|
|
|
|
|
|
|
|
|
|
Previous: WESTERN ASSET TRUST INC, N-30D, 1997-08-29 |
Next: SCOTTISH WIDOWS INTERNATIONAL FUND, NSAR-A, 1997-08-29 |
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED
JUNE 30, 1997
<PAGE>
August 20, 1997
Dear Shareholder:
Enclosed are financial statements for the Western Asset Trust Core Portfolio for
the year ending June 30, 1997.
I am pleased to report that the fund continues to produce positive investment
results returning 8.3% (net) versus the Salomon Brothers Broad Market Index
return of 8.2% for the period. As we draw close to the end of the fund's seventh
year of operation, total assets stand at just over $500 million, with more than
60 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
CORE 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 exceeded that of its benchmark, the Salomon Brothers Broad Market Index,
returning 8.3% (net) vs. 8.2%, 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.
[Graph Appears Here. See Plots Points Below]
Average Annual Total Return
WAT Core SBBI
1 Year 8.3% 8.2%
3 Years 9.0% 8.5%
5 Years 8.0% 7.2%
Since Inception 9.8% 8.8%
Western Asset Trust Salomon Brothers
Core Portfolio (net) Broad Market Index
9/30/90 10,000 10,000
12/31/90 10,510 10,507
3/31/91 10,856 10,783
6/30/91 11,050 10,977
9/30/91 11,711 11,602
12/31/91 12,405 12,184
3/31/92 12,274 12,043
6/30/92 12,775 12,532
9/30/92 13,375 13,073
12/31/92 13,379 13,110
3/31/93 14,102 13,655
6/30/93 14,629 14,034
9/30/93 15,191 14,404
12/31/93 15,232 14,407
3/31/94 14,837 14,004
6/30/94 14,500 13,868
9/30/94 14,583 13,943
12/31/94 14,573 13,997
3/31/95 15,476 14,705
6/30/95 16,546 15,607
9/30/95 16,880 15,903
12/31/95 17,629 16,594
3/31/96 17,242 16,303
6/30/96 17,429 16,383
9/30/96 17,767 16,689
12/31/96 18,371 17,193
3/31/97 18,142 17,104
6/30/97 18,871 17,721
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1997
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S> <C>
CORPORATE BONDS AND NOTES -13.0%
Banking and Finance - 2.4%
BNY Capital I
7.97% 12/31/26 $ 5,000 $ 5,011
General Motors Acceptance Corp.
0% (A) 6/15/15 14,900 4,217
J.P. Morgan & Company
6.17% (B) 2/15/12 2,000 1,956
JPM Capital Trust II
7.95% 2/1/27 1,000 1,001
-------------
12,185
-------------
Food and Beverage - 1.9%
Coca Cola Company
7.875% 9/15/98 100 102
Philip Morris Companies, Inc.
8.75% 6/1/01 100 106
RJR Nabisco, Inc.
8.75% 4/15/04 320 325
8.75% 8/15/05 2,100 2,131
8.50% 7/1/07 1,300 1,301
8.75% 7/15/07 5,530 5,600
-------------
9,565
-------------
Industrial - 5.3%
Continental Cablevision Incorporated
9.00% 9/1/08 3,200 3,577
Loews Corporation
7.625% 6/1/23 8,459 8,049
TCI Communications Incorporated
8.75% 8/1/15 11,620 12,179
Texaco Capital Incorporated
7.75% 2/15/33 3,000 2,982
-------------
26,787
-------------
</TABLE>
3
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S> <C>
CORPORATE BONDS AND NOTES - Continued
Media and Entertainment - 1.2%
News America Holdings Incorporated
8.25% 10/17/2096 $ 4,100 $ 4,060
Time Warner Incorporated
6.85% 1/15/26 2,000 1,967
-------------
6,027
-------------
Oil and Gas - 0.2%
Phillips Petroleum Company
8.49% 1/1/23 1,000 1,042
-------------
Telephone - 1.5%
U.S. West Capital Funding Incorporated
7.90% 2/1/27 5,120 5,172
7.95% 2/1/2097 2,610 2,630
-------------
7,802
-------------
Utilities - 0.5%
System Energy Resources, Inc.
7.43% 1/15/11 2,726 2,643
-------------
Total Corporate Bonds and Notes
(Identified Cost - $65,358) 66,051
- -----------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES - 8.1%
Fixed-rate Securities - 4.1%
Automobile Info Receivable 96-1(C)
6.53% 10/30/01 1,852 1,806
Chevy Chase 1997-A
7.65% 1/20/08 12,350 12,336
Midstate Trust II Class A-4
9.625% 4/1/03 700 750
Premier Auto Trust
6.575% 10/6/00 1,600 1,607
</TABLE>
4
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S> <C>
ASSET-BACKED SECURITIES - Continued
Fixed-rate Securities - Continued
Rural Housing Trust 1987 - 1
3.33% 10/1/28 $ 49 $ 46
Union Acceptance Corp.
6.70% 6/10/03 4,500 4,436
-------------
20,981
-------------
Stripped Securities(D) - 0.3%
Option One CTS Arm Trust
3.040%(1) 3/25/01 32,656 1,184
-------------
Indexed Securities (B) - 3.7%
First USA Credit Card Master Trust(C)
5.868% 2/10/06 10,000 10,025
Matterhorn One Limited Trust Certificates(C)
6.138% 6/21/06 3,848 3,854
Student Loan Marketing Association
5.84% 10/25/12 5,000 4,972
-------------
18,851
-------------
Total Asset-backed Securities
(Identified Cost - $42,227) 41,016
- -----------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES - 8.8%
Fixed-rate Securities - 5.9%
Asset Securitization Corporation
6.92% 2/14/29 8,310 8,295
Chase Commercial Mortgage Securities Corp.(C)
7.37% 2/19/07 3,676 3,732
Macerich SCG Funding Limited Partnership(C)
7.08% 3/15/06 6,000 6,041
</TABLE>
5
<PAGE>
WESTERN ASSET TRUST, INC.
CORE 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 $ 2,953 $ 2,984
7.12% 4/13/36 4,500 4,526
Resolution Trust Corporation
9.20% 6/25/24 4,294 4,314
-------------
29,892
-------------
Variable-rate Securities(E) - 2.9%
Resolution Trust Corporation
6.838% 5/25/21 1,468 1,454
6.93% 10/25/21 3,303 3,299
6.904% 6/25/24 8,000 7,948
7.341% 10/25/28 236 234
7.971% 9/25/29 1,897 1,911
-------------
14,846
-------------
Stripped Securities(D)- N.M.
Structured Mortgage Asset Residential Trust
.134%(1) 1/25/23 30,327 76
-------------
Total Mortgage-backed Securities
(Identified Cost - $44,163) 44,814
- -----------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 27.9%
Fixed-rate Securities - 22.2%
Federal Home Loan Bank
7.50% 12/6/10 500 488
7.30% 12/27/10 750 726
7.10% 2/28/11 500 480
-------------
1,694
-------------
</TABLE>
6
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - Continued
Fixed-rate Securities - Continued
United States Treasury Bonds
6.50% 11/15/26 $ 1,530 $ 1,467
6.625% 2/15/27 81,380 79,626
---------
81,093
---------
United States Treasury Notes
6.00% 6/30/99 10,900 10,885
6.375% 9/30/01 19,100 19,103
---------
29,988
---------
Stripped Securities(D)- 0.5%
Resolution Funding Corporation
0%(2) 10/15/19 10,000 2,071
---------
Tennessee Valley Authority
0%(2) 11/1/19 3,064 588
---------
Indexed Securities(J)- 5.2%
United States Treasury Inflation-Indexed Security
3.375% 1/15/07 26,876 26,229
---------
Total U.S. Government and Agency Obligations
(Identified Cost - $140,705) 141,663
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S> <C>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - 25.9%
Fixed-rate Securities - 22.3%
Federal Home Loan Mortgage Corporation
8.25% 8/1/01 $ 49 $ 50
8.44% 10/27/04 500 504
6.75% 10/15/05 604 607
9.30% 4/15/19 2,533 2,671
7.00% 4/1/24 to 1/1/27 36,365 35,754
6.50% 3/1/26 6,732 6,457
-------------
46,043
-------------
Federal Housing Authority USGI #68
7.43% 3/1/21 312 298
-------------
Federal National Mortgage Association
7.00% 1/1/27 to 3/1/27 26,569 26,028
7.50% 7/1/27(F) 24,910 24,964
-------------
50,992
-------------
Government National Mortgage Association
10.00% 11/15/09 9 10
8.00% 10/15/26 to 2/15/27 15,686 16,049
-------------
16,059
-------------
Stripped Securities(D)- 1.1%
Federal Home Loan Mortgage Corporation
10.00%(1) 3/1/21 2,800 796
0%(2) 7/15/22 473 357
0%(2) 9/15/22 1,495 1,387
-------------
2,540
-------------
</TABLE>
8
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S> <C>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - Continued
Stripped Securities(D) - Continued
Federal National Mortgage Association
9.50%(1) 2/1/17 $ 335 $ 102
1009.25%(1) 8/25/21 16 550
0%(2) 5/25/22 3,279 2,562
-------------
3,214
-------------
Indexed Securities(B) - 2.5%
Government National Mortgage Association
6.875% 12/20/21 963 990
7.00% 2/20/22 1,542 1,585
7.125% 4/20/25 to 6/20/25 10,001 10,298
-------------
12,873
-------------
Total U.S. Government Agency Mortgage-backed
Securities
(Identified Cost - $130,614) 132,019
- -----------------------------------------------------------------------------------------------------------------------
YANKEE BONDS(G) - 1.5%
Fixed-rate Securities - 0.6%
YPF Sociedad Anonima
7.50% 10/26/02 2,986 3,025
-------------
Indexed Securities(B) - 0.9%
United Mexican States(C)
7.875% 8/6/01 4,500 4,514
-------------
Total Yankee Bonds
(Identified Cost - $7,454) 7,539
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Shares Value
--------- -----
<S> <C>
COMMON STOCKS AND EQUITY INTERESTS - 5.7%
Blackrock 2001 Term Trust, Inc. 1,840 $ 14,952
Home Ownership Funding(C) 4 4,352
Kenwood Properties Incorporated(C) 8 7,830
News Corporation Limited(C) 1,820 1,207
News Corporation Limited Warrants(C,H) 18 631
-------------
Total Common Stocks and Equity Interests
(Identified Cost - $28,787) 28,972
- -----------------------------------------------------------------------------------------------------------------------
Principal
Amount
---------
SHORT-TERM INVESTMENTS - 13.2%
Corporate - 10.4%
CSX Corporation
5.77% 7/14/97 $ 5,000 4,990
Edison Funding Co.
5.84% 7/22/97 5,000 4,983
Hanson Finance PLC
5.77% 7/14/97 5,000 4,990
Levi Strauss & Company
5.80% 7/11/97 11,500 11,482
5.80% 7/14/97 5,000 4,990
5.81% 7/16/97 6,703 6,687
Nabisco Incorporated
5.71% 7/14/97 5,000 4,990
5.73% 7/14/97 10,000 9,979
-------------
53,091
-------------
</TABLE>
10
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S> <C>
SHORT-TERM INVESTMENTS - Continued
U. S. Government and Agency Obligations - 2.7%
Fixed-rate Securities - 2.5%
Federal Home Loan Mortgage Corporation
5.42% 7/14/97 $ 10,000 $ 9,980
-------------
United States Treasury Bills
5.16% 8/21/97 1,750 1,737(I)
5.165% 8/21/97 500 496(I)
5.295% 8/21/97 500 496(I)
-------------
2,729
-------------
Indexed Securities(B) - 0.2%
Student Loan Marketing Association
5.42% 11/20/97 250 250
-------------
Repurchase Agreement - 0.1%
J.P. Morgan Securities, Inc.
6.05% dated 6/30/97, to be repurchased at $767
on 7/1/97 (Collateral: $790 Federal National
Mortgage Association Medium-term note, 6.22%
due 3/8/06, value $805) 767 767
-------------
Actual
Contracts
---------
Options Purchased - N.M.
Eurodollar Future Put
September 97, Strike Price $94 153 15
Eurodollar Future Call
December 97, Strike Price $94 674 177
-------------
192
-------------
Total Short-term Investments
(Identified Cost - $67,014) 67,009
- -----------------------------------------------------------------------------------------------------------------------
Total Investments - 104.1%
(Identified Cost - $526,323) 529,083
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Expiration Actual Appreciation/
Date Contracts (Depreciation)
---------- --------- --------------
<S><C>
FUTURES CONTRACT PURCHASED
Treasury Bond Future September 97 304 $150
----
FUTURES CONTRACTS SOLD
Five-year Treasury Note Future September 97 258 (99)
Ten-year Treasury Note Future September 97 78 46
----
(53)
===================================================================================================================
</TABLE>
(A) Zero-coupon Bond - A bond with no periodic interest which is sold at such a
discount as to produce a current yield-to-maturity.
(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
U.S. Treasury bill rate, London Interbank Offered Rate (LIBOR) or the
Consumer Price Index (CPI). The coupon rate shown is the rate at June 30,
1997.
(C) 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.
(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) 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.
(F) When-issued Security - Security purchased on a delayed delivery basis.
Final settlement amount and maturity date have not yet been announced.
(G) Yankee Bond - Dollar denominated bond issued in the U.S. by foreign
entities.
(H) Non-income producing.
(I) Collateral to cover futures sold.
(J) 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.
12
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997
<TABLE>
<S><C>
Assets
Investments at value (Identified Cost - $526,323,223) $ 529,083,194
Receivable for:
Investments sold 16,116,448
Fund shares sold 238
Interest receivable 5,682,287
Dividends receivable 420,387
Other assets 7,003
---------------
Total assets 551,309,557
Liabilities
Payable for:
Investments purchased 42,614,841
Fund shares repurchased 21,515
Futures variation margin 79,684
Due to adviser and administrator 185,595
Accrued expenses 55,394
---------------
Total liabilities 42,957,029
---------------
Net assets $ 508,352,528
===============
Analysis of Net Assets
Common stock at par value $.001 per share, authorized
100,000,000 shares; issued and outstanding 4,507,160 shares $ 4,507
Accumulated paid-in capital 493,018,504
Undistributed net investment income 7,701,659
Undistributed net realized gain on investments, options and futures 4,771,120
Unrealized appreciation of investments, options and futures 2,856,738
---------------
Net assets $ 508,352,528
===============
Net asset value, offering price, and redemption price per share $112.79
=======
</TABLE>
- ----------
See notes to financial statements.
13
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF OPERATIONS
For the Year Ended June 30, 1997
<TABLE>
<S><C>
Investment Income:
Interest $ 33,756,002
Dividends 1,010,497
---------------
$ 34,766,499
Expenses:
Advisory fee 2,006,880
Administrative fee 250,860
Custodian fee 137,500
Registration fees 59,930
Legal and audit fees 27,608
Directors' fees 16,687
Transfer agent and shareholder servicing expense 9,466
Reports to shareholders 4,565
Other expenses 17,507
---------------
2,531,003
Less fees waived (22,402)
---------------
Total expenses, net of waivers 2,508,601
----------------
Net Investment Income 32,257,898
Net Realized and Unrealized Gain on Investments:
Realized gain on investments, options and futures 6,819,910
Unrealized appreciation of investments, options and futures 2,085,611
---------------
Net Realized and Unrealized Gain on Investments 8,905,521
----------------
Increase in Net Assets Resulting from Operations $ 41,163,419
================
</TABLE>
- ----------
See notes to financial statements.
14
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years Ended June 30,
------------------------------------------------------
1997 1996
---------------------- ---------------------
<S><C>
Change in Net Assets:
Net investment income $ 32,257,898 $ 24,557,119
Net realized gain on investments,
options and futures 6,819,910 2,279,243
Change in unrealized appreciation of
investments, options and futures 2,085,611 (9,811,628)
------------------ ---------------------
Increase in net assets resulting from operations 41,163,419 17,024,734
Distributions to shareholders from:
Net investment income (29,354,125) (22,394,910)
Net realized gain on investments (306,044) (1,507,661)
Increase in net assets from Fund share
transactions 43,149,810 123,803,625
------------------ ---------------------
Increase in net assets 54,653,060 116,925,788
Net Assets:
Beginning of year 453,699,468 336,773,680
------------------ ---------------------
End of year (including undistributed
net investment income of $7,614,835
and $7,058,516, respectively) $ 508,352,528 $ 453,699,468
================== ======================
</TABLE>
- ----------
See notes to financial statements.
15
<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 Years Ended June 30,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------------------
<S><C>
Per Share Operating Performance:
Net asset value, beginning of year $ 110.46 $112.17 $ 105.02 $ 116.64 $ 112.04
------------------------------------------------------------------------------
Net investment income(A) 7.05 6.70 6.82 5.64 6.57
Net realized and unrealized gain (loss)
on investments, options and futures 1.86 (1.36) 7.19 (6.28) 8.71
------------------------------------------------------------------------------
Total from investment operations 8.91 5.34 14.01 (0.64) 15.28
------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (6.51) (6.61) (6.86) (6.11) (6.72)
Net realized gain on investments (0.07) (0.44) - (4.87) (3.96)
------------------------------------------------------------------------------
Total distributions (6.58) (7.05) (6.86) (10.98) (10.68)
------------------------------------------------------------------------------
Net asset value, end of year $112.79 $ 110.46 $ 112.17 $ 105.02 $ 116.64
==============================================================================
Total return(A) 8.27% 4.86% 14.12% -.89% 14.52%
Ratios/Supplemental Data:
Ratios to average net assets:
Expenses(A) 0.50% 0.50% 0.50% 0.50% 0.50%
Net investment income(A) 6.4% 6.3% 7.0% 6.0% 6.0%
Portfolio turnover rate 384.8% 266.0% 257.9% 272.5% 313.1%
Net assets, end of year
(in thousands) $508,353 $453,699 $336,774 $205,959 $135,886
</TABLE>
- ----------
(A) Net of investment advisory fees waived pursuant to a voluntary expense
limitation of 0.50%. In the absence of this limitation, the ratio of
expenses to average net assets would have been 0.50% for the year ended
June 30, 1997, 0.53% for the years ended June 30, 1996 and 1995, 0.58% for
the year ended June 30, 1994 and 0.57% for the year ended June 30, 1993.
See notes to financial statements.
16
<PAGE>
WESTERN ASSET TRUST, INC.
CORE 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 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.
Distributions to Shareholders
Net investment income for dividend purposes is recorded on the accrual basis and
consists of interest and dividend 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.
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.
17
<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 2,594 1,518,190 259 109,855
Options closed (2,347) (1,515,262) (259) (109,855)
Options expired (228) (79,665) - -
Options exercised (431) (225,956) - -
- --------------------------------------------------------------------------- ------------------------------
Options outstanding at June 30, 1997 - $ - - $ -
=========================================================================== ==============================
</TABLE>
18
<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 12.
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 $505,938,423 and $508,257,785,
respectively. Purchases and sales of U.S. Government securities aggregated
$1,256,457,102 and $1,234,195,907, respectively for the same period.
At June 30, 1997, the cost of securities for federal income tax purposes was
$526,323,223. Aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost was $5,285,809 and aggregate
gross unrealized depreciation for all securities in which there was an excess of
tax cost over value was $2,525,838.
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 1,764,736 $ 196,333,251 1,015,043 $ 113,947,873
Reinvestment of distributions 233,589 26,037,708 205,591 22,867,433
Repurchased (1,598,534) (179,221,149) (115,482) (13,011,681)
- ------------------------------------------------------------------------ -----------------------------------
Net increase 399,791 $ 43,149,810 1,105,152 $ 123,803,625
======================================================================== ===================================
</TABLE>
19
<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 June 30, 1997, $20,585 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
0.40% 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 0.50% of the Fund's average daily net assets. Pursuant to this agreement,
advisory fees of $22,402 were waived for the year ended June 30, 1997, and
$165,010 was due to the Adviser at June 30, 1997.
20
|
|