-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J0JqZgIYNsxQC0G3t6HfZ7tGp5MJPql2q7kafkL6ETQizqCs6EGhinLN4gz9lW5C DS7kN80ldLEkN7mAjxjq1A== 0000950169-97-000936.txt : 19971031 0000950169-97-000936.hdr.sgml : 19971031 ACCESSION NUMBER: 0000950169-97-000936 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 33 FILED AS OF DATE: 19971030 EFFECTIVENESS DATE: 19971030 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN ASSET TRUST INC CENTRAL INDEX KEY: 0000863520 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-34929 FILM NUMBER: 97703702 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-06110 FILM NUMBER: 97703703 BUSINESS ADDRESS: STREET 1: 111 S CALVERT ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 3015393400 MAIL ADDRESS: STREET 2: 111 S CALVERT ST CITY: BALTIMORE STATE: MD ZIP: 21202 485BPOS 1 WESTERN ASSET TRUST 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. 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 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 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 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 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 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 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 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. 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. 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. 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. 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)
Money Market Limited and Core Intermediate Duration Long Duration Short Duration Portfolio Portfolio Portfolio Portfolio Portfolios --------- ------------ -------- ------------- -------------- 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% --------- ------------ -------- ------------- --------------
- ------------------ (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. 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.
1 Year 3 Years 5 Years 10 Years ------ ------- ------- -------- 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
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. 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. WESTERN ASSET 10 PROSPECTUS
YEARS ENDED JUNE 30, 1997 1996 1995 1994 1993 1992 1991(A) - ------------------------------------------------------------------------------------------------ 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
- ------------------ (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. 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.
YEARS ENDED JUNE 30, 1997 1996 1995 - -------------------------------------------------------------------------------------------------- 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%
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
- ------------------ (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. 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.
YEARS ENDED JUNE 30, 1997 1996(A) - -------------------------------------------------------------------------------------------------- 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
- ------------------ (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. 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 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 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. 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. 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 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 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 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 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 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. WESTERN ASSET 23 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 WESTERN ASSET 24 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. WESTERN ASSET 25 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. WESTERN ASSET 26 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. WESTERN ASSET 27 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. WESTERN ASSET 28 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 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. WESTERN ASSET 30 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 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 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 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 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 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. 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 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 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 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 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. 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 (THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.) 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 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 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 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 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 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 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
Years Ended June 30, 1997 1996 1995 1994 1993(A) - ------------------------------------- -------- --------- --------- --------- --------- 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
(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 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 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 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 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 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 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 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 12 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 13 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 14 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: 15 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 16 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 17 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. 18 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: 19 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 20 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. 21 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 22 ("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 23 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. 24 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. 25 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. 26 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 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 TABLE OF CONTENTS ----------------- Page ---- 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 2 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 3 (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 4 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. 5 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 6 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 7 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 8 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 9 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. 10 (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 11 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. 12 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 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 *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 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 COMPENSATION TABLE ------------------
========================================================================================================= Aggregate Compensation From Total Compensation From Fund Name of Person and Position the Fund* and Complex Paid to Directors** - --------------------------------------------------------------------------------------------------------- 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 ==================================== ====================================================================
* 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 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 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 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 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 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 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:
============================================================================================= Name and Address % of Ownership As of October 15, 1997 ============================================================================================= 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 =============================================================================================
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:
============================================================================================ Name and Address % of Ownership As of October 15, 1997 ============================================================================================ 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 ============================================================================================
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
============================================================================================ Name and Address % of Ownership As of October 15, 1997 ============================================================================================ 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 ============================================================================================
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:
============================================================================================ Name and Address % of Ownership As of October 15, 1997 ============================================================================================ 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 ============================================================================================
24 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:
=========================================================================================== Name and Address % of Ownership As of October 15, 1997 =========================================================================================== 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 ===========================================================================================
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:
============================================================================================ Name and Address % of Ownership As of October 15, 1997 ============================================================================================ 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 ============================================================================================
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 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 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 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 WESTERN ASSET TRUST, INC. STATEMENT OF ASSETS AND LIABILITIES June 30, 1997
Long Short Money Duration Duration Market Portfolio Portfolio Portfolio --------- --------- --------- 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 ======= ======= =======
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 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 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 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 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 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 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; 3 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. 4 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 5 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. 6 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. 7 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 8 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. 9 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. 10 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 11 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 12 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 13 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 14 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. 15 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. 16 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. 17 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. 18 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 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 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 ------------------
========================================================================================================= Aggregate Compensation From Total Compensation From Fund Name of Person and Position the Fund* and Complex Paid to Directors** - --------------------------------------------------------------------------------------------------------- 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 =========================================================================================================
21
========================================================================================================= Aggregate Compensation From Total Compensation From Fund Name of Person and Position the Fund* and Complex Paid to Directors** - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Ilene S. Harker - Vice President None None - --------------------------------------------------------------------------------------------------------- Marie K. Karpinski - Vice President and Treasurer None None =========================================================================================================
* 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 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 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:
============================================================================================ Name and Address % of Ownership As of October 15, 1997 ============================================================================================ 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 ============================================================================================
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:
============================================================================================ Name and Address % of Ownership As of October 15, 1997 ============================================================================================ Northern Trust Company 10.72% 10 S. LaSalle Street Chicago, IL 60675 ============================================================================================
24
============================================================================================ Name and Address % of Ownership As of October 15, 1997 ============================================================================================ 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 ============================================================================================
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 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 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 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 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 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 WESTERN ASSET TRUST, INC. STATEMENTS OF ASSETS AND LIABILITIES JUNE 30, 1997
Corporate Mortgage Securities Securities Portfolio Portfolio --------- --------- 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 ======= =======
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 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 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 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 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 (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 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 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. 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 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 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 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 - --------- * 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. 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. 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) EX-1 2 EXHIBIT 1A 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 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 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 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. (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 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. (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, 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 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. 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 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 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 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 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 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. 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 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 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, 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 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. 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 EX-1 3 EXHIBIT 1B 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. 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 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 EX-1 4 EXHIBIT 1C 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 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 EX-2 5 EXHIBIT 2 EXHIBIT 2 WESTERN ASSET TRUST, INC. A Maryland Corporation BY-LAWS November 8, 1990 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 20 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, 21 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. 22 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 23 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 24 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, 25 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. 26 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 27 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. 28 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 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; 30 (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 31 (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 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 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. 34 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 35 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 36 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 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. 38 (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. 39 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 40 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) 41 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, 42 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 43 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; 44 (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 45 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. 46 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 EX-5 6 EXHIBIT 5A 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 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 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 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 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 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 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 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 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 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 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 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 EX-5 7 EXHIBIT 5B 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"); (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 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 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 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 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 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 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 EX-5 8 EXHIBIT 5C 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 (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 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 (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 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 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 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 EX-5 9 EXHIBIT 5D 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"); (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 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 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 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 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 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 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 EX-6 10 EXHIBIT 6A 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 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 - 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 - 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 - 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 - 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 - 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 - 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- EX-8 11 EXHIBIT 8A 113090-2 CUSTODIAN CONTRACT Between WESTERN ASSET TRUST, INC. and STATE STREET BANK AND TRUST COMPANY 21O1189 WP1170C 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 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 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- EX-8 12 EXHIBIT 8B 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. 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- 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- 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- 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. -5- 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 EX-8 13 EXHIBIT 8C 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 ---------------------------- EX-9 14 EXHIBIT 9A TRANSFER AGENCY AND SERVICE AGREEMENT between WESTERN ASSET TRUST, INC. and STATE STREET BANK AND TRUST COMPANY 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 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: 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- (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- 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- 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- (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- 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- 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- 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- 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- 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- 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 -12- 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- 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. -14- 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- 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. 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- EX-9 15 EXHIBIT 9B(1) 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 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 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 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 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 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 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 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 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 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 EX-9 16 EXHIBIT 9B(2) 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 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 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 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 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 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 EX-9 17 EXHIBIT 9B(3) 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 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 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 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 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 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 EX-9 18 EXHIBIT 9B(4) 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 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 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 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 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 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 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 EX-10 19 EXHIBIT 10A [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 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 EX-10 20 EXHIBIT 10B [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 EX-10 21 EXHIBIT 10C [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 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 -------------------------- EX-11 22 EXHIBIT 11A&B 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 EX-13 23 EXHIBIT 13 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 EX-16 24 EXHIBIT 16 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% ---- 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% ---- 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% ---- 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% ---- EX-27 25 CORE PORTFOLIO
6 0000863520 WESTERN ASSET TRUST, INC. 1 CORE PORTFOLIO 1 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 526,323,223 529,083,194 22,219,360 7,003 0 551,309,557 42,614,841 0 342,188 42,957,029 0 493,023,011 4,507,160 4,107,369 7,701,659 0 4,771,120 0 2,856,738 508,352,528 1,010,497 33,756,002 0 2,508,601 32,257,898 6,819,910 2,085,611 41,163,419 0 (29,354,125) (306,044) 0 1,764,736 (1,598,534) 233,589 54,653,060 7,058,516 (4,003,239) 0 0 2,006,880 0 2,531,003 501,720,010 110.46 7.05 1.86 (6.51) (.07) 0 112.79 .5 0 0
EX-27 26 INTERNATIONAL SECURITIES PORTFOLIO
6 0000863520 WESTERN ASSET TRUST, INC. 2 INTERNATIONAL SECURITIES PORTFOLIO 1 12-MOS JUN-30-1997 JUL-01-1996 JUN-30-1997 267,028,078 263,604,737 50,745,688 16,538 15,657,090 330,024,053 21,361,018 0 4,965,197 26,326,215 0 295,435,763 3,111,396 2,313,006 11,226,939 0 (1,956,428) 0 (1,008,436) 303,697,838 0 16,857,542 0 736,702 16,120,840 12,872,742 1,957,074 30,950,656 0 (23,883,131) 0 0 696,192 (149,249) 251,448 83,602,129 0 5,959,077 1,146,876 0 1,252,466 0 1,791,410 263,677,035 95.16 5.29 6.27 (9.11) 0 0 97.61 .28 0 0
EX-27 27 INTERMEDIATE PORTFOLIO
6 0000863520 WESTERN ASSET TRUST, INC. 3 INTERMEDIATE PORTFOLIO 1 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 227,609,434 228,419,936 12,803,960 26,612 0 241,250,508 16,573,750 0 179,729 16,753,479 0 219,831,615 2,094,377 630,357 3,164,952 0 677,313 0 823,149 224,497,029 115,287 10,923,123 0 734,549 10,303,861 1,449,959 1,321,962 13,075,782 0 (8,019,676) (993,330) 0 1,492,047 (112,844) 84,817 158,417,966 916,017 181,545 0 0 568,685 0 893,054 162,481,376 104.83 5.49 3 (5.42) (.71) 0 107.19 .45 0 0
EX-27 28 LIMITED DURATION PORTFOLIO
6 0000863520 WESTERN ASSET TRUST, INC. 4 LIMITED DURATION PORTFOLIO 1 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 27,915,125 27,909,155 265,824 60,592 26,040 28,261,611 1,672,654 0 52,266 1,724,920 0 26,074,877 259,252 159,890 364,806 0 84,269 0 12,739 26,536,691 1,752 1,339,752 0 82,387 1,259,117 139,480 26,226 1,424,823 0 (1,012,185) (59,773) 0 112,955 (24,218) 10,624 10,426,742 134,065 (11,629) 0 0 60,550 0 243,744 20,183,359 100.76 5.94 1.34 (5.31) (.37) 0 102.36 .41 0 0
EX-27 29 LONG DURATION PORTFOLIO
6 0000863520 WESTERN ASSET TRUST, INC. 5 LONG DURATION PORTFOLIO 1 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 0 0 0 32,000 0 32,000 0 0 31,000 31,000 0 0 10 0 0 0 0 0 0 1,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EX-27 30 SHORT DURATION PORTFOLIO
6 0000863520 WESTERN ASSET TRUST, INC. 6 SHORT DURATION PORTFOLIO 1 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 0 0 0 10,000 0 10,000 0 0 9,000 9,000 0 0 10 0 0 0 0 0 0 1,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EX-27 31 MONEY MARKET PORTFOLIO
6 0000863520 WESTERN ASSET TRUST, INC. 7 MONEY MARKET PORTFOLIO 1 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 0 0 0 32,000 0 32,000 0 0 31,000 31,000 0 0 1,000 0 0 0 0 0 0 1,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EX-27 32 CORPORATE SECURITIES PORTFOLIO
6 0000863520 WESTERN ASSET TRUST, INC. 8 CORPORATE SECURITIES PORTFOLIO 1 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 0 0 0 17,000 0 17,000 0 0 16,000 16,000 0 0 10 0 0 0 0 0 0 1,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EX-27 33 MORTGAGE SECURITIES PORTFOLIO
6 0000863520 WESTERN ASSET TRUST, INC. 9 MORTGAGE SECURITIES PORTFOLIO 1 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 0 0 0 17,000 0 17,000 0 0 16,000 16,000 0 0 10 0 0 0 0 0 0 1,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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