As filed with the Securities and Exchange Commission on September 3, 1996.
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. 14 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 16 [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:
[ ] immediately upon filing pursuant to Rule 485(b)
[ ] on ______________ pursuant to Rule 485(b)
[X] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on , 1996 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on _____________, 1996 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, 1996.
<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 Portfolio
Core 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 Portfolio
Core 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>
WESTERN ASSET TRUST, INC.
Money Market Portfolio
Short Duration Portfolio
Limited Duration Portfolio
Intermediate Portfolio
Core 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 Core Portfolio the
Intermediate Portfolio and the Limited
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 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>
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>
WESTERN ASSET TRUST, INC.
Money Market Portfolio
Short Duration Portfolio
Limited Duration Portfolio
Intermediate Portfolio
Core 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>
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>
PROSPECTUS
WESTERN ASSET TRUST, INC.
MONEY MARKET PORTFOLIO
SHORT DURATION PORTFOLIO
LIMITED DURATION PORTFOLIO
INTERMEDIATE PORTFOLIO
CORE 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 Portfolio, Core 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, Core 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 Core
Portfolio, the Limited Duration Portfolio and the Intermediate Portfolio have
commenced operations. Effective March 13, 1996, the Portfolio formerly known as
the Intermediate Duration Portfolio changed its name to the Intermediate
Portfolio, and the Portfolio formerly known as the Full Range Duration Portfolio
changed its name to the Core Portfolio.
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, 1996, 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, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary................................................. 3
Investment Risks and Considerations................................ 4
Expense Information................................................ 7
Financial Highlights............................................... 8
Investment Objectives and Policies................................. 12
Description of Securities and Investment Techniques................ 16
Purchase of Shares................................................. 29
Redemption of Shares............................................... 30
Exchange Privilege................................................. 32
How Net Asset Value is Determined.................................. 32
Dividends and Other Distributions.................................. 33
Federal Tax Treatment of Dividends and Other Distributions......... 33
Management of the Fund............................................. 35
Other Information.................................................. 37
Appendix........................................................... 39
</TABLE>
<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. Six of those portfolios are
offered through this Prospectus -- the Money Market Portfolio, Short Duration
Portfolio, Limited Duration Portfolio, Intermediate Portfolio, Core 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 Core Portfolio, the Limited
Duration Portfolio and the Intermediate 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.
<PAGE>
<TABLE>
<S> <C>
DOLLAR-WEIGHTED
PORTFOLIO AVERAGE DURATION
Short Duration Six to fifteen months
Limited Duration One to three years
Intermediate Two to four years
Core 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.
<PAGE>
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, 1996 had approximately $ billion aggregate assets
under management and private accounts totaling approximately $ billion. The
Administrator also serves as investment adviser, manager or consultant to
investment companies with assets of approximately $ 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.
<PAGE>
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.
<PAGE>
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 Core Portfolio,
Intermediate Portfolio and Limited Duration Portfolio are based on their fees
and expenses for the fiscal year ended June 30, 1996. 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
Limited and
Core Intermediate Duration Long Duration Short Duration
Portfolio Portfolio Portfolio Portfolio Portfolios
<S> <C> <C> <C> <C> <C>
Management Fees .40% .35% .30% .40% .30%
Other Expenses .13% .65% .50% .25% .20%
Less Voluntary Fee Waivers and
Reimbursements (.03%) (.55%) (.40%) (.15%) (.10%)
Total Fund Operating Expenses .50% .45% .40% .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>
Core Portfolio $5 $16 $28 $63
Intermediate Portfolio $5 $14 $25 $57
Limited Duration Portfolio $4 $13 $22 $51
Long Duration Portfolio $5 $16 N/A N/A
Money Market and
Short Duration
Portfolios $4 $13 N/A N/A
</TABLE>
<PAGE>
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 a portion of its fees for the
Intermediate Portfolio and the Limited Duration Portfolio, so that the fee for
the Intermediate Portfolio is 0.35% of the Portfolio's average daily net assets,
and the fee for the Limited Duration Portfolio is 0.30% of the Portfolio's
average daily net assets, until December 31, 1996. The Adviser has also
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 Core and Long Duration Portfolios, 0.45% of the
Portfolio's average daily net assets for such month for the Intermediate
Portfolio, and 0.40% of the Portfolio's average daily net assets for such month
for the Limited Duration, Money Market and Short Duration Portfolios until
December 31, 1996. For all the Portfolios, the Administrator has voluntarily
agreed to limit its annual fee to 0.05% of each 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 Long Duration Portfolio would be
0.65% of average daily net assets; the actual expenses of the Limited Duration
Portfolio would have been 0.80% of average daily net assets; the actual expenses
of the Intermediate Portfolio would have been 1.00% of average daily net assets
and the actual expenses of the Core 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
CORE PORTFOLIO
The financial highlights for the years ended June 30, 1996, 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 Core
Portfolio's financial statements for the year ended June 30, 1996, and the
unqualified report of Price Waterhouse LLP thereon, are included in the Core
Portfolio's 1996 Annual Report to Shareholders and are incorporated by reference
in the Statement of Additional Information.
<PAGE>
As of the date of this Prospectus, the Money Market Portfolio, Short
Duration Portfolio and Long Duration Portfolio have not commenced operations.
Accordingly, no condensed financial information with respect to those Portfolios
is included in the following tables.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1996 1995 1994 1993 1992 1991(A)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $112.17 $105.02 $116.64 $112.04 $106.28 $100.00
Net investment income(B) 6.70 6.82 5.64 6.57 6.90 6.66
Net realized and unrealized gain
(loss) on investments, options
and futures(C) (1.36) 7.19 (6.28) 8.71 8.72 4.28
Total from investment operations 5.34 14.01 (0.64) 15.28 15.62 10.94
Distributions to shareholders
from:
Net investment income (6.61) (6.86) (6.11) (6.72) (7.11) (4.66)
Net realized gain on
investments (.44) -- (4.87) (3.96) (2.75) --
Total distributions (7.05) (6.86) (10.98) (10.68) (9.86) (4.66)
Net asset value, end of period $110.46 $112.17 $105.02 $116.64 $112.04 $106.28
Total return 4.86% 14.12% (0.89)% 14.52% 15.61% 11.01%(D)
RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
Expenses(B) 0.50% 0.50% 0.50% 0.50% 0.50% 0.65%(E)
Net investment income(B) 6.3% 7.0% 6.0% 6.0% 6.7% 8.0%(E)
Portfolio turnover rate 266.0% 257.90% 272.49% 313.05% 299.65% 177.25%(E)
Net assets, end of period
(in thousands) $453,699 $336,774 $205,959 $135,886 $92,892 $43,076
</TABLE>
(A) FOR THE PERIOD SEPTEMBER 4, 1990 (COMMENCEMENT OF OPERATIONS) TO JUNE 30,
1991.
(B) NET 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 $111,421, $69,442, $66,823, $71,911, AND
$128,262 WERE WAIVED FOR THE YEARS ENDED JUNE 30, 1996, 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 YEARS ENDED JUNE 30, 1996 AND 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.
(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.
<PAGE>
FINANCIAL HIGHLIGHTS
INTERMEDIATE PORTFOLIO
The financial highlights for the years ended June 30, 1996 and 1995 have
been obtained from the financial statements which have been audited by Price
Waterhouse LLP, independent accountants. The Intermediate Portfolio's financial
statements for the year ended June 30, 1996 and the unqualified report of Price
Waterhouse LLP thereon, are included in the Intermediate Portfolio's 1996 Annual
Report to Shareholders and are incorporated by reference in the Statement of
Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996 1995
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $107.36 $100.00
Net investment incomeA 5.41 3.86
Net realized and unrealized gain (loss) on investments, options and futures(B) (0.06) 6.02
Total from investment operations 5.35 9.88
Distributions to shareholders from:
Net investment income (5.35) (2.47)
Net realized gain on investments (2.53) (0.05)
Total distributions (7.88) (2.52)
Net asset value, end of year $104.83 $107.36
Total return 5.15% 10.08%
RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
ExpensesA 0.50% 0.50%
Net investment income(A) 6.28% 6.11%
Portfolio turnover rate 841.89% 764.45%
Net assets, end of year (in thousands) $66,079 $20,313
</TABLE>
(A) NET 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 $130,938 AND $29,571 WERE
WAIVED FOR THE YEARS ENDED JUNE 30, 1996 AND 1995, RESPECTIVELY. IN THE
ABSENCE OF THIS LIMITATION, THE RATIO OF EXPENSES TO AVERAGE NET ASSETS
WOULD HAVE BEEN 1.03% AND 1.60%, RESPECTIVELY.
(B) 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.
<PAGE>
FINANCIAL HIGHLIGHTS
LIMITED DURATION PORTFOLIO
The financial highlights for the period May 1, 1996 (commencement of
operations) to June 30, 1996 have been obtained from the financial statements
which have been audited by Price Waterhouse LLP, independent accountants. The
Limited Duration Portfolio's financial statements for the period ended June 30,
1996 and the unqualified report of Price Waterhouse LLP thereon, are included in
the Limited Duration Portfolio's 1996 Annual Report to Shareholders and are
incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
PERIOD ENDED JUNE 30, 1996(A)
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $100.00
Net investment income(B) 0.84
Net realized and unrealized loss on investments(C) (0.08)
Total from investment operations 0.76
Net asset value, end of period $100.76
Total return(D) 0.76%
RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
Expenses(B) 0.50%(E)
Net investment income(B) 5.58%(E)
Portfolio turnover rate 1,042%(E)
Net assets, end of period (in thousands) $16,110
</TABLE>
(A) FOR THE PERIOD MAY 1, 1996 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1996.
(B) NET 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 $7,212 WERE WAIVED FOR THE
PERIOD ENDED JUNE 30, 1996. IN THE ABSENCE OF THIS LIMITATION, THE RATIO OF
EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.80%.
(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
(E) ANNUALIZED
<PAGE>
Further information about the performance of the Core Portfolio, the
Intermediate Portfolio and the Limited Duration Portfolio is contained in each
Portfolio's 1996 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 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
<PAGE>
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 ("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
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
<PAGE>
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.
<PAGE>
INTERMEDIATE 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 Core or Long Duration Portfolios because its average duration will be
shorter.
CORE 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
a 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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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,
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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 Core Portfolio and the Intermediate Portfolio
for the fiscal year ended June 30, 1996 were 266.0% and 841.89%, respectively.
The annualized turnover rate of the
<PAGE>
Limited Duration Portfolio for the period May 1, 1996 (commencement of
operations) to June 30, 1996 was 1,042.0%. The Fund 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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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 $ billion as of September 30, 1996. The Adviser
also renders investment advice to private accounts with assets under management
of approximately $ 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 Core 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 Portfolio and the Limited Duration Portfolio is Stephen A. Walsh.
Mr. Walsh has been portfolio manager of the Intermediate Portfolio since the
Portfolio commenced operations on July 1, 1994 and has been portfolio manager
for the Limited Duration Portfolio since May 1, 1996. 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 seventeen open-end investment companies and
to one close-end investment company. These funds had aggregate assets under
management of about $ billion as of September 30, 1996.
<PAGE>
MANAGEMENT AND OTHER EXPENSES
The Core Portfolio and Long Duration Portfolio each pay 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. The Money Market, Short Duration and
Limited Duration Portfolios each 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 Intermediate Portfolio pays the Adviser a fee, computed
daily and payable monthly, at an annual rate equal to 0.35% of the Portfolio's
average daily net assets. The Core, 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 DISTRIBUTORS
Legg Mason Wood Walker, Incorporated ("Legg Mason") is authorized to
distribute the Fund's shares. Legg Mason 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. Legg Mason receives no direct
compensation from the Fund for these expenses.
Arroyo Seco Inc. ("Arroyo Seco"), a wholly-owned subsidiary of the
Adviser, is also authorized to offer the Fund's shares for sale to its
customers. The Fund makes no payments to Arroyo Seco in connection with the
offer or sale of the Fund's shares, and Arroyo Seco does not collect any
commissions or other fees from customers in connection with the offer or sale of
the Fund's shares.
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.
<PAGE>
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 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 August 2, 1996, Northern Trust Company, as trustee, may be deemed
to "control" the Core Portfolio; Mac & Co. and Northern Trust Company, as
Trustees, may be deemed to "control" the Intermediate Portfolio; and Western
Michigan University Investment & Endowment Management may be deemed to "control"
the Limited 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.
<PAGE>
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.
<PAGE>
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, 1996
<PAGE>
INVESTMENT ADVISER
117 East Colorado Boulevard
Pasadena, CA 91105
ADMINISTRATOR Legg Mason Fund Adviser, Inc.
111 South Calvert Street
Baltimore, MD 21202
DISTRIBUTORS Legg Mason Wood Walker, Incorporated
111 South Calvert Street
Baltimore, MD 21202
Arroyo Seco, Inc.
117 East Colorado Boulevard
Pasadena, CA 91105
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
<PAGE>
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, 1996, 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, 1996
<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 28
Appendix 30
<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 ("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. 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
1
<PAGE>
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, 1996, had
approximately $_______ billion in aggregate assets under management and
private accounts totaling approximately $________ billion. The
Administrator also serves as investment adviser, manager or consultant to
seventeen investment companies with assets of approximately $______ 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 Fund has no plan under Rule 12b-1
imposing fees for distribution expenses. See "Purchase of Shares," page 22.
REDEMPTION OF SHARES
2
<PAGE>
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, 1996. 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*
Sales load imposed on purchases None
Sales load imposed on reinvested distributions None
Deferred sales load None
Redemption fees None
Exchange fees None
Annual Fund Operating Expenses (After Fee Waivers and Reimbursements):
(as a percentage of average net assets)
Domestic International
Portfolios Portfolio
Management Fees .125%* .000%*
Other Expenses, comprised of:
Administrative Fees .025% .075%
Other .100% .181%
----- -----
Total Other Expenses .125% .256%
----- -----
Total Fund Operating Expenses .250%* .256%*
==== =====
- ------------------
* 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," below. 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.
3
<PAGE>
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.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Domestic Portfolios $ 3 $8 N/A N/A
International Portfolio $ 3 $8 $14 $33
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,
1996. [In addition, Western Asset has voluntarily waived for calendar year 1996
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 .656% rather than .256% of average daily net assets.
See "Management and Other Expenses," page 26. These agreements are voluntary
and may be terminated by Western Asset at any time.
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 three years ended June
30, 1994, 1995 and 1996, 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, 1996,
and the report of Price Waterhouse LLP thereon, are included in the
International Portfolio's 1996 Annual Report to Shareholders and are
incorporated by reference
4
<PAGE>
in the Statement of Additional Information. The Annual Report is available 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, 1996 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.
5
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30, 1996 1995 1994 1993(A)
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $92.10 $93.76 $105.53 $100.00
------ -------- -------- --------
Net investment income(B) 5.78 6.29 6.94 3.21
Net realized and unrealized gain (loss)
on investments and forward currency
contracts and currency translations(C) 3.56 (1.04) (7.36) 2.59
------ -------- -------- --------
Total from investment operations 9.34 5.25 (0.42) 5.80
------ -------- -------- --------
Distributions to shareholders from:
Net investment income (6.28) (0.63) (8.64) (0.27)
Net realized gain on investments -- -- (2.71) --
Tax return of capital -- (6.28) -- --
------ -------- -------- --------
Total distributions (6.28) (6.91) (11.35) (0.27)
-------- -------- --------
Net asset value, end of period $95.16 $92.10 $93.76 $105.53
------ -------- -------- --------
Total return(D) 10.36% 6.03% (1.14)% 5.81%
Ratios/Supplemental Data:
Ratios to average net assets:
Expenses(B) 0.26% 0.28% 0.30% 0.45%(E)
Net investment income(B) 6.02% 5.67% 5.53% 6.08%(E)
Portfolio turnover rate 348.40% 355.03% 571.18% 249.94%(E)
Net assets, end of period (in
thousands) $220,096 $178,334 $106,806 $93,288
</TABLE>
(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 $970,680, $480,824, $572,322 and $136,356 were
waived for the years ended June 30, 1996, 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 0.66%, 0.68% and 0.70% for the years ended June 30, 1996, 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 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
7
<PAGE>
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.
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.
8
<PAGE>
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- 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.
9
<PAGE>
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. Passthrough
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
"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
10
<PAGE>
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 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
11
<PAGE>
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 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
12
<PAGE>
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 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. The economy is currently recovering from
a recession and the Bank of Japan continues to maintain a very loose monetary
policy. The official discount rate has been at .50 percent since September 1995.
A series of fiscal packages have also been implemented in an effort to stimulate
the economy.
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
13
<PAGE>
is now recovering, 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 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
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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.
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
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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 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
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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 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.
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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 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 into 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."
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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.
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
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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.
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, 1996 was 348.40%. 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, 1996 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.
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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.
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
23. 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
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will be executed at the net asset value determined as of the close of the
Exchange on its next trading day.
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 a Portfolio'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 comparable position. Where a security is traded on more than one
market, which may include
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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
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.
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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 ("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 $_____ billion as of September 30, 1996. Western
Asset also renders investment advice to private
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accounts with fixed income assets under management of approximately $_____
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 seventeen portfolios and to one closed-end investment company. These funds
had aggregate assets under management of about $_____ billion as of
September 30, 1996. 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 27. 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 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.
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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, 1996. [In addition, Western Asset has voluntarily
waived for calendar year 1996 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 DISTRIBUTORS
Legg Mason Wood Walker, Incorporated ("Legg Mason") 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").
Legg Mason 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. Legg Mason receives no direct compensation from the Fund for these
expenses. Legg Mason is a wholly owned subsidiary of Legg Mason, Inc.
Arroyo Seco Inc. ("Arroyo Seco"), a wholly-owned subsidiary of the
Adviser, is also authorized to offer the Fund's shares for sale to its
customers. The Fund makes no payments to Arroyo Seco in connection with the
offer or sale of the Fund's shares, and Arroyo Seco does not collect any
commissions or other fees from customers in connection with the offer or sale of
the Fund's shares.
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 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
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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.
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."
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.
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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.
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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.
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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
Distributors
Legg Mason Wood Walker, Inc.
111 South Calvert Street
Baltimore, MD 21202
Arroyo Seco, Inc.
117 East Colorado Boulevard
Pasadena, CA 91105
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
<PAGE>
WESTERN ASSET TRUST, INC.
Money Market Portfolio
Short Duration Portfolio
Limited Duration Portfolio
Intermediate Portfolio
Core 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 Portfolio, Core
Portfolio and Long Duration Portfolio (collectively, "Portfolios"). The
Portfolios described in this Statement of Additional Information are
diversified.
Effective March 13, 1996, the Portfolio formerly known as the
"Intermediate Duration Portfolio" changed its name to the "Intermediate
Portfolio," and the Portfolio formerly known as the "Full Range Duration
Portfolio" changed its name to the "Core Portfolio."
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, 1996, 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, 1996
<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 30
Appendix A - Ratings of Securities A-1
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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;
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(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 ("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 to
fixed-rate, fixed-term mortgages, the Portfolios may purchase pools of
variable-rate mortgages, growingequity mortgages, graduated-payment mortgages
and other types.
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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.
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 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.
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
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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. 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.
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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.
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.
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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 net 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
options on futures 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 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
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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.
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.
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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 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
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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 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.
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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 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.
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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.
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
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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.
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, [67] (1)(2) Chairman of the Board and Director;
Consultant, McGagh Associates (corporate financial consulting), January
1989-present; Director of Pacific American
15
<PAGE>
Income Shares, Inc.; formerly: Senior Vice-President, Chief Financial Officer
and Director of Northrop Corporation (military aircraft).
Dr. Richard C. Gilman, [73] (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, [77] (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, [55] (2) (3) Director; Senior Partner, Munger, Tolles
& Olson (a law partnership); Director of Pacific American Income Shares, Inc.
*W. Curtis Livingston, III, [53] (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., [74] 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, [59] (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, [49] 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, [47] 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, [37] 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, [41] 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, [36] 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.
16
<PAGE>
Marie K. Karpinski, [47] 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, [49] Vice-President; Director of Client Services,
Western Asset Management Company, 1984-present.
S. Kenneth Leech, [42] 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, [46] Vice-President; Director of Investment Systems,
Western Asset Management Company.
Joseph L. Orlando, [36] 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, [31] 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, [36] 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.
17
<PAGE>
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, 1996.
18
<PAGE>
COMPENSATION TABLE
Total
Compensation
From Fund
Aggregate and Fund
Name of Person and Compensation Complex Paid
Position From the Fund* to Directors**
William G. McGagh -
Chairman of the
Board and Director $9,500 $17,300
Dr. Richard C. Gilman
- - Director $8,500 $16,300
Gordon L. Hough -
Director $8,500 $14,400
Ronald L. Olson -
Director $8,500 $14,000
W. Curtis Livingston,
III - President and
Director None None
Norman Barker, Jr. -
Director $8,500 $18,100
Louis A. Simpson -
Director $8,500 $4,000
Ilene S. Harker - Vice
President and
Secretary None None
Marie K. Karpinski - None None
Vice President and
Treasurer
==============================================================================
* Represents fees paid to each director during the fiscal year ended
June 30, 1996.
** Represents aggregate compensation paid to each director
during the calendar year ended December 31, 1995.
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 , and amended
effective as of the date hereof, between the Adviser and the Fund covering the
Portfolios other than the Intermediate and Short Duration Portfolios, and an
Investment Advisory Agreement dated February 10, 1994, and amended effective
as of the date hereof, between the Adviser and the Fund covering the
Intermediate and Short Duration Portfolios
19
<PAGE>
(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 11, 1996.
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 the Core and Long Duration Portfolio's average
daily net assets, 0.35% of the Intermediate Portfolio's average
daily net assets, and 0.30% of the Limited Duration, Short Duration and Money
Market Portfolio's average daily net assets. Effective as of the date hereof,
the advisory fee for the Intermediate and Limited Duration Portfolios was
changed from 0.40% of average daily net assets to 0.35% and 0.30%, respectively,
of average daily net assets, although the Adviser had previously, effective as
of March 13, 1996, waived a portion of its fees for those Portfolios so that the
advisory fees for those Portfolios were 0.35% and 0.30%, respectively, of
average daily net assets.
For the Core Portfolio, the Adviser received $1,548,346 (prior to fees
waived of $111,421) for the year ended June 30, 1996, $963,008 (prior to fees
waived of $69,442) for the year ended June 30, 1995, and $732,397 (prior to fees
waived of $158,373) for the year ended June 30, 1994. For the Intermediate
Portfolio, the Adviser received $130,938 (prior to fees waived of $130,938)
for the year ended June 30, 1996 and $29,571 (prior to fees waived of $29,571)
for the year ended June 30, 1995. For the Limited Duration Portfolio, the
Advisor received $7,212 (prior to fees waived of $7,212) the year ended June
30, 1996.
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.
20
<PAGE>
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 and Short Duration Portfolios, and an
Administration Agreement with the Fund dated February 10, 1994 covering the
Intermediate and Short Duration Portfolios (together, the "Administration
Agreement"). The Administration Agreement was most recently approved on April
11, 1996 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.
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
dividenddisbursing agent, and to provide certain shareholder services not
provided by the Fund's transfer and dividend-disbursing agent.
For the Core, 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
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 Core Portfolio, the Administrator received fees of
$193,547, $120,376 and $183,100 for the years ended June 30, 1996, 1995 and
1994, respectively. For the Intermediate Portfolio, the Administrator waived
all administrative fees for the years ended June 30, 1996 and 1995.
For the Limited Duration Portfolio, the Administrator received fees
of $1,202 (prior to fees waived of $69) for the year ended June 30, 1996.
21
<PAGE>
The Fund's Distributors
Legg Mason Wood Walker, Incorporated ("Legg Mason"), 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 11, 1996.
Legg Mason 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.
Arroyo Seco, Inc., ("Arroyo Seco"), 117 East Colorado Boulevard,
Pasadena, CA 91105, a wholly-owned subsidiary of the Adviser, is also authorized
to offer the Fund's shares for sale to its customers pursuant to an Agreement
dated November 9, 1995. 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, Arroyo Seco, the
Adviser or their affiliates, on September 12, 1996.
The Fund makes no payments to Arroyo Seco in connection with the offer
or sale of the Fund's shares, and Arroyo Seco does not collect any commissions
or other fees from customers in connection with the offer or sale of the Fund's
shares. Arroyo Seco is not obligated to sell any specific amount of Fund shares.
The Agreement is terminable without penalty, at any time, by vote of a majority
of the Fund's directors, a majority of the Fund's disinterested directors, or a
majority of the Fund's outstanding shares, or by Arroyo Seco 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 Core
and Long Duration Portfolios, 0.45% of the Portfolio's average daily net assets
for such month the Intermediate Portfolio, and 0.40% of the Portfolio's average
daily net assets for such month for the Money Market, Limited Duration and
Short Duration Portfolios. 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 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.
22
<PAGE>
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, 1996 and 1995, the Core
Portfolio's portfolio turnover rates were 266.0% and 257.90%, respectively. For
the years ended June 30, 1996 and 1995, the Intermediate Portfolio's portfolio
turnover rates were 841.89% and 764.45%, respectively. For the year ended
June 30, 1996, the Limited Duration Portfolio's annualized turnover rate was
1,042.0%.
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.
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.
23
<PAGE>
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 marketmakers 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, 1996, 1995 and 1994 ,
the Core Portfolio paid $97,148, $59,330 and $59,750, respectively, in
brokerage commissions on futures and options transactions. For the years ended
June 30, 1996 and 1995, the Intermediate Portfolio paid $11,655 and $5,970,
respectively, in brokerage commissions on futures and options transactions. For
the year ended June 30, 1996, the Limited Duration Portfolio paid no 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 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
24
<PAGE>
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 ShortShort 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.
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.
25
<PAGE>
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.
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 Core
Portfolio as of August 2, 1996:
% of Ownership
Name and Address As of
August 2, 1996
Magma Copper Company
7400 N. Oracle Road
Suite 200
Tucson, AZ 85704 6.97%
Royal Maccabees Life Insurance Co.
25800 Northwestern Highway
Southfield, MI 48037 5.53%
North Dakota State Investment Board
1930 Burnt Boat Drive
Bismarck, ND 58501 26.62%
Newspaper and Mail Deliverers' Publishers'
Pension Fund
41-18 27th Street
Long Island City, NY 11101-3825 6.70%
Aquarium & Co.
222 Berkeley Street
Boston, MA 02116-3764 5.33%
Thompson Consumer Electronics, Inc.
600 North Sherman Drive
Indianapolis, IN 46201-2598 6.95%
===============================================================================
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 Core Portfolio as of August 2, 1996:
27
<PAGE>
% of Ownership
Name and Address As of
August 2, 1996
Northern Trust Company
50 S. LaSalle Street
Chicago, IL 60675 31.47%
Mellon Bank N.A.
One Mellon Bank Center
Room 151-0545
Pittsburgh, PA 15258-0001 6.97%
State Street Bank & Trust Company
Solomon Willard Bldg.
Enterprise Drive
North Quincy, MA 02171 12.28%
Royal Maccabees Life Insurance Co.
25800 Northwestern Highway
Southfield, MI 48037 5.53%
Newspaper and Mail Deliverers' Publishers'
Pension Fund
41-18 27th Street
Long Island City, NY 11101-3825 6.70%
================================================================================
28
<PAGE>
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 Portfolio as of
August 2, 1996:
% of Ownership
Name and Address As of
August 2, 1996
Allergan Inc.
2525 Dupont Drive
P.O. Box 19534
Irvine, CA 92713-9354 26.55%
Risdon Corporation
One Risdon Corporation
Naugatuck, CT 06770 5.79%
Wendel & Co.
1 Wall Street, 6th floor
New York, NY 10286 6.37%
Harvard Industries Inc.
2502 N. Rocky Point Drive
Tampa, FL 33607 15.47%
Community Hospital
1515 North Madison Ave.
Anderson, IN 46011 8.41%
MA Hanna Master Trust
200 Public Square
Cleveland, OH 44114-2301 30.79%
================================================================================
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 Portfolio as of August 2,
1996:
29
<PAGE>
% of Ownership
Name and Address As of
August 2, 1996
First Union National Bank
401 S. Tryon Street
Charlotte, NC 28202 16.85%
Mint & Co.
P.O. Box 4044
Boston, MA 02211 5.79%
Mellon Bank, N.A.
Mutual Funds
P.O. Box 320
Pittsburgh, PA 15230-0320 26.55%
Bank of NY
1 Wall Street 6.37%
New York, NY 10268
Key Trust
P.O. Box 94870
Cleveland, OH 44101 8.41%
================================================================================
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 Limited Duration Portfolio as
of August 2, 1996:
% of Ownership
Name and Address As of
August 2, 1996
Western Michigan University
Investment & Endowment Mgmt.
1083 Seibert Admin. Bldg.
Kalamazoo, MI 49008 94.14%
HFA Investment Partnership
1201 3rd Ave. Ste. 2000
Seattle, WA 98101-3000 5.85%
================================================================================
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 Limited Duration Portfolio as of August
2, 1996:
30
<PAGE>
% of Ownership
Name and Address As of
August 2, 1996
Western Michigan University
Investment & Endowment Mgmt.
1083 Seibert Admin. Bldg.
Kalamazoo, MI 49008 94.14%
Northwestern Trust Co.
601 Union Street, Ste. 3600
Seattle, WA 98101 5.85%
================================================================================
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.
31
<PAGE>
The Core Portfolio's total returns as of June 30, 1996 were as follows:
Average
Cumulative Annual
Total Return Total Return
One Year 4.86% 4.86%
Five Years 57.01% 9.44%
Life of Fund(A) 74.29% 10.01%
(A) Fund's inception - September 4, 1990.
The Intermediate Portfolio's total returns as of June 30, 1996 were as
follows:
Average
Cumulative Annual
Total Return Total Return
One Year 4.70% 4.70%
Life of Fund(A) 15.26% 7.35%
(A) Fund's inception - July 1, 1994.
The Limited Duration Portfolio's total returns as of June 30, 1996 were as
follows:
Cumulative
Total Return
Life of Fund(A) 0.76%
(A) Fund's inception - May 1, 1996.
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
32
<PAGE>
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 Core Portfolio's Portfolio of Investments as of June 30, 1996;
Statement of Assets and Liabilities as of June 30, 1996; Statement of Operations
for the year ended June 30, 1996; Statement of Changes in Net Assets for the
years ended June 30, 1996 and June 30, 1995; the Financial Highlights for the
same periods and for the years ended June 30, 1992 to June 30, 1994; the Notes
to Financial Statements and the related Report of Independent Accountants, all
of which are included in the Core Portfolio's Annual Report to Shareholders for
the year ended June 30, 1996, are hereby incorporated by reference in this
Statement of Additional Information.
The Intermediate Portfolio's Portfolio of Investments as of June 30,
1996; Statement of Assets and Liabilities as of June 30, 1996; Statement of
33
<PAGE>
Operations for the year ended June 30, 1996; Statement of Changes in Net Assets
for the year ended June 30, 1996 and June 30, 1995; the Financial Highlights for
the same periods; the Notes to Financial Statements and the related Report of
Independent Accountants, all of which are included in the Intermediate
Portfolio's Annual Report to Shareholders for the year ended June 30, 1996,
are hereby incorporated by reference in this Statement of Additional
Information.
The Limited Duration Portfolio's Portfolio of Investments as of June
30, 1996; Statement of Assets and Liabilities as of June 30 , 1996; Statement of
Operations for the year ended June 30, 1996; Statement of Changes in Net Assets
for the year ended June 30, 1996; 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 Limited Duration Portfolio's
Annual Report to Shareholders for the year ended June 30, 1996, are hereby
incorporated by reference in this Statement of Additional Information.
34
<PAGE>
The audited Statement of Assets and Liabilities as of June 30, 1996 for
the Money Market, Short Duration and Long Duration Portfolios and the Reports of
Independent Accountants are shown on the following pages.
35
<PAGE>
WESTERN ASSET TRUST, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
<TABLE>
<CAPTION>
Long Short Money
Duration Duration Market
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Assets
Cash....................................................... $ 1,000 $ 1,000 $ 1,000
Deferred organization and initial offering costs............ 31,000 9,000 31,000
------- ------- -------
Total assets.................................................. 32,000 10,000 32,000
------- ------- -------
Liabilities
Accrued organization expenses and initial offering costs.... 31,000 9,000 31,000
------- ------- -------
Total liabilities............................................. 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
======= ======= =======
</TABLE>
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
A. Western Asset Trust, Inc. ("Corporation"), was organized on May 16,
1990. The Long Duration Portfolio, Short Duration Portfolio and Money Market
Portfolio ("Portfolios") constitute three of the nine portfolios established
under the Corporation at June 30, 1996. 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 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
36
<PAGE>
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.
37
<PAGE>
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, Short Duration Portfolio, Money Market Portfolio,
Corporate Securities Portfolio and Mortgage Securities Portfolio (five of the
nine portfolios comprising Western Asset Trust, Inc.) at June 30, 1996, 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.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Baltimore, Maryland
August 30, 1996
<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 uppermedium 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 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.
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
A-1
<PAGE>
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,
1996, 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, 1996
<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
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
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 ("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.
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
4
<PAGE>
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 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
5
<PAGE>
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 lowerrated 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 $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
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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 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
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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.
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
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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 net 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).
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
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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 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
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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 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.
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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
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
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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 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
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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, 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
14
<PAGE>
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 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
15
<PAGE>
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 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
16
<PAGE>
of transactions of less than $1 million) for the underlying foreign currencies
at prices that are less favorable than for round lots.
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 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-
17
<PAGE>
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 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
18
<PAGE>
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.
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-themoney," 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
19
<PAGE>
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, [67] (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, [73] (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, [77] (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, [55] (2) (3) Director; Senior Partner, Munger, Tolles
& Olson (a law partnership); Director of Pacific American Income Shares, Inc.
*W. Curtis Livingston, III, [53] (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.
20
<PAGE>
Norman Barker, Jr., [74] 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, [59] (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, [49] 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, [47] 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, [37] 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, [41] 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, [36] 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, [47] 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, [49] Vice-President; Director of Client Services,
Western Asset Management Company, 1984 - present.
S. Kenneth Leech, [42] 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, [46] Vice-President; Director of Investment Systems,
Western Asset Management Company.
21
<PAGE>
Joseph L. Orlando, [36] 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, [31] 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, [36] 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.
(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, 1996.
22
<PAGE>
COMPENSATION TABLE
Pension or Total
Retirement Estimated Compensation
Aggregate Benefits Annual From Fund and
Compensation Accrued as Benefits Fund Complex
Name of Person and From the Part of Funds' Upon Paid to
Position Fund* Expenses Retirement Directors**
William G. McGagh -
Chairman of the Board
and Director $9,500 N/A N/A $17,300
Dr. Richard C. Gilman
- - Director $8,500 N/A N/A $16,300
Gordon L. Hough -
Director $8,500 N/A N/A $14,400
Ronald L. Olson -
Director $8,500 N/A N/A $14,000
W. Curtis Livingston,
III - President and None N/A N/A None
Director
Norman Barker, Jr. -
Director $8,500 N/A N/A $18,100
Louis A. Simpson -
Director $8,500 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
============================================================================
* Represents fees paid to each director during the fiscal year ended June
30, 1996.
** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1995.
23
<PAGE>
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").
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 11, 1996. 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 $970,680 (prior to fees waived of $970,680) for the year
ended June 30, 1996, $480,824 (prior to fees waived of $480,824) for the year
ended June 30, 1995, and $572,322 (prior to fees waived of $572,322) for the
year ended June 30, 1994.
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 Western Asset and the Fund.
24
<PAGE>
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 are not "interested persons" (as defined in the 1940 Act) of the Fund, the
Administrator or its affiliates on April 11, 1996.
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, 1996, 1995 and 1994 , the Administrator received administrative
fees from the International Portfolio of $182,007, $90,158, $107,311,
respectively.
The Fund's Distributors
Legg Mason Wood Walker, Incorporated ("Legg Mason"),
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 11, 1996.
Legg Mason 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.
Arroyo Seco, Inc., ("Arroyo Seco"), 117 East Colorado
Boulevard, Pasadena, CA 91105, a wholly-owned subsidiary of the Adviser, is also
authorized to offer the Fund's shares for sale to its customers pursuant to an
Agreement dated November 9, 1995. 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, Arroyo Seco, the
Adviser or their affiliates, on September 12, 1996.
The Fund makes no payments to Arroyo Seco in connection with
the offer or sale of the Fund's shares , and Arroyo Seco does not collect any
commissions or other fees from customers in connection with the offer or sale of
the Fund's shares. Arroyo Seco is not obligated to sell any specific amount of
Fund shares. The Agreement is terminable without penalty, at any time, by vote
of a majority of the Fund's directors, a majority of the Fund's disinterested
directors, or a majority of the Fund's outstanding shares, or by Arroyo Seco
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, 1996.
[In addition, Western Asset has voluntarily waived for calendar year 1996 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.]
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 International
Portfolio as of August 2, 1996:
% of Ownership
Name and Address As of
August 2, 1996
AT&T 12.53%
One Oak Way, Room 3ED146
Berkeley Heights, N.J. 07922
FPL Group, Inc. 6.94%
FPL Group Pension Plan
11770 U.S. Highway One
North Palm Beach, FL 33408
Lockheed Corporation 8.59%
Salaried Pension Fixed Income
4500 Park Granada Boulevard
Calabasas, CA 91399-0222
Annuity Board of the Southern 6.81%
Baptist Convention
2401 Cedar Springs
Dallas, Texas 75221-2190
Ameritech Blazerhold & Co. 9.54%
1 Enterprise Dr. W2A
North Quincy, MA 02171-2126
Northwest Airlines 8.55%
5101 Northwest Drive
St. Paul, MN 55111-3034
IBM Retirement Fund 11.26%
3001 Summer Street
Stanford, CT 06905
================================================================================
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
August 2, 1996:
% of Ownership
Name and Address As of
August 2, 1996
Northern Trust Company 23.63%
10 S. LaSalle Street
Chicago, IL 60675
Bankers Trust Company of California, N.A. 14.12%
Arco Finance Station
Los Angeles, CA 90071
State Street Bank & Trust Company 9.86%
One Heritage Drive
North Quincy, MA 02171
Chase Manhattan Bank 11.26%
Chase Metrotech Center
Brooklyn, NY 11245
BOST & Co. 7.77%
P.O. Box 3198
Pittsburgh, PA 15230-3198
Ameritech Blazerhold & Co. 9.54%
1 Enterprise Dr. W2A
North Quincy, MA 02171-2126
Boston Safe Deposit & Trust 7.08%
Cabot Road
Medford, MA 02155
================================================================================
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.
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, 1996 and 1995, the
International Portfolio's annualized portfolio turnover rates were 348.40% and
355.03%, 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.
27
<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 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 year ended
June 30, 1996, the International Securities Portfolio paid $9,685 in brokerage
commissions with respect to futures and options transactions. For the years
ended June 30, 1995 and 1994 , the International Portfolio paid no brokerage
commissions.
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.
28
<PAGE>
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 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
29
<PAGE>
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.
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.
30
<PAGE>
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.
The International Securities Portfolio's returns as of June 30, 1996 were as
follows:
Average
Cumulative Annual
Total Return Total Return
One Year 10.36% 10.36%
Life of Fund(A) 22.42% 5.98%
(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.
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<PAGE>
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, 1996 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, 1996, 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, 1996,
the Statement of Assets and Liabilities as of June 30, 1996, the Statement of
Operations for the year ended June 30, 1996, the Statement of Changes in Net
Assets for the years ended June 30, 1996 and 1995; and the Financial Highlights
for the same periods and for the year ended June 30, 1994 and the period from
January 7, 1993 to June 30, 1993, 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, 1996, are hereby
incorporated by reference in this Statement of Additional Information.
32
<PAGE>
WESTERN ASSET TRUST, INC.
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1996
<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, 1996. 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
33
<PAGE>
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.
34
<PAGE>
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, Short Duration Portfolio, Money Market Portfolio,
Corporate Securities Portfolio and Mortgage Securities Portfolio (five of the
nine portfolios comprising Western Asset Trust, Inc.) at June 30, 1996, 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.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Baltimore, Maryland
August 30, 1996
<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 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.
A-1
<PAGE>
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.
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.
A-2
<PAGE>
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-3
<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) Core Portfolio, Intermediate Portfolio and Limited Duration
Portfolio. The financial statements for the year ended June 30, 1996 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 Financial Data Schedules for the Core,
Intermediate and Limited Duration Portfolios appear as Exhibits 27.1., 27.3 and
27.4, respectively.
(2) Money Market Portfolio, Short Duration Portfolio and Long
Duration Portfolio. The Money Market, Short Duration Portfolio and Long
Duration Portfolios have not commenced operations. The audited Statement of
Assets and Liabilities as of June 30, 1996 for those Portfolios, and the
related Report of Independent Accountants, are included in the Statement of
Additional Information describing those Portfolios. The Financial Data Schedules
for the Long Duration, Short Duration and Money Market Portfolio appear as
Exhibits 27.5, 27.6 and 27.7, respectively.
(3) 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, 1996 for those Portfolios, and the related Report of Independent
Accountants, are included in the Statement of Additional Information
describing those Portfolios. The Financial Data Schedules for Corporate
Securities Portfolio and Mortgage Securities Portfolio appear as Exhibits 27.8
and 27.9, respectively.
(4) International Securities Portfolio. The financial statements
for the year ended June 30, 1996 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
27.2.
(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)
(d) Articles Supplementary, as filed March 1, 1996-
filed herewith
(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, Core and Long
Duration Portfolios(3)
(b) Corporate Securities and Mortgage Securities
Portfolios(5)
(c) International Securities Portfolio(5)
(d) Short Duration and Intermediate Portfolios(7)
(e) Amendments for Intermediate and Limited Duration
Portfolios-- filed herewith
<PAGE>
(6) (a) Underwriting agreement(3)
(b) Underwriting Agreement dated November 9, 1995 -
filed herewith
(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, Core and
Long Duration Portfolios(3)
(2) Corporate Securities and Mortgage
Securities Portfolios(5)
(3) International Securities Portfolio(5)
(4) Short Duration and Intermediate
Portfolios(7)
(10) Opinion of counsel
(a) Money Market, Limited Duration, Core and Long
Duration Portfolios(3)
(b) Corporate Securities, Mortgage Securities and
International Securities Portfolios(5)
(c) Short Duration and Intermediate Portfolios(7)
(11) Other opinions, appraisals, rulings and consents
Accountants' consent
(a) Money Market, Short Duration, Limited Duration,
Intermediate, Core 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 and Long Duration
Portfolios -- none
(b) Core Portfolio, Intermediate Portfolio and
Limited 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 August 2, 1996)
Shares of Capital Stock,
$.001 par value
Money Market Portfolio 1
Short Duration Portfolio 1
Limited Duration Portfolio 2
Intermediate Portfolio 11
Core Portfolio 36
Long Duration Portfolio 1
Mortgage Securities Portfolio 1
Corporate Securities Portfolio 1
International Securities Portfolio 31
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 to believe the act or omission was unlawful.
Indemnification may be made
<PAGE>
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 above-mentioned 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 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
<PAGE>
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 June 25, 1996 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 28, 1996 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.
Arroyo Seco, Inc. does not act as principal underwriter, depositor
or investment adviser for any other investment company.
(b) The following tables set forth information concerning each
director and officer of the Registrant's principal underwriters,
Legg Mason Wood Walker, Incorporated ("LMWW") and Arroyo Seco, Inc.
("Arroyo Seco").
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
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive None
Vice President and
Director
<PAGE>
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
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
<PAGE>
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
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
<PAGE>
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
Eileen M. O'Rourke Vice President None
and Controller
Marie K. Karpinski Vice President None
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
<PAGE>
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.
Position and Positions and
Name and Principal Offices with Offices with
Business Address* Underwriter-Arroyo Seco Registrant
Ilene S. Harker Chief Executive Officer Vice President
W. Curtis Livingston Director Director and President
James W. Hirschmann Director of Marketing Vice President
Randolph L. Kohn Director of Client Services Vice President
Steven T. Saruwatari Chief Financial Officer Assistant Treasurer
Donna E. Barnes Corporate Secretary Assistant Treasurer
* All addresses are 117 East Colorado Boulevard, Pasadena, California
91105, 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
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>
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 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 29th day of August, 1996.
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. 14 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 August 29, 1996
W. Curtis Livingston, III
/s/ Norman Barker, Jr. Director August 29, 1996
Norman Barker, Jr.*
/s/ Richard C. Gilman Director August 29, 1996
Richard C. Gilman*
/s/ Gordon L. Hough Director August 29, 1996
Gordon L. Hough*
/s/ William G. McGagh Director August 29, 1996
William G. McGagh*
/s/ Ronald L. Olson Director August 29, 1996
Ronald L. Olson*
/s/ Louis A. Simpson Director August 29, 1996
Louis A. Simpson*
/s/ Marie K. Karpinski Vice President August 29, 1996
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>
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)
EXHIBIT 1(d)
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
WESTERN ASSET TRUST, INC.
FIRST: The Board of Directors of Western Asset Trust, Inc., a Maryland
corporation ("Corporation"), by action on February 8, 1996, has changed the name
of the Corporation's Full Range Duration Portfolio to the Core Portfolio, and
changed the name of the Corporation's Intermediate Duration Portfolio to the
Intermediate Portfolio. Following such name changes, the five billion shares
that the Corporation is authorized to issue shall be comprised of one hundred
million (100,000,000) shares in the Core Portfolio, one hundred million
(100,000,000) shares in the Long Duration Portfolio, one hundred million
(100,000,000) shares in the Limited Duration Portfolio, one hundred million
(100,000,000) shares in the Short Duration Portfolio, one hundred million shares
in the Intermediate Portfolio, one billion (1,000,000,000) shares in the Money
Market Portfolio, one billion (1,000,000,000) shares in the Mortgage Securities
Portfolio, one billion (1,000,000,000) shares in the International Securities
Portfolio and five hundred million (500,000,000) shares not classified in any
portfolio.
The par value of the shares of capital stock remains 1/10th of one cent
($.001) per share and the aggregate par value remains at five million dollars
($5,000,000).
<PAGE>
SECOND: The unissued shares of the Corporation, as so classified, the
shares of the Corporation already issued and outstanding, and any shares of any
further classes that may from time to time by authorized, established and
classified or reclassified by the Board of Directors shall have the relative
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption specified in the Corporation's Articles of Incorporation as currently
in effect.
THIRD: The Corporation is registered with U.S. Securities and Exchange
Commission as an open-end investment company under the Investment
Company Act of 1940.
IN WITNESS WHEREOF, the undersigned Secretary of Western Asset Trust,
Inc., hereby executes these Articles Supplementary on behalf of the Corporation,
and hereby acknowledges these Articles Supplementary to be the act of the
Corporation and further states under the penalties for perjury that, to the best
of her knowledge, information and belief, the matters and facts set forth herein
are true in all material respects.
Date: 2-29-96 By: /s/ W. Curtis Livingston
W. Curtis Livingston, President
Attest: /s/ Donna Barnes
EXHIBIT 5(e)
FEE AND PORTFOLIO NAME CHANGE AMENDMENT
Investment Advisory and Management Agreement (August 31, 1990)
Western Asset Trust, Inc.
Limited Duration Portfolio
Full Range Duration Portfolio
Long Duration Portfolio
Money Market Portfolio
This Amendment is made this 8th day of February, 1996, by and between
WESTERN ASSET TRUST, INC. ("Fund"), a Maryland corporation, and WESTERN ASSET
MANAGEMENT COMPANY ("Western Asset"), a California corporation registered as an
investment adviser under the Investment Advisers Act of 1940.
WHEREAS, the Fund is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), consisting of nine series of shares, two of which are know as the Full
Range Duration Portfolio and the Limited Duration Portfolio; and
WHEREAS, Western Asset and the Fund have entered into an Investment
Advisory and Management Agreement (the "Agreement") dated as of August 31, 1990,
pursuant to which Western Asset provides the Fund with certain investment
advisory and administrative services; and
WHEREAS, the Fund has changed the name of the Full Range Duration
Portfolio to the "Core Portfolio", which name change does not affect the meaning
or terms of the approved investment objective, policies and practices for such
portfolio as approved by the Funds Board of Directors; and
WHEREAS, Western Asset and the Fund desire to amend the Agreement to
reflect the name change to the Full Range Duration Portfolio, and to change the
fee for the Limited Duration Portfolio to .30% of that portfolio's average daily
net assets.
NOW THEREFORE, for mutual consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
(A.) All references in the Agreement to the "Full Range Duration
Portfolio" are hereby changed to the "Core Portfolio".
(B.) Section 7. Compensation of the Agreement shall be amended in its
entirety to read as follows:
<PAGE>
(a) For the services which Western Asset will render to the Fund under this
Agreement, each of the Core and Long Duration Portfolios will pay Western a
fee, computed daily and paid monthly, at an annual rate equal to 0.40
percent of that Portfolio's average daily net assets, and each of the
Limited Duration and the Money Market Portfolio will pay Western a fee,
computed daily and paid monthly, at an annual rate equal to 0.30 percent of
that Portfolio's average daily net assets. Fees with regard to the Fund
shall be paid promptly following the end of each calendar month. In the
event that the Adviser's right to such fee with respect to a Portfolio
commences on a date other than the first day of the month, the fee for such
month shall be based on the average daily net assets of that Portfolio in
that period from the date of commencement to the last day of the month. If
this Agreement is terminated with respect to a Portfolio as of any date not
the last day of a calendar month, a final fee shall be paid promptly after
the date of termination and shall be based only on the average daily net
assets of that Portfolio in that period from the beginning of such month to
such date of termination. The average daily net assets of a Portfolio shall
in all cases be based on calendar days and be computed as of such time and
in such manner as may be determined by the Board of Directors of the Fund.
(b) No director, officer or employee of the Fund shall receive from the
Fund any salary or other compensation as such director, officer or employee
while he is at the same time a director, officer or employee of Western
Asset, or any affiliated company of Western Asset.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the
Investment Advisory and Management Agreement to be executed by their officers
designated below on the day and year first above written.
[SEAL] WESTERN ASSET TRUST, INC.
Attest:
By: /s/ Gloria Cobble By: /s/ W. Curtis Livingston
GLORIA COBBLE W. CURTIS LIVINGSTON
[SEAL] Western Asset Management Company
Witness:
<PAGE>
By: /s/ Donna Barnes By: /s/ Ilene S. Harker
DONNA BARNES ILENE S. HARKER
<PAGE>
FEE AND PORTFOLIO NAME CHANGE AMENDMENT
Investment Advisory and Management Agreement (February 10, 1994)
Western Asset Trust, Inc.
Intermediate Portfolio
Short Duration Portfolio
This Amendment is made this 8th day of February, 1996, by and between
WESTERN ASSET TRUST, INC. ("Fund"), a Maryland corporation, and WESTERN ASSET
MANAGEMENT COMPANY ("Western Asset"), a California corporation registered as an
investment adviser under the Investment Advisers Act of 1940.
WHEREAS, the Fund is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), consisting of nine series of shares, two of which are known as the
Intermediate Duration Portfolio and the Short Duration Portfolio; and
WHEREAS, Western Asset and the Fund have entered into an Investment
Advisory and Management Agreement (the "Agreement") dated as of February 10,
1994, pursuant to which Western Asset provides the Fund with certain investment
advisory and administrative services; and
WHEREAS, the Fund has changed the name of the Intermediate Duration
Portfolio to the "Intermediate Portfolio", which name change does not affect the
meaning or terms of the approved investment objectives, policies and practices
for such portfolio as approved by the Board of Directors; and
WHEREAS, Western Asset and the Fund desire to amend the Agreement to
reflect the name change to the Intermediate Portfolio, and to change the fee for
the Intermediate to .35% of that portfolio's average daily net assets.
NOW THEREFORE, for mutual consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
(A.) All references in the Agreement to the "Intermediate Duration
Portfolio" are hereby changed to the "Intermediate Portfolio."
(B.) Section 8. Compensation of the Agreement shall be amended in
its entirety to read as follows:
<PAGE>
(a) For the services which Western Asset will render to the Fund under this
Agreement, the Intermediate Portfolio will pay Western Asset a fee,
computed daily and paid monthly, at an annual rate equal to 0.35% of that
Portfolio's average daily net assets, and the Short Duration Portfolio will
pay Western Asset a fee, computed daily and paid monthly, at an annual rate
equal to 0.30% of that Portfolio's average daily net assets. Fees with
regard to the Fund shall be paid promptly following the end of each
calendar month. In the event that the Adviser's right to such fee with
respect to a Portfolio commences on a date other than the first day of the
month, the fee for such month shall be based on the average daily net
assets of that Portfolio in that period from the date of commencement to
the last day of the month. If this Agreement is terminated with respect to
a Portfolio as of any date not the last day of a calendar month, a final
fee shall be paid promptly after the date of termination and shall be based
only on the average daily net assets of that Portfolio in that period from
the beginning of such month to such date of termination. The average daily
net assets of a Portfolio shall in all cases be based on calendar days and
be computed as of such time and in such manner as may be determined by the
Board of Directors of the Fund.
(b) No director, officer or employee of the Fund shall receive from the
Fund any salary or other compensation as such director, officer or employee
while he is at the same time a director, officer or employee of Western
Asset, or any affiliated company of Western Asset.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the
Investment Advisory and Management Agreement to be executed by their officers
designated below on the day and year first above written.
[SEAL] WESTERN ASSET TRUST, INC.
Attest:
By: /s/ Gloria Cobble By: /s/ W. Curtis Livingston
GLORIA COBBLE W. CURTIS LIVINGSTON
[SEAL] Western Asset Management Company
Witness:
By: /s/ Donna Barnes By: /s/ Ilene S. Harker
DONNA BARNES ILENE S. HARKER
AGREEMENT
This AGREEMENT is made as of the 9th day of November, 1995, by
and between Western Asset Trust, Inc., a Maryland corporation (the
"Corporation") and Arroyo Seco, Inc., a California corporation (the "Broker").
WHEREAS, the Corporation has registered its securities with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended (the "1940 Act") and the Securities Act of 1933, as amended , (the "1933
Act") and has registered certain of its securities under the provisions of
various state securities laws; and
WHEREAS, the Corporation offers for public sale securities in its
Full Range Duration Portfolio, International Securities Portfolio, Intermediate
Duration Portfolio, and Limited Duration Portfolio (each a "Series"), and may
offer securities of other Series for public sale from time to time; and
WHEREAS, the Broker, a wholly-owned subsidiary of Western Asset
Management Company, the investment adviser to each Series, wishes to offer the
Corporation's securities for sale to its customers; and
WHEREAS, the Corporation desires to authorize the Broker to offer
the Corporation's securities for sale, subject to certain terms and conditions
set forth in this Agreement, and without any payment by the Corporation;
NOW, THEREFORE, in consideration of the promises and mutual
covenants herein contained; it is agreed as follows:
1. The Broker is hereby authorized to offer to its customers the
securities of the Corporation (the "Shares") for sale. Any such offer or sale
shall comply in full with the terms set forth in the then effective Prospectus
of the Corporation or the applicable Series. The Broker shall comply with all
applicable federal and state laws, and rules promulgated by self-regulatory
organizations. The Corporation shall not make any payment to the Broker in
connection with the offer or sale of Shares or any other service provided
hereunder.
2. The public offering price of the Shares shall be the net asset
value per share (as determined by the Corporation) of the outstanding Shares of
the Series. The Broker shall not collect any commission or other fee in
connection with the offer or sale of the Shares.
<PAGE>
3. The Broker shall transmit any funds received from the Broker's
customers to the Corporation's transfer agent by wire transfer no later than the
next business day following placement of an order to purchase Shares.
4. In connection with sales and offers of Shares, the Broker
shall give only such information and make only such statements or
representations as are contained in the Prospectus, Statement of Additional
Information, or in information furnished in writing to the Broker by the
Corporation, and the Corporation shall not be responsible in any way for any
other information, statements or representations given or made by the Broker or
its representatives or agent. As used in this Agreement, the terms "Prospectus"
and "Statement of Additional Information" shall mean, respectively, the form of
prospectus and statement of additional information with respect to one or more
Series filed by the Corporation with the Securities and Exchange Commission as
part of its registration statement under the 1940 Act and the 1933 Act, as
amended from time to time ("Registration Statement").
5. The Broker will only place purchase orders for Shares
registered under the 1940 Act and the 1933 Act, and qualified (or exempt from
qualification requirements) for sale in the state where the customer resides.
The Corporation shall advise the Broker immediately if any such registration or
qualification is terminated or suspended.
6. The Corporation reserves the right at any time to withdraw all
offerings of the Shares or any or all Series by written notice to the Broker at
its principal office.
7. The Broker agrees to act as agent for the Corporation to
receive and transmit promptly to the Corporation's transfer agent requests for
redemption of Shares.
8. The Corporation agrees to set forth in its Prospectus the name
of the Broker and a telephone number provided by the Broker, and therein to
indicate that the Broker will sell Shares of the Corporation at no additional
cost to the prospective shareholder.
9. The Corporation shall at its own expense provide all customers
of the Broker who become shareholders in the Corporation all materials provided
to all shareholders of record in the Corporation, including without limitation
annual reports and updated Prospectuses.
10. The Broker shall maintain records of expenditures separate
and apart from those of Western Asset Management Company. The Corporation shall
be entitled to examine such records at any time, or from time to time, for the
purpose of excluding such expenditures from any determination of the fees to be
paid by the Corporation to Western Asset Management Company for investment
advisory services.
11. The Broker is an independent contractor and shall be an agent
for the Corporation only in respect to the sale and redemption of the Shares.
-2-
<PAGE>
12. The services of the Broker to the Corporation under this
Agreement are not to be deemed exclusive. The Broker shall be free to render
similar services or other services to others so long as its services hereunder
are not impaired thereby. The Corporation shall be free, in its sole discretion,
to distribute its own Shares to prospective investors, to make agreements with
other broker-dealers with respect to distribution of Shares, and to repurchase
its Shares from investors, without utilizing or notifying the Broker.
13. The Corporation is responsible for (i) the compliance of each
prospectus, or other material provided by the Corporation to the Broker for
distribution to its customers, will all applicable laws, rules and regulations,
(ii) the registration or qualification of all Shares under all applicable
federal and state laws, except to the extent the failure to so comply by the
Corporation is caused by the Broker's failure to comply with applicable laws,
rules and regulations or its failure to satisfy applicable terms of this
Agreement.
14. Subject to paragraphs 15, 16 and 17 below, this Agreement
shall remain in effect from the start date of its execution until December 31,
1996, and from year to year thereafter.
15. This Agreement shall automatically terminate in the event of
its assignment and may be terminated at any time without the payment of any
penalty by the Corporation or by the Broker on sixty (60) days' written notice
to the other party. The Corporation may effect such termination by action of its
executive officers or by a vote of (i) a majority of its directors, (ii) a
majority of its directors who are not interested persons of the Corporation and
who have no direct or indirect financial interest in the operation of this
agreement or any agreement between the Corporation and Western Asset Management
Company (the "Disinterested Directors"), or (iii) a majority of the outstanding
voting securities of the Corporation.
16. This Agreement shall be submitted for approval to the
Corporation's Board of Directors annually and shall continue in effect only so
long as specifically approved annually (i) by a majority vote of the
Corporation's Board of Directors, and (ii) by a vote of the majority of the
Disinterested Directors, cast in person at a meeting called for the purpose of
voting on such approval.
-3-
<PAGE>
17. The effectiveness of this Agreement is specifically
conditioned on the Broker: (i) being accepted for Membership into the National
Association of Securities Dealers, Inc. ("NASD"), and (ii) registering as a
broker or dealer in no less than twenty (20) states or territories. In the event
that the Broker's membership in the NASD is suspended or terminated, or if the
Broker shall be registered at any time in fewer than twenty (20) states or
territories, this Agreement shall automatically terminate upon the occurrence of
such event.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their officers thereunder duly authorized as of the date first
set forth above.
Attest: WESTERN ASSET TRUST, INC.
/s/ Donna Barnes /s/ Ilene S. Harker
DONNA BARNES ILENE S. HARKER
Attest: ARROYO SECO, INC.
/s/ Mary L. Beckner /s/ Matthew V. Cicero
MARY L. Beckner Matthew V. Cicero
- ------------------------- -----------------------------
-4-
EXHIBIT 11
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. 14 to the registration statement on Form N-1A (the
"Registration Statement") of our reports dated July 31, 1996, relating to the
financial statements and financial highlights appearing in the June 30, 1996
Annual Reports to Shareholders of Western Asset Trust Core Portfolio,
Intermediate Portfolio, Limited Duration Portfolio and International Securities
Portfolio (four 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 Statements of
Additional Information constituting part of this Registration Statement of our
report dated August 30, 1996, relating to the statements of assets and
liabilities of Western Asset Trust Long Duration Portfolio, Short Duration
Portfolio, Money Market Portfolio, Corporate Securities Portfolio and Mortgage
Securities Portfolio (five of the nine portfolios comprising Western Asset
Trust, Inc.), which appears in such Statements 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
heading "Independent Accountants" in the Statements of Additional Information.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Baltimore, Maryland
August 30, 1996
EXHIBIT 16(b)
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
June 30, 1995 - June 30, 1996 (one year)
Cumulative Total Return
ERV = (110.46 x 1.5778918)-(112.18 x 1.4817431) x 1000 + 1000 = 1048.56
------------------------------------------
(112.18 x 1.4817431)
P = 1000
C = 1048.56 - 1 = .04856 = 4.86%
------- ----
1000
Average Annual Return: Same
June 30, 1991 - June 30, 1996 (five years)
Cumulative Total Return:
ERV = (110.46 x 1.5778918)-(106.19 x 1.0453818) x 1000 + 1000 = 1570.09
------------------------------------------
(106.19 x 1.0453818)
P = 1000
C = 1570.09 - 1 = 0.57009 = 57.01%
------- ------
1000
Average Annual Return:
1
-----
5
(0.57009 + 1) - 1 = 9.44%
----
September 4, 1990 - June 30, 1995 (life of fund)
Cumulative Total Return:
ERV = (110.46 x1.5778918)-(100.00 x 1.0) x 1000 + 1000 = 1742.94
(100.00 x 1.0)
P = 1000
C = 1742.94 - 1 = 0.74294 = 74.29%
------- ------
1000
Average Annual Return:
1
------
5.8219
(0.74294 + 1) - 1 = 10.01%
-----
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
June 30, 1995 - June 30, 1996 (one year)
Cumulative Total Return
ERV = (104.83 x 1.0994831) - (107.36 x 1.0253594) x 1000 + 1000 = 1047.02
-------------------------------------------
(107.36 x 1.0253594)
P = 1000
C = 1047.02 - 1 = .04702 = 4.70%
------- ----
1000
Average Annual Return: Same
July 1, 1994 - June 30, 1996 (life of fund)
Cumulative Total Return:
ERV = (104.83 x 1.0253594) - (100.00 x 1.0) x 1000 + 1000 = 1152.59
--------------------------------------
(100.00 x 1.0)
P = 1000
C = 1152.59 - 1 = .15259 = 15.26%
------- -----
1000
Average Annual Return:
1
-----
2
(0.15259 + 1) - 1 = 7.35%
----
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
May 1, 1996 - June 30, 1996 (life of fund) Cumulative Total Return
ERV = (100.76 x 1.0) - (100.00 x 1.0) x 1000 + 1000 = 1007.60
--------------------------------
(100.00 x 1.0)
P = 1000
C = 1007.60 - 1 = .0076 = 0.76%
------- ----
1000
EXHIBIT 16(d)
WESTERN ASSET TRUST, INC.
INTERNATIONAL SECURITIES PORTFOLIO
June 30, 1995 - June 30, 1996 (one year)
Cumulative Total Return
ERV = (95.16 x 1.2864602)-(92.10 x 1.2043871) x 1000 + 1000 = 1103.63
---------------------------------------
(92.10 x 1.2043871)
P = 1000
C = 1103.63 - 1 = .10363 = 10.36%
------- -----
1000
Average Annual Return: Same
January 7, 1993 - June 30, 1996 (life of fund)
Cumulative Total Return:
ERV = (95.16 x 1.2864602) - (100.00 x 1.0) x 1000 + 1000 = 1224.20
-------------------------------------
(100.00 x 1.0)
P = 1000
C = 1224.20 - 1 = 0.22420 = 22.42%
------- ------
1000
Average Annual Return:
1
--------
3.479452
(0.22420 + 1) - 1 = 5.98%
----
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<INVESTMENTS-AT-VALUE> 490,430,061
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<OTHER-ITEMS-LIABILITIES> 738,053
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<ACCUMULATED-NET-GAINS> (4,003,239)
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<NET-ASSETS> 453,699,468
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 26,492,560
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<EXPENSES-NET> 1,935,441
<NET-INVESTMENT-INCOME> 24,557,119
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<NET-CHANGE-FROM-OPS> 17,024,734
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<DISTRIBUTIONS-OF-GAINS> (1,507,661)
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<NUMBER-OF-SHARES-SOLD> 1,015,043
<NUMBER-OF-SHARES-REDEEMED> (115,482)
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<GROSS-EXPENSE> 1,592,769
<AVERAGE-NET-ASSETS> 242,670,801
<PER-SHARE-NAV-BEGIN> 92.10
<PER-SHARE-NII> 5.78
<PER-SHARE-GAIN-APPREC> 3.56
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<INVESTMENTS-AT-COST> 72,756,393
<INVESTMENTS-AT-VALUE> 72,257,580
<RECEIVABLES> 1,803,955
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<OTHER-ITEMS-ASSETS> 10,529
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<OTHER-ITEMS-LIABILITIES> 40,928
<TOTAL-LIABILITIES> 8,031,647
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<PAID-IN-CAPITAL-COMMON> 65,480,314
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<SHARES-COMMON-PRIOR> 189,209
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<PER-SHARE-GAIN-APPREC> (.06)
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000863520
<NAME> WESTERN ASSET TRUST, INC.
<SERIES>
<NUMBER> 4
<NAME> LIMITED DURATION PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> MAY-01-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 17,889,138
<INVESTMENTS-AT-VALUE> 17,875,651
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<OTHER-ITEMS-LIABILITIES> 88,149
<TOTAL-LIABILITIES> 1,990,009
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11,629)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (13,487)
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<NET-CHANGE-IN-ASSETS> 16,108,949
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<PER-SHARE-NAV-BEGIN> 100.00
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000863520
<NAME> WESTERN ASSET TRUST, INC.
<SERIES>
<NUMBER> 5
<NAME> LONG DURATION PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
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<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
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<NET-INVESTMENT-INCOME> 0
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<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-30-1996
<PERIOD-END> JUN-30-1996
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<INVESTMENTS-AT-VALUE> 0
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<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,000
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<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
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<INTEREST-INCOME> 0
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<NET-INVESTMENT-INCOME> 0
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<DISTRIBUTIONS-OF-INCOME> 0
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<NUMBER-OF-SHARES-SOLD> 0
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<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<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
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<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-30-1996
<PERIOD-END> JUN-30-1996
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<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 31,000
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1,000
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<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
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<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
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<DISTRIBUTIONS-OF-INCOME> 0
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<NUMBER-OF-SHARES-SOLD> 0
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<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
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<PER-SHARE-DIVIDEND> 0
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<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> 8
<NAME> CORPORATE SECURITIES PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
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<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
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<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
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<NET-CHANGE-FROM-OPS> 0
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<DISTRIBUTIONS-OF-INCOME> 0
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<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
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<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
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<PER-SHARE-DIVIDEND> 0
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<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 SECURITIES PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
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<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
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<SENIOR-EQUITY> 0
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<SHARES-COMMON-STOCK> 10
<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
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<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
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<NET-CHANGE-FROM-OPS> 0
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<DISTRIBUTIONS-OF-INCOME> 0
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<NUMBER-OF-SHARES-SOLD> 0
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<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 0
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<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
