WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
REPORT TO SHAREHOLDERS
FOR THE SIX MONTHS ENDED
DECEMBER 31, 1996
<PAGE>
February 25, 1997
Dear Shareholder:
Enclosed are the mid-year financial statements for the Western Asset
Trust Core Portfolio, covering the period July 1 - December 31, 1996.
Now in its seventh year of operation, the fund continues to enjoy
positive investment results relative to its benchmark both for this period and
since inception. Total assets have risen to over $550 million, with more than 40
participants.
The principal factors behind the fund's recent performance, when it
returned 5.4% (net of all fees) versus the broad market's 4.9% return, were
its longer than market duration posture, which was rewarded by declining
interest rates, and its emphasis on corporate and mortgage-backed securities,
which profited from a narrowing of their yield spreads versus other domestic
market sectors.
Please feel free to call if you have any questions.
Sincerely,
/s/ W. Curtis Livingston
------------------------
W. Curtis Livingston
President
Enclosure
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS
December 31, 1996
(Amounts in Thousands)
(Unaudited)
Principal
Amount Value
--------- -----
CORPORATE BONDS AND NOTES -12.2%
Banking and Finance - 1.5%
General Motors Acceptance Corp.
0%(D) 6/15/15 $ 14,900 $ 3,894
JPM Capital Trust I
7.54% 1/15/27 3,800 3,714
Northern Trust Company
6.70% 9/15/05 300 296
--------
7,904
--------
Food and Beverage - 1.8%
Coca-Cola Company
7.875% 9/15/98 100 103
Philip Morris Companies, Inc.
8.75% 6/1/01 100 107
RJR Nabisco, Inc.
8.75% 4/15/04 320 323
8.75% 8/15/05 3,400 3,415
8.75% 7/15/07 5,530 5,522
--------
9,470
--------
Industrial - 4.7%
Loews Corporation
8.25% 1/15/07 2,100 2,175
7.625% 6/1/23 8,459 8,300
Millenium America Incorporated
7.625% 11/15/26 3,800 3,675
TCI Communications Incorporated
8.75% 8/1/15 11,620 11,479
--------
25,629
--------
Media and Entertainment - 3.5%
News America Holdings Incorporated
7.75% 12/1/45 6,500 6,053
8.25% 10/17/96 4,100 4,044
Time Warner Entertainment Company, L.P.
8.375% 7/15/33 6,070 6,092
2
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS -Continued
(Amounts in Thousands)
Principal
Amount Value
--------- -----
CORPORATE BONDS AND NOTES -Continued
Media and Entertainment - Continued
Time Warner Incorporated
8.18% 8/15/07 $ 600 $ 615
6.85% 1/15/26 2,000 1,950
--------
18,754
--------
Oil and Gas - 0.2%
Phillips Petroleum Company
8.49% 1/1/23 1,000 1,057
--------
Utilities - 0.5%
Public Service Electric & Gas Company
6.125% 8/1/02 200 194
System Energy Resources, Inc
7.43% 1/15/11 2,726 2,642
--------
2,836
--------
Total Corporate Bonds and Notes
(Identified Cost - $65,696) 65,650
- ------------------------------------------------------------------------------
ASSET-BACKED SECURITIES - 5.5%
Fixed-rate Securities - 2.1%
Auto Info Receivable 96-1(G)
6.53% 10/30/01 2,761 2,768
Midstate Trust II Class A-4
9.625% 4/1/03 700 763
Northwest Airlines
7.67% 1/2/15 6,000 6,215
Premier Auto Trust
6.575% 10/6/00 1,250 1,262
Rural Housing Trust 1987 - 1
3.33% 10/1/28 58 55
-------
11,063
-------
Stripped Securities(C) - 0.4%
Option One CTS Arm Trust
3.039%1 3/25/01 39,855 2,067
-------
3
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
--------- -----
ASSET-BACKED SECURITIES - Continued
Indexed Securities(B) - 3.0%
First Usa Credit Card Master Trust(G)
6.531% 2/10/06 $ 10,000 $ 9,950
Matterhorn One Limited Trust Certificates(G)
5.981% 6/21/06 6,434 6,442
--------
16,392
--------
Total Asset-Backed Securities
(Identified Cost - $29,606) 29,522
- -------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES - 8.3%
Fixed-rate Securities - 5.5%
Asset Securitization Corporation
6.92% 2/14/29 8,384 8,376
DLJ Mortgage Acceptance Corporation
7.29% 11/12/21 8,100 8,222
Nomura Asset Securities Corporation
7.07% 4/13/36 3,014 3,046
7.12% 4/13/36 4,500 4,545
Resolution Trust Corporation
8.15% 1/25/21 427 426
9.20% 6/25/24 5,116 5,141
--------
29,756
--------
Variable-rate Securities(A) - 2.8%
Resolution Trust Corporation
6.881% 5/25/21 1,612 1,608
6.947% 10/25/21 3,303 3,207
6.963% 6/25/24 8,000 7,841
7.342% 10/25/28 256 251
7.981% 9/25/29 2,096 2,099
--------
15,006
--------
4
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
--------- -----
MORTGAGE-BACKED SECURITIES - Continued
Stripped Security(C) - N.M.
Structured Mortgage Asset Residential Trust
.138%(1) 1/25/23 $ 32,065 $ 85
---------
Total Mortgage-backed Securities
(Identified Cost - $44,429) 44,847
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 35.9%
Fixed-rate Securities - 35.0%
Federal Home Loan Bank
7.50% 12/6/10 500 490
7.30% 12/27/10 750 729
7.10% 2/28/11 500 482
---------
1,701
---------
United States Treasury Bonds
6.00% 2/15/26 67,490 61,427
6.75% 8/15/26 40,620 40,925
6.50% 11/15/26 300 294
---------
102,646
---------
United States Treasury Notes
5.875% 11/15/99 32,500 32,373
6.875% 3/31/00 18,290 18,702
6.625% 7/31/01 19,090 19,394
6.25% 10/31/01 13,990 14,003
---------
84,472
---------
Stripped Securities(C) - 0.9%
Federal National Mortgage Association
0%(D,E) 3/9/02 1,100 1,089
---------
5
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
--------- -----
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - Continued
Stripped Securities(C) - Continued
Resolution Funding Corporation
0%(1) 1/15/17 $ 3,222 $ 804
0%(1) 4/15/17 2,426 595
0%(2) 10/15/19 7,260 1,484
---------
2,883
---------
Tennessee Valley Authority
0%(1) 11/1/19 3,064 575
---------
Total U.S. Government and Agency Obligations
(Identified Cost - $190,677) 193,366
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - 25.7%
Fixed-rate Securities - 22.7%
Federal Home Loan Mortgage Corporation
8.25% 8/1/01 68 70
8.44% 10/27/04 500 509
8.40% 1/15/05 56 56
6.75% 10/15/05 789 795
9.30% 4/15/19 2,778 3,083
7.00% 4/1/24 to 4/1/26 43,173 42,404
6.50% 3/1/26 to 5/1/26 22,039 21,077
---------
67,994
---------
Federal Housing Authority USGI #68
7.43% 3/1/21 314 306
---------
Federal National Mortgage Association
9.00% 9/25/04 3,963 4,123
7.00% 4/25/05 1,430 1,444
8.80% 1/25/19 2,000 2,086
9.50% 7/25/20 3,715 4,056
7.00% 1/1/27(I) 26,600 26,010
---------
37,719
---------
6
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
--------- -----
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - Continued
Fixed-rate Securities - Continued
Government National Mortgage Association
10.00% 11/15/09 $ 10 $ 11
8.00% 11/15/26 9,898 10,096
8.00% 1/1/27(I) 6,000 6,120
--------
16,227
--------
Variable-rate Security(A) - 1.8%
Government National Mortgage Association
7.125% 4/20/25 9,471 9,691
--------
Stripped Securities(C) - 1.2%
Federal Home Loan Mortgage Corporation
10.00%(1) 3/1/21 3,177 878
0%(2) 7/15/22 523 403
0%(2) 9/15/22 1,912 1,785
--------
3,066
--------
Federal National Mortgage Association
9.50%(1) 2/1/17 380 115
1009.25%(1) 8/25/21 17 497
0%(2) 5/25/22 3,693 2,955
--------
3,567
--------
Total U.S. Government Agency Mortgage-Backed
Securities
(Identified Cost - $137,474) 138,570
- -------------------------------------------------------------------------------
YANKEE BONDS(F) - 2.4%
Fixed-rate Securities - 1.6%
Banque Paribas
8.35% 6/15/07 3,250 3,483
6.875% 3/1/09 2,100 1,990
YPF Sociedad Anonima
7.50% 10/26/02 3,210 3,245
--------
8,718
--------
7
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
--------- -----
YANKEE BONDS(F) - Continued
Indexed Security(B) - 0.8%
United Mexican States(G)
7.563% 8/6/01 $ 4,500 $ 4,509
--------
Total Yankee Bonds
(Identified Cost - $13,012) 13,227
- -------------------------------------------------------------------------------
Shares
------
COMMON STOCK - 2.2%
Blackrock 2001 Term Trust, Inc. 1,492 11,748
--------
Total Common Stock
(Identified Cost - $11,766) 11,748
- -------------------------------------------------------------------------------
PREFERRED STOCK - 0.8%
News Corporation Limited(G)
5.00% 11/12/16 7,300 4,503
--------
Total Preferred Stock
(Identified Cost - $4,610) 4,503
- -------------------------------------------------------------------------------
WARRANTS(J) - 0.4%
News Corporation Limited(G) 73 2,359
--------
Total Warrants
(Identified Cost - $2,697) 2,359
- -------------------------------------------------------------------------------
8
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S><C>
SHORT-TERM INVESTMENTS - 9.4%
Corporate - 2.4%
Fixed-rate Security - 2.4%
ICI Wilmington Incorporated
7.625% 3/15/97 $ 100 $ 100
---------
Indexed Security(B) - N.M.
Ford Motor Credit Company
5.50% 3/14/97 12,995 12,995
---------
U. S. Government Obligations and Agency - 0.4%
Fixed-rate Security - 0.3%
United States Treasury Bill
5.35% 1/9/97 1,750 1,748(H)
---------
Indexed Security(B) - 0.1%
Student Loan Marketing Association
5.57% 11/20/97 250 251
---------
Repurchase Agreement - 6.6%
J.P. Morgan Securities, Inc.
6.80% dated 12/31/96, to be repurchased at $35,487
on 1/2/97 (Collateral: $15,225 Tennessee Valley Authority
Bonds, 6.75% to 8.625% due 11/1/25 to 11/15/29, value $15,583;
$4,000 Student Loan Marketing Association Medium-term
note, 5.20% due 2/26/99, value $4,103; $9,950 Federal National
Mortgage Association Medium-term notes, 6.45% to 6.71%
due 10/14/99 to 7/24/01, value $10,475; $6,595 Federal Home
Loan Mortgage Association Medium-term note 7.176% due
10/30/06, value $6,754) 35,474 35,474
---------
Total Short-term Investments
(Identified Cost - $50,539) 50,568
- -----------------------------------------------------------------------------------------------
Total Investments - 102.8%
(Identified Cost - $550,506) 554,360
- -----------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Expiration Actual Appreciation/
Date Contracts (Depreciation)
OPTION WRITTEN
Treasury Bond Future Call
Strike Price $116.00 February 97 205 $ 185
-----
FUTURES CONTRACT PURCHASED
Five-year Treasury Note Future March 97 633 (575)
-----
FUTURES CONTRACTS SOLD
Ten-year Treasury Note Future March 97 78 114
Treasury Bond Future March 97 289 504
-----
618
=====
(A)The coupon rates shown on variable rate securities are the rates at December
31, 1996. These rates vary with the weighted average coupon of the underlying
loans.
(B)Indexed Security - The rate of interest earned on these securities is tied to
an index such as the Cost of Funds Index (COFI), three month Treasury Bill
rate or London Interbank Offered Rate (LIBOR). The coupon rate shown is the
rate at December 31, 1996.
(C)Stripped Security - A security with interest-only or principal-only payment
streams, denoted by the superscript 1 and 2, respectively. For interest-only
securities, the amount shown as principal is the notional balance used to
calculate the amount of interest due.
(D)Zero-coupon Bond - A bond with no periodic interest which is sold at such a
discount as to produce a current yield-to-maturity.
(E)This particular zero-coupon bond is callable on March 9, 1997. If not called,
interest will accrue at 7.89% until maturity.
(F)Yankee Bond - Dollar denominated bond issued in the U.S by foreign entities.
(G)Rule 144a Security - A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except to
qualified institutional buyers.
(H)Collateral to cover futures sold.
(I)When-issued Security - Security purchased on a delayed delivery basis. Final
settlement amount and maturity date have not yet been announced.
(J)Non-income producing.
N.M.Not meaningful.
See notes to financial statements.
10
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF ASSETS AND LIABLITIES
December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
<S><C>
Assets
Investments at value (Identified Cost -$550,505,640) $ 554,359,548
Receivable for:
Investments sold 11,134,542
Fund shares sold 208,000
Futures variation margin 125,469
Interest receivable 6,946,711
Dividends receivable 98,038
Other assets 16,072
-------------
Total assets 572,888,380
Liabilities
Payable for:
Investments purchased 33,545,557
Income distribution due 6,857
Options written, at market (premiums received $291,119) 105,703
Due to adviser and administrator 205,746
Accrued expenses 22,846
-------------
Total liabilities 33,886,709
-------------
Net assets $ 539,001,671
=============
Analysis of Net Assets
Common stock at par value $.001 per share, authorized
1,000,000,000 shares; issued and outstanding 4,839,175 shares $ 4,839
Accumulated paid-in capital 531,752,582
Overdistribution of net investment income (1,657,095)
Undistributed net realized gain on investments, options and futures 4,819,257
Unrealized appreciation of investments, options and futures 4,082,088
-------------
Net assets $ 539,001,671
=============
Net asset value, offering price, and redemption price per share $111.38
=======
</TABLE>
See notes to financial statements.
11
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
<S><C>
Investment Income:
Interest $ 17,709,037
Dividend 91,779
------------
$ 17,800,816
Expenses:
Advisory fee 1,022,587
Administrative fee 127,823
Custodian fee 71,500
Registration fees 19,930
Legal and audit fees 18,130
Directors' fees 7,937
Reports to shareholders 4,061
Transfer agent and shareholder servicing expense 1,841
Other expenses 8,650
------------
1,282,459
Less fees waived (4,813)
------------
Total expenses, net of waivers 1,277,646
------------
Net Investment Income 16,523,170
Net Realized and Unrealized Gain on Investments:
Realized gain on investments, options and futures 6,781,223
Unrealized appreciation of investments options and futures 3,310,961
------------
Net Realized and Unrealized Gain on Investments 10,092,184
------------
Increase in Net Assets Resulting from Operations $ 26,615,354
============
</TABLE>
See notes to financial statements.
12
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
Six Months Ended Year Ended
December 31, 1996 June 30, 1996
----------------- -------------
(Unaudited)
<S><C>
Change in Net Assets:
Net investment income $ 16,523,170 $ 24,557,119
Net realized gain on investments,
options and futures 6,781,223 2,279,243
Change in unrealized appreciation of
investments, options and futures 3,310,961 (9,811,62)
------------- -------------
Increase in net assets resulting from operations 26,615,354 17,024,734
Distributions to shareholders from:
Net investment income (22,891,328) (22,394,910)
Net realized gain on investments (306,044) (1,507,66)
Increase in net assets from Fund share
transactions 81,884,221 123,803,625
------------- -------------
Increase in net assets 85,302,203 116,925,788
Net Assets:
Beginning of period 453,699,468 336,773,680
------------- -------------
End of period (including (over)/under
distributed net investment income
of $(1,657,095)and $7,058,516, respectively) $ 539,001,671 $ 453,699,468
============= =============
</TABLE>
See notes to financial statements.
13
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data for a share of
common stock outstanding, total investment return, ratios to average net assets
and other supplemental data. This information has been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
For the
Six Months Ended
December 31, For the Years Ended June 30,
1996 1996 1995 1994 1993 1992
-------------------------------------------------------------------------------
(Unaudited)
<S><C>
Per Share Operating Performance:
Net asset value, beginning of period $ 110.46 $ 112.17 $ 105.02 $ 116.64 $ 112.04 $ 106.28
-------------------------------------------------------------------------------
Net investment income(A) 3.44 6.70 6.82 5.64 6.57 6.90
Net realized and unrealized gain (loss)
on investments, options and futures 2.48 (1.36) 7.19 (6.28) 8.71 8.72
-----------------------------------------------------------------------------
Total from investment operations 5.92 5.34 14.01 (0.64) 15.28 15.62
-----------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (4.93) (6.61) (6.86) (6.11) (6.72) (7.11)
Net realized gain on investments (0.07) (0.44) - (4.87) (3.96) (2.75)
-----------------------------------------------------------------------------
Total distributions (5.00) (7.05) (6.86) (10.98) (10.68) (9.86)
------------------------------------------------------------------------------
Net asset value, end of period $ 111.38 $ 110.46 $ 112.17 $ 105.02 $ 116.64 $ 112.04
=============================================================================
Total return(A) 5.38%(B) 4.86% 14.12% -0.89% 14.52% 15.61%
Ratios/Supplemental Data:
Ratios to average net assets:
Expenses(A) 0.50%(C) 0.50% 0.50% 0.50% 0.50% 0.50%
Net investment income(A) 6.5%(C) 6.3% 7.0% 6.0% 6.0% 6.8%
Portfolio turnover rate 378.4%(C) 266.0% 257.9% 272.5% 313.1% 299.7%
Net assets, end of period
(in thousands) $539,002 $453,699 $336,774 $205,959 $135,886 $92,892
</TABLE>
(A) Net of investment advisory fees waived pursuant to a voluntary expense
limitation of 0.50%, including a voluntary administrative fee limitation of
0.05%.
(B) Not Annualized
(C) Annualized
See notes to financial statements.
14
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 Core Portfolio
("Fund"), formerly known as Western Asset Trust Full Range 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 September 4, 1990, 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 a contract's value
fluctuates, payments known as variation margin are made to or received from the
futures commission merchant.
Dividends 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.
Security Transactions
Security transactions are recorded on the trade date. Realized gains and losses
from security transactions are reported on an identified cost basis.
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.
15
<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.
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 were as follows:
<TABLE>
<CAPTION>
Calls Puts
----------------------------------------------------
Contracts Premiums Contracts Premiums
----------------------------------------------------
<S><C>
Options outstanding at June 30, 1996 412 $ 302,693 - $ -
Options written 1,340 841,405 259 109,855
Options closed (1,104) (681,488) (259) (109,855)
Options expired (156) (32,955) - -
Options exercised (287) (138,536) - -
---------------------- ----------------------
Options outstanding at December 31, 1996 205 $ 291,119 - -
====================== ======================
</TABLE>
16
<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 December 31, 1996 are
described at the end of the "Portfolio of Investments", page 11.
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 six months ended December 31, 1996, aggregated $282,998,760 and
$274,541,813, respectively. Purchases and sales of U.S. Government securities
aggregated $755,442,023 and $689,549,392, respectively for the same period.
At December 31, 1996, the cost of securities for federal income tax purposes was
$550,505,560. Aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost was $7,167,467 and aggregate
gross unrealized depreciation for all securities in which there was an excess of
tax cost over value was $3,313,480.
4. Fund Share Transactions:
At December 31, 1996, there were 100,000,000 Fund shares authorized at $.001 par
value. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
For the Six Months Ended For the Year Ended
December 31, 1996 June 30, 1996
------------------------- --------------------------
Shares Amount Shares Amount
------------------------- --------------------------
<S><C>
Sold 767,424 $ 85,791,912 1,015,043 $ 113,947,873
Reinvestment of distributions 185,020 20,802,344 205,591 22,867,433
Repurchased (220,638) (24,710,035) (115,482) (13,011,681)
- -------------------------------------------------------------- --------------------------
Net increase 731,806 $ 81,884,221 1,105,152 $ 123,803,625
============================================================== ==========================
</TABLE>
17
<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 0.10% of average daily net assets of the Fund. The Administrator has
voluntarily agreed to indefinitely limit its annual fee to 0.05% of the Fund's
average daily net assets. At December 31, 1996, $22,865 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 0.40% of average daily net assets of
the Fund. The Adviser has voluntarily agreed to indefinitely waive its fees and
reimburse the Fund to the extent necessary to limit the total expenses to an
annual rate of 0.50% of the Fund's average daily net assets. Pursuant to this
agreement, advisory fees of $4,813 were waived for the six months ended December
31, 1996, and $182,881 was due to the Adviser at December 31, 1996.
18
