<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE DURATION PORTFOLIO
FINANCIAL REPORT
REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED
JUNE 30, 1995
<PAGE>
(Western Asset Management Company logo)
Dear Shareholder:
Enclosed are the fiscal year-end financial statements for the Western Asset
Trust Intermediate Portfolio.
This marks the end of the fund's first year of operation, a period in which
interest rates and market conditions were unusually volatile. Assets in the
fund reached $20 million by last June. The portfolio's returns were slightly
behind the Fund's Benchmark for the year, with the fund earning 10.08% vs
10.96% for the Salomon Brothers Medium-Term Index.
Please give us a call if you have any questions on the enclosed.
Sincerely,
W. Curtis Livingston
President
<PAGE>
WESTERN ASSET TRUST
INTERMEDIATE DURATION PORTFOLIO
Portfolio Manager: Stephen A. Walsh, Western
The Funds performance was strong on an absolute basis in the 12 months
ending June 30, 1995. On a relative basis however, it lagged its benchmark.
Though interest rates were unusually volatile for the period, intermediate
and long term interest rates fell on balance, resulting in net price
appreciation. Most of the strategies in place in the portfolio were rewarded,
however the Fund was adversely impacted by being underinvested during the
third quarter of last year as the Fund started. The portfolio's yield curve
exposure shifted several times during the period, correctly anticipating major
shifts in the term structure of interest rates: the portfolio's barbell exposure
in the second half of 1994 added to performance as the yield curve flattened,
and the portfolio's bullet exposure added to performance as the yield curve
steepened in the first quarter of 1995. Sector exposure was a contributor to
performance as well, as the portfolio was overweighted in mortgages for the
balance of the period, and mortgages were the top-performing sector.
However, this was a drag on performance in the second quarter of 1995 as the
mortgage sector lagged other major sectors. Finally, most corporate holdings
contributed to performance as their spreads narrowed over the course of the
period.
Comparison of $10,000 Investment in WAT Intermediate Duration and Salomon
Brothers Medium Term Index. Plot Points From Graph Listed Below.
Salomon Brothers Western Asset
7/1/94 10000 10000
9/30/94 10078 10006
12/31/94 10088 10055
3/31/95 10562 10467
6/30/95 11097 11008
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WESTERN ASSET TRUST, INC.
INTERMEDIATE DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
CORPORATE BONDS AND NOTES - 12.0%
Finance - 6.1%
Ford Motor Credit Company
5.86% 8/14/98 $ 250 $ 246
General Motors Acceptance Corp.
8.375% 2/3/99 300 317
Lehman Brothers Holdings, Inc.
8.63% 2/26/99 400 418
Salomon Inc.
5.91% 9/29/95 250 249
1,230
Food, Beverage and Tobacco - 1.8%
Philip Morris Companies Inc.
7.125% 12/1/99 350 356
Industrial - 0.5%
American Home Products
7.70% 2/15/00 100 105
Media and Entertainment - 1.4%
Time Warner Entertainment Company, L.P.
8.375% 7/15/33 300 294
Transportation - 0.9%
United Air Lines, Inc.
11.21% 5/1/14 150 182
Utilities - 1.3%
Long Island Lighting Co.
8.625% 4/15/04 250 261
Total Corporate Bonds and Notes
(Identified Cost - $2,267) 2,428
ASSET-BACKED SECURITIES - 7.3%
Fixed-rate Securities - 4.9%
AFC Home Equity Loan Trust Series 1993 Class 1A
8.00% 12/25/24 225 230
Fleetwood Credit Corp. Grantor Trust
8.75% 10/15/04 303 304
Fleet Finance Home Equity Trust
6.70% 10/16/06 221 220
Lehman Home Improvement Loan Trust
8.65% 12/25/14 142 143
Securitized Asset Sales Series 1994 Class A3
6.86% 8/25/33 93 93
990
</TABLE>
1
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
ASSET-BACKED SECURITIES - Continued
Variable-rate Securities(A) - 2.4%
Security Pacific Home Equity Loan
8.10% 6/15/20 $ 480 $ 487
Total Asset-backed Securities
(Identified Cost - $1,471) 1,477
MORTGAGE-BACKED SECURITIES - 7.6%
Fixed-rate Securities(A) - 1.8%
Resolution Trust Corporation
7.75% 12/25/18 361 361
Variable-rate Securities(A) - 5.8%
Resolution Trust Corporation
5.439% 7/25/20 117 114
8.773% 3/25/21 190 195
6.475% 9/25/21 711 686
7.834% 9/25/29 188 192
1,187
Total Mortgage-backed Securities
(Identified Cost - $1,537) 1,548
U.S. GOVERNMENT SECURITIES - 38.8%
United States Treasury Notes
6.25% 8/31/96 600 603
6.625% 3/31/97 4,300 4,356
6.125% 5/15/98 600 604
7.50% 10/31/99 2,190 2,313
Total U.S. Government Securities
(Identified Cost - $7,721) 7,876
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES - 4.9%
Fixed-rate Securities(A) - 2.8%
Government National Mortgage Association
7.50% 1/20/25 297 304
7.00% 6/20/25 267 272
576
Variable-rate Securities(A) - 2.1%
Federal Home Loan Mortgage Corporation
PC# 775330
6.082% 1/1/19 159 158
Federal National Mortgage Association
5.858% 3/1/18 262 257
415
</TABLE>
2
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C> <C>
Total U. S. Government Agency
Mortgage-backed Securities
(Identified Cost - $973) $ 991
YANKEE BONDS(B) - 8.5%
Banque Paribas
8.35% 6/15/07 $ 850 916
Province of Saskatchewan CDA
8.00% 7/15/04 50 54
Hydro-Quebec
8.05% 7/7/24 700 765
Total Yankee Bonds
(Identified Cost $1,684) 1,735
SHORT-TERM INVESTMENTS - 21.9%
Repurchase Agreement
Goldman, Sachs & Company, Inc.
6.00% dated 6/30/95 to be repurchased
at $1,466 on 7/3/95 (Collateral: $1,465)
United States Treasury Notes, 8.5% due
11/15/95, value $1,495) 1,464 1,464
Federal Home Loan Mortgage Corporation
6.10% 7/3/95 2,000 1,999
United States Treasury Bill
5.51% 7/20/95 1,000 997
Total Short-Term Investments
(Identified Cost - $4,460) 4,460
Total Investments
(Identified Cost - $20,113) $20,515
</TABLE>
3
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Actual
Expiration Number of
Date Contracts Appreciation
<S> <S> <C> <C>
FUTURES CONTRACTS PURCHASED
Treasury Note Futures Sept. 95 10 $ 33
</TABLE>
(A) The coupon rate shown is the rate as of June 30, 1995. The rate varies
with the weighted average coupon of the underlying loans.
(B) Yankee Bond - A dollar-denominated bond issued in the U.S. by a foreign
entity.
See notes to financial statements.
4
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE DURATION PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995
<TABLE>
<S> <C>
Assets
Investments at value (Identified Cost - $20,113,486) $20,515,069
Cash 849
Interest receivable 223,404
Due from adviser 47,326
Futures variation margin receivable 3,438
Other assets 49,776
Total assets 20,839,862
Liabilities
Payable for investments purchased 488,812
Accrued expenses 37,659
Total liabilities 526,471
Net assets $20,313,391
Analysis of Net Assets
Common stock at par value $.001 per share, authorized
100,000,000 shares; issued and outstanding
189,209 shares $ 189
Accumulated paid-in capital 19,280,816
Undistributed net investment income 263,166
Accumulated net realized gain on investments 334,587
Unrealized appreciation of investments 434,633
Net assets $20,313,391
Net asset value, offering price, and redemption price
per share $107.36
</TABLE>
See notes to financial statements.
5
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE DURATION PORTFOLIO
STATEMENT OF OPERATIONS
For the Year Ended June 30, 1995
<TABLE>
<S> <C> <C> <C>
Investment Income:
Interest $ 489,381
Expenses:
Advisory fee $ 29,571
Administrative fee 3,696
Custodian 35,500
Directors' fees 14,463
Legal fees 12,900
Audit fee 12,000
Registration fees 5,700
Organizational expense 4,144
Other expenses 624
118,598
Less fees waived and expenses reimbursed (80,593)
Total expenses, net of waivers and
reimbursements 38,005
Net Investment Income 451,376
Net Realized and Unrealized Gain on Investments:
Realized gain on investments 337,201
Unrealized appreciation of investments 434,633
Net Realized and Unrealized Gain on Investments 771,834
Increase in Net Assets Resulting from Operations $1,223,210
</TABLE>
See notes to financial statements.
6
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE DURATION PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended
June 30, 1995
<S> <C>
Increase in Net Assets:
Net investment income $ 451,376
Net realized gain on investments 337,201
Unrealized appreciation of investments 434,633
Increase in net assets resulting from operations 1,223,210
Distributions to shareholders:
Net investment income (188,210)
Net realized gain on investments, options and futures (2,614)
Increase in net assets from Fund share transactions 19,280,005
Increase in net assets 20,312,391
Net Assets:
Beginning of year 1,000
End of year (including undistributed net investment income
of $263,166) $20,313,391
</TABLE>
See notes to financial statements.
7
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE DURATION PORTFOLIO
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data for a share of common
stock outstanding, total investment return, ratios to average net assets and
other supplemental data. This information has been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
For the Year Ended
June 30, 1995
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $100.00
Net investment income 3.86
Net realized and unrealized gain on investments 6.02(B)
Total from investment operations 9.88
Distributions to shareholders:
Net investment income (2.47)
Net realized gain on investments (.05)
Total distributions (2.52)
Net asset value, end of year 107.36
Total return 10.08%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses .50%(A)
Net investment income 6.11%(A)
Portfolio turnover rate 764.45%
Net assets, end of year (in thousands) $20,313
</TABLE>
(A) Net of investment advisory and administrative fees waived pursuant to a
voluntary expense limitation of 0.50%.
(B) The amount presented is calculated pursuant to a methodology prescribed
by the Securities and Exchange Commission for a share outstanding
throughout the year. This amount is inconsistent with the Fund's
aggregate gains and losses because of the timing of sales and redemptions
of Fund shares in relation to fluctuating market values for the investment
portfolio.
See notes to financial statements.
8
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE DURATION PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Western Asset Trust, Inc. ("Corporation") is registered under the Investment
Company Act of 1940, as amended. Western Asset Trust Intermediate Duration
Portfolio ("Fund"), a diversified, open-end management investment company, is
one of the portfolios established by the Corporation. The Fund was organized
on May 16, 1990 and had no operations prior to July 1, 1994, other than those
related to organizational matters.
Security Valuation
Portfolio securities are valued based upon market quotations. When market
quotations are not readily available, securities are valued based on prices
received from recognized broker-dealers in the same or similar securities.
The amortized cost method of valuation is used for debt obligations with 60
days or less remaining to maturity.
Options and Futures
The current market value of a traded option is the last sale price or, in
the absence of a sale, the mean between the closing bid and asked price.
Futures contracts are marked-to-market on a daily basis. As the contract's
value fluctuates, payments known as variation margin are made to or received
from the futures commission merchant.
Distributions to Shareholders
Net investment income for distribution purposes is recorded on the accrual
basis and consists of interest income less expenses. Bond premium and
original issue discount are amortized for financial reporting and tax
purposes using the effective interest method over the period to maturity of
the security and serve to increase or reduce interest income.
Security Transactions
Security transactions are recorded on the trade date. Realized gains and
losses from security transactions are reported on an identified cost basis.
Deferred Organizational Expense
Deferred organizational expenses of $53,920 are being amortized on a
straight-line basis over 5 years beginning on the date operations began.
Federal Income Taxes
No provision for federal income or excise taxes is required since the Fund
intends to qualify as a regulated investment company and distribute all of its
taxable income to its shareholders.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
2. Financial Instruments:
As part of the Fund's investment program, the Fund utilizes repurchase
agreements, options and futures contracts. The nature and risk 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.
Repurchase Agreements
All repurchase agreements are fully collateralized by obligations issued by
the U.S. government or its agencies and such collateral is in the possession
of the Fund's custodian. Risks arise from the possible delay in recovery or
potential loss of rights in the collateral should the issuer of the repurchase
agreement fail financially.
Option Transactions
A call option on a bond or bond future gives the option holder the right to
purchase a bond or bond future at a specified price until a certain date in
exchange for a premium paid to the writer of the option. Risks arise from
the possible illiquidity of the options market and from movements in underlying
security values. Call options on bonds and bond futures written by the fund
and related premiums received during the year ended June 30, 1995 were as
follows:
<TABLE>
<CAPTION>
Contracts Premiums
<S> <C> <C>
Options outstanding at July 1, 1994 -0- $ -0-
Options written 33 11,315
Options exercised -0- -0-
Options closed (33) (11,315)
Options outstanding at June 30, 1995 -0- -0-
</TABLE>
Futures
The Fund has entered into futures contracts in connection with its interest
rate management strategy. Risks arise from the possible illiquidity of the
futures market and from the possibility that a change in the value of
a contrat may not correlate with changes in interest rates.
3. Portfolio Transactions:
Purchases and sales of portfolio securities (excluding short-term, U.S.
government securities, written and purchased options and futures contracts)
for the year ended June 30, 1995 aggregated $8,842,045 and $1,784,429,
respectively. Purchases and sales of U.S. government securities aggregated
$59,739,050 and $51,321,244, respectively, for the same period.
At June 30, 1995, the cost of securities for federal income tax purposes was
$20,113,486. Aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost was $416,035 and aggregate
gross unrealized depreciation for all securities in which there was an excess
of tax cost over value was $14,452.
The Fund has unused realized capital loss carryforwards for federal income
tax purposes of $2,796,685 which expires in 2001. The Fund intends to retain
gains realized in future periods that may be offset by available capital loss
carryforwards.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
4. Fund Share Transactions:
At June 30, 1995, there were 100,000,000 Fund shares authorized at $.001
par value. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
For the Year Ended
June 30, 1995
Shares Amount
<S> <C> <C>
Sold 191,760 $19,549,656
Reinvestment of distributions 1,875 190,824
Repurchased (4,436) (460,475)
Net increase 189,199 $19,280,005
</TABLE>
5. Transactions with Affiliates:
The Fund has an administration agreement with Legg Mason Fund Adviser, Inc.
("Administrator"), a corporate affiliate of Legg Mason Wood Walker,
Incorporated ("Legg Mason"), a member of the New York Stock Exchange and the
distributor for the Fund. Under this agreement, the Administrator provides
the Fund with administrative services for which the Fund pays a fee at an
annual rate of 0.10% of average daily net assets of the Fund. The
Administrator has voluntarily agreed to temporarily waive its fees. Pursuant
to this agreement, administration fees of $3,696 were waived for the year
ended June 30, 1995.
Western Asset Management Company ("Adviser"), a corporate affiliate of the
Administrator and Legg Mason, serves as investment adviser to the Fund. The
Adviser is responsible for the actual investment activity of the Fund, for
which the Fund pays a fee at an annual rate of 0.40% of average daily net
assets of the Fund. The Adviser has voluntarily agreed to waive its fees and
reimburse the Fund to the extent necessary to limit the total expenses to an
annual rate of 0.50% of the Fund's average daily net assets. Pursuant to this
agreement, advisory fees of $29,571 waived for the year ended June 30, 1995.
11
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Western Asset Trust Intermediate Duration Portfolio:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and financial highlights present fairly, in all material
respects, the financial position of Western Asset Trust Intermediate Duration
Portfolio (the "Fund") (one of the portfolios constituting Western Asset Trust,
Inc.) at June 30, 1995, the results of its operations, the changes in its net
assets and the financial highlights for the year July 1, 1994 (commencement of
operations) through June 30, 1995, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at June 30, 1995 by correspondence with the custodian
and the application of alternative auditing procedures for unsettled security
transactions, provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
July 31, 1995
12
