1.2%
Dex Media East LLC 9.875% 11/15/09 706 808
Dex Media East LLC 12.125% 11/15/12 986 1,213
Hollinger International
Publishing 9.000% 12/15/10 760 808
--------
2,829
--------
Real Estate -- 0.5%
Ventas Realty, Limited
Partnership 8.750% 5/1/09 695 763
Ventas Realty, Limited
Partnership 9.000% 5/1/12 408 453
--------
1,216
--------
Restaurants -- 0.7%
Domino's Inc. 8.250% 7/1/11 1,566 1,678(A)
--------
Retail -- 1.6%
Backsaver Acquisition Corp. 9.250% 5/31/08 1,196 260(F,G)
Hollywood Entertainment
Corporation 9.625% 3/15/11 411 442
J.C. Penney Company, Inc. 7.400% 4/1/37 1,407 1,528
Norcraft Companies 9.000% 11/1/11 1,330 1,436(A)
Relax The Back Acquisition
Corp. 9.250% 5/31/08 513 112(F,G)
--------
3,778
--------
Special Purpose -- 7.0%
ACC Escrow Corporation 10.000% 8/1/11 1,210 1,349(A)
Asbury Automotive Group Inc. 9.000% 6/15/12 1,576 1,667
Asbury Automotive Group Inc. 8.000% 3/15/14 30 30(A)
Couche Tard United States L.P. 7.500% 12/15/13 820 859(A)
Annual Report to Shareholders
19
Maturity
Rate Date Par Value
- ------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Special Purpose -- Continued
H & E Equipment Services LLC 11.125% 6/15/12 $ 1,454 $ 1,461
Kraton Polymers LLC 8.125% 1/15/14 600 624(A)
Midland Funding II 11.750% 7/23/05 1,368 1,478
Qwest Capital Funding, Inc. 5.875% 8/3/04 1,030 1,033
Qwest Capital Funding, Inc. 7.000% 8/3/09 1,411 1,400
Qwest Capital Funding, Inc. 7.250% 2/15/11 815 803
Qwest Capital Funding, Inc. 6.875% 7/15/28 1,423 1,238
River Rock Entertainment 9.750% 11/1/11 900 968(A)
Sensus Metering Systems
Incorporated 8.625% 12/15/13 970 995(A)
Toll Corp. 8.000% 5/1/09 479 502
UCAR Finance Inc. 10.250% 2/15/12 1,435 1,650
--------
16,057
--------
Storage Facilities -- 0.5%
Mobile Mini, Inc. 9.500% 7/1/13 1,020 1,122
--------
Telecommunications -- 4.6%
Cincinnati Bell Inc. 7.250% 7/15/13 1,170 1,228(A)
Cincinnati Bell Inc. 8.375% 1/15/14 570 613(A)
Crown Castle International
Corp. 10.750% 8/1/11 510 574
EchoStar DBS Corporation 4.410% 10/1/08 1,090 1,135(A,H)
EchoStar DBS Corporation 9.125% 1/15/09 142 159
MCI Communications Corporation 6.500% 4/15/10 1,360 1,095(D)
PanAmSat Corporation 6.375% 1/15/08 651 676
PanAmSat Corporation 8.500% 2/1/12 147 163
Qwest Corporation 6.875% 9/15/33 2,310 2,194
Qwest Services Corporation 13.500% 12/15/10 2,339 2,842(A)
--------
10,679
--------
Statement of Net Assets -- Continued
High Yield Portfolio -- Continued
Annual Report to Shareholders
20
Maturity
Rate Date Par Value
- ------------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Telecommunications (Cellular/Wireless) -- 2.0%
Nextel Communications, Inc. 9.375% 11/15/09 $ 1,287 $ 1,403
Nextel Communications, Inc. 5.250% 1/15/10 1,139 1,156(I)
Nextel Communications, Inc. 7.375% 8/1/15 840 903
SBA Communications Corporation 0.000% 12/15/11 1,665 1,174(A,B)
--------
4,636
--------
Transportation -- 1.7%
Continental Airlines, Inc. 7.373% 12/15/15 482 418
Delta Air Lines, Inc. 7.900% 12/15/09 690 558
Kansas City Southern Railway 9.500% 10/1/08 1,834 2,036
OMI Corporation 7.625% 12/1/13 430 434(A)
Quality Distribution LLC 9.000% 11/15/10 440 460(A)
--------
3,906
--------
Water Utilities -- 0.3%
National Waterworks, Inc. 10.500% 12/1/12 667 745
--------
Total Corporate Bonds and Notes
(Identified Cost -- $189,564) 196,418
- ------------------------------------------------------------------------------
Yankee Bonds(J) -- 7.1%
Building Materials -- 0.5%
North American Energy Partners 8.750% 12/1/11 1,070 1,124(A)
--------
Chemicals -- 0.9%
Rhodia S.A. 7.625% 6/1/10 540 518(A)
Rhodia S.A. 8.875% 6/1/11 1,750 1,610(A)
--------
2,128
--------
Annual Report to Shareholders
21
Maturity
Rate Date Par Value
- ------------------------------------------------------------------------------
Yankee Bonds -- Continued
Manufacturing (Diversified) -- 1.0%
Tyco International Group S.A. 6.375% 10/15/11 $ 1,653 $ 1,767
Tyco International Group S.A. 6.875% 1/15/29 503 515
--------
2,282
--------
Media -- 0.8%
Alliance Atlantis
Communications Inc. 13.000% 12/15/09 338 385
Vivendi Universal S.A. 9.250% 4/15/10 1,156 1,370(A)
--------
1,755
--------
Paper and Forest Products -- 0.5%
Abitibi-Consolidated Inc. 8.500% 8/1/29 783 816
Abitibi-Consolidated Inc. 8.850% 8/1/30 203 220
--------
1,036
--------
Publishing -- 0.2%
Sun Media Corporation 7.625% 2/15/13 501 536
--------
Services -- 0.4%
Compagnie Generale de
Geophysique S.A. 10.625% 11/15/07 828 878
--------
Special Purpose -- 1.8%
Calpine Canada Energy Finance 8.500% 5/1/08 1,443 1,151
Eircom Funding 8.250% 8/15/13 1,030 1,141
MDP Acquisitions plc 9.625% 10/1/12 1,189 1,331
Yell Finance B.V. 10.750% 8/1/11 510 597
--------
4,220
--------
Statement of Net Assets -- Continued
High Yield Portfolio -- Continued
Annual Report to Shareholders
22
Maturity
Rate Date Par Value
- ------------------------------------------------------------------------------
Yankee Bonds -- Continued
Telecommunications (Cellular/Wireless) -- 0.3%
Rogers Wireless Communications
Inc. 9.625% 5/1/11 $ 628 $ 751
--------
Transportation -- 0.7%
Teekay Shipping Corporation 8.875% 7/15/11 1,455 1,651
--------
Total Yankee Bonds (Identified
Cost -- $15,311) 16,361
- ------------------------------------------------------------------------------
Common Stocks -- 0.1%
Diversified Telecommunication Services -- N.M.
Cincinnati Bell Inc. 0.1shs 1(K)
--------
Engineering and Construction -- 0.1%
Washington Group International,
Inc. 5 166(K)
--------
Food -- N.M.
International Fast Food
Corporation 40 0.005(K)
--------
Total Common Stocks (Identified Cost -- $2,847) 167
- ------------------------------------------------------------------------------
Preferred Stocks -- 1.6%
Cablevision Systems New York
Group 11.125% 19 1,978
Cablevision Systems New York
Group 11.750% 5 537
High Voltage Engineering
Corporation 12.500% 0.5 5(L)
Paxson Communications
Corporation 14.250% 0.1 1,273(F,L)
--------
Total Preferred Stocks (Identified Cost -- $3,992) 3,793
- ------------------------------------------------------------------------------
Warrants -- 0.1%
American Tower Corporation 1wts 104(A,L)
Horizon PCS, Inc. 2 0.02(A,L)
Next Generation Network, Inc. 16 0.2(L)
Washington Group International, Series A 3 27(L)
Washington Group International, Series B 3 26(L)
Washington Group International, Series C 2 13(L)
--------
Total Warrants (Identified
Cost -- $310) 170
Total Long-Term Securities (Identified Cost -- $211,024) 216,909
- ------------------------------------------------------------------------------
Annual Report to Shareholders
23
Par Value
- ------------------------------------------------------------------------------
Short-Term Securities -- 4.4%
Repurchase Agreements -- 4.4%
Credit Suisse First Boston USA 0.97%, dated
12/31/03, to be repurchased at $4,140 on 1/2/04
(Collateral: $4,195 Federal Home Loan Bank bonds,
2.25%, due 12/15/05, value $4,227) $ 4,140 $ 4,140
Goldman, Sachs & Company 0.97%, dated 12/31/03, to
be repurchased at $6,000 on 1/2/04 (Collateral:
$5,880 Freddie Mac notes, 3.875%, due 2/15/05,
value $6,209) 6,000 6,000
--------
Total Short-Term Securities (Identified Cost -- $10,140) 10,140
- ------------------------------------------------------------------------------
Total Investments -- 98.6% (Identified Cost -- $222,164) 227,049
Other Assets Less Liabilities -- 1.4% 3,158
--------
Net assets consist of:
Accumulated paid-in capital applicable to:
24,584 Primary Class shares outstanding $ 376,878
706 Institutional Class shares
outstanding 6,497
Under/(over) distributed net
investment income (88)
Accumulated net realized
gain/(loss) on investments (157,965)
Unrealized
appreciation/(depreciation) of
investments 4,885
---------
Net assets -- 100.0% $230,207
========
Net asset value per share:
Primary Class $9.10
========
Institutional Class $9.11
========
- ------------------------------------------------------------------------------
Statement of Net Assets -- Continued
High Yield Portfolio -- Continued
Annual Report to Shareholders
24
- ------------------------------------------------------------------------------
(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 24.3% of net
assets.
(B) Stepped coupon security -- A security with a predetermined schedule of
interest or dividend rate changes, at which time it begins to accrue
interest or pay dividends.
(C) 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.
(D) Bond is in default at December 31, 2003.
(E) Unit -- A security which consists of a bond and warrants to purchase the
common stock of the issuer.
(F) Private placement.
(G) Illiquid security valued at fair value under procedures adopted by the
Board of Directors.
(H) Indexed security -- The rates of interest earned on these securities are
tied to the London Interbank Offered Rate ("LIBOR"). The coupon rates are
the rates as of December 31, 2003.
(I) Convertible security -- Security may be converted into the issuer's common
stock.
(J) Yankee Bond -- A dollar-denominated bond issued in the U.S. by foreign
entities.
(K) Non-income producing.
(L) Pay-in-Kind ("PIK") security -- A security in which interest or dividends
during the initial few years is paid in additional PIK securities rather
than in cash.
See notes to financial statements.
Annual Report to Shareholders
25
Statement of Operations
High Yield Portfolio
For the Year Ended December 31, 2003
(Amounts in Thousands)
- --------------------------------------------------------------------------
Investment Income:
Dividends $ 336
Interest 17,596
-------
Total income $17,932
Expenses:
Management fee 1,344
Distribution and service fees 1,008
Audit and legal fees 58
Custodian fee 175
Directors' fees and expenses 17
Registration fees 31
Reports to shareholders 43
Transfer agent and shareholder servicing expense:
Primary Class 205
Institutional Class 2
Other expenses 10
-------
Total expenses 2,893
-------
Net Investment Income 15,039
Net Realized and Unrealized Gain/(Loss) on
Investments:
Net realized gain/(loss) on investments 2,379
Change in unrealized appreciation/(depreciation) of
investments 24,619
-------
Net Realized and Unrealized Gain/(Loss) on Investments 26,998
- --------------------------------------------------------------------------
Change in Net Assets Resulting From Operations $42,037
- --------------------------------------------------------------------------
See notes to financial statements.
Annual Report to Shareholders
26
Statement of Changes in Net Assets
High Yield Portfolio
(Amounts in Thousands)
For the Years Ended
---------------------------------
12/31/03 12/31/02
- ----------------------------------------------------------------------------
Change in Net Assets:
Net investment income $ 15,039 $ 16,637
Net realized gain/(loss) on investments 2,379 (35,418)
Change in unrealized appreciation/
(depreciation) of investments 24,619 8,382
- ----------------------------------------------------------------------------
Change in net assets resulting from
operations 42,037 (10,399)
Distributions to shareholders from net
investment income:
Primary Class (14,885) (16,509)
Institutional Class (389) (204)
Change in net assets from Fund share transactions:
Primary Class 35,499 (10,226)
Institutional Class 3,066 1,672
- ----------------------------------------------------------------------------
Change in net assets 65,328 (35,666)
Net Assets:
Beginning of year 164,879 200,545
- ----------------------------------------------------------------------------
End of year $230,207 $164,879
- ----------------------------------------------------------------------------
Under/(over) distributed net investment
income $ (88) $ 135
- ----------------------------------------------------------------------------
See notes to financial statements.
Annual Report to Shareholders
27
Financial Highlights
High Yield Portfolio
Contained below is per share operating performance data for a share of common
stock outstanding, total investment return, ratios to average net assets and
other supplemental data. This information has been derived from information
provided in the financial statements.
Primary Class:
Years Ended December 31,
----------------------------------------------------
2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------
Net asset value,
beginning of year $7.96 $9.22 $10.18 $14.97 $14.72
----------------------------------------------------
Investment operations:
Net investment income .63 .77 .94 1.32 1.01
Net realized and
unrealized
gain/(loss) on
investments 1.15 (1.26) (.94) (3.45) .29
----------------------------------------------------
Total from investment
operations 1.78 (.49) -- (2.13) 1.30
----------------------------------------------------
Distributions:
From net investment
income (.64) (.77) (.96) (1.27) (1.05)
From net realized gain
on investments -- -- -- (1.39) --
----------------------------------------------------
Total distributions (.64) (.77) (.96) (2.66) (1.05)
----------------------------------------------------
Net asset value, end of
year $9.10 $7.96 $9.22 $10.18 $14.97
----------------------------------------------------
Ratios/supplemental
data:
Total return 23.03% (5.28)% (.13)% (16.43)% 8.82%
Expenses to average
net assets 1.41% 1.36% 1.51% 1.51% 1.31%
Net investment income
to average net
assets 7.26% 9.06% 9.59% 9.98% 6.51%
Portfolio turnover
rate 122% 97% 130% 45% 83%
Net assets, end of year
(in thousands) $223,773 $162,175 $199,214 $217,769 $375,099
- ------------------------------------------------------------------------------
See notes to financial statements.
Annual Report to Shareholders
28
Financial Highlights -- Continued
Institutional Class:
Period From Period
Years Ended December 31, March 8 to Ended
--------------------------------- December 31, January 28,
2003 2002 2001 2000 1999 1999
- -------------------------------------------------------------------------------------------
Net asset value,
beginning of year $7.96 $9.20 $10.18 $14.97 $15.98 $14.67
-------------------------------------------------------------------
Investment
operations:
Net investment
income .66 .78 1.01 1.41 .89 .08
Net realized and
unrealized
gain/(loss) on
investments 1.15 (1.24) (1.00) (3.47) (.92) .72
-------------------------------------------------------------------
Total from
investment
operations 1.81 (.46) .01 (2.06) (.03) .80
-------------------------------------------------------------------
Distributions:
From net investment
income (.66) (.78) (.99) (1.34) (.98) (.04)
From net realized
gain on
investments -- -- -- (1.39) -- --
-------------------------------------------------------------------
Total distributions (.66) (.78) (.99) (2.73) (.98) (.04)
-------------------------------------------------------------------
Net asset value, end
of year $9.11 $7.96 $9.20 $10.18 $14.97 $15.43
-------------------------------------------------------------------
Ratios/supplemental
data:
Total return 23.54% (5.00)% (.06)% (15.99)% (.20)%(A) 5.47%(A)
Expenses to average
net assets .85% .82% .97% 1.03% .82%(B) .81%(B)
Net investment
income to average
net assets 7.78% 9.63% 10.20% 10.98% 7.19%(B) 7.17%(B)
Portfolio turnover
rate 122% 97% 130% 45% 78%(B) 116%(B)
Net assets, end of
year (in thousands) $6,434 $2,704 $1,331 $ 673 $ 673 $ --
- -------------------------------------------------------------------------------------------
(A) Not annualized.
(B) Annualized.
See notes to financial statements.
Annual Report to Shareholders
29
Performance Information
Investment Grade Income Portfolio
The following graphs compare the Fund's total returns against those of a
closely matched broad-based securities market index. The lines illustrate the
cumulative total return of an initial $10,000 investment in Primary Class shares
and an initial $1,000,000 investment in Institutional Class shares of the Fund,
for the periods indicated. The lines for the Fund represent the total return
after deducting all Fund investment management and other administrative expenses
and the transaction costs of buying and selling securities. The lines
representing the securities market index do not include any transaction costs
associated with buying and selling securities in the index or other
administrative expenses.
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 the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Average annual
returns tend to smooth out variations in a fund's return, so that they differ
from actual year-to-year results. Performance would have been lower if fees had
not been waived in various periods.
Effective September 30, 2002, Investment Grade changed its comparative index
from the Lehman Aggregate Bond Index to the Lehman Credit Bond Index, because
the new index is more representative of the types of securities in which the
Fund invests.
Performance Information -- Continued
Annual Report to Shareholders
30
Growth of a $10,000 Investment -- Primary Class
[VALUE TRUST GRAPH]
Investment Grade Income Lehman Aggregate Bond Lehman Credit Bond
Portfolio - Primary Class Index(A) Index(B)
------------------------- --------------------- ------------------
12/31/1993 10000.00 10000.00 10000.00
3/31/1994 9709.00 9713.00 9727.00
6/30/1994 9503.00 9613.00 9652.00
9/30/1994 9539.00 9672.00 9751.00
12/31/1994 9518.00 9708.00 9734.00
3/31/1995 10098.00 10198.00 10253.00
6/30/1995 10729.00 10819.00 10896.00
9/30/1995 10957.00 11032.00 11120.00
12/31/1995 11435.00 11502.00 11583.00
3/31/1996 11260.00 11298.00 11422.00
6/30/1996 11294.00 11362.00 11477.00
9/30/1996 11536.00 11572.00 11701.00
12/31/1996 11928.00 11919.00 12043.00
3/31/1997 11882.00 11853.00 11993.00
6/30/1997 12348.00 12288.00 12410.00
9/30/1997 12802.00 12696.00 12803.00
12/31/1997 13158.00 13070.00 13049.00
3/31/1998 13355.00 13274.00 13269.00
6/30/1998 13588.00 13584.00 13533.00
9/30/1998 13899.00 14158.00 14074.00
12/31/1998 14077.00 14206.00 14131.00
3/31/1999 13883.00 14135.00 14133.00
6/30/1999 13752.00 14011.00 14018.00
9/30/1999 13844.00 14106.00 14116.00
12/31/1999 13949.00 14089.00 14154.00
3/31/2000 14253.00 14400.00 14329.00
6/30/2000 14318.00 14651.00 14537.00
9/30/2000 14729.00 15092.00 15003.00
12/31/2000 15226.00 15727.00 15494.00
3/31/2001 15704.00 16204.00 16109.00
6/30/2001 15918.00 16296.00 16272.00
9/30/2001 16404.00 17047.00 16948.00
12/31/2001 16371.00 17055.00 17007.00
3/31/2002 16362.00 17071.00 16978.00
6/30/2002 16575.00 17701.00 17517.00
9/30/2002 17176.00 18512.00 18251.00
12/31/2002 17815.00 18804.00 18731.00
3/31/2003 18340.00 19066.00 19154.00
6/30/2003 19462.00 19542.00 19923.00
9/30/2003 19387.00 19514.00 19948.00
12/31/2003 19626.00 19576.00 20026.00
Cumulative Average Annual
Total Return Total Return
One Year +10.16% +10.16%
Five Years +39.42% +6.87%
Ten Years +96.26% +6.98%
The graph and table do not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of Fund shares.
Past performance does not predict future performance.
- ---------------
(A) A market value-weighted index that tracks the daily price, coupon,
pay-downs, and total return performance of fixed rate, publicly placed,
dollar-denominated, and nonconvertible investment grade debt issues with at
least $100 million par amount outstanding and with at least one year to
final maturity.
(B) This index includes all publicly issued, fixed rate, non-convertible,
investment grade, domestic corporate debt. It also includes Yankee bonds,
which are dollar-denominated, SEC-registered public, non-convertible debt
issued or guaranteed by foreign sovereign governments, municipalities,
governmental agencies, and international agencies.
Annual Report to Shareholders
31
Growth of a $1,000,000 Investment -- Institutional Class
[VALUE TRUST GRAPH]
Investment Grade Income Lehman Aggregate Bond Lehman Credit Bond
Portfolio - Institutional Class Index(C) Index(C)
------------------------------- --------------------- ------------------
12/1/1995 1000000.00 1000000.00 1000000.00
12/31/1995 1014220.00 1014000.00 1012700.00
3/31/1996 999934.00 996100.00 998500.00
6/30/1996 1004200.00 1001700.00 1003400.00
9/30/1996 1026950.00 1020200.00 1022900.00
12/31/1996 1063760.00 1050800.00 1052800.00
3/31/1997 1060180.00 1045000.00 1048500.00
6/30/1997 1104520.00 1083400.00 1084900.00
9/30/1997 1146710.00 1119300.00 1119300.00
12/31/1997 1180240.00 1152300.00 1140800.00
3/31/1998 1199600.00 1170200.00 1160000.00
6/30/1998 1222200.00 1197600.00 1183100.00
9/30/1998 1251810.00 1248200.00 1230400.00
12/31/1998 1269590.00 1252400.00 1235400.00
3/31/1999 1253790.00 1246200.00 1235500.00
6/30/1999 1243630.00 1235200.00 1225500.00
9/30/1999 1254520.00 1243600.00 1234100.00
12/31/1999 1265380.00 1242100.00 1237400.00
3/31/2000 1294720.00 1269500.00 1252700.00
6/30/2000 1300890.00 1291600.00 1270900.00
9/30/2000 1341390.00 1330600.00 1311700.00
12/31/2000 1387190.00 1386500.00 1354500.00
3/31/2001 1432610.00 1428600.00 1408300.00
6/30/2001 1453760.00 1436700.00 1422600.00
9/30/2001 1501340.00 1502900.00 1481700.00
12/31/2001 1500330.00 1503600.00 1486800.00
3/31/2002 1501550.00 1505000.00 1484300.00
6/30/2002 1522920.00 1560600.00 1531400.00
9/30/2002 1580220.00 1632100.00 1595600.00
12/31/2002 1641110.00 1657800.00 1637500.00
3/31/2003 1691570.00 1680900.00 1674500.00
6/30/2003 1797170.00 1722900.00 1741800.00
9/30/2003 1792460.00 1720400.00 1743900.00
12/31/2003 1806400.00 1725800.00 1750700.00
Cumulative Average Annual
Total Return Total Return
One Year +10.71% +10.71%
Five Years +43.11% +7.43%
Life of Class* +80.64% +7.59%
*Inception date: December 1, 1995
The graph and table do not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of Fund shares.
Past performance does not predict future performance.
- ---------------
(C) Index returns are for periods beginning November 30, 1995.
Annual Report to Shareholders
32
Statement of Net Assets
Investment Grade Income Portfolio
December 31, 2003
(Amounts in Thousands)
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Long-Term Securities -- 97.7%
Corporate Bonds and Notes -- 69.9%
Aerospace/Defense -- 1.2%
General Dynamics Corporation 3.000% 5/15/08 $ 525 $ 513
Lockheed Martin Corporation 8.500% 12/1/29 1,200 1,572
Raytheon Company 6.150% 11/1/08 600 653
Raytheon Company 5.375% 4/1/13 500 501
Raytheon Company 6.400% 12/15/18 840 882
United Technologies Corporation 7.500% 9/15/29 550 673
--------
4,794
--------
Auto Parts and Equipment -- 0.1%
American Axle & Manufacturing
Inc. 9.750% 3/1/09 50 53
Lear Corporation 7.960% 5/15/05 231 247
--------
300
--------
Automotive -- 1.8%
Ford Motor Company 7.450% 7/16/31 2,000 2,021
Ford Motor Company 8.900% 1/15/32 370 414
Ford Motor Company 7.700% 5/15/97 630 605
General Motors Corporation 7.125% 7/15/13 370 406
General Motors Corporation 8.250% 7/15/23 650 738
General Motors Corporation 8.375% 7/15/33 2,960 3,436
--------
7,620
--------
Banking and Finance -- 6.9%
Boeing Capital Corporation 6.500% 2/15/12 1,000 1,093
Boeing Capital Corporation 5.800% 1/15/13 1,500 1,573
Capital One Bank 6.875% 2/1/06 150 162
Countrywide Home Loans, Inc. 3.250% 5/21/08 1,200 1,180
Ford Motor Credit Company 6.875% 2/1/06 250 267
Ford Motor Credit Company 6.500% 1/25/07 4,800 5,113
Ford Motor Credit Company 5.800% 1/12/09 2,500 2,575
Ford Motor Credit Company 7.250% 10/25/11 1,600 1,735
General Motors Acceptance
Corporation 6.125% 2/1/07 910 979
Annual Report to Shareholders
33
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Banking and Finance -- Continued
General Motors Acceptance
Corporation 6.150% 4/5/07 $ 1,090 $ 1,168
General Motors Acceptance
Corporation 6.125% 8/28/07 1,000 1,074
General Motors Acceptance
Corporation 7.250% 3/2/11 160 176
General Motors Acceptance
Corporation 7.000% 2/1/12 1,250 1,344
General Motors Acceptance
Corporation 0.000% 6/15/15 2,700 1,285(A)
Household Finance Corporation 7.000% 5/15/12 2,727 3,110
John Deere Capital Corporation 4.500% 8/22/07 495 518
MBNA America Bank 7.750% 9/15/05 1,200 1,309(B)
National Rural Utilities
Cooperative Finance
Corporation 7.250% 3/1/12 1,700 1,981
SB Treasury Company LLC 9.400% 12/29/49 840 965(B)
Toyota Motor Credit Corporation 2.800% 1/18/06 1,000 1,018
--------
28,625
--------
Banks -- 5.8%
Bank of America Corporation 3.875% 1/15/08 1,500 1,529
Bank of America Corporation 7.400% 1/15/11 2,000 2,346
Bank of America Corporation 6.250% 4/15/12 1,720 1,896
Bank of America Corporation 4.750% 8/15/13 470 462
Bank One Corporation 4.125% 9/1/07 1,000 1,033
Bank One Corporation 5.250% 1/30/13 3,300 3,385
CBA Capital Trust I 5.805% 12/31/49 3,510 3,618(B)
FleetBoston Financial
Corporation 7.250% 9/15/05 1,600 1,740
UnionBanCal Corporation 5.250% 12/16/13 785 793
US Bank N.A. 6.375% 8/1/11 1,000 1,115
Statement of Net Assets -- Continued
Investment Grade Income Portfolio -- Continued
Annual Report to Shareholders
34
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Banks -- Continued
Wachovia Bank N.A. 7.800% 8/18/10 $ 800 $ 965
Wachovia Corporation 3.500% 8/15/08 2,400 2,390
Washington Mutual Bank 5.500% 1/15/13 1,000 1,031
Washington Mutual, Inc. 5.625% 1/15/07 1,600 1,724
--------
24,027
--------
Building Materials -- N.M.
American Standard, Inc. 8.250% 6/1/09 37 43
American Standard, Inc. 7.625% 2/15/10 5 5
Nortek Holdings, Inc. 8.875% 8/1/08 100 105
--------
153
--------
Cable -- 1.4%
Comcast Cable Communications,
Inc. 6.750% 1/30/11 1,250 1,391
Comcast Corporation 5.850% 1/15/10 800 854
Comcast Corporation 7.050% 3/15/33 1,800 1,958
Cox Communications, Inc. 7.125% 10/1/12 1,250 1,442
Tele-Communications, Inc. 7.125% 2/15/28 180 195
--------
5,840
--------
Casino Resorts -- 0.2%
Harrah's Operating Company,
Inc. 7.875% 12/15/05 500 544
Harrah's Operating Company,
Inc. 7.500% 1/15/09 405 461
--------
1,005
--------
Chemicals -- 0.7%
Rohm and Haas Company 7.400% 7/15/09 1,000 1,172
The Dow Chemical Company 6.000% 10/1/12 750 789
The Dow Chemical Company 7.375% 11/1/29 800 895
--------
2,856
--------
Annual Report to Shareholders
35
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Computer Services and Systems -- 1.0%
Compaq Computer Corporation 7.650% 8/1/05 $ 1,500 $ 1,620
Hewlett-Packard Company 6.500% 7/1/12 700 777
International Business Machines
Corporation 4.750% 11/29/12 1,750 1,754
--------
4,151
--------
Consumer Products -- 0.4%
Kimberly-Clark Corporation 4.500% 7/30/05 500 520(B)
The Procter & Gamble Company 4.300% 8/15/08 1,000 1,037
--------
1,557
--------
Diversified Financial Services -- 8.4%
Associates Corporation of North
America 8.150% 8/1/09 775 933
Capital One Financial
Corporation 8.750% 2/1/07 400 451
Capital One Financial
Corporation 7.125% 8/1/08 340 367
CIT Group Inc. 4.000% 5/8/08 1,000 1,011
CIT Group Inc. 3.875% 11/3/08 1,350 1,346
Citigroup Inc. 5.800% 3/15/04 1,000 1,009
Citigroup Inc. 5.000% 3/6/07 4,800 5,096
Citigroup Inc. 5.625% 8/27/12 1,600 1,689
Citigroup Inc. 5.875% 2/22/33 1,200 1,179
FDA Queens LP 6.990% 6/15/17 1,687 1,874
General Electric Capital
Corporation 6.800% 11/1/05 1,970 2,139
General Electric Capital
Corporation 5.000% 6/15/07 3,000 3,195
General Electric Capital
Corporation 3.500% 5/1/08 2,640 2,643
General Electric Capital
Corporation 5.875% 2/15/12 1,600 1,720
General Electric Capital
Corporation 6.750% 3/15/32 980 1,085
IBJ Preferred Capital Corp. LLC 8.790% 12/29/49 1,520 1,657(B)
Transamerica Finance
Corporation 5.750% 1/28/04 2,000 2,005
Statement of Net Assets -- Continued
Investment Grade Income Portfolio -- Continued
Annual Report to Shareholders
36
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Diversified Financial Services -- Continued
U.S. Bancorp 3.125% 3/15/08 $ 1,650 $ 1,627
Wells Fargo & Company 5.125% 2/15/07 2,600 2,774
Wells Fargo & Company 6.375% 8/1/11 800 892
--------
34,692
--------
Drug and Grocery Store Chains -- 0.7%
Fred Meyer, Inc. 7.375% 3/1/05 1,000 1,059
Kroger Company 8.000% 9/15/29 1,000 1,200
Safeway Inc. 5.800% 8/15/12 750 776
--------
3,035
--------
Electric -- 4.0%
AEP Texas Central Company 5.500% 2/15/13 1,060 1,086
American Electric Power
Company, Inc. 6.125% 5/15/06 965 1,040
American Electric Power
Company, Inc. 5.250% 6/1/15 350 344
Commonwealth Edison Company 6.150% 3/15/12 560 611
Dominion Resources, Inc. 5.125% 12/15/09 490 512
Dominion Resources, Inc. 5.700% 9/17/12 2,280 2,402
FirstEnergy Corp. 5.500% 11/15/06 2,120 2,196
FirstEnergy Corp. 6.450% 11/15/11 305 316
FirstEnergy Corp. 7.375% 11/15/31 1,075 1,100
Niagara Mohawk Power
Corporation 7.750% 10/1/08 1,010 1,172
Oncor Electric Delivery Company 7.000% 9/1/22 500 551
Southern California Edison
Company 8.000% 2/15/07 950 1,086
System Energy Resources, Inc. 7.430% 1/15/11 490 505
Tampa Electric Company 6.375% 8/15/12 380 408
The Cleveland Electric
Illuminating Company 5.650% 12/15/13 800 787(B)
Annual Report to Shareholders
37
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Electric -- Continued
The Cleveland Electric
Illuminating Company 7.880% 11/1/17 $ 850 $ 994
The Detroit Edison Company 5.200% 10/15/12 1,260 1,294
--------
16,404
--------
Electrical Equipment -- 0.2%
Emerson Electric Co. 6.000% 8/15/32 900 917
--------
Energy -- 2.4%
Alabama Power Company 3.125% 5/1/08 920 905
Calpine Corporation 7.750% 4/15/09 49 38
Calpine Corporation 8.500% 2/15/11 620 490
DTE Energy Company 6.375% 4/15/33 350 343
Duke Energy Corporation 1.630% 12/8/05 1,020 1,019(C)
Duke Energy Corporation 5.625% 11/30/12 270 281
Entergy Gulf States, Inc. 8.250% 4/1/04 1,800 1,828
Exelon Corporation 6.750% 5/1/11 2,000 2,234
MidAmerican Energy Holdings
Company 5.875% 10/1/12 750 786
TXU Corp. 6.375% 6/15/06 100 106
TXU Energy Co. 7.000% 3/15/13 930 1,029
Xcel Energy, Inc. 7.000% 12/1/10 900 1,021
--------
10,080
--------
Entertainment -- 0.3%
The Walt Disney Company 6.375% 3/1/12 1,250 1,375
--------
Environmental Services -- 1.0%
Republic Services, Inc. 6.750% 8/15/11 2,340 2,616
Safety-Kleen Corp. 9.250% 5/15/09 119 6(D)
Statement of Net Assets -- Continued
Investment Grade Income Portfolio -- Continued
Annual Report to Shareholders
38
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Environmental Services -- Continued
Waste Management, Inc. 6.375% 11/15/12 $ 230 $ 249
Waste Management, Inc. 7.375% 5/15/29 700 788
Waste Management, Inc. 7.750% 5/15/32 420 495
--------
4,154
--------
Food, Beverage and Tobacco -- 4.6%
Altria Group, Inc. 6.375% 2/1/06 490 520
Altria Group, Inc. 7.000% 11/4/13 1,550 1,654
Altria Group, Inc. 7.750% 1/15/27 665 717
Anheuser-Busch Companies, Inc. 4.375% 1/15/13 800 778
Anheuser-Busch Companies, Inc. 6.500% 2/1/43 600 652
Archer-Daniels-Midland Company 7.000% 2/1/31 1,000 1,149
Campbell Soup Company 5.000% 12/3/12 800 817
Coca-Cola Enterprises Inc. 5.250% 5/15/07 980 1,051
Kellogg Company 6.000% 4/1/06 1,000 1,071
Kellogg Company 6.600% 4/1/11 800 897
Kellogg Company 7.450% 4/1/31 650 768
Kraft Foods Inc. 5.250% 6/1/07 750 798
Kraft Foods Inc. 6.250% 6/1/12 210 229
Kraft Foods Inc. 6.500% 11/1/31 1,250 1,306
Nabisco Incorporated 7.050% 7/15/07 3,100 3,487
R.J. Reynolds Tobacco Holdings,
Inc. 7.750% 5/15/06 1,280 1,344
R.J. Reynolds Tobacco Holdings,
Inc. 7.875% 5/15/09 860 897
The Pepsi Bottling Group, Inc. 7.000% 3/1/29 900 1,031
--------
19,166
--------
Gaming -- N.M.
Horseshoe Gaming Holding Corp. 8.625% 5/15/09 69 73
--------
Gas and Pipeline Utilities -- 1.7%
CenterPoint Energy Resources
Corp. 7.875% 4/1/13 1,010 1,143(B)
Dynegy Holdings Inc. 8.750% 2/15/12 1,690 1,705
Annual Report to Shareholders
39
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Gas and Pipeline Utilities -- Continued
Panhandle Eastern Pipeline
Company 4.800% 8/15/08 $ 1,170 $ 1,206(B)
Tennessee Gas Pipeline Company 8.375% 6/15/32 1,000 1,061
The Williams Companies, Inc. 7.625% 7/15/19 2,000 2,092
--------
7,207
--------
Health Care -- 0.6%
Tenet Healthcare Corporation 7.375% 2/1/13 2,310 2,322
--------
Homebuilding -- 0.2%
Centex Corporation 5.125% 10/1/13 420 414
Pulte Homes, Inc. 6.250% 2/15/13 385 409
--------
823
--------
Insurance -- 0.6%
Ace Capital Trust II 9.700% 4/1/30 50 65
Loews Corporation 7.625% 6/1/23 1,000 1,028
Loews Corporation 7.000% 10/15/23 1,000 994
Provident Companies, Inc. 7.000% 7/15/18 590 593
--------
2,680
--------
Investment Banking/Brokerage -- 5.2%
Credit Suisse First Boston USA,
Inc. 3.875% 1/15/09 1,500 1,498
J.P. Morgan Chase & Co. 5.350% 3/1/07 1,400 1,498
J.P. Morgan Chase & Co. 6.625% 3/15/12 2,750 3,072
J.P. Morgan Chase & Co. 5.750% 1/2/13 1,100 1,160
Lehman Brothers Holdings Inc. 6.250% 5/15/06 2,000 2,173
Lehman Brothers Holdings Inc. 6.625% 1/18/12 800 903
Merrill Lynch & Co., Inc. 3.375% 9/14/07 1,345 1,362
Merrill Lynch & Co., Inc. 6.000% 2/17/09 800 880
Morgan Stanley 5.800% 4/1/07 2,600 2,826
Morgan Stanley 7.250% 4/1/32 1,200 1,407
The Bear Stearns Companies Inc. 4.000% 1/31/08 1,600 1,630
Statement of Net Assets -- Continued
Investment Grade Income Portfolio -- Continued
Annual Report to Shareholders
40
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Investment Banking/Brokerage -- Continued
The Goldman Sachs Group, Inc. 6.600% 1/15/12 $ 1,550 $ 1,732
The Goldman Sachs Group, Inc. 6.125% 2/15/33 1,300 1,309
--------
21,450
--------
Machinery -- 0.3%
Caterpillar Inc. 6.550% 5/1/11 1,070 1,215
--------
Manufacturing (Diversified) -- 0.1%
The Gillette Company 2.875% 3/15/08 410 401
--------
Media -- 3.9%
AOL Time Warner Inc. 6.150% 5/1/07 1,600 1,741
AOL Time Warner Inc. 6.875% 5/1/12 2,050 2,307
AOL Time Warner Inc. 7.700% 5/1/32 2,020 2,357
Clear Channel Communications,
Inc. 4.400% 5/15/11 1,210 1,182
Liberty Media Corporation 2.670% 9/17/06 2,335 2,360(C)
Liberty Media Corporation 8.500% 7/15/29 840 1,017
Liberty Media Corporation 8.250% 2/1/30 420 503
News America Holdings 8.875% 4/26/23 500 641
News America Holdings 7.750% 2/1/24 80 94
News America Holdings 8.250% 10/17/96 200 236
News America Incorporated 7.625% 11/30/28 1,410 1,634
News America Incorporated 6.550% 3/15/33 110 114
Time Warner Entertainment
Company, L.P. 8.375% 7/15/33 460 584
Viacom Inc. 5.625% 8/15/12 1,250 1,330
--------
16,100
--------
Medical Care Facilities -- 0.4%
HCA Inc. 6.300% 10/1/12 1,790 1,846
--------
Annual Report to Shareholders
41
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Metals and Mining -- 0.5%
Alcoa Inc. 5.375% 1/15/13 $ 1,800 $ 1,880
--------
Oil and Gas -- 2.1%
Apache Corporation 6.250% 4/15/12 1,010 1,123
ConocoPhillips 4.750% 10/15/12 2,170 2,179
Devon Energy Corporation 7.950% 4/15/32 1,080 1,302
El Paso Corporation 7.800% 8/1/31 1,660 1,413
El Paso Corporation 7.750% 1/15/32 340 290
Ocean Energy Inc. 4.375% 10/1/07 965 997
XTO Energy, Inc. 6.250% 4/15/13 1,250 1,316
--------
8,620
--------
Paper and Forest Products -- 1.0%
MeadWestvaco Corporation 6.850% 4/1/12 1,130 1,243
Weyerhaeuser Company 6.125% 3/15/07 750 813
Weyerhaeuser Company 6.750% 3/15/12 1,070 1,167
Weyerhaeuser Company 7.375% 3/15/32 720 783
--------
4,006
--------
Pharmaceuticals -- 0.4%
Bristol-Myers Squibb Company 4.750% 10/1/06 300 317
Bristol-Myers Squibb Company 5.750% 10/1/11 1,160 1,254
--------
1,571
--------
Photo Equipment and Supplies -- 0.4%
Eastman Kodak Company 3.625% 5/15/08 975 926
Eastman Kodak Company 7.250% 11/15/13 500 525
--------
1,451
--------
Real Estate -- 0.4%
EOP Operating Limited
Partnership 6.750% 2/15/12 1,500 1,657
--------
Statement of Net Assets -- Continued
Investment Grade Income Portfolio -- Continued
Annual Report to Shareholders
42
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Retail -- 0.4%
Target Corporation 5.875% 3/1/12 $ 1,240 $ 1,346
Wal-Mart Stores, Inc. 7.550% 2/15/30 200 246
--------
1,592
--------
Special Purpose -- 6.4%
American Honda Finance
Corporation 3.850% 11/6/08 960 967(B)
BAE Systems Holdings Inc. 6.400% 12/15/11 1,250 1,344(B)
DaimlerChrysler NA Holding
Corp. 6.400% 5/15/06 800 857
DaimlerChrysler NA Holding
Corp. 4.050% 6/4/08 730 725
DaimlerChrysler NA Holding
Corp. 7.300% 1/15/12 735 818
DaimlerChrysler NA Holding
Corp. 6.500% 11/15/13 290 306
DaimlerChrysler NA Holding
Corp. 8.500% 1/18/31 1,800 2,151
Devon Financing Corporation ULC 6.875% 9/30/11 140 159
Duke Capital Corporation 6.250% 2/15/13 340 359
Gemstone Investors Limited 7.710% 10/31/04 440 444(B)
H.J. Heinz Finance Company 6.750% 3/15/32 800 893
NiSource Finance Corp. 3.200% 11/1/06 985 993
Sprint Capital Corporation 6.000% 1/15/07 700 748
Sprint Capital Corporation 8.375% 3/15/12 2,750 3,211
Sprint Capital Corporation 6.900% 5/1/19 720 735
Sprint Capital Corporation 8.750% 3/15/32 700 827
TCI Communications Financing
III 9.650% 3/31/27 3,350 4,037
Unilever Capital Corporation 7.125% 11/1/10 480 558
Verizon Global Funding Corp. 6.125% 6/15/07 2,600 2,845
Verizon Global Funding Corp. 6.875% 6/15/12 1,000 1,122
Verizon Global Funding Corp. 7.375% 9/1/12 1,300 1,506
Verizon Wireless Capital LLC 5.375% 12/15/06 800 854
--------
26,459
--------
Annual Report to Shareholders
43
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Corporate Bonds and Notes -- Continued
Telecommunications -- 1.9%
AT&T Corp. 8.050% 11/15/11 $ 800 $ 921
AT&T Corp. 8.750% 11/15/31 640 748
Citizens Communications Company 8.500% 5/15/06 1,000 1,092
EchoStar DBS Corporation 4.410% 10/1/08 500 520(B,C)
GTE Corporation 6.940% 4/15/28 1,700 1,784
Qwest Corporation 5.625% 11/15/08 550 544
SBC Communications Inc. 5.875% 8/15/12 2,020 2,145
--------
7,754
--------
Telecommunications (Cellular/Wireless) -- 0.8%
AT&T Wireless Services Inc. 7.500% 5/1/07 1,500 1,682
Cingular Wireless LLC 5.625% 12/15/06 800 858
Motorola, Inc. 7.625% 11/15/10 850 977
--------
3,517
--------
Transportation -- 1.5%
Burlington Northern Railroad
Company 6.960% 3/22/09 275 297
Burlington Northern Railroad
Company 7.330% 6/23/10 201 225
Consolidated Rail Corporation 7.875% 5/15/43 600 723
Continental Airlines, Inc. 7.256% 3/15/20 610 620
Delta Air Lines, Inc. 7.111% 9/18/11 230 232
Delta Air Lines, Inc. 7.570% 5/18/12 400 414
Delta Air Lines, Inc. 6.718% 7/2/24 792 848
Norfolk Southern Railway
Company 7.000% 6/15/05 475 510
Northwest Airlines Corporation 7.575% 3/1/19 203 209
Union Pacific Corporation 6.500% 4/15/12 1,750 1,944
United Airlines, Inc. 7.783% 1/1/14 245 204
--------
6,226
--------
Total Corporate Bonds and Notes (Identified Cost -- $275,340) 289,601
- -----------------------------------------------------------------------------
Statement of Net Assets -- Continued
Investment Grade Income Portfolio -- Continued
Annual Report to Shareholders
44
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
U.S. Government and Agency Obligations -- 5.6%
Fixed Rate Securities -- 5.6%
Fannie Mae 2.250% 5/15/06 $ 17,620 $ 17,620
Federal Home Loan Bank 3.625% 11/14/08 3,030 3,047
Tennessee Valley Authority 5.375% 11/13/08 150 162
United States Treasury Notes 3.375% 11/15/08 1,245 1,255
United States Treasury Bonds 5.375% 2/15/31 970 1,011
--------
Total U.S. Government and Agency Obligations (Identified Cost --
$23,061) 23,095
- -----------------------------------------------------------------------------
U.S. Government Agency Mortgage-Backed Securities -- N.M.
Fixed Rate Securities -- N.M.
Fannie Mae 8.000% 4/25/06 46 48
--------
Indexed Securities(C) -- N.M.
Freddie Mac 3.423% 9/1/24 146 151
--------
Total U.S. Government Agency Mortgage-Backed Securities
(Identified Cost -- $193) 199
- -----------------------------------------------------------------------------
Yankee Bonds(F) -- 22.2%
Banks -- 1.7%
ABN Amro Bank NV 4.650% 6/4/18 1,530 1,408(B)
HBOS Treasury Services plc 3.750% 9/30/08 985 986(B)
ING Bank N.V. 5.125% 5/1/15 500 498(B)
Inter-American Development Bank 4.000% 1/18/05 2,450 2,517
Royal Bank of Scotland Group
plc 8.817% 3/31/49 1,500 1,624
--------
7,033
--------
Cable -- 0.2%
British Sky Broadcasting Group
plc 6.875% 2/23/09 870 977
--------
Electric -- 0.7%
Empresa Nacional de
Electricidad S.A. 8.500% 4/1/09 905 1,020
Hydro-Quebec 7.500% 4/1/16 1,625 2,003
--------
3,023
--------
Annual Report to Shareholders
45
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Yankee Bonds -- Continued
Foreign Governments -- 7.3%
Federative Republic of Brazil 2.063% 4/15/09 $ 162 $ 153(C)
Federative Republic of Brazil 14.500% 10/15/09 280 366
Federative Republic of Brazil 12.000% 4/15/10 580 696
Federative Republic of Brazil 2.063% 4/15/12 430 386(C)
Federative Republic of Brazil 2.063% 4/15/12 660 592(C)
Federative Republic of Brazil 8.000% 4/15/14 1,589 1,557
Federative Republic of Brazil 11.000% 8/17/40 410 451
Italian Republic 3.625% 9/14/07 1,700 1,735
Province of Nova Scotia 5.750% 2/27/12 1,500 1,611
Province of Ontario 3.500% 9/17/07 1,000 1,016
Province of Ontario 5.125% 7/17/12 900 942
Quebec Province 7.500% 9/15/29 1,440 1,794
Republic of Colombia 10.500% 7/9/10 360 404
Republic of Colombia 11.750% 2/25/20 510 614
Republic of Panama 9.625% 2/8/11 120 138
Republic of Panama 9.375% 7/23/12 470 536
Republic of Panama 10.750% 5/15/20 240 288
Republic of Peru 9.125% 2/21/12 50 56
Republic of Peru 9.875% 2/6/15 70 81
Republic of Peru 4.500% 3/7/17 50 45(B,E)
Republic of Peru 5.000% 3/7/17 884 817(E)
Republic of Peru 8.750% 3/7/17 235 217(B,E)
Republic of Peru 8.750% 11/21/33 150 150
Republic of South Africa 7.375% 4/25/12 650 730
Republic of the Philippines 9.875% 1/15/19 400 423
Republic of the Philippines 10.625% 3/16/25 50 56
Russian Federation 8.250% 3/31/10 80 89
Russian Federation 5.000% 3/31/30 1,190 1,141(E)
United Mexican States 8.375% 1/14/11 6,475 7,689
United Mexican States 11.500% 5/15/26 3,705 5,363
--------
30,136
--------
Statement of Net Assets -- Continued
Investment Grade Income Portfolio -- Continued
Annual Report to Shareholders
46
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Yankee Bonds -- Continued
Insurance -- 0.9%
Axa 8.600% 12/15/30 $ 1,630 $ 2,055
Oil Insurance Ltd. 5.150% 8/15/33 585 589(B)
XL Capital plc 6.500% 1/15/12 700 766
--------
3,410
--------
Manufacturing (Diversified) -- 1.7%
Tyco International Group S.A. 6.375% 6/15/05 1,000 1,053
Tyco International Group S.A. 6.375% 2/15/06 900 959
Tyco International Group S.A. 6.375% 10/15/11 250 267
Tyco International Group S.A. 7.000% 6/15/28 554 575
Tyco International Group S.A. 6.875% 1/15/29 3,976 4,075
--------
6,929
--------
Oil and Gas -- 1.4%
Anderson Exploration Ltd. 6.750% 3/15/11 450 499
Petrobras International Finance
Company (PIFCO) 9.750% 7/6/11 905 1,054
Petroliam Nasional Berhad 7.625% 10/15/26 610 704(B)
YPF Sociedad Anonima 10.000% 11/2/28 3,500 3,745
--------
6,002
--------
Special Purpose -- 5.4%
Anadarko Finance Company 6.750% 5/1/11 970 1,099
Anadarko Finance Company 7.500% 5/1/31 710 832
ChevronTexaco Capital Company 3.500% 9/17/07 1,000 1,018
Conoco Funding Company 5.450% 10/15/06 1,250 1,341
Conoco Funding Company 6.350% 10/15/11 640 718
Conoco Funding Company 7.250% 10/15/31 1,500 1,770
Deutsche Telekom International
Finance BV 8.750% 6/15/30 1,400 1,789
Deutsche Telekom International
Finance BV 9.250% 6/1/32 670 919
Diageo Capital plc 3.500% 11/19/07 630 636
Diageo Capital plc 3.375% 3/20/08 120 119
Annual Report to Shareholders
47
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
Yankee Bonds -- Continued
Special Purpose -- Continued
General Motors Nova Scotia
Finance Company 6.850% 10/15/08 $ 1,160 $ 1,241
HSBC Capital Funding LP 4.610% 12/13/49 760 716(E)
HSBC Holdings plc 5.250% 12/12/12 1,700 1,741
INTELSAT 6.500% 11/1/13 400 417(B)
PDVSA Finance Ltd. 1999 - I 9.750% 2/15/10 2,840 2,996
Petronas Capital Ltd. 7.875% 5/22/22 770 912(B)
Redwood Capital II Ltd. 4.160% 1/1/04 200 200(B,C)
Telefonica Europe BV 8.250% 9/15/30 800 1,010
UFJ Finance Aruba A E C 6.750% 7/15/13 2,835 3,023
--------
22,497
--------
Telecommunications -- 2.6%
British Telecommunications plc 8.375% 12/15/10 900 1,095
British Telecommunications plc 8.875% 12/15/30 420 550
France Telecom S.A. 9.000% 3/1/11 3,000 3,603
France Telecom S.A. 9.750% 3/1/31 340 452
Koninklijke KPN NV 8.000% 10/1/10 990 1,184
Tele Norte Leste Participacoes
S.A. 8.000% 12/18/13 1,080 1,061(B)
Telecom Italia S.p.A. 5.250% 11/15/13 1,065 1,067(B)
Telecom Italia S.p.A. 6.375% 11/15/33 880 885(B)
Vodafone Group plc 7.625% 2/15/05 1,000 1,066
--------
10,963
--------
Transportation -- 0.3%
C P Railway Limited 7.125% 10/15/31 1,000 1,154
--------
Total Yankee Bonds (Identified Cost -- $86,669) 92,124
--------
Total Long-Term Securities (Identified Cost -- $385,263) 405,019
- -----------------------------------------------------------------------------
Short-Term Securities -- 0.9%
Repurchase Agreements -- 0.9%
Credit Suisse First Boston 0.97%, dated 12/31/03,
to be repurchased at $1,653 on 1/2/04
(Collateral: $1,675 Federal Home Loan Bank bonds,
2.25%, due 12/15/05, value $1,688) 1,653 1,653
Statement of Net Assets -- Continued
Investment Grade Income Portfolio -- Continued
Annual Report to Shareholders
48
Par Value
- -----------------------------------------------------------------------------
Repurchase Agreements -- Continued
Goldman, Sachs & Company 0.97%, dated 12/31/03, to
be repurchased at $2,000 on 1/2/04 (Collateral:
$1,740 Freddie Mac bonds, 6.75%, due 3/15/31,
value $2,075) $ 2,000 $ 2,000
--------
Total Short-Term Securities (Identified Cost -- $3,653) 3,653
- -----------------------------------------------------------------------------
Total Investments -- 98.6% (Identified
Cost -- $388,916) 408,672
Other Assets Less
Liabilities -- 1.4% 5,908
--------
Net assets consist of:
Accumulated paid-in capital applicable to:
37,571 Primary Class shares outstanding $388,722
542 Institutional Class shares outstanding 5,641
Under/(over) distributed net investment income (116)
Accumulated net realized gain/(loss) on investments,
options and futures 577
Unrealized appreciation/(depreciation) of
investments, options and futures 19,756
--------
Net assets -- 100.0% $414,580
========
Net asset value per share:
Primary Class $10.88
========
Institutional Class $10.89
========
- -----------------------------------------------------------------------------
(A) Zero coupon bond -- A bond with no periodic interest payments which is sold
at such a discount as to produce a current yield to maturity.
(B) Rule 144a Security -- A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified institutional buyers. These securities represent 5.7% of net
assets.
(C) Indexed security -- The rates of interest earned on these securities are
tied to the London Interbank Offered Rate ("LIBOR") or the one-year Treasury
Bill rate. The coupon rates are the rates as of December 31, 2003.
(D) Bond is in default at December 31, 2003.
(E) Stepped coupon security -- A security with a predetermined schedule of
interest or dividend rate changes, at which time it begins to accrue
interest or pay dividends.
(F) Yankee Bond -- A dollar-denominated bond issued in the U.S. by foreign
entities.
See notes to financial statements.
Annual Report to Shareholders
49
Statement of Operations
Investment Grade Income Portfolio
For the Year Ended December 31, 2003
(Amounts in Thousands)
- --------------------------------------------------------------------------
Investment Income:
Interest $21,952
Expenses:
Management fee $ 2,342
Distribution and service fees 1,932
Audit and legal fees 63
Custodian fee 231
Directors' fees and expenses 27
Registration fees 43
Reports to shareholders 41
Transfer agent and shareholder servicing expense:
Primary Class 283
Institutional Class 4
Other expenses 20
-------
4,986
Less fees waived (1,103)
-------
Total expenses, net of waivers 3,883
-------
Net Investment Income 18,069
-------
Net Realized and Unrealized Gain/(Loss) on
Investments:
Net realized gain/(loss) on investments, options and
futures
Investments 5,559
Options 0.4
Futures 1,148
-------
6,707
Change in unrealized appreciation/(depreciation) of
investments, options and futures 11,745
-------
Net Realized and Unrealized Gain/(Loss) on Investments 18,452
- --------------------------------------------------------------------------
Change in Net Assets Resulting From Operations $36,521
- --------------------------------------------------------------------------
See notes to financial statements.
Annual Report to Shareholders
50
Statement of Changes in Net Assets
Investment Grade Income Portfolio
(Amounts in Thousands)
For the Years Ended
---------------------------------
12/31/03 12/31/02
- ----------------------------------------------------------------------------
Change in Net Assets:
Net investment income $ 18,069 $ 15,507
Net realized gain/(loss) on investments,
options and futures 6,707 4,513
Change in unrealized appreciation/
(depreciation) of investments, options
and futures 11,745 6,234
- ----------------------------------------------------------------------------
Change in net assets resulting from
operations 36,521 26,254
Distributions to shareholders:
From net investment income:
Primary Class (18,075) (15,366)
Institutional Class (209) (142)
From net realized gain on investments:
Primary Class (2,770) --
Institutional Class (36) --
Change in net assets from Fund share transactions:
Primary Class 58,641 68,814
Institutional Class 2,909 1,317
- ----------------------------------------------------------------------------
Change in net assets 76,981 80,877
Net Assets:
Beginning of year 337,599 256,722
- ----------------------------------------------------------------------------
End of year $414,580 $337,599
- ----------------------------------------------------------------------------
Under/(over) distributed net investment
income $ (116) $ 99
- ----------------------------------------------------------------------------
See notes to financial statements.
Annual Report to Shareholders
51
Financial Highlights
Investment Grade Income Portfolio
Contained below is per share operating performance data for a share of common
stock outstanding, total investment return, ratios to average net assets and
other supplemental data. This information has been derived from information
provided in the financial statements.
Primary Class:
Years Ended December 31,
------------------------------------------------
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------
Net asset value, beginning
of year $10.42 $10.10 $9.97 $9.78 $10.52
------------------------------------------------
Investment operations:
Net investment income .50(A) .54(A) .60(A) .67(A) .61(A)
Net realized and
unrealized gain/(loss)
on investments,
options and futures .53 .32 .14 .19 (.71)
------------------------------------------------
Total from investment
operations 1.03 .86 .74 .86 (.10)
------------------------------------------------
Distributions:
From net investment
income (.50) (.54) (.61) (.67) (.61)
From net realized gain
on investments (.07) -- -- -- (.03)
------------------------------------------------
Total distributions (.57) (.54) (.61) (.67) (.64)
------------------------------------------------
Net asset value, end of
year $10.88 $10.42 $10.10 $9.97 $9.78
------------------------------------------------
Ratios/supplemental data:
Total return 10.16% 8.82% 7.52% 9.16% (.91)%
Expenses to average net
assets 1.00%(A) 1.00%(A) 1.00%(A) 1.00%(A) 1.00%(A)
Net investment income
to average net
assets 4.62%(A) 5.32%(A) 5.90%(A) 6.82%(A) 6.08%(A)
Portfolio turnover rate 78% 131% 131% 94% 145%
Net assets, end of year
(in thousands) $408,685 $334,763 $255,298 $194,987 $183,615
- ---------------------------------------------------------------------------------
(A) Net of fees waived by LMFA for expenses in excess of a voluntary expense
limitation of 1.00% until April 30, 2004. If no fees had been waived by
LMFA, the annualized ratio of expenses to average daily net assets would
have been as follows: for the years ended December 31, 2003, 1.28%; 2002,
1.30%; 2001, 1.27%; 2000, 1.31%; and 1999, 1.31%.
See notes to financial statements.
Annual Report to Shareholders
52
Financial Highlights -- Continued
Institutional Class:
Years Ended December 31,
--------------------------------------------------
2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------
Net asset value,
beginning of year $10.43 $10.11 $9.97 $9.79 $10.52
--------------------------------------------------
Investment operations:
Net investment income .55(B) .59(B) .66(B) .71(B) .66(B)
Net realized and
unrealized
gain/(loss) on
investments, options
and futures .53 .31 .14 .19 (.70)
--------------------------------------------------
Total from investment
operations 1.08 .90 .80 .90 (.04)
--------------------------------------------------
Distributions:
From net investment
income (.55) (.58) (.66) (.72) (.66)
From net realized gain
on investments (.07) -- -- -- (.03)
--------------------------------------------------
Total distributions (.62) (.58) (.66) (.72) (.69)
--------------------------------------------------
Net asset value, end of
year $10.89 $10.43 $10.11 $9.97 $ 9.79
--------------------------------------------------
Ratios/supplemental
data:
Total return 10.71% 9.38% 8.16% 9.63% (.33)%
Expenses to average
net assets .50%(B) .48%(B) .47%(B) .48%(B) .46%(B)
Net investment
income to average
net assets 5.13%(B) 5.85%(B) 6.50%(B) 7.32%(B) 6.59%(B)
Portfolio turnover
rate 78% 131% 131% 94% 145%
Net assets, end of year
(in thousands) $5,895 $2,836 $1,424 $ 839 $ 238
- ----------------------------------------------------------------------------
(B) Net of fees waived by LMFA for expenses in excess of a voluntary expense
limitation of 0.50% until April 30, 2004. If no fees had been waived by
LMFA, the annualized ratio of expenses to average daily net assets would
have been as follows: for the years ended December 31, 2003, 0.78%; 2002,
0.78%; 2001, 0.74%; 2000, 0.79%; and 1999, 0.77%.
See notes to financial statements.
Annual Report to Shareholders
53
Performance Information
U.S. Government Intermediate-Term Portfolio
The following graphs compare the Fund's total returns against those of a
closely matched broad-based securities market index. The lines illustrate the
cumulative total return of an initial $10,000 investment in Primary Class shares
and an initial $1,000,000 investment in Institutional Class shares of the Fund,
for the periods indicated. The lines for the Fund represent the total return
after deducting all Fund investment management and other administrative expenses
and the transaction costs of buying and selling securities. The lines
representing the securities market index do not include any transaction costs
associated with buying and selling securities in the index or other
administrative expenses.
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 the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Average annual
returns tend to smooth out variations in a fund's return, so that they differ
from actual year-to-year results. Performance would have been lower if fees had
not been waived in various periods.
Effective September 30, 2002, Government Intermediate changed its comparative
index from the Lehman Intermediate Government/Credit Bond Index to the Lehman
Intermediate Government Bond Index, because the new index is more representative
of the types of securities in which the Fund invests.
Performance Information -- Continued
Annual Report to Shareholders
54
Growth of a $10,000 Investment -- Primary Class
[VALUE TRUST GRAPH]
U.S. Government Lehman Intermediate
Intermediate Term Portfolio - Government/Credit Bond Lehman Intermediate
Primary Class Index Government Bond Index
----------------------------- ---------------------- ---------------------
12/31/1993 10000.00 10000.00 10000.00
3/31/1994 9855.00 9687.00 9815.00
6/30/1994 9789.00 9566.00 9760.00
9/30/1994 9793.00 9614.00 9835.00
12/31/1994 9807.00 9649.00 9825.00
3/31/1995 10188.00 10130.00 10234.00
6/30/1995 10672.00 10787.00 10712.00
9/30/1995 10845.00 10994.00 10878.00
12/31/1995 11168.00 11506.00 11241.00
3/31/1996 11092.00 11237.00 11165.00
6/30/1996 11167.00 11290.00 11240.00
9/30/1996 11337.00 11489.00 11434.00
12/31/1996 11668.00 11840.00 11698.00
3/31/1997 11635.00 11738.00 11695.00
6/30/1997 11954.00 12165.00 12021.00
9/30/1997 12232.00 12591.00 12329.00
2/31/1997 12481.00 12995.00 12601.00
3/31/1998 12634.00 13192.00 12792.00
6/30/1998 12871.00 13537.00 13028.00
9/30/1998 13295.00 14208.00 13637.00
12/31/1998 13300.00 14226.00 13671.00
3/31/1999 13246.00 14056.00 13633.00
6/30/1999 13096.00 13902.00 13606.00
9/30/1999 13218.00 13977.00 13744.00
12/31/1999 13236.00 13921.00 13737.00
3/31/2000 13547.00 14295.00 13962.00
6/30/2000 13743.00 14502.00 14216.00
9/30/2000 14095.00 14919.00 14597.00
12/31/2000 14553.00 15570.00 15176.00
3/31/2001 14876.00 16068.00 15632.00
6/30/2001 14920.00 16117.00 15697.00
9/30/2001 15535.00 16884.00 16476.00
12/31/2001 15400.00 16894.00 16453.00
3/31/2002 15418.00 16815.00 16410.00
6/30/2002 15943.00 17446.00 17044.00
9/30/2002 16453.00 18440.00 17865.00
12/31/2002 16600.00 18759.00 18039.00
3/31/2003 16744.00 19067.00 18206.00
6/30/2003 16961.00 19740.00 18514.00
9/30/2003 16808.00 19640.00 18489.00
12/31/2003 16785.00 19634.00 18452.00
Cumulative Average Annual
Total Return Total Return
One Year +1.11% +1.11%
Five Years +26.20% +4.76%
Ten Years +67.85% +5.32%
The graph and table do not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of Fund shares.
Past performance does not predict future performance.
- ---------------
(A) An index based on all publicly issued intermediate government and corporate
debt securities with an average maturity of 4 to 5 years.
(B) A total return index consisting of investment grade corporate debt issues as
well as U.S. government securities. The debt issues all maintain maturities
within a range of 1 to 10 years.
Annual Report to Shareholders
55
Growth of a $1,000,000 Investment -- Institutional Class
[VALUE TRUST GRAPH]
U.S. Government Lehman Intermediate
Intermediate Term Portfolio - Government/Credit Bond Lehman Intermediate
Institutional Class Index (C) Government Bond Index (C)
----------------------------- ---------------------- -------------------------
12/1/1994 1000000.00 1000000.00 1000000.00
12/31/1994 1005190.00 1006600.00 1003300.00
3/31/1995 1045430.00 1056700.00 1045000.00
6/30/1995 1096620.00 1125300.00 1093800.00
9/30/1995 1115960.00 1146900.00 1110800.00
12/31/1995 1150230.00 1200300.00 1147800.00
3/31/1996 1143110.00 1172200.00 1140100.00
6/30/1996 1152660.00 1177700.00 1147700.00
9/30/1996 1172050.00 1198500.00 1167500.00
12/31/1996 1208790.00 1235100.00 1194500.00
3/31/1997 1207800.00 1224500.00 1194200.00
6/30/1997 1240830.00 1269000.00 1227500.00
9/30/1997 1271410.00 1313500.00 1258800.00
12/31/1997 1299050.00 1355600.00 1286700.00
3/31/1998 1317990.00 1376200.00 1306200.00
6/30/1998 1344490.00 1412200.00 1330300.00
9/30/1998 1389370.00 1482100.00 1392500.00
12/31/1998 1391780.00 1484100.00 1395900.00
3/31/1999 1387890.00 1466300.00 1392100.00
6/30/1999 1373940.00 1450300.00 1389300.00
9/30/1999 1388530.00 1458100.00 1403400.00
12/31/1999 1392310.00 1452200.00 1402700.00
3/31/2000 1426830.00 1491200.00 1425600.00
6/30/2000 1450840.00 1512900.00 1451600.00
9/30/2000 1490000.00 1556300.00 1490500.00
12/31/2000 1540490.00 1624300.00 1549600.00
3/31/2001 1575330.00 1676200.00 1596100.00
6/30/2001 1582190.00 1681300.00 1602800.00
9/30/2001 1649570.00 1761400.00 1682300.00
12/31/2001 1637480.00 1762400.00 1680000.00
3/31/2002 1641550.00 1754100.00 1675600.00
6/30/2002 1699550.00 1819900.00 1740300.00
9/30/2002 1757830.00 1923600.00 1824200.00
12/31/2002 1774240.00 1956900.00 1842000.00
3/31/2003 1791920.00 1989100.00 1859000.00
6/30/2003 1819200.00 2059200.00 1890400.00
9/30/2003 1802870.00 2048800.00 1887900.00
12/31/2003 1804600.00 1943900.00 1884100.00
Cumulative Average Annual
Total Return Total Return
One Year +1.71% +1.71%
Five Years +29.66% +5.33%
Life of Class* +80.46% +6.72%
*Inception date: December 1, 1994
The graph and table do not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of Fund shares.
Past performance does not predict future performance.
- ---------------
(C) Index returns are for periods beginning November 30, 1994.
Annual Report to Shareholders
56
Statement of Net Assets
U.S. Government Intermediate-Term Portfolio
December 31, 2003
(Amounts in Thousands)
Maturity
Rate Date Par Value
- ---------------------------------------------------------------------------------
Long-Term Securities -- 76.8%
U.S. Government and Agency Obligations -- 34.3%
Fixed Rate Securities -- 34.3%
Fannie Mae 4.375% 7/17/13 $ 7,000 $ 6,701
Freddie Mac 4.500% 1/15/13 33,000 32,833
United States Treasury
Notes 3.000% 11/15/07 9,310 9,390
United States Treasury
Notes 2.625% 5/15/08 950 936
United States Treasury
Notes 5.000% 8/15/11 1,880 2,012
United States Treasury
Notes 4.250% 8/15/13 37,000 37,046
United States Treasury
Bonds 5.750% 8/15/10 3,490 3,913
United States Treasury
Bonds 8.000% 11/15/21 7,670 10,359
United States Treasury
Bonds 5.250% 11/15/28 11,560 11,644
--------
Total U.S. Government and Agency Obligations (Identified
Cost -- $116,502) 114,834
- ---------------------------------------------------------------------------------
U.S. Government Agency Mortgage-Backed Securities -- 36.8%
Fixed Rate Securities -- 36.5%
Fannie Mae 8.500% 6/1/10 to 8/1/11 147 151
Fannie Mae 6.500% 11/1/10 to 10/1/32 13,400 14,049
Fannie Mae 7.000% 1/1/13 to 1/1/33 15,522 16,439
Fannie Mae 9.500% 7/1/14 173 192
Fannie Mae 11.000% 12/1/15 123 138
Fannie Mae 5.500% 9/1/17 4,927 5,110
Fannie Mae 12.500% 1/1/18 to 4/1/18 145 169
Fannie Mae 5.000% 6/1/18 39,532 40,371
Fannie Mae 9.000% 11/1/21 291 324
Fannie Mae 6.000% 11/1/27 to 9/1/32 2,242 2,319
Freddie Mac 8.250% 2/1/08 41 42
Freddie Mac 8.500% 12/1/08 to 6/1/21 234 248
Freddie Mac 9.750% 11/1/09 to 11/1/14 78 84
Freddie Mac 9.000% 1/1/17 to 1/1/21 400 438
Freddie Mac 5.500% 3/1/17 to 8/1/17 5,364 5,563
Freddie Mac 7.000% 1/25/21 to 4/1/32 7,253 7,669
Freddie Mac 8.000% 2/1/31 846 912
Freddie Mac 5.000% 8/1/33 23,723 23,429
Annual Report to Shareholders
57
Maturity
Rate Date Par Value
- ---------------------------------------------------------------------------------
U.S. Government Agency Mortgage-Backed Securities -- Continued
Fixed Rate Securities -- Continued
Government National
Mortgage Association 9.000% 7/15/04 to 9/15/22 $ 721 $ 772
Government National
Mortgage Association 6.000% 5/15/14 to 11/15/32 2,202 2,295
Government National
Mortgage Association 6.500% 10/15/31 to 6/15/32 1,308 1,379
--------
122,093
--------
Indexed Securities(A) -- 0.3%
Government National
Mortgage Association 7.313% 6/16/26 4,616 519(B1)
Government National
Mortgage Association 7.363% 8/16/26 3,813 482(B1)
--------
1,001
--------
Total U.S. Government Agency Mortgage-Backed Securities (Identified
Cost -- $123,499) 123,094
- ---------------------------------------------------------------------------------
Corporate Bonds and Notes -- 0.3%
Banking and Finance -- 0.3%
Household Finance
Corporation 8.000% 7/15/10 690 826
--------
Total Corporate Bonds and Notes (Identified Cost -- $730) 826
- ---------------------------------------------------------------------------------
Statement of Net Assets -- Continued
U.S. Government Intermediate-Term Portfolio -- Continued
Annual Report to Shareholders
58
Maturity
Rate Date Par Value
- ---------------------------------------------------------------------------------
Mortgage-Backed Securities -- 5.1%
Fixed Rate Securities -- 5.1%
Blackrock Capital
Finance L.P. 1997-R3 7.220% 11/25/28 $ 960 $ 980(C)
Residential Asset
Securitization Trust
2003-A14 4.750% 2/25/19 16,100 16,216
--------
Total Mortgage-Backed Securities (Identified Cost -- $17,129) 17,196
- ---------------------------------------------------------------------------------
Preferred Stocks -- 0.3%
Home Ownership Funding
Corporation 13.331% 5shs 251(C,D)
Home Ownership Funding
Corporation II 13.338% 14 704(C,D)
--------
Total Preferred Stocks (Identified Cost -- $1,537) 955
--------
Total Long-Term Securities (Identified Cost -- $259,397) 256,905
- ---------------------------------------------------------------------------------
Short-Term Securities -- 22.8%
U.S. Governmental Agency Obligations -- 0.3%
Fannie Mae 0.000% 3/24/04 $ 850 848(E,F)
Fannie Mae 0.000% 3/24/04 50 50(E,F)
--------
898
--------
Annual Report to Shareholders
59
Par Value
- ---------------------------------------------------------------------------------
Short-Term Securities -- Continued
Repurchase Agreements -- 22.5%
Credit Suisse First Boston
0.97%, dated 12/31/03, to be repurchased for $31,436
on 1/2/04 (Collateral: $31,685 Federal Home Loan Bank
bonds, 2.25%, due 12/15/05, value $32,110) $ 31,436 $ 31,436
Goldman, Sachs & Company 0.97%, dated 12/31/03, to be
repurchased at $44,000 on 1/2/04 (Collateral: $42,795
Fannie Mae notes, 5.25%, due 8/1/12, value $45,817) 44,000 44,000
--------
75,436
--------
Total Short-Term Securities (Identified Cost -- $76,334) 76,334
- ---------------------------------------------------------------------------------
Total Investments -- 99.6% (Identified Cost -- $335,731) 333,239
Other Assets Less Liabilities -- 0.4% 1,345
--------
Net assets consist of:
Accumulated paid-in capital applicable to:
31,012 Primary Class shares outstanding $332,095
734 Institutional Class shares outstanding 7,551
Under/(over) distributed net investment income 1,269
Accumulated net realized gain/(loss) on
investments, options and futures (3,277)
Unrealized appreciation/(depreciation) of
investments, options and futures (3,054)
--------
Net assets -- 100.0% $334,584
========
Net asset value per share:
Primary Class $10.54
========
Institutional Class $10.55
========
Statement of Net Assets -- Continued
U.S. Government Intermediate-Term Portfolio -- Continued
Annual Report to Shareholders
60
Expiration Actual Appreciation/
Date Contracts (Depreciation)
- ----------------------------------------------------------------------
Futures Contracts Purchased(G)
Eurodollar Futures September 2004 39 $ 35
Eurodollar Futures December 2004 100 141
-----
$ 176
-----
Futures Contracts Written(G)
U.S. Treasury Note Futures March 2004 234 $(415)
U.S. Treasury Bond Futures March 2004 148 (323)
-----
$(738)
-----
- ----------------------------------------------------------------------
(A) Indexed security -- The rates of interest earned on these securities are
tied to the London Interbank Offered Rate ("LIBOR"). The coupon rates are
the rates as of December 31, 2003.
(B) Stripped security -- Security with interest-only or principal-only payment
streams, denoted by a 1 or 2, respectively. For interest-only securities,
the amount shown as principal is the notional balance used to calculate the
amount of interest due.
(C) 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 0.6% of net
assets.
(D) Stepped coupon security -- A security with a predetermined schedule of
interest or dividend rate changes.
(E) 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.
(F) Collateral to cover futures contracts.
(G) Futures are described in more detail in the notes to financial statements.
See notes to financial statements.
Annual Report to Shareholders
61
Statement of Operations
U.S. Government Intermediate-Term Portfolio
For the Year Ended December 31, 2003
(Amounts in Thousands)
- --------------------------------------------------------------------------
Investment Income:
Dividends $ 310
Interest 12,576
-------
Total income $ 12,886
Expenses:
Management fee 2,052
Distribution and service fees 1,821
Audit and legal fees 62
Custodian fee 200
Directors' fees and expenses 22
Registration fees 33
Reports to shareholders 32
Transfer agent and shareholder servicing expense:
Primary Class 237
Institutional Class 3
Other expenses 21
-------
4,483
Less fees waived (800)
-------
Total expenses, net of waivers 3,683
--------
Net Investment Income 9,203
--------
Net Realized and Unrealized Gain/(Loss) on
Investments:
Net realized gain/(loss) on:
Investments 11,399
Options 18
Futures (3,365)
-------
8,052
Change in unrealized appreciation/(depreciation) of
investments, options and futures (13,276)
--------
Net Realized and Unrealized Gain/(Loss) on Investments (5,224)
- --------------------------------------------------------------------------
Change in Net Assets Resulting From Operations $ 3,979
- --------------------------------------------------------------------------
See notes to financial statements.
Annual Report to Shareholders
62
Statement of Changes in Net Assets
U.S. Government Intermediate-Term Portfolio
(Amounts in Thousands)
For the Years Ended
-----------------------
12/31/03 12/31/02
- --------------------------------------------------------------------------
Change in Net Assets:
Net investment income $ 9,203 $ 13,614
Net realized gain/(loss) on investments, options
and futures 8,052 4,950
Change in unrealized appreciation/(depreciation)
of investments, options and futures (13,276) 7,494
- --------------------------------------------------------------------------
Change in net assets resulting from operations 3,979 26,058
Distributions to shareholders from net investment
income:
Primary Class (9,512) (13,280)
Institutional Class (279) (374)
Change in net assets from Fund share transactions:
Primary Class (47,284) 67,093
Institutional Class (1,598) 1,963
- --------------------------------------------------------------------------
Change in net assets (54,694) 81,460
Net Assets:
Beginning of year 389,278 307,818
- --------------------------------------------------------------------------
End of year $334,584 $389,278
- --------------------------------------------------------------------------
Under/(over) distributed net investment income $ 1,269 $ 138
- --------------------------------------------------------------------------
See notes to financial statements.
Annual Report to Shareholders
63
Financial Highlights
U.S. Government Intermediate-Term Portfolio
Contained below is per share operating performance data for a share of common
stock outstanding, total investment return, ratios to average net assets and
other supplemental data. This information has been derived from information
provided in the financial statements.
Primary Class:
Years Ended December 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------
Net asset value,
beginning of year $10.70 $10.32 $10.26 $9.92 $10.51
--------------------------------------------------------
Investment operations:
Net investment income .26(A) .41(A) .53(A) .62(A) .54(A)
Net realized and
unrealized
gain/(loss) on
investments,
options and futures (.14) .38 .06 .33 (.59)
--------------------------------------------------------
Total from investment
operations .12 .79 .59 .95 (.05)
--------------------------------------------------------
Distributions:
From net investment
income (.28) (.41) (.53) (.61) (.54)
--------------------------------------------------------
Total distributions (.28) (.41) (.53) (.61) (.54)
--------------------------------------------------------
Net asset value, end of
year $10.54 $10.70 $10.32 $10.26 $9.92
--------------------------------------------------------
Ratios/supplemental
data:
Total return 1.11% 7.79% 5.83% 9.95% (.48)%
Expenses to average
net assets 1.00%(A) 1.00%(A) 1.00%(A) 1.00%(A) 1.00%(A)
Net investment income
to average net
assets 2.48%(A) 3.85%(A) 5.08%(A) 6.14%(A) 5.28%(A)
Portfolio turnover
rate 487% 204% 535% 248% 979%
Net assets, end of year
(in thousands) $326,844 $379,793 $300,597 $272,668 $298,207
- ----------------------------------------------------------------------------------
(A) Net of fees waived by LMFA for expenses in excess of a voluntary expense
limitation of 1.00% until April 30, 2004. If no fees had been waived by
LMFA, the annualized ratio of expenses to average daily net assets would
have been as follows: for the years ended December 31, 2003, 1.21%; 2002,
1.19%; 2001, 1.17%; 2000, 1.19%; and 1999, 1.19%.
See notes to financial statements.
Annual Report to Shareholders
64
Financial Highlights -- Continued
Institutional Class:
Years Ended December 31,
--------------------------------------------------
2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------
Net asset value,
beginning of year $10.70 $10.32 $10.27 $9.92 $10.51
--------------------------------------------------
Investment operations:
Net investment income .32(B) .46(B) .58(B) .67(B) .59(B)
Net realized and
unrealized
gain/(loss) on
investments, options
and futures (.14) .38 .05 .35 (.59)
--------------------------------------------------
Total from investment
operations .18 .84 .63 1.02 --
--------------------------------------------------
Distributions:
From net investment
income (.33) (.46) (.58) (.67) (.59)
--------------------------------------------------
Total distributions (.33) (.46) (.58) (.67) (.59)
--------------------------------------------------
Net asset value, end of
year $10.55 $10.70 $10.32 $10.27 $9.92
--------------------------------------------------
Ratios/supplemental
data:
Total return 1.71% 8.35% 6.30% 10.64% .04%
Expenses to average
net assets 0.46%(B) .47%(B) .46%(B) .46%(B) .47%(B)
Net investment income
to average net
assets 3.03%(B) 4.38%(B) 5.63%(B) 6.66%(B) 5.84%(B)
Portfolio turnover
rate 487% 204% 535% 248% 979%
Net assets, end of year
(in thousands) $7,740 $9,485 $7,221 $6,723 $9,076
- ----------------------------------------------------------------------------
(B) Net of fees waived by LMFA for expenses in excess of a voluntary expense
limitation of 0.50% until April 30, 2004. If no fees had been waived by
LMFA, the annualized ratio of expenses to average daily net assets would
have been as follows: for the years ended December 31, 2003, 0.68%; 2002,
0.66%; 2001, 0.63%; 2000, 0.65%; and 1999, 0.66%.
See notes to financial statements.
Annual Report to Shareholders
65
Statement of Net Assets
U.S. Government Money Market Portfolio
December 31, 2003
(Amounts in Thousands)
Maturity
Rate Date Par Value
- -----------------------------------------------------------------------------
U.S. Government and Agency Obligations -- 81.8%
Fannie Mae 0.82% to 5.125% 1/2/04 to 182,060 182,139
1/19/05 $ $
Federal Farm Credit
Bank 1.08% 5/17/04 7,000 6,971
Federal Home Loan Bank 1.00% to 3.375% 1/14/04 to
1/18/05 23,500 23,564
Freddie Mac 0.80% to 5.25% 1/5/04 to
11/16/04 134,644 134,767
Sallie Mae 1.00% 1/26/04 7,900 7,895
Sallie Mae 0.961% 3/18/04 3,250 3,250(A)
Sallie Mae 0.944% 4/15/04 2,000 2,000(A)
Sallie Mae 0.951% 5/20/04 2,500 2,500(A)
--------
Total U.S. Government and Agency Obligations (Identified
Cost -- $363,086) 363,086
- -----------------------------------------------------------------------------
Repurchase Agreements -- 18.6%
Goldman Sachs & Company
0.97%, dated 12/31/03, to be repurchased at $40,000
on 1/2/04 (Collateral: $33,105 Fannie Mae notes,
7.125%, due 1/15/30, value $41,890) 40,000 40,000
Lehman Brothers, Inc.
0.95%, dated 12/31/03, to be repurchased at $42,373
on 1/2/04 (Collateral: $102,925 Resolution Funding
Corp. principal-only securities, due 10/15/19,
value $43,220) 42,373 42,373
--------
Total Repurchase Agreements (Identified Cost --$82,373) 82,373
- -----------------------------------------------------------------------------
Total Investments, at Amortized Cost and Value --100.4% 445,459(B)
Other Assets Less Liabilities -- (0.4)% (1,578)
--------
Net assets applicable to 443,881 shares
outstanding -- 100.0% $443,881
========
Net asset value per share $1.00
========
- -----------------------------------------------------------------------------
(A) Rates of interest earned on these securities are tied to the quarterly
Treasury rate. The coupon rates are the rates as of December 31, 2003.
(B) Also represents cost for federal income tax purposes.
See notes to financial statements.
Annual Report to Shareholders
66
Statement of Operations
U.S. Government Money Market Portfolio
For the Year Ended December 31, 2003
(Amounts in Thousands)
- ----------------------------------------------------------------------------
Investment Income:
Interest $6,118
Expenses:
Management fee $2,550
Distribution and service fees 1,021
Audit and legal fees 40
Custodian fee 149
Directors' fees and expenses 25
Registration fees 50
Reports to shareholders 23
Transfer agent and shareholder servicing expense 276
Other expenses 17
------
4,151
Less fees waived (510)
------
Total expenses, net of waivers 3,641
------
Net Investment Income 2,477
- ----------------------------------------------------------------------------
Change in Net Assets Resulting From Operations $2,477
- ----------------------------------------------------------------------------
See notes to financial statements.
Annual Report to Shareholders
67
Statement of Changes in Net Assets
U.S. Government Money Market Portfolio
(Amounts in Thousands)
For the Years Ended
-----------------------
12/31/03 12/31/02
- --------------------------------------------------------------------------
Change in Net Assets:
Net investment income $ 2,477 $ 5,624
- --------------------------------------------------------------------------
Change in net assets resulting from operations 2,477 5,624
Distributions to shareholders from net investment
income (2,633) (5,624)
Change in net assets from Fund share transactions (97,836) 40,803
- --------------------------------------------------------------------------
Change in net assets (97,992) 40,803
Net Assets:
Beginning of year 541,873 501,070
- --------------------------------------------------------------------------
End of year $443,881 $541,873
- --------------------------------------------------------------------------
See notes to financial statements.
Annual Report to Shareholders
68
Financial Highlights
U.S. Government Money Market Portfolio
Contained below is per share operating performance data for a share of common
stock outstanding, total investment return, ratios to average net assets and
other supplemental data. This information has been derived from information
provided in the financial statements.
Years Ended December 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------
Net asset value,
beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
--------------------------------------------------------------------
Investment operations:
Net investment
income .0049(A) .01(A) .04(A) .06(A) .04(A)
--------------------------------------------------------------------
Total from
investment
operations .0049 .01 .04 .06 .04
--------------------------------------------------------------------
Distributions:
From net investment
income (.0049) (.01) (.04) (.06) (.04)
--------------------------------------------------------------------
Total
distributions (.0049) (.01) (.04) (.06) (.04)
--------------------------------------------------------------------
Net asset value, end
of year $1.00 $1.00 $1.00 $1.00 $1.00
--------------------------------------------------------------------
Ratios/supplemental
data:
Total return .51% 1.13% 3.57% 5.66% 4.44%
Expenses to average
net assets .71%(A) .72%(A) .71%(A) .73%(A) .73%(A)
Net investment
income to average
net assets .49%(A) 1.11%(A) 3.46%(A) 5.53%(A) 4.34%(A)
Net assets, end of
year (in thousands) $443,881 $541,873 $501,070 $426,988 $379,994
- -------------------------------------------------------------------------------------------------
(A) Net of 12b-1 service fees waived by Legg Mason Wood Walker, Inc. of 0.10% of
average daily net assets. If no fees had been waived by Legg Mason, the
annualized ratio of expenses to average daily net assets would have been as
follows for the years ended December 31, 2003: 0.81%; 2002: 0.82%; 2001:
0.81%; 2000: 0.83%; 1999: 0.83%.
See notes to financial statements.
Annual Report to Shareholders
69
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 High
Yield Portfolio ("High Yield"), the Investment Grade Income Portfolio
("Investment Grade"), the U.S. Government Intermediate-Term Portfolio
("Government Intermediate"), and the U.S. Government Money Market Portfolio
("Government Money Market") (each a "Fund"), is registered under the Investment
Company Act of 1940 ("1940 Act"), as amended, as an open-end, diversified
investment company.
The High Yield, Investment Grade and Government Intermediate Portfolios
consist of two classes of shares: Primary Class and Institutional Class. 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.
Preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America 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. The following is a summary of significant accounting policies
followed by the Funds in the preparation of their financial statements:
Security Valuation
Securities owned by High Yield, Investment Grade and Government Intermediate
for which market quotations are readily available are valued at current market
value. Securities for which market quotations are not readily available are fair
valued by the Board of Directors and management. 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 December 31, 2003, $372, or
0.16%, of the High Yield Portfolio's net assets were fair valued in accordance
with the procedures adopted by the Board of Directors.
With respect to High Yield, where a security is traded on more than one
market, which may include foreign markets, the securities are generally valued
on the market considered by the 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.
In accordance with Rule 2a-7, 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
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc. -- Continued
Annual Report to Shareholders
70
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.
Security Transactions
Security transactions are recorded on the trade date. Realized gains and
losses from security transactions are reported on an identified cost basis for
both financial reporting and federal income tax purposes. At December 31, 2003,
$27 was receivable for securities sold in Investment Grade; High Yield,
Government Intermediate and Government Money Market had no receivables for
securities sold. There were no payables for securities purchased for any of the
Funds.
For the year ended December 31, 2003, investment transactions (excluding
short-term investments) were as follows:
Purchases Proceeds From Sales
---------------------- ----------------------
U.S. Gov't. U.S. Gov't.
Securities Other Securities Other
- ----------------------------------------------------------------------------
High Yield $ 1,705 $274,684 $ 1,711 $240,514
Investment Grade 177,267 219,752 161,211 130,990
Government Intermediate 1,621,878 16,216 1,629,577 16,936
Repurchase Agreements
The Funds may engage in repurchase agreement transactions. Under the terms of
a typical repurchase agreement, a fund takes possession of an underlying debt
obligation subject to an obligation of the seller to repurchase, and a fund to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during a fund's holding period. This arrangement results in a fixed rate
of return that is not subject to market fluctuations during the fund's holding
period. The value of the collateral is at all times at least equal to the total
amount of the repurchase obligation, including interest. In the event of
counterparty default, a fund has the right to use the collateral to satisfy the
terms of the repurchase agreement. However, there could be potential loss to the
fund in the event the fund is delayed or prevented from exercising its right to
dispose of the collateral securities, including the risk of a possible decline
in the value of the collateral securities during the period in which the fund
seeks to assert its rights. The Funds' investment adviser 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.
Annual Report to Shareholders
71
Investment Income and Distributions to Shareholders
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 are declared daily and paid monthly for each Fund except High Yield,
which declares and pays 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 accounting principles generally accepted in the United States of
America; accordingly, periodic reclassifications are made within the Funds'
capital accounts to reflect income and gains available for distribution under
federal income tax regulations. At December 31, 2003, accrued dividends payable
were as follows: High Yield, $150; Investment Grade, $114; Government
Intermediate, $72; and Government Money Market, $1. There were no capital gain
distributions payable at December 31, 2003.
2. 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 and capital gain to its shareholders.
Because federal income tax regulations differ from accounting principles
generally accepted in the United States of America, income and capital gain
distributions determined in accordance with tax regulations may differ from net
investment income and realized gains recognized for financial reporting
purposes. Accordingly, the character of distributions and composition of net
assets for tax purposes differ from those reflected in the accompanying
financial statements.
Distributions during the years ended December 31, 2003 and 2002, were
characterized as follows for tax purposes:
Investment
High Yield Grade
----------------- -----------------
2003 2002 2003 2002
- -------------------------------------------------------------------------
Ordinary income $15,274 $16,713 $18,284 $15,508
Long-term capital gains -- -- 2,806 --
------- ------- ------- -------
Total distributions $15,274 $16,713 $21,090 $15,508
======= ======= ======= =======
Government Government
Intermediate Money Market
----------------- -----------------
2003 2002 2003 2002
- -------------------------------------------------------------------------
Ordinary income $ 9,791 $13,654 $ 2,633 $ 5,624
------- ------- ------- -------
Total distributions $ 9,791 $13,654 $ 2,633 $ 5,624
======= ======= ======= =======
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc. -- Continued
Annual Report to Shareholders
72
Pursuant to federal income tax regulations applicable to investment companies,
the Funds have elected to treat net capital losses realized between November 1
and December 31 of each year ("post-October loss") as occurring on the first day
of the following tax year. For the year ended December 31, 2003, realized
capital losses reflected in the accompanying financial statements, as shown in
the table below, will not be recognized for federal income tax purposes until
2004.
The tax basis components of net assets at December 31, 2003, were as follows:
Investment Government Government
High Yield Grade Intermediate Money Market
- ----------------------------------------------------------------------------------
Unrealized appreciation $ 16,363 $ 21,385 $ 1,963 $ --
Unrealized depreciation (11,202) (1,879) (4,499) --
--------- -------- -------- --------
Net unrealized
appreciation/
(depreciation) 5,161 19,506 (2,536) --
Undistributed ordinary
income -- 124 1,380 79
Undistributed long-term
capital gains -- 701 -- --
Capital loss carryforwards (158,017) -- (3,834) --
Post-October loss push and
other loss deferrals (171) -- -- --
Paid-in capital 383,234 394,249 339,574 443,802
--------- -------- -------- --------
Net assets $ 230,207 $414,580 $334,584 $443,881
========= ======== ======== ========
The Funds intend to retain realized capital gains that may be offset against
available capital loss carryforwards for federal income tax purposes. Investment
Grade and Government Money Market have no capital loss carryforwards. Unused
capital loss carryforwards for federal income tax purposes for Government
Intermediate, and High Yield at December 31, 2003, are as follows:
Government
Expiration Date High Yield Intermediate
- ------------------------------------------------------
2008 $ (38,887) $ (3,834)
2009 (83,723) --
2010 (32,610) --
2011 (2,797) --
For financial reporting purposes, capital accounts and distributions to
shareholders are adjusted to reflect the tax character of permanent book/tax
differences. For the year ended December 31, 2003, the Funds recorded the
following permanent reclassifications, which
Annual Report to Shareholders
73
relate primarily to reclassifications of gains/losses on paydown securities.
Results of operations and net assets were not affected by these
reclassifications.
High Investment Government Government
Yield Grade Intermediate Money Market
- ----------------------------------------------------------------------------------
Undistributed net investment
income $ 12 $ -- $ 1,719 $ --
Accumulated realized gain/(loss) -- (1) (1,707) --
Paid-in capital (12) 1 (12) --
At December 31, 2003, the cost of investments for federal income tax purposes
was $221,570 for High Yield, $389,166 for Investment Grade, $335,213 for
Government Intermediate, and $445,459 for Government Money Market.
3. Financial Instruments:
Options and Futures
As part of their investment programs, High Yield, Investment Grade and
Government Intermediate 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 put or call 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:
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 Realize a gain or loss depending on whether through a
closing sale the proceeds from the closing sale transaction transaction are
greater or less than the cost of the
option.
- ------------------------------------------------------------------------
The Fund exercises a The cost of the security purchased through the
call option exercise of the option will be increased by
the premium originally paid to purchase the
option.
- ------------------------------------------------------------------------
The Fund exercises a put Realize a gain or loss from the sale of the
option underlying security. The proceeds of that sale
will be reduced by the premium originally paid
to purchase the put option.
- ------------------------------------------------------------------------
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc. -- Continued
Annual Report to Shareholders
74
Written option: Impact on the Fund:
- ------------------------------------------------------------------------
The option expires Realize a gain equal to the amount of
the premium received.
- ------------------------------------------------------------------------
The option is closed Realize a gain or loss without regard to any
through a closing unrealized gain or loss on the underlying
purchase transaction 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 Realize a gain or loss from the sale of the
exercised by the option underlying security. The proceeds of that sale
purchaser will be increased by the premium originally
received when the option was written.
- ------------------------------------------------------------------------
A written put option is The amount of the premium originally received
exercised by the option will reduce the cost of the security that the
purchaser Fund purchased when the option was exercised.
- ------------------------------------------------------------------------
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 forgo the opportunity
of profit if the market price of the underlying security increases and the
option is exercised. The risk in writing a put option is that a Fund may incur a
loss if the market price of the underlying security decreases and the option is
exercised. In addition, there is the risk a Fund may not be able to enter into a
closing transaction because of an illiquid secondary market or, for
over-the-counter options, because of the counterparty's inability to perform.
Activity in written call and put options during the year ended December 31,
2003, was as follows:
Calls Puts
-------------------- --------------------
Actual Actual
Investment Grade Contracts Premiums Contracts Premiums
- -------------------------------------------------------------------------------
Options outstanding, December 31,
2002 -- $ -- -- $ --
Options written 17,480 107 -- --
Options closed -- -- -- --
Options expired (17,480) (107) -- --
Options exercised -- -- -- --
------- ----- ---- -----
Options outstanding, December 31,
2003 -- $ -- -- $ --
======= ===== ==== =====
Annual Report to Shareholders
75
Calls Puts
-------------------- --------------------
Actual Actual
Government Intermediate Contracts Premiums Contracts Premiums
- -------------------------------------------------------------------------------
Options outstanding, December 31,
2002 50 $ 48 50 $ 40
Options written -- -- 200 39
Options closed -- -- (150) (27)
Options expired (50) (48) (100) (52)
Options exercised -- -- -- --
------- ----- ---- -----
Options outstanding, December 31,
2003 -- $ -- -- $ --
======= ===== ==== =====
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
December 31, 2003 for Government Intermediate are listed at the end of its
statement of net assets.
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 forward
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.
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc. -- Continued
Annual Report to Shareholders
76
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 December 31, 2003, High Yield had no open forward currency exchange
contracts.
4. 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 voluntarily agreed to waive its fees to the extent each Fund's
expenses (exclusive of taxes, interest, brokerage and extraordinary expenses)
exceed during any month certain annual rates. These voluntary expense
limitations for Investment Grade and Government Intermediate are due to expire
on April 30, 2004, or when net assets reach $500 million. High Yield and
Government Money Market have no expense limitations. The following chart shows
Annual Report to Shareholders
77
annual rates of management fees, expense limits, management fees waived, and
management fees payable for each Fund:
Year Ended At
December 31, December 31,
2003 2003
------------ ------------
Management Expense Management Management
Fund Fee Limitation Fees Waived Fees Payable
- -----------------------------------------------------------------------------------------------------
High Yield
-- Primary Class 0.65% None $ -- $123
-- Institutional Class 0.65% None -- 3
Investment Grade
-- Primary Class 0.60% 1.00% 1,092 115
-- Institutional Class 0.60% 0.50% 11 2
Government Intermediate
-- Primary Class 0.55% 1.00% 781 89
-- Institutional Class 0.55% 0.50% 19 2
Government Money Market 0.50% - 0.40%(A) None -- 200
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: 77% of the management fee received by LMFA for High Yield; 40%
for Investment Grade; and 30% for Government Money Market. For Government
Intermediate, LMFA pays the Adviser a fee, computed daily and payable monthly,
of 0.20% of its average daily net assets, not to exceed the fee received by
LMFA.
- ---------------
(A) Government Money Market's management fee varies with the level of the Fund's
average daily net assets. The management fee is calculated as follows:
Average Net Assets Advisory Fee Rate
--------------------------------------------
$0 - $500 million 0.50%
next $500 million 0.475%
next $500 million 0.45%
next $500 million 0.425%
thereafter 0.40%
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc. -- Continued
Annual Report to Shareholders
78
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 December 31, 2003
------------------------
Distribution Service Distribution and Service
Fee Fee Fees Payable
- -----------------------------------------------------------------------------------
High Yield 0.25% 0.25% $ 94
Investment Grade 0.25% 0.25% 172
Government Intermediate 0.25% 0.25% 140
Government Money Market -- 0.10% 40
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.
LM Fund Services, Inc. ("LMFS"), a registered transfer agent, has an agreement
with the Funds' transfer agent to assist it with some of its duties. For this
assistance, the transfer agent paid LMFS the following amounts for the year
ended December 31, 2003: High Yield, $62; Investment Grade, $78; Government
Intermediate, $66; and Government Money Market, $101.
LMFA, the Adviser, Legg Mason and LMFS are corporate affiliates and wholly
owned subsidiaries of Legg Mason, Inc.
5. Line of Credit:
The Funds, except for Government Money Market, but including certain other
Legg Mason Funds, participate in a $300 million line of credit ("Credit
Agreement") to be used for temporary or emergency purposes. 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
Credit Agreement bear interest at a rate equal to the federal funds rate plus
the federal funds rate margin. For the year ended December 31, 2003, the Funds
had no borrowings under the Credit Agreement.
Annual Report to Shareholders
79
6. Fund Share Transactions:
At December 31, 2003, there were 1,750,000 shares authorized at $.001 par
value for all classes of each portfolio of the Corporation. Share transactions
were as follows:
High Yield
-------------------------------------------
Primary Class Institutional Class
--------------------- -------------------
Year Ended Year Ended
12/31/03 12/31/02 12/31/03 12/31/02
- ---------------------------------------------------------------------------
Shares:
Sold 11,415 7,016 978 539
Reinvested 1,342 1,548 44 24
Repurchased (8,542) (9,809) (656) (368)
--------- --------- ------- -------
Net Change 4,215 (1,245) 366 195
========= ========= ======= =======
Amount:
Sold $ 97,837 $ 59,520 $ 8,358 $ 4,580
Reinvested 11,598 12,937 385 199
Repurchased (73,936) (82,683) (5,677) (3,107)
--------- --------- ------- -------
Net Change $ 35,499 $ (10,226) $ 3,066 $ 1,672
========= ========= ======= =======
Investment Grade
-------------------------------------------
Primary Class Institutional Class
--------------------- -------------------
Year Ended Year Ended
12/31/03 12/31/02 12/31/03 12/31/02
- ---------------------------------------------------------------------------
Shares:
Sold 14,879 13,866 412 248
Reinvested 1,713 1,351 23 14
Repurchased (11,141) (8,370) (165) (131)
--------- --------- ------- -------
Net Change 5,451 6,847 270 131
========= ========= ======= =======
Amount:
Sold $ 159,989 $ 139,370 $ 4,456 $ 2,494
Reinvested 18,456 13,611 244 142
Repurchased (119,804) (84,167) (1,791) (1,319)
--------- --------- ------- -------
Net Change $ 58,641 $ 68,814 $ 2,909 $ 1,317
========= ========= ======= =======
Notes to Financial Statements -- Continued
Legg Mason Income Trust, Inc. -- Continued
Annual Report to Shareholders
80
U.S. Government Intermediate
-------------------------------------------
Primary Class Institutional Class
--------------------- -------------------
Year Ended Year Ended
12/31/03 12/31/02 12/31/03 12/31/02
- ---------------------------------------------------------------------------
Shares:
Sold 10,382 19,141 417 525
Reinvested 785 1,104 26 35
Repurchased (15,656) (13,879) (595) (374)
--------- --------- ------- -------
Net Change (4,489) 6,366 (152) 186
========= ========= ======= =======
Amount:
Sold $ 110,857 $ 200,888 $ 4,469 $ 5,520
Reinvested 8,339 11,577 272 365
Repurchased (166,480) (145,372) (6,339) (3,922)
--------- --------- ------- -------
Net Change $ (47,284) $ 67,093 $(1,598) $ 1,963
========= ========= ======= =======
U.S. Government
Money Market
-------------------------
Year Ended
12/31/03 12/31/02
- --------------------------------------------------------------------------
Shares:
Sold 1,306,465 1,465,517
Reinvested 2,476 5,423
Repurchased (1,406,777) (1,430,137)
----------- -----------
Net Change (97,836) 40,803
=========== ===========
Amount:
Sold $ 1,306,465 $ 1,465,517
Reinvested 2,476 5,423
Repurchased (1,406,777) (1,430,137)
----------- -----------
Net Change $ (97,836) $ 40,803
=========== ===========
Annual Report to Shareholders
81
Report of Independent Auditors
To the Shareholders of High Yield Portfolio, Investment Grade Income Portfolio,
U.S. Government Intermediate-Term Portfolio, and U.S. Government Money Market
Portfolio and to the Directors of Legg Mason Income Trust, Inc.:
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
High Yield Portfolio, Investment Grade Income Portfolio, U.S. Government
Intermediate-Term Portfolio, and U.S. Government Money Market Portfolio
(comprising the Legg Mason Income Trust, Inc., hereafter referred to as the
"Funds") at December 31, 2003, and the results of their operations, the changes
in their net assets and the financial highlights for each of the fiscal periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Funds' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2003, by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 30, 2004
Annual Report to Shareholders
82
Directors and Officers
The table below provides information about each of the Corporation's directors
and officers, including biographical information about their business experience
and information about their relationships with Legg Mason, Inc. and its
affiliates. The mailing address of each director and officer is 100 Light
Street, c/o Legal and Compliance Department, 23rd Floor, Baltimore, Maryland
21202.
----------------------------------------------------------------------------------------------------------
Term of
Office
and
Position(s) Length Number of Other
Held With of Time Legg Mason Directorships Principal Occupation(s)
Name and Age Fund Served(A) Funds Overseen Held During the Past Five Years
----------------------------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS:
----------------------------------------------------------------------------------------------------------
Lehman, Arnold Director Since Director/Trustee None Director of The Brooklyn
L.(B) 1987 of all Legg Mason Museum of Art since 1997;
Age 59 funds (consisting Trustee of American
of 22 Federation of Arts since
portfolios). 1998. Formerly: Director
of The Baltimore Museum of
Art (1979-1997).
----------------------------------------------------------------------------------------------------------
Masters, Robin Director Since Director/Trustee None Retired. Director of
J.W.(B) 2002 of all Legg Mason Bermuda SMARTRISK
Age 48 funds (consisting (non-profit) since 2001.
of 22 Formerly: Chief Investment
portfolios). Officer of ACE Limited
(insurance) (1995-2000).
----------------------------------------------------------------------------------------------------------
McGovern, Jill Director Since Director/Trustee None Chief Executive Officer of
E.(B) 1989 of all Legg Mason The Marrow Foundation
Age 59 funds (consisting since 1993. Formerly:
of 22 Executive Director of the
portfolios). Baltimore International
Festival (1991-1993);
Senior Assistant to the
President of The Johns
Hopkins University
(1985-1990).
----------------------------------------------------------------------------------------------------------
Mehlman, Arthur Director Since Director/Trustee None Retired. Director of The
S.(B) 2002 of all Legg Mason League for People with
Age 61 funds (consisting Disabilities, Inc.;
of 22 Director of University of
portfolios). Maryland Foundation and
University of Maryland
College Park Foundation
(non-profits). Formerly:
Partner, KPMG LLP
(international accounting
firm) (1972-2002).
----------------------------------------------------------------------------------------------------------
Annual Report to Shareholders
83
----------------------------------------------------------------------------------------------------------
Term of
Office
and
Position(s) Length Number of Other
Held With of Time Legg Mason Directorships Principal Occupation(s)
Name and Age Fund Served(A) Funds Overseen Held During the Past Five Years
----------------------------------------------------------------------------------------------------------
O'Brien, G. Director Since Director/Trustee Director of the Trustee of Colgate
Peter(B) 2002 of all Legg Mason Royce Family of University; President of
Age 58 funds (consisting Funds Hill House, Inc.
of 22 (consisting of (residential home care).
portfolios). 19 portfolios); Formerly: Managing
Director of Director, Equity Capital
Renaissance Markets Group of Merrill
Capital Lynch & Co. (1971- 1999).
Greenwich
Funds; Director
of Technology
Investment
Capital Corp.
----------------------------------------------------------------------------------------------------------
Rowan, S. Director Since Director/Trustee None Consultant, Rowan &
Ford(B) 2002 of all Legg Mason Blewitt Inc. (management
Age 60 funds (consisting consulting); Visiting
of 22 Associate Professor,
portfolios). George Washington
University
since
2002;
Director
of
Santa
Fe
Institute
(scientific
research
institute)
since
1999;
Director
of
Annapolis
Center
for
Science-Based
Public
Policy
since
1995.
----------------------------------------------------------------------------------------------------------
INTERESTED DIRECTORS:
----------------------------------------------------------------------------------------------------------
Curley, John Chairman Since Chairman and None Director and/or officer of
F., Jr.(C) and 1987 Director/Trustee various Legg Mason
Age 64 Director of all Legg Mason affiliates. Formerly: Vice
funds (consisting Chairman and Director of
of 22 Legg Mason, Inc. and Legg
portfolios). Mason Wood Walker,
Incorporated; Director of
Legg Mason Fund Adviser,
Inc. and Western Asset
Management Company (each a
registered investment
adviser).
----------------------------------------------------------------------------------------------------------
Fetting, Mark President President President and Director of the Executive Vice President
R.(C) and since Director/Trustee Royce Family of of Legg Mason, Inc.;
Age 49 Director 2001; of all Legg Mason Funds Director and/or officer of
Director funds (consisting (consisting of various Legg Mason
since of 22 19 portfolios). affiliates since 2000.
2002 portfolios). Formerly: Division
President and Senior
Officer of Prudential
Financial Group, Inc. and
related companies,
including fund boards and
consulting services to
subsidiary companies
(1991-2000); Partner,
Greenwich Associates; Vice
President, T. Rowe Price
Group, Inc.
----------------------------------------------------------------------------------------------------------
Directors and Officers -- Continued
Annual Report to Shareholders
84
----------------------------------------------------------------------------------------------------------
Term of
Office
and
Position(s) Length Number of Other
Held With of Time Legg Mason Directorships Principal Occupation(s)
Name and Age Fund Served(A) Funds Overseen Held During the Past Five Years
----------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS:
----------------------------------------------------------------------------------------------------------
Karpinski, Vice Since Vice President None Vice President and
Marie K.(D) President 1987 and Treasurer of Treasurer of Legg Mason
Age 54 and all Legg Mason Fund Adviser, Inc. and
Treasurer funds (consisting Western Asset Funds, Inc.;
of 22 Treasurer and Principal
portfolios). Financial and Accounting
Officer of Pacific
American Income Shares,
Inc., Western Asset
Premier Bond Fund and
Western Asset/ Claymore
U.S. Treasury Inflation
Protected Securities Fund,
and Western Asset/
Claymore U.S. Treasury
Inflation Protected
Securities Fund 2.
----------------------------------------------------------------------------------------------------------
Merz, Gretory Vice Since Vice President, None Vice President and Deputy
T.(D) President, 2003 Secretary and General Counsel of Legg
Age 45 Secretary Chief Legal Mason, Inc. since 2003.
and Chief Officer of all Formerly: Associate
Legal Legg Mason funds General Counsel, Fidelity
Officer (consisting of 22 Investments (1993-2002);
portfolios) Associate, Debevoise &
Plimpton (1985-1993).
----------------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE CORPORATION'S DIRECTORS
AND OFFICERS IS CONTAINED IN THE STATEMENT OF ADDITIONAL
INFORMATION, AVAILABLE WITHOUT CHARGE UPON REQUEST BY
CALLING 1-800-822-5544.
- ---------------
(A) Directors of the Corporation serve a term of indefinite length until their
resignation or removal and stand for re-election by shareholders only as and
when required by the 1940 Act. Officers of the Corporation serve one-year
terms, subject to annual reappointment by the Board of Directors.
(B) Each of the Independent Directors serves on the standing committees of the
Board of Directors, which include the Audit Committee (chair: Arthur
Mehlman), the Nominating Committee (co-chairs: Peter O'Brien and Jill
McGovern), and the Independent Directors Committee (chair: Arnold Lehman).
(C) Mr. Curley and Mr. Fetting are considered to be interested persons (as
defined in the 1940 Act) of the Corporation by virtue of being employees of
Legg Mason Wood Walker, Incorporated, the principal underwriter of the
Corporation.
(D) Officers of the Corporation are interested persons (as defined in the 1940
Act).
Notes
Notes
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
Mark R. Fetting, President
Arnold L. Lehman
Robin J.W. Masters
Dr. Jill E. McGovern
Arthur S. Mehlman
G. Peter O'Brien
S. Ford Rowan
Officers
Marie K. Karpinski, Vice President and Treasurer
Gregory T. Merz, Vice President, Secretary and Chief Legal Officer
Erin K. Morris, Assistant Treasurer
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
Braintree, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Counsel
Kirkpatrick & Lockhart LLP
Washington, DC
Independent Auditors
PricewaterhouseCoopers LLP
Baltimore, MD
About the Legg Mason Funds
Legg Mason, Inc., based in Baltimore, Maryland, has built its reputation, at
least in part, on the success of the Legg Mason Funds, introduced in 1979. The
primary purpose of our funds is to enable investors to diversify their
portfolios across various asset classes and, consequently, enjoy the stability
and growth prospects generally associated with diversification.
The success of our funds is contingent on the experience, discipline, and acumen
of our fund managers. We believe the quality of our managers is crucial to
investment success. Unlike many firms, which focus on a particular asset class
or the fluctuations of the market, at Legg Mason we focus on providing a
collection of top-notch managers in all the major asset classes.
This report is not to be distributed unless preceded or accompanied by a
prospectus.
Legg Mason Funds Legg Mason Institutional Funds
For Primary Class Shareholders For FI and I Class
800-822-5544 Shareholders
www.leggmasonfunds.com 888-425-6432
www.lminstitutionalfunds.com
Legg Mason Wood Walker, Incorporated
P.O. Box 1476, Baltimore, MD 21203-1476
410-539-0000
LMF-056 [LEGG MASON FUNDS LOGO]
Item 2 - Code of Ethics
Did the registrant adopt a code of ethics, as of the end of the period covered
by this report, which applies to the registrant's principal executive officer,
principal financial officer, principle accounting officer or controller, or
persons performing similar functions, regardless of whether these individuals
are employed by the registrant or a third party? If not, why not? Briefly
describe any amendments or waivers that occurred during the period. State if the
code of ethics, including amendments and waivers are on a website and provide
the website address. State if the registrant will send a copy of the code of
ethics to shareholders at no charge upon request.
THE REGISTRANT, LEGG MASON INCOME TRUST, INC. ON AUGUST 6, 2003, ADOPTED
A CODE OF ETHICS THAT APPLIES TO THE FUND PRESIDENT AND TREASURER, A
COPY OF WHICH IS ATTACHED AS AN EXHIBIT TO THIS FORM N-CSR.
Item 3 - Audit Committee Financial Expert
Did the registrant's board of directors determine that the registrant either:
(a) has at least one audit committee financial expert serving on its audit
committee; or (b) does not
have an audit committee financial expert serving on its audit committee? If yes,
disclose the name of the financial expert and whether he/she is "independent."
If no, explain why not.
THE DIRECTORS OF LEGG MASON INCOME TRUST, INC. DETERMINED THAT THE FUND
HAS AT LEAST ONE AUDIT COMMITTEE FINANCIAL EXPERT SERVING ON ITS AUDIT
COMMITTEE.
MR. ARTHUR S. MEHLMAN IS THE AUDIT COMMITTEE FINANCIAL EXPERT. HE IS
"INDEPENDENT."
Item 4 - Principal Accounting Fees and Services
(a) Audit Fees - Disclose the aggregate fees billed for each of the last two
fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements
or services that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for those fiscal
years.
FY 02 - $127,000
FY 03 - $139,220
(b) Audit-Related Fees - Disclose the aggregate fees billed in each of the
last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance of
the audit of the registrant's financial statements and are not reported
under paragraph (a) of this Item. Describe the nature of the services
comprising the fees disclosed under this category.
THERE WERE NO ADDITIONAL FEES DURING EACH OF THE LAST TWO FISCAL YEARS
THAT WERE NOT DISCLOSED IN ITEM (a) ABOVE.
(c) Tax Fees - Disclose the aggregate fees billed in each of the last two
fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning. Describe
the nature of the services comprising the fees disclosed under this
category.
FY 02 - $3,200
FY 03 - $3,480
SERVICES INCLUDE PREPARATION OF FEDERAL AND STATE INCOME TAX RETURNS,
REVIEW OF EXCISE TAX DISTRIBUTION REQUIREMENTS AND PREPARATION OF EXCISE
TAX RETURNS.
(d) All Other Fees - Disclose the aggregate fees billed in each of the last
two fiscal years for products or services provided by the principal
accountant, other than the services reporting in paragraphs (a) through
(c) of this Item. Describe the nature of the services comprising the
fees disclosed under this category.
THERE WERE NO ADDITIONAL FEES DURING EACH OF THE LAST TWO FISCAL YEARS
THAT WERE NOT DISCLOSED IN ITEMS (a) OR (c) ABOVE.
(e) (1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
THE AUDIT COMMITTEE'S ONLY POLICY IS DELEGATION TO ITS CHAIRPERSON OF
THE AUTHORITY TO PRE-APPROVE ITEMS THAT REQUIRE A DECISION PRIOR TO THE
NEXT MEETING OF THE COMMITTEE.
(2) Disclose the percentage of services described in each of paragraphs
(a) through (d) of this Item that were approved by the audit committee
pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
NONE.
(f) If greater than 50%, disclose the percentage of hours expended on the
principal accountant's engagement to audit the registrant's financial
statements for the most recent fiscal year that were attributed to work
performed by persons other than the principal accountant's full-time,
permanent employees.
NOT APPLICABLE.
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by,
or under common control with the adviser that provides ongoing services
to the registrant for each of the last two fiscal years of the
registrant.
FY 02 - $542,653
FY 03 - $883,350
(h) Disclose whether the registrant's audit committee of the board of
directors has considered whether the provision of non-audit services
that were rendered to the registrant's investment adviser (not including
any sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser), and any
entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant that were not
pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation
S-X is compatible with maintaining the principal accountant's
independence.
THE MEMBERS OF THE AUDIT COMMITTEE OF LEGG MASON INCOME TRUST, INC. HAVE
CONSIDERED WHETHER THE NON-AUDIT SERVICES THAT WERE RENDERED BY THE
FUND'S PRINCIPAL ACCOUNTANT TO THE ENTITIES SPECIFIED IN THIS ITEM AND
THAT WERE NOT PRE-
APPROVED BY THE AUDIT COMMITTEE ARE COMPATIBLE WITH MAINTAINING THE
PRINCIPAL ACCOUNTANT'S INDEPENDENCE.
Item 5 - Reserved
Item 6 - Reserved
Item 7 - Disclosure of Proxy Voting Policies and Procedures For closed-end
management investment companies, describe the policies and procedures that it
uses to determine how to vote proxies relating to portfolio securities,
including the procedures that the company uses when a vote presents a conflict
between the interests of its shareholders, and those of the company's investment
adviser; principal underwriter; or any affiliated person of the company, its
investment adviser, or its principal underwriter.
(NOT APPLICABLE)
Item 8 - Reserved
Item 9 - Controls and Procedures
(a) Disclose the conclusions of the registrant's principal executive
officer or officers and principal financial officer or officers,
or persons performing similar functions, regarding the
effectiveness of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Act (17 CFR
270.30a-3(c))) as of a date within 90 days of the filing date of
the report that includes the disclosure required by this
paragraph, based on the evaluation of these controls and
procedures required by Rule 30a-3(b) under the Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the
Exchange Act (17 CFR 240-13a-15(b) or 240.15d-15(b)).
WITHIN 90 DAYS OF THE FILING DATE OF THIS FORM N-CSR, THE REGISTRANT'S
PRESIDENT AND TREASURER REVIEWED THE REGISTRANT'S DISCLOSURE CONTROLS
AND PROCEDURES ("THE PROCEDURES") AND EVALUATED THEIR EFFECTIVENESS.
BASED ON THEIR REVIEW, SUCH OFFICERS DETERMINED THAT THE PROCEDURES
ENSURE THAT INFORMATION REQUIRED TO BE DISCLOSED BY THE REGISTRANT ON
FORM N-CSR IS RECORDED, PROCESSED, SUMMARIZED AND REPORTED WITHIN THE
TIME PERIODS REQUIRED BY THE SECURITIES AND EXCHANGE COMMISSION'S RULES
AND REGULATIONS.
(b) Disclose any change in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's last
fiscal half-year (the registrant's second fiscal half-year in
the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
THERE WERE NO CHANGES IN THE REGISTRANT'S INTERNAL CONTROL OVER
FINANCIAL REPORTING DURING THE REGISTRANT'S LAST HALF-YEAR THAT HAVE
MATERIALLY AFFECTED, OR ARE REASONABLY LIKELY TO MATERIALLY AFFECT, THE
INTERNAL CONTROL OVER FINANCIAL REPORTING.
Item 10 - Exhibits
(a) File the exhibits listed below as part of this Form.
(a)(1) Any code of ethics, or amendment thereto, that is the subject of
the disclosure required by Item 2, to the extent that the
registrant intends to satisfy the Item requirements through
filing of an exhibit.
(ATTACHED)
(a)(2) A separate certification for each principal execute officer and
principal financial officer of the registrant as required by
Rule 30a-2(a) under the Act (17 CFR 270.30a-2(a)), exactly as
set forth below:
(ATTACHED)
(b) If the report is filed under Section 13(a) or 15(d) of the
Exchange Act, provide the certifications required by Rule
30a-2(b) under the Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or
Rule 15d-14(b) under the Exchange Act (17 CFR 240.13a-14(b) or
240.15d-14(b)), and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. 1350) as an exhibit. A
certification furnished pursuant to this paragraph will not be
deemed "filed" for the purposes of Section 18 of the Exchange
Act (15 U.S.C. 78r), or other wise subject to the liability of
that section. Such certification will not be deemed to be
incorporated by reference into any filing under the Securities
Act of 1933 or the Exchange Act, except to the extent that the
registrant specifically incorporates it by reference.
(ATTACHED)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Legg Mason Income Trust, Inc.
By: /s/ Mark R. Fetting
- ---------------------------------
Mark R. Fetting
President,
Legg Mason Income Trust, Inc.
Date: 2/20/04
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Mark R. Fetting
- -------------------------------
Mark R. Fetting
President,
Legg Mason Income Trust, Inc.
Date: 2/20/04
By: /s/ Marie K. Karpinski
- ----------------------------------
Marie K. Karpinski
Treasurer,
Legg Mason Income Trust, Inc.
Date: 2/20/04