WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
REPORT TO SHAREHOLDERS
FOR THE SIX MONTHS ENDED
DECEMBER 31, 1996
<PAGE>
February 25, 1997
Dear Shareholder:
Enclosed are the mid-year financial statements for the Western Asset
Trust Intermediate Portfolio, covering the period July 1 - December 31, 1996.
Now in its third year of operation, the fund continues to enjoy
positive investment results relative to its benchmark both for this period and
since inception. Total assets have risen to over $190 million, with more than 18
participants.
The principal factors behind the fund's recent good performance, when
it returned 5% (net of all fees) versus the Salomon Brothers' Broad Investment
Grade Medium Term Index's 4.6% return, were its longer than market duration
posture, which was rewarded by declining interest rates, and its emphasis on
corporate and mortgage-backed securities, which profited from a narrowing of
their yield spreads versus other domestic market sectors.
Please feel free to call if you have any questions.
Sincerely,
/s/ W. Curtis Livingston
W. Curtis Livingston
President
Enclosure
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS
December 31, 1996
(Amounts in Thousands)
(Unaudited)
Principal
Amount Value
CORPORATE BONDS AND NOTES - 13.2% ----------- -----------
Banking and Finance - 7.9%
Associates Corporation, North America
8.125% 1/15/98 $ 340 $ 347
Deutsche Bank Financial Incorporated
6.70% 12/13/06 4,000 3,926
Donaldson Lufkin & Jenrette
5.625% 2/15/16 2,500 2,409
Ford Motor Credit Company
6.42% 2/4/98 300 302
5.86% 8/14/98 250 249
6.125% 1/9/06 235 221
General Electric Capital Corporation
7.65% 2/23/98 240 245
General Motors Acceptance Corp.
6.00% 12/7/98 210 209
8.375% 2/3/99 300 312
Lehman Brothers Holdings, Inc.
8.63% 2/26/99 400 417
National Westminster Bancorp
9.375% 11/15/03 290 331
Norwest Corporation
5.75% 11/16/98 100 99
7.65% 3/15/05 280 294
United States Leasing International
8.75% 12/1/01 500 541
Wachovia Capital Trust I(A)
7.64% 1/15/27 2,500 2,485
-----------
12,387
-----------
Food and Beverage - 2.1%
Philip Morris Companies, Inc.
7.125% 10/1/04 2,000 1,990
6.95% 6/1/06 1,350 1,366
-----------
3,356
-----------
2
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
-------------- -----------
CORPORATE BONDS AND NOTES - Continued
Industrial - 2.0%
CSR America, Inc.
6.875% 7/21/05 $ 300 $ 297
TCI Communications, Inc.
6.82% 9/15/10 2,830 2,816
-----------
3,113
-----------
Media and Entertainment - 1.2%
Time Warner Inc.
7.75% 6/15/05 1,800 1,811
-----------
Total Corporate Bonds and Notes
(Identified Cost - $20,591) 20,667
- -------------------------------------------------------------------------------
ASSET-BACKED SECURITIES - 21.8%
Fixed-rate Securities - 18.4%
Bridgestone/Firestone Master Trust
6.17% 7/1/03 2,800 2,786
-----------
Chevy Chase Home Loan Trust
7.15% 5/15/15 1,300 1,312
-----------
Cityscape Home Equity Loan Trust(A)
7.40% 9/25/27 3,000 3,000
-----------
FASCO Auto Trust 1996-BA1(A)
9.05% 3/17/03 2,080 2,134
-----------
Fleet Finance Home Equity Trust
6.70% 10/15/06 1,137 1,143
-----------
Fleetwood Credit Corp. Grantor Trust
8.75% 10/15/04 181 184
-----------
Ford Credit Auto Loan Master Trust
7.375% 4/15/99 220 221
-----------
3
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
-------------- -----------
ASSET-BACKED SECURITIES - Continued
Fixed-rate Securities - Continued
Guaranteed Export Certificates
6.13% 6/15/04 $ 1,765 $ 1,750
-----------
Lehman FHA Title I Loan Trust
7.71% 8/25/17 2,447 2,495
-----------
Lehman Home Improvement Loan Trust
8.65% 7/25/17 35 36
-----------
Mego Mortgage FHA Title I Loan Trust
6.55% 9/25/07 777 778
7.275% 9/25/16 1,447 1,455
-----------
2,233
-----------
Merrill Lynch Mortgage Investors, Inc.
9.70% 6/15/08 1,000 1,038
9.65% 9/15/10 1,750 1,891
-----------
2,929
-----------
NAL Auto Trust(A)
7.30% 12/15/00 1,899 1,902
-----------
Olympic Automobile Receivables Trust
7.875% 7/15/01 542 552
-----------
Sears Credit Account Master Trust
6.25% 1/15/03 350 351
-----------
Security Pacific Home Equity Loan
8.10% 6/15/20 104 104
-----------
Standard Credit Card Master Trust
5.50% 2/7/00 150 148
5.90% 2/7/01 190 189
6.55% 10/7/07 2,000 1,965
-----------
2,302
-----------
4
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
-------------- -----------
ASSET-BACKED SECURITIES - Continued
Fixed-rate Securities - Continued
World Financial Network Credit Card Master
Trust
6.95% 4/15/06 $ 2,050 $ 2,082
-----------
World Omni Automobile Lease Securitization
Trust
6.05% 11/25/01 1,419 1,421
-----------
Variable-rate Securities(B) - 0.7%
U.S. Home Equity Loan Certificates
9.125% 4/15/21 1,000 1,014
-----------
Stripped Securities(C) - 0.8%
Option One CTS Arm Trust
3.039%(1) 3/25/01 4,603 239
-----------
Citibank Credit Card Master Trust I
0%(2) 2/7/03 1,300 1,000
-----------
Indexed Security(D) - 1.9%
Lehman Home Equity Loan Trust
5.847% 12/15/27 3,000 3,000
-----------
Total Asset-backed Securities
(Identified Cost - $34,085) 34,190
- -------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES - 18.7%
Fixed-rate Securities - 12.1%
Asset Securitization Corporation
6.72% 11/12/26 3,000 3,025
-----------
Citicorp Mortgage Securities, Inc.
9.00% 6/1/02 2,093 2,116
-----------
5
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
-------------- -----------
MORTGAGE-BACKED SECURITIES - Continued
Fixed-rate Securities - Continued
Criimi Mae Trust 1(A)
6.77% 5/30/98 $ 1,400 $ 1,396
-----------
DLJ Mortgage Acceptance Corporation
6.86% 11/12/21 1,994 2,006
-----------
Metropolitan Asset Funding, Inc.
6.05% 11/20/01 2,000 1,992
6.95% 8/20/08 2,278 2,250
-----------
4,242
-----------
Resolution Trust Corporation
7.75% 12/25/18 247 247
8.40% 7/25/24 1,308 1,314
-----------
1,561
-----------
Structured Asset Securities Corp.
6.60% 10/25/24 1,919 1,916
7.75% 2/25/28 2,645 2,679
-----------
4,595
-----------
Variable-rate Securities(B) - 5.9%
Housing Securities, Inc.(A)
5.988% 11/25/26 913 902
-----------
Merrill Lynch Mortgage Investors, Inc.
6.69% 11/21/28 1,993 1,992
-----------
6
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
-------------- -----------
MORTGAGE-BACKED SECURITIES - Continued
Variable-rate Securities(B) - Continued
Resolution Trust Corporation
5.965% 7/25/20 $ 85 $ 84
8.765% 3/25/21 2,190 2,247
6.963% 6/25/24 600 588
10.806% 1/25/25 365 374
6.157% 1/25/27 720 706
7.981% 9/25/29 140 140
8.29% 9/25/29 922 943
7.339% 12/25/29 1,193 1,173
-----------
6,255
-----------
Securitized Asset Sales Series 1994
Class A3
6.933% 8/25/33 81 81
-----------
Stripped Securities(C) - 0.4%
CMC Securities Corp.
0%(2) 2/25/09 602 433
-----------
Securitized Asset Sales Series 1995 - 6
0%(2) 12/25/10 352 244
-----------
Indexed Securities(D) - 0.3%
Resolution Trust Corporation
6.525% 9/25/21 543 534
-----------
Total Mortgage-backed Securities
(Identified Cost - $29,403) 29,382
- -------------------------------------------------------------------------------
7
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
-------------- -----------
U.S. GOVERNMENT OBLIGATIONS - 27.9%
United States Treasury Notes
6.125% 8/31/98 to 12/31/01 $ 20,000 $ 19,982
5.875% 3/31/99 to 11/15/99 2,450 2,441
6.50% 4/30/99 1,980 2,004
6.375% 5/15/99 to 9/30/01 7,540 7,591
6.875% 3/31/00 to 5/15/06 7,240 7,450
6.625% 7/31/01 1,280 1,300
7.00% 7/15/06 2,870 2,982
-----------
Total U.S Government Obligations
(Identified Cost - $43,575) 43,750
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - 12.6%
Fixed-rate Securities - 10.5%
Federal Home Loan Mortgage Corporation
8.50% 7/1/06 218 224
6.50% 1/1/12(F) 6,200 6,088
7.76% 5/1/12 418 422
6.50% 6/1/13 to 11/1/15 1,828 1,772
7.50% 4/1/17 445 453
9.30% 4/15/19 1,443 1,601
-----------
10,560
-----------
Federal National Mortgage Association
8.50% 2/1/08 931 970
6.50% 6/1/14 1,828 1,772
8.00% 12/1/14 1,231 1,271
7.00% 1/1/26 895 875
-----------
4,888
-----------
Government National Mortgage Association
9.50% 9/15/05 398 420
9.00% 6/15/06 412 428
-----------
848
-----------
8
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
-------------- -----------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - Continued
Variable-rate Securities(B) - 1.9%
Federal Home Loan Mortgage Corporation
6.692% 1/1/19 $ 124 $ 123
-----------
Federal National Mortgage Association
6.191% 3/1/18 225 221
-----------
Government National Mortgage Association
6.50% 1/20/25 2,611 2,669
-----------
Stripped Securities(C) - 0.2%
Federal Home Loan Mortgage Corporation
10.00%(1) 3/1/21 299 82
-----------
Federal National Mortgage Association
0%(2) 5/25/22 370 296
-----------
Total U.S. Government Agency Mortgage-backed
Securities
(Identified Cost - $19,478) 19,687
- -------------------------------------------------------------------------------
YANKEE BONDS(E) - 3.7%
Fixed-rate Securities - 2.7%
Hydro - Quebec
7.74% 2/26/99 350 360
Province de Quebec
8.625% 1/19/05 1,000 1,119
5.67%(G) 2/27/26 1,100 1,086
YPF Sociedad Anonima
7.50% 10/26/02 1,735 1,754
-----------
4,319
-----------
9
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
-------------- -----------
YANKEE BONDS(E) - Continued
Indexed Security(D) - 1.0%
United Mexican States(A)
7.563% 8/6/01 $ 1,500 $ 1,503
----------
Total Yankee Bonds
(Identified Cost - $5,788) 5,822
- -------------------------------------------------------------------------------
Shares
--------------
COMMON STOCKS - 2.5%
Blackrock 1999 Term Trust, Inc. 10 89
Blackrock 2001 Term Trust, Inc. 490 3,860
-----------
Total Common Stocks
(Identified Cost - $3,945) 3,949
- -------------------------------------------------------------------------------
Principal
Amount
--------------
SHORT-TERM INVESTMENTS - 3.6%
Corporate - 0.2%
General Motors Acceptance Corp.
7.45% 6/5/97 340 342
-----------
10
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
-------------- -----------
SHORT-TERM INVESTMENTS - Continued
U. S. Government Obligation - 0.2%
United States Treasury Bill
5.35% 1/9/97 $ 250 $ 250(H)
-----------
Repurchase Agreement - 3.2%
J.P. Morgan Securities, Inc.
6.80% dated 12/31/96, to be
repurchased at $5,078 on 1/2/97
(Collateral: $4,770 Federal
National Mortgage Association
Medium-term note, 8.55% due
8/30/99, value, $5,342) 5,076 5,076
-----------
Actual
Contracts
--------------
Option Purchased - N.M.
Eurodollar Future Call
March 97 Strike Price $94.25 80 14
-----------
Total Short-term Investments
(Identified Cost - $5,712) 5,682
- -------------------------------------------------------------------------------
Total Investments - 104.0%
(Identified Cost - $162,577) $ 163,129
===============================================================================
11
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Expiration Actual Appreciation/
Date Contracts (Depreciation)
OPTIONS WRITTEN
Eurodollar Call
Strike Price $94.75 March 97 80 $ 8
-----
FUTURES CONTRACTS SOLD
Treasury Bond Future March 97 25 41
-----
(A) Rule 144a Security - A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified buyers.
(B) The coupon rate shown on variable rate securities are the rates at December
31, 1996. These rates vary with the weighted average coupon of the
underlying loans.
(C) Stripped Security - A security with interest-only or principal-only payment
streams, denoted by the superscript 1 or 2, respectively. For interest-only
securities, the amount shown as principal is the notional balance used to
calculate the amount of interest due.
(D) Indexed Security - The rate of interest earned on these securities is tied
to an index such as the Cost of Funds Index (COFI) or London Interbank
Offered Rate (LIBOR). The coupon rate shown is the rate at December 31,
1996.
(E) Yankee Bond - Dollar denominated bond issued in the U.S. by foreign
entities.
(F) When-issued Security - Security purchased on a delayed delivery basis.
Final settlement amount and maturity date have not yet been announced.
(G) The rate of interest earned on this security is fixed at 5.67% until
February 2001 and is 7.14% thereafter.
(H) Collateral to cover futures sold.
N.M. Not Meaningful
- ----------
See notes to financial statements.
12
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
STATEMENT OF ASSETS AND LIABLITIES
December 31, 1996
(Unaudited)
Assets
Investments at value (Identified Cost - $162,576,932) $163,128,898
Receivable for:
Investments sold 4,421,953
Fund shares sold 709
Futures variation margin 31,250
Interest receivable 1,363,851
Dividends receivable 16,496
Other assets 45,002
---------------
Total assets 169,008,159
Liabilities
Payable for investments purchased 12,021,015
Options written, at market (premiums received $11,400) 3,000
Due to adviser and administrator 43,439
Accrued expenses 18,285
---------------
Total liabilities 12,085,739
---------------
Net assets $156,922,420
===============
Analysis of Net Assets
Common stock at par value $.001 per share,
authorized 100,000,000 shares: issued
and outstanding 1,486,633 shares $ 1,487
Accumulated paid-in capital 155,673,694
Undistributed net investment income 58,555
Undistributed net realized gain on investments,
options and futures 587,100
Unrealized appreciation of investments,
options and futures 601,584
---------------
Net assets $156,922,420
===============
Net asset value, offering price, and redemption
price per share $105.56
=======
See notes to financial statements.
13
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 1996
(Unaudited)
<TABLE>
<S> <C>
Investment Income:
Interest $4,173,997
Dividends 25,580
----------
$4,199,577
Expenses:
Advisory fee 219,370
Administrative fee 31,338
Custodian fee 47,600
Legal and audit fees 21,365
Registration fees 16,330
Directors' fees 7,643
Organizational expense 6,222
Transfer agent and shareholder servicing expense 530
Reports to shareholders 90
Other expenses 432
----------
350,920
Less fees waived (65,175)
----------
Total expenses, net of waivers and reimbursements 285,745
--------------
Net Investment Income 3,913,832
Net Realized and Unrealized Gain on Investments:
Realized gain on investments, options and futures 1,397,167
Unrealized appreciation of investments options and futures 1,100,397
----------
Net Realized and Unrealized Gain on Investments 2,497,564
--------------
Increase in Net Assets Resulting from Operations $6,411,396
==============
</TABLE>
- ----------
See notes to financial statements.
14
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
Six Months Ended Year Ended
December 31, 1996 June 30, 1996
-------------------------- --------------------
(Unaudited)
<S> <C>
Increase in Net Assets:
Net investment income $ 3,913,832 $ 2,179,679
Net realized gain on investments, options and futures 1,397,167 466,746
Change in unrealized appreciation of investments 1,100,397 (933,466)
---------------- ----------------
Increase in net assets resulting from operations 6,411,396 1,712,978
Distributions to shareholders from:
Net investment income (4,773,465) (1,526,827)
Net realized gain on investments (993,329) (619,788)
Increase in net assets from Fund share transactions 90,198,755 46,199,309
---------------- ----------------
Increase in net assets 90,843,357 45,765,672
Net Assets:
Beginning of period 66,079,063 20,313,391
---------------- ----------------
End of period (including undistributed
net investment income of $58,555
and $918,187 respectively) $ 156,922,420 $ 66,079,063
================ ================
</TABLE>
- ----------
See notes to financial statements.
15
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data for a share of
common stock outstanding throughout each period shown, total investment return,
ratios to average net assets and other supplemental data. This information has
been derived from information in the financial statements.
<TABLE>
<CAPTION> For The
For the Years Ended
Six Months Ended June 30,
December 31, -----------------------------
1996 1996 1995
---------------------- ------------- -----------
(Unaudited)
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 104.83 $ 107.36 $ 100.00
------------------------------------------------
Net investment income(A) 2.37 5.41 3.86
Net realized and unrealized gain (loss) on investments,
options and futures 2.86 (0.06) 6.02
------------------------------------------------
Total from investment operations 5.23 5.35 9.88
------------------------------------------------
Distributions to shareholders from:
Net investment income (3.79) (5.35) (2.47)
Net realized gain on investments (0.71) (2.53) (0.05)
------------------------------------------------
Total distributions (4.50) (7.88) (2.52)
------------------------------------------------
Net asset value, end of period $ 105.56 $ 104.83 $ 107.36
================================================
Total return(A) 5.03%(B) 5.15% 10.08%
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets::
Expenses(A) .46%(C) .50% .50%
Net investment income(A) 6.24%(C) 6.28% 6.11%
Portfolio turnover rate 125.13%(C) 841.89% 764.45%
Net assets, end of period (in thousands) $ 156,922 $ 66,079 $ 20,313
</TABLE>
- ----------
(A) Net of investment advisory and administrative fees waived pursuant to a
voluntary expense limitation of 0.50% to August 5, 1996 and 0.45%
thereafter.
(B) Not annualized
(C) Annualized
See notes to financial statements.
16
<PAGE>
WESTERN ASSET TRUST, INC.
INTERMEDIATE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies:
The Western Asset Trust, Inc. ("Corporation") is registered under the Investment
Company Act of 1940, as amended. The Western Asset Trust Intermediate Portfolio
("Fund"), formerly known as Western Asset Trust Intermediate Duration Portfolio,
a diversified, open-end management investment company, is one of the portfolios
established by the Corporation. The Fund was organized on May 16, 1990 and had
no operations prior to July 1, 1994, other than those related to organizational
matters.
Security Valuation
Portfolio securities are valued based upon market quotations. When market
quotations are not readily available, securities are valued based on prices
received from recognized broker-dealers in the same or similar securities. The
amortized cost method of valuation is used for debt obligations with 60 days or
less remaining to maturity.
Options and Futures
The current market value of a traded option is the last sale price or, in the
absence of a sale, the mean between the closing bid and asked price. Futures
contracts are marked-to-market on a daily basis. As the contract's value
fluctuates, payments known as variation margin are made to or received from the
futures commission merchant.
Dividends to Shareholders
Net investment income for dividend purposes is recorded on the accrual basis and
consists of interest income less expenses. Bond premium and original issue
discount are amortized for financial reporting and tax purposes using the
effective interest method over the period to maturity of the security and serve
to reduce or increase interest income.
Security Transactions
Security transactions are recorded on the trade date. Realized gains and losses
from security transactions are reported on an identified cost basis.
Deferred Organizational Expense
Deferred organizational expenses of $53,920 are being amortized on a
straight-line basis through June 1999.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
1. Significant Accounting Policies - continued
Federal Income Taxes
No provision for federal income or excise taxes is required since the Fund
intends to continue to qualify as a regulated investment company and distribute
all of its taxable income to its shareholders.
Use of Estimates
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
2. Financial Instruments:
As part of the Fund's investment program, the Fund utilizes repurchase
agreements, options and futures contracts. The nature and risk of these
financial instruments and the reasons for using them are set forth more fully in
the Corporation's Prospectus and Statement of Additional Information.
Repurchase Agreements
All repurchase agreements are fully collateralized by obligations issued by the
U.S. Government or its agencies and such collateral is in the possession of the
Fund's custodian. Risks arise from the possible delay in recovery or potential
loss of rights in the collateral should the issuer of the repurchase agreement
fail financially.
Option Transactions
A call option gives the option holder the right to purchase the underlying
security at a specified price until a specified date. A put option gives the
option holder the right to sell the underlying security at a specified price
until a specified date. Risks arise from the possible illiquidity of the options
market and from movements in security values. Call and put options written by
the Fund and related premiums received during the period are as follows:
<TABLE>
<CAPTION>
Calls Puts
------------------------ -----------------------
Contracts Premiums Contracts Premiums
------------------------ -----------------------
<S> <C>
Options outstanding at June 30, 1996 - - - -
Options written 352 $ 80,611 6,186 $ 68,933
Options closed (266) (67,006) (6,186) (68,933)
Options expired - - - -
Options exercised (6) (2,205) - -
- ------------------------------------------------------------------- -------------------------
Options outstanding at December 31, 1996 80 $ 11,400 - $ -
=================================================================== =========================
</TABLE>
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
2. Financial Instruments - continued
Futures
The fund has entered into futures contracts in connection with its interest rate
management strategy. Risks arise from the possible illiquidity of the futures
market and from the possibility that a change in the value of a contract may not
correlate with changes in interest rates. The open long and short futures
positions and related appreciation or depreciation at December 31, 1996 are
described at the end of the "Portfolio of Investments", page 12.
3. Portfolio Transactions:
Purchases and sales of portfolio securities (excluding short-term, U.S.
Government securities, written and purchased options and futures contracts) for
the six months ended December 31, 1996, aggregated $144,206,382 and $88,239,874,
respectively. Purchases and sales of U.S. Government securities aggregated
$261,261,265 and $229,549,871, respectively for the same period.
At December 31, 1996, the cost of securities for federal income tax purposes was
$162,576,932. Aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost was $1,006,555 and aggregate
gross unrealized depreciation for all securities in which there was an excess of
tax cost over value was $454,589.
4. Fund Share Transactions:
At December 31, 1996, there were 100,000,000 Fund shares authorized at $.001 par
value. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
For the For the
Six Months Ended Year Ended
December 31,1996 June 30, 1996
------------------------------------ ---------------------------------
Shares Amount Shares Amount
------------------------------------ ---------------------------------
<S> <C>
Sold 1,220,145 $89,819,783 478,708 $50,184,057
Reinvestment of distributions 53,933 5,730,095 20,430 2,145,317
Repurchased (417,802) (5,351,123) (57,990) (6,130,066)
- --------------------------------------------------------------------- ---------------------------------
Net increase 856,276 $90,198,755 441,148 $46,199,308
====================================================================== =================================
</TABLE>
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
5. Transactions with Affiliates:
The Fund has an administration agreement with Legg Mason Fund Adviser, Inc.
("Administrator"), a corporate affiliate of Legg Mason Wood Walker, Incorporated
("Legg Mason"), a member of the New York Stock Exchange and the distributor for
the Fund. Under this agreement, the Administrator provides the Fund with
administrative services for which the Fund pays a fee at an annual rate of 0.05%
of average daily net assets of the Fund. At December 31, 1996, $6,611 was due to
the Administrator.
Western Asset Management Company ("Adviser"), a corporate affiliate of the
Administrator and Legg Mason, serves as investment adviser to the Fund. The
Adviser is responsible for the actual investment activity of the Fund, for which
the Fund pays a fee at an annual rate of 0.35% of average daily net assets of
the Fund. The Adviser has voluntarily agreed to indefinitely waive its fees and
reimburse the Fund to the extent necessary to limit the total expenses to an
annual rate of 0.45% of the Fund's average daily net assets. Pursuant to this
agreement, advisory fees of $65,175 were waived, and $36,828 was due to the
Adviser at December 31, 1996.
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