THE BOARD OF DIRECTORS
WILLIAM G. McGAGH*, Chairman
RONALD J. ARNAULT+
JOHN E. BRYSON*
ANITA L. DEFRANTZ+
RONALD L. OLSON*
WILLIAM E. B. SIART*
LOUIS A. SIMPSON+
OFFICERS PACIFIC
W. CURTIS LIVINGSTON AMERICAN
President INCOME
SCOTT F. GRANNIS SHARES, INC.
Vice President SEMI-ANNUAL
ILENE S. HARKER REPORT
Vice President 1999
S. KENNETH LEECH
Vice President
STEPHEN A. WALSH
Vice President
STEVEN T. SARUWATARI
Treasurer
MARIE K. KARPINSKI
Assistant Treasurer
BRIAN M. EAKES
Assistant Treasurer
LISA G. HATHAWAY
Secretary
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-99
<PAGE>
Dear Shareholders:
MARKET REVIEW AND PERFORMANCE
Events in the fixed income markets in the first half of this year were
dominated by the continued robust strength of the U.S. economy and fears that
this strength may create inflationary pressures in the future. Although measured
inflation has increased as a result of sharply higher energy prices, most other
sensitive price indicators remain subdued. Nevertheless, the Federal Reserve
made inflation concerns official by deciding to raise interest rates in June,
citing as the primary reason tight labor markets and supposedly "above-trend"
economic growth. The net result of these developments has been a sharp increase
in interest rates, with intermediate-term rates rising somewhat more than
long-term rates, suggesting that concerns over further Fed tightening were
greater than concerns over any significant rise in future inflation.
Year-to-date bond market performance for the various global fixed income
sectors looks like a mirror image of 1998 results. While the government bond
sector (U.S. and globally) was the top performer of 1998, and emerging market
debt was the worst performer, so far in 1999 the reverse is true. Emerging
market debt and high yield bonds, the riskier sectors that suffered sharply in
the currency and liquidity crises of 1998, have had the strongest performance
through the first half of the year. The broad U.S. bond market (as measured by
the Salomon Broad Market Index) experienced a negative total return of 1.4%,
unannualized over the period.
Consistent with the challenging environment for bonds, PAI's share price
decreased from $15.75 at the beginning of the year, to close the half at
$13.875. Investment grade corporate securities, the bulk of the portfolio's
holdings, were among the worst performers of the domestic fixed income market.
The portfolio's total return over the period (price gains/losses plus interest
income, net of expenses) was -2.09%, slightly trailing the BBB Corporate Debt
peer group, which had an average return of -1.78%. Despite the recent adversity,
however, the Fund's long-term competitive record remains excellent; for example,
for this period ending June 30, 1999, PAI ranked first (of 15 funds) for the
past 10 years in the Lipper Analytical Services group of comparable closed-end
investment grade bond funds.
ECONOMIC OUTLOOK AND PORTFOLIO STRATEGY
Despite recent concerns, core inflation (ex-energy) has been in a steady
descent for almost 10 years, and now sits at its lowest level in 35 years. Yet
inflation and Fed tightening fears have risen even as the dollar continues its
climb to a ten-year high against the vast majority of the world's currencies.
Historical evidence shows a strong link between a rising currency and falling
inflation: since 1970, the U.S. inflation rate has only trended down during
periods of a stable or strong dollar. Weak commodity prices also bolster the
dollar's value. Despite the sizeable gains in oil and lumber this year, most
commodity prices are trading at historically depressed levels, with the average
commodity having fallen some 20% in the past three years.
Meanwhile, the U.S. stock market has reached lofty levels on the back of the
economy's strength, and even most global stock markets have been moving up of
late. But the corporate bond market is demanding exceptionally high yields,
apparently out of fear that the good times won't last. In addition, the world's
capital markets assign such a high probability to the imminent demise and
default of emerging market countries that their bond spreads are trading at
eye-popping levels of
1
<PAGE>
more than 1,000 basis points.(1) It is more than challenging to reconcile the
strength of world equity markets with the fear embodied in spreads throughout
the world credit markets.
Behind the scenes, the main engine driving the dynamic U.S. economy is the
fabulous high-tech revolution. It continues to offer its boon to mankind in the
form of ever-cheaper and ever-more-powerful computational and productivity
tools. So far this has been a virtuous growth cycle, because the incentives to
invest in U.S. productivity have been enormous. With low inflation and even
deflation the new norm, the only investments that pay off are those which can
reduce costs and/or increase the productivity of labor (as opposed to the
speculative investments that paid off in the inflationary 1970s). It is no
wonder that labor is becoming scarce and real wages are rising, with so much new
capital chasing the average worker. More importantly, it is not hard to see why
low inflation is a stimulus to growth, since productive investments are the only
game in town.
Nevertheless, the Fed appears determined to slow down this engine of growth
that is the U.S. economy. To date, their efforts to tighten monetary policy have
proved beneficial, because they result in lower inflation and a stronger dollar
and that attracts more new investment. But at some point tighter monetary policy
and sharply higher interest rates are likely to take a toll on growth, and there
is a growing body of evidence to suggest that this is occurring. Wide credit
spreads begin to make sense in this context, because debt is not very desirable
when tight money and the prospect of slowing growth are in the air. Still, it is
hard to imagine that the Fed would risk an outright deflation or recession
scenario. After all, they were quick to ease when the going got rough last year,
and they have plenty of room to ease should deflation risks get out of hand
tomorrow.
STRATEGY
The great difficulty we face today is balancing our belief that the inflation
fundamentals (e.g., a strong dollar, weak gold and commodity prices, high real
interest rates and a flat yield curve) remain very bullish for bonds, with the
recognition that healthy economic growth fundamentals have become antagonistic.
The near-term direction of rates will depend on whether the U.S. economy grows
by more than the Federal Reserve feels comfortable with, but the long-term
direction should be dictated by the continuing evidence of tight money and low
inflation. It may turn out that the economy slows by enough to allay the Fed's
concerns, but even if it doesn't, the bond market cannot forever ignore the
reality of continued low inflation.
This leaves us with a desire to have a longer than market duration with an
emphasis on longer maturities to lock in today's yields. Credit spreads are
attractive, but economic slowdown risks call for some defensive measures in the
form of higher credit quality and broad diversification, consistent with the
portfolio's mandate. On balance and over time, we expect that the portfolio will
benefit handsomely from a decline in interest rates to levels that are more
commensurate with today's benign inflation environment. In addition, we believe
that today's relatively wide spreads in corporate, emerging market and mortgage
debt are unlikely to persist, and that they also will return to levels more
commensurate with what appear to be reasonably healthy economic fundamentals.
- --------------
(1) 100 basis points = 1%.
2
<PAGE>
DIVIDEND POLICY
As we explained in the last letter, the changing market environment has
increasingly challenged our long-term policy of maintaining relatively stable
and dependable dividends. The events of the last several months have exacerbated
that situation and lead us to make an adjustment that we believe will better
situate our dividend payment policy to the reality of a continuing volatile
marketplace.
Namely, we will, in the future, formally review our earnings outlook twice a
year (instead of once as in the past) and make adjustments at those intervals if
our projections call for them. In that light, it is necessary, at the current
time, to reduce the regular dividend payout from a .275(cent) quarterly rate to
a .25(cent) rate for the rest of 1999. Our next review will take place in
January 2000, when we will set a level for the first half of that year. The
overall objective for our policy, as much stability and predictability as
possible, is unchanged. Tuning dividends more tightly to market changes is
essential to continuing that in current market circumstances.
As always, we remain dedicated to delivering the highest level of value-added
for our shareholders. Please let us know if we can answer any questions for you.
Sincerely,
/s/ W. Curtis Livington
- -------------------------
W. Curtis Livingston
President
3
<PAGE>
PACIFIC AMERICAN INCOME SHARES, INC.
- --------------------------------------------------------------------------------
THE COMPANY
- --------------------------------------------------------------------------------
Pacific American Income Shares, Inc. (the "Company") 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, MA 02266-8200.
4
<PAGE>
PACIFIC AMERICAN INCOME SHARES, INC.
- --------------------------------------------------------------------------------
PORTFOLIO DIVERSIFICATION June 30, 1999
- --------------------------------------------------------------------------------
[CHARTS APPEAR HERE]
BY RATING*
(At Market Value)
4.00% BONDS NOT RATED
1.96% SHORT-TERM
22.59% AAA
7.07% AA
6.51% A
34.90% BBB
17.95% BB
5.02% B
BY INDUSTRY*
(At Market Value)
1.96% SHORT-TERM SECURITIES
3.29% U.S. GOVERNMENT AND AGENCIES
4.14% FINANCIAL AND LEASING
4.98% MORTGAGE-BACKED
7.90% UTILITIES - GAS AND ELECTRIC
13.92% U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
31.46% FOREIGN AND INTERNATIONAL
32.35% INDUSTRIALS AND MISCELLANEOUS
*EXPRESSED AS A PERCENTAGE OF PORTFOLIO
5
<PAGE>
PACIFIC AMERICAN INCOME SHARES, INC.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS June 30, 1999 (Unaudited) (Amounts in Thousands)
- --------------------------------------------------------------------------------
Market
Par Value
- -------------------------------------------------------------------------------
INVESTMENT SECURITIES -- 98.8%
FINANCIAL AND LEASING -- 4.2%
Dean Witter Discover, 6.75%, due 10-15-13 $2,700 $ 2,617
IBJ Preferred Cap Co. LLC, 8.79%, due 12-29-49 1,610 1,344(A,B)
J.P. Morgan Capital Trust II, 7.95%, due 2-1-27 150 149
SB Treasury Co. LLC, 9.40%, due 12-29-49 1,530 1,503(A,B)
Socgen Real Estate Co. LLC, 7.64%, due 12-29-49 150 142(A,B)
-------
5,755
-------
FOREIGN AND INTERNATIONAL -- 31.7%
Geberit International SA, 10.13%, due 4-15-07 2,600 1,521(C)
HSBC Holdings plc, 7.50%, due 7-15-09 800 796
Imperial Tobacco Group plc, 7.13%, due 4-1-09 3,000 2,862
Korea Electric Power, 7.13%, due 4-1-01 3,000 3,105
Manitoba Province, 9.50%, 9-15-18 730 911
PDVSA Finance LTD, 7.40%, due 8-15-16 2,000 1,465(A)
PDVSA Finance LTD, 9.95%, due 2-15-20 2,000 1,901(A)
Petroleos Mexicanos, 8.85%, due 9-15-07 3,545 3,191(A)
Petroleos Mexicanos, 9.50%, due 9-15-27 510 482(A)
Petroliam Nasional Berhad, 7.13%, due 8-15-05 150 139(A)
Petroliam Nasional Berhad, 7.75%, due 8-15-15 1,640 1,388(A)
Petroliam Nasional Berhad, 7.63%, due 10-15-26 1,290 1,101(A)
Petrozuata Finance Inc., 7.63%, due 4-1-09 500 420(A)
Petrozuata Finance Inc., 8.22%, due 4-1-17 1,570 1,213(A)
Pohang Iron & Steel Company Ltd., 7.38%, due 5-15-05 3,000 2,860
Quebec Province, 7.22%, due 7-22-36 980 1,011
Republic of Argentina, 5.94%, due 3-31-05 1,209 1,031(B)
Republic of Argentina, 11.75%, due 4-7-09 3,120 2,824
Republic of Brazil, 11.63%, due 4-15-04 350 326
Republic of Panama, 9.34%, due 4-1-29 300 284
Rothmans Nederland Holdings BV, 6.88%, due 5-6-08 1,800 1,741
Sakura Cap Funding, 6%, due 8-29-49 2,500 2,000(A,B)
Tata Electric Company, 8.50%, due 8-19-17 3,000 2,561(A)
Telefonica De Argentina, 11.88%, due 11-1-04 4,500 4,590
United Mexican States, 11.50%, due 5-15-26 890 975
6
<PAGE>
PACIFIC AMERICAN INCOME SHARES, INC.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------
Market
Par Value
- --------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL -- CONTINUED
United Mexican States, 10.38%, due 5-17-09 $ 490 $ 493
Vnesheconombank, 6.06%, due 12-15-15 150 23(B)
YPF Sociedad Anonima, 9.13%, due 2-24-09 2,500 2,554
-------
43,768
-------
INDUSTRIALS AND MISCELLANEOUS -- 32.6%
Adelphia Communications, 7.88%, due 5-1-09 1,500 1,403
American Standard Inc., 8.25%, due 6-1-09 1,000 994
Burlington Northern Sante Fe, 6.38%, due 12-15-05 240 234
Century Communications Corp., 8.88%, due 1-15-07 1,000 1,000
Charter Communications, 8.63%, due 4-1-09 171 164(A)
Crown Castle International Corp., 9%, due 5-15-11 100 98
Crown Castle International Corp., 0%, due 5-15-11 300 176(D)
CSX Corp., 6.25%, due 5-1-07 460 430
Edison Mission Energy, 7.73%, due 6-15-09 1,500 1,523(A)
Ford Motor Co., 6.63%, due 10-1-28 120 108
Ford Motor Co., 7.70%, due 5-15-97 1,500 1,506
Fugi Bank, 9.87%, due 12-31-49 2,000 1,750(A,B)
Horseshoe Gaming, L.L.C., 8.63%, due 5-15-09 54 53(A)
International Game Technology, 8.38%, due 5-15-09 1,700 1,666(A)
J. Seagram & Sons, 6.80%, due 12-15-08 450 429
J. Seagram & Sons, 7.50%, due 12-15-08 440 426
J. Seagram & Sons, 7.60%, due 12-15-28 200 193
Liberty Media Group, 7.88%, due 1-15-09 1,500 1,491(A)
Loews Corporation, 7.63%, due 6-1-23 2,242 2,156
Lyondell Chemical Company, 9.88%, due 5-1-07 375 382(A)
McLeodUSA Incorporated, 8.13%, due 2-15-09 1,000 930(A)
Mohegan Tribal Gaming, 8.13%, due 1-1-06 2,000 1,960(A)
Nabisco Group Holdings Corp., 7.75%, due 5-15-09 1,010 1,000
Nabisco Group Holdings Corp., 7.88%, due 5-15-09 1,680 1,632
News America, Inc., 7.63%, due 11-30-28 1,310 1,273(A)
News America, Inc., 6.75%, due 1-9-38 930 867(A)
7
<PAGE>
PACIFIC AMERICAN INCOME SHARES, INC.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------
Market
Par Value
- --------------------------------------------------------------------------------
INDUSTRIALS AND MISCELLANEOUS -- CONTINUED
News America Holdings Incorporated, 8.88%, due 4-26-23 $ 1,325 $ 1,463
Norfolk Southern Corp., 7.70%, due 5-15-17 1,400 1,438
Nortek, Inc., 8.88%, due 8-1-08 80 79(A)
Northrop Grumman Corp., 9.38%, due 10-15-24 2,000 2,122
Occidental Petroleum Corp., 8.45%, due 2-15-29 1,500 1,570
Price Communications Wire Co., 9.13%, due 12-15-06 1,000 1,015
Raytheon Co., 6.75%, due 8-15-07 420 416
Rogers Cable System, Ltd., 10%, due 3-15-05 1,000 1,070
Safety-Kleen Corp., 9.25%, due 5-15-09 800 808(A)
TCI Communications Inc., 8.75%, due 8-1-15 160 181
TCI Communications Inc., 7.88%, due 2-15-26 1,890 1,992
TCI Communications Inc., 9.65%, due 3-31-27 3,000 3,395
Terex Corp., 8.88%, due 4-1-08 424 407(A)
Time Warner, Inc., 9.15%, due 2-1-23 3,000 3,440
Union Pacific Group, 7.15%, due 5-15-28 2,000 1,774
-------
45,014
-------
Mortgage-Backed Securities -- 5.0%
Asset Securitization Corp., 7.42%, due 4-14-27 2,400 2,485
Commercial Mtg. Accep. Corp., 6.53%, due 6-15-07 3,100 3,070
Glendale Federal Savings and Loan Assoc., 9.13%, due 1-25-08 87 87
Nomura Asset Securities Corp., 7.12%, due 4-13-36 1,170 1,182
Resolution Trust Corporation, 9.40%, due 5-25-24 103 103
-------
6,927
-------
U.S. GOV'T. AGENCY MORTGAGE-BACKED SECURITIES -- 14.0%
Fannie Mae, 8%, due 4-25-06 1,460 1,495
Fannie Mae, 10.50%, due 7-1-09 140 149
Fannie Mae, 13.50%, due 5-1-12 48 56
Fannie Mae, 6%, due 1-1-14 24 23
Fannie Mae, 7%, due 7-1-13 1,580 1,562(E)
Fannie Mae, 14.50%, due 6-1-17 112 125
Fannie Mae, 14%, due 9-1-17 871 967
8
<PAGE>
PACIFIC AMERICAN INCOME SHARES, INC.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------
Market
Par Value
- --------------------------------------------------------------------------------
U.S. GOV'T. AGENCY MORTGAGE-BACKED SECURITIES -- CONTINUED
Fannie Mae, 11.50%, due 11-1-17 $ 721 $ 778
Fannie Mae, 13.50%, due 11-1-17 114 126
Fannie Mae, 14%, due 2-1-18 721 801
Fannie Mae, 13.25%, due 3-1-18 390 441
Freddie Mac, 10.75%, due 7-1-00 10 10
Freddie Mac, 10.25%, due 5-1-09 174 184
Freddie Mac, 11.88%, due 6-15-13 245 268
Freddie Mac, 6.50%, due 2-1-29 7,165 6,916
Gov't Nat'l Mortgage Assoc., 12.25%, due 3-20-14 113 124
Gov't Nat'l Mortgage Assoc., 9%, due 9-15-19 61 66
Gov't Nat'l Mortgage Assoc., 7%, due 8-15-25 214 211
Gov't Nat'l Mortgage Assoc., 7%, due 11-15-27 1,856 1,831
Gov't Nat'l Mortgage Assoc., 7%, due 12-15-27 1,718 1,696
Gov't Nat'l Mortgage Assoc., 6%, due 12-15-28 676 631
Gov't Nat'l Mortgage Assoc., 7%, due 6-15-28 824 813
Gov't Nat'l Mortgage Assoc., 6.50%, due 8-15-28 95 91
-------
19,364
-------
U.S. GOVERNMENT AND AGENCIES -- 3.3%
U.S. Treasury Bonds, 6.38%, due 8-15-27 2,830 2,900
U.S. Treasury Notes, 5.25%, due 11-15-28 1,900 1,684
-------
4,584
-------
UTILITIES - GAS AND ELECTRIC -- 8.0%
Gulf States Utilities, 8.25%, due 4-1-04 3,200 3,382
Niagra Mohawk Power, 7.75%, due 10-1-08 600 620
PNPP II Funding Corp., 9.12%, due 5-30-16 2,459 2,682(A)
Sithe/Independence Funding Corporation, 9%, due 12-30-13 4,000 4,304
-------
10,988
-------
9
<PAGE>
PACIFIC AMERICAN INCOME SHARES, INC.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------
Market
Par Value
- --------------------------------------------------------------------------------
Warrants -- N.M.
Republic of Argentina Global Bonds, strike price $93.30,
exp. 9-19-27 2 wts N.M.
--------
Total Investment Securities $136,400
--------
SHORT-TERM SECURITIES -- 2.0%
Repurchase Agreement -- 2.0%
Merrill Lynch Securities Corp.
4.95%, dated 6-30-99, to be repurchased at $2,720 on 7-1-99
(Collateral: $2,860 Federal Home Loan Bank medium-term notes,
5.13%, due 9-15-03, value $2,820) $2,720 2,720
--------
Total Short-Term Securities 2,720
--------
Total Investments-- 100.8% 139,120
Other Assets Less Liabilities-- (0.8%) (1,153)
--------
Net Assets-- 100.0% $137,967
========
- --------------------------------------------------------------------------------
(A) Rule 144a security -- A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified institutional buyers. These securities represent 25.29% of net
assets.
(B) Variable rate security--The rate shown is the rate as of June 30, 1999.
(C) Security is denominated and traded in German Deutschmarks.
(D) Stepped coupon security--A bond which amortizes to par by a specified date,
at which time it begins to accrue interest.
(E) When-issued security -- Security issued on a delayed-delivery basis. Final
settlement and maturity not yet determined.
N.M. -- Not meaningful.
See notes to financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AMERICAN INCOME SHARES, INC.
- -----------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES June 30, 1999 (Unaudited) (Amounts in Thousands)
- -----------------------------------------------------------------------------------------
<S><C>
ASSETS:
Investment securities at market value (Cost $139,277) $136,401
Short-term securities 2,720
--------
Total investments $139,121
Receivable for:
Sales of investments 1,758
Accrued interest 2,046
--------
3,804
Securities lending collateral 12,518
Other assets 13
--------
155,456
LIABILITIES:
Payable for investments purchased 4,912
Obligation to return securities lending collateral 12,518
Accrued expenses 59
--------
17,489
--------
NET ASSETS -- equivalent to $14.69 per share on
9,389 shares of Common Stock outstanding $137,967
========
SUMMARY OF STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share:authorized
20,000 shares; issued and outstanding 9,389
shares $ 94
Additional paid-in capital 142,585
Overdistributions of net investment income (396)
Accumulated net realized loss on investments (1,439)
Unrealized depreciation of investments (2,877)
--------
Net assets applicable to outstanding common stock $137,967
========
</TABLE>
- --------------
See notes to financial statements.
11
<PAGE>
PACIFIC AMERICAN INCOME SHARES, INC.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (Unaudited) (Amounts in Thousands)
- --------------------------------------------------------------------------------
For the Six Months Ended
June 30, 1999
------------------------
INVESTMENT INCOME:
Income:
Interest $ 5,299
Expenses:
Advisory fee $376
Custodian fee 39
Transfer agent and shareholder servicing expense 32
Directors' fees and expenses 30
Legal and auditing fees 22
Taxes, other than federal income taxes 18
Printing, stationery, and reports to shareholders 16
Registration fees 10
Less fees waived (12)
----
531
-------
Net investment income 4,768
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (1,237)
Unrealized depreciation of investments (6,503)
-------
Net realized and unrealized loss on investments (7,740)
-------
Change in net assets resulting from operations $(2,972)
=======
- --------------
See notes to financial statements.
12
<PAGE>
PACIFIC AMERICAN INCOME SHARES, INC.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (Amounts in Thousands)
- --------------------------------------------------------------------------------
For the Six For the
Months Ended Year Ended
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
Operations:
Net investment income $ 4,768 $ 9,667
Net realized gain (loss) on investments and
foreign currency contracts (1,237) 3,310
Decrease in unrealized appreciation of
investments and foreign currency contracts (6,503) (3,823)
-------- --------
Change in net assets resulting from operations (2,972) 9,154
Distributions to shareholders from:
Net investment income (5,164) (11,012)
Net realized gain on investments -- (3,273)
-------- --------
(5,164) (14,285)
Common stock issued in payment of
dividends (representing 70 shares) -- 1,095
-------- --------
Total decrease (8,136) (4,036)
Net Assets:
Beginning of period 146,103 150,139
-------- --------
End of period $137,967 $146,103
======== ========
- --------------
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 Six For the Years Ended December 31,
Months Ended -------------------------------------------------
June 30, 1999 1998 1997 1996 1995 1994
------------- -------- -------- --------- -------- --------
(Unaudited)
<S><C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $15.56 $16.11 $15.77 $16.27 $14.30 $16.25
------ ------ ------ ------ ------ ------
Net investment income .51 1.04 1.14 1.14 1.18 1.23
Net realized and unrealized gain
(loss) on investments (.83) (.06) .76 (.16) 1.99 (1.90)
------ ------ ------ ------ ------ ------
Total from investment operations (.32) .98 1.90 .98 3.17 (.67)
------ ------ ------ ------ ------ ------
Distributions paid from:
Net investment income (.55) (1.18) (1.18) (1.18) (1.20) (1.20)
Net realized gain on investments -- (.35) (.38) (.30) -- (.08)
------ ------ ------ ------ ------ ------
Total distributions (.55) (1.53) (1.56) (1.48) (1.20) (1.28)
------ ------ ------ ------ ------ ------
Net asset value, end of period $14.69 $15.56 $16.11 $15.77 $16.27 $14.30
====== ====== ====== ====== ====== ======
Market value per share, end of period $13.88 $15.75 $16.25 $14.375 $15.25 $13.125
====== ====== ====== ======= ====== =======
TOTAL RETURN:
Based on market value per share (8.62%) 6.61% 24.73% 4.16% 25.92% (12.75%)
RATIOS TO AVERAGE NET ASSETS:
Expenses .76% .76% .71% .72% .81% .76%
Net investment income 6.79% 6.54% 7.11% 7.22% 7.62% 8.20%
SUPPLEMENTAL DATA:
Portfolio turnover rate 401% 378% 201% 326% 132% 116%
Net assets at end of period
(in thousands) $137,967 $146,103 $150,139 $146,979 $151,627 $133,239
</TABLE>
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See notes to financial statements.
14
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PACIFIC AMERICAN INCOME SHARES, INC.
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NOTES TO FINANCIAL STATEMENTS (Unaudited) (Amounts in Thousands)
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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, 1999, are reflected in the
accompanying Schedule of Investments at their value on June 30, 1999. 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 or depreciation 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, 1999, aggregated
$74,854 and $47,500, respectively. Purchases and sales of U.S. Government
securities were $220,455 and $266,469, respectively, for the six months ended
June 30, 1999. As of June 30, 1999, unrealized net depreciation for federal
income tax and financial reporting purposes aggregated $(2,876), of which
$1,974 related to appreciated securities and $4,850 related to depreciated
securities. The aggregate cost of investment securities owned for federal
income tax purposes was $141,997 at June 30, 1999.
(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 are determined in accordance with federal income tax
regulations, which may differ from those determined in accordance with
generally accepted accounting principles; accordingly, periodic
reclassifications are made within the Company's capital accounts to reflect
income and gains available for distribution under federal income tax
regulations.
(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.
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PACIFIC AMERICAN INCOME SHARES, INC.
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NOTES TO FINANCIAL STATEMENTS (Continued) (Amounts in Thousands)
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(e) Use of estimates -- 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.
(f) Foreign Currency Translation -- The books and records of the Funds are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis: (i) market value of investment securities,
assets and liabilities at the closing daily rate of exchange; and (ii)
purchases and sales of investment securities, interest income and expenses at
the rate of exchange prevailing on the respective date of such transactions.
The effect of changes in foreign exchange rates on realized and unrealized
security gains or losses are reflected as a component of such gains or
losses.
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, 1999.
On April 17, 1998, the Adviser entered into an investment subadvisory
agreement with Western Asset Global Management, Limited ("WAGM"), which is a
wholly owned subsidiary of Legg Mason, Inc., to provide the Company with
investment research, advice, management and supervision and a continuous
investment program for the Company's portfolio of non-dollar securities
consistent with the Company's investment objectives and policies. As
compensation, the Adviser will pay WAGM a fee based on the prorata assets of the
Company managed by WAGM during the month.
NOTE 3 -- SECURITIES LOANED
The Company lends its securities to approved brokers to earn additional
income and receives cash and U.S. government securities as collateral against
the loans. Cash collateral received is invested in a money market pooled account
by the fund's lending agent. Collateral is maintained over the life of the loan
in an amount not less than 100% of the value of loaned securities. At June 30,
1999, the market value of the securities on loan to broker-dealers was $12,141,
for which the Company received collateral of $12,518 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.
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PACIFIC AMERICAN INCOME SHARES, INC.
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NOTES TO FINANCIAL STATEMENTS (Continued) (Amounts in Thousands)
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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, 1999, there were no open forward currency exchange contracts.
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