February 25, 1998
Dear Shareholder
Enclosed are the mid-year financial statements for the Western Asset Trust Core
Portfolio, covering the period July 1 - December 31, 1997.
Now in its eighth 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 $620 million, with more than 60
participants.
The principal factors behind the fund's recent good performance, when it
returned 7.2% (net of all fees) versus the broad market's 6.4% return, were its
longer than market duration posture, which was rewarded by declining interest
rates and its barbelled exposure to maturities, which benefited from a
pronounced flattening of the yield curve. Corporate issue selection, with an
emphasis on the cable and media sector, and mortgage exposure, which focussed on
discount coupons, were also factors contributing to positive nominal and
relative returns.
Please feel free to call if you have any questions.
Sincerely,
/s/ W. Curtis Livingston
________________________
W. Curtis Livingston
President
Enclosure
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
REPORT TO SHAREHOLDERS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S><C>
CORPORATE BONDS AND NOTES 11.67%
BANKING AND FINANCE 2.57%
BNY Capital Trust 7.97% 12/31/26 $5,000 $5,322
Ford Motor Credit 6.55% 09/10/02 2,735 2,768
General Motors Acceptance Corp. 0.00% 06/15/15 14,900 4,734(A)
Grand Metro Investment 8.625% 08/15/01 150 161
J.P. Morgan - Inflation Linked Notes 5.543% 02/15/12 2,000 1,912(F)
J.P. Morgan Capital Trust 7.95% 02/01/27 1,000 1,058
--------------
15,955
FOOD, BEVERAGE AND TOBACCO 1.74%
Phillip Morris Companies, Inc. 8.75% 06/01/01 100 107
Phillip Morris Companies, Inc. 7.00% 07/15/05 2,000 2,039
RJR Nabisco, Inc. 8.75% 04/15/07 320 343
RJR Nabisco, Inc. 8.50% 08/15/05 800 853
RJR Nabisco, Inc. 8.75% 07/15/07 2,100 2,266
RJR Nabisco, Inc. 8.75% 07/01/07 4,770 5,173
--------------
10,781
INDUSTRIAL 4.06%
Continental Cablevision 9.00% 09/01/08 3,200 3,697
Loews Corporation 7.625% 06/01/23 8,459 8,698
TCI Communications Incorporated 8.75% 08/01/15 8,360 9,689
Texaco Capital Inc 7.75% 02/15/33 3,000 3,120
--------------
25,204
MEDIA AND ENTERTAINMENT 1.05%
News America Holdings Incorporated 8.25% 10/17/96 4,100 4,464
Time Warner Entertainment Incorporated 6.85% 01/15/26 2,000 2,047
--------------
6,511
OIL AND GAS 0.17%
Phillips Petroleum Company 8.49% 01/01/23 1,000 1,078
TELEPHONE 0.90%
U.S West Capital Funding, Inc. 7.900% 02/01/27 5,120 5,603
</TABLE>
2
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S><C>
UTILITIES 1.18%
Cleveland Electric and Illuminating Company 7.88% 11/01/17 $4,450 $4,679(G)
System Energy Resources, Inc. 7.43% 01/15/11 2,639 2,660
--------------
7,339
Total Corporate Bonds and Notes
(Identified Cost - $67,700) 72,471
- ------------------------------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT AND AGENCY OBLIGATIONS 35.23%
FIXED-RATE SECURITIES 30.34%
United States Treasury Bonds 6.00% 02/15/26 9,850 9,838
United States Treasury Bonds 6.625% 02/15/27 48,730 52,902
United States Treasury Bonds 6.375% 08/15/27 58,100 61,277
United States Treasury Bonds 6.125% 11/15/27 1,500 1,541
United States Treasury Notes 6.875% 05/15/06 180 193
United States Treasury Notes 6.625% 07/31/01 50 51
United States Treasury Notes 6.625% 03/31/02 1,280 1,321
United States Treasury Notes 6.625% 05/15/07 18,870 19,973
United States Treasury Notes 6.375% 09/30/01 13,100 13,370
United States Treasury Notes 6.125% 08/15/07 1,300 1,336
United States Treasury Notes 6.00% 06/30/99 11,000 11,055
United States Treasury Notes 5.875% 09/30/02 8,050 8,094
United States Treasury Notes 5.75% 10/31/02 4,650 4,654
United States Treasury Notes 5.75% 11/30/02 2,600 2,602
United States Treasury Notes 5.75% 08/15/03 200 200
United States Treasury Notes 5.625% 11/30/00 30 30
--------------
188,437
INDEXED SECURITIES 4.35%
United States Treasury Notes 3.375% 01/15/07 27,764 27,035(E)
STRIPPED SECURITIES 0.54%
Resolution Funding Corporation 0.00% 10/15/19 10,000 2,631(D,2)
Tennessee Valley Authority 0.00% 11/01/19 3,064 740(D,2)
--------------
3,371
Total U.S. Government and Agency Obligations
(Identified Cost - $215,000) 218,843
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S><C>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES 22.28%
FIXED-RATE SECURITIES 21.23%
Fannie Mae 6.00% 10/01/11 $323 $319
Fannie Mae 6.00% 01/01/26 1,984 1,917
Fannie Mae 6.00% 03/01/26 11,866 11,440
Fannie Mae 7.00% 12/01/27 7,000 7,050(H)
Fannie Mae 7.50% 07/01/27 198 203
Fannie Mae 7.50% 07/01/27 196 200
Fannie Mae 7.00% 01/01/27 1,959 1,977
Fannie Mae 7.00% 01/01/27 1,154 1,165
Fannie Mae 7.00% 01/01/27 992 999
Fannie Mae 7.00% 03/01/27 2,477 2,494
Fannie Mae 7.00% 03/01/27 2,281 2,297
Fannie Mae 7.00% 03/01/27 3,969 3,998
Fannie Mae 7.00% 03/01/27 1,001 1,010
Fannie Mae 7.00% 03/01/27 1,804 1,817
Fannie Mae 7.00% 03/01/27 1,993 2,008
Fannie Mae 7.00% 03/01/27 2,004 2,019
Fannie Mae 7.00% 03/01/27 958 967
Fannie Mae 7.00% 03/01/27 1,000 1,007
Fannie Mae 7.00% 04/01/27 2,732 2,751
Fannie Mae 7.00% 03/01/27 1,991 2,010
Fannie Mae 6.00% 11/01/27 497 479
Fannie Mae 6.00% 11/01/27 994 958
Fannie Mae 6.00% 11/01/27 2,982 2,874
Fannie Mae 5.758% 01/01/28 12,700 12,541(H)
Federal Housing Authority USGI #68 7.43% 03/01/21 295 301
Federal Home Loan Bank 7.10% 02/28/11 500 494
Freddie Mac 9.75% 07/01/08 379 401
Freddie Mac 9.30% 04/15/19 2,280 2,447
Freddie Mac 9.25% 06/01/02 134 141
Freddie Mac 8.25% 08/01/01 29 30
Freddie Mac 7.50% 04/01/06 140 144
Freddie Mac 7.00% 04/01/24 3,319 3,362
Freddie Mac 7.00% 04/01/24 3,769 3,821
Freddie Mac 7.00% 09/01/25 8,103 8,205
Freddie Mac 7.00% 03/01/26 2,648 2,677
Freddie Mac 7.00% 04/01/26 2,836 2,867
</TABLE>
4
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S><C>
Freddie Mac 7.00% 04/01/26 $760 $768
Freddie Mac 7.00% 04/01/26 3,944 3,987
Freddie Mac 7.00% 01/01/27 9,705 9,811
Freddie Mac 6.75% 10/15/05 395 395
Freddie Mac 6.75% 05/01/04 182 183
Freddie Mac 6.50% 03/01/26 6,466 6,403
Government National Mortgage Association 9.50% 03/15/03 133 139
Government National Mortgage Association 10.25% 06/15/03 25 26
Government National Mortgage Association 10.00% 11/15/09 8 9
Government National Mortgage Association 6.875% 12/20/21 872 898
Government National Mortgage Association 7.00% 02/20/22 1,396 1,437
Government National Mortgage Association 7.00% 01/15/24 203 206
Government National Mortgage Association 7.00% 01/15/24 186 188
Government National Mortgage Association 7.00% 01/15/24 617 624
Government National Mortgage Association 7.00% 01/15/24 77 78
Government National Mortgage Association 7.00% 01/15/24 866 875
Government National Mortgage Association 7.00% 01/15/24 22 22
Government National Mortgage Association 7.00% 01/15/24 874 884
Government National Mortgage Association 8.00% 10/15/26 987 1,023
Government National Mortgage Association 8.00% 11/15/26 9,327 9,668
Government National Mortgage Association 8.00% 01/15/27 949 984
Government National Mortgage Association 8.00% 02/15/27 3,737 3,873
--------------
131,871
VARIABLE-RATE SECURITIES 0.28%
Government National Mortgage Association 7.375% 06/20/25 1,665 1,714(C,F)
STRIPPED SECURITIES 0.78%
Fannie Mae 1009.5% 02/25/20 1 1(D,1)
Fannie Mae 9.50% 02/01/17 297 82(D,1)
Fannie Mae 1009.3% 08/25/21 14 406(D,1)
Fannie Mae 0.00% 05/25/22 913 873(D,2)
Fannie Mae 0.00% 05/25/22 1,948 1,444(D,2)
Freddie Mac 10.000% 03/21/21 2,491 709(D,1)
Freddie Mac 0.00% 07/15/22 406 320(D,2)
Freddie Mac 0.00% 09/15/22 1,045 998(D,2)
--------------
4,833
Total U.S. Government Agency Mortgage-backed Securities
(Identified Cost - $134,624) 138,418
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S><C>
ASSET-BACKED SECURITIES 8.97%
FIXED-RATE SECURITIES 3.36%
Automobile Information Receivable 6.53% 10/30/01 $1,311 $1,314(G)
Chevy Chase 1997-A 7.65% 12/20/07 8,702 8,793
Fleet Finance Home Equity Trust 6.70% 10/15/06 29 29
Lehman FHA Title 1 Loan Trust 6.84% 02/25/04 95 95
Midstate Trust II Class A-4 9.625% 04/01/03 700 753
Navistar Financial Corp Owner Trust 6.35% 01/15/00 2,236 2,241
Rural Housing Trust 1987-1 3.33% 10/01/28 38 37
Saks Master Trust 1996-1 A 6.199% 03/20/02 3,000 3,003
Tyron Mortgage Funding, Inc. 6.35% 05/20/01 47 47
Union Acceptance Corporation 6.70% 06/10/03 4,500 4,544
--------------
20,856
INDEXED SECURITIES 5.50%
Advanta Credit Card Master Trust 6.138% 01/01/05 6,000 5,998(F)
Discover Card Master Trust 5.724% 04/17/07 2,500 2,491(F)
Keycorp Student Loan Trust 6.06% 11/27/28 6,191 6,123(F)
GE Capital Corporation Commercial Mortgage 5.946% 06/21/06 1,365 1,365(F)
Student Loan Marketing Association 5.656% 10/25/04 3,811 3,792(F)
Student Loan Marketing Association 5.74% 04/25/06 5,760 5,753(F)
Student Loan Marketing Association 5.876% 07/27/09 3,700 3,682(F)
Student Loan Marketing Association 5.988% 10/25/12 5,000 4,938(F)
--------------
34,142
STRIPPED SECURITIES 0.12%
Option One CTS Arm Trust 3.050% 03/25/01 25,950 742(D,1)
Total Asset-backed Securities
(Identified Cost - $56,880) 55,740
- ------------------------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 10.67%
FIXED-RATE SECURITIES 8.22%
Asset Securitization Corp. 6.92% 02/14/29 8,233 8,457
Chase Commercial Mortgage Securities 7.37% 02/19/07 3,676 3,853(G)
FMAC Loan Receivables Trust 7.35% 04/01/19 195 201(G)
GMAC Commercial Mortgage Securities 6.869% 08/15/07 5,700 5,823
Macerich SCG Funding Limited Partnership 7.08% 03/15/06 6,000 6,092(G)
Merrill Lynch Mortgage Investors, Inc. 6.96% 11/21/28 15,010 15,474
Merrill Lynch Mortgage Investors, Inc. 6.69% 11/21/28 114 115
Nomura Asset Securities Corporation 7.12% 04/13/36 4,500 4,695
</TABLE>
6
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S><C>
Nomura Asset Securities Corporation 7.07% 04/13/36 $2,880 $2,970
Onyx Acceptance Grantor Trust 6.45% 12/15/02 113 114
Resolution Trust Corporation 9.20% 06/25/24 3,258 3,277
--------------
51,071
VARIABLE-RATE SECURITIES 2.40%
Resolution Trust Corporation 10.352% 08/25/21 228 238(C)
Resolution Trust Corporation 7.97% 09/25/29 1,706 1,703(C)
Resolution Trust Corporation 7.80% 11/25/21 19 19(C)
Resolution Trust Corporation 7.342% 10/25/28 207 205(C)
Resolution Trust Corporation 7.016% 06/25/24 8,000 8,070(C)
Resolution Trust Corporation 6.90% 10/25/21 3,303 3,333(C)
Resolution Trust Corporation 6.816% 05/25/21 1,270 1,273(C)
Resolution Trust Corporation 6.484% 10/25/17 89 88(C)
--------------
14,929
INDEXED SECURITIES 0.03%
Prudential Securities Financing Corp. 6.375% 04/25/26 131 132(F)
Resolution Trust Corporation 7.94% 09/25/21 84 85(F)
--------------
217
STRIPPED SECURITIES 0.01%
Structured Mortgage Asset Residential Trust 2500% 08/25/22 1 22(D,1)
Structured Mortgage Asset Residential Trust 0.136% 01/25/23 25,140 47(D,2)
--------------
69
Total Mortgage-backed Securities
(Identified Cost - $54,852) 66,286
- ------------------------------------------------------------------------------------------------------------------------------
YANKEE BONDS 1.02%
FIXED-RATE SECURITIES
Hydro Quebec 8.05% 07/07/24 200 230(B)
Korea Development Bank 8.65% 01/26/00 2,910 2,740(B)
Korea Development Bank 7.90% 02/01/02 555 468(B)
YPF Sociedad Anonima 7.50% 10/26/02 2,829 2,874(B)
Total Yankee Bonds
(Identified Cost $6,255) 6,312
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND EQUITY INTERESTS 3.91%
Black Rock 2001 Term Trust, Inc. 2,130 shrs 18,374
Home Ownership Funding 4 4,359(G)
</TABLE>
7
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S><C>
News Corp Exchange Trust 5.00% 11/12/16 1,820 shrs $1,180
News Corp Exchange Trust 18 wts 404
Total Common Stocks and Equity Interests
(Identified Cost - $23,350) 24,317
- -------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 8.47%
COMMERCIAL PAPER 1.77%
Levi Strauss 6.12% 01/02/98 $4,000 3,999
Nabisco 6.12% 01/15/98 4,000 3,990
Nissan 5.84% 01/02/98 3,000 3,000
--------------
10,989
CORPORATE 0.03%
Consumers Energy Company 8.75% 02/15/98 100 100
Coca-Cola Company 7.875% 09/15/98 100 101
--------------
201
MORTGAGE-BACKED SECURITIES 0.03%
Fannie Mae 8.00% 11/01/98 77 77
Fannie Mae 8.00% 11/01/98 118 119
--------------
196
U.S. GOVERNMENT AGENCY OBLIGATIONS 0.44%
United States Treasury Bills 5.23% 03/05/98 2,750 2,725
REPURCHASE AGREEMENT 6.18%
Merrill Lynch Securities, Inc.
6.60% dated 12/31/97, to be repurchased at $38,380 on
1/2/98 (Collateral: $38,895 Fannie Mae Mortgage-backed
securities, 6.58% due 12/17/07, value $39,238) 38,366 38,366
ACTUAL
OPTIONS PURCHASED 0.02% CONTRACTS
----------
Eurodollar Futures, April 98 Call, Strike Price $94.00 48 29
Eurodollar Futures, June 98 Call, Strike Price $94.25 302 109
------------
138
Total Short-Term Investments
(Identified Cost - $52,588) 52,615
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S><C>
Total Investments (Identified Cost - $620,753) 102.22% $635,002
Other Assets Less Liabilities -2.22% (13,819)
-------------
NET ASSETS CONSISTING OF:
Accumulated paid-in-capital applicable to
5,443 shares outstanding $600,159
Overdistribution of net investment income (1,921)
Undistributed net realized gain on investments 8,988
Unrealized appreciation of investments 13,957
----------
NET ASSETS 100.00% $621,183
============
NET ASSET VALUE PER SHARE $114.13
============
ACTUAL APPRECIATION/
EXPIRATION CONTRACTS (DEPRECIATION)
-------------------------------------------------------
OPTIONS WRITTEN
Treasury Bond Future Put, Strike Price $116.00 February 98 120 $65
FUTURES CONTRACTS PURCHASED
U.S. Treasury Bond Future March 98 295 (72)
U.S. Treasury Note Future March 98 401 (285)
-------------
(357)
</TABLE>
- ----------------------------
A Zero-Coupon Bond - A bond with no periodic interest payments which is
sold at such a discount as to produce a current yield to maturity.
B Yankee Bond - Dollar denominated bond issued in the U.S. by foreign
entities.
C The coupon rates shown on variable rate securities are the rates at
December 31, 1997. These rates vary with the weighted average
coupon of the underlying securities.
D Stripped Security - Security with interest-only or principal-only
payment streams, denoted by superscript 1 or 2, respectively. For
interest-only securities, the amount shown as principal is the
notional balance used to calculate the amount of interest due.
E United States Treasury Inflation-Indexed Securities - U.S. Treasury
securities whose principal value is adjusted daily in accordance
with changes in the Consumer Price Index. Interest is calculated
on the basis of the current adjusted principal value.
F Indexed Security - The rate of interest earned on this type of
security is tied to the London Interbank Offered Rate (LIBOR), the
Consumer Price Index (CPI), the Global Telecom Basket (GTB) index
or the one year Treasury Bill rate. The coupon rate is the rate as
of December 31, 1997.
G Rule 144a Security - A security purchased pursuant to Rule 144a under
the Securities Act of 1933 which may not be resold subject to that rule
except to qualified buyers.
H When-issued Security - Security purchased on a delayed delivery basis.
Final settlement amount and maturity date have not yet been announced.
N.M. Not Meaningful
9
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
INVESTMENT INCOME:
Interest $18,257
Dividends 842
---------
$19,099
EXPENSES:
Management fee 1,161
Administrative fee 145
Transfer agent and
shareholder servicing expense 9
Custodian fees 78
Registration fees 19
Audit and legal fees 20
Reports to shareholders 2
Directors' fees 9
Other expenses 8
---------
Total expenses 1,451
----------
NET INVESTMENT INCOME 17,648
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain on investments, options
and futures 10,960
Change in unrealized appreciation of
investments, options and futures 11,100
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 22,060
----------
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $39,708
==========
STATEMENT OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1997
------------------- ---------------
(UNAUDITED)
CHANGE IN NET ASSETS:
Net investment income $17,648 $32,258
Net realized gain (loss) on investments,
options and futures 10,960 6,820
Change in unrealized appreciation
of investments, options and futures 11,100 2,086
--------- ---------
Change in net assets resulting
from operations 39,708 41,164
Distributions to shareholders from:
Net investment income (27,271) (29,354)
Net realized gain on investments (6,743) (306)
Change in net assets from
Fund share transactions 107,136 43,150
--------- ---------
Change in net assets 112,830 54,654
NET ASSETS:
Beginning of period 508,353 453,699
--------- ---------
End of period (including
(over)/under distributed
net investment income
of $(1,921) and
$7,702, respectively) $621,183 $508,353
========= =========
10
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
FINANCIAL HIGHLIGHTS
Contained below is per share operating data for a share of common stock
outstanding, total investment return, ratios to average net assets and other
supplemental data. This information has been derived from information provided
in the financial statements.
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEARS ENDED JUNE 30,
MONTHS ENDED -------------------------------------------------------
DECEMBER 31, 1997 1997 1996 1995 1994 1993
------------------- -------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE: (UNADUITED)
Net asset value, beginning of period $112.79 $110.46 $112.17 $105.02 $116.64 $112.04
Net investment income (A) 3.22 7.05 6.70 6.82 5.64 6.57
Net realized and unrealized gain (loss)
on investments, options and futures 4.77 1.86 (1.36) 7.19 (6.28) 8.71
------------------- -------------------------------------------------------
Total from investment operations 7.99 8.91 5.34 14.01 (0.64) 15.28
------------------- -------------------------------------------------------
Distributions to shareholders from:
Net investment income (5.28) (6.51) (6.61) (6.86) (6.11) (6.72)
Net realized gain on investments (1.37) (0.07) (0.44) - (4.87) (3.96)
------------------- -------------------------------------------------------
Total distributions (6.65) (6.58) (7.05) (6.86) (10.98) (10.68)
------------------- -------------------------------------------------------
Net asset value, end of period $114.13 $112.79 $110.46 $112.17 $105.02 $116.64
=================== =======================================================
Total return 7.23% (B) 8.27% 4.86% 14.12% -0.89% 14.52%
RATIOS / SUPPLEMENTAL DATA:
Ratios to average net assets
Expenses (A) 0.50% (C) 0.50% 0.50% 0.50% 0.50% 0.50%
Net investment income (A) 6.08% (C) 6.40% 6.30% 7.00% 6.00% 6.00%
Portfolio turnover rate 201.87% (C) 384.80% 266.00% 257.90% 272.50% 313.10%
Net assets, end of period
(in thousands) $621,183 $508,353 $453,699 $336,774 $205,959 $135,886
</TABLE>
- ---------------------------------------------
(A) Net of advisory fees waived pursuant to a voluntary expense limitation of
0.50%. In the absence of this limitation, the ratio of expenses to
average net assets would have been 0.50% for the year ended June 30,
1997, 0.53% for the year ended June 30, 1996 and 1995, 0.58% for the year
ended June 30, 1994 and 0.57% for the year ended June 30, 1993.
(B) Not annualized
(C) Annualized
See notes to financial statements.
11
<PAGE>
WESTERN ASSET TRUST, INC.
CORE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
The Western Asset Trust, Inc. ("Corporation") is registered under the Investment
Company Act of 1940, as amended. The Western Asset Trust Core Portfolio
("Fund"), formerly known as Western Asset Trust Full Range Duration Portfolio, a
diversified, open-end management investment company, is one of the portfolios
established by the Corporation. The Fund was organized on May 16, 1990 and had
no operations prior to September 4, 1990, other than those related to
organizational matters.
SECURITY VALUATION
Portfolio securities are valued based upon market quotations. When market
quotations are not readily available, securities are valued based on prices
received from recognized broker-dealers in the same or similar securities. The
amortized cost method of valuation is used for debt obligations with 60 days or
less remaining to maturity.
OPTIONS AND FUTURES
The current market value of a traded option is the last sale price or, in the
absence of a sale, the mean between the closing bid and asked price. Futures
contracts are marked-to-market on a daily basis. As a contract's value
fluctuates, payments known as variation margin are made to or received from the
futures commission merchant.
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income for dividend purposes is recorded on the accrual basis and
consists of interest and dividend income less expenses. Bond premium and
original issue discount are amortized for financial reporting and tax purposes
using the effective interest method over the period to maturity of the security
and serve to reduce or increase interest income.
Distributions are determined on a tax basis and may differ from net investment
income and realized capital gains for financial reporting purposes.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SECURITY TRANSACTIONS
Security transactions are recorded on the trade date. Realized gains and losses
from security transactions are reported on an identified cost basis.
USE OF ESTIMATES
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
FEDERAL INCOME TAXES
No provision for federal income or excise taxes is required since the Fund
intends to continue to qualify as a regulated investment company and distribute
all of its taxable income to its shareholders.
2. FINANCIAL INSTRUMENTS:
As part of the Fund's investment program, the Fund utilizes repurchase
agreements, options and futures contracts. The nature and risk of these
financial instruments and the reasons for using them are set forth more fully in
the Corporation's Prospectus and Statement of Additional Information.
REPURCHASE AGREEMENTS
All repurchase agreements are fully collateralized by obligations issued by the
U.S. Government or its agencies and such collateral is in the possession of the
Fund's custodian. Risks arise from the possible delay in recovery or potential
loss of rights in the collateral should the issuer of the repurchase agreement
fail financially.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
OPTION TRANSACTIONS
A call option gives the option holder the right to purchase the underlying
security at a specified price until a specified date. A put option gives the
option holder the right to sell the underlying security at a specified price
until a specified date. Risks arise from the possible illiquidity of the options
market and from movements in security values. Call and put options written by
the Fund and related premiums received during the period were as follows:
<TABLE>
<CAPTION>
CALLS PUTS
----------------------------------- ----------------------------------
ACTUAL PREMIUMS ACTUAL PREMIUMS
CONTRACTS CONTRACTS
- --------------------------------------------------------- ---------------- ------------------ ---------------- -----------------
<S> <C>
Options outstanding at June 30, 1997 - - - -
Options written 966 $753 1,649 $1,056
Options closed (726) (611) (1,308) (860)
Options expired (120) (40) - -
Options exercised - - (341) (196)
- --------------------------------------------------------- ---------------- ------------------ ---------------- -----------------
Options outstanding at December 31, 1997 (120) $102 - $ -
========================================================= ================ ================== ================ =================
</TABLE>
FUTURES
The Fund may enter 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, 1997 are
described at the end of the "Statement of Net Assets", page 9.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
3. PORTFOLIO TRANSACTIONS:
Purchases and sales of portfolio securities (excluding short-term, U.S.
Government securities, written and purchased options and futures contracts) for
the year ended December 31, 1997, aggregated $228,945 and $197,914,
respectively. Purchases and sales of U.S. Government securities aggregated
$432,270 and $364,978, respectively for the same period.
At December 31, 1997, the cost of securities for federal income tax purposes was
$568,564. Aggregate gross unrealized appreciation for all securities in which
there was an excess of value over tax cost was $16,571 and aggregate gross
unrealized depreciation for all securities in which there was an excess of tax
cost over value was $2,322.
4. FUND SHARE TRANSACTIONS:
At December 31, 1997, there were 5,000,000 shares of common stock of the
Corporation authorized at $.001 par value. Transactions in Fund shares were as
follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED
-------------------------------------------- -------------------------------------------
DECEMBER 31, 1997 JUNE 30, 1997
-------------------------------------------- -------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------- ----------------------- -------------------- ------------------- -----------------------
<S> <C>
Sold 853 $ 98,032 1,765 $ 196,333
Reinvestment of distributions 279 31,659 234 26,038
Repurchased (197) (22,555) (1,599) (179,221)
- ---------------------------------- ----------------------- -------------------- ------------------- -----------------------
Net increase 935 $ 107,136 400 $ 43,150
================================== ======================= ==================== =================== =======================
</TABLE>
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
5. TRANSACTIONS WITH AFFILIATES:
The Fund has an administration agreement with Legg Mason Fund Adviser, Inc.
("Administrator"), a corporate affiliate of Legg Mason Wood Walker, Incorporated
("Legg Mason"), a member of the New York Stock Exchange and the distributor for
the Fund. Under this agreement, the Administrator provides the Fund with
administrative services for which the Fund pays a fee at an annual rate of 0.10%
of average daily net assets of the Fund. The Administrator has voluntarily
agreed to indefinitely limit its annual fee to 0.05% of the Fund's average daily
net assets. At December 31, 1997, $26 was due to the Administrator.
Western Asset Management Company ("Adviser"), a corporate affiliate of the
Administrator and Legg Mason, serves as investment adviser to the Fund. The
Adviser is responsible for the actual investment activity of the Fund, for which
the Fund pays a fee at an annual rate of 0.50% of average daily net assets of
the Fund. The Adviser has voluntarily agreed to indefinitely limit its fee to
0.40% of average daily net assets and to further waive its fees and reimburse
the Fund to the extent necessary to limit the total expenses to an annual rate
of 0.50% of the Fund's average daily net assets. No advisory fees were waived
for the six months ended December 31, 1997, and $210 was due to the Adviser at
December 31, 1997.
16
