<PAGE>
PACIFIC
AMERICAN
INCOME
SHARES,INC.
ANNUAL
REPORT
1999
<PAGE>
Dear Shareholders:
Market Review and Performance
1999 proved to be the second-worst year in recorded history for the bond
market, as Treasury yields rose by more this past year than they declined in the
prior year. Fortunately, the rise in corporate yields was mitigated to some
extent by a narrowing of spreads. In the end, a strong economy and improving
prospects for earnings provided fundamental support for the corporate bond
market, as did diminished fears of Y2K disruptions.
The Pacific American portfolio recorded a total return based on its net asset
value (price gains/losses plus interest income, net of expenses) of 0.51% for
the period, compared to -1.54% for its BBB Corporate Debt peer group as reported
by Lipper Analytical Services. While relative performance was strong, the Fund's
share price declined from $15.75 at the beginning of the year (December 31, 1998
closing price) to close the year at $11.875, while the NAV declined $1.02, from
$15.56 to $14.54.
We believe that the resulting significant increase in the share price discount
to net asset value during the year reflects the market's general aversion to
bonds rather than any fundamental deterioration in the portfolio itself. In
fact, the portfolio's quality emphasis and issue selection were rewarded
handsomely. Lower quality securities performed much better than higher quality
securities, and emerging market debt securities posted stellar returns as
investor confidence in the sector rebounded sharply. I'm very pleased to note
that the Fund's competitive record remains excellent. For the period ending
December 31, 1999, Pacific American ranked first (out of a total of 16 funds)
for the past 3, 5, and 10 years, and second for the past 1 and 15 years, in the
Lipper Analytical Services' group of closed-end investment grade bond funds.
Economic Outlook
The major challenge facing the bond market today is monitoring the course of
Fed policy. Inflation expectations are still relatively sanguine, as measured by
the 2.3% difference between 30-year TIPS (Treasury Inflation-Protected
Securities) yields and 30-year Treasury yields. This is lower than last year's
2.7% rise in the Consumer Price Index, and not too far above the 1.9% rise in
the core CPI (ex food and energy), which ranks as the lowest rate in 34 years.
The Fed, however, has been tightening with the intent to slow growth, and
recently asserted that consumer spending (PCE) rather than inflation is their
focus. The dollar is relatively strong, and commodity and precious metals prices
are relatively weak, with the notable exception of energy prices. For the first
time in 10 years the yield curve has inverted, as longer-term interest rates
have dropped below short-term interest rates, and real interest rates are very
high. Taken together, these sensitive market indicators suggest that monetary
policy is reasonably tight and inflation is being kept under control.
We believe that both nominal and real yields are very attractive at these
levels, but we have tempered our long duration exposure somewhat out of
deference to the concerns associated with the Fed's apparent assault on growth.
Relatively high volatility continues to argue for holding a negatively convex
exposure as a defensive strategy. We do not think the economic fundamentals
warrant more monetary tightening than the market had already priced in, so we
continue to emphasize a neutral to somewhat bulleted yield curve exposure.
1
<PAGE>
Meanwhile, low inflation and sound money should continue to provide a
foundation for healthy economic growth, so the outlook for corporate bonds,
which represent excellent value, is bright. We remain overweight in that sector,
particularly to credits in the lower end of the quality scale. Mortgage spreads,
on the other hand, have declined enough to warrant a somewhat less aggressive
exposure than in the past. High yield and emerging market sectors continue to
offer excellent value as well, but lingering systemic risk argues for careful
selection and well-diversified exposures.
Strategy
These conditions imply little if any change in portfolio strategy. We will
continue to place an emphasis on longer maturities in an attempt to lock in
today's attractive yields. The outlook for corporate bonds remains quite
attractive, but economic slowdown risks call for broad diversification and
careful attention to the balance between risk and reward. For example, we
continue to believe that a moderate and well-diversified exposure to dollar-
denominated emerging market debt from major issuers can enhance the portfolio's
yield without adding unduly to overall credit risk.
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. The combination
of these factors should restore much of the bond market's lost appeal. In the
meantime, the portfolio offers a dividend yield that appears unusually
attractive relative to current low-inflation fundamentals.
Dividend Policy
Thanks to rising market yields and positive investment results, I'm happy to
say that we anticipate raising the quarterly dividend from the 25c rate of the
past six months to 26c for the next six months. Our next review of dividend
policy, based on market conditions and earnings results will take place in July,
at which time we will make adjustments to this rate if necessary. Above all, it
is our objective to deliver as high and as stable a dividend payout as is
possible, consistent with our projections of the portfolio's earnings ability.
As always, we remain dedicated to delivering the highest level of value for
our shareholders. Please let us know if we can answer any questions for you.
Sincerely,
/s/ James W. Hirschmann
- -----------------------
James W. Hirschmann
President
2
<PAGE>
Pacific American Income Shares, Inc.
Statistical Highlights (Amounts in Thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
-------- --------
<S> <C> <C>
Net Asset Value $136,485 $146,103
Per Share $14.54 $15.56
Net Investment Income $9,939 $9,667
Per Share $1.06 $ 1.04
Dividends Paid $9,859 $11,012
Per Share $1.05 $1.18
Capital Gains Paid $328 $3,273
Per Share $.04 $.35
</TABLE>
- --------------------------------------------------------------------------------
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
Divident 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 Register of the Company, offer two convenient ways to add shares of the
Company to your account. First, PAI offers to all shareholders 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
shareholder elects otherwise. Second, the Company offers to registered
shareholders (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").
3
<PAGE>
Pacific American Income Shares, Inc.
- --------------------------------------------------------------------------------
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 the shares on the date of the distribution is at
or above the net asset value ("NAV") 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 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 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 shareholders
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 purposes 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 shareholders (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 shareholder may, however, have their shares taken out of
"street name" and re-register such shares in their own name, becoming a
registered shareholder 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 shareholders that the Board of Directors may declare.
4
<PAGE>
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 accumulate such shares and those of any
other terminating participants for purposes of such sale. Brokerage charges,
transfer taxes, and any other costs of sale will be allocated pro rata among the
selling participants. Any such sale may be made on any securities exchange where
such shares are traded, in the over-the-counter market or in negotiated
transactions, and may be subject to such terms of price, delivery, etc., as 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, 1999
- --------------------------------------------------------------------------------
BY RATING*
(At Market Value)
[PIE CHART APPEARS HERE]
AAA 24.5%
AA 1.6%
A 13.9%
BBB 39.2%
B 4.8%
BB 14.0%
Short-Term Securities 0.4%
Not Rated 1.6%
BY SECTOR*
(At Market Value)
0.4% SHORT-TERM SECURITIES
0.8% ASSET-BACKED SECURITIES
4.1% MORTGAGE-BACKED SECURITIES
4.6% U.S. GOVERNMENT AND AGENCY OBLIGATIONS
15.8% U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
33.4% YANKEE BONDS
40.9% CORPORATE BONDS AND NOTES
*EXPRESSED AS A PERCENTAGE OF THE PORTFOLIO
6
<PAGE>
Pacific American Income Shares, Inc.
Schedule of Investments December 31, 1999 (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Maturity
Rate Date Par Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds and Notes -- 40.2%
Aerospace/Defense -- 4.9%
Lockheed Martin Corp. 9% 1/15/22 $2,500 $ 2,635
Northrop Grumman Corp. 9.375% 10/15/24 2,000 2,054
Raytheon Co. 6.4% 12/15/18 2,000 1,666
Raytheon Co. 6.75% 8/15/07 420 392
--------
6,747
--------
Automotive -- 1.1%
Ford Motor Company 7.7% 5/15/97 1,500 1,438
--------
Banking and Finance -- 5.3%
Ace Ina Holding, Inc. 8.3% 8/15/06 2,000 2,021
Ford Motor Credit Company 5.8% 1/12/09 120 106
IBJ Preferred Capital Co. LLC 8.79% 12/29/49 1,110 1,049/B,C/
J.P. Morgan Capital Trust II 7.95% 2/1/27 150 141
Morgan Stanley Dean Witter & Co. 6.75% 10/15/13 2,700 2,465
SB Treasury Co. LLC 9.4% 12/29/49 1,530 1,515/B,C/
--------
7,297
--------
Building Materials -- 0.8%
American Standard, Inc. 8.25% 6/1/09 1,000 963
Nortek, Inc. 8.875% 8/1/08 80 76/C/
--------
1,039
--------
Cable -- 2.7%
Adelphia Communications Corp. 8.875% 1/15/07 1,000 962
Adelphia Communications Corp. 7.875% 5/1/09 1,534 1,381
Charter Communications 8.625% 4/1/09 137 128
CSC Holdings, Inc. 8.125% 7/15/09 70 71
Price Communications Wireless, Inc. 9.125% 12/15/06 1,000 1,012
TCI Communications Inc. 8.75% 8/1/15 160 175
--------
3,729
--------
Chemicals -- 0.4%
Dow Chemical Company 7.375% 11/1/29 210 201
Lyondell Chemical Company 9.875% 5/1/07 375 389/C/
--------
590
--------
</TABLE>
7
<PAGE>
Pacific American Income Shares, Inc.
Schedule of Investments (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Maturity
Rate Date Par Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Construction and Machinery -- 0.3%
Terex Corp. 8.875% 4/1/08 $ 424 $ 403
--------
Energy -- 3.0%
Sithe/Independence Funding Corporation 9% 12/30/13 4,000 4,046
--------
Environmental Services -- 2.3%
Safety-Kleen Corp. 9.25% 5/15/09 800 774
Waste Management Inc. 7.375% 5/15/29 3,000 2,361/C/
--------
3,135
--------
Food, Beverage and Tobacco -- 1.8%
J. Seagram & Sons 7.6% 12/15/28 200 188
RJ Reynolds Tobacco Holdings, Inc. 7.75% 5/15/06 1,010 893
RJ Reynolds Tobacco Holdings, Inc. 7.875% 5/15/09 1,680 1,426
--------
2,507
--------
Gaming -- 2.0%
Horseshoe Gaming, L.L.C. 8.625% 5/15/09 54 52/C/
International Game Technology 8.375% 5/15/09 1,700 1,645/C/
Mohegan Tribal Gaming Authority 8.125% 1/1/06 1,000 982/C/
--------
2,679
--------
Gas and Pipeline Utilities -- 0.4%
Occidental Petroleum Corp. 8.45% 2/15/29 500 518
--------
Media -- 4.1%
News America, Inc. 8.875% 4/26/23 1,325 1,397
News America, Inc. 6.75% 1/9/38 930 854
Time Warner, Inc. 9.15% 2/1/23 3,000 3,352
--------
5,603
--------
Real Estate -- 0.1%
Socgen Real Estate Co. LLC 7.64% 12/29/49 150 135/C/
--------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Maturity
Rate Date Par Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Services -- 2.2%
Fuji Co., Ltd. 9.87% 12/31/49 $1,000 $ 1,000/B/
Loews Corporation 7.625% 6/1/23 2,242 2,056
--------
3,056
--------
Telecommunications -- 3.2%
AT&T Corp. 9.65% 3/31/27 3,000 3,298
McLeodUSA Incorporated 8.125% 2/15/09 1,000 937/C/
NEXTLINK Communications, Inc. 10.75% 6/1/09 30 31
PSINet, Inc. 10.5% 12/1/06 70 71/C/
--------
4,337
--------
Transportation -- 0.2%
Burlington Northern Santa Fe Corp. 6.375% 12/15/05 240 227
--------
Utilities -- 5.4%
Edison Mission Energy 7.73% 6/15/09 1,500 1,484/C/
Gulf States Utilities 8.25% 4/1/04 3,200 3,284
PNPP II Funding Corp. 9.12% 5/30/16 2,459 2,536
--------
7,304
--------
Total Corporate Bonds and Notes
(Identified Cost -- $56,018) 54,790
- -------------------------------------------------------------------------------------------------------------------
Asset-Backed Securities -- 0.8%
Nomura Asset Securities Corp. 7.12% 4/13/36 1,170 1,146
--------
Total Asset-Backed Securities (Identified Cost -- $1,169) 1,146
- -------------------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities -- 4.0%
Fixed-Rate Securities -- 1.8%
Asset Securitization Corp. 7.42% 4/14/27 2,400 2,418
--------
Variable-Rate Securities -- 2.2%
Commercial Mortgage Acceptance Corp. 6.53% 6/15/07 3,100 2,992/B/
Glendale Federal Savings and Loan Assoc. 9.125% 1/25/08 76 76/B/
--------
3,068
--------
Total Mortgage-Backed Securities (Identified Cost -- $5,670) 5,486
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Pacific American Income Shares, Inc.
Schedule of Investments (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Maturity
Rate Date Par Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and Agency Obligations -- 4.5%
United States Treasury Bond 8% 11/15/21 $2,450 $ 2,780
United States Treasury Bond 5.25% 11/15/28 2,460 2,027
United States Treasury Note 7% 7/15/06 1,286 1,317
--------
Total U.S. Government and Agency Obligations
(Identified Cost -- $6,332) 6,124
- -------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-Backed Securities -- 15.5%
Fannie Mae 8% 4/25/06 1,248 1,264
Fannie Mae 10.5% 7/1/09 134 143
Fannie Mae 6% 4/1/14 24 22
Fannie Mae 14.5% 6/1/17 86 96
Fannie Mae 13.5% 5/1/12 to 104 115
10/1/17
Fannie Mae 11.5% 11/1/17 565 607
Fannie Mae 14% 9/1/17 to 1,197 1,324
2/1/18
Fannie Mae 13.25% 3/1/18 242 269
Fannie Mae 7% 7/1/29 1,528 1,477
Freddie Mac 10.75% 7/1/00 10 10
Freddie Mac 6.25% 7/15/04 4,000 3,911
Freddie Mac 10.25% 5/1/09 153 160
Freddie Mac 11.875% 6/15/13 218 230
Freddie Mac 6.5% 2/1/29 6,945 6,548
Government National Mortgage Association 12.25% 3/20/14 80 90
Government National Mortgage Association 9% 9/15/19 61 64
Government National Mortgage Association 7% 8/15/25 to 4,290 4,146
6/15/28
Government National Mortgage Association 6.5% 8/15/28 94 88
Government National Mortgage Association 6% 12/15/28 665 605
--------
Total U.S. Government Agency Mortgage-Backed
Securities (Identified Cost -- $21,816) 21,169
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Maturity
Rate Date Par Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Yankee Bonds/A/ -- 32.8%
Corporates -- 26.5%
Credit Suisse First Boston London 7.9% 5/1/07 $3,000 $ 2,859/B,C/
Imperial Tobacco Group plc 7.125% 4/1/09 3,000 2,697
Korea Electric Power 10% 4/1/01 3,000 3,079
PDVSA Finance LTD 7.4% 8/15/16 2,000 1,468
PDVSA Finance LTD 9.95% 2/15/20 2,000 1,829/C/
Petroleos Mexicanos 9.5% 9/15/27 4,055 4,065/C/
Petroliam Nasional Berhad 7.125% 8/15/05 150 144/C/
Petroliam Nasional Berhad 7.75% 8/15/15 1,640 1,511/C/
Petroliam Nasional Berhad 7.625% 10/15/26 1,290 1,147/C/
Petrozuata Finance, Inc. 7.63% 4/1/09 500 392/C/
Petrozuata Finance, Inc. 8.22% 4/1/17 1,660 1,158/C/
Pohang Iron & Steel Company Ltd. 7.375% 5/15/05 3,000 2,899
Rothmans Nederland Holdings BV 6.875% 5/6/08 1,800 1,623
Royal & Sun Alliance Insurance Group Plc 8.95% 10/15/29 2,750 2,749/C/
Sanwa Finance Aruba AEC 8.35% 7/15/09 1,400 1,411
Tata Electric Company 8.5% 8/19/17 3,000 2,583/C/
Telefonica de Argentina S.A. 11.875% 11/1/04 4,500 4,590
--------
36,204
--------
Foreign Governments -- 6.3%
Manitoba Province 9.5% 9/15/18 730 878
Quebec Province 7.22% 7/22/36 980 981
Republic of Argentina 6.8125% 3/31/05 334 298/B,D/
Republic of Argentina 11.75% 4/7/09 3,020 3,020
Republic of Bulgaria 6.5% 7/28/11 640 506/B/
Republic of Colombia 9.75% 4/23/09 510 489
Republic of Panama 6.5% 7/17/16 551 433/B/
Republic of Panama 9.375% 4/1/29 300 286
Republic of Philippines 9.5% 10/21/24 480 486
United Mexican States 10.375% 2/17/09 490 523
United Mexican States 11.5% 5/15/26 570 677
Vnesheconombank 6.0625% 12/15/15 150 24/B,D/
--------
8,601
--------
Total Yankee Bonds (Identified Cost -- $46,185) 44,805
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Pacific American Income Shares, Inc.
Schedule of Investments (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Warrants -- N.M.
Republic of Argentina Global Bonds,
strike price $93.30, expiring 9/19/27 1 wt $ 2
--------
Total Warrants (Identified Cost -- $22) 2
- -------------------------------------------------------------------------------------------------------------------
Short-Term Investments -- 0.4%
Repurchase Agreement -- 0.4%
Merrill Lynch Government Securities, Inc.
4.10%, dated 12/31/99, to be repurchased
at $560 on 1/3/00 (Collateral: $580 Fannie Mae
medium-term notes, 5.25%, due 1/15/03,
value $586) $ 560 560
--------
Total Short-Term Investments
(Identified Cost -- $560) 560
- -------------------------------------------------------------------------------------------------------------------
Total Investments -- 98.2% (Identified Cost -- $137,772) 134,082
Other Assets Less Liabilities -- 1.8% 2,403
--------
Net assets -- 100.0% $136,485
========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/ Yankee Bonds -- Dollar-denominated bonds issued in the U.S. by foreign
entities.
/B/ The coupon rates shown on variable rate securities are the rates at
December 31,1999.
/C/ 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 21.3% of net
assets.
/D/ Indexed security -- The rate of interest on this security is tied to the
London Interbank Offered Rate (LIBOR). The coupon rate is the rate as of
December 31, 1999.
N.M. -- Not meaningful.
See notes to financial statements.
12
<PAGE>
Pacific American Income Shares, Inc.
Statement of Assets and Liabilities December 31, 1999 (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investment securities at market value (cost $137,212) $133,522
Short-term securities 560
--------
Total investments $134,082
Receivable for accrued interest 2,545
Securities lending collateral 750
Other assets 13
--------
137,390
LIABILITIES:
Obligation to return securities lending collateral 750
Accrued expenses 155
--------
905
--------
NET ASSETS -- equivalent to $14.54 per share on
9,389 shares of common stock outstanding $136,485
========
SUMMARY OF STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share:authorized
20,000 shares; 9,389 issued and outstanding
shares $ 94
Additional paid-in capital 142,585
Under/(over) distributions of net investment income 85
Accumulated net realized loss on investments (2,589)
Unrealized depreciation of investments (3,690)
--------
Net assets applicable to outstanding common stock $136,485
========
</TABLE>
- ----------
See notes to financial statements.
13
<PAGE>
Pacific American Income Shares, Inc.
Statement of Operations (Amounts in Thousands)
- --------------------------------------------------------------------------------
For the Year Ended
December 31, 1999
------------------
INVESTMENT INCOME:
Interest income $ 11,013
Expenses:
Advisory fee 744
Custodian fee 90
Transfer agent and shareholder servicing expense 73
Audit and legal fees 36
Directors' fees and expenses 63
Registration fees 16
Reports to shareholders 35
Taxes, other than federal income taxes 41
--------
1,098
Less fees waived (24)
--------
Total expenses, net of waivers 1,074
--------
Net investment income 9,939
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain/(loss) on investments (2,054)
Unrealized depreciation of investments (7,316)
--------
Net realized and unrealized gain/(loss) on investments (9,370)
--------
Change in net assets resulting from operations $ 569
--------
________
See notes to financial statements.
14
<PAGE>
Pacific American Income Shares, Inc.
Statement of Changes in Net Assets (Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998
---- ----
<S> <C> <C>
Operations:
Net investment income $ 9,939 $ 9,667
Net realized gain/(loss) on investments (2,054) 3,310
Increase/(decrease) in unrealized appreciation of
investments (7,316) (3,823)
-------- --------
Change in net assets resulting from operations 569 9,154
Distributions to shareholders from:
Net investment income (9,859) (11,012)
Net realized gain/(loss) on investments (328) (3,273)
-------- --------
(10,187) (14,285)
Common stock issued in payment of
dividends (representing 70 shares) -- 1,095
-------- --------
Total increase/(decrease) (9,618) (4,036)
Net Assets:
Beginning of year 146,103 150,139
-------- --------
End of year (including undistributed net investment
income of $85 and $0, respectively) $136,485 $146,103
======== ========
</TABLE>
________
See notes to financial statements.
15
<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,
---------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year $ 15.56 $ 16.11 $ 15.77 $ 16.27 $ 14.30
-------- -------- -------- -------- --------
Net investment income 1.06 1.04 1.14 1.14 1.18
Net realized and unrealized gain/
(loss) on investments (.99) (.06) .76 (.16) 1.99
-------- -------- -------- -------- --------
Total from investment operations .07 .98 1.90 .98 3.17
-------- -------- -------- -------- --------
Distributions paid from:
Net investment income (1.05) (1.18) (1.18) (1.18) (1.20)
Net realized gain/(loss) on investments (.04) (.35) (.38) (.30) --
-------- -------- -------- -------- --------
Total distributions (1.09) (1.53) (1.56) (1.48) (1.20)
-------- -------- -------- -------- --------
Net asset value, end of year $ 14.54 $ 15.56 $ 16.11 $ 15.77 $ 16.27
======== ======== ======== ======== ========
Market value per share, end of year $ 11.88 $ 15.75 $ 16.25 $ 14.375 $ 15.25
======== ======== ======== ======== ========
TOTAL RETURN:
Based on market value per share (18.39)% 6.61% 24.73% 4.16% 25.92%
RATIOS TO AVERAGE NET ASSETS:
Expenses .76% .76% .71% .72% .81%
Net investment income 7.07% 6.54% 7.11% 7.22% 7.62%
SUPPLEMENTAL DATA:
Portfolio turnover rate 242% 378% 201% 326% 132%
Net assets at end of year
(in thousands) $136,485 $146,103 $150,139 $146,979 $151,627
</TABLE>
See notes to financial statements.
16
<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, 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, 1999, are reflected in the
accompanying Schedule of Investments at their value on December 31, 1999. In
valuing portfolio securities, securities listed or traded on a national
securities exchange are valued at the last sales price. 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 year ended December 31, 1999, aggregated
$102,371 and $79,370, respectively. Purchases and sales of U.S. Government
securities were $240,252 and $283,079, respectively, for the year ended
December 31, 1999. As of December 31, 1999, unrealized net depreciation for
federal income tax and financial reporting purposes aggregated $3,897, of
which $1,443 related to appreciated securities and $5,340 related to
depreciated securities. The aggregate cost of investment securities owned for
federal income tax purposes was $137,979 at December 31, 1999. Unused capital
loss carryforwards for federal income tax purposes at December 31, 1999, were
$2,308, which expire in 2007.
(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.
17
<PAGE>
Pacific American Income Shares, Inc.
Notes to Financial Statements (Continued) (Amounts in Thousands)
- --------------------------------------------------------------------------------
(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 Company
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 year ended
December 31, 1999.
On April 17, 1998, the Adviser entered into an investment subadvisory
agreement with Western Asset Global Management, Limited ("WAGM") 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 Company'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 December
31, 1999, the market value of the securities on loan to broker-dealers was $716,
for which the Company received collateral of $750 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.
18
<PAGE>
- --------------------------------------------------------------------------------
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, 1999, there were no open forward currency exchange contracts.
NOTE 5 -- SHAREHOLDER MEETING RESULTS (Unaudited)
The Company's annual meeting of shareholders was held on May 17, 1999. Of the
9,389 shares outstanding, the following shares were voted at the meeting:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Election of seven Directors:
Ronald J. Arnault, Jr. 7,569 -- 167
John E. Bryson 7,579 -- 157
Anita L. DeFrantz 7,541 -- 195
William G. McGagh 7,566 -- 170
Ronald L. Olson 7,578 -- 158
William E.B. Siart 7,577 -- 159
Louis A. Simpson 7,582 -- 154
Ratification of the selection of PricewaterhouseCoopers LLP
as independent accountants for the Company
for the year ending December 31, 1999 7,564 25 147
</TABLE>
19
<PAGE>
Pacific American Income Shares, Inc.
Report of Independent Accounts
- --------------------------------------------------------------------------------
To the Shareholders and Directors of Pacific American Income Shares, Inc.:
In our opinion, the 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. (hereafter
referred to as the "Company") at December 31, 1999, and the results of its
operations, the changes in its net assets and the financial highlights for each
of the fiscal periods presented, in conformity with accounting principles
generally accepted in the United States. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Company'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 auditing standards
generally accepted in the United States, which require that we plan and perform
the audits 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, 1999, by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 10, 2000
20
<PAGE>
The Board Of Directors
WILLIAM G. MCGAGH*, CHAIRMAN
RONALD J. ARNAULT+
JOHN E. BRYSON*
ANITA L. DE FRANTZ+
RONALD L. OLSON*
WILLIAM E. B. SIART*
LOUIS A. SIMPSON+
Officers
JAMES W. HIRSCHMANN
President
SCOTT F. GRANNIS
Vice President
ILENE S. HARKER
Vice President
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-AR-99
