As filed with the Securities and Exchange Commission on October 30, 1997.
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. 15 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 17 [X]
WESTERN ASSET TRUST, INC.
(Exact Name of Registrant as Specified in Charter)
111 South Calvert Street
Baltimore, Maryland 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 539-0000
Copies to:
CHARLES A. BACIGALUPO R. GREGORY MORGAN, ESQ.
111 South Calvert Street Munger, Tolles & Olson
Baltimore, Maryland 21202 355 South Grand Avenue
(Name and Address of 35th Floor
Agent for Service) Los Angeles, CA 90071-1560
It is proposed that this filing will become effective:
[X] immediately upon filing pursuant to Rule 485(b)
[ ] on pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(i)
[ ] on __________, 1997 pursuant to Rule 485(a)(i)
[ ] 75 days after filing pursuant to Rule 485(a)(ii)
[ ] on __________, 1997 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 22, 1997.
<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:
Core Portfolio
Intermediate Portfolio
Limited Duration Portfolio
Short Duration Portfolio
Money Market Portfolio
Long Duration Portfolio
Prospectus for the following Portfolios:
International Securities Portfolio
Corporate Securities Portfolio
Mortgage Securities Portfolio
Part B
Statement of Additional Information for the following Portfolios:
Core Portfolio
Intermediate Portfolio
Limited Duration Portfolio
Money Market Portfolio
Short Duration Portfolio
Long Duration Portfolio
Statement of Additional Information for the following Portfolios:
International Securities Portfolio
Corporate Securities Portfolio
Mortgage Securities Portfolio
Part C - Other Information
Signature Page
Exhibit Index
Exhibits
<PAGE>
WESTERN ASSET TRUST, INC.
Core Portfolio
Intermediate Portfolio
Limited Duration Portfolio
Money Market Portfolio
Short Duration Portfolio
Long Duration Portfolio
Cross Reference Sheet
---------------------
Part A. Item No. Prospectus Caption
- ---------------- ------------------
1 Cover Page
2 Prospectus Summary; Expense Information
3 Financial Highlights; Other Information
4 Investment Objectives and Policies; Description of
Securities and Investment Techniques; Other Information
5 Management of the Fund; Expense Information; Back
Cover Page
5A Not Applicable as to the 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.
International Securities Portfolio
Mortgage Securities Portfolio
Corporate 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.
Core Portfolio
Intermediate Portfolio
Limited Duration Portfolio
Money Market Portfolio
Short Duration Portfolio
Long Duration Portfolio
Cross Reference Sheet
---------------------
Statement of Additional
Part B. Item No. Information Caption
- ---------------- -----------------------
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Additional Information About
Investment Limitations and
Policies
14 Management of the Fund
15 Principal Holders of Securities
16 Management of the Fund;
Other Information
17 Portfolio Transactions and
Brokerage
18 Other Information
19 Purchases and Redemptions
20 Additional Tax Information
21 Management of the Fund
22 Other Information
23 Financial Statements And Reports of
Independent Accountants
<PAGE>
WESTERN ASSET TRUST, INC.
International Securities Portfolio
Mortgage Securities Portfolio
Corporate 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.
CORE PORTFOLIO
INTERMEDIATE PORTFOLIO
LIMITED DURATION PORTFOLIO
LONG DURATION PORTFOLIO
SHORT DURATION PORTFOLIO
MONEY MARKET 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
Core Portfolio, Intermediate Portfolio, Limited Duration Portfolio, Long
Duration Portfolio, Short Duration Portfolio and Money Market 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 Core, Intermediate,
Limited Duration, Long Duration and Short 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, 1997, 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., (626) 844-9400.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Dated: October 30, 1997
<PAGE>
WESTERN ASSET
2
PROSPECTUS
TABLE OF CONTENTS
Prospectus Summary...................................................... 3
Investment Risks and Considerations..................................... 4
Expense Information..................................................... 7
Financial Highlights.................................................... 9
Investment Objectives and Policies...................................... 13
Description of Securities and Investment Techniques..................... 17
Purchase of Shares...................................................... 30
Redemption of Shares.................................................... 32
Exchange Privilege...................................................... 33
How Net Asset Value is Determined....................................... 34
Dividends and Other Distributions....................................... 34
Federal Tax Treatment of Dividends and Other Distributions.............. 35
Management of the Fund.................................................. 36
Other Information....................................................... 38
Appendix................................................................ 41
<PAGE>
WESTERN ASSET
3
PROSPECTUS
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 Core Portfolio, Intermediate Portfolio,
Limited Duration Portfolio, Long Duration Portfolio, Short Duration Portfolio
and Money Market 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 29 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
13.
<PAGE>
WESTERN ASSET
4
PROSPECTUS
DOLLAR-WEIGHTED
PORTFOLIO AVERAGE DURATION
- ---------------------- -------------------------------------------------------
Core Within (plus/minus) 20% of the average duration
of the domestic bond market as a whole,
as determined by the Adviser
Intermediate Two to four years
Limited Duration One to three years
Long Duration At least eight years
Short Duration Six to fifteen months
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>
WESTERN ASSET
5
PROSPECTUS
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 13, and "Description of Securities and Investment Techniques,"
page 17.
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, 1997 had approximately $4.8 billion aggregate assets
under management and private accounts totaling approximately $27.3 billion. The
Administrator also serves as investment adviser or manager to investment
companies with assets of approximately $9.5 billion as of the same date. See
"The Fund's Investment Adviser," page 36, and "The Fund's Administrator," page
37.
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 30.
<PAGE>
WESTERN ASSET
6
PROSPECTUS
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 32, and "Exchange
Privilege," page 33.
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," page 34 and "Federal Tax Treatment of
Dividends and Other Distributions," page 35.
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 38.
<PAGE>
WESTERN ASSET
7
PROSPECTUS
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, 1997. 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(A):
(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 (after fee
waivers) .40% .25% .00% .25% .20%
Other expenses (after expense
reimbursement) .10% .20% .40% .25% .20%
--------- ------------ -------- ------------- --------------
Total Fund Operating Expenses
(after fee waivers and
expense reimbursement) .50% .45% .40% .50% .40%
--------- ------------ -------- ------------- --------------
</TABLE>
- ------------------
(A) IF THE ADVISER AND THE ADMINISTRATOR HAD NOT UNDERTAKEN TO LIMIT FUND
EXPENSES AS DESCRIBED ON THE FOLLOWING PAGE, THE MANAGEMENT FEES, OTHER EXPENSES
AND TOTAL OPERATING EXPENSES OF EACH FUND WOULD BE AS FOLLOWS: FOR CORE
PORTFOLIO, 0.40%, 0.10% AND 0.50% OF AVERAGE NET ASSETS; FOR INTERMEDIATE
PORTFOLIO, 0.35%, 0.20% AND 0.55% OF AVERAGE NET ASSETS; FOR LIMITED DURATION
PORTFOLIO, 0.30%, 0.90% AND 1.20% OF AVERAGE NET ASSETS; FOR LONG DURATION
PORTFOLIO, 0.40%, 0.25% AND 0.65% OF AVERAGE NET ASSETS; AND FOR THE MONEY
MARKET AND SHORT DURATION PORTFOLIOS, 0.30%, 0.20% AND 0.50%, RESPECTIVELY, OF
AVERAGE NET ASSETS.
<PAGE>
WESTERN ASSET
8
PROSPECTUS
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>
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>
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.
<PAGE>
WESTERN ASSET
9
PROSPECTUS
FEE WAIVERS
The Adviser has voluntarily agreed to waive its fees and/or reimburse
each Portfolio to the extent the Portfolio's expenses (exclusive of taxes,
interest, brokerage and other transaction expenses and any other extraordinary
expenses) exceed during any month an annual rate of 0.50% of the Portfolio's
average daily net assets for such month for the 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 October 30, 1998. For the Portfolios other than the Short
Duration and Intermediate, the Administrator has voluntarily agreed to limit its
annual fee to 0.05% of each Portfolio's average daily net assets. These
agreements are voluntary and may be terminated by the Adviser or the
Administrator at any time.
FINANCIAL HIGHLIGHTS
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.
The financial information in the tables that follow has been obtained
from the financial statements which have been audited by Price Waterhouse LLP,
independent accountants.
FINANCIAL HIGHLIGHTS
CORE PORTFOLIO
The Core Portfolio's financial statements for the year ended June 30,
1997, and the unqualified report of Price Waterhouse LLP thereon, are included
in the Core Portfolio's 1997 Annual Report to Shareholders and are incorporated
by reference in the Statement of Additional Information.
<PAGE>
WESTERN ASSET
10
PROSPECTUS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1997 1996 1995 1994 1993 1992 1991(A)
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period $110.46 $112.17 $105.02 $116.64 $112.04 $106.28 $100.00
------- ------- ------- ------- ------- ------- -------
Net investment income(B) 7.05 6.70 6.82 5.64 6.57 6.90 6.66
Net realized and unrealized
gain (loss) on
investments, options and
futures 1.86 (1.36) 7.19 (6.28) 8.71 8.72 4.28
------- ------- ------- ------- ------- ------- -------
Total from investment
operations 8.91 5.34 14.01 (0.64) 15.28 15.62 10.94
------- ------- ------- ------- ------- ------- -------
Distributions to
shareholders from:
Net investment income (6.51) (6.61) (6.86) (6.11) (6.72) (7.11) (4.66)
Net realized gain on
investments (0.07) (.44) -- (4.87) (3.96) (2.75) --
------- ------- ------- ------- ------- ------- -------
Total distributions (6.58) (7.05) (6.86) (10.98) (10.68) (9.86) (4.66)
------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period $112.79 $110.46 $112.17 $105.02 $116.64 $112.04 $106.28
======= ======= ======= ======= ======= ======= -------
Total return 8.27% 4.86% 14.12% (0.89)% 14.52% 15.61% 11.01%(C)
RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE
NET ASSETS:
Expenses(B) 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.65%(D)
Net investment income(B) 6.4% 6.3% 7.0% 6.0% 6.0% 6.7% 8.0%(D)
Portfolio turnover rate 384.8% 266.0% 257.90% 272.49% 313.05% 299.65% 177.25%(D)
Net assets, end of period
(in thousands) $508,353 $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 $22,402, $111,421, $69,442, $66,823, $71,911, AND $128,262 WERE
WAIVED FOR THE YEARS ENDED JUNE 30, 1997, 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 0.50% FOR THE YEAR ENDED
JUNE 30, 1997, .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) NOT ANNUALIZED.
(D) ANNUALIZED.
<PAGE>
WESTERN ASSET
11
PROSPECTUS
FINANCIAL HIGHLIGHTS
INTERMEDIATE PORTFOLIO
The Intermediate Portfolio's financial statements for the year ended June
30, 1997 and the unqualified report of Price Waterhouse LLP thereon, are
included in the Intermediate Portfolio's 1997 Annual Report to Shareholders and
are incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1997 1996 1995
<S> <C> <C> <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 8.32% 5.15% 10.08%
</TABLE>
<TABLE>
<S> <C> <C> <C>
RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
Expenses(A) 0.45% 0.50% 0.50%
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% UNTIL JUNE 30, 1996 AND 0.45% UNTIL JUNE 30, 1997; AND A
VOLUNTARY ADMINISTRATIVE EXPENSE WAIVER OF 0.05%. PURSUANT TO THIS LIMITATION,
ADVISORY FEES OF $158,505, $130,938 AND $29,571 WERE WAIVED FOR THE YEARS ENDED
JUNE 30, 1997, 1996 AND 1995, RESPECTIVELY. IN THE ABSENCE OF THIS LIMITATION,
THE RATIO OF EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 0.55%, 1.03% AND
1.60%, RESPECTIVELY.
<PAGE>
WESTERN ASSET
12
PROSPECTUS
FINANCIAL HIGHLIGHTS
LIMITED DURATION PORTFOLIO
The Limited Duration Portfolio's financial statements for the year ended
June 30, 1997 and the unqualified report of Price Waterhouse LLP thereon, are
included in the Limited Duration Portfolio's 1997 Annual Report to Shareholders
and are incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1997 1996(A)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $100.76 $100.00
------- -------
Net investment income(B) 5.94 0.84
Net realized and unrealized gain (loss) on investments 1.34 (0.08)
------- -------
Total from investment operations 7.28 0.76
------- -------
Distributions to shareholders from:
Net investment income (5.31) --
Net realized gain on investments (0.37) --
------- -------
Total distributions (5.68) --
------- -------
Net asset value, end of period $102.36 $100.76
======= =======
Total return(C) 7.42% 0.76%
RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
Expenses(B) 0.40% 0.50%(D)
Net investment income(B) 6.24% 5.58%(D)
Portfolio turnover rate 435.47% 1,042.0%(D)
Net assets, end of period (in thousands) $26,537 $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% UNTIL JUNE 30, 1996 AND 0.40% UNTIL JUNE 30, 1997; AND A
VOLUNTARY ADMINISTRATIVE EXPENSE WAIVER OF 0.05%. PURSUANT TO THIS LIMITATION,
ADVISORY FEES OF $60,550 AND $7,212 WERE WAIVED FOR THE YEAR ENDED JUNE 30, 1997
AND THE PERIOD ENDED JUNE 30, 1996, RESPECTIVELY. IN THE ABSENCE OF THIS
LIMITATION, THE RATIO OF EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.20%
AND 0.80%, RESPECTIVELY.
(C) NOT ANNUALIZED.
(D) ANNUALIZED.
<PAGE>
WESTERN ASSET
13
PROSPECTUS
Further information about the performance of the Core Portfolio, the
Intermediate Portfolio and the Limited Duration Portfolio is contained in each
Portfolio's 1997 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 forward commitment
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>
WESTERN ASSET
14
PROSPECTUS
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 29 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>
WESTERN ASSET
15
PROSPECTUS
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 enter into forward commitment
transactions; lend securities to brokers, dealers and other financial
institutions to earn income; and borrow money for temporary or emergency
purposes. See "Forward Commitments," page 25, 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, Core or Long Duration
Portfolios because its average duration will be shorter.
<PAGE>
WESTERN ASSET
16
PROSPECTUS
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 Lehman Brothers
Aggregate 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>
WESTERN ASSET
17
PROSPECTUS
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. The Intermediate Portfolio generally maintains a dollar-weighted average
maturity ranging between three and ten years. However, the average maturity may
deviate from that range during periods of unusual liquidity needs or immediately
following a major infusion of cash. 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 Fannie Mae ("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
<PAGE>
WESTERN ASSET
18
PROSPECTUS
the sale of the underlying residential property, refinancing or foreclosure, net
of fees or costs which may be incurred.
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
<PAGE>
WESTERN ASSET
19
PROSPECTUS
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. 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
<PAGE>
WESTERN ASSET
20
PROSPECTUS
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.
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 Baa or better by Moody's or BBB 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 13.
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
<PAGE>
WESTERN ASSET
21
PROSPECTUS
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.
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 13.
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 26.
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
<PAGE>
WESTERN ASSET
22
PROSPECTUS
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 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.
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PROSPECTUS
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 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
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PROSPECTUS
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.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWING
A reverse repurchase agreement is a portfolio management technique in
which a Portfolio temporarily transfers possession of a portfolio instrument to
another person, such as a financial institution or broker-dealer, in return for
cash. At the same time, the Portfolio agrees to repurchase the instrument at an
agreed upon time (normally within seven days) and price, including interest
payment.
Any Portfolio may engage in reverse repurchase agreements and other
borrowing as a means of raising cash to satisfy redemption requests or for other
temporary or emergency purposes without selling portfolio instruments. While
engaging in reverse repurchase agreements, each Portfolio will maintain cash,
U.S. Government Securities or high-grade, liquid debt securities in a segregated
account at its custodian bank with a value at least equal to the Portfolio's
obligation under the agreements, adjusted daily. Reverse repurchase agreements
may expose a Portfolio to greater fluctuations in the value of its assets and
renders the segregated assets unavailable for sale or other disposition.
Each Portfolio will limit its investments in reverse repurchase
agreements and other borrowing to no more than one-third of its total assets. To
avoid potential leveraging effects of such borrowing (including reverse
repurchase agreements), a Portfolio will not make investments while its
borrowing is in excess of 5% of its total assets.
LOANS OF PORTFOLIO SECURITIES
A Total Return Portfolio may lend portfolio securities to brokers or
dealers in corporate or government securities, banks or other recognized
institutional borrowers of securities, provided that cash or equivalent
collateral, equal to at least 100% of the market value of the securities loaned,
is continuously maintained by the borrower with the Portfolio. During the time
securities are on loan, the borrower will pay the Portfolio an amount equivalent
to any dividends or interest paid on such securities, and the Portfolio may
invest the cash collateral and earn additional income, or it may receive an
agreed upon amount of interest income from the borrower who has delivered
equivalent collateral. These loans are subject to termination at the option of
the Portfolio or the borrower. A Portfolio may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. No Portfolio presently expects to have on loan at any given time
securities totaling more than one-third of its net assets.
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PROSPECTUS
FORWARD COMMITMENTS
Any Portfolio may enter into commitments to purchase U.S. government
securities or other securities on a "forward commitment" basis, including
purchases on a "when-issued" basis or a "to be announced" basis. When such
transactions are negotiated, the price is fixed at the time the commitment is
made, but delivery and payment for the securities takes place at a later date.
Such securities are often the most efficiently priced and have the best
liquidity in the bond market. During the period between a commitment and
settlement, no payment is made by the purchaser for the securities purchased
and, thus, no interest accrues to the purchaser from the transaction. In a to be
announced transaction, a Portfolio has committed to purchase securities for
which all specific information is not yet known at the time of the trade,
particularly the exact face amount in forward commitment mortgage-backed
securities transactions.
A Portfolio may sell the securities subject to a forward commitment
purchase, which may result in a gain or loss. When a Portfolio purchases
securities on a forward commitment basis, it assumes the risks of ownership,
including the risk of price fluctuation, at the time of purchase, not at the
time of receipt. Purchases of forward commitment securities also involve a risk
of loss if the seller fails to deliver after the value of the securities has
risen. Depending on market conditions, a Portfolio's forward commitment
purchases could cause its net asset value to be more volatile. A Portfolio will
direct its custodian to place cash or U.S. government obligations in a separate
account equal to the value of the commitments of the Portfolio to purchase
securities as a result of its forward commitment obligation. 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.
Each Portfolio (other than the Money Market Portfolio) may also enter
into a forward commitment to sell only those securities it owns and will do so
only with the intention of actually delivering the securities. The use of
forward commitments enables a Portfolio to hedge against anticipated changes in
interest rates and prices. In a forward sale, a Portfolio does not participate
in gains or losses on the security occurring after the commitment date. Forward
commitments to sell securities also involve a risk of loss if the seller fails
to take delivery after the value of the securities has declined. A Portfolio
will direct its custodian to place the securities subject to a forward
commitment in a separate account. Forward commitment transactions involve
additional risks similar to those associated with investments in options and
futures contracts. See "Options and Futures Contracts."
The Fund does not expect that any Portfolio's purchases of forward
commitments will at any time exceed, in the aggregate, 20% of that Portfolio's
total assets.
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WESTERN ASSET
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PROSPECTUS
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, 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.
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WESTERN ASSET
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PROSPECTUS
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 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.
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WESTERN ASSET
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PROSPECTUS
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 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
<PAGE>
WESTERN ASSET
29
PROSPECTUS
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 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.
<PAGE>
WESTERN ASSET
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PROSPECTUS
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, Intermediate Portfolio and
Limited Duration Portfolio for the fiscal year ended June 30, 1997 were 384.8%,
419.26% and 435.47%, respectively. The Fund anticipates that the average
turnover rate of each of the other Total Return Portfolios will not exceed 300%.
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 (100% or more) may
result in increased transaction costs and the realization of capital gains.
Trading in fixed income securities does not generally involve the payment of
brokerage commissions, but does involve indirect transaction costs. For more
information on the taxation of distributions from a Portfolio's capital gains,
see "Federal Tax Treatment of Dividends and Other Distributions," page 35. 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 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
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WESTERN ASSET
31
PROSPECTUS
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 (626)
844-9400 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.
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 34.
Investors who wish to purchase Fund shares through the contribution of
securities should contact the Fund at (626) 844-9400 for instructions. Investors
who purchase Fund shares
<PAGE>
WESTERN ASSET
32
PROSPECTUS
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 (626) 844-9400; or (3) by wire communication with State
Street. In each case, the investor should first notify the Fund at (626)
844-9400 of the 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
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WESTERN ASSET
33
PROSPECTUS
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 (626) 844-9400 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 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
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WESTERN ASSET
34
PROSPECTUS
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 (626)
844-9400.
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.
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
<PAGE>
WESTERN ASSET
35
PROSPECTUS
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. If a shareholder has elected to receive dividends and/or other
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
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.
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.
<PAGE>
WESTERN ASSET
36
PROSPECTUS
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.
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 sixteen open-end investment
company portfolios and one closed-end investment company which together had
assets under management of approximately $4.8 billion as of September 30, 1997.
The Adviser also renders investment advice to private
<PAGE>
WESTERN ASSET
37
PROSPECTUS
accounts with assets under management of approximately $27.3 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.
Effective October 30, 1997, Western Asset's Investment Strategy Group
became responsible for the day-to-day management of each Portfolio. 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 investment
adviser or manager to seventeen open-end investment companies. These funds had
aggregate assets under management of about $9.5 billion as of September 30,
1997.
MANAGEMENT AND OTHER EXPENSES
The Core and Long Duration Portfolios 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
<PAGE>
WESTERN ASSET
38
PROSPECTUS
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.
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
<PAGE>
WESTERN ASSET
39
PROSPECTUS
contract). The Fund will also call a special meeting of shareholders at the
request of 25% or more of the shares entitled to vote thereat, or at the request
of 10% of the shareholders for the purpose of considering the removal of one or
more directors. Shareholders wishing to call such a meeting should submit a
written request to the Fund at 117 East Colorado Blvd., Pasadena, California
91105, stating the purpose of the proposed meeting and the matters to be acted
upon.
As of October 15, 1997, Western Michigan University and University
Athletic Association 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.
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
<PAGE>
WESTERN ASSET
40
PROSPECTUS
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 Lehman Brothers Aggregate Bond Index, the Lehman
Brothers Intermediate Government Corporate Bond Index and the Lehman Brothers
Long Government Corporate 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>
WESTERN ASSET
41
PROSPECTUS
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, 1997
<PAGE>
(THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.)
<PAGE>
WESTERN ASSET
PROSPECTUS
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
1306 Concourse Dr.
Linthicum, MD 21090
COUNSEL Munger, Tolles & Olson
355 South Grand Avenue
Los Angeles, CA 90071
<PAGE>
Prospectus
WESTERN ASSET TRUST, INC.
International Securities Portfolio
Corporate Securities Portfolio
Mortgage 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, 1997, 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., (626) 844- 9400.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION
NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Dated: October 30, 1997
<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 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.
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.
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 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.
1
<PAGE>
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, 1997, had approximately
$4.8 billion in aggregate assets under management and private accounts totaling
approximately $27.3 billion. The Administrator also serves as investment adviser
or manager to seventeen investment companies with assets of approximately $9.5
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
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
2
<PAGE>
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, 1997. 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(A):
(as a percentage of average net assets)
Domestic International
Portfolios Portfolio
---------- ---------
Management fees (after fee waivers) .150% .075%
Other expenses .100% .204%
----- -----
Total Fund Operating Expenses
(after fee waivers) .250% .279%
==== =====
- ------------------
(A) The expenses of the Portfolios for the current fiscal year have been reduced
by voluntary fee waivers . See "Fee Waivers," below. If the Adviser and the
Administrator had not undertaken to limit Fund expenses, the management fees,
other expenses and total operating expenses of each Fund would be as follows:
for each of the Domestic Portfolios, 0.175%, 0.100% and 0.275% of average net
assets; and for the International Portfolio, 0.475%, 0.204% and 0.679% of
average net assets. The Portfolios are offered only to clients of Western Asset,
who are required to pay separate fees for advisory services provided by Western
Asset based on the amount of assets under management. However, such fees are not
charged against assets invested in the Portfolios.
The following example illustrates the expenses that an investor would
pay on a $1,000 investment over various time periods assuming (1) a 5% annual
rate of return and (2) redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Domestic Portfolios $ 3 $ 8 N/A N/A
International Portfolio $ 3 $ 9 $16 $35
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
3
<PAGE>
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. 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 October 30, 1998. In
addition, Western Asset has voluntarily waived for calendar year 1997 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. See "Management and Other Expenses," page 26. These
agreements are voluntary and may be terminated by Western Asset at any time.
FINANCIAL HIGHLIGHTS
The financial information in the table that follows has been obtained
from the financial statements which have been audited by Price Waterhouse LLP,
independent accountants.
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, 1997 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.
FINANCIAL HIGHLIGHTS
INTERNATIONAL SECURITIES PORTFOLIO
The International Portfolio's financial statements for the year ended June
30, 1997, and the report of Price Waterhouse LLP thereon, are included in the
International Portfolio's 1997 Annual Report to Shareholders and are
incorporated by reference in the Statement of Additional Information. The Annual
Report is available to shareholders without charge by calling Western Asset
Management Company at (626) 584-4300. Investors should understand that all the
following information should be read in conjunction with such audited financial
statements and related notes.
4
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30, 1997 1996 1995 1994 1993(A)
- ------------------------------------- -------- --------- --------- --------- ---------
<S> <C>
Per Share Operating
Performance:
Net asset value, beginning of
period $95.16 $92.10 $93.76 $105.53 $100.00
-------- --------- --------- --------- ---------
Net investment income(B) 5.29 5.78 6.29 6.94 3.21
Net realized and unrealized gain
(loss) on investments and forward
currency contracts and currency
translations 6.27 3.56 (1.04) (7.36) 2.59
-------- --------- --------- --------- ---------
Total from investment operations 11.56 9.34 5.25 (0.42) 5.80
-------- --------- --------- --------- ---------
Distributions to shareholders
from:
Net investment income (9.11) (6.28) (0.63) (8.64) (0.27)
Net realized capital gain -- -- -- (2.71) --
Tax return of capital -- -- (6.28) -- --
-------- --------- --------- --------- ---------
Total distributions (9.11) (6.28) (6.91) (11.35) (0.27)
-------- --------- --------- --------- ---------
Net asset value, end of period $97.61 $95.16 $92.10 $93.76 $105.53
======== ========= ========= ========= =========
Total return(C) 12.83% 10.36% 6.03% (1.14)% 5.81%
Ratios/Supplemental Data:
Ratios to average net assets:
Expenses(B) 0.28% 0.26% 0.28% 0.30% 0.45%(D)
Net investment income(B) 6.11% 6.02% 5.67% 5.53% 6.08%(D)
Portfolio turnover rate 290.56% 348.40% 355.03% 571.18% 249.94%(D)
Net assets, end of period (in
thousands) $303,698 $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 $1,054,708, $970,680, $480,824, $572,322 and $136,356
were waived for the years ended June 30, 1997, 1996, 1995, 1994 and the period
January 7, 1993 (commencement of operations) to June 30, 1993. In the absence of
this waiver, the ratio of expenses to average net assets would have been 0.68%,
0.66%, 0.68% and 0.70% for the years ended June 30, 1997, 1996, 1995 and 1994,
and 0.85% for the period January 7, 1993 (commencement of operations) to June
30, 1993.
(C) Not annualized.
(D) Annualized
5
<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 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.
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.
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 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.
6
<PAGE>
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 enter into forward commitment transactions; lend its securities to
brokers, dealers and other financial institutions to earn income; and borrow
money for temporary or emergency purposes. See "Forward Commitments," 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.
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.
7
<PAGE>
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 Fannie Mae ("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.
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
8
<PAGE>
now issues guaranteed mortgage certificates, on which it guarantees semi-annual
interest payments and a specified minimum annual payment of principal.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases residential mortgages from a list of
approved seller/servicers, which include savings and loan associations, savings
banks, commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and
interest only by FNMA, not the U.S. Government.
Privately Issued Mortgage-Related Securities. Mortgage-related
securities offered by private issuers include pass-through securities comprised
of pools of residential mortgage loans; mortgage-backed bonds which are
considered to be debt obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations ("CMOs") which are collateralized by mortgage-related securities
issued by FHLMC, FNMA or GNMA or by pools of mortgages. Any Portfolio may
purchase privately issued mortgage-related securities.
CMOs are typically structured with classes or series which have
different maturities and are generally retired in sequence. In the most common
arrangement, each class of obligations receives periodic interest payments
according to the coupon rate on the obligations. However, all monthly principal
payments and any prepayments from the collateral pool are paid first to the
"Class 1" holders. Thereafter, all payments of principal are allocated to the
next most senior class of obligations until that class of obligations has been
fully repaid. Although full payoff of each class of obligations is contractually
required by a certain date, any or all classes of obligations may be paid off
sooner than expected because of an increase in the payoff speed of the pool.
Other allocation methods may be used.
Mortgage-related securities created by non-governmental issuers
generally offer a higher rate of interest than government and government-related
securities because there are no direct or indirect government guarantees of
payment in the former securities, resulting in higher risks. Timely payment of
interest and principal may be supported by various forms of insurance, including
individual loan, title, and hazard policies on the mortgages in the pool, or by
private guarantees of the issuer of the mortgage-related securities. There can
be no assurance that the insurers will be able to meet their obligations under
the relevant insurance policies or that the private issuers will be able to meet
their obligations under the relevant guarantees. Such guarantees and policies
often do not cover the full amount of the pool. Where privately issued
securities are collateralized by securities issued by FHLMC, FNMA or GNMA, the
timely payment of interest and principal is supported by the government-related
securities collateralizing such obligations. The market for private pools is
smaller and less liquid than the market for the government and
government-related mortgage pools.
Stripped Mortgage-Backed Securities. These securities are interests in
a pool of mortgage assets that receive interest and principal distributions in
different proportions from that received by the underlying pool. They may be
issued by agencies or instrumentalities of the U.S. government or by private
mortgage lenders. Stripped mortgage-backed securities generally are more
sensitive to changes in prepayment and interest rates and the market for such
securities is less liquid than is the case for traditional debt securities and
mortgage-backed securities.
Some stripped mortgage-backed securities receive only interest
payments. The yield on such securities is extremely sensitive to the rate of
principal payments (including prepayments) on the underlying mortgage assets,
and a rapid rate of repayment may have a material adverse effect on such
securities' yield to maturity. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Portfolio may fail to
recoup fully its initial investment in these securities, even if they are rated
high quality. When interest rate are declining, such principal prepayments
usually increase, and reinvestments of such principal prepayments will be at a
lower rate than that on the original mortgage-related security.
9
<PAGE>
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 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.
10
<PAGE>
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 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.
11
<PAGE>
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 very weak 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. The economy is now recovering
from a period of weak growth. The German Central Bank has reacted by raising
interest rates. This was also done to satisfy the requirement for rate
convergence in front of the expected single currency in Europe. Inflation
remains at very moderate levels.
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
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shareholders may have certain rights if dividends are not paid. Shareholders may
suffer a loss of value if dividends are not paid, and generally have no legal
recourse against the issuer. The market prices of preferred stocks are subject
to changes in interest rates and are more sensitive to changes in the issuer's
creditworthiness than are the prices of debt securities. Under ordinary
circumstances, preferred stock does not carry voting rights.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed amount
of common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities ordinarily provide a stream
of income with generally higher yields than those of common stocks of the same
or similar issuers, but lower than the yield on non-convertible debt.
Convertible securities are usually subordinated to comparable-tier
nonconvertible securities but rank senior to common stock in a corporation's
capital structure.
The value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at market
value, if converted into the underlying common stock. Convertible securities are
typically issued by smaller capitalized companies whose stock prices may be
volatile. The price of a convertible security often reflects such variations in
the price of the underlying common stock in a way that non-convertible debt does
not. The Portfolios have no current intention of converting any convertible
securities they may own into equity or holding them as equity upon conversion,
although they may do so for temporary purposes. A convertible security may be
subject to redemption at the option of the issuer at a price established in the
convertible security's governing instrument. If a convertible security held by a
Portfolio is called for redemption, the Portfolio will be required to permit the
issuer to redeem the security, convert it into the underlying common stock or
sell it to a third party. Any of these actions could have an adverse effect on a
Portfolio's ability to achieve its investment objective.
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
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income attributable to its zero coupon or pay-in-kind bonds. Such disposal could
occur at a time which would be disadvantageous to the Portfolio and when the
Portfolio would not otherwise choose to dispose of the assets.
REPURCHASE AGREEMENTS
A repurchase agreement is an agreement under which a Portfolio acquires
either U.S. Government obligations or high-quality liquid debt securities from a
securities dealer or bank subject to resale at an agreed upon price and date.
The securities are held by the Portfolio as collateral until retransferred and
will be supplemented by additional collateral if necessary to maintain a total
market value equal to or in excess of the value of the repurchase agreement. The
Portfolio bears a risk that the proceeds from any sale of collateral upon a
default in the obligation to repurchase will be less than the repurchase price.
A Portfolio also bears a risk that the other party to a repurchase agreement
will default on its obligations and the Portfolio will be delayed or prevented
from exercising its rights to dispose of the collateral securities. A Portfolio
will enter into repurchase agreements only with financial institutions which are
deemed by its adviser to present minimal risk of default during the term of the
agreement based on guidelines which are periodically reviewed by the Board of
Directors.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWING
A reverse repurchase agreement is a portfolio management technique in
which a Portfolio temporarily transfers possession of a portfolio instrument to
another person, such as a financial institution or broker-dealer, in return for
cash. At the same time, the Portfolio agrees to repurchase 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.
FORWARD COMMITMENTS
Any Portfolio may enter into commitments to purchase U.S. government
securities or other securities on a "forward commitment" basis, including
purchases on a "when-issued" basis or a "to be announced" basis. When such
transactions are negotiated, the price is fixed at the time the commitment is
made, but delivery and payment for the securities takes place at a later date.
Such securities are often the most efficiently priced and have the best
liquidity in the bond market. During the period between a commitment and
settlement, no payment is made by the purchaser for the securities purchased
and, thus, no interest accrues to the purchaser from the transaction. In a to be
announced transaction, a Portfolio has committed to purchase securities for
which all specific information is not yet known at the time of the trade,
particularly the exact face amount in forward commitment mortgage-backed
securities transactions.
A Portfolio may sell the securities subject to a forward commitment
purchase, which may result in a gain or loss. When a Portfolio purchases
securities on a forward commitment basis, it assumes the risks of ownership,
including the risk of price fluctuation, at the time of purchase, not at the
time of receipt. Purchases of forward commitment securities also involve a risk
of loss if the seller fails to deliver after the value of the securities has
risen. Depending on market conditions, a Portfolio's forward commitment
purchases could cause its net asset value to be more volatile. A Portfolio will
direct its custodian to place cash or U.S. government obligations in a separate
account equal to the value of the commitments of the Portfolio to purchase
securities as a result of its forward commitment obligation. 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.
Each Portfolio may also enter into a forward commitment to sell only
those securities it owns and will do so only with the intention of actually
delivering the securities. The use of forward commitments enables a Portfolio to
hedge against anticipated changes in interest rates and prices. In a forward
sale, a Portfolio does not participate in gains or losses on the security
occurring after the commitment date. Forward commitments to sell securities also
involve a risk of loss if the seller fails to take delivery after the value of
the securities has declined. A Portfolio will direct its custodian to place the
securities subject to a forward commitment in a separate account. Forward
commitment transactions involve additional risks similar to those associated
with investments in options and futures contracts. See "Options and Futures
Contracts."
The Fund does not expect that any Portfolio's purchases of forward
commitments will at any time exceed, in the aggregate, 20% of that Portfolio's
total assets.
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:
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the frequency of trades and quotes, the number of dealers and potential
purchasers, the existence of dealer undertakings to make a market, and the
nature of the security and of marketplace trades. The adviser's consideration of
these factors and determination that a particular security is liquid remains
subject to the Board's continuing oversight. The Board also reviews at least
annually the continuing appropriateness of these procedures.
Investing in securities eligible for trading under this Rule could
adversely affect the liquidity of a Portfolio, if the newly-developing markets
among qualified purchasers for such securities do not develop as anticipated, or
if such purchasers become, for a time, uninterested in purchasing these
securities.
OPTIONS AND FUTURES; FORWARD CURRENCY EXCHANGE CONTRACTS
The Portfolios may use options to attempt to enhance income and may
also use options and futures contracts for hedging purposes. The International
Portfolio may also use forward currency contracts for hedging purposes or to
attempt to enhance income.
The Portfolios may purchase and sell call and put options on bond
indices and on securities in which the Portfolio is authorized to invest for
hedging purposes or to enhance income. The Portfolios may also purchase and sell
interest rate and bond index futures contracts and options thereon for hedging
purposes. In addition, the Portfolios may purchase and sell covered straddles on
options on securities or bond 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
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will develop or continue to exist. Lack of a liquid market for any reason may
prevent a Portfolio from liquidating an unfavorable position, and the Portfolio
would remain obligated to meet margin requirements until the position is closed.
Purchase of such instruments for which there is no liquid secondary market will
be subject to the Portfolio's investment limitation on "illiquid securities."
Each Portfolio will establish segregated accounts or maintain covering
positions when engaging in the above strategies, to the extent required by the
SEC and staff positions. A Portfolio may write a call or put option only if the
option is "covered." A call option is covered if, so long as the Portfolio is
obligated under the option, it will own an offsetting position in the underlying
security, currency or futures contract, or a right to obtain the security,
currency or futures contract. A put option is covered if the Portfolio maintains
in a segregated account with the Fund's custodian, cash, or liquid high-quality
debt securities, with a value sufficient to cover its potential obligations, as
marked to market daily.
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
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required to complete 75% of them. If the transaction is not completed, the risk
of the anticipatory hedge is the same as if the Portfolio had entered into the
transaction for speculative purposes.
The Statement of Additional Information contains a more detailed
description of futures, options and forward strategies.
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, 1997 was 290.56%. The Fund anticipates that the average turnover
rate of each Domestic Portfolio will not exceed 300%. 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 (100% or more) may result in increased
transaction costs and the realization of capital gains. Trading in fixed income
securities does not generally involve the payment of brokerage commissions, but
does involve indirect transaction costs. For more information on the taxation of
distributions from a Portfolio's capital gains, see "Federal Tax Treatment of
Dividends and Other Distributions." Each Portfolio will take these possibilities
into account as part of its investment strategy.
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PURCHASE OF SHARES
Shares of the Portfolios described in this Prospectus are available
only to clients maintaining separate accounts with Western Asset or its
affiliates, which will place all purchase orders for shares of the Portfolios on
behalf of such clients. Shares of each Portfolio are sold at the net asset value
next determined after a purchase order in proper form and payment in federal
funds are received by Boston Financial Data Services, Inc. ("BFDS"), the Fund's
transfer and dividend-disbursing agent. There is no sales charge. Concurrent
with the initial purchase of shares in any Portfolio, Western Asset will open an
account with that Portfolio in the name of the client.
Federal funds purchases will be accepted only on days on which the
Fund and BFDS are open for business. The Fund is "open for business" on each day
the New York Stock Exchange ("Exchange") is open for trading. In past years, the
Exchange has observed the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
Shares may also be purchased and paid for by the contribution of
eligible portfolio securities, subject in each case to approval by the
Portfolio's adviser. Approval will depend on, among other things, the nature and
quality of the securities offered and the current needs of the Portfolio in
question. Securities offered in payment for shares will be valued in the same
way and at the same time the Fund values its portfolio securities for purposes
of determining net asset value. See "How Net Asset Value is Determined," page
23. Investors who wish to purchase Fund shares through the contribution of
securities should contact the Fund at (626) 844-9400 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 (626) 844-9400; or (3) by wire
communication with BFDS. No charge is made for redemptions.
Upon receipt of a request for redemption before the close of business
of the Exchange on any day when the Exchange is open, BFDS, as transfer agent
for the Fund, will redeem Portfolio shares at the net asset value per share
determined as of the close of the Exchange on that day. Requests for redemption
received by the transfer agent after the close of business on the Exchange will
be executed at the net asset value determined as of the close of the Exchange on
its next trading day.
Requests for redemption should indicate:
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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 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
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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. If a shareholder has elected
to receive dividends and/or other distributions in cash and the postal or other
delivery service is unable to deliver checks to the shareholder's address of
record, such shareholder's distribution option will automatically be converted
to having all dividends and other distributions reinvested in additional shares.
No interest will accrue on amounts represented by uncashed distribution or
redemption checks.
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.
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.
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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 sixteen open-end investment
company portfolios and one closed-end investment company which together had
assets under management of approximately $4.8 billion as of September 30, 1997.
Western Asset also renders investment advice to private accounts with fixed
income assets under management of approximately $27.3 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
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("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 investment adviser or manager to nine other open-end investment
companies with a total of seventeen portfolios. These funds had aggregate assets
under management of about $9.5 billion as of September 30, 1997. 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," below. 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.
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 October 30, 1998. In addition, Western Asset has voluntarily waived
for calendar year 1997 all of its fees for services to the International
Portfolio under its management agreement, other than the portion of such fee
equal to the fee paid by Western Asset to the Administrator (at an annual rate
of .075% of average net assets) for services to the International Portfolio
under the Administration Agreement.
A Portfolio may reimburse its adviser for fees foregone or expenses
reimbursed by them pursuant to the expense limitation if expenses fall below the
limit prior to the end of the fiscal year.
THE FUND'S DISTRIBUTOR
Legg Mason Wood Walker, Incorporated ("Distributor") is authorized to
distribute the Portfolios' shares pursuant to an underwriting agreement with the
Fund which was approved by the Board of Directors ("Underwriting Agreement").
The Distributor or its affiliates is obligated to pay all expenses in connection
with the offering of Fund shares, including any compensation to its investment
brokers, the printing and distribution
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of prospectuses, statements of additional information and periodic reports used
in connection with the offering to prospective investors, after the prospectuses
and statements of additional information have been prepared, set in type and
mailed to existing shareholders at the Fund's expense, and for supplementary
sales literature and advertising costs. The Distributor receives no direct
compensation from the Fund for these expenses. The Distributor is a wholly owned
subsidiary of Legg Mason, Inc.
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
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.
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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.
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
1306 Concourse Drive
Linthicum, MD 21090
Legal Counsel
Munger, Tolles & Olson
355 South Grand Avenue, 35th Floor
Los Angeles, CA 90071-1560
Prospectus
October 30, 1997
<PAGE>
WESTERN ASSET TRUST, INC.
Core Portfolio
Intermediate Portfolio
Limited Duration Portfolio
Long Duration Portfolio
Short Duration Portfolio
Money Market 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 -- Core Portfolio, Intermediate Portfolio, Limited
Duration Portfolio, Long Duration Portfolio, Short Duration Portfolio and Money
Market 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, 1997,
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., (626) 844-9400.
Dated: October 30, 1997
<PAGE>
TABLE OF CONTENTS
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Page
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Additional Information About Investment Limitations and Policies 3
Valuation of Portfolio Shares 14
Management of the Fund 16
Purchases and Redemptions 22
Exchange Privilege 22
Portfolio Transactions and Brokerage 23
Additional Tax Information 24
Other Information 25
Principal Holders of Securities 26
Financial Statements 31
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;
(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
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(10) Invest in oil, gas or mineral-related programs or leases, provided
that a Portfolio may invest in securities issued by companies that engage in
such activities.
The foregoing investment limitations cannot be changed without the
affirmative vote of the lesser of (a) more than 50% of the outstanding shares of
the affected Portfolio or (b) 67% or more of the shares of the affected
Portfolio present at a shareholders' meeting if more than 50% of the outstanding
shares of that Portfolio are represented at the meeting in person or by proxy.
Except with respect to investment limitation number (1), if a percentage
restriction is adhered to at the time of an investment or transaction, a later
increase or decrease in percentage resulting from a change in the value of
portfolio securities or amount of total assets will not be considered a
violation of any of the foregoing limitations.
Except as otherwise specified, the investment limitations and policies
described below may be changed by the Fund's Board of Directors without
shareholder approval.
Ratings of Debt Obligations
Moody's Investors Service, Inc. ("Moody's), Standard & Poor's Ratings
Group ("S&P") and other nationally recognized or foreign statistical rating
organizations ("SROs") are private organizations that provide ratings of the
credit quality of debt obligations. A description of the ratings assigned to
corporate debt obligations by Moody's and S&P is included in Appendix A. A
Portfolio may consider these ratings in determining whether to purchase, sell or
hold a security. Ratings are not absolute assurances of quality. Consequently,
securities with the same maturity, interest rate and rating may have different
market prices. Credit rating agencies attempt to evaluate the safety of
principal and interest payments and do not evaluate the risks of fluctuations in
market value. Also, rating agencies may fail to make timely changes in credit
ratings in response to subsequent events, so that an issuer's current financial
condition may be better or worse than the rating indicates.
Mortgage-Related Securities
Mortgage-related securities represent an ownership interest in a pool
of residential mortgage loans. These securities are designed to provide monthly
payments of interest and, in most instances, principal to the investor. The
mortgagor's monthly payments to his/her lending institution are "passed through"
to investors such as the Portfolios. Most issuers or poolers provide guarantees
of payments, regardless of whether the mortgagor actually makes the payment. The
guarantees made by issuers or poolers are often backed by various forms of
credit, insurance and collateral, although these may be in amounts less than the
full obligation of the pool to its shareholders.
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of one- to four-family homes. The
terms and characteristics of the mortgage instruments are generally uniform
within a pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, the Portfolios may purchase pools of variable-rate
mortgages, growing-equity mortgages, graduated-payment mortgages and other
types.
All poolers apply standards for qualification to lending institutions
which originate mortgages for the pools. Poolers also establish credit standards
and underwriting criteria for individual mortgages included in the pools. In
addition, many mortgages included in pools are insured through private mortgage
insurance companies.
The average life of mortgage-related securities varies with the
maturities and the nature of the underlying mortgage instruments. For example,
securities issued by the Government National Mortgage Association ("GNMA") tend
to have a longer average life than participation certificates ("PCs") issued by
the Federal Home Loan Mortgage Corporation ("FHLMC") because there is a tendency
for the conventional and privately-insured mortgages underlying FHLMC PCs to
repay at faster rates than the Federal Housing Administration and Veterans
Administration loans underlying GNMAs. In addition, the term of a security may
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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 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.
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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
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
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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.
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
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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.
A Portfolio may purchase put options in order to hedge against a
decline in the market value of securities held in its portfolio. The put option
enables a Portfolio to sell the underlying security at the predetermined
exercise price; thus the potential for loss to the Portfolio below the exercise
price is limited to the option premium paid. If the market price of the
underlying security is higher than the exercise price of the put option, any
profit the Portfolio realizes on the sale of the security would be reduced by
the premium paid for the put option less any amount for which the put option may
be sold.
A Portfolio may write covered call options on securities in which it is
authorized to invest. Because it can be expected that a call option will be
exercised if the market value of the underlying security increases to a level
greater than the exercise price, a Portfolio will write covered call options on
securities generally when the Adviser believes that the premium received by the
Portfolio, plus anticipated appreciation in the market price of the underlying
security up to the exercise price of the option, will be greater than the total
appreciation in the price of the security. The strategy may be used to provide
limited protection against a decrease in the market price of the security, in an
amount equal to the premium received for writing the call option less any
transaction costs. Thus, in the event that the market price of the underlying
security held by the Portfolio declines, the amount of such decline will be
offset wholly or in part by the amount of the premium received by the Portfolio.
If, however, there is an increase in the market price of the underlying security
and the option is exercised, the Portfolio would be obligated to sell the
security at less than its market value. The Portfolio would give up the ability
to sell the portfolio securities used to cover the call option while the call
option was outstanding. Such securities would also be considered illiquid in the
case of over-the-counter ("OTC") options written by a Portfolio, and therefore
subject to a Portfolio's limitation on investing no more than 10% of its total
assets in illiquid securities. In addition, a Portfolio could lose the ability
to participate in an increase in the value of such securities above the exercise
price of the call option because such an increase would likely be offset by an
increase in cost of closing out the call option (or could be negated if the
buyer chose to exercise the call option at an exercise price below the
securities' current market value).
Futures Contracts and Options on Futures Contracts
Each Portfolio will limit its use of futures contracts and futures
options to hedging transactions or other circumstances permitted to registered
investment companies by regulatory authorities. For example, a Portfolio might
use futures contracts to attempt to hedge against anticipated changes in
interest rates that might adversely affect either the value of the Portfolio's
securities or the price of the securities which the Portfolio intends to
purchase. A Portfolio's hedging may include sales of futures contracts as an
offset against the effect of expected increases in interest rates, and purchases
of futures contracts as an offset against the
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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 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
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is less, the Portfolio realizes a loss. The Portfolio will also bear transaction
costs for each contract which will be included in these calculations.
A Portfolio will not enter into futures contracts or option positions
if, immediately thereafter, the initial margin deposits plus premiums paid by
it, less the amount by which any such options positions are "in-the-money" at
the time of purchase, would exceed 5% of the fair market value of the
Portfolio's total assets. A call option is "in-the-money" if the value of the
futures contract that is the subject of the option exceeds the exercise price. A
put option is "in-the-money" if the exercise price exceeds the value of the
futures contract that is the subject of the option.
The requirements for qualification as a regulated investment company
also may limit the extent to which a Portfolio may enter into futures or options
on futures. See "Additional Tax Information."
Risks Associated with Futures and Options
In considering the Portfolios' use of futures contracts and options,
particular note should be taken of the following:
(1) Positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such futures
contracts. Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
(2) The ability to establish and close out positions in either futures
contracts or exchange-listed options is also subject to the maintenance of a
liquid secondary market. Consequently, it may not be possible for a Portfolio to
close a position and, in the event of adverse price movements, the Portfolio
would have to make daily cash payments of variation margin (except in the case
of purchased options). However, in the event futures contracts or options have
been used to hedge portfolio securities, such securities will not be sold until
the contracts can be terminated. In such circumstances, an increase in the price
of the securities, if any, may partially or completely offset losses on the
futures contract. However, there is no guarantee that the price of the
securities will, in fact, correlate with the price movements in the contracts
and thus provide an offset to losses on the contracts.
(3) Successful use by a Portfolio of futures contracts and options will
depend upon the Adviser's ability to predict movements in the direction of the
overall securities and interest rate markets, which may require different skills
and techniques than predicting changes in the prices of individual securities.
Moreover, futures contracts relate not to the current level of the underlying
instrument but to anticipated levels at some point in the future. There is, in
addition, the risk that 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.
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(4) The value of an option position will reflect, among other things,
the current market price of the underlying security or futures contract, the
time remaining until expiration, the relationship of the exercise price to the
market price, the historical price volatility of the underlying security or
futures contract and general market conditions. For this reason, the successful
use of options as a hedging strategy depends upon the Adviser's ability to
forecast the direction of price fluctuations in the underlying market.
(5) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the futures
position and the securities being hedged, movements in the prices of futures
contracts may not correlate perfectly with movements in the prices of the hedged
securities due to price distortions in the futures market. There may be several
reasons unrelated to the value of the underlying securities which cause this
situation to occur. First, as noted above, all participants in the futures
market are subject to initial and variation margin requirements. If, to avoid
meeting additional margin deposit requirements or for other reasons, investors
choose to close a significant number of futures contracts through offsetting
transactions, distortions in the normal price relationship between the
securities and the futures markets may occur. Second, because the margin deposit
requirements in the futures market are less onerous than margin requirements in
the securities market, there may be increased participation by speculators in
the futures market; such speculative activity in the futures market also may
cause temporary price distortions. Third, participants could make or take
delivery of the underlying securities instead of closing out their contracts. As
a result, a correct forecast of general market trends may not result in
successful hedging through the use of futures contracts over the short term. In
addition, activities of large traders in both the futures and securities markets
involving arbitrage and other investment strategies may result in temporary
price distortions.
(6) Options normally have expiration dates of up to nine months. The
exercise price of the options may be below, equal to or above the current market
value of the underlying security or futures contract. Options that expire
unexercised have no value, and the Portfolio will realize a loss in the amount
paid and any transaction costs.
(7) Like options on securities, options on futures contracts have a
limited life. The ability to establish and close out options on futures will be
subject to the development and maintenance of liquid secondary markets on the
relevant exchanges or boards of trade. There can be no certainty that liquid
secondary markets for all options on futures contracts will develop.
(8) Purchasers of options on futures contracts pay a premium in cash at
the time of purchase. This amount and the transaction costs are all that is at
risk. Sellers of options on futures contracts, however, must post an initial
margin and are subject to additional margin calls which could be substantial in
the event of adverse price movements. In addition, although the maximum amount
at risk when the Portfolio purchases an option is the premium paid for the
option and the transaction costs, there may be circumstances when the purchase
of an option on a futures contract would result in a loss to the Portfolio when
the use of a futures contract would not, such as when there is no movement in
the value of the securities being hedged.
(9) A Portfolio's activities in the futures and options markets may
result in a higher portfolio turnover rate and additional transaction costs in
the form of added brokerage commissions; however, a Portfolio also may save on
commissions by using such contracts as a hedge rather than buying or selling
individual securities in anticipation or as a result of market movements.
(10) A Portfolio may purchase and write both exchange-traded options
and options traded on the OTC market. Exchange markets for options on debt
securities exist but are relatively new, and the ability to establish and close
out positions on the exchanges is subject to the maintenance of a liquid
secondary market. Although the Portfolios intend to purchase or write only those
exchange-traded options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market will exist for any
particular option at any specific time. Closing transactions may be effected
with respect to options traded in the OTC markets only by negotiating directly
with the other party to the option contract, or in a secondary market for the
option if such market exists. Although the Portfolios will enter into OTC
options only with
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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.
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.
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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
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.
13
<PAGE>
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, [68] (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).
Norman Barker, Jr., [75] Director; Director of Pacific American Income
Shares, Inc., Bank Plus (holding company for Fidelity Federal Bank), ICN
Pharmaceuticals, Inc. and TCW Convertible Securities Fund, Inc. (management
investment company); formerly: Chairman of the Board of First Interstate
Bancorp.
Dr. Richard C. Gilman, [74] (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.
*W. Curtis Livingston, III, [54] (1) President and Director; President,
Director and Chief Executive Officer of Western Asset Management Company
(investment management firm and the investment adviser to the Fund), December
1980-present; President, Pacific American Income Shares, Inc.; Director, Legg
Mason, Inc.
14
<PAGE>
*Ronald L. Olson, [56] (2) (3) Director; Senior Partner, Munger, Tolles
& Olson LLP (a law partnership); Director of Pacific American Income Shares,
Inc.
*Louis A. Simpson, [60] (1) (4) Director; President and CEO, Capital
Operations of Government Employees Insurance Company (GEICO Corporation) since
May 1993; Director of Pacific American Income Shares, Inc., Potomac Electric
Power Company, Potomac Capital Investment Corporation, Thompson PBE, COHR, Inc.
and Salomon Inc. Formerly: Vice Chairman of GEICO (1985-1993); Senior Vice
President and Chief Investment Officer of GEICO (1979-1985); President and CEO
of Western Asset Management Company.
Ronald J. Arnault, [54] Director; President of RJA Consultants (energy
industry financial consulting); member, Board of Governors of The Music Center
of Los Angeles and the Center Theatre Group. Formerly: Executive Vice President,
Chief Financial Officer and Director of ARCO; Director of Vastar Resources,
Inc., ARCO Chemical Company, SunAmerica, Inc. and Brookings Institution.
William E. B. Siart [50] Director; Director of Pacific American Income
Shares, Inc. Formerly: Chairman (1995-1996), Chief Executive Officer
(1995-1996), President (1990-1996) of First Interstate Bancorp. Member of the
Board of Trustees of the University of Southern California.
Donna E. Barnes, [37] Secretary; Secretary, Pacific American Income
Shares, Inc., April 1996 - present; Compliance Officer of Western Asset
Management Company, 1991 - present. Formerly: Assistant Secretary of the Fund
and Pacific American Income Shares, Inc., 1993-1996.
Carl L. Eichstaedt, [37] Vice President; Portfolio Manager of Western
Asset Management Company, 1994 - present; formerly: Senior partner, Portfolio
Manager of Harris Investment Management, 1993-1994; Portfolio Manager of Pacific
Investment Management Company, 1992-1993; Director Fixed Income of Security
Pacific Investment Managers, 1990-1992; and Vice President of Chemical
Securities, Inc., 1986-1990.
Kent S. Engel, [50] Vice-President; Managing Director and Chief
Investment Officer of Western Asset Management Company, 1969-present;
Vice-President and Portfolio Manager of Pacific American Income Shares, Inc.
Keith J. Gardner, [40] Vice President; Portfolio Manager of Western
Asset Management Company, 1994 - present; formerly: Senior Portfolio Manager of
Legg Mason, Inc., 1992-1994; Portfolio Manager of T. Rowe Price Associates,
Inc., 1985-1992.
Scott F. Grannis, [48] Vice President; Economist, Western Asset
Management Company, 1989 present; Vice President of Pacific American Income
Shares, Inc.; formerly: Vice-President, Leland O'Brien Rubinstein (investment
advisory firm), 1986-89.
Ilene S. Harker, [42] Vice President; Managing Director, Administration
and Controls, Western Asset Management Company, 1978-present; Vice President,
Pacific American Income Shares, Inc., since April 1996; Formerly: Secretary of
the Fund and Secretary of Pacific American Income Shares, Inc., 1993-1996.
James W. Hirschmann, III, [37] Vice-President; Managing Director,
Marketing, Western Asset Management Company, April 1989-present and Western
Asset Global Management Limited, January 1997-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, [48] Vice-President and Treasurer; Vice-President
and Treasurer of nine Legg Mason funds (open-end investment companies);
Assistant Treasurer of Pacific American Income Shares, 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.
15
<PAGE>
Randolph L. Kohn, [50] Vice-President; Managing Director, Client
Services, Western Asset Management Company, 1984-present.
S. Kenneth Leech, [43] Vice-President; Managing Director, Portfolio
Management, Western Asset Management Company, May 1990-present; formerly:
Portfolio Manager of Greenwich Capital, 1988-1990; Fixed Income Manager of The
First Boston Corporation (holding company; stock and bond dealers), 1985- 1987.
Edward A. Moody, [47] Vice-President; Portfolio Manager, Western Asset
Management Company, 1985-present.
Joseph L. Orlando, [37] Vice-President; Marketing Executive of Western
Asset Management Company, 1992-present; formerly: Regional Manager of T. Rowe
Price Associates (investment management firm), January 1988 - July 1992.
Steven T. Saruwatari, [32] Assistant Treasurer; Senior Financial
Officer, Western Asset Management Company, 1995-present; 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.
Stephen A. Walsh, [38] Vice-President: Managing Director and Portfolio
Manager, Western Asset Management Company, 1991 - present; formerly: Portfolio
Manager and Trader of Security Pacific Investment Managers, Inc. (investment
management company), 1989-1991.
- --------------------
(1) Member of the Executive Committee of the Board. When the full Board is
not in session, the Executive Committee may exercise all the powers held by the
Board in the management of the business and affairs of the Fund that may be
lawfully exercised by the full Board, except the power to declare a dividend, to
authorize the issuance of stock, to recommend to stockholders any matter
requiring stockholders' approval, to amend the By-Laws, or to approve any merger
or share exchange which does not require shareholder approval.
(2) Member of the Audit Committee of the Board. The Audit Committee meets
with the Fund's independent accountants to review the financial statements of
the Fund, the arrangements for special and annual audits, the adequacy of
internal controls, the Fund's periodic reporting process, material contracts
entered into by the Fund, the services provided by the accountants, any proposed
changes in accounting practices or principles, the independence of the
accountants; and to report on such matters to the Board.
The Fund has no nominating or compensation committee.
(3) Mr. Olson may be deemed an interested person because the law firm in
which he is a partner has provided certain services to the Fund and its
investment adviser.
(4) Because Mr. Simpson is a Director of Salomon Inc., the parent company
of a registered broker-dealer, Mr. Simpson may be an interested person.
Officers and directors of the Fund who are affiliated persons of the
Adviser, Administrator or Distributors 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, 1997.
16
<PAGE>
COMPENSATION TABLE
------------------
<TABLE>
<CAPTION>
=========================================================================================================
Aggregate Compensation From Total Compensation From Fund
Name of Person and Position the Fund* and Complex Paid to Directors**
- ---------------------------------------------------------------------------------------------------------
<S> <C>
William G. McGagh -
Chairman of the Board and Director $12,000 $20,400
- ---------------------------------------------------------------------------------------------------------
Dr. Richard C. Gilman - Director $10,500 $18,500
- ---------------------------------------------------------------------------------------------------------
Ronald L. Olson - Director $10,500 $18,600
- ---------------------------------------------------------------------------------------------------------
W. Curtis Livingston, III - President
and Director None None
- ---------------------------------------------------------------------------------------------------------
Norman Barker, Jr. - Director $10,000 $20,400
- ---------------------------------------------------------------------------------------------------------
Louis A. Simpson - Director $10,500 $18,600
- ---------------------------------------------------------------------------------------------------------
William E. B. Siart - Director $500 $500
- ---------------------------------------------------------------------------------------------------------
Ronald J. Arnault - Director $0 $0
- ---------------------------------------------------------------------------------------------------------
Ilene S. Harker - Vice President None None
- ---------------------------------------------------------------------------------------------------------
Marie K. Karpinski - Vice President
and Treasurer None None
==================================== ====================================================================
</TABLE>
* Represents fees paid to each director during the fiscal year ended June
30, 1997.
** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1996. The complex consists of the Fund
and Pacific American Income Shares, Inc.
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 as amended on February
8, 1996, 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 as amended on February 8, 1996, between the Adviser
and the Fund covering the Intermediate and Short Duration Portfolios (together,
the "Advisory Agreement"). The Advisory Agreement was most recently approved by
the Board of Directors, including a majority of the directors who are not
"interested persons" (as defined in the 1940 Act) of the Fund, the Adviser or
its affiliates, on April 8, 1997.
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.
For the Core Portfolio, the Adviser received $2,006,880 (prior to fees
waived of $22,402), $1,548,346 (prior to fees waived of $111,421) and $963,008
(prior to fees waived of $69,442) for the years ended June 30, 1997, 1996 and
1995, respectively. For the Intermediate Portfolio, the Adviser received
$568,685 (prior to fees waived of $158,505), $130,938 (prior to fees waived of
$130,938) and $29,571 (prior to fees waived of $29,571) for the years ended June
30, 1997, 1996 and 1995, respectively. For the Limited Duration
17
<PAGE>
Portfolio, the Adviser waived all advisory fees for the year ended June 30, 1997
and for the period May 1, 1996 (commencement of operations) to 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.
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 8,
1997 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
dividend-disbursing 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 $250,860,
$193,547 and $120,376 for the years ended June 30, 1997, 1996 and 1995,
respectively. For the Intermediate Portfolio, the Administrator received fees of
$81,241 for the year ended June 30, 1997 and waived all administrative fees for
the years ended June 30, 1996 and1995. For the Limited Duration Portfolio, the
Administrator received fees of $10,092 and $1,202 (prior to fees waived of $69)
for the year ended June 30, 1997 and the period May 1, 1996 (commencement of
operations) to June 30, 1996.
18
<PAGE>
The Fund's Distributor
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 8, 1997.
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 April 8, 1997.
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 for 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
19
<PAGE>
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.
The Fund has authorized one or more brokers to accept purchase and
redemption orders on the Fund's behalf. Such brokers are authorized to designate
other intermediaries to accept purchase and redemption orders on the Fund's
behalf. So long as such authorization is effective, the Fund will be deemed to
have received a purchase or redemption order when an authorized broker or, if
applicable a broker's authorized designee, accepts the order, which will be
priced at the net asset value for the applicable Portfolio next computed after
the order is accepted by such an authorized broker or the broker's authorized
designee.
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, 1997 and 1996, the Core
Portfolio's portfolio turnover rates were 384.8% and 266.0%, respectively; the
Intermediate Portfolio's portfolio turnover rates were 419.26% and 841.89%,
respectively; and the Limited Duration Portfolio's portfolio turnover rates were
435.47% and 1,042.0% (annualized), respectively.
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.
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.
20
<PAGE>
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. Brokerage commissions paid on futures and options transactions were as
follows: for the years ended June 30, 1997, 1996 and 1995, the Core Portfolio
paid $150,548, $97,148 and $59,330, respectively; the Intermediate Portfolio
paid $50,835, $11,655 and $5,970, respectively; and the Limited Duration
Portfolio paid $7,170 and $0 for the years ended June 30, 1997 and the period
ended June 30, 1996. 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 January. Such a
distribution, therefore, will be taxable to shareholders for the year in which
that December 31 falls.
Hedging Transactions
The use of hedging strategies, such as writing and purchasing options
and futures contracts, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the income received in
connection therewith by a Portfolio. Income from transactions in options and
futures derived by a Portfolio with respect to its business of investing in
securities will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts will be
subject to the Short-Short Limitation if they are held for less than three
months.
If a Portfolio satisfied certain requirements, any increase in value on
a position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Portfolio satisfies
the Short- Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income
21
<PAGE>
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.
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.
22
<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 October 15, 1997:
<TABLE>
<CAPTION>
=============================================================================================
Name and Address % of Ownership
As of
October 15, 1997
=============================================================================================
<S> <C>
BHP Copper-Group 6.58%
7400 N. Oracle Road
Suite 200
Tucson, AZ 85704
- ---------------------------------------------------------------------------------------------
Newspaper and Mail Deliverers' Publishers' Pension Fund 7.24%
41-18 27th Street
Long Island City, NY 11101-3825
- ---------------------------------------------------------------------------------------------
Houghton Mifflin Company Pension Plan 5.39%
222 Berkeley Street
Boston, MA 02116-3764
- ---------------------------------------------------------------------------------------------
Thompson Consumer Electronics, Inc. 7.24%
600 North Sherman Drive
Indianapolis, IN 46201-2598
=============================================================================================
</TABLE>
The following chart contains the name, address and percentage of
ownership of each person who is known by the Fund to own of record five percent
or more of the outstanding shares of the Core Portfolio as of October 15, 1997:
<TABLE>
<CAPTION>
============================================================================================
Name and Address % of Ownership
As of
October 15, 1997
============================================================================================
<S> <C>
Northern Trust Company 11.31%
50 S. LaSalle Street
Chicago, IL 60675
- --------------------------------------------------------------------------------------------
State Street Bank & Trust Company 16.86%
Solomon Willard Bldg.
Enterprise Drive
North Quincy, MA 02171
- --------------------------------------------------------------------------------------------
Newspaper and Mail Deliverers' Publishers' Pension Fund 7.24%
41-18 27th Street
Long Island City, NY 11101-3825
- --------------------------------------------------------------------------------------------
Bankers Trust 9.55%
648 Grassmere Park Road
2nd Floor
Nashville, TN 37211
============================================================================================
</TABLE>
Set forth below is a table which contains the name, address and
percentage of ownership of each person who is known by the Fund to own
beneficially five percent or more of the outstanding shares of the Intermediate
Portfolio as of October 15, 1997:
23
<PAGE>
<TABLE>
<CAPTION>
============================================================================================
Name and Address % of Ownership
As of
October 15, 1997
============================================================================================
<S> <C>
Harvard Industries Inc. 7.22%
2502 N. Rocky Point Drive
Tampa, FL 33607
- --------------------------------------------------------------------------------------------
Allergan Inc. 7.63%
2525 Dupont Drive
P.O. Box 19534
Irvine, CA 92713-9354
- --------------------------------------------------------------------------------------------
Anne Arundel County MD Master Trust 10.88%
44 Calvert Street
Annapolis, MD 21404
- --------------------------------------------------------------------------------------------
Harn Industries 15.75%
P.O. Box 554
Milwaukee, WI 53201
- --------------------------------------------------------------------------------------------
MA Hanna Master Trust 13.67%
200 Public Square
Cleveland, OH 44114-2301
============================================================================================
</TABLE>
The following chart contains the name, address and percentage of
ownership of each person who is known by the Fund to own of record five percent
or more of the outstanding shares of the Intermediate Portfolio as of October
15, 1997:
<TABLE>
<CAPTION>
============================================================================================
Name and Address % of Ownership
As of
October 15, 1997
============================================================================================
<S> <C>
Marshall & Ilsley Trust Co. 15.75%
1000 N. Water Street
Milwaukee, WI 53202
- --------------------------------------------------------------------------------------------
First Union National Bank 7.94%
401 S. Tryon Street
Charlotte, NC 28202
- --------------------------------------------------------------------------------------------
Northern Trust Company 13.67%
50 LaSalle Street
Chicago, IL 60675
- --------------------------------------------------------------------------------------------
Key Trust 10.66%
P.O. Box 94870
Cleveland, OH 44101
- --------------------------------------------------------------------------------------------
State Street Bank & Trust 10.88%
P.O. Box 1992
Boston, MA 02105
- --------------------------------------------------------------------------------------------
Mac & Co. 7.63%
Mellon Bank NA
Pittsburgh, PA 15230
============================================================================================
</TABLE>
24
<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 Limited
Duration Portfolio as of October 15, 1997:
<TABLE>
<CAPTION>
===========================================================================================
Name and Address % of Ownership
As of
October 15, 1997
===========================================================================================
<S> <C>
Western Michigan University 42.75%
Investment & Endowment Mgmt.
1083 Seibert Admin. Bldg.
Kalamazoo, MI 49008
- -------------------------------------------------------------------------------------------
University Athletic Assoc. 25.35%
P.O. Box, 14485
Gainesville, FL 32604
- -------------------------------------------------------------------------------------------
Good Shepherd Medical 23.92%
P.O. Box 160
Westerville, OH 43086
- -------------------------------------------------------------------------------------------
Northwestern Trust Co. 7.97%
600HFA Bldg.
914 S. 8th Street
Minneapolis, MN 55404
===========================================================================================
</TABLE>
The following chart contains the name, address and percentage of
ownership of each person who is known by the Fund to own of record five percent
or more of the outstanding shares of the Limited Duration Portfolio as of
October 15, 1997:
<TABLE>
<CAPTION>
============================================================================================
Name and Address % of Ownership
As of
October 15, 1997
============================================================================================
<S> <C>
Western Michigan University 42.75%
Investment & Endowment Mgmt.
1083 Seibert Admin. Bldg.
Kalamazoo, MI 49008
- --------------------------------------------------------------------------------------------
University Athletic Assoc. 25.35%
P.O. Box, 14485
Gainesville, FL 32604
- --------------------------------------------------------------------------------------------
Strafe & Co. 23.92%
P.O. Box 160
Westerville, OH 43086
- --------------------------------------------------------------------------------------------
Northwestern Trust Co. 7.97%
600HFA Bldg.
914 S. 8th Street
Minneapolis, MN 55404
============================================================================================
</TABLE>
Performance Information
The Fund may, from time to time, include the total return for its
Portfolios in marketing materials or reports to shareholders or prospective
investors. Quotations of average annual total return for a Portfolio will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Portfolio over periods of one, five and ten years
(up to the life of the Portfolio), calculated pursuant to the
25
<PAGE>
following formula: P (1 + T)(superscript 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 Core Portfolio's total returns as of June 30, 1997 were as follows:
Average
Cumulative Annual
Total Return Total Return
------------ ------------
One Year 8.27% 8.27%
Five Years 47.05% 8.02%
Life of Fund(A) 88.71% 9.76%
- ---------
(A) Fund's inception - September 4, 1990.
The Intermediate Portfolio's total returns as of June 30, 1997 were as
follows:
Average
Cumulative Annual
Total Return Total Return
------------ ------------
One Year 8.32% 8.32%
Life of Fund(A) 25.40% 7.83%
- ---------
(A) Fund's inception - July 1, 1994.
The Limited Duration Portfolio's total returns as of June 30, 1997 were
as follows:
Average
Cumulative Annual
Total Return Total Return
------------ ------------
One Year 7.42% 7.42%
Life of Fund(A) 8.23% 7.01%
- ---------
(A) Fund's inception - May 1, 1996.
26
<PAGE>
The current annualized yield for the Money Market Portfolio is based
upon a specified seven-day period and is computed by determining the net change
in the value of a hypothetical account in the Portfolio. The net change in the
value of the account includes the value of dividends and of additional shares
purchased with dividends, but does not include realized gains and losses or
unrealized appreciation and depreciation. In addition, the fund may use a
compound effective annualized yield quotation which is calculated as prescribed
by SEC regulations, by adding one to the base period return (calculated as
prescribed above), raising the sum to a power equal to 365 divided by 7, and
subtracting one.
The Fund's performance may fluctuate daily depending upon such factors
as the average maturity of its securities, changes in investments, changes in
interest rates and variations in operating expenses. Therefore, current
performance does not provide a basis for determining future performance. The
fact that the Fund's performance will fluctuate and that shareholders' principal
is not guaranteed or insured should be considered in comparing the Fund's
performance with the performance of fixed-income investments. In comparing the
performance of the Fund to other investment vehicles, consideration should be
given to the investment policies of each, including the types of investments
owned, lengths of maturities of the portfolio, the method used to compute the
performance and whether there are any special charges that may reduce the yield.
Custodian, Transfer Agent and Dividend-Disbursing Agent
State Street Bank and Trust Company, P.O. Box 1790, Boston,
Massachusetts 02105, serves as custodian of the Fund's assets. Boston Financial
Data Services, Inc., P.O. Box 953, Boston, Massachusetts 02103 serves as
transfer and dividend-disbursing agent and administrator of various shareholder
services. Shareholders who request an historical transcript of their account
will be charged a fee based upon the number of years researched. The Fund
reserves the right, upon 60 days' written notice, to make other charges to
investors to cover administrative costs.
Independent Accountants
Price Waterhouse LLP, 1306 Concourse Drive, Linthicum, Maryland 21090,
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, CA 90071,
serves as legal counsel to the Fund.
FINANCIAL STATEMENTS
The Core Portfolio's Portfolio of Investments as of June 30, 1997;
Statement of Assets and Liabilities as of June 30, 1997; Statement of Operations
for the year ended June 30, 1997; Statement of Changes in Net Assets for the
years ended June 30, 1997 and 1996; the Financial Highlights for the periods
presented; 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, 1997, are hereby
incorporated by reference in this Statement of Additional Information.
The Intermediate Portfolio's Portfolio of Investments as of June 30,
1997; Statement of Assets and Liabilities as of June 30, 1997; Statement of
Operations for the year ended June 30, 1997; Statement of Changes in Net Assets
for the years ended June 30, 1997 and 1996; the Financial Highlights for the
periods presented; the Notes to Financial Statements and the related Report of
Independent Accountants, all of which
27
<PAGE>
are included in the Intermediate Portfolio's Annual Report to Shareholders for
the year ended June 30, 1997, are hereby incorporated by reference in this
Statement of Additional Information.
The Limited Duration Portfolio's Portfolio of Investments as of June
30, 1997; Statement of Assets and Liabilities as of June 30, 1997; Statement of
Operations for the year ended June 30, 1997; Statement of Changes in Net Assets
for the years ended June 30, 1997 and 1996; the Financial Highlights for the
periods presented; 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, 1997, are
hereby incorporated by reference in this Statement of Additional Information.
The audited Statement of Assets and Liabilities as of June 30, 1997 for
the Money Market, Short Duration and Long Duration Portfolios and the Reports of
Independent Accountants are shown on the following pages.
28
<PAGE>
WESTERN ASSET TRUST, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997
<TABLE>
<CAPTION>
Long Short Money
Duration Duration Market
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <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 31,000 9,000
------- ------- -------
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 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, 1997. 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 Wood Walker, Incorporated ("Legg Mason"), a wholly owned subsidiary of
Legg Mason, Inc. and a member of the New York Stock Exchange, and Arroyo Seco,
Inc., a wholly owned subsidiary of Western Asset, act as distributors 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 or any holder thereof 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.
29
<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 and Money Market Portfolio
(three of the nine portfolios comprising Western Asset Trust, Inc.) at June 30,
1997, 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 included 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
Linthicum, Maryland
October 30, 1997
<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.
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
A-1
<PAGE>
terms of the obligation. BB indicates the lowest degree of speculation and CC
the highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Description of Moody's preferred stock ratings:
- -----------------------------------------------
Aaa-An issue which is rated "Aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stock.
Aa-An issue which is rated "Aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
A-An issue which is rated "A" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
Baa-An issue which is rated "Baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
Ba-An issue which is rated "Ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
A-2
<PAGE>
WESTERN ASSET TRUST, INC.
International Securities Portfolio
Corporate Securities Portfolio
Mortgage 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,
1997, 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
(626) 844-9400.
Dated: October 30, 1997
<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 34
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. Because the International Portfolio is non-diversified, it is
only required to comply with this limitation for each of its fiscal quarter ends
as prescribed by the Internal Revenue Code;
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;
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;
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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 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.
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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
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
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A Portfolio's investments in U.S. dollar-denominated or foreign
currency-denominated fixed income and other debt securities of non-governmental
domestic or foreign issuers are limited to fixed income or other debt securities
(bonds, debentures, notes and other similar instruments) which meet the minimum
ratings criteria set forth for the Portfolio or, if unrated, are judged by that
Portfolio's adviser to be of comparable quality to fixed income or other debt
securities in which the Portfolio may invest. The rate of return or return of
principal on some obligations may be linked or indexed to the level of exchange
rates between the U.S. dollar and a foreign currency or currencies.
Where one rating organization has assigned an investment grade rating
to an instrument and others have given it a lower rating, the Fund may consider
the instrument to be investment grade. The market for lower-rated securities may
be thinner and less active than that for higher-rated securities, which can
adversely affect the prices at which these securities can be sold, and may make
it difficult for a Portfolio to obtain market quotations daily. If market
quotations are not available, these securities will be valued by a method that
the Fund's Board of Directors believes accurately reflects fair market value.
Judgment may play a greater role in valuing lower-rated debt securities than is
the case with respect to securities for which a broader range of dealer
quotations and last-sale information are available.
Although the prices of lower-rated bonds are generally less sensitive
to interest rate changes than are higher-rated bonds, the prices of lower-rated
bonds may be more sensitive to adverse economic changes and developments
regarding the individual issuer. Although the market for lower-rated debt
securities is not new, and the market has previously weathered economic
downturns, there has been in recent years a substantial increase in the use of
such securities to fund corporate acquisitions and restructurings. Accordingly,
the past performance of the market for such securities may not be an accurate
indication of its performance during future economic downturns or periods of
rising interest rates.
Bank Obligations
Bank obligations in which the Portfolios may invest include
certificates of deposit, bankers' acceptances and time deposits in U.S. banks
(including foreign branches) which have more than $1 billion in total assets at
the time of investment and are members of the Federal Reserve System or are
examined by the Comptroller of the Currency or whose deposits are insured by the
Federal Deposit Insurance Corporation. A Portfolio also may invest in
certificates of deposit of savings and loan associations (federally or state
chartered and federally insured) having total assets in excess of $1 billion.
The International Portfolio may invest in obligations of domestic or
foreign branches of foreign banks and foreign branches of domestic banks. These
investments involve risks that are different from investments in securities of
domestic branches of domestic banks. These risks include seizure of foreign
deposits, currency controls, interest limitations or other governmental
restrictions which might affect the payment of principal or interest on the bank
obligations held by the Portfolio.
The International Portfolio limits its investments in foreign bank
obligations to U.S. dollar-denominated or foreign currency-denominated
obligations of foreign banks (including U.S. branches of foreign banks) which at
the time of investment (1) have more than $10 billion, or the equivalent in
other currencies, in total assets; (2) have branches or agencies (limited
purpose offices which do not offer all banking services) in the United States;
and (3) are judged by Western Asset to be of comparable quality to obligations
of U.S. banks in which the Portfolios may invest. Subject to the limitation on
concentration of less than 25% of the Portfolio's assets in the securities of
issuers in a particular industry, there is no limitation on the amount of the
International Portfolio's assets which may be invested in obligations of foreign
banks which meet the conditions set forth herein. Foreign banks are not
generally subject to examination by any U.S. Government agency or
instrumentality.
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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
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.
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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
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
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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 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.
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The International Portfolio's ability to establish and close out
positions on such options is subject to the maintenance of a liquid secondary
market. Although many options on foreign currencies are exchange trades, the
majority are traded on the OTC market. The Portfolio will not purchase or write
such options unless, in the opinion of its adviser, the market for them has
developed sufficiently. The Portfolio may use foreign currency options traded on
a commodities exchange only for hedging purposes or in other circumstances
permitted by the CFTC. There can be no assurance that a liquid secondary market
will exist for a particular option at any specific time. In addition, options on
foreign currencies are affected by all of those factors that influence foreign
exchange rates and investments generally. These OTC options also involve credit
risks which may not be present in the case of exchange-traded currency options.
Futures Contracts and Options on Futures Contracts
Each Portfolio will limit its use of futures contracts and futures
options to hedging transactions or other circumstances permitted by regulatory
authorities. For example, a Portfolio might use futures contracts to attempt to
hedge against anticipated changes in interest rates that might adversely affect
either the value of the Portfolio's securities or the price of the securities
which the Portfolio intends to purchase. A Portfolio's hedging may include sales
of futures contracts as an offset against the effect of expected increases in
interest rates, and purchases of futures contracts as an offset against the
effect of expected declines in interest rates. Although other techniques could
be used to reduce exposure to interest rate fluctuations, a Portfolio may be
able to hedge its exposure more effectively and perhaps at a lower cost by using
futures contracts and options on futures contracts.
The International Portfolio may also purchase call or put options on
foreign currency futures contracts to obtain a fixed foreign exchange rate at
limited risk. The Portfolio may purchase a call option on a foreign currency
futures contract to hedge against a rise in the foreign exchange rate while
intending to invest in a foreign security of the same currency. The
International Portfolio may purchase put options on foreign currency futures
contracts as a partial hedge against a decline in the foreign exchange rates or
the value of its foreign portfolio securities. The Portfolio may write a call
option on a foreign currency futures contract as a partial hedge against the
effects of declining foreign exchange rates on the value of foreign securities.
A Portfolio also may use futures contracts on fixed income instruments
and options thereon to hedge its investment portfolio against changes in the
general level of interest rates. A futures contract on a fixed income instrument
is a bilateral agreement pursuant to which one party agrees to make, and the
other party agrees to accept, delivery of the specified type of fixed income
security called for in the contract at a specified future time and at a
specified price. A Portfolio may purchase a futures contract on a fixed income
security when it intends to purchase fixed income securities but has not yet
done so. This strategy may minimize the effect of all or part of an increase in
the market price of the fixed income security that a Portfolio intends to
purchase in the future. A rise in the price of the fixed income security prior
to its purchase may be either offset by an increase in the value of the futures
contract purchased by a Portfolio or avoided by taking delivery of the fixed
income securities under the futures contract. Conversely, a fall in the market
price of the underlying fixed income security may result in a corresponding
decrease in the value of the futures position. A Portfolio may sell a futures
contract on a fixed income security in order to continue to receive the income
from a fixed income security, while endeavoring to avoid part or 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.
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A Portfolio may sell bond index futures contracts in anticipation of a
general market or market sector decline that could adversely affect the market
value of its investments. To the extent that a portion of the Portfolio's
investments correlate with a given index, the sale of futures contracts on that
index could reduce the risks associated with a market decline and thus provide
an alternative to the liquidation of securities positions. For example, if a
Portfolio correctly anticipates a general market decline and sells bond index
futures to hedge against this risk, the gain in the futures position should
offset some or all of the decline in the value of the portfolio. A Portfolio may
purchase bond index futures contracts if a significant market or market sector
advance is anticipated. Such a purchase of a futures contract would serve as a
temporary substitute for the purchase of individual debt securities, which debt
securities may then be purchased in an orderly fashion. This strategy may
minimize the effect of all or part of an increase in the market price of
securities that the Fund intends to purchase. A rise in the price of the
securities should be partly or wholly offset by gains in the futures position.
As in the case of a purchase of a bond index futures contract, a
Portfolio may purchase a call option on a bond index futures contract to hedge
against a market advance in securities that the Portfolio plans to acquire at a
future date. A Portfolio may write covered put options on bond index futures as
a partial anticipatory hedge and may write covered call options on bond index
futures as a partial hedge against a decline in the prices of bonds held in its
portfolio. This is analogous to writing covered call options on securities. A
Portfolio also may purchase put options on bond index futures contracts. The
purchase of put options on bond index futures contracts is analogous to the
purchase of protective put options on individual securities where a level of
protection is sought below which no additional economic loss would be incurred
by the Portfolio.
The International Portfolio may also purchase and sell futures
contracts on a foreign currency. The Portfolio may sell a foreign currency
futures contract to hedge against possible variations in the exchange rate of
the foreign currency in relation to the U.S. dollar. In addition, the
International Portfolio may sell a foreign currency futures contract when the
adviser anticipates a general weakening of the foreign currency exchange rate
that could adversely affect the market values of the Portfolio's foreign
securities holdings. In this case, the sale of futures contracts on the
underlying currency may reduce the risk to the Portfolio caused by foreign
currency variations and, by so doing, provide an alternative to the liquidation
of securities positions in the Portfolio and resulting transaction costs. When
the adviser anticipates a significant foreign exchange rate increase while
intending to invest in a foreign currency, the Portfolio may purchase a foreign
currency futures contract to hedge against a rise in foreign exchange rates
pending completion of the anticipated transaction. Such a purchase would serve
as a temporary measure to protect the 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
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would enter into a long straddle when it believes that it is likely that
interest rates or foreign currency exchange rates will be more volatile during
the term of the options than the option pricing implies. A short straddle is a
combination of a call and put written on the same futures contract where the
exercise price of the put option is less than the exercise price of the call
option and where the same security or futures contract is considered "cover" for
both the put and the call. A Portfolio would enter into a short straddle when it
believes that it is unlikely that interest rates or foreign currency exchange
rates will be as volatile during the term of the options as the option pricing
implies. In such case, the Portfolio will set aside cash and/or liquid, high
grade debt securities in a segregated account with its custodian equal in value
to the amount, if any, by which the put is "in-the-money", that is, the amount
by which the exercise price of the put exceeds the current market value of the
underlying futures contract.
When a purchase or sale of a futures contract is made by a Portfolio,
the Portfolio is required to deposit with its custodian (or a broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Portfolio may be required by an exchange to increase the level of its initial
margin payment. Additionally, initial margin requirements may be increased
generally in the future by regulatory action. Each Portfolio expects to earn
interest income on its initial margin deposits. A futures contract held by a
Portfolio is valued daily at the official settlement price of the exchange on
which it is traded. Each day the Portfolio pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Portfolio but is instead settlement between
the Portfolio and the broker of the amount one would owe the other if the
futures contract 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
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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, currency and interest rate markets, which may require
different skills and techniques than predicting changes in the prices of
individual securities. Moreover, futures contracts relate not to the current
level of the underlying instrument but to the anticipated levels at some point
in the future. There is, in addition, the risk that the movements in the price
of the futures contract will not correlate with the movements in prices of the
securities or currencies being hedged. For example if the price of the futures
contract moves less than the price of the securities or currencies that are
subject to the hedge, the hedge will not be fully effective; however, if the
price of securities or currencies being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it had not hedged
at all. If the price of the securities or currencies being hedged has moved in a
favorable direction, this advantage may be partially offset by losses in the
futures position. In addition, if the Portfolio has insufficient cash, it may
have to sell assets from its investment portfolio to meet daily variation margin
requirements. Any such sale of assets may or may not be made at prices that
reflect the rising market; consequently, a Portfolio may need to sell assets at
a time when such sales are disadvantageous to the Portfolio. If the price of the
futures contract moves more than the price of the underlying securities or
currencies, the Portfolio will experience either a loss or a gain on the futures
contract that may or may not be completely offset by movements in the price of
the securities or currencies that are the subject of the hedge.
(4) The value of an option position will reflect, among other things,
the current market price of the underlying security, futures contract or
currency, the time remaining until expiration, the relationship of the exercise
price to the market price, the historical price volatility of the underlying
security, futures contract or currency and general market conditions. For this
reason, the successful use of options as a hedging strategy depends upon the
adviser's ability to forecast the direction of price fluctuations in the
underlying market or market sector.
(5) In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between price movements in the futures
position and the securities or currencies being hedged, movements in the prices
of futures contracts may not correlate perfectly with movements in the prices of
the hedged securities or currencies due to price distortions in the futures
market. There may be several reasons
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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 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
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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 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.
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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-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.
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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 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.
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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-the-money," in a
total loss of the purchase price of the warrants. Warrants are generally
unsecured obligations of their issuers and are not standardized foreign currency
options issued by the Options Clearing Corporation ("OCC"). Unlike foreign
currency options issued by OCC, the terms of foreign currency warrants generally
will not be amended in the event of governmental or regulatory actions affecting
exchange rates or in the event of the imposition of other regulatory controls
affecting the international currency markets. The initial public offering price
of foreign currency warrants is generally considerably in excess of the price
that a commercial user of foreign currencies might pay in the interbank market
for a comparable option involving significantly larger amounts of foreign
currencies. Foreign currency warrants are subject to significant foreign
exchange risk, including risks arising from complex political and economic
factors.
VALUATION OF PORTFOLIO SHARES
As described in the Prospectus, securities for which market quotations
are readily available are valued at current market value. Securities are valued
at the last sale price for a comparable position on the day the securities are
being valued or, lacking any sales on such day, at the last available bid price.
In cases where securities are traded on more than one market, the securities are
generally valued on the market considered by the adviser as the primary market.
All investments valued in foreign currency are valued daily in U.S.
dollars on the basis of the foreign currency exchange rate prevailing at the
time such valuation is determined. Foreign currency exchange rates are generally
determined prior to the close of trading on the New York Stock Exchange.
Occasionally, events affecting the value of foreign investments and such
exchange rates occur between the time at which they are determined and the close
of trading on the Exchange. Such investments will be valued at their fair value,
as determined in good faith by or under the direction of the Board of Directors.
Foreign currency exchange transactions of a Portfolio occurring on a spot basis
are valued at the spot rate for purchasing or selling currency prevailing on the
foreign exchange market.
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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, [68] (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).
Norman Barker, Jr., [75] Director; Director of Pacific American Income
Shares, Inc., Bank Plus (holding company for Fidelity Federal Bank), ICN
Pharmaceuticals, Inc. and TCW Convertible Securities Fund, Inc. (management
investment company); formerly: Chairman of the Board of First Interstate
Bancorp.
Dr. Richard C. Gilman, [74] (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.
*W. Curtis Livingston, III, [54] (1) President and Director; President,
Director and Chief Executive Officer of Western Asset Management Company
(investment management firm and the investment adviser to the Fund), December
1980-present; President, Pacific American Income Shares, Inc.; Director, Legg
Mason, Inc.
*Ronald L. Olson, [56] (2) (3) Director; Senior Partner, Munger, Tolles
& Olson LLP (a law partnership); Director of Pacific American Income Shares,
Inc.
*Louis A. Simpson, [60] (1) (4) Director; President and CEO, Capital
Operations of Government Employees Insurance Company (GEICO Corporation) since
May 1993; Director of Pacific American Income Shares, Inc., Potomac Electric
Power Company, Potomac Capital Investment Corporation, Thompson PBE, COHR, Inc.
and Salomon Inc. Formerly: Vice Chairman of GEICO (1985-1993); Senior Vice
President and Chief Investment Officer of GEICO (1979-1985); President and CEO
of Western Asset Management Company.
Ronald J. Arnault, [54] Director; President of RJA Consultants (energy
industry financial consulting); member, Board of Governors of The Music Center
of Los Angeles and the Center Theatre Group. Formerly: Executive Vice President,
Chief Financial Officer and Director of ARCO; Director of Vastar Resources,
Inc., ARCO Chemical Company, SunAmerica, Inc. and Brookings Institution.
William E. B. Siart [50] Director; Director of Pacific American Income
Shares, Inc. Formerly: Chairman (1995-1996), Chief Executive Officer
(1995-1996), President (1990-1996) of First Interstate Bancorp. Member of the
Board of Trustees of the University of Southern California.
Donna E. Barnes, [37] Secretary; Secretary, Pacific American Income
Shares, Inc., April 1996 - present; Compliance Officer of Western Asset
Management Company, 1991 - present. Formerly: Assistant Secretary of the Fund
and Pacific American Income Shares, Inc., 1993-1996.
19
<PAGE>
Carl L. Eichstaedt, [37] Vice President; Portfolio Manager of Western
Asset Management Company, 1994 - present; formerly: Senior partner, Portfolio
Manager of Harris Investment Management, 1993-1994; Portfolio Manager of Pacific
Investment Management Company, 1992-1993; Director Fixed Income of Security
Pacific Investment Managers, 1990-1992; and Vice President of Chemical
Securities, Inc., 1986-1990.
Kent S. Engel, [50] Vice-President; Managing Director and Chief
Investment Officer of Western Asset Management Company, 1969-present;
Vice-President and Portfolio Manager of Pacific American Income Shares, Inc.
Keith J. Gardner, [40] Vice President; Portfolio Manager of Western
Asset Management Company, 1994 - present; formerly: Senior Portfolio Manager of
Legg Mason, Inc., 1992-1994; Portfolio Manager of T. Rowe Price Associates,
Inc., 1985-1992.
Scott F. Grannis, [48] Vice President; Economist, Western Asset
Management Company, 1989-present; Vice President of Pacific American Income
Shares, Inc.; formerly: Vice-President, Leland O'Brien Rubinstein (investment
advisory firm), 1986-89.
Ilene S. Harker, [42] Vice President; Managing Director, Administration
and Controls, Western Asset Management Company, 1978-present; Vice President,
Pacific American Income Shares, Inc., since April 1996; Formerly: Secretary of
the Fund and Secretary of Pacific American Income Shares, Inc., 1993-1996.
James W. Hirschmann, III, [37] Vice-President; Managing Director,
Marketing, Western Asset Management Company, April 1989-present and Western
Asset Global Management Limited, January 1997-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, [48] Vice-President and Treasurer; Vice-President
and Treasurer of nine Legg Mason funds (open-end investment companies);
Assistant Treasurer of Pacific American Income Shares, 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.
Randolph L. Kohn, [50] Vice-President; Managing Director, Client
Services, Western Asset Management Company, 1984-present.
S. Kenneth Leech, [43] Vice-President; Managing Director, Portfolio
Management, Western Asset Management Company, May 1990-present; formerly:
Portfolio Manager of Greenwich Capital, 1988-1990; Fixed Income Manager of The
First Boston Corporation (holding company; stock and bond dealers), 1985-1987.
Edward A. Moody, [47] Vice-President; Portfolio Manager, Western Asset
Management Company, 1985-present.
Joseph L. Orlando, [37] Vice-President; Marketing Executive of Western
Asset Management Company, 1992-present; formerly: Regional Manager of T. Rowe
Price Associates (investment management firm), January 1988 - July 1992.
Steven T. Saruwatari, [32] Assistant Treasurer; Senior Financial
Officer, Western Asset Management Company, 1995-present; 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.
20
<PAGE>
Stephen A. Walsh, [38] Vice-President: Managing Director and Portfolio
Manager, Western Asset Management Company, 1991 - present; formerly: Portfolio
Manager and Trader of Security Pacific Investment Managers, Inc. (investment
management company), 1989-1991.
- --------------------
(1) Member of the Executive Committee of the Board. When the full Board is
not in session, the Executive Committee may exercise all the powers held by the
Board in the management of the business and affairs of the Fund that may be
lawfully exercised by the full Board, except the power to declare a dividend, to
authorize the issuance of stock, to recommend to stockholders any matter
requiring stockholders' approval, to amend the By-Laws, or to approve any merger
or share exchange which does not require shareholder approval.
(2) Member of the Audit Committee of the Board. The Audit Committee meets
with the Fund's independent accountants to review the financial statements of
the Fund, the arrangements for special and annual audits, the adequacy of
internal controls, the Fund's periodic reporting process, material contracts
entered into by the Fund, the services provided by the accountants, any proposed
changes in accounting practices or principles, the independence of the
accountants; and to report on such matters to the Board.
The Fund has no nominating or compensation committee.
(3) Mr. Olson may be deemed an interested person because the law firm in
which he is a partner has provided certain services to the Fund and its
investment adviser.
(4) Because Mr. Simpson is a Director of Salomon Inc., the parent company
of a registered broker-dealer, Mr. Simpson may be an interested person.
Officers and directors of the Fund who are affiliated persons of the
Adviser, Administrator or Distributors 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, 1997.
COMPENSATION TABLE
------------------
<TABLE>
<CAPTION>
=========================================================================================================
Aggregate Compensation From Total Compensation From Fund
Name of Person and Position the Fund* and Complex Paid to Directors**
- ---------------------------------------------------------------------------------------------------------
<S> <C>
William G. McGagh -
Chairman of the Board and Director $12,000 $20,400
- ---------------------------------------------------------------------------------------------------------
Dr. Richard C. Gilman - Director $10,500 $18,500
- ---------------------------------------------------------------------------------------------------------
Ronald L. Olson - Director $10,500 $18,600
- ---------------------------------------------------------------------------------------------------------
W. Curtis Livingston, III - President
and Director None None
- ---------------------------------------------------------------------------------------------------------
Norman Barker, Jr. - Director $10,000 $20,400
- ---------------------------------------------------------------------------------------------------------
Louis A. Simpson - Director $10,500 $18,600
- ---------------------------------------------------------------------------------------------------------
William E. B. Siart - Director $500 $500
- ---------------------------------------------------------------------------------------------------------
Ronald J. Arnault - Director $0 $0
=========================================================================================================
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
=========================================================================================================
Aggregate Compensation From Total Compensation From Fund
Name of Person and Position the Fund* and Complex Paid to Directors**
- ---------------------------------------------------------------------------------------------------------
<S> <C>
- ---------------------------------------------------------------------------------------------------------
Ilene S. Harker - Vice President None None
- ---------------------------------------------------------------------------------------------------------
Marie K. Karpinski - Vice President
and Treasurer None None
=========================================================================================================
</TABLE>
* Represents fees paid to each director during the fiscal year ended June
30, 1997.
** Represents aggregate compensation paid to each director during the
calendar year ended December 31, 1996. The complex consists of the Fund
and Pacific American Income Shares, Inc.
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 8, 1997. 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 $1,252,466 (prior to fees waived of $1,054,708), $970,680 (prior
to fees waived of $970,680) and $480,824 (prior to fees waived of $480,824) for
the years ended June 30, 1997, 1996 and 1995, respectively.
Each Portfolio pays all of its other expenses which are not assumed by
the adviser or the Administrator. These expenses include, among others, expenses
of preparing and printing prospectuses, statements of additional information,
proxy statements and reports and of distributing them to existing shareholders,
custodian charges, transfer agency fees, organizational expenses, compensation
of the directors who are not "interested persons" of the adviser, Administrator
or Distributor, as that term is defined in the 1940 Act, legal and audit
expenses, insurance expenses, expenses of registering and qualifying shares of
the Portfolio for sale under federal and state law, distribution fees,
governmental fees, expenses incurred in connection with membership in investment
company organizations, interest expense, taxes and brokerage fees and
commissions. The Portfolios also are liable for such nonrecurring expenses as
may arise, including litigation to which a Portfolio or the Fund may be a party.
The Fund may also have an obligation to indemnify its directors and officers
with respect to litigation.
Under the Advisory Agreement, Western Asset will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Advisory Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties thereunder.
The Advisory Agreement terminates automatically upon assignment and is
terminable with respect to any Portfolio at any time without penalty by vote of
the Fund's Board of Directors, by vote of a majority of that Portfolio's
outstanding voting securities, or by the adviser, on not less than 60 days'
notice to the other party, and may be terminated immediately upon the mutual
written consent of the parties.
22
<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 8, 1997.
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, 1997, 1996 and 1995, the Administrator received administrative
fees from the International Portfolio of $197,758, $182,007 and $90,158,
respectively.
The Fund's Distributor
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 8, 1997.
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 April 8, 1997.
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
23
<PAGE>
equal to .85% of the Portfolio's average daily net assets. These voluntary
expense limitations are in effect to October 30, 1998. In addition, Western
Asset has voluntarily waived for calendar year 1997 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.
PRINCIPAL HOLDERS OF SECURITIES
Set forth below is a table which contains the name, address and
percentage of ownership of each person who is known by the Fund to own
beneficially five percent or more of the outstanding shares of the International
Portfolio as of October 15, 1997:
<TABLE>
<CAPTION>
============================================================================================
Name and Address % of Ownership
As of
October 15, 1997
============================================================================================
<S> <C>
AT&T 15.25%
One Oak Way, Room 3ED146
Berkeley Heights, N.J. 07922
- --------------------------------------------------------------------------------------------
AT&T Long Distance 14.03%
One Oak Way
Berkeley Heights, NJ 07922
- --------------------------------------------------------------------------------------------
IBM 13.71%
3001 Summer Street
Stanford, CT 06905
- --------------------------------------------------------------------------------------------
Lockheed Master Trust 10.45%
6801 Rockledge Drive
Bethesda, MD 20817
- --------------------------------------------------------------------------------------------
Northwest Airlines 10.41%
5104 Northwest Drive
St. Paul, MN 55111
- --------------------------------------------------------------------------------------------
Florida P&L Group Pension Plan 8.46%
700 Universe Blvd.
Juno Beach, FL 33408
- --------------------------------------------------------------------------------------------
Southern Baptist 8.29%
2401 Cedar Springs Road
Dallas, TX 75221
============================================================================================
</TABLE>
The following chart contains the name, address and percentage of ownership
of each person who is known by the Fund to own of record five percent or more of
the outstanding shares of the International Portfolio as of October 15, 1997:
<TABLE>
<CAPTION>
============================================================================================
Name and Address % of Ownership
As of
October 15, 1997
============================================================================================
<S> <C>
Northern Trust Company 10.72%
10 S. LaSalle Street
Chicago, IL 60675
============================================================================================
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
============================================================================================
Name and Address % of Ownership
As of
October 15, 1997
============================================================================================
<S> <C>
Bankers Trust Company of California, N.A. 12.43%
Arco Finance Station
Los Angeles, CA 90071
- --------------------------------------------------------------------------------------------
State Street Bank & Trust Company 12.12%
One Heritage Drive
North Quincy, MA 02171
- --------------------------------------------------------------------------------------------
Chase Manhattan Bank 13.71%
Chase Metrotech Center
Brooklyn, NY 11245
- --------------------------------------------------------------------------------------------
Mac & Co. 30.59%
P.O. Box 3198
Pittsburgh, PA 15230
============================================================================================
Boston Safe Deposit & Trust 8.46%
Cabot Road
Medford, MA 02155
============================================================================================
</TABLE>
PURCHASES AND REDEMPTIONS
The Fund reserves the right to modify or terminate the mail, telephone
or wire redemption services described in the Prospectus at any time. The Fund
also reserves the right to suspend or postpone redemptions (1) for any period
during which the New York Stock Exchange ("Exchange") is closed (other than for
customary weekend and holiday closings), (2) when trading in markets the Fund
normally utilizes is restricted or an emergency, as defined by rules and
regulations of the SEC, exists, making disposal of the Fund's investments or
determination of its net asset value not reasonably practicable, or (3) for such
other periods as the SEC by regulation or order may permit for protection of the
Fund's shareholders. In the case of any such suspension, an investor may either
withdraw the request for redemption or receive payment based upon the net asset
value next determined after the suspension is lifted.
The Fund agrees to redeem shares of each Portfolio solely in cash up to
the lesser of $250,000 or 1% of the Portfolio's net assets during any 90-day
period for any one shareholder. In consideration of the best interests of the
remaining shareholders, the Fund reserves the right to pay any redemption price
exceeding this amount in whole or in part by a distribution in kind of readily
marketable securities held by a Portfolio in lieu of cash. It is highly unlikely
that shares would ever be redeemed in kind. If shares are redeemed in kind,
however, the redeeming shareholder should expect to incur transaction costs upon
the disposition of the securities received in the distribution.
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, 1997 and 1996, the International
Portfolio's portfolio turnover rates were 290.56% and 348.40%, 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.
25
<PAGE>
The Fund may not always pay the lowest commission or spread available. Rather,
in placing orders on behalf of the Fund, the adviser will also take into account
such factors as size of the order, difficulty of execution, efficiency of the
executing broker's or dealer's facilities (including the services described
below) and any risk assumed by the executing broker or dealer.
Consistent with the policy of obtaining most favorable price and
execution, the adviser may give consideration to research, statistical and other
services furnished by broker-dealers to the adviser for its use, may place
orders with broker-dealers who provide supplemental investment and market
research and securities and economic analysis, and may pay to those
broker-dealers a higher brokerage commission or spread than may be charged by
other broker-dealers. In selecting a broker, the adviser may consider that such
research, analysis and other services may be useful to it in connection with
services to clients other than the Fund. The adviser's fees are not reduced by
reason of its receiving such brokerage and research services.
The Fund may not buy securities from, or sell securities to, the
adviser, or affiliated persons of the adviser as principal, except as permitted
by the rules and regulations of the SEC. Subject to certain conditions, the Fund
may purchase securities that are offered in underwritings in which an affiliate
of the adviser is a participant, although the Fund may not make such purchases
directly from such affiliate.
The Adviser will select brokers to execute portfolio transactions. In
the over-the-counter market, the Fund generally will deal with responsible
primary market-makers unless a more favorable execution can otherwise be
obtained.
Investment decisions for the Fund are made independently from those of
other funds and accounts advised by the adviser. However, the same security may
be held in the portfolios of more than one fund or account. When two or more
accounts simultaneously engage in the purchase or sale of the same security, the
prices and amounts will be equitably allocated to each account. In some cases,
this procedure may adversely affect the price or quantity of the security
available to a particular account. In other cases, however, an account's ability
to participate in larger volume transactions may produce better executions and
prices. For the years ended June 30, 1997 and 1996, the International Portfolio
paid $15,440 and $9,685, respectively, in brokerage commissions on futures and
options transactions. For the year ended June 30, 1995, 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. 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)
26
<PAGE>
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 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.
27
<PAGE>
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.
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
28
<PAGE>
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)(superscript
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, 1997 were as
follows:
Average
Cumulative Annual
Total Return Total Return
------------ ------------
One Year 12.83% 12.83%
Life of Fund(A) 38.12% 7.47%
- ---------
(A) Fund's inception January 7, 1993.
The Fund's performance may fluctuate daily depending upon such factors as
the average maturity of its securities, changes in investments, changes in
interest rates and variations in operating expenses. Therefore, current
performance does not provide a basis for determining future performance. The
fact that the Fund's performance will fluctuate and that shareholders' principal
is not guaranteed or insured should be considered in comparing the Fund's
performance with the performance on fixed-income investments. In comparing the
performance of the Fund to other investment vehicles, consideration should also
be given to the investment policies of each, including the types of investments
owned, lengths of maturities of the portfolio, the method used to compute the
performance and whether there are any special charges that may reduce the yield.
Custodian, Transfer Agent and Dividend-Disbursing Agent
State Street Bank and Trust Company, P.O. Box 1790, Boston, Massachusetts
02105, serves as custodian of the Fund's assets. Boston Financial Data Services,
Inc., P.O. Box 953, Boston, MA 02103, serves as transfer and dividend-disbursing
agent and administrator of various shareholder services. Shareholders who
request an historical transcript of their accounts will be charged a fee based
upon the number of years researched. The Fund reserves the right, upon 60 days'
written notice, to make other charges to investors to cover administrative
costs.
Independent Accountants
Price Waterhouse LLP, 1306 Concourse Drive, Suite 100, Linthicum, Maryland
21090, 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, 1997 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, 1997, neither the Corporate Securities Portfolio nor the
Mortgage Securities
29
<PAGE>
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, 1997,
the Statement of Assets and Liabilities as of June 30, 1997, the Statement of
Operations for the year ended June 30, 1997, the Statement of Changes in Net
Assets for the years ended June 30, 1997 and 1996; and the Financial Highlights
for the periods presented, 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, 1997, are hereby
incorporated by reference in this Statement of Additional Information.
30
<PAGE>
WESTERN ASSET TRUST, INC.
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1997
<TABLE>
<CAPTION>
Corporate Mortgage
Securities Securities
Portfolio Portfolio
--------- ---------
<S> <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, 1997. 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, and Arroyo Seco,
Inc., a wholly owned subsidiary of Western Asset, act as distributors of the
Portfolios' shares.
B. Deferred organization and initial offering costs represent expenses
incurred in connection with the Portfolios' organization and will be amortized
on a straight line basis over five years commencing on the effective date of
each Portfolio's initial sale of shares to the public. The Portfolios have
agreed to reimburse Western Asset for organization expenses advanced by Western
Asset. The advances are repayable on demand but must be fully repaid within five
years from the commencement of operations. The proceeds realized by Western
Asset or any holder thereof 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.
31
<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
Corporate Securities Portfolio and Mortgage Securities Portfolio (two of the
nine portfolios comprising Western Asset Trust, Inc.) at June 30, 1997, 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 included 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
Linthicum, Maryland
October 30, 1997
<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.
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
A-1
<PAGE>
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposure to adverse
conditions.
Description of Moody's preferred stock ratings:
- -----------------------------------------------
aaa-An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stock.
aa-An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance that earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
a-An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa-An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba-An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
Description of Moody's Short-Term Debt Ratings
- ----------------------------------------------
Prime-1. Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior capacity for repayment of short-term promissory obligations. P-1
repayment capacity will normally be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2. Issuers (or supporting institutions) rated Prime-2 (P-2) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Description of Standard & Poor's Commercial Paper Ratings
- ---------------------------------------------------------
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2, and 3 to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for the issues
designated "A-1".
A-2
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements
The Registrant is an open-end management investment company with
nine portfolios. The following financial statements are included in this
Registration Statement for the respective portfolios:
(1) Core Portfolio, Intermediate Portfolio and Limited Duration
Portfolio. The financial statements for the year ended June 30, 1997 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, 1997 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, 1997 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, 1997 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 -- filed herewith
(b) Articles Supplementary, as filed November 14, 1991
-- filed herewith
(c) Articles Supplementary, as filed March 29, 1994 --
filed herewith
(d) Articles Supplementary, as filed March 1, 1996(1)
(2) Bylaws, as amended November 8, 1990 -- filed herewith
(3) Voting trust agreement -- none
(4) Specimen security -- not applicable
(5) Investment advisory contract
(a) Money Market, Limited Duration, Core and Long
Duration Portfolios -- filed herewith
(b) Corporate Securities and Mortgage Securities
Portfolios -- filed herewith
(c) International Securities Portfolio -- filed
herewith
(d) Short Duration and Intermediate Portfolios -- filed
herewith
(e) Amendments to the Investment Advisory and
Management Agreements(1)
(6) (a) Underwriting Agreement -- filed herewith
(b) Underwriting Agreement dated November 9, 1995(1)
(7) Bonus, profit sharing or pension plans -- none
(8) (a) Custodian agreement -- filed herewith
<PAGE>
(b) Amendment to Custodian agreement -- filed herewith
(c) Amendment to Custodian agreement -- filed herewith
(9) (a) Transfer Agent agreement -- filed herewith
(b) Administration agreement
(1) Money Market, Limited Duration, Core and
Long Duration Portfolios -- filed herewith
(2) Corporate Securities and Mortgage
Securities Portfolios -- filed herewith
(3) International Securities Portfolio --
filed herewith
(4) Short Duration and Intermediate Portfolios
-- filed herewith
(10) Opinion of counsel
(a) Money Market, Limited Duration, Core and Long
Duration Portfolios -- filed herewith
(b) Corporate Securities, Mortgage Securities and
International Securities Portfolios -- filed
herewith
(c) Short Duration and Intermediate Portfolios
-- filed herewith
(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 -- filed
herewith
(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
(17) Financial Data Schedules -- filed herewith as Exhibits
27.1 - 27.9
- -------------------------
(1) Incorporated herein by reference to corresponding Exhibit of
Post-Effective Amendment No. 14 to the Registration Statement,
SEC File No. 33-34929, filed September 3, 1996.
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 October 15, 1997)
-------------- -----------------------
Shares of Capital Stock,
$.001 par value
Core Portfolio 70
Intermediate Portfolio 27
Limited Duration Portfolio 4
<PAGE>
International Securities Portfolio 24
Money Market Portfolio 1
Short Duration Portfolio 1
Long Duration Portfolio 1
Mortgage Securities Portfolio 1
Corporate Securities Portfolio 1
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 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
<PAGE>
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 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 other 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, 1997 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 or manager to seventeen
open-end registered investment companies. Information as to the officers and
directors of Fund Adviser is included in its Form ADV filed August 11, 1997 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.
<PAGE>
Legg Mason Investors Trust, Inc.
(b) The following table sets forth information concerning each
director and officer of the Registrant's principal
underwriter, Legg Mason Wood Walker, Incorporated ("LMWW").
Position 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
of the Board
James W. Brinkley President and None
Director
Edmund J. Cashman, Jr. Senior Executive None
Vice President and
Director
Richard J. Himelfarb Senior Executive Vice None
President and
Director
Edward A. Taber III Senior Executive Vice
President and None
Director
Robert A. Frank Executive Vice None
President and
Director
Robert G. Sabelhaus 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
<PAGE>
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 H. McIntyre Senior Vice None
1747 Pennsylvania President and
Avenue, N.W. Director
Washington, D.C. 20006
Mark I. Preston Senior Vice None
President and
Director
F. Barry Bilson Senior Vice None
President and
Director
M. Walter D'Alessio, Jr. Director None
1735 Market Street
Philadelphia, PA 19103
Harry M. Ford, Jr. Senior Vice None
President
William F. Haneman, Jr. Senior Vice None
One Battery Park Plaza President
New York, New York 10005
Theodore S. Kaplan Senior Vice None
President and
General Counsel
Horace M. Lowman, Jr. Senior Vice None
President and
Asst. Secretary
<PAGE>
Seth J. Lehr Senior Vice None
1735 Market St. President
Philadelphia, PA 19103
Robert L. Meltzer Senior Vice None
One Battery Park Plaza President
New York, NY 10004
John A. Pliakas Senior Vice None
99 Summer Street President
Boston, MA 02101
Gail Reichard Senior Vice None
7 E. Redwood St. President
Baltimore, MD 21202
Timothy C. Scheve Senior Vice None
President and
Treasurer
Elisabeth N. Spector Senior Vice None
President
Joseph Sullivan Senior Vice None
President
Cheryl Allen Vice President None
221 West Sixth St.
Austin, TX 78701
William H. Bass, Jr. Vice President None
Nathan S. Betnun Vice President None
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
John R. Gilner Vice President None
Terrence R. Duvernay Vice President None
1100 Poydras St.
New Orleans, LA 70163
Richard A. Jacobs Vice President None
C. Gregory Kallmyer Vice President None
<PAGE>
Edward W. Lister, Jr. Vice President None
Marie K. Karpinski Vice President Vice President
and Treasurer
Anne S. Morse Vice President None
1735 Market St.
Philadelphia, PA 19103
Hance V. Myers, III Vice President None
1100 Poydras St.
New Orleans, LA 70163
Jonathan M. Pearl Vice President None
1777 Reisterstown Rd.
Pikesville, MD 21208
Douglas F. Pollard Vice President None
Carl W. Riedy, Jr. Vice President None
Robert W. Schnakenberg Vice President None
1111 Bagby St.
Houston, TX 77002
Henry V. Sciortino Vice President None
1735 Market St.
Philadelphia, PA 19103
Chris Scitti Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Eugene B. Shephard Vice President None
1111 Bagby St.
Houston, TX 77002-2510
Lawrence D. Shubnell Vice President None
Alexsander M. Stewart Vice President None
One World Trade Center
New York, NY 10048
F. James Tennies Vice President, None
Asst. Secretary &
Asst. General Counsel
Robert S. Trio Vice President None
1747 Pennsylvania Ave.
Washington, DC 20006
Lewis T. Yeager Vice President None
7 E. Redwood St.
Baltimore, MD 21202
Joseph F. Zunic Vice President None
<PAGE>
- ---------
* All addresses are 111 South Calvert Street, Baltimore, Maryland 21202,
unless otherwise indicated.
(c) The Registrant has no principal underwriter which is
not an affiliated person of the Registrant or an
affiliated person of such an affiliated person.
Item 30. Location of Accounts and Records
--------------------------------
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
Item 31. Management Services -- none
-------------------
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 meets all of the requirements for effectiveness of this
registration statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Pasadena and State of
California, on the 27th day of October, 1997.
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. 15 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
/s/ W. Curtis Livingston, III President October 27, 1997
- -----------------------------
W. Curtis Livingston, III
/s/ Norman Barker, Jr. Director October 27, 1997
- -----------------------------
Norman Barker, Jr.*
/s/ Richard C. Gilman Director October 27, 1997
- -----------------------------
Richard C. Gilman*
/s/ William G. McGagh Director October 27, 1997
- -----------------------------
William G. McGagh*
/s/ Ronald L. Olson Director October 27, 1997
- -----------------------------
Ronald L. Olson*
/s/ Louis A. Simpson Director October 27, 1997
- -----------------------------
Louis A. Simpson*
/s/ Marie K. Karpinski Vice President October 27, 1997
- ----------------------------- and Treasurer
Marie K. Karpinski
*Signatures affixed by W. Curtis Livingston, III pursuant to a power of attorney
dated November 10, 1994, a copy of 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
- ----------------------------- and Treasurer
Marie K. Karpinski (principal financial
and accounting
officer)
ARTICLES OF INCORPORATION
OF
WESTERN ASSET TRUST, INC.
FIRST: The undersigned, ARTHUR C. DELIBERT, whose post office address
is South Lobby-Ninth Floor, 1800 M Street, N.W., Washington, D.C. 20036, being
at least eighteen years of age, under and by virtue of the General Laws of the
State of Maryland authorizing the formation of corporations, is acting as sole
incorporator with the intention of forming a corporation.
SECOND: The name of the corporation is WESTERN ASSET TRUST,
INC. (the "Corporation").
THIRD: The duration of the Corporation shall be perpetual.
FOURTH: The purposes for which the Corporation is formed are to act as
an open-end management investment company under the Investment company under the
Investment Company Act of 1940, as amended ("1940 Act"), and to exercise and
enjoy all of the powers, rights and privileges granted to, or conferred upon,
corporations of a similar character by the General Laws of the State of Maryland
now or hereafter in force, including, but not limited to, the following:
(a) To hold, invest and reinvest its funds, and in connection
therewith to hold part or all of its funds in cash, and to
purchase, subscribe for or otherwise acquire, hold for
investment or otherwise, to trade and
<PAGE>
deal in, write, sell, assign, negotiate, transfer, exchange,
lend, pledge or otherwise dispose of or turn to account or
realize upon, securities (which term "securities" shall, for
the purposes of these Articles of Incorporation, without
limiting the generality thereof, be deemed to include any
stocks, shares, bonds, debentures, bills, notes, mortgages or
other obligations or evidences of indebtedness, and any
options, certificates, receipts, warrants or other instruments
representing rights to receive, purchase, subscribe for or
sell the same, or evidencing or representing any other rights
or interests therein, or in any property or assets; and any
negotiable or non-negotiable instruments and money market
instruments, including bank certificates of deposit, finance
paper, commercial paper, bankers' acceptances and all kinds of
repurchase or reverse repurchase agreements) created or issued
by any United States or foreign issuer (which term "issuer"
shall, for the purpose of these Articles of Incorporation,
without limiting the generality thereof, be deemed to include
any persons, firms, associations, partnerships, corporation,
syndicates, combinations, organizations, governments or
subdivisions, agencies or instrumentalities of any
government); and to exercise, as owner or holder of any
securities, all
<PAGE>
rights, powers and privileges in respect thereof, including
the right to vote thereon; to aid by further investment any
issuer, any obligation of or interest in which is held by the
Corporation or in its affairs of which the Corporation has any
direct or indirect interest; to guarantee or become surety or
any or all of the contracts, stocks, bonds, notes, debentures
and other obligations of any corporation, company, trust,
association or firm; and to do any and all acts and things for
the preservation, protection, improvement and enhancement in
value of any and all such securities.
(b) To acquire all or any part of the goodwill, rights, property
and business of any person, firm, association or corporation
heretofore or hereafter engaged in any business similar to any
business which the Corporation has the power to conduct, and
to hold, utilize, enjoy and in any manner dispose of the whole
or any part of the rights, property and business so acquired,
and to assume in connection therewith any liabilities of any
such person, firm, association or corporation.
(c) To apply for, obtain, purchase or otherwise acquire, any
patents, copyrights, licenses, trademarks, trade names and the
like, which may be capable of being used
<PAGE>
for any of the purposes of the Corporation; and to use,
exercise, develop, grant licenses in respect of, sell and
otherwise turn to account, the same.
(d) To issue and sell shares of its own capital stock and
securities convertible into such capital stock in such amounts
and on such terms and conditions, for such purposes and for
such amount or kind of consideration (including without
limitation thereto, securities) now or hereafter permitted by
the State of Maryland, by the 1940 Act and by these Articles
of Incorporation, as its Board of Directors may determine.
(e) To purchase or otherwise acquire, hold, dispose of, resell,
transfer, reissue or cancel (all without the vote or consent
of the stockholders of the Corporation) shares of its capital
stock in any manner and to the extent now or hereafter
permitted by the laws of the State of Maryland, by the 1940
Act and by these Articles of Incorporation.
(f) To conduct its business in all its branches at one or more
offices in any part of the world, without restriction or limit
as to extent.
<PAGE>
(g) To exercise and enjoy, in any states, territories, districts
and United States dependencies and in foreign countries, all
of the powers, rights and privileges granted to, or conferred
upon, corporations by the General Laws of the State of
Maryland now or hereafter in force.
(h) In general to carry on any other business in connection with
or incidental to its corporate purposes, to do everything
necessary, suitable or proper for the accomplishment of such
purposes or for the attainment of any object or the
furtherance of any power hereinbefore set forth, either alone
or in association with others, to do every other act or thing
incidental or appurtenant to or growing out of or connected
with its business or purposes, objects or powers, and, subject
to the foregoing, to have and exercise all the powers, rights
and privileges conferred upon corporations by the laws of the
State of Maryland as in force from time to time.
The foregoing objects and purposes shall, except as otherwise expressly
provided, be in no way limited or restricted by reference to, or
inference from, the terms of any other clause of this or any other
Article of these Articles of Incorporation, and shall each be regarded
as independent and construed as a power as well as an object and a
purpose, and the enumeration of specific
<PAGE>
purposes, objects and powers shall not be construed to limit or
restrict in any manner the meaning of general terms or the general
powers of the Corporation now or thereafter conferred by the laws of
Maryland, nor shall the expression of one thing be deemed to exclude
another though it be of like nature, not expressed; provided however,
that the Corporation shall not have power to carry on within the State
of Maryland any business whatsoever the carrying on of which would
preclude it from being classified as an ordinary business corporation
under the laws of said State; nor shall it carry on any business, or
exercise any powers, in any other state, territory, district or country
except to the extent that the same may lawfully be carried on or
exercised under the laws thereof.
Incident to meeting the purposes specified above, the
Corporation also shall have the power:
(1) To acquire (by purchase, lease or otherwise) and to
hold, use, maintain, develop and dispose of (by sale or
otherwise) any property, real or personal, and any
interest therein.
(2) To borrow money, and in this connection, issue notes or
other evidence of indebtedness.
<PAGE>
(3) To buy, hold, sell, and otherwise deal in and with
commodities, indices of commodities or securities, and
foreign exchange, including the purchase and sale of
futures contracts, options on futures contracts related
thereto and forward contracts, subject to any
applicable provisions of law.
FIFTH: The post office address of the principal office of the
Corporation in the State of Maryland is 111 South Calvert Street,
Baltimore, Maryland 21202. The name of the resident agent of the
Corporation in the State of Maryland is Charles A. Bacigalupo, whose
post office address is 111 South Calvert Street, Baltimore, Maryland
21202. The resident agent is a citizen of the State of Maryland and
actually resides therein.
SIXTH: SECTION 6.1. CAPITAL STOCK. The total number of shares
of capital stock which the Corporation shall have authority to issue is
five billion (5,000,000,000) shares, of the par value of one tenth of
one cent ($.001) ("Shares"), and of the aggregate par value of five
million dollars ($5,000,000). The Shares may be issued by the Board of
Directors in such separate and distinct series ("Series") as the Board
of Directors shall from time to time create and establish. The Board of
Directors shall have full power and authority, in its sole discretion,
to create and establish Shares having such preferences, rights, voting
powers, restrictions, limitations as to dividends,
<PAGE>
qualifications, and terms and conditions of redemption as
shall be fixed and determined from time to time by resolution
or resolutions providing for the issuance of such Shares
adopted by the Board of Directors. In addition, the Board of
Directors is hereby expressly granted authority to increase or
decrease the number of Shares of any class, but the number of
Shares of any class shall not be decreased by the Board of
Directors below the number of Shares thereof then outstanding.
The Board of Directors is authorized, from time to time, to
classify or to reclassify, as the case may be, any unissued Shares of
the Corporation in separate series. The shares of said series of stock
shall have such preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions
of redemptions as shall be fixed and determined from time to time by
the Board of Directors. The Corporation may hold as treasury Shares,
reissue for such consideration and on such terms as the Board of
Directors may determine, or cancel, at its discretion from time to
time, any Shares reacquired by the Corporation. No holder of any of the
Shares shall be entitled as of right to subscribe for, purchase, or
otherwise acquire any Shares of the Corporation which the Corporation
proposes to issue or reissue.
Without limiting the authority of the Board of Directors set
forth herein to establish and designate any further
<PAGE>
Series, and to classify and reclassify any unissued Shares, there are
hereby established and classified, four Series of stock, each
comprising one hundred million (100,000,000) Shares, to be known as
Full Range Duration Portfolio, Long Duration Portfolio, Limited
Duration Portfolio and Short Duration Portfolio, and one series of
stock, comprising one billion (1,000,000,000) Shares, to be known as
the Money Market Portfolio.
The Corporation shall have the authority to issue any
additional Shares hereafter authorized and any Shares redeemed or
repurchased by the Corporation. All Shares of any class when properly
issued in accordance with these Articles of Incorporation shall be
fully paid and nonassessable.
SECTION 6.2. ESTABLISHMENT OF SERIES. The establishment of any
Series in addition to those established in Section 6.1 hereof shall be
effective upon the adoption of a resolution by a majority of the then
Directors setting forth such establishment and designation and the
relative rights and preferences of the Shares of such Series. At any
time that there are no Shares outstanding of any particular Series
previously established and designated, the Directors may be a majority
vote abolish that Series and the establishment and designation thereof.
<PAGE>
SECTION 6.3. DIVIDENDS. Dividends and distributions on Shares
with respect to each Series may be declared and paid with such
frequency, in such form and in such amount as the Board of Directors
may from time to time determine. Dividends may be declared daily or
otherwise pursuant to a standing resolution or resolutions adopted only
once or with such frequency as the Board of Directors may determine.
All dividends on Shares of each Series shall be paid only out
of the income belonging to that Series and capital gains distributions
on Shares of each Series shall be paid only out of the capital gains
belonging to that Series. All dividends and distributions on Shares of
each Series shall be distributed pro rata to the holders of that Series
in proportion to the number of Shares of that Series held by such
holders at the date and time of record established for the payment of
such dividends or distributions, except that in connection with any
dividend or distribution program or procedure the Board of Directors
may determine that no dividend or distribution shall be payable on
Shares as to which the Shareholder's purchase order and/or payment have
not been received by the time or times established by the Board of
Directors under such program or procedure.
The Board of Directors shall have the power, in its sole
discretion, to distribute in any fiscal year as dividends (including
dividends designated in whole or part as capital
<PAGE>
gain distributions) amounts sufficient, in the opinion of the Board of
Directors, to enable each Series of the Corporation to qualify as a
regulated investment company under the Internal Revenue Code of 1986,
as amended, or any successor or comparable statute thereto, and
regulations promulgated thereunder, and to avoid liability of each
Series of the Corporation for Federal income tax in respect of that
year. However, nothing in the foregoing shall limit the authority of
the Board of Directors to make distributions greater than or less than
the amount necessary to qualify as a regulated investment company and
to avoid liability of any Series of the Corporation for such tax.
Dividends and distributions may be paid in cash, property or
Shares, or a combination thereof, as determined by the Board of
Directors or pursuant to any program that the Board of Directors may
have in effect at the time. Any such dividend or distribution paid in
Shares will be paid at the current net asset value thereof as defined
in Section 6.7.
SECTION 6.4. ASSETS AND LIABILITIES OF SERIES. All
consideration received by the Corporation for the issue or sale of
Shares of a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits,
and proceeds thereof, including any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such
<PAGE>
proceeds in whatever form the same may be, shall be referred to as
"assets belonging to" that Series. In addition, any assets, income,
earnings, profits, and proceeds thereof, funds, or payments which are
not readily identifiable as belonging to any particular Series shall be
allocated by the Board of Directors between and among one or more of
the Series in such manner as the Board of Directors, in its sole
discretion, deems fair and equitable. Each such allocation shall be
conclusive and binding upon the Stockholders of all Series for all
purposes, and shall be referred to as assets belonging to that Series.
The assets belonging to a particular Series shall be so recorded upon
the books of the Corporation. The assets belonging to each particular
Series shall be charged with the liabilities of that Series and all
expenses, costs, charges and reserves attributable to that Series. Any
general liabilities, expenses, costs, charges or reserves of the
Corporation which are not readily identifiable as belonging to any
particular Series shall be allocated and charged by the Board of
Directors between or among any one or more of the Series in such a
manner as the Board of Directors in its sole discretion deems fair and
equitable. Each such allocation shall be conclusive and binding upon
the Stockholders of all Series for all purposes.
SECTION 6.5. VOTING. On each matter submitted to a vote of the
Stockholders, each holder of a Share shall be entitled to one vote for
each Share and fractional votes for
<PAGE>
fractional Shares standing in his name on the books of the Corporation;
provided, however, that when required by the 1940 Act or rules
thereunder or when the Board of Directors has determined that the
matter affects only the interests of one Series, matters may be
submitted to a vote of the Stockholders of a particular Series, and
each holder of Shares thereof shall be entitled to votes equal to the
number of full and fractional Shares of the Series standing in his name
on the books of the Corporation. The presence in person or by proxy of
the holders of one-third of the Shares of capital stock of the
Corporation outstanding and entitled to vote thereat shall constitute a
quorum for the transaction of business at a Stockholders' meeting,
except that where any provision of law or of these Articles of
Incorporation permit or require that holders of any Series shall vote
as a Series, then one-third of the aggregate number of Shares of
capital stock of that Series outstanding and entitled to vote shall
constitute a quorum for the transaction of business by that Series.
SECTION 6.6. REDEMPTION BY STOCKHOLDERS. Each holder of Shares
shall have the right at such times as may be permitted by the
Corporation to require the Corporation to redeem all or any part of his
Shares at a redemption price per Share equal to the net asset value per
Share as of such time as the Board of Directors shall have prescribed
by resolution. In the absence of such resolution, the redemption price
per Share shall be the net
<PAGE>
asset value next determined (in accordance with Section 6.7) after
receipt by the Corporation of a request for redemption in proper form
less such charges as are determined by the Board of Directors and
described in the Corporation's registration statement under the
Securities Act of 1933. The Board of Directors may specify conditions,
prices, and places of redemption, and may specify binding requirements
for the proper form or forms of requests for redemption. Payment of the
redemption price may be wholly or partly in securities or other assets
at the value of such securities or assets used in such determination of
net asset value, or may be in cash. Notwithstanding the foregoing, the
Board of Directors may postpone payment of the redemption price and may
suspend the right of the holders of Shares to require the Corporation
to redeem Shares during any period or at any time when and to the
extent permissible under the 1940 Act.
SECTION 6.7. NET ASSET VALUE PER SHARE. The net asset value of
each Share of each Series shall be the quotient obtained by dividing
the value of the total assets of the Series, less liabilities, by the
total number of Shares of the Series outstanding. The Board of
Directors shall have the power and duty to determine from time to time
the net asset value per Share at such times and by such methods as it
shall determine subject to any restrictions or requirements under the
1940 Act and the rules, regulations and interpretations thereof
promulgated or
<PAGE>
issued by the Securities and Exchange Commission or insofar as
permitted by any order of the Securities and Exchange Commission
applicable to the Corporation. The Board of Directors may delegate such
power and duty to any one or more of the directors and officers of the
Corporation, to the Corporation's investment adviser, to the custodian
or depository of the Corporation's assets, or to another agent of the
Corporation.
SECTION 6.8. REDEMPTION BY THE CORPORATION. The Board of
Directors may cause the Corporation to redeem at current net asset
value all Shares owned or held by any one Stockholder having an
aggregate current net asset value of less than five million dollars
($5,000,000). No such redemption shall be effected unless the
Corporation has given the Stockholder at least sixty (60) days' notice
of its intention to redeem the Shares and an opportunity to purchase a
sufficient number of additional Shares to bring the aggregate current
net asset value of his Shares to five million dollars ($5,000,000).
Upon redemption of Shares pursuant to this Section, the Corporation
shall promptly cause payment of the full redemption price, in any
possible form, to be made to the holder of Shares so redeemed. The
Board of Directors may be a majority vote establish from time to time
amounts less than five million dollars ($5,000,000) at which the
Corporation will redeem Shares pursuant to this Section.
<PAGE>
SEVENTH: SECTION 7.1. ISSUANCE OF NEW STOCK. The Board of
Directors is authorized to issue and sell or cause to be issued and
sold from time to time (without the necessity of offering the same or
any part thereof to existing stockholders) all or any portion or
portions of the entire authorized but unissued Shares of the
Corporation, and all or any portion or portions of the Shares of the
Corporation from time to time in its treasury, for cash or for any
other lawful consideration or considerations and on or for any terms,
conditions, or prices consistent with the provisions of law and of the
Articles of Incorporation at the time in force; provided, however, that
in no event shall Shares of the Corporation having a par value be
issued or sold for a consideration or considerations less in amount or
value than the par value of the Shares so issued or sold, and provided
further that in no event shall any Shares of the Corporation be issued
or sold, except as a stock dividend distributed to stockholders, for a
consideration (which shall be net to the Corporation after underwriting
discounts or commissions) less in amount or value than the net asset
value of the Shares so issued or sold determined as of such time as the
Board of Directors shall have by resolution prescribed. In the absence
of such a resolution, such net asset value shall be that next
determined after an unconditional order in proper form to purchase such
Shares is accepted, except that Shares may be sold to an underwriter at
(a) the net asset value next determined after such orders are
<PAGE>
received by a dealer with whom such underwriter has a sales agreement
or (b) the net asset value determined at a later time.
SECTION 7.2. FRACTIONAL SHARES. The Corporation may issue and
sell fractions of Shares having pro rate all the rights of full Shares,
including, without limitation, the right to vote and to receive
dividends, and wherever the words "Share" or "Shares" are used in these
Articles or in the By-Laws they shall be deemed to include fractions of
Shares, where the context does not clearly indicate that only full
Shares are intended.
EIGHTH: Notwithstanding any provision of law requiring a
greater proportion than a majority of the votes of all classes or
series (or of any class or series entitled to vote thereon as a
separate class or series) to take or authorize any action, in
accordance with the authority granted by Section 2-104(b)(5) of the
Maryland General Corporation Law, the Corporation is hereby authorized
to take such action upon the concurrence of a majority of the aggregate
number of Shares entitled to vote thereon (or of a majority of the
aggregate number of Shares of a class or Series entitled to vote
thereon as a separate class or Series). The right to cumulate votes in
the election of directors is expressly prohibited.
NINTH: SECTION 9.1. BOARD OF DIRECTORS. All corporate powers
and authority of the Corporation (except as
<PAGE>
otherwise provided by statute, by these Articles of Incorporation, or
by the By-Laws of the Corporation) shall be vested in and exercised by
the Board of Directors. The number of directors constituting the Board
of Directors shall be such number as may from time to time be fixed in
or in accordance with the By-Laws of the Corporation, provided that
after stock is issued to more than one stockholder, such number shall
not be less than three. Except as provided in the By-Laws, the election
of directors may be conducted in any way approved at the meting
(whether of stockholders or directors) at which the election is held,
provided that such election shall be by ballot whenever requested by
any person entitled to vote. The names of the persons who shall act as
initial directors until stock is issued to more than one stockholder or
the first meeting of stockholders, whichever shall occur earlier, and
until their successors have been duly chosen and qualified are John F.
Curley, Jr. and Marie K. Karpinski.
SECTION 9.2. BY-LAWS. Except as may otherwise be provided in
the By-Laws, the Board of Directors of the Corporation is expressly
authorized to make, alter, amend and repeal By-Laws or to adopt new
By-Laws of the Corporation, without any action on the part of the
Stockholders; but the By-Laws made by the Board of Directors and the
power so conferred may be altered or repealed by the Stockholders.
TENTH: SECTION 10.1. The Board of Directors may in its
discretion from time to time enter into an exclusive or nonexclusive
distribution contract or contracts providing for the sale of Shares
whereby the Corporation may either agree to sell Shares to the other
party to the contract or appoint such other party its sales agent for
such shares (such other party being herein sometimes called the
"underwriter"), and in either case on such terms and conditions as may
be prescribed in the By-Laws, if any, and such further terms and
conditions as the Board of Directors may in its discretion determine
not inconsistent with the provisions of these Articles of Incorporation
and such contract may also provide for the repurchase of Shares of the
Corporation by such other party or parties as agent of the Corporation.
The Board of Directors may also in its discretion from time to time
enter into an investment advisory or management contract or contracts
whereby the other party to such contract shall undertake to furnish to
the Board of Directors such management, investment advisory,
statistical and research facilities and services and such other
facilities and services, if any, and all upon such terms and
conditions, as the Board of Directors may in its discretion determine.
SECTION 10.2. Any contract of the character described in
Section 10.1 or for services as administrator, custodian, transfer
agent or disbursing agent or related services may be entered into with
any corporation, firm, trust or association,
<PAGE>
although any one or more of the directors or officers of the
Corporation may be an officer, director, trustee, stockholder or member
of such other party to the contract, and no such contract shall be
invalidated or rendered voidable by reason of the existence of any such
relationship, nor shall any person holding such relationship be liable
merely by reason of such relationship for any loss or expense to the
Corporation under or by reason of said contract or accountable for any
profit realized directly or indirectly therefrom, provided that the
contract when entered into was reasonable and fair and not inconsistent
with the provisions of this Article TENTH. The same person (including a
firm, corporation, trust, or association) may be the other party to
contracts entered into pursuant to Section 10.1 above, and any
individual may be financially interested or otherwise affiliated with
persons who are parties to any or all of the contracts mentioned in
this Section 10.2.
ELEVENTH: SECTION 11.1. To the maximum extent permitted by
applicable law (including Maryland law and the 1940 Act) as currently
in effect or as it may hereafter be amended, no director or officer of
the Corporation shall be liable to the Corporation or its stockholders
for money damages.
SECTION 11.2. To the maximum extent permitted by applicable
law (including Maryland law and the 1940 Act) currently in effect or as
it may hereafter be amended, the Corporation shall
<PAGE>
indemnify and advance expenses as provided in the By-Laws to its
present and past directors, officers, employees and agents, and persons
who are serving or have served at the request of the Corporation as a
director, officer, employee, partner, trustee or agent or in similar
capacities for other entities.
SECTION 11.3. No repeal or modification of this Article
ELEVENTH by the stockholders of the Corporation, or adoption or
modification of any other provision of the Articles of Incorporation or
By-Laws inconsistent with this Article ELEVENTH, shall repeal or narrow
any limitation on the liability of any director or officer of the
Corporation or indemnification available to any person covered by these
provisions with respect to any act or omission which occurred prior to
such repeal, modification or adoption.
TWELFTH: The Corporation reserves the right form time to time
to make any amendment of these Articles of Incorporation, now or
hereafter authorized by law, including any amendment which alters
contract rights, as expressly set forth in these Articles of
Incorporation, of any outstanding Shares. Any amendment to these
Articles of Incorporation may be adopted at a meeting of the
stockholders upon receiving an affirmative vote of a majority of all
votes entitled to be cast thereon.
<PAGE>
IN WITNESS WHEREOF, the undersigned incorporator of WESTERN
ASSET TRUST, INC. has executed the foregoing Articles of Incorporation
and hereby acknowledges the same to be his act and further acknowledges
that, to the best of his knowledge, information, and belief, the
matters and facts set forth therein are true in all material respects
under the penalties of perjury.
On the 16th day of May, 1990.
/s/ Arthur C. Delibert
-----------------------
Arthur C. Delibert
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 April 11, 1991 has classified one
billion (1,000,000,000) unissued shares of the five billion (5,000,000,000)
shares of capital stock that the Corporation is authorized to issue as shares in
each of the Corporate Securities Portfolio, Mortgage Securities Portfolio and
International Securities Portfolio. Following such reclassification, the five
billion shares that the Corporation is authorized to issue shall be comprised of
one hundred million (100,000,000) shares in the Full Range Duration 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
billion (1,000,000,000) shares in the Money Market Portfolio, one billion
(1,000,000,000) shares in the Corporate Securities 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 six hundred
million (600,000,000) shares not classified in any portfolio.
<PAGE>
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).
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 be authorized, established and
classified or reclassified by the Board of Directors shall have the relative
preferences, conversions 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 withi the U.S. Securities and
Exchange as an open-end investment company under the Investment Company Act of
1940.
FOURTH: The Board of Directors has classified such stock under the
authority contained in Article Sixth of the Corporation's Articles of
Incorporation as currently in effect.
IN WITNESS WHEREOF, the undersigned Vice President of Western Asset
Trust, Inc. hereby executes these
<PAGE>
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 his knowledge, information
and belief, the matters and facts set forth herein are true in all material
respects.
DATE: November 13, 1991 /s/ Ilene S. Harker
-------------------
Ilene S. Harker
Vice President
ATTEST: /s/ John L. Cecil
-----------------
John L. Cecil
Secretary
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 10, 1994, has classified one
hundred million (100,000,000) unissued shares of the five billion
(5,000,000,000) shares of capital stock that the Corporation is authorized to
issue as shares in each of the Intermediate Duration Portfolio and the Enhanced
Cash Portfolio. Following such reclassification, the five billion shares that
the Corporation is authorized to issue shall be comprised of one hundred million
(100,000,000) shares in the Full Range Duration Portfolio, one hundred million
(100,000,000) shares in the Long Range 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
(100,000,000) shares in the Enhanced Cash 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 four hundred million (400,000,000) 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).
SECOND: The unissued shares of the Corporation, as so classified., the
shares of the Corporation already issued and outstanding, and any shares of any
<PAGE>
further classes that may from time to time be 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 the U.S. Securities and
Exchange Commission as an open-end investment company under the Investment
Company Act of 1940.
FOURTH: The Board of Directors has classified such stock under the
authority contained in Article Sixth of the Corporation's Articles of
Incorporation as currently in effect.
IN WITNESS WHEREOF, the undersigned President 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 his knowledge, information and belief, the matters and facts set forth herein
are true in all material respects.
DATE: 2-10-94 /s/ W. Curtis Livingston
-------------------------
W. Curtis Livingston
President
ATTEST: /s/ Ilene S. Harker
-------------------
Ilene S. Harker
Secretary
EXHIBIT 2
WESTERN ASSET TRUST, INC.
A Maryland Corporation
BY-LAWS
November 8, 1990
<PAGE>
Table of Contents
-----------------
Page
----
ARTICLE I NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL........... 5
1.01. Name................................................. 5
1.02. Principal Offices.................................... 5
1.03. Seal................................................. 5
ARTICLE II STOCKHOLDERS................................................ 6
2.01. Annual Meetings...................................... 6
2.02. Special Meetings..................................... 6
2.03. Place of Meetings.................................... 7
2.04. Notice of Meetings................................... 7
2.05. Voting - In General.................................. 8
2.06. Stockholders Entitled to Vote........................ 9
2.07. Voting - Proxies..................................... 9
2.08. Quorum............................................... 10
2.09. Absence of Quorum.................................... 10
2.10. Stock Ledger and List of Stockholders................ 11
2.11. Action Without Meeting............................... 13
ARTICLE III BOARD OF DIRECTORS.......................................... 13
3.01. Number of Term of Office............................. 13
3.02. Qualifications of Directors.......................... 14
3.03. Election of Directors................................ 14
3.04. Removal of Directors................................. 14
3.05. Vacancies and Newly Created Directorships.............15
3.06. General Powers....................................... 15
3.07. Power to Issue and Sell Stock........................ 16
3.08. Power to Declare Dividends........................... 16
3.09. Annual and Regular Meetings.......................... 17
3.10. Special Meetings..................................... 18
3.11. Notice............................................... 19
3.12. Waiver of Notice..................................... 19
3.13. Quorum and Voting.................................... 19
3.14. Compensation......................................... 20
3.15. Action Without a Meeting............................. 20
3.16. Chairman of the Board................................ 20
ARTICLE IV EXECUTIVE COMMITTEE AND OTHER COMMITTEES.................... 21
4.01. How Constituted...................................... 21
4.02. Powers of the Executive Committee.................... 21
2
<PAGE>
4.03. Proceedings, Quorum and Manner of Acting............. 22
4.04. Other Committees..................................... 22
ARTICLE V OFFICERS.................................................... 23
5.01. General.............................................. 23
5.02. Election, Term of Office and
Qualifications...................................... 23
5.03. Resignation.......................................... 24
5.04. Removal.............................................. 24
5.05. Vacancies and Newly Created Offices.................. 24
5.06. President............................................ 25
5.07. Vice President....................................... 25
5.08. Treasurer and Assistant Treasurers................... 26
5.09. Secretary and Assistant Secretaries.................. 27
5.10. Subordinate Officers................................. 27
5.11. Remuneration......................................... 28
5.12. Surety Bonds......................................... 28
ARTICLE VI CUSTODY OF SECURITIES....................................... 29
6.01. Employment of a Custodian............................ 29
6.02. Action Upon Termination of Custodian
Agreement........................................... 29
6.03. Provisions of Custodian Contract..................... 30
6.04. Other Arrangements................................... 35
ARTICLES VII EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES.............. 35
7.01. General.............................................. 35
7.02. Checks, Notes, Drafts, Etc........................... 36
7.03. Voting of Securities................................. 36
ARTICLE VIII CAPITAL STOCK............................................... 37
8.01. Certificates of Stock................................ 37
8.02. Transfer of Capital Stock............................ 38
8.03. Transfer Agents and Registrars....................... 39
8.04. Transfer Regulations................................. 39
8.05. Fixing of Record Date................................ 40
8.06. Lost, Stolen or Destroyed Certificates............... 40
ARTICLE IX FISCAL YEAR, ACCOUNTANT..................................... 41
9.01. Fiscal Year.......................................... 41
9.02. Accountant........................................... 41
3
<PAGE>
ARTICLE X INDEMNIFICATION AND INSURANCE............................... 42
10.01. Indemnification of Officers, Directors,
Employees and Agents................................ 42
10.02. Insurance of Officers, Directors,
Employees and Agents................................ 45
10.03. Non-exclusivity...................................... 45
ARTICLE XI AMENDMENTS.................................................. 46
11.01. General.............................................. 46
11.02. By Stockholders Only................................. 47
4
<PAGE>
ARTICLE I
---------
NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL
-------------------------------------------------
Section 1.01. Name: The name of the Corporation is Western Asset
Trust, Inc.
Section 1.02. Principal Offices: The principal office of the
Corporation in the State of Maryland shall be located in the City of Baltimore.
The Corporation shall also maintain a principal office in Pasadena, California.
The Corporation may establish and maintain such other offices and places of
business as the board of directors may, from time to time, determine.
Section 1.03. Seal: The corporate seal of the Corporation shall be
circular in form and shall bear the name of the Corporation, the year of its
incorporation, and the words "Corporate Seal, Maryland." The form of the seal
shall be subject to alteration by the board of directors and the seal may be
used by causing it or a facsimile to be impressed or affixed or printed or
otherwise reproduced. Any officer or director of the Corporation shall have
authority to affix the corporate seal of the Corporation to any document
requiring the same.
5
<PAGE>
ARTICLE II
----------
STOCKHOLDERS
------------
Section 2.01. Annual Meetings: There shall be no stockholders'
meetings for the election of directors and the transaction of other proper
business except as required by law or as hereinafter provided.
Section 2.02. Special Meetings: Special meetings of the stockholders
may be called at any time by the chairman of the board, the president, any vice
president, or by a majority of the board of directors. Special meetings of the
stockholders shall be called by the secretary upon the written request of the
holders of shares entitled to vote not less than 25% of all the shares entitled
to be voted at such meeting, provided that (a) such request shall state the
purposes of such meeting and the matters proposed to be acted on, and (b) the
stockholders requesting such meeting shall have paid to the Corporation the
reasonable estimated cost of preparing and mailing the notice thereof, which the
secretary shall determine and specify to such stockholders. No special meeting
need be called upon the request of the holders of shares entitled to vote less
than a majority of all the shares entitled to be voted at such meeting to
consider any matter which is substantially the same as a matter voted upon at
any special meeting of the stockholders held during the preceding 12 months.
Notwithstanding the foregoing, a special
6
<PAGE>
meeting of the stockholders for the purpose of voting upon the removal of any
director or directors shall be called by the secretary upon the written request
of the holders of shares entitled to vote not less than 10% of all the
outstanding shares.
Section 2.03. Place of Meetings: The board of directors may fix the
place of stockholders' meetings, have one or more offices, and keep the books of
the Corporation at any other place within the United States as they may from
time to time determine, or, in the case of meetings as shall be specified in
each notice or waiver of notice of the meeting.
Section 2.04. Notice of Meetings: The secretary shall cause notice of
the place, date and hour, and, in the case of a special meeting or as otherwise
required by law, the purpose or purposes for which the meeting is called, to be
mailed, not less than 10 nor more than 90 days before the date of the meeting,
to each stockholder entitled to vote at such meeting, at his address as it
appears on the records of the Corporation at the time of such mailing. Notice of
any stockholders' meeting need not be given to any stockholder who shall sign a
written waiver of such notice whether before or after the time of such meeting,
which waiver shall be filed with the record of such meeting, or to any
stockholder who shall attend such meeting in person or by proxy. Notice of
adjournment of a stockholders' meeting to another time
7
<PAGE>
or place need not be given, if such time and place are announced at the
meeting.
Section 2.05. Voting - In General: At every stockholders' meeting each
stockholder shall be entitled to one vote for each share and a fractional vote
for each fraction of a share of stock of the Corporation validly issued and
outstanding and held by such stockholder, except that no shares held by the
Corporation shall be entitled to a vote. Except as otherwise specifically
provided in the Articles of Incorporation or these By-Laws or as required by
provisions of the Investment Company Act of 1940, as amended from time to time,
all matters shall be decided by a vote of the majority of the votes validly cast
at a meeting at which a quorum is present. The vote upon any question shall be
by ballot whenever requested by any person entitled to vote, but, unless such a
request is made, voting may be conducted in any way approved by the meeting.
At any meeting at which there is an election of Directors, the chairman
of the meeting may, and upon the request of the holders of 10% of the stock
entitled to vote at such election shall, appoint two inspectors of election
who shall first subscribe an oath or affirmation to execute faithfully the
duties of inspectors at such election with strict impartiality and according
to the best of their ability, and shall, after the election, make a
certificate of the result of the vote taken. No
8
<PAGE>
candidate for the office of Director shall be appointed as an inspector.
Section 2.06. Stockholders Entitled to Vote: If, pursuant to Section
8.05 hereof, a record date has been fixed for the determination of stockholders
entitled to notice of or to vote at any stockholders' meeting, each stockholder
of the Corporation shall be entitled to vote, in person or by proxy, each share
of stock and fraction of a share of stock standing in his name on the books of
the Corporation on such record date and outstanding at the time of the meeting.
If no record date has been fixed for the determination of stockholders, the
record date for the determination of stockholders entitled to notice of or to
vote at a meeting of stockholders shall be (a) at the close of business (i) on
the day ten days before the day on which notice of the meeting is mailed or (ii)
on the day 90 days before the meeting, whichever is the closer date to the
meeting; or, (b) if notice is waived by all stockholders, at the close of
business on the tenth day next preceding the day on which the meeting is held.
Section 2.07. Voting - Proxies: A stockholder may vote the stock he
owns of record by written proxy executed by the stockholder himself or by his
duly authorized attorney in fact. No proxy shall be voted after eleven months
from its date unless it provides for a longer period. Each proxy shall be dated,
but
9
<PAGE>
need not be sealed, witnessed or acknowledged. Proxies shall be delivered to an
inspector of election or, if no inspector has been appointed, then to the
secretary of the Corporation, or person acting as secretary of the meeting,
before being voted. A proxy with respect to stock held in the name of two or
more persons shall be valid if executed by one of them unless at or prior to
exercise of such proxy the Corporation receives from any one of them written
notice to the contrary and a copy of the instrument or order which so provides.
A proxy purporting to be executed by or on behalf of a stockholder shall be
deemed valid unless challenged at or prior to its exercise. A proxy in the form
of a telegram, datagram or telex shall not be valid; however, a mechanical or
electronic facsimile of an otherwise valid proxy shall be valid.
Section 2.08. Quorum: Except as otherwise provided in the Articles of
Incorporation, the presence at any stockholders' meeting, in person or by proxy,
of stockholders entitled to cast one-third of the votes entitled to be cast
thereat shall be necessary and sufficient to constitute a quorum for the
transaction of business.
Section 2.09. Absence of Quorum: In the absence of a quorum, the
holders or proxies of a majority of the shares present at the meeting in
person or by proxy and entitled to vote thereat, or, if no stockholder
entitled to vote is present
10
<PAGE>
thereat in person or by proxy, any officer present thereat entitled to preside
or act as secretary of such meeting, may adjourn the meeting without determining
the date of the new meeting or, from time to time, without further notice to a
date not more than 120 days after the original record date. Any business that
might have been transacted at the meeting originally called may be transacted at
any such adjourned meeting at which a quorum is present.
Section 2.10. Stock Ledger and List of Stockholders: It shall be the
duty of the secretary or assistant secretary of the Corporation to cause an
original or duplicate stock ledger to be maintained at the office of the
Corporation's transfer agent. Such stock ledger may be in written form or any
other form capable of being converted into written form within a reasonable time
for visual inspection. Any one or more persons, each of whom has been a
stockholder of record of the Corporation for at least six months next preceding
such request, and who owns in the aggregate 5% or more of the outstanding
capital stock of the Corporation, may, in person or by agent, upon written
request, inspect and copy during usual business hours the corporation's stock
ledger at its principal office in Maryland or in Pasadena, California; and may
submit (unless the Corporation at the time of the request does not maintain a
duplicate stock ledger at its principal office in Maryland and in Pasadena,
California) a written request to any officer of the Corporation or its resident
agent in
11
<PAGE>
Maryland or its office in Pasadena, California, for a list of the stockholders
of the Corporation. Within 20 days after such a request, there shall be prepared
and filed at the Corporation's principal office in Maryland or in Pasadena,
California, as appropriate, a list containing the names and addresses of all
stockholders of the Corporation and the number of shares of each class held by
each stockholder, certified as correct by an officer of the Corporation, by its
stock transfer agent, or by its registrar. Notwithstanding the foregoing,
whenever ten or more shareholders of record who have been such for at least six
months preceding such request, and who own in the aggregate either shares having
a net asset value of at least $25,000 or at least one percent of the outstanding
shares, whichever is less, shall apply to the secretary in writing, stating that
they wish to communicate with other shareholders with a view to obtaining
signatures to a request for a special meeting of shareholders to vote upon the
removal of one or more directors, and including with the application a form of
communication and request which they wish to transmit, the Fund shall, within
five business days after receipt of such application, either: (1) afford to such
applicants access to a list of the names and addresses of all shareholders as
recorded on the books of the Fund; or (2) inform the applicants as to the
approximate number of shareholders of record, and the approximate cost of
mailing to them the proposed communication and form of request, and, upon the
written request of the applicants, accompanied by a tender of the material to be
12
<PAGE>
mailed and of the reasonable expenses of mailing, shall, with reasonable
promptness, mail such material to all shareholders of record; provided, however,
that the Fund may avail itself of any of the rights afforded to a common law
trust pursuant to Section 16(c) of the Investment Company Act of 1940.
Section 2.11. Action Without Meeting: Any action to be taken by
stockholders may be taken without a meeting if all stockholders entitled to vote
on the matter consent to the action in writing and the written consents are
filed with the records of the meetings of stockholders. Such consent shall be
treated for all purposes as a vote at a meeting.
ARTICLE III
-----------
BOARD OF DIRECTORS
------------------
Section 3.01. Number and Term of Office: The board of directors shall
consist of six directors, which number may be increased or decreased by a
resolution of a majority of the entire board of directors; provided that the
number of directors shall not be less than three nor more than twenty; and
further provided that if there is no stock outstanding the number of directors
may be less than three but not less than one, and if there is stock outstanding
and so long as there are less than three stockholders, the number of directors
may be less than three but not less than the number of stockholders. Each direc-
13
<PAGE>
tor (whenever selected) shall hold office until his successor is elected and
qualified or until his earlier death, resignation or removal.
Section 3.02. Qualification of Directors: Except for the initial board
of directors, at least one of the members of the board of directors shall be a
person who is not an interested person of the Corporation, as defined in the
Investment Company Act of 1940, as amended.
Section 3.03. Election of Directors: Initially the director or
directors of the Corporation shall be that person or those persons named as such
in the Articles of Incorporation. Thereafter, except as otherwise provided in
Section 3.04 and 3.05 hereof, the directors shall be elected by the stockholders
on a date fixed by the Board of Directors. The plurality of all the votes
validly cast at a meeting at which a quorum is present in person or by proxy is
sufficient to elect a director.
Section 3.04. Removal of Directors: At any stockholders' meeting duly
called, provided a quorum is present, any director may be removed (either with
or without cause) by the affirmative vote of a majority of all the votes
entitled to be cast for the election of directors, and at the same meeting a
duly qualified person may be elected in his stead by a plurality of the votes
validly cast.
14
<PAGE>
Section 3.05. Vacancies and Newly Created Directorships: If any
vacancies shall occur in the board of directors by reason of death, resignation,
removal or otherwise, or if the authorized number of directors shall be
increased, the directors then in office shall continue to act, and such
vacancies (if not previously filled by the stockholders) may be filled by a
majority of the directors then in office, although less than a quorum, except
that a newly created directorship may be filled only by a majority vote of the
entire board of directors, provided that in either case immediately after
filling such vacancy, at least two-thirds of the directors then holding office
shall have been elected to such office by the stockholders of the Corporation.
In the event that at any time, other than the time preceding the first
stockholders' meeting, less than a majority of the directors of the Corporation
holding office at that time were so elected by the stockholders, a meeting of
the stockholders shall be held promptly and in any event within 60 days for the
purpose of electing directors to fill any exiting vacancies in the board of
directors unless the Securities and Exchange Commission shall by order extend
such period.
Section 3.06. General Powers:
(a) The property, affairs and business of the Corporation shall be
managed by or under the direction of the board of directors, which may exercise
all the powers of the
15
<PAGE>
Corporation except those powers vested solely in the stockholders of the
Corporation by statute, by the Articles of Incorporation, or by these By-Laws.
(b) All acts done by any meeting of the directors or by any person
acting as a director, so long as his successor shall not have been duly elected
or appointed, shall, notwithstanding that it be afterwards discovered that there
was some defect in the election of the directors or of such person acting as
aforesaid or that they or any of them were disqualified, be as valid as if the
directors or such other person, as the case may be, had been duly elected and
were or was qualified to be directors or a director of the Corporation.
Section 3.07. Power to Issue and Sell Stock: The board of directors may
from time to time issue and sell or cause to be issued and sold any of the
Corporation's authorized shares to such person and for such consideration as the
board of directors shall deem advisable, subject to the provisions of Article
Seventh of the Articles of Incorporation.
Section 3.08. Power to Declare Dividends:
(a) The board of directors, from time to time as they may deem
advisable, may declare and pay dividends in stock, cash or other property of the
Corporation, out of any source available
16
<PAGE>
for dividends, to the stockholders according to their respective rights and
interests in accordance with the provisions of the Articles of Incorporation.
(b) The board of directors shall cause to be accompanied by a written
statement any dividend payment wholly or partly from any source other than:
(i) the Corporation's accumulated undistributed net income (determined
in accordance with good accounting practice and the rules and
regulations of the Securities and Exchange Commission then in effect)
and not including profits or losses realized upon the sale of
securities or other properties; or
(ii) the Corporation's net income so determined for the current or
preceding fiscal year.
Such statement shall adequately disclose the source or sources of such payment
and the basis of calculation, and shall be in such form as the Securities and
Exchange Commission may prescribe.
Section 3.09. Annual and Regular Meetings: The annual meeting of the
board of directors for choosing officers and transacting other proper business
shall be held at such time and
17
<PAGE>
place as the Board may determine. The board of directors from time to time may
provide by resolution for the holding regular meetings and fix their time and
place which need not be in the State of Maryland. Except as otherwise provided
under the Investment Company Act of 1940, notice of such annual and regular
meetings need not be given, provided that notice of any change in the time or
place of such meetings shall be sent promptly, in the manner provided for notice
of special meetings, to each director not present at the meeting at which such
change was made. Except as otherwise provided under the Investment Company Act
of 1940, as amended, members of the board of directors or any committee
designated thereby may participate in a meeting of such board or committee by
means of a conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other at the same
time; and participation by such means shall constitute presence in person at a
meeting.
Section 3.10. Special Meetings: Special meetings of the board of
directors shall be held whenever called by the chairman of the board, the
president (or, in the absence or disability of the president, by any vice
president), the treasurer, or two or more directors, at the time and place
(which need not be in the State of Maryland) specified in the respective notices
or waivers of notice of such meetings.
18
<PAGE>
Section 3.11. Notice: Except as otherwise provided, notice of any
special meeting shall be given by the secretary to each director, by mailing to
him, postage prepaid, addressed to him at his address as registered on the books
of the Corporation or, if not so registered, at his last known address, a
written or printed notification of such meeting at least three days before the
meeting or by delivering such notice to him at least two days before the
meeting, or by sending to him at least 24 hours before the meeting, by prepaid
telegram, addressed to him at his said registered address, if any, or if he has
no such registered address, at his last known address, notice of such meeting.
Section 3.12. Waiver of Notice: No notice of any meeting need be given
to any director who attends such meeting in person or to any director who waives
notice of such meeting in writing (which waiver shall be filed with the records
of such meeting), whether before or after the time of the meeting.
Section 3.13. Quorum and Voting: At all meetings of the board of
directors the presence of one-half or more of the number of directors then in
office shall constitute a quorum for the transaction of business, provided that
there shall be present no fewer than two directors. In the absence of a quorum,
a majority of the directors present may adjourn the meeting, from time to time,
until a quorum shall be present. The action of a majority of the directors
present at a meeting at which a quorum is
19
<PAGE>
present shall be the action of the board of directors unless the concurrence of
a greater proportion is required for such action by law, by the Articles of
Incorporation or by these By-Laws.
Section 3.14. Compensation: Each director may receive such
remuneration for his services as shall be fixed from time to time by
resolution of the board of directors.
Section 3.15. Action Without a Meeting: Except as otherwise provided
under the Investment Company Act of 1940, as amended, any action required or
permitted to be taken at any meeting of the board of directors may be taken
without a meeting if written consents thereto are signed by all members of the
board and such written consents are filed with the records of the meetings of
the board.
Section 3.16. Chairman of the Board: The board of directors, at its
first meeting and thereafter at its annual meeting, shall elect from among the
directors a chairman of the board, who shall serve at the pleasure of the board
of directors. If the board of directors does not elect a chairman at any annual
meeting, it may do so at any subsequent regular or special meeting. The chairman
of the board shall hold office until the next annual meeting of the board of
directors and until his successor shall have been chosen and qualified. If the
office of chairman of the board shall become vacant for any reason, the
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board of directors may fill such vacancy at any regula or special meeting. The
chairman of the board shall preside at all stockholders' meetings and at all
meetings of the board of directors and shall have such powers and perform such
duties as may be assigned to him from time to time by the board of directors.
The chairman of the board shall not be considered an officer of the Corporation
by reason of holding said position.
ARTICLE IV
----------
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
----------------------------------------
Section 4.01. How Constituted: By resolution adopted by the board of
directors, the board may designate an executive committee, consisting of not
less than three nor more than five directors. The board may also designate
additional committees consisting of at least two directors. Each member of a
committee shall be a director and shall hold office during the pleasure of the
board. The chairman of the board, if any, and the president shall be members of
the executive committee.
Section 4.02. Powers of the Executive Committee: Unless otherwise
provided by a resolution of the board of directors, when the board of directors
is not in session the executive committee shall have and may exercise all powers
of the board of directors in the management of the business and affairs of the
Corporation that may lawfully be exercised by the full board of directors,
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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.
Section 4.03. Proceedings, Quorum and Manner of Acting: In the absence
of an appropriate resolution of the board of directors, each committee may adopt
such rules and regulations governing its proceedings, quorum and manner of
acting as it shall deem proper and desirable, provided that the quorum shall not
be less than two directors. In the absence of any member of any such committee,
the members thereof present at any meeting, whether or not they constitute a
quorum, may appoint a member of the board of directors to act in the place of
such absent member.
Section 4.04. Other Committees: The board of directors may appoint
other committees, each consisting of one or more persons, who need not be
directors. Each such committee shall have such powers and perform such duties as
may be assigned to it from time to time by the board of directors, but shall not
exercise any power which may lawfully be exercised only by the board of
directors or a committee thereof.
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ARTICLE V
---------
OFFICERS
--------
Section 5.01. General: The officers of the Corporation shall be a
president, a secretary and a treasurer, and may include one or more vice
presidents, assistant secretaries or assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 5.10
hereof.
Section 5.02. Election, Term of Office and Qualifications: The officers
of the Corporation (except those appointed pursuant to Section 5.10 hereof)
shall be elected by the board of directors at its first meeting or such
subsequent meetings as shall be held prior to its first annual meeting, and
thereafter annually at its annual meeting. If any officers are not elected at
any annual meeting, such officers may be elected at any subsequent regular or
special meeting of the board. Except as provided in Sections 5.03, 5.04 and 5.05
hereof, each officer chosen by the board of directors shall hold office until
the next annual meeting of the board of directors and until his successor shall
have been chosen and qualified. Any person may hold one or more offices of the
Corporation except that the president may not hold the office of vice president,
and provided further that a person who holds more than one office may not act in
more than one capacity to execute, acknowledge or verify an instrument
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required by law to be executed, verified or acknowledged by more than one
officer. No officer need be a director.
Section 5.03. Resignation: Any officer may resign his office at any
time by delivering a written resignation to the board of directors, the
president, the secretary, or any assistant secretary. Unless otherwise specified
therein, such resignation shall take effect upon delivery.
Section 5.04. Removal: Any officer may be removed from office whenever
in the board's judgement the best interest of the Corporation will be served
thereby, by the vote of a majority of the board of directors given at the
regular meeting or any special meeting called for such purpose. In addition, any
officer or agent appointed in accordance with the provisions of Section 5.11
hereof may be removed, either with or without cause, by any officer upon whom
such power of removal shall have been conferred by the board of directors.
Section 5.05. Vacancies and Newly Created Offices: If any vacancy shall
occur in any office by reason of death, resignation, removal, disqualification
or other cause, or if any new office shall be created, such vacancies or newly
created offices may be filled by the board of directors at any regular or
special meeting or, in the case of any office created pursuant to Section
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5.11 hereof, by any officer upon whom such power shall have been conferred by
the board of directors.
Section 5.06. President: The president shall be the chief executive
officer of the Corporation and, in the absence of the Chairman of the Board,
shall preside at all stockholders' meetings and at all meetings of the board of
directors. Subject to the supervision of the board of directors, he shall have
general charge of the business, affairs and property of the Corporation and
general supervision over its officers, employees and agents. Subject to the
provisions of Section 7.01 and except as the board of directors may otherwise
order, he may sign in the name and on behalf of the Corporation all deeds,
bonds, contracts or agreements. He shall exercise such other powers and perform
such other duties as from time to time may be assigned to him by the board of
directors.
Section 5.07. Vice President: The board of directors may from time to
time designate and elect one or more vice presidents who shall have such powers
and perform such duties as from time to time may be assigned to them by the
board of directors or the president. At the request or in the absence of
disability of the president, the vice president (or, if there are two or more
vice presidents, then the senior of the vice presidents present and able to act)
may perform all the duties of the president and,
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when so acting, shall have all the powers of and be subject to all the
restrictions upon the president.
Section 5.08. Treasurer and Assistant Treasurers: The treasurer shall
be the principal financial and accounting officer of the Corporation. He shall
deliver all funds and securities of the Corporation which may come into his
hands to such bank or trust company as the board of directors shall employ as
Custodian. He shall have the custody of the seal of the Trust. He shall prepare
annually a full and correct statement of the affairs of the Corporation,
including a balance sheet and a financial statement of operations for the
preceding fiscal year, which shall be submitted at the annual stockholder
meeting and filed at the Corporation's principal office within 20 days of the
meeting, or when no annual meeting is held, filed at the Corporation's principal
office within 120 days after the end of the fiscal year. The Treasurer shall
furnish such other reports regarding the business and condition as the board of
directors may from time to time require and perform such duties additional to
the foregoing as the board of directors may from time to time designate.
Any assistant treasurer may perform such duties of the treasurer as the
treasurer or the board of directors may assign, and, in the absence of the
treasurer, may perform all the duties of the treasurer.
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Section 5.09. Secretary and Assistant Secretaries: The secretary shall
attend to the giving and serving of all notices of the Corporation and shall act
as secretary at, and record all proceedings of, the meetings of the stockholders
and directors in the books to be kept for that purpose. He shall keep in safe
custody the seal of the Corporation, and shall have charge of the records of the
Corporation, including the stock books an such other books and papers as the
board of directors may direct and such books, reports, certificates and other
documents required by law to be kept, all of which shall at all reasonable times
be open to inspection by any director. At every meeting of the stockholders, he
shall receive and take charge of and/or canvass all proxies and/or ballots, and
shall decide all questions touching the qualification of voters, the validity of
proxies and the acceptance or rejection of votes. He shall perform such other
duties as appertain to his office or as may be required by the board of
directors.
Any assistant secretary may perform such duties of the secretary as the
secretary or the board of directors may assign, and, in the absence of the
secretary, may perform all the duties of the secretary.
Section 5.10. Subordinate Officers: The board of directors from time
to time may appoint such other officers or agents as it
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may deem advisable, each of whom shall have such title, hold office for such
period, have such authority and perform such duties as the board of directors
may determine. The board of directors from time to time may delegate to one or
more officers or agents the power to appoint any such subordinate officers or
agents and to prescribe their respective rights, terms of office, authorities
and duties.
Section 5.11. Remuneration: The salaries or other compensation of the
officers of the Corporation shall be fixed from time to time by resolution of
the board of directors, except that the board of directors may by resolution
delegate to any person or group of persons the power to fix the salaries or
other compensation of any subordinate officers or agents appointed in accordance
with the provisions of Section 5.11 hereof.
Section 5.12. Surety Bonds: The board of directors may require any
officer or agent of the Corporation to execute a bond (including, without
limitation, any bond required by the Investment Company act of 1940, as amended,
and the rules and regulations of the Securities and Exchange Commission) to the
Corporation in such sum and with such surety or sureties as the board of
directors may determine, conditioned upon the faithful performance of his duties
to the Corporation, including responsibility for negligence and for the
accounting of any of the Corporation's property, funds or securities that may
come into his hands.
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ARTICLE VI
----------
CUSTODY OF SECURITIES
---------------------
Section 6.01. Employment of a Custodian: The Corporation shall place
and at all times maintain in the custody of a custodian (including any
sub-custodian for the custodian) all funds, securities and similar investments
owned by the Corporation. The custodian (and any sub-custodian) shall be a bank
or similar financial institution having not less than $2,000,000 aggregate
capital, surplus and undivided profits and shall be appointed from time to time
by the board of directors, which shall fix its remuneration.
Section 6.02. Action Upon Termination of Custodian Agreement: Upon
termination of a custodian agreement or inability of the custodian to continue
to serve, the board of directors shall promptly appoint a successor custodian,
but in the event that no successor custodian can be found who has the required
qualifications and is willing to serve, the board of directors shall call as
promptly as possible a special meeting of the stockholders to determine whether
the Corporation shall function without a custodian or shall be liquidated. If so
directed by vote of the holders of a majority of the outstanding shares of stock
of the Corporation, the custodian shall deliver and pay over all property of the
Corporation held by it as specified in such vote.
29
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Section 6.03. Provisions of Custodian Contract: The Custodian employed
by the Corporation pursuant to the Articles of Incorporation shall be required
to enter into a contract with the Corporation which shall contain in substance
the following provisions:
(a) The Corporation will cause all securities and funds owned by the
Corporation to be delivered or paid to the Custodian.
(b) The Custodian will receive and receipt for any monies due to the
Corporation and deposit the same in its own banking department and in such other
banking institutions, if any, as the Custodian and the board of directors may
approve. The Custodian shall have the sole power to draw upon any such account.
(c) The Custodian shall release and deliver securities owned by the
Corporation in the following cases only:
(1) Upon the sale of such securities for the account of the
Corporation and receipt of payment therefor;
(2) To the issuer thereof or its agent when such securities
are called, redeemed, retired or otherwise become payable; provided, that in any
such case the cash is to be delivered to the Custodian;
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<PAGE>
(3) To the issuer thereof or its agent for transfer into the
name of the Corporation, the Custodian or a nominee of either, or for exchange
for a different number of bonds or certificates representing the same aggregate
face amount or number of units; provided, that in any such case the new
securities are to be delivered to the Custodian;
(4) To the broker selling the same for examination, in accord
with the "street delivery" custom;
(5) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities or pursuant to provision of any
deposit agreement; provided, that in any case the new securities and cash, if
any, are to be delivered to the Custodian;
(6) In the case of warrants, rights, or similar securities,
the surrender thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts of temporary securities for
definitive securities;
(7) To any pledgee by way of pledge or hypothecation of the
Corporation's assets to secure any loan; and
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(8) For deposit in a system for the central handling of
securities in accordance with the following provision:
Subject to such rules, regulations and orders as the Commission may
adopt, the Board of Directors may direct the custodian to deposit all
or any part of the securities owned by the Corporation in a system for
the central handling of securities established by a national securities
exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other
person as may be permitted by the Commission, or otherwise in
accordance with the 1940 Act as amended from time to time, pursuant to
which system all securities of any particular class or series of any
issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery
of such securities, provided that all such deposits shall be subject to
withdrawal only upon the order of the Corporation.
(d) The Custodian shall pay out monies of the Corporation only upon the
purchase of securities for the account of the Cor-
32
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poration and the delivery in due course of such securities to the Custodian, or
in connection with the conversion, exchange or surrender of securities owned by
the Corporation as set forth in (c), or for the repurchase of shares issued by
the Corporation or for the making of any disbursements authorized by the
Corporation or for the making of any disbursements authorized by the board of
directors pursuant to the Articles of Incorporation or these By-laws, or for the
payment of any expense or liability incurred by the Corporation; provided that,
in every case where payment is made by the Custodian in advance of receipt of
the securities purchased, the Custodian shall be absolutely liable to the
Corporation for such securities to the same extent as if the securities had been
received by the Custodian.
(e) The Custodian shall make deliveries of securities and payments of
cash only upon written instructions signed or initialed by such officer or
officers or other agent or agents of the Corporation as may be authorized to
sign or initial such instructions by resolution of the board of directors; it
being understood that the board of directors may from time to time authorize a
different person or persons to sign or initial instructions for different
purposes.
The contract between the Corporation and the Custodian may contain any
other provisions that are not inconsistent with the
33
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provisions of the Articles of Incorporation or with these By-laws as the board
of directors may approve.
Such contract shall be terminable by either party upon written notice
to the other within such time not exceeding sixty (60) days as may be specified
in the contract; provided, however, that upon termination of the contract or
inability of the Custodian to continue to serve, the Custodian shall, upon
written notice of appointment of another bank or trust company as custodian,
deliver and pay over to such successor custodian all securities and monies held
by it for account of the Corporation. In such case, the board of directors shall
promptly implement the procedures described in Section 6.02 hereof.
Such contract shall also provide that, pending appointment of a
successor custodian or a vote of the shareholders specifying some other
disposition of the funds and property, the Custodian shall not deliver funds and
property of the Corporation to the Corporation, but may deliver them to a bank
or trust company doing business in the United States, of its own selection
having an aggregate capital, surplus and undivided profits, as shown by its last
published report, of not less than $2,000,000. The property of the Corporation
is to be held under terms similar to those on which they were held by the
retiring custodian.
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Any sub-custodian employed by the Custodian pursuant to authorization
to do so granted by the Corporation pursuant to Section 6.01 hereof shall be
required to enter into a contract with the Custodian containing in substance the
same provisions as those described in paragraphs (a) through (e) above, except
that any contract with a sub-custodian performing its duties outside the United
States and its territories and possessions, may omit or limit any of such
conditions, provided tha, any such omission or limitation shall be expressly
approved by a majority of the directors of the Corporation.
Section 6.04. Other Arrangements: The Corporation may make such other
arrangements for the custody of its assets (including deposit arrangements) as
may be required by any applicable law, rule or regulation.
ARTICLE VII
-----------
EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES
----------------------------------------------
Section 7.01. General: Subject to the provisions of Sections 5.07,
6.03, 7.02 and 8.03 hereof, all deeds, documents, transfers, contracts,
agreements and other instruments requiring execution by the Corporation shall be
signed by the president or a vice president and by the treasurer or secretary or
an assistant treasurer or an assistant secretary, or as the board of
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<PAGE>
directors may otherwise, from time to time, authorize. Any such authorization
may be general or confined to specific instances.
Section 7.02. Checks, Notes, Drafts, Etc.: So long as the Corporation
shall employ a custodian to keep custody of the cash and securities of the
Corporation, all checks and drafts for the payment of money by the Corporation
may be signed in the name of the Corporation by the custodian. Except as
otherwise authorized by the board of directors, all requisitions or orders for
the assignment of securities standing in the name of the custodian or its
nominee, or for the execution of powers to transfer the same, shall be signed in
the name of the Corporation by the president or a vice president and by the
treasurer or an assistant treasurer. Promissory notes, checks or drafts payable
to the Corporation may be endorsed only to the order of the custodian or its
nominee and only by the treasurer or president or a vice president or by such
other person or persons as shall be authorized by the board of directors.
Section 7.03. Voting of Securities: Unless otherwise ordered by the
board of directors, the president or any vice president shall have full power
and authority on behalf of the Corporation to attend and to act and to vote, or
in the name of the Corporation to execute proxies to vote, at any meeting of
stockholders of any company in which the Corporation may hold stock. At any such
meeting such officer shall possess and may
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<PAGE>
exercise (in person or by proxy) any and all rights, powers and privileges
incident to the ownership of such stock. The board of directors may by
resolution from time to time confer like powers upon any other person or
persons.
ARTICLE VIII
------------
CAPITAL STOCK
-------------
Section 8.01. Certificates of Stock:
(a) Certificates of stock shall not be issued unless requested in
writing by a shareholder. If properly requested, certificates of each series of
shares ("Series") of the Corporation shall be in the form approved by the board
of directors, signed in the name of the Corporation by the president or any vice
president and by the treasurer or any assistant treasurer or the secretary or
any assistant secretary, sealed with the seal of the Corporation and certifying
the number and kind of shares owned by him in the Corporation. Such signatures
and seal may be a facsimile and may be mechanically reproduced thereon. The
certificates containing such facsimiles shall be valid for all intents and
purposes.
(b) In case any officer who shall have signed any such certificate, or
whose facsimile signature has been placed thereon, shall cease to be such an
officer (because of death, resigna-
37
<PAGE>
tion or otherwise) before such certificate is issued, such certificate may be
issued and delivered by the Corporation with the same effect as if he were such
officer at the date of issue.
(c) The number of each certificate issued, the name of the person
owning the shares represented thereby, the number of such shares and the date of
issuance shall be entered upon the stock books of the Corporation at the time of
issuance.
(d) Every certificate exchanged, surrendered for redemption or
otherwise returned to the Corporation shall be marked "Canceled" with the date
of cancellation.
Section 8.02. Transfer of Capital Stock:
(a) Transfers of shares of any Series of the Corporation shall be made
on the books of the Corporation by the holder of record thereof (in person or by
his attorney thereunto duly authorized by a power of attorney duly executed in
writing and filed with the secretary of the Corporation) (i) if a certificate or
certificates have been issued, upon the surrender of the certificate or
certificates, properly endorsed or accompanied by proper instruments of
transfer, representing such shares, or (ii) as otherwise prescribed by the board
of directors.
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(b) The Corporation shall be entitled to treat the holder of record of
any share of stock as the absolute owner thereof for all purposes, and
accordingly shall not be bound to recognize any legal, equitable or other claim
or interest in such share on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise expressly
provided by the statutes of the State of Maryland.
Section 8.03. Transfer Agents and Registrars: The board of directors
may, from time to time, appoint or remove transfer agents or registrars of
transfers of shares of any Series of the Corporation. Upon any such appointment
being made, all certificates representing shares of any Series of the
Corporation thereafter issued shall be countersigned by one of such transfer
agents or registrars or by both and shall not be valid unless so countersigned.
Section 8.04. Transfer Regulations: Except as provided in the Articles
of Incorporation, the shares of any Series of the Corporation may be freely
transferred, subject to the charging of customary transfer fees, and the board
of directors may, from time to time, adopt rules and regulations with reference
to the method of transfer of the shares of any Series of the Corporation.
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Section 8.05. Fixing of Record Date: The board of directors may fix in
advance a date as a record date for the determination of the stockholders
entitled to notice of or to vote at any stockholders' meeting or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or to receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any change, conversion or
exchange of stock, or for the purpose of any other lawful action; provided that
such record date shall be a date not more than 90 nor less than 10 days prior to
the date on which the particular action requiring such determination of
stockholders of record will be taken, except as otherwise provided by law.
Section 8.06. Lost, Stolen or Destroyed Certificates: Before issuing a
new certificate for stock of the Corporation alleged to have been lost, stolen
or destroyed, the board of directors or any officer authorized by the board may,
in its discretion, require the owner of the lost, stolen or destroyed
certificate (or his legal representative) to give the Corporation a bond or
other indemnity, in such form and in such amount as the board or any such
officer may direct and with such surety or sureties as may be satisfactory to
the board or any such officer, sufficient to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss, theft or
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destruction of any such certificate or the issuance of such new certificate.
ARTICLE IX
----------
FISCAL YEAR, ACCOUNTANT
-----------------------
Section 9.01 Fiscal Year: The fiscal year of the Corporation shall,
unless otherwise ordered by the board of directors, be twelve calendar months
ending on the 30th day of June in each year.
Section 9.02. Accountant:
(a) The Corporation shall employ an independent accountant or firm of
independent accountants as its accountant to examine the accounts of the
Corporation and to sign and certify financial statements filed by the
Corporation. The accountant's certificates and reports shall be addressed both
to the board of directors and to the stockholders.
(b) A majority of the members of the board of directors who are not
interested persons (as such term is defined in the Investment Company Act of
1940, as amended) of the Corporation shall select the accountant at any meeting
held within 30 days before or 90 days after the beginning of the fiscal year of
the Corporation or before the annual stockholders' meeting (if any)
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<PAGE>
in that year. Such selection shall be submitted for ratification or rejection at
the next succeeding stockholders' meeting, when and if such meeting is held. If
such meeting shall reject such selection, the accountant shall be selected by
majority vote of the Corporation's outstanding voting securities, either at the
meeting at which the rejection occurred or at a subsequent meeting of
stockholders called for the purpose.
(c) Any vacancy occurring between meetings, due to the death or
resignation of the accountant, may be filled by a majority of the members of the
board of directors who are not such interested persons.
ARTICLE X
---------
INDEMNIFICATION AND INSURANCE
-----------------------------
Section 10.01 Indemnification of Officers, Directors, Employees and
Agents. The Corporation shall indemnify each person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
("Proceeding"), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the Corporation as a director, officer, employee,
partner, trustee or agent of another corporation, partnership, joint venture,
trust,
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or other enterprise, against all reasonable expenses (including attorneys' fees)
actually incurred, and judgments, fines, penalties and amounts paid in
settlement in connection with such Proceeding to the maximum extent permitted by
law, now existing or hereafter adopted. Notwithstanding the foregoing, the
following provisions shall apply with respect to indemnification of the
Corporation's directors, officers, and investment adviser (as defined in the
Investment Company Act of 1940, as amended):
(a) Whether or not there is an adjudication of liability in such
Proceeding, the Corporation shall not indemnify any such
person for any liability arising by reason of such person's
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her
office or under any contract or agreement with the Corporation
("disabling conduct").
(b) The Corporation shall not indemnify any such person unless:
(1) the court or other body before which the Proceeding
was brought (a) dismisses the Proceeding for
insufficiency of evidence of any disabling conduct,
or (b) reaches a final decision
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on the merits that such person was not liable by
reason of disabling conduct; or
(2) absent such a decision, a reasonable determination is
made, based upon a review of the facts, by (a) the
vote of a majority of a quorum of the directors of
the Corporation who are neither interested persons of
the Corporation as defined in the Investment Company
At of 1940, as amended, nor parties to the
Proceeding, or (b) if such quorum is not obtainable,
or even if obtainable, if a majority of a quorum of
directors described above so directs, based upon a
written opinion by independent legal counsel, that
such person was not liable by reason of disabling
conduct.
(c) Reasonable expenses (including attorneys' fees) incurred in
defending a Proceeding involving any such person will be paid
by the Corporation in advance of the final disposition thereof
upon an undertaking by such person to repay such expenses
unless it is ultimately determined that he or she is entitled
to indemnification, if:
(1) such person shall provide adequate security for his
or her undertaking;
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(2) the Corporation shall be insured against losses
arising by reason of such advance; or
(3) a majority of a quorum of the directors of the
Corporation who are neither interested persons of the
Corporation as defined in the Investment Company Act
of 1940, as amended, nor parties to the Proceeding,
or independent legal counsel in a written opinion,
shall determine, based on a review of readily
available facts, that there is reason to believe that
such person will be found to be entitled to
indemnification.
Section 10.02. Insurance of Officers, Directors, Employees and Agents:
The Corporation may purchase and maintain insurance or other sources of
reimbursement to the extent permitted by law on behalf of any person who is or
was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee,
partner, trustee or agent of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him or her and
incurred by him or her in or arising out of his position.
Section 10.03. Non-exclusivity: The indemnification and advancement
of expenses provided by, or granted pursuant to, this
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Article X shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under the
Articles of Incorporation, these By-laws, agreement, vote of stockholders or
directors, or otherwise, both as to action in his or her official capacity and
as action in another capacity while holding such office.
ARTICLE XI
----------
AMENDMENTS
----------
Section 11.01. General: Except as provided in Section 11.02 hereof, all
By-Laws of the Corporation, whether adopted by the board of directors or the
stockholders, shall be subject to amendment, alteration or repeal, and new
By-Laws may be made, by the affirmative vote of a majority of either:
(a) the holders of record of the outstanding shares of stock of the
Corporation entitled to vote, at any meeting, the notice or waiver of notice of
which shall have specified or summarized the proposed amendment, alteration,
repeal or new By-Law; or
(b) the directors, at any regular or special meeting the notice or
waiver of notice of which shall have specified or summarized the proposed
amendment, alteration, repeal or new By-Law.
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Section 11.02. By Stockholders Only:
(a) No amendment of any section of these By-laws shall be made except
by the stockholders of the Corporation if the By-laws provide that such section
may not be amended, altered or repealed except by the stockholders.
(b) From and after the issuance of any shares of the capital stock of
the Corporation, no amendment of this Article XI shall be made except by the
stockholders of the Corporation.
END OF BY-LAWS
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 31st day of August, 1990, by and between WESTERN
ASSET TRUST, INC. ("Fund"), a Maryland corporation and WESTERN ASSET MANAGEMENT
COMPANY ("Western"), a California corporation registered as an investment
adviser under the Investment Advisers Act of 1940.
WHEREAS, the Fund is an open-end, diversified, management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), consisting initially of four series of shares, called the Limited
Duration Portfolio, the Full Range Duration Portfolio, the Long Duration
Portfolio and the Money Market Portfolio (collectively, the "Portfolios") and
WHEREAS, the Fund wishes to retain Western to provide the Portfolios
with certain investment advisory services, and
WHEREAS, Western is willing to furnish such services on the terms and
conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Western as investment adviser
for each Portfolio for the period and on the
<PAGE>
terms set forth in this Agreement. Western accepts such appointment and agrees
to furnish the services herein set forth for the compensation herein provided.
2. Delivery of Documents. The Fund has furnished Western with copies
properly certified or authenticated of each of the following:
(a) The Fund's Articles of Incorporation, as filed with the
Maryland Department of Assessment and Taxation on May 16, 1990
and all amendments thereto (such Articles of Incorporation, as
presently in effect and as they shall from time to time be
amended, are herein called the "Articles");
(b) The Fund's By-Laws and all amendments thereto (such By-Laws,
as presently in effect and they shall from time to time be
amended, are herein called the "ByLaws");
(c) Resolutions of the Fund's Board of Directors authorizing the
appointment of Western as investment adviser and approving
this Agreement;
(d) The Fund's Notification of Registration on Form N-8A under the
1940 Act as filed with the Securities and Exchange Commission
on May 16, 1990 and all amendments
2
<PAGE>
thereto;
(e) The Fund's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended, and the 1940 Act (File No.
811-06110) as filed with the Securities and Exchange
Commission on May 16, 1990, including all exhibits thereto,
relating to shares of the Fund's common stock of par value
$0.001 per share (herein called "Shares") and all amendments
thereto; and
(f) The Fund's most recent prospectus (such document as presently
in effect and all amendments and supplements thereto is herein
called the "Prospectus");
(g) The Fund's most recent statement of additional information
(such document as presently in effect and all amendments and
supplements thereto is herein called the "Statement of
Additional Information").
The Fund will furnish Western from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing.
3. (a). Investment Advisory Services. Subject to the supervision of the
Fund's Board of Directors, Western shall regularly provide each Portfolio with
investment research,
3
<PAGE>
advice, management and supervision and shall furnish a continuous investment
program for each Portfolio's portfolio of securities consistent with that
Portfolio's investment objective, policies, and limitations as stated in the
minutes of the Fund's Directors, including the formulation, from time to time,
of lists of specific approved investments for each Portfolio. Western shall
determine from time to time what securities shall be purchased, retained or sold
by each Portfolio, and shall implement those decisions, all subject to the
provisions of the Fund's Articles and By-Laws, the 1940 Act, the applicable
rules and regulations of the Securities and Exchange Commission, and other
applicable federal and state law, as well as the investment objective, policies
and limitations of each Portfolio. Western will place orders pursuant to its
investment determinations for each Portfolio either directly with the issuer or
with any broker or dealer. In placing orders with brokers and dealers, Western
will attempt to obtain the best net price and the most favorable execution of
its orders; however, Western may, in its discretion, purchase and sell portfolio
securities from and to brokers and dealers who provide any Portfolio with
research, analysis, advice and similar services, and Western may pay to these
brokers, in return for research and analysis, a higher commission than may be
charged by other brokers. In no instance will portfolio securities be purchased
from or sold to Western or any affiliated person thereof except in accordance
with the rules, regulations or orders promulgated by the Securities and Exchange
Commission
4
<PAGE>
pursuant to the 1940 Act. Western shall also provide advice and recommendations
with respect to other aspects of the business and affairs of the Fund, and shall
perform such other functions of management and supervision as may be requested
by the Fund and agreed to by Western.
(b) Western will maintain, or oversee the maintenance of, all books and
records with respect to the portfolio securities transactions of each Portfolio
in accordance with all applicable federal and state laws and regulations, and
will furnish the Fund's Board of Directors with such daily, periodic and special
reports as either may request.
(c) Western will furnish the Fund with office facilities, including
space, furniture and equipment and all personnel reasonably necessary for the
operation of the Fund.
(d) Western shall authorize and permit any of its directors, officers
and employees, who may be elected as directors or officers of the Fund, to serve
in the capacities in which they are elected, and shall bear their salary or
other compensation and expenses, if any.
4. Services Not Exclusive. Western's services hereunder are not deemed
to be exclusive, and Western shall be free to render similar services to others.
It is understood that persons
5
<PAGE>
employed by Western to assist in the performance of its duties hereunder might
not devote their full time to such service. Nothing herein shall be deemed to
limit or restrict the right of Western or any affiliate of Western to engage in
and devote time and attention to other businesses or to render services of
whatever kind or nature.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, Western hereby agrees that all records which it maintains
for the Fund are property of the Fund and further agrees to surrender promptly
to the Fund any such records upon the Fund's request. Western further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act, any such
records required to be maintained by Rule 31a-1 under the 1940 Act.
6. Expenses. During the term of this Agreement, Western will pay all
expenses incurred by it in connection with its services under this Agreement.
Other than as herein specifically indicated, Western shall not be responsible
for the Fund's expenses. Specifically, Western will not be responsible, except
to the extent of the reasonable compensation of employees of the Fund whose
services may be used by Western hereunder, for any of the following expenses of
the Fund, which expenses shall be borne by the Fund: organizational expenses;
legal expenses; interest; taxes; governmental fees; fees, voluntary assessments
and other
6
<PAGE>
expenses incurred in connection with membership in investment company
organization; the cost (including brokerage commissions or charges, if any) of
securities purchased or sold by the Fund and any losses incurred in connection
therewith; distribution fees, if any; fees of custodians, subcustodians,
transfer agents, registrars or other agents for all services to the Fund;
expenses relating to the redemption or repurchase of the Fund's shares; expenses
of registering and qualifying Fund shares for sale under applicable federal and
state law and maintaining such registrations and qualifications; expenses of
preparing, setting in print, printing and distributing prospectuses, proxy
statements, reports, notices, stock certificates and dividends to Fund
shareholders; costs of stationery; costs of stockholders' and other meetings of
the Fund; compensation of officers and directors who are not affiliated persons
of Western; fees and expenses of independent auditors; traveling expenses of
directors of the Fund, if any; expenses for fidelity bonds and other insurance
covering the Fund and its officers and directors; costs of indemnification; and
any extraordinary expenses.
7. Compensation. (a) For the services which Western will render to the
Fund under this Agreement, each of the Limited Duration, Full Range Duration 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 the Money Market Portfolio will pay Western a fee,
7
<PAGE>
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 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
each Portfolio in that period from the date of commencement to that last day of
the month. If this Agreement is terminated with respect to any Portfolio as of
any date not the last day of a calendar month, a final fee with regard to that
Portfolio shall be paid promptly after the date of termination and shall be
based only on the average daily net assets of the 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 or any
affiliated company of Western.
8. Limitation of Liability. Western will not be liable for any error of
judgment or mistake of law or for any loss suffered
8
<PAGE>
by the Fund or any Portfolio in connection with the performance of this
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 this
Agreement.
9. The Fund acknowledges that Western may make payments from the fees
paid to it under this Agreement, from past profits or from any other source
available to it to other persons, including but not limited to Legg Mason Fund
Adviser, Inc. and Legg Mason Wood Walker, Incorporated, for shareholder,
administrative, advisory, recordkeeping and distribution services provided by
such persons in connection with the Fund's shares.
10. Definitions. As used in this Agreement, the terms "assignment",
"interested person", and "majority of the outstanding voting securities" shall
have the meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
11. Duration and Termination. This Agreement will become effective with
respect to each Portfolio on the date first written above, provided that it
shall have been approved by the
9
<PAGE>
Fund's Board of Directors and by the shareholders of that Portfolio in
accordance with the requirements of the 1940 Act and, unless sooner terminated
as provided herein, will continue in effect for two years from the above written
date. Thereafter, if not terminated, this Agreement shall continue in effect
with respect to each Portfolio for successive annual periods ending on the same
date of each year, provided that such continuance is specifically approved at
least annually (i) by the Fund's Board of Directors or (ii) by a vote of a
majority of the outstanding voting securities of the Portfolio (as defined in
the 1940 Act), provided that in either event the continuance is also approved by
a majority of the Fund's Directors who are not interested persons (as defined in
the 1940 Act) of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on such approval.
This Agreement is terminable with respect to any Portfolio or in its
entirety without penalty by the Fund's Board of Directors, by vote of a majority
of the outstanding voting securities of each affected Portfolio (as defined in
the 1940 Act), or by Western, on not less than 60 days' notice to the other
party and will be terminated upon the mutual written consent of Western and the
Fund. This Agreement will also automatically and immediately terminate in the
event of its assignment.
10
<PAGE>
In the event this Agreement is terminated by either party or upon
written notice from Western at any time, the Fund hereby agrees that it will
eliminate from its corporate name any reference to the name of "Western Asset."
The Fund shall have the non-exclusive use of the name "Western Asset" in whole
or in part only so long as this Agreement is effective or until such notice is
given.
12. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
13. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought and no material amendment of this Agreement shall be
effective until approved by vote of the holders of a majority of the outstanding
voting securities of the Fund or each Portfolio to which such amendment relates,
as the case may be.
14. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define
11
<PAGE>
or delimit any of the provisions hereof or otherwise affect their construction
or effect. Should any part of this Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective successors, to the extent
permitted by law, and shall be governed by Maryland law.
IN WITNESS WHEREOF, the parties hereto have causes this 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/ James A. Walsh By: /s/John L. Cecil
[seal] WESTERN ASSET MANAGEMENT COMPANY
Witness:
By: /s/ James A. Walsh By: /s/ W. Curtis Livingston
12
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
Western Asset Trust, Inc.
Corporate Securities Portfolio
Mortgage Securities Portfolio
AGREEMENT made this 30th day of June, 1992, 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, diversified, management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), consisting initially of seven series of shares, two of which are
known as the Corporate Securities Portfolio and the Mortgage Securities
Portfolio (collectively, the "Portfolios") and
WHEREAS, the Fund wishes to retain Western Asset to provide the
Portfolios certain investment advisory and administrative services, and
WHEREAS, Western Asset is willing to furnish such services on the terms
and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Western Asset as investment
adviser for the Portfolios for the period and on the terms set forth in this
Agreement. Western Asset accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.
2. Delivery of Documents. The Fund has furnished Western Asset with
copies properly certified or authenticated of each of the following:
(a) The Fund's Articles of Incorporation, as filed with the
Maryland Department of Assessment and Taxation on May 16, 1990
and all amendments thereto (such Articles of Incorporation, as
presently in effect and as they shall from time to time be
amended, are herein called the "Articles");
(b) The Fund's By-Laws and all amendments thereto (such By-Laws,
as presently in effect and they shall from time to time be
amended, are herein called the "By-Laws");
<PAGE>
(c) Resolutions of the Fund's Board of Directors authorizing the
appointment of Western Asset as investment adviser and
approving this Agreement;
(d) The Fund's Notification of Registration on Form N-8A under the
1940 Act as filed with the Securities and Exchange Commission
on May 16, 1990 and all amendments thereto;
(e) The Fund's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended, and the 1940 Act (File No.
811-06110) as filed with the Securities and Exchange
Commission on May 16, 1990, including all exhibits thereto,
relating to shares of the Fund's common stock of par value
$0.001 per share (herein called "Shares") and all amendments
thereto; and
(f) The most recent prospectus or prospectuses for the Portfolios
(such document as presently in effect and all amendments and
supplements thereto is herein called the "Prospectus");
(g) The most recent statement of additional information or
statements of additional information (such document as
presently in effect and all amendments and supplements thereto
is herein called the "Statement of Additional Information").
The Fund will furnish Western Asset from time to time with copies,
properly certified or authenticated, of all amendments of or supplements to the
foregoing.
3. (a). Investment Advisory Services. Subject to the supervision of the
Fund's Board of Directors, Western Asset shall regularly provide each Portfolio
with investment research, advice, management and supervision and shall furnish a
continuous investment program for each Portfolio's portfolio of securities
consistent with each Portfolio's respective investment objective, policies, and
limitations as stated in the minutes of the Fund's Directors. Western Asset
shall determine from time to time what securities shall be purchased, retained
or sold by the Portfolios, and shall implement those decisions, all subject to
the provisions of the Fund's Articles and ByLaws, the 1940 Act, the applicable
rules and regulations of the Securities and Exchange Commission, and other
applicable federal and state law, as well as the investment objective, policies
and limitations of the Portfolios. Western Asset will place orders pursuant to
its investment determinations for each Portfolio either directly with the issuer
or with any broker or dealer. In placing orders with brokers and dealers,
Western Asset will attempt to obtain the best net price and the most favorable
execution of its orders; however, Western Asset may, in its discretion, purchase
and sell
2
<PAGE>
portfolio securities from and to brokers and dealers who provide Western Asset
with research, analysis, advice and similar services, and Western Asset may pay
to these brokers, in return for research and analysis, a higher commission than
may be charged by other brokers. In no instance will portfolio securities be
purchased from or sold to Western Asset, WLO Global Management or any affiliated
person thereof except in accordance with the rules, regulations or orders
promulgated by the Securities and Exchange Commission pursuant to the 1940 Act.
Western Asset shall also provide advice and recommendations with respect to
other aspects of the business and affairs of the Fund, and shall perform such
other functions of management and supervision as may be requested by the Fund
and agreed to by Western Asset.
4. Administrative Services. (a) Subject always to the control of the
Board of Directors of the Fund and to such policies as the Board may determine,
Western Asset agrees, at its expense, (1) to furnish the management and
administrative services necessary for the operation of each Portfolio and
handling its shareholder relations, including overseeing bookkeeping and
accounting services and the calculation and publication of each Portfolio's net
asset value, providing office space, equipment and facilities, data processing,
internal auditing and clerical services (excluding determination of net asset
value); preparing reports to each Portfolio's shareholders and tax returns;
reports to and filings with governmental bodies; and conducting relations on
behalf of each Portfolio with custodians, depositories, transfer agents,
registrars and dividend disbursing and reinvestment plan agents, accountants,
attorneys, underwriters, insurers and banks, and (ii) to furnish all necessary
management facilities, including salaries of personnel, required for it to
execute its duties faithfully.
(b) Western Asset will maintain, or oversee the maintenance of, all
books and records with respect to the portfolio securities transactions of each
Portfolio in accordance with all applicable federal and state laws and
regulations, and will furnish the Fund's Board of Directors with such daily,
periodic and special reports as they may request. In compliance with the
requirements of Rule 31a-3 under the Investment Company Act of 1940, Western
Asset hereby agrees that any records which it maintains for the Fund are the
property of the Fund and further agrees to surrender promptly to the Fund any of
such records upon the Fund's request. Western Asset further agrees to arrange
for the preservation of the records required to be maintained by Rule 31a-1
under the Investment Company Act of 1940 for the periods prescribed by Rule
31a-2 under said Act.
(c) Western Asset shall act as liaison with the Fund's independent
public accountants and shall provide account analyses, fiscal year summaries,
and other audit related
3
<PAGE>
schedules. Western Asset shall take all reasonable action in the performance of
its obligations under this Agreement to assure that the necessary information is
made available to such accountants for the expression of their opinion, as such
may be required by the Fund from time to time.
(d) Western Asset, at its own expense, shall provide a system whereby
information is supplied to shareholders concerning their accounts and the
operation of the Fund. Western Aset shall also provide, at its own expense, a
system whereby orders for purchases and redemption of each Portfolio's shares
which are received by the Fund or its distributor, Legg Mason Wood Walker,
Incorporated, are promptly processed and transmitted to the Fund's transfer
agent. Western Asset may delegate some or all of the functions specified in this
subparagraph to Legg Mason Wood Walker, Incorporated or another appropriate
person.
5. General. (a) Western Asset will furnish the Fund with office
facilities, including space, furniture and equipment and all personnel
reasonably necessary for the operation of the Fund.
(b) Western Asset shall authorize and permit any of its directors,
officers and employees, who may be elected as directors or officers of the Fund,
to serve in the capacities in which they are elected, and shall bear their
salary or other compensation and expenses, if any.
(c) In the performance of its duties under this Agreement, Western
Asset will comply with the provisions of the Articles of Incorporation and
By-Laws of the Fund and the stated investment objectives, policies and
restrictions of each Portfolio, and will use its best efforts to safeguard and
promote the welfare of the Fund, and to comply with other policies which the
Board may from time to time determine.
6. Services Not Exclusive. Western Asset's services hereunder are not
deemed to be exclusive, and Western Asset shall be free to render similar
services to others. It is understood that persons employed by Western Asset to
assist in the performance of its duties hereunder might not devote their full
time to such service. Nothing herein shall be deemed to limit or restrict the
right of Western Asset or any affiliate of Western Asset to engage in and devote
time and attention to other businesses or to render services of whatever kind or
nature.
7. Expenses. During the term of this Agreement, Western Asset will pay
all expenses incurred by it in connection with its services under this
Agreement. Other than as herein specifically indicated, Western Asset shall not
be responsible for the Fund's expenses. Specifically, Western Asset will not be
responsible, except to the extent of the reasonable compensation of employees of
the Fund whose services may be used by Western Asset
4
<PAGE>
hereunder, for any of the following expenses of the Fund, which expenses shall
be borne by the Fund: organizational expenses; legal expenses; interest; taxes;
governmental fees; fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations; the cost
(including brokerage commissions or charges, if any) of securities purchased or
sold by the Fund and any losses incurred in connection therewith; distribution
fees, if any; fees of custodians, subcustodians, transfer agents, registrars or
other agents for all services to the Fund; expenses relating to the redemption
or repurchase of the Fund's shares; expenses of registering and qualifying Fund
shares for sale under applicable federal and state law and maintaining such
registrations and qualifications; expenses of preparing, setting in print,
printing and distributing prospectuses, proxy statements, reports, notices,
stock certificates and dividends to Fund shareholders; costs of stationery;
costs of stockholders' and other meetings of the Fund; compensation of officers
and directors who are not affiliated persons of Western Asset; fees and expenses
of independent auditors; traveling expenses of directors of the Fund, if any;
expenses for fidelity bonds and other insurance covering the Fund and its
officers and directors; costs of indemnification; and any extraordinary
expenses.
8. Compensation. (a) For the services which Western Asset will render
to the Fund under this Agreement, the Corporate Securities Portfolio will pay
Western Asset a fee, computed daily and paid monthly, at an annual rate equal to
0.175% of that Portfolio's average daily net assets, and the Mortgage Securities
Portfolio will pay Western Asset a fee, computed daily and paid monthly, at an
annual rate equal to 0.175% 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 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 each Portfolio in that period from the
date of commencement to that last day of the month. If this Agreement is
terminated with respect to any Portfolio as of any date not the last day of a
calendar month, a final fee with regard to that Portfolio shall be paid promptly
after the date of termination and shall be based only on the average daily net
assets of the 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,
WLO Global
5
<PAGE>
Management or any affiliated company of Western Asset or WLO Global Management.
9. Limitation of Liability. Western Asset 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 this 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 this Agreement.
10. With the approval of the Fund's Board of Directors, Western Asset
may contract with another party to provide to the Portfolios some or all of the
administrative services described in this Agreement. The Fund acknowledges that
Western Asset may make payments from the fees paid to it under this Agreement,
from past profits or from any other source available to it to other persons,
including but not limited to Legg Mason Fund Adviser, Inc. and Legg Mason Wood
Walker, Incorporated, for shareholder, administrative, advisory, recordkeeping
and distribution services provided by such persons in connection with the Fund's
shares.
11. Definitions. As used in this Agreement, the terms "assignment",
"interested person", and "majority of the outstanding voting securities" shall
have the meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
12. Duration and Termination. This Agreement will become effective with
respect to a Portfolio on the date first written above, provided that it shall
have been approved by the Fund's Board of Directors and by the shareholders of
that Portfolio in accordance with the requirements of the 1940 Act and, unless
sooner terminated as provided herein, will continue in effect for two years from
the above written date. Thereafter, if not terminated, this Agreement shall
continue in effect with respect to each Portfolio for successive annual periods
ending on the same date of each year, provided that such continuance is
specifically approved at least annually (i) by the Fund's Board of Directors or
(ii) by a vote of a majority of the outstanding voting securities of the
Portfolio (as defined in the 1940 Act), provided that in either event the
continuance is also approved by a majority of the Fund's Directors who are not
interested persons (as defined in the 1940 Act) of any party to this Agreement,
by vote cast in person at a meeting called for the purpose of voting on such
approval.
6
<PAGE>
This Agreement is terminable with respect to a Portfolio without
penalty by the Fund's Board of Directors, by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of that Portfolio, or
by Western Asset, on not less than 60 days' notice to the other party and will
be terminated upon the mutual written consent of Western Asset and the Fund.
This Agreement will also automatically and immediately terminate in the event of
its assignment.
In the event this Agreement is terminated by either party or upon
written notice from Western Asset at any time, the Fund hereby agrees that it
will eliminate from its corporate name any reference to the name of "Western
Asset." The Fund shall have the non-exclusive use of the name "Western Asset" in
whole or in part only so long as this Agreement is effective or until such
notice is given.
13. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
14. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought and no material amendment of this Agreement shall be
effective with respect to a Portfolio until approved by vote of the holders of a
majority of the outstanding voting securities of that Portfolio.
15. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. Should any part of this Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective successors, to the extent
permitted by law, and shall be governed by Maryland law.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have causes this 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/ Ilene S. Harker By: /s/ W. Curtis Livingston
[seal] WESTERN ASSET MANAGEMENT COMPANY
Witness:
By: /s/ Ilene S. Harker By: /s/ W. Curtis Livingston
8
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
Western Asset Trust, Inc.
International Securities Portfolio
AGREEMENT made this 30th day of June, 1992, 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, diversified, management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), consisting initially of seven series of shares, one of which is
known as the International Securities Portfolio ("Portfolio") and
WHEREAS, the Fund wishes to retain Western Asset to provide to the
Portfolio certain investment advisory and administrative services, and
WHEREAS, Western Asset is willing to furnish such services on the terms
and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Western Asset as investment
adviser for the Portfolio for the period and on the terms set forth in this
Agreement. Western Asset accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.
2. Delivery of Documents. The Fund has furnished Western Asset with
copies properly certified or authenticated of each of the following:
(a) The Fund's Articles of Incorporation, as filed with the
Maryland Department of Assessment and Taxation on May 16, 1990
and all amendments thereto (such Articles of Incorporation, as
presently in effect and as they shall from time to time be
amended, are herein called the "Articles");
(b) The Fund's By-Laws and all amendments thereto (such By-Laws,
as presently in effect and they shall from time to time be
amended, are herein called the "By-Laws");
(c) Resolutions of the Fund's Board of Directors authorizing the
appointment of Western Asset as investment adviser and
approving this Agreement;
1
<PAGE>
(d) The Fund's Notification of Registration on Form N-8A under the
1940 Act as filed with the Securities and Exchange Commission
on May 16, 1990 and all amendments thereto;
(e) The Fund's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended, and the 1940 Act (File No.
811-06110) as filed with the Securities and Exchange
Commission on May 16, 1990, including all exhibits thereto,
relating to shares of the Fund's common stock of par value
$0.001 per share (herein called "Shares") and all amendments
thereto; and
(f) The most recent prospectus for the Portfolio (such document as
presently in effect and all amendments and supplements thereto
is herein called the "Prospectus");
(g) The most recent statement of additional information (such
document as presently in effect and all amendments and
supplements thereto is herein called the "Statement of
Additional Information").
The Fund will furnish Western Asset from time to time with copies,
properly certified or authenticated, of all amendments of or supplements to the
foregoing.
3. (a). Investment Advisory Services. Subject to the supervision of the
Fund's Board of Directors, Western Asset shall regularly provide the Portfolio
with investment research, advice, management and supervision and shall furnish a
continuous investment program for the Portfolio's portfolio of securities
consistent with the Portfolio's respective investment objective, policies, and
limitations as stated in the minutes of the Fund's Directors. Western Asset
shall determine from time to time what securities shall be purchased, retained
or sold by the Portfolio, and shall implement those decisions, all subject to
the provisions of the Fund's Articles and ByLaws, the 1940 Act, the applicable
rules and regulations of the Securities and Exchange Commission, and other
applicable federal and state law, as well as the investment objective, policies
and limitations of the Portfolio. Western Asset will place orders pursuant to
its investment determinations for the Portfolio either directly with the issuer
or with any broker or dealer. In placing orders with brokers and dealers,
Western Asset will attempt to obtain the best net price and the most favorable
execution of its orders; however, Western Asset may, in its discretion, purchase
and sell portfolio securities from and to brokers and dealers who provide
Western Asset with research, analysis, advice and similar services, and Western
Asset may pay to these brokers, in return for research and analysis, a higher
commission than may be charged by other brokers. In no instance will portfolio
securities be purchased
2
<PAGE>
from or sold to Western Asset, WLO Global Management or any affiliated person
thereof except in accordance with the rules, regulations or orders promulgated
by the Securities and Exchange Commission pursuant to the 1940 Act. Western
Asset shall also provide advice and recommendations with respect to other
aspects of the business and affairs of the Fund, and shall perform such other
functions of management and supervision as may be requested by the Fund and
agreed to by Western Asset.
4. Administrative Services. (a) Subject always to the control of the
Board of Directors of the Fund and to such policies as the Board may determine,
Western Asset agrees, at its expense, (1) to furnish the management and
administrative services necessary for the operation of the Portfolio and
handling its shareholder relations, including overseeing bookkeeping and
accounting services and the calculation and publication of the Portfolio's net
asset value, providing office space, equipment and facilities, data processing,
internal auditing and clerical services (excluding determination of net asset
value); preparing reports to the Portfolio's shareholders and tax returns;
reports to and filings with governmental bodies; and conducting relations on
behalf of the Portfolio with custodians, depositories, transfer agents,
registrars and dividend disbursing and reinvestment plan agents, accountants,
attorneys, underwriters, insurers and banks, and (ii) to furnish all necessary
management facilities, including salaries of personnel, required for it to
execute its duties faithfully.
(b) Western Asset will maintain, or oversee the maintenance of, all
books and records with respect to the portfolio securities transactions of the
Portfolio in accordance with all applicable federal and state laws and
regulations, and will furnish the Fund's Board of Directors with such daily,
periodic and special reports as they may request. In compliance with the
requirements of Rule 31a-3 under the Investment Company Act of 1940, Western
Asset hereby agrees that any records which it maintains for the Fund are the
property of the Fund and further agrees to surrender promptly to the Fund any of
such records upon the Fund's request. Western Asset further agrees to arrange
for the preservation of the records required to be maintained by Rule 31a-1
under the Investment Company Act of 1940 for the periods prescribed by Rule
31a-2 under said Act.
(c) Western Asset shall act as liaison with the Fund's independent
public accountants and shall provide account analyses, fiscal year summaries,
and other audit related schedules. Western Asset shall take all reasonable
action in the performance of its obligations under this Agreement to assure that
the necessary information is made available to such accountants for the
expression of their opinion, as such may be required by the Fund from time to
time.
3
<PAGE>
(d) Western Asset, at its own expense, shall provide a system whereby
information is supplied to shareholders concerning their accounts and the
operation of the Fund. Western Aset shall also provide, at its own expense, a
system whereby orders for purchases and redemption of the Portfolio's shares
which are received by the Fund or its distributor, Legg Mason Wood Walker,
Incorporated, are promptly processed and transmitted to the Fund's transfer
agent. Western Asset may delegate some or all of the functions specified in this
subparagraph to Legg Mason Wood Walker, Incorporated or another appropriate
person.
5. General. (a) Western Asset will furnish the Fund with office
facilities, including space, furniture and equipment and all personnel
reasonably necessary for the operation of the Fund.
(b) Western Asset shall authorize and permit any of its directors,
officers and employees, who may be elected as directors or officers of the Fund,
to serve in the capacities in which they are elected, and shall bear their
salary or other compensation and expenses, if any.
(c) In the performance of its duties under this Agreement, Western
Asset will comply with the provisions of the Articles of Incorporation and
By-Laws of the Fund and the stated investment objectives, policies and
restrictions of the Portfolio, and will use its best efforts to safeguard and
promote the welfare of the Fund, and to comply with other policies which the
Board may from time to time determine.
6. Services Not Exclusive. Western Asset's services hereunder are not
deemed to be exclusive, and Western Asset shall be free to render similar
services to others. It is understood that persons employed by Western Asset to
assist in the performance of its duties hereunder might not devote their full
time to such service. Nothing herein shall be deemed to limit or restrict the
right of Western Asset or any affiliate of Western Asset to engage in and devote
time and attention to other businesses or to render services of whatever kind or
nature.
7. Expenses. During the term of this Agreement, Western Asset will pay
all expenses incurred by it in connection with its services under this
Agreement. Other than as herein specifically indicated, Western Asset shall not
be responsible for the Fund's expenses. Specifically, Western Asset will not be
responsible, except to the extent of the reasonable compensation of employees of
the Fund whose services may be used by Western Asset hereunder, for any of the
following expenses of the Fund, which expenses shall be borne by the Fund:
organizational expenses; legal expenses; interest; taxes; governmental fees;
fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; the cost (including brokerage
commissions or charges, if any) of
4
<PAGE>
securities purchased or sold by the Fund and any losses incurred in connection
therewith; distribution fees, if any; fees of custodians, subcustodians,
transfer agents, registrars or other agents for all services to the Fund;
expenses relating to the redemption or repurchase of the Fund's shares; expenses
of registering and qualifying Fund shares for sale under applicable federal and
state law and maintaining such registrations and qualifications; expenses of
preparing, setting in print, printing and distributing prospectuses, proxy
statements, reports, notices, stock certificates and dividends to Fund
shareholders; costs of stationery; costs of stockholders' and other meetings of
the Fund; compensation of officers and directors who are not affiliated persons
of Western Asset; fees and expenses of independent auditors; traveling expenses
of directors of the Fund, if any; expenses for fidelity bonds and other
insurance covering the Fund and its officers and directors; costs of
indemnification; and any extraordinary expenses.
8. Compensation. (a) For the services which Western Asset will render
to the Fund under this Agreement, the Portfolio will pay Western Asset a fee,
computed daily and paid monthly, at an annual rate equal to 0.475% of the
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 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
the Portfolio in that period from the date of commencement to that last day of
the month. If this Agreement is terminated with respect to the Portfolio as of
any date not the last day of a calendar month, a final fee with regard to the
Portfolio shall be paid promptly after the date of termination and shall be
based only on the average daily net assets of the Portfolio in that period from
the beginning of such month to such date of termination. The average daily net
assets of the 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.
9. Limitation of Liability. Western Asset 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 this 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 this Agreement.
5
<PAGE>
10. With the approval of the Fund's Board of Directors, Western Asset
may contract with another party to provide to the Portfolio some or all of the
administrative services described in this Agreement. The Fund acknowledges that
Western Asset may make payments from the fees paid to it under this Agreement,
from past profits or from any other source available to it to other persons,
including but not limited to Legg Mason Fund Adviser, Inc. and Legg Mason Wood
Walker, Incorporated, for shareholder, administrative, advisory, recordkeeping
and distribution services provided by such persons in connection with the Fund's
shares.
11. Definitions. As used in this Agreement, the terms "assignment",
"interested person", and "majority of the outstanding voting securities" shall
have the meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
12. Duration and Termination. This Agreement will become effective with
respect to a Portfolio on the date first written above, provided that it shall
have been approved by the Fund's Board of Directors and by the shareholders of
the Portfolio in accordance with the requirements of the 1940 Act and, unless
sooner terminated as provided herein, will continue in effect for two years from
the above written date. Thereafter, if not terminated, this Agreement shall
continue in effect with respect to the Portfolio for successive annual periods
ending on the same date of each year, provided that such continuance is
specifically approved at least annually (i) by the Fund's Board of Directors or
(ii) by a vote of a majority of the outstanding voting securities of the
Portfolio (as defined in the 1940 Act), provided that in either event the
continuance is also approved by a majority of the Fund's Directors who are not
interested persons (as defined in the 1940 Act) of any party to this Agreement,
by vote cast in person at a meeting called for the purpose of voting on such
approval.
This Agreement is terminable without penalty by the Fund's Board of
Directors, by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of that Portfolio, or by Western Asset, on not less
than 60 days' notice to the other party and will be terminated upon the mutual
written consent of Western Asset and the Fund. This Agreement will also
automatically and immediately terminate in the event of its assignment.
In the event this Agreement is terminated by either party or upon
written notice from Western Asset at any time, the Fund hereby agrees that it
will eliminate from its corporate name any reference to the name of "Western
Asset." The Fund shall have the non-exclusive use of the name "Western Asset" in
whole or in part only so long as this Agreement is effective or until such
notice is given.
6
<PAGE>
13. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
14. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought and no material amendment of this Agreement shall be
effective with respect to a Portfolio until approved by vote of the holders of a
majority of the outstanding voting securities of the Portfolio.
15. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. Should any part of this Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective successors, to the extent
permitted by law, and shall be governed by Maryland law.
IN WITNESS WHEREOF, the parties hereto have causes this 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/ Ilene S. Harker By: /s/ W. Curtis Livingston
WESTERN ASSET
MANAGEMENT COMPANY
[seal]
Attest:
By: /s/ Ilene S. Harker By: /s/ W. Curtis Livingston
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
Western Asset Trust, Inc.
Intermediate Duration Portfolio
Short Duration Portfolio
AGREEMENT made this 10th day of February, 1994, 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, diversified, management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), consisting initially of nine series of shares, two of which are
known as the Intermediate Duration Portfolio and the Short Duration Portfolio
(collectively, the "Portfolios") and
WHEREAS, the Fund wishes to retain Western Asset to provide the
Portfolios certain investment advisory and administrative services, and
WHEREAS, Western Asset is willing to furnish such services on the terms
and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Western Asset as investment
adviser for the Portfolios for the period and on the terms set forth in this
Agreement. Western Asset accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.
2. Delivery of Documents. The Fund has furnished Western Asset with
copies properly certified or authenticated of each of the following:
(a) The Fund's Articles of Incorporation, as filed with the
Maryland Department of Assessment and Taxation on May 16, 1990
and all amendments thereto (such Articles of Incorporation, as
presently in effect and as they shall from time to time be
amended, are herein called the "Articles");
(b) The Fund's By-Laws and all amendments thereto (such By-Laws,
as presently in effect and they shall from time to time be
amended, are herein called the "By-Laws");
<PAGE>
(c) Resolutions of the Fund's Board of Directors authorizing the
appointment of Western Asset as investment adviser and
approving this Agreement;
(d) The Fund's Notification of Registration on Form N-8A under the
1940 Act as filed with the Securities and Exchange Commission
on May 16, 1990 and all amendments thereto;
(e) The Fund's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended, and the 1940 Act (File No.
811-06110) as filed with the Securities and Exchange
Commission on May 16, 1990, including all exhibits thereto,
relating to shares of the Fund's common stock of par value
$0.001 per share (herein called "Shares") and all amendments
thereto; and
(f) The most recent prospectus or prospectuses for the Portfolios
(such document as presently in effect and all amendments and
supplements thereto is herein called the "Prospectus");
(g) The most recent statement of additional information or
statements of additional information (such document as
presently in effect and all amendments and supplements thereto
is herein called the "Statement of Additional Information").
The Fund will furnish Western Asset from time to time with copies,
properly certified or authenticated, of all amendments of or supplements to the
foregoing.
3. (a). Investment Advisory Services. Subject to the supervision of the
Fund's Board of Directors, Western Asset shall regularly provide the Portfolios
with investment research, advice, management and supervision and shall furnish a
continuous investment program for each Portfolio's portfolio of securities
consistent with each Portfolio's respective investment objective, policies, and
limitations as stated in the minutes of the Fund's Directors. Western Asset
shall determine from time to time what securities shall be purchased, retained
or sold by the Portfolios, and shall implement those decisions, all subject to
the provisions of the Fund's Articles and ByLaws, the 1940 Act, the applicable
rules and regulations of the Securities and Exchange Commission, and other
applicable federal and state law, as well as the investment objective, policies
and limitations of the Portfolios. Western Asset will place orders pursuant to
its investment determinations for each Portfolio either directly with the issuer
or with any broker or dealer. In placing orders with brokers and dealers,
Western Asset will attempt to obtain the best net price and the most favorable
execution of its orders; however, Western Asset may, in its
2
<PAGE>
discretion, purchase and sell portfolio securities from and to brokers and
dealers who provide Western Asset with research, analysis, advice and similar
services, and Western Asset may pay to these brokers, in return for research and
analysis, a higher commission than may be charged by other brokers. In no
instance will portfolio securities be purchased from or sold to Western Asset or
any affiliated person thereof except in accordance with the rules, regulations
or orders promulgated by the Securities and Exchange Commission pursuant to the
1940 Act. Western Asset shall also provide advice and recommendations with
respect to other aspects of the business and affairs of the Fund, and shall
perform such other functions of management and supervision as may be requested
by the Fund and agreed to by Western Asset.
4. Administrative Services.
(a) Subject always to the control of the Board of
Directors of the Fund and to such policies as the
Board may determine, Western Asset agrees, at its
expense, (1) to furnish the management and
administrative services necessary for the operation
of each Portfolio and handling its shareholder
relations, including overseeing bookkeeping and
accounting services and the calculation and
publication of each Portfolio's net asset value,
providing office space, equipment and facilities,
data processing, internal auditing and clerical
services (excluding determination of net asset
value); preparing reports to each Portfolio's
shareholders and tax returns; reports to and filings
with governmental bodies; and conducting relations on
behalf of each Portfolio with custodians,
depositories, transfer agents, registrars and
dividend disbursing and reinvestment plan agents,
accountants, attorneys, underwriters, insurers and
banks, and (ii) to furnish all necessary management
facilities, including salaries of personnel, required
for it to execute its duties faithfully.
(b) Western Asset will maintain, or oversee the
maintenance of, all books and records with respect to
the portfolio securities transactions of each
Portfolio in accordance with all applicable federal
and state laws and regulations, and will furnish the
Fund's Board of Directors with such daily, periodic
and special reports as they may request. In
compliance with the requirements of Rule 31a-3 under
the Investment Company Act of 1940, Western Asset
hereby agrees that any records which it maintains for
the Fund are the property of the Fund and further
agrees to surrender promptly to the Fund any of such
records upon the Fund's request. Western Asset
further agrees to arrange for the preservation of the
records required to be maintained by Rule 31a-1 under
the Investment
3
<PAGE>
Company Act of 1940 for the periods prescribed by
Rule 31a-2 under said Act.
(c) Western Asset shall act as liaison with the Fund's
independent public accountants and shall provide
account analyses, fiscal year summaries, and other
audit related schedules. Western Asset shall take all
reasonable action in the performance of its
obligations under this Agreement to assure that the
necessary information is made available to such
accountants for the expression of their opinion, as
such may be required by the Fund from time to time.
(d) Western Asset, at its own expense, shall provide a
system whereby information is supplied to
shareholders concerning their accounts and the
operation of the Fund. Western Aset shall also
provide, at its own expense, a system whereby orders
for purchases and redemption of each Portfolio's
shares which are received by the Fund or its
distributor, Legg Mason Wood Walker, Incorporated,
are promptly processed and transmitted to the Fund's
transfer agent. Western Asset may delegate some or
all of the functions specified in this subparagraph
to Legg Mason Wood Walker, Incorporated or another
appropriate person.
5. General.
--------
(a) Western Asset will furnish the Fund with office
facilities, including space, furniture and equipment
and all personnel reasonably necessary for the
operation of the Fund.
(b) Western Asset shall authorize and permit any of its
directors, officers and employees, who may be elected
as directors or officers of the Fund, to serve in the
capacities in which they are elected, and shall bear
their salary or other compensation and expenses, if
any.
(c) In the performance of its duties under this
Agreement, Western Asset will comply with the
provisions of the Articles of Incorporation and
By-Laws of the Fund and the stated investment
objectives, policies and restrictions of each
Portfolio, and will use its best efforts to safeguard
and promote the welfare of the Fund, and to comply
with other policies which the Board may from time to
time determine.
6. Services Not Exclusive. Western Asset's services
hereunder are not deemed to be exclusive, and Western
Asset shall be free to render similar services to
others. It is understood that persons employed by
Western Asset to assist in the performance of its
duties hereunder
4
<PAGE>
might not devote their full time to such service.
Nothing herein shall be deemed to limit or restrict
the right of Western Asset or any affiliate of
Western Asset to engage in and devote time and
attention to other businesses or to render services
of whatever kind or nature.
7. Expenses. During the term of this Agreement, Western
Asset will pay all expenses incurred by it in
connection with its services under this Agreement.
Other than as herein specifically indicated, Western
Asset shall not be responsible for the Fund's
expenses. Specifically, Western Asset will not be
responsible, except to the extent of the reasonable
compensation of employees of the Fund whose services
may be used by Western Asset hereunder, for any of
the following expenses of the Fund, which expenses
shall be borne by the Fund: organizational expenses;
legal expenses; interest; taxes; governmental fees;
fees, voluntary assessments and other expenses
incurred in connection with membership in investment
company organizations; the cost (including brokerage
commissions or charges, if any) of securities
purchased or sold by the Fund and any losses incurred
in connection therewith; distribution fees, if any;
fees of custodians, subcustodians, transfer agents,
registrars or other agents for all services to the
Fund; expenses relating to the redemption or
repurchase of the Fund's shares; expenses of
registering and qualifying Fund shares for sale under
applicable federal and state law and maintaining such
registrations and qualifications; expenses of
preparing, setting in print, printing and
distributing prospectuses, proxy statements, reports,
notices, stock certificates and dividends to Fund
shareholders; costs of stationery; costs of
stockholders' and other meetings of the Fund;
compensation of officers and directors who are not
affiliated persons of Western Asset; fees and
expenses of independent auditors; traveling expenses
of directors of the Fund, if any; expenses for
fidelity bonds and other insurance covering the Fund
and its officers and directors; costs of
indemnification; and any extraordinary expenses.
8. Compensation.
-------------
(a) For the services which Western Asset will render to
the Fund under this Agreement, the Intermediate
Duration Portfolio will pay Western Asset a fee,
computed daily and paid monthly, at an annual rate
equal to 0.40% 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 commences on a date other than the first
day of the month, the fee for such month shall be
based on
5
<PAGE>
the average daily net assets of each Portfolio in
that period from the date of commencement to that
last day of the month. If this Agreement is
terminated with respect to any Portfolio as of any
date not the last day of a calendar month, a final
fee with regard to that Portfolio shall be paid
promptly after the date of termination and shall be
based only on the average daily net assets of the
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.
9. Limitation of Liability. Western Asset 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 this 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 this Agreement.
10. With the approval of the Fund's Board of Directors,
Western Asset may contract with another party to
provide to the Portfolios some or all of the
administrative services described in this Agreement.
The Fund acknowledges that Western Asset may make
payments from the fees paid to it under this
Agreement, from past profits or from any other source
available to it to other persons, including but not
limited to Legg Mason Fund Adviser, Inc. and Legg
Mason Wood Walker, Incorporated, for shareholder,
administrative, advisory, recordkeeping and
distribution services provided by such persons in
connection with the Fund's shares.
11. Definitions. As used in this Agreement, the terms
"assignment", "interested person", and "majority of
the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940
Act, subject to such exemptions as may be granted by
the Securities and Exchange Commission by any rule,
regulation or order.
12. Duration and Termination. This Agreement will become
effective with respect to a Portfolio on the date
first written above, provided that it
6
<PAGE>
shall have been approved by the Fund's Board of
Directors and by the shareholders of that Portfolio
in accordance with the requirements of the 1940 Act
and, unless sooner terminated as provided herein,
will continue in effect for two years from the above
written date. Thereafter, if not terminated, this
Agreement shall continue in effect with respect to
each Portfolio for successive annual periods ending
on the same date of each year, provided that such
continuance is specifically approved at least
annually (i) by the Fund's Board of Directors or (ii)
by a vote of a majority of the outstanding voting
securities of the Portfolio (as defined in the 1940
Act), provided that in either event the continuance
is also approved by a majority of the Fund's
Directors who are not interested persons (as defined
in the 1940 Act) of any party to this Agreement, by
vote cast in person at a meeting called for the
purpose of voting on such approval.
This Agreement is terminable with respect to a
Portfolio without penalty by the Fund's Board of
Directors, by vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of
that Portfolio, or by Western Asset, on not less than
60 days' notice to the other party and will be
terminated upon the mutual written consent of Western
Asset and the Fund. This Agreement will also
automatically and immediately terminate in the event
of its assignment.
In the event this Agreement is terminated by either
party or upon written notice from Western Asset at
any time, the Fund hereby agrees that it will
eliminate from its corporate name any reference to
the name of "Western Asset." The Fund shall have the
non-exclusive use of the name "Western Asset" in
whole or in part only so long as this Agreement is
effective or until such notice is given.
13. Further Actions. Each party agrees to perform such
further acts and execute such further documents as
are necessary to effectuate the purposes hereof.
14. Amendments. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but
only by an instrument in writing signed by the party
against which enforcement of the change, waiver,
discharge or termination is sought and no material
amendment of this Agreement shall be effective with
respect to a Portfolio until approved by vote of the
holders of a majority of the outstanding voting
securities of that Portfolio.
15. Miscellaneous. This Agreement embodies the entire
agreement and understanding between the parties
hereto, and supersedes all prior agreements and
understandings relating to the subject matter hereof.
The captions in this Agreement are included for
convenience of
7
<PAGE>
reference only and in no way define or delimit any of
the provisions hereof or otherwise affect their
construction or effect. Should any part of this
Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby. This
Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective
successors, to the extent permitted by law, and shall
be governed by Maryland law.
IN WITNESS WHEREOF, the parties hereto have causes this 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/ Crispina By: /s/ Ilene S. Harker
[seal] WESTERN ASSET MANAGEMENT COMPANY
Witness:
By: /s/ Crispina By: /s/ W. Curtis Livingston
UNDERWRITING AGREEMENT
This UNDERWRITING AGREEMENT, made this 10th day of August, 1990, by and
between Western Asset Trust, Inc., a Maryland corporation ("Corporation") and
Legg Mason Wood Walker, Incorporated, a Maryland corporation (the
"Distributor").
WHEREAS, the Corporation has filed a registration statement with the
Securities and Exchange Commission for the purpose of registering as a series
type open-end, diversified investment company under the Investment Company Act
of 1940, as amended (the "1940 Act"), and for the purpose of registering the
shares of common stock of the Corporation (the "Shares") for sale to the public
under the Securities Act of 1933 (the "1933 Act"); and will register the Shares
as may be required by the provisions of various state securities laws; and
WHEREAS, the Corporation intends to offer for public sale distinct
series of Shares ("Series"), each corresponding to a distinct portfolio; and
WHEREAS, the Corporation wishes to retain the Distributor as the
principal underwriter in connection with the offering and sale of the Shares and
to furnish certain other services to the Fund as specified in this Agreement;
and
<PAGE>
WHEREAS, this Agreement has been approved by a vote of the
Corporation's Board of Directors and certain disinterested directors in
conformity with Section 15(c) of the 1940 Act; and
WHEREAS, the Distributor is willing to act as principal underwriter and
to furnish such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. The Corporation hereby appoints the Distributor as principal
underwriter in connection with the offering and sale of the Series. The
Corporation authorizes the Distributor, as agent for the Corporation, upon the
commencement of operations of any Series and subject to applicable federal and
state law and the Articles of Incorporation and By-Laws of the Corporation and
to such terms and conditions as the Corporation may specify: (a) to promote the
Series; (b) to solicit orders for the purchase of the Shares of the Series; and
(c) to accept orders for the purchase of the Shares on behalf of the
Corporation. The Distributor shall comply with all applicable federal and state
laws and offer the Shares of each Series on an agency or "best efforts" basis
under which the Corporation shall issue only such Shares as are actually sold.
- 2 -
<PAGE>
2. The public offering price of the Shares of each Series shall be the
net asset value per share (as determined by the Corporation) of the outstanding
Shares of the Series. The Corporation shall furnish the Distributor with a
statement of each computation of net asset value and of the details entering
into such computation.
3. As used in this Agreement, the term "Registration Statement" shall
mean the registration statement most recently filed by the Corporation with the
Securities and Exchange Commission and effective under the 1940 Act and 1933
Act, as such Registration Statement is amended by any amendments thereto at the
time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean, respectively, the form of prospectus and statement of
additional information with respect to the Series filed by the Corporation as
part of the Registration Statement, as they may be amended from time to time.
4. In connection with sales and offers of sale of Shares, the
Distributor 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 Distributor 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
Distributor or its representatives or
- 3 -
<PAGE>
agents. Except as specifically provided in this Agreement, the Corporation shall
bear none of the expenses of the Distributor in connection with its offer and
sale of the Shares.
5. The Corporation agrees at its own expense to register the Shares
with the Securities and Exchange Commission, state and other regulatory bodies
as required, and to prepare and file from time to time such Prospectuses,
Statements of Additional Information, amendments, reports and other documents as
may be necessary to maintain the Registration Statement. Each Series shall bear
all expenses related to preparing and typesetting such Prospectuses, Statements
of Additional Information, and other materials required by law and such other
expenses, including printing and mailing expenses, related to such Series'
communications with persons who are shareholders of the Series.
6. The Corporation 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
- 4 -
<PAGE>
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 this 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 this Agreement.
7. The Distributor agrees to indemnify, defend and hold the
Corporation, its several officers and directors, and any person who controls the
Corporation 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
Corporation, 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
information furnished in writing by the Distributor to the Corporation for use
in the Registration Statement or arising out of or based upon any alleged
omission to state a material fact in connection with such
- 5 -
<PAGE>
information required to be stated in the Registration Statement or necessary to
make such information not misleading.
8. The Corporation reserves the right at any time to withdraw all
offerings of the Shares of any or all Series by written notice to the
Distributor at its principal office.
9. The Corporation shall not issue certificates representing Shares
unless requested by a shareholder. If such request is transmitted through the
Distributor, the Corporation will cause certificates evidencing the Shares owned
to be issued in such names and denominations as the Distributor shall from time
to time direct, provided that no certificates shall be issued for fractional
Shares.
10. The Distributor agrees to act as agent for the Corporation to
receive and transmit promptly to the Corporation's transfer agent shareholder
requests for redemption of Shares.
12. The Distributor is an independent contractor and shall be agent for
the Corporation only in respect to the sale and redemption of the Shares.
13. The services of the Distributor to the Corporation under this
Agreement are not to be deemed exclusive. The Distributor shall be free to
render similar services or other
- 6 -
<PAGE>
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, and to repurchase its shares from investors,
without utilizing or notifying the Distributor.
13. As used in this Agreement, the terms "securities" and "net assets"
shall have the meanings ascribed to them in the Articles of Incorporation of the
Corporation; and the terms "assignment", "interested persons", and "majority of
the outstanding voting securities" shall have the meanings given to them by
Section 2(a) of the 1940 Act, subject to such exemptions as may be granted by
the Securities and Exchange Commission by any rule, regulation or order.
14. Subject to the provisions of paragraphs 15 and 16 below, this
Agreement will remain in effect for one year from the date of its execution 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 Distributor on sixty (60) days' written notice to
the other party. The Corporation may effect such termination by a vote of (i) a
majority of the Corporation's Board of Directors, (ii) a majority of the
directors who are not interested persons of the
- 7 -
<PAGE>
Corporation and who have no direct or indirect financial interest in the
operation of this Agreement (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 the vote of a majority of the Disinterested Directors,
cast in person at a meeting called for the purpose of voting on such approval.
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: WESTERN ASSET TRUST, INC.
By: /s/ John L. Cecil By: /s/ W. Curtis Livingston
-------------------------- ----------------------------
Attest: LEGG MASON WOOD WALKER, INCORPORATED
By: /s/ Marie K. Karpinski By: /s/ John F. Curley, Jr.
-------------------------- ----------------------------
-8-
113090-2
CUSTODIAN CONTRACT
Between
WESTERN ASSET TRUST, INC.
and
STATE STREET BANK AND TRUST COMPANY
21O1189
WP1170C
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. Employment of Custodian and Property to be Held By
It....................................................................1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian.....................................1
2.1 Holding Securities...........................................1
2.2 Delivery of Securities.......................................2
2.3 Registration of Securities...................................4
2.4 Bank Accounts................................................4
2.5 Payments for Shares..........................................5
2.6 Availability of Federal Funds................................5
2.7 Collection of Income.........................................5
2.8 Payment of Fund Monies.......................................5
2.9 Liability for Payment in Advance of
Receipt of Securities Purchased..............................6
2.10 Payments for Repurchases or Redemptions
of Shares of the Fund........................................7
2.11 Appointment of Agents........................................7
2.12 Deposit of Fund Assets in Securities System..................7
2.12A Fund Assets Held in the Custodian's Direct
Paper System.................................................8
2.12A Segregated Account...........................................9
2.14 Ownership Certificates for Tax Purposes.....................10
2.15 Proxies.....................................................10
2.16 Communications Relating to Portfolio
Securities..................................................10
2.17 Proper Instructions.........................................10
2.18 Actions Permitted Without Express Authority.................11
2.19 Evidence of Authority.......................................11
3. Duties of Custodian With Respect to the Books of
Account and Calculation of Net Asset Value and
Net Income...........................................................11
4. Records............................................................. 12
5. Opinion of Fund's Independent Accountants............................12
6. Reports to Fund by Independent Public Accountants....................12
7. Compensation of Custodian............................................12
8. Responsibility of Custodian..........................................13
9. Effective Period, Termination and Amendment..........................13
10. Successor Custodian..................................................14
11. Interpretive and Additional Provisions...............................15
12. Additional Funds.....................................................15
13. Massachusetts Law to Apply...........................................15
14. Prior Contracts......................................................15
15. Miscellaneous........................................................15
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between Western Asset Trust, Inc., a corporation
organized and existing under the laws of the Maryland, having its principal
place of business at 111 South Calvert Street, Baltimore, Maryland, 21202
hereinafter called the "Fund", and State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in four series, the
Full Range Duration Portfolio, Long Duration Portfolio, Limited Duration
Portfolio and Money Market Portfolio (such series together with all other series
subsequently established by the Fund and made subject to this Contract in
accordance with paragraph 12, being herein referred to as the "Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of the assets of
the Portfolios of the Fund pursuant to the provisions of the Articles of
Incorporation. The Fund on behalf of the Portfolio(s) agrees to deliver to the
Custodian all
<PAGE>
securities and cash of the Portfolios, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Portfolio(s) from time to time, and the cash consideration received
by it for such new or treasury shares of capital stock of the Fund representing
interests in the Portfolios, ("Shares") as may be issued or sold from time to
time. The Custodian shall not be responsible for any property of a Portfolio
held or received by the Portfolio and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section
2.17), the Custodian shall on behalf of the applicable Portfolio(s) from time to
time employ one or more sub-custodians, but only in accordance with an
applicable vote by the Board of Directors of the Fund on behalf of the
applicable Portfolio(s), and provided that the Custodian shall have no more or
less responsibility or liability to the Fund on account of any actions or
omissions of any sub-custodian so employed than any such sub-custodian has to
the Custodian.
2. Duties of the Custodian with Respect to Property of the Fund Held By
--------------------------------------------------------------------
the Custodian
-------------
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Portfolio all non-cash property, including all
securities owned by such Portfolio, other than (a) securities which are
maintained pursuant to Section 2.12 in a clearing agency which acts as
a securities depository or in a book-entry system authorized by the
U.S. Department of the Treasury,
-2-
<PAGE>
collectively referred to herein as "Securities System" and (b)
commercial paper of an issuer for which State Street Bank and Trust
Company acts as issuing and paying agent ("Direct Paper") which is
deposited and/or maintained in the Direct Paper System of the Custodian
pursuant to Section 2.12A.
2.2 Delivery of Securities. The Custodian shall release and deliver
securities owned by a Portfolio held by the Custodian or in a
Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("Direct Paper System Account") only
upon receipt of Proper Instructions from the Fund on behalf of the
applicable Portfolio, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio
and receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the
Portfolio;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.12 hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Portfolio;
-3-
<PAGE>
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Portfolio or into the name of any nominee or
nominees of the Custodian or into the name or nominee name of
any agent appointed pursuant to Section 2.11 or into the name
or nominee name of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the
Portfolio, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
custom; provided that in any such case, the Custodian shall
have no responsibility or liability for any loss arising from
the delivery of such securities
-4-
<PAGE>
prior to receiving payment for such securities except as may
arise from the Custodian's own negligence or willful
misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Portfolio, but only against receipt of adequate
collateral as agreed upon from time to time by the Custodian
and the Fund on behalf of the
-5-
<PAGE>
Portfolio, which may be in the form of cash or obligations
issued by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Portfolio prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund on behalf of the Portfolio requiring a pledge of
assets by the Fund on behalf of the Portfolio, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a member of The
National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities
exchange, or of any similar organization or organizations,
-6-
<PAGE>
regarding escrow or other arrangements in connection with
transactions by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian, and a Futures Commission Merchant registered under
the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or organizations,
regarding account deposits in connection with transactions by
the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the currently effective prospectus and statement of
additional information of the Fund, related to the Portfolio
("Prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper
-7-
<PAGE>
Instructions from the Fund on behalf of the applicable
Portfolio, a certified copy of a resolution of the Board of
Directors or of the Executive Committee signed by an officer
of the Fund and certified by the Secretary or an Assistant
Secretary, specifying the securities of the Portfolio to be
delivered, setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of
such securities shall be made.
2.3 Registration of Securities. Securities held by the Custodian (other
than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized
in writing the appointment of a nominee to be used in common with other
registered investment companies having the same investment adviser as
the Portfolio, or in the name or nominee name of any agent appointed
pursuant to Section 2.11 or in the name or nominee name of any
sub-custodian appointed pursuant to Article 1. All securities accepted
by the Custodian on behalf of the Portfolio under the terms of this
Contract shall be in "street name" or other good delivery form.
-8-
<PAGE>
If, however, the Fund directs the Custodian to maintain securities in
"street name", the Custodian shall utilize its best efforts only to
timely collect income due the Fund on such securities and to notify the
Fund on a best efforts basis only of relevant corporate actions
including, without limitation, pendency of calls, maturities, tender or
exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the name of each Portfolio of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to
the provisions hereof, all cash received by it from or for the account
of the Portfolio, other than cash maintained by the Portfolio in a bank
account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the Custodian for a
Portfolio may be deposited by it to its credit as Custodian in the
Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company Act of
1940 and that each such bank or trust company and the funds to be
deposited with each such bank or trust company shall on behalf of each
applicable Portfolio be approved by vote of a majority of
-9-
<PAGE>
the Board of Directors of the Fund. Such funds shall be deposited by
the Custodian in its capacity as Custodian and shall be withdrawable by
the Custodian only in that capacity.
2.5 Payments for Shares. The Custodian shall receive from the distributor
for the Shares or from the Transfer Agent of the Fund and deposit into
the account of the appropriate Portfolio such payments as are received
for Shares of that Portfolio issued or sold from time to time by the
Fund. The Custodian will provide timely notification to the Fund on
behalf of each such Portfolio and the Transfer Agent of any receipt by
it of payments for Shares of such Portfolio.
2.6 Availability of Federal Funds. Upon mutual agreement between the Fund
on behalf of each applicable Portfolio and the Custodian, the Custodian
shall, upon the receipt of Proper Instructions from the Fund on behalf
of a Portfolio, make federal funds available to such Portfolio as of
specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for Shares of
such Portfolio which are deposited into the Portfolio's account.
2.7 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to
-10-
<PAGE>
custom in the securities business, and shall collect on a timely basis
all income and other payments with respect to bearer securities if, on
the date of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall credit such income, as
collected, to such Portfolio's custodian account. Without limiting the
generality of the foregoing, the Custodian shall detach and present for
payment all coupons and other income items requiring presentation as
and when they become due and shall collect interest when due on
securities held hereunder. Income due each Portfolio on securities
loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to
which the Portfolio is properly entitled.
2.8 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of securities, options, futures contracts or
options on futures contracts for the account of the Portfolio
-11-
<PAGE>
but only (a) against the delivery of such securities or
evidence of title to such options, futures contracts or
options on futures contracts to the Custodian (or any bank,
banking firm or trust company doing business in the United
States or abroad which is qualified under the Investment
Company Act of 1940, as amended, to act as a custodian and has
been designated by the Custodian as its agent for this
purpose) registered in the name of the Portfolio or in the
name of a nominee of the Custodian referred to in Section 2.3
hereof or in proper form for transfer; (b) in the case of a
purchase effected through a Securities System, in accordance
with the conditions set forth in Section 2.12 hereof; (c) in
the case of a purchase involving the Direct Paper System, in
accordance with the conditions set forth in Section 2.12A; (d)
in the case of repurchase agreements entered into between the
Fund on behalf of the Portfolio and the Custodian, or another
bank, or a broker-dealer which is a member of NASD, (i)
against delivery of the securities either in certificate form
or through an entry crediting the Custodian's account at the
-12-
<PAGE>
Federal Reserve Bank with such securities or (ii) against
delivery of the receipt evidencing purchase by the Portfolio
of securities owned by the Custodian along with written
evidence of the agreement by the Custodian to repurchase such
securities from the Portfolio or (e) for transfer to a time
deposit account of the Fund in any bank, whether domestic or
foreign; such transfer may be effected prior to receipt of a
confirmation from a broker and/or the applicable bank pursuant
to Proper Instructions from the Fund as defined in Section
2.17;
2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the
Portfolio as set forth in Section 2.10 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments
for the account of the Portfolio: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be
-13-
<PAGE>
in whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
Portfolio, a certified copy of a resolution of the Board of
Directors or of the Executive Committee of the Fund signed by
an officer of the Fund and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment,
setting forth the purpose for which such payment is to be
made, declaring such purpose to be a proper purpose, and
naming the person or persons to whom such payment is to be
made.
2.9 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of securities for the account of
a Portfolio is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions
from the Fund on behalf of such Portfolio to
-14-
<PAGE>
so pay in advance, the Custodian shall be absolutely liable to the Fund
for such securities to the same extent as if the securities had been
received by the Custodian.
2.10 Payments for Repurchases or Redemptions of Shares of the Fund. From
such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation of Trust and any
applicable votes of the Board of Directors of the Fund pursuant
thereto, the Custodian shall, upon receipt of instructions from the
Transfer Agent, make funds available for payment to holders of Shares
who have delivered to the Transfer Agent a request for redemption or
repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon
receipt of instructions from the Transfer Agent to wire funds to or
through a commercial bank designated by the redeeming shareholders. In
connection with the redemption or repurchase of Shares of the Fund, the
Custodian shall honor checks drawn on the Custodian by a holder of
Shares, which checks have been furnished by the Fund to the holder of
Shares, when presented to the Custodian in accordance with such
procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
2.11 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself
-15-
<PAGE>
qualified under the Investment Company Act of 1940, as amended, to act
as a custodian, as its agent to carry out such of the provisions of
this Article 2 as the Custodian may from time to time direct; provided,
however, that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.
2.12 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section
17A of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively
referred to herein as "Securities System" in accordance with applicable
Federal Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the
Securities System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
-16-
<PAGE>
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a Securities System shall
identify by book-entry those securities belonging to the
Portfolio;
3) The Custodian shall pay for securities purchased for the
account of the Portfolio upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Portfolio. The Custodian shall transfer
securities sold for the account of the Portfolio upon (i)
receipt of advice from the Securities System that payment for
such securities has been transferred to the Account, and (ii)
the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the
Portfolio. Copies of all advices from the Securities System of
transfers of securities for the account of the Portfolio shall
identify the Portfolio, be maintained for the Portfolio by the
Custodian and be provided to the Fund at its request. Upon
request, the Custodian
-17-
<PAGE>
shall furnish the Fund on behalf of the Portfolio confirmation
of each transfer to or from the account of the Portfolio in
the form of a written advice or notice and shall furnish to
the Fund on behalf of the Portfolio copies of daily
transaction sheets reflecting each day's transactions in the
Securities System for the account of the Portfolio.
4) The Custodian shall provide the Fund for the Portfolio with
any report obtained by the Custodian on the Securities
System's accounting system, internal accounting control and
procedures for safeguarding securities deposited in the
Securities System;
5) The Custodian shall have received from the Fund on behalf of
the Portfolio the initial or annual certificate, as the case
may be, required by Article 9 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the
Portfolio for any loss or damage to the Portfolio resulting
from use of the Securities System by reason of any negligence,
misfeasance or misconduct of the Custodian or any of its
agents or of any of
-18-
<PAGE>
its or their employees or from failure of the Custodian or any
such agent to enforce effectively such rights as it may have
against the Securities System; at the election of the Fund, it
shall be entitled to be subrogated to the rights of the
Custodian with respect to any claim against the Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Portfolio has not been made whole for any such loss
or damage.
2.12A Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund on behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the
Direct Paper System only if such securities are represented in
an account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
-19-
<PAGE>
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System
shall identify by book-entry those securities belonging to the
Portfolio;
4) The Custodian shall pay for securities purchased for the
account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such payment and transfer
of securities to the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the
Portfolio upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for
the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the account
of the Portfolio, in the form of a written advice or notice,
of Direct Paper on the next business day following such
transfer and shall furnish to the Fund on behalf of the
Portfolio copies of daily transaction sheets reflecting each
day's transaction in the Securities System for the account of
the Portfolio;
-20-
<PAGE>
6) The Custodian shall provide the Fund on behalf of the
Portfolio with any report on its system of internal accounting
control as the Fund may reasonably request from time to time.
2.13 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on
behalf of each such Portfolio, into which account or accounts may be
transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.12 hereof, (i) in
accordance with the provisions of any agreement among the Fund on
behalf of the Portfolio, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures
commission merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract
market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the
Portfolio or commodity futures contracts or options thereon
-21-
<PAGE>
purchased or sold by the Portfolio, (iii) for the purposes of
compliance by the Portfolio with the procedures required by Investment
Company Act Release No. 10666, or any subsequent release or releases of
the Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for
other proper corporate purposes, but only, in the case of clause (iv),
upon receipt of, in addition to Proper Instructions from the Fund on
behalf of the applicable Portfolio, a certified copy of a resolution of
the Board of Directors or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate purposes.
2.14 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to securities of each Portfolio held by it and in
connection with transfers of securities.
2.15 Proxies. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in the
name of the Portfolio or a nominee of the Portfolio, all proxies,
-22-
<PAGE>
without indication of the manner in which such proxies are to be voted,
and shall promptly deliver to the Portfolio such proxies, all proxy
soliciting materials and all notices relating to such securities.
2.16 Communications Relating to Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund for each Portfolio all written information (including, without
limitation, pendency of calls and maturities of securities and
expirations of rights in connection therewith and notices of exercise
of call and put options written by the Fund on behalf of the Portfolio
and the maturity of futures contracts purchased or sold by the
Portfolio) received by the Custodian from issuers of the securities
being held for the Portfolio. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Portfolio all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Portfolio
desires to take action with respect to any tender offer, exchange offer
or any other similar transaction, the Portfolio shall notify the
Custodian at least three business days prior to the date on which the
Custodian is to take such action.
2.17 Proper Instructions. Proper Instructions as used throughout this
Article 2 means a writing signed or
-23-
<PAGE>
initialed by one or more person or persons as the Board of Directors
shall have from time to time authorized. Each such writing shall set
forth the specific transaction or type of transaction involved,
including a specific statement of the purpose for which such action is
requested. Oral instructions will be considered Proper Instructions if
the Custodian reasonably believes them to have been given by a person
authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in
writing. Upon receipt of a certificate of the Secretary or an Assistant
Secretary as to the authorization by the Board of Directors of the Fund
accompanied by a detailed description of procedures approved by the
Board of Directors, Proper Instructions may include communications
effected directly between electro-mechanical or electronic devices
provided that the Board of Directors and the Custodian are satisfied
that such procedures afford adequate safeguards for the Portfolios'
assets. For purposes of this Section, Proper Instructions shall include
instructions received by the Custodian pursuant to any three-party
agreement which requires a segregated asset account in accordance with
Section 2.13.
2.18 Actions Permitted without Express Authority. The Custodian may in its
discretion, without express authority from the Fund on behalf of each
applicable Portfolio:
-24-
<PAGE>
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Portfolio, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Portfolio except as otherwise directed by the Board of
Directors of the Fund.
2.19 Evidence of Authority. The Custodian shall be protected in acting upon
any instructions, notice, request, consent, certificate or other
instrument or paper believed by it to be genuine and to have been
properly executed by or on behalf of the Fund. The Custodian may
receive and accept a certified copy of a vote of the Board of Directors
of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of
any action by the Board of Directors pursuant to the Articles of
-25-
<PAGE>
Incorporation as described in such vote, and such vote may be
considered as in full force and effect until receipt by the Custodian
of written notice to the contrary.
3. Duties of Custodian with Respect to the Books of Account and
------------------------------------------------------------
Calculation of Net Asset Value and Net Income
---------------------------------------------
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Directors of the Fund to keep
the books of account of each Portfolio and/or compute the net asset value per
share of the outstanding shares of each Portfolio or, if directed in writing to
do so by the Fund on behalf of the Portfolio, shall itself keep such books of
account and/or compute such net asset value per share. If so directed, the
Custodian shall also calculate daily the net income of the Portfolio as
described in the Fund's currently effective prospectus related to such Portfolio
and shall advise the Fund and the Transfer Agent daily of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such net
income among its various components. The calculations of the net asset value per
share and the daily income of each Portfolio shall be made at the time or times
described from time to time in the Fund's currently effective prospectus related
to such Portfolio.
4. Records
-------
The Custodian shall with respect to each Portfolio create and maintain
all records relating to its activities and obligations under this Contract in
such manner as will meet the
-26-
<PAGE>
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by each Portfolio
and held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
5. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund on behalf
of each applicable Portfolio may from time to time request, to obtain from year
to year favorable opinions from the Fund's independent accountants with respect
to its activities hereunder in connection with the preparation of the Fund's
Form N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
6. Reports to Fund by Independent Public Accountants
-------------------------------------------------
The Custodian shall provide the Fund, on behalf of each of the
Portfolios at such times as the Fund may reasonably require, with reports by
independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures
-27-
<PAGE>
contracts, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this Contract;
such reports, shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
7. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund on behalf of each applicable Portfolio and the Custodian.
8. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith
-28-
<PAGE>
without negligence. It shall be entitled to rely on and may act upon advice of
counsel (who may be counsel for the Fund) on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
Notwithstanding the foregoing, the responsibility of the Custodian with respect
to redemptions effected by check shall be in accordance with a separate
Agreement entered into between the Custodian and the Fund.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, to advance cash or securities for
any purpose for the benefit of a Portfolio or in the event that the Custodian or
its nominee shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance of this
Contract, except such as may arise from its or its nominee's own negligent
action, negligent failure to act or willful misconduct, any property at any time
held for the account of the applicable Portfolio shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to
-29-
<PAGE>
utilize available cash and to dispose of such Portfolio's assets to the extent
necessary to obtain reimbursement.
9. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.12 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Directors of the Fund has
approved the initial use of a particular Securities System by such Portfolio, as
required by Rule 17f-4 under the Investment Company Act of 1940, as amended and
that the Custodian shall not with respect to a Portfolio act under Section 2.12A
hereof in the absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board of Directors has approved the initial use
of the Direct Paper System by such Portfolio; provided
-30-
<PAGE>
further, however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Articles of Incorporation, and further provided, that the Fund on behalf
of one or more of the Portfolios may at any time by action of its Board of
Directors (i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii) immediately terminate
this Contract in the event of the appointment of a conservator or receiver for
the Custodian by the Comptroller of the Currency or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
10. Successor Custodian
-------------------
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Directors of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities of each
applicable Portfolio then held by it hereunder and shall transfer to an account
of the successor custodian all of the securities of each such Portfolio held in
a Securities System.
-31-
<PAGE>
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to transfer
to an account of such successor custodian all of the securities of each such
Portfolio held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of
-32-
<PAGE>
Directors to appoint a successor custodian, the Custodian shall be entitled to
fair compensation for its services during such period as the Custodian retains
possession of such securities, funds and other properties and the provisions of
this Contract relating to the duties and obligations of the Custodian shall
remain in full force and effect.
11. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and
the Fund on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Articles of Incorporation
of the Fund. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Contract.
12. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to the Full Range Duration Portfolio, Long Duration Portfolio, Limited
Duration Portfolio and Money Market Portfolio with respect to which it desires
to have the Custodian render services as custodian under the terms hereof, it
shall so notify the Custodian in writing, and if the Custodian agrees in
-33-
<PAGE>
writing to provide such services, such series of Shares shall become a Portfolio
hereunder.
13. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
14. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
15. Miscellaneous
-------------
15.1 The Custodian agrees to treat all records and other information
relative to the Fund and its prior, present or potential Shareholders
confidentially and the Custodian on behalf of itself and its employees
agrees to keep confidential all such information, except after prior
notification to an approval in writing by the Fund, which approval
shall not be unreasonably withheld. The preceding notwithstanding, in
the event legal process is served upon the Custodian requiring certain
disclosure, the Custodian may divulge such information. In such event,
the Custodian shall, if legally permissible, advise the Fund of its
receipt of such legal process.
15.2 Notwithstanding any other provision in this Agreement, the parties
agree that the assets and liabilities of each Portfolio of the Fund are
separate and distinct from the assets and liabilities of each other
Portfolio and that no Portfolio
-34-
<PAGE>
shall be liable or shall be charged for any debt, obligation or
liability of any other Portfolio, whether arising under the Agreement
or otherwise.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 10th day of December, 1990.
ATTEST WESTERN ASSET TRUST, INC.
/s/ Kathi D. Glenn By /s/ Marie K. Karpinksi
- ---------------------------- --------------------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ Brenda L. Casey By /s/ John Henrich
- ---------------------------- --------------------------------
Assistant Secretary Vice President
-35-
AMENDMENT TO THE CUSTODIAN CONTRACT
-----------------------------------
AGREEMENT made by and between State Street Bank and Trust Company
(the "Custodian") and Western Asset Trust, Inc. (the "Fund")
WHEREAS, the Custodian and the Fund are parties to a custodian contract
dated December 10, 1990 (the "Custodian Contract") governing the terms and
conditions under which the Custodian maintains custody of the securities and
other assets of the Fund; and
WHEREAS, the Custodian and the Fund desire to amend the Custodian
Contract to provide for the maintenance of the Fund's foreign securities, and
cash incidental to transactions in such securities, in the custody of certain
foreign banking institutions and foreign securities depositories acting as
sub-custodians in conformity with the requirements of Rule 17f-5 under the
Investment Company Act of 1940;
NOW THEREFORE, in consideration of the premises and covenants contained
herein, the Custodian and the Fund hereby amend the Custodian Contract by the
addition of the following terms and conditions;
1. Appointment of Foreign Sub-Custodians
-------------------------------------
The Fund hereby authorizes and instructs the Custodian to employ as
sub-custodians for the Fund's securities and other assets maintained outside the
United States the foreign banking institutions and foreign securities
depositories designated on Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions", as defined in Section 2.17 of the Custodian
Contract, together with a certified resolution of the Fund's Board of Directors,
the Custodian and the Fund may agree to amend Schedule A hereto from time to
time to designate additional foreign banking institutions and foreign securities
depositories to act as sub-custodian. Upon receipt of Proper Instructions, the
Fund may instruct the Custodian to cease the employment of any one or more of
such sub-custodians for maintaining custody of the Fund's assets.
2. Assets to be Held
-----------------
The Custodian shall limit the securities and other assets maintained in
the custody of the foreign sub-custodians to: (a) "foreign securities", as
defined in paragraph (c)(l) of Rule 17f-5 under the Investment Company Act of
1940, and (b) cash and cash equivalents in such amounts as the Custodian or the
Fund may determine to be reasonably necessary to effect the Fund's foreign
securities transactions.
<PAGE>
3. Foreign Securities Depositories
-------------------------------
Except as may otherwise be agreed upon in writing by the Custodian and
the Fund, assets of the Fund shall be maintained in foreign securities
depositories only through arrangements implemented by the foreign banking
institutions serving as sub-custodians pursuant to the terms hereof. Where
possible, such arrangements shall include entry into agreements containing the
provisions set forth in Section 5 and Section 9 hereof.
4. Segregation of Securities
-------------------------
The Custodian shall identify on its books as belonging to the Fund, the
foreign securities of the Fund held by each foreign sub-custodian. Each
agreement pursuant to which the Custodian employs a foreign banking institution
shall require that such institution establish a custody account for the
Custodian on behalf of the Fund and physically segregate in that account,
securities and other assets of the Fund, and, in the event that such institution
deposits the Fund's securities in a foreign securities depository, that it shall
identify on its books as belonging to the Custodian, as agent for the Fund, the
securities so deposited.
5. Agreements with Foreign Banking Institutions
--------------------------------------------
Each agreement with a foreign banking institution shall be
substantially in the form set forth in Exhibit 1 hereto and shall provide that:
(a) the Fund's assets will not be subject to any right, charge, security
interest, lien or claim of any kind in favor of the foreign banking institution
or its creditors or agents, except a claim of payment for their safe custody or
administration; (b) beneficial ownership for the Fund's assets will be freely
transferable without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the assets
as belonging to the Fund; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent permitted under
applicable law the independent public accountants for the Fund, will be given
access to the books and records of the foreign banking institution relating to
its actions under its agreement with the Custodian; (e) the foreign banking
institutions will retain all books and records relating to its actions under its
agreement with the Custodian for the periods required by Rule 31a-2; and (f)
assets of the Fund held by the foreign sub-custodian will be subject only to the
instructions of the Custodian or its agents.
6. Access of Independent Accountants of the Fund
---------------------------------------------
Upon request of the Fund, the Custodian will use its best efforts to
arrange for the independent accountants of the
-2-
<PAGE>
Fund to be afforded access to the books and records of any foreign banking
institution employed as a foreign sub-custodian insofar as such books and
records relate to the performance of such foreign banking institution under its
agreement with the Custodian.
7. Reports by Custodian
--------------------
The Custodian will supply to the Fund from time to time, as mutually
agreed upon, statements in respect of the securities and other assets of the
Fund held by foreign sub-custodians, including but not limited to an
identification of entities having possession of the Fund's securities and other
assets and advices or notifications of any transfers of securities to or from
each custodial account maintained by a foreign banking institution for the
Custodian on behalf of the Fund indicating, as to securities acquired for the
Fund, the identity of the entity having physical possession of such securities.
8. Transactions in Foreign Custody Account
---------------------------------------
(a) Except as otherwise provided in paragraph (b) of this Section 8,
the provisions of Sections 2.2 and 2.8 of the Custodian Contract shall apply,
mutatis mutandis to the foreign securities of the Fund held outside the United
States by foreign sub-custodians.
(b) Notwithstanding any provision of the Custodian Contract to the
contrary, settlement and payment for securities received for the account of the
Fund and delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading or
securities processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer therefor (or an agent for
such purchaser or dealer) against a receipt with the expectation of receiving
later payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may
be maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of the Custodian Contract, and the Fund agrees to hold any
such nominee harmless from any liability as a holder of record of such
securities.
9. Liability of Foreign Sub-Custodians
-----------------------------------
Each agreement pursuant to which the Custodian employs a foreign
banking institution as a foreign sub-custodian shall require the institution to
exercise reasonable care in the
-3-
<PAGE>
performance of its duties and to indemnify, and hold harmless, the custodian and
each Fund from and against, or to insure its assets against, any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
institution's performance of such obligations. At the election of the Fund, it
shall be entitled to be subrogated to the rights of the Custodian with respect
to any claims against a foreign banking institution as a consequence of any such
loss, damage, cost, expense, liability or claim if and to the extent that the
Fund has not been made whole for any such loss, damage, cost, expense, liability
or claim.
10. Liability of Custodian
----------------------
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to
sub-custodians generally in the Custodian Contract and, regardless of whether
assets are maintained in the custody of a foreign banking institution, a foreign
securities depository or a branch of a U.S. bank as contemplated by paragraph 13
hereof, the Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from nationalization, expropriation, currency
restrictions, or acts of war or terrorism or any loss where the sub-custodian
has otherwise exercised reasonable care. Notwithstanding the foregoing
provisions of this paragraph 10, in delegating custody duties to State Street
London Ltd., the Custodian shall not be relieved of any responsibility to the
Fund for any loss due to such delegation, except such loss as may result from
(a) political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection, civil
strife or armed hostilities) or (b) other losses (excluding a bankruptcy or
insolvency of State Street London Ltd. not caused by political risk) due to Acts
of God, nuclear incident or other losses under circumstances where the Custodian
and State Street London Ltd. have exercised reasonable care.
11. Reimbursement for Advances
--------------------------
If the Fund requires the Custodian to advance cash or securities for
any purpose including the purchase or sale of foreign exchange or of contracts
for foreign exchange, or in the event that the Custodian or its nominee shall
incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except such as
may arise from its or its nominee's own negligent action, negligent failure to
act or willful misconduct, any property at any time held for the account of the
Fund shall be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of the Fund assets to the extent necessary to obtain reimbursement.
-4-
<PAGE>
12. Monitoring Responsibilities
---------------------------
The Custodian shall furnish annually to the Fund, during the month of
June, information concerning the foreign sub-custodians employed by the
Custodian. Such information shall be similar in kind and scope to that furnished
to the Fund in connection with the initial approval of this amendment to the
Custodian Contract. In addition, the Custodian will promptly inform the Fund in
the event that the Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or any material loss of the
assets of the Fund or in the case of any foreign sub-custodian not the subject
of an exemptive order from the Securities and Exchange Commission is notified by
such foreign sub-custodian that there appears to be a substantial likelihood
that its shareholders' equity will decline below S200 million (U.S. dollars or
the equivalent thereof) or that its shareholders' equity has declined below S200
million (in each case computed in accordance with generally accepted U.S.
accounting principles).
13. Branches of U.S. Banks
----------------------
(a) Except as otherwise set forth in this amendment to the Custodian
Contract, the provisions hereof shall not apply where the custody of the Fund
assets is maintained in a foreign branch of a banking institution which is a
"bank" as defined by Section 2(a)(5) of the Investment Company Act of 1940
meeting the qualification set forth in Section 26(a) of said Act. The
appointment of any such branch as a sub-custodian shall be governed by paragraph
1 of the Custodian Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in
an interest bearing account established for the Fund with the Custodian's London
Branch, which account shall be subject to the direction of the Custodian, State
Street London Ltd. or both.
14. Applicability of Custodian Contract
-----------------------------------
Except as specifically superseded or modified herein, the terms and
provisions of the Custodian Contract shall continue to apply with full force and
effect.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the day of , 1993.
ATTEST: WESTERN ASSET TRUST, INC.
/s/ Blanche P. Roche By: /s/ Marie K. Karpinski
- -------------------------- ---------------------------------
(Title) Vice President & Treasurer
ATTEST: STATE STREET BANK AND TRUST COMPANY
/s/ By: /s/ Ronald E. Logue
- -------------------------- ---------------------------------
Assistant Secretary Senior Vice President
AMENDMENT TO CUSTODIAN CONTRACT
Agreement made by and between State Street Bank and Trust Company
(the "Custodian") and Western Asset Trust, Inc. (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a custodian contract
dated December 10, 1990, as amended, April 20, 1993 (the "Custodian Contract")
governing the terms and conditions under which the Custodian maintains custody
of the securities and other assets of the Fund; and
WHEREAS, the Custodian and the Fund desire to amend the terms and
conditions under which the Custodian maintains the Fund's securities and other
non-cash property in the custody of certain foreign sub-custodians in conformity
with the requirements of Rule 17f-5 under the Investment Company Act of 1940, as
amended;
NOW THEREFORE, in consideration of the premises and covenants contained
herein, the Custodian and the Fund hereby amend the Custodian Contract by the
addition of the following terms and provisions;
1. Notwithstanding any provisions to the contrary set forth in the
Custodian Contract, the Custodian may hold securities and other non-cash
property for all of its customers, including the Fund, with a foreign
sub-custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
records of the Custodian with respect to securities and other non-cash property
of the Fund which are maintained in such account shall identify by book-entry
those securities and other non-cash property belonging to the Fund and (ii) the
Custodian shall require that securities and other non-cash property so held by
the foreign sub-custodian be held separately from any assets of the foreign
sub-custodian or of others.
2. Except as specifically superseded or modified herein, the terms and
provisions of the Custodian Contract shall continue to apply with full force and
effect.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed as a sealed instrument in its name and behalf by its duly authorized
representative this 28th day of May, 1996.
WESTERN ASSET TRUST, INC.
By: /s/ Marie K. Karpinski
------------------------------
Title: Vice President & Treas.
----------------------------
STATE STREET BANK AND TRUST COMPANY
By: /s/ M L Summers
------------------------------
Title: Vice President
----------------------------
TRANSFER AGENCY AND SERVICE AGREEMENT
between
WESTERN ASSET TRUST, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
Article 1 Terms of Appointment; Duties of the Bank..................2
Article 2 Fees and Expenses.........................................5
Article 3 Representations and Warranties of the Bank................6
Article 4 Representations and Warranties of the Fund................7
Article 5 Indemnification...........................................7
Article 6 Covenants of the Fund and the Bank.......................ll
Article 7 Termination of Agreement.................................13
Article 8 Additional Funds.........................................13
Article 9 Assignment...............................................14
Article 10 Amendment................................................14
Article 11 Massachusetts Law to Apply...............................15
Article 12 Merger of Agreement......................................15
Article 13 Miscellaneous............................................15
Article 14 Counterparts.............................................15
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 10th day of December, 1990, by and between
WESTERN ASSET TRUST, INC., a Maryland corporation, having its principal office
and place of business at 111 South Calvert, Baltimore, Maryland 21202 (the
"Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company
having its principal office and place of business at 225 Franklin Street,
Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate Portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer Shares in four series,
theFull Range Duration Portfolio, Long Duration Portfolio, Limited Duration
Portfolio and Money Market Portfolio (such series, together with all other
series subsequently established by the Fund and made subject to this Agreement
in accordance with Article 8, being herein referred to, as a Portfolio, and
collectively as the "Portfolios);
WHEREAS, the Fund, on behalf of the Portfolios desires to appoint the
Bank as its transfer agent, dividend disbursing agent and agent in connection
with certain other activities, and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
<PAGE>
Article 1 Terms of Appointment; Duties of the Bank
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund, on behalf of the Portfolios, hereby employs and appoints
the Bank to act as, and the Bank agrees to act as its transfer agent for the
authorized and issued shares of beneficial interest of the Fund representing
interests in each of the respective Portfolios ("Shares"), dividend disbursing
agent and agent in connection with any accumulation, open-account or similar
plans provided to the Shareholders of each of the respective Portfolios of the
Fund ("Shareholders") and set out in the currently effective Prospectuses and
Statement of Additional Information ("prospectuses") of the Fund on behalf of
the applicable Portfolio, including without limitation any periodic investment
plan or periodic withdrawal program.
1.02 The Bank agrees that it will perform the following
services:
(a) In accordance with the Prospectuses and procedures
established from time to time by agreement between the Fund on behalf of each of
the Portfolios, as applicable, and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase of
Shares, and promptly deliver payment and appropriate
documentation therefor to the Custodian of the Fund
authorized pursuant to the Articles of Incorporation
of the Fund (the "Custodian);
-2-
<PAGE>
(ii) Pursuant to purchase orders, issue the appropriate
number of Shares and hold such Shares in the
appropriate Shareholder account;
(iii) Receive for acceptance, redemption requests and
redemption directions and deliver the appropriate
documentation therefor to the Custodian;
(iv) In respect to the transactions in items (i), (ii) and
(iii) above, the Bank shall execute transactions
directly with broker-dealers authorized by the Fund
who shall thereby be deemed to be acting on behalf of
the Fund;
(v) At the appropriate time as and when it receives
monies paid to it by the Custodian with respect to
any redemption, pay over or cause to be paid over in
the appropriate manner such monies as instructed
directly or indirectly by the redeeming Shareholders;
(vi) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(vii) Prepare and transmit payments for dividends and
distributions declared by the Fund on behalf of the
applicable Portfolio; and
(viii) Issue replacement certificates for those certificates
alleged to have been lost, stolen or destroyed upon
receipt by the Bank of indemnification satisfactory
to the Bank and protecting the Bank and the Fund, and
the Bank at
-3-
<PAGE>
its option, may issue replacement certificates in
place of mutilated stock certificates upon
presentation thereof and without such indemnity;
(ix) Report abandoned property to the various states as
authorized by the Fund per policies and principles
agreed upon by the Fund and the Bank;
(x) Maintain records of account for and advise the Fund
and its Shareholders as to the foregoing; and
(xi) Record the issuance of Shares and maintain
pursuant to Rule 17Ad-10(e) under the Securities
Exchange Act of 1934 a record of the total number
of Shares which are authorized, based upon data
provided to it by the Fund, and issued and
outstanding. Bank shall also provide the Fund on a
regular basis with the total number of Shares which
are authorized and issued and outstanding and
shall have no obligation, when recording the
issuance of Shares, to monitor the issuance of
such Shares or to take cognizance of any laws
relating to the issue or sale of such Shares, which
functions shall be the sole responsibility of the
Fund.
(b) In addition to and not in lieu of the services set forth
in the above paragraph (a), the Bank shall: (i) perform the customary services
of a transfer agent, dividend disbursing agent and, as relevant, agent in
connection with accumulation, open account or similar plans (including without
-4-
<PAGE>
limitation any periodic investment plan or periodic withdrawal program);
including but not limited to: maintaining all Shareholder accounts, preparing
Shareholder record date lists for special meetings and for mailings to
Shareholders; addressing and mailing proxies, receiving and tabulating proxies,
and doing all other things necessary in connection with proxy solicitation,
addressing and mailing Shareholder reports, prospectuses and other materials to
current Shareholders; withholding, and paying to the appropriate federal and
state authorities, taxes on U.S. resident and non-resident alien accounts;
preparing, filing and mailing to Shareholders U.S. Treasury Department Forms
1099 and other appropriate forms required with respect to dividends and
distributions by federal and state authorities for all registered Shareholders;
preparing and mailing purchase and sale confirmation forms and statements of
account to Shareholders for all purchases and redemptions of Shares and other
confirmable transactions in Shareholder accounts, preparing and mailing activity
statements for Shareholders, providing Shareholder account information and (ii)
provide a system which will enable the Fund to monitor the total number of
Shares sold in each State.
(c) In additions, the Fund shall (i) identify to the Bank in
writing those transactions and assets to be treated as exempt from blue sky
reporting for each State and (ii) verify the establishment of transactions for
each State on the system prior to activation and thereafter monitor the daily
activity for each State. The responsibility of the Bank for the Fund's blue sky
State registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Fund and the reporting of
such transactions to the Fund as provided above.
-5-
<PAGE>
(d) Procedures as to who shall provide certain of these
services in Article 1 may be established from time to time by agreement between
the Fund on behalf of each Portfolio and the Bank per the attached service
responsibilty schedule. The Bank may at times perform only a portion of these
services and the Fund or its agent may perform these services on the Fund's
behalf.
Article 2 Fees and Expenses
2.01 For the performance by the Bank pursuant to this
Agreement, the Fund agrees on behalf of each of the Portfolios, to pay the Bank
an annual maintenance fee for each Shareholder account as set out in the initial
fee schedule attached hereto. Such fees and out-of-pocket expenses and advances
identified under Section 2.02 below may be changed from time to time subject to
mutual written agreement between the Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above, the
Fund agrees on behalf of the Portfolios, to reimburse the Bank for out-of-pocket
expenses or advances incurred by the Bank for the items set out in the fee
schedule attached hereto. In addition, any other expenses incurred by the Bank
at the request or with the consent of the Fund which are not properly borne by
the Bank as part of its duties and obligations under this Agreement will be
reimbursed by the Fund on behalf of the applicable Portfolio.
2.03 The Fund agrees on behalf of each of the Portfolios to
pay all fees and reimbursable expenses within five days following the receipt of
the respective billing notice. Postage for receipt of dividends, proxies, Fund
reports and other
-6-
<PAGE>
mailings to all Shareholder accounts shall be advanced to the Bank by the Fund
at least seven (7) days prior to the mailing date of such materials.
Article 3 Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and in
good standing under the laws of The Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in The
Commonwealth of Massachusetts.
3.03 It is empowered under applicable laws and by its charter
and by-laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that;
4.01 It is a corporation duly organized and existing and
in good standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles
of Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
-7-
<PAGE>
4.04 It is an open-end and diversified management investment
company registered under the Investment Company Act of 1940, as amended.
4.05 A registration statement under the Securities Act of 1933
and the Investment Company Act of 1940 is currently effective and will remain
effective, and appropriate state securities law filings have been made and will
continue to be made, with respect to all Shares being offered for sale.
Article 5 Indemnification
5.01 The Bank shall not be responsible for, and the Fund shall
on behalf of the applicable Portfolio, indemnify and hold the Bank harmless from
and against, any and all losses, damages, costs, charges, counsel fees,
payments, expenses and liability arising out of or attributable to:
(a) All actions of the Bank or its agent or subcontractors
required to be taken pursuant to this Agreement, provided such actions are taken
in good faith and without negligence or willful misconduct.
(b) The Fund's lack of good faith, negligence or willful
misconduct or which arise out of the breach of any representation or warranty of
the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors on information, records and documents which (i) are received by
the Bank or its agents or subcontractors and furnished to it by or performed
-8-
<PAGE>
by or on behalf of the Fund, and (ii) have been prepared and/or maintained by
the Fund or any other person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by the Bank or its
agents or subcontractors of any instructions or requests of the Fund on behalf
of the applicable Portfolio.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any state that such Shares be registered in such state or
in violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of such Shares of each
portfolio in such state.
5.02 The Bank shall indemnify and hold the Fund harmless from
and against any and all losses, damages, and any and all reasonable cost,
charges, counsel fees, payments, expenses and liability arising out of or
attributed to any action or failure or omission to act by the Bank as a result
of the Bank's lack of good faith, negligence or willful misconduct.
5.03 At any time the Bank may apply to any authorized officer
of the Fund for instructions, and may consult with experienced securities
counsel with respect to any matter arising in connection with the services to be
performed by the Bank under this Agreement, and the Bank and its agents and
subcontractors shall not be liable and shall be indemnified by the Fund on
behalf of the applicable Portfolio for any action taken or omitted by it in good
faith in reliance upon such instructions or upon the opinion of such counsel
that such
-9-
<PAGE>
actions or omissions comply with the terms of this Agreement or with all
applicable laws. The Bank, its agents and subcontractors shall be protected and
indemnified in acting upon any paper or document furnished by or on behalf of
the Fund, reasonably believed by the Bank to be genuine and to have been signed
by the proper person or persons, or upon any instruction, information, data,
records or documents provided the Bank or its agents or subcontractors by
machine readable input, telex, CRT data entry or other similar means authorized
by the Fund, and shall not be held to have notice of any change. of authority of
any person, until receipt of written notice thereof from the Fund. The Bank, its
agents and subcontractors shall also be protected and indemnified in recognizing
stock certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officers of the Fund, and the proper
countersignature of any former transfer agent or registrar, or of a co-transfer
agent or co-registrar.
5.04 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes. In addition, the Bank shall make reasonable
provisions for emergency use of electronic data processing equipment to the
extent appropriate equipment is available, and the Bank shall further use
reasonable care to minimize the likelihood of such damage, loss
-10-
<PAGE>
of data, delays and/or errors and should such damage, loss of data, delays
and/or errors occur, the Bank shall use its best efforts to mitigate the effects
of such occurrence.
5.05 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement or
for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in
this Article 5 shall apply, upon the assertion of a claim for which either party
may be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
Article 6 Covenants of the Fund and the Bank
6.01 The Fund shall, on behalf of the Portfolios promptly
furnish to the Bank the following:
(a) A certified copy of the resolution of the Board of
Directors of the Fund authorizing the appointment of the Bank and the execution
and delivery of this Agreement.
(b) A copy of the Articles of Incorporation and By-Laws
of the Fund and all amendments thereto.
-11-
<PAGE>
6.02 The Bank hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to the Fund for safekeeping of
stock certificates, check forms and facsimile signature imprinting devices, if
any; and for the preparation or use, and for keeping account of, such
certificates, forms and devices and to make such changes in said procedures and
facilities as the Fund may from time to time reasonably request.
6.03 The Bank shall keep records relating to the services to
be performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Coopany Act of 1940, as amended,
and the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered to the Fund on and in accordance with its request.
6.04 The Bank and the Fund agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be required by law.
6.05 In case of any requests or demands for the inspection of
the Shareholder records of the Fund, the Bank will
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<PAGE>
endeavor to notify the Fund and to secure instructions from an authorized
officer of the Fund as to such inspection. The Bank reserves the right, however,
to exhibit the Shareholder records to any person whenever it i8 advised by its
counsel that it may be held liable for the failure to exhibit the Shareholder
records to such person.
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material will
be borne by the Portfolio to which such expenses relate. Additionally, the Bank
reserves the right to charge for any other reasonable expenses associated with
such termination. In the event that the Corporation designates a successor to
any of the Bank's obligations hereunder, the Bank shall, at the expense and
direction of each Fund, transfer to such successor a certified list of the
Shareholders of such Fund, a complete record of the account of each Shareholder,
and all other relevant books, records and other data established or maintained
by the Bank hereunder.
Article 8 Additional Funds
8.01 In the event that the Fund establishes one or more series
of Shares in addition to Full Range Duration Portfolio, Long Duration Portfolio,
Limited Duration Portfolio and Money Market Portfolio with respect to which it
desires to
-13-
<PAGE>
have the Bank render services as transfer agent under the terms hereof, it shall
so notify the Bank in writing, and if the Bank agrees in writing to provide such
services, such series of Shares shall become a Portfolio hereunder.
Article 9 Assignment
9.01 Except as provided in Section 9.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by the Bank
without the written consent of the other party.
9.02 This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and assigns.
9.03 The Bank may, without further consent on the part of the
Fund, subcontract for the performance hereof with (i) Boston Financial Data
Services, Inc., a Massachusetts corporation ("BFDS") which is duly registered as
a transfer agent pursuant to Section 17A(c)(l) of the Securities Exchange Act of
1934 ("Section 17A(c)(l)"), (ii) a BFDS subsidiary duly registered as a transfer
agent pursuant to Section 17A(c)(l), (iii) a BFDS affiliate; provided, however
that the Bank shall be as fully responsible to the Fund for the acts and
omissions of any subcontractor as it is for its own acts and omissions.
Article 10 Amendment
10.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.
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<PAGE>
Article 11 Massachusetts Law to Apply
11.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
Article 12 Merger of Agreement
12.01 This Agreement constitutes the entire agreement between
the parties hereto and supersedes any prior agreement with respect to the
subject matter hereof whether oral or written.
Article 13 Miscellaneous
13.01 The Bank agrees to treat all records and other
information relative to the Fund and its prior, present or potential
Shareholders confidentially and the Bank on behalf of itself and its employees
agrees to keep confidential all such information, except after prior
notification to and approval in writing by the Fund, which approval shall not be
unreasonably withheld and may not be withheld where the Bank may be exposed to
civil or criminal contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, or when so requested
by the Fund.
13.02 Notwithstanding any other provision of this Agreement,
the parties agree that the assets and liabilities of each Portfolio of the Fund
are separate and distinct from the assets and liabilites of each other Portfolio
and that no Portfolio shall be liable or shall be charged for any debt,
obligation or liability of any other Portfolio, whether arising under this
Agreement or otherwise.
-15-
<PAGE>
Article 14 Counterparts
14.01 This Agreement may be executed by the parties hereto on
any number of counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their behalf under their seals by
and through their duly authorized officers, as of the day and year first above
written.
WESTERN ASSET TRUST, INC.
BY: /s/ Marie K. Karpinski
--------------------------------
ATTEST:
BY: /s/ Kathi D. Glenn
------------------------------
STATE STREET BANK AND TRUST COMPANY
BY: /s/ J W Fletelin
--------------------------------
Vice President
ATTEST:
BY: /s/ P McClure
------------------------------
Assistant Secretary
-16-
ADMINISTRATION AGREEMENT
ADMINISTRATION AGREEMENT, made this 31st day of August, 1990, by and
between Western Asset Trust, Inc., a Maryland Corporation, ("Fund"), and Legg
Mason Fund Adviser, Inc., a Maryland corporation (the "Administrator"), having
its principal place of business at 111 South Calvert Street, Baltimore, MD
21203.
WHEREAS, the Fund is registered as an open-end, diversified management
investment company under the Investment Company Act of 1940 ("1940 Act") and has
registered its shares of common stock for sale to the public under the
Securities Act of 1933; and
WHEREAS, the Fund initially has established four separate portfolios
known as the Full Range Duration Portfolio, the Long Duration Portfolio, the
Limited Duration Portfolio and the Money Market Portfolio, and may establish
additional portfolios in the future (all present and future portfolios referred
to herein as the "Portfolios"); and
WHEREAS, the Fund wishes to retain the Administrator to provide
administrative services to the Fund on behalf of each Portfolio; and
1
<PAGE>
WHEREAS, the Administrator is willing to furnish such services on the
terms and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. The Fund hereby appoints Legg Mason Fund Adviser, Inc. as
Administrator of the Fund and each Portfolio for the period and on the terms set
forth in this Agreement. The Administrator accepts such appointment and agrees
to render the services herein set forth, for the compensation herein provided.
2. The Fund shall at all times keep the Administrator fully informed
with regard to the securities owned by it, its funds available, or to become
available, for investment, and generally as to the condition of its affairs. It
shall furnish the Administrator with such other documents and information with
regard to its affairs as the Administrator may from time to time reasonably
request.
3. Services on a Continuing Basis.
(a) Subject always to the control of the Board of Directors of
the Fund (the "Board") and to such policies as the Board may determine, the
Administrator agrees, at its expense, (1) to furnish the management and
administrative services
2
<PAGE>
necessary for the operation of the Fund and handling its shareholder relations,
including overseeing bookkeeping and accounting services and the calculation and
publication of each Portfolio's net asset value, providing office space,
equipment and facilities, data processing, internal auditing and clerical
services (excluding determination of net asset value); preparing reports to the
Fund's shareholders and tax returns; reports to and filing with governmental
bodies; and conducting relations on behalf of the Fund with custodians,
depositories, transfer agents, registrar and dividend disbursing and
reinvestment plan agents, accountants, attorneys, underwriters, insurers and
banks, (ii) to pay all salaries, fees and expenses of officers and directors of
the Fund who are affiliated persons of the Administrator (except to the extent
such persons are employees of the Corporation's investment adviser), and (iii)
to furnish all necessary management facilities, including salaries of personnel,
required for it to execute its duties faithfully.
(b) The Administrator shall oversee the maintenance of all
books and records required by the Investment Company Act of 1940 and the rules
and regulations thereunder, as well as all other applicable federal and state
laws and regulations. In compliance with the requirements of Rule 31a-3 under
the Investment Company Act of 1940, the Administrator hereby agrees that any
records which it maintains for the Fund are the property of the Fund and further
agrees to surrender promptly to the Fund
3
<PAGE>
any of such records upon the Fund's request. The Administrator further agrees to
arrange for the preservation of the records required to be maintained by Rule
31a-1 under the Investment Company Act of 1940 for the periods prescribed by
Rule 31a-2 under said Act.
(c) In the performance of its duties under this Contract, the
Administrator will comply with the provisions of the Articles of Incorporation
and By-laws of the Fund and the stated investment objectives, policies and
restrictions of each Portfolio, and will use its best efforts to safeguard and
promote the welfare of the Fund, and to comply with other policies which the
Board may from time to time determine.
(d) The Administrator shall act as liaison with the Fund's
independent public accountants and shall provide account analyses, fiscal year
summaries, and other audit related schedules. The Administrator shall take all
reasonable action in the performance of its obligations under this Agreement to
assure that the necessary information is made available to such accountants for
the expression of their opinion, as such may be required by the Fund from time
to time.
4. (a) The Administrator, at its own expense, shall provide
a system whereby information is supplied to shareholders concerning their
accounts and the operation of the Fund. The
4
<PAGE>
Administrator shall also provide, at its own expense, a system whereby orders
for purchases and redemption of Fund shares which are received by the Fund or
its distributor, Legg Mason Wood Walker, Incorporated, are promptly processed
and transmitted to the Fund's transfer agent. The Administrator may delegate
some or all of the functions specified in this subparagraph to Legg Mason Wood
Walker, Incorporated or another appropriate person. The Administrator shall not
have the right to use any list of shareholders of the Fund or any other list of
investors which it obtains in connection with its provisions of services under
this Agreement, nor shall the Administrator sell or knowingly provide such list
or lists to any unaffiliated person.
(b) Other than as specifically indicated in this Agreement, the
Administrator shall not be responsible for the Fund's expenses. Specifically,
the Administrator will not be responsible, except to the extent of the
reasonable compensation of employees of the Fund whose services may be used by
the Administrator hereunder, for any of the following expenses of the Fund,
which expenses shall be borne by the Fund: organizational expenses; legal
expenses; interest; taxes; governmental fees; fees, voluntary assessments and
other expenses incurred in connection with membership in investment company
organizations; the cost (including brokerage commissions or charges, if any) of
securities purchased or sold by the Fund and any losses incurred in connection
therewith; distribution fees, if any; fees of
5
<PAGE>
custodians, subcustodians, transfer agents, registrars or other agents for all
services to the Fund; expenses relating to the redemption or repurchase of the
Fund's shares; expenses of registering and qualifying Fund shares for sale under
applicable federal and state law and maintaining such registrations and
qualifications; expenses or preparing, setting in print, printing and
distributing prospectuses, proxy statements, reports, notices, stock
certificates and dividends to Fund shareholders; costs of stationery; costs of
stockholders' and other meetings of the Fund; compensation of officers and
directors who are not affiliated persons of Fund Adviser; fees and expenses of
independent auditors; traveling expenses of directors of the Fund, if any;
expenses for fidelity bonds and other insurance covering the Fund and its
officers and directors; costs of indemnification; and any extraordinary
expenses.
(c) The Administrator shall authorize and permit any of its directors,
officers and employees, who may be elected as directors or officers of the Fund,
to serve in the capacities in which they are elected, and shall bear their
salary or other compensation and expenses, if any.
5. 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 the
Administrator or any
6
<PAGE>
affiliated company of the Administrator.
6. As compensation for the services performed and the facilities
furnished and expenses assumed by the Administrator, including the services of
any consultants or agents retained by the Administrator, the Fund shall pay the
Administrator, as promptly as possible after the last day of each month, a fee,
calculated daily, of 0.1% annually of the daily net assets of each Portfolio.
In the event that the Administrator's right to such fee from a
Portfolio commences on a date other than the first day of the month, the fee
from such Portfolio for such month shall be based on the average daily net
assets of that Portfolios 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 on any date not the last day of a month, the fee from such
Portfolio shall be paid as promptly as possible after such date of termination,
and shall be based 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 each Portfolio shall in all cases be computed as of such
time as may be determined by the Board of Directors of the Fund. The manner of
calculating each Portfolio's average daily net assets for the purpose of this
Agreement shall be determined by the Fund's Board of Directors and shall be
binding on the parties.
7
<PAGE>
7. The Administrator shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with
performance of this 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 hereunder.
8. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Administrator who may also be a director,
officer, or employee of the Fund, to engage in other business or to devote his
time and attention in part to the management or other aspects of any other
business, whether or a similar nature or a dissimilar nature, or limit or
restrict the right of the Administrator to engage in any other business or to
render services of any kind, including investment advisory and management
services, to any other corporation, firm, individual or association.
9. The Fund acknowledges that the Administrator may make payments from
the fees paid to it under this Agreement, from past profits or from any other
source available to it to other persons, including but not limited to Western
Asset Management Company and Legg Mason Wood Walker, Incorporated, for
shareholder, administrative, advisory, recordkeeping and distribution services
provided by such persons in connection with the Fund's shares.
8
<PAGE>
10. As used in this Agreement, the terms "assignment", "interested
person", and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
11. This Agreement will become effective on the date first set forth
above, provided that it shall have been approved by the Fund's Board of
Directors and, unless sooner terminated as provided for herein, shall continue
in effect for two years from the date of its execution and for successive annual
periods, provided that its continuance is specifically approved annually by the
Fund's Board of Directors, including a majority of the directors of the Fund who
are not parties to this Agreement or "interested" persons as defined by the 1940
Act, of any such party ("Disinterested Directors") cast in person at a meeting
called for the purpose of voting on such Agreement.
This Agreement is terminable without penalty, by vote of the Fund's
Board of Directors, by vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Fund or by the Administrator, on not less
than 60 days' notice to the other party and may be terminated immediately upon
the mutual written consent of the Administrator and the Fund. This Agreement
will automatically and immediately terminate in the
9
<PAGE>
event of its assignment.
12. No provision of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
13. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
[SEAL] WESTERN ASSET TRUST, INC.
Attest:
By: /s/ John L. Cecil By: /s/ W. Curtis Livingston
[SEAL] LEGG MASON FUND ADVISER, INC.
Attest:
By: /s/ Marie K. Karpinski By: /s/ William H. Miller, III
10
ADMINISTRATION AGREEMENT
Western Asset Trust, Inc.
Corporate Securities Portfolio
Mortgage Securities Portfolio
ADMINISTRATION AGREEMENT, made this 30th day of June, 1992, by and
between Western Asset Management Company, a California Corporation, ("Western
Asset"), and Legg Mason Fund Adviser, Inc., a Maryland corporation (the
"Administrator"), having its principal place of business at 111 South Calvert
Street, Baltimore, MD 21203.
WHEREAS, Western Asset serves as investment adviser to Western Asset
Trust, Inc. ("Fund"), an open-end, diversified management investment company
which is registered under the Investment Company Act of 1940 ("1940 Act") and
has registered its shares of common stock for sale to the public under the
Securities Act of 1933; and
WHEREAS, the Fund initially has established seven separate portfolios,
two of which are known as the Corporate Securities Portfolio and the Mortgage
Securities Portfolio (referred to herein as the "Portfolios"), and may establish
additional portfolios in the future; and
WHEREAS, Western Asset wishes to retain the Administrator to provide
administrative services to the Fund on behalf of each Portfolio; and
WHEREAS, the Administrator is willing to furnish such services on the
terms and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. Western Asset hereby appoints Legg Mason Fund Adviser, Inc. as
Administrator of each Portfolio for the period and on the terms set forth in
this Agreement. The Administrator accepts such appointment and agrees to render
the services herein set forth, for the compensation herein provided.
2. Western Asset shall at all times keep the Administrator fully
informed with regard to the securities owned by the Portfolios, their funds
available, or to become available, for investment, and generally as to the
condition of their affairs. It shall furnish the Administrator with such other
documents and
1
<PAGE>
information with regard to the affairs of the Portfolios as the Administrator
may from time to time reasonably request.
3. Services on a Continuing Basis.
(a) Subject always to the control of the Board of Directors of
the Fund (the "Board") and to such policies as the Board may determine, the
Administrator agrees, at its expense, (1) to furnish the management and
administrative services necessary for the operation of each Portfolio and
handling their shareholder relations, including overseeing bookkeeping and
accounting services and the calculation and publication of each Portfolio's net
asset value, providing office space, equipment and facilities, data processing,
internal auditing and clerical services (excluding determination of net asset
value); preparing reports to the Portfolios' shareholders and tax returns;
reports to and filing with governmental bodies; and conducting relations on
behalf of the Fund with custodians, depositories, transfer agents, registrar and
dividend disbursing and reinvestment plan agents, accountants, attorneys,
underwriters, insurers and banks, (ii) to pay all salaries, fees and expenses of
officers and directors of the Fund who are affiliated persons of the
Administrator (except to the extent such persons are employees of the
Corporation's investment adviser), and (iii) to furnish all necessary management
facilities, including salaries of personnel, required for it to execute its
duties faithfully.
(b) The Administrator shall oversee the maintenance of all
books and records required by the Investment Company Act of 1940 and the rules
and regulations thereunder, as well as all other applicable federal and state
laws and regulations. In compliance with the requirements of Rule 31a-3 under
the Investment Company Act of 1940, the Administrator hereby agrees that any
records which it maintains for the Fund are the property of the Fund and further
agrees to surrender promptly to the Fund any of such records upon the Fund's
request. The Administrator further agrees to arrange for the preservation of the
records required to be maintained by Rule 31a-1 under the Investment Company Act
of 1940 for the periods prescribed by Rule 31a-2 under said Act.
(c) In the performance of its duties under this Contract, the
Administrator will comply with the provisions of the Articles of Incorporation
and By-laws of the Fund and the stated investment objectives, policies and
restrictions of each Portfolio, and will use its best efforts to safeguard and
promote the welfare of the Fund, and to comply with other policies which the
Board may from time to time determine.
(d) The Administrator shall act as liaison with the Fund's
independent public accountants and shall provide account analyses, fiscal year
summaries, and other audit related schedules. The Administrator shall take all
reasonable action in
2
<PAGE>
the performance of its obligations under this Agreement to assure that the
necessary information is made available to such accountants for the expression
of their opinion, as such may be required by the Fund from time to time.
4. (a) The Administrator, at its own expense, shall provide a system
whereby information is supplied to shareholders concerning their accounts and
the operation of the Fund. The Administrator shall also provide, at its own
expense, a system whereby orders for purchases and redemption of Portfolio
shares which are received by the Fund or its distributor, Legg Mason Wood
Walker, Incorporated, are promptly processed and transmitted to the Fund's
transfer agent. The Administrator may delegate some or all of the functions
specified in this subparagraph to Legg Mason Wood Walker, Incorporated or
another appropriate person. The Administrator shall not have the right to use
any list of shareholders of the Fund or any other list of investors which it
obtains in connection with its provisions of services under this Agreement, nor
shall the Administrator sell or knowingly provide such list or lists to any
unaffiliated person.
(b) Other than as specifically indicated in this Agreement, the
Administrator shall not be responsible for the Fund's expenses. Specifically,
the Administrator will not be responsible, except to the extent of the
reasonable compensation of employees of the Fund whose services may be used by
the Administrator hereunder, for any of the following expenses of the Fund,
which expenses shall be borne by the Fund: organizational expenses; legal
expenses; interest; taxes; governmental fees; fees, voluntary assessments and
other expenses incurred in connection with membership in investment company
organizations; the cost (including brokerage commissions or charges, if any) of
securities purchased or sold by the Fund and any losses incurred in connection
therewith; distribution fees, if any; fees of custodians, subcustodians,
transfer agents, registrars or other agents for all services to the Fund;
expenses relating to the redemption or repurchase of the Fund's shares; expenses
of registering and qualifying Fund shares for sale under applicable federal and
state law and maintaining such registrations and qualifications; expenses or
preparing, setting in print, printing and distributing prospectuses, proxy
statements, reports, notices, stock certificates and dividends to Fund
shareholders; costs of stationery; costs of stockholders' and other meetings of
the Fund; compensation of officers and directors who are not affiliated persons
of Fund Adviser; fees and expenses of independent auditors; traveling expenses
of directors of the Fund, if any; expenses for fidelity bonds and other
insurance covering the Fund and its officers and directors; costs of
indemnification; and any extraordinary expenses.
(c) The Administrator shall authorize and permit any of its directors,
officers and employees, who may be elected as
3
<PAGE>
directors or officers of the Fund, to serve in the capacities in which they are
elected, and shall bear their salary or other compensation and expenses, if any.
5. 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 the
Administrator or any affiliated company of the Administrator.
6. As compensation for the services performed and the facilities
furnished and expenses assumed by the Administrator, including the services of
any consultants or agents retained by the Administrator, each Portfolio shall
pay the Administrator, as promptly as possible after the last day of each month,
a fee, calculated daily, of 0.025% annually of the daily net assets of each
Portfolio.
In the event that the Administrator's right to such fee from a
Portfolio commences on a date other than the first day of the month, the fee
from such Portfolio for such month shall be based on the average daily net
assets of that Portfolios 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 on any date not the last day of a month, the fee from such
Portfolio shall be paid as promptly as possible after such date of termination,
and shall be based 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 each Portfolio shall in all cases be computed as of such
time as may be determined by the Board of Directors of the Fund. The manner of
calculating each Portfolio's average daily net assets for the purpose of this
Agreement shall be determined by the Fund's Board of Directors and shall be
binding on the parties.
7. The Administrator shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with
performance of this 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 hereunder.
8. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Administrator who may also be a director,
officer, or employee of the Fund, to engage in other business or to devote his
time and attention in part to the management or other aspects of any other
business, whether or a similar nature or a dissimilar nature, or limit or
restrict the right of the Administrator to engage in any other business or to
render services of any kind, including investment advisory and management
services, to any other corporation, firm, individual or association.
4
<PAGE>
9. The Administrator may make payments from the fees paid to it under
this Agreement, from past profits or from any other source available to it to
other persons, including but not limited to Western Asset Management Company and
Legg Mason Wood Walker, Incorporated, for shareholder, administrative, advisory,
recordkeeping and distribution services provided by such persons in connection
with the Fund's shares.
10. As used in this Agreement, the terms "assignment", "interested
person", and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
11. This Agreement will become effective on the date first set forth
above, provided that it shall have been approved by the Fund's Board of
Directors and, unless sooner terminated as provided for herein, shall continue
in effect for two years from the date of its execution and for successive annual
periods, provided that its continuance is specifically approved annually by the
Fund's Board of Directors, including a majority of the directors of the Fund who
are not parties to this Agreement or "interested" persons as defined by the 1940
Act, of any such party ("Disinterested Directors") cast in person at a meeting
called for the purpose of voting on such Agreement.
This Agreement is terminable with respect to a Portfolio without
penalty by Western Asset, by vote of the Fund's Board of Directors, by vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Fund or by the Administrator, on not less than 60 days' notice to the other
party and may be terminated immediately upon the mutual written consent of the
Administrator and the Fund. This Agreement will automatically and immediately
terminate in the event of its assignment, and will automatically and immediately
terminte with respect to a Portfolio in the event Western Asset no longer serves
as investment adviser to that Portfolio.
12. No provision of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
13. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
[SEAL] WESTERN ASSET TRUST, INC.
Attest:
By: /s/ Ilene S. Harker By: /s/ W. Curtis Livingston
[SEAL] LEGG MASON FUND ADVISER, INC.
Attest:
By: /s/ Kathi D. Glenn By: /s/ William H. Miller, III
6
ADMINISTRATION AGREEMENT
Western Asset Trust, Inc.
International Securities Portfolio
ADMINISTRATION AGREEMENT, made this 30th day of June, 1992, by and
between Western Asset Management Company, a California corporation, ("Western
Asset"), and Legg Mason Fund Adviser, Inc., a Maryland corporation (the
"Administrator"), having its principal place of business at 111 South Calvert
Street, Baltimore, MD 21203.
WHEREAS, Western Asset serves as investment adviser to Western Asset
Trust, Inc. ("Fund"), an open-end, diversified management investment company
which is registered under the Investment Company Act of 1940 ("1940 Act") and
has registered its shares of common stock for sale to the public under the
Securities Act of 1933; and
WHEREAS, the Fund has established seven separate portfolios, one of
which is known as the International Securities Portfolio ("Portfolio"); and
WHEREAS, Western Asset wishes to retain the Administrator to provide
administrative services to the Fund on behalf of the Portfolio; and
WHEREAS, the Administrator is willing to furnish such services on the
terms and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. Western Asset hereby appoints Legg Mason Fund Adviser, Inc. as
Administrator of the Portfolio for the period and on the terms set forth in this
Agreement. The Administrator accepts such appointment and agrees to render the
services herein set forth, for the compensation herein provided.
2. Western Asset shall at all times keep the Administrator fully
informed with regard to the securities owned by the Portfolio, its funds
available, or to become available, for investment, and generally as to the
condition of its affairs. It shall furnish the Administrator with such other
documents and information with regard to the affairs of the Portfolio as the
Administrator may from time to time reasonably request.
1
<PAGE>
3. Services on a Continuing Basis.
(a) Subject always to the control of the Board of Directors of
the Fund (the "Board") and to such policies as the Board may determine, the
Administrator agrees, at its expense, (1) to furnish the management and
administrative services necessary for the operation of the Portfolio and
handling its shareholder relations, including overseeing bookkeeping and
accounting services and the calculation and publication of the Portfolio's net
asset value, providing office space, equipment and facilities, data processing,
internal auditing and clerical services (excluding determination of net asset
value); preparing reports to the Portfolio's shareholders and tax returns;
reports to and filing with governmental bodies; and conducting relations on
behalf of the Fund with custodians, depositories, transfer agents, registrar and
dividend disbursing and reinvestment plan agents, accountants, attorneys,
underwriters, insurers and banks, (ii) to pay all salaries, fees and expenses of
officers and directors of the Fund who are affiliated persons of the
Administrator (except to the extent such persons are employees of the
Corporation's investment adviser), and (iii) to furnish all necessary management
facilities, including salaries of personnel, required for it to execute its
duties faithfully.
(b) The Administrator shall oversee the maintenance of all
books and records required by the Investment Company Act of 1940 and the rules
and regulations thereunder, as well as all other applicable federal and state
laws and regulations. In compliance with the requirements of Rule 31a-3 under
the Investment Company Act of 1940, the Administrator hereby agrees that any
records which it maintains for the Fund are the property of the Fund and further
agrees to surrender promptly to the Fund any of such records upon the Fund's
request. The Administrator further agrees to arrange for the preservation of the
records required to be maintained by Rule 31a-1 under the Investment Company Act
of 1940 for the periods prescribed by Rule 31a-2 under said Act.
(c) In the performance of its duties under this Contract, the
Administrator will comply with the provisions of the Articles of Incorporation
and By-laws of the Fund and the stated investment objectives, policies and
restrictions of the Portfolio, and will use its best efforts to safeguard and
promote the welfare of the Fund, and to comply with other policies which the
Board may from time to time determine.
(d) The Administrator shall act as liaison with the Fund's
independent public accountants and shall provide account analyses, fiscal year
summaries, and other audit related schedules. The Administrator shall take all
reasonable action in the performance of its obligations under this Agreement to
assure that the necessary information is made available to such
2
<PAGE>
accountants for the expression of their opinion, as such may be required by the
Fund from time to time.
4. (a) The Administrator, at its own expense, shall provide a system
whereby information is supplied to shareholders concerning their accounts and
the operation of the Fund. The Administrator shall also provide, at its own
expense, a system whereby orders for purchases and redemption of Portfolio
shares which are received by the Fund or its distributor, Legg Mason Wood
Walker, Incorporated, are promptly processed and transmitted to the Fund's
transfer agent. The Administrator may delegate some or all of the functions
specified in this subparagraph to Legg Mason Wood Walker, Incorporated or
another appropriate person. The Administrator shall not have the right to use
any list of shareholders of the Fund or any other list of investors which it
obtains in connection with its provisions of services under this Agreement, nor
shall the Administrator sell or knowingly provide such list or lists to any
unaffiliated person.
(b) Other than as specifically indicated in this Agreement, the
Administrator shall not be responsible for the Fund's expenses. Specifically,
the Administrator will not be responsible, except to the extent of the
reasonable compensation of employees of the Fund whose services may be used by
the Administrator hereunder, for any of the following expenses of the Fund,
which expenses shall be borne by the Fund: organizational expenses; legal
expenses; interest; taxes; governmental fees; fees, voluntary assessments and
other expenses incurred in connection with membership in investment company
organizations; the cost (including brokerage commissions or charges, if any) of
securities purchased or sold by the Fund and any losses incurred in connection
therewith; distribution fees, if any; fees of custodians, subcustodians,
transfer agents, registrars or other agents for all services to the Fund;
expenses relating to the redemption or repurchase of the Fund's shares; expenses
of registering and qualifying Fund shares for sale under applicable federal and
state law and maintaining such registrations and qualifications; expenses or
preparing, setting in print, printing and distributing prospectuses, proxy
statements, reports, notices, stock certificates and dividends to Fund
shareholders; costs of stationery; costs of stockholders' and other meetings of
the Fund; compensation of officers and directors who are not affiliated persons
of Fund Adviser; fees and expenses of independent auditors; traveling expenses
of directors of the Fund, if any; expenses for fidelity bonds and other
insurance covering the Fund and its officers and directors; costs of
indemnification; and any extraordinary expenses.
(c) The Administrator shall authorize and permit any of its directors,
officers and employees, who may be elected as directors or officers of the Fund,
to serve in the capacities in
3
<PAGE>
which they are elected, and shall bear their salary or other compensation and
expenses, if any.
5. 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 the
Administrator or any affiliated company of the Administrator.
6. As compensation for the services performed and the facilities
furnished and expenses assumed by the Administrator, including the services of
any consultants or agents retained by the Administrator, the Portfolio shall pay
the Administrator, as promptly as possible after the last day of each month, a
fee, calculated daily, of 0.075% annually of the daily net assets of the
Portfolio.
In the event that the Administrator's right to such fee from the
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 the Portfolio in
that period from the date of commencement to the last day of the month. If this
Agreement is terminated with respect to the Portfolio as on any date not the
last day of a month, the fee shall be paid as promptly as possible after such
date of termination, and shall be based on the average daily net assets of the
Portfolio in that period from the beginning of such month to such date of
termination. The average daily net assets of the Portfolio shall in all cases be
computed as of such time as may be determined by the Board of Directors of the
Fund. The manner of calculating the Portfolio's average daily net assets for the
purpose of this Agreement shall be determined by the Fund's Board of Directors
and shall be binding on the parties.
7. The Administrator shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with
performance of this 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 hereunder.
8. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Administrator who may also be a director,
officer, or employee of the Fund, to engage in other business or to devote his
time and attention in part to the management or other aspects of any other
business, whether or a similar nature or a dissimilar nature, or limit or
restrict the right of the Administrator to engage in any other business or to
render services of any kind, including investment advisory and management
services, to any other corporation, firm, individual or association.
4
<PAGE>
9. The Administrator may make payments from the fees paid to it under
this Agreement, from past profits or from any other source available to it to
other persons, including but not limited to Western Asset Management Company and
Legg Mason Wood Walker, Incorporated, for shareholder, administrative, advisory,
recordkeeping and distribution services provided by such persons in connection
with the Portfolio's shares.
10. As used in this Agreement, the terms "assignment", "interested
person", and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
11. This Agreement will become effective on the date first set forth
above, provided that it shall have been approved by the Fund's Board of
Directors and, unless sooner terminated as provided for herein, shall continue
in effect for two years from the date of its execution and for successive annual
periods, provided that its continuance is specifically approved annually by the
Fund's Board of Directors, including a majority of the directors of the Fund who
are not parties to this Agreement or "interested" persons as defined by the 1940
Act, of any such party ("Disinterested Directors") cast in person at a meeting
called for the purpose of voting on such Agreement.
This Agreement is terminable without penalty by Western Asset, by vote
of the Fund's Board of Directors, by vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Fund or by the Administrator,
on not less than 60 days' notice to the other party and may be terminated
immediately upon the mutual written consent of the Administrator and the Fund.
This Agreement will automatically and immediately terminate in the event of its
assignment, and will automatically and immediately terminte with respect to a
Portfolio in the event Western Asset no longer serves as investment adviser to
the Portfolio.
12. No provision of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
13. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
[SEAL] WESTERN ASSET MANAGEMENT COMPANY
Attest:
By: /s/ Ilene S. Harker By: /s/ W. Curtis Livingston
[SEAL] LEGG MASON FUND ADVISER, INC.
Attest:
By: /s/ Kathi D. Glenn By: /s/ William H. Miller, III
6
ADMINISTRATION AGREEMENT
ADMINISTRATION AGREEMENT, made this 10th day of February, 1994, by and
between Western Asset Trust, Inc., a Maryland Corporation, ("Fund"), and Legg
Mason Fund Adviser, Inc., a Maryland corporation (the "Administrator"), having
its principal place of business at 111 South Calvert Street, Baltimore, MD
21203.
WHEREAS, The Fund is registered as an open-end, diversified management
investment company under the Investment Company Act of 1940 ("1940 Act") and has
registered its shares of common stock for sale to the public under the
Securities Act of 1933; and
WHEREAS, the Fund has established nine separate portfolios, two of
which are known as the Intermediate Duration Portfolio and the Short Duration
Portfolio (referred to herein as the "Portfolios"), and may establish additional
portfolio in the future; and
WHEREAS, the Fund wishes to retain the Administrator to provide
administrative services to the Fund on behalf of each Portfolio; and
WHEREAS, the Administrator is willing to furnish such services on the
terms and conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. The Fund hereby appoints Legg Mason Fund Adviser, Inc. as
Administrator of the Fund and each Portfolio for the period and on the terms set
forth in this Agreement. The Administrator accepts such appointment and agrees
to render the services herein set forth, for the compensation herein provided.
2. The Fund shall at all times keep the Administrator fully informed
with regard to the securities owned by it, its funds available, or to become
available, for investment, and generally as to the condition of its affairs. It
shall furnish the Administrator with such other documents and information with
regard to the affairs of each Portfolio as the Administrator may from time to
time reasonably request.
3. Services on a Continuing Basis.
(a) Subject always to the control of the Board of
Directors of the Fund (the "Board") and to such
policies as the Board may determine, the
1
<PAGE>
Administrator agrees, at its expense, (1) to furnish
the management and administrative services necessary
for the operation of the Fund and handling its
shareholder relations, including overseeing
bookkeeping and accounting services and the
calculation and publication of each Portfolio's net
asset value, providing office space, equipment and
facilities, data processing, internal auditing and
clerical services (excluding determination of net
asset value); preparing reports to the Fund's
shareholders and tax returns; reports to and filing
with governmental bodies; and conducting relations on
behalf of the Fund with custodians, depositories,
transfer agents, registrar and dividend disbursing
and reinvestment plan agents, accountants, attorneys,
underwriters, insurers and banks, (ii) to pay all
salaries, fees and expenses of officers and directors
of the Fund who are affiliated persons of the
Administrator (except to the extent such persons are
employees of the Corporation's investment adviser),
and (iii) to furnish all necessary management
facilities, including salaries of personnel, required
for it to execute its duties faithfully.
(b) The Administrator shall oversee the maintenance of
all books and records required by the Investment
Company Act of 1940 and the rules and regulations
thereunder, as well as all other applicable federal
and state laws and regulations. In compliance with
the requirements of Rule 31a-3 under the Investment
Company Act of 1940, the Administrator hereby agrees
that any records which it maintains for the Fund are
the property of the Fund and further agrees to
surrender promptly to the Fund any of such records
upon the Fund's request. The Administrator further
agrees to arrange for the preservation of the records
required to be maintained by Rule 31a-1 under the
Investment Company Act of 1940 for the periods
prescribed by Rule 31a-2 under said Act.
(c) In the performance of its duties under this Contract,
the Administrator will comply with the provisions of
the Articles of Incorporation and By-laws of the Fund
and the stated investment objectives, policies and
restrictions of each Portfolio, and will use its best
efforts to safeguard and promote the welfare of the
Fund, and to comply with other policies which the
Board may from time to time determine.
(d) The Administrator shall act as liaison with the
Fund's independent public accountants and shall
provide account analyses, fiscal year summaries, and
other audit related schedules. The Administrator
shall take all reasonable action in the performance
of its obligations under this Agreement to assure
that
2
<PAGE>
the necessary information is made available to such
accountants for the expression of their opinion, as
such may be required by the Fund from time to time.
4. (a) The Administrator, at its own expense, shall provide
a system whereby information is supplied to
shareholders concerning their accounts and the
operation of the Fund. The Administrator shall also
provide, at its own expense, a system whereby orders
for purchases and redemption of Fund shares which are
received by the Fund or its distributor, Legg Mason
Wood Walker, Incorporated, are promptly processed and
transmitted to the Fund's transfer agent. The
Administrator may delegate some or all of the
functions specified in this subparagraph to Legg
Mason Wood Walker, Incorporated or another
appropriate person. The Administrator shall not have
the right to use any list of shareholders of the Fund
or any other list of investors which it obtains in
connection with its provisions of services under this
Agreement, nor shall the Administrator sell or
knowingly provide such list or lists to any
unaffiliated person.
(b) Other than as specifically indicated in this
Agreement, the Administrator shall not be responsible
for the Fund's expenses. Specifically, the
Administrator will not be responsible, except to the
extent of the reasonable compensation of employees of
the Fund whose services may be used by the
Administrator hereunder, for any of the following
expenses of the Fund, which expenses shall be borne
by the Fund: organizational expenses; legal
expenses; interest; taxes; governmental fees; fees,
voluntary assessments and other expenses incurred in
connection with membership in investment company
organizations; the cost (including brokerage
commissions or charges, if any) of securities
purchased or sold by the Fund and any losses incurred
in connection therewith; distribution fees, if any;
fees of custodians, subcustodians, transfer agents,
registrars or other agents for all services to the
Fund; expenses relating to the redemption or
repurchase of the Fund's shares; expenses of
registering and qualifying Fund shares for sale under
applicable federal and state law and maintaining such
registrations and qualifications; expenses or
preparing, setting in print, printing and
distributing prospectuses, proxy statements, reports,
notices, stock certificates and dividends to Fund
shareholders; costs of stationery; costs of
stockholders' and other meetings of the Fund;
compensation of officers and directors who are not
affiliated persons of Fund Adviser; fees and expenses
of independent auditors; traveling expenses of
directors of the Fund, if any; expenses for fidelity
3
<PAGE>
bonds and other insurance covering the Fund and its
officers and directors; costs of indemnification; and
any extraordinary expenses.
(c) The Administrator shall authorize and permit any of
its directors, officers and employees, who may be
elected as directors or officers of the Fund, to
serve in the capacities in which they are elected,
and shall bear their salary or other compensation and
expenses, if any.
5. 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 the Administrator or any
affiliated company of the Administrator.
6. As compensation for the services performed and the facilities
furnished and expenses assumed by the Administrator, including
the services of any consultants or agents retained by the
Administrator, The Fund shall pay the Administrator, as
promptly as possible after the last day of each month, a fee,
calculated daily, of 0.05% annually of the daily net assets of
each Portfolio.
In the event that the Administrator's right to such fee from a
Portfolio commences on a date other than the first day of the
month, the fee from such Portfolio 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 on any date not the last day of a month, the fee
shall be paid as promptly as possible after such date of
termination, and shall be based 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 each Portfolio shall in all cases be computed as of
such time as may be determined by the Board of Directors of
the Fund. The manner of calculating each Portfolio's average
daily net assets for the purpose of this Agreement shall be
determined by the Fund's Board of Directors and shall be
binding on the parties.
7. The Administrator shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the
Fund in connection with performance of this 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
hereunder.
4
<PAGE>
8. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Administrator who may also be a director,
officer, or employee of the Fund, to engage in other business or to devote his
time and attention in part to the management or other aspects of any other
business, whether of a similar nature or a dissimilar nature, or limit or
restrict the right of the Administrator to engage in any other business or to
render services of any kind, including investment advisory and management
services, to any other corporation, firm, individual or association.
5
<PAGE>
9. The Fund acknowledges that the Administrator may make payments
from the fees paid to it under this Agreement, from past
profits or from any other source available to it to other
persons, including but not limited to Western Asset Management
Company and Legg Mason Wood Walker, Incorporated, for
shareholder, administrative, advisory, recordkeeping and
distribution services provided by such persons in connection
with the Fund's shares.
10. As used in this Agreement, the terms "assignment", "interested
person", and "majority of the outstanding voting securities"
shall have the meanings given to them by Section 2(a) of the
1940 Act, subject to such exemptions as may be granted by the
Securities and Exchange Commission by any rule, regulation or
order.
11. This Agreement will become effective on the date first set
forth above, provided that it shall have been approved by the
Fund's Board of Directors and, unless sooner terminated as
provided for herein, shall continue in effect for two years
from the date of its execution and for successive annual
periods, provided that its continuance is specifically
approved annually by the Fund's Board of Directors, including
a majority of the directors of the Fund who are not parties to
this Agreement or "interested" persons as defined by the 1940
Act, of any such party ("Disinterested Directors") cast in
person at a meeting called for the purpose of voting on such
Agreement.
This Agreement is terminable without penalty by Western Asset,
by vote of the Fund's Board of Directors, by vote of a
majority (as defined in the 1940 Act) of the outstanding
voting securities of the Fund or by the Administrator, on not
less than 60 days' notice to the other party and may be
terminated immediately upon the mutual written consent of the
Administrator and the Fund. This Agreement will automatically
and immediately terminate in the event of its assignment.
12. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in
writing signed by
6
<PAGE>
the party against which enforcement of the change, waiver,
discharge or termination is sought.
13. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
[SEAL] WESTERN ASSET TRUST, INC.
Attest:
By: /s/ Crispina By: /s/ Ilene S. Harker
[SEAL] LEGG MASON FUND ADVISER, INC.
Attest:
By: /s/ Kathi D. Glenn By: /s/ Marie K. Karpinski
7
[KIRKPATRICK & LOCKHART letterhead here]
August 23, 1990
Western Asset Trust, Inc.
117 East Colorado Boulevard
Pasadena, California 91105
Gentlemen:
You have requested our opinion regarding certain matters in connection
with the issuance of shares by Western Asset Trust, Inc. ("Fund"). We have
examined the Fund's Articles of Incorporation filed and recorded on May 16, 1990
with the Office of Taxation and Assessment in Baltimore, Maryland, and other
corporate documents relating to the authorization and issuance of the capital
stock of the Fund. Based upon this examination, we are of the opinion that:
1. All legal requirements have been complied with in the organization of
the Fund and that it is now a validly existing corporation in good
standing under the laws of the State of Maryland;
2. The authorized capital stock of the Fund consists of 5,000,000,000
shares, of a par value of $.001 each;
3. The indefinite number of unissued shares which are currently being
registered under the Securities Act of 1933 may be legally and validly
issued from time to time in accordance with the Fund's Articles of
Incorporation and By-Laws, and subject to compliance with the
Securities Act of 1933, the Investment Company Act of 1940, and
applicable state laws regulating the sale of securities; and
4. When so issued, the Fund's shares will be fully paid and nonassessable.
We hereby consent to the filing of this opinion in connection with Pre-
Effective Amendment No. 2 to the Registration Statement on Form N-1A (File No.
33-34929) which you are about to
<PAGE>
KIRKPATRICK & LOCKHART
Western Asset Trust, Inc.
August 23, 1990
Page 2
file with the Securities and Exchange Commission. We also consent to the
reference to our firm under the caption "The Fund's Legal Counsel" in the
Registration Statement.
Very truly yours,
/s/ Arthur J. Brown
-------------------
Arthur J. Brown
[KIRKPATRICK & LOCKHART letterhead here]
June 25, 1992
Western Asset Trust, Inc.
117 East Colorado Boulevard
Pasadena, California 91105
Ladies and Gentlemen:
You have requested our opinion regarding certain matters in connection
with the issuance of shares by Western Asset Trust, Inc. ("Fund") in three
series designated as the Corporate Securities Portfolio, Mortgage Securities
Portfolio and International Securities Portfolio. We have examined the Fund's
Articles of Incorporation and Articles Supplementary filed and recorded on May
16, 1990 and November 14, 1991, respectively, with the Office of Taxation and
Assessment in Baltimore, Maryland, and other corporate documents relating to the
authorization and issuance of the capital stock of the Fund. Based upon this
examination, we are of the opinion that the indefinite number of unissued shares
which are currently being registered under the Securities Act of 1933 ("Shares")
may be legally issued from time to time in accordance with the Fund's Articles
of Incorporation and By-Laws, and subject to compliance with the Securities Act
of 1933, the Investment Company Act of 1940, and applicable state laws
regulating the sale of securities; and that, when so issued, the Shares will be
fully paid and nonassessable.
We hereby consent to the filing of this opinion in connection with
Post- Effective Amendment No. 4 to the Registration Statement on Form N-1A (File
No. 33-34929) which you are about to file with the Securities and Exchange
Commission. We also consent to the reference to our firm under the caption
"Legal Counsel" in the Registration Statement.
Very truly yours,
/s/ Arthur C. Delibert
----------------------
Arthur C. Delibert
[MUNGER, TOLLES & OLSON letterhead here]
April 25, 1994
Western Asset Trust, Inc.
117 East Colorado Boulevard
Pasadena, California 91105
Re: Western Asset Trust, Inc. -- Short Duration
and Intermediate Duration Portfolio
Ladies and Gentlemen:
You have requested our opinion regarding certain matters in connection
with the issuance of shares of Western Asset Trust, Inc. (the "Fund") in two
series designated as the Short Duration Portfolio and Intermediate Duration
Portfolio. We have examined the Fund's Articles of Incorporation and Articles
Supplementary filed and recorded on May 16, 1990 and November 14, 1991, and
March 29, 1994, respectively, with the Office of Taxation and Assessment in
Baltimore, Maryland, the Fund's Bylaws, resolutions passed by the Fund's Board
of Directors on February 10, 1994, and other corporate documents relating to the
authorization and issuance of the capital stock of the Fund (collectively the
"Other Documents").
Based upon our examination, we are of the opinion that the one hundred
million unissued shares of the Fund which have been classified as shares of the
Short Duration Portfolio, and the one hundred million unissued shares of the
Fund which have been classified as shares of the Intermediate Duration
Portfolio, all of which shares are currently registered under the Securities Act
of 1933 (collectively the "Shares"), may, subject to compliance with the
Securities Act of 1933, the Investment Company Act of 1940, and applicable state
laws regulating the
<PAGE>
MUNGER, TOLLES & OLSON
Western Asset Trust, Inc.
April 25, 1994
Page 2
sale of securities, be legally issued from time to time pursuant to and in
accordance with the Fund's Articles of Incorporation, Articles Supplementary,
Bylaws and the Other Documents; and that the Shares, when so issued and paid
for, will be fully paid and nonassessable.
We hereby consent to the filing of this opinion in connection with
Post- Effective Amendment No. 10 to the Registration Statement on Form N-1A
(File No. 33-34929) which you are about to file with the Securities and Exchange
Commission. We also consent to the reference to our firm under the caption
"Legal Counsel" in the Registration Statement.
Very truly yours,
/s/ Munger, Tolles & Olson
--------------------------
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. 15 to the registration statement on Form N-1A (the
"Registration Statement") of our reports dated July 31, 1997, relating to the
financial statements and financial highlights appearing in the June 30, 1997
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 Statement of
Additional Information constituting part of this Registration Statement of our
report dated October 30, 1997, 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 Prospectuses and under the
headings "Financial Statements" and "Independent Accountants" in the Statements
of Additional Information.
PRICE WATERHOUSE LLP
Linthicum, Maryland
October 30, 1997
Exhibit 13
August 24, 1990
Western Asset Trust, Inc.
117 East Colorado Boulevard
Pasadena, CA 91105
Gentlemen:
Please be advised that the $100,000 worth of shares of Western Asset
Trust, Inc. (consisting of 970 shares of the Full Range Duration Portfolio, 10
shares of the Long Duration Portfolio, 10 shares of the Limited Duration
Portfolio and 1000 shares of the Money Market Portfolio) which we have today
purchased from you were purchased as an investment with no present intention of
redeeming or selling such shares and we do not have any intention of redeeming
or selling such shares.
Very truly yours,
WESTERN ASSET MANAGEMENT COMPANY
/s/ Kent S. Engel
___________________________
Kent S. Engel
Managing Director
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
June 30, 1996 - June 30, 1997 (one year)
Cumulative Total Return
ERV = (112.79 x 1.6731247) - (110.46 x 1.5778921) x 1000 + 1000 = 1082.72
--------------------------------------------
(110.46 x 1.5778921)
P = 1000
C = 1082.72 - 1 = .0827 = 8.27%
------- ----
1000
Average Annual Return: Same
June 30, 1992 - June 30, 1997 (five years)
Cumulative Total Return:
ERV = (112.79 x 1.6731247) - (112.03 x 1.1455422) x 1000 + 1000 = 1470.46
---------------------------------------------
(112.03 x 1.1455422)
P = 1000
C = 1470.46 - 1 = 0.4705 = 47.05%
------- ------
1000
Average Annual Return:
1
---
5
(0.4705 + 1) - 1 = 8.02%
----
September 4, 1990 - June 30, 1997 (life of fund)
Cumulative Total Return:
ERV = (112.79 x 1.6731247) - (100.00 x 1.0) x 1000 + 1000 = 1887.12
--------------------------------------
(100.00 x 1.0)
P = 1000
C = 1887.12 - 1 = 0.8871 = 88.71%
-------- ------
1000
Average Annual Return:
1
------
6.8219
(0.8871 + 1) - 1 = 9.76%
----
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
June 30, 1996 - June 30, 1997 (one year)
Cumulative Total Return
ERV = (107.19 x 1.1699303) - (104.83 x 1.1043494) x 1000 + 1000 = 1083.23
--------------------------------------------
(104.83 x 1.1043494)
P = 1000
C = 1083.23 - 1 = .0832 = 8.32%
-------- ----
1000
Average Annual Return: Same
July 1, 1994 - June 30, 1997 (life of fund)
Cumulative Total Return:
ERV = (107.19 x 1.1699303) - (100.00 x 1.0) x 1000 + 1000 = 1254.05
---------------------------------------
(100.00 x 1.0)
P = 1000
C = 1254.05 - 1 = .2540 = 25.40%
------- -----
1000
Average Annual Return:
1
---
3
(0.2540 + 1) - 1 = 7.83%
----
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
June 30, 1996 - June 30, 1997 (one year)
Cumulative Total Return
ERV = (102.36 x 1.0573901) - (100.76 x 1.0) x 1000 + 1000 = 1074.18
--------------------------------------
(100.76 x 1.0)
P = 1000
C =1074.18 - 1 = .0742 = 7.42%
------- ----
1000
Average Annual Return: Same
May 1, 1996 - June 30, 1997 (life of fund)
Cumulative Total Return
ERV = (102.36 x 1.0573901) - (100.00 x 1.0) x 1000 + 1000 = 1082.34
--------------------------------------
(100.00 x 1.0)
P = 1000
C = 1082.34 - 1 = .0823 = 8.23%
------- ----
1000
Average Annual Return:
1
------
1.6694
(0.0823 + 1) - 1 = 7.01%
----
<PAGE>
WESTERN ASSET TRUST, INC.
INTERNATIONAL SECURITIES PORTFOLIO
June 30, 1996 - June 30, 1997 (one year)
Cumulative Total Return
ERV = (97.65 x 1.4144572) - (95.16 x 1.2864602) x 1000 + 1000 = 1128.27
-----------------------------------------
(95.16 x 1.2864602)
P = 1000
C = 1128.27 - 1 = .1283 = 12.83%
------- -----
1000
Average Annual Return: Same
January 7, 1993 - June 30, 1996 (life of fund)
Cumulative Total Return:
ERV = (97.65 x 1.4144572) - (100.00 x 1.0) x 1000 + 1000 = 1381.22
-------------------------------------
(100.00 x 1.0)
P = 1000
C = 1381.22 - 1 = 0.3812 = 38.12%
------- ------
1000
Average Annual Return:
1
--------
4.479452
(0.3812 + 1) - 1 = 7.47%
----
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000863520
<NAME> WESTERN ASSET TRUST, INC.
<SERIES>
<NUMBER> 1
<NAME> CORE PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 526,323,223
<INVESTMENTS-AT-VALUE> 529,083,194
<RECEIVABLES> 22,219,360
<ASSETS-OTHER> 7,003
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 551,309,557
<PAYABLE-FOR-SECURITIES> 42,614,841
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 342,188
<TOTAL-LIABILITIES> 42,957,029
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 493,023,011
<SHARES-COMMON-STOCK> 4,507,160
<SHARES-COMMON-PRIOR> 4,107,369
<ACCUMULATED-NII-CURRENT> 7,701,659
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