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WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED
JUNE 30, 1997
<PAGE>
August 20, 1997
Dear Shareholder:
Enclosed are the financial statements for the Western Asset Trust Intermediate
Portfolio for the year ending June 30, 1997.
I am pleased to report that the fund produced positive investment results for
the period, returning 8.3% (net) versus the Salomon Medium Term Index's return
of 7.9%. At the close of the fund's third year of operation, total assets stand
at just over $220 million, with more than 25 participants.
The mainstay of the fund's returns continues to be our reliance on a variety of
strategies, with close attention paid to the interplay of risks involved in the
aggregate. Factors contributing to performance in this latest period include the
portfolio's long duration posture, successful anticipation of shifts in the
yield curve, and an overweighting to both the corporate and mortgage sectors.
Please feel free to call if you have any questions.
Sincerely,
W. Curtis Livingston
President
Enclosure
<PAGE>
WESTERN ASSET TRUST
INTERMEDIATE PORTFOLIO
Portfolio Manager: Western Asset Management Investment Strategy Group
The fund's performance was on balance favorably impacted by market conditions in
the 12 months ended June 30, 1997. Although interest rates were unusually
volatile during the period, yields overall declined somewhat. The fund's total
return substantially exceeded that of its benchmark, the Salomon Medium Term
Index, returning 8.3% (net) vs. 7.9%, as major strategies produced generally
positive results. The fund benefited from a long duration posture which it held
throughout the period, and yield curve strategies correctly anticipated the
periods when short- and long-term interest rates moved by greater and lesser
degrees relative to each other. A modest overweighting to the corporate sector
was rewarded as yield spreads narrowed, and a modest overweighting to the
mortgage sector benefited from tighter spreads as well.
[Graphic Appears Here and Plots Points Below]
Average Annual Total Return
WAT Intm SB Med Term
1 Year 8.3% 7.9%
Since Inception 7.8% 8.0%
Western Asset Trust Salomon Medium
Intermediate Portfolio (net) Term Index
7/1/94 10,000 10,000
9/30/94 10,006 10,077
12/31/94 10,055 10,088
3/31/95 10,467 10,562
6/30/95 11,008 11,097
9/30/95 11,215 11,291
12/31/95 11,615 11,685
3/31/96 11,544 11,609
6/30/96 11,577 11,682
9/30/96 11,815 11,904
12/31/96 12,160 12,216
3/31/97 12,171 12,218
6/30/97 12,540 12,606
<PAGE>
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1997
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S><C>
CORPORATE BONDS AND NOTES - 14.4%
Banking and Finance - 8.0%
Bankamerica Capital III(A)
6.386% 1/15/27 $ 3,000 $ 2,945
Deutsche Bank Financial Incorporated
6.70% 12/13/06 4,000 3,900
Ford Motor Credit Company
7.00% 9/25/01 250 252
6.50% 2/28/02 3,000 2,964
6.125% 1/9/06 235 220
General Motors Acceptance Corp.
6.00% 12/7/98 210 209
Heller Financial Incorporated
6.50% 11/1/01 4,400 4,341
Lehman Brothers Holdings, Inc.
8.63% 2/26/99 400 414
National Westminster Bancorp
9.375% 11/15/03 290 327
Norwest Corporation
5.75% 11/16/98 100 100
United States Leasing International
8.75% 12/1/01 500 536
6.625% 5/15/03 1,750 1,724
-------
17,932
-------
Food and Beverage - 2.8%
Philip Morris Companies, Inc.
7.125% 10/1/04 2,000 1,991
6.95% 6/1/06 4,350 4,364
-------
6,355
-------
Industrial - 1.5%
TCI Communications Incorporated
8.00% 8/1/05 3,200 3,251
-------
</TABLE>
3
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S><C>
CORPORATE BONDS AND NOTES - Continued
Media and Entertainment - 2.1%
Time Warner Inc.
7.75% 6/15/05 $ 4,650 $ 4,726
-------
Total Corporate Bonds and Notes
(Identified Cost - $32,072) 32,264
- ---------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES - 27.5%
Fixed-rate Securities - 24.0%
Bridgestone/Firestone Master Trust
6.17% 7/1/03 3,800 3,761
Chevy Chase 1997-A
7.65% 12/20/07 4,100 4,095
Chevy Chase Home Loan Trust
7.15% 5/15/15 1,300 1,303
Cityscape Home Equity Loan Trust(B)
7.40% 9/25/28 2,832 2,837
CS First Boston Mortgage Securities Corp.
6.62% 9/25/09 4,000 3,931
FASCO Auto Trust 1996-BA1(B)
9.05% 3/17/03 1,614 1,641
Fleet Finance Home Equity Trust
6.70% 10/15/06 675 678
Fleetwood Credit Corp. Grantor Trust
8.75% 10/15/04 151 152
Guaranteed Export Certificates
6.13% 6/15/04 1,647 1,627
Irwin Home Equity Corporation Trust
6.77% 6/15/06 2,000 1,999
Lehman FHA Title I Loan Trust
7.71% 8/25/17 2,206 2,236
Lehman Home Improvement Loan Trust
8.65% 7/25/17 5 5
</TABLE>
4
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S><C>
ASSET-BACKED SECURITIES - Continued
Fixed-rate Securities - Continued
Long Beach(B)
6.85% 2/15/03 $ 5,606 $ 5,600
Mego Mortgage FHA Title I Loan Trust
6.55% 9/25/07 605 603
7.275% 9/25/16 1,282 1,286
7.17% 5/25/23 1,700 1,704
Merrill Lynch Mortgage Investors, Inc.
9.70% 6/15/08 966 1,003
9.65% 9/15/10 1,750 1,871
NAL Auto Trust(B)
7.30% 12/15/00 1,424 1,419
Nationsbank 1997-A(B)
7.442% 1/10/11 2,700 2,708
Preferred Credit Corporation
7.15% 5/25/10 2,100 2,105
Sears Credit Account Master Trust
6.25% 1/15/03 350 351
Standard Credit Card Master Trust
5.50% 2/7/00 150 148
5.90% 2/7/01 190 189
6.55% 10/7/07 2,000 1,948
Union Acceptance Corporation
6.375% 10/8/03 2,800 2,792
World Financial Network Credit Card Master Trust
6.95% 4/15/06 4,750 4,789
World Omni Automobile Lease Securitization Trust
6.05% 11/25/01 1,129 1,130
-------
53,911
-------
Variable-rate Securities(C) - 0.4%
U.S. Home Equity Loan Certificates
9.125% 4/15/21 1,000 1,004
-------
</TABLE>
5
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S><C>
ASSET-BACKED SECURITIES - Continued
Stripped Securities(D) - 2.0%
Bay View Auto Trust
3.15%(1) 12/15/04 $27,623 $ 773
Citibank Credit Card Master Trust I
0%(2) 2/7/03 1,300 1,027
Option One CTS Arm Trust
3.040%(1) 3/25/01 3,772 137
Union Acceptance Corporation
2.75%(1) 5/10/04 75,591 2,433
-------
4,370
-------
Indexed Securities(A) - 1.1%
Lehman Home Equity Loan Trust
5.918% 12/15/27 2,568 2,569
-------
Total Asset-backed Securities
(Identified Cost - $61,613) 61,854
- ---------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES - 12.6%
Fixed-rate Securities - 8.7%
Asset Securitization Corporation
6.72% 11/12/26 2,901 2,908
Citicorp Mortgage Securities, Inc.
9.00% 6/1/02 1,723 1,729
Criimi Mae Trust 1(B)
6.77% 5/30/98 1,400 1,397
DLJ Mortgage Acceptance Corporation
6.86% 11/12/21 1,813 1,812
Merrill Lynch Mortgage Investors, Inc.
6.69% 11/21/28 1,952 1,951
Metropolitan Asset Funding, Inc.
6.05% 11/20/01 1,441 1,435
6.95% 4/20/08 2,220 2,193
</TABLE>
6
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S><C>
MORTGAGE-BACKED SECURITIES - Continued
Fixed-rate Securities - Continued
Nomura Asset Securities Corporation
7.07% 4/13/36 $ 1,864 $ 1,883
Resolution Trust Corporation
8.40% 7/25/24 1,014 1,014
Structured Asset Securities Corp.
6.60% 10/25/24 933 931
7.75% 2/25/28 2,354 2,384
-------
19,637
-------
Variable-rate Securities(C) - 3.4%
Housing Securities, Inc.(B)
5.987% 11/25/26 777 765
-------
Resolution Trust Corporation
5.947% 7/25/20 77 75
8.756% 3/25/21 2,073 2,108
6.904% 6/25/24 600 596
6.073% 1/25/27 1,904 1,857
7.971% 9/25/29 126 127
8.297% 9/25/29 865 871
7.359% 12/25/29 1,096 1,094
-------
6,728
-------
Securitized Asset Sales Series 1994 Class A3
6.930% 8/25/33 77 76
-------
Stripped Securities(D) - 0.3%
CMC Securities Corp.
0%(2) 2/25/09 574 416
Securitized Asset Sales Series 1995 - 6
0%(2) 12/25/10 335 230
-------
646
-------
</TABLE>
7
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S><C>
MORTGAGE-BACKED SECURITIES - Continued
Indexed Securities(A) - 0.2%
Resolution Trust Corporation
6.389% 9/25/21 $ 466 $ 455
-------
Total Mortgage-backed Securities
(Identified Cost - $28,314) 28,307
- ---------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS - 12.6%
Fixed-rate Securities - 6.9%
United States Treasury Bonds
6.50% 11/15/26 9,960 9,552
6.625% 2/15/27 1,000 978
-------
10,530
-------
United States Treasury Notes
6.125% 8/31/98 3,000 3,008
5.875% 3/31/99 150 150
6.50% 4/30/99 1,980 1,995
-------
5,153
-------
Stripped Securities(D) - 0.2%
United States Treasury Bonds
0%2 8/15/20 2,400 486
-------
Indexed Securities(H) - 5.5%
United States Treasury Inflation-Indexed Security
3.375% 1/15/07 12,518 12,216
-------
Total U.S. Government Obligations
(Identified Cost - $28,539) 28,385
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S><C>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - 15.6%
Fixed-rate Securities - 9.5%
Federal Home Loan Mortgage Corporation
8.50% 7/1/06 $ 195 $ 199
7.76% 5/1/12 372 378
6.50% 6/1/13 to 11/1/15 1,751 1,699
7.50% 4/1/17 428 437
9.30% 4/15/19 1,316 1,387
-------
4,100
-------
Federal National Mortgage Association
8.50% 2/1/08 854 887
6.00% 7/1/12(E) 6,000 5,784
6.50% 6/1/14 1,790 1,738
8.00% 12/1/14 1,075 1,102
7.00% 1/1/26 to 4/1/27 7,103 6,958
-------
16,469
-------
Government National Mortgage Association
9.50% 9/15/05 364 385
9.00% 6/15/06 382 399
-------
784
-------
Variable-rate Securities(C) - 0.1%
Federal Home Loan Mortgage Corporation
6.668% 1/1/19 113 112
-------
Federal National Mortgage Association
6.176% 3/1/18 214 212
-------
Stripped Securities(D) - 0.2%
Federal Home Loan Mortgage Corporation
10.00%(1) 3/1/21 259 74
-------
Federal National Mortgage Association
0%(2) 5/25/22 328 257
-------
</TABLE>
9
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S><C>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - Continued
Indexed Securities(A) - 5.8%
Government National Mortgage Association
7.125% 8/20/21 to 8/20/22 $ 8,645 $ 8,918
6.875% 12/20/21 1,617 1,661
7.00% 1/20/25 2,370 2,432
-------
13,011
-------
Total U.S. Government Agency Mortgage-backed
Securities
(Identified Cost - $34,826) 35,019
- ---------------------------------------------------------------------------------------------------------------------
YANKEE BONDS(F) - 5.7%
Fixed-rate Securities - 5.0%
Hydro - Quebec
7.74% 2/26/99 350 357
Petrozuata Finance Incorporated(B)
7.63% 4/1/09 2,100 2,097
Province de Quebec
8.625% 1/19/05 1,000 1,115
7.00% 1/30/07 4,000 3,963
YPF Sociedad Anonima
7.50% 10/26/02 1,614 1,635
7.00% 10/26/02 2,119 2,115
-------
11,282
-------
Indexed Securities(A) - 0.7%
United Mexican States(B)
7.875% 8/6/01 1,500 1,505
-------
Total Yankee Bonds
(Identified Cost - $12,592) 12,787
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Shares Value
--------- -----
<S><C>
COMMON STOCKS AND EQUITY INTERESTS - 2.5%
Blackrock 1999 Term Trust, Inc. 10 $ 90
Blackrock 2001 Term Trust, Inc. 667 5,421
-------
Total Common Stocks and Equity Interests
(Identified Cost - $5,363) 5,511
- ---------------------------------------------------------------------------------------------------------------------
Principal
Amount
---------
SHORT-TERM INVESTMENTS - 10.8%
Corporate - 0.4%
Associates Corporation, North America
8.125% 1/15/98 $ 340 344
Ford Motor Credit Company
6.42% 2/4/98 300 301
General Electric Capital Corporation
7.65% 2/23/98 240 242
-------
887
-------
U. S. Government Obligations - 0.1%
United States Treasury Bills
5.16% 8/21/97 250 248(G)
-------
Repurchase Agreement - 10.3%
J.P. Morgan Securities, Inc.
6.05% dated 6/30/97, to be repurchased at
$23,113 on 7/1/97 (Collateral: $23,425 Federal
National Mortgage Association Medium-term notes
7.43%, value $23,848) 23,109 23,109
-------
</TABLE>
11
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Actual
Contracts Value
--------- -----
<S><C>
SHORT-TERM INVESTMENTS - Continued Options Purchased - N.M.
Eurodollar Future Put
September 97, Strike Price $94 66 $ 7
United States Treasury Notes Future Put
August 97, Strike Price $105.5 108 42
--------
49
--------
Total Short-term Investments
(Identified Cost - $24,290) 24,293
- ---------------------------------------------------------------------------------------------------------------------
Total Investments 101.7%
(Identified Cost - $227,609) $228,420
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Expiration Actual Appreciation/
Date Contracts (Depreciation)
---------- --------- --------------
<S><C>
OPTIONS WRITTEN
U.S. Treasury Bond Future Put
Strike Price $110 August 97 43 $ 12
FUTURES CONTRACT SOLD
Five-year U.S. Treasury Notes September 97 2 1
----
13
===================================================================================================================
</TABLE>
(A) Indexed Security - The rate of interest earned on these securities is tied
to an index such as the Cost of Funds Index (COFI), One Year Treasury
Constant Maturity rate, London Interbank Offered Rate (LIBOR) or the
Consumer Price Index (CPI). The coupon rate shown is the rate at June 30,
1997.
(B) Rule 144a Security - A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified buyers.
(C) The coupon rates shown on variable rate securities are the rates at June
30, 1997. These rates vary with the weighted average coupon of the
underlying loans.
(D) Stripped Security - A security with interest-only or principal-only payment
streams, denoted by the superscript 1 or 2, respectively. For interest-only
securities, the amount shown as principal is the notional balance used to
calculate the amount of interest due.
(E) When-issued Security - Security purchased on a delayed delivery basis.
Final settlement amount and maturity date have not yet been announced.
(F) Yankee Bond - Dollar denominated bond issued in the U.S. by foreign
entities.
(G) Collateral to cover futures contracts sold.
(H) United States Treasury Inflation -Indexed Security - U.S. Treasury
securities whose principal value is adjusted daily in accordance with
changes to the Consumer Price Index. Interest is calculated on the basis of
the current adjusted principal value.
N.M. Not Meaningful
See notes to financial statements.
13
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
STATEMENT OF ASSETS AND LIABLITIES
June 30, 1997
<TABLE>
<CAPTION>
Assets
<S><C>
Investments at value (Identified Cost - $227,609,434) $228,419,936
Receivable for:
Investments sold 10,792,071
Fund shares sold 78,869
Futures variation margin 500
Interest receivable 1,932,520
Other assets 26,612
------------
Total assets 241,250,508
Liabilities
Payable for:
Investments purchased 16,573,750
Fund shares repurchased 31,669
Options written, at market (premiums received $31,271) 19,484
Due to adviser and administrator 43,711
Accrued expenses 84,865
------------
Total liabilities 16,753,479
------------
Net assets $224,497,029
============
Analysis of Net Assets
Common stock at par value $.001 per share, authorized
100,000,000 shares: issued and outstanding 2,094,377 shares $ 2,094
Accumulated paid-in capital 219,829,521
Undistributed net investment income 3,164,952
Undistributed net realized gain on investments, options and futures 677,313
Unrealized appreciation of investments, options and futures 823,149
------------
Net assets $224,497,029
============
Net asset value, offering price, and redemption price per share $107.19
=======
</TABLE>
See notes to financial statements.
14
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
STATEMENT OF OPERATIONS
For the Year Ended June 30, 1997
<TABLE>
<CAPTION>
<S><C>
Investment Income:
Interest $10,923,123
Dividends 115,287
-----------
$11,038,410
Expenses:
Advisory fee 568,685
Administrative fee 81,241
Custodian fee 98,500
Registration fees 73,090
Legal and audit fees 38,950
Directors' fees 15,784
Organizational expense 12,444
Transfer agent and shareholder servicing expense 2,370
Reports to shareholders 315
Other expenses 1,675
-----------
893,054
Less fees waived (158,505)
-----------
Total expenses, net of waivers 734,549
-----------
Net Investment Income 10,303,861
Net Realized and Unrealized Gain on Investments:
Realized gain on investments, options and futures 1,449,959
Unrealized appreciation of investments, options and futures 1,321,962
-----------
Net Realized and Unrealized Gain on Investments 2,771,921
-----------
Increase in Net Assets Resulting from Operations $13,075,782
-----------
</TABLE>
See notes to financial statements.
15
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years Ended June 30,
---------------------------------------------
1997 1996
------------ ------------
<S><C>
Increase in Net Assets:
Net investment income $ 10,303,861 $ 2,179,678
Net realized gain on investments,
options and futures 1,449,959 466,746
Change in unrealized appreciation of investments,
options and futures 1,321,962 (933,446)
------------ -----------
Increase in net assets resulting from operations 13,075,782 1,712,978
Distributions to shareholders from:
Net investment income (8,019,676) (1,526,827)
Net realized gain on investments (993,330) (619,788)
Increase in net assets from Fund share transactions 154,355,190 46,199,309
------------ -----------
Increase in net assets 158,417,966 45,765,672
Net Assets:
Beginning of year 66,079,063 20,313,391
------------ -----------
End of year (including undistributed
net investment income of $3,202,372
and $918,187 respectively) $224,497,029 $66,079,063
============ ===========
</TABLE>
See notes to financial statements.
16
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data for a share of
common stock outstanding throughout each period shown, total investment return,
ratios to average net assets and other supplemental data. This information has
been derived from information in the financial statements.
<TABLE>
<CAPTION>
For the Years Ended June 30,
-------------------------------------------
1997 1996 1995
-------- ------- -------
<S><C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 104.83 $107.36 $100.00
-------------------------------------------
Net investment income(A) 5.49 5.41 3.86
Net realized and unrealized gain (loss) on investments,
options and futures 3.00 (0.06) 6.02
-------------------------------------------
Total from investment operations 8.49 5.35 9.88
-------------------------------------------
Distributions to shareholders from:
Net investment income (5.42) (5.35) (2.47)
Net realized gain on investments (0.71) (2.53) (0.05)
-------------------------------------------
Total distributions (6.13) (7.88) (2.52)
-------------------------------------------
Net asset value, end of year $ 107.19 $104.83 $107.36
===========================================
Total return(A) 8.32% 5.15% 10.08%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(A) .47% .50% .50%
Net investment income(A) 6.33% 6.28% 6.11%
Portfolio turnover rate 419.26% 841.89% 764.45%
Net assets, end of year (in thousands) $224,497 $66,079 $20,313
</TABLE>
(A) Net of investment advisory fees waived pursuant to a voluntary expense
limitation of 0.50% to August 5, 1996 and 0.45% thereafter. In the absence
of this limitation, the ratio of expenses to average net assets would have
been 0.55% for the year ended June 30, 1997, 1.03% for the year ended June
30, 1996 and 1.60% for the year ended June 30 1995.
See notes to financial statements.
17
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
The Western Asset Trust, Inc. ("Corporation") is registered under the Investment
Company Act of 1940, as amended. The Western Asset Trust Intermediate Portfolio
("Fund"), formerly known as Western Asset Trust Intermediate Duration Portfolio,
a diversified, open-end management investment company, is one of the portfolios
established by the Corporation. The Fund was organized on May 16, 1990 and had
no operations prior to July 1, 1994, other than those related to organizational
matters.
Security Valuation
Portfolio securities are valued based upon market quotations. When market
quotations are not readily available, securities are valued based on prices
received from recognized broker-dealers in the same or similar securities. The
amortized cost method of valuation is used for debt obligations with 60 days or
less remaining to maturity.
Options and Futures
The current market value of a traded option is the last sale price or, in the
absence of a sale, the mean between the closing bid and asked price. Futures
contracts are marked-to-market on a daily basis. As the contract's value
fluctuates, payments known as variation margin are made to or received from the
futures commission merchant.
Distributions to Shareholders
Net investment income for dividend purposes is recorded on the accrual basis and
consists of interest income less expenses. Bond premium and original issue
discount are amortized for financial reporting and tax purposes using the
effective interest method over the period to maturity of the security and serve
to reduce or increase interest income.
Distributions are determined on a tax basis and may differ from net investment
income and realized capital gains for financial reporting purposes.
Security Transactions
Security transactions are recorded on the trade date. Realized gains and losses
from security transactions are reported on an identified cost basis.
Deferred Organizational Expense
Deferred organizational expenses of $53,920 are being amortized on a
straight-line basis through June 1999.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
1. Significant Accounting Policies - continued
Federal Income Taxes
No provision for federal income or excise taxes is required since the Fund
intends to continue to qualify as a regulated investment company and distribute
all of its taxable income to its shareholders.
Use of Estimates
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
2. Financial Instruments:
As part of the Fund's investment program, the Fund utilizes repurchase
agreements, options and futures contracts. The nature and risk of these
financial instruments and the reasons for using them are set forth more fully in
the Corporation's Prospectus and Statement of Additional Information.
Repurchase Agreements
All repurchase agreements are fully collateralized by obligations issued by the
U.S. Government or its agencies and such collateral is in the possession of the
Fund's custodian. Risks arise from the possible delay in recovery or potential
loss of rights in the collateral should the issuer of the repurchase agreement
fail financially.
Option Transactions
A call option gives the option holder the right to purchase the underlying
security at a specified price until a specified date. A put option gives the
option holder the right to sell the underlying security at a specified price
until a specified date. Risks arise from the possible illiquidity of the options
market and from movements in security values. Call and put options written by
the Fund and related premiums received during the period are as follows:
<TABLE>
<CAPTION>
Calls Puts
------------------------ -------------------------
Contracts Premiums Contracts Premiums
- -------------------------------------------------------------------------- -------------------------
<S><C>
Options outstanding at June 30, 1996 - $ - - $ -
Options written 3,402 140,080 10,481 164,697
Options closed (456) (126,238) (6,578) (115,963)
Options expired (1,960) (8,575) - -
Options exercised (986) (5,267) (3,860) (17,463)
- -------------------------------------------------------------------------- -------------------------
Options outstanding at June 30, 1997 - $ - 43 $ 31,271
========================================================================== =========================
</TABLE>
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
2. Financial Instruments - continued
Futures
The fund has entered into futures contracts in connection with its interest rate
management strategy. Risks arise from the possible illiquidity of the futures
market and from the possibility that a change in the value of a contract may not
correlate with changes in interest rates. The open long and short futures
positions and related appreciation or depreciation at June 30, 1997 are
described at the end of the "Portfolio of Investments", page 13.
3. Portfolio Transactions:
Purchases and sales of portfolio securities (excluding short-term, U.S.
Government securities, written and purchased options and futures contracts) for
the year ended June 30, 1997, aggregated $286,250,233 and $167,933,128,
respectively. Purchases and sales of U.S. Government securities aggregated
$508,029,037 and $491,527,157, respectively for the same period.
At June 30, 1997, the cost of securities for federal income tax purposes was
$227,609,434. Aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost was $1,581,038 and aggregate
gross unrealized depreciation for all securities in which there was an excess of
tax cost over value was $770,536.
4. Fund Share Transactions:
At June 30, 1997, there were 100,000,000 Fund shares authorized at $.001 par
value. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
For the Years Ended June 30,
----------------------------------------------------------------------
1997 1996
-------------------------------- ------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------- ------------------------------
<S><C>
Sold 1,492,047 $157,504,457 478,708 $50,184,057
Reinvestment of distributions 84,817 8,937,482 20,430 2,145,317
Repurchased (112,844) (12,086,749) (57,990) (6,130,066)
- ------------------------------------------------------------------------- ------------------------------
Net increase 1,464,020 $154,355,190 441,148 $46,199,308
========================================================================= ==============================
</TABLE>
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
5. Transactions with Affiliates:
The Fund has an administration agreement with Legg Mason Fund Adviser, Inc.
("Administrator"), a corporate affiliate of Legg Mason Wood Walker, Incorporated
("Legg Mason"), a member of the New York Stock Exchange and the distributor for
the Fund. Under this agreement, the Administrator provides the Fund with
administrative services for which the Fund pays a fee at an annual rate of 0.05%
of average daily net assets of the Fund. At June 30, 1997, $8,964 was due to the
Administrator.
Western Asset Management Company ("Adviser"), a corporate affiliate of the
Administrator and Legg Mason, serves as investment adviser to the Fund. The
Adviser is responsible for the actual investment activity of the Fund, for which
the Fund pays a fee at an annual rate of 0.50% of average daily net assets of
the Fund. The Adviser has voluntarily agreed to indefinitely limit its fee to
0.35% of average daily net assets and to further waive its fees and reimburse
the Fund to the extent necessary to limit the total expenses to an annual rate
of 0.45% of the Fund's average daily net assets. Pursuant to this agreement,
advisory fees of $158,505 were waived for the year ended June 30, 1997, and
$34,747 was due to the Adviser at June 30, 1997.
21
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