The Board of Directors
NORMANBARKER, JR.*+ Chairman
JOHNE.BRYSON*
RICHARDC. GILMAN+
GORDON L. HOUGH*+
WILLIAM G. McGAGH
RONALD L. OLSON
LOUIS A. SIMPSON
Officers PACIFIC
W. CURTIS LIVINGSTON III AMERICAN
President INCOME
KENT S. ENGEL SHARES, INC.
Vice President ANNUAL
&Portfolio Manager REPORT
SCOTT F. GRANNIS 1996
Vice President
ILENE S. HARKER
Vice President
DONNA E. 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
State Street Bank and Trust Company
P.O. Box 8200
Boston, Massachusetts 02266-8200
*Member of Executive Committee
+Member of Audit Committee
PACIFIC
AMERICAN
INCOME
SHARES, INC.
P.O. BOX 983
PASADENA
CALIFORNIA 91105
<PAGE>
Dear Shareholders:
Market Review and Performance
Last year was a difficult one for the bond market, but a relatively good one for
our shareholders. Despite historically stable economic fundamentals, interest
rates gyrated as the market attempted to understand the inflationary
implications of every nuance in the economic statistics. When the dust finally
settled, the economy picked up steam following its 1995 slump, and Treasury
yields ended the year somewhat higher. Though these higher yields depressed
Pacific American's (PAIS) share price fractionally, the fund performed well,
continuing to deliver a high level of income to shareholders, enhanced this time
with a capital gain distribution.
Despite the adverse impact of volatile and generally lower bond prices,
there were pockets of opportunity for which the fund was well positioned. Yield
premiums on corporate issues--both in the investment-grade and particularly in
the high-yield arenas--declined last year, as strong economic fundamentals
bolstered the outlook for credit quality improvements, and investors hungered
for yield against a global backdrop of generally low interest rates. A modest
exposure to emerging market debt was rewarded as Latin American countries such
as Mexico and Argentina gradually recovered their economic and political
stability, causing the sector to generate very impressive returns. Finally, the
fund benefited from a moderate exposure to mortgage-backed securities, the
top-performing sector of the broad bond market.
Because of these successful strategies, the fund generated a total return
(net price gains/losses plus interest income) of 4.2% for the year. This
compares favorably with the return of 4.3% for investment grade corporate debt,
and the 3.6% total return for the broad investment grade bond market. According
to Lipper Analytical Services, for the year ending December 31, 1996, PAIS'
return ranked third out of its universe of 16 competitive closed-end investment
grade bond funds. Its long-term competitive record remains excellent: for
periods ending December 31, 1996, PAIS ranked first of 15 for the past five
years, and second of 15 for the past ten years. As we anticipated in last year's
letter, regular dividends of $1.18 per share were paid in calendar year 1996, as
well as a $.295 per share capital gain distribution.
Economic Outlook and Portfolio Strategy
As we enter the seventh year of the current business cycle, the usual cast
of nefarious characters is conspicuously absent from the economic stage, namely
rising inflation and policy excesses. Today's core rate of inflation (2-2.5%)
compares favorably to the low-inflation experience of the 1950s and 60s, and
inflation has never been as stable in our economic history as it has been for
the past six years. This is undoubtedly a tribute to nine years of Fed Chairman
Greenspan's steady hand at the monetary helm, in which period we have seen the
slowest rate of growth in the monetary aggregates in history.
For all the bond market's angst over the inflationary implications of
growth, the economy has grown at a moderate rate at best--averaging 2.5% per
year since 1991--and no other business cycle in modern times has exhibited
growth rate volatility as low as this one. There have been some
1
<PAGE>
ups and downs, but the current growth rate is about average, and it's a
mixed bag at that. Consumer demand has weakened since last summer, with the
housing and auto sectors just about flat, while other areas, particularly
construction and exports, have strengthened.
Thanks to Washington's new-found discipline and high tax burdens, the
federal budget deficit has contracted significantly, and the Fed remains stingy
with credit. So, unlike any other in modern memory, this business cycle
expansion has not been driven by stimulus measures. Instead, the drivers have
been the virtuous forces of disinflation, restructuring and good, old-fashioned
productivity. That's why growth has not led to rising inflation, because today's
growth is the by-product of low-inflation fundamentals and is thus consistent
with a secular decline in interest rates.
Going forward, we believe that these forces will remain favorable for the
bond market. Monetary policy appears reasonably tight, as suggested by the
strong dollar, falling gold price and stable industrial commodity prices. The
relatively wide gap between interest rates and inflation has the effect of
tightening monetary conditions further, thus providing added insurance that the
economy does not "overheat." Happily, there is a substantial cushion between
short-term interest rates and inflation, giving the Fed plenty of room to ease
policy should the economy falter. As for fiscal policy, the political climate in
Washington is likely to remain conservative, and the chances of meaningful
entitlement reform, budget cutting, and tax reform are significant and growing.
We thus have little reason to expect negative policy surprises on the
horizon, and this in turn should help keep economic and financial market
volatility in check. Sooner or later, as concerns over growth are replaced by
the continuing reality of low and stable inflation, interest rates should resume
their secular downtrend. We thus see little reason to change the strategies that
have been in place for the past year.
Dividend Policy
Thanks to the moderate rise in market interest rates over the past year,
and our efforts to preserve as high a current income level for PAIS shareholders
as possible, we anticipate no change this year in the current regular quarterly
dividend rate of $0.295/share. It is unlikely, however, that there will be
another significant capital gain distribution.
As always, we renew our pledge to deliver the highest level of management
expertise to our shareholders. Please let us know if we can answer any questions
for you.
Sincerely,
/s/ W. Curtis Livingston, III
W. Curtis Livingston, III
Chairman
2
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Statistical Highlights (Amounts in Thousands, except per share amounts)
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1996 1995
Net Asset Value $146,979 $151,627
Per Share $15.77 $16.27
Net Investment Income $10,641 $11,029
Per Share $1.14 $1.18
Dividends Paid $10,997 $11,184
Per Share $1.18 $1.20
Capital Gains Paid $2,749 --
Per Share $.295 --
- --------------------------------------------------------------------------------
The Company
- --------------------------------------------------------------------------------
Pacific American Income Shares, Inc. is a closed-end, diversified
management investment company which seeks for its shareholders a high level of
current income through investment in a diversified portfolio of debt securities.
Substantially all of the net investment income is distributed to shareholders. A
Dividend Reinvestment Plan is available to those shareholders of record desiring
it. The shares are listed on the New York Stock Exchange where they are traded
under the symbol PAI, and price quotations can be found in publications under
the abbreviation PacAmShrs.
- --------------------------------------------------------------------------------
Investment Policies
- --------------------------------------------------------------------------------
The Company's fundamental investment policies provide that its portfolio be
invested as follows:
[ ] At least 75% in debt securities rated within the four highest grades, and in
government securities, bank debt, commercial paper, cash or cash equivalents.
[ ] Up to 25% in other fixed income securities, convertible bonds, convertible
preferred and preferred stock.
[ ] Not more than 25% in securities restricted as to resale.
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
State Street Bank and Trust Company ("State Street"), which acts as the
Transfer Agent and Registrar for the Common Stock of Pacific American Income
Shares, Inc. ("PAIS"), makes available to registered shareholders of PAIS a
dividend reinvestment plan ("Plan"). Under the Plan, cash dividends and other
cash distributions payable to participants in the Plan will automatically be
invested in additional shares of Common Stock of PAIS which will be purchased in
the open market or in negotiated transactions. If you elect to participate in
the Plan, State Street, acting for each participant in the Plan, will apply all
cash dividends and other cash distributions which become payable to such
participants on shares of Common Stock of PAIS (including both shares evidenced
by certificates held by participants and shares credited to the accounts of
participants under the Plan) to the purchase of additional shares of such stock
for each participant. These purchases may be made on any securities exchange
where such shares are traded, in the over-the-counter market or in negotiated
transactions, and may be subject to such terms of price, delivery, etc., as
State Street may agree to.
3
<PAGE>
For the purpose of making purchases, State Street will commingle each
participant's funds with those of all other participants in the Plan. The price
per share of shares purchased for each participant's account with respect to a
particular dividend or other distribution shall be the average price (including
brokerage commissions, transfer taxes and any other costs of purchase) of all
shares purchased with respect to that dividend or other distribution.
Participants may obtain, without charge, a certificate or certificates for all
or part of the full shares credited to their accounts at any time by making a
request in writing to State Street. State Street will hold the total shares
purchased (unless and until the certificate(s) of a participant are delivered)
for all participants in its name or the name of its nominee and will have no
responsibility for the value of such shares after their purchase. Full and
fractional shares will be voted by State Street in accordance with the
participant's instructions.
Although the Plan is similar to dividend reinvestment plans for
shareholders of industrial companies, it differs from reinvestment plans for
shareholders of some other closed-end investment companies. Under the latter
plans, dividends and distributions are invested in additional shares at market
price or per share net asset value, whichever is lower, and shares which are
purchased at net asset value are acquired from the issuer rather than in the
market.
PAIS will pay all costs applicable to the Plan except brokerage
commissions, transfer taxes and any other costs of purchase or sale with respect
to shares purchased and sold by State Street under the Plan, which costs will be
charged to participants. In the event PAIS determines to no longer pay such
costs, State Street will terminate the Plan and may, but is not obligated to,
offer a new plan under which it would impose a direct service charge on
participants.
Participation in the Plan may be terminated by a participant by written
instructions to that effect to State Street. Such termination shall be effective
as of the record date next succeeding the receipt of such instructions by State
Street, unless a later date of termination is specified in such instructions.
State Street may terminate a participant's participation in the Plan by mailing
a notice of intention to terminate to the participant at his address as it
appears on State Street's records. Such termination shall be effective as of the
record date for a distribution next succeeding the date such notice was mailed
by State Street, unless a later date of termination is specified in such notice.
Upon termination, a participant may request a certificate for the full shares
credited to his account or may request the sale of all or part of such shares.
If such participant instructs State Street to sell the shares credited to the
participant's account, State Street may accumulate such shares and those of any
other terminating participants for purposes of such sale. Brokerage charges,
transfer taxes, and any other costs of sale will be allocated pro rata among the
selling participants. Any such sale may be made on any securities exchange where
such shares are traded, in the over-the-counter market or in negotiated
transactions, and may be subject to such terms of price, delivery, etc., as
State Street may agree to. 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, and
will be included in the Form 1099 information return to the Internal Revenue
Service and only one Form 1099 will be sent to participants each year.
Further information about the Plan may be obtained by writing to State
Street Bank and Trust Company, Dividend Reinvestment Service, P.O. Box 8200,
Boston, MA 02266-8200.
4
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Portfolio Diversification December 31, 1996
- --------------------------------------------------------------------------------
BY RATING*
(At Market Value)
[PIE CHART APPEARS HERE--SEE VALUES BELOW]
AAA................................ 39.0%
AA................................. 2.1%
A.................................. 5.4%
BBB................................ 28.7%
BB................................. 18.1%
B.................................. 3.6%
Short-Term Securities.............. .3%
Not Rated.......................... 2.8%
BY INDUSTRY*
(At Market Value)
[BAR GRAPH APPEARS HERE--SEE VALUES BELOW]
.3% Short-Term Securities
.9% Mortgage-Backed
3.5% Equities
4.6% Foreign & International
5.6% Financial & Leasing
10.9% U.S. Government & Agencies
20.7% Utilities--Gas & Electric
26.2% Industrials & Miscellaneous
27.3% U.S. Gov't Mortgage-Backed
*Expressed as a percentage of total investments
5
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1996 (Amounts in Thousands)
- --------------------------------------------------------------------------------
Market
Par Value
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES -- 106.0%
FINANCIAL AND LEASING -- 5.9%
Dean Witter Discover, 6.75%, due 10-15-13 $2,700 $ 2,517
J.P. Morgan Capital Trust, 7.54%, due 1-15-27 1,100 1,075
Western Financial Savings Bank, 8.5%, due 7-1-03 5,000 5,043
- --------------------------------------------------------------------------------
8,635
- --------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL(A) -- 4.9%
Republic of Argentina, 6.31%, due 3-31-05 1,955 1,699(E)
Hydro Quebec, 8.05%, due 7-7-24 1,500 1,649
United Mexican States, 7.63%, due 8-6-01 1,400 1,403(E)
United Mexican States, 11.38%, due 9-15-16 2,300 2,402
- --------------------------------------------------------------------------------
7,153
- --------------------------------------------------------------------------------
INDUSTRIALS AND MISCELLANEOUS -- 27.8%
Auburn Hills Trust, 12.38%, due 5-1-20 2,094 3,174(E)
Cablevision Industries, 9.25%, due 4-1-08 2,000 2,121
GMAC Zero Coupon Units, 0%, due 6-15-15 4,300 1,124(F)
Harrahs Operations, Inc., 8.75%, due 3-15-00 2,500 2,531
K Mart Corp., 7.95%, due 2-1-23 3,000 2,453
Loews Corporation, 7.63%, due 6-1-23 2,242 2,200
Millennium America, Inc., 7.63%, due 11-15-26 1,100 1,064
News America Holdings Incorporated, 8.88%, due 4-26-23 2,635 2,815
News America Holdings Incorporated, 8.45%, due 8-1-34 930 1,011
Northrop Grumman Corp., 9.38%, due 10-15-24 2,000 2,211
Owens-Illinois, Inc., 11%, due 12-1-03 3,000 3,338
RJR Nabisco, Inc., 8.75%, due 8-15-05 400 402
RJR Nabisco, Inc., 8.75%, due 7-15-07 4,280 4,273
Rogers Cable System, LTD., 10%, due 3-15-05 1,000 1,065
Safeway Inc., 10%, due 12-1-01 1,500 1,682
TCI Communications Inc., 8.75%, due 8-1-15 3,000 2,964
6
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Schedule of Investments (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------
Market
Par Value
- --------------------------------------------------------------------------------
INDUSTRIALS AND MISCELLANEOUS-- Continued
Tele Communications, Inc., 9.25%, due 1-15-23 2,200 $ 2,138
Time Warner, Inc., 8.18%, due 8-15-07 1,050 1,077
Unisys Corporation, 10.63%, due 10-1-99 3,100 3,212
- --------------------------------------------------------------------------------
40,855
- --------------------------------------------------------------------------------
U.S. GOV'T MORTGAGE-BACKED SECURITIES -- 29.1%
Federal Home Loan Mortgage Corp., 8.50%, due 3-15-97 761 768
Federal Home Loan Mortgage Corp., 10.75%, due 7-1-00 57 63
Federal Home Loan Mortgage Corp., 10.25%, due 5-1-09 334 362
Federal Home Loan Mortgage Corp., 11.88%, due 6-15-13 501 513
Federal National Mortgage Assoc., 8%, due 4-25-06 3,000 3,085
Federal National Mortgage Assoc., 10.50%, due 7-1-09 275 301
Federal National Mortgage Assoc., 7%, due 12-1-26 15,345 15,006
Federal National Mortgage Assoc., 7%, due 1-1-27 9,900 9,680(B)
Gov't Nat'l Mortgage Assoc., 12.25%, due 3-20-14 205 238
Gov't Nat'l Mortgage Assoc., 9%, due 9-15-19 158 169
Gov't Nat'l Mortgage Assoc., 8%, due 10-15-26 4,646 4,740(B)
Resolution Trust Corporation, 6.319%, due 5-25-19 1,404 1,396
Resolution Trust Corporation, 9.40%, due 5-25-24 4,000 4,038
Resolution Trust Corporation, 8%, due 4-25-25 2,574 2,428
- --------------------------------------------------------------------------------
42,787
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES -- 1.0%
Glendale Federal Savings and Loan Assoc., 9.13%,
due 1-25-08 175 175
Granite Home Loan, 13.5%, due 1-1-99 25 25(C)
Nomura Asset Securities Corp., 7.12%, due 4-13-36 1,170 1,182
Valley Federal S&L, Manufactured Housing, 13.25%,
due 1-15-99 43 43(C)
- --------------------------------------------------------------------------------
1,425
- --------------------------------------------------------------------------------
7
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Schedule of Investments (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------
Market
Par Value
- --------------------------------------------------------------------------------
UTILITIES - GAS AND ELECTRIC -- 22.0%
Connecticut Yankee Atomic Mtg., 12%, due 6-1-00 $ 870 $ 893
Connecticut Light &Power Co., 7.88%, due 6-1-01 3,250 3,320
First PV Funding Corporation, 10.15%, due 1-15-16 1,682 1,787
Gulf States Utilities, 8.25%, due 4-1-04 3,200 3,382
Long Island Lighting Co., 9.75%, due 5-1-21 5,000 5,339
Louis Dreyfus Natural Gas, 9.25%, due 6-15-04 2,000 2,160
Niagra Mohawk Power, 7.75%, due 5-15-06 3,000 2,794
Niagra Mohawk Power, 8.75%, due 4-1-22 2,500 2,368
North Atlantic Energy Corp., 9.05%, due 6-1-02 2,161 2,158
PNPP II Funding Corp., 9.12%, due 5-30-16 2,469 2,420(D)
Sithe/Independence Funding Corporation, 9%, due 12-30-13 4,000 4,066
Systems Energy Resources, 7.43%, due 1-15-11 1,818 1,761
- --------------------------------------------------------------------------------
32,448
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCIES -- 11.6%
Resolution Funding Corporation, 8.88%, due 4-15-30 3,175 4,003
U.S. Treasury Bonds, 6%, due 2-15-26 5,200 4,733
U.S. Treasury Notes, 6.88%, due 3-31-00 1,000 1,023
U.S. Treasury Notes, 6.63%, due 7-31-01 2,950 2,997
U.S. Treasury Notes, 6.25%, due 10-31-01 1,360 1,361
U.S. Treasury Notes, 7.25%, due 5-15-04 1,070 1,126
U.S. Treasury Notes, 7.5%, due 2-15-05 1,625 1,738
- --------------------------------------------------------------------------------
16,981
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------------
EQUITIES -- 3.7%
News Corp - Trust Originated Preferred Security, 5%,
due 11-12-16 2,100 1,295
News Corp - Warrants 21 679(G)
Time Warner Inc., 10.25% Preferred Stock 3 3,460
- --------------------------------------------------------------------------------
5,434
- --------------------------------------------------------------------------------
Total Investment Securities 155,718
- --------------------------------------------------------------------------------
8
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Schedule of Investments (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------
Market
Par Value
- --------------------------------------------------------------------------------
SHORT-TERM SECURITIES -- 0.3%
Repurchase Agreement -- 0.3%
J.P. Morgan, Inc.
6.8% dated 12-31-96, to be repurchased at $453 on 1-2-97
(Collateral $455 Federal National Mortgage
Association Mortgage-backed Securities,
7.00% due 9-16-99, value $474) $453 $ 453
- --------------------------------------------------------------------------------
Total Short-term Securities 453
- --------------------------------------------------------------------------------
Total Investments-- 106.3% $156,171
================================================================================
(A) Foreign securities are denominated and traded in U.S. dollars.
(B) When-issued security--Security issued on a delayed delivery basis.
Final settlement and maturity not yet determined.
(C) 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 $68 (less than .1% of net assets) at December
31, 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, 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.
(D) Rule 144a security which has restrictions for resale.
(E) The rate shown is the rate as of December 31, 1996.
(F) 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.
(G) Non-income producing.
See notes to financial statements.
9
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1996 (Amounts in Thousands)
- --------------------------------------------------------------------------------
ASSETS
Investment securities at market value (Cost $151,339) $155,718
Short-term securities 453
- --------------------------------------------------------------------------------
Total investments $156,171
Receivable for:
Sales of investments 1,985
Accrued interest 2,496
- --------------------------------------------------------------------------------
4,481
Other assets 43
- --------------------------------------------------------------------------------
160,695
LIABILITIES:
Payable for securities purchased 13,022
Accrued expenses 635
Investment advisory fee payable 59
- --------------------------------------------------------------------------------
13,716
- --------------------------------------------------------------------------------
NET ASSETS -- equivalent to $15.77 per share on
9,319 shares of Common Stock outstanding $146,979
================================================================================
SUMMARY OF STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share:authorized
10,000 shares; issued and outstanding 9,319
shares 93
Capital surplus 141,491
Undistributed net realized gain on investments 1,016
Unrealized appreciation of investments 4,379
- --------------------------------------------------------------------------------
Net assets applicable to oustanding Common Stock $146,979
================================================================================
See notes to financial statements.
10
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Statement of Operations (Amounts in Thousands)
- --------------------------------------------------------------------------------
For the Year
Ended December 31, 1996
-----------------------
INVESTMENT INCOME:
Income:
Dividends $ 196
Interest 11,513
11,709
Expenses:
Advisory fee $772
Transfer agent and shareholder servicing expense 75
Custodian fee 65
Directors' fees and expenses 59
Legal and auditing fees 42
Printing, stationery, and reports to shareholders 32
Taxes, other than federal income taxes 28
Registration fees 16
Other expenses 3
Less fees waived (24)
1,068
- -------------------------------------------------------------------------------
Net investment income 10,641
REALIZED AND UNREALIZED GAIN (LOSS)ON INVESTMENTS:
Net realized gain on investments 3,370
Unrealized depreciation of investments (4,913)
- -------------------------------------------------------------------------------
Net realized and unrealized loss on investments (1,543)
- -------------------------------------------------------------------------------
Increase in net assets resulting from operations $ 9,098
===============================================================================
See notes to financial statements.
11
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets (Amounts in Thousands)
- --------------------------------------------------------------------------------
For the Years
Ended December 31,
-----------------------
1996 1995
-------- ---------
Operations:
Net investment income $ 10,641 $ 11,029
Net realized gain on investments 3,370 3,752
Increase (decrease) in unrealized appreciation of
investments (4,913) 14,791
- --------------------------------------------------------------------------------
Change in net assets resulting from operations 9,098 29,572
Distributions to shareholders from:
Net investment income (10,997) (11,184)
Net realized gain on investments (2,749) --
- --------------------------------------------------------------------------------
Total increase (decrease) (4,648) 18,388
Net Assets:
Beginning of year 151,627 133,239
- --------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $0 and $206, respectively) $146,979 $151,627
================================================================================
See notes to financial statements.
12
<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 Years Ended December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $16.27 $14.30 $16.25 $15.94 $16.06
- ------------------------------------------------------------------------------------------------
Net investment income 1.14 1.18 1.23 1.27 1.38
Net realized and unrealized gain (loss)
on investments (.16) 1.99 (1.90) .84 .39
- ------------------------------------------------------------------------------------------------
Total from investment operations .98 3.17 (.67) 2.11 1.77
- ------------------------------------------------------------------------------------------------
Distributions paid from:
Net investment income (1.18) (1.20) (1.20) (1.28) (1.40)
Net realized gain on investments (.30) -- (.08) (.52) --
Dilutive effect of stock issuance -- -- -- -- (.49)
- -----------------------------------------------------------------------------------------------
Net asset value, end of year $15.77 $16.27 $14.30 $16.25 $15.94
===============================================================================================
Market value per share, end of year $14.375 $15.25 $13.125 $16.375 $15.625
================================================================================================
TOTAL RETURN:
Based on market value per share 4.16% 25.92% -12.75% 16.57% 8.17%
RATIOS TO AVERAGE NET ASSETS:
Expenses .72% .81% .76% .72%+ .79%
Net investment income 7.22% 7.62% 8.20% 7.71% 8.31%
SUPPLEMENTAL DATA:
Portfolio turnover rate 326.30% 131.73% 116.19% 130.25% 83.51%
Net assets at end of year
(in thousands) $146,979 $151,627 $133,239 $151,424 $142,311
</TABLE>
- ------------
+Exclusive of expenses relating to Convertible Notes which were converted in
1993.
See notes to financial statements.
13
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (Amounts in Thousands)
- --------------------------------------------------------------------------------
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 December 31, 1996 are reflected in the
accompanying Schedule of Investments at their market value on December 31,
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 other than Rule 144a securities is described in Note C to the
Schedule of Investments. The difference between cost and market value is
reflected separately as net 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 year ended December 31, 1996
aggregated $45,603 and $49,766, respectively. Purchases and sales of U.S.
government securities were $466,540 and $444,882, respectively, for the
year ended December 31, 1996. As of December 31, 1996, unrealized
appreciation for federal income tax and financial reporting purposes
aggregated $4,379 of which $5,058 related to appreciated securities and
$679 related to depreciated securities. The aggregate cost of investment
securities owned for federal income tax purposes was $151,339 at December
31, 1996.
(c) Recognition of income, expense and distributions to shareholders --
The Company accrues interest income and certain expenses on a daily basis.
Dividend income is recorded on the ex-dividend date. Dividends and other
distributions to shareholders 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.
(e) Use of Estimates -- The preparation of the financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could
differ from those estimates.
14
<PAGE>
Pacific American Income Shares, Inc.
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Notes to Financial Statements (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------
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 and 0.4% of such net assets in
excess of $60,000. 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 and 1% of average net assets over $30,000 the Adviser will reimburse the
Company for any excess. No expense reimbursement is due for the year ended
December 31, 1996.
NOTE 3 -- SECURITIES LOANED
At December 31, 1996, the market value of the securities on loan to
broker-dealers was $18,426, for which the Company received collateral of $18,967
in cash. Such collateral is in the possession of the Company's custodian. As
with other extensions of credit, the Company may bear the risk of delay in
recovery or even loss of rights to the collateral should the borrower of the
securities fail financially.
NOTE 4 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
(Amounts in Thousands, except per share amounts)
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
Investment income Total $2,940 $2,874 $2,861 $3,034
Net investment income Total 2,664 2,605 2,598 2,774
Per Share .286 .279 .279 .298
Net realized and
unrealized gain
(loss) on
investments Total (4,110) (1,640) 830 3,377
Per Share (.441) (.175) .089 .362
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
Investment income Total $3,036 $3,115 $3,072 $2,982
Net investment income Total 2,803 2,805 2,737 2,684
Per Share .301 .301 .294 .288
Net realized and
unrealized gain
(loss) on
investments Total 1,452 12,020 (4,538) 9,609
Per Share .156 1.290 (.487) 1.031
15
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Pacific American Income Shares, Inc.
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Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
Pacific American Income Shares, Inc.
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 Pacific American Income Shares,
Inc. at December 31, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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, 1996 by correspondence with the custodian and brokers and, where
appropriate, the application of alternative auditing procedures for unsettled
security transactions, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
January 24, 1997
