PACIFIC
AMERICAN
INCOME
SHARES, INC.
SEMI-ANNUAL
REPORT
1996
The Board of Directors
NORMAN BARKER, JR.*(dagger) Chairman
JOHN E. BRYSON*
RICHARD C. GILMAN(dagger)
GORDON L. HOUGH*(dagger)
WILLIAM G. McGAGH
RONALD L. OLSON
LOUIS A. SIMPSON
Officers
W. CURTIS LIVINGSTON III
President
KENT S. ENGEL
Vice President
& Portfolio Manager
SCOTT F. GRANNIS
Vice President
ILENE S. HARKER
Vice President
DONNA BARNES
Secretary
STEVEN T. SARUWATARI
Treasurer
MARIE K. KARPINSKI
Assistant Treasurer
References
INVESTMENT ADVISER
Western Asset Management Company
117 East Colorado Boulevard
Pasadena, California 91105
TRANSFER AGENT
Boston EquiServ
P.O. Box 1728
Boston, Massachusetts 02105
* Member of Executive Committee
(dagger) Member of Audit Committee
PACIFIC
AMERICAN
INCOME
SHARES, INC.
P.O. BOX 983
PASADENA
CALIFORNIA 91102
<PAGE>
Dear Shareholders:
In a continuation of the seesaw pattern we've seen since early 1994, yields
in the fixed income markets rose sharply during the first half of 1996, thus
reversing more than half the declines registered in 1995. Despite this unusual
volatility, our investment strategies helped offset some of the negative impact
of rising rates on bond prices, resulting in a total return (price appreciation
plus dividends) for the first half of the year of -0.31%. The Fund's NAV fell
from $16.27 to $15.63, as rising yields caused bond prices to decline.
These results compare quite favorably both to the overall bond market,
which registered a total return of -1.25% in the six months ending June 30,
1996, and to the other funds with which we compete. According to Lipper
Analytical Services, for the six months ending June 30, 1996, PAIS ranked fourth
of 16 closed-end investment grade bond funds, first of 16 in the two years
ending June 30, 1996, and first of 15 in the five years ending June 30, 1996.
The Fund's quarterly dividend rate fell modestly in February to $0.295, compared
to the $0.30 rate which prevailed through 1995, in recognition of the
substantial decline in market yields which transpired. Share price decreased
from 15 1/4 to 14 3/8.
The Fund benefited during the period primarily from its traditional
emphasis on corporate bonds with attractive yield characteristics. In addition,
the Fund's relative performance was enhanced by our decision to increase the
portfolio's exposure to mortgage-backed securities early in the year, in the
belief that the wider yield spreads available in this sector offered an
attractive alternative and also helped boost the portfolio's overall credit
quality. Relative performance also was aided by the Fund's "barbell" exposure to
interest rates (which consisted of an emphasis on both long- and
shorter-maturity bonds), since long-term interest rates rose somewhat less than
intermediate-term rates.
Market Review
Recent market action largely confirms that the substantial rise in interest
rates which occurred earlier in the year is beginning to have a depressing
effect on demand, resulting in the overall pace of economic growth coming in
below expectations. Economic data now paint a picture of a slowing in the demand
for big-ticket items such as housing and vehicles, as well as a general slowing
in the pace of overall retail sales. More recently, activity in the
manufacturing sector has cooled, and employment growth has moderated. The
combination of these factors suggests that nominal growth in the economy will be
subdued in the second half, and inflation pressures are unlikely to rise as many
had feared earlier this year.
As a consequence of the recent slowdown in the pace of economic activity,
expectations of Fed tightening have moderated substantially, as there is now
little chance that growth will overheat near term. Meanwhile, sensitive
indicators of inflation--such as commodity prices, precious metals and the
dollar--continue to indicate a relative absence of price pressures. We
anticipate that the lagged effects of higher interest rates will continue to
depress activity in the months to come. This will not only ease fears of tighter
monetary policy, but also calm inflation expectations, thus allowing interest
rates to decline further, with the potential for short- and intermediate-term
rates to decline somewhat more than long-term interest rates.
1
<PAGE>
Portfolio Strategy
Consistent with our view that interest rates are likely to decline over the
medium term, we continue to hold an above-average exposure to interest rates. In
recent months, we have shifted the emphasis somewhat in order to emphasize the
intermediate area of the yield curve, in the belief that this will be the major
beneficiary of declining yields. The portfolio continues to be concentrated in
the corporate sector, with emphasis on companies with attractive yields and the
potential for improving credit fundamentals. Mortgage spreads continue to offer
value at these levels, so we are maintaining a larger-than-average exposure to
the sector, while emphasizing issues with a minimum of prepayment sensitivity in
a falling interest rate environment.
Shareholder Meeting Results
The Fund's annual meeting of shareholders was held on April 11, 1996. Of
the 9,319,423 shares outstanding, the following shares (in thousands) were voted
at the meeting:
For Against Abstain
Election of seven directors:
Norman Barker, Jr. 7,624 -- 132
John E. Bryson 7,644 -- 112
Richard C. Gilman 7,621 -- 135
Gordon L. Hough 7,625 -- 131
William G. McGagh 7,646 -- 110
Ronald L. Olson 7,647 -- 109
Louis A. Simpson 7,643 -- 113
Ratification of selection of
Price Waterhouse LLP as the Fund's
independent accountants for the year
ending December 31, 1996. 7,622 28 106
Despite the unusual adversity we've faced over the past several years, we
are pleased with the Fund's performance, and believe it is a testament to our
efforts to avoid excessive risk and instead concentrate on strategies which we
believe will benefit the portfolio over time. We, of course, welcome any
comments or questions you may have, and look forward to devoting our best
efforts to the Fund and its shareholders.
Sincerely,
/s/ W. Curtis Livingston, III
W. Curtis Livingston, III
President
2
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
A Dividend Reinvestment Plan is available to all shareholders of record of the
Company. For participants in the Plan, cash dividends are automatically
reinvested in additional shares of the Company's stock. These shares are
purchased on the open market. Interested shareholders may obtain more
information by contacting the Dividend Reinvestment Agent, Boston EquiServ, P.O.
Box 1728, Boston, MA 02105.
- --------------------------------------------------------------------------------
Schedule of Investments June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Rating Market
Amount (Note A) Value
- -------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT SECURITIES
FINANCIAL AND LEASING -- 9.0%
$ 2,700,000 Dean Witter Discover, 6.75% due 10-15-13 A $ 2,443,095
1,600,000 Equitable Companies, 9% due 12-15-04 A 1,760,944
2,630,000 PaineWebber Group, 7.63% due 2-15-14 BBB 2,472,358
1,500,000 Salomon Inc., 6.75% due 2-15-03 BBB 1,435,890
5,000,000 Western Financial Savings Bank, 8.50%, due 7-1-03 BB 5,004,450
- -------------------------------------------------------------------------------------------------
13,116,737
- -------------------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCIES (Note B) -- 4.5%
3,564,000 Rep. of Argentina, 6.313%(dagger) due 3-31-05 BB 2,779,920
3,500,000 Hydro Quebec, 8.05% due 7-7-24 A 3,710,140
- -------------------------------------------------------------------------------------------------
6,490,060
- -------------------------------------------------------------------------------------------------
INDUSTRIAL AND MISCELLANEOUS -- 30.5%
2,094,000 Auburn Hills Trust, 12.00%(dagger) due 5-1-20 A 3,024,574
2,000,000 Cablevision Industries, 9.25% due 4-1-08 BB 2,050,000
2,500,000 Harrahs Operations, Inc., 8.75% due 3-15-00 BBB 2,512,500
3,000,000 Kmart Corp., 7.95% due 2-1-23 BB 2,280,000
1,790,000 Lockheed Martin Corp., 6.63% due 6-15-98 BBB 1,796,426
1,070,000 Lockheed Martin Corp., 7.45% due 6-15-04 BBB 1,084,830
2,242,000 Loews Corporation, 7.63% due 6-1-23 AA 2,123,510
2,635,000 News America Holdings Incorporated, 8.88% due 4-26-23 BBB 2,733,654
</TABLE>
3
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Schedule of Investments (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Rating Market
Amount (Note A) Value
- -------------------------------------------------------------------------------------------------
<S> <C>
$ 930,000 News America Holdings Incorporated, 8.45% due 8-1-34 BBB $ 987,028
1,170,000 Nomura Asset Securities Corp., 7.12% due 4-13-36 AAA 1,142,761
2,000,000 Northrop Grumman Corp., 9.38% due 10-15-24 BBB 2,150,260
3,000,000 Owens-Illinois, Inc., 11% due 12-1-03 BB 3,225,000
400,000 RJR Nabisco, Inc., 8.75% due 8-15-05 BBB 395,800
4,280,000 RJR Nabisco, Inc., 8.75% due 7-15-07 BBB 4,200,606
1,000,000 Rogers Cable System, LTD., 10% due 3-15-05 BB 985,000
1,500,000 Safeway Inc., 10% due 12-1-01 BB 1,631,250
3,000,000 TCI Communications Inc., 8.75% due 8-1-15 BBB 2,948,640
2,200,000 TCI Communications Inc., 7.88% due 2-15-26 BBB 1,937,628
1,185,000 Time Warner, Inc., 9.15% due 2-1-23 BBB 1,225,219
2,945,000 Time Warner Entertainment Company, 8.38% due 7-15-33 BBB 2,827,907
3,100,000 Unisys Corporation, 10.63% due 10-1-99 B 3,100,000
- -------------------------------------------------------------------------------------------------
44,362,593
- -------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES -- 28.2%
1,165,344 Federal Home Loan Mortgage Corp., 8.5% due 3-15-97 AAA 1,161,418
78,368 Federal Home Loan Mortgage Corp., 10.75% due 7-1-00 AAA 86,327
375,192 Federal Home Loan Mortgage Corp., 10.25% due 5-1-09 AAA 401,159
500,689 Federal Home Loan Mortgage Corp., 11.88% due 6-15-13 AAA 526,991
25,400,000 Federal Home Loan Mortgage Corp., 7% due 3-1-26
(Note C) AAA 24,455,374
3,000,000 Federal National Mortgage Assoc., 8% due 4-25-06 AAA 3,107,790
302,367 Federal National Mortgage Assoc., 10.5% due 7-01-09 AAA 328,337
193,955 Glendale Federal Savings and Loan Assoc.,
9.13% due 1-25-08 AA 193,955
206,575 Gov't. Nat'l. Mortgage Assoc., 12.25% due 3-20-14 AAA 238,279
177,962 Gov't. Nat'l. Mortgage Assoc., 9% due 9-15-19 AAA 187,953
4,600,000 Gov't. Nat'l. Mortgage Assoc., 8% due 3-15-26 (Note C) AAA 4,716,104
30,706 Granite Home Loan Mortgage Cert., 13.5% due 1-1-99
(Note D) AA 30,706
1,485,659 Resolution Trust Corporation, 7.18%(dagger) due 5-25-19 AA 1,418,804
3,999,941 Resolution Trust Corporation, 9.4% due 5-25-24 AAA 4,109,751
73,655 Valley Federal S&L, Manufactured Housing Part. Cert.,
13.25% due 1-15-99 (Note D) AA 73,655
- -------------------------------------------------------------------------------------------------
41,036,603
- -------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Schedule of Investments (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Rating Market
Amount (Note A) Value
- -------------------------------------------------------------------------------------------------
<S> <C>
UTILITIES -- GAS AND ELECTRIC -- 19.1%
$ 870,000 Connecticut Yankee Atomic Power, 12% due 6-1-00 BB $ 893,603
3,250,000 Connecticut Light & Power Co., 7.88% due 6-1-01 BBB 3,293,778
3,500,000 First PV Funding Corporation, 10.15% due 1-15-16 B 3,683,750
5,000,000 Long Island Lighting Co., 9.75% due 5-1-21 BBB 5,136,700
2,000,000 Louis Dreyfus Natural Gas, 9.25% due 6-15-04 BB 2,047,500
3,000,000 Niagra Mohawk Power, 7.75% due 5-15-06 BB 2,656,140
2,161,000 North Atlantic Energy Corp., 9.05% due 6-1-02 BB 2,138,526
2,478,000 PNPP II Funding Corp., 9.12% due 5-30-16 BB 2,385,645
4,000,000 Sithe/Independence Funding Corp., 9%
due 12-30-13 (Note E) BBB 3,861,480
1,872,117 Systems Energy Resources, 7.43% due 1-15-11 BBB 1,782,199
- -------------------------------------------------------------------------------------------------
27,879,321
- -------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCIES -- 14.2%
3,175,000 ResolutionFunding Corporation, 8.88% due 4-15-30 AAA 3,869,023
4,040,000 U.S. Treasury Notes, 6.38% due 5-15-99 AAA 4,048,848
1,420,000 U.S. Treasury Notes, 6.88% due 3-31-00 AAA 1,440,633
2,840,000 U.S. Treasury Notes, 6.50% due 5-31-01 AAA 2,841,335
6,030,000 U.S. Treasury Notes, 6.63% due 6-30-01 AAA 6,042,663
2,490,000 U.S. Treasury Notes, 6.88% due 5-15-06 AAA 2,517,614
- -------------------------------------------------------------------------------------------------
20,760,116
- -------------------------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------------------------------
PREFERRED STOCK -- 1.0%
1,500 Time Warner, Inc. 1,459,688
- -------------------------------------------------------------------------------------------------
Total Investment Securities-- 106.5% 155,105,116
- -------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Schedule of Investments (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------
<S> <C>
SHORT-TERM SECURITIES
$20,493,000 J.P. Morgan, Repurchase Agreement
5.47% due 6-28-96, to be repurchased at $20,502,000 on
7-1-96 (Collateral: $21,090,000 Federal Home Loan Bank
discount notes due 8-26-96, value $20,905,000) $ 20,493,000
3,000,000 Lockheed Martin Corp.
5.50% due 7-12-96 2,994,958
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Total Short-Term Securities-- 16.1% 23,487,958
- -------------------------------------------------------------------------------------------------
Total Investments-- 122.6% $178,593,074
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</TABLE>
Note A -- The rating shown is the higher of the ratings provided by Moody's
Investors Service or Standard and Poor's Corporation. Securities
issued and/or guaranteed by the U.S. Government or any of its
agencies, when not rated by Moody's or Standard and Poor's, are
considered to be AAA.
Note B -- Foreign securities are denominated and traded in U.S. dollars.
Note C -- When-issued security--security issued on a delayed delivery basis.
Final settlement and maturity not yet determined.
Note D -- The Company purchased Granite Home Loan Mortgage Certificates at
98.958, and Valley Federal S&L Manufactured Housing Participation
Certificates at 99.5, in private placement transactions on
December 22, 1983 and January 30, 1984, respectively. These
investments are restricted as to resale and amounted to
approximately $104,400 (.1% of net assets) at June 30, 1996.
Restricted securities have been valued at fair value in accordance
with valuation methods approved by the Board of Directors. Such
approved methods reflect the Board's consideration of, among other
things, the financial condition of the issuer, pricing opinions of
two outside broker-dealers, current interest rates and the maturity of
the security. The Company will bear the costs incurred, if any, in
connection with any future disposition of these securities.
Note E -- Rule 144a security.
- ----------
(dagger) The rate shown is the rate as of June 30, 1996.
See notes to financial statements.
6
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Statement of Operations (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investment securities at market value (Cost $152,571,596) $155,105,116
Short-term securities -- at cost plus interest earned 23,487,958
Total investments $178,593,074
Accrued interest and dividends 2,483,124
Other assets 43,047
181,119,245
LIABILITIES:
Accrued expenses 162,782
Dividends payable 269,148
Payable for securities purchased 34,978,734
Investment advisory fees payable 60,994
35,471,658
NET ASSETS -- equivalent to $15.63 per share on
9,319,423 shares of Common Stock outstanding $145,647,587
SUMMARY OF STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share: authorized
10,000,000 shares; issued and outstanding 9,319,423
shares $ 93,194
Capital surplus 141,490,573
Distributions in excess of net investment income (23,882)
Undistributed net realized gain on investments 1,554,182
Unrealized appreciation of investments 2,533,520
Net assets applicable to outstanding Common Stock $145,647,587
</TABLE>
- -----------
See notes to financial statements.
7
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Statement of Operations (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, 1996
<S> <C>
INVESTMENT INCOME:
Income:
Interest $ 5,813,832
Expenses:
Advisory fee $ 386,193
Transfer agent and shareholder servicing expense 35,999
Custodian fees 34,224
Directors' fees and expenses 29,862
Printing, stationery, and reports to shareholders 25,300
Legal and auditing fees 21,316
Taxes, other than federal income taxes 14,140
Registration fees 8,150
Other expenses 1,845
Less fee waived (12,000)
545,029
Net investment income 5,268,803
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments
(excluding short-term securities):
Proceeds from sales of investments 201,275,460
Cost of securities sold on basis of identified cost 200,266,790
Net realized gain of investments 1,008,670
Unrealized appreciation (depreciation) of investments:
End of period appreciation 2,533,520
Beginning of period appreciation 9,292,180
Decrease in unrealized appreciation (6,758,660)
Net realized and unrealized loss on investments (5,749,990)
Decrease in net assets resulting from operations $ (481,187)
</TABLE>
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See notes to financial statements.
8
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six For the
Months Ended Year Ended
June 30, 1996 December 31, 1995
(Unaudited)
<S> <C>
Operations:
Net investment income $ 5,268,803 $ 11,028,839
Net realized gain on investments 1,008,670 3,751,679
Increase (decrease) in unrealized appreciation of
investments (6,758,660) 14,791,141
Increase (decrease) in net assets resulting from
operations (481,187) 29,571,659
Distributions to shareholders from
net investment income (5,498,448) (11,183,308)
Total increase (decrease) (5,979,635) 18,388,351
Net Assets:
Beginning of period 151,627,222 133,238,871
End of period (including (over)underdistributions of
net investment income of ($23,882) and
$205,763, respectively) $145,647,587 $151,627,222
</TABLE>
- ----------
See notes to financial statements.
9
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Financial Highlights:
- --------------------------------------------------------------------------------
Contained below is per share operating performance data for a share of
common stock outstanding throughout each year, total investment return,
ratios to average net assets and other supplemental data. This information
has been derived from information provided in the financial statements and
market price data for the Company's shares.
<TABLE>
<CAPTION>
For the Six For the Years Ended December 31,
Months Ended ----------------------------------------------------------
June 30, 1996 1995 1994 1993 1992 1991
(Unaudited)
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $16.27 $14.30 $16.25 $15.94 $16.06 $14.62
Net investment income .57 1.18 1.23 1.27 1.38 1.47
Net realized and unrealized gain (loss)
on investments (.62) 1.99 (1.90) .84 .39 1.43
Total from investment operations (.05) 3.17 (.67) 2.11 1.77 2.90
Distributions paid from:
Net investment income (.59) (1.20) (1.20) (1.28) (1.40) (1.46)
Net realized gain on investments -- (.08) (.52) -- --
Dilutive effect of stock issuance -- -- -- -- (.49) --
Net asset value, end of period $15.63 $16.27 $14.30 $16.25 $15.94 $16.06
Market value per share, end of period $14.375 $15.25 $13.125 $16.375 $15.625 $15.75
TOTAL RETURN:
Based on market value per share -1.89%(B) 25.92% -12.75% 16.57% 8.17% 25.82%
RATIOS TO AVERAGE NET ASSETS:
Expenses .74%(C) .81% .76% .72%(A) .79%(A) .84%(A)
Net investment income 7.17%(C) 7.62% 8.20% 7.71% 8.31% 9.60%
SUPPLEMENTAL DATA:
Portfolio turnover rate 276.63%(C) 131.73% 116.19% 130.25% 83.51% 41.52%
Net assets at end of period
(in thousands) $145,648 $151,627 $133,239 $151,424 $142,311 $107,735
</TABLE>
- ----------
(A) Exclusive of expenses relating to Convertible Notes which were converted in
1993.
(B) Not annualized
(C) Annualized
See notes to financial statements.
10
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company is registered under the Investment Company Act of 1940 as a
diversified, closed-end management investment company. The significant
accounting policies of the Company, which are in accordance with generally
accepted accounting principles for investment companies, include the following:
(a) Cash -- Cash includes demand deposits held with the Company's
custodian and does not include short-term investments.
(b) Investments -- Security transactions are recorded on the trade
date. Investment securities owned at June 30, 1996 are reflected in the
accompanying Schedule of Investments at their value on June 30, 1996. In
valuing portfolio securities, securities listed or traded on a national
securities exchange are valued at the last sales price on the last business
day of the period. Each security traded in the over-the-counter market,
including listed debt securities whose primary market is believed to be
over-the-counter, is generally valued at the mean of the bid prices at the
time of computation. Prices are obtained from at least two dealers
regularly making a market in the security, unless such prices can be
obtained from only a single market maker. The method of valuing restricted
securities is described in Note D to the Schedule of Investments. The
difference between cost and market value is reflected separately as
unrealized appreciation of investments. Short-term securities are generally
stated at cost plus interest earned, which approximates market value.
The net realized gain or loss on investment transactions is determined
for federal income tax and financial reporting purposes on the basis of
identified cost. Purchases and sales of securities other than short-term
and U.S. government securities for the six months ended June 30, 1996
aggregated $24,387,873 and $27,376,676, respectively. Purchases and sales
of U.S. government securities were $197,953,920 and $173,898,784,
respectively, for the six months ended June 30, 1996. As of June 30, 1996,
unrealized appreciation for federal income tax and financial reporting
purposes aggregated $2,533,520 of which $3,941,006 related to appreciated
securities and $1,407,486 related to depreciated securities. The aggregate
cost of investment securities owned for federal income tax purposes was
$176,059,554 at June 30, 1996.
(c) Recognition of income, expense and distributions to shareholders --
The Company accrues interest income and expenses on a daily basis.
Dividends are recorded on the ex-dividend date.
(d) Federal income taxes -- No provision for federal income or excise
taxes has been made in the accompanying financial statements because the
Company intends to distribute to its shareholders substantially all of its
taxable net income and realized capital gains, and otherwise comply with
the Internal Revenue Code provisions applicable to regulated investment
companies.
11
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
NOTE 2 -- INVESTMENT ADVISORY AGREEMENT AND AFFILIATED PERSONS:
The Company has entered into an investment advisory agreement with Western
Asset Management Company ("Adviser"), which is a wholly owned subsidiary of Legg
Mason, Inc., pursuant to which the Adviser provides investment advice and
administrative services to the Company. In return for its advisory services, the
Company pays the Adviser a monthly fee at an annual rate of 0.7% of the average
monthly net assets of the Company up to $60,000,000 and 0.4% of such net assets
in excess of $60,000,000. If expenses (including the Adviser's fee but excluding
interest, taxes, brokerage fees, the expenses of any offering by the Company of
its securities and extraordinary expenses beyond the control of the Company)
borne by the Company in any fiscal year exceed 1.5% of average net assets up to
$30,000,000 and 1% of average net assets over $30,000,000, the Adviser will
reimburse the Company for any excess. No expense reimbursement was due under
this agreement for the six months ended June 30, 1996 nor for the year ended
December 31, 1995.
NOTE 3 -- QUARTERLY RESULTS OF OPERATIONS:
<TABLE>
<CAPTION>
Three Months Ended
- ----------------------------------------------------------------------------------------------------
June 30, 1996 March 31, 1996 Dec. 31, 1995 Sept. 30, 1995
- ----------------------------------------------------------------------------------------------------
<S> <C>
Investment income Total $ 2,873,498 $2,940,334 $ 2,982,175 $ 3,071,783
Net investment income Total 2,604,629 2,664,174 2,683,746 2,737,336
Per Share .279 .286 .288 .294
Net realized and
unrealized gain
(loss) on
investments Total (1,640,535) (4,109,455) 9,608,886 (4,537,709)
Per Share (.176) (.441) 1.031 (.487)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
- ----------------------------------------------------------------------------------------------------
June 30, 1995 March 31, 1995 Dec. 31, 1994 Sept. 30, 1994
- ----------------------------------------------------------------------------------------------------
<S> <C>
Investment income Total $ 3,114,653 $3,036,121 $ 3,084,482 $ 3,233,052
Net investment income Total 2,805,108 2,802,649 2,778,236 3,006,269
Per Share .301 .301 .298 .323
Net realized and
unrealized gain
(loss) on
investments Total 12,020,012 1,451,631 (1,842,315) (2,500,960)
Per Share 1.290 .156 (.198) (.268)
</TABLE>
12
