As filed with the Securities and Exchange Commission on October 30, 1995.
1933 Act File No. 33-34929
1940 Act File No. 811-06110
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 13 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 15 [X]
WESTERN ASSET TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
111 South Calvert Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO R. GREGORY MORGAN, ESQ.
111 South Calvert Street Munger, Tolles & Olson
Baltimore, Maryland 21202 355 South Grand Avenue
(Name and Address of 35th Floor
Agent for Service) Los Angeles, CA 90071-1560
It is proposed that this filing will become effective:
[X] immediately upon filing pursuant to Rule 485(b)
[ ] on ______________ pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on , 1995 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on , 1995 pursuant to Rule 485(a)(ii)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed a notice pursuant to Rule 24f-2 under the Investment
Company Act of 1940 and filed the notice required by such Rule for its most
recent fiscal year on August 29, 1995.
<PAGE>
WESTERN ASSET TRUST, INC.
Contents of Registration Statement
This registration statement consists of the following papers and documents:
Cover Sheet
Table of Contents
Cross Reference Sheets
Part A
Prospectus for the following Portfolios:
Money Market Portfolio
Short Duration Portfolio
Limited Duration Portfolio
Intermediate Duration Portfolio
Full Range Duration Portfolio
Long Duration Portfolio
Prospectus for the following Portfolios:
Corporate Securities Portfolio
Mortgage Securities Portfolio
International Securities Portfolio
Part B
Statement of Additional Information for the following Portfolios:
Money Market Portfolio
Short Duration Portfolio
Limited Duration Portfolio
Intermediate Duration Portfolio
Full Range Duration Portfolio
Long Duration Portfolio
Statement of Additional Information for the following Portfolios:
Corporate Securities Portfolio
Mortgage Securities Portfolio
International Securities Portfolio
Part C - Other Information
Signature Page
Exhibit Index
Exhibits
PAGE
<PAGE>
WESTERN ASSET TRUST, INC.
Money Market Portfolio
Short Duration Portfolio
Limited Duration Portfolio
Intermediate Duration Portfolio
Full Range Duration Portfolio
Long Duration Portfolio
Cross Reference Sheet
Part A. Item No. Prospectus Caption
1 Cover Page
2 Prospectus Summary; Expense Information
3 Financial Highlights; Other Information
4 Investment Objectives and Policies;
Description of Securities
and Investment Techniques; Other Information
5 Management of the Fund; Expense Information;
Back Cover Page
5A Not Applicable as to the Full Range Duration
Portfolio and the Intermediate Duration Portfolio
because the information called for by this item
with respect to such Portfolios was contained in
the annual report of such Portfolios. Not
applicable as to the Money Market Portfolio,
Short Duration Portfolio, Limited Duration
Portfolio and Long Duration Portfolio in
reliance on Instruction 5 to Item 5A, because the
Statement of Additional Information does not
contain audited financial statements covering a
period of operations of such Portfolios of at
least six months.
6 Dividends and Other Distributions; Federal Tax
Treatment of Dividends and Other Distributions;
Other Information
7 Purchase of Shares; How Net Asset
Value is Determined; Other Information
8 Redemption of Shares
9 Not Applicable
<PAGE>
<PAGE>
WESTERN ASSET TRUST, INC.
Mortgage Securities Portfolio
Corporate Securities Portfolio
International Securities Portfolio
Cross Reference Sheet
Part A. Item No. Prospectus Caption
1 Cover Page
2 Prospectus Summary; Expense Information
3 Financial Highlights; Other Information
4 Investment Objectives and Policies;
Description of Securities and Investment
Techniques; Other Information
5 Management of the Fund; Expense Information; Back
Cover Page
5A Not Applicable as to the International Securities
Portfolio because the information called for by
this item with respect to such Portfolio was
contained in the annual report of such Portfolio.
Not applicable as to the Mortgage Securities and
Corporate Securities Portfolio in reliance on
Instruction 5 to Item 5A, because the Statement
of Additional Information does not contain
audited financial statements covering a period of
operations of such Portfolios of at least six
months.
6 Dividends and Other Distributions; Federal Tax
Treatment of Dividends and Other Distributions;
Other Information
7 Purchase of Shares; How Net Asset
Value is Determined; Other Information
8 Redemption of Shares
9 Not Applicable<PAGE>
<PAGE>
WESTERN ASSET TRUST, INC.
Money Market Portfolio
Short Duration Portfolio
Limited Duration Portfolio
Intermediate Duration Portfolio
Full Range Duration Portfolio
Long Duration Portfolio
Cross Reference Sheet
Statement of Additional
Part B. Item No. Information Caption
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Additional Information About
Investment Limitations and
Policies
14 Management of the Fund
15 Principal Holders of Securities
16 Management of the Fund;
Other Information
17 Portfolio Transactions and
Brokerage
18 Other Information
19 Purchases and Redemptions
20 Additional Tax Information
21 Management of the Fund
22 Other Information
23 Financial Statements And Reports of
Independent Accountants<PAGE>
<PAGE>
WESTERN ASSET TRUST, INC.
Mortgage Securities Portfolio
Corporate Securities Portfolio
International Securities Portfolio
Cross Reference Sheet
Statement of Additional
Part B. Item No. Information Caption
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Additional Information About
Investment Limitations and
Policies
14 Management of the Fund
15 Principal Holders of Securities
16 Management of the Fund;
Other Information
17 Portfolio Transactions and
Brokerage
18 Other Information
19 Purchases and Redemptions
20 Additional Tax Information
21 Management of the Fund
22 Other Information
23 Financial Statements And Reports of
Independent Accountants<PAGE>
<PAGE>
PROSPECTUS
WESTERN ASSET TRUST, INC.
MONEY MARKET PORTFOLIO
SHORT DURATION PORTFOLIO
LIMITED DURATION PORTFOLIO
INTERMEDIATE DURATION PORTFOLIO
FULL RANGE DURATION PORTFOLIO
LONG DURATION PORTFOLIO
Western Asset Trust, Inc. ("Fund") is a no-load, open-end, management
investment company currently consisting of nine separate professionally managed
investment portfolios. The six portfolios described in this Prospectus -- the
Money Market Portfolio, Short Duration Portfolio, Limited Duration Portfolio,
Intermediate Duration Portfolio, Full Range Duration Portfolio and Long Duration
Portfolio (collectively, "Portfolios") -- are intended to provide pension and
profit-sharing plans, other employee benefit trusts, endowments, foundations,
other institutions and corporations, as well as high net worth individuals, with
access to the professional investment management services of Western Asset
Management Company, the investment adviser to the Fund. The Short Duration,
Limited Duration, Intermediate Duration, Full Range Duration and Long Duration
Portfolios seek to maximize total return, consistent with prudent investment
management and liquidity needs, by investing in a portfolio of fixed income
securities and related instruments to achieve a specified average duration.
Duration is a measure of the expected life of a fixed income security on a cash
flow basis. For any fixed income security with interest payments occurring prior
to the payment of principal, duration is always less than maturity. The
Portfolios described in this Prospectus are diversified. ALTHOUGH THE MONEY
MARKET PORTFOLIO WILL ATTEMPT TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE, THERE CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO DO SO. AN INVESTMENT IN
THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT.
Of the six portfolios covered by this Prospectus, only the Full Range
Duration Portfolio, the Limited Duration Portfolio and the Intermediate Duration
Portfolio have commenced operations.
This Prospectus sets forth concisely the information about the Fund that
a prospective investor ought to know before investing. It should be read and
retained for future reference. A Statement of Additional Information about the
Fund dated October 30, 1995, has been filed with the Securities and Exchange
Commission ("SEC") and, as amended from time to time, is incorporated herein by
reference. The Statement of Additional Information is available without charge
upon request from Western Asset Trust, Inc., (818) 584-4300.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Dated: October 30, 1995
<PAGE>
WESTERN ASSET MANAGEMENT
2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary......................................................... 3
Investment Risks and Considerations........................................ 4
Expense Information........................................................ 7
Financial Highlights....................................................... 8
Investment Objectives and Policies......................................... 11
Description of Securities and Investment Techniques........................ 15
Purchase of Shares......................................................... 28
Redemption of Shares....................................................... 29
Exchange Privilege......................................................... 31
How Net Asset Value is Determined.......................................... 31
Dividends and Other Distributions.......................................... 32
Federal Tax Treatment of Dividends and Other Distributions................. 32
Management of the Fund..................................................... 34
Other Information.......................................................... 36
Appendix................................................................... 38
</TABLE>
PROSPECTUS
<PAGE>
WESTERN ASSET MANAGEMENT
3
PROSPECTUS SUMMARY
THE FUND
Western Asset Trust, Inc. is a no-load, open-end management investment
company that was organized as a Maryland corporation on May 16, 1990. The Fund
consists of nine separate professionally managed investment Portfolios, each
with its own investment objective and policies. Six of those portfolios are
offered through this Prospectus -- the Money Market Portfolio, Short Duration
Portfolio, Limited Duration Portfolio, Intermediate Duration Portfolio, Full
Range Duration Portfolio and Long Duration Portfolio. The Portfolios are
designed to provide pension and profit-sharing plans, other employee benefit
trusts, endowments, foundations, other institutions and corporations, as well as
high net worth individuals, with access to the professional investment
management services offered by Western Asset Management Company, the investment
adviser to the Fund. Of the six Portfolios covered by this Prospectus, only the
Full Range Duration Portfolio, the Limited Duration Portfolio and the
Intermediate Duration Portfolio have commenced operations.
INVESTMENT OBJECTIVES
MONEY MARKET PORTFOLIO - The investment objective of the Money Market
Portfolio is to obtain high current income consistent with liquidity and
conservation of principal. This Portfolio seeks to attain its objective by
investing in high quality money market instruments considered under SEC
regulations to have a remaining term to maturity of 397 days or less. This
Portfolio will maintain a dollar-weighted average maturity of 90 days or less.
TOTAL RETURN PORTFOLIOS - The investment objective of each of the
following five portfolios ("Total Return Portfolios") is to maximize total
return, consistent with prudent investment management and liquidity needs, by
investing to obtain the average duration specified for that Portfolio. Duration
is a measure of the expected life of a fixed income security on a cash flow
basis. Most debt obligations provide interest payments and a final payment at
maturity. Some also have call provisions that allow the issuer to redeem the
security at specified dates prior to maturity. Duration incorporates yield,
coupon interest payments, final maturity and call features into a single
measure. It is therefore considered a more accurate measure of a security's
expected life and sensitivity to interest rate changes than is the security's
term to maturity. See page 27 for a further explanation of the term "duration"
and its application to various fixed income securities.
Each Portfolio seeks to achieve its objective by investing primarily in
U.S. dollar-denominated fixed income and other debt securities of domestic and
foreign entities, including corporate bonds, securities issued or guaranteed as
to principal and interest by the U.S. Government, its agencies and
instrumentalities ("U.S. Government Securities"), mortgage-related securities
and money market instruments. The Portfolios differ in terms of the
dollar-weighted average duration of their respective portfolio securities and/or
in the proportion of their assets invested in certain types of securities and,
therefore, their relative risk. See "Investment Objectives and Policies," page
11.
PROSPECTUS
<PAGE>
WESTERN ASSET MANAGEMENT
4
<TABLE>
<S> <C>
DOLLAR-WEIGHTED
PORTFOLIO AVERAGE DURATION
Short Duration Six to fifteen months
Limited Duration One to three years
Intermediate Duration Two to four years
Full Range Duration Within (plus/minus) 20% of the average duration
of the domestic bond market as a whole,
as determined by the Adviser
Long Duration At least eight years
</TABLE>
The average duration of a Total Return Portfolio may be less than that
specified during periods of unusual liquidity needs or immediately following a
major infusion of cash.
There can be no assurance that the investment objective of any Portfolio
will be achieved. Because the market value of each of the Total Return
Portfolios' investments will change, the net asset value per share of each such
Portfolio also will vary. The Money Market Portfolio will attempt to maintain a
net asset value of $1.00 per share, but there can be no assurance this will be
achieved.
INVESTMENT RISKS AND CONSIDERATIONS
All Portfolios may invest in U.S. Government Securities, some of which
may not be backed by the full faith and credit of the United States. While
principal and interest payments on some mortgage-related securities may be
guaranteed by the U.S. Government, government agencies or other guarantors, the
market value of the securities is not guaranteed. Events such as prepayments on
underlying mortgage loans also may adversely affect the return from
mortgage-related securities. Securities rated Baa by Moody's Investors Service,
Inc. ("Moody's") are deemed by that agency to have speculative characteristics.
All Portfolios may invest in U.S. dollar-denominated securities of
foreign issuers, which are subject to additional risk factors not applicable to
securities of U.S. issuers, including risks arising from confiscatory taxation,
taxes on purchases and sales, interest and dividend income, political and
economic developments abroad and differences in the regulation of issuers or
securities markets. Securities of foreign issuers may also be less liquid and
their prices more volatile than securities of U.S. issuers. The economy of a
foreign nation may be more or less favorable than the U.S. economy.
PROSPECTUS
<PAGE>
WESTERN ASSET MANAGEMENT
5
All Portfolios may invest in repurchase agreements, which entail a risk
of loss if the seller defaults on its obligations and the Portfolio involved is
delayed or prevented from exercising its rights to dispose of the collateral
securities. All of the Total Return Portfolios may purchase securities on a
when-issued basis. Securities purchased on a when-issued basis may decline or
appreciate in market value prior to delivery.
All of the Total Return Portfolios may use options, futures contracts on
fixed income instruments and options on such futures for hedging purposes or as
part of their investment strategies. Use of these instruments involves certain
costs and risks, including the risk that a Portfolio could not close out a
futures or option position when it would be most advantageous to do so, and the
risk of an imperfect correlation between the value of the security being hedged
and the value of the particular instrument. See "Investment Objectives and
Policies," page 11, and "Description of Securities and Investment Techniques,"
page 15.
The Total Return Portfolios are intended to have different average
durations. When interest rates are falling, a Portfolio with a shorter duration
generally will not generate as high a level of total return as a Portfolio with
a longer duration. Conversely, when interest rates are rising, a Portfolio with
a shorter duration will generally outperform longer duration portfolios.
Assuming that long-term interest rates are higher than short-term rates (which
is commonly the case), shorter duration portfolios generally will not generate
as high a level of total return as longer duration portfolios when interest
rates are flat. Shorter duration portfolios are, however, subject generally to
less fluctuation in their principal values as interest rates change.
INVESTMENT ADVISER AND FUND ADMINISTRATOR
Western Asset Management Company serves as investment adviser ("Adviser")
to the Fund. Legg Mason Fund Adviser, Inc. serves as the Fund's administrator
("Administrator"). The Adviser renders investment advice to investment companies
that as of September 30, 1995 had approximately $3.2 billion aggregate assets
under management and private accounts totaling approximately $15.0 billion. The
Administrator also serves as investment adviser, manager or consultant to
investment companies with assets of approximately $5.0 billion as of the same
date. See "The Fund's Investment Adviser" and "The Fund's Administrator," page
34.
PURCHASE OF SHARES
Shares of each Portfolio are offered without a sales charge at the net
asset value per share next determined after receipt of a purchase order and
payment in proper form. Each investor in any Portfolio must make a minimum
initial investment of $1,000,000 in that Portfolio. After such an initial
investment has been made, an investor may invest amounts of $10,000 or more in
that Portfolio. The Fund has no plan under Rule 12b-1 imposing fees for
distribution expenses. See "Purchase of Shares," page 28.
PROSPECTUS
<PAGE>
WESTERN ASSET MANAGEMENT
6
REDEMPTION AND EXCHANGES
Shares of each Portfolio may be redeemed without charge at the net asset
value per share of the Portfolio next determined after receipt of the redemption
request in proper form. Shares of any Portfolio may be exchanged for shares of
any other Portfolio described in this Prospectus on the basis of their relative
per share net asset values. See "Redemption of Shares," page 29, and "Exchange
Privilege," page 31.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Money Market Portfolio declares dividends daily and pays them
monthly. Each of the Total Return Portfolios declares and pays dividends
quarterly out of its net investment income. All dividends and other
distributions are automatically reinvested, unless cash payment is requested.
See "Dividends and Other Distributions" and "Federal Tax Treatment of Dividends
and Other Distributions," page 32.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company ("State Street") serves as the Fund's
custodian, and Boston Financial Data Services, Inc. ("BFDS") serves as the
Fund's transfer agent and dividend-disbursing agent. The Fund may maintain
foreign securities and cash in the custody of certain eligible foreign banks and
securities depositories. See "The Fund's Custodian and Transfer Agent,"page 35.
PROSPECTUS
<PAGE>
WESTERN ASSET MANAGEMENT
7
EXPENSE INFORMATION
The purpose of the following table is to assist investors in
understanding the various costs and expenses that they will bear directly or
indirectly. "Management Fees" and "Other Expenses" for the Full Range Duration
Portfolio and Intermediate Duration Portfolio are based on their fees and
expenses for the fiscal year ended June 30, 1995. For the other Portfolios,
"Management Fees" are based on the Fund's current contracts, and "Other
Expenses" are estimates for their initial year of operations.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales load imposed on purchases None
Sales load imposed on reinvested distributions None
Deferred Sales Load None
Redemption fees None
Exchange fees None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (AFTER VOLUNTARY FEE WAIVERS):
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Money Market
Full Range Intermediate Limited and and
Duration Duration Long Duration Short Duration
Portfolio Portfolio Portfolios Portfolios
<S> <C> <C> <C> <C>
Management Fees .40% .40% .40% .30%
Other Expenses .13% 1.20% .25% .20%
Less Voluntary Fee Waivers and
Reimbursements (.03%) (1.10%) (.15%) (.10%)
Total Fund Operating Expenses .50% .50% .50% .40%
</TABLE>
The following example illustrates the expenses that an investor would pay
on a $1,000 investment over various time periods, assuming (1) a 5% annual rate
of return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Full Range Duration
Portfolio $5 $16 $28 $63
Intermediate Duration Portfolio $5 $16 $28 $63
Limited and Long Duration
Portfolios $5 $16 N/A N/A
Money Market and
Short Duration
Portfolios $4 $13 N/A N/A
</TABLE>
PROSPECTUS
<PAGE>
WESTERN ASSET MANAGEMENT
8
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same over the time periods shown. The above tables and the
assumption in the example of a $1,000 investment and a 5% annual return are
required by regulations of the SEC applicable to all mutual funds. THE ASSUMED
5% ANNUAL RETURN IS NOT A PREDICTION OF, AND DOES NOT REPRESENT, ANY PORTFOLIO'S
PROJECTED OR ACTUAL PERFORMANCE. THE ABOVE TABLES SHOULD NOT BE CONSIDERED
REPRESENTATIONS OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. A Portfolio's actual expenses will depend upon, among
other things, the level of average net assets, the levels of sales and
redemptions of shares, the extent to which a Portfolio incurs variable expenses,
such as transfer agency costs, and whether the Adviser reimburses all or a
portion of the Portfolio's expenses and/or waives all or a portion of its
advisory and other fees.
FEE WAIVERS
The Adviser has voluntarily agreed to waive its fees and/or reimburse
each Portfolio to the extent the Portfolio's expenses (exclusive of taxes,
interest, brokerage and other transaction expenses and any other extraordinary
expenses) exceed during any month an annual rate of 0.50% of the Portfolio's
average daily net assets for such month for the Limited Duration, Intermediate
Duration, Full Range Duration and Long Duration Portfolios, and 0.40% of the
Portfolio's average daily net assets for such month for the Money Market and
Short Duration Portfolios until December 31, 1995. For the Limited Duration,
Money Market, Full Range Duration and Long Duration Portfolios, the
Administrator has voluntarily agreed to limit its annual fee to 0.05% of the
Portfolio's average daily net assets.
If the Adviser and the Administrator had not undertaken to limit Fund
expenses as described above, the projected total expenses of the Short Duration
Portfolio would be 0.45% of average daily net assets, the projected total
expenses of the Money Market Portfolio would be 0.50% of average daily net
assets, the projected total expenses of the Limited Duration and Long Duration
Portfolios would be 0.65% of average daily net assets; the actual expenses of
the Intermediate Duration Portfolio would have been 1.60% of average daily net
assets and the actual expenses of the Full Range Duration Portfolio would have
been 0.53% of average daily net assets. These agreements are voluntary and may
be terminated by the Adviser or the Administrator at any time.
FINANCIAL HIGHLIGHTS
FULL RANGE DURATION PORTFOLIO
The financial highlights for the years ended June 30, 1995, 1994, 1993
and 1992, and for the period September 4, 1990 (Commencement of Operations)
through June 30, 1991, have been obtained from the financial statements which
have been audited by Price Waterhouse LLP, independent accountants. The Full
Range Duration Portfolio's financial statements for the year ended June 30,
1995, and the unqualified report of Price Waterhouse LLP thereon, are included
in the Full Range Duration Portfolio's 1995 Annual Report to Shareholders and
are incorporated by reference in the Statement of Additional Information.
PROSPECTUS
<PAGE>
WESTERN ASSET MANAGEMENT
9
As of the date of this Prospectus, the Money Market Portfolio, Short
Duration Portfolio and Long Duration Portfolio have not commenced operations.
The Limited Duration Portfolio is scheduled to commence operations on November
1, 1995. Accordingly, no condensed financial information with respect to those
Portfolios is included in the following tables.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1995 1994 1993 1992 1991A
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $105.02 $116.64 $112.04 $106.28 $100.00
Net investment incomeB 6.82 5.64 6.57 6.90 6.66
Net realized and unrealized gain (loss) on
investmentsC 7.19 (6.28) 8.71 8.72 4.28
Total from investment operations 14.01 (0.64) 15.28 15.62 10.94
Distributions to shareholders from:
Net investment income (6.86) (6.11) (6.72) (7.11) (4.66)
Net realized gain on investments -- (4.87) (3.96) (2.75) --
Total distributions (6.86) (10.98) (10.68) (9.86) (4.66)
Net asset value, end of period $112.17 $105.02 $116.64 $112.04 $106.28
Total return 14.12% (0.89)% 14.52% 15.61% 11.01%D
RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
ExpensesB 0.50% 0.50% 0.50% 0.50% 0.65%E
Net investment incomeB 7.0% 6.0% 6.0% 6.7% 8.0%E
Portfolio turnover rate 257.90% 272.49% 313.05% 299.65% 177.25%E
Net assets, end of period
(in thousands) $336,774 $205,959 $135,886 $92,892 $43,076
</TABLE>
AFOR THE PERIOD SEPTEMBER 4, 1990 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1991.
BNET OF INVESTMENT ADVISORY FEES WAIVED PURSUANT TO A VOLUNTARY EXPENSE
LIMITATION AS FOLLOWS: 0.65% THROUGH JUNE 30, 1991; 0.50% THEREAFTER AND A
VOLUNTARY ADMINISTRATIVE EXPENSE WAIVER OF 0.05%. PURSUANT TO THIS LIMITATION,
ADVISORY FEES OF $69,442, $66,823, $71,911, AND $128,262 WERE WAIVED FOR THE
YEARS ENDED JUNE 30, 1995, 1994, 1993 AND JUNE 30, 1992, RESPECTIVELY.
ADDITIONALLY, ADVISORY FEES OF $54,697 REMAIN WAIVED FROM THE PRIOR PERIOD ENDED
JUNE 30, 1991. IN THE ABSENCE OF THIS LIMITATION, THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS WOULD HAVE BEEN .53% FOR THE YEAR ENDED JUNE 30, 1995, .58%
FOR THE YEAR ENDED JUNE 30, 1994, .57% FOR THE YEAR ENDED JUNE 30, 1993, .70%
FOR THE YEAR ENDED JUNE 30, 1992, AND .81% FOR THE PERIOD SEPTEMBER 4, 1990 TO
JUNE 30, 1991.
CTHE AMOUNT PRESENTED IS CALCULATED PURSUANT TO A METHODOLOGY PRESCRIBED BY THE
SEC 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.
DNOT ANNUALIZED FOR PERIODS OF LESS THAN A FULL YEAR.
EANNUALIZED.
PROSPECTUS
<PAGE>
WESTERN ASSET MANAGEMENT
10
FINANCIAL HIGHLIGHTS
INTERMEDIATE DURATION PORTFOLIO
The financial highlights for the year ended June 30, 1995 have been
obtained from the financial statements which have been audited by Price
Waterhouse LLP, independent accountants. The Intermediate Duration Portfolio's
financial statements for the year ended June 30, 1995 and the unqualified report
of Price Waterhouse LLP thereon, are included in the Intermediate Duration
Portfolio's 1995 Annual Report to Shareholders and are incorporated by reference
in the Statement of Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1995
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $100.00
Net investment incomeA 3.86
Net realized and unrealized gain (loss) on investmentsB 6.02
Total from investment operations 9.88
Distributions to shareholders from:
Net investment income (2.47)
Net realized gain on investments (0.05)
Total distributions (2.52)
Net asset value, end of period $107.36
Total return 10.08%
RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
ExpensesA 0.50%
Net investment incomeA 6.11%
Portfolio turnover rate 764.45%
Net assets, end of period (in thousands) $20,313
</TABLE>
ANET OF INVESTMENT ADVISORY FEES WAIVED PURSUANT TO A VOLUNTARY EXPENSE
LIMITATION OF 0.50% AND A VOLUNTARY ADMINISTRATIVE EXPENSE WAIVER OF 0.05%.
PURSUANT TO THIS LIMITATION, ADVISORY FEES OF $29,571 WERE WAIVED FOR
THE YEAR ENDED JUNE 30, 1995. IN THE ABSENCE OF THIS LIMITATION, THE RATIO
OF EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.60%.
BTHE AMOUNT PRESENTED IS CALCULATED PURSUANT TO A METHODOLOGY PRESCRIBED BY THE
SEC 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.
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Further information about the performance of the Full Range Duration
Portfolio and the Intermediate Duration Portfolio is contained in each
Portfolio's 1995 Annual Report to Shareholders which may be obtained from the
Adviser without charge.
INVESTMENT OBJECTIVES AND POLICIES
The following describes the investment objective and policies of each
Portfolio. The securities and investment techniques discussed in this section
are described in greater detail under the heading "Description of Securities and
Investment Techniques" and in the Statement of Additional Information.
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to obtain high
current income consistent with liquidity and conservation of principal. The
Portfolio seeks to attain this objective by investing in high quality money
market instruments, which include, but are not limited to, marketable
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; instruments of domestic and foreign banks and savings and
loan institutions (such as certificates of deposit, demand and time deposits,
savings shares and bankers' acceptances) provided that the issuing bank or
institution has total assets of over $1 billion at the time of purchase or the
principal amount of the instrument is insured by the Federal Deposit Insurance
Corporation; commercial paper; and repurchase agreements involving any of the
above instruments. A money market instrument is considered to be "high quality"
if it has received one of the two highest ratings by two or more nationally
recognized statistical rating organizations ("NRSROs") (or by one NRSRO if only
one has rated the security) or, if unrated, is determined by the Adviser, acting
pursuant to guidelines established by the Board of Directors, to be of
comparable quality. There can be no assurance that the Money Market Portfolio
will meet its investment objective.
The Money Market Portfolio will not purchase instruments having a
remaining term to maturity of more than 397 days (except that the Portfolio may
enter into short-term repurchase agreements involving securities that are
considered under SEC regulations to have a term to maturity of
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more than 397 days), and will maintain an average maturity, computed on a
dollar-weighted basis, of 90 days or less. It may purchase securities on a
when-issued basis. This Portfolio will invest only in U.S. dollar-denominated
securities.
SEC regulations divide eligible money market securities into two
categories. "First tier" securities are those rated in the highest rating
category by at least two NRSROs (or one NRSRO if only one has rated the
security) or, if unrated, determined by the Adviser to be of comparable quality.
"Second tier" securities are all other high quality securities. The Money Market
Portfolio may not invest more than five percent of its total assets in first
tier securities of any one issuer (other than a security issued or guaranteed as
to principal and interest by the U.S. Government, its agencies or
instrumentalities), except on a temporary basis. The Portfolio may not invest
more than one percent of its total assets, or $1 million, whichever is greater,
in the second tier securities of any one issuer, and may not invest more than
five percent of its total assets in second tier securities generally. Both the
percentages and the quality standards set forth in this paragraph are measured
at the time a security is purchased. Purchases of unrated securities and
purchases of securities rated by only a single NRSRO must be approved or
ratified by the Fund's Board of Directors.
TOTAL RETURN PORTFOLIOS
The investment objective of each of the Total Return Portfolios is to
maximize total return, consistent with prudent investment management and
liquidity needs, by investing to obtain the average duration specified for that
Portfolio. "Total Return" includes interest from underlying securities, capital
gains and appreciation on the securities held in the Portfolio, and gains from
the use of futures and options. As set forth below, the Total Return Portfolios
differ from one another primarily in the range of duration and/or in the
proportion of assets invested in certain types of securities. Duration is a
measure of the expected life of a fixed income security on a cash flow basis.
Most debt obligations provide interest payments and a final payment at maturity.
Some also have call provisions that allow the issuer to redeem the security at
specified dates prior to maturity. Duration incorporates yield, coupon interest
payments, final maturity and call features into a single measure. It is
therefore considered a more accurate measure of a security's expected life and
sensitivity to interest rate changes than is the security's term to maturity.
See page 27 for a further explanation of the term "duration" and its application
to various fixed income securities. There can be no assurance that any of the
Total Return Portfolios will achieve their investment objectives.
The Total Return Portfolios invest primarily in the following types of
securities: obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; U.S. dollar-denominated fixed income securities
of non-governmental domestic or foreign issuers rated Baa or better by Moody's
or BBB or better by Standard & Poor's Ratings Group ("S&P"), securities
comparably rated by another NRSRO or, if unrated, determined by the Adviser to
be of comparable quality; mortgage-and other asset-backed securities; U.S.
dollar-denominated obligations of foreign governments or their subdivisions,
agencies and instrumentalities, international agencies or supranational
entities. The Total
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Return Portfolios may also invest in certificates of deposit, time deposits and
bankers' acceptances issued by domestic and foreign banks and denominated in
U.S. dollars; and may engage in repurchase agreements and reverse repurchase
agreements involving any of the foregoing.
Each Total Return Portfolio is authorized to invest up to 25% of its
total assets in the securities of foreign issuers. However, each Portfolio
presently intends to limit such investments to securities denominated in U.S.
dollars. Each Total Return Portfolio may invest or hold up to 5% of its net
assets in debt securities that are rated below investment grade but rated B or
higher by Moody's or S&P. See the Appendix to the Statement of Additional
Information for a description of Moody's and S&P ratings applicable to fixed
income securities.
Each Total Return Portfolio may buy or sell futures contracts on fixed
income instruments, options on such futures contracts and options on securities
to hedge against changes in the value of securities which the Portfolio owns or
anticipates purchasing due to anticipated changes in interest rates. Each Total
Return Portfolio may use options on debt securities for non-hedging purposes, in
an effort to enhance income.
The Total Return Portfolios also may purchase securities on a when-issued
basis and enter into forward commitments to purchase securities; lend securities
to brokers, dealers and other financial institutions to earn income; and borrow
money for temporary or emergency purposes. See "When-Issued Securities," page
23, for details on investment restrictions.
In selecting securities for each Total Return Portfolio, the Adviser may
utilize economic forecasting, interest rate anticipation, credit and call risk
analysis, and other security selection techniques. The proportion of each
Portfolio's assets committed to investment in securities with particular
characteristics (such as maturity, type and coupon rate) will vary based on the
Adviser's outlook for the U.S. and foreign economies, the financial markets and
other factors.
The compositions of the Total Return Portfolios are as follows:
SHORT DURATION PORTFOLIO - invests in a portfolio with a dollar-weighted
average duration normally ranging between six and fifteen months. The total rate
of return for this Portfolio is expected to exhibit less volatility than that of
the other Total Return Portfolios because its average duration will be shorter.
LIMITED DURATION PORTFOLIO - invests in a portfolio with a
dollar-weighted average duration normally ranging between one and three years.
The total rate of return for this Portfolio is expected to exhibit less
volatility than that of the Intermediate Duration, Full Range Duration or Long
Duration Portfolios because its average duration will be shorter.
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INTERMEDIATE DURATION PORTFOLIO - invests in a portfolio with a
dollar-weighted average duration normally ranging between two and four years.
The total rate of return for this Portfolio is expected to exhibit less
volatility than that of the Full Range Duration or Long Duration Portfolios
because its average duration will be shorter.
FULL RANGE DURATION PORTFOLIO - invests in a portfolio with a
dollar-weighted average duration that will normally stay within (plus/minus) 20%
of what the Adviser believes to be the average duration of the domestic bond
market as a whole, but may have a longer or shorter duration during periods of
unusual market conditions, as judged by the Adviser. The Adviser bases its
analysis of the average duration of the domestic bond market on bond market
indices which it believes to be representative. The Adviser currently uses the
Salomon Brothers Broad Investment-Grade Bond Index for this purpose. As the
average duration of the domestic bond market is currently about four and
one-half years, the duration of this Portfolio is expected to range between four
and six years. Portfolio holdings will be concentrated in areas of the bond
market (based on quality, sector, coupon or maturity) which the Adviser believes
to be relatively undervalued.
LONG DURATION PORTFOLIO - invests in a portfolio with a dollar-weighted
average duration that will normally be at least eight years. This Portfolio will
include securities with limited potential for call. To the extent that this is
accomplished through investment in U.S. Government Securities, it will minimize
the Portfolio's credit risk but may also reduce its total return. The total rate
of return of this Portfolio is expected to exhibit more volatility than that of
the other Total Return Portfolios, due to the greater interest rate sensitivity
and credit risk normally associated with longer duration investments.
The average duration of any Total Return Portfolio may be less than that
specified during periods of unusual liquidity needs or immediately following a
major infusion of cash.
INVESTMENT RESTRICTIONS
The investment objective of each Portfolio may not be changed without the
affirmative vote of a majority of outstanding shares of the affected Portfolio.
Except for the investment objectives and those restrictions or policies
specifically identified as "fundamental," the investment policies and practices
described in this Prospectus and in the Statement of Additional Information may
be changed by the Fund's Board of Directors without shareholder approval.
The fundamental restrictions applicable to all Portfolios include a
prohibition on investing 25% or more of total assets in the securities of
issuers in a particular industry (with the exception of securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements with respect thereto). Investments by the Money Market
Portfolio in U.S. bank instruments are not considered investments in any one
industry, and the Money Market Fund may invest 25% or more of its total assets
in such instruments. For this purpose, the Fund considers U.S.
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branches of foreign banks to be U.S. banks if they are subject to substantially
the same regulation as domestic banks, and considers foreign branches of U.S.
banks to be U.S. banks if the domestic parent would be unconditionally liable in
the event that the foreign branch failed to pay on the instruments for any
reason. Additional fundamental and non-fundamental investment restrictions are
set forth in the Statement of Additional Information.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following describes in greater detail different types of securities
and investment techniques used by the individual Portfolios, as described in the
preceding section.
U.S. GOVERNMENT SECURITIES
Each Portfolio may purchase U.S. Government Securities, which include (1)
U.S. Treasury bills (maturity of one year or less), U.S. Treasury notes
(maturity of one to ten years) and U.S. Treasury bonds (maturities generally
greater than ten years) and (2) obligations issued or guaranteed by U.S.
Government agencies or instrumentalities which are supported by any of the
following: (a) the full faith and credit of the U.S. Government (such as
certificates of the Government National Mortgage Association ("GNMA")); (b) the
right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Government (such as obligations of the Federal Home Loan Banks);
(c) discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities (such as the Federal National
Mortgage Association ("FNMA")); or (d) only the credit of the instrumentality
(such as the Student Loan Marketing Association ("SLMA")). In the case of
obligations not backed by the full faith and credit of the United States, a
Portfolio must look principally to the agency or instrumentality issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Mortgage-related securities represent an interest in a pool of mortgages
made by lenders such as commercial banks, savings and loan institutions,
mortgage bankers and others. Mortgage-related securities may be issued by
governmental, government-related entities or by non-governmental entities, and
provide monthly payments which consist of interest and, in most cases,
principal. In effect, these payments are a "pass-through" of the monthly
payments made by the individual borrowers on their residential mortgage loans,
net of any fees paid to the issuer or guarantor of such securities. Additional
payments to holders of mortgage-related securities are caused by repayments
resulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred.
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As prepayment rates of individual pools of mortgage loans vary widely, it
is not possible to predict accurately the average life of a particular security.
The volume of prepayments of principal on a pool of mortgages underlying a
particular mortgage-related security will influence the yield of that security,
and the principal returned to a Portfolio may be reinvested in instruments whose
yield may be higher or lower than that which might have been obtained had such
prepayments not occurred. When interest rates are declining, such prepayments
usually increase, and reinvestments of such principal prepayments will be at a
lower rate than that on the original mortgage-related security. The rate of
prepayment may also be affected by general economic conditions, the location and
age of the mortgages, and other social and demographic conditions.
GOVERNMENT MORTGAGE-RELATED SECURITIES. GNMA is the principal federal
government guarantor of mortgage-related securities. GNMA is a wholly owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA pass-through securities are considered to have a very low risk of default
in that (1) the underlying mortgage loan portfolio is comprised entirely of
government-backed loans and (2) the timely payment of both principal and
interest on the securities is guaranteed by the full faith and credit of the
U.S. Government, regardless of whether they have been collected. GNMA
pass-through securities are, however, subject to the same market risk as
comparable debt securities. Therefore, the market value of a Portfolio's GNMA
securities can be expected to fluctuate in response to changes in interest rate
levels.
Residential mortgage loans are also pooled by the Federal Home Loan
Mortgage Corporation ("FHLMC"), a corporate instrumentality of the U.S.
Government. The mortgage loans in FHLMC's portfolio are not government backed;
rather, the loans are either uninsured with loan-to-value ratios of 80% or less
or privately insured if the loan-to-value ratio exceeds 80%. FHLMC, not the U.S.
Government, guarantees the timely payment of interest and ultimate collection of
principal on FHLMC securities. FHLMC also now issues guaranteed mortgage
certificates, on which it guarantees semiannual interest payments and a
specified minimum annual payment of principal.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases residential mortgages from a list of
approved seller/servicers, which include savings and loan associations, savings
banks, commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and
interest only by FNMA, not the U.S. Government.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES. Mortgage-related securities
offered by private issuers include pass-through securities comprised of pools of
residential mortgage loans; mortgage-backed bonds which are considered to be
debt obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and collateralized mortgage obligations ("CMOs") which
are collateralized by mortgage-related securities issued by FHLMC, FNMA or GNMA
or by pools of mortgages. Any Portfolio may purchase privately issued
mortgage-related securities.
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CMOs are typically structured with classes or series which have different
maturities and are generally retired in sequence. Each class of obligations
receives periodic interest payments according to the coupon rate on the
obligations. However, all monthly principal payments and any prepayments from
the collateral pool are paid first to the "Class 1" holders. Thereafter, all
payments of principal are allocated to the next most senior class of obligations
until that class of obligations has been fully repaid. Although full payoff of
each class of obligations is contractually required by a certain date, any or
all classes of obligations may be paid off sooner than expected because of an
increase in the payoff speed of the pool. Other allocation methods may be used.
Mortgage-related securities created by non-governmental issuers generally
offer a higher rate of interest than government and government-related
securities because there are no direct or indirect government guarantees of
payment in the former securities. However, many issuers or servicers of
mortgage-related securities guarantee timely payment of interest and principal
on such securities. Timely payment of interest and principal may also be
supported by various forms of insurance, including individual loan, title, and
hazard policies on the mortgages in the pool, or by private guarantees of the
issuer of the mortgage-related securities. There can be no assurance that the
insurers will be able to meet their obligations under the relevant insurance
policies or that the private issuers will be able to meet their obligations
under the relevant guarantees. Such guarantees and insurance policies may not
cover the entire obligation. Where privately issued securities are
collateralized by securities issued by FHLMC, FNMA or GNMA, the timely payment
of interest and principal is supported by the government-related securities
collateralizing such obligations. The market for conventional pools is smaller
and less liquid than the market for the government and government-related
mortgage pools.
ASSET-BACKED SECURITIES. Asset-backed securities refer to securities that
directly or indirectly represent a participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. Such assets are securitized
through the use of trusts or special purpose corporations. Asset-backed
securities are backed by a pool of assets representing the obligations often of
a number of different parties. Payments of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution, usually unaffiliated with the trust or
the special purpose corporation. Certain of such securities may be illiquid, in
that there is not a ready market if a Portfolio wishes to resell the security.
The principal of mortgage-backed and other asset-backed securities may be
prepaid at any time. As a result, if such securities are purchased at a premium,
a prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect. Conversely, if the securities are purchased at a discount, prepayments
faster than expected will increase yield to maturity and prepayments slower than
expected will decrease it. Accelerated prepayments also reduce the certainty of
the yield because the Portfolio must reinvest the assets at the then-current
rates. Accelerated prepayments on securities purchased at a premium also impose
a
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risk of loss of principal because the premium may not have been fully amortized
at the time the principal is repaid in full.
New types of mortgage-backed and asset-backed securities, derivative
securities and hedging instruments are developed and marketed from time to time.
Consistent with its investment limitations, the Portfolios expect to invest in
those new types of securities and instruments that the Adviser believes may
assist the Portfolios in achieving their investment objectives.
The Total Return Portfolios will invest only in high grade
mortgage-related (or other asset-backed) securities either (1) issued by U.S.
Government owned or sponsored corporations (currently GNMA, FHLMC and FNMA) or
(2) rated A or better by Moody's or by S&P or, if unrated, determined by the
Adviser to be of comparable quality. Investments by the Money Market Portfolio
are subject to the quality standards described on page 11.
NON-GOVERNMENTAL DEBT SECURITIES
A Portfolio's investments in U.S. dollar-denominated debt securities of
domestic or foreign non-governmental issuers are limited to debt securities
(bonds, debentures, notes and other similar debt instruments) which meet the
minimum ratings criteria set forth for the Portfolio or which, if unrated, are
determined by the Adviser (acting, in the case of the Money Market Portfolio,
pursuant to guidelines adopted by the Board) to be of comparable quality.
Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's describes securities rated Baa as
"medium-grade" obligations; they are "neither highly protected nor poorly
secured ... [I]nterest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well." S&P describes securities rated BBB as "regarded as
having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity . . . than
in higher rated categories." Each Total Return Portfolio may invest or hold up
to 5% of its net assets in securities rated below investment grade, i.e., rated
below BBB or Baa, but rated B or better by Moody's or S&P, securities comparably
rated by another NRSRO or, if unrated, determined by the Adviser to be of
comparable quality. Such securities are described as "speculative" by Moody's
and S&P and may be subject to greater market fluctuations and greater risk of
loss of income or principal, including a greater possibility of default or
bankruptcy of the issuer of such securities, than are more highly rated debt
securities. The Adviser seeks to minimize the risks of investing in all
securities through diversification, in-depth credit analysis and attention to
current developments in interest rates and market conditions.
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The Adviser monitors the ratings of securities held by the Portfolios and
the creditworthiness of their issuers. If the rating of a security in which a
Portfolio has invested falls below the minimum rating in which the Portfolio is
permitted to invest, the Portfolio will dispose of that security within a
reasonable time, having due regard for market conditions, tax implications and
other applicable factors.
A debt security may be callable, i.e., subject to redemption at the
option of the issuer at a price established in the security's governing
instrument. If a debt security held by a Portfolio is called for redemption, the
Portfolio will be required to permit the issuer to redeem the security or sell
it to a third party. Either of these actions could have an adverse effect on a
Portfolio's ability to achieve its investment objective.
COMMERCIAL PAPER AND OTHER SHORT-TERM INSTRUMENTS
Commercial paper represents short-term unsecured promissory notes issued
in bearer form by banks or bank holding companies, corporations and finance
companies. The commercial paper purchased by the Total Return Portfolios
consists of U.S. dollar-denominated obligations of domestic or foreign issuers
which, at the time of investment, are (1) rated P-1 or P-2 by Moody's, A-1 or
A-2 or better by S&P, or F-1 or F-2 by Fitch Investors Service, (2) issued or
guaranteed as to principal and interest by issuers or guarantors having an
existing debt security rating of A or better by Moody's or by S&P or (3) if
unrated, are determined to be of comparable quality by the Adviser. The Money
Market Portfolio adheres to the quality standards described on page 11.
The Portfolios may purchase commercial paper issued pursuant to the
private placement exemption in Section 4(2) of the Securities Act of 1933.
Section 4(2) paper is restricted as to disposition under federal securities laws
in that any resale must similarly be made in an exempt transaction. The Fund may
or may not regard such securities as illiquid, depending on the circumstances of
each case. See "Restricted and Illiquid Securities," page 23.
Any Portfolio may also invest in obligations (including certificates of
deposit, demand and time deposits and bankers' acceptances) of U.S. banks and
savings and loan institutions if the issuer has total assets in excess of $1
billion at the time of purchase or if the principal amount of the instrument is
insured by the Federal Deposit Insurance Corporation. A bankers' acceptance is a
time draft drawn on a commercial bank by a borrower, usually in connection with
an international commercial transaction. Time deposits are non-negotiable
deposits maintained in a banking institution for a specified period of time at a
specified interest rate. Certificates of deposit are negotiable short-term
obligations issued by banks against funds deposited in the issuing institution.
The interest rate on some certificates of deposit is periodically adjusted prior
to the stated maturity, based upon a specified market rate. While domestic bank
deposits are insured by an agency of the U.S. Government, the Portfolios will
generally assume positions considerably in excess of the insurance limits.
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PREFERRED STOCK
Any of the Total Return Portfolios may purchase preferred stock as a
substitute for debt securities of the same issuer when, in the Adviser's
opinion, the preferred stock is more attractively priced in light of the risks
involved. Preferred stock pays dividends at a specified rate and has preference
over common stock in the payment of dividends and the liquidation of the
issuer's assets but is junior to the debt securities of the issuer in those same
respects. The market prices of preferred stocks are subject to changes in
interest rates and are more sensitive to changes in the issuer's
creditworthiness than are the prices of debt securities. Under ordinary
circumstances, preferred stock does not carry voting rights.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed amount
of common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities have characteristics
similar to nonconvertible debt securities in that they ordinarily provide a
stream of income with generally higher yields than those of common stocks of the
same or similar issuers. Convertible securities are usually subordinated to
comparable-tier nonconvertible securities but rank senior to common stock in a
corporation's capital structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at market
value, if converted into the underlying common stock. The Portfolios have no
current intention of converting any convertible securities they may own into
equity or holding them as equity upon conversion, although they may do so for
temporary purposes. A convertible security may be subject to redemption at the
option of the issuer at a price established in the convertible security's
governing instrument. If a convertible security held by a Portfolio is called
for redemption, the Portfolio will be required to permit the issuer to redeem
the security, convert it into the underlying common stock or sell it to a third
party. Any of these actions could have an adverse effect on a Portfolio's
ability to achieve its investment objective. The Money Market Portfolio will not
invest in convertible securities.
VARIABLE AND FLOATING RATE SECURITIES
Any Portfolio may invest in variable and floating rate securities. These
securities provide for periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates are
adjusted periodically based upon some appropriate interest index. The
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adjustment intervals may be event-based (floating), and range from daily up to
annually, or may be regular (variable).
The Adviser believes that the variable or floating rate of interest paid
on these securities may reduce the wide fluctuations in market value typical of
fixed-rate long-term securities. The Money Market Portfolio may invest in
variable and floating rate securities only if they comply with conditions
established by the SEC under which they are considered to have remaining
maturities of 397 days or less.
ZERO COUPON BONDS
A zero coupon bond is a security that makes no fixed interest payments
but instead is sold at a deep discount from its face value. The bond is redeemed
at its face value on the specified maturity date. Zero coupon bonds may be
issued as such, or they may be created by a broker who strips the coupons from a
bond and separately sells the rights to receive principal and interest. The
prices of zero coupon bonds tend to fluctuate more in response to changes in
market interest rates than do the prices of interest-paying debt securities with
similar maturities. The Money Market Portfolio will not invest in zero coupon
bonds.
A Portfolio investing in zero coupon bonds generally accrues income on
such securities prior to the receipt of cash payments. Since each Portfolio must
distribute substantially all of its income to shareholders to qualify as a
regulated investment company under federal income tax law, a Portfolio investing
in zero coupon bonds may have to dispose of other securities to generate the
cash necessary for the distribution of income attributable to its zero coupon
bonds.
REPURCHASE AGREEMENTS
A repurchase agreement is an agreement under which either U.S. Government
obligations or high-quality liquid debt securities are acquired from a
securities dealer or bank subject to resale at an agreed upon price and date.
The securities are held by a Portfolio as collateral until retransferred and
will be supplemented by additional collateral if necessary to maintain a total
market value equal to or in excess of the value of the repurchase agreement. The
involved Portfolio bears a risk of loss in the event that the other party to a
repurchase agreement defaults on its obligations and the Portfolio is delayed or
prevented from exercising its rights to dispose of the collateral securities. A
Portfolio also bears a risk that the proceeds from any sale of collateral will
be less than the repurchase price. A Portfolio will enter into repurchase
agreements only with financial institutions which are deemed by the Adviser to
present minimal risk of default during the term of the agreement based on
guidelines which are periodically reviewed by the Board of Directors.
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REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWING
A reverse repurchase agreement is a portfolio management technique in
which a Portfolio temporarily transfers possession of a portfolio instrument to
another person, such as a financial institution or broker-dealer, in return for
cash. At the same time, the Portfolio agrees to repurchase the instrument at an
agreed upon time (normally within seven days) and price, including interest
payment.
Any Portfolio may engage in reverse repurchase agreements and other
borrowing as a means of raising cash to satisfy redemption requests or for other
temporary or emergency purposes without selling portfolio instruments. While
engaging in reverse repurchase agreements, each Portfolio will maintain cash,
U.S. Government Securities or high-grade, liquid debt securities in a segregated
account at its custodian bank with a value at least equal to the Portfolio's
obligation under the agreements, adjusted daily. Reverse repurchase agreements
may expose a Portfolio to greater fluctuations in the value of its assets and
renders the segregated assets unavailable for sale or other disposition.
Each Portfolio will limit its investments in reverse repurchase
agreements and other borrowing to no more than one-third of its total assets. To
avoid potential leveraging effects of such borrowing (including reverse
repurchase agreements), a Portfolio will not make investments while its
borrowing is in excess of 5% of its total assets.
LOANS OF PORTFOLIO SECURITIES
A Total Return Portfolio may lend portfolio securities to brokers or
dealers in corporate or government securities, banks or other recognized
institutional borrowers of securities, provided that cash or equivalent
collateral, equal to at least 100% of the market value of the securities loaned,
is continuously maintained by the borrower with the Portfolio. During the time
securities are on loan, the borrower will pay the Portfolio an amount equivalent
to any dividends or interest paid on such securities, and the Portfolio may
invest the cash collateral and earn additional income, or it may receive an
agreed upon amount of interest income from the borrower who has delivered
equivalent collateral. These loans are subject to termination at the option of
the Portfolio or the borrower. A Portfolio may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. No Portfolio presently expects to have on loan at any given time
securities totaling more than one-third of its net assets.
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WHEN-ISSUED SECURITIES
Any Portfolio may enter into commitments to purchase U.S. Government
Securities or other securities on a when-issued basis. A Portfolio may purchase
when-issued securities because such securities are often the most efficiently
priced and have the best liquidity in the bond market. When a Portfolio
purchases securities on a when-issued basis, it assumes the risks of ownership
at the time of purchase, not at the time of receipt. However, the Portfolio does
not have to pay for the obligations until they are delivered to it. This is
normally seven to fifteen days later, but could be considerably longer in the
case of some mortgage-backed securities. Depending on market conditions, the
Portfolio's when-issued purchases could, but will not necessarily, cause its
share value to be more volatile, because they increase the amount by which the
Portfolio's total assets, including the value of the when-issued securities
which the Portfolio has contracted to purchase, exceed its net assets. The Fund
does not expect that any Portfolio's commitment to purchase when-issued
securities will at any time exceed, in the aggregate, 20% of that Portfolio's
total assets.
To meet its payment obligation, each Portfolio will establish a
segregated account with its custodian, consisting of liquid assets, such as
cash, U.S. Government Securities or other appropriate high-grade debt
obligations, in an amount at least equal in value to that Portfolio's
commitments to purchase when-issued securities. If the value of these assets
declines, the involved Portfolio will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is equal
to the amount of such commitments.
RESTRICTED AND ILLIQUID SECURITIES
Restricted securities are securities subject to legal or contractual
restrictions on their resale, such as private placements. Such restrictions
might prevent the sale of restricted securities at a time when the sale would
otherwise be desirable. No securities for which there is not a readily available
market ("illiquid assets") will be acquired by any Portfolio if such acquisition
would cause the aggregate value of illiquid assets to exceed 10% of the
Portfolio's net assets. Time deposits and repurchase agreements maturing in more
than seven days are also considered illiquid.
Under SEC regulations, certain securities acquired through private
placements can be traded freely among qualified purchasers. The SEC has stated
that an investment company's board of directors, or its investment adviser
acting under authority delegated by the board, may determine that a security
eligible for trading under this rule is not "illiquid" for purposes of the limit
on the amount of a portfolio's net assets which may be invested in illiquid
assets. The Fund intends to rely on this rule, to the extent appropriate, to
deem specific securities acquired through private placement as not "illiquid."
The Board has delegated to the Adviser the responsibility for determining
whether a particular security eligible for trading under this rule is illiquid.
In making such determinations, the Adviser will consider the following factors
the Board has deemed relevant: the frequency of trades and quotes, the number of
dealers and potential purchasers, the existence of dealer undertakings to make a
market,
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and the nature of the security and of marketplace trades. The Adviser's
consideration of these factors and determination that a particular security is
liquid remains subject to the Board's continuing oversight. The Board also
reviews at least annually the continuing appropriateness of these procedures.
Investing in securities eligible for trading under this Rule could
adversely affect the liquidity of a Portfolio, if the newly-developing markets
among qualified purchasers for such securities do not develop as anticipated, or
if such purchasers become, for a time, uninterested in purchasing these
securities.
FOREIGN SECURITIES
All of the Total Return Portfolios may invest directly in U.S.
dollar-denominated instruments of foreign issuers. These may include debt
securities (including preferred or preference stock) of non-governmental
issuers, certificates of deposit, fixed time deposits and bankers' acceptances
issued by foreign banks, and debt obligations of foreign governments or their
subdivisions, agencies and instrumentalities, international agencies and
supranational entities. Each of the Total Return Portfolios will limit its
investments in foreign securities to less than 25% of its total assets. The
Money Market Portfolio may also invest in such securities, but only if they meet
the other criteria for investment by that Portfolio. Some securities issued by
foreign governments or their subdivisions, agencies and instrumentalities may
not be backed by the full faith and credit of the foreign government. In
selecting foreign debt securities, each Portfolio will adhere to the same
quality standards as it does for domestic debt securities.
The Portfolios will limit such investments to fixed income and other debt
securities of issuers based in developed countries (including countries in the
European Community, Canada, Japan, Australia, New Zealand and newly
industrialized countries, such as Singapore, Taiwan and South Korea). Investing
in the securities of issuers based in any foreign country nevertheless involves
special risks and considerations not typically associated with investing in U.S.
companies. These include risks resulting from differences in accounting,
auditing and financial reporting standards, which may be less rigorous than in
the U.S.; lower liquidity than U.S. fixed income or debt securities have; the
possibility of nationalization, expropriation or confiscatory taxation; adverse
changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency out of a country); and political
instability or general economic conditions which could affect U.S. investments
in foreign countries. There may be less publicly available information
concerning foreign issuers of securities held by the Portfolios than is
available concerning U.S. issuers. Additionally, purchases and sales of foreign
securities and dividends and interest payable on those securities may be subject
to foreign taxes; taxes may be withheld from dividend and interest payments on
those securities. Foreign securities often trade with less frequency and volume
than domestic securities and therefore may exhibit greater price volatility and
a greater risk of illiquidity. Additional costs associated with an investment in
foreign securities will generally include higher custodial fees than apply to
domestic custodial arrangements. The relative performance of various countries'
fixed income markets historically has
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25
reflected wide variations relating to the unique characteristics of each
country's economy. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
Foreign securities purchased by the Portfolios may be listed on foreign
exchanges or traded over-the-counter. Transactions on foreign exchanges are
usually subject to fixed commissions which are generally higher than negotiated
commissions on U.S. transactions, although the Portfolios will endeavor to
obtain the best net results in effecting transactions. There is generally less
government supervision and regulation of exchanges and brokers in foreign
countries than in the United States.
OPTIONS AND FUTURES CONTRACTS
The Total Return Portfolios may purchase and write call and put options
on securities, enter into futures contracts and use options on futures
contracts. A Portfolio may use these techniques to attempt to hedge against
changes in interest rates or securities prices or in other circumstances
permitted to a registered investment company by the Commodity Futures Trading
Commission ("CFTC").
The Total Return Portfolios may purchase put options on securities to
protect holdings in an underlying or related security against a substantial
decline in market value. A Portfolio may purchase call options on securities to
protect against substantial increases in prices of securities the Portfolio
intends to purchase pending its ability to invest in such securities in an
orderly manner. A Portfolio may use options on debt securities in an attempt to
enhance income.
Many options on debt securities are traded primarily on the
over-the-counter ("OTC") market. OTC options differ from exchange-traded options
in that the former are two-party contracts with price and other terms negotiated
between buyer and seller and generally do not have as much market liquidity as
exchange-traded options. Thus, when a Portfolio purchases an OTC option, it
relies on the dealer from which it has purchased the option to make or take
delivery of the securities underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Portfolio as well as the
loss of the expected benefit of the transaction. OTC options may be considered
"illiquid securities" for purposes of the Portfolios' investment limitations.
Each Total Return Portfolio may also purchase and sell futures contracts
on fixed income instruments and may purchase and write put and call options on
such futures contracts. Most futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single day;
once the daily limit has been reached on a particular contract, no trades may be
made that day at a price beyond that limit. In addition, certain of these
instruments are relatively new and without a significant trading history. As a
result, there is no assurance that an active secondary market will develop or
continue to exist. Lack of a liquid market for any reason may prevent a
Portfolio from liquidating an unfavorable position, and the Portfolio would
remain obligated to meet margin
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requirements until the position is closed. Purchase of such instruments for
which there is no liquid secondary market will be subject to the Portfolio's
investment limitation on "illiquid securities."
A Portfolio may write a call or put option only if the option is
"covered." An option is covered if, so long as the Portfolio is obligated under
the option, it will own an offsetting position in the underlying security,
currency or futures contract, or a right to obtain the security, currency or
futures contract, or will maintain in a segregated account with the Fund's
custodian, marked to market daily, cash, receivables or high-grade liquid debt
securities with a value sufficient to cover its potential obligations.
A Portfolio will incur brokerage fees and related transaction costs when
it purchases or sells futures contracts and premiums and transaction costs when
it buys options. When a Portfolio purchases or sells a futures contract, the
Portfolio is required to deposit with its custodian (or a broker, if legally
permitted) a specified amount of cash or U.S. Government Securities ("initial
margin"). A Portfolio will not enter into futures contract or commodities option
positions if, immediately thereafter, its initial margin deposits plus premiums
paid by it, less the amount by which any such options positions are
"in-the-money" at the time of purchase, would exceed 5% of the fair market value
of the Portfolio's total assets. If a Portfolio writes an option or sells a
futures contract and is not able to close out that position prior to settlement
date, the Portfolio may be required to deliver cash or securities substantially
in excess of these amounts. The Portfolios' ability to write put options on
futures, other than to effect closing transactions, may be restricted by the
CFTC.
A Portfolio might not employ any of the strategies described above, and
there can be no assurance that any strategy used will succeed. A Portfolio's
ability to engage in these practices may be limited by market conditions, the
rules and regulations of the CFTC, tax considerations and certain other legal
considerations. Moreover, in the event that an anticipated change in the price
of the securities or currencies that are the subject of the strategy does not
occur, it may be that a Portfolio would have been in a better position had it
not used that strategy at all.
The use of options and futures contracts involves certain investment
risks and transaction costs to which the Portfolios might not be subject if they
did not use such instruments. These risks include (1) dependence on the
Adviser's ability to predict movements in the prices of individual securities,
fluctuations in the general securities markets or in market sectors and
movements in interest rates; (2) imperfect correlation between movements in the
price of options, currencies, futures contracts, or options thereon and
movements in the price of the securities hedged or used for cover; (3) the fact
that skills and techniques needed to trade options, futures contracts and
options thereon are different from those needed to select the securities in
which the Portfolios invest; (4) lack of assurance that a liquid secondary
market will exist for any particular option, futures contract or option thereon
at any particular time; (5) possible impediments to effective portfolio
management or the ability to meet redemption requests or other current
obligations caused by the segregation of a large percentage of a Portfolio's
assets to cover its obligations; and (6) the possible need to defer closing out
certain options, futures contracts and options thereon in order to continue to
qualify for the beneficial tax treatment
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WESTERN ASSET MANAGEMENT
27
afforded "regulated investment companies" under the Internal Revenue Code of
1986, as amended ("Code") (see "Additional Tax Information" in the Statement of
Additional Information).
New futures contracts, options thereon and other financial products and
risk management techniques continue to be developed. The Total Return Portfolios
may use these investments or techniques to the extent consistent with their
investment objectives and regulatory and federal tax considerations.
DURATION
Duration is a measure of the expected life of a fixed income security on
a cash flow basis. Duration takes the time intervals over which the interest and
principal payments are scheduled and weights each by the present values of the
cash to be received at the corresponding future point in time. For any fixed
income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. For example, a current coupon
bond with a maturity of 3.5 years will have a duration of approximately three
years. In general, the lower the stated or coupon rate of interest of a fixed
income security, the longer its duration; conversely, the higher the stated or
coupon rate of interest of a fixed income security, the shorter its duration.
The durations of futures, options and options on futures are, in general,
closely related to the durations of the securities that underlie them.
CAPITAL APPRECIATION AND RISK
The capital appreciation (or depreciation) of fixed income and other debt
securities is partially a function of changes in the current level of interest
rates. An increase in interest rates generally reduces the market value of
existing fixed income and other debt securities, while a decline in interest
rates generally increases the market value of such securities. When interest
rates are falling, a Portfolio with a shorter duration generally will not
generate as high a level of total return as a Portfolio with a longer duration.
Conversely, when interest rates are rising, a Portfolio with a shorter duration
will generally outperform longer duration portfolios. When interest rates are
flat, shorter duration portfolios generally will not generate as high a level of
total return as longer duration portfolios (assuming that long-term interest
rates are higher than short-term rates, which is commonly the case). Changes in
the creditworthiness, or the market's perception of the creditworthiness, of the
issuers of fixed income and other debt securities will also affect their prices.
PORTFOLIO TURNOVER
The turnover rates of the Full Range Duration Portfolio and the
Intermediate Duration Portfolio for the fiscal year ended June 30, 1995 were
257.90% and 764.45%, respectively. The Fund
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anticipates that the average turnover rate of each of the other Total Return
Portfolios will not exceed 200%. The portfolio turnover rate is calculated by
dividing the lesser of the Portfolio's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the Portfolio during the year. A Portfolio may frequently sell
fixed income securities and buy ostensibly similar securities to obtain a higher
yield and take advantage of market anomalies, a practice which will tend to
increase the reported turnover rate of the Portfolio. High turnover rates may
result in increased transaction costs and certain tax consequences. Each
Portfolio will take these considerations into account as part of its investment
strategy.
PURCHASE OF SHARES
Prior to or concurrent with the initial purchase of shares in any
Portfolio, each investor must open an account with the Fund for that Portfolio
by completing and signing an Account Application Form and mailing it to Western
Asset Trust at the following address: 117 East Colorado Blvd., Pasadena,
California 91105.
An investor must make a minimum initial investment of $1,000,000 to open
an account in any Portfolio. Thereafter, the minimum investment for each
purchase of additional shares in that Portfolio is $10,000. The Fund reserves
the right to change these minimum amount requirements at its discretion.
Investors should always furnish a shareholder account number when making
additional purchases of shares of any Portfolio.
Shares of each Portfolio are sold without a sales charge at the net asset
value next determined after a purchase order and payment in proper form are
received by Boston Financial Data Services, Inc. ("BFDS"), the Fund's transfer
and dividend-disbursing agent. Purchase orders that do not designate a Portfolio
will be returned to the investor.
Purchases of shares can be made by wiring federal funds to BFDS. Before
wiring federal funds, the investor must first telephone the Fund at (818)
584-4300 to receive instructions for wire transfer. On the telephone, the
following information will be required: shareholder name; name of the person
authorizing the transaction; shareholder account number; name of the Portfolio
to be purchased; amount being wired; and name of the wiring bank.
Funds should be wired through the Federal Reserve System to:
State Street Bank Boston
ABA#011-000-028
Western Asset Trust: [Insert Name of Portfolio and State
Street Bank's fund numbers*]
[Insert your account name and number]
*THIS NUMBER CAN BE OBTAINED FROM WESTERN ASSET TRUST.
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WESTERN ASSET MANAGEMENT
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The wire should state that the funds are for the purchase of shares of a
specific Portfolio and include the account name and number. Wires for purchase
of Money Market Portfolio shares must be received by BFDS prior to 12:00 noon,
Eastern time, in order to earn dividends on shares purchased that day.
Federal funds purchases will be accepted only on days on which the Fund
and BFDS are open for business. The Fund is "open for business" on each day the
New York Stock Exchange ("Exchange") is open for trading and the Federal Reserve
Bank of Boston is open for business. The Exchange is closed on the following
holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day (observed), Labor Day, Thanksgiving and Christmas. The Federal
Reserve Bank of Boston observes the above holidays, except Good Friday, and also
observes Columbus Day and Veterans Day.
Shares may also be purchased and paid for by the contribution of eligible
portfolio securities, subject in each case to approval by the Fund's Adviser.
Approval will depend on, among other things, the nature and quality of the
securities offered and the current needs of the Portfolio in question.
Securities offered in payment for shares will be valued in the same way and at
the same time the Fund values its portfolio securities for purposes of
determining net asset value. See "How Net Asset Value is Determined," page 31.
Investors who wish to purchase Fund shares through the contribution of
securities should contact the Fund at (818) 584-4300 for instructions. Investors
who purchase Fund shares through the contribution of securities should realize
that, although the Fund may under some circumstances distribute portfolio
securities rather than cash upon redemption, they are not likely to receive upon
redemption the same securities that they contributed upon purchase. Investors
should also realize that at the time of contribution they may be required to
recognize a gain or loss for tax purposes on securities contributed. The Adviser
has full discretion to reject any securities offered as payment for shares.
Investors may be charged a fee if they effect transactions through a broker or
agent.
Any shares purchased or received as a distribution will be credited
directly to the investor's account. Certificates for shares will not be issued
unless specifically requested in writing. There is no charge for certificates.
Requests for certificates should be addressed to the Fund.
The Fund reserves the right to reject any order for the purchase of
shares. In addition, the Fund may suspend the offering of shares at any time and
resume it at any time thereafter.
REDEMPTION OF SHARES
Portfolio shares may be redeemed through three methods: (1) by sending a
written request for redemption to "Western Asset Trust, Inc., c/o Boston
Financial Data Services, P.O. Box 953, Boston, Massachusetts 02103"; (2) by
calling the Fund at (818) 584-4300; or (3) by wire communication with State
Street. In each case, the investor should first notify the Fund at (818)
584-4300 of the
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intention to redeem. No charge is made for redemptions. Shareholders who wish to
be able to redeem by telephone or wire communication must complete an
authorization form in advance.
Upon receipt of a request for redemption before the close of business of
the Exchange on any day when the Exchange is open, BFDS, as transfer agent for
the Fund, will redeem Portfolio shares at the net asset value per share next
determined. Requests for redemption received by the transfer agent after the
close of business on the Exchange will be executed at the net asset value next
determined on the next day that the Fund is open for business.
Requests for redemption should indicate:
1. The number of shares or dollar amount to be redeemed and the
investor's shareholder account number;
2. The investor's name and the names of any co-owner of the account,
using exactly the same name or names used in establishing the account;
3. Proof of authorization to request redemption on behalf of any
co-owner of the account (please contact the Administrator for further details);
and
4. The name, address, and account number to which the redemption
payment should be sent.
Shares may not be redeemed by telephone or wire if held in certificate form.
Contact the Fund at (818) 584-4300 for more information. The Fund reserves the
right to modify or terminate the redemption procedures upon notice to
shareholders.
Payment of the redemption price normally will be made by wire the next
business day after receipt of a redemption request in good order. However, the
Fund reserves the right to postpone the payment date when the Exchange is
closed, when trading is restricted, or during other periods as permitted by
federal securities laws, or to take up to seven days to make payment upon
redemption if, in the judgment of the Adviser, the Portfolio involved could be
adversely affected by immediate payment. Shareholders who receive a redemption
in kind may incur costs to dispose of such securities. The proceeds of a
redemption or repurchase may be more or less than your original cost.
Shareholders of some investment companies have experienced difficulty
contacting their funds by telephone during periods of intense market activity.
Shareholders who are unable to contact the Fund by telephone and wish to make a
redemption should follow the instructions for redeeming by mail or by wire.
Other supporting legal documents, such as copies of the trust instrument
or power of attorney, may be required from corporations or other organizations,
fiduciaries or persons other than the
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WESTERN ASSET MANAGEMENT
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shareholder of record making the request for redemption or repurchase. If you
have a question concerning the sale or redemption of shares, please contact the
Fund or State Street.
The Fund may elect to close any shareholder account with a current value
of less than $1,000,000 by redeeming all of the shares in the account and
mailing the proceeds to the investor. However, the Fund will not redeem accounts
that fall below $1,000,000 solely as a result of a reduction in net asset value
per share. If the Fund elects to redeem the shares in an account, the
shareholder will be notified that the account is below $1,000,000 and will be
allowed 60 days in which to make an additional investment in order to avoid
having the account closed. Shares will be redeemed at the net asset value
calculated on the day of redemption. Note that if an account is established with
only the minimum initial investment, any redemption from that account prior to
making an additional investment may result in the Fund electing to close that
account.
EXCHANGE PRIVILEGE
Shareholders in any Portfolio described in this Prospectus may exchange
their shares for shares of any of the other Portfolios described herein,
provided that no account of the shareholder contains less than the minimum
required investment of $1,000,000 and that the other Portfolio is offering its
shares at the time of the proposed exchange. Investments by exchange among any
of the Portfolios are made at the per share net asset values next determined
after the order for exchange is received in good order. The Fund reserves the
right to revise or revoke the exchange privilege at its discretion. For further
information concerning the exchange privilege, or to make an exchange, please
contact the Fund at 117 East Colorado Blvd., Pasadena, CA 91105, telephone (818)
584-4300.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per share is determined daily for each Portfolio as of
the close of regular trading on the Exchange (normally 4:00 p.m., Eastern time),
on every day that the Exchange is open, by subtracting the Portfolio's
liabilities from its total assets and dividing the result by the number of
shares outstanding. Securities owned by any of the Total Return Portfolios for
which market quotations are readily available are valued at current market
value. Current market value means the last sale price of the day for a
comparable position, or, in the absence of any such sales, the last available
bid price. Where a security is traded on more than one market, the securities
are generally valued on the market considered by the Adviser to be the primary
market. Securities with remaining maturities of 60 days or less are valued at
amortized cost. All other securities owned by any of the Total Return Portfolios
are valued primarily on the basis of valuations furnished by a pricing service
which utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since the Board of Directors believes that such
valuations reflect more accurately the fair value of such securities.
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The Money Market Portfolio attempts to maintain a per share net asset
value of $1.00 by using the amortized cost method of valuation. The Portfolio
cannot guarantee that net asset value will always remain at $1.00 per share. The
Money Market Portfolio will determine net asset value per share twice daily as
of 12:00 noon, Eastern time, and the close of regular trading on the Exchange
(normally 4:00 p.m., Eastern time), on every day that the Exchange is open.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Money Market Portfolio declares as a dividend at the close of the
Exchange each business day, to shareholders of record as of 12:00 noon that day,
substantially all of its net investment income since the prior day's dividend.
The Money Market Portfolio pays dividends monthly. Each of the Total Return
Portfolios declares and pays a dividend each quarter out of its net investment
income for that quarter.
Dividends and other distributions paid by a Portfolio are automatically
reinvested in additional shares of that Portfolio, unless the investor requests
payments in cash. For the Money Market Portfolio, reinvestment of dividends and
other distributions occurs on the payment date. A shareholder who redeems all
shares in the Money Market Portfolio will receive all dividends and other
distributions declared for the month to the date of the redemption. For the
Total Return Portfolios, reinvestment occurs on the ex-dividend date.
An election to receive dividends or other distributions in cash rather
than additional shares may be made by notifying in writing the Fund's transfer
and dividend-disbursing agent, Boston Financial Data Services, Inc., P.O. Box
953, Boston, Massachusetts 02103. The election must be received at least ten
days before the payment date in order to be effective for distributions paid as
of that date.
The Fund's Board of Directors reserves the right to revise the dividend
policy or postpone the payment of dividends if warranted in its judgment due to
unusual circumstances, such as an unexpected large expense, loss or fluctuation
in net asset value.
FEDERAL TAX TREATMENT OF DIVIDENDS AND OTHER
DISTRIBUTIONS
Each Portfolio is treated as a separate corporation for federal income
tax purposes. Each Portfolio intends to qualify or to continue to qualify as a
regulated investment company ("RIC") under the Code so that it will not be
subject to federal income tax on its investment company taxable income
(consisting generally of net investment income and net short-term capital gain,
if any) and net capital gain (the excess of net long-term capital gain over net
short-term capital loss), if any, that is distributed to its shareholders.
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Dividends from a Portfolio's investment company taxable income (whether
paid in cash or reinvested in Portfolio shares) are taxable to its shareholders
(other than tax-exempt investors) as ordinary income to the extent of the
Portfolio's earnings and profits. Distributions of a Portfolio's net long-term
capital gain, when designated as such, whether paid in cash or reinvested in
Portfolio shares, are taxable to its shareholders as long-term capital gain,
regardless of how long shareholders have held their shares.
A Portfolio will be subject to a nondeductible 4% excise tax to the
extent it does not distribute by the end of any calendar year substantially all
of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
Each Portfolio intends to make distributions in such amounts that will avoid
imposition of the excise tax.
A distribution declared by a Portfolio in December of any year and
payable to shareholders of record on a date in that month will be deemed to have
been paid by the Portfolio and received by the shareholders on December 31 if
the distribution is paid by the Portfolio during the following January. Such a
distribution, therefore, will be taxable to shareholders for the year in which
that December 31 falls.
Each Portfolio sends a notice to each shareholder following the end of
each calendar year specifying the amounts of all income dividends and capital
gain distributions paid (or deemed paid) during that year. Each Portfolio is
required to withhold 31% of all dividends, capital gain distributions and
redemption proceeds payable to any individuals and certain other noncorporate
shareholders who do not provide the Portfolio with a correct taxpayer
identification number. Each Portfolio also is required to withhold 31% of all
dividends and capital gain distributions paid to such shareholders who otherwise
are subject to backup withholding.
A redemption of shares may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are more or
less than the shareholder's adjusted tax basis for the redeemed shares. Similar
tax consequences will result upon an exchange of shares of one Portfolio for
those of another.
The requirements for qualification as a RIC may limit the extent to which
a Portfolio will be able to engage in transactions in options or futures
contracts.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Portfolios and their shareholders; see
the Statement of Additional Information for a further discussion. In addition to
the federal tax considerations described above, which are applicable to any
investment in a Portfolio, there may be other federal, state or local tax
considerations applicable to a particular investor. Prospective shareholders are
urged to consult their tax advisers with respect to the effects of this
investment on their own tax situations.
PROSPECTUS
<PAGE>
WESTERN ASSET MANAGEMENT
34
MANAGEMENT OF THE FUND
THE FUND'S INVESTMENT ADVISER
The business and affairs of the Fund are managed under the direction of
its Board of Directors. The Adviser, Western Asset Management Company, acts as
the portfolio manager for each Portfolio and is responsible for the actual
investment management of each Portfolio, including the responsibility for making
decisions and placing orders to buy, sell or hold a particular security.
The Adviser renders investment advice to fourteen open-end investment
companies and one closed-end investment company which together had assets under
management of approximately $3.2 billion as of September 30, 1995. The Adviser
also renders investment advice to private accounts with assets under management
of approximately $15.0 billion as of that date. The Adviser is a subsidiary of
Legg Mason, Inc., a financial services holding company, which is also the parent
of Legg Mason Fund Adviser, Inc. The address of the Adviser is 117 East Colorado
Boulevard, Pasadena, California 91105.
The portfolio manager for the Full Range Duration Portfolio is Kent
Engel, who is primarily responsible for the day-to-day management of that
Portfolio. Mr. Engel has been portfolio manager since the Portfolio commenced
operations on September 4, 1990. He has been Director and Chief Investment
Officer of Western Asset Management Company since 1969. He is also
Vice-President and Portfolio Manager of Pacific American Income Shares, Inc. The
portfolio manager for the Intermediate Duration Portfolio and the Limited
Duration Portfolio is Stephen A. Walsh. Mr. Walsh has been portfolio manager of
the Intermediate Duration Portfolio since the Portfolio commenced operations on
July 1, 1994. He has been a Director and Senior Portfolio Manager of Western
Asset Management Company since 1991. Prior to joining Western Asset Management
Company, Mr. Walsh was a Portfolio Manager and Trader for Security Pacific
Investment Managers, Inc. from 1988 to 1991. Portfolio managers have not been
appointed for the other Portfolios, which have not commenced operations (i.e.,
first begun to invest their assets in accordance with their investment
objectives) as of the date of this Prospectus.
THE FUND'S ADMINISTRATOR
Legg Mason Fund Adviser, Inc., the Administrator, serves as the Fund's
administrator. The Administrator manages the non-investment affairs of the Fund,
directs matters related to the operation of the Fund and provides office space
and administrative staff for the Fund. The Administrator acts as manager,
investment adviser or consultant to fifteen open-end investment companies and to
one close-end investment company. These funds had aggregate assets under
management of about $5.0 billion as of September 30, 1995.
PROSPECTUS
<PAGE>
WESTERN ASSET MANAGEMENT
35
MANAGEMENT AND OTHER EXPENSES
Each of the Total Return Portfolios (other than the Short Duration
Portfolio) pays the Adviser a fee, computed daily and payable monthly, at an
annual rate equal to 0.40% of the Portfolio's average daily net assets, and the
Money Market and Short Duration Portfolios pay the Adviser a fee, computed daily
and payable monthly, at an annual rate equal to 0.30% of the Portfolio's average
daily net assets. The Full Range Duration, Limited Duration, Long Duration and
Money Market Portfolios each pay the Administrator a fee, calculated daily and
payable monthly, at an annual rate equal to 0.10% of the Portfolio's average
daily net assets and the Intermediate and Short Duration Portfolios each pay the
Administrator a fee, calculated daily and payable monthly, at an annual rate
equal to 0.05% of the Portfolio's average daily net assets. Each Portfolio pays
all its other expenses which are not assumed by the Administrator or the
Adviser. The Adviser and the Administrator have agreed to waive their fees or
reimburse the Portfolios to the extent the Portfolio's expenses exceed certain
levels. These agreements are voluntary and may be terminated by the Adviser or
the Administrator at any time. See "Expense Information," page 7.
THE FUND'S DISTRIBUTOR
Legg Mason Wood Walker, Incorporated ("Distributor") is authorized to
distribute the Fund's shares. The Distributor or its affiliates is obligated to
pay all expenses in connection with the offering of Fund shares, including any
compensation to its investment brokers, the printing and distribution of
prospectuses, statements of additional information and periodic reports used in
connection with the offering to prospective investors, after the prospectuses
and statements of additional information have been prepared, set in type and
mailed to existing shareholders at the Fund's expense, and for supplementary
sales literature and advertising costs. The Distributor receives no direct
compensation from the Fund for these expenses.
THE FUND'S CUSTODIAN AND TRANSFER AGENT
State Street serves as the custodian of the Fund's assets and BFDS serves
as its transfer and dividend-disbursing agent. The duties of State Street and
BFDS include processing requests for the purchase, exchange or redemption of
shares and performing other administrative services on behalf of the Fund. The
Fund may maintain foreign securities and cash in the custody of certain eligible
foreign banks and securities depositaries. No assurance can be given that the
Board of Directors' appraisal of the risks in connection with foreign custodial
arrangements will always be correct or that expropriation, nationalization,
freezes or confiscation of Fund assets will not occur.
PROSPECTUS
<PAGE>
WESTERN ASSET MANAGEMENT
36
OTHER INFORMATION
SHARES OF THE FUND
The Fund has authorized capital of a total of five billion shares of
common stock at par value $0.001. The Money Market Portfolio has an authorized
capital of one billion shares; each of the Total Return Portfolios has an
initial authorized capital of 100 million shares. The Fund's remaining
authorized shares include three billion one hundred million shares allocated to
portfolios of the Fund not covered by this Prospectus, and four hundred million
shares not allocated to any portfolio. All shares are the same class, and each
share is entitled to one vote on any matter submitted to a shareholder vote.
Fractional shares have fractional voting rights. Voting rights are not
cumulative. Voting on matters pertinent only to a particular Portfolio, such as
the adoption of an investment advisory contract for that Portfolio, is limited
to that Portfolio's shareholders. All shares of the Fund are fully paid and
nonassessable and have no preemptive or conversion rights.
Although the Fund does not intend to hold annual shareholder meetings, it
will hold a special meeting of shareholders when the Investment Company Act of
1940 (the "1940 Act") requires a shareholder vote on certain matters (including
the election of directors or approval of an advisory contract). The Fund will
also call a special meeting of shareholders at the request of 25% or more of the
shares entitled to vote thereat, or at the request of 10% of the shareholders
for the purpose of considering the removal of one or more directors.
Shareholders wishing to call such a meeting should submit a written request to
the Fund at 117 East Colorado Blvd., Pasadena, California 91105, stating the
purpose of the proposed meeting and the matters to be acted upon.
As of October 19, 1995, Northern Trust Company, as trustee, and the North
Dakota State Investment Board, may be deemed to "control" the Full Range
Duration Portfolio, and as of October 20, 1995, Mellon Bank, N.A., as trustee,
may be deemed to "contol" the Intermediate Duration Portfolio, as that term is
defined in the 1940 Act. Prior to the initial public offering of a Portfolio's
shares, the Adviser will be the sole shareholder of each Portfolio and is thus a
controlling person, as that term is defined in the 1940 Act, of each Portfolio.
CONFIRMATIONS AND REPORTS
BFDS will send confirmations showing all purchases and redemptions of
shares made, and all dividends and other distributions paid, during the previous
month. Reports will be sent to shareholders at least semiannually showing the
Fund's investments and other information. Shareholders will also receive each
year an annual report containing financial statements audited by the Fund's
independent accountants.
PROSPECTUS
<PAGE>
WESTERN ASSET MANAGEMENT
37
Shareholder inquiries should be addressed to: Western Asset Trust, Inc.,
117 East Colorado Blvd., Pasadena, California 91105.
PERFORMANCE INFORMATION
From time to time, the Money Market Portfolio may present its yield,
including a compound effective yield, in marketing materials or reports to
shareholders. That Portfolio's yield is derived from the income generated by an
investment in the Portfolio over a stated seven-day period. This income is
"annualized," meaning that the average daily net income generated by the
investment during that week is assumed to be generated each day over a 365-day
period, and is shown as a percentage of the investment. The "effective yield" is
calculated similarly but assumes that the income earned by an investment is
reinvested. The Money Market Portfolio's "effective yield" will be slightly
higher than its "yield" because of the compounding effect of this assumed
reinvestment.
Each of the Total Return Portfolios may quote its total return in
marketing materials or in reports or other communications to shareholders. A
mutual fund's "total return" is a measurement of the overall change in value,
including changes in share price and assuming reinvestment of dividends and
capital gain distributions, of an investment in the fund. "Cumulative total
return" shows a fund's performance over a specific period of time. "Average
annual total return" is the average annual compounded return that would have
produced the same cumulative total return if the fund's performance had been
constant over the entire period. Because average annual returns tend to smooth
out variations in a fund's return, they differ from actual year-by-year results.
Investors should consider all performance information in light of a
Portfolio's investment objectives and policies, characteristics of the Portfolio
and the existing market conditions during the time period related to the
performance information. Performance information is based on historical
performance and should not be viewed as representative of the Portfolio's future
performance. The investment return and principal value of an investment in a
Portfolio will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
Performance information for a Portfolio may also be compared to various
unmanaged indices, such as the Salomon Brothers Broad Investment-Grade Bond
Index, the Salomon Brothers Medium-Term Investment-Grade Bond Index and the
Salomon Brothers Long-Term Investment-Grade Bond Index, as well as reports and
indices of investment company performance prepared by Lipper Analytical
Services, and other entities or organizations which track the performance of
investment companies or investment advisers. Indices of securities prices rather
than of managed investment products (e.g., Lipper) generally do not reflect
deductions for administrative and management costs and expenses.
PROSPECTUS
<PAGE>
WESTERN ASSET MANAGEMENT
38
APPENDIX
The Fund may use the following options and futures contracts:
OPTIONS ON DEBT SECURITIES - A call option is a short-term contract
pursuant to which the purchaser of the option, in return for a premium, has the
right to buy the security underlying the option at a specified price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option during the option term,
to deliver the underlying security against payment of the exercise price. A put
option is a similar contract that gives its purchaser, in return for a premium,
the right to sell the underlying security at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the
underlying security at the exercise price.
INTEREST RATE FUTURES CONTRACTS - Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities, in
most cases the contracts are closed out before the settlement date without the
making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS - Options on futures contracts are similar
to options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance that represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short position in
the case of a call and a long position in the case of a put.
October 30, 1995
PROSPECTUS
<PAGE>
(THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.)
<PAGE>
WESTERN ASSET MANAGEMENT
INVESTMENT ADVISER
Western Asset Management Company
117 East Colorado Boulevard
Pasadena, CA 91105
<TABLE>
<C> <S>
ADMINISTRATOR Legg Mason Fund Adviser, Inc.
111 South Calvert Street
Baltimore, MD 21202
DISTRIBUTOR Legg Mason Wood Walker, Incorporated
111 South Calvert Street
Baltimore, MD 21202
CUSTODIAN State Street Bank & Trust Company
P.O. Box 1790
Boston, MA 02105
TRANSFER AGENT Boston Financial Data Services, Inc.
P.O. Box 953
Boston, MA 02103
INDEPENDENT ACCOUNTANTS Price Waterhouse LLP
7 St. Paul Street
Baltimore, MD 21202
COUNSEL Munger, Tolles & Olson
355 South Grand Avenue
Los Angeles, CA 90071
</TABLE>
PROSPECTUS
<PAGE>
Prospectus for Public Portfolios
Prospectus
WESTERN ASSET TRUST, INC.
Corporate Securities Portfolio
Mortgage Securities Portfolio
International Securities Portfolio
Western Asset Trust, Inc. ("Fund") is a no-load, open-end,
management investment company currently consisting of nine separate
professionally managed investment portfolios. The three portfolios
described in this prospectus ("Portfolios") are offered only to clients
of Western Asset Management Company ("Western Asset") and its
affiliates. Western Asset serves as investment adviser to the Corporate
Securities and Mortgage Securities Portfolios ("Domestic Portfolios")
and to the International Securities Portfolio ("International
Portfolio"). Each Portfolio seeks maximum total return, consistent with
prudent investment management, by investing primarily in securities of
the types specified for that Portfolio. The Domestic Portfolios are
diversified Portfolios. The International Portfolio is non-diversified.
This Prospectus sets forth concisely the information about the Fund
that a prospective investor ought to know before investing. It should
be read and retained for future reference. A Statement of Additional
Information about the Fund dated October 30, 1995, has been filed with
the Securities and Exchange Commission ("SEC") and, as amended from time
to time, is incorporated herein by reference. The Statement of
Additional Information is available without charge upon request from
Western Asset Trust, Inc., (818) 584-4300.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Dated: October 30, 1995
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary 1
Expense Information 3
Financial Highlights 5
Investment Objectives and Policies 7
Description of Securities and Investment Techniques 9
Purchase of Shares 22
Redemption of Shares 22
How Net Asset Value is Determined 23
Dividends and Other Distributions 24
Federal Tax Treatment of Dividends and Other Distributions 24
Management of the Fund 25
Other Information 31
Appendix A-1
<PAGE>
PROSPECTUS SUMMARY
THE FUND
Western Asset Trust, Inc. is a no-load, open-end management
investment company that was organized as a Maryland corporation on May
16, 1990. The Fund consists of nine separate professionally managed
investment Portfolios, each with its own investment objective and
policies. The three Portfolios described in this prospectus are
available only to clients maintaining separately managed accounts with
Western Asset or its affiliates.
INVESTMENT OBJECTIVES
The investment objective of each Portfolio is to maximize total
return, consistent with prudent investment management, by investing
primarily in securities of the type specified for that Portfolio. The
Portfolios differ in the proportion of their assets invested in certain
types of fixed income securities and, therefore, their relative risk.
See "Investment Objectives and Policies," page 7.
The Corporate Securities Portfolio seeks to achieve its objective
by investing at least 75% of its total assets in U.S. dollar-denominated
debt securities of non-governmental domestic issuers rated Baa or better
by Moody's Investors Service Inc. ("Moody's") or BBB or better by
Standard & Poor's Ratings Group ("S&P") or, if unrated, judged by
Western Asset to be of comparable quality. Western Asset expects that,
under normal circumstances, this Portfolio will invest substantially all
of its assets in such securities.
The Mortgage Securities Portfolio seeks to achieve its objective by
investing at least 75% of its total assets in mortgage-related
securities. The mortgage-related securities purchased by this Portfolio
must be either (1) issued or guaranteed as to principal and interest by
the U.S. Government, its agencies or instrumentalities or (2) rated A or
better by Moody's or A or better by S&P or, if unrated, judged by
Western Asset to be of comparable quality. Western Asset anticipates
that, under normal circumstances, substantially all of this Portfolio's
assets will be invested in mortgage-related securities.
The International Securities Portfolio seeks to achieve its
objective by investing at least 75% of its total assets in debt or
fixed-income securities denominated in major foreign currencies and in
baskets of currencies (which may include U.S. and foreign currencies).
Western Asset anticipates that, under normal circumstances,
substantially all of this Portfolio's assets will be invested in
securities of foreign issuers. Under normal circumstances, the
Portfolio's assets will be invested in securities of foreign issuers
representing at least three foreign countries.
There can be no assurance that any Portfolio will achieve its
investment objective. Because the market value of each Portfolio's
investments will change, the net asset value per share of each Portfolio
also will vary.
INVESTMENT RISKS AND CONSIDERATIONS
All Portfolios may invest in U.S. Government securities, some of
which may not be backed by the full faith and credit of the United
States. While principal and interest payments on government securities,
including some mortgage-related securities, may be guaranteed by the
U.S.
1
<PAGE>
Government, government agencies or other guarantors, the market
value of the securities is not guaranteed. Events such as prepayments
on underlying mortgage loans also may adversely affect the return from
mortgage-related securities. Stripped mortgage-backed securities
generally are more sensitive to changes in prepayment and interest rates
than traditional debt securities and mortgage-backed securities.
Securities rated Baa by Moody's are deemed by that agency to have
speculative characteristics.
The International Portfolio may invest in securities of foreign
issuers, including foreign governments, which are generally subject to
additional risk factors not applicable to securities of U.S. issuers,
including risks arising from changes in currency exchange rates,
confiscatory taxation, taxes on purchases, sales, interest and dividend
income, political and economic developments abroad and differences in
the regulation of issuers or securities markets. Securities of foreign
issuers may also be less liquid and their prices more volatile than
securities of U.S. issuers. The economy of a foreign nation may be more
or less favorable than the U.S. economy.
The International Portfolio is "non-diversified" within the meaning
of the Investment Company Act of 1940 (the "Investment Company Act" or
the "Act"). Accordingly, the International Portfolio may be more
susceptible to risks associated with economic, political or regulatory
issues in a particular country or group of countries than would a
diversified Portfolio.
All Portfolios may invest in repurchase agreements, which entail a
risk of loss if the seller defaults on its obligations and the Portfolio
involved is delayed or prevented from exercising its rights to dispose
of the collateral securities. All Portfolios may purchase securities on
a when-issued basis. Securities purchased on a when-issued basis may
decline or appreciate in market value prior to delivery.
All of the Portfolios may use options, futures contracts and
options on futures for hedging purposes and may use options to enhance
income. The International Portfolio may also use forward currency
contracts for hedging and income purposes. Use of these instruments
involves certain costs and risks, including the risk that a Portfolio
could not close out a futures or option position when it would be most
advantageous to do so, and the risk of an imperfect correlation between
the value of the security being hedged and the value of the particular
derivative instrument. See "Investment Objectives and Policies," page
7, and "Description of Securities and Investment Techniques," page 9.
INVESTMENT ADVISER AND FUND ADMINISTRATOR
Western Asset serves as investment adviser to all of the
Portfolios. Legg Mason Fund Adviser, Inc. serves as the Fund's
administrator ("Administrator"). Western Asset renders investment
advice to registered investment company portfolios that, as of September
30, 1995, had approximately $3.2 billion in aggregate assets under
management and private accounts totaling approximately $15.0 billion.
The Administrator also serves as investment adviser, manager or
consultant to sixteen investment companies with assets of approximately
$5.0 billion as of that date. See "The Fund's Investment Adviser," page
25, and "The Fund's Administrator," page 26.
PURCHASE OF SHARES
Shares of each Portfolio are offered without a sales charge at the
net asset value per share of the Portfolio next determined after receipt
of a purchase order and payment in proper form. The
2
<PAGE>
Fund has no plan under Rule 12b-1 imposing fees for distribution expenses.
See "Purchase of Shares," page 22.
REDEMPTION OF SHARES
Shares of each Portfolio may be redeemed without charge at the net
asset value per share of the Portfolio next determined after receipt of
a redemption request in proper form. See "Redemption of Shares," page
22.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Portfolio will declare and pay dividends quarterly out of its
net investment income. Each will also make an annual distribution of any
net capital gain (the excess of long-term capital gain over short-term
capital loss), net short-term capital gain, and, in the case of the
International Portfolio, gains from certain foreign currency
transactions. The Portfolios may make an additional distribution if
necessary to avoid a 4% excise tax on certain undistributed income and
capital gain. All dividends and other distributions will be
automatically reinvested, unless cash payment is requested. See
"Dividends and Other Distributions," and "Federal Tax Treatment of
Dividends and Other Distributions," page 24.
EXPENSE INFORMATION
The purpose of the following table is to assist investors in
understanding the various costs and expenses that they will bear
directly or indirectly. "Management Fees" and "Other Expenses" for the
International Securities Portfolio are based on its fees and expenses
for the fiscal year ended June 30, 1995. For the other Portfolios,
"Management Fees" are based on the Fund's current contracts, and "Other
Expenses" are estimates for their initial year of operations.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses*
<S> <C>
Sales load imposed on purchases None
Sales load imposed on reinvested distributions None
Deferred sales load None
Redemption fees None
Exchange fees None
</TABLE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (After Fee Waivers and Reimbursements):
(as a percentage of average net assets)
Domestic International
Portfolios Portfolio
<S> <C> <C>
Management Fees .125%* .000%*
Other Expenses, comprised of:
Administrative Fees .025% .075%
Other .100% .208%
Total Other Expenses .125% .283%
Total Fund Operating Expenses .250%* .283%*
</TABLE>
3
<PAGE>
__________________
* The expenses of the Portfolios for the current year have been reduced
by voluntary fee waivers and reimbursement agreements of Western Asset.
See "Fee Waivers," page 5. The Portfolios are offered only to clients
of Western Asset, who are required to pay separate fees for advisory
services provided by Western Asset based on the amount of assets under
management. However, such fees are not charged against assets invested
in the Portfolios.
The following example illustrates the expenses that an investor would
pay on a $1,000 investment over various time periods assuming (1) a 5%
annual rate of return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Domestic Portfolios $ 3 $ 8 N/A N/A
International Portfolio $ 3 $ 9 $16 $36
</TABLE>
This example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund
Operating Expenses remain the same over the time periods shown. The
above tables and the assumptions in the example of a $1,000 investment
and a 5% annual return are required by regulations of the SEC applicable
to all mutual funds. The assumed 5% annual return is not a prediction
of, and does not represent, any Portfolio's projected or actual
performance. The above tables should not be considered representations
of past or future expenses. Actual expenses may be greater or less than
those shown. A Portfolio's actual expenses will depend upon, among
other things, the level of average net assets, the levels of sales and
redemptions of shares, the extent to which a Portfolio incurs variable
expenses, such as transfer agency costs, and whether a Portfolio's
adviser reimburses all or a portion of the Portfolio's expenses and/or
waives all or a portion of its advisory and other fees. See "Fee
Waivers" below, for a description of annual operating expenses before
any fee waiver or reimbursement.
Fee Waivers
Western Asset has voluntarily undertaken to waive its fees and/or
reimburse each Domestic Portfolio to the extent a Portfolio's expenses
(exclusive of taxes, interest, brokerage and other transaction expenses
and any extraordinary expenses) exceed during any month an annual rate
of 0.25% of average daily net assets for such month. If the adviser had
not undertaken to limit expenses as described above, the projected total
expenses of each Domestic Portfolio would be .275% of average daily net
assets. Western Asset has also voluntarily undertaken to waive fees
and/or reimburse the International Portfolio to the extent that
Portfolio's expenses (exclusive of taxes, interest, brokerage and other
transaction expenses and any extraordinary expenses) exceed during any
month an annual rate of 0.85% of average daily net assets for such
month. These waiver and reimbursement agreements are in effect to December 31,
1995. In addition, Western Asset has voluntarily waived for calendar year 1995
its fee for services to the International Portfolio under its management
agreement, other than a portion of such fee equal to the fee paid by
Western Asset to the Administrator for services to the International
Portfolio under the administration agreement. If Western Asset had not
waived its fees as described above, management fees for the
International Portfolio would have been .475% rather than .000% of
average daily net assets and total expenses for that Portfolio would
have been .683% rather than .283% of average daily net assets. See
"Management and Other Expenses," page 29. These agreements are
voluntary and may be terminated by Western Asset at any time.
4
<PAGE>
FINANCIAL HIGHLIGHTS
INTERNATIONAL SECURITIES PORTFOLIO
The financial highlights for the period January 7, 1993
(Commencement of Operations) through June 30, 1993 and for each of the
two years ended June 30, 1994 and 1995, have been obtained from the
financial statements which have been audited by Price Waterhouse LLP,
independent accountants. The International Portfolio's financial
statements for the year ended June 30, 1995, and the report of Price
Waterhouse LLP thereon, are included in the International Portfolio's
1995 Annual Report to Shareholders and are incorporated by reference in
the Statement of Additional Information. The Annual Report is
availiable to shareholders without charge by calling Western Asset
Management Company at (818) 584-4300. Investors should understand that
all the following information should be read in conjunction with such
audited financial statements and related notes.
The Domestic Portfolios have not commenced operations.
Accordingly, no condensed financial information with respect to those
portfolios is included in the following table. The Statements of Assets
and Liabilities for the Domestic Portfolios as of June 30, 1995 and
related notes, audited by Price Waterhouse LLP, independent accountants,
and the report of Price Waterhouse LLP thereon, are included in the
Statement of Additional Information, which is available upon request.
<TABLE>
<CAPTION>
Years Ended June 30, 1995 1994 1993A
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $93.76 $105.53 $100.00
Net investment incomeB 6.29 6.94 3.21
Net realized and unrealized gain (loss)
on investments and forward currency
contracts and currency translationsC (1.04) (7.36) 2.59
Total from investment operations 5.25 (0.42) 5.80
Distributions to shareholders from:
Net investment income (0.63) (8.64) (0.27)
Net realized capital gain -- (2.71) --
Tax return of capital (6.28) -- --
Total distributions (6.91) (11.35) (0.27)
Net asset value, end of period $92.10 $93.76 $105.53
Total returnD 6.03% (1.14)% 5.81%
Ratios/Supplemental Data:
Ratios to average net assets:
ExpensesB 0.28% 5.67% 0.30%
Net investment incomeB 5.53% 0.45%E 6.08%E
Portfolio turnover rate 355.03% 571.18% 249.94%E
Net assets, end of period (in
thousands) $178,334 $106,806 $93,288
</TABLE>
5
<PAGE>
A For the period January 7, 1993 (commencement of operations) to June
30, 1993.
B Net of voluntary waiver of investment advisory fees. Pursuant to this
waiver, advisory fees of $480,824, $572,322 and $136,356 were waived for
the years ended June 30, 1995 and 1994 and the period January 7, 1993
(commencement of operations) to June 30, 1993. In the absence of this
waiver, the ratio of expenses to average net assets would have been
0.68% and 0.70% for the years ended June 30, 1995 and 1994, and 0.85%
for the period January 7, 1993 (commencement of operations) to June 30,
1993.
C The amount presented is calculated pursuant to a methodology
prescribed by the SEC 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.
D Not annualized for periods of less than a full year.
E Annualized
6
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Portfolio is to maximize total
return, consistent with prudent investment management, by investing
primarily in securities of the types specified below for each respective
Portfolio. "Total return" includes interest from underlying securities,
capital gains and appreciation on the securities held in the Portfolio,
and gains from the use of futures and options and, in the case of the
International Portfolio, from favorable changes in foreign currency
exchange rates. As set forth below, the Portfolios differ from one
another primarily in the proportion of assets invested in certain types
of fixed income securities.
The Mortgage Securities Portfolio invests at least 75% of its total
assets in U.S. dollar-denominated, mortgage-related securities of
domestic issuers. The mortgage-related securities purchased by this
Portfolio must be either (1) issued or guaranteed as to principal and
interest by the U.S. Government, its agencies or instrumentalities or
(2) rated A or better by Moody's or A or better by S&P or, if unrated,
judged by Western Asset to be of comparable quality. Western Asset
expects that, under normal circumstances, this Portfolio will invest
substantially all of its assets in such securities.
The Corporate Securities Portfolio invests at least 75% of its
total assets in U.S. dollar-denominated debt securities of
non-governmental domestic issuers rated Baa or better by Moody's or BBB
or better by S&P or, if unrated, judged by Western Asset to be of
comparable quality. Western Asset expects that, under normal
circumstances, this Portfolio will invest substantially all of its
assets in such securities. Securities rated Baa by Moody's are deemed
by that agency to have speculative characteristics.
The International Securities Portfolio invests at least 75% of its
total assets in securities denominated in major foreign currencies and
in baskets of currencies (which may include U.S. and foreign
currencies), such as the European Currency Unit, or "ECU," or as they
may further develop. Western Asset anticipates that, under normal
circumstances, substantially all of this Portfolio's assets will be
invested in securities of foreign issuers. Western Asset will manage
the investments of the Portfolio across different international bond
markets so that, under normal circumstances, the Portfolio's assets will
be invested in securities of foreign issuers representing at least three
foreign countries. The adviser will select the Portfolio's foreign
country and currency composition based on its evaluation of relative
interest rates, inflation rates, exchange rates, monetary and fiscal
policies, trade and current account balances, and any other specific
factors the adviser believes relevant.
INVESTMENT POLICIES
In selecting securities for each Portfolio, the adviser may utilize
economic forecasting, interest rate anticipation, credit and call risk
analysis, and other security selection techniques. The proportion of
each Portfolio's assets committed to investment in securities with
particular characteristics (such as maturity, type, and coupon rate)
will vary based on its adviser's outlook for the U.S. economy (and, in
the case of the International Portfolio, foreign economies), the
financial markets, and other factors. There is no assurance that any
Portfolio will achieve its investment objective.
Within the limits described above, the Portfolios may invest in the
following types of securities: obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities; U.S.
dollar-denominated debt securities of domestic issuers rated Baa or
better
7
<PAGE>
by Moody's or BBB or better by S&P or, if unrated, judged by the adviser to
be of comparable quality; mortgage- and other asset-backed securities;
variable and floating rate debt securities; high quality commercial paper;
and corporate obligations (including preferred stock, convertible securities,
zero coupon securities and pay-in-kind securities) rated Baa or higher by
Moody's or BBB or higher by S&P, issued by domestic entities and denominated
in U.S. dollars, or unrated securities judged by the adviser to be of
comparable quality; certificates of deposit, fixed time deposits and bankers'
acceptances issued by domestic banks and denominated in U.S. dollars; and
repurchase agreements collateralized by any security in which it may invest.
The Portfolios may also engage in reverse repurchase agreements and dollar
roll transactions.
The International Portfolio may invest in the above types of
securities whether denominated in U.S. dollars or foreign currencies,
and whether issued by domestic or foreign issuers. It may also invest
in U.S. dollar-denominated or foreign currency-denominated obligations
of foreign governments or their subdivisions, agencies and
instrumentalities, international agencies (such as the World Bank) or
supranational entities; and foreign currency exchange-related
securities, including foreign currency warrants. In evaluating the
credit risk of a foreign debt security, the International Portfolio may
use ratings assigned by rating agencies recognized in the primary market
for those securities.
The International Portfolio is "non-diversified" within the meaning
of the Investment Company Act. Accordingly, the International Portfolio
may invest a greater percentage of its total assets in securities of a
particular foreign issuer, or may invest in a smaller number of
different foreign issuers, than it would if it were a "diversified"
company under the Act. The International Portfolio may be more
susceptible to risks associated with economic, political or regulatory
issues in a particular country or group of countries than would a
diversified portfolio.
The Portfolios may also buy or sell interest rate futures
contracts, options on interest rate futures contracts and options on
debt securities and bond indices to hedge against changes in the value
of securities which the Portfolio owns or anticipates purchasing due to
anticipated changes in interest rates. The Portfolios may also use
options on debt securities for non-hedging purposes, in an effort to
enhance income. The International Portfolio may buy or sell foreign
currencies, foreign currency options, or foreign currency futures and
related options, and may enter into foreign currency forward contracts
for the purpose of hedging against foreign exchange risk arising from
the Portfolio's investment or anticipated investment in securities
denominated in foreign currencies. The International Portfolio also may
enter into foreign currency forward contracts and buy or sell foreign
currencies or foreign currency options for purposes of increasing
exposure to a particular foreign currency or to shift exposure to
foreign currency fluctuations from one country to another. See "Options
and Futures; Forward Currency Exchange Contracts," page 18 and "Risks of
Futures, Options and Forward Contracts," page 20. Each Portfolio may
purchase securities on a when-issued basis and enter into forward
commitments to purchase securities; lend its securities to brokers,
dealers and other financial institutions to earn income; and borrow
money for temporary or emergency purposes. See "When-Issued
Securities," page 17.
See "Description of Securities and Investment Techniques," below,
and the Statement of Additional Information for a description of
securities and investment techniques listed above and restrictions
generally applicable to a Portfolio's investment in or use of them. See
the Appendix to the Statement of Additional Information for a
description of Moody's and S&P's ratings applicable to fixed-income
securities.
8
<PAGE>
INVESTMENT RESTRICTIONS
The investment objective of each Portfolio may not be changed
without the affirmative vote of a majority of outstanding shares (as
defined in the Investment Company Act) of the affected Portfolio.
Except for the investment objectives and those restrictions or policies
specifically identified as "fundamental," the investment policies and
practices described in this Prospectus and in the Statement of
Additional Information may be changed by the Fund's Board of Directors
without shareholder approval.
The fundamental restrictions applicable to all Portfolios include a
prohibition on investing 25% or more of total assets in the securities
of issuers in a particular industry (with the exception of securities
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements with respect thereto).
However, the Mortgage Securities Portfolio will under normal
circumstances invest more than 25% of its total assets in
mortgage-backed and other asset-backed securities (including, for this
purpose, securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, and repurchase agreements with respect
thereto). Investments in those securities involve special risks. See
"Mortgage-Related and Other Asset-Backed Securities," below. The
Mortgage Securities Portfolio's policy of so concentrating its
investments has the effect of increasing its exposure to those risks and
might cause the value of its securities to fluctuate more than would
otherwise be the case.
Additional fundamental and non-fundamental investment restrictions
are set forth in the Statement of Additional Information.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following describes in greater detail different types of
securities and investment techniques used by the individual Portfolios,
as described in the preceding section.
U.S. GOVERNMENT SECURITIES
Each Portfolio may purchase U.S. Government securities, which
include (1) U.S. Treasury bills (maturity of one year or less), U.S.
Treasury notes (maturity of one to ten years) and U.S. Treasury bonds
(maturities generally greater than ten years) and (2) obligations issued
or guaranteed by U.S. Government agencies or instrumentalities which are
supported by any of the following: (a) the full faith and credit of the
U.S. Government (such as certificates of the Government National
Mortgage Association ("GNMA")); (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the U.S. Government
(such as obligations of the Federal Home Loan Banks); (c) discretionary
authority of the U.S. Government to purchase certain obligations of
agencies or instrumentalities (such as the Federal National Mortgage
Association ("FNMA")); or (d) only the credit of the instrumentality
(such as the Student Loan Marketing Association). In the case of
obligations not backed by the full faith and credit of the United
States, a Portfolio must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate
repayment and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet
its commitments.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Mortgage-related securities represent interests in pools of
mortgages made by lenders such as commercial banks, savings and loan
institutions, mortgage bankers and others. Mortgage-
9
<PAGE>
related securities may be issued by governmental or government-related
entities or by non-governmental entities such as banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers.
Mortgage-related securities provide monthly payments which consist
of interest and, in most cases, principal. In effect, these payments
are a "pass-through" of the monthly payments made by the individual
borrowers on their residential mortgage loans, net of any fees paid to
the issuer or guarantor of such securities. Additional payments to
holders of mortgage-related securities are caused by repayments
resulting from the sale of the underlying residential property,
refinancing or foreclosure, net of fees or costs which may be incurred.
Government Mortgage-Related Securities. GNMA is the principal
federal government guarantor of mortgage-related securities. GNMA is a
wholly owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA pass-through securities are
considered to have a very low risk of default in that (1) the underlying
mortgage loan Portfolio is comprised entirely of government-backed loans
and (2) the timely payment of both principal and interest on the
securities is guaranteed by the full faith and credit of the U.S.
Government, regardless of whether they have been collected. GNMA
pass-through securities are, however, subject to the same market risk as
comparable debt securities. Therefore, the market value of a
Portfolio's GNMA securities can be expected to fluctuate in response to
changes in interest rate levels.
Residential mortgage loans are also pooled by the Federal Home Loan
Mortgage Corporation ("FHLMC"), a corporate instrumentality of the U.S.
Government. The mortgage loans in FHLMC's Portfolio are not government
backed; rather, the loans are either uninsured with loan-to-value ratios
of 80% or less or privately insured if the loan-to-value ratio exceeds
80%. FHLMC, not the U.S. Government, guarantees the timely payment of
interest and ultimate collection of principal on FHLMC participation
certificates. FHLMC also now issues guaranteed mortgage certificates,
on which it guarantees semi-annual interest payments and a specified
minimum annual payment of principal.
FNMA is a government-sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. FNMA purchases residential
mortgages from a list of approved seller/servicers, which include
savings and loan associations, savings banks, commercial banks, credit
unions and mortgage bankers. Pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest only by FNMA,
not the U.S. Government.
Privately Issued Mortgage-Related Securities. Mortgage-related
securities offered by private issuers include pass-through securities
comprised of pools of residential mortgage loans; mortgage-backed bonds
which are considered to be debt obligations of the institution issuing
the bonds and are collateralized by mortgage loans; and bonds and
collateralized mortgage obligations ("CMOs") which are collateralized by
mortgage-related securities issued by FHLMC, FNMA or GNMA or by pools of
mortgages. Any Portfolio may purchase privately issued mortgage-related
securities.
CMOs are typically structured with classes or series which have
different maturities and are generally retired in sequence. In the most
common arrangement, each class of obligations receives periodic interest
payments according to the coupon rate on the obligations. However, all
monthly principal payments and any prepayments from the collateral pool are
paid first to the
10
<PAGE>
"Class 1" holders. Thereafter, all
payments of principal are allocated to the next most senior class of
obligations until that class of obligations has been fully repaid.
Although full payoff of each class of obligations is contractually required
by a certain date, any or all classes of obligations may be paid off sooner
than expected because of an increase in the payoff speed of the pool.
Other allocation methods may be used.
Mortgage-related securities created by non-governmental issuers
generally offer a higher rate of interest than government and
government-related securities because there are no direct or indirect
government guarantees of payment in the former securities, resulting in
higher risks. Timely payment of interest and principal may be supported
by various forms of insurance, including individual loan, title, and
hazard policies on the mortgages in the pool, or by private guarantees
of the issuer of the mortgage-related securities. There can be no
assurance that the insurers will be able to meet their obligations under
the relevant insurance policies or that the private issuers will be able
to meet their obligations under the relevant guarantees. Such
guarantees and policies often do not cover the full amount of the pool.
Where privately issued securities are collateralized by securities
issued by FHLMC, FNMA or GNMA, the timely payment of interest and
principal is supported by the government-related securities
collateralizing such obligations. The market for private pools is
smaller and less liquid than the market for the government and
government-related mortgage pools.
Stripped Mortgage-Backed Securities. These securities are
interests in a pool of mortgage assets that receive interest and
principal distributions in different proportions from that received by
the underlying pool. They may be issued by agencies or
instrumentalities of the U.S. government or by private mortgage lenders.
Stripped mortgage-backed securities generally are more sensitive to
changes in prepayment and interest rates and the market for such
securities is less liquid than is the case for traditional debt
securities and mortgage-backed securities.
Some stripped mortgage-backed securities receive only interest
payments. The yield on such securities is extremely sensitive to the
rate of principal payments (including prepayments) on the underlying
mortgage assets, and a rapid rate of repayment may have a material
adverse effect on such securities' yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of
principal, the Portfolio may fail to recoup fully its initial investment
in these securities, even if they are rated high quality. When interest
rate are declining, such principal prepayments usually increase, and
reinvestments of such principal prepayments will be at a lower rate than
that on the original mortgage-related security.
Asset-Backed Securities. Asset-backed securities refer to
securities that directly or indirectly represent a participation in, or
are secured by and payable from, assets such as motor vehicle
installment sales, installment loan contracts, leases of various types
of real and personal property and receivables from revolving credit
(credit card) agreements. Such assets are being securitized through the
use of trusts and special purpose corporations. Asset-backed securities
are backed by a pool of assets often representing the obligations of a
number of different parties. Payments of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a
letter of credit issued by a financial institution, usually unaffiliated
with the trust or corporation. Certain of such securities may be
illiquid, in that there is not a ready market if a Portfolio wishes to
resell the security.
Prepayment Risk. The principal of most mortgage-backed and other
asset-backed securities may be prepaid at any time. As a result, if
such securities are purchased at a premium, a prepayment rate that is
faster than expected will reduce yield to maturity, while a prepayment
rate
11
<PAGE>
that is slower than expected will have the opposite effect.
Conversely, if the securities are purchased at a discount, prepayments
faster than expected will increase yield to maturity and prepayments
slower than expected will decrease it. Accelerated prepayments also
reduce the certainty of the yield because the Portfolio must reinvest
the assets at the then-current rates. Accelerated prepayments on
securities purchased at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the
time the principal is repaid in full. When interest rates are
declining, such prepayments usually increase, and reinvestments of such
principal prepayments will be at a lower rate than that on the original
mortgage-related security. The rate of prepayment may also be affected
by general economic conditions, the location and age of the mortgages,
and other social and demographic conditions.
New types of mortgage-backed and asset-backed securities,
derivative securities and hedging instruments are developed and marketed
from time to time. Consistent with their respective investment policies
and limitations, the Portfolios expect to invest in those new types of
securities and instruments that the adviser believes may assist the
Portfolios in achieving their investment objectives.
The Portfolios will invest in mortgage-related or other
asset-backed securities only if they are either (1) issued or guaranteed
as to principal and interest by the U.S. Government, its agencies or
instrumentalities (currently GNMA, FHLMC and FNMA) or (2) rated A or
better by Moody's or A or better by S&P or, if unrated, judged by the
adviser to be of comparable quality.
NON-GOVERNMENTAL DEBT SECURITIES
Each Portfolio may invest in investment grade corporate debt
obligations. Each Portfolio's adviser seeks to minimize the risks of
investing in all securities through diversification, in-depth credit
analysis and attention to current developments in interest rates and
market conditions.
Securities rated Baa and BBB are the lowest which are considered
"investment grade" obligations. Moody's describes securities rated Baa
as "medium-grade" obligations; they are "neither highly protected nor
poorly secured ... [I]nterest payments and principal security appear
adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well." S&P describes securities rated
BBB as "regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity . . . than in higher rated
categories."
Western Asset monitors the ratings of securities held by
the Portfolios and the creditworthiness of their issuers. If the rating
of a security in which a Portfolio has invested falls below the minimum
rating in which the Portfolio is permitted to invest, the Portfolio will
dispose of that security within a reasonable time, having due regard for
market conditions, tax implications and other applicable factors. An
issue given different ratings by different rating agencies is evaluated
by the adviser to determine which is most appropriate. The Portfolios
will not hold more than 5% of their net assets in below investment-grade
securities.
A debt security may be callable, i.e., subject to redemption at the
option of the issuer at a price established in the security's governing
instrument. If a debt security held by a Portfolio is called for
redemption, the Portfolio will be required to permit the issuer to
redeem the security or
12
<PAGE>
sell it to a third party. Either of these actions
could have an adverse effect on a Portfolio's ability to achieve its
investment objective.
FOREIGN SECURITIES
The International Portfolio may invest directly in U.S.
dollar-denominated or foreign currency-denominated foreign fixed-income
securities (including preferred or preference stock) of non-governmental
issuers, certificates of deposit, fixed time deposits and bankers'
acceptances issued by foreign banks, and debt obligations of foreign
governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities. Some securities
issued by foreign governments or their subdivisions, agencies and
instrumentalities may not be backed by the full faith and credit of the
foreign government.
The International Portfolio will limit its foreign investments to
fixed income and other debt securities of issuers based in developed
countries (including, but not limited to, countries in the European
Community, Canada, Japan, Australia, New Zealand and newly
industrialized countries, such as Singapore, Taiwan and South Korea).
Investing in the securities of issuers in any foreign country
nevertheless involves special risks and considerations not typically
associated with investing in U.S. companies. These include risks
resulting from differences in accounting, auditing and financial
reporting standards; lower liquidity than U.S. fixed income or debt
securities; the possibility of nationalization, expropriation or
confiscatory taxation; adverse changes in investment or exchange control
regulations (which may include suspension of the ability to transfer
currency out of a country); and political instability which could affect
U.S. investments in foreign countries. There may be less publicly
available information concerning foreign issuers of securities held by
the Portfolios than is available concerning U.S. issuers. Additionally,
purchases and sales of foreign securities and dividends and interest
payable on those securities may be subject to foreign taxes; taxes may
be withheld from dividend and interest payments on those securities.
Foreign securities often trade with less frequency and volume than
domestic securities and therefore may exhibit greater price volatility
and a greater risk of illiquidity. Additional costs associated with an
investment in foreign securities will generally include higher custodial
fees than apply to domestic custodial arrangements and transaction costs
of foreign currency conversions. Changes in foreign exchange rates also
will affect the value of securities denominated or quoted in currencies
other than the U.S. dollar. The relative performance of various
countries' fixed income markets historically has reflected wide
variations relating to the unique characteristics of each country's
economy. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Bank deposit
insurance regulations and limits may vary widely in foreign countries.
Foreign securities purchased by the International Portfolio may be
listed on foreign exchanges or traded over-the-counter. Transactions on
foreign exchanges are usually subject to mark-ups or commissions higher
than negotiated commissions on U.S. transactions, although the Portfolio
will endeavor to obtain the best net results in effecting transactions.
There is generally less government supervision and regulation of
exchanges and brokers in foreign countries than in the United States.
It is anticipated that over 25% of the International Portfolio's
assets may be invested in securities of Japanese issuers, and that over
25% of the Portfolio's assets may be invested in securities of German
issuers. Such issuers may include the foreign governments of these
countries and their subdivisions, agencies, and instrumentalities, and
also non-governmental
13
<PAGE>
issuers. Whether the International Portfolio will concentrate in foreign
governmental issuers or other issuers of these countries will depend on
relative market and economic circumstances from time to time. Among such
circumstances are the relative performance of these and other countries'
fixed income markets, expectations as to future relative performance of
those markets, relative foreign exchange rates, relative economic
performance and expectations for these and other foreign countries, and
similar investment factors. The International Portfolio will concentrate in
these countries when such circumstances suggest the potential of a relative
higher return from such concentration.
The investment of a substantial amount of the Portfolio's assets in
securities of issuers from these two countries raises special
considerations for investors in addition to the considerations generally
applicable to foreign securities described above.
Japan currently has the second largest GNP in the world. While the
Japanese economy has grown substantially over the last three decades, with its
growth rate averaging over 5% in the 1970s and 1980s, the growth rate in Japan
has slowed substantially this decade. Japan continues to be heavily dependent
upon international trade and has recently suffered as a result of trade
frictions and a sharp rise in the yen. The economy has had some false signs of
recovery, but currently remains very weak. The Bank of Japan is currently
maintaining a very loose monetary policy, with a recent reduction in the
official discount rate to .50 percent. A series of fiscal stimulus packages
have also been implemented. The central bank hopes that these measures will
lead to an economic recovery in the early part of 1996.
Germany currently has the third largest GNP in the world. It too
has grown substantially over the past few decades. Reunification with
the former East Germany put considerable pressures on monetary policy and
financial markets. Deficits are now being brought back into line and
inflation has fallen to impressive levels. Following a period of economic
contraction, the German economy has recovered, although growth is not expected
to accelerate too rapidly. Interest rates have been steadily lowered in
order to provide stimulus for the economy.
COMMERCIAL PAPER AND OTHER SHORT-TERM INSTRUMENTS
Commercial paper represents short-term unsecured promissory notes
issued in bearer form by banks or bank holding companies, corporations
and finance companies. The commercial paper purchased by the Portfolios
consists of U.S. dollar-denominated or foreign currency-denominated
obligations of domestic or foreign issuers which, at the time of
investment, is (1) rated P-1 or P-2 by Moody's, A-1 or A-2 or better by
S&P, or F-1 or F-2 by Fitch Investors Service, (2) issued or guaranteed
as to principal and interest by issuers or guarantors having an existing
debt security rating of A or better by Moody's or by S&P or (3) if
unrated, are judged to be of comparable quality by that Portfolio's
adviser.
The Portfolios may purchase commercial paper issued pursuant to the
private placement exemption in Section 4(2) of the Securities Act of
1933. Section 4(2) paper is restricted as to disposition under the
federal securities laws in that any resale must similarly be made in an
exempt transaction. The Fund may or may not regard such securities as
illiquid, depending on the circumstances of each case. See "Restricted
and Illiquid Securities," page 18.
Any Portfolio may also invest in obligations (including
certificates of deposit, demand and time deposits and bankers'
acceptances) of U.S. banks and savings and loan institutions if the
issuer has total assets in excess of $1 billion at the time of purchase
or if the principal amount of the instrument is insured by the Federal
Deposit Insurance Corporation. A bankers' acceptance is a time draft
drawn on a commercial bank by a borrower, usually in connection with an
14
<PAGE>
international commercial transaction. Time deposits are non-negotiable
deposits maintained in a banking institution for a specified period of
time at a specified interest rate. Certificates of deposit are
negotiable short-term obligations issued by banks against funds
deposited in the issuing institution. The interest rate on some
certificates of deposit is periodically adjusted prior to the stated
maturity, based upon a specified market rate. While domestic bank
deposits are insured by an agency of the U.S. Government, the Portfolios
will generally assume positions considerably in excess of the insurance
limits.
PREFERRED STOCK
Any of the Portfolios may purchase preferred stock as a substitute
for debt securities of the same issuer when, in the opinion of that
Portfolio's adviser, the preferred stock is more attractively priced in
light of the risks involved. Preferred stock pays dividends at a
specified rate and generally has preference over common stock in the
payment of dividends and the liquidation of the issuer's assets but is
junior to the debt securities of the issuer in those same respects.
Unlike interest payments on debt securities, dividends on preferred
stock are generally payable at the discretion of the issuer's board of
directors, although preferred shareholders may have certain rights if
dividends are not paid. Shareholders may suffer a loss of value if
dividends are not paid, and generally have no legal recourse against the
issuer. The market prices of preferred stocks are subject to changes in
interest rates and are more sensitive to changes in the issuer's
creditworthiness than are the prices of debt securities. Under ordinary
circumstances, preferred stock does not carry voting rights.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock
or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer
within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged.
Before conversion, convertible securities ordinarily provide a stream of
income with generally higher yields than those of common stocks of the
same or similar issuers, but lower than the yield on non-convertible
debt. Convertible securities are usually subordinated to
comparable-tier nonconvertible securities but rank senior to common
stock in a corporation's capital structure.
The value of a convertible security is a function of (1) its yield
in comparison with the yields of other securities of comparable maturity
and quality that do not have a conversion privilege and (2) its worth,
at market value, if converted into the underlying common stock.
Convertible securities are typically issued by smaller capitalized
companies whose stock prices may be volatile. The price of a
convertible security often reflects such variations in the price of the
underlying common stock in a way that non-convertible debt does not.
The Portfolios have no current intention of converting any convertible
securities they may own into equity or holding them as equity upon
conversion, although they may do so for temporary purposes. A
convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Portfolio is called for
redemption, the Portfolio will be required to permit the issuer to
redeem the security, convert it into the underlying common stock or sell
it to a third party. Any of these actions could have an adverse effect
on a Portfolio's ability to achieve its investment objective.
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VARIABLE AND FLOATING RATE SECURITIES
Any Portfolio may invest in variable and floating rate securities.
These securities provide for periodic adjustment in the interest rate
paid on the obligations. The terms of such obligations must provide
that interest rates are adjusted periodically based upon some
appropriate interest index. The adjustment intervals may be event-based
(floating), and range from daily up to annually, or may be regular
(variable). The adviser believes that the variable or floating rate of
interest paid on these securities may reduce the wide fluctuations in
market value typical of fixed-rate long-term securities. The yield
available on floating rate securities is typically less than that on
fixed-rate notes of similar maturity issued by the same company.
ZERO COUPON AND PAY-IN-KIND BONDS
A zero coupon bond is a security that makes no fixed interest
payments but instead is sold at a deep discount from its face value.
The bond is redeemed at its face value on the specified maturity date.
Zero coupon bonds may be issued as such, or they may be created by a
broker who strips the coupons from a bond and separately sells the
rights to receive principal and interest. Pay-in-kind securities pay
interest in the form of additional securities, thereby adding additional
debt to the issuer's balance sheet. The prices of both types of bonds
tend to fluctuate more in response to changes in market interest rates
than do the prices of debt securities with similar maturities, that pay
interest in cash.
A Portfolio investing in zero coupon or pay-in-kind bonds generally
accrues income on such securities prior to the receipt of cash payments.
Since each Portfolio must distribute substantially all of its income to
shareholders to qualify for pass-through treatment under the federal
income tax laws, a Portfolio investing in such bonds may have to dispose
of other securities to generate the cash necessary for the distribution
of income attributable to its zero coupon or pay-in-kind bonds. Such
disposal could occur at a time which would be disadvantageous to the
Portfolio and when the Portfolio would not otherwise choose to dispose
of the assets.
REPURCHASE AGREEMENTS
A repurchase agreement is an agreement under which a Portfolio
acquires either U.S. Government obligations or high-quality liquid debt
securities from a securities dealer or bank subject to resale at an
agreed upon price and date. The securities are held by the Portfolio as
collateral until retransferred and will be supplemented by additional
collateral if necessary to maintain a total market value equal to or in
excess of the value of the repurchase agreement. The Portfolio bears a
risk that the proceeds from any sale of collateral upon a default in the
obligation to repurchase will be less than the repurchase price. A
Portfolio also bears a risk that the other party to a repurchase
agreement will default on its obligations and the Portfolio will be
delayed or prevented from exercising its rights to dispose of the
collateral securities. A Portfolio will enter into repurchase
agreements only with financial institutions which are deemed by its
adviser to present minimal risk of default during the term of the
agreement based on guidelines which are periodically reviewed by the
Board of Directors.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWING
A reverse repurchase agreement is a portfolio management technique
in which a Portfolio temporarily transfers possession of a portfolio
instrument to another person, such as a financial institution or
broker-dealer, in return for cash. At the same time, the Portfolio
agrees to repurchase
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the instrument at an agreed upon time (normally within seven days)
and price, including interest payment. A Portfolio may also enter
into dollar rolls, in which the Portfolio sells a fixed income
security for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type, coupon and
maturity) securities on a specified future date. During the roll
period, the Portfolio would forgo principal and interest paid on such
securities. The Portfolio would be compensated by the difference
between the current sales price and the forward price for the future
purchase, as well as by the interest earned on the proceeds of the
initial sale.
Any Portfolio may engage in reverse repurchase agreements, dollar
rolls and other borrowing as a means of raising cash to satisfy
redemption requests or for other temporary or emergency purposes without
selling portfolio instruments. While engaging in reverse repurchase
agreements and dollar rolls, each Portfolio will maintain cash, U.S.
Government securities or high-grade, liquid debt securities in a
segregated account at its custodian bank with a value at least equal to
the Portfolio's obligation under the agreements, adjusted daily.
Reverse repurchase agreements and dollar rolls may expose a
Portfolio to greater fluctuations in value of its assets and renders the
segregated assets unavailable for sale or other disposition. To avoid
potential leveraging effects of borrowing (including reverse repurchase
agreements and dollar rolls), a Portfolio will not purchase securities
while such borrowing is in excess of 5% of its total assets. Each
Portfolio will limit its borrowing to no more than one-third of its
total assets.
LOANS OF PORTFOLIO SECURITIES
Any Portfolio may lend portfolio securities to brokers or dealers
in corporate or government securities, banks or other recognized
institutional borrowers of securities, provided that cash or equivalent
collateral, equal to at least 100% of the market value of the securities
loaned is continuously maintained by the borrower with the Portfolio.
During the time securities are on loan, the borrower will pay the
Portfolio an amount equivalent to any dividends or interest paid on such
securities, and the Portfolio may invest the cash collateral and earn
additional income, or it may receive an agreed upon amount of interest
income from the borrower who has delivered equivalent collateral. These
loans are subject to termination at the option of the Portfolio or the
borrower. A Portfolio may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or
placing broker. No Portfolio presently expects to have on loan at any
given time securities totaling more than one-third of its net asset
value.
WHEN-ISSUED SECURITIES
Any Portfolio may enter into commitments to purchase U.S.
Government securities or other securities on a when-issued basis. A
Portfolio may purchase when-issued securities because such securities
are often the most efficiently priced and have the best liquidity in the
bond market. When a Portfolio purchases securities on a when-issued
basis, it assumes the risks of ownership at the time of purchase, not at
the time of receipt. However, the Portfolio does not have to pay for
the obligations until they are delivered to it. This is normally seven
to 15 days later, but could be considerably longer in the case of some
mortgage-backed securities. Depending on market conditions, the
Portfolio's when-issued purchases could, but will not necessarily, cause
its share value to be more volatile, because they increase the amount by
which the Portfolio's total assets, including the value of the
when-issued securities which the Portfolio has contracted to purchase,
exceed its net assets. The Fund does not expect that any Portfolio's
commitment to purchase
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when-issued securities will at any time exceed, in the aggregate, 20%
of that Portfolio's total assets.
To meet its payment obligation, each Portfolio will establish a
segregated account with its custodian and maintain liquid assets, such
as cash, U.S. Government securities or other appropriate high-grade debt
obligations, in an amount at least equal in value to that Portfolio's
commitments to purchase when-issued securities. If the value of these
assets declines, the involved Portfolio will place additional liquid
assets in the account on a daily basis so that the value of the assets
in the account is equal to the amount of such commitments.
RESTRICTED AND ILLIQUID SECURITIES
Restricted securities are securities subject to legal or
contractual restrictions on their resale, such as private placements.
Such restrictions might prevent the sale of restricted securities at a
time when sale would otherwise be desirable. No securities for which
there is not a readily available market ("illiquid assets") will be
acquired by any Portfolio if such acquisition would cause the aggregate
value of illiquid assets to exceed 10% of the Portfolio's net assets.
Time deposits and repurchase agreements maturing in more than seven days
are also considered illiquid.
Under SEC regulations, certain securities acquired through private
placements can be traded freely among qualified purchasers. The SEC has
stated that an investment company's board of directors, or its
investment adviser acting under authority delegated by the board, may
determine that a security eligible for trading under this rule is not
"illiquid" for purposes of the limit on the amount of a portfolio's net
assets which may be invested in illiquid assets. The Fund intends to
rely on this rule, to the extent appropriate, to deem specific
securities acquired through private placement as not "illiquid." The
Board has delegated to the adviser the responsibility for determining
whether a particular security eligible for trading under this rule is
illiquid. In making such determinations, the adviser will consider the
following factors the Board has deemed relevant: the frequency of trades
and quotes, the number of dealers and potential purchasers, the
existence of dealer undertakings to make a market, and the nature of the
security and of marketplace trades. The adviser's consideration of
these factors and determination that a particular security is liquid
remains subject to the Board's continuing oversight. The Board also
reviews at least annually the continuing appropriateness of these
procedures.
Investing in securities eligible for trading under this Rule could
adversely affect the liquidity of a Portfolio, if the newly-developing
markets among qualified purchasers for such securities do not develop as
anticipated, or if such purchasers become, for a time, uninterested in
purchasing these securities.
OPTIONS AND FUTURES; FORWARD CURRENCY EXCHANGE CONTRACTS
The Portfolios may use options to attempt to enhance income and may
also use options and futures contracts for hedging purposes. The
International Portfolio may also use forward currency contracts for
hedging purposes or to attempt to enhance income.
The Portfolios may purchase and sell call and put options on bond
indices and on securities in which the Portfolio is authorized to invest
for hedging purposes or to enhance income. The Portfolios may also
purchase and sell interest rate and bond index futures contracts and
options thereon for hedging purposes. In addition, the Portfolios may
purchase and sell covered straddles on options on securities or bond
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indices or on options on futures contract on securities or bond indices.
The International Portfolio may also purchase and sell covered straddles
on currency options or on options on currency futures.
The International Portfolio may enter into forward currency
contracts for the purchase or sale of a specified currency at a
specified future date either with respect to specified transactions or
with respect to its portfolio positions. For example, when Western
Asset anticipates making a currency exchange transaction in connection
with the purchase or sale of a security, the International Portfolio may
enter into a forward contract in order to set the exchange rate at which
the transaction will be made. The International Portfolio may enter in
to a forward contract to sell an amount of a foreign currency
approximating the value of some or all of its security positions
denominated in such currency. It may also engage in cross-hedging by
using a forward contract in one currency to hedge against fluctuations
in the value of securities denominated in a different currency. The
purpose of these contracts is to minimize the risk to the Portfolio from
adverse changes in the relationship between two currencies.
The International Portfolio may also purchase and sell foreign
currency futures contracts, options thereon and options on foreign
currencies to hedge against the risk of fluctuations in the market value
of foreign securities it holds or intends to purchase, resulting from
changes in foreign exchange rates. The Portfolio may also purchase and
sell options on foreign currencies and use forward currency contracts to
enhance income.
Many options on debt securities are traded primarily on the
over-the-counter ("OTC") market. OTC options differ from
exchange-traded options in that the former are two-party contracts with
price and other terms negotiated between buyer and seller and generally
do not have as much market liquidity as exchange-traded options. Thus,
when a Portfolio purchases an OTC option, it relies on the dealer from
which it has purchased the option to make or take delivery of the
securities underlying the option. Failure by the dealer to do so would
result in the loss of the premium paid by the Portfolio as well as the
loss of the expected benefit of the transaction. OTC options may be
considered "illiquid securities" for purposes of the Portfolios'
investment limitations. Currency options traded on U.S. or other
exchanges may be subject to position limits which may limit the ability
of a Portfolio to reduce foreign currency risk using such options.
Most futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single day;
once the daily limit has been reached on a particular contract, no
trades may be made that day at a price beyond that limit. In addition,
certain of these instruments are relatively new and without a
significant trading history. As a result, there is no assurance that an
active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent a Portfolio from liquidating an
unfavorable position, and the Portfolio would remain obligated to meet
margin requirements until the position is closed. Purchase of such
instruments for which there is no liquid secondary market will be
subject to the Portfolio's investment limitation on "illiquid
securities."
Each Portfolio will establish segregated accounts or maintain
covering positions when engaging in the above strategies, to the extent
required by the SEC and staff positions. A Portfolio may write a call
or put option only if the option is "covered." A call option is covered
if, so long as the Portfolio is obligated under the option, it will own
an offsetting position in the underlying security, currency or futures
contract, or a right to obtain the security, currency or futures
contract. A put option is covered if the Portfolio maintains in a
segregated account with the Fund's custodian, cash, or liquid
high-quality debt securities, with a value sufficient to cover its
potential obligations, as marked to market daily.
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A Portfolio will incur brokerage fees and related transaction costs
when it purchases or sells futures contracts and premiums and
transaction costs when it buys options. When a Portfolio purchases or
sells a futures contract, the Portfolio is required to deposit with its
custodian (or a broker, if legally permitted) a specified amount of cash
or U.S. Government securities ("initial margin"). A Portfolio will not
enter into futures contracts or commodities option positions if,
immediately thereafter, its initial margin deposits plus premiums paid
by it, less the amount by which any such options positions are
"in-the-money" at the time of purchase, would exceed 5% of the fair
market value of the Portfolio's total assets. If a Portfolio writes an
option or sells a futures contract and is not able to close out that
position prior to settlement date, the Portfolio may be required to
deliver cash or securities substantially in excess of these amounts.
The Fund might not employ any of the strategies described above,
and there can be no assurance that any strategy used will succeed. A
Portfolio's ability to engage in these practices may be limited by
market conditions, the rules and regulations of the Commodity Futures
Trading Commission, tax considerations and certain other legal
considerations. Moreover, in the event that an anticipated change in
the price of the securities or currencies that are the subject of the
strategy does not occur, it may be that a Portfolio would have been in a
better position had it not used that strategy at all.
Risks of Futures, Options and Forward Contracts. The use of
options, futures and forward currency exchange contracts involves
certain investment risks and transaction costs to which the Portfolios
might not be subject if they did not use such instruments. These risks
include (1) dependence on the adviser's ability to predict movements in
the prices of individual securities, fluctuations in the general
securities markets or in market sectors and movements in interest rates
and currency markets; (2) imperfect correlation between movements in the
price of options, currencies, futures contracts, forward currency
exchange contracts or options thereon and movements in the price of the
securities or currencies hedged or used for cover; (3) the fact that
skills and techniques needed to trade options, futures contracts and
options thereon or to use forward currency exchange contracts are
different from those needed to select the securities in which the
Portfolios invest; (4) lack of assurance that a liquid secondary market
will exist for any particular option, futures contract or option thereon
at any particular time; (5) the possibility that the use of cover or
segregation involving a large percentage of a Portfolio's assets could
impede portfolio management or the Portfolio's ability to meet
redemption requests or other short-term obligations; and (6) the
possible need to defer closing out certain options, futures contracts
and options thereon in order to continue to qualify for the beneficial
tax treatment afforded "regulated investment companies" under the
Internal Revenue Code of 1986, as amended ("Code") (see "Additional Tax
Information" in the Statement of Additional Information). The use of
options and forward contracts for speculative purposes, i.e., to enhance
income or to increase a Portfolio's exposure to a particular security or
foreign currency, subjects the Portfolio to additional risk. The use of
futures or forward contracts to hedge an anticipated purchase (other
than a when-issued or delayed delivery purchase), also subjects the
Portfolio to additional risk until the purchase is completed or the
position is closed out. Although the Portfolio generally will not enter
into such anticipatory hedges without the expectation of completing the
transaction, it is only required to complete 75% of them. If the
transaction is not completed, the risk of the anticipatory hedge is the
same as if the Portfolio had entered into the transaction for
speculative purposes.
The Statement of Additional Information contains a more detailed
description of futures, options and forward strategies.
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New futures contracts, options thereon and other financial products
and risk management techniques continue to be developed. The Portfolios
may use these investments or techniques to the extent consistent with
their investment objectives and regulatory and federal tax
considerations.
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
The International Portfolio may purchase various fixed income and
debt securities, the return on which may be linked or indexed to
relative exchange rates between the U.S. dollar and a foreign currency
or currencies or between foreign currencies. Western Asset will base
its decision for the Portfolio to invest in any such securities on the
same general criteria applicable to the adviser's decision for the
Portfolio to invest in any fixed income security, including the
Portfolio's minimum ratings and investment quality criteria, with the
additional element of foreign currency exchange rate exposure added to
the adviser's analysis of interest rates and other factors.
CAPITAL APPRECIATION AND RISK
The capital appreciation (or depreciation) of fixed income and
other debt securities is partially a function of changes in the current
level of interest rates. An increase in interest rates generally
reduces the market value of existing fixed income and other debt
securities, while a decline in interest rates generally increases the
market value of such securities. When interest rates are falling, a
Portfolio with a shorter maturity generally will not generate as high a
level of total return as a portfolio with a longer maturity.
Conversely, when interest rates are rising, a Portfolio with a shorter
maturity will generally outperform longer maturity portfolios. When
interest rates are flat, shorter duration Portfolios generally will not
generate as high a level of total return as longer maturity portfolios
(assuming that long-term interest rates are higher than short-term
rates, which is commonly the case).
Changes in the creditworthiness, or the market's perception of the
creditworthiness, of the issuers of fixed income and other debt
securities will also affect their prices. The market value of
securities denominated in currencies other than the U.S. dollar will be
affected further by movements in foreign currency exchange rates that
may result in overall appreciation or depreciation of a security
regardless of the movement of interest rates in its trading market.
PORTFOLIO TURNOVER
The turnover rate of the International Portfolio for the fiscal
year ended June 30, 1995 was 355.03%. The Fund anticipates that the
average turnover rate of each Domestic Portfolio will not exceed 200%.
The portfolio turnover rate is calculated by dividing the lesser of the
Portfolio's annual sales or purchases of portfolio securities (exclusive
of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the average market value of the
securities in the Portfolio during the year. A Portfolio may frequently
sell fixed income securities and buy ostensibly similar securities to
obtain yield and take advantage of changes in securities prices, a
practice which will tend to increase the reported turnover rate of the
Portfolio. The International Portfolio's turnover rate for the fiscal
year ended June 30, 1995 reflects the volatile nature of international
securities markets during such period. High turnover rates may result
in increased transaction costs and the realization of capital gains.
Trading in fixed income securities does not generally involve the
payment of brokerage commissions, but does involve indirect transaction
costs. For more information on the taxation of distributions from a
Portfolio's capital gains, see "Federal Tax Treatment of Dividends and
Other Distributions." Each Portfolio will take these possibilities into
account as part of its investment strategy.
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PURCHASE OF SHARES
Shares of the Portfolios described in this Prospectus are available
only to clients maintaining separate accounts with Western Asset or its
affiliates, which will place all purchase orders for shares of the
Portfolios on behalf of such clients. Shares of each Portfolio are sold
at the net asset value next determined after a purchase order in proper
form and payment in federal funds are received by Boston Financial Data
Services, Inc. ("BFDS"), the Fund's transfer and dividend-disbursing
agent. There is no sales charge. Concurrent with the initial purchase
of shares in any Portfolio, Western Asset will open an account with that
Portfolio in the name of the client.
Federal funds purchases will be accepted only on days on which the
Fund and BFDS are open for business. The Fund is "open for business" on
each day the New York Stock Exchange ("Exchange") is open for trading.
In past years, the Exchange has observed the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
Shares may also be purchased and paid for by the contribution of
eligible portfolio securities, subject in each case to approval by the
Portfolio's adviser. Approval will depend on, among other things, the
nature and quality of the securities offered and the current needs of
the Portfolio in question. Securities offered in payment for shares
will be valued in the same way and at the same time the Fund values its
portfolio securities for purposes of determining net asset value. See
"How Net Asset Value is Determined," page 25. Investors who wish to
purchase Fund shares through the contribution of securities should
contact the Fund at (818) 584-4300 for instructions. Investors who
purchase Fund shares through the contribution of securities should
realize that, although the Fund may under some circumstances distribute
portfolio securities rather than cash upon redemption, they are not
likely to receive upon redemption the same securities that they
contributed upon purchase. Investors should also realize that at the
time of contribution they may be required to recognize a gain or loss
for tax purposes on securities contributed. The Portfolio's adviser
will have full discretion to reject any securities offered as payment
for shares.
Certificates for shares will not be issued unless specifically
requested in writing. There is no charge for certificates. Requests
for certificates should be addressed to the Fund.
The Fund reserves the right to reject any order for the purchase of
shares. In addition, the Fund may suspend the offering of shares at any
time and resume it at any time thereafter.
REDEMPTION OF SHARES
Subject to the terms of each private account client's investment
management agreement with Western Asset Management Company, Portfolio
shares may be redeemed through three methods: (1) by sending a written
request for redemption to Western Asset Trust, Inc., 117 East Colorado
Boulevard, Pasadena, California 91105; (2) by calling the Fund at (818)
584-4300; or (3) by wire communication with BFDS. No charge is made for
redemptions.
Upon receipt of a request for redemption before the close of
business of the Exchange on any day when the Exchange is open, BFDS, as
transfer agent for the Fund, will redeem Portfolio shares at the net
asset value per share determined as of the close of the Exchange on that
day. Requests for redemption received by the transfer agent after the
close of business on the Exchange will be executed at the net asset
value determined as of the close of the Exchange on its next trading
day.
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Requests for redemption should indicate:
1. The number of shares or dollar amount to be redeemed and the
investor's shareholder account number;
2. The investor's name and the names of any co-owner of the
account using exactly the same name or names used in establishing the
account;
3. Proof of authorization to request redemption on behalf of any
co-owner of the account (please contact the Fund for further details);
and
4. The name, address, and account number to which the redemption
payment should be sent.
Shares may not be redeemed by telephone or wire if held in
certificate form. Contact the Fund for more information. The Fund
reserves the right to modify or terminate the redemption procedures upon
notice to shareholders.
Payment of the redemption price normally will be made by wire the
next business day after receipt of a redemption request in good order.
However, the Fund reserves the right to postpone the payment date when
the Exchange is closed, when trading is restricted, or during other
periods as permitted by federal securities laws, or to take up to seven
days to make payment upon redemption if, in the judgment of the adviser,
the Portfolio involved could be adversely affected by immediate payment.
Share prices will fluctuate, and the proceeds of a redemption or
repurchase may be more or less than your original cost.
Shareholders of some investment companies have experienced
difficulty contacting their funds by telephone during periods of intense
market activity. Shareholders who are unable to contact the Fund by
telephone and wish to make a redemption should follow the instructions
for redeeming by mail or by wire.
Other supporting legal documents, such as copies of the trust
instrument or power of attorney, may be required from corporations or
other organizations, fiduciaries or persons other than the shareholder
of record making the request for redemption or repurchase. If you have
a question concerning the sale or redemption of shares, please contact
the Fund or State Street.
HOW NET ASSET VALUE IS DETERMINED
Net asset value per share is determined for each Portfolio daily as
of the close of regular trading on the Exchange (normally 4:00 p.m.,
Eastern Time), on every day that the Exchange is open, by subtracting
the Fund's liabilities from its total assets and dividing the result by
the number of shares outstanding. Portfolio securities are valued on
the basis of market quotations or at fair value as determined under the
guidance of the Board of Directors. Most securities held by the
Portfolios are valued at fair value, primarily on the basis of
valuations furnished by a pricing service which utilizes both
dealer-supplied valuations and electronic data processing techniques
which take into account appropriate factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other data.
Securities for which market quotations are readily available are valued
at the last sale price of the day for a comparable position, or, in the
absence of any such sales, the last available bid price for a
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comparable position. Where a security is traded on more than one market,
which may include foreign markets, the securities are generally valued on the
market considered by the adviser to be the primary market. Securities
with remaining maturities of 60 days or less are valued at amortized
cost. The International Portfolio values its foreign securities in U.S.
dollars on the basis of the then-prevailing exchange rates.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Portfolio declares and pays a dividend following the end of
each calendar quarter out of its net investment income for that quarter.
Each will also make an annual distribution of any net capital gain (the
excess of long-term capital gain over short-term capital loss), net
short-term capital gain, and, in the case of the International
Portfolio, gains from certain foreign currency transactions. The
Portfolios may make an additional distribution if necessary to avoid a
4% excise tax on certain undistributed income and capital gain.
Dividends paid by a Portfolio are automatically reinvested in additional
shares of that Portfolio, unless the investor requests payments in cash.
An election to receive dividends or other distributions in cash
rather than additional shares may be made by notifying BFDS in writing.
The election must be received at least ten days before the payment date
in order to be effective for distributions paid as of that date.
The Fund's Board of Directors reserves the right to revise the
dividend policy or postpone the payment of dividends if warranted in its
judgment due to unusual circumstances, such as an unexpected large
expense, loss or fluctuation in net asset value.
FEDERAL TAX TREATMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS
Each Portfolio is treated as a separate corporation for federal
income tax purposes. Each Domestic Portfolio intends to qualify, and
the International Portfolio intends to continue to qualify, as a
regulated investment company ("RIC") under the Code so that it will not
be subject to federal income tax on that part of its investment company
taxable income (consisting generally of net investment income, net gains
from certain foreign currency transactions and net short-term capital
gain, if any) and any net capital gain (the excess of net long-term
capital gain over net short-term capital loss) that is distributed to
its shareholders.
Dividends from a Portfolio's investment company taxable income
(whether paid in cash or reinvested in Portfolio shares) are taxable to
its shareholders (other than tax-exempt investors) as ordinary income to
the extent of the Portfolio's earnings and profits. Distributions of a
Portfolio's net capital gain, when designated as such, whether paid in
cash or reinvested in Portfolio shares, are taxable to its shareholders
as long-term capital gain, regardless of how long they have held their
shares.
A Portfolio will be subject to a nondeductible 4% excise tax to the
extent it does not distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain
net income for the one-year period ending on October 31 of that year,
plus certain other amounts. Each Portfolio intends to make
distributions in amounts that will avoid imposition of the excise tax.
Each Portfolio sends a notice to each of its shareholders following
the end of each calendar year specifying the amounts of all income
dividends and capital gain distributions paid (or deemed paid) during
that year. Each Portfolio is required to withhold 31% of all dividends,
capital gain
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distributions and redemption proceeds payable to any
individuals and certain other noncorporate shareholders who do not
provide the Portfolio with a correct taxpayer identification number or
who otherwise are subject to backup withholding.
A redemption of shares may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are
more or less than the shareholder's adjusted basis for the redeemed
shares.
The requirements for qualification as a RIC may limit the extent to
which a Portfolio will be able to engage in transactions in options,
futures contracts or forward contracts.
The International Portfolio's dividend and interest income, and
gains realized from disposition of foreign securities, may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on the Portfolio's securities.
Tax conventions between certain countries and the United States may
reduce or eliminate these foreign taxes, however, and foreign countries
generally do not impose taxes on capital gains in respect of investments
by foreign investors.
If more than 50% of the value of the International Portfolio's
total assets at the close of its taxable year consists of securities of
foreign corporations, the Portfolio will be eligible to, and expects to,
file an election with the Internal Revenue Service that will enable its
taxable shareholders, in effect, to receive the benefit of the foreign
tax credit with respect to certain foreign and U.S. possessions income
taxes that may be paid by the Portfolio. Pursuant to the election, the
Portfolio will treat those taxes as dividends paid to its shareholders
and each shareholder will be required to (1) include in gross income,
and treat as paid by him or her, his or her proportionate share of those
taxes, (2) treat his or her share of those taxes and any dividend paid
by the Portfolio that represents income from foreign or U.S. possessions
sources as his or her own income from those sources and (3) either
deduct the taxes deemed paid by him or her in computing his or her
taxable income or, alternatively, use the foregoing information in
calculating the foreign tax credit against his or her federal income
tax. Not all foreign taxes may be deductible or creditable, however,
because the Portfolio may invest in securities of companies that are
located in countries that impose taxes for which a federal income tax
deduction or credit is not available. If the Portfolio makes the
described election, it will report to its shareholders shortly after
each taxable year their respective shares of the Portfolio's income from
sources within, and taxes paid to, foreign countries and U.S.
possessions. There can be no assurance, however, that the Portfolio
will be eligible to make such an election.
The foregoing is only a summary of some of the important federal
tax considerations generally affecting the Portfolios and their
shareholders; see the Statement of Additional Information for a further
discussion. In addition to the federal tax considerations described
above, which are applicable to any investment in a Portfolio, there may
be other federal, state or local tax considerations applicable to a
particular investor. Prospective shareholders are urged to consult
their tax advisers with respect to the effects of this investment on
their own tax situations.
MANAGEMENT OF THE FUND
THE FUND'S INVESTMENT ADVISER
The business and affairs of the Fund are managed under the
direction of its Board of Directors. Pursuant to an investment advisory
and administration agreement with the Fund
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("Advisory Agreement"), which was approved by the Fund's Board of Directors,
Western Asset serves as investment adviser and portfolio manager for all
of the Portfolios and is responsible for the day-to-day investment management
of the assets of the Portfolios, including the responsibility for making
decisions and placing orders to buy, sell or hold a particular security.
Western Asset renders investment advice to fourteen open-end
investment companies and one closed-end investment company which
together had assets under management of approximately $3.2 billion as
of September 30, 1995. Western Asset also renders investment advice to
private accounts with fixed income assets under management of
approximately $15.0 billion as of that date. Western Asset is a
subsidiary of Legg Mason, Inc., a financial services holding company,
which is also the parent of Legg Mason Fund Adviser, Inc. The address
of Western Asset is 117 East Colorado Boulevard, Pasadena, California
91105.
Western Asset's International Investment Strategy Group is
responsible for the day-to-day management of the International
Portfolio. The Group has held such responsibility since December 31,
1994.
Portfolio managers have not been appointed for the Domestic
Portfolios, which have not commenced operations (i.e. first begun to
invest their assets in accordance with their investment objectives) as
of the date of this Prospectus.
THE FUND'S ADMINISTRATOR
Legg Mason Fund Adviser, Inc., the Administrator, serves as the
Fund's administrator, pursuant to administration agreements with Western
Asset, which were approved by the Fund's Board of Directors
("Administration Agreement"). The Administrator manages the
non-investment affairs of the Fund, directs matters related to the
operation of the Fund and provides office space and administrative staff
for the Fund. The Administrator acts as manager, investment adviser or
consultant to nine other open-end investment companies with a total of
fifteen portfolios and to one closed-end investment company. These
funds had aggregate assets under management of about $5.0 billion as of
September 30, 1995. The Administrator's address is 111 South Calvert
Street, Baltimore, Maryland 21202.
MANAGEMENT AND OTHER EXPENSES
For services under its management agreement, each of the Domestic
Portfolios pays Western Asset a fee, computed daily and payable monthly,
at an annual rate equal to .175% of the Portfolio's average daily net
assets, of which .150% is retained as a management fee and .025% is paid
pursuant to the Administration Agreement. For services under its
management agreement, the International Portfolio is obligated to pay
Western Asset a fee, computed daily and payable monthly, at an annual
rate equal to .475% of the Portfolio's average daily net assets.
However, Western Asset has waived a portion of such fees. See "Expense
Limitation," page 29. For services under the Administration Agreements,
Western Asset (not the Fund) pays the Administrator a fee, calculated
daily and payable monthly, at an annual rate equal to .025% of the
average daily net assets of each Domestic Portfolio, and an annual rate
of .075% of the average net assets of the International Portfolio.
Each Portfolio pays all its other expenses which are not assumed by
its adviser or the Administrator. These expenses include, among others,
expenses of preparing and printing prospectuses, statements of
additional information, proxy statements and reports and of distributing
26
<PAGE>
them to existing shareholders, custodian charges, transfer agency fees,
organizational expenses, compensation of the directors who are not
"interested persons" of the adviser, Administrator or Distributor as
that term is defined in the Investment Company Act, legal and audit
expenses, insurance expenses, expenses of registering and qualifying
shares of the Portfolio for sale under federal and state law,
distribution fees, governmental fees, expenses incurred in connection
with membership in investment company organizations, interest expense,
taxes and brokerage fees and commissions. The Portfolios also are
liable for such nonrecurring expenses as may arise, including litigation
to which a Portfolio or the Fund may be a party. The Fund may also have
an obligation to indemnify its directors and officers with respect to
litigation.
Expense Limitation. Western Asset has voluntarily agreed to waive
its fees or reimburse each of the Domestic Portfolios to the extent the
Portfolio's expenses (exclusive of taxes, interest, brokerage and other
transaction expenses and any extraordinary expenses) exceed during any
month an annual percentage rate equal to .25% of the Portfolio's average
daily net assets, and Western Asset has voluntarily agreed to waive its
fees or reimburse the International Portfolio to the extent that
Portfolio's expenses (exclusive of taxes, interest, brokerage and other
transaction expenses and any extraordinary expenses) exceed during any
month an annual percentage rate equal to .85% of that Portfolio's average
daily net assets. These waiver and reimbursement agreements are in effect
until December 31, 1995. In addition, Western Asset has voluntarily waived
for calendar year 1995 all of its fees for services to the International
Portfolio under its management agreement, other than the portion of such
fee equal to the fee paid by Western Asset to the Administrator (at an
annual rate of .075% of average net assets) for services to the
International Portfolio under the Administration Agreement.
A Portfolio may reimburse its adviser for fees foregone or expenses
reimbursed by them pursuant to the expense limitation if expenses fall
below the limit prior to the end of the fiscal year.
THE FUND'S DISTRIBUTOR
Legg Mason Wood Walker, Incorporated ("Distributor") is authorized
to distribute the Portfolios' shares pursuant to an underwriting
agreement with the Fund which was approved by the Board of Directors
("Underwriting Agreement"). The Distributor or its affiliates is
obligated to pay all expenses in connection with the offering of Fund
shares, including any compensation to its investment brokers, the
printing and distribution of prospectuses, statements of additional
information and periodic reports used in connection with the offering to
prospective investors, after the prospectuses and statements of
additional information have been prepared, set in type and mailed to
existing shareholders at the Fund's expense, and for supplementary sales
literature and advertising costs. The Distributor receives no direct
compensation from the Fund for these expenses. The Distributor is a
wholly owned subsidiary of Legg Mason, Inc.
THE FUND'S CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company ("State Street") serves as
custodian of the Fund's assets and BFDS serves as its transfer agent and
dividend disbursing agent. The duties of State Street and BFDS include
processing requests for the purchase or redemption of shares and
performing other administrative services on behalf of the Fund.
Pursuant to rules adopted under Section 17(f) of the Investment
Company Act, the International Portfolio may maintain foreign securities
and cash in the custody of certain eligible foreign banks and securities
depositories. Selection of these foreign custodial institutions is made
27
<PAGE>
by the Board of Directors in accordance with SEC rules. The Board of
Directors will consider a number of factors, including, but not limited
to, the relationship of the institution to State Street, the reliability
and financial stability of the institution, the ability of the
institution to capably perform custodial services for the Fund, the
reputation of the institution in its national market, the political and
economic stability of the countries in which the sub-custodians will be
located and risks of potential nationalization or expropriation of Fund
assets. No assurance can be given that the Board of Directors'
appraisal of the risks in connection with foreign custodial arrangements
will always be correct or that expropriation, nationalization, freezes,
or confiscation of Fund assets will not occur.
OTHER INFORMATION
DESCRIPTION OF THE FUND
The Fund may establish additional Portfolios in the future. The
Fund has authorized capital of a total of five billion shares of common
stock at par value $0.001. Each of the Portfolios described herein has
an initial authorized capital of one billion shares. All shares are the
same class, and each share is entitled to one vote on any matter
submitted to a shareholder vote. Fractional shares have fractional
voting rights. Voting rights are not cumulative. Voting on matters
pertinent only to a particular Portfolio, such as the adoption of an
investment advisory contract for that Portfolio, is limited to that
Portfolio's shareholders. All shares of the Fund are fully paid and
nonassessable and have no preemptive or conversion rights.
Although the Fund does not intend to hold annual shareholder
meetings, it will hold a special meeting of shareholders when the
Investment Company Act requires a shareholder vote on certain matters
(including the election of directors or approval of an advisory
contract). The Fund will also call a special meeting of shareholders at
the request of 25% or more of the shares entitled to vote thereat, or,
as required by the Act, at the request of 10% of the shareholders for
the purpose of considering the removal of one or more directors.
Shareholders wishing to call such a meeting should submit a written
request to the Fund at 117 East Colorado Blvd., Pasadena, California
91105, stating the purpose of the proposed meeting and the matters to be
acted upon.
As of October 6, 1995, Northern Trust Company, as trustee, may be
deemed to "control" the International Securities Portfolio, as that term
is defined in the 1940 Act. Prior to the initial public offering of a
Portfolio's shares, the Adviser will be the sole shareholder of each
Portfolio and is thus a controlling person, as that term is defined in
the 1940 Act, of each Portfolio.
CONFIRMATIONS AND REPORTS
BFDS will send to each shareholder or its agent monthly
confirmations showing all purchases and redemptions of shares made, and
all dividends and other distributions paid, during the previous month.
Reports will be sent to shareholders or their agents at least
semiannually showing the Fund's investments and other information.
Shareholders or their agents will also receive each year an annual
report containing financial statements audited by the Fund's independent
accountants.
Shareholder inquiries should be addressed to "Western Asset Trust,
Inc., 117 East Colorado Blvd., Pasadena, California 91105."
28
<PAGE>
PERFORMANCE INFORMATION
From time to time, each Portfolio may quote its total return in
marketing materials or in reports or other communications to
shareholders. A mutual fund's "total return" is a measurement of the
overall change in value, including changes in share price and assuming
reinvestment of dividends and capital gain distributions, of an
investment in the fund. "Cumulative total return" shows a fund's
performance over a specific period of time. "Average annual total
return" is the average annual compounded return that would have produced
the same cumulative total return if the fund's performance had been
constant over the entire period. Because average annual returns tend to
smooth out variations in a fund's return, they differ from actual
year-by-year results.
Investors should consider all performance information in light of a
Portfolio's investment objectives and policies, characteristics of the
Portfolio and the existing market conditions during the time period
indicated. Performance information is based on historical performance
only and should not be viewed as representative of the Portfolio's
future performance. The investment return and principal value of an
investment in a Portfolio will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Performance information for a Portfolio may be compared to various
unmanaged indices, such as the Salomon Brothers Corporate Index, the
Salomon Brothers Mortgage Index and the Salomon Brothers World
Government Bond Index (Ex U.S.). Such indices of securities prices
generally do not reflect deductions for administrative and management
costs and expenses.
29
<PAGE>
Investment Adviser
Western Asset Management Company
117 East Colorado Boulevard
Pasadena, CA 91105
Administrator
Legg Mason Fund Adviser, Inc.
111 South Calvert Street
Baltimore, MD 21202
Distributor
Legg Mason Wood Walker, Inc.
111 South Calvert Street
Baltimore, MD 21202
Custodian
State Street Bank & Trust Company
P.O. Box 1790
Boston, MA 02105
Transfer Agent
Boston Financial Data Services, Inc
P.O. Box 953
Boston, MA 02103
Independent Accountants
Price Waterhouse LLP
7 St. Paul Street
Baltimore, MD 21202
Legal Counsel
Munger, Tolles & Olson
355 South Grand Avenue, 35th Floor
Los Angeles, CA 90071-1560
Prospectus
October 30, 1995
30
<PAGE>
APPENDIX
The Fund may use the following hedging instruments:
Options on Debt Securities and Foreign Currencies - A call option
is a short-term contract pursuant to which the purchaser of the option,
in return for a premium, has the right to buy the security or currency
underlying the option at a specified price at any time during the term
of the option. The writer of the call option, who receives the premium,
has the obligation, upon exercise of the option during the option term,
to deliver the underlying security or currency against payment of the
exercise price. A put option is a similar contract that gives its
purchaser, in return for a premium, the right to sell the underlying
security or currency at a specified price during the option term. The
writer of the put option, who receives the premium, has the obligation,
upon exercise of the option during the option term, to buy the
underlying security or currency at the exercise price.
Interest Rate and Foreign Currency Futures Contracts - Interest
rate and foreign currency futures contracts are bilateral agreements
pursuant to which one party agrees to make, and the other party agrees
to accept, delivery of a specified type of debt security or currency at
a specified future time and at a specified price. Although such futures
contracts by their terms call for actual delivery or acceptance of debt
securities or currency, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery.
Options on Futures Contracts - Options on futures contracts are
similar to options on securities or currency, except that an option on a
futures contract gives the purchaser the right, in return for the
premium, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put),
rather than to purchase or sell a security or currency, at a specified
price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance that represents the
amount by which the market price of the futures contract exceeds, in the
case of a call, or is less than, in the case of a put, the exercise
price of the option on the future. The writer of an option, upon
exercise, will assume a short position in the case of a call and a long
position in the case of a put.
Forward Currency Contracts - A forward currency contract involves
an obligation to purchase or sell a specific currency at a specified
future date, which may be any fixed number of days from the contract
date agreed upon by the parties, at a price set at the time the contract
is entered into.
A-1
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WESTERN ASSET TRUST, INC.
Money Market Portfolio
Short Duration Portfolio
Limited Duration Portfolio
Intermediate Duration Portfolio
Full Range Duration Portfolio
Long Duration Portfolio
STATEMENT OF ADDITIONAL INFORMATION
Western Asset Trust, Inc. ("Fund") is a no-load, open-end
management investment company currently consisting of nine separate
professionally managed investment portfolios. The six portfolios
described in this Statement of Additional Information are -- Money
Market Portfolio, Short Duration Portfolio, Limited Duration Portfolio,
Intermediate Duration Portfolio, Full Range Duration Portfolio and Long
Duration Portfolio (collectively, "Portfolios"). The Portfolios
described in this Statement of Additional Information are diversified.
The investment objective of the Money Market Portfolio is to seek
high current income consistent with liquidity and conservation of
principal. The investment objective of all other Portfolios is to
maximize total return, consistent with prudent investment management and
liquidity needs, by investing to obtain the average duration specified
for that Portfolio. These Portfolios differ from one another primarily
in the proportion of assets invested in certain types of securities and
in their normal duration.
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus for the Fund, dated
October 30, 1995, which has been filed with the Securities and Exchange
Commission ("SEC"). Copies of the Fund's Prospectus are available
without charge from Western Asset Trust, Inc., (818) 584-4300.
Dated: October 30, 1995
<PAGE>
TABLE OF CONTENTS
Page
Additional Information About Investment Limitations and Policies 3
Valuation of Portfolio Shares 14
Management of the Fund 16
Purchases and Redemptions 21
Exchange Privilege 22
Portfolio Transactions and Brokerage 22
Additional Tax Information 23
Other Information 25
Principal Holders of Securities 26
Financial Statements 29
Appendix A - Ratings of Securities A-1
2
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES
In addition to the investment objective of each Portfolio described
in the Prospectus, the Fund has adopted certain fundamental investment
limitations for each Portfolio that cannot be changed except by vote of
the holders of a majority of the outstanding voting securities of the
affected Portfolio. No Portfolio may:
(1) Borrow money or issue senior securities, except that a Portfolio
may borrow from banks or enter into reverse repurchase agreements,
provided that, immediately after such borrowing, the total amount
borrowed by the Portfolio, including reverse repurchase agreements, does
not exceed 33 1/3% of its total assets (including the amount borrowed)
less liabilities (other than the borrowings); and provided further that
any Portfolio may enter into transactions in options, futures, options
on futures and forward foreign currency contracts as described in the
Prospectus and this Statement of Additional Information;
(2) Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the
Portfolio, except as may be necessary in connection with permitted
borrowings, provided that this limitation does not prohibit escrow,
collateral or margin arrangements in connection with the Portfolio's use
of options, futures contracts, options on futures contracts, forward
foreign currency contracts, when-issued securities or reverse repurchase
agreements;
(3) Invest more than 5% of its total assets (taken at market value)
in securities of any one issuer, or buy 10% or more of all the
securities of any one issuer, except that up to 25% of a Portfolio's
total assets may be invested without regard to this limitation, and
provided that this limitation does not apply to securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities;
(4) Purchase securities on margin, except for short-term credits
necessary for clearance of portfolio transactions and except that a
Portfolio may make margin deposits in connection with its use of
options, futures contracts, options on futures contracts and forward
foreign currency contracts;
(5) Invest 25% or more of its total assets (taken at market value)
in any one industry, provided that this limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or repurchase agreements thereon; and provided
further that investments by the Money Market Portfolio in U.S. bank
instruments (such as bankers' acceptances, certificates of deposits and
time or demand deposits) shall not be considered investments in any one
industry for purposes of this policy; and provided further that, for
purposes of this limitation, U.S. branches of foreign banks are
considered U.S. banks if they are subject to substantially the same
regulation as domestic banks, and foreign branches of U.S. banks are
considered U.S. banks if the domestic parent would be unconditionally
liable in the event that the foreign branch failed to pay on the
instruments for any reason;
(6) Purchase or sell commodities or commodity contracts, except
that a Portfolio may purchase or sell futures on fixed income
instruments and foreign currencies and options thereon, may engage in
transactions in foreign currencies and may purchase or sell options on
securities and on foreign currencies and forward foreign currency
contracts;
(7) Underwrite securities of other issuers, except to the extent
that, in connection with the disposition of portfolio securities, a
Portfolio may be deemed an underwriter under federal securities laws;
3
<PAGE>
(8) Make loans, except loans of portfolio securities and except to
the extent that the purchase of a portion of an issue of publicly
distributed notes, bonds or other evidences of indebtedness or deposits
with banks and other financial institutions may be considered loans;
(9) Purchase or sell real estate, provided that a Portfolio may
invest in securities secured by, or issued by companies that invest in,
real estate or interests therein, including real estate investment
trusts; or
(10) Invest in oil, gas or mineral-related programs or leases,
provided that a Portfolio may invest in securities issued by companies
that engage in such activities.
The foregoing investment limitations cannot be changed without the
affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the affected Portfolio or (b) 67% or more of the shares of the
affected Portfolio present at a shareholders' meeting if more than 50%
of the outstanding shares of that Portfolio are represented at the
meeting in person or by proxy. Except with respect to investment
limitation number (1), if a percentage restriction is adhered to at the
time of an investment or transaction, a later increase or decrease in
percentage resulting from a change in the value of portfolio securities
or amount of total assets will not be considered a violation of any of
the foregoing limitations.
Except as otherwise specified, the investment limitations and
policies described below may be changed by the Fund's Board of Directors
without shareholder approval.
Ratings of Debt Obligations
Moody's Investors Service, Inc. ("Moody's), Standard & Poor's
Ratings Group ("S&P") and other nationally recognized or foreign
statistical rating organizations ("SROs") are private organizations that
provide ratings of the credit quality of debt obligations. A
description of the ratings assigned to corporate debt obligations by
Moody's and S&P is included in Appendix A. A Portfolio may consider
these ratings in determining whether to purchase, sell or hold a
security. Ratings are not absolute assurances of quality. Consequently,
securities with the same maturity, interest rate and rating may have
different market prices. Credit rating agencies attempt to evaluate the
safety of principal and interest payments and do not evaluate the risks
of fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so
that an issuer's current financial condition may be better or worse than
the rating indicates.
Mortgage-Related Securities
Mortgage-related securities represent an ownership interest in a
pool of residential mortgage loans. These securities are designed to
provide monthly payments of interest and, in most instances, principal
to the investor. The mortgagor's monthly payments to his/her lending
institution are "passed through" to investors such as the Portfolios.
Most issuers or poolers provide guarantees of payments, regardless of
whether the mortgagor actually makes the payment. The guarantees made
by issuers or poolers are often backed by various forms of credit,
insurance and collateral, although these may be in amounts less than the
full obligation of the pool to its shareholders.
Pools consist of whole mortgage loans or participations in loans.
The majority of these loans are made to purchasers of one- to
four-family homes. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among
pools. For example, in addition
4
<PAGE>
to fixed-rate, fixed-term mortgages, the Portfolios may purchase pools of
variable-rate mortgages, growing-equity mortgages, graduated-payment
mortgages and other types.
All poolers apply standards for qualification to lending
institutions which originate mortgages for the pools. Poolers also
establish credit standards and underwriting criteria for individual
mortgages included in the pools. In addition, many mortgages included
in pools are insured through private mortgage insurance companies.
The average life of mortgage-related securities varies with the
maturities and the nature of the underlying mortgage instruments. For
example, securities issued by the Government National Mortgage
Association ("GNMA") tend to have a longer average life than
participation certificates ("PCs") issued by the Federal Home Loan
Mortgage Corporation ("FHLMC") because there is a tendency for the
conventional and privately-insured mortgages underlying FHLMC PCs to
repay at faster rates than the Federal Housing Administration and
Veterans Administration loans underlying GNMAs. In addition, the term
of a security may be shortened by unscheduled or early payments of
principal and interest on the underlying mortgages. The occurrence of
mortgage prepayments is affected by factors including the level of
interest rates, general economic conditions, the location and age of the
mortgage and other social and demographic conditions.
In determining the dollar-weighted average maturity of each
Portfolio, the Adviser will follow industry practice in assigning an
average life to the mortgage-related securities held by each Portfolio
unless the interest rate on the mortgages underlying the securities is
such that a different prepayment rate is likely. For example, if a GNMA
has a high interest rate relative to the market, that GNMA is likely to
have a shorter overall maturity than a GNMA with a market rate coupon.
Moreover, the Adviser may deem it appropriate to change the projected
average life for a Portfolio's mortgage-related securities as a result
of fluctuations in market interest rates and other factors.
Yields on mortgage-related securities are typically quoted based on
the maturity of the underlying instruments and the associated average
life assumption. Actual prepayment experience may cause the yield to
differ from the yield expected on the basis of average life.
Reinvestment of the prepayments may occur at higher or lower interest
rates than the original investment, thus affecting the yield of the
Portfolio. The compounding effect from reinvestments of monthly
payments received by each Portfolio will increase the yield to
shareholders compared to bonds that pay interest semi-annually.
Private Mortgage-Related Securities
Certain private mortgage pools are organized in such a way that the
SEC staff considers them to be closed-end investment companies. Each
Portfolio's investment in such pools is constrained by federal statute,
which restricts investments in the shares of other investment companies.
The private mortgage-related securities in which the Portfolios may
invest include foreign mortgage pass-through securities ("Foreign
Pass-Throughs"), which are structurally similar to the pass-through
instruments described above. Such securities are issued by originators
of and investors in mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, investment bankers,
specialized financial institutions and special purpose subsidiaries of
the foregoing. Foreign Pass-Throughs usually are backed by a pool of
fixed rate or adjustable-rate mortgage loans. The Foreign Pass-Throughs
in which the Fund invests typically are not guaranteed by an entity
having the credit status of the Government National Mortgage
Association, but generally utilize various types of credit enhancement.
5
<PAGE>
Asset-Backed Securities
Asset-backed securities are structurally similar to mortgage-backed
securities, but are secured by interests in a different type of
receivable. Asset-backed securities therefore present certain risks
that are not presented by mortgage-related debt securities or other
securities in which the Fund may invest. Primarily, these securities do
not have the benefit of the same security interest in the related
collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set
off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the
servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a
risk that the purchaser would acquire an interest superior to that of
the holders of the related automobile receivables. In addition, because
of the large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee for the holders of
the automobile receivables may not have proper security interest in all
of the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. Because
asset-backed securities are relatively new, the market experience in
these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
Non-Governmental Fixed Income and Other Debt Securities
A Portfolio's investments in U.S. dollar-denominated fixed income
and other debt securities of non-governmental domestic or foreign
issuers are limited to fixed income or other debt securities (bonds,
debentures, notes and other similar instruments) which meet the minimum
ratings criteria set forth for the Portfolio or, if unrated, are
determined by the Adviser to be of comparable quality to fixed income or
other debt securities in which the Portfolio may invest.
Each of the Portfolios (except the Money Market Portfolio) may
invest up to 5% of its net assets in debt securities of non-governmental
issuers that are below investment grade but are rated B or higher by
Moody's or S&P. Where one of the SRO's has assigned an investment grade
rating to an instrument and others have given it a lower rating, the
Fund may consider the instrument to be investment grade for purposes of
the 5% limitation. The market for lower-rated securities may be thinner
and less active than that for higher-rated securities, which can
adversely affect the prices at which these securities can be sold, and
may make it difficult for a Portfolio to obtain market quotations daily.
If market quotations are not available, these securities will be valued
by a method that the Fund's Board of Directors believes accurately
reflects fair market value. Judgment may play a greater role in valuing
lower-rated debt securities than is the case with respect to securities
for which a broader range of dealer quotations and last-sale information
are available.
Although the prices of lower-rated bonds are generally less
sensitive to interest rate changes than are higher-rated bonds, the
prices of lower-rated bonds may be more sensitive to adverse economic
changes and developments regarding the individual issuer. Although the
market for lower-rated debt securities is not new, and the market has
previously weathered economic downturns, there has been in recent years
a substantial increase in the use of such securities to fund corporate
acquisitions and restructurings. Accordingly, the past performance of
the market for such securities may not be an accurate indication of its
performance during future economic downturns or periods of rising
interest rates.
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Bank Obligations
Bank obligations in which the Portfolios may invest include
certificates of deposit, bankers' acceptances and time deposits in U.S.
banks (including foreign branches) which have more than $1 billion in
total assets at the time of investment and are members of the Federal
Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation.
A Portfolio also may invest in certificates of deposit of savings and
loan associations (federally or state chartered and federally insured)
having total assets in excess of $1 billion.
Each Portfolio limits its investments in foreign bank obligations to
U.S. dollar-denominated obligations of foreign banks (including U.S.
branches of foreign banks) which at the time of investment (1) have more
than $10 billion, or the equivalent in other currencies, in total
assets; (2) have branches or agencies (limited purpose offices which do
not offer all banking services) in the United States; and (3) are
determined by the Adviser to be of comparable quality to obligations of
U.S. banks in which the Portfolios may invest. Subject to the
limitation on concentration of no more than 25% of a Portfolio's assets
in the securities of issuers in a particular industry and the
limitations on foreign securities and securities denominated in foreign
currency, there is no limitation on the amount of a Portfolio's assets
which may be invested in obligations of foreign banks which meet the
conditions set forth herein, except for the Money Market Portfolio,
which may invest only in U.S. dollar-denominated instruments. As noted
in the Prospectus, the Total Return Portfolios have no present intention
of investing in securities denominated in foreign currencies. Foreign
banks are not generally subject to examination by any U.S. Government
agency or instrumentality.
Restricted and Illiquid Securities
Each Portfolio is authorized to invest up to 10% of its net assets
in securities for which no readily available market exists, which for
this purpose includes, among other things, repurchase agreements
maturing in more than seven days. Restricted securities may be sold
only (1) pursuant to SEC Rule 144A or other exemption, (2) in privately
negotiated transactions or (3) in public offerings with respect to which
a registration statement is in effect under the Securities Act of 1933.
Such securities include those that are subject to restrictions contained
in the securities laws of other countries. Securities that are freely
marketable in the country where they are principally traded, but would
not be freely marketable in the United States, will not be subject to
this 10% limit. Where registration is required, a Portfolio may be
obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell
and the time the Portfolio may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse
market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell.
Reverse Repurchase Agreements and Other Borrowing
Each Portfolio may borrow for temporary or emergency purposes. This
borrowing may be unsecured. The Investment Company Act of 1940 ("1940
Act") requires a Portfolio to maintain continuous asset coverage (that
is, total assets including borrowings, less liabilities exclusive of
borrowings) of at least 300% of the amount borrowed. If the asset
coverage should decline below 300% as a result of market fluctuations or
for other reasons, a Portfolio may be required to sell some of its
holdings within three days to reduce the debt and restore the 300% asset
coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. Borrowing may exaggerate
the effect on net asset value of any increase or decrease in the market
value of the Portfolio.
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To avoid the potential leveraging effects of a
Portfolio's borrowings, a Portfolio will not make investments while
borrowings are in excess of 5% of the Portfolio's assets. Money
borrowed will be subject to interest costs which may or may not be
recovered by appreciation of the securities purchased. A Portfolio also
may be required to maintain minimum average balances in connection with
such borrowing or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of
borrowing over the stated interest rate. The Portfolios may enter into
reverse repurchase agreements as a method of borrowing.
Securities of Foreign Issuers
Each of the Total Return Portfolios is authorized to invest up to
25% of its total assets in U.S. dollar-denominated or foreign
currency-denominated securities of foreign issuers, but each currently
intends to limit such investments to U.S. dollar-denominated securities.
In addition to the risks of foreign securities described in the
Prospectus, investment in securities denominated in foreign currencies
would involve the additional risk that changes in foreign exchange
rates will affect the value of the securities. A Portfolio investing in
such securities would be subject to the transaction costs of foreign
currency conversion.
Short Sales
The Portfolios do not currently intend to sell securities short,
other than through the use of futures and options as described in the
Prospectus. No Portfolio is permitted to engage in short sales unless
it simultaneously owns, or has the right to acquire, securities
identical in kind and amount to those sold short.
Options and Futures
In pursuing their individual investment objectives, the Total Return
Portfolios may, as described in the Prospectus, purchase and sell
(write) both put options and call options on securities, may enter into
futures contracts on fixed income instruments and may purchase and sell
options on such futures contracts ("futures options") for hedging
purposes or in other circumstances permitted to a registered investment
company by the Commodity Futures Trading Commission ("CFTC") as part of
each Portfolios' investment strategy. If other types of options,
futures contracts or options on futures are traded in the future, a
Portfolio may also use those investments.
Each of the Total Return Portfolios is also authorized to purchase
and sell put and call options on foreign currencies, enter into futures
contracts on foreign currencies and may purchase and sell options on
such futures contracts. A Portfolio may use these techniques to attempt
to hedge against changes in foreign currency exchange rates or in other
circumstances permitted to a registered investment company by the CFTC.
Each of the Total Return Portfolios also is authorized to enter into
forward foreign currency contracts in amounts approximating the value of
some or all of the Portfolio's securities positions (or anticipated
positions) denominated in the currency being sold to hedge against
changes in the value of that currency relative to the U.S. dollar, to
increase the Portfolio's exposure to a currency the Adviser believes may
rise in value relative to the U.S. dollar, or to shift the Portfolio's
exposure to foreign currency fluctuations from one currency to another.
A Portfolio will not engage in these techniques unless it owns or
intends to purchase securities denominated in a foreign currency, which
the Portfolios do not currently intend to do.
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Options on Securities
A Portfolio may purchase call options on securities that the Adviser
intends to include in the Portfolio's investment portfolio in order to
fix the cost of a future purchase. Call options also may be used as a
means of participating in an anticipated price increase of a security on
a more limited risk basis than would be possible if the security itself
were purchased. In the event of a decline in the price of the
underlying security, use of this strategy would serve to limit the
Portfolio's potential loss to the option premium paid; conversely, if
the market price of the underlying security increases above the exercise
price and the Portfolio either sells or exercises the option, any profit
realized will be reduced by the premium.
A Portfolio may purchase put options in order to hedge against a
decline in the market value of securities held in its portfolio. The
put option enables a Portfolio to sell the underlying security at the
predetermined exercise price; thus the potential for loss to the
Portfolio below the exercise price is limited to the option premium
paid. If the market price of the underlying security is higher than the
exercise price of the put option, any profit the Portfolio realizes on
the sale of the security would be reduced by the premium paid for the
put option less any amount for which the put option may be sold.
A Portfolio may write covered call options on securities in which it
is authorized to invest. Because it can be expected that a call option
will be exercised if the market value of the underlying security
increases to a level greater than the exercise price, a Portfolio will
write covered call options on securities generally when the Adviser
believes that the premium received by the Portfolio, plus anticipated
appreciation in the market price of the underlying security up to the
exercise price of the option, will be greater than the total
appreciation in the price of the security. The strategy may be used to
provide limited protection against a decrease in the market price of the
security, in an amount equal to the premium received for writing the
call option less any transaction costs. Thus, in the event that the
market price of the underlying security held by the Portfolio declines,
the amount of such decline will be offset wholly or in part by the
amount of the premium received by the Portfolio. If, however, there is
an increase in the market price of the underlying security and the
option is exercised, the Portfolio would be obligated to sell the
security at less than its market value. The Portfolio would give up the
ability to sell the portfolio securities used to cover the call option
while the call option was outstanding. Such securities would also be
considered illiquid in the case of over-the-counter ("OTC") options
written by a Portfolio, and therefore subject to a Portfolio's
limitation on investing no more than 10% of its total assets in illiquid
securities. In addition, a Portfolio could lose the ability to
participate in an increase in the value of such securities above the
exercise price of the call option because such an increase would likely
be offset by an increase in cost of closing out the call option (or
could be negated if the buyer chose to exercise the call option at an
exercise price below the securities' current market value).
Futures Contracts and Options on Futures Contracts
Each Portfolio will limit its use of futures contracts and futures
options to hedging transactions or other circumstances permitted to
registered investment companies by regulatory authorities. For example,
a Portfolio might use futures contracts to attempt to hedge against
anticipated changes in interest rates that might adversely affect either
the value of the Portfolio's securities or the price of the securities
which the Portfolio intends to purchase. A Portfolio's hedging may
include sales of futures contracts as an offset against the effect of
expected increases in interest rates, and purchases of futures contracts
as an offset against the effect of expected declines in interest rates.
Although other techniques could be used to reduce exposure to interest
rate fluctuations, a Portfolio may be able to hedge its
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exposure more effectively and perhaps at a lower cost by using futures
contracts and options on futures contracts.
A Portfolio also may use futures contracts on fixed income
instruments and options thereon to hedge its investment portfolio
against changes in the general level of interest rates. A futures
contract on a fixed income instrument is a bilateral agreement pursuant
to which one party agrees to make, and the other party agrees to accept,
delivery of the specified type of fixed income security called for in
the contract at a specified future time and at a specified price. A
Portfolio may purchase a futures contract on a fixed income security
when it intends to purchase fixed income securities but has not yet done
so. This strategy may minimize the effect of all or part of an increase
in the market price of the fixed income security that a Portfolio
intends to purchase in the future. A rise in the price of the fixed
income security prior to its purchase may either be offset by an
increase in the value of the futures contract purchased by a Portfolio
or avoided by taking delivery of the fixed income securities under the
futures contract. Conversely, a fall in the market price of the
underlying fixed income security may result in a corresponding decrease
in the value of the futures position. A Portfolio may sell a futures
contract on a fixed income security in order to continue to receive the
income from a fixed income security, while endeavoring to avoid part or
all of the decline in the market value of that security that would
accompany an increase in interest rates.
A Portfolio may purchase a call option on a futures contract to
hedge against a market advance in fixed income securities which the
Portfolio plans to acquire at a future date. The purchase of a call
option on a futures contract is analogous to the purchase of a call
option on an individual fixed income security which can be used as a
temporary substitute for a position in the security itself. A Portfolio
also may write covered call options on futures contracts as a partial
hedge against a decline in the price of fixed income securities held in
the Portfolio's investment portfolio, or purchase put options on futures
contracts in order to hedge against a decline in the value of fixed
income securities held in the Portfolio's investment portfolio. A
Portfolio may write a covered put option as a partial anticipatory
hedge.
When a purchase or sale of a futures contract is made by a
Portfolio, the Portfolio is required to deposit with its custodian (or a
broker, if legally permitted) a specified amount of cash or U.S.
Government securities ("initial margin"). The margin required for a
futures contract is set by the exchange on which the contract is traded
and may be modified during the term of the contract. The initial margin
is in the nature of a performance bond or good faith deposit on the
futures contract which is returned to the Portfolio upon termination of
the contract, assuming all contractual obligations have been satisfied.
Under certain circumstances, such as during periods of high volatility,
a Portfolio may be required by an exchange to increase the level of its
initial margin payment. Additionally, initial margin requirements may
be increased generally in the future by regulatory action. Each
Portfolio expects to earn interest income on its initial margin
deposits. A futures contract held by a Portfolio is valued daily at the
official settlement price of the exchange on which it is traded. Each
day the Portfolio pays or receives cash, called "variation margin,"
equal to the daily change in value of the futures contract. This
process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Portfolio but is instead settlement
between the Portfolio and the broker of the amount one would owe the
other if the futures contract expired. In computing daily net asset
value, each Portfolio will mark to market its open futures positions.
A Portfolio is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by it.
Such margin deposits will vary depending on the nature of the underlying
futures contract (and the related initial margin requirements), the
current market value of the option and other futures positions held by
the Portfolio.
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Although some futures contracts call for making or taking delivery
of the underlying securities, generally those contracts are closed out
prior to delivery by offsetting purchases or sales of matching futures
contracts (involving the same currency or underlying security and
delivery month). If an offsetting purchase price is less than the
original sale price, the Portfolio realizes a gain, or if it is more,
the Portfolio realizes a loss. If an offsetting sale price is more than
the original purchase price, the Portfolio realizes a gain, or if it is
less, the Portfolio realizes a loss. The Portfolio will also bear
transaction costs for each contract which will be included in these
calculations.
A Portfolio will not enter into futures contracts or option
positions if, immediately thereafter, the initial margin deposits plus
premiums paid by it, less the amount by which any such options positions
are "in-the-money" at the time of purchase, would exceed 5% of the fair
market value of the Portfolio's total assets. A call option is
"in-the-money" if the value of the futures contract that is the subject
of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
The requirements for qualification as a regulated investment company
also may limit the extent to which a Portfolio may enter into futures or
options on futures. See "Additional Tax Information."
Risks Associated with Futures and Options
In considering the Portfolios' use of futures contracts and options,
particular note should be taken of the following:
(1) Positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such
futures contracts. Futures exchanges may limit the amount of
fluctuation permitted in certain futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the
price of a futures contract may vary either up or down from the previous
day's settlement price at the end of the current trading session. Once
the daily limit has been reached in a futures contract subject to the
limit, no more trades may be made on that day at a price beyond that
limit. The daily limit governs only price movements during a particular
trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for
several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of positions and subjecting some holders
of futures contracts to substantial losses.
(2) The ability to establish and close out positions in either
futures contracts or exchange-listed options is also subject to the
maintenance of a liquid secondary market. Consequently, it may not be
possible for a Portfolio to close a position and, in the event of
adverse price movements, the Portfolio would have to make daily cash
payments of variation margin (except in the case of purchased options).
However, in the event futures contracts or options have been used to
hedge portfolio securities, such securities will not be sold until the
contracts can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset
losses on the futures contract. However, there is no guarantee that the
price of the securities will, in fact, correlate with the price
movements in the contracts and thus provide an offset to losses on the
contracts.
(3) Successful use by a Portfolio of futures contracts and options
will depend upon the Adviser's ability to predict movements in the
direction of the overall securities and interest rate markets, which
may require different skills and techniques than predicting changes in
the prices of individual securities. Moreover, futures contracts relate
not to the current level of the underlying instrument but to
anticipated levels at some point in the future. There is, in addition,
the risk that
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movements in the price of the futures contract will not
correlate with movements in the prices of the securities being hedged.
If the price of the securities being hedged has moved in a favorable
direction, this advantage may be partially offset by losses in the
futures position. In addition, if the Portfolio has insufficient cash,
it may have to sell assets from its investment portfolio to meet daily
variation margin requirements. Any such sale of assets may or may not
be made at prices that reflect the rising market; consequently, a
Portfolio may need to sell assets at a time when such sales are
disadvantageous to the Portfolio. If the price of the futures contract
moves more than the price of the underlying securities, the Portfolio
will experience either a loss or a gain on the futures contract that may
or may not be completely offset by movements in the price of the
securities that are the subject of the hedge.
(4) The value of an option position will reflect, among other
things, the current market price of the underlying security or futures
contract, the time remaining until expiration, the relationship of the
exercise price to the market price, the historical price volatility of
the underlying security or futures contract and general market
conditions. For this reason, the successful use of options as a hedging
strategy depends upon the Adviser's ability to forecast the direction of
price fluctuations in the underlying market.
(5) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the
futures position and the securities being hedged, movements in the
prices of futures contracts may not correlate perfectly with movements
in the prices of the hedged securities due to price distortions in the
futures market. There may be several reasons unrelated to the value of
the underlying securities which cause this situation to occur. First,
as noted above, all participants in the futures market are subject to
initial and variation margin requirements. If, to avoid meeting
additional margin deposit requirements or for other reasons, investors
choose to close a significant number of futures contracts through
offsetting transactions, distortions in the normal price relationship
between the securities and the futures markets may occur. Second,
because the margin deposit requirements in the futures market are less
onerous than margin requirements in the securities market, there may be
increased participation by speculators in the futures market; such
speculative activity in the futures market also may cause temporary
price distortions. Third, participants could make or take delivery of
the underlying securities instead of closing out their contracts. As a
result, a correct forecast of general market trends may not result in
successful hedging through the use of futures contracts over the short
term. In addition, activities of large traders in both the futures and
securities markets involving arbitrage and other investment strategies
may result in temporary price distortions.
(6) Options normally have expiration dates of up to nine months.
The exercise price of the options may be below, equal to or above the
current market value of the underlying security or futures contract.
Options that expire unexercised have no value, and the Portfolio will
realize a loss in the amount paid and any transaction costs.
(7) Like options on securities, options on futures contracts have a
limited life. The ability to establish and close out options on futures
will be subject to the development and maintenance of liquid secondary
markets on the relevant exchanges or boards of trade. There can be no
certainty that liquid secondary markets for all options on futures
contracts will develop.
(8) Purchasers of options on futures contracts pay a premium in
cash at the time of purchase. This amount and the transaction costs are
all that is at risk. Sellers of options on futures contracts, however,
must post an initial margin and are subject to additional margin calls
which could be substantial in the event of adverse price movements. In
addition, although the maximum amount
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at risk when the Portfolio purchases an option is the premium paid for
the option and the transaction costs, there may be circumstances when
the purchase of an option on a futures contract would result in a loss
to the Portfolio when the use of a futures contract would not, such as
when there is no movement in the value of the securities being hedged.
(9) A Portfolio's activities in the futures and options markets may
result in a higher portfolio turnover rate and additional transaction
costs in the form of added brokerage commissions; however, a Portfolio
also may save on commissions by using such contracts as a hedge rather
than buying or selling individual securities in anticipation or as a
result of market movements.
(10) A Portfolio may purchase and write both exchange-traded
options and options traded on the OTC market. Exchange markets for
options on debt securities exist but are relatively new, and the
ability to establish and close out positions on the exchanges is subject
to the maintenance of a liquid secondary market. Although the
Portfolios intend to purchase or write only those exchange-traded
options for which there appears to be an active secondary market, there
is no assurance that a liquid secondary market will exist for any
particular option at any specific time. Closing transactions may be
effected with respect to options traded in the OTC markets only by
negotiating directly with the other party to the option contract, or in
a secondary market for the option if such market exists. Although the
Portfolios will enter into OTC options only with dealers which agree to
enter into, and which are expected to be capable of entering into,
closing transactions with the Portfolios, there can be no assurance that
a Portfolio will be able to liquidate an OTC option at a favorable price
at any time prior to expiration. In the event of insolvency of the
contra-party, a Portfolio may be unable to liquidate an OTC option.
Accordingly, it may not be possible to effect closing transactions with
respect to certain options, with the result that the Portfolio would
have to exercise those options which it has purchased in order to
realize any profit. With respect to options written by a Portfolio, the
inability to enter into a closing transaction may result in material
losses to the Portfolio. For example, because a Portfolio must maintain
a covered position with respect to any call option it writes on a
security or futures contract the Portfolio may not sell the underlying
security or futures contract or invest any cash, U.S. Government
securities or short-term debt securities used as cover during the period
it is obligated under such option. This requirement may impair a
Portfolio's ability to sell a portfolio security or make an investment
at a time when such a sale or investment might be advantageous.
Additional Risks of Options on Securities, Futures Contracts and Options
on Futures Contracts Traded on Foreign Exchanges
Options on securities, futures contracts and options on futures
contracts may be traded on foreign exchanges. Such transactions may not
be regulated as effectively as similar transactions in the United
States, may not involve a clearing mechanism and related guarantees and
are subject to the risk of governmental actions affecting trading in, or
the price of, foreign securities. The value of such positions also
could be adversely affected by (1) other complex foreign political,
legal and economic factors, (2) lesser availability than in the United
States of data on which to make trading decisions, (3) delays in the
Portfolios' ability to act upon economic events occurring in foreign
markets during non-business hours in the United States, (4) the
imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States and (5) lesser trading
volume.
Cover for Hedging Strategies
A Portfolio will not use leverage in its hedging strategies. Each
Portfolio will comply with guidelines established by the SEC with
respect to coverage of hedging strategies by mutual funds, and, if the
guidelines so require, will set aside cash and/or liquid, high-grade
debt securities in a segregated
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account with its custodian in the amount prescribed, as marked to
market daily. Securities, options or futures positions used for
cover and securities held in a segregated account cannot be sold
or closed out while the hedging strategy is outstanding, unless they
are replaced with similar assets. As a result, there is a possibility
that the use of cover or segregation involving a large percentage of a
Portfolio's assets could impede portfolio management or a Portfolio's
ability to meet redemption requests or other current obligations.
Duration
Traditionally, a fixed income security's term to maturity was used
to evaluate the sensitivity of the security's price to changes in
interest rates. Duration is a measure of the expected life of a fixed
income security on a cash flow basis, that was developed as a more
precise method of evaluating such sensitivity. A security's term to
maturity measures only the time until final payment of the security, and
does not take into account the pattern of payments made prior to
maturity. Duration takes time intervals over which the interest and
principal payments are scheduled and weights each by the present values
of the cash to be received at the corresponding future point in time.
There may be circumstances under which even duration calculations do
not properly reflect the interest rate exposure of a security. For
example, floating variable rate securities may have final maturities of
ten or more years; however, their interest exposure corresponds to the
frequency of the coupon reset. Similarly, many mortgage pass-through
securities may have stated final maturities of 30 years, but current
prepayment rates are more critical in determining the security's
interest rate exposure. In these situations, the Adviser may consider
other analytical techniques that incorporate the economic life of a
security into its determination of interest rate exposure.
VALUATION OF PORTFOLIO SHARES
As described in the Prospectus, securities owned by any of the
Total Return Portfolios for which market quotations are readily
available are valued at current market value. Securities are valued at
the last sale price for a comparable position on the day the securities
are being valued or, lacking any sales on such day, at the last
available bid price. In cases where securities are traded on more than
one market, the securities are generally valued on the market considered
by the Adviser as the primary market.
Occasionally, events affecting the value of foreign investments
occur between the time at which they are determined and the close of
trading on the New York Stock Exchange ("Exchange"), which events will
not be reflected in a computation of a Portfolio's net asset value on
that day. If events materially affecting the value of such investments
occur during such time period, the investments will be valued at their
fair value as determined in good faith by or under the direction of the
Board of Directors.
Use of the Amortized Cost Method
The Board of Directors has decided that the best method for
determining the value of securities held by the Money Market Portfolio
is amortized cost. Under this method, portfolio instruments are valued
at acquisition cost as adjusted for amortization of premium or accrual
of discount rather than at current market value. The Board of Directors
continually assesses this method of valuation and recommends changes
where necessary to assure that the Money Market Portfolio's investments
are valued at their fair value as determined in good faith by or under
the direction of the directors.
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The Fund's use of the amortized cost method of valuing portfolio
instruments held by the Money Market Portfolio depends on its compliance
with Rule 2a-7 under the 1940 Act. Under that Rule, the Board of
Directors must establish procedures reasonably designed to stabilize the
net asset value per share, as computed for purposes of distributions and
redemptions, at $1.00 per share, taking into account current market
conditions and the Portfolio's investment objective.
Under Rule 2a-7, the Money Market Portfolio is permitted to purchase
instruments which are subject to demand features or standby commitments.
As defined by the Rule, a demand feature entitles the Portfolio to
receive the principal amount of the instrument from the issuer or a
third party (1) at any time, on no more than 30 days' notice or (2) at
specified intervals not exceeding 397 days, and upon no more than 30
days' notice. A standby commitment entitles the Portfolio to achieve
same day settlement and to receive an exercise price equal to the
amortized cost of the underlying instrument plus accrued interest at the
time of exercise.
Although demand features and standby commitments are techniques that
are defined as "puts" under Rule 2a-7, the Portfolio does not consider
them to be "puts" as that term is used in the Fund's investment
limitations. Demand features and standby commitments are features which
enhance an instrument's liquidity, while the investment limitation
limiting "puts" is designed to limit the purchase and sale of put and
call options to certain purposes and is not designed to prohibit the
Fund from using techniques which enhance the liquidity of portfolio
instruments.
Monitoring Procedures
The Board of Directors' procedures include monitoring the
relationship between the amortized cost value per share and a net asset
value per share based upon available indications of market value. The
Board will take any steps it considers appropriate if there is a
difference of more than 0.5% between the two (such as redeeming in kind
or shortening the average portfolio maturity) to minimize any material
dilution or other unfair results arising from differences between the
two methods of determining net asset value.
Investment Restrictions
Rule 2a-7 requires the Money Market Portfolio to limit its
investments to instruments that present minimal credit risk, in the
opinion of the Board, and are of high quality. The Rule also requires
the Portfolio to maintain a dollar-weighted average portfolio maturity
of not more than 90 days that is appropriate to the objective of
maintaining a stable net asset value of $1.00 per share. In addition,
no instrument considered under SEC rules to have a remaining maturity of
more than 397 days can be purchased by the Portfolio. The Portfolio may
hold securities with maturities greater than 397 days as collateral for
repurchase agreements and other collateralized transactions of short
duration. Should the disposition of a portfolio security result in a
dollar-weighted average portfolio maturity of more than 90 days, the
Portfolio will invest its available cash to reduce the average maturity
to 90 days or less as soon as possible.
It is the Money Market Portfolio's usual practice to hold portfolio
securities to maturity and realize par, unless the Adviser determines
that sale or other disposition is appropriate in light of the
Portfolio's investment objective. Under the amortized cost method of
valuation, neither the amount of daily income nor the net asset value is
affected by any unrealized appreciation or depreciation of the
portfolio.
15
<PAGE>
In periods of declining interest rates, the indicated daily yield on
shares of the Money Market Portfolio computed by dividing the annualized
daily income on the portfolio by the net asset value computed as above
may tend to be higher than a similar computation made by using a method
of valuation based upon market prices and estimates. In periods of
rising interest rates, the indicated daily yield on shares of the
Portfolio computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market
prices and estimates.
MANAGEMENT OF THE FUND
Directors and Officers
The Fund's officers are responsible for the operation of the Fund
under the direction of the Board of Directors. The officers and
directors of the Fund and their principal occupations during the past
five years are set forth below. An asterisk (*) indicates directors who
are "interested persons" of the Fund as defined in the 1940 Act. The
address of each officer and director is 117 East Colorado Blvd.,
Pasadena, CA 91105.
William G. McGagh, [66] (1)(2) Chairman of the Board and Director;
Consultant, McGagh Associates (corporate financial consulting), January
1989-present; Director of Pacific American Income Shares, Inc.;
formerly: Senior Vice-President, Chief Financial Officer and Director
of Northrop Corporation (military aircraft).
Dr. Richard C. Gilman, [72] (1) (2) Director; President Emeritus of
Occidental College, 1988-present; Director of Pacific American Income
Shares, Inc.; formerly: President and Chief Executive Officer of
Occidental College.
Gordon L. Hough, [76] (1) Director; Director of Pacific American
Income Shares, Inc., Ameron, Inc. (construction products) and the
Chronicle Publishing Company; formerly: Director of First Interstate
Bank.
*Ronald L. Olson, [54] (2) (3) Director; Senior Partner, Munger,
Tolles & Olson (a law partnership); Director of Pacific American Income
Shares, Inc.
*W. Curtis Livingston, III, [52] (1) President and Director;
President, Director and Chief Executive Officer of Western Asset
Management Company (investment management firm), December 1980-present;
President, Pacific American Income Shares, Inc.
Norman Barker, Jr., [73] Director; Director of American Health
Properties (real estate investment trust), Southern California Edison
Company, SPI Pharmaceuticals, Inc., ICN Pharmaceutical, Inc., and TCW
Convertible Securities Fund, Inc. (management investment company);
formerly: Chairman of the Board of First Interstate Bancorp.
*Louis A. Simpson, [58] (4) Director; President and CEO Capital
Operations of Government Employees Insurance Company (GEICO Corporation)
since May 1993; Vice Chairman of GEICO (1985-1993); Senior Vice
President and Chief Investment Officer of GEICO (1979-1985). Director
of Pacific American Income Shares, Inc., Potomac Electric Power Company,
Potomac Capital Investment Corporation, and Salomon Inc. Formerly:
President and CEO of Western Asset Management Company.
16
<PAGE>
Kent S. Engel, [48] Vice-President; Director and Chief Investment
Officer of Western Asset Management Company, 1969-present;
Vice-President and Portfolio Manager of Pacific American Income Shares,
Inc.
Scott F. Grannis, [46] Vice President; Director and Economist,
Western Asset Management Company, 1989 - present; Director, Supershares
Services Corp. (investment company services); formerly: Vice-President,
Leland O'Brien Rubinstein (investment advisory firm), 1986-89.
Stephen A. Walsh, [36] Vice-President: Director and Senior Portfolio
Manager, Western Asset Management Company; formerly: Portfolio Manager
and Trader of Security Pacific Investment Managers, Inc. (investment
management company), 1989-1991; Portfolio Manager of Atlantic Richfield
Company (petroleum company), 1981-1988.
Ilene S. Harker, [40] Vice President and Secretary; Director of
Administration and Controls, Western Asset Management Company,
1978-present; Secretary, Pacific American Income Shares, Inc.,
1993-present.
James W. Hirschmann, III, [35] Vice-President; Director of
Marketing, Western Asset Management Company, April 1989-present;
formerly: Vice-President and Director of Marketing, Financial Trust
Corporation (bank holding company), January 1988 - April 1989;
Vice-President of Marketing, Atalanta/Sosnoff Capital (investment
management company), January 1986 - January 1988.
Marie K. Karpinski, [46] Vice-President and Treasurer;
Vice-President and Treasurer of fifteen Legg Mason funds (open-end
investment companies); Secretary/Treasurer of Worldwide Value Fund, Inc.
(closed-end investment company); Treasurer of Legg Mason Fund Adviser,
Inc., March 1986-present; Vice-President of Legg Mason Wood Walker,
Inc., February 1992 - present; Assistant Vice-President of Legg Mason
Wood Walker, Inc., March 1989- February 1992.
Randolph L. Kohn, [48] Vice-President; Director of Client Services,
Western Asset Management Company, 1984-present.
S. Kenneth Leech, [41] Vice-President; Director of Portfolio
Management, Western Asset Management Company, May 1990-present;
formerly: Senior Trader of Greenwich Capital, 1988-1990; Fixed Income
Manager of The First Boston Corporation (holding company; stock and bond
dealers), 1985-1987.
Edward A. Moody, [45] Vice-President; Director of Investment
Systems, Western Asset Management Company.
Joseph L. Orlando, [35] Vice-President; Senior Marketing Manager of
Western Asset Management Company; formerly: Regional Manager of T. Rowe
Price Associates (investment management firm), January 1988 - July 1992.
Steven T. Saruwatari, [30] Assistant Treasurer; Senior Financial
Officer, Western Asset Management Company; formerly: Controller-Finance
for LaSalle Paper Company/Spicers Paper, Inc. (distributor of fine
printing papers), June 1991-November 1994; and Senior Auditor for
Coopers and Lybrand (international public accounting firm), September
1988 - May 1991.
17
<PAGE>
Donna A. Barnes, [35] Assistant Secretary; Assistant Secretary,
Pacific American Income Shares, Inc., 1993 - present; employee of
Western Asset Management Company, 1991 - present. Formerly: Personnel
Officer, First Interstate Bank, Ltd. (1982-1989).
____________________
(1) Member of the Executive Committee of the Board. When the full Board
is not in session, the Executive Committee may exercise all the powers
held by the Board in the management of the business and affairs of the
Fund that may be lawfully exercised by the full Board, except the power
to declare a dividend, to authorize the issuance of stock, to recommend
to stockholders any matter requiring stockholders' approval, to amend
the By-Laws, or to approve any merger or share exchange which does not
require shareholder approval.
(2) Member of the Audit Committee of the Board. The Audit Committee
meets with the Fund's independent accountants to review the financial
statements of the Fund, the arrangements for special and annual audits,
the adequacy of internal controls, the Fund's periodic reporting
process, material contracts entered into by the Fund, the services
provided by the accountants, any proposed changes in accounting
practices or principles, the independence of the accountants; and to
report on such matters to the Board.
The Fund has no nominating or compensation committee.
(3) Mr. Olson may be deemed an interested person because the law firm in
which he is a partner has provided certain services to the Fund and its
investment adviser.
(4) Because Mr. Simpson is a Director of Salomon Inc., the parent
company of a registered broker-dealer, Mr. Simpson may be an interested
person.
Officers and directors of the Fund who are affiliated persons of the
Adviser, Administrator or Distributor receive no salary or fees from the
Fund. Non-affiliated directors of the Fund receive a fee of $2,000
annually for serving as a director, and a fee of $500 and related
expenses per Portfolio for each meeting of the Board of Directors
attended by them. The Chairman of the Board receives an additional
$1,000 per year for serving in that capacity.
The following table provides certain information relating to the
compensation of the Fund's directors and senior executive officers for
the fiscal year ended June 30, 1995.
18
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From Fund and
Aggregate Benefits Accrued Estimated Fund Complex
Name of Person and Compensation as Part of Funds' Annual Benefits Paid to
Position From the Fund* Expenses Upon Retirement Directors**
<S> <C> <C> <C> <C>
William G. McGagh -
Chairman of the Board and
Director $9,000 N/A N/A $17,300
Dr. Richard C. Gilman -
Director $6,500 N/A N/A $16,300
Gordon L. Hough - Director $6,500 N/A N/A $14,400
Ronald L. Olson - Director $6,500 N/A N/A $14,000
W. Curtis Livingston, III -
President and Director None N/A N/A None
Norman Barker, Jr. -
Director $8,000 N/A N/A $18,100
Louis A. Simpson -
Director $6,000 N/A N/A $4,000
Ilene S. Harker - Vice
President and Secretary None N/A N/A None
Marie K. Karpinski - Vice
President and Treasurer None N/A N/A None
</TABLE>
* Represents fees paid to each director during the fiscal year ended
June 30, 1995.
** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1994.
The Fund's Investment Adviser
Western Asset Management Company ("Adviser"), 117 East Colorado
Boulevard, Pasadena, CA 91105, serves as investment adviser to the Fund
under an Investment Advisory Agreement dated August 24, 1990 between the
Adviser and the Fund covering the Portfolios other than the Intermediate
Duration and Short Duration Portfolios, and an Investment Advisory
Agreement dated February 10, 1994 between the Adviser and the Fund
covering the Intermediate Duration and Short Duration Portfolios
(together, the "Advisory Agreement"). The Advisory Agreement was most
recently approved by the Board of Directors, including a majority of the
directors who are not "interested persons" (as defined in the 1940 Act)
of the Fund, the Adviser or its affiliates, on April 13, 1995.
Under the Advisory Agreement, the Adviser is responsible, subject
to the general supervision of the Fund's Board of Directors, for the
actual management of the Fund's assets, including the responsibility for
making decisions and placing orders to buy, sell or hold a particular
security, consistent with the investment objectives and policies
described in the Fund's Prospectus and this Statement of Additional
Information. The Adviser also is responsible for the compensation of
directors and officers of the Fund who are employees of the Adviser or
its affiliates. The Adviser receives for its services to the Fund an
advisory fee calculated daily and payable monthly, at an annual rate
equal to 0.40% of each Total Return Portfolio's average daily net
assets. For the Full Range Duration Portfolio,
19
<PAGE>
the Adviser received $963,008 (prior to fees waived of $69,442) for the
year ended June 30, 1995, $732,397 (prior to fees waived of $158,373) for
the year ended June 30, 1994, and $441,639 (prior to fees waived of $71,911)
for the year ended June 30, 1993. For the Intermediate Duration Portfolio,
the Adviser received $29,571 (prior to fees waived of $29,571) for the year
ended June 30, 1995.
Each Portfolio pays all of its other expenses which are not assumed
by the Adviser or the Administrator. These expenses include, among
others, expenses of preparing and printing prospectuses, statements of
additional information, proxy statements and reports and of distributing
them to existing shareholders, custodian charges, transfer agency fees,
organizational expenses, compensation of the directors who are not
"interested persons" of the Adviser, Administrator or Distributor, as
that term is defined in the 1940 Act, legal and audit expenses,
insurance expenses, expenses of registering and qualifying shares of the
Portfolio for sale under federal and state law, distribution fees,
governmental fees, expenses incurred in connection with membership in
investment company organizations, interest expense, taxes and brokerage
fees and commissions. The Portfolios also are liable for such
nonrecurring expenses as may arise, including litigation to which a
Portfolio or the Fund may be a party. The Fund may also have an
obligation to indemnify its directors and officers with respect to
litigation.
Under the Advisory Agreement, the Adviser will not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Fund in connection with the performance of the Advisory Agreement,
except a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its
obligations or duties thereunder.
The Advisory Agreement terminates automatically upon assignment and
is terminable with respect to any Portfolio at any time without penalty
by vote of the Fund's Board of Directors, by vote of a majority of that
Portfolio's outstanding voting securities, or by the Adviser, on not
less than 60 days' notice to the Fund, and may be terminated immediately
upon the mutual written consent of the Adviser and the Fund.
The Fund's Administrator
Legg Mason Fund Adviser, Inc. ("Administrator"), 111 South Calvert
Street, Baltimore, MD 21202, serves as the administrator for the Fund
under an Administration Agreement with the Fund dated August 24, 1990
covering the Portfolios other than the Intermediate Duration and Short
Duration Portfolios, and an Administration Agreement with the Fund dated
February 10, 1994 covering the Intermediate Duration and Short Duration
Portfolios (together, the "Administration Agreement"). The
Administration Agreement was most recently approved on April 13, 1995 by
the Fund's Board of Directors, including a majority of the directors who
are not "interested persons" of the Fund, the Administrator or its
affiliates. The Administration Agreement covering the Intermediate
Duration and Short Duration Portfolios was approved by the Fund's Board
of Directors, including a majority of the directors who are not
"interested persons" of the Fund, the Administrator or its affiliates,
on February 10, 1994, and was approved by the sole shareholder of the
Intermediate Duration Portfolio and the sole shareholder of the Short
Duration Portfolio on April 18, 1994.
Under the Administration Agreement, the Administrator is obligated
to provide the Fund with office space and certain officers, to oversee
accounting and recordkeeping services provided by the Fund's custodian
and transfer and dividend-disbursing agent, and to provide certain
shareholder services not provided by the Fund's transfer and
dividend-disbursing agent.
20
<PAGE>
For the Full Range Duration, Long Duration, Limited Duration and
Money Market Portfolios, the Administrator receives for its services to
the Fund an administrative fee, calculated daily and payable monthly, at
an annual rate equal to 0.10% of the Portfolio's average daily net
assets. Effective July 1, 1991, the Administrator voluntarily agreed to
limit its annual fee to 0.05% of the Portfolio's average daily net
assets. This agreement is voluntary and may be terminated at any time.
For services to the Short Duration and Intermediate Duration Portfolios,
the Administrator receives a fee, calculated daily and payable monthly,
at an annual rate equal to 0.05% of those Portfolio's average daily net
assets. For the Full Range Duration Portfolio, the Administrator
received fees of $120,376, $183,100 and $55,205 for the years ended June
30, 1995, 1994 and 1993, respectively. For the Intermediate Duration
Portfolio, the Administrator waived all administrative fees for the year
ended June 30, 1995.
The Fund's Distributor
Legg Mason Wood Walker, Incorporated ("Legg Mason" or
"Distributor"), 111 South Calvert Street, Baltimore, MD 21202, acts as a
distributor of the shares of the Fund pursuant to an Underwriting
Agreement with the Fund dated August 24, 1990 ("Underwriting
Agreement"). This Agreement was most recently approved by the Fund's
Board of Directors, including a majority of the directors who are not
"interested persons" (as defined in the 1940 Act) of the Fund, Legg
Mason or its affiliates, on April 13, 1995.
The Distributor is not obligated to sell any specific amount of
Fund shares and receives no compensation pursuant to the Underwriting
Agreement. The Underwriting Agreement is terminable with respect to any
Portfolio without penalty, at any time, by vote of a majority of the
Fund's disinterested directors, or by vote of the holders of a majority
of the shares of that Portfolio, or by Legg Mason upon 60 days' notice
to the Fund.
Expense Limitations
The Adviser has voluntarily agreed to waive its fees and/or
reimburse each Portfolio to the extent the Portfolio's expenses
(exclusive of taxes, interest, brokerage and other transaction expenses
and any other extraordinary expenses) exceed during any month an annual
percentage rate equal to 0.50% of the Portfolio's average daily net
assets for such month for the Limited, Intermediate, Full Range and Long
Duration Portfolios, and 0.40% of the Portfolio's average daily net
assets for such month for the Money Market and Short Duration
Portfolios. For the Full Range Duration Portfolio, the Adviser waived
advisory fees of $69,442, $158,373 and $71,911 for the years ended June
30, 1995, 1994 and 1993, respectively. For the Intermediate Duration
Portfolio, the Adviser waived all advisory fees for the year ended June
30, 1995. These agreements are voluntary and may be terminated at any
time.
A Portfolio may reimburse its Adviser for fees foregone or expenses
reimbursed by it pursuant to the expense limitation if expenses fall
below the limit prior to the end of the fiscal year.
PURCHASES AND REDEMPTIONS
The Fund reserves the right to modify or terminate the mail,
telephone or wire redemption services described in the Prospectus at any
time. The Fund also reserves the right to suspend or postpone
redemptions (1) for any period during which the Exchange is closed
(other than for customary weekend and holiday closings), (2) when
trading in markets the Fund normally utilizes is restricted or an
emergency, as defined by rules and regulations of the SEC, exists,
making disposal of the Fund's investments or determination of its net
asset value not reasonably practicable, or (3) for such other
21
<PAGE>
periods as the SEC by regulation or order may permit for the protection
of the Fund's shareholders. In the case of any such suspension, an investor
may either withdraw the request for redemption or receive payment based
upon the net asset value next determined after the suspension is lifted.
The Fund agrees to redeem shares of each Portfolio solely in cash
up to the lesser of $250,000 or 1% of the Portfolio's net assets during
any 90-day period for any one shareholder. In consideration of the best
interests of the remaining shareholders, the Fund reserves the right to
pay any redemption price exceeding this amount in whole or in part by a
distribution in kind of readily marketable securities held by a
Portfolio in lieu of cash. It is highly unlikely that shares would ever
be redeemed in kind. If shares are redeemed in kind, however, the
redeeming shareholder should expect to incur transaction costs upon the
disposition of the securities received in the distribution.
EXCHANGE PRIVILEGE
Shareholders in any of the Portfolios are entitled to exchange
their shares for shares of the other Portfolios, provided that the
shares of those Portfolios are eligible for sale in the shareholder's
state of residence, and are being offered at the time.
When a shareholder decides to exchange shares of a Portfolio, the
Fund's transfer agent will redeem shares of the Portfolio and invest the
proceeds in shares of the Portfolio selected. Redemptions of shares of
the Portfolio will be made at their net asset value determined on the
same day that the request is received in proper order, if received
before the close of business of the Exchange on any day when the Fund
and its transfer agent are open for business. If the request is
received by the transfer agent after the close of business on the
Exchange, shares will be redeemed at their net asset value determined as
of the close of the Exchange on the next day that the Fund and its
transfer agent are open for business.
There is no charge for the exchange privilege and no sales charge
imposed on an exchange, but the Fund reserves the right to modify or
terminate the exchange privilege at any time. For information
concerning the exchange privilege, or to make an exchange, please
contact the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are
excluded from the calculation. For the years ended June 30, 1995 and
1994, the Full Range Duration Portfolio's portfolio turnover rates were
257.90% and 272.49%, respectively. For the year ended June 30, 1995,
the Intermediate Duration Portfolio's portfolio turnover rate was
764.45%.
Under the Advisory Agreement, the Adviser is responsible for the
execution of the Fund's portfolio transactions. In selecting brokers or
dealers, the Adviser must seek the most favorable price (including the
applicable dealer spread) and execution for such transactions, subject
to the possible payment as described below of higher brokerage
commissions or spreads to brokers or dealers who provide research and
analysis. The Fund may not always pay the lowest commission or spread
available. Rather, in placing orders on behalf of the Fund, the Adviser
will also take into account such factors as size of the order,
difficulty of execution, efficiency of the executing broker's or
dealer's facilities (including the services described below) and any
risk assumed by the executing broker or dealer.
22
<PAGE>
Consistent with the policy of obtaining most favorable price and
execution, the Adviser may give consideration to research, statistical
and other services furnished by brokers or dealers to the Adviser for
its use, may place orders with brokers or dealers who provide
supplemental investment and market research and securities and economic
analysis, and may pay to those brokers or dealers a higher brokerage
commission or spread than may be charged by other brokers or dealers.
Such research, analysis and other services may be useful to the Adviser
in connection with services to clients other than the Fund. The
Adviser's fee is not reduced by reason of its receiving such brokerage
and research services.
The Fund may not buy securities from, or sell securities to, the
Adviser or its affiliated persons as principal, except as permitted by
the rules and regulations of the SEC. Subject to certain conditions,
the Fund may purchase securities that are offered in underwritings in
which an affiliate of the Adviser is a participant, although the Fund
may not make such purchases directly from such affiliate.
The Adviser will select brokers to execute portfolio transactions.
In the over-the-counter market, the Fund generally will deal with
responsible primary market-makers unless a more favorable execution can
otherwise be obtained.
Investment decisions for the Fund are made independently from those
of other funds and accounts advised by the Adviser. However, the same
security may be held in the portfolios of more than one fund or account.
When two or more accounts simultaneously engage in the purchase or sale
of the same security, the prices and amounts will be equitably allocated
to each account. In some cases, this procedure may adversely affect the
price or quantity of the security available to a particular account. In
other cases, however, an account's ability to participate in larger
volume transactions may produce better executions and prices. For the
years ended June 30, 1995, 1994 and 1993, the Full Range Duration
Portfolio paid $59,330, $59,750 and $44,690, respectively in brokerage
commissions on futures and options transactions. For the year ended
June 30, 1995, the Intermediate Duration Portfolio paid $5,970 in
brokerage commissions on futures and options transactions. No brokerage
commissions were paid by any Portfolio to affiliated persons.
ADDITIONAL TAX INFORMATION
General Requirements for "Pass-Through" Treatment
In order to continue to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as
amended ("Code"), each Portfolio must distribute annually to its
shareholders at least 90% of its investment company taxable income
(consisting generally of net investment income and net short-term
capital gain, if any) ("Distribution Requirement") and must meet several
additional requirements. With respect to each Portfolio, these
requirements include the following: (1) the Portfolio must derive at
least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the
sale or other disposition of securities or other income (including
gains from options or futures ) derived with respect to its business of
investing in securities ("Income Requirement"); (2) the Portfolio must
derive less than 30% of its gross income each taxable year from the sale
or other disposition of securities, options or futures that were held
for less than three months ("Short-Short Limitation"); (3) at the close
of each quarter of the Portfolio's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items,
U.S. Government securities and other securities, with those other
securities limited, in respect of any one issuer, to an amount that does
not exceed 5% of the value of the
23
<PAGE>
Portfolio's total assets; and (4) at the close of each quarter of the
Portfolio's taxable year, not more than 25% of its total assets may be
invested in securities (other than U.S. Government securities) of
any one issuer.
A distribution declared by a Portfolio in December of any year and
payable to shareholders of record on a date in that month will be deemed
to have been paid by the Portfolio and received by the shareholders on
December 31 if the distribution is paid by the Portfolio during the
following January. Such a distribution, therefore, will be taxable to
shareholders for the year in which that December 31 falls.
Hedging Transactions
The use of hedging strategies, such as writing and purchasing
options and futures contracts, involves complex rules that will
determine for income tax purposes the character and timing of
recognition of the income received in connection therewith by a
Portfolio. Income from transactions in options and futures derived by a
Portfolio with respect to its business of investing in securities will
qualify as permissible income under the Income Requirement. However,
income from the disposition of options and futures contracts will be
subject to the Short-Short Limitation if they are held for less than
three months.
If a Portfolio satisfied certain requirements, any increase in
value on a position that is part of a "designated hedge" will be offset
by any decrease in value (whether realized or not) of the offsetting
hedging position during the period of the hedge for purposes of
determining whether the Portfolio satisfies the Short-Short Limitation.
Thus, only the net gain (if any) from the designated hedge will be
included in gross income for purposes of that Limitation. Each
Portfolio intends that, when it engages in hedging strategies, the
hedging transactions will qualify for this treatment, but at the present
time it is not clear whether this treatment will be available for all of
each Portfolio's hedging transactions. To the extent this treatment is
not available, a Portfolio may be forced to defer the closing out of
certain options and futures contracts beyond the time when it otherwise
would be advantageous to do so, in order for the Portfolio to continue
to qualify as a RIC.
Original Issue Discount
A Portfolio may purchase debt securities issued with original issue
discount. Original issue discount that accrues in a taxable year will
be treated as income earned by the Portfolio and therefore an equivalent
amount must be distributed to satisfy the distribution requirement and
avoid imposition of the 4% excise tax. Because the original issue
discount earned by a Portfolio in a taxable year may not be represented
by cash income, the Portfolio may have to dispose of other securities
and use the proceeds thereof to make distributions in amounts necessary
to satisfy those distribution requirements. A Portfolio may realize
capital gains or losses from such dispositions, which would increase or
decrease the Portfolio's investment company taxable income and/or net
capital gain. In addition, any such gains may be realized on the
disposition of securities held for less than three months. Because of
the Short-Short Limitation, any such gains would reduce the Portfolio's
ability to sell other securities (and options and futures), held for
less than three months that it might wish to sell in the ordinary course
of its portfolio management.
24
<PAGE>
Miscellaneous
If a Portfolio invests in shares of preferred stock or otherwise
holds dividend-paying securities as a result of exercising a conversion
privilege, a portion of the dividends from the Portfolio's investment
company taxable income (whether paid in cash or reinvested in additional
shares) may be eligible for the dividends-received deduction allowed to
corporations. The eligible portion may not exceed the aggregate
dividends received by the Portfolio from U.S. corporations. However,
dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to
the alternative minimum tax.
If shares of any Portfolio are sold at a loss after being held for
six months or less, the loss will be treated as long-term, instead of
short-term, capital loss to the extent of any capital gain distributions
received on those shares. Investors also should be aware that if shares
are purchased shortly before the record date for any distribution, the
shareholder will pay full price for the shares and receive some portion
of the price back as a taxable dividend or capital gain distribution.
Dividends and interest received by a Portfolio, and gains realized
by a Portfolio on foreign securities, may be subject to income,
withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on the Portfolio's securities.
Tax conventions between certain countries and the United States may
reduce or eliminate these foreign taxes, however, and foreign countries
generally do not impose taxes on capital gains in respect of investments
by foreign investors.
OTHER INFORMATION
The Fund is a Maryland corporation, incorporated on May 16, 1990.
The capitalization of the Fund consists of five billion shares of common
stock with a par value of $0.001 each. Three Portfolios of the Fund,
not described in this Statement of Additional Information, are sold only
to private account clients of the Adviser. The Board of Directors may
establish additional portfolios (with different investment objectives
and fundamental policies) at any time in the future. Establishment and
offering of additional portfolios will not alter the rights of the
Fund's shareholders. When issued, shares are fully paid,
non-assessable, redeemable and freely transferable. Shares do not have
preemptive rights or subscription rights. In liquidation of a
Portfolio, each shareholder is entitled to receive his or her pro rata
share of the net assets of that Portfolio.
25
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
Set forth below is a table which contains the name, address and
percentage of ownership of each person who is known by the Fund to own
beneficially five percent or more of the outstanding shares of the Full
Range Duration Portfolio as of October 19, 1995:
<TABLE>
<CAPTION>
Name and Address % of Ownership
As of
October 19, 1995
<S> <C>
Magma Copper Company 9.22%
7400 N. Oracle Road
Suite 200
Tucson, AZ 85704
Royal Maccabees Life Insurance Co. 6.93%
25800 Northwestern Highway
Southfield, MI 48037
North Dakota State Investment Board 28.92%
1930 Burnt Boat Drive
Bismarck, ND 58501
Newspaper and Mail Deliverers' Publishers' Pension Fund 7.77%
41-18 27th Street
Long Island City, NY 11101-3825
Houghton Mifflin Company Pension 7.10%
Plan
222 Berkeley Street
Boston, MA 02116-3764
Thompson Consumer Electronics, Inc. 8.85%
600 North Sherman Drive
Indianapolis, IN 46201-2598
</TABLE>
The following chart contains the name, address and percentage of
ownership of each person who is known by the Fund to own of record five
percent or more of the outstanding shares of the Full Range Duration
Portfolio as of October 19, 1995:
<TABLE>
<CAPTION>
Name and Address % of Ownership
As of
October 19, 1995
<S> <C>
Northern Trust Company 33.85%
50 S. LaSalle Street
Chicago, IL 60675
Bankers Trust Company of California, N.A. 6.40%
Arco Finance Station
400 South Hope Street
Los Angeles, CA 90071
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Name and Address % of Ownership
As of
October 19, 1995
<S> <C>
Mellon Bank N.A. 9.22%
One Mellon Bank Center
Room 151-0545
Pittsburgh, PA 15258-0001
State Street Bank & Trust Company 7.10%
Solomon Willard Bldg.
Enterprise Drive
North Quincy, MA 02171
Royal Maccabees Life Insurance Co. 6.93%
25800 Northwestern Highway
Southfield, MI 48037
Newspaper and Mail Deliverers' Publishers' Pension Fund 7.77%
41-18 27th Street
Long Island City, NY 11101-3825
STRAFE & Co. 8.85%
235 West Schrock Road
Westerville, OH 43081-2874
</TABLE>
Set forth below is a table which contains the name,
address and percentage of ownership of each person who is known by the
Fund to own beneficially five percent or more of the outstanding shares
of the Intermediate Duration Portfolio as of October 20, 1995:
<TABLE>
<CAPTION>
Name and Address % of Ownership
As of
October 20, 1995
<S> <C>
Vermont American Corporation Inc. 15.59%
100 E. Liberty Street
Louisville, KY 40202
Allergan Inc. 38.08%
2525 Dupont Drive
P.O. Box 19534
Irvine, CA 92713-9354
Risdon Corporation 21.28%
One Risdon Corporation
Naugatuck, CT 06770
Sun Microsystems, Inc. 20.01%
901 San Antonio Road
Palo Alto, CA 94303
Wright State University Foundation 5.04%
Alumni Foundation Building
Dayton, OH 45435
</TABLE>
The following chart contains the name, address and
percentage of ownership of each person who is known by the Fund to own
of record five percent or more of the outstanding shares of the
Intermediate Duration Portfolio as of October 20, 1995:
27
<PAGE>
<TABLE>
<CAPTION>
Name and Address % of Ownership
As of
October 20, 1995
<S> <C>
National City Bank, KY 20.63%
4100 W. 150th Street
Cleveland, OH 44135
Risdon Corporation 21.28%
One Risdon Corporation
Naugatuck, CT 06770
Mellon Bank, N.A. 38.08%
Mutual Funds
P.O. Box 320
Pittsburgh, PA 15230-0320
Continental Trust Co. 20.01%
231 S. La Salle Street
Chicago, IL 60697-0001
</TABLE>
Performance Information
The Fund may, from time to time, include the total return for its
Portfolios in marketing materials or reports to shareholders or
prospective investors. Quotations of average annual total return for a
Portfolio will be expressed in terms of the average annual compounded
rate of return of a hypothetical investment in the Portfolio over
periods of one, five and ten years (up to the life of the Portfolio),
calculated pursuant to the following formula: P (1 + T)n = ERV (where P
= a hypothetical initial payment of $1,000, T = the average annual total
return, n = number of years, and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period). All
total return figures reflect the deduction of a proportional share of
Portfolio expenses on an annual basis and assume that all dividends and
other distributions are reinvested when paid.
The Full Range Duration Portfolio's total returns as of June 30,
1995 were as follows:
<TABLE>
<CAPTION>
Average
Cumulative Annual
Total Return Total Return
<S> <C> <C>
One Year 14.12% 14.12%
Life of FundA 66.22% 11.12%
</TABLE>
AFund's inception - September 4, 1990.
The Intermediate Duration Portfolio's total returns as of June 30, 1995
were as follows:
<TABLE>
<CAPTION>
Average
Cumulative Annual
Total Return Total Return
<S> <C> <C>
One Year 10.08% 10.08%
Life of FundA 10.08% 10.08%
</TABLE>
AFund's inception - July 1, 1994.
28
<PAGE>
The current annualized yield for the Money Market Portfolio is based
upon a specified seven-day period and is computed by determining the net
change in the value of a hypothetical account in the Portfolio. The net
change in the value of the account includes the value of dividends and
of additional shares purchased with dividends, but does not include
realized gains and losses or unrealized appreciation and depreciation.
In addition, the fund may use a compound effective annualized yield
quotation which is calculated as prescribed by SEC regulations, by
adding one to the base period return (calculated as prescribed above),
raising the sum to a power equal to 365 divided by 7, and subtracting
one.
The Fund's performance may fluctuate daily depending upon such
factors as the average maturity of its securities, changes in
investments, changes in interest rates and variations in operating
expenses. Therefore, current performance does not provide a basis for
determining future performance. The fact that the Fund's performance
will fluctuate and that shareholders' principal is not guaranteed or
insured should be considered in comparing the Fund's performance with
the performance of fixed-income investments. In comparing the
performance of the Fund to other investment vehicles, consideration
should be given to the investment policies of each, including the types
of investments owned, lengths of maturities of the portfolio, the method
used to compute the performance and whether there are any special
charges that may reduce the yield.
Custodian, Transfer Agent and Dividend-Disbursing Agent
State Street Bank and Trust Company, P.O. Box 1790, Boston,
Massachusetts 02105, serves as custodian of the Fund's assets. Boston
Financial Data Services, Inc., P.O. Box 953, Boston, Massachusetts
02103 serves as transfer and dividend-disbursing agent and administrator
of various shareholder services. Shareholders who request an historical
transcript of their account will be charged a fee based upon the number
of years researched. The Fund reserves the right, upon 60 days' written
notice, to make other charges to investors to cover administrative
costs.
Independent Accountants
Price Waterhouse LLP, 7 St. Paul Street, Baltimore, Maryland 21202,
have been selected by the Board of Directors to serve as the Fund's
independent accountants.
Legal Counsel
Munger, Tolles & Olson, 355 South Grand Avenue, Los Angeles, CA
90071, serves as legal counsel to the Fund.
FINANCIAL STATEMENTS
The Full Range Duration Portfolio's Portfolio of Investments as of
June 30, 1995; Statement of Assets and Liabilities as of June 30, 1995;
Statement of Operations for the year ended June 30, 1995; Statement of
Changes in Net Assets for the years ended June 30, 1995 and June 30,
1994; the Financial Highlights for the same periods and the period
September 4, 1990 (Commencement of Operations) to June 30, 1991; the
Notes to Financial Statements and the related Report of Independent
Accountants, all of which are included in the Full Range Duration
Portfolio's Annual Report to Shareholders for the
29
<PAGE>
year ended June 30, 1995, are hereby incorporated by reference in this
Statement of Additional Information.
The Intermediate Duration Portfolio's Portfolio of Investments as of
June 30, 1995; Statement of Assets and Liabilities as of June 30, 1995;
Statement of Operations for the year ended June 30, 1995; Statement of
Changes in Net Assets for the year ended June 30, 1995; the Financial
Highlights for the same period; the Notes to Financial Statements and
the related Report of Independent Accountants, all of which are included
in the Intermediate Duration Portfolio's Annual Report to Shareholders
for the year ended June 30, 1995, are hereby incorporated by reference
in this Statement of Additional Information.
The audited Statement of Assets and Liabilities as of June 30, 1995
for the Money Market, Limited Duration, Short Duration and Long Duration
Portfolios and the Reports of Independent Accountants are shown on the
following pages.
30
<PAGE>
WESTERN ASSET TRUST, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995
<TABLE>
<CAPTION>
Long Limited Short Money
Duration Duration Duration Market
Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Assets
Cash........................................................ $ 1,000 $ 1,000 $ 1,000 $ 1,000
Deferred organization and initial offering costs............ 31,000 31,000 9,000 31,000
Total assets.................................................. 32,000 32,000 10,000 32,000
Liabilities
Accrued organization expenses and initial offering costs.... 31,000 31,000 9,000 31,000
Total liabilities............................................. 31,000 31,000 9,000 31,000
Net Assets-Offering and redemption price of $100.00 per share
with 10 shares each outstanding of the Long Duration, Limited
Duration and Short Duration Portfolios and $1.00 per share
with 1,000 shares outstanding of the Money Market Portfolio
(5,000,000,000 shares par value $.001 per share authorized).. $ 1,000 $ 1,000 $ 1,000 $ 1,000
</TABLE>
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
A. Western Asset Trust, Inc. ("Corporation"), was organized on May
16, 1990. The Long Duration Portfolio, Limited Duration Portfolio,
Short Duration Portfolio and Money Market Portfolio ("Portfolios")
constitute four of the nine portfolios established under the Corporation
at June 30, 1995. The Portfolios have had no operations other than those
matters related to their organization and registration as an investment
company under the Investment Company Act of 1940 and the sale of their
shares. Western Asset Management Company ("Western Asset"), a wholly
owned subsidiary of Legg Mason, Inc. (a financial services holding
company), has provided the initial capital for the Portfolios by
purchasing 10 shares each of the Long Duration Portfolio, Limited
Duration Portfolio and Short Duration Portfolio at $100.00 per share and
1,000 shares of the Money Market Portfolio at $1.00 per share. Such
shares were acquired for investment and can be disposed of only by
redemption. Legg Mason Wood Walker, Incorporated ("Legg Mason"), a
wholly owned subsidiary of Legg Mason, Inc. and a member of the New York
Stock Exchange, acts as distributor of the Portfolios' shares.
B. Deferred organization and initial offering costs represent
expenses incurred in connection with the Portfolios' organization and
will be amortized on a straight line basis over five years commencing on
the effective date of each Portfolio's initial sale of shares to the
public. The Portfolios have agreed to reimburse Western Asset for the
organization expenses advanced by Western Asset. The advances are
repayable on demand but must be fully repaid within five years from the
commencement of operations. The proceeds realized by Western Asset upon
redemption during the amortization period of any of the shares
constituting initial capital will be reduced by a proportionate amount
of unamortized deferred organization expenses which the number of
initial shares redeemed bears to the number of initial shares then
outstanding.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Western Asset Trust, Inc.
In our opinion, the accompanying statements of assets and liabilities
present fairly, in all material respects, the financial position
of Western Asset Trust Long Duration Portfolio, Limited Duration
Portfolio, Short Duration Portfolio, Money Market Portfolio, Corporate
Securities Portfolio and Mortgage Securities Portfolio (six of the nine
portfolios comprising Western Asset Trust, Inc.) at June 30, 1995,
in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Trust's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits
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 provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
October 26, 1995
31
<PAGE>
APPENDIX A
RATINGS OF SECURITIES
Description of Moody's Investors Service, Inc. ("Moody's") corporate
bond ratings:
Aaa-Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large
or exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment
attributes and are to be considered upper-medium grade obligations.
Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa-Bonds which are rated Baa are considered medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time
may be small.
Description of Standard & Poor's Ratings Group corporate bond ratings:
AAA-This is the highest rating assigned by Standard & Poor's to an
obligation and indicates an extremely strong capacity to pay principal
and interest.
AA-Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the
majority of instances they differ from AAA issues only in small degree.
A-1
<PAGE>
A-Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the
A category.
BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominately speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such bonds will likely
have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposure to adverse conditions.
Description of Moody's preferred stock ratings:
Aaa-An issue which is rated "Aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stock.
Aa-An issue which is rated "Aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
A-An issue which is rated "A" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater
than in the "aaa" and "aa" classification, earnings and asset protection
are, nevertheless, expected to be maintained at adequate levels.
Baa-An issue which is rated "Baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be questionable
over any great length of time.
Ba-An issue which is rated "Ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and
asset protection may be very moderate and not well safeguarded during
adverse periods. Uncertainty of position characterizes preferred stocks
in this class.
A-2
<PAGE>
WESTERN ASSET TRUST, INC.
Corporate Securities Portfolio
Mortgage Securities Portfolio
International Securities Portfolio
STATEMENT OF ADDITIONAL INFORMATION
Western Asset Trust, Inc. ("Fund") is a no-load, open-end
management investment company currently consisting of nine separate
professionally managed investment portfolios. Each of the three
Portfolios described in this Statement of Additional Information
("Portfolios") seeks maximum total return, consistent with prudent
investment management by investing primarily in securities of the types
specified for that Portfolio. The Portfolios differ from one another
primarily in the proportion of assets invested in certain types of
securities. Also, the Corporate Securities and Mortgage Securities
Portfolios ("Domestic Portfolios") are diversified Portfolios. The
International Portfolio is non-diversified.
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus for the Portfolios,
dated October 30, 1995, which has been filed with the Securities and
Exchange Commission ("SEC"). Copies of the Fund's Prospectus are
available without charge from the Fund at (818) 584-4300.
Dated: October 30, 1995
<PAGE>
TABLE OF CONTENTS
Page
Additional Information About Investment Limitations and Policies 3
Valuation of Portfolio Shares 21
Management of the Fund 21
Principal Holders of Securities 27
Purchases and Redemptions 28
Portfolio Transactions and Brokerage 29
Additional Tax Information 30
Other Information 32
Financial Statements 33
Appendix A - Ratings of Securities A-1
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES
In addition to the investment objective of each Portfolio described in
the Prospectus, the Fund has adopted certain fundamental investment
limitations for each Portfolio that cannot be changed except by vote of
the holders of a majority of the outstanding voting securities of the
affected Portfolio. No Portfolio may:
1. Borrow money or issue senior securities, except that a Portfolio
may borrow from banks or enter into reverse repurchase agreements and
dollar rolls, provided that, immediately after such borrowing, the total
amount borrowed by the Portfolio, including reverse repurchase
agreements and dollar rolls, does not exceed 33 1/3% of its total assets
(including the amount borrowed) less liabilities (other than the
borrowings); and provided further that any Portfolio may enter into
transactions in options, futures, options on futures and forward foreign
currency contracts;
2. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the
Portfolio, except as may be necessary in connection with permitted
borrowings, provided that this limitation does not prohibit escrow,
collateral or margin arrangements in connection with the Portfolio's use
of options, futures contracts, options on futures contracts, forward
foreign currency contracts, when-issued securities, reverse repurchase
agreements, dollar rolls, or similar investment techniques;
3. Invest more than 5% of its total assets (taken at market value) in
securities of any one issuer, or buy 10% or more of all the securities
of any one issuer, except that up to 25% of a Domestic Portfolio's total
assets and up to 50% of the International Portfolio's total assets may
be invested without regard to this limitation, and provided that this
limitation does not apply to securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities;
4. Purchase securities on margin, except for short-term credits
necessary for clearance of Portfolio transactions and except that a
Portfolio may make margin deposits in connection with its use of
options, futures contracts, options on futures contracts and forward
foreign currency contracts;
5. Invest 25% or more of its total assets (taken at market value) in
any one industry, provided that this limitation does not apply to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or repurchase agreements thereon. The Mortgage
Securities Portfolio will under normal circumstances invest more than
25% of its total assets in mortgage-backed and other asset-backed
securities (including, for this purpose, securities issued or guaranteed
by the U.S. Government, its agencies and instrumentalities, and
repurchase agreements with respect thereto);
6. Purchase or sell commodities or commodity contracts, except that a
Portfolio may purchase or sell futures on securities and bond indices,
options on the foregoing, and options on securities and bond indices;
and except that the International Securities Portfolio may also purchase
and sell foreign currencies, forward foreign currency contracts, options
and futures on foreign currencies and options on such futures;
7. Underwrite securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, a Portfolio
may be deemed an underwriter under the federal securities laws;
3
<PAGE>
8. Make loans, except loans of portfolio securities and except to the
extent that the purchase of an issue of debt securities, other evidences
of indebtedness or deposits with banks and other financial institutions
may be considered loans;
9. Purchase or sell real estate or interests in real estate limited
partnerships, provided that a Portfolio may invest in securities secured
by, or issued by companies that invest in, real estate or interests
therein, including real estate investment trusts; or
10. Invest in oil, gas or mineral-related programs or leases,
provided that a Portfolio may invest in securities issued by companies
that engage in such activities.
The foregoing investment limitations cannot be changed without the
affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the affected Portfolio or (2) 67% or more of the shares of the
affected Portfolio present at a shareholders' meeting if more than 50%
of the outstanding shares of that Portfolio are represented at the
meeting in person or by proxy. Except with respect to investment
limitation number 1, if a percentage restriction is adhered to at the
time of an investment or transaction, a later increase or decrease in
percentage resulting from a change in the value of portfolio securities
or amount of total assets will not be considered a violation of any of
the foregoing limitations.
Except as otherwise specified, the investment limitations and policies
which follow may be changed by the Fund's Board of Directors without
shareholder approval.
Ratings of Debt Obligations
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings
Group ("S&P") and other nationally recognized or foreign statistical
rating organizations ("SROs") are private organizations that provide
ratings of the credit quality of debt obligations. A description of the
ratings assigned to corporate debt obligations by Moody's and S&P is
included in Appendix A. A Portfolio may consider these ratings in
determining whether to purchase, sell or hold a security. Ratings are
not absolute assurances of quality. Consequently, securities with the
same maturity, interest rate and rating may have different market
prices. Credit rating agencies attempt to evaluate the safety of
principal and interest payments and do not evaluate the risks of
fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so
that an issuer's current financial condition may be better or worse than
the rating indicates. Subsequent to its purchase by a Portfolio, an
issue of securities may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by the Portfolio.
Western Asset Management Company ("Western Asset"), adviser to the
Portfolios, will consider such an event in determining whether the
Portfolio should continue to hold the obligation.
Mortgage-Related Securities
Mortgage-related securities represent participations in, or are
secured by and payable from, mortgage loans secured by real property.
These securities are designed to provide monthly payments of interest
and, in most instances, principal to the investor. The mortgagor's
monthly payments to his/her lending institution are "passed through" to
investors such as the Portfolios. Many issuers or poolers provide
guarantees of payments, regardless of whether the mortgagor actually
makes the payment. These guarantees are often backed by various forms
of credit, insurance and collateral, although these may be in amounts
less than the full obligation of the pool to its shareholders.
4
<PAGE>
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of one- to four-family
homes. The terms and characteristics of the mortgage instruments are
generally uniform within a pool but may vary among pools. In addition
to fixed-rate, fixed-term mortgages, the Portfolios may purchase pools
of variable-rate mortgages, growing-equity mortgages, graduated-payment
mortgages and other types.
All poolers apply standards for qualification to lending institutions
which originate mortgages for the pools. Poolers also establish credit
standards and underwriting criteria for individual mortgages included in
the pools. In addition, many mortgages included in pools are insured
through private mortgage insurance companies.
The average life of mortgage-related securities varies with the
maturities and the nature of the underlying mortgage instruments. For
example, securities issued by the Government National Mortgage
Association ("GNMAs") tend to have a longer average life than
participation certificates ("PCs") issued by the Federal Home Loan
Mortgage Corporation ("FHLMC") because there is a tendency for the
conventional and privately-insured mortgages underlying FHLMC PCs to
repay at faster rates than the Federal Housing Administration and
Veterans Administration loans underlying GNMAs. In addition, the term
of a security may be shortened by unscheduled or early payments of
principal and interest on the underlying mortgages. The occurrence of
mortgage prepayments is affected by factors including the level of
interest rates, general economic conditions, the location and age of the
mortgage and other social and demographic conditions.
Yields on mortgage-related securities are typically quoted based on
the maturity of the underlying instruments and the associated average
life assumption. Actual prepayment experience may cause the yield to
differ from the yield expected on the basis of average life. The
compounding effect from reinvestments of monthly payments received by
each Portfolio will increase the yield to shareholders compared to bonds
that pay interest semi-annually.
Private Mortgage-Related Securities
Certain private mortgage pools are organized in such a way that the
SEC staff considers them to be closed-end investment companies. Each
Portfolio's investment in such pools is constrained by federal statute,
which restricts investments in the shares of other investment companies.
The private mortgage-related securities in which the International
Securities Portfolio may invest include foreign mortgage pass-through
securities ("Foreign Pass-Throughs"), which are structurally similar to
the pass-through instruments described above. Such securities are
issued by originators of and investors in mortgage loans, including
savings and loan associations, mortgage bankers, commercial banks,
investment bankers, specialized financial institutions and special
purpose subsidiaries of the foregoing. Foreign Pass-Throughs usually
are backed by a pool of fixed rate or adjustable-rate mortgage loans.
The Foreign Pass-Throughs in which the International Portfolio may
invest typically are not guaranteed by an entity having the credit
status of the Government National Mortgage Association, but generally
utilize various types of credit enhancement.
Asset-Backed Securities
Asset-backed securities are structurally similar to mortgage-backed
securities, but are secured by interests in a different type of
receivable. Asset-backed securities therefore present
5
<PAGE>
certain risks that are not presented by mortgage-related debt securities or
other securities in which the Fund may invest. Primarily, these securities do
not have the benefit of the same security interest in the related
collateral. Credit card receivables are generally unsecured and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set
off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the
servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a
risk that the purchaser would acquire an interest superior to that of
the holders of the related automobile receivables. In addition, because
of the large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee for the holders of
the automobile receivables may not have proper security interest in all
of the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. Because
asset-backed securities are relatively new, the market experience in
these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
Non-Governmental Fixed Income and Other Debt Securities
A Portfolio's investments in U.S. dollar-denominated or foreign
currency-denominated fixed income and other debt securities of
non-governmental domestic or foreign issuers are limited to fixed income
or other debt securities (bonds, debentures, notes and other similar
instruments) which meet the minimum ratings criteria set forth for the
Portfolio or, if unrated, are judged by that Portfolio's adviser to be
of comparable quality to fixed income or other debt securities in which
the Portfolio may invest. The rate of return or return of principal on
some obligations may be linked or indexed to the level of exchange rates
between the U.S. dollar and a foreign currency or currencies.
Where one rating organization has assigned an investment grade rating
to an instrument and others have given it a lower rating, the Fund may
consider the instrument to be investment grade. The market for
lower-rated securities may be thinner and less active than that for
higher-rated securities, which can adversely affect the prices at which
these securities can be sold, and may make it difficult for a Portfolio
to obtain market quotations daily. If market quotations are not
available, these securities will be valued by a method that the Fund's
Board of Directors believes accurately reflects fair market value.
Judgment may play a greater role in valuing lower-rated debt securities
than is the case with respect to securities for which a broader range of
dealer quotations and last-sale information are available.
Although the prices of lower-rated bonds are generally less sensitive
to interest rate changes than are higher-rated bonds, the prices of
lower-rated bonds may be more sensitive to adverse economic changes and
developments regarding the individual issuer. Although the market for
lower-rated debt securities is not new, and the market has previously
weathered economic downturns, there has been in recent years a
substantial increase in the use of such securities to fund corporate
acquisitions and restructurings. Accordingly, the past performance of
the market for such securities may not be an accurate indication of its
performance during future economic downturns or periods of rising
interest rates.
Bank Obligations
Bank obligations in which the Portfolios may invest include
certificates of deposit, bankers' acceptances and time deposits in U.S.
banks (including foreign branches) which have more than
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$1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation.
A Portfolio also may invest in certificates of deposit of savings and
loan associations (federally or state chartered and federally insured)
having total assets in excess of $1 billion.
The International Portfolio may invest in obligations of domestic or
foreign branches of foreign banks and foreign branches of domestic
banks. These investments involve risks that are different from
investments in securities of domestic branches of domestic banks. These
risks include seizure of foreign deposits, currency controls, interest
limitations or other governmental restrictions which might affect the
payment of principal or interest on the bank obligations held by the
Portfolio.
The International Portfolio limits its investments in
foreign bank obligations to U.S. dollar-denominated or foreign
currency-denominated obligations of foreign banks (including U.S.
branches of foreign banks) which at the time of investment (1) have more
than $10 billion, or the equivalent in other currencies, in total
assets; (2) have branches or agencies (limited purpose offices which do
not offer all banking services) in the United States; and (3) are judged
by Western Asset to be of comparable quality to obligations of U.S.
banks in which the Portfolios may invest. Subject to the limitation on
concentration of less than 25% of the Portfolio's assets in the
securities of issuers in a particular industry, there is no limitation
on the amount of the International Portfolio's assets which may be
invested in obligations of foreign banks which meet the conditions set
forth herein. Foreign banks are not generally subject to examination by
any U.S. Government agency or instrumentality.
Restricted and Illiquid Securities
Each Portfolio is authorized to invest up to 10% of its net assets in
securities for which no readily available market exists, which for this
purpose includes, among other things, repurchase agreements maturing in
more than seven days, OTC options and securities used as cover for such
options. Restricted securities may be sold only (1) pursuant to SEC
Rule 144A or other exemption, (2) in privately negotiated transactions
or (3) in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933. Such
securities may include those that are subject to restrictions contained
in the securities laws of other countries. Securities that are freely
marketable in the country where they are principally traded, but would
not be freely marketable in the United States, will not be subject to
this 10% limit. Where registration is required, a Portfolio may be
obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell
and the time the Portfolio may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse
market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell.
Reverse Repurchase Agreements and Other Borrowing
Each Portfolio may borrow for temporary or emergency purposes. This
borrowing may be unsecured. The Investment Company Act of 1940 ("1940
Act") requires a Portfolio to maintain continuous asset coverage (that
is, total assets including borrowings, less liabilities exclusive of
borrowings) of at least 300% of the amount borrowed. If the asset
coverage should decline below 300% as a result of market fluctuations or
for other reasons, a Portfolio may be required to sell some of its
holdings within three days (exclusive of Sundays and holidays) to reduce
the debt and
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restore the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. Borrowing may
exaggerate the effect on net asset value of any increase or decrease in the
market value of the Portfolio. To avoid the potential leveraging effects of a
Portfolio's borrowings, a Portfolio will not make investments while borrowings
are in excess of 5% of the Portfolio's assets. Money borrowed will be subject
to interest costs which may or may not be recovered by appreciation of the
securities purchased. A Portfolio also may be required to maintain minimum
average balances in connection with such borrowing or to pay a commitment or
other fee to maintain a line of credit; either of these requirements
would increase the cost of borrowing over the stated interest rate. For
purposes of its borrowing limitation and policies, the Fund considers
reverse repurchase agreements to be borrowing.
Short Sales
The Portfolios do not currently intend to sell securities short, other
than through the use of futures and options as described in the
Prospectus. No Portfolio is permitted to engage in short sales unless
it simultaneously owns, or has the right to acquire, securities
identical in kind and amount to those sold short.
Sovereign Debt
Investments in debt securities issued by foreign governments and their
political subdivisions or agencies ("Sovereign Debt") involve special
risks. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to repay
principal and/or interest when due in accordance with the terms of such
debt, and the International Portfolio may have limited legal recourse in
the event of a default.
Sovereign Debt differs from debt obligations issued by private
entities in that, generally, remedies for defaults must be pursued in
the courts of the defaulting party. Legal recourse is therefore
somewhat diminished. Political conditions, especially a sovereign
entity's willingness to meet the terms of its debt obligations, are of
considerable significance. Also, there can be no assurance that the
holders of commercial bank debt issued by the same sovereign entity may
not contest payments to the holders of Sovereign Debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors,
its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is
due, the relative size of the debt service burden to the economy as a
whole, the sovereign debtor's policy toward principal international
lenders and the political constraints to which a sovereign debtor may be
subject. Increased protectionism on the part of a country's trading
partners, or political changes in those countries, could also adversely
affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local
government or agency.
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing Sovereign Debt could adversely affect the
International Portfolio's investments. Political changes or a
deterioration of a country's domestic economy or balance of trade may
affect the willingness of countries to service their Sovereign Debt.
While Western Asset intends to manage investments in a manner that will
minimize the exposure to such risks, there can be no assurance that
adverse political changes will not cause the Portfolio to suffer a loss
of interest or principal on any of its holdings.
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Options and Futures
In pursuing their individual investment objectives the Portfolios may,
as described in the Prospectus, purchase and sell (write) both put
options and call options on securities and bond indices, may enter into
futures contracts on fixed income instruments and may purchase and sell
options on such futures contracts ("futures options") for hedging
purposes or in other circumstances permitted by the Commodity Futures
Trading Commission ("CFTC") as part of each Portfolios' investment
strategy. In addition, the International Portfolio may purchase and
sell put and call options on foreign currencies, may enter into futures
contracts on foreign currencies and purchase and sell options on such
futures contracts. If other types of options, futures contracts or
options on futures are traded in the future, a Portfolio may also use
those investment strategies.
Options on Securities
A Portfolio may purchase call options on securities that its adviser
intends to include in the Portfolio's investment portfolio in order to
fix the cost of a future purchase. Call options also may be used as a
means of participating in an anticipated price increase of a security on
a more limited risk basis than would be possible if the security itself
were purchased. In the event of a decline in the price of the
underlying security, use of this strategy would serve to limit the
Portfolio's potential loss to the option premium paid; conversely, if
the market price of the underlying security increases above the exercise
price and the Portfolio either sells or exercises the option, any profit
realized will be reduced by the premium.
A Portfolio may purchase put options in order to hedge against a
decline in the market value of securities held in its portfolio or to
enhance income. The put option enables a Portfolio to sell the
underlying security at the predetermined exercise price; thus the
potential for loss to the Portfolio below the exercise price is limited
to the option premium paid. If the market price of the underlying
security is higher than the exercise price of the put option, any profit
the Portfolio realizes on the sale of the security would be reduced by
the premium paid for the put option less any amount for which the put
option may be sold.
A Portfolio may write covered call options on securities in which it
is authorized to invest. Because it can be expected that a call option
will be exercised if the market value of the underlying security
increases to a level greater than the exercise price, a Portfolio might
write covered call options on securities generally when its adviser
believes that the premium received by the Portfolio will exceed the
extent to which the market price of the underlying security will exceed
the exercise price. The strategy may be used to provide limited
protection against a decrease in the market price of the security, in an
amount equal to the premium received for writing the call option less
any transaction costs. Thus, in the event that the market price of the
underlying security held by the Portfolio declines, the amount of such
decline will be offset wholly or in part by the amount of the premium
received by the Portfolio. If, however, there is an increase in the
market price of the underlying security and the option is exercised, the
Portfolio would be obligated to sell the security at less than its
market value. The Portfolio would give up the ability to sell the
portfolio securities used to cover the call option while the call option
was outstanding. Such securities would also be considered illiquid in
the case of over-the-counter ("OTC") options written by a Portfolio, and
therefore subject to a Portfolio's limitation on investing no more than
10% of its total assets in illiquid securities. In addition, a
Portfolio could lose the ability to participate in an increase in the
value of such securities above the exercise price of the call option
because such an increase would
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likely be offset by an increase in cost of closing out the call option
(or could be negated if the buyer chose to exercise the call option at
an exercise price below the securities' current market value).
A Portfolio may purchase put and call options and write covered put
and call options on bond indices in much the same manner as securities
options, except that bond index options may serve as a hedge against
overall fluctuations in the debt securities markets (or a market sector)
rather than anticipated increases or decreases in the value of a
particular security. A bond index assigns a value to the securities
included in the index and fluctuates with changes in such values.
Settlements of bond index options are effected with cash payments and do
not involve the delivery of securities. Thus, upon settlement of a bond
index option, the purchaser will realize, and the writer will pay, an
amount based on the difference between the exercise price and the
closing price of the bond index. The effectiveness of hedging
techniques using bond index options will depend on the extent to which
price movements in the bond index selected correlate with price
movements of the securities in which the Portfolio invests.
A Portfolio may purchase and write covered straddles on securities,
currencies or bond indices. A long straddle is a combination of a call
and a put option purchased on the same security where the exercise price
of the put is less than or equal to the exercise price of the call. A
Portfolio would enter into a long straddle when its adviser believes
that it is likely that interest rates or currency exchange rates will be
more volatile during the term of the options than the option pricing
implies. A short straddle is a combination of a call and a put written
on the same security where the exercise price of the put is less than or
equal to the exercise price of the call and where the same issue of
security or currency is considered cover for both the put and the call.
A Portfolio would enter into a short straddle when its adviser believes
that it is unlikely that interest rates or currency exchange rates will
be as volatile during the term of the options as the option pricing
implies. In such case, the Portfolio will set aside cash and/or liquid,
high grade debt securities in a segregated account with its custodian
equivalent in value to the amount, if any, by which the put is
in-the-money, that is, the amount by which the exercise price of the put
exceeds the current market value of the underlying security.
Foreign Currency Options and Related Risks.
The International Portfolio may purchase and write (sell) options on
foreign currencies in order to hedge against the risk of foreign
exchange rate fluctuation on foreign securities the Portfolio holds or
which it intends to purchase. For example, if the Portfolio enters into
a contract to purchase securities denominated in a foreign currency, it
could effectively fix the maximum U.S. dollar cost of the securities by
purchasing call options on that foreign currency. Similarly, if the
Portfolio held securities denominated in a foreign currency and
anticipated a decline in the value of that currency against the U.S.
dollar, it could hedge against such a decline by purchasing a put option
on the currency involved. The purchase of an option on foreign currency
may be used to hedge against fluctuations in exchange rates although, in
the event of exchange rate movements adverse to the Portfolio's
position, it may forfeit the entire amount of the premium plus related
transaction costs. In addition, the Portfolio may purchase call options
on foreign currency to enhance income when its adviser anticipates that
the currency will appreciate in value, but the securities denominated in
that currency do not present attractive investment opportunities.
If the International Portfolio writes an option on foreign currency,
it will constitute only a partial hedge, up to the amount of the premium
received, and the Portfolio could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring
losses. The Portfolio may use options on currency to cross-hedge, which
involves writing or purchasing
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options on one currency to hedge against changes in exchange rates of a
different, but related, currency.
The International Portfolio's ability to establish and close out
positions on such options is subject to the maintenance of a liquid
secondary market. Although many options on foreign currencies are
exchange trades, the majority are traded on the OTC market. The
Portfolio will not purchase or write such options unless, in the opinion
of its adviser, the market for them has developed sufficiently. The
Portfolio may use foreign currency options traded on a commodities
exchange only for hedging purposes or in other circumstances permitted
by the CFTC. There can be no assurance that a liquid secondary market
will exist for a particular option at any specific time. In addition,
options on foreign currencies are affected by all of those factors that
influence foreign exchange rates and investments generally. These OTC
options also involve credit risks which may not be present in the case
of exchange-traded currency options.
Futures Contracts and Options on Futures Contracts
Each Portfolio will limit its use of futures contracts and futures
options to hedging transactions or other circumstances permitted by
regulatory authorities. For example, a Portfolio might use futures
contracts to attempt to hedge against anticipated changes in interest
rates that might adversely affect either the value of the Portfolio's
securities or the price of the securities which the Portfolio intends to
purchase. A Portfolio's hedging may include sales of futures contracts
as an offset against the effect of expected increases in interest rates,
and purchases of futures contracts as an offset against the effect of
expected declines in interest rates. Although other techniques could be
used to reduce exposure to interest rate fluctuations, a Portfolio may
be able to hedge its exposure more effectively and perhaps at a lower
cost by using futures contracts and options on futures contracts.
The International Portfolio may also purchase call or put options on
foreign currency futures contracts to obtain a fixed foreign exchange
rate at limited risk. The Portfolio may purchase a call option on a
foreign currency futures contract to hedge against a rise in the foreign
exchange rate while intending to invest in a foreign security of the
same currency. The International Portfolio may purchase put options on
foreign currency futures contracts as a partial hedge against a decline
in the foreign exchange rates or the value of its foreign portfolio
securities. The Portfolio may write a call option on a foreign currency
futures contract as a partial hedge against the effects of declining
foreign exchange rates on the value of foreign securities.
A Portfolio also may use futures contracts on fixed income
instruments and options thereon to hedge its investment portfolio
against changes in the general level of interest rates. A futures
contract on a fixed income instrument is a bilateral agreement pursuant
to which one party agrees to make, and the other party agrees to accept,
delivery of the specified type of fixed income security called for in
the contract at a specified future time and at a specified price. A
Portfolio may purchase a futures contract on a fixed income security
when it intends to purchase fixed income securities but has not yet done
so. This strategy may minimize the effect of all or part of an increase
in the market price of the fixed income security that a Portfolio
intends to purchase in the future. A rise in the price of the fixed
income security prior to its purchase may be either offset by an
increase in the value of the futures contract purchased by a Portfolio
or avoided by taking delivery of the fixed income securities under the
futures contract. Conversely, a fall in the market price of the
underlying fixed income security may result in a corresponding decrease
in the value of the futures position. A Portfolio may sell a futures
contract on a fixed income security in order to continue to receive the
income from a fixed income security, while endeavoring to avoid part or
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all of the decline in the market value of that security that would
accompany an increase in interest rates.
A Portfolio may purchase a call option on a futures contract to hedge
against a market advance in fixed income securities which the Portfolio
plans to acquire at a future date. The purchase of a call option on a
futures contract is analogous to the purchase of a call option on an
individual fixed income security which can be used as a temporary
substitute for a position in the security itself. A Portfolio also may
write covered call options on futures contracts as a partial hedge
against a decline in the price of fixed income securities held in the
Portfolio's investment portfolio, or purchase put options on futures
contracts in order to hedge against a decline in the value of fixed
income securities held in the Portfolio's investment portfolio. A
Portfolio may write a covered put option as a partial anticipatory
hedge.
A Portfolio may sell bond index futures contracts in anticipation of a
general market or market sector decline that could adversely affect the
market value of its investments. To the extent that a portion of the
Portfolio's investments correlate with a given index, the sale of
futures contracts on that index could reduce the risks associated with a
market decline and thus provide an alternative to the liquidation of
securities positions. For example, if a Portfolio correctly anticipates
a general market decline and sells bond index futures to hedge against
this risk, the gain in the futures position should offset some or all of
the decline in the value of the portfolio. A Portfolio may purchase bond
index futures contracts if a significant market or market sector advance
is anticipated. Such a purchase of a futures contract would serve as a
temporary substitute for the purchase of individual debt securities,
which debt securities may then be purchased in an orderly fashion. This
strategy may minimize the effect of all or part of an increase in the
market price of securities that the Fund intends to purchase. A rise in
the price of the securities should be partly or wholly offset by gains
in the futures position.
As in the case of a purchase of a bond index futures contract, a
Portfolio may purchase a call option on a bond index futures contract to
hedge against a market advance in securities that the Portfolio plans to
acquire at a future date. A Portfolio may write covered put options on
bond index futures as a partial anticipatory hedge and may write covered
call options on bond index futures as a partial hedge against a decline
in the prices of bonds held in its portfolio. This is analogous to
writing covered call options on securities. A Portfolio also may
purchase put options on bond index futures contracts. The purchase of
put options on bond index futures contracts is analogous to the purchase
of protective put options on individual securities where a level of
protection is sought below which no additional economic loss would be
incurred by the Portfolio.
The International Portfolio may also purchase and sell futures
contracts on a foreign currency. The Portfolio may sell a foreign
currency futures contract to hedge against possible variations in the
exchange rate of the foreign currency in relation to the U.S. dollar.
In addition, the International Portfolio may sell a foreign currency
futures contract when the adviser anticipates a general weakening of the
foreign currency exchange rate that could adversely affect the market
values of the Portfolio's foreign securities holdings. In this case,
the sale of futures contracts on the underlying currency may reduce the
risk to the Portfolio caused by foreign currency variations and, by so
doing, provide an alternative to the liquidation of securities positions
in the Portfolio and resulting transaction costs. When the adviser
anticipates a significant foreign exchange rate increase while intending
to invest in a foreign currency, the Portfolio may purchase a foreign
currency futures contract to hedge against a rise in foreign exchange
rates pending completion of the anticipated transaction. Such a
purchase would serve as a temporary measure to protect the
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Portfolio against any rise in the foreign exchange rate which may add
additional costs to acquiring the foreign security position.
The International Portfolio may also purchase call or put options on
foreign currency futures contracts to obtain a fixed foreign exchange
rate at limited risk. The Portfolio may purchase a call option or write
a put option on a foreign currency futures contract to hedge against a
rise in the foreign exchange rate while intending to invest in a foreign
security of the same currency. The Portfolio may purchase put options
on foreign currency futures contracts as a partial hedge against a
decline in the foreign exchange rates or the value of its foreign
portfolio securities. It may also write a call option on a foreign
currency futures contract as a partial hedge against the effects of
declining foreign exchange rates on the value of foreign securities.
A Portfolio may also write put options on interest rate, bond index or
foreign currency futures contracts while, at the same time, purchasing
call options on the same interest rate, bond index or foreign currency
futures contract in order synthetically to create a long interest rate,
bond or foreign currency futures contract position. The options will
have the same strike prices and expiration dates. A Portfolio will
engage in this strategy only when its adviser believes it is more
advantageous to the Portfolio to do so as compared to purchasing the
futures contract.
A Portfolio may also purchase and write covered straddles on interest
rate, foreign currency or bond index futures contracts. A long straddle
is a combination of a call and a put purchased on the same futures
contract where the exercise price of the put option is less than the
exercise price of the call option. A Portfolio would enter into a long
straddle when it believes that it is likely that interest rates or
foreign currency exchange rates will be more volatile during the term of
the options than the option pricing implies. A short straddle is a
combination of a call and put written on the same futures contract where
the exercise price of the put option is less than the exercise price of
the call option and where the same security or futures contract is
considered "cover" for both the put and the call. A Portfolio would
enter into a short straddle when it believes that it is unlikely that
interest rates or foreign currency exchange rates will be as volatile
during the term of the options as the option pricing implies. In such
case, the Portfolio will set aside cash and/or liquid, high grade debt
securities in a segregated account with its custodian equal in value to
the amount, if any, by which the put is "in-the-money", that is, the
amount by which the exercise price of the put exceeds the current market
value of the underlying futures contract.
When a purchase or sale of a futures contract is made by a Portfolio,
the Portfolio is required to deposit with its custodian (or a broker, if
legally permitted) a specified amount of cash or U.S. Government
securities ("initial margin"). The margin required for a futures
contract is set by the exchange on which the contract is traded and may
be modified during the term of the contract. The initial margin is in
the nature of a performance bond or good faith deposit on the futures
contract which is returned to the Portfolio upon termination of the
contract, assuming all contractual obligations have been satisfied.
Under certain circumstances, such as periods of high volatility, a
Portfolio may be required by an exchange to increase the level of its
initial margin payment. Additionally, initial margin requirements may
be increased generally in the future by regulatory action. Each
Portfolio expects to earn interest income on its initial margin
deposits. A futures contract held by a Portfolio is valued daily at the
official settlement price of the exchange on which it is traded. Each
day the Portfolio pays or receives cash, called "variation margin,"
equal to the daily change in value of the futures contract. This
process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Portfolio but is instead settlement
between the Portfolio and the broker of the amount one would owe the
other if the futures contract
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expired. In computing daily net asset value, each Portfolio will mark to
market its open futures positions.
A Portfolio is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by it.
Such margin deposits will vary depending on the nature of the underlying
futures contract (and the related initial margin requirements), the
current market value of the option and other futures positions held by
the Portfolio.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally those contracts are closed out
prior to delivery by offsetting purchases or sales of matching futures
contracts (involving the same currency or underlying security and
delivery month). If an offsetting purchase price is less than the
original sale price, the Portfolio realizes a gain, or if it is more,
the Portfolio realizes a loss. If an offsetting sale price is more than
the original purchase price, the Portfolio realizes a gain, or if it is
less, the Portfolio realizes a loss. The Portfolio will also bear
transaction costs for each contract which will be included in these
calculations.
A Portfolio will not enter into futures contracts or commodities
option positions if, immediately thereafter, the initial margin deposits
plus premiums paid by it, less the amount by which any such options
positions are "in-the-money" at the time of purchase, would exceed 5% of
the fair market value of the Portfolio's total assets. A call option is
"in-the-money" if the value of the futures contract that is the subject
of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option. Foreign currency options
traded on a commodities exchange are considered commodity options for
this purpose.
The requirements for qualification as a regulated investment company
also may limit the extent to which a Portfolio may engage in
transactions in futures, options on futures or forward contracts. See
"Taxation."
Risks Associated with Futures and Options
In considering the Portfolios' use of futures contracts and options,
particular note should be taken of the following:
(1) Positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such
futures contracts. Futures exchanges may limit the amount of
fluctuation permitted in certain futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the
price of a futures contract may vary either up or down from the previous
day's settlement price at the end of the current trading session. Once
the daily limit has been reached in a futures contract subject to the
limit, no more trades may be made on that day at a price beyond that
limit. The daily limit governs only price movements during a particular
trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for
several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of positions and subjecting some holders
of futures contracts to substantial losses.
(2) The ability to establish and close out positions in either futures
contracts or exchange-listed options is also subject to the maintenance
of a liquid secondary market.
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Consequently, it may not be possible for a Portfolio to close a position
and, in the event of adverse price movements, the Portfolio would have to
make daily cash payments of variation margin (except in the case of
purchased options). However, in the event futures contracts or options have
been used to hedge portfolio securities, such securities will not be sold
until the contracts can be terminated. In such circumstances, an increase in
the price of the securities, if any, may partially or completely offset losses
on the futures contract. However, there is no guarantee that the price of the
securities will, in fact, correlate with the price movements in the
contracts and thus provide an offset to losses on the contracts.
(3) Successful use by a Portfolio of futures contracts and options
will depend upon the adviser's ability to predict movements in the
direction of the overall securities, currency and interest rate markets,
which may require different skills and techniques than predicting
changes in the prices of individual securities. Moreover, futures
contracts relate not to the current level of the underlying instrument
but to the anticipated levels at some point in the future. There is, in
addition, the risk that the movements in the price of the futures
contract will not correlate with the movements in prices of the
securities or currencies being hedged. For example if the price of the
futures contract moves less than the price of the securities or
currencies that are subject to the hedge, the hedge will not be fully
effective; however, if the price of securities or currencies being
hedged has moved in an unfavorable direction, the Portfolio would be in
a better position than if it had not hedged at all. If the price of the
securities or currencies being hedged has moved in a favorable
direction, this advantage may be partially offset by losses in the
futures position. In addition, if the Portfolio has insufficient cash,
it may have to sell assets from its investment portfolio to meet daily
variation margin requirements. Any such sale of assets may or may not
be made at prices that reflect the rising market; consequently, a
Portfolio may need to sell assets at a time when such sales are
disadvantageous to the Portfolio. If the price of the futures contract
moves more than the price of the underlying securities or currencies,
the Portfolio will experience either a loss or a gain on the futures
contract that may or may not be completely offset by movements in the
price of the securities or currencies that are the subject of the hedge.
(4) The value of an option position will reflect, among other things,
the current market price of the underlying security, futures contract or
currency, the time remaining until expiration, the relationship of the
exercise price to the market price, the historical price volatility of
the underlying security, futures contract or currency and general market
conditions. For this reason, the successful use of options as a hedging
strategy depends upon the adviser's ability to forecast the direction of
price fluctuations in the underlying market or market sector.
(5) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the
futures position and the securities or currencies being hedged,
movements in the prices of futures contracts may not correlate perfectly
with movements in the prices of the hedged securities or currencies due
to price distortions in the futures market. There may be several
reasons unrelated to the value of the underlying securities or
currencies which cause this situation to occur. First, as noted above,
all participants in the futures market are subject to initial and
variation margin requirements. If, to avoid meeting additional margin
deposit requirements or for other reasons, investors choose to close a
significant number of futures contracts through offsetting transactions,
distortions in the normal price relationship between the securities or
currencies and the futures markets may occur. Second, because the margin
deposit requirements in the futures market are less onerous than margin
requirements in the securities market, there may be increased
participation by speculators in the futures market; such speculative
activity in the futures market also may cause temporary price
distortions. Third, participants could make or take delivery of the
underlying securities or currencies
15
<PAGE>
instead of closing out their contracts. As a result, a correct forecast of
general market trends may not result in successful hedging through the use of
futures contracts over the short term. In addition, activities of large
traders in both the futures and securities markets involving arbitrage and
other investment strategies may result in temporary price distortions.
(6) Options normally have expiration dates of up to three years. The
exercise price of the options may be below, equal to or above the
current market value of the underlying security, futures contract or
currency. Options that expire unexercised have no value, and the
Portfolio will realize a loss in the amount paid plus any transaction
costs.
(7) Like options on securities and currencies, options on futures
contracts have a limited life. The ability to establish and close out
options on futures will be subject to the development and maintenance of
liquid secondary markets on the relevant exchanges or boards of trade.
There can be no certainty that liquid secondary markets for all options
on futures contracts will develop.
(8) Purchasers of options on futures contracts pay a premium in cash
at the time of purchase. This amount and the transaction costs are all
that is at risk. Sellers of options on futures contracts, however, must
post an initial margin and are subject to additional margin calls which
could be substantial in the event of adverse price movements. In
addition, although the maximum amount at risk when the Portfolio
purchases an option is the premium paid for the option and the
transaction costs, there may be circumstances when the purchase of an
option on a futures contract would result in a loss to the Portfolio
when the use of a futures contract would not, such as when there is no
movement in the value of the securities or currencies being hedged.
(9) A Portfolio's activities in the futures and options markets may
result in a higher portfolio turnover rate and additional transaction
costs in the form of added brokerage commissions; however, a Portfolio
also may save on commissions by using such contracts as a hedge rather
than buying or selling individual securities or currencies in
anticipation or as a result of market movements.
(10) A Portfolio may purchase and write both exchange-traded
options and options traded on the OTC market. Exchange markets for
options on debt securities and foreign currencies exist but are
relatively new, and the ability to establish and close out positions on
the exchanges is subject to the maintenance of a liquid secondary
market. Although the Portfolios intend to purchase or write only those
exchange-traded options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market
will exist for any particular option at any specific time. Closing
transactions may be effected with respect to options traded in the OTC
markets (currently the primary markets for options on debt securities
and foreign currencies) only by negotiating directly with the other
party to the option contract, or in a secondary market for the option if
such market exists. Although the Portfolios will enter into OTC options
only with dealers which agree to enter into, and which are expected to
be capable of entering into, closing transactions with the Portfolios,
there can be no assurance that a Portfolio will be able to liquidate an
OTC option at a favorable price at any time prior to expiration. In the
event of insolvency of the contra-party, a Portfolio may be unable to
liquidate an OTC option. Accordingly, it may not be possible to effect
closing transactions with respect to certain options, with the result
that the Portfolio would have to exercise those options which it has
purchased in order to realize any profit. With respect to options
written by a Portfolio, the inability to enter into a closing
transaction may result in material losses to the Portfolio. For
example, because a Portfolio must maintain a covered position with
respect to any call option it writes on a security, futures contract
16
<PAGE>
or currency, the Portfolio may not sell the underlying security, futures
contract or currency or invest any cash, U.S. Government securities or
liquid high quality debt securities used as cover during the period it
is obligated under such option. This requirement may impair a
Portfolio's ability to sell a portfolio security or make an investment
at a time when such a sale or investment might be advantageous.
(11) Bond index options are settled exclusively in cash. If a
Portfolio writes a call option on an index, the Portfolio will not know
in advance the difference, if any, between the closing value of the
index on the exercise date and the exercise price of the call option
itself and thus will not know the amount of cash payable upon
settlement. In addition, a holder of a bond index option who exercises
it before the closing index value for that day is available runs the
risk that the level of the underlying index may subsequently change.
Special Risks Related to Foreign Currency Futures Contracts and Options
on Such Contracts and Options on Foreign Currencies
Buyers and sellers of foreign currency futures contracts are subject
to the same risks that apply to the use of futures generally. In
addition, there are risks associated with foreign currency futures
contracts and their use as a hedging device similar to those associated
with options on foreign currencies described below. Further, settlement
of a foreign currency futures contract must occur within the country
issuing the underlying currency. Thus, the Portfolio must accept or
make delivery of the underlying foreign currency in accordance with any
U.S. or foreign restrictions or regulations regarding the maintenance of
foreign banking arrangements by U.S. residents and may be required to
pay any fees, taxes or charges associated with such delivery that are
assessed in the issuing country.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts
is relatively new. The ability to establish and close out positions on
such options is subject to the maintenance of a liquid secondary market.
To reduce this risk, the Portfolio will not purchase or write options on
foreign currency futures contracts unless and until, in the opinion of
Western Asset, the market for such options has developed sufficiently
that the risks in connection with such options are not greater than the
risks in connection with transactions in the underlying foreign currency
futures contracts. Compared to the purchase or sale of foreign currency
futures contracts, the purchase of call or put options on futures
contracts involves less potential risk to the Portfolio because the
maximum amount at risk is the premium paid for the option (plus
transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a
loss, such as when there is no movement in the price of the underlying
currency or futures contract, when the purchase of the underlying
futures contract would not result in a loss.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or
both currencies and may have no relationship to the investment merits of
a foreign security. Because foreign currency transactions occurring in
the interbank market involve substantially larger amounts than those
that may be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying
foreign currencies at prices that are less favorable than for round
lots.
17
<PAGE>
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis. Quotation information available is generally representative of
very large transactions in the interbank market and thus may not reflect
relatively smaller transactions (i.e., less than $1 million) where rates
may be less favorable. The interbank market in foreign currencies is a
global, around-the-clock market. To the extent that the U.S. options
markets are closed while the markets for the underlying currencies
remain open, significant price and rate movements may take place in the
underlying markets that cannot be reflected in the options markets until
they reopen.
Additional Risks of Options on Securities, Futures Contracts, Options on
Futures and Forward Currency Exchange Contracts and Options Thereon
Traded on Foreign Exchanges
Options on securities, futures contracts, options on futures
contracts, currencies and options on currencies may be traded on foreign
exchanges. Such transactions may not be regulated as effectively as
similar transactions in the United States, may not involve a clearing
mechanism and related guarantees and are subject to the risk of
governmental actions affecting trading in, or the price of, foreign
securities. The value of such positions also could be adversely
affected by (1) other complex foreign political, legal and economic
factors, (2) lesser availability than in the United States of data on
which to make trading decisions, (3) delays in the Portfolios' ability
to act upon economic events occurring in foreign markets during
non-business hours in the United States, (4) the imposition of different
exercise and settlement terms and procedures and margin requirements
than in the United States and (5) lesser trading volume.
Cover for Strategies Involving Options, Futures and Forward Contracts
A Portfolio will not use leverage in its hedging strategies. A
Portfolio will not enter into an options, futures or forward currency
strategy that exposes it to an obligation to another party unless it
owns either (1) an offsetting ("covering") position in securities,
currencies or other options, futures or forward contracts or (2) cash,
receivables and liquid high quality debt securities with a value
sufficient to cover its potential obligations. In the case of
transactions entered into as a hedge, a Portfolio will hold securities,
currencies or other options, futures or forward currency positions whose
values are expected to offset ("cover") its obligations under the
hedging strategies. Each Portfolio will comply with guidelines
established by the SEC with respect to coverage of these strategies by
mutual funds, and, if the guidelines so require, will set aside cash
and/or liquid, high-grade debt securities in a segregated account with
its custodian in the amount prescribed, as marked to market daily.
Securities, currencies or other options or futures positions used for
cover and securities held in a segregated account cannot be sold or
closed out while the strategy is outstanding, unless they are replaced
with similar assets. As a result, there is a possibility that the use
of cover or segregation involving a large percentage of a Portfolio's
assets could impede portfolio management or a Portfolio's ability to
meet redemption requests or other current obligations.
Forward Currency Exchange Contracts
The International Portfolio may use forward currency exchange
contracts to hedge against uncertainty in the level of future exchange
rates or to enhance income.
The International Portfolio may enter into forward currency exchange
contracts with respect to specific transactions. For example, when the
Portfolio anticipates purchasing or selling a
18
<PAGE>
security denominated in a foreign currency, or when it anticipates the
receipt in a foreign currency of dividend or interest payments on a security
that it holds, the Portfolio may desire to "lock-in" the U.S. dollar price
of the security or the U.S. dollar equivalent of such payment, as the case may
be, by entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars or foreign currency, of the amount of
foreign currency involved in the underlying transaction. The Portfolio
will thereby attempt to protect itself against a possible loss resulting
from an adverse change in the relationship between the currency exchange
rates during the period between the date on which the security is
purchased or sold, or on which the payment is declared, and the date on
which such payments are made or received.
The International Portfolio also may use forward currency exchange
contracts to lock in the U.S. dollar value of its portfolio positions,
to increase the Portfolio's exposure to foreign currencies that Western
Asset believes may rise in value relative to the U.S. dollar or to shift
the Portfolio's exposure to foreign currency fluctuations from one
country to another. For example, when the adviser believes that the
currency of a particular foreign country may suffer a substantial
decline relative to the U.S. dollar or another currency, it may enter
into a forward contract to sell the amount of the former foreign
currency approximating the value of some or all of the Portfolio's
securities denominated in such foreign currency. These investment
practices generally are referred to as "cross-currency hedging" when two
foreign currencies is involved.
The precise matching of the forward contract amount and the value of
the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between
the date the forward contract is entered into and the date it matures.
Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot (i.e., cash) market (and bear
the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Portfolio is obligated to
deliver and if a decision is made to sell the security and make delivery
of the foreign currency. Conversely, it may be necessary to sell on the
spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign
currency the Portfolio is obligated to deliver.
The projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging strategy
is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing
the Portfolio to sustain losses on these contracts and transaction
costs. The International Portfolio may enter into forward contracts or
maintain a net exposure to such contracts only if (1) the consummation
of the contracts would not obligate the Portfolio to deliver an amount
of foreign currency in excess of the value of the Fund's portfolio
securities or other assets denominated in that currency or (2) the
Portfolio maintains cash, U.S. Government securities or liquid,
high-grade debt securities in a segregated account with the Fund's
custodian, marked to market daily, in an amount not less than the value
of the Portfolio's total assets committed to the consummation of the
contract. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated into the longer term investment
decisions made with regard to overall diversification strategies.
However, the Portfolio's adviser believes that it is important to have
the flexibility to enter into such forward contracts when it determines
that the best interests of the Portfolio will be served.
At or before the maturity date of a forward contract requiring the
International Portfolio to sell a currency, the Portfolio may either
sell a portfolio security and use the sale proceeds to make delivery of
the currency or retain the security and offset its contractual
obligation to deliver the
19
<PAGE>
currency by purchasing a second contract pursuant to which the Portfolio will
obtain, on the same maturity date, the same amount of the currency that it is
obligated to deliver. Similarly, the Portfolio may close out a forward
contract requiring it to purchase a specified currency by entering into a
second contract entitling it to sell the same amount of the same currency on
the maturity date of the first contract. The Portfolio would realize a gain
or loss as a result of entering into such an offsetting forward contract
under either circumstance to the extent the exchange rate or rates
between the currencies involved moved between the execution dates of the
first contract and the offsetting contract.
The cost to the International Portfolio of engaging in forward
contracts varies with factors such as the currencies involved, the
length of the contract period and the market conditions then prevailing.
Because forward contracts are usually entered into on a principal basis,
no fees or commissions are involved. The use of forward contracts does
not eliminate fluctuations in the prices of the underlying securities
the Portfolio owns or intends to acquire, but it does fix a rate of
exchange in advance. In addition, although forward contracts limit the
risk of loss due to a decline in the value of the hedged currencies, at
the same time they limit any potential gain that might result should the
value of the currencies increase.
Although the International Portfolio values its assets daily in terms
of U.S. dollars, it does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. The Portfolio may
convert foreign currency from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign
currency to the Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the
dealer.
Foreign Currency Exchange-Related Securities and Foreign Currency Warrants
Foreign currency warrants entitle the holder to receive from their
issuer an amount of cash (generally, for warrants issued in the United
States, in U.S. dollars) which is calculated pursuant to a predetermined
formula and based on the exchange rate between a specified foreign
currency and the U.S. dollar as of the exercise date of the warrant.
Foreign currency warrants generally are exercisable upon their issuance
and expire as of a specified date and time. Foreign currency warrants
have been issued in connection with U.S. dollar-denominated debt
offerings by major corporate issuers in an attempt to reduce the foreign
currency exchange risk which is inherent in the international fixed
income/debt marketplace. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in
a particular direction.
Foreign currency warrants are severable from the debt obligations with
which they may be offered and may be listed on exchanges. Foreign
currency warrants may be exercisable only in certain minimum amounts,
and an investor wishing to exercise warrants who possesses less than the
minimum number required for exercise may be required either to sell the
warrants or to purchase additional warrants, thereby incurring
additional transaction costs. In the case of any exercise of warrants,
there may be a time delay between the time a holder of warrants gives
instructions to exercise and the time the exchange rate relating to
exercise is determined, during which time the exchange rate could change
significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised.
20
<PAGE>
The expiration date of the warrants may be accelerated if the warrants
are delisted from an exchange or if their trading is suspended
permanently, which would result in the loss of any remaining "time
value" of the warrants (i.e., the difference between the current market
value and the exercise value of the warrants) and, in the case where the
warrants were "out-of-the-money," in a total loss of the purchase price
of the warrants. Warrants are generally unsecured obligations of their
issuers and are not standardized foreign currency options issued by the
Options Clearing Corporation ("OCC"). Unlike foreign currency options
issued by OCC, the terms of foreign currency warrants generally will not
be amended in the event of governmental or regulatory actions affecting
exchange rates or in the event of the imposition of other regulatory
controls affecting the international currency markets. The initial
public offering price of foreign currency warrants is generally
considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option
involving significantly larger amounts of foreign currencies. Foreign
currency warrants are subject to significant foreign exchange risk,
including risks arising from complex political and economic factors.
VALUATION OF PORTFOLIO SHARES
As described in the Prospectus, securities for which market quotations
are readily available are valued at current market value. Securities
are valued at the last sale price for a comparable position on the day
the securities are being valued or, lacking any sales on such day, at
the last available bid price. In cases where securities are traded on
more than one market, the securities are generally valued on the market
considered by the adviser as the primary market.
All investments valued in foreign currency are valued daily in U.S.
dollars on the basis of the foreign currency exchange rate prevailing at
the time such valuation is determined. Foreign currency exchange rates
are generally determined prior to the close of trading on the New York
Stock Exchange. Occasionally, events affecting the value of foreign
investments and such exchange rates occur between the time at which they
are determined and the close of trading on the Exchange. Such
investments will be valued at their fair value, as determined in good
faith by or under the direction of the Board of Directors. Foreign
currency exchange transactions of a Portfolio occurring on a spot basis
are valued at the spot rate for purchasing or selling currency
prevailing on the foreign exchange market.
MANAGEMENT OF THE FUND
Directors and Officers
The Fund's officers are responsible for the operation of the Fund
under the direction of the Board of Directors. The officers and
directors of the Fund and their principal occupations during the past
five years are set forth below. An asterisk (*) indicates directors who
are "interested persons" of the Fund as defined in the 1940 Act. The
address of each officer and director is 117 East Colorado Blvd.,
Pasadena, CA 91105.
William G. McGagh, [66] (1) (2) Chairman of the Board and Director;
Consultant, McGagh Associates (corporate financial consulting), January
1989-present; Director of Pacific American Income Shares, Inc.;
formerly: Senior Vice-President, Chief Financial Officer and Director
of Northrop Corporation (military aircraft).
21
<PAGE>
Dr. Richard C. Gilman, [72] (1) (2) Director; President Emeritus of
Occidental College, 1988-present; Director of Pacific American Income
Shares, Inc.; formerly: President and Chief Executive Officer of
Occidental College.
Gordon L. Hough, [76] (1) Director; Director of Pacific American
Income Shares, Inc., Ameron, Inc. (construction products) and the
Chronicle Publishing Company; formerly: Director of First Interstate
Bank.
*Ronald L. Olson, [54] (2) (3) Director; Senior Partner, Munger,
Tolles & Olson (a law partnership); Director of Pacific American Income
Shares, Inc.
*W. Curtis Livingston, III, [52] (1) President and Director;
President, Director and Chief Executive Officer of Western Asset
Management Company (investment management firm), December 1980-present;
President, Pacific American Income Shares, Inc.
Norman Barker, Jr., [73] Director; Director of American Health
Properties (real estate investment trust), Southern California Edison
Company, SPI Pharmaceuticals, Inc., ICN Pharmaceutical, Inc., and TCW
Convertible Securities Fund, Inc. (management investment company);
formerly: Chairman of the Board of First Interstate Bancorp.
*Louis A. Simpson, [58] (4) Director; President and CEO Capital
Operations of Government Employees Insurance Company (GEICO Corporation)
since May 1993; Vice Chairman of GEICO (1985-1993); Senior Vice
President and Chief Investment Officer of GEICO (1979-1985). Director
of Pacific American Income Shares, Inc., Potomac Electric Power Company,
Potomac Capital Investment Corporation, and Salomon Inc. Formerly:
President and CEO of Western Asset Management Company.
Kent S. Engel, [48] Vice-President; Director and Chief Investment
Officer of Western Asset Management Company 1969 - present;
Vice-President and Portfolio Manager of Pacific American Income Shares,
Inc.
Scott F. Grannis, [46] Vice President; Director and Economist, Western
Asset Management Company, 1989 - present; Director, Supershares Services
Corp. (investment company services); formerly: Vice-President, Leland
O'Brien Rubinstein (investment advisory firm), 1986-89.
Stephen A. Walsh, [36] Vice-President: Director and Senior Portfolio
Manager, Western Asset Management Company; formerly: Portfolio Manager
and Trader of Security Pacific Investment Managers, Inc. (investment
management company), 1989-1991; Portfolio Manager of Atlantic Richfield
Company (petroleum company), 1981-1988.
Ilene S. Harker, [40] Vice President and Secretary; Director of
Administration and Controls, Western Asset Management Company 1978 -
present; Secretary, Pacific American Income Shares, Inc., 1993 -
present.
James W. Hirschmann, III, [35] Vice-President; Director of Marketing,
Western Asset Management Company, April 1989-present; formerly:
Vice-President and Director of Marketing, Financial Trust Corporation
(bank holding company), January 1988 - April 1989; Vice-President of
Marketing, Atalanta/Sosnoff Capital (investment management company),
January 1986 - January 1988.
22
<PAGE>
Marie K. Karpinski, [46] Vice-President and Treasurer; Vice-President
and Treasurer of fifteen Legg Mason funds (open-end investment
companies); Secretary/Treasurer of Worldwide Value Fund, Inc.
(closed-end investment company); Treasurer of Legg Mason Fund Adviser,
Inc. March 1986 - present; Vice-President of Legg Mason Wood Walker,
Inc., February 1992 - present; Assistant Vice-President of Legg Mason
Wood Walker, Inc., March 1989- February 1992.
Randolph L. Kohn, [48] Vice-President; Director of Client Services,
Western Asset Management Company, 1984 - present.
S. Kenneth Leech, [41] Vice-President; Director of Portfolio
Management, Western Asset Management Company, May 1990-present;
formerly: Senior Trader of Greenwich Capital, 1988-1990; Fixed Income
Manager of The First Boston Corporation (holding company; stock and bond
dealers), 1985-1987.
Edward A. Moody, [45] Vice-President; Director of Investment Systems,
Western Asset Management Company.
Joseph L. Orlando, [35] Vice-President; Senior Marketing Manager of
Western Asset Management Company; formerly: Regional Manager of T. Rowe
Price Associates (investment management firm), January 1988 - July 1992.
Steven T. Saruwatari, [30] Assistant Treasurer; Senior Financial
Officer, Western Asset Management Company; formerly: Controller-Finance
for LaSalle Paper Company/Spicers Paper, Inc. (distributor of fine
printing papers), June 1991-November 1994; and Senior Auditor for
Coopers and Lybrand (international public accounting firm), September
1988 - May 1991.
Donna A. Barnes, [35] Assistant Secretary; Assistant Secretary,
Pacific American Income Shares, Inc., 1993 - present; employee of
Western Asset Management Company 1991 - present. Formerly: Personnel
Officer, First Interstate Bank, Ltd. (1982-1989).
____________________
(1) Member of the Executive Committee of the Board. When the full
Board is not in session, the Executive Committee may exercise all the
powers held by the Board in the management of the business and affairs
of the Fund that may be lawfully exercised by the full Board, except the
power to declare a dividend, authorize the issuance of stock, recommend
to stockholders any matter requiring stockholders' approval, amend the
By-Laws, or approve any merger or share exchange which does not require
shareholder approval.
(2) Member of the Audit Committee of the Board. The Audit Committee
meets with the Fund's independent accountants to review the financial
statements of the Fund, the arrangements for special and annual audits,
the adequacy of internal controls, the Fund's periodic reporting
process, material contracts entered into by the Fund, the services
provided by the accountants, any proposed changes in accounting
practices or principles and the independence of the accountants; and
reports on such matters to the Board.
The Fund has no nominating or compensation committee.
(3) Mr. Olson is an interested person because the law firm in which he
is a partner has provided certain services to the Fund and its
investment adviser.
23
<PAGE>
(4) Because Mr. Simpson is a Director of Salomon Inc., the parent
company of a registered broker-dealer, Mr. Simpson may be an interested
person.
Officers and directors of the Fund who are affiliated persons of the
investment adviser, Administrator or Distributor receive no salary or
fees from the Fund. Independent directors of the Fund receive a fee of
$2,000 annually for serving as a director, and a fee of $500 per
Portfolio for each meeting of the Board of Directors attended by him.
The Chairman of the Board receives an additional $1,000 per year for
serving in that capacity.
The following table provides certain information relating to the
compensation of the Fund's directors and senior executive officers for
the fiscal year ended June 30, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From Fund and
Aggregate Benefits Accrued Estimated Fund Complex
Name of Person and Compensation as Part of Funds' Annual Benefits Paid to
Position From the Fund* Expenses Upon Retirement Directors**
<S> <C> <C> <C> <C>
William G. McGagh -
Chairman of the Board and
Director $9,000 N/A N/A $17,300
Dr. Richard C. Gilman -
Director $6,500 N/A N/A $16,300
Gordon L. Hough - Director $6,500 N/A N/A $14,400
Ronald L. Olson - Director $6,500 N/A N/A $14,000
W. Curtis Livingston, III -
President and Director None N/A N/A None
Norman Barker, Jr. -
Director $8,000 N/A N/A $18,100
Louis A. Simpson - Director $6,000 N/A N/A $4,000
Ilene S. Harker - Vice
President and Secretary None N/A N/A None
Marie K. Karpinski - Vice
President and Treasurer None N/A N/A None
</TABLE>
* Represents fees paid to each director during the fiscal year ended
June 30, 1995.
** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1994.
The Portfolios' Investment Adviser
Western Asset Management Company ("Western Asset"), 117 East
Colorado Boulevard, Pasadena, CA 91105, serves as investment adviser to
the Corporate, Mortgage and International Securities Portfolios under an
investment advisory and administration agreement dated June 30, 1992,
between Western Asset and the Fund ("Advisory Agreement").
24
<PAGE>
The Advisory Agreement was most recently approved by the Board of
Directors, including a majority of the directors who are not "interested
persons" (as defined in the 1940 Act) of the Fund, the advisers or their
affiliates, on April 13, 1995. Under the Advisory Agreement, Western
Asset is responsible, subject to the general supervision of the Fund's
Board of Directors, for the actual management of the assets of the
Portfolios, including the responsibility for making decisions and
placing orders to buy, sell or hold a particular security, consistent
with the investment objectives and policies described in the Portfolios'
Prospectus and this Statement of Additional Information. Western Asset
is also responsible for the compensation of directors and officers of
the Fund who are employees of Western Asset or its affiliates.
Western Asset receives for its services to the Fund an advisory fee
calculated daily and payable monthly, at an annual rate equal to .175%
of each Domestic Portfolio's average daily net assets and .475% of the
International Portfolio's average daily net assets. For the
International Portfolio, Western Asset received $480,824 (prior to fees
waived of $480,824) for the year ended June 30, 1995, $572,322 (prior to
fees waived of $572,322) for the year ended June 30, 1994 and $136,356
(prior to fees waived of $136,356) for the period January 7, 1993
(Commencement of Operations) to June 30, 1993.
Each Portfolio pays all of its other expenses which are not assumed
by the adviser or the Administrator. These expenses include, among
others, expenses of preparing and printing prospectuses, statements of
additional information, proxy statements and reports and of distributing
them to existing shareholders, custodian charges, transfer agency fees,
organizational expenses, compensation of the directors who are not
"interested persons" of the adviser, Administrator or Distributor, as
that term is defined in the 1940 Act, legal and audit expenses,
insurance expenses, expenses of registering and qualifying shares of the
Portfolio for sale under federal and state law, distribution fees,
governmental fees, expenses incurred in connection with membership in
investment company organizations, interest expense, taxes and brokerage
fees and commissions. The Portfolios also are liable for such
nonrecurring expenses as may arise, including litigation to which a
Portfolio or the Fund may be a party. The Fund may also have an
obligation to indemnify its directors and officers with respect to
litigation.
Under the Advisory Agreement, Western Asset will not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Fund in connection with the performance of the Advisory Agreement,
except a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its
obligations or duties thereunder.
The Advisory Agreement terminates automatically upon assignment and
is terminable with respect to any Portfolio at any time without penalty
by vote of the Fund's Board of Directors, by vote of a majority of that
Portfolio's outstanding voting securities, or by the adviser, on not
less than 60 days' notice to the other party, and may be terminated
immediately upon the mutual written consent of the parties.
The Fund's Administrator
Legg Mason Fund Adviser, Inc. ("Administrator"), 111 South Calvert
Street, Baltimore, MD 21202, serves as the administrator for the Fund
under Administration Agreements with Western Asset dated June 30, 1992
("Administration Agreements"). The Administration Agreements were most
recently approved by the Fund's Board of Directors, including a majority
of the directors who
25
<PAGE>
are not "interested persons" (as defined in the 1940 Act) of the Fund, the
Administrator or its affiliates on April 13, 1995.
Under the Administration Agreements, the Administrator is obligated
to provide the Portfolios with office space and certain officers, to
oversee accounting and recordkeeping services provided by the Fund's
custodian and transfer and dividend-disbursing agent, and to provide
shareholder services not provided by the Fund's transfer and dividend
disbursing agent.
The Administrator receives for its services to the Fund an
administrative fee, calculated daily and payable monthly, at an annual
rate equal to 0.025% of each of the Domestic Portfolio's average daily
net assets and 0.075% of the International Portfolio's average daily net
assets. For the years ended June 30, 1995 and 1994 and for the period
January 7, 1993 (Commencement of Operations) to June 30, 1993, the
Administrator received administrative fees from the International
Portfolio of $90,158, $107,311 and $25,567, respectively.
The Fund's Distributor
Legg Mason Wood Walker, Incorporated ("Legg Mason" or
"Distributor"), 111 South Calvert Street, Baltimore, MD 21202, acts as a
distributor of the shares of the Fund pursuant to an Underwriting
Agreement with the Fund dated August 24, 1990 ("Underwriting
Agreement"). This Agreement was most recently approved by the Fund's
Board of Directors, including a majority of the directors who are not
"interested persons" (as defined in the 1940 Act) of the Fund, Legg
Mason or its affiliates, on April 13, 1995.
The Distributor is not obligated to sell any specific amount of
Fund shares and receives no compensation pursuant to the Underwriting
Agreement. The Underwriting Agreement is terminable with respect to any
Portfolio without penalty, at any time, by vote of a majority of the
Fund's disinterested directors, or by vote of the holders of a majority
of the shares of that Portfolio, or by Legg Mason upon 60 days' notice
to the Fund.
Expense Limitations
Western Asset has agreed to waive its fees or reimburse each of the
Corporate and Mortgage Portfolios to the extent a Portfolio's expenses
(exclusive of taxes, interest, brokerage and other transaction expenses
and any extraordinary expenses) exceed during any month an annual
percentage rate equal to .25% of the Portfolio's average daily net
assets. Western Asset has agreed to waive its fees or reimburse the
International Portfolio to the extent the Portfolio's expenses
(exclusive of taxes, interest, brokerage and other transaction expenses
and any extraordinary expenses) exceed during any month an annual
percentage rate equal to .85% of the Portfolio's average daily net
assets. These voluntary expense limitations are in effect to December
31, 1995. In addition, Western Asset has voluntarily waived for
calendar year 1995 all of its fees for services to the International
Portfolio under its management agreement, other than the portion of such
fee equal to the fee paid by Western Asset to the Administrator (at an
annual rate of .075% of average net assets) for services to the
International Portfolio under the Administration Agreement.
26
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
Set forth below is a table which contains the name, address and
percentage of ownership of each person who is known by the Fund to own
beneficially five percent or more of the outstanding shares of the
International Portfolio as of October 6, 1995:
<TABLE>
<CAPTION>
% of Ownership
As of
Name and Address Oct. 6, 1995
<S> <C>
AT&T
One Oak Way, Room 3ED146
Berkeley Heights, N.J. 07922 18.57%
FPL Group, Inc.
FPL Group Pension Plan
11770 U.S. Highway One
North Palm Beach, FL 33408 12.16%
Lockheed Corporation
Salaried Pension Fixed Income
4500 Park Granada Boulevard
Calabasas, CA 91399-0222 13.90%
Annuity Board of the Southern
Baptist Convention
2401 Cedar Springs
Dallas, Texas 75221-2190 5.63%
Unisys Corporation
Township Line & Union Meeting Roads
Blue Bell, PA 19422 6.33%
</TABLE>
27
<PAGE>
The following chart contains the name, address and percentage
of ownership of each person who is known by the Fund to own of record
five percent or more of the outstanding shares of the International
Portfolio as of October 6, 1995:
<TABLE>
<CAPTION>
% of Ownership
As of
Name and Address October 6, 1995
<S> <C>
Northern Trust Company
10 S. LaSalle Street
Chicago, IL 60675 28.91%
Bankers Trust Company of California, N.A.
Arco Finance Station
Los Angeles, CA 90071 22.57%
State Street Bank & Trust Company
One Heritage Drive
North Quincy, MA 02171 12.99%
Harris Trust & Savings Bank
111 West Monroe Street
Chicago, IL 60690 6.33%
Boston Safe Deposit & Trust
1 Cabot Road
Medford, MA 02155 16.75%
</TABLE>
PURCHASES AND REDEMPTIONS
The Fund reserves the right to modify or terminate the mail,
telephone or wire redemption services described in the Prospectus at any
time. The Fund also reserves the right to suspend or postpone
redemptions (1) for any period during which the New York Stock Exchange
("Exchange") is closed (other than for customary weekend and holiday
closings), (2) when trading in markets the Fund normally utilizes is
restricted or an emergency, as defined by rules and regulations of the
SEC, exists, making disposal of the Fund's investments or determination
of its net asset value not reasonably practicable, or (3) for such other
periods as the SEC by regulation or order may permit for protection of
the Fund's shareholders. In the case of any such suspension, an
investor may either withdraw the request for redemption or receive
payment based upon the net asset value next determined after the
suspension is lifted.
The Fund agrees to redeem shares of each Portfolio solely in cash up
to the lesser of $250,000 or 1% of the Portfolio's net assets during any
90-day period for any one shareholder. In consideration of the best
interests of the remaining shareholders, the Fund reserves the right to
pay any redemption price exceeding this amount in whole or in part by a
distribution in kind of readily marketable securities held by a
Portfolio in lieu of cash. It is highly unlikely that shares would ever
be redeemed in kind. If shares are redeemed in kind, however, the
redeeming shareholder should expect to incur transaction costs upon the
disposition of the securities received in the distribution.
28
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The portfolio turnover rate is computed by dividing the lesser of
purchases or sales of securities for the period by the average value of
portfolio securities for that period. Short-term securities are
excluded from the calculation. For the years ended June 30, 1995 and
1994, the International Portfolio's annualized portfolio turnover rates
were 355.03% and 571.18%, respectively.
Under the Advisory Agreement, the adviser is responsible for the
execution of that Portfolio's portfolio transactions. In selecting
brokers or dealers, the adviser must seek the most favorable price
(including the applicable dealer spread) and execution for such
transactions, subject to the possible payment as described below of
higher brokerage commissions or spreads to brokers or dealers who
provide research and analysis. The Fund may not always pay the lowest
commission or spread available. Rather, in placing orders on behalf of
the Fund, the adviser will also take into account such factors as size
of the order, difficulty of execution, efficiency of the executing
broker's or dealer's facilities (including the services described below)
and any risk assumed by the executing broker or dealer.
Consistent with the policy of obtaining most favorable price and
execution, the adviser may give consideration to research, statistical
and other services furnished by broker-dealers to the adviser for its
use, may place orders with broker-dealers who provide supplemental
investment and market research and securities and economic analysis, and
may pay to those broker-dealers a higher brokerage commission or spread
than may be charged by other broker-dealers. In selecting a broker, the
adviser may consider that such research, analysis and other services may
be useful to it in connection with services to clients other than the
Fund. The adviser's fees are not reduced by reason of its receiving
such brokerage and research services.
The Fund may not buy securities from, or sell securities to, the
adviser, or affiliated persons of the adviser as principal, except as
permitted by the rules and regulations of the SEC. Subject to certain
conditions, the Fund may purchase securities that are offered in
underwritings in which an affiliate of the adviser is a participant,
although the Fund may not make such purchases directly from such
affiliate.
The Adviser will select brokers to execute portfolio transactions. In
the over-the-counter market, the Fund generally will deal with
responsible primary market-makers unless a more favorable execution can
otherwise be obtained.
Investment decisions for the Fund are made independently from those of
other funds and accounts advised by the adviser. However, the same
security may be held in the portfolios of more than one fund or account.
When two or more accounts simultaneously engage in the purchase or sale
of the same security, the prices and amounts will be equitably allocated
to each account. In some cases, this procedure may adversely affect the
price or quantity of the security available to a particular account. In
other cases, however, an account's ability to participate in larger
volume transactions may produce better executions and prices. For the
years ended June 30, 1995, 1994 and the period January 7, 1993
(Commencement of Operations) to June 30, 1993, the International
Portfolio paid no brokerage commissions.
29
<PAGE>
ADDITIONAL TAX INFORMATION
General
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended
("Code"), each Portfolio must distribute annually to its shareholders at
least 90% of its investment company taxable income (consisting generally
of net investment income, net gains from certain foreign currency
transactions and net short-term capital gain, if any) ("Distribution
Requirement") and must meet several additional requirements. With
respect to each Portfolio, these requirements include the following:
(1) the Portfolio must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income
Requirement"); (2) the Portfolio must derive less than 30% of its gross
income each taxable year from the sale or other disposition of
securities, or any of the following, that were held for less than three
months: options, futures or forward contracts (other than those on
foreign currencies), or foreign currencies (or options, futures or
forward contracts thereon) that are not directly related to the
Portfolio's principal business of investing in securities (or options
and futures with respect to securities) ("Short-Short Limitation"); (3)
at the close of each quarter of the Portfolio's taxable year, at least
50% of the value of its total assets must be represented by cash and
cash items, U.S. Government securities and other securities, with those
other securities limited, in respect of any one issuer, to an amount
that does not exceed 5% of the value of the Portfolio's total assets;
and (4) at the close of each quarter of the Portfolio's taxable year,
not more than 25% of its total assets may be invested in securities
(other than U.S. Government securities) of any one issuer.
A distribution declared by a Portfolio in December of any year and
payable to shareholders of record on a date in that month will be deemed
to have been paid by the Portfolio and received by the shareholders on
December 31 if the distribution is paid by the Portfolio during the
following January. Such a distribution, therefore, will be taxable to
shareholders for the year in which that December 31 falls.
Hedging Transactions
The use of hedging and option income strategies, such as writing and
purchasing options and futures contracts and entering into forward
contracts, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the income received
in connection therewith by a Portfolio. Income from foreign currencies
(except certain gains therefrom that may be excluded by future
regulations), and income from transactions in options, futures and
forward contracts derived by a Portfolio with respect to its business of
investing in securities or foreign currencies, will qualify as
permissible income under the Income Requirement. However, income from
the disposition of options and futures contracts (other than those on
foreign currencies) will be subject to the Short-Short Limitation if
they are held for less than three months. Income from the disposition
of foreign currencies, and options, futures and forward contracts on
foreign currencies, that are not directly related to a Portfolio's
principal business of investing in securities (or options and futures
with respect to securities) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If a Portfolio satisfies certain requirements, any increase in value on
a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) of the
30
<PAGE>
offsetting hedging position during the period of the hedge for purposes of
determining whether the Portfolio satisfies the Short-Short Limitation.
Thus, only the net gain (if any) from the designated hedge will be included in
gross income for purposes of that Limitation. Each Portfolio intends
that, when it engages in hedging transactions, they will qualify for
this treatment, but at the present time it is not clear whether this
treatment will be available for all of each Portfolio's hedging
transactions. To the extent this treatment is not available, a
Portfolio may be forced to defer the closing out of certain options and
futures contracts beyond the time when it otherwise would be
advantageous to do so, in order for the Portfolio to qualify as a RIC.
Foreign Securities
The International Portfolio may invest in the stock of "passive foreign
investment companies" ("PFICs"). A PFIC is a foreign corporation that,
in general, meets either of the following tests: (1) at least 75% of its
gross income is passive or (2) an average of at least 50% of its assets
produce, or are held for the production of, passive income. Under
certain circumstances, a RIC that holds stock of a PFIC will be subject
to federal income tax on a portion of any "excess distribution" received
on the stock or of any gain on disposition of the stock (collectively
"PFIC income"), plus interest thereon, even if the RIC distributes the
PFIC income as a taxable dividend to its shareholders. The balance of
the PFIC income will be included in the RIC's investment company taxable
income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders.
If the International Portfolio invests in a PFIC and elects to treat
the PFIC as a "qualified electing fund," then in lieu of the foregoing
tax and interest obligation, the Portfolio would be required to include
in income each year its pro rata share of the qualified electing fund's
annual ordinary earnings and net capital gain (the excess of net
long-term capital gain over net short-term capital loss) -- which would
have to be distributed because of the Distribution Requirement and to
avoid imposition of the 4% excise tax referred to in the Prospectus --
even if those earnings and gain were not received by the Fund. In most
instances it will be very difficult, if not impossible, to make this
election because of certain requirements thereof.
Original Issue Discount
A Portfolio may purchase zero coupon or other debt securities issued
with original issue discount. Original issue discount that accrues in a
taxable year must be included in a Portfolio's income and therefore an
equivalent amount must be distributed to satisfy the Distribution
Requirement and avoid imposition of the 4% excise tax. Because the
original issue discount earned by a Portfolio in a taxable year may not
be represented by cash income, the Portfolio may have to dispose of
other securities and use the proceeds thereof to make the necessary
distributions. A Portfolio may realize capital gains or losses from
those dispositions, which would increase or decrease the Portfolio's
investment company taxable income and/or net capital gain. In addition,
any such gains may be realized on the disposition of securities held for
less than three months. Because of the Short-Short Limitation, any such
gains would reduce the Portfolio's ability to sell other securities (and
certain options, futures, and, with respect to the International
Portfolio, forward contracts and foreign currencies) held for less than
three months that it might wish to sell in the ordinary course of its
portfolio management.
31
<PAGE>
Miscellaneous
If a Portfolio invests in shares of preferred stock or otherwise holds
dividend-paying securities as a result of exercising a conversion
privilege, a portion of the dividends from the Portfolio's investment
company taxable income (whether paid in cash or reinvested in additional
Portfolio shares) may be eligible for the dividends-received deduction
allowed to corporations. The eligible portion may not exceed the
aggregate dividends received by the Portfolio from U.S. corporations.
However, dividends received by a corporate shareholder and deducted by
it pursuant to the dividends-received deduction are subject indirectly
to the alternative minimum tax.
If shares of any Portfolio are sold at a loss after being held for six
months or less, the loss will be treated as long-term, instead of
short-term, capital loss to the extent of any capital gain distributions
received on those shares. Investors should also be aware that if shares
are purchased shortly before the record date for any distribution, the
shareholder will pay full price for the shares and receive some portion
of the price back as a taxable dividend or capital gain distribution.
Dividends and interest received by a Portfolio, and gains realized by a
Portfolio on foreign securities, may be subject to income, withholding
or other taxes imposed by foreign countries and U.S. possessions that
would reduce the yield on the Portfolio's securities. Tax conventions
between certain countries and the United States may reduce or eliminate
these foreign taxes, however, and foreign countries generally do not
impose taxes on capital gains in respect of investments by foreign
investors.
OTHER INFORMATION
The Fund is a Maryland corporation, incorporated on May 16, 1990. The
capitalization of the Fund consists of five billion shares of common
stock with a par value of $0.001 each. The Fund has six Portfolios in
addition to the three Portfolios described herein. The Board of
Directors may establish additional Portfolios (with different investment
objectives and fundamental policies) at any time in the future.
Establishment and offering of additional Portfolios will not alter the
rights of the Fund's shareholders. When issued, shares are fully paid,
non-assessable, redeemable and freely transferable. Shares do not have
preemptive rights or subscription rights. In liquidation of a Portfolio,
each shareholder is entitled to receive his or her pro rata share of the
net assets of that Portfolio.
Performance Information
The Fund may, from time to time, include the total return of its
Portfolios in marketing materials or reports to shareholders or
prospective investors. Quotations of average annual total return for a
Portfolio will be expressed in terms of the average annual compounded
rate of return of a hypothetical investment in the Portfolio over
periods of one, five and ten years (up to the life of the Portfolio),
calculated pursuant to the following formula: P (1 + T)n = ERV (where P
= a hypothetical initial payment of $1,000, T = the average annual total
return, n = number of years, and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period). All
total return figures reflect the deduction of a proportional share of
Portfolio expenses on an annual basis and assume that all dividends and
other distributions are reinvested when paid.
32
<PAGE>
The International Securities Portfolio's returns as of June 30, 1995 were
as follows:
<TABLE>
<CAPTION>
Average
Cumulative Annual
Total Return Total Return
<S> <C> <C>
One Year 6.03% 6.03%
Life of FundA 10.92% 4.27%
A Fund's inception January 7, 1993.
The Fund's performance may fluctuate daily depending upon such factors
as the average maturity of its securities, changes in investments,
changes in interest rates and variations in operating expenses.
Therefore, current performance does not provide a basis for determining
future performance. The fact that the Fund's performance will fluctuate
and that shareholders' principal is not guaranteed or insured should be
considered in comparing the Fund's performance with the performance on
fixed-income investments. In comparing the performance of the Fund to
other investment vehicles, consideration should also be given to the
investment policies of each, including the types of investments owned,
lengths of maturities of the portfolio, the method used to compute the
performance and whether there are any special charges that may reduce
the yield.
Custodian, Transfer Agent and Dividend-Disbursing Agent
State Street Bank and Trust Company, P.O. Box 1790, Boston,
Massachusetts 02105, serves as custodian of the Fund's assets. Boston
Financial Data Services, Inc., P.O. Box 953, Boston, MA 02103, serves
as transfer and dividend-disbursing agent and administrator of various
shareholder services. Shareholders who request an historical transcript
of their accounts will be charged a fee based upon the number of years
researched. The Fund reserves the right, upon 60 days' written notice,
to make other charges to investors to cover administrative costs.
Independent Accountants
Price Waterhouse LLP, 7 St. Paul Street, Baltimore, Maryland 21202,
has been selected by the Board of Directors to serve as the Fund's
independent accountants.
Legal Counsel
Munger, Tolles & Olson, 355 South Grand Avenue, Los Angeles,
California 90071, serves as legal counsel to the Fund.
FINANCIAL STATEMENTS
The Statement of Assets and Liabilities as of June 30, 1995 for the
Corporate Securities Portfolio, and Mortgage Securities Portfolio, and
the Report of Independent Accountants related thereto, are shown on the
following pages. As of June 30, 1995, neither the Corporate Securities
Portfolio nor the Mortgage Securities Portfolio had commenced operations
(i.e. first begun to invest its assets in accordance with its investment
objectives). Accordingly, no financial statements other than such
Statement of Assets and Liabilities have been prepared.
The International Portfolio's Portfolio of Investments as of June 30,
1995, the Statement of Assets and Liabilities as of June 30, 1995, the
Statement of Operations for the year ended June 30, 1995, the Statement
of Changes in Net Assets for the years ended June 30, 1995 and 1994;
33
<PAGE>
and the Financial Highlights for the same periods, the Notes to Financial
Statements and the related Report of the Independent Accountants, all of
which are included in the International Portfolio's report for the year
ended June 30, 1995, are hereby incorporated by reference in this
Statement of Additional Information.
34
<PAGE>
WESTERN ASSET TRUST, INC.
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1995
</TABLE>
<TABLE>
<CAPTION>
Corporate Mortgage
Securities Securities
Portfolio Portfolio
<S> <C> <C>
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . $ 1,000 $ 1,000
Deferred organization and initial offering
costs. . . . . . . . . . . . . . . . . . . . . 16,000 16,000
Total assets . . . . . . . . . . . . . . . . . . . 17,000 17,000
Liabilities
Accrued organization expenses and initial
offering costs . . . . . . . . . . . . . . . . 16,000 16,000
Total liabilities. . . . . . . . . . . . . . . . . 16,000 16,000
Net Assets-Offering and redemption price of $100.00 per
share with 10 shares each outstanding of the Corporate
Securities and Mortgage Securities Portfolios
(5,000,000,000 shares par value $.001 per share authorized) $ 1,000 $ 1,000
</TABLE>
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
A. Western Asset Trust, Inc. ("Corporation") was organized on May
16, 1990. The Corporate Securities Portfolio and Mortgage Securities
Portfolio ("Portfolios") constitute two of the nine portfolios
established under the Corporation at June 30, 1995. The Portfolios have
had no operations other than those matters related to their organization
and registration as an investment company under the Investment Company
Act of 1940 and the sale of their shares. Western Asset Management
Company ("Western Asset"), a wholly owned subsidiary of Legg Mason, Inc.
(a financial services holding company), has provided the initial capital
for the Portfolios by purchasing 10 shares each of the Corporate
Securities Portfolio and Mortgage Securities Portfolio at $100.00 per
share. Such shares were acquired for investment and can be disposed of
only by redemption. Legg Mason Wood Walker, Incorporated, a wholly
owned subsidiary of Legg Mason, Inc. and a member of the New York Stock
Exchange, acts as distributor of the Portfolios' shares.
B. Deferred organization and initial offering costs represent
expenses incurred in connection with the Portfolios' organization and
will be amortized on a straight line basis over five years commencing on
the effective date of each Portfolio's initial sale of shares to the
public. The Portfolios have agreed to reimburse Western Asset for
organization expenses advanced by Western Asset. The advances are
repayable on demand but must be fully repaid within five years from the
commencement of operations. The proceeds realized by Western Asset upon
redemption during the amortization period of any of the shares
constituting initial capital will be reduced by a proportionate amount
of unamortized deferred organization expenses which the number of
initial shares redeemed bears to the number of initial shares then
outstanding.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Western Asset Trust, Inc.
In our opinion, the accompanying statements of assets and liabilities
present fairly, in all material respects, the financial position
of Western Asset Trust Long Duration Portfolio, Limited Duration
Portfolio, Short Duration Portfolio, Money Market Portfolio, Corporate
Securities Portfolio and Mortgage Securities Portfolio (six of the nine
portfolios comprising Western Asset Trust, Inc.) at June 30, 1995,
in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Trust's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits
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 provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
October 26, 1995
35
<PAGE>
APPENDIX A
RATINGS OF SECURITIES
Description of Moody's Investors Service, Inc. ("Moody's") corporate
bond ratings:
Aaa-Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large
or exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment
attributes and are to be considered upper-medium grade obligations.
Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa-Bonds which are rated Baa are considered medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time
may be small.
Description of Standard & Poor's Ratings Group corporate bond ratings:
AAA-This is the highest rating assigned by Standard & Poor's to an
obligation and indicates an extremely strong capacity to pay principal
and interest.
AA-Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the
majority of instances they differ from AAA issues only in small degree.
A-Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the
A category.
A-1
<PAGE>
BB, B, CCC, CC-Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominately speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such bonds will likely
have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposure to adverse conditions.
Description of Moody's preferred stock ratings:
aaa-An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stock.
aa-An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a reasonable
assurance that earnings and asset protection will remain relatively well
maintained in the foreseeable future.
a-An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater
than in the "aaa" and "aa" classification, earnings and asset protection
are, nevertheless, expected to be maintained at adequate levels.
baa-An issue which is rated "baa" is considered to be a
medium-grade preferred stock, neither highly protected nor poorly
secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
ba-An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and
asset protection may be very moderate and not well safeguarded during
adverse periods. Uncertainty of position characterizes preferred stocks
in this class.
Description of Moody's Short-Term Debt Ratings
Prime-1. Issuers (or supporting institutions) rated Prime-1 (P-1)
have a superior capacity for repayment of short-term promissory
obligations. P-1 repayment capacity will normally be evidenced by many
of the following characteristics: leading market positions in
well-established industries; high rates of return on funds employed;
conservative capitalization structure with moderate reliance on debt and
ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established
access to a range of financial markets and assured sources of alternate
liquidity.
Prime-2. Issuers (or supporting institutions) rated Prime-2 (P-2)
have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above, but to a lesser degree. Earnings trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is
maintained.
Description of Standard & Poor's Commercial Paper Ratings
A. Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2, and 3 to indicate the relative degree
of safety.
A-1. This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
A-2. Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as high as for
the issues designated "A-1".
A-2
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
The Registrant is an open-end management investment company with nine
portfolios. The following financial statements are included in this
Registration Statement for the respective portfolios:
(1) Full Range Duration Portfolio. The financial statements for the
year ended June 30, 1995 and the report of the independent accountants thereon
are incorporated into the Statement of Additional Information (Part B) by
reference to the Annual Report to Shareholders for the same period. The Full
Range Duration's Financial Data Schedule appears as Exhibit 27.1.
(2) Money Market Portfolio, Short Duration Portfolio, Limited Duration
and Long Duration Portfolio. The Money Market, Short Duration Portfolio,
Limited Duration and Long Duration Portfolios have not commenced operations.
The audited Statement of Assets and Liabilities as of June 30, 1995 for those
Portfolios, and the related Report of Independent Accountants, are included in
the Statement of Additional Information describing those Portfolios. The
Financial Data Schedule for Limited Duration, Long Duration, Short Duration
and Money Market Portfolio appears as Exhibit 27.4, 27.5, 27.6 and 27.7,
respectively.
(3) Intermediate Duration Portfolio. The financial statements for the
year ended June 30, 1995 and the report of the independent accountants thereon
are incorporated into the Statement of Additional Information (Part B) by
reference to the Annual Report to Shareholders for the same period. The
Intermediate Duration's Financial Data Schedule appears as Exhibit 27.2.
(4) Corporate Securities Portfolio and Mortgage Securities Portfolio.
The Corporate Securities Portfolio and Mortgage Securities Portfolio have not
commenced operations. The Statement of Assets and Liabilities as of June 30,
1995 for those Portfolios, and the related Report of Independent Accountants,
are included in the Statement of Additional Information describing those
Portfolios. The Financial Data Schedule for Corporate Securities Portfolio
and Mortgage Securities Portfolio appears as Exhibit 27.8 and 27.9,
respectively.
(5) International Securities Portfolio. The financial statements for
the year ended June 30, 1995 and the report of the independent accountants
thereon are incorporated into the Statement of Additional Information (Part B)
by reference to the Annual Report to Shareholders for the same period. The
International Securities Portfolio's Financial Data Schedule appears as
Exhibit 27.3.
(b) Exhibits
(1)(a) Articles of Incorporation(1)
(b) Articles Supplementary, as filed November 14, 1991(4)
(c) Articles Supplementary, as filed March 29, 1994(7)
(2) Bylaws, as amended November 8, 1990(3)
(3) Voting trust agreement -- none
(4) Specimen security(2)
(5) Investment advisory contract
(a) Money Market, Limited Duration, Full Range Duration and
Long Duration Portfolios(3)
(b) Corporate Securities and Mortgage Securities Portfolios(5)
(c) International Securities Portfolio(5)
(d) Short Duration and Intermediate Duration Portfolios(7)
(6) Underwriting agreement(3)
<PAGE>
(7) Bonus, profit sharing or pension plans -- none
(8) Custodian agreement(3)
(9)(a) Transfer Agent agreement(3)
(b) Administration agreement
(1) Money Market, Limited Duration, Full Range Duration and
Long Duration Portfolios(3)
(2) Corporate Securities and Mortgage Securities Portfolios(5)
(3) International Securities Portfolio(5)
(4) Short Duration and Intermediate Duration Portfolios(7)
(10) Opinion of counsel
(a) Money Market, Limited Duration, Full Range Duration and Long
Duration Portfolios(3)
(b) Corporate Securities, Mortgage Securities and International
Securities Portfolios(5)
(c) Short Duration and Intermediate Duration Portfolios(7)
(11) Other opinions, appraisals, rulings and consents
Accountants' consent
(a) Money Market, Short Duration, Limited Duration, Intermediate
Duration, Full Range Duration and Long Duration Portfolios -
filed herewith
(b) Corporate Securities, Mortgage Securities and International
Securities Portfolios - filed herewith
(12) Financial statements omitted from Item 23 -- not applicable
(13) Agreement for providing initial capital(2)
(14) Prototype retirement plans -- none
(15) Plan pursuant to Rule 12b-1 -- none
(16) Schedule for computation of performance quotations
(a) Money Market, Short Duration, Limited Duration and Long
Duration Portfolios -- none
(b) Full Range Duration Portfolio and Intermediate Duration
Portfolio -- filed herewith
(c) Corporate Securities and Mortgage Securities Portfolios --
none
(d) International Securities Portfolio -- filed herewith
(27) Financial Data Schedule -- filed herewith
_________________________
1 Incorporated herein by reference to corresponding Exhibit of the
initial Registration Statement, SEC File No. 33-34929, filed
May 16, 1990.
2 Incorporated herein by reference to corresponding Exhibit of
Pre-Effective Amendment No. 2 to the Registration Statement,
SEC File No. 33-34929, filed August 27, 1990.
3 Incorporated herein by reference to corresponding Exhibit of
Post-Effective Amendment No. 1 to the Registration Statement,
SEC File No. 33-34929, filed February 27, 1991.
4 Incorporated herein by reference to corresponding Exhibit of
Post-Effective Amendment No. 2 to the Registration Statement, SEC
File No. 33-34929, filed November 18, 1991.
5 Incorporated herein by reference to corresponding Exhibit of
Post-Effective Amendment No. 4 to the Registration Statement,
SEC File No. 33-34929, filed May 1, 1992.
<PAGE>
6 Incorporated herein by reference to corresponding Exhibit of
Post-Effective Amendment No. 8 to the Registration Statement, SEC
File No. 33-34929, filed October 29, 1993.
7 Incorporated herein by reference to corresponding Exhibit of
Post-Effective Amendment No. 10 to the Registration Statement, SEC
File No. 33-34929, filed April 25, 1994.
Item 25. Persons Controlled by or under Common Control with Registrant
Registrant does not control any other person.
Item 26. Number of Holders of Securities
Number of Recordholders
Title of Class (as of September 30, 1995)
Shares of Capital Stock,
$.001 par value
Money Market Portfolio 1
Short Duration Portfolio 1
Limited Duration Portfolio 1
Intermediate Duration Portfolio 5
Full Range Duration Portfolio 25
Long Duration Portfolio 1
Mortgage Securities Portfolio 1
Corporate Securities Portfolio 1
International Securities Portfolio 20
Item 27. Indemnification
Article ELEVENTH of the Articles of Incorporation provides that to the
maximum extent permitted by applicable law (including Maryland law and the
1940 Act) the directors and officers of the Registrant shall not be liable
to the Registrant or to any of its stockholders for monetary damages.
Article ELEVENTH also provides that no amendment, alteration or repeal of the
contents contained in the preceding sentence or the adoption, alteration or
amendment of any other provision of the Articles or Bylaws inconsistent with
Article ELEVENTH shall adversely affect any limitation of liability of any
director or officer of the Registrant with respect to any act or failure to
act which occurred prior to such amendment, alteration, repeal or adoption.
Section 11.2 of Article ELEVENTH of the Registrant's Articles of
Incorporation provides that the Registrant shall indemnify its present and
past directors, officers, employees and agents, and persons who are
serving or have served at the Registrant's request in similar capacities for
other entities to the maximum extent permitted by applicable law
(including Maryland law and the Investment Company Act of 1940).
Section 2-418(b) of the Maryland Corporations and Associations Code
("Maryland Code") permits the Registrant to indemnify its directors unless it
is established that the act or omission of the director was material to the
matter giving rise to the proceeding, and (a) the act or omission was
committed in bad faith or was the result of active and deliberate dishonesty;
(b) the director actually received an improper personal benefit in money,
property or services; or (c) in the case of a criminal proceeding, the
director had reasonable cause
<PAGE>
to believe the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements and reasonable expenses
incurred in connection with a proceeding, in accordance with the Maryland
Code. Pursuant to Section 2418(j)(2) of the Maryland Code, the Registrant
is permitted to indemnify its officers, employees and agents to the same
extent. The provisions set forth above apply insofar as consistent with
Section 17(h) of the 1940 Act, which prohibits indemnification of any
director or officer of the Registrant against any liability to the Registrant
or its shareholders to which such director or officer otherwise would be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Section 10.1 of Article X of the Bylaws sets forth the procedures by
which the Registrant will indemnify its directors, officers, employees and
agents. Section 10.2 of Article X of the Bylaws provides that the Registrant
may purchase and maintain insurance on behalf of the abovementioned persons to
the extent permitted by law.
Registrant undertakes to carry out all indemnification provisions of its
Articles of Incorporation and Bylaws in accordance with Investment Company Act
Release No. 11330 (September 4, 1980) and successor releases.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be provided to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding or payment pursuant to
any insurance policy) is asserted against the Registrant by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
prohibited as against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Under the Distribution Agreement, the Fund agrees to indemnify, defend
and hold the Distributor, its several officers and directors, and any person
who controls the Distributor within the meaning of Section 15
of the 1933 Act, free and harmless from and against any and all claims,
demands, liabilities and expenses (including the cost of investigating or
defending such claims, demands or liabilities and any counsel fees
incurred in connection therewith) which the Distributor, its officers or
directors, or any such controlling person may incur, under the 1933 Act or
under common law or otherwise, arising out of or based upon any
alleged untrue statement of a material fact contained in the Registration
Statement or arising out of or based upon any alleged omission to state a
material fact required to be stated or necessary to make the Registration
Statement not misleading, provided that in no event shall anything contained
in the Distribution Agreement be construed so as to protect the Distributor
against any liability to the Corporation or its shareholders to
which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its duties,
or by reason of its reckless disregard of its obligations and duties
under the Agreement.
The Investment Advisory Agreements provide that the Adviser
will not be liable for any error of judgment or mistake of law or for any
loss suffered by the Fund or any Portfolio in connection with the
performance of the agreement, except a loss resulting from a breach of <PAGE>
<PAGE>
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations or duties under the agreement. The Administration Agreements
provide that the Administrator shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with performance of the Administration Agreement, except a loss resulting from
willful misfeasance, bad faith, or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations and duties
thereunder.
Item 28. Business and Other Connections of Investment Adviser
I. Western Asset Management Company ("Western"), the
Registrant's investment adviser, is a registered investment adviser
incorporated on October 5, 1971. Western is primarily engaged in the
investment advisory business. Western also renders investment advice to
fourteen open-end registered investment companies, one closed-end registered
investment company, and private accounts. Information as to the officers and
directors of Western is included in its Form ADV filed on May 17, 1995 with the
Securities and Exchange Commission (registration number 801-08162) and is
incorporated herein by reference.
II. Legg Mason Fund Adviser, Inc. ("Fund Adviser"), the
Registrant's administrator, is a registered investment adviser incorporated on
January 20, 1982. Fund Adviser is engaged primarily in the investment advisory
business. Fund Adviser also serves as investment adviser for fifteen open-end
registered investment companies and as investment consultant for one
closed-end registered investment company. Information as to the officers and
directors of Fund Adviser is included in its Form ADV filed June 30, 1995
with the Securities and Exchange Commission (Registration Number 801-16958)
and is incorporated herein by reference.
Item 29. Principal Underwriters
(a) Legg Mason Cash Reserve Trust
Legg Mason Special Investment Trust, Inc.
Legg Mason Value Trust, Inc.
Legg Mason Tax-Exempt Trust, Inc.
Legg Mason Income Trust, Inc.
Legg Mason Total Return Trust, Inc.
Legg Mason Tax-Free Income Fund
Legg Mason Global Trust, Inc.
Legg Mason Investors Trust, Inc.
(b) The following table sets forth information concerning each director
and officer of the Registrant's principal underwriter, Legg Mason
Wood Walker, Incorporated ("LMWW").
Positions and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter - LMWW Registrant
Raymond A. Mason Chairman of the None
Board
John F. Curley, Jr. Vice Chairman None
<PAGE>
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive None
Vice President and
Director
Robert G. Sabelhaus Executive Vice None
President and
Director
Richard J. Himelfarb Executive Vice None
President and
Director
Edward A. Taber III Executive Vice None
President and
Director
Charles A. Bacigalupo Senior Vice None
President,
Secretary and
Director
Thomas M. Daly, Jr. Senior Vice None
President and
Director
Jerome M. Dattel Senior Vice None
President and
Director
Robert G. Donovan Senior Vice None
President and
Director
Thomas E. Hill Senior Vice None
One Mill Place President and
Easton, MD 21601 Director
Arnold S. Hoffman Senior Vice None
1735 Market Street President and
Philadelphia, PA 19103 Director
Carl Hohnbaum Senior Vice None
24th Floor President and
Two Oliver Plaza Director
Pittsburgh, PA 15222
William B. Jones, Jr. Senior Vice None
<PAGE>
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Laura L. Lange Senior Vice None
President and
Director
Marvin McIntyre Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Mark I. Preston Senior Vice None
President and
Director
F. Barry Bilson Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
Harry M. Ford, Jr. Senior Vice None
President
William F. Haneman, Jr. Senior Vice None
One Battery Park Plaza President
New York, New York 10005
Theodore S. Kaplan Senior Vice None
President and
General Counsel
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
William H. Miller, III Senior Vice None
President
Douglas C. Petty, Jr. Senior Vice None
1747 Pennsylvania President
Avenue, N.W.
Washington, D.C. 20006
John A. Pliakas Senior Vice None
99 Summer Street President
<PAGE>
Boston, MA 02101
E. Robert Quasman Senior Vice None
President
Gail Reichard Senior Vice None
7 E. Redwood St. President
Baltimore, MD 21202
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Joseph Sullivan Senior Vice None
President
Peter J. Biche Vice President None
1735 Market Street
Philadelphia, PA 19103
John C. Boblitz Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Andrew J. Bowden Vice President None
D. Stuart Bowers Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Edwin J. Bradley, Jr. Vice President None
Scott R. Cousino Vice President None
Robert Dickey, IV Vice President None
One World Trade Center
New York, NY 10048
John R. Gilner Vice President None
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
Seth J. Lehr Vice President None
1735 Market St.
Philadelphia, PA 19103
Edward W. Lister, Jr. Vice President None
<PAGE>
Eileen M. O'Rourke Vice President None
and Controller
Marie K. Karpinski Vice President Vice President
and Treasurer
Jonathan M. Pearl Vice President None
1777 Reisterstown Rd.
Pikesville, MD 21208
Douglas F. Pollard Vice President None
Chris Scitti Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
Lewis T. Yeager Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Joseph F. Zunic Vice President None
Charles R. Spencer, Jr. Vice President None
600 Thimble Shoals Blvd.
Newport News, VA 23606
* All addresses are 111 South Calvert Street, Baltimore,
Maryland 21202, unless otherwise indicated.
(c) The Registrant has no principal underwriter which is not an
affiliated person of the Registrant or an affiliated person
of such an affiliated person.
Item 30. Location of Accounts and Records
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
Item 31. Management Services -- none
<PAGE>
Item 32. Undertakings
(b) Registrant hereby undertakes to file a post-effective
amendment, using financial statements which need not be
certified, within four to six months from the effective
date of Registrant's 1933 Act registration statement.
(c) Registrant hereby undertakes to provide each person to
whom a prospectus is delivered with a copy of its latest
annual report to shareholders upon request and without charge.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Western Asset Trust, Inc.,
certifies that it meets all the requirements for effectiveness in this
Post-Effective Amendment No. 13 to its Registration Statement pursuant to
Rule 485 (b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Pasadena and State of California,
on the 30th day of October, 1995.
WESTERN ASSET TRUST, INC.
By: /s/ W. Curtis Livingston, III
W. Curtis Livingston, III
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 13 to the Registrant's Registration Statement
has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
/s/ W. Curtis Livingston, III President October 30, 1995
W. Curtis Livingston, III
/s/ Norman Barker, Jr. Director October 30, 1995
Norman Barker, Jr.*
/s/ Richard C. Gilman Director October 30, 1995
Richard C. Gilman*
/s/ Gordon L. Hough Director October 30, 1995
Gordon L. Hough*
/s/ William G. McGagh Director October 30, 1995
William G. McGagh*
/s/ Ronald L. Olson Director October 30, 1995
Ronald L. Olson*
/s/ Louis A. Simpson Director October 30, 1995
Louis A. Simpson*
/s/ Marie K. Karpinski Vice President October 30, 1995
Marie K. Karpinski and Treasurer
*Signatures affixed by W. Curtis Livingston, III pursuant to a power of
attorney dated November 10, 1994 which is filed herewith.
<PAGE>
<PAGE>
WESTERN ASSET MANAGEMENT COMPANY
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ilene S. Harker, Kent S. Engel, and W. Curtis
Livingston, III, as his or her true and lawful attorneys-in-fact and agents,
each acting along, with full powers of substitution, for him or her in his or
her name, place and stead, in any and all capacities, to sign any or all
post-effective amendments to this Registration Statement of Western Asset
Trust, Inc., and to file the same, with all exhibits thereto, and all other
documents in connection therewith, of the Securities Act of 1933, File
No. 33-34929 and The Investment Company of Act 1940, File No. 811-06110,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his or her
substitute may lawfully do or cause to be done by virtue hereof.
Signature Title Date
/s/ W. Curtis Livingston, III Director November 10, 1994
W. Curtis Livingston, III
/s/ Norman Barker, Jr. Director November 10, 1994
Norman Barker, Jr.
/s/ Richard C. Gilman Director November 10, 1994
Richard C. Gilman
/s/ Gordon L. Hough Director November 10, 1994
Gordon L. Hough
/s/ William G. McGagh Director November 10, 1994
William G. McGagh
/s/ Ronald L. Olson Director November 10, 1994
Ronald L. Olson
/s/ Louis A. Simpson Director November 10, 1994
Louis A. Simpson
/s/ Marie K. Karpinski Vice President November 10, 1994
Marie K. Karpinski and Treasurer
(principal financial
and accounting
officer)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
and Statements of Additional Information constituting parts of this
Post-Effective Amendment No. 13 to the registration statement on Form N-1A
(the "Registration Statement") of our reports dated July 31, 1995, relating
to the financial statements and selected per share data and ratios appearing
in the June 30, 1995 Annual Reports to Shareholders of Western Asset Trust
Full Range Duration Portfolio, Intermediate Duration Portfolio and
International Securities Portfolio (three of the nine portfolios comprising
Western Asset Trust, Inc.), which are also incorporated by reference into
the Registration Statement.
In addition, we hereby consent to the use in the Statement of Additional
Information constituting part of this Registration Statement of our report
dated October 26, 1995, relating to the statements of assets and
liabilities of Western Asset Trust Long Duration Portfolio, Limited
Duration Portfolio, Short Duration Portfolio, Money Market Portfolio,
Corporate Securities Portfolio and Mortgage Securities Portfolio (six of
the nine portfolios comprising Western Asset Trust, Inc.), which appears
in such Statement of Additional Information.
We also consent to the references to us under the headings "Financial
Highlights" and "Independent Accountants" in the Prospectus and under the
headings "Financial Statements" and "Independent Accountants" in the Statement
of Additional Information.
PRICE WATERHOUSE LLP
Baltimore, Maryland
October 26, 1995
WESTERN ASSET TRUST, INC.
FULL RANGE DURATION PORTFOLIO
June 30, 1994 - June 30, 1995 (one year)
Cumulative Total Return
ERV = (112.18 x 1.4817431) - (105.02 x 1.3869846) x 1000 + 1000 = 1141.16
-------------------------------------------
(105.02 x 1.3869846)
P = 1000
C = 1141.16 - 1 = .14116 = 14.12%
-------
1000
Average Annual Return: Same
September 4, 1990 - June 30, 1995 (life of fund)
Cumulative Total Return:
ERV = (112.18 x 1.4817431) - (100.00 x 1.0) x 1000 + 1000 = 1662.22
-------------------------------------
(100.00 x 1.0)
P = 1000
C = 1662.22 - 1 = 0.662219 = 66.22%
---------
1000
Average Annual Return:
1
------
4.8219
(0.662219 + 1) - 1 = 11.12%
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE DURATION PORTFOLIO
June 30, 1994 - June 30, 1995 (one year)
Cumulative Total Return
ERV = (107.36 x 1.0253594) - (100.00 x 1.0) x 1000 + 1000 = 1100.83
---------------------------------------
(100.00 x 1.0)
P = 1000
C = 1100.83 - 1 = .100826 = 10.08%
-------
1000
Average Annual Return: Same
July 1, 1994 - June 30, 1995 (life of fund)
Cumulative Total Return:
ERV = (107.36 x 1.0253594) - (100.00 x 1.0) x 1000 + 1000 = 1100.83
--------------------------------------
(100.00 x 1.0)
P = 1000
C = 1100.83 - 1 = .100826 = 10.08%
-------
1000
Average Annual Return: Same
WESTERN ASSET TRUST, INC.
INTERNATIONAL SECURITIES PORTFOLIO
June 30, 1994 - June 30, 1995 (one year)
Cumulative Total Return
ERV = (92.10 x 1.2043870) - (93.76 x 1.1157478) x 1000 + 1000 = 1060.33
------------------------------------------
(93.76 x 1.1157478)
P = 1000
C = 1060.33 - 1 = .06033 = 6.03%
--------
1000
Average Annual Return: Same
January 7, 1993 - June 30, 1995 (life of fund)
Cumulative Total Return:
ERV = (92.10 x 1.2043870) - (100.00 x 1.0) x 1000 + 1000 = 1109.24
--------------------------------------
(100.00 x 1.0)
P = 1000
C = 1109.24 - 1 = 0.109240 = 10.92%
-------
1000
Average Annual Return:
1
---
2.479452
(0.109240 + 1) - 1 = 4.27%
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> FULL RANGE DURATION PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 342,558,084
<INVESTMENTS-AT-VALUE> 353,006,807
<RECEIVABLES> 38,919,161
<ASSETS-OTHER> 80,252
<OTHER-ITEMS-ASSETS> 808
<TOTAL-ASSETS> 392,007,028
<PAYABLE-FOR-SECURITIES> 54,886,495
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 346,853
<TOTAL-LIABILITIES> 55,233,348
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 326,069,439
<SHARES-COMMON-STOCK> 3,002,217
<SHARES-COMMON-PRIOR> 1,961,111
<ACCUMULATED-NII-CURRENT> 4,896,307
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,774,821)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,582,755
<NET-ASSETS> 336,773,680
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 18,023,023
<OTHER-INCOME> 0
<EXPENSES-NET> 1,208,017
<NET-INVESTMENT-INCOME> 16,815,006
<REALIZED-GAINS-CURRENT> 1,242,701
<APPREC-INCREASE-CURRENT> 16,617,288
<NET-CHANGE-FROM-OPS> 34,674,995
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (15,198,153)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,016,478
<NUMBER-OF-SHARES-REDEEMED> (122,879)
<SHARES-REINVESTED> 147,507
<NET-CHANGE-IN-ASSETS> 130,814,265
<ACCUMULATED-NII-PRIOR> 3,279,454
<ACCUMULATED-GAINS-PRIOR> (6,017,522)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 963,008
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,277,459
<AVERAGE-NET-ASSETS> 240,751,798
<PER-SHARE-NAV-BEGIN> 105.02
<PER-SHARE-NII> 6.82
<PER-SHARE-GAIN-APPREC> 7.19
<PER-SHARE-DIVIDEND> (6.86)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 112.17
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> INTERNATIONAL SECURITIES PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 167,135,378
<INVESTMENTS-AT-VALUE> 172,910,340
<RECEIVABLES> 6,016,555
<ASSETS-OTHER> 13,285
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 178,940,180
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 606,158
<TOTAL-LIABILITIES> 606,158
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 184,305,748
<SHARES-COMMON-STOCK> 1,936,395
<SHARES-COMMON-PRIOR> 1,139,164
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11,494,734)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,523,008
<NET-ASSETS> 178,334,022
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,152,492
<OTHER-INCOME> 0
<EXPENSES-NET> 339,896
<NET-INVESTMENT-INCOME> 6,812,596
<REALIZED-GAINS-CURRENT> (8,516,464)
<APPREC-INCREASE-CURRENT> 9,080,419
<NET-CHANGE-FROM-OPS> 7,376,551
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,207,417)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (6,818,395)
<NUMBER-OF-SHARES-SOLD> 734,420
<NUMBER-OF-SHARES-REDEEMED> (27,689)
<SHARES-REINVESTED> 90,500
<NET-CHANGE-IN-ASSETS> 71,527,668
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (15,532,575)
<OVERDISTRIB-NII-PRIOR> (6,560)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 480,824
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 820,720
<AVERAGE-NET-ASSETS> 120,206,727
<PER-SHARE-NAV-BEGIN> 93.76
<PER-SHARE-NII> 6.29
<PER-SHARE-GAIN-APPREC> (1.04)
<PER-SHARE-DIVIDEND> (0.63)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> (6.28)
<PER-SHARE-NAV-END> 92.10
<EXPENSE-RATIO> 0.28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> INTERMEDIATE DURATION PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 20,113,486
<INVESTMENTS-AT-VALUE> 20,515,069
<RECEIVABLES> 274,168
<ASSETS-OTHER> 49,776
<OTHER-ITEMS-ASSETS> 849
<TOTAL-ASSETS> 20,839,862
<PAYABLE-FOR-SECURITIES> 488,812
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 37,659
<TOTAL-LIABILITIES> 526,471
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19,281,005
<SHARES-COMMON-STOCK> 189,209
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 263,166
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 334,587
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 434,633
<NET-ASSETS> 20,313,391
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 489,381
<OTHER-INCOME> 0
<EXPENSES-NET> 38,005
<NET-INVESTMENT-INCOME> 451,376
<REALIZED-GAINS-CURRENT> 337,201
<APPREC-INCREASE-CURRENT> 434,633
<NET-CHANGE-FROM-OPS> 1,223,210
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (188,210)
<DISTRIBUTIONS-OF-GAINS> (2,614)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 191,760
<NUMBER-OF-SHARES-REDEEMED> (4,436)
<SHARES-REINVESTED> 1,875
<NET-CHANGE-IN-ASSETS> 20,312,391
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 29,571
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 118,598
<AVERAGE-NET-ASSETS> 7,392,472
<PER-SHARE-NAV-BEGIN> 100.00
<PER-SHARE-NII> 3.86
<PER-SHARE-GAIN-APPREC> 6.02
<PER-SHARE-DIVIDEND> (2.47)
<PER-SHARE-DISTRIBUTIONS> (0.05)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 107.36
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> LIMITED DURATION PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 32,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 32,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 31,000
<TOTAL-LIABILITIES> 31,000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 10
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> LONG DURATION PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 32,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 32,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 31,000
<TOTAL-LIABILITIES> 31,000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 10
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> SHORT DURATION PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 10,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,000
<TOTAL-LIABILITIES> 9,000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 10
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> MONEY MARKET PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 32,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 32,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 31,000
<TOTAL-LIABILITIES> 31,000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 08
<NAME> CORPORATE SECURITIES PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 17,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 17,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16,000
<TOTAL-LIABILITIES> 16,000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 10
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> MORTGAGE SECURITITES PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 17,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 17,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 16,000
<OTHER-ITEMS-LIABILITIES> 16,000
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1,000
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
