UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-10603
Name of Fund: Western Asset Premier Bond Fund
Fund Address: 100 Light Street
Baltimore, MD 21202
Name and address of agent for service:
James W. Hirschmann, President, Western Asset Premier Bond Fund
100 Light Street
Baltimore, MD 21202.
Registrant's telephone number, including area code: (410) 539-0000
Date of fiscal year end: December 31, 2003
Date of reporting period: December 31, 2003
Item 1 - Report to Shareholders
Annual Report to Shareholders
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
General Market Performance
The year 2003 was truly remarkable in many respects. The U.S. military
overturned Iraq's government in record-setting fashion; the U.S. economy staged
a surprising and robust rebound; the equity market surged, reasserting its
dominance over the bond market after three years of underperformance; credit
spreads experienced an unparalleled contraction after 5 years of widening; and
despite all the good news, the Federal Reserve lowered and held short-term
interest rates to a mere 1% even as Treasury yields drifted higher. On a
disturbing note, however, the dollar plunged, gold and commodity prices soared,
breakeven spreads on Treasury Inflation-Protected Securities (TIPS) reached new
highs, and the Fed insisted repeatedly that these harbingers of rising
inflation were trumped by the economy's so-called excess capacity, thus, in our
view, officially sanctioning higher inflation for the first time in over 20
years. Non-government bonds thrived in this environment, as a stronger economy
boosted confidence in the overall outlook for earnings, and easy money gave
pricing power back to an increasing number of industries. Plus, the low level
of yields on Treasuries dramatically enhanced the appeal of the higher yields
available on corporate and high-yield debt. Mortgage-backed investors struggled
to cope with by far the most rapid pace of prepayments in history, but
fortunately the system survived an unprecedented bout of volatility in late
summer. Easy money and improving economic conditions also helped high-yield and
emerging-market debt markets to flourish.
Fund Performance
With a strong emphasis on the BBB sector of the corporate bond market and a
secondary emphasis on emerging market and high-yield debt securities, the Fund
was favorably exposed to a friendly climate throughout the year. The Fund was
able to pay monthly dividends at an annualized rate of 8.5%, and its total
return (price gains/losses plus interest income, net of expenses) was 21.6% for
the year. For reference, the Lehman Brothers BAA Credit Index had a total
return of 11.9% for the year, and the Lehman High-Yield Index had a total
return of 20.0%. The fund's share price rose from $14.45 to $15.85 over the
course of the year.
1
Annual Report to Shareholders
SCHEDULE OF INVESTMENTS
December 31, 2003
(Amounts in Thousands)
Western Asset Premier Bond Fund
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
------------------------------------------------
Long-Term Securities 135.7%
Corporate Bonds and Notes 82.9%
Advertising 0.3%
Vertis Inc. 10.875% 06/15/09 $ 500 $ 531
--------
Aerospace/Defense 3.0%
Armor Holdings, Inc. 8.250% 08/15/13 220 235/A/
Systems 2001 Asset Trust 6.664% 09/15/13 312 344/A/
Esterline Technologies Corporation 7.750% 06/15/13 250 269/A/
Northrop Grumman Corporation 7.750% 02/15/31 1,000 1,216
Raytheon Company 6.750% 08/15/07 1,000 1,108/B/
Raytheon Company 7.200% 08/15/27 1,000 1,093
TD Funding Corp. 8.375% 07/15/11 200 213
The Boeing Company 6.125% 02/15/33 600 602
--------
5,080
--------
Apparel 0.6%
Oxford Industries, Inc. 8.875% 06/01/11 500 547/A/
Russell Corporation 9.250% 05/01/10 500 518
--------
1,065
--------
Auto Parts and Equipment 0.5%
Keystone Automotive Operations Inc. 9.750% 11/01/13 240 258/A/
TRW Automotive 11.000% 02/15/13 155 182
TRW Automotive 9.375% 02/15/13 118 135
Tenneco Automotive Inc. 10.250% 07/15/13 230 262
--------
837
--------
Automotive 3.8%
Asbury Automotive Group Inc. 9.000% 06/15/12 375 397
Asbury Automotive Group Inc. 8.000% 03/15/14 30 30/A/
DaimlerChrysler NA Holdings Corp. 7.300% 01/15/12 1,000 1,113
DaimlerChrysler NA Holdings Corp. 8.500% 01/18/31 1,000 1,195
Ford Motor Company 7.450% 07/16/31 2,700 2,728
General Motors Corporation 8.375% 07/15/33 800 929
--------
6,392
--------
Banking and Finance 4.2%
Boeing Capital Corporation 6.500% 02/15/12 1,000 1,093
Ford Motor Credit Company 7.250% 10/25/11 1,700 1,844
Fuji JGB Inv LLC 9.870% 06/30/08 790 893/A,C/
General Motors Acceptance Corporation 7.000% 02/01/12 1,500 1,613
Household Finance Corporation 4.750% 07/15/13 1,670 1,624
--------
7,067
--------
2
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
------------------------------------------------
Corporate Bonds and Notes--Continued
Banks 1.1%
Bank One Corporation 5.250% 01/30/13 $1,300 $ 1,334
Washington Mutual Bank FA 5.500% 01/15/13 440 454
--------
1,788
--------
Building Materials 0.6%
Nortek Holdings, Inc. 10.000% 05/15/11 370 267/A,C/
Nortek Holdings, Inc. 9.875% 06/15/11 750 827
--------
1,094
--------
Cable 1.6%
Charter Communication Holdings II 10.250% 09/15/10 410 431/A/
Charter Communication Holdings II 9.625% 11/15/09 360 317
Comcast Cable Communications, Inc. 6.750% 01/30/11 500 556
Comcast Corporation 7.050% 03/15/33 1,000 1,088
LodgeNet Entertainment Corporation 9.500% 06/15/13 221 242
--------
2,634
--------
Chemicals 2.7%
Equistar Chemicals LP/Equistar Funding Corp. 10.625% 05/01/11 153 169
Equistar Chemicals LP/Equistar Funding Corp. 10.625% 05/01/11 110 122/A/
FMC Corporation 10.250% 11/01/09 203 237
Huntsman International LLC 9.875% 03/01/09 250 274
Huntsman International LLC 10.125% 07/01/09 250 257
IMC Global Inc. 11.250% 06/01/11 300 330
Lyondell Chemical Company 9.625% 05/01/07 108 114
Nalco Company 8.875% 11/15/13 160 170/A/
The Dow Chemical Company 6.000% 10/01/12 2,500 2,632
Westlake Chemical Corporation 8.750% 07/15/11 250 274/A/
--------
4,579
--------
Computers Services and Systems 0.6%
Electronic Data Systems Corporation 7.450% 10/15/29 500 500
International Business Machines Corporation 4.750% 11/29/12 240 240
Viasystems, Inc. 10.500% 01/15/11 260 278/A/
--------
1,018
--------
Construction Machinery 0.2%
H&E Equipment Services LLC 11.125% 06/15/12 360 362
--------
Diversified Financial Services 2.8%
CIT Group Inc. 7.750% 04/02/12 1,600 1,891
Citigroup Inc. 6.625% 06/15/32 1,000 1,083
3
Annual Report to Shareholders
SCHEDULE OF INVESTMENTS--Continued
Western Asset Premier Bond Fund--Continued
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
----------------------------------------------
Corporate Bonds and Notes--Continued
Diversified Financial Services--Continued
General Electric Capital Corporation 4.250% 01/15/08 $ 740 $ 765
General Electric Capital Corporation 6.000% 06/15/12 700 759
General Electric Capital Corporation 5.450% 01/15/13 250 260
--------
4,758
--------
Diversified Services 1.4%
Loews Corporation 3.125% 09/15/07 2,500 2,416/D/
--------
Drug & Grocery Store Chains 0.3%
Safeway Inc. 5.800% 08/15/12 500 517
--------
Electric 3.7%
Exelon Generation Company LLC 6.950% 06/15/11 2,000 2,246
Niagra Mohawk Power Corporation 7.750% 10/01/08 1,500 1,741
Oncor Electric Delivery Company 7.000% 09/01/22 250 275
Orion Power Holdings, Inc. 12.000% 05/01/10 500 607
The AES Corporation 8.500% 11/01/07 210 213
The AES Corporation 9.500% 06/01/09 97 108
The AES Corporation 9.000% 05/15/15 500 565/A/
The Cleveland Electric Illuminating Company 5.650% 12/15/13 500 492/A/
--------
6,247
--------
Energy 4.3%
American Electric Power Company, Inc. 6.125% 05/15/06 750 808
Calpine Corporation 8.500% 02/15/11 892 706
Dominion Resources, Inc. 5.700% 09/17/12 770 811
Duke Energy Corporation 6.250% 01/15/12 250 270
FirstEnergy Corp. 5.500% 11/15/06 750 777
FirstEnergy Corp. 6.450% 11/15/11 1,110 1,151
FirstEnergy Corp. 7.375% 11/15/31 1,390 1,422
MidAmerican Energy Holdings Company 5.875% 10/01/12 250 262
Progress Energy, Inc. 7.100% 03/01/11 250 282
Progress Energy, Inc. 6.850% 04/15/12 750 836
--------
7,325
--------
Entertainment 0.6%
Regal Cinemas, Inc. 9.375% 02/01/12 500 565
Six Flags, Inc. 9.750% 06/15/07 500 524
--------
1,089
--------
4
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
----------------------------------------------
Corporate Bonds and Notes--Continued
Environmental Services 3.2%
Allied Waste North America Incorporated 10.000% 08/01/09 $ 788 $ 851
IMCO Recycling, Inc. 10.375% 10/15/10 320 329/A/
Republic Services, Inc. 6.750% 08/15/11 750 838
Waste Management, Inc. 7.375% 08/01/10 1,000 1,156
Waste Management, Inc. 7.375% 05/15/29 2,000 2,251
Waste Management, Inc. 7.750% 05/15/32 40 47
--------
5,472
--------
Food, Beverage and Tobacco 3.3%
Altria Group, Inc. 7.750% 01/15/27 1,000 1,079/B/
DIMON Incorporated 9.625% 10/15/11 500 558
Nabisco Incorporated 7.550% 06/15/15 1,500 1,795
R.J. Reynolds Tobacco Holdings, Inc. 7.750% 05/15/06 2,000 2,100
--------
5,532
--------
Gaming 1.3%
Ameristar Casinos, Inc. 10.750% 02/15/09 500 575
Coast Hotels and Casinos, Inc. 9.500% 04/01/09 230 243
Inn of the Mountain Gods 12.000% 11/15/10 50 53/A/
Isle of Capri Casinos, Inc. 9.000% 03/15/12 250 278
Pinnacle Entertainment, Inc. 9.250% 02/15/07 500 518
Wynn Las Vegas, LLC 12.000% 11/01/10 500 589
--------
2,256
--------
Gas and Pipeline Utilities 4.6%
Duke Energy Field Services Corporation LLC 7.875% 08/16/10 750 879
Dynegy Holdings Inc. 8.750% 02/15/12 1,500 1,513
Kinder Morgan, Inc. 6.650% 03/01/05 1,000 1,056
Kinder Morgan Energy Partners, L.P. 7.125% 03/15/12 500 573
Panhandle Eastern Pipe Line Company 4.800% 08/15/08 400 412/A/
Texas Eastern Transmission 5.250% 07/15/07 750 798
Western Gas Resources, Inc. 10.000% 06/15/09 270 290
The Williams Companies, Inc. 8.625% 06/01/10 402 451
The Williams Companies, Inc. 7.500% 01/15/31 500 506
The Williams Companies, Inc. 8.750% 03/15/32 1,200 1,356
--------
7,834
--------
Healthcare 0.5%
Fresenius Medical Care Capital Trust II 7.875% 02/01/08 250 267
Tenet Healthcare Corporation 7.375% 02/01/13 550 553
--------
820
--------
5
Annual Report to Shareholders
SCHEDULE OF INVESTMENTS--Continued
Western Asset Premier Bond Fund--Continued
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
----------------------------------------------
Corporate Bonds and Notes--Continued
Home Building 0.6%
Atrium Companies, Inc. 10.500% 05/01/09 $ 500 $ 535
Schuler Homes, Inc. 9.375% 07/15/09 500 563
--------
1,098
--------
Insurance 0.3%
Willis Corroon Corporation 9.000% 02/01/09 500 525
--------
Investment Banking/Brokerage 3.7%
Credit Suisse First Boston, USA 6.500% 01/15/12 1,125 1,252
J.P. Morgan Chase & Co. 6.625% 03/15/12 1,750 1,955
Morgan Stanley Dean Witter & Co. 6.600% 04/01/12 1,500 1,675
The Goldman Sachs Group, Inc. 6.600% 01/15/12 1,200 1,341
--------
6,223
--------
Lodging/Hotels 0.6%
Extended Stay America, Inc. 9.875% 06/15/11 500 560
Felcor Lodging LP 10.000% 09/15/08 108 117
HMH Properties Inc. 7.875% 08/01/08 250 260
--------
937
--------
Machinery 1.2%
AGCO Corporation 9.500% 05/01/08 281 308
Case New Holland, Inc. 9.250% 08/01/11 380 425/A/
Joy Global Inc. 8.750% 03/15/12 330 368
NMHG Holdings Co. 10.000% 05/15/09 295 326
Terex Corporation 10.375% 04/01/11 500 560
--------
1,987
--------
Manufacturing (Diversified) 1.4%
Eastman Kodak Co. 7.250% 11/15/13 600 630
Interface, Inc. 10.375% 02/01/10 250 264
Jacuzzi Brands, Inc. 9.625% 07/01/10 395 434/A/
Koppers Inc. 9.875% 10/15/13 380 419/A/
Norcraft Companies, L.P. 9.000% 11/01/11 320 346/A/
Rayovac Corporation 8.500% 10/01/13 220 233
--------
2,326
--------
Materials and Basic Industry 0.1%
Hexcel Corporation 9.875% 10/01/08 169 191
--------
Media 3.1%
AOL Time Warner Inc. 6.150% 05/01/07 250 272
AOL Time Warner Inc. 6.875% 05/01/12 1,400 1,575
6
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
----------------------------------------------
Corporate Bonds and Notes--Continued
Media--Continued
AOL Time Warner Inc. 7.700% 05/01/32 $ 750 $ 875
Liberty Media Corporation 3.750% 02/15/30 1,860 1,216/D/
News America Holdings Incorporated 6.625% 01/09/08 300 334
News America Holdings Incorporated 8.875% 04/26/23 400 513
Paxson Communications Corporation 10.750% 07/15/08 500 546
--------
5,331
--------
Medical Care Facilities 1.1%
AmeriPath, Inc. 10.500% 04/01/13 500 532
Ardent Health Services 10.000% 08/15/13 280 305/A/
Extendicare Health Services, Inc. 9.500% 07/01/10 500 555
Genesis Healthcare Corp. 8.000% 10/15/13 130 136/A/
Vanguard Health Systems, Inc. 9.750% 08/01/11 250 271
--------
1,799
--------
Metals and Mining 0.5%
Alcoa Inc. 5.375% 01/15/13 750 784
--------
Oil and Gas 5.2%
Amerada Hess Corporation 7.300% 08/15/31 450 465
Anadarko Finance Company 6.750% 05/01/11 750 850
Anadarko Finance Company 7.500% 05/01/31 1,000 1,171
ConocoPhillips 4.750% 10/15/12 1,000 1,004
Devon Energy Corporation 7.950% 04/15/32 1,000 1,206
El Paso CPG Co. 6.375% 02/01/09 333 297
El Paso CPG Co. 7.750% 06/15/10 1,496 1,412
El Paso Corporation 7.625% 07/15/11 500 463
Hanover Compressor Company 8.625% 12/15/10 170 177
Occidental Petroleum Corporation 6.750% 01/15/12 500 564
Parker Drilling Company 10.125% 11/15/09 250 265
Valero Energy Corporation 7.500% 04/15/32 400 446
Vintage Petroleum, Inc. 7.875% 05/15/11 500 528
--------
8,848
--------
Paper and Forest Products 2.9%
Georgia-Pacific Corp. 8.125% 05/15/11 363 399
Georgia-Pacific Corp. 9.500% 12/01/11 250 290
Georgia-Pacific Corp. 8.875% 05/15/31 202 222
MeadWestvaco Corporation 6.850% 04/01/12 500 550
Potlatch Corporation 10.000% 07/15/11 725 808
7
Annual Report to Shareholders
SCHEDULE OF INVESTMENTS--Continued
Western Asset Premier Bond Fund--Continued
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
----------------------------------------------
Corporate Bonds and Notes--Continued
Paper and Forest Products--Continued
Weyerhaeuser Company 6.750% 03/15/12 $1,500 $ 1,636
Weyerhaeuser Company 7.375% 03/15/32 1,000 1,087
--------
4,992
--------
Publishing 0.3%
Dex Media East LLC 9.875% 11/15/09 250 286
Dex Media East LLC 12.125% 11/15/12 187 230
--------
516
--------
Rental Auto/Equipment 0.1%
NationsRent, Inc. 9.500% 10/15/10 210 226/A/
--------
Retail 0.5%
Hollywood Entertainment Corporation 9.625% 03/15/11 750 806
--------
Retail (Food Chains) 0.2%
Domino's Inc. 8.250% 07/01/11 381 408/A/
--------
Special Purposes 1.0%
Air 2 U.S. Series A 8.027% 10/01/19 331 281/A/
Couche-Tard U.S. Finance 7.500% 12/15/13 210 220/A/
Kraton Polymers LLC 8.125% 01/15/14 150 156/A/
River Rock Entertainment 9.750% 11/01/11 230 247/A/
Sensus Metering Systems 8.625% 12/15/13 240 246/A/
UCAR Finance Inc. 10.250% 02/15/12 500 575
--------
1,725
--------
Storage Facilities 0.2%
Mobile Mini, Inc. 9.500% 07/01/13 239 263/A/
--------
Telecommunications 6.4%
AT&T Corp. 8.050% 11/15/11 2,000 2,302
BellSouth Corporation 6.000% 10/15/11 1,000 1,084
Cincinnati Bell Inc. 8.375% 01/15/14 130 140/A/
Citizens Communications Company 8.500% 05/15/06 250 273
EchoStar DBS Corporation 10.375% 10/01/07 210 230
EchoStar DBS Corporation 9.125% 01/15/09 110 123
Insight Communications Company, Inc. 12.125% 02/15/11 499 427/C/
PanAmSat Corporation 8.500% 02/01/12 380 422
Qwest Capital Funding, Inc. 7.750% 02/15/31 1,000 920
Qwest Corporation 6.875% 09/15/33 500 475
8
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
------------------------------------------------
Corporate Bonds and Notes--Continued
Telecommunications--Continued
SBC Communication Inc. 6.250% 03/15/11 $1,000 $ 1,095/B/
Sprint Capital Corporation 6.000% 01/15/07 1,500 1,602
Sprint Capital Corporation 8.375% 03/15/12 1,000 1,168
TCI Communications, Inc. 9.650% 03/31/27 500 602
--------
10,863
--------
Telecommunications (Cellular/Wireless) 1.8%
ACC Escrow Corp. 10.000% 08/01/11 280 312
AT&T Wireless Services, Inc. 7.500% 05/01/07 500 561
AT&T Wireless Services, Inc. 8.125% 05/01/12 500 588
Cingular Wireless LLC 6.500% 12/15/11 250 273
Motorola, Inc. 7.625% 11/15/10 400 460
Telecommunications (Cellular/Wireless)--Continued
Nextel Communications, Inc. 9.375% 11/15/09 51 56
Nextel Communications, Inc. 5.250% 01/15/10 290 294/D/
SBA Communications Corp. 9.750% 12/15/11 420 296/A,C/
Verizon Wireless Capital LLC 5.375% 12/15/06 250 267
--------
3,107
--------
Transportation 6.5%
Continental Airlines, Inc. 8.048% 11/01/20 840 861
Continental Airlines, Inc. 7.373% 12/15/15 123 107
Delta Airlines, Inc. 6.718% 01/02/23 3,537 3,785
Kansas City Southern Railway 9.500% 10/01/08 275 305
Quality Distribution LLC 9.000% 11/15/10 110 115/A/
Union Pacific Corporation 6.125% 01/15/12 2,000 2,167/B/
United Air Lines, Inc. 7.783% 01/01/14 643 533
US Airways, Inc. 6.760% 04/15/08 1,652 1,443
US Airways, Inc. 8.360% 01/20/19 1,743 1,759
--------
11,075
--------
Total Corporate Bonds and Notes
(Identified Cost--$130,359) 140,743
-----------------------------------------------------------------------------------------------------
Asset-Backed Securities 9.9%
Fixed Rate Securities 9.6%
ACE 2002-M Trust 0.000% 10/13/17 312 6/B,E/
ARG Funding Corp. 1999-IA 6.020% 05/20/05 833 839/A/
Banagricola DPR Funding 2.213% 03/15/10 2,500 2,491/A/
Captiva CBO 1997-1 Ltd. 6.860% 11/30/09 682 682/A/
Conseco Finance Securitizations Corp. 2000-4 7.730% 04/01/31 2,000 2,039
9
Annual Report to Shareholders
SCHEDULE OF INVESTMENTS--Continued
Western Asset Premier Bond Fund--Continued
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
-----------------------------------------------
Asset-Backed Securities--Continued
Fixed Rate Securities--Continued
Conseco Finance Securitizations Corp. 2002-1 6.681% 12/01/32 $2,086 $ 2,123
Conseco Recreational Enthusiast Consumer Trust
2000-A 8.480% 11/15/20 1,500 1,568
Contimortgage Home Equity Loan Trust 1997-4 7.330% 10/15/28 797 399
Green Tree Financial Corporation 1992-2 9.150% 01/15/18 1,277 1,223
Green Tree Financial Corporation 1999-4 6.970% 05/01/31 1,402 1,454
Pegasus Aviation Lease Securitization 2000-1 8.370% 03/25/30 1,300 777/A/
Saxson Asset Securities Trust 2000-2 8.370% 07/25/30 2,000 2,065
Vanderbilt Mortgage Finance 1997-B 8.155% 10/07/26 750 718
--------
16,384
--------
Floating Rate Securities 0.1%
Korea Asset Funding Ltd. 2000-1A 3.20% 02/10/09 90 89/A,H/
--------
Stripped Securities 0.2%
Bayview Financial Acquisition Trust 2002-FA 5.50% 06/25/05 6,000 376/A,F/
--------
Total Asset-Backed Securities
(Identified Cost--$17,129) 16,849
-----------------------------------------------------------------------------------------------------
Mortgage-Backed Securities 4.0%
Fixed Rate Securities 3.9%
Asset Securization Corporation 1996-D2 6.920% 02/14/29 556 591
Commercial Mortgage Acceptance Corporation
1997-ML1 6.570% 12/15/30 1,250 1,366
Commercial Mortgage Acceptance Corporation
1997-ML1 6.735% 12/15/30 1,720 1,863
Enterprise Mortgage Acceptance Company 1998-1 6.110% 01/15/25 195 194/A/
Enterprise Mortgage Acceptance Company 1999-1 6.420% 10/15/25 455 196/A/
GMAC Commercial Mortgage Security Inc. 1998-C1 6.700% 05/15/30 631 706
GMAC Commercial Mortgage Security Inc. 1998-C1 6.974% 05/15/30 1,000 1,083
Nomura Asset Securities Corporation 1996-MD5 7.120% 04/13/39 520 566
--------
6,565
--------
Stripped Securities 0.1%
LB-UBS Commercial Mortgage Trust 2001-C3 1.214% 06/15/36 3,234 180/A,F/
--------
Total Mortgage-Backed Securities
(Identified Cost--$6,616) 6,745
-----------------------------------------------------------------------------------------------------
10
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
-------------------------------------------------
U.S. Government Securities 6.2%
United States Treasury 10 Year Inflation
Protection Security 1.875% 07/15/13 $10,000 $ 10,001/G/
United States 10 Year Treasury Note 4.250% 08/15/13 550 551
--------
Total U.S. Government Securities
(Identified Cost--$10,568) 10,552
-------------------------------------------------------------------------------------------------
Yankee Bonds/H/ 32.4%
Chemicals 0.3%
Rhodia SA 8.875% 06/01/11 494 454/A/
--------
Electric 1.1%
Hydro-Quebec 6.300% 05/11/11 1,700 1,917/B/
--------
Energy 1.8%
Calpine Canada Power Ltd. 8.500% 05/01/08 500 399
North America Energy Partners 8.750% 12/01/11 270 283/A/
Petroliam Nasional Berhad 7.750% 08/15/15 2,000 2,405/A/
--------
3,087
--------
Entertainment 0.1%
Alliance Atlantis Communications Inc. 13.000% 12/15/09 107 122
--------
Food, Beverage and Tobacco 0.9%
Bavaria S.A. 8.875% 11/01/10 1,550 1,589/A/
--------
Foreign Government 17.8%
Dominican Republic 9.500% 09/27/06 370 311/A/
Federative Republic of Brazil 14.500% 10/15/09 1,430 1,870
Federative Republic of Brazil 12.000% 04/15/10 800 960
Federative Republic of Brazil 2.063% 04/15/12 600 539/I/
Federative Republic of Brazil 8.000% 04/15/14 1,884 1,846
Federative Republic of Brazil 8.875% 04/15/24 100 98
Federative Republic of Brazil 11.000% 08/17/40 1,140 1,254
Morocco A Loan Participation Note 2.031% 01/02/09 314 308/I/
Republic of Bulgaria 8.250% 01/15/15 2,623 3,075/A/
Republic of Colombia 10.500% 07/09/10 890 998
Republic of Colombia 11.750% 02/25/20 2,090 2,518
Republic of Ecuador 12.000% 11/15/12 265 259/A/
Republic of Ecuador 7.000% 08/15/30 360 279/A,C/
Republic of Panama 9.625% 02/08/11 1,420 1,640
Republic of Panama 10.750% 05/15/20 1,320 1,584
11
Annual Report to Shareholders
SCHEDULE OF INVESTMENTS--Continued
Western Asset Premier Bond Fund--Continued
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
------------------------------------------------
Yankee Bonds/H/--Continued
Foreign Government--Continued
Republic of Peru 9.125% 02/21/12 $ 200 $ 223
Republic of Peru 5.000% 03/07/17 3,102 2,868/C/
Republic of Peru 8.750% 11/21/33 520 520
Republic of Philippines 9.875% 01/15/19 1,150 1,216
Republic of Turkey 12.375% 06/15/09 200 256
Republic of Turkey 11.750% 06/15/10 190 240
Russian Federation 8.250% 03/31/10 330 369
Russian Federation 5.000% 03/31/30 3,720 3,581
Russian Ministry of Finance 3.000% 05/14/06 10 10
United Mexican States 11.500% 05/15/26 2,355 3,409
--------
30,231
--------
Insurance 0.8%
Residential Reinsurance LTD 6.073% 06/01/05 300 307/A,I/
XL Capital Finance (Europe) plc 6.500% 01/15/12 1,000 1,095
--------
1,402
--------
Manufacturing (Diversified) 2.2%
Tyco International Group SA 6.375% 10/15/11 1,000 1,069
Tyco International Group SA 6.875% 01/15/29 2,615 2,680
--------
3,749
--------
Media 0.2%
Vivendi Universal SA 9.250% 04/15/10 303 359/A/
--------
Oil and Gas 1.3%
Anderson Exploration Ltd. 6.750% 03/15/11 2,000 2,218
--------
Paper and Forest Products 0.2%
Abitibi-Consolidated Inc. 8.850% 08/01/30 300 324
--------
Services 0.3%
Compagnie Generale de Geophysique SA 10.625% 11/15/07 500 530
--------
Special Purposes 4.0%
Arcel Finance Limited 5.984% 02/01/09 1,200 1,287/A/
Burlington Resources Finance 7.400% 12/01/31 450 533
Deutsche Telekom Int'l. Finance 5.250% 07/22/13 600 606
Eircom Funding 8.250% 08/15/13 80 89
MDP Acquisitions PLC 9.625% 10/01/12 500 560
12
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
------------------------------------------------
Yankee Bonds/H/--Continued
Special Purposes--Continued
PDVSA Finance Ltd. 8.500% 11/16/12 $ 1,310 $ 1,271
Petrozuata Finance, Inc. 8.220% 04/01/17 2,000 1,840/A/
UFJ Finance Aruba AEC 6.750% 07/15/13 500 533
--------
6,719
--------
Telecommunications 0.5%
France Telecom SA 9.750% 03/01/31 600 797
--------
Telecommunications (Cellular/Wireless) 0.2%
Vodaphone Group PLC 7.750% 02/15/10 250 296
--------
Transportation 0.7%
Canadian Pacific Railway 6.250% 10/15/11 1,000 1,099
OMI Corporation 7.625% 12/01/13 110 111/A/
--------
1,210
--------
Total Yankee Bonds
(Identified Cost--$48,255) 55,004
------------------------------------------------------------------------------------------
Preferred Stocks 0.3%
CSC Holdings Inc. 4shs 450
--------
Total Preferred Stocks
(Identified Cost--$329) 450
------------------------------------------------------------------------------------------
Warrants N.M.
American Tower 0.251wts 31
--------
Total Warrants
(Identified Cost--$16) 31
--------
Total Long-Term Securities
(Identified Cost--$213,272) 230,374
--------
13
Annual Report to Shareholders
SCHEDULE OF INVESTMENTS--Continued
Western Asset Premier Bond Fund--Continued
% OF
NET ASSETS PAR VALUE
---------------------------------
Short-Term Securities 5.4%
Repurchase Agreement
Credit Suisse First Boston
0.97%, dated 12/31/03, to be repurchased at $9,151 on 01/02/04 (Collateral:
$9,275 Federal Home Loan Bank bonds, due 12/15/05, value $9,333) $9,150 $ 9,150
--------
Total Short-Term Securities
(Identified Cost--$9,150) 9,150
---------------------------------------------------------------------------------------------------------------------
Total Investments
(Identified Cost--$222,422) 141.1% 239,524
Other Assets Less Liabilities 1.3% 2,248
Liquidation Value of Preferred Shares (42.4%) (72,000)
--------
Net Assets Applicable to Common Shareholders 100.0% $169,772
========
ACTUAL
EXPIRATION CONTRACTS APPRECIATION
---------------------------------
Futures Contracts Written/I/
U.S. Treasury Bond Futures March 2004 100 $ 62
U.S. Treasury Bond Futures March 2004 90 56
U.S. Treasury Bond Futures March 2004 23 25
--------
$ 143
========
---------------------------------------------------------------------------------------------------------------------
/A/Rule 144a Security - A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified institutional buyers. These securities represent 17.1% of net
assets applicable to common shareholders.
/B/Collateral to cover futures and option contracts.
/C/Stepped-coupon security - A security with a predetermined schedule of
interest or dividend rate changes at which time it begins to accrue interest
or pay dividends.
/D/Convertible Bond - Bond may be converted into the issuer's common stock.
/E/Zero-coupon Bond - A bond with no periodic interest payments which is sold
at such a discount as to produce a current yield to maturity.
/F/Stripped Security - Security with interest-only payment streams. For
interest-only securities, the amount shown as principal is the notional
balance used to calculate the amount of the interest due.
/G/Treasury Inflation Protected Security - Treasury security whose principal
value is adjusted daily in accordance with changes to the Consumer Price
Index (CPI). Interest is calculated on the basis of the current adjusted
principal value.
/H/Yankee Bond - A dollar-denominated bond issued in the U.S. by foreign
entities.
/I/Floating Rate Security - The rate of interest on this type of security is
tied to the London Interbank Offer Rate (LIBOR). The coupon rate is as of
December 31, 2003.
/J/Futures are described in more detail in the Notes to Financial Statements.
N.M.--Notmeaningful.
See notes to financial statements.
14
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2003
(Amounts in Thousands)
Western Asset Premier Bond Fund
Assets:
Investments, at value (cost $222,422) $239,524
Cash 1
Interest and dividends receivable 4,146
--------
Total assets 243,671
--------
Liabilities:
Dividends to shareholders 1,599
Investment management and administrative fees payable 116
Payable for securities purchased 40
Variation margin payable for futures contracts 33
Accrued expenses and other liabilities 111
--------
Total liabilities 1,899
--------
Preferred Shares:
$25 liquidation value per share applicable to 3 shares authorized and outstanding,
including dividends payable (Note 6) 72,000
--------
Net Assets Applicable to Common Shareholders $169,772
========
Composition of Net Assets Applicable to Common Shareholders:
Common shares, no par value, unlimited number of shares authorized, 11,320 shares
issued and outstanding (Note 5) 160,359
Under/(over) distributed net investment income (346)
Accumulated net realized gain/(loss) on investments, options and futures (7,486)
Net unrealized appreciation/(depreciation) on investments, options and futures 17,245
--------
Net Assets Applicable to Common Shareholders $169,772
========
Net asset value per common share:
($169,772 / 11,320 common shares issued and outstanding) $ 15.00
========
--------------------------------------------------------------------------------------------
See notes to financial statements.
15
Annual Report to Shareholders
STATEMENT OF OPERATIONS
For the Year Ended December 31, 2003
(Amounts in Thousands)
Western Asset Premier Bond Fund
Investment Income:
Interest $16,801
-------
Expenses:
Advisory and administration fees 1,289
Audit and legal fees 210
Preferred shares auction agent fees 182
Trustees' fees 95
Custodian fees 69
Reports to shareholders 62
Registration fees 25
Transfer agent and shareholder servicing fee 25
Preferred shares rating agency fees 13
Other expenses 30
-------
Total operating expenses 2,000
Excise tax expense 7
-------
Total expenses 2,007
-------
Net Investment Income 14,794
-------
Net Realized and Unrealized Gain/(Loss) on Investments, Options and Futures:
Realized gain/(loss) on:
Investments 776
Options 1,340
Futures (5,225)
-------
(3,109)
-------
Unrealized appreciation/(depreciation) on investments, options and futures 20,102
-------
Net realized and unrealized gain/(loss) on investments, options and futures 16,993
-------
Change in net assets resulting from operations 31,787
-------
Dividends to Preferred Shareholders from Net Investment Income (906)
-------
Net Increase in Net Assets Applicable to Common Shareholders Resulting from Operations $30,881
=======
-----------------------------------------------------------------------------------------------
See notes to financial statements.
16
STATEMENTS OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
(Amounts in Thousands)
Western Asset Premier Bond Fund
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002*
------------------------------------------------------------------------------------------------------------------
Change in Net Assets Applicable to Common Shareholders:
Net investment income $ 14,794 $ 11,013
Net realized gain/(loss) on investments, options and futures (3,109) (3,960)
Unrealized appreciation/(depreciation) on investments, options and futures 20,102 (2,857)
-------- --------
Change in net assets resulting from operations 31,787 4,196
-------- --------
Dividends to Preferred Shareholders from net investment income (906) (323)
-------- --------
Change in Net Assets Applicable to Common Shareholders Resulting from
Operations 30,881 3,873
-------- --------
Distributions to Common Shareholders:
From net investment income (14,716) (10,631)
-------- --------
Capital Transactions:
Proceeds from initial common shares offering -- 156,143
Offering costs from common shares issuance -- (270)
Offering costs from preferred shares issuance (166) (1,228)
Reinvestment of dividends resulting in the issuance of common shares 3,159 2,627
-------- --------
2,993 157,272
-------- --------
Net change in net assets applicable to common shareholders 19,158 150,514
-------- --------
Net Assets:
Beginning of period 150,614 100
-------- --------
End of period $169,772 $150,614
======== ========
Under/(over) distributed net investment income $ (346) $ 72
-------- --------
------------------------------------------------------------------------------------------------------------------
*March 28, 2002 (commencement of operations).
See notes to financial statements.
17
Annual Report to Shareholders
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data for a common share
outstanding throughout each period shown, total investment return, ratios to
average net assets and other supplemental data. This information has been
derived from information in the financial statements.
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002*
--------------------------------------------------------------------------------------------------------------------
Investment Operations:
Net asset value per common share, beginning of period $ 13.57 $ 14.32/(1)/
-------- --------
Net investment income/(2)/ 1.32 1.02
Net realized and unrealized gain/(loss) on investments, options and futures 1.51 (0.63)
Dividends to Preferred Shareholders (0.08) (0.03)
-------- --------
Total from investment operations applicable to Common Shareholders 2.75 0.36
-------- --------
Dividends to Common Shareholders
From net investment income (1.31) (0.97)
-------- --------
Offering costs charged to paid in capital (0.01) (0.14)
-------- --------
Net asset value per common share, end of period/(3)/ $ 15.00 $ 13.57
======== ========
Market value, end of period/(3)/ $ 15.85 $ 14.45
======== ========
Total Investment Return Based on:/(4)/
Market Value 21.56% 1.98%
Net Asset Value 20.81% 1.87%
Ratio to Average Net Assets Applicable to Common
Shareholders/Supplementary Data:
Net assets applicable to common shareholders, end of period (in thousands) $169,772 $150,614
Expenses 1.24% 1.55%/(6)/
Expenses, excluding interest expense 1.24% 1.07%/(6)/
Net investment income/(5)/ 8.55% 9.37%/(6)/
Portfolio turnover rate 38% 111%
Asset Coverage on preferred shares per $1,000, end of period $ 3,384 $ 3,141
--------------------------------------------------------------------------------------------------------------------
/(1)/Net sales load of $0.68 on initial shares issued.
/(2)/Based on average shares outstanding.
/(3)/Net asset value and market value are published in The Wall Street Journal
each Monday.
/(4)/Total investment return is calculated assuming a purchase of common shares
on the opening of the first day and a sale on the closing of the last day
of each year reported. Dividends and distributions are assumed, for
purposes of this calculation, to be reinvested at prices obtained under
the Fund's dividend reinvestment plan. Total investment return is not
annualized for periods of less than one year. Brokerage commissions are
not reflected.
/(5)/Ratios are calculated on the basis of income and expenses applicable to
both the common and preferred shares relative to the average net assets of
common shareholders. Ratios of net investment income before preferred
share dividends to average net assets of common shareholders are 9.11% and
9.66%, respectively.
/(6)/Annualized.
*March 28, 2002 (commencement of operations).
See notes to financial statements.
18
NOTES TO FINANCIAL STATEMENTS
(Amounts in Thousands)
1. Significant Accounting Policies:
Western Asset Premier Bond Fund (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, closed-end management
investment company. The Fund commenced investment operations on March 28, 2002.
The Fund's investment objective is to provide current income and capital
appreciation by investing primarily in a diversified portfolio of investment
grade bonds. The Fund currently seeks to achieve its investment objective by
investing substantially all of its assets in bonds, including corporate bonds,
U.S. government and agency securities and mortgage-related securities. The
ability of the issuers of the securities held by the Fund to meet their
obligations might be affected by economic developments in a specific state,
industry or region.
Preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
these estimates.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
Security Valuation
Securities owned by the Fund for which market quotations are readily
available are valued at current market value. Securities for which market
quotations are not readily available are fair valued by the Board of Trustees
or the Fund's Valuation Committee pursuant to procedures adopted by the Board.
In determining fair value, the Board of Trustees or the Fund's Valuation
Committee consider all relevant qualitative and quantitative information
available. The factors are subject to change over time and are reviewed
periodically. The values assigned to fair value investments are based on
available information and do not necessarily represent amounts that might
ultimately be realized, since such amounts depend on future developments
inherent in long-term investments. Further, because of the inherent uncertainty
of valuation, those estimated values may differ significantly from the values
that would have been used had a ready market for the investments existed, and
the differences could be material.
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 Fund's adviser to be the primary market. The Fund will value its foreign
securities in U.S. dollars on the basis of the then-prevailing exchange rates.
Security Transactions
Security transactions are recorded on the trade date. Realized gains and
losses from security transactions are reported on an identified cost basis for
both financial reporting and federal income tax purposes.
Purchases and sales of investment securities (excluding short-term
investments, U.S. government securities and U.S. government agencies)
aggregated $74,220 and $92,594, respectively, for the year ended December 31,
2003. There were purchases of $12,592 and sales of $2,077 of U.S. government
and government agency obligations for the year ended December 31, 2003.
Foreign Currency Transactions
Assets and liabilities initially expressed in terms of non-U.S. currencies
are translated into U.S. dollars at current rates of exchange. Purchases and
sales of securities and income and expenses are translated into U.S. dollars at
the prevailing market rates on the dates of such transactions. The effects of
changes in non-U.S. currency exchange rates on investment securities and other
assets and liabilities are included with the net realized and unrealized gain
or loss on investment securities.
Repurchase Agreements
The Fund may engage in repurchase agreements. Under the terms of a typical
repurchase agreement, a fund takes possession of an underlying debt obligation
subject to an obligation of the seller to repurchase, and a fund to resell, the
obligation at an agreed-upon price and time, thereby determining the yield
during a fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the fund's holding
period. The value of the collateral is at all times equal to at least the total
amount of the repurchase obligation, including interest. In the event of a
counterparty default, a fund has the right to use the collateral to satisfy the
terms of the repurchase agreement. However, there could be a potential loss to
the fund in
19
Annual Report to Shareholders
NOTES TO FINANCIAL STATEMENTS--Continued
(Amounts in Thousands)
the event the fund is delayed or prevented from exercising its right to dispose
of the collateral securities, including the risk of a possible decline in the
value of the collateral securities during the period in which the fund seeks to
assert its rights. The Fund's investment adviser reviews the value of the
collateral and the creditworthiness of those banks and dealers with which the
Fund enters into repurchase agreements to evaluate potential risks.
Reverse Repurchase Agreements
The Fund may engage in reverse repurchase agreements. Under the terms of a
typical reverse repurchase agreement, a fund sells an underlying debt
obligation subject to an obligation to repurchase the security from the buyer
at an agreed-upon price and time, thereby determining the yield to the buyer
during the buyer's holding period. A reverse repurchase agreement involves the
risk, among others, that the market value of the securities the Fund has sold
and is obligated to repurchase exceed the cash collateral retained by the Fund.
In the event the buyer of the securities under a repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the
agreement may be restricted pending a determination by the party, or its
trustee or receiver, whether to enforce the Fund's obligation to repurchase the
securities. At the time the Fund enters into a reverse repurchase agreement, it
will segregate, on it books, liquid assets having a value at least equal to the
repurchase price or take other actions permitted by law to cover its
obligations. The Fund had no reverse repurchase agreements outstanding at
December 31, 2003.
Options, Futures and Swap Agreements
The current market value of a traded option is the last sale price or, in
the absence of a sale, the mean between the closing bid and asked price.
Futures contracts are valued daily at the settlement price established by the
board of trade or exchange on which they are traded. Futures contracts are
marked-to-market on a daily basis. As a contract's value fluctuates, payments
known as variation margin are made or received by the Fund each day, depending
on the daily fluctuation in the value of the contract. The daily changes in
contract value are recorded as unrealized gains or losses, and the Fund
recognizes a gain or loss when the contract is closed. Swap agreements are
priced daily based upon quotations from brokers and the change, if any, is
recorded as unrealized appreciation or depreciation.
Investment Income and Distributions to Common Shareholders
Dividend income and distributions are recorded on the ex-dividend date.
Dividends from net investment income are declared and paid monthly to common
shareholders. Net capital gain distributions are declared and paid after the
end of the tax year in which the gain is realized. Distributions are determined
in accordance with federal income tax regulations, which may differ from those
determined in accordance with accounting principles generally accepted in the
United States of America; accordingly, periodic reclassifications are made
within the Funds' capital accounts to reflect income and gains available for
distribution under federal income tax regulations. Interest income and expenses
are recorded on the accrual basis. Bond discounts and premiums are amortized
and included in interest income for financial reporting purposes and federal
income tax purposes.
Short Sales
The Fund may sell a security it does not own in anticipation of a decline in
the market price of that security. The Fund must then borrow the security sold
short and deliver it to the dealer that brokered the short sale. A gain,
limited to the price at which the security was sold short, or a loss,
potentially unlimited in size, will be recognized upon the termination of the
short sale. With respect to each short sale, the Fund must segregate collateral
consisting of liquid assets with a value at least equal to the current market
value of the shorted securities, marked-to-market daily or take other actions
permitted by law to cover its obligations. Dividend expenses and fees paid to
brokers to borrow securities in connection with short sales are considered part
of the cost of short sale transactions. The Fund had no open short sales at
December 31, 2003.
Reclassification of Capital Accounts
For financial reporting purposes, capital accounts and distributions to
shareholders are adjusted to reflect the tax character of permanent book/tax
differences. For the period ended December 31, 2003, the Fund increased
accumulated net realized losses on investments, options and futures by $404,
increased Under/(over) distributed net investment income by $410 and decreased
common shares by $6.
20
2. Federal Income Taxes:
No provision for federal income or excise taxes is required since the Fund
intends to continue to qualify as a regulated investment company and distribute
all of its taxable income and capital gains to its shareholders. Because
federal income tax regulations differ from accounting principles generally
accepted in the United States, income and capital gains distributions
determined in accordance with tax regulations may differ from net investment
income and realized gains recognized for financial reporting purposes.
Accordingly, the character of the distributions and composition of net assets
for tax purposes differ from those reflected in the accompanying financial
statements.
3. Financial Instruments:
Forward Foreign Currency Exchange Contracts
As part of the investment program, the Fund may utilize forward currency
exchange contracts. Forward foreign exchange contracts are marked-to-market
daily using forward foreign currency exchange rates supplied by an independent
pricing service. The change in the contract's market value is recorded by the
Fund as an unrealized gain or loss. When a contract is closed or delivery is
taken, the Fund records a realized gain or loss equal to the difference between
the value of the contact at the time it was opened and the value at the time it
was closed.
The use of forward foreign currency exchange contracts does not eliminate
fluctuations in the underlying prices of the Fund's securities, but it does
establish a rate of exchange that can be achieved in the future. These forward
foreign currency exchange contracts involve market risk in excess of amounts
reflected in the financial statements. Although forward foreign currency
exchange contracts used for hedging purposes limit the risk of loss due to the
decline in the value of the hedged currency, they also limit any potential gain
that might result should the value of the currency increase. In addition, the
Fund could be exposed to risks if the counterparties to the contracts are
unable to meet the terms of their contracts. The Fund had no outstanding
forward foreign exchange contracts as of December 31, 2003.
Option and Futures
As part of the investment program, the Fund may utilize options and futures.
Options may be written (sold) or purchased by the Fund. When a fund purchases a
put or call option, the premium paid is recorded as an investment and its value
is marked-to-market daily. When a fund writes a put or call option, an amount
equal to the premium received by the fund is recorded as a liability and its
value is marked-to-market daily.
When options, whether written or purchased, expire, are exercised or are
closed (by entering into a closing purchase or sale transaction), the Fund
realizes a gain or loss as described in the chart below:
Purchased option: Impact on the Fund:
The option expires Realize a loss in the amount of the cost of the option.
---------------------------------------------------------------------------------------------------------------------------
The option is closed through a Realize a gain or loss depending on whether the proceeds from the closing sale
closing sale transaction transaction are greater or less than the cost of the option.
---------------------------------------------------------------------------------------------------------------------------
The Fund exercises a call option The cost of the security purchased through the exercise of the option will be increased
by the premium originally paid to purchase the option.
---------------------------------------------------------------------------------------------------------------------------
The Fund exercises a put option Realize a gain or loss from the sale of the underlying security. The proceeds of that sale
will be reduced by the premium originally paid to purchase the put option.
---------------------------------------------------------------------------------------------------------------------------
21
Annual Report to Shareholders
NOTES TO FINANCIAL STATEMENTS--Continued
(Amounts in Thousands)
Written option: Impact on the Fund:
The option expires Realize a gain equal to the amount of the premium
received.
----------------------------------------------------------------------------------------
The option is closed through a Realize a gain or loss without regard to any
closing purchase transaction unrealized gain or loss on the underlying
security and eliminate the option liability. The
Fund will realize a loss in this transaction if
the cost of the closing purchase exceeds the
premium received when the option was written.
----------------------------------------------------------------------------------------
A written call option is exercised by Realize a gain or loss from the sale of the
the option purchaser underlying security. The proceeds of that sale
will be increased by the premium originally
received when the option was written.
----------------------------------------------------------------------------------------
A written put option is exercised by The amount of the premium originally received
the option purchaser will reduce the cost of the security that the
Fund purchased when the option was exercised.
----------------------------------------------------------------------------------------
The risk associated with purchasing options is limited to the premium
originally paid. Options written by a Fund involve, to varying degrees, risk of
loss in excess of the option value reflected in the schedule of investments.
The risk in writing a covered call option is that a Fund may forgo the
opportunity of profit if the market price of the underlying security increases
and the option is exercised. The risk in writing a put option is that the Fund
may incur a loss if the market price of the underlying security decreases and
the option is exercised. In addition, there is a risk a Fund may not be able to
enter into a closing transaction because of an illiquid secondary market, or,
for over-the-counter options, because of the counterparty's inability or
unwillingness to perform.
Activity in written call and put options for the year ended December 31,
2003 was as follows:
Calls Puts
------------------- ------------------
Actual Actual
Contracts Premiums Contracts Premiums
------------------- ------------------
Options outstanding at December 31, 2002 700 $ 826 785 $ 694
Options written 2,290 1,919 3,846 2,862
Options closed (1,890) (1,637) (2,430) (1,529)
Options expired (400) (282) (2,201) (2,027)
Options exercised (700) (826) -- --
------ ------- ------ -------
Options outstanding at December 31, 2003 -- $ -- -- $ --
====== ======= ====== =======
Upon entering into a futures contract, the Fund is required to deposit with
the broker cash or cash equivalents equal to a certain percentage of the
contract amount. This is known as the "initial margin". Subsequent payments
("variation margin") are made or received by the Fund each day, depending on
the daily fluctuation in the value of the contract. The daily changes in
contract value are recorded as unrealized gains or losses and the Fund
recognizes a realized gain or loss when the contract is closed. Futures
contracts are valued daily at the settlement price established by the board of
trade or exchange on which they are traded.
The Fund enters into futures contracts in connection with its interest rate
management strategy, or for other purposes. Futures contracts involve, to
varying degrees, risk of loss in excess of the amounts reflected in the
financial statements. The change in the value of the futures contract primarily
corresponds with the value of their underlying instruments, which may not
correlate with changes in interest rates (if applicable). In addition, there is
a risk that the Fund may not be able to enter into a closing transaction
because of an illiquid secondary market.
The open short futures positions and related appreciation or depreciation at
December 31, 2003, are listed at the end of the Fund's schedule of investments.
Swap Agreements
The use of swaps involves risks that are different from those associated
with ordinary portfolio securities transactions. Swap agreements may be
considered to be illiquid. Although the Fund will not enter into any swap
agreements unless the adviser
22
believes that the other party to the transaction is creditworthy, the Fund does
bear the risk of loss of the amount expected to be received under a swap
agreement in the event of default or bankruptcy of the agreement counterparty.
The Fund may invest in different types of swap agreements. The Fund had no open
swap agreements at December 31, 2003.
4. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended
December 31, 2003 and December 31, 2002 was as follows:
December 31, December 31,
2003 2002
------------ ------------
Distribution paid from:
Ordinary Income $15,622 $10,954
Net Long-Term Capital Gains -- --
------- -------
Total Taxable Distribution $15,622 $10,954
As of December 31, 2003, the components of accumulated earnings on a tax
basis were as follows:
Undistributed ordinary income--net $ 81
Undistributed long-term capital gains--net --
-------
Total undistributed earnings--net $ 81
Capital loss carryforward $(7,204)*
Unrealized gains/(losses)--net 16,536**
-------
Total accumulated earnings/(losses)--net $ 9,413
=======
--------
*At December 31, 2003, the Fund had a net capital loss carryforward of $7,204,
of which $5,139 expires in the year 2010 and $2,065 expires in the year 2011.
This amount will be available to offset like amounts of any future taxable
gains.
**The difference between book-basis and tax-basis unrealized gains/(losses) is
primarily attributable to the tax deferral of losses on wash sales, the
difference between book and tax amortization methods of premium and discount
and the mark to market rules for options and futures contracts and other
book/tax temporary differences.
At December 31, 2003, the cost of securities for federal income tax purposes
was $222,950. Accordingly, gross unrealized appreciation of investment was
$17,843 and gross unrealized depreciation of investments was $1,269, resulting
in net unrealized appreciation of $16,574.
5. Common Shares:
Of the common shares of stock outstanding at December 31, 2003, Western
Asset Management Company owned 8,191 shares (share amounts are not in
thousands).
6. Preferred Shares (amounts are not in thousands):
There are 2,880 shares of Auction Market Preferred Shares ("Preferred
Shares") authorized. The Preferred Shares have rights as set forth in the
Fund's Agreement and Declaration of Trust, as amended to date, and its Bylaws,
as amended to date (the "Bylaws"), or as otherwise determined by the Trustees.
The 2,880 Preferred Shares outstanding consist of two series, 1,440 shares of
Series M and 1,440 shares of Series W. The Preferred Shares have a liquidation
value of $25,000 per share, plus any accumulated but unpaid dividends whether
or not earned or declared.
Dividends on the Series M and Series W Preferred Shares are cumulative and
are paid at a rate typically reset every seven and twenty-eight days,
respectively, based on the results of an auction. Dividend rates ranged from
1.04% to 1.65% from December 31, 2002 to December 31, 2003. Under the
Investment Company Act of 1940, the Fund may not declare dividends or make
other distributions on common shares or purchase any such shares if, at the
time of the declaration, distribution or purchase, asset coverage with respect
to the outstanding Preferred Shares would be less than 200%.
23
Annual Report to Shareholders
NOTES TO FINANCIAL STATEMENTS--Continued
(Amounts in Thousands)
The Preferred Shares are redeemable at the option of the Fund, in whole or
in part, on the second business day preceding any dividend payment date at
$25,000 per share plus any accumulated but unpaid dividends. The Preferred
Shares are also subject to mandatory redemption at $25,000 per share plus any
accumulated but unpaid dividends, whether or not earned or declared, if certain
requirements relating to the composition of the assets and liabilities of the
Fund as set forth in the Bylaws are not satisfied.
Preferred shareholders, who are entitled to one vote per Preferred Share,
generally vote as a single class with the common shareholders, but will vote
separately as a class (and, in certain circumstances, vote separately by
series) with respect to certain matters set forth in the Bylaws. The preferred
shareholders are entitled to elect two Trustees of the Fund.
7. Securities Loaned:
The Fund may lend its securities to approved brokers to earn additional
income and will receive cash and U.S. government securities as collateral
against the loans. Cash collateral received is invested in a money market
pooled account by the Fund's lending agent. Collateral is maintained over the
life of the loan in an amount not less than 100% of the value of the loaned
securities. As of December 31, 2003, there were no securities on loan.
8. Transactions with Affiliates and Certain Other Parties:
The Fund has an Investment Management Agreement with Western Asset
Management Company ("Western Asset"). Pursuant to the terms of the management
agreement, the Fund pays Western Asset an annual fee, payable monthly, in an
amount equal to 0.55% of the average weekly value of the Fund's total managed
assets. Pursuant to a portfolio management agreement between Western Asset and
Western Asset Management Company Limited ("WAML"), Western Asset pays a portion
of the fees it receives from the Fund to WAML at an annual rate of 0.425% of
the average weekly value of the Fund's total managed assets that WAML manages.
Under the terms of the Administration Agreement among the Fund, Western Asset
and Princeton Administrators, L.P. (the "Administrator"), Western Asset pays
the Administrator, a monthly fee at an annual rate of 0.125% of the Fund's
average weekly total managed assets, subject to a monthly minimum fee of
$12,500 (not in thousands).
Western Asset and WAML are wholly owned subsidiaries of Legg Mason, Inc.
9. Trustee Compensation (dollar amounts are not in thousands):
Each Trustee currently receives a fee of $5,000 annually for serving as a
Trustee of the Fund, and a fee of $2,000 and related expenses for each meeting
the Board of Trustees attended. The Chairman of the Board receives an
additional $2,500 per year for serving in that capacity. Audit Committee
members receive $1,000 for each meeting, and the Audit Committee Chairman
receives an additional $1,000 annually. Other committee members receive $500
per meeting.
24
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Trustees of Western Asset Premier Bond Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of the Western Asset Premier Bond
Fund (hereafter referred to as the "Fund") at December 31, 2003, and the
results of its operations, the changes in its net assets, and the financial
highlights for each of the fiscal periods presented, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund'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 auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes 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, which included
confirmation of securities at December 31, 2003 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 6, 2004
25
Annual Report to Shareholders
FEDERAL TAX INFORMATION
(Unaudited)
Of the Fund's ordinary income distributions paid during the year ended
December 31, 2003, 0.10% was attributable to Federal obligations. In
calculating the foregoing percentage, Fund expenses have been allocated on a
pro rata basis.
The law varies in each state as to whether and what percentage of dividend
income attributable to Federal obligations is exempt from state income tax. We
recommend that you consult your tax advisor to determine if any portion of the
dividends you received is exempt from state income tax.
Western Asset Premier Bond Fund
26
Dividend Reinvestment Plan
Western Asset Premier Bond Fund ("WEA") and EquiServe Trust Company N.A.
("Agent"), as the Transfer Agent and Registrar of WEA, offer a convenient way
to add shares of WEA to your account. WEA offers to all common shareholders a
Dividend Reinvestment Plan ("Plan"). Under the Plan, cash distributions (e.g.,
dividends and capital gains) on the common shares are automatically invested in
shares of WEA unless the shareholder elects otherwise.
As a participant in the Dividend Reinvestment Plan, you will automatically
receive your dividend or net capital gains distribution in newly issued shares
of WEA, if the market price of the shares on the date of the distribution is at
or above the net asset value ("NAV") of the shares, minus estimated brokerage
commissions that would be incurred upon the purchase of common shares on the
open market. The number of shares to be issued to you will be determined by
dividing the amount of the cash distribution to which you are entitled (net of
any applicable withholding taxes) by the greater of the NAV per share on such
date or 95% of the market price of a share on such date. If the market price of
a share on such distribution date is below the NAV, minus estimated brokerage
commissions that would be incurred upon the purchase of common shares on the
open market, the Agent will, as agent for the participants, buy shares of WEA
through a broker on the open market. All common shares acquired on your behalf
through the Plan will be automatically credited to an account maintained on the
books of the Agent.
Additional Information Regarding the Plan
WEA will pay all costs applicable to the Plan, with the exceptions noted
below. Brokerage commissions for open market purchases by the Agent under the
Plan will be charged to participants. All shares acquired through the Plan
receive voting rights and are eligible for any stock split, stock dividend, or
other rights accruing to shareholders that the Board of Trustees may declare.
You may terminate participation in the Plan at any time by giving written
notice to the Agent. Such termination shall be effective prior to the record
date next succeeding the receipt of such instructions or by a later date of
termination specified in such instructions. Upon termination, a participant may
request a certificate for the full shares credited to his or her account or may
request the sale of all or part of such shares. Fractional shares credited to a
terminating account will be paid for in cash at the current market price at the
time of termination.
Dividends and other distributions invested in additional shares under the
Plan are subject to income tax just as if they had been received in cash. After
year end, dividends paid on the accumulated shares will be included in the Form
1099-DIV information return to the Internal Revenue Service (IRS) and only one
Form 1099-DIV will be sent to participants each year.
Inquiries regarding the Plan, as well as notices of termination, should be
directed to EquiServe Trust Company, N.A., P.O. Box 43011, Providence, Rhode
Island 02940-3011--Investor Relations telephone number (866) 290-4386.
Proxy Voting Policies and Procedures
You may request a free description of the policies and procedures that the
Company uses to determine how proxies relating to the Company's portfolio
securities are voted by calling 1-626-844-9528 or by writing to the Company, or
obtain a copy of these policies and procedures (and other information relating
to the Company) from the Securities and Exchange Commission's web site
(http://www.sec.gov).
27
Annual Report to Shareholders
TRUSTEES AND OFFICERS
The Trustees and officers of the Fund, their ages, and a description of
their principal occupations during the past five years are listed below. Except
as shown, each Trustee's and officer's principal occupation and business
experience for the last five years have been with the employer(s) indicated,
although in some cases the Trustee or officer may have held different positions
with such employer(s). A Statement of Additional Information for the Company
includes additional information about the Company's Trustees. You may request a
free copy of the Statement of Additional Information by calling 1-626-844-9528.
Unless otherwise indicated, the business address of the persons listed below is
c/o Western Asset Management Company, 385 East Colorado Blvd., Pasadena, CA
91105.
Number of
Term of Portfolios In
Office and Fund Complex
Position(s) Length of Time Principal Occupation(s) Overseen by
Name and Age with the Fund Served During the Past Five Years Trustee/(1)/
-------------------- ------------- -------------- --------------------------------------------------- -------------
Independent Trustees
--------------------------------------------------------------------------------------------------------------------
Ronald J. Arnault Trustee Term expires Retired (1996) Executive Vice President, Chief 14
Age 60 in 2006; Financial Officer and member of the Board of
served since Directors of Atlantic Richfield Company.
2002
--------------------------------------------------------------------------------------------------------------------
John E. Bryson Trustee Term expires Chairman and CEO, Edison International (electric 14
Age 60 in 2006; power generator, distributor and structured finance
served since provider), since 1990. Chairman of Southern
2002 California Edison Company (1990-1999 and 2003-
present). Chief Executive Officer of Southern
California Edison Company (1990-1999).
--------------------------------------------------------------------------------------------------------------------
Anita L. DeFrantz Trustee Term expires President (since 1987) and Director (since 1990), 14
Age 51 in 2004; Amateur Athletic Foundation of Los Angeles.
served since President and Director, Kids in Sports, since 1994.
2002 Vice President and Director International Rowing
Federation 1997-Present. Member International
Olympic Committee ("IOC"), 1986-Present.
Member IOC Executive Board 1992-2001. Member
U.S. Olympic Committee ("USOC") 1976-Present.
Member USOC Executive Board 1997-Present.
--------------------------------------------------------------------------------------------------------------------
William G. McGagh Trustee and Term expires Consultant, McGagh Associates (corporate financial 14
Age 74 Chairman of in 2004; consulting), since 1989. Chairman of the Board of
the Trustees served since the John Tracy Clinic. Chairman of the Board of
2002 the Los Angeles Orthopaedic Hospital. Formerly,
Senior Vice President, Chief Financial Officer and
Director of Northrup Grumman Corp. (defense,
aerospace and cyberspace products).
--------------------------------------------------------------------------------------------------------------------
William E. B. Siart Trustee Term expires Chairman, Walt Disney Concert Hall, Inc., since 14
Age 57 in 2005; 1998. Chairman, Excellent Education Development,
served since since 2000, President and Chief Executive Officer
2002 (1998-2000). Formerly: First Interstate Bancorp,
Chairman and Chief Executive Officer.
--------------------------------------------------------------------------------------------------------------------
Louis A. Simpson Trustee Term expires President and Chief Executive Officer, Capital 14
Age 67 in 2005; Operations, since 1993, GEICO Corporation.
served since Formerly: President and Chief Executive Officer,
2002 Western Asset Management Company ("Western
Asset") (1977-1979).
--------------------------------------------------------------------------------------------------------------------
Other
Principal Occupation(s) Directorships
During the Past Five Years Held by Trustee
--------------------------------------------------- -----------------
---------------------------------------------------------------------
Retired (1996) Executive Vice President, Chief None
Financial Officer and member of the Board of
Directors of Atlantic Richfield Company.
---------------------------------------------------------------------
Chairman and CEO, Edison International (electric Director of The
power generator, distributor and structured finance Boeing Company
provider), since 1990. Chairman of Southern and The Walt
California Edison Company (1990-1999 and 2003- Disney Company
present). Chief Executive Officer of Southern
California Edison Company (1990-1999).
---------------------------------------------------------------------
President (since 1987) and Director (since 1990), None
Amateur Athletic Foundation of Los Angeles.
President and Director, Kids in Sports, since 1994.
Vice President and Director International Rowing
Federation 1997-Present. Member International
Olympic Committee ("IOC"), 1986-Present.
Member IOC Executive Board 1992-2001. Member
U.S. Olympic Committee ("USOC") 1976-Present.
Member USOC Executive Board 1997-Present.
---------------------------------------------------------------------
Consultant, McGagh Associates (corporate financial None
consulting), since 1989. Chairman of the Board of
the John Tracy Clinic. Chairman of the Board of
the Los Angeles Orthopaedic Hospital. Formerly,
Senior Vice President, Chief Financial Officer and
Director of Northrup Grumman Corp. (defense,
aerospace and cyberspace products).
---------------------------------------------------------------------
Chairman, Walt Disney Concert Hall, Inc., since Director of
1998. Chairman, Excellent Education Development, Sybron Dental
since 2000, President and Chief Executive Officer Specialties, Inc.
(1998-2000). Formerly: First Interstate Bancorp,
Chairman and Chief Executive Officer.
---------------------------------------------------------------------
President and Chief Executive Officer, Capital Director of
Operations, since 1993, GEICO Corporation. Comcast Corp.
Formerly: President and Chief Executive Officer, and ResMed Inc.
Western Asset Management Company ("Western
Asset") (1977-1979).
---------------------------------------------------------------------
28
Number of
Term of Portfolios In
Office and Fund Complex
Position(s) Length of Time Principal Occupation(s) Overseen by
Name and Age with the Fund Served During the Past Five Years Trustee/(1)/
----------------------- ------------- -------------- ---------------------------------------------------- -------------
Officers
------------------------------------------------------------------------------------------------------------------------
James W. Hirschmann III President Served since Director, President and Chief Executive Officer, N/A
Age 43 2001/(2)/ Western Asset, March 1999 to present; Director of
Western Asset Management Company Limited, 1999
to present; Member, Board of Directors of Medical
Simulation Corporation; Member, Board of Trustees
of Widener College; President, Western Asset
Funds, Inc. and Pacific American Income Shares,
Inc. Formerly: Director of Marketing, Western Asset,
April 1989 to 1998; Vice President and Director of
Marketing, Financial Trust Corporation (bank
holding company), 1988 to 1989; Vice President of
Marketing, Atalanta/Sosnoff Capital (investment
management company), 1986 to 1988.
------------------------------------------------------------------------------------------------------------------------
Ilene S. Harker Vice Served since Head of Enterprise Risk Management, Western N/A
Age 49 President 2001/(2)/ Asset, 2003 to present; Vice President, Pacific
American Income Shares, Inc., since April 1996;
Vice President, Western Asset Funds, Inc., since
November 1990. Formerly: Secretary of Pacific
American Income Shares, Inc., 1993 to 1996;
Director of Compliance and Controls, Western
Asset, 1978 to 2003.
------------------------------------------------------------------------------------------------------------------------
S. Kenneth Leech Vice Served since Chief Investment Officer, Western Asset, 1998 to N/A
Age 49 President 2001/(2)/ present; Vice President, Western Asset Funds, Inc.
and Pacific American Income Shares, Inc. Formerly:
Director of Portfolio Management, Western Asset,
1990 to 1998; Senior Trader, Greenwich Capital,
1988 to 1990; Fixed Income Manager of The First
Boston Corporation (holding company; stock and
bond dealers), 1980 to 1987; Portfolio Manager of
National Bank of Detroit, 1977 to 1980.
------------------------------------------------------------------------------------------------------------------------
Marie K. Karpinski Treasurer Served since Vice President, Legg Mason Wood Walker, N/A
Age 55 and 2001/(2)/ Incorporated, 1992 to present; Vice President and
Principal Treasurer of all Legg Mason retail funds (open-end
Financial investment companies), 1986 to present; Vice
and President and Treasurer of Legg Mason Charles
Accounting Street Trust, Inc. (open-end investment company)
Officer and Western Asset Funds, Inc.; Treasurer and
Principal Financial and Accounting Officer of
Pacific American Income Shares, Inc., 2001 to
present, Western Asset Funds, Inc., 1990 to
present, Western Asset/Claymore U.S. Treasury
Inflation Protected Securities Fund, 2003 to present
and Western Asset U.S. Treasury Inflation
Protected Securities Fund 2, 2004 to present.
Formerly: Assistant Treasurer of Pacific American
Income Shares, Inc., 1988 to 2001; Assistant Vice
President, Legg Mason Wood Walker,
Incorporated, 1989 to 1992.
------------------------------------------------------------------------------------------------------------------------
Other
Principal Occupation(s) Directorships
During the Past Five Years Held by Trustee
---------------------------------------------------- ---------------
--------------------------------------------------------------------
Director, President and Chief Executive Officer, N/A
Western Asset, March 1999 to present; Director of
Western Asset Management Company Limited, 1999
to present; Member, Board of Directors of Medical
Simulation Corporation; Member, Board of Trustees
of Widener College; President, Western Asset
Funds, Inc. and Pacific American Income Shares,
Inc. Formerly: Director of Marketing, Western Asset,
April 1989 to 1998; Vice President and Director of
Marketing, Financial Trust Corporation (bank
holding company), 1988 to 1989; Vice President of
Marketing, Atalanta/Sosnoff Capital (investment
management company), 1986 to 1988.
--------------------------------------------------------------------
Head of Enterprise Risk Management, Western N/A
Asset, 2003 to present; Vice President, Pacific
American Income Shares, Inc., since April 1996;
Vice President, Western Asset Funds, Inc., since
November 1990. Formerly: Secretary of Pacific
American Income Shares, Inc., 1993 to 1996;
Director of Compliance and Controls, Western
Asset, 1978 to 2003.
--------------------------------------------------------------------
Chief Investment Officer, Western Asset, 1998 to N/A
present; Vice President, Western Asset Funds, Inc.
and Pacific American Income Shares, Inc. Formerly:
Director of Portfolio Management, Western Asset,
1990 to 1998; Senior Trader, Greenwich Capital,
1988 to 1990; Fixed Income Manager of The First
Boston Corporation (holding company; stock and
bond dealers), 1980 to 1987; Portfolio Manager of
National Bank of Detroit, 1977 to 1980.
--------------------------------------------------------------------
Vice President, Legg Mason Wood Walker, N/A
Incorporated, 1992 to present; Vice President and
Treasurer of all Legg Mason retail funds (open-end
investment companies), 1986 to present; Vice
President and Treasurer of Legg Mason Charles
Street Trust, Inc. (open-end investment company)
and Western Asset Funds, Inc.; Treasurer and
Principal Financial and Accounting Officer of
Pacific American Income Shares, Inc., 2001 to
present, Western Asset Funds, Inc., 1990 to
present, Western Asset/Claymore U.S. Treasury
Inflation Protected Securities Fund, 2003 to present
and Western Asset U.S. Treasury Inflation
Protected Securities Fund 2, 2004 to present.
Formerly: Assistant Treasurer of Pacific American
Income Shares, Inc., 1988 to 2001; Assistant Vice
President, Legg Mason Wood Walker,
Incorporated, 1989 to 1992.
--------------------------------------------------------------------
29
Annual Report to Shareholders
TRUSTEES AND OFFICERS--Continued
Number of
Term of Portfolios In
Office and Fund Complex Other
Position(s) Length of Time Principal Occupation(s) Overseen by Directorships
Name and Age with the Fund Served During the Past Five Years Trustee/(1)/ Held by Trustee
-------------- ------------- -------------- --------------------------------------------------- ------------- ---------------
Officers
-----------------------------------------------------------------------------------------------------------------------------
Erin K. Morris Assistant Served since Assistant Vice President of Legg Mason Wood N/A N/A
Age 37 Treasurer 2001/(2)/ Walker, Incorporated, 2002 to present; Assistant
Treasurer (2001 to present) of: Legg Mason Income
Trust, Legg Mason Cash Reserve Trust, Legg Mason
Tax Exempt Trust, Legg Mason Tax-Free Income
Fund, Pacific American Income Shares, Inc.,
Western Asset Funds, Inc., Western Asset/
Claymore U.S. Treasury Inflation Protected
Securities Fund (2003 to present) and Western
Asset/Claymore U.S. Treasury Inflation Protected
Securities Fund 2 (2004 to present); Manager, Fund
Accounting, Legg Mason Wood Walker,
Incorporated (2000 to present). Formerly: Assistant
Manager, Fund Accounting, Legg Mason Wood
Walker, Incorporated (1993 to 2000).
-----------------------------------------------------------------------------------------------------------------------------
Lisa G. Mrozek Secretary Served since Senior Compliance Officer, Western Asset; N/A N/A
Age 41 2001/(2)/ President of the Board of Directors of Southern
California Dollars for Scholars; Member of the
Board of Trustees of Scholarship America;
Secretary, Western Asset Funds, Inc. and Pacific
American Income Shares, Inc. (1999 to present).
Formerly: Assistant Vice President, Fund Business
Management, Capital Research and Management
Company (an investment management firm), 1990
to 1999.
-----------------------------------------------------------------------------------------------------------------------------
/(1)/Each Trustee also serves as a Director for Pacific American Income Shares,
Inc. (closed-end investment company) and Western Asset Funds, Inc.
(open-end investment company), which are considered part of the same Fund
Complex as the Fund.
/(2)/Each officer shall hold office until his or her respective successor is
chosen and qualified, or in each case until he or she sooner dies,
resigns, is removed with or without cause or becomes disqualified.
30
Item 2 - Code of Ethics
Did the registrant adopt a code of ethics, as of the end of the period covered
by this report, which applies to the registrant's principal executive officer,
principal financial officer, principle accounting officer or controller, or
persons performing similar functions, regardless of whether these individuals
are employed by the registrant or a third party? If not, why not? Briefly
describe any amendments or waivers that occurred during the period. State if the
code of ethics, including amendments and waivers are on a website and provide
the website address. State if the registrant will send a copy of the code of
ethics to shareholders at no charge upon request.
THE REGISTRANT, WESTERN ASSET PREMIER BOND FUND, HAS ADOPTED A CODE OF
ETHICS THAT APPLIES TO THE FUND PRESIDENT AND TREASURER, A COPY OF
WHICH IS ATTACHED AS AN EXHIBIT TO THIS FORM N-CSR.
Item 3 - Audit Committee Financial Expert
Did the registrant's board of directors determine that the registrant either:
(a) has at least one audit committee financial expert serving on its audit
committee; or (b) does not have an audit committee financial expert serving on
its audit committee? If yes, disclose the name of the financial expert and
whether he/she is "independent." If no, explain why not.
THE DIRECTORS OF WESTERN ASSET PREMIER BOND FUND DETERMINED THAT THE
FUND HAS AT LEAST ONE AUDIT COMMITTEE FINANCIAL EXPERT SERVING ON ITS
AUDIT COMMITTEE.
MR. RONALD J. ARNAULT IS THE AUDIT COMMITTEE FINANCIAL EXPERT. HE IS
"INDEPENDENT."
Item 4 - Principal Accounting Fees and Services
(a) Audit Fees - Disclose the aggregate fees billed for each of the last
two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial
statements or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for
those fiscal years.
FY 02 - $23,300
FY 03 - $26,900
(b) Audit-Related Fees - Disclose the aggregate fees billed in each of the
last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance of
the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item. Describe the nature of the
services comprising the fees disclosed under this category.
FY 02 - $18,785 (2 tests required to be audited)
FY 03 - $ 8,700
REVIEW OF THE RATING AGENCY COMPLIANCE TESTING FOR THE REGISTRANT'S
AUCTION MARKET PREFERRED SHARES OUTSTANDING.
(c) Tax Fees - Disclose the aggregate fees billed in each of the last two
fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning. Describe
the nature of the services comprising the fees disclosed under this
category.
FY 02 - $800
FY 03 - $870
SERVICES INCLUDE PREPARATION OF FEDERAL AND STATE INCOME TAX RETURNS,
REVIEW OF EXCISE TAX DISTRIBUTION REQUIREMENTS AND PREPARATION OF
EXCISE TAX RETURNS.
(d) All Other Fees - Disclose the aggregate fees billed in each of the
last two fiscal years for products or services provided by the
principal accountant, other than the services reporting in paragraphs
(a) through (c) of this Item. Describe the nature of the services
comprising the fees disclosed under this category.
FY 02 - $0
FY 03 - $3,500
INTERIM AUDIT OF FUND SECURITIES' PRICING AND N-CSR CERTIFICATION
RELATED ITEMS.
(e) (1) Disclose the audit committee's pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of Regulation
S-X.
WITH REGARD TO THE POSSIBLE NECESSITY FOR PRE-APPROVAL BETWEEN
MEETINGS, THE COMMITTEE AGREED TO ARRANGE APPROVAL BY MEANS OF
TELEPHONIC MEETING OR IN WRITING, INCLUDING BY AN EXCHANGE OF E-MAILS.
(2) Disclose the percentage of services described in each of
paragraphs (a) through (d) of this Item that were approved by the
audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X.
NONE.
(f) If greater than 50%, disclose the percentage of hours expended on the
principal accountant's engagement to audit the registrant's financial
statements for the most recent fiscal year that were attributed to
work performed by persons other than the principal accountant's
full-time, permanent employees.
NOT APPLICABLE.
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen
by another investment adviser), and any entity controlling, controlled
by, or under common control with the adviser that provides ongoing
services to the registrant for each of the last two fiscal years of
the registrant.
FY 02 - $542,653
FY 03 - $883,350
(h) Disclose whether the registrant's audit committee of the board of
directors has considered whether the provision of non-audit services
that were rendered to the registrant's investment adviser (not
including any sub-adviser whose role is primarily portfolio management
and is subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common control
with the adviser that provides ongoing services to the registrant that
were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal
accountant's independence.
THE MEMBERS OF THE AUDIT COMMITTEE OF WESTERN ASSET PREMIER BOND FUND
HAVE CONSIDERED WHETHER THE NON-AUDIT SERVICES THAT WERE RENDERED BY
THE FUND'S PRINCIPAL ACCOUNTANT TO THE ENTITIES SPECIFIED IN THIS ITEM
AND THAT WERE NOT PRE-APPROVED BY THE AUDIT COMMITTEE ARE COMPATIBLE
WITH MAINTAINING THE PRINCIPAL ACCOUNTANT'S INDEPENDENCE.
Item 5 - Reserved
Item 6 - Reserved
Item 7 - Disclosure of Proxy Voting Policies and Procedures
For closed-end management investment companies, describe the policies and
procedures that it uses to determine how to vote proxies relating to portfolio
securities, including the procedures that the company uses when a vote presents
a conflict between the interests of its shareholders, and those of the company's
investment adviser; principal underwriter; or any affiliated person of the
company, its investment adviser, or its principal underwriter.
A COPY OF THE PROXY VOTING POLICIES AND PROCEDURES IS ATTACHED AS AN
EXHIBIT TO THIS FORM N-CSR.
Item 8 - Reserved
Item 9 - Controls and Procedures
(a) Disclose the conclusions of the registrant's principal executive
officer or officers and principal financial officer or officers, or
persons performing similar functions, regarding the effectiveness of
the registrant's disclosure controls and procedures (as defined in
Rule 30a-3(c) under the Act (17 CFR 270.30a-3(c))) as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on the evaluation of these controls
and procedures required by Rule 30a-3(b) under the Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Exchange Act
(17 CFR 240-13a-15(b) or 240.15d-15(b)).
WITHIN 90 DAYS OF THE FILING DATE OF THIS FORM N-CSR, THE REGISTRANT'S
PRESIDENT AND TREASURER REVIEWED THE REGISTRANT'S DISCLOSURE CONTROLS
AND PROCEDURES ("THE PROCEDURES") AND EVALUATED THEIR EFFECTIVENESS.
BASED ON THEIR REVIEW, SUCH OFFICERS DETERMINED THAT THE PROCEDURES
ENSURE THAT INFORMATION REQUIRED TO BE DISCLOSED BY THE REGISTRANT ON
FORM N-CSR IS RECORDED, PROCESSED, SUMMARIZED AND REPORTED WITHIN THE
TIME PERIODS REQUIRED BY THE SECURITIES AND EXCHANGE COMMISSION'S
RULES AND REGULATIONS.
(b) Disclose any change in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
THERE WERE NO CHANGES IN THE REGISTRANT'S INTERNAL CONTROL OVER
FINANCIAL REPORTING DURING THE REGISTRANT'S LAST HALF-YEAR THAT HAVE
MATERIALLY AFFECTED, OR ARE REASONABLY LIKELY TO MATERIALLY AFFECT,
THE INTERNAL CONTROL OVER FINANCIAL REPORTING.
Item 10 - Exhibits
(a) File the exhibits listed below as part of this Form.
(a)(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant
intends to satisfy the Item requirements through filing of an
exhibit.
(ATTACHED)
(a)(2) A separate certification for each principal execute officer and
principal financial officer of the registrant as required by Rule
30a-2(a) under the Act (17 CFR 270.30a-2(a)), exactly as set forth
bolow:
(ATTACHED)
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange
Act, provide the certifications required by Rule 30a-2(b) under the
Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the
Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)), and Section 1350
of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)
as an exhibit. A certification furnished pursuant to this paragraph
will not be deemed "filed" for the purposes of Section 18 of the
Exchange Act (15 U.S.C. 78r), or other wise subject to the liability
of that section. Such certification will not be deemed to be
incorporated by reference into any filing under the Securities Act of
1933 or the Exchange Act, except to the extent that the registrant
specifically incorporates it by reference.
(ATTACHED)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Western Asset Premier Bond Fund
By: /s/ James W. Hirschmann
------------------------
James W. Hirschmann
President, Western Asset Premier Bond Fund
Date: 2/20/04
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ James W. Hirschmann
------------------------
James W. Hirschmann
President, Western Asset Premier Bond Fund
Date: 2/20/04
By: /s/ Marie K. Karpinski
-----------------------
Marie K. Karpinski
Treasurer and Principal Financial Accounting Officer,
Western Asset Premier Bond Fund
Date: 2/20/04