The Board of Directors
WILLIAM G. McGAGH* Chairman
RONALD J. ARNAULT+
JOHNE.BRYSON*
ANITA L. DEFRANTZ+
RICHARDC. GILMAN+
RONALD L. OLSON*
WILLIAM E. B. SIART*
LOUIS A. SIMPSON+
Officers
W. CURTIS LIVINGSTON
President
KENT S. ENGEL
Vice President
& Portfolio Manager
SCOTT F. GRANNIS
Vice President
ILENE S. HARKER
Vice President
S. KENNETH LEECH
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
Boston EquiServe
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
PACAM-SEMI-AR-7/98
PACIFIC
AMERICAN
INCOME
SHARES, INC.
SEMI-ANNUAL
REPORT
1998
<PAGE>
Dear Shareholders:
Market Review and Performance
For most of the first half of this year, fixed-income markets were
dominated by events overseas. Following a first-quarter remission, the Asian flu
re-emerged, and the emerging markets quickly joined the list of victims. The
U.S. launched a surprise bailout of the Japanese yen in an attempt to limit the
spread of the disease. Global economic tensions rose as the yen fell, commodity
prices fell, Asian economies plumbed the depths of recession, and emerging
market debt spreads widened to near-default levels. In typical
bad-news-is-good-news-fashion, global turmoil and deflating commodity prices
helped U.S. bond yields fall to historic lows.
Despite generally higher bond prices, the news from the Fund's perspective
was somewhat mixed. On the positive side, the Fund was well positioned for
declining interest rates, with its continued emphasis on longer maturities to
lock in yields. However, since the major impact of the Asian/emerging market
distress was to reinforce the outlook for slower economic growth, credit spreads
in the corporate and emerging market sectors rose as the general level of
interest rates fell. Although this limited price gains for the period (and even
resulted in price declines for some securities), it does mean that Pacific
American's (PAI) earning potential will be enhanced going forward. For example,
distressed prices for emerging market debt gave us an opportunity to
significantly increase exposure to that sector of the market during the period,
thereby boosting the Fund's overall yield.
After all the ups and downs, PAI's share price eased slightly, from $16.25
to $16.125, while its net asset value rose marginally, from $16.11 to $16.16,
leaving the shares trading at a discount of just 0.2% to net asset value. The
Fund generated a total return based on its net asset value of 4.04% for the
first six months of the year. This compares reasonably well with the return of
4.42% for investment grade corporate debt, and the 3.97% total return for the
broad investment grade bond market. According to Lipper Analytical Services, for
the year ending June 30, 1998, PAI's return ranked fourth out of its universe of
16 competitive closed-end investment grade bond funds. Its long-term competitive
record, as measured by Lipper, remains excellent: for periods ending June 30,
1998, PAI ranked first for the past five years, and first for the past ten
years. As we anticipated in our last letter, dividends were paid at an annual
rate of $1.18 per share for the period.
Economic Outlook and Portfolio Strategy
After many years of tight money, the Fed has succeeded in sharply reducing
the rate of inflation, but it has also set in motion two major and conflicting
forces: tight labor markets and the rising wages that accompany them are
clashing with zero pricing power to gradually squeeze corporate earnings. Low
inflation has fueled investment-led growth and technology-led productivity
gains, making labor scarce as it becomes more valuable. But a strong dollar and
falling commodity prices place severe limits on the pricing power of most
businesses. This conflict eventually will be resolved in the form of slower
growth in corporate earnings, a moderation in the pace of hiring, and finally, a
moderation in the pace of overall growth.
Once the U.S. economy begins to slow appreciably, the door will open to Fed
ease. This eventually will allow short-term rates to fall, but long-term rates
are likely to lag (note: although it typically provides short-term relief, Fed
easing eventually makes the bond market nervous), thus leading to
1
<PAGE>
a gradual steepening of the yield curve over time. In the interim, the Fed's
resolute determination to fight even the hint of inflation will keep short rates
on hold, thus leaving open the possibility of an inversion of the curve as long
rates continue to track the downward trend of inflation.
Not to be overlooked amidst all the fuss over Asia are the opportunities
which are being created in the emerging market sector. Although a scenario in
which ALL emerging market countries default seems highly unlikely, today's 600
basis point spread on emerging market debt implies a 30-40% probability that
such a catastrophe will actually happen! That's a big silver lining behind the
Asian cloud, since there are a number of emerging market countries that continue
to enjoy attractive fundamentals in spite of the Asian turmoil.
The bulk of the Fund's holdings remains concentrated in corporate
securities chosen for their attractive yield and prospects for improving credit
quality. In recent months we have taken advantage of the higher yields available
in emerging market securities to establish a substantial, though
well-diversified exposure to that sector, emphasizing sovereign issues of the
major economies of Latin America and Southeast Asia. We feel that these
securities offer very attractive risk-reward characteristics when compared to
domestic securities of similar credit quality. We continue to maintain a
moderate exposure to mortgage-backed securities, since their yields are still
quite attractive relative to their excellent credit quality. As before, however,
our emphasis is on discount coupons and commercial mortgages in order to
minimize the risk of more rapid prepayments as interest rates decline.
Dividend Policy
Our goal has always been to maintain as high an income level for PAI
shareholders as possible. We anticipate maintaining an annual dividend
distribution rate of $1.18 per share for the current quarter, but we will be
carefully evaluating this policy in light of the ongoing decline in market
yields. Despite our best efforts, dividend distributions and the need to
reinvest cash flows at lower yields may gradually erode the Fund's earning
potential in the future.
Annual Meeting of Stockholders
At PAI's annual meeting of stockholders, held on April 17,1998, all four
proposals were approved by the Company's shareholders. This includes the
election of eight directors, the amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock to
20,000,000, the approval of a new investment sub-advisory agreement between the
Adviser and Western Asset Global Management Limited, and the ratification of the
selection of PricewaterhouseCoopers LLP as independent accountants.
With the approval of these proposals, we believe PAI will be in a stronger
position in its efforts to continually benefit the portfolio. We remain
dedicated to delivering the highest level of value added for our shareholders,
always cognizant of the need to balance near-term risk with the goal of
maximizing yield over time. And, as always, we are pleased to answer any
questions you may have.
Sincerely,
/s/ W. Curtis Livingston
__________________________
W. Curtis Livingston
President
2
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
A Dividend Reinvestment Plan is available to all shareholders of record of
the Company. For participants in the Plan, cash dividends and other
distributions 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 8200, Boston, MA02266-8200.
3
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Portfolio Diversification June 30, 1998
- --------------------------------------------------------------------------------
BY INDUSTRY*
(At Market Value)
[GRAPH APPEARS HERE]
4.5% MORTGAGE-BACKED
5.6% ASSET-BACKED SECURITIES
6.3% U.S. GOVERNMENT & AGENCIES
7.3% FINANCIAL & LEASING
8.4% UTILITIES--GAS & ELECTRIC
20.5% FOREIGN & INTERNATIONAL
20.6% INDUSTRIALS & MISCELLANEOUS
22.7% SHORT-TERM SECURITIES
23.7% U.S. GOV'T MORTGAGE-BACKED
0 5 10 15 20 25 30
BY RATING*
(At Market Value)
[PIE CHART APPEARS HERE]
Not
Rated 6.4%
Short-Term
Securities 22.7%
B 5.7%
BB 14.1%
BBB 18.1%
A 9.7%
AA 2.0%
AAA 40.9%
*EXPRESSED AS A PERCENTAGE OF NET ASSETS
4
<PAGE>
Pacific American Income Shares, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Schedule of Investments June 30, 1998 (Unaudited) (Amounts in Thousands)
- --------------------------------------------------------------------------------------------------
Market
Par Value
- --------------------------------------------------------------------------------------------------
<S><C>
INVESTMENT SECURITIES -- 96.9%
FINANCIAL AND LEASING -- 7.3%
Commercial Mtg. Accep. Corp., 6.53%, due 6-15-07 $ 3,100 $ 3,151
Commercial Mtg. Accep. Corp., 6.57%, due 12-15-30 590 602
Dean Witter Discover, 6.75%, due 10-15-13 2,700 2,745
IBJ Preferred Cap Co. LLC, 8.79%, due 12-29-49 2,960 2,703(D)
J.P. Morgan Capital Trust II, 7.95%, due 2-1-27 150 162
SB Treasury Co. LLC, 9.40%, due 12-29-49 1,530 1,521(D)
Socgen Real Estate Co. LLC, 7.64%, due 12-29-49 150 151(D)
--------
11,035
--------
FOREIGN AND INTERNATIONAL -- 20.5%
Export Import Bank Korea, 6.38%, due 2-15-06 830 628
Geberit International SA, 10.13%, due 4-15-07 2,600 1,640(A)
Hydro Quebec, 8.05%, due 7-7-24 1,500 1,785
Petroleos Mexicanos, 8.85%, due 9-15-07 3,675 3,528(D)
Petroliam Nasional Berhad, 7.13%, due 10-18-06 410 351(D)
Petroliam Nasional Berhad, 7.75%, due 8-15-15 1,640 1,354(D)
Petroliam Nasional Berhad, 7.63%, due 10-15-26 2,000 1,547(D)
Republic of Argentina, 6.63%, due 3-31-05 447 396(E)
Republic of Argentina, 6.63%, due 3-31-05 3,705 3,266(E)
Republic of Brazil, 6.75%, due 1-1-01 3,871 3,677(E)
Republic of Brazil, 8%, due 4-15-14 5,581 4,105
Republic of Korea, 8.88%, due 4-15-08 4,300 3,903
Russian Ministry of Finance, 12.75%, due 6-24-28 1,190 1,189(D)
Tata Electric Company, 8.50%, due 8-19-17 3,000 2,520(D)
United Mexican States, 11.5%, due 5-15-26 250 289
United Mexican States, 11.5%, due 5-15-26 550 636
Vnesheconombank, 6.63%, due 12-15-15 150 82(E)
--------
30,896
--------
INDUSTRIALS AND MISCELLANEOUS -- 20.6%
Auburn Hills Trust, 12%, due 5-1-20 2,094 3,453
Ford Motor Co., 7.70%, due 5-15-97 1,500 1,712
GMAC Zero Coupon Units, 0%, due 6-15-15 4,300 1,400(F)
</TABLE>
5
<PAGE>
Pacific American Income Shares, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Schedule of Investments (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------------------------
Market
Par Value
- --------------------------------------------------------------------------------------------------
<S><C>
INDUSTRIALS AND MISCELLANEOUS --CONTINUED
Gulf States Utilities, 8.25%, due 4-1-04 $ 3,200 $ 3,442
Kmart Corp., 7.95%, due 2-1-23 3,000 3,023
Keystone Owner Trust, 6.62%, due 11-25-08 817 818(D)
Loews Corporation, 7.63%, due 6-1-23 2,242 2,279
News America, Inc., 6.75%, due 1-9-38 930 930(D)
News America Holdings Incorporated, 8.88%, due 4-26-23 2,635 3,139
Northrop Grumman Corp., 9.38%, due 10-15-24 2,000 2,448
Philip Morris, Inc., 7%, due 7-15-05 590 604
RJR Nabisco, Inc., 8.75%, due 8-15-05 400 417
Rogers Cable System, Ltd., 10%, due 3-15-05 1,000 1,110
TCI Communications Inc., 8.75%, due 8-1-15 440 530
Tele Communications, Inc., 9.25%, due 1-15-23 800 933
Time Warner, Inc., 9.15%, due 2-1-23 3,000 3,782
WorldCom Inc., 9.38%, due 1-15-04 958 1,006
--------
31,026
--------
U.S. GOV'T AGENCY MORTGAGE-BACKED SECURITIES -- 23.7%
Fannie Mae, 8%, due 4-25-06 2,225 2,311
Fannie Mae, 10.50%, due 7-1-09 166 181
Fannie Mae, 6.5%, due 12-1-12 9,790 9,845(B)
Fannie Mae, 6%, due 12-1-27 1,270 1,236(B)
Freddie Mac, 10.75%, due 7-1-00 12 13
Freddie Mac, 10.25%, due 5-1-09 240 260
Freddie Mac, 11.88%, due 6-15-13 315 367
Gov't Nat'l Mortgage Assoc., 12.25%, due 3-20-14 173 195
Gov't Nat'l Mortgage Assoc., 9%, due 9-15-19 154 166
Gov't Nat'l Mortgage Assoc., 6.5%, due 1-1-28 700 699(B)
Gov't Nat'l Mortgage Assoc., 7%, due 1-1-28 20,140 20,461(B)
--------
35,734
--------
ASSET-BACKED SECURITIES -- 5.6%
American Residential Eagle, 5.75%, due 9-25-19 3,000 3,001
Sallie Mae, 5.74%, due 4-25-06 5,515 5,515(E)
--------
8,516
--------
</TABLE>
6
<PAGE>
Pacific American Income Shares, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Schedule of Investments (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------------------------
Market
Par Value
- --------------------------------------------------------------------------------------------------
<S><C>
MORTGAGE-BACKED SECURITIES -- 4.5%
Asset Securitization Corp., 7.42%, due 4-14-27 $ 2,400 $ 2,531
Glendale Federal Savings and Loan Assoc., 9.13%, due 1-25-08 114 113
Nomura Asset Securities Corp., 7.12%, due 4-13-36 1,170 1,236
Resolution Trust Corporation, 9.40%, due 5-25-24 2,987 2,992
Resolution Trust Corporation, 8%, due 4-25-25 12 12
--------
6,884
--------
UTILITIES - GAS AND ELECTRIC -- 8.4%
First PV Funding Corporation, 10.15%, due 1-15-16 677 721
Niagra Mohawk Power, 7.75%, due 5-15-06 1,500 1,605
Niagra Mohawk Power, 8.75%, due 4-1-22 2,500 2,750
PNPP II Funding Corp., 9.12%, due 5-30-16 2,459 2,852(D)
Sithe/Independence Funding Corporation, 9%, due 12-30-13 4,000 4,693
--------
12,621
--------
U.S. GOVERNMENT AND AGENCIES -- 6.3%
Resolution Funding Corporation, 8.88%, due 4-15-30 3,175 4,556
U.S. Treasury Notes, 5.88%, due 9-30-02 1,600 1,620
U.S. Treasury Notes, 5.75%, due 10-31-02 520 524
U.S. Treasury Notes, 5.75%, due 4-30-03 940 949
U.S. Treasury Notes, 3.38%, due 1-15-07 902 874(C)
U.S. Treasury Notes, 6.38%, due 8-15-27 875 961
--------
9,484
--------
Total Investment Securities 146,196
--------
</TABLE>
7
<PAGE>
Pacific American Income Shares, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Schedule of Investments (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------------------------
Market
Par Value
- --------------------------------------------------------------------------------------------------
<S><C>
SHORT-TERM SECURITIES -- 22.7%
Repurchase Agreement -- 22.7%
J.P. Morgan Securities, Inc.
5.70%, dated 6-30-98, to be repurchased at $34,223 on 7-1-98
(Collateral: $33,685 Fannie Mae Medium-term Notes,
6.55%, due 7-15-02, value $35,917) $34,218 $ 34,218
--------
Total Short-term Securities 34,218
--------
Total Investments-- 119.6% 180,414
Other Assets Less Liabilities-- (19.6%) (29,595)
--------
Net Assets-- 100.0% $150,819
========
- --------------------------------------------------------------------------------------------------
</TABLE>
(A) Security is denominated and traded in German Deutschmarks.
(B) When-issued security -- Security issued on a delayed-delivery basis. Final
settlement and maturity not yet determined.
(C) United States Treasury Inflation-Indexed Security--U.S. Treasury security
whose principal value is adjusted daily in accordance with changes in the
Consumer Price Index. Interest is calculated on the basis of the current
adjusted principal value.
(D) 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.
(E) Variable rate security--The rate shown is the rate as of June 30, 1998.
(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.
See notes to financial statements.
8
<PAGE>
Pacific American Income Shares, Inc.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities June 30, 1998 (Unaudited) (Amounts in Thousands)
- ---------------------------------------------------------------------------------------------------
<S><C>
ASSETS:
Investment securities at market value (Cost $139,517) $146,196
Short-term securities 34,218
--------
Total investments $180,414
Receivable for:
Sales of investments 3,873
Accrued interest 1,865
--------
5,738
Other assets 14
--------
186,166
LIABILITIES:
Payable for investments purchased 35,211
Accrued expenses 127
Depreciation of forward currency contracts 9
--------
35,347
--------
NET ASSETS -- equivalent to $16.16 per share on
9,336 shares of Common Stock outstanding $150,819
========
SUMMARY OF STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share:authorized
20,000 shares; issued and outstanding 9,336
shares $ 93
Additional paid in capital 141,753
Overdistributions of net investment income (678)
Undistributed net realized gain on investments 2,981
Unrealized appreciation of investments and forward
currency contracts 6,670
--------
Net assets applicable to outstanding Common Stock $150,819
========
</TABLE>
- --------------
See notes to financial statements.
9
<PAGE>
Pacific American Income Shares, Inc.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Statement of Operations June 30, 1998 (Unaudited) (Amounts in Thousands)
- ---------------------------------------------------------------------------------------------------
<S><C>
For the Six Months
Ended June 30, 1998
---------------------
INVESTMENT INCOME:
Income:
Interest $5,364
Expenses:
Advisory fee $392
Custodian fee 39
Directors' fees and expenses 34
Transfer agent and shareholder servicing expense 33
Legal and auditing fees 18
Printing, stationery, and reports to shareholders 17
Taxes, other than federal income taxes 17
Registration fees 5
Other expenses 1
Less fees waived (12)
----
544
------
Net investment income 4,820
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 1,875
Unrealized depreciation of investments (779)
------
Net realized and unrealized gain (loss) on investments 1,096
------
Increase in net assets resulting from operations $5,916
======
</TABLE>
- --------------
See notes to financial statements.
10
<PAGE>
Pacific American Income Shares, Inc.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Statement of Changes in Net Assets (Amounts in Thousands)
- ---------------------------------------------------------------------------------------------------
For the Six For the
Months Ended Year Ended
June 30, 1998 Dec. 31, 1997
--------------- ---------------
(Unaudited)
<S><C>
Operations:
Net investment income $ 4,820 $ 10,626
Net realized gain on investments 1,875 4,002
Increase (decrease) in unrealized appreciation of
investments (779) 3,070
-------- --------
Change in net assets resulting from operations 5,916 17,698
Distributions to shareholders from:
Net investment income (5,498) (10,997)
Net realized gain on investments -- (3,541)
-------- --------
(5,498) (14,538)
Common stock issued in payment of dividends 262 --
-------- --------
Total increase (decrease) 680 3,160
Net Assets:
Beginning of period 150,139 146,979
-------- --------
End of period $150,819 $150,139
======== ========
</TABLE>
- --------------
See notes to financial statements.
11
<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.
<TABLE>
<CAPTION>
For the Six For the Years Ended December 31,
Months Ended -----------------------------------------------------
June 30, 1998 1997 1996 1995 1994 1993
-------------- -------- -------- -------- -------- --------
(Unaudited)
<S><C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $16.11 $15.77 $16.27 $14.30 $16.25 $15.94
------ ------ ------ ------ ------ ------
Net investment income .52 1.14 1.14 1.18 1.23 1.27
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS .12 .76 (.16) 1.99 (1.90) .84
------ ------ ------ ------ ------ ------
Total from investment operations .64 1.90 .98 3.17 (.67) 2.11
------ ------ ------ ------ ------ ------
Distributions paid from:
Net investment income (.59) (1.18) (1.18) (1.20) (1.20) (1.28)
Net realized gain on investments -- (.38) (.30) -- (.08) (.52)
------ ------ ------ ------ ------ ------
Net asset value, end of period $16.16 $16.11 $15.77 $16.27 $14.30 $16.25
====== ====== ====== ====== ====== ======
Market value per share, end of period $16.125 $16.25 $14.375 $15.25 $13.125 $16.375
======= ====== ======= ====== ======= =======
TOTAL RETURN:
Based on market value per share 2.82%(B) 24.73% 4.16% 25.92% (12.75%) 16.57%
RATIOS TO AVERAGE NET ASSETS:
Expenses .73%(A) .71% .72% .81% .76% .72%(C)
Net investment income 6.45%(A) 7.11% 7.22% 7.62% 8.20% 7.71%
SUPPLEMENTAL DATA:
Portfolio turnover rate 423%(A) 201% 326% 132% 116% 130%
Net assets at end of period
(IN THOUSANDS) $150,819 $150,139 $146,979 $151,627 $133,239 $151,424
</TABLE>
- --------------
(A) Annualized
(B) Not annualized
(C) Exclusive of expenses relating to Convertible Notes which were converted in
1993.
See notes to financial statements.
12
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (Unaudited) (Amounts in Thousands)
- --------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Pacific American Income Shares, Inc. (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, 1998 are reflected in the
accompanying Schedule of Investments at their value on June 30, 1998. 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 and asked
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 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, 1998
aggregated $37,334 and $38,971, respectively. Purchases and sales of U.S.
government securities were $273,006 and $274,350, respectively, for the six
months ended June 30, 1998. As of June 30, 1998, unrealized appreciation
for federal income tax and financial reporting purposes aggregated $6,679
of which $8,065 related to appreciated securities and $1,386 related to
depreciated securities. The aggregate cost of investment securities owned
for federal income tax purposes was $139,517 at June 30, 1998.
(c) Recognition of income, expense and distributions to shareholders --
The Company accrues interest income and expenses on a daily basis. Dividend
income and distributions to shareholders are recorded on the ex-dividend
date. Distributions to shareholders are determined on a tax basis and may
differ from net investment income and realized capital gains for financial
reporting purposes.
(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.
13
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
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 six months
ended June 30, 1998.
NOTE 3 -- SECURITIES LOANED
At June 30, 1998, the market value of the securities on loan to
broker-dealers was $10,015, for which the Company received collateral of $10,457
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 -- FORWARD CURRENCY EXCHANGE CONTRACTS
Forward foreign currency contracts are marked-to-market daily using foreign
currency exchange rates supplied by an independent pricing service. The change
in a contract's market value is recorded by the Company as an unrealized gain or
loss. When the contract is closed or delivery is taken, the Company records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
The use of forward foreign currency contracts does not eliminate
fluctuations in the underlying prices of the Company's securities, but it does
establish a rate of exchange that can be achieved in the future. These forward
foreign currency contracts involve market risk in excess of amounts reflected in
the Financial Statements. Although forward foreign currency contracts used for
hedging purposes limit the risk of loss due to a 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 Company could be exposed to
risks if the counterparties to the contracts are unable to meet the terms of
their contracts. The Adviser will enter into forward foreign currency contracts
only with parties approved by the Board of Directors because there is a risk of
loss to the Company if the counterparties do not complete the transaction.
At June 30, 1998, open forward currency exchange contracts were as follows:
Contract to
Settlement ----------------------------------- Unrealized
Date Receive Deliver Gain/(Loss)
-------------------------------------------------------------------
10/19/98 USD 3,947 DEM 7,100 $(15)
10/19/98 DEM 4,500 USD 2,505 6
----
(9)
14
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
NOTE 5 -- SHAREHOLDER MEETING RESULTS
The Fund's annual meeting of shareholders was held on April 17, 1998. Of the
9,319,423 shares outstanding, the following shares (in thousands) were voted at
the meeting:
<TABLE>
<CAPTION>
For Against Abstain
------ --------- ---------
<S><C>
Election of eight Directors:
Ronald J. Arnault, Jr. 8,056 -- 126
John E. Bryson 8,059 -- 123
Anita L. DeFrantz 8,035 -- 147
Dr. Richard C. Gilman 8,038 -- 144
William G. McGagh 8,052 -- 130
Ronald L. Olson 8,058 -- 124
William E.B. Siart 8,058 -- 124
Louis A. Simpson 8,058 -- 124
Approval of amendment to the Company's
Certificate of Incorporation to increase the number
of authorized shares of Common Stock: 7,512 436 234
Approval of Investment Sub-Advisory
agreement between Western Asset Management
Company and Western Asset Global Management Limited: 7,603 237 342
Ratification of the selection of PricewaterhouseCoopers LLP
as independent accountants for the Company
for the year ending December 31, 1998: 7,997 41 144
</TABLE>
15
<PAGE>
(This page has been left blank intentionally)
