The Board of Directors
NORMAN BARKER, JR.*+ Chairman
RONALD J. ARNAULT
JOHN E.BRYSON*
RICHARD C. GILMAN+
WILLIAM G. McGAGH
RONALD L. OLSON*
WILLIAM E. B. SIART PACIFIC
LOUIS A. SIMPSON+ AMERICAN
INCOME
Officers SHARES, INC.
W. CURTIS LIVINGSTON ANNUAL
President REPORT
KENT S. ENGEL 1997
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
<PAGE>
Dear Shareholders:
Market Review and Performance
I am pleased to report that last year was a good year for the bond market
and also for our shareholders. Things got off to a rough start in the early
months as interest rates gyrated, but the bond market soon took its cue from a
dramatic decline in inflation, and yields dropped by a full percentage point by
the end of the year. More recently, 30-year bond yields reached historic lows,
as evidence accumulates that the war against inflation may be drawing to a
close.
The major event of 1997, of course, was the collapse of Asian currencies
and the subsequent and sharp decline of Asian stock and bond markets.
Fortunately, the portfolio did not have any exposure to the region. In fact, the
events in Asia probably served us well in the end by reinforcing the outlook for
low inflation in the U.S., resulting in a substantial decline in intermediate
and long-term interest rates.
The portfolio was well-positioned for the rally in bond prices, having
emphasized longer maturities in order to lock in the higher yields they offered.
It also benefited from a general decline in the yield premiums for corporate
bonds, 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. The Fund's emphasis on cable and media bonds was
rewarded, as this sector turned in an outstanding performance for the year. A
moderate exposure to emerging market debt, which was cut back somewhat during
the summer as valuations became less attractive, also added meaningfully to
total returns. This left us with the opportunity to increase exposure to higher
yield yankee bonds carefully following the dramatic increase in these yields in
the wake of the Korean crisis late in the year.
As a result of successful strategies, falling rates and the increasing
attractiveness of yield-oriented funds, Pacific American's (PAI) share price
rose from $14.38 to $16.25 over the course of the year. At the same time, the
share price rose from a discount of 8.85% to net asset value to a slight
premium. Based on market value, the Fund generated a total return (price
gains/losses plus interest income, net of expenses) of 21.9% for the year. This
compares quite favorably with the return of 10.2% for investment grade corporate
debt, and the 9.6% total return for the broad investment grade bond market.
According to Lipper Analytical Services, for the year ending December 31, 1997,
PAI return ranked first 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, 1997, PAI ranked first for the past five years,
and second 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 1997, as well as
a $0.38 per share capital gains distribution.
Economic Outlook and Portfolio Strategy
The big story in 1998 is likely to be the gradual unwinding of the monetary
tightening that occurred in 1997 as a result of the Federal Reserve remaining
firm despite the impact of the Asian situation. Forward indicators of inflation
still reflect monetary tightness, and core inflation, which is currently less
than 2%, appears to be falling still. The difficulties confronting the Asian
region are likely to persist for some time, and will undoubtedly contribute to
keeping a lid on inflationary pressures here, as well as contributing to slow
the economy on the margin. As inflation remains low and
1
<PAGE>
the economy loses a bit of steam, we expect the Fed to shift to an easing
mode within the next several months.
On balance, we think interest rates still have the potential to decline.
With inflation so low, the current level of nominal yields represents excellent
value in real, inflation-adjusted terms. Consequently, we plan to continue to
emphasize longer maturity bonds, in order to capture and lock in as much of the
benefit of higher yields as is prudent. Our strategies are infused with a note
of caution which recognizes that valuations are not as attractive as they have
been, and the economy may begin to respond to the rather sharp decline in
interest rates we've seen in the past nine months.
The bulk of the Fund's holdings are in corporate securities chosen for the
attractiveness of their yield and their prospects for fundamental credit quality
improvement. In recognition of the effective tightening of monetary policy and
the rise of potentially deflationary risks, however, we have taken steps to
upgrade the portfolio's credit quality somewhat over the past year, and have
trimmed overall corporate exposure from the levels of previous years. In turn,
we have increased the Fund's exposure to the mortgage sector, where yields
appear quite attractive relative to their excellent credit quality.
Nevertheless, in view of the potential risk of prepayments as interest rates
decline, our holdings remain defensive, with an emphasis on discount coupons and
AAA commercial mortgages.
Dividend Policy
Our goal has consistently been to maintain as high an income level for PAI
shareholders as possible. I am pleased to report that we anticipate maintaining
an annual dividend distribution rate of $1.18 per share.
Board of Directors
At their February meeting, the PAI directors elected a new chairman,
William McGagh. Mr. McGagh has been a member of the Board since 1984 and is also
chairman of the Board of Western Asset Trust, Pacific American's sister fund
company.
Mr. McGagh replaces Norman Barker, a PAI director from the company's
beginning in 1972 and the Chairman since 1984. All of us salute Mr. Barker on
his retirement and acknowledge his leadership and considerable contribution to
our enterprise.
The slate of directors nominated for election this Spring includes two new
individuals. Ronald Arnault, appointed a director in September, 1997 is included
as well as Anita De Frantz who will join us in April. Ms. De Frantz is a highly
regarded Los Angeles attorney who heads the Amateur Athletic Foundation of Los
Angeles and serves as Vice President of the International Olympic Committee.
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
President
2
<PAGE>
Pacific American Income Shares, Inc.
- -------------------------------------------------------------------------------
Statistical Highlights (Amounts in Thousands, except per share amounts)
- -------------------------------------------------------------------------------
December 31,
---------------------------------
1997 1996
------ ----
Net Asset Value $ 150,139 $ 146,979
Per Share $ 16.11 $ 15.77
Net Investment Income $ 10,626 $ 10,641
Per Share $ 1.14 $ 1.14
Dividends Paid $ 10,997 $ 10,997
Per Share $ 1.18 $ 1.18
Capital Gains Paid $ 3,541 $ 2,749
Per Share .38 $ .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
- -------------------------------------------------------------------------------
Pacific American Income Shares, Inc. ("PAI" or the "Company") and State
Street Bank and Trust Company ("State Street" or the "Agent"), as the Transfer
Agent and Registrar of the Company, offer two convenient ways to add shares of
the Company to your account. First, PAI offers to all stockholders a Dividend
Reinvestment Plan ("Plan"). Under the Plan, cash distributions (e.g. dividends
and capital gains) are automatically invested in shares of PAI unless the
stockholder elects otherwise. Second, the Company offers to registered
stockholders (those who own shares in their own name on the Company's records)
the option to purchase additional whole and partial shares of PAI--the Optional
Cash Investment Service ("Optional Cash Investment Service").
Dividend Reinvestment Plan:
As a participant in the Dividend Reinvestment Plan, you will automatically
receive your dividend or net capital gains distribution in newly issued shares
of PAI, if the market price of
3
<PAGE>
the shares on the date of the distribution is at or above the net asset value of
the shares. The number of shares to be issued to you will be determined by
dividing the amount of the cash distribution to which you are entitled (net of
any applicable withholding taxes) by the greater of the net asset value ("NAV")
per share on such date or 95% of the market price of a share on such date. If
the market price of a share on such a distribution date is below the NAV, the
Agent will, as agent for the participants, buy shares of PAI stock through a
broker on the open market. All shares of Common Stock acquired on your behalf
through the Plan will be automatically credited to an account maintained on the
books of State Street. Full and fractional shares will be voted by State Street
in accordance with your instructions.
Optional Cash Investment Service:
Under the Optional Cash Investment Service (offered to registered
stockholders only), funds received from shareholders for stock purchases will be
pooled once per month. The Agent will then purchase shares of PAI stock through
a broker on the open market. For the purpose of making purchases, the Agent 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. The Agent will hold the total shares purchased 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.
Beneficial stockholders (those who own shares held in a brokerage, bank or
other financial institution account) are not eligible to participate in this
option because there is no way to make payments through a broker, bank or
nominee. A beneficial stockholder may, however, have their shares taken out of
"street name" and re-register such shares in their own name, becoming a
registered stockholder in order to participate. If you wish to do so, please
contact your broker, bank or nominee.
Additional Information regarding the Plan and the Optional Cash Investment
Service:
PAI will pay all costs applicable to the Plan and Optional Cash Investment
Service, with noted exceptions. Brokerage commissions, transfer taxes and any
other costs of purchase or sale by the Agent under the Plan or Optional Cash
Investment Service, will be charged to participants. In the event PAI determines
to no longer pay such costs, the Agent will terminate the Plan and Optional Cash
Investment Service and may, but is not obligated to, offer a new plan under
which it would impose a direct service charge on participants.
All shares acquired through the Plan or the Optional Cash Investment
Service receive voting rights and are eligible for any stock split, stock
dividend, or other rights accruing to stockholders that the Board of Directors
may declare.
You may terminate participation in the Plan or the Optional Cash Investment
Service at any time by giving written notice to the Agent. Such termination
shall be effective prior to the record date next succeeding the receipt of such
instructions or by a later date of termination specified in such instructions.
Upon termination, a participant may request a certificate for the full shares
credited to his or her account or may request the sale of all or part of such
shares. If the participant instructs the Agent to sell the shares credited to
the participant's account, the Agent may accumu-
4
<PAGE>
late 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 the Agent 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. After
year-end, dividends paid on the accumulated shares will be included in the Form
1099-DIV information return to the Internal Revenue Service (IRS) and only one
Form 1099-DIV will be sent to participants each year.
Inquiries regarding the Plan and the Optional Cash Investment Service, as
well as notices of termination, should be directed to State Street Bank and
Trust Company, c/o Boston EquiServe, P.O. Box 8200, Boston, MA 02266-8200 -
Investor Relations telephone number (800) 426-5523.
5
<PAGE>
Pacific American Income Shares, Inc.
- -------------------------------------------------------------------------------
Portfolio Diversification December 31, 1997
- -------------------------------------------------------------------------------
[PIE CHART APPEARS BELOW]
BY RATING*
(At Market Value)
Not Rated 7.2%
BB 13.0%
B 2.4%
Short-Term Securities 9.9%
AA 2.0%
A 7.6%
BBB 22.3%
AAA 44.2%
BY INDUSTRY*
(At Market Value)
5.1% Asset-Backed Securities
6.1% U.S. Government & Agencies
6.8% Mortgage-Backed
7.7% Financial & Leasing
8.8% Foreign & International
9.9% Short-Term Securities
16.9% Utilities-Gas & Electric
23.2% Industrials & Miscellaneous
24.1% U.S. Gov't Mortgage-Backed
*EXPRESSED AS A PERCENTAGE OF NET ASSETS
6
<PAGE>
Pacific American Income Shares, Inc.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schedule of Investments December 31, 1997 (Amounts in Thousands)
- ---------------------------------------------------------------------------------------------
Market
Par Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT SECURITIES -- 98.7%
FINANCIAL AND LEASING -- 7.7%
Commercial Mtg. Accep. Corp., 6.53%, due 12-15-30 $ 3,100 $ 3,122
Commercial Mtg. Accep. Corp., 6.57%, due 12-15-30 590 594
Dean Witter Discover, 6.75%, due 10-15-13 2,700 2,680
J.P. Morgan Capital Trust II, 7.95%, due 2-1-27 300 318
Western Financial Savings Bank, 8.5%, due 7-1-03 5,000 4,822
--------
11,536
--------
FOREIGN AND INTERNATIONAL -- 8.8%
Republic of Argentina, 9.75%, due 9-19-27 1,143 1,090(E)
Republic of Brazil, 6.81%, due 1-1-01 1,594 1,515
Exide Holdings, 9.13%, due 4-15-04 4,500 2,552(A)
Geberit International SA, 10.13%, due 4-16-07 2,600 1,568(A)
Hydro Quebec, 8.05%, due 7-7-24 1,500 1,727
Petroleos Mexicanos, 8.85%, due 9-15-07 1,500 1,485(D)
Tata Electric Company, 8.50%, due 8-19-17 3,000 2,675
Republic of Venezuela, 9.25%, due 9-15-27 730 651
--------
13,263
--------
INDUSTRIALS AND MISCELLANEOUS -- 23.2%
Auburn Hills Trust, 12%, due 5-1-20 2,094 3,329
Ford Motor Co., 7.70%, due 5-15-97 1,500 1,648
GMAC Zero Coupon Units, 0%, due 6-15-15 4,300 1,366(F)
Gulf States Utilities, 8.25%, due 4-1-04 3,200 3,456
Harrahs Operations, Inc., 8.75%, due 3-15-00 2,500 2,556
Kmart Corp., 7.95%, due 2-1-23 3,000 2,899
Loews Corporation, 7.63%, due 6-1-23 2,242 2,305
News America Holdings Incorporated, 8.88%, due 4-26-23 2,635 3,067
News America Holdings Incorporated, 8.45%, due 8-1-34 930 1,050
Northrop Grumman Corp., 9.38%, due 10-15-24 2,000 2,320
Philip Morris, Inc., 7%, due 7-15-05 590 601
RJR Nabisco, Inc., 8.75%, due 8-15-05 400 432
RJR Nabisco, Inc., 8.75%, due 7-15-07 1,660 1,800
Rogers Cable System, Ltd., 10%, due 3-15-05 1,000 1,100
Pacific American Income Shares, Inc.
</TABLE>
7
<PAGE>
Pacific American Income Shares, Inc.
<TABLE>
<CAPTION>
Schedule of Investments (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------------------------
Market
Par Value
- ----------------------------------------------------------------------------------------------------
<S> <C>
TCI Communications Inc., 8.75%, due 8-1-15 $ 440 $ 510
Tele Communications, Inc., 9.25%, due 1-15-23 800 886
Time Warner, Inc., 9.15%, due 2-1-23 3,000 3,696
US West Capital Funding, Inc., 7.95%, due 2-1-2097 700 771
WorldCom Inc., 9.38%, due 4-15-04 958 1,014
-------
34,806
-------
U.S. GOV'T AGENCY MORTGAGE-BACKED SECURITIES -- 24.1%
Fannie Mae, 8%, due 4-25-06 2,644 2,745
Fannie Mae, 10.50%, due 7-1-09 228 250
Fannie Mae, 6%, due 2-1-26 537 518
Fannie Mae, 6%, due 3-1-26 1,445 1,393
Fannie Mae, 7%, due 12-1-27 24,690 24,867(B)
Freddie Mac, 10.75%, due 7-1-00 26 27
Freddie Mac, 10.25%, due 5-1-09 268 291
Freddie Mac, 11.88%, due 6-15-13 361 398
Freddie Mac, 7.50%, due 1-1-28 1,000 1,005(B)
Gov't Nat'l Mortgage Assoc., 12.25%, due 3-20-14 190 213
Gov't Nat'l Mortgage Assoc., 9%, due 9-15-19 155 168
Gov't Nat'l Mortgage Assoc., 7%, due 1-1-28 4,240 4,274(B)
--------
36,149
--------
ASSET-BACKED SECURITIES -- 5.1%
Student Loan Marketing Assoc., 5.74%, due 4-25-06 6,080 6,072
Union Acceptance Corp., 6.70%, due 6-10-03 1,500 1,514
---------
7,586
---------
MORTGAGE-BACKED SECURITIES -- 6.8%
Asset Securitization Corp., 7.42%, due 4-14-27 2,400 2,539
Glendale Federal Savings and Loan Assoc., 9.13%, due 1-25-08 136 136
Nomura Asset Securities Corp., 7.12%, due 4-13-36 1,170 1,221
Resolution Trust Corporation, 9.40%, due 5-25-24 4,000 4,034
Resolution Trust Corporation, 8%, due 4-25-25 2,303 2,338
Valley Federal S&L, Manufactured Housing, 13.25%, due 1-15-99 5 5(C)
--------
10,273
--------
</TABLE>
8
<PAGE>
Pacific American Income Shares, Inc.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schedule of Investments (Continued) (Amounts in Thousands)
- ---------------------------------------------------------------------------------------------------
Market
Par Value
- ---------------------------------------------------------------------------------------------------
<S> <C>
UTILITIES - GAS AND ELECTRIC -- 16.9%
Connecticut Light &Power Co., 7.88%, due 6-1-01 $ 3,250 $ 3,288
First PV Funding Corporation, 10.15%, due 1-15-16 1,616 1,749
Long Island Lighting Co., 9.75%, due 5-1-21 5,000 5,079
Niagra Mohawk Power, 7.75%, due 5-15-06 3,000 3,167
Niagra Mohawk Power, 8.75%, due 4-1-22 2,500 2,684
North Atlantic Energy Corp., 9.05%, due 6-1-02 2,024 2,080
PNPP II Funding Corp., 9.12%, due 5-30-16 2,459 2,755(D)
Sithe/Independence Funding Corporation, 9%, due 12-30-13 4,000 4,596
-------
25,398
-------
U.S. GOVERNMENT AND AGENCIES -- 6.1%
Resolution Funding Corporation, 8.88%, due 4-15-30 3,175 4,376
U.S. Treasury Bonds, 6%, due 2-15-26 200 200
U.S. Treasury Bonds, 6.63%, due 2-15-27 570 619
U.S. Treasury Bonds, 6.13%, due 11-15-27 800 822
U.S. Treasury Notes, 5.88%, due 9-30-02 100 101
U.S. Treasury Notes, 5.75%, due 10-31-02 520 521
U.S. Treasury Notes, 3.38%, due 1-15-07 898 874(G)
U.S. Treasury Notes, 6.63%, due 5-15-07 1,310 1,387
U.S. Treasury Notes, 6.13%, due 8-15-07 190 195
---------
9,095
--------
Total Investment Securities 148,106
---------
</TABLE>
9
<PAGE>
Pacific American Income Shares, Inc.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schedule of Investments (Continued) (Amounts in Thousands)
- ----------------------------------------------------------------------------------------------------
Market
Par Value
- ----------------------------------------------------------------------------------------------------
<S> <C>
SHORT-TERM SECURITIES -- 9.9%
Repurchase Agreement -- 9.9% Merrill Lynch
Securities Corp.
6.60%, dated 12-31-97, to be repurchased at $14,914 on 1-2-98
(Collateral $15,115 Fannie Mae Medium-term Notes,
6.58%, due 12-17-07, value $15,248) $14,909 $ 14,909
----------
Total Short-term Securities 14,909
----------
Total Investments-- 108.6% 163,015
Other Assets Less Liabilities-- (8.6%) (12,876)
--------
Net Assets-- 100.0% $150,139
=========
</TABLE>
- --------------------------------------------------------------------------------
(A) Security is denominated and traded in German Deutchmarks.
(B) When-issued security -- Security issued on a delayed delivery basis. Final
settlement and maturity not yet determined.
(C) The Company purchased Valley Federal S&L Manufactured Housing Participation
Certificates at 99.5, in a private placement transaction on January 30,
1984. This investment is restricted as to resale and amounted to
approximately $5 (less than .1% of net assets) at December 31, 1997.
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 -- 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 buyers.
(E) Variable rate security--The rate shown is the rate as of December 31, 1997.
(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) 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.
See notes to financial statements.
10
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1997 (Amounts in Thousands)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investment securities at market value (Cost $140,777) $148,106
Short-term securities 14,909
--------
Total investments $163,015
Receivable for:
Sales of investments 19,328
Accrued interest 2,241
Appreciation of forward currency contracts 120
--------
21,689
Other assets 16
--------
184,720
LIABILITIES:
Payable for investments purchased 34,412
Accrued expenses 169
---------
34,581
NETASSETS -- equivalent to $16.11 per share on
9,319 shares of Common Stock outstanding $150,139
========
SUMMARYOFSTOCKHOLDERS' 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 1,106
Unrealized appreciation of investments and forward
currency contracts 7,449
----------
Net assets applicable to outstanding Common Stock $150,139
========
</TABLE>
See notes to financial statements.
11
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Statement of Operations (Amounts in Thousands)
- -----------------------------------------------------------------------------------------------------
For the Year
Ended December 31, 1997
----------------------
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest $11,580
Dividends 111
--------
11,691
Expenses:
Advisory fee $777
Transfer agent and shareholder servicing expense 55
Custodian fee 70
Directors' fees and expenses 61
Legal and auditing fees 43
Printing, stationery, and reports to shareholders 28
Taxes, other than federal income taxes 35
Registration fees 16
Other expenses 4
Less fees waived (24)
-----
1,065
-------
Net investment income 10,626
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 4,002
Unrealized appreciation of investments 3,070
-------
Net realized and unrealized gain on investments 7,072
-------
Increase in net assets resulting from operations $17,698
=======
</TABLE>
See notes to financial statements.
12
<PAGE>
Pacific American Income Shares, Inc.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Statement of Changes in Net Assets (Amounts in Thousands)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
For the Years
Ended December 31,
--------------------------
1997 1996
-------- -------
Operations:
Net investment income $ 10,626 $ 10,641
Net realized gain on investments 4,002 3,370
Increase (decrease) in unrealized appreciation of
investments 3,070 (4,913)
--------- --------
Change in net assets resulting from operations 17,698 9,098
Distributions to shareholders from:
Net investment income (10,997) (10,997)
Net realized gain on investments (3,541) (2,749)
--------- --------
Total increase (decrease) 3,160 (4,648)
Net Assets:
Beginning of year 146,979 151,627
--------- --------
End of year $150,139 $146,979
======== ========
</TABLE>
See notes to financial statements.
13
<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 Years Ended December 31,
-----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $15.77 $16.27 $14.30 $16.25 $15.94
------ ------ ------ ------ ------
Net investment income 1.14 1.14 1.18 1.23 1.27
Net realized and unrealized gain (loss)
on investments .76 (.16) 1.99 (1.90) .84
------ -------- ------- ------- ------
Total from investment operations 1.90 .98 3.17 (.67) 2.11
------ -------- ------ ------ ------
Distributions paid from:
Net investment income (1.18) (1.18) (1.20) (1.20) (1.28)
Net realized gain on investments (.38) (.30) -- (.08) (.52)
------ ------ ------ ------ ------
Net asset value, end of year $16.11 $15.77 $16.27 $14.30 $16.25
====== ====== ====== ====== ======
Market value per share, end of year $16.25 $14.375 $15.25 $13.125 $16.375
====== ======= ====== ======= =======
TOTAL RETURN:
Based on market value per share 21.91% 4.16% 25.92% (12.75%) 16.57%
RATIOS TO AVERAGE NET ASSETS:
Expenses .71% .72% .81% .76% .72%(A)
Net investment income 7.11% 7.22% 7.62% 8.20% 7.71%
SUPPLEMENTAL DATA:
Portfolio turnover rate 201% 326% 132% 116% 130%
Net assets at end of year
(in thousands) $150,139 $146,979 $151,627 $133,239 $151,424
</TABLE>
(A) Exclusive of expenses relating to Convertible Notes which were converted in
1993.
See notes to financial statements.
14
<PAGE>
Pacific American Income Shares, Inc.
- -------------------------------------------------------------------------------
Notes to Financial Statements (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 December 31, 1997 are reflected in the
accompanying Schedule of Investments at their value on December 31, 1997.
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 method of valuing
restricted securities is described in footnote C 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 year ended December 31, 1997
aggregated $51,615 and $61,716, respectively. Purchases and sales of U.S.
government securities were $251,825 and $256,136, respectively, for the
year ended December 31, 1997. As of December 31, 1997, unrealized
appreciation for federal income tax and financial reporting purposes
aggregated $7,329 of which $8,008 related to appreciated securities and
$679 related to depreciated securities. The aggregate cost of investment
securities owned for federal income tax purposes was $140,777 at December
31, 1997.
(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.
15
<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 year ended
December 31, 1997.
NOTE 3 -- SECURITIES LOANED
At December 31, 1997, the market value of the securities on loan to
broker-dealers was $5,797, for which the Company received collateral of $5,994
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 December 31, 1997, open forward currency exchange contracts were as
follows:
Contract to
Settlement ----------------------------- Unrealized
Date Receive Deliver Gain/(Loss)
- ------------------------------------------------------------------------------
4/17/98 USD 4,095 DEM 7,100 $120
16
<PAGE>
Pacific American Income Shares, Inc.
- -------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
- ------------------------------------------------------------------------------
NOTE 5 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
(Amounts in Thousands, except per share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
--------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Investment income Total $2,864 $3,004 $2,932 $2,891
Net investment income Total 2,597 2,737 2,660 2,632
Per Share .28 .29 .29 .28
Net realized and
unrealized gain
(loss) on
investments Total (2,553) 4,288 3,566 1,771
Per Share (.27) .46 .38 .19
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 .28 .28 .28 .30
Net realized and
unrealized gain
(loss) on
investments Total (4,110) (1,640) 830 3,377
Per Share (.44) (.17) .09 .36
</TABLE>
17
<PAGE>
Pacific American Income Shares, Inc.
- ------------------------------------------------------------------------------
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, 1997, 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, 1997, 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
Linthicum, Maryland
January 28, 1998
