N-CSR 1 pais063003.txt PACIFIC AMERICAN INCOME SHARES NCSR 063003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-2351 Name of Fund: Pacific American Income Shares, Inc. Fund Address: 100 Light Street Baltimore, MD 21202 Name and address of agent for service: James W. Hirschmann, President, Pacific American Income Shares, Inc. 100 Light Street Baltimore, MD 21202. Registrant's telephone number, including area code: (410) 539-0000 Date of fiscal year end: December 31, 2003 Date of reporting period: June 30, 2003 Item 1 -- Report to Shareholders ----------------------------- Pacific American Income Shares, Inc. Semi-Annual Report to Shareholders June 30, 2003 ----------------------------- Semi-Annual Report to Shareholders Statistical Highlights (Amounts in Thousands, except per share amounts) --------------------------------------------------------------------------------
Six Months Ended Year Ended June 30, 2003 December 31, 2002 ------------- ----------------- Net Asset Value $155,282 $141,238 Per Share $16.54 $15.04 Net Investment Income $4,304 $9,406 Per Share $0.46 $1.00 Dividends Paid $4,624 $9,389 Per Share $0.49 $1.00
-------------------------------------------------------------------------------- The Company -------------------------------------------------------------------------------- Pacific American Income Shares, Inc. (the "Fund") 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 the 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 Fund'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 Fund. For participants in the Plan, cash dividends and other distributions are automatically reinvested in additional shares of the Fund's stock. These shares are purchased on the open market. Interested shareholders may obtain more information by contacting the Dividend Reinvestment Agent, EquiServe Trust Company, N.A., P.O. Box 43011, Providence, RI 02940-3011, Investor Relations telephone number 1-866-290-4386. 1 Semi-Annual Report to Shareholders Portfolio Diversification June 30, 2003 -------------------------------------------------------------------------------- [CHART] BY RATING* (At Market Value) AAA 9% AA 4% A 19% BBB 46% BB 10% B 5% CCC 2% Short-Term Securities 1% Not Rated 4% [CHART] BY SECTOR* (At Market Value) 0.9% SHORT-TERM SECURITIES 0.9% MORTGAGE-BACKED SECURITIES 2.2% U.S. GOVERNMENT AND AGENCY OBLIGATIONS 3.1% U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES 25.6% YANKEE BONDS 67.3% CORPORATE BONDS AND NOTES *EXPRESSED AS A PERCENTAGE OF THE PORTFOLIO 2 Schedule of Investments June 30, 2003 (Unaudited) (Amounts in Thousands) --------------------------------------------------------------------------------
Maturity Rate Date Par Value --------------------------------------------------------------------------- Long-Term Securities -- 97.4% Corporate Bonds and Notes -- 66.2% Aerospace/Defense -- 2.6% Northrop Grumman Corporation 9.375% 10/15/24 $2,000 $ 2,238 Raytheon Company 6.750% 8/15/07 420 476 Raytheon Company 6.400% 12/15/18 610 686 Systems 2001 Asset Trust 6.664% 9/15/13 579 652/A/ -------- 4,052 -------- Automotive -- 1.5% Ford Motor Company 8.900% 1/15/32 730 743 Ford Motor Company 7.700% 5/15/97 940 845 General Motors Corporation 7.125% 7/15/13 110 109 General Motors Corporation 8.250% 7/15/23 190 189 General Motors Corporation 8.375% 7/15/33 480 473 -------- 2,359 -------- Banking and Finance -- 4.9% Ford Motor Credit Company 7.375% 10/28/09 1,190 1,247 Ford Motor Credit Company 7.375% 2/1/11 880 910 Ford Motor Credit Company 7.250% 10/25/11 500 514 General Motors Acceptance Corporation 7.250% 3/2/11 2,000 2,052 General Motors Acceptance Corporation 6.875% 8/28/12 500 499/B/ Household Finance Corporation 7.200% 7/15/06 300 343 Household Finance Corporation 7.000% 5/15/12 970 1,148 Sears Roebuck Acceptance Corp. 6.500% 12/1/28 730 761 Sears Roebuck Acceptance Corp. 7.000% 6/1/32 190 212 -------- 7,686 -------- Banks -- 3.7% Bank of America Corporation 6.250% 4/15/12 1,320 1,529 Bank of America Corporation 7.800% 9/15/16 250 325 Bank One Corporation 5.250% 1/30/13 1,400 1,510/B/ The Sanwa Bank, Ltd., New York 7.400% 6/15/11 1,500 1,682/B/
3 Semi-Annual Report to Shareholders Schedule of Investments (Continued) (Amounts in Thousands) --------------------------------------------------------------------------------
Maturity Rate Date Par Value ------------------------------------------------------------------------------- Banks -- Continued UBS Preferred Funding Trust I 8.622% 10/29/49 $ 240 $ 307/C/ Wells Fargo Bank NA, San Francisco 6.450% 2/1/11 340 401 -------- 5,754 -------- Building Materials -- 0.6% American Standard, Inc. 8.250% 6/1/09 500 577 Nortek Holdings, Inc. 8.875% 8/1/08 330 344 -------- 921 -------- Cable -- 0.7% TCI Communications, Inc. 8.750% 8/1/15 160 208 Tele-Communications, Inc. 9.800% 2/1/12 700 927 -------- 1,135 -------- Casino Resorts -- 0.2% Park Place Entertainment Corporation 8.125% 5/15/11 250 274 -------- Chemicals -- 1.3% The Dow Chemical Company 5.250% 5/14/04 2,000 2,053 -------- Computer Services and Systems -- 0.3% Electronic Data Systems Corporation 7.450% 10/15/29 425 434/B/ -------- Diversified Financial Services -- 2.3% Capital One Financial Corporation 7.125% 8/1/08 90 96 CIT Group Inc. 5.750% 9/25/07 400 436 General Electric Capital Corporation 6.750% 3/15/32 700 819 IBJ Preferred Capital Corp. LLC 8.790% 12/29/49 110 111/A,C/ SB Treasury Company LLC 9.400% 12/29/49 600 660/A,C/ U.S. Bancorp 3.125% 3/15/08 210 212 Wells Fargo & Company 5.900% 5/21/06 300 331 Wells Fargo & Company 5.000% 11/15/14 920 975 -------- 3,640 --------
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Maturity Rate Date Par Value ----------------------------------------------------------------------------- Diversified Services -- 1.5% Loews Corporation 7.625% 6/1/23 $1,242 $ 1,289 Loews Corporation 7.000% 10/15/23 1,000 1,021 -------- 2,310 -------- Electric -- 1.4% AEP Texas Central Company 5.500% 2/15/13 420 448/A/ American Electric Power Company, Inc. 5.250% 6/1/15 80 81 CenterPoint Energy Houston Electric LLC 6.950% 3/15/33 390 447/A/ Oncor Electric Delivery Company 7.000% 9/1/22 500 558 The AES Corporation 9.500% 6/1/09 39 39/B/ The Detroit Edison Company 5.200% 10/15/12 530 571 -------- 2,144 -------- Energy -- 8.4% Alabama Power Company 3.125% 5/1/08 360 364/B/ American Electric Power Company, Inc. 6.125% 5/15/06 410 449 Calpine Corporation 8.500% 2/15/11 858 644/B/ Dominion Resources, Inc. 5.125% 12/15/09 210 226 Dominion Resources, Inc. 5.700% 9/17/12 570 626 DTE Energy Company 6.375% 4/15/33 100 104 Duke Energy Corporation 5.625% 11/30/12 70 75 Exelon Corporation 6.750% 5/1/11 3,000 3,471 MidAmerican Energy Holdings Company 5.875% 10/1/12 2,000 2,193 Progress Energy, Inc. 7.100% 3/1/11 750 872 Sithe Independence Funding Corporation 9.000% 12/30/13 1,500 1,609 TXU Corp. 6.375% 6/15/06 1,500 1,596/B/ TXU Energy Co. 7.000% 3/15/13 370 410/A/ Xcel Energy, Inc. 7.000% 12/1/10 350 400 -------- 13,039 -------- Environmental Services -- 2.7% Allied Waste North America Incorporated 8.875% 4/1/08 250 271 Republic Services, Inc. 6.750% 8/15/11 470 545
5 Semi-Annual Report to Shareholders Schedule of Investments (Continued) (Amounts in Thousands) --------------------------------------------------------------------------------
Maturity Rate Date Par Value -------------------------------------------------------------------------- Environmental Services -- Continued Safety-Kleen Corp. 9.250% 5/15/09 $ 346 $ 19/D/ Waste Management, Inc. 7.375% 5/15/29 2,800 3,306 -------- 4,141 -------- Food, Beverage and Tobacco -- 2.9% Altria Group, Inc. 7.750% 1/15/27 1,200 1,286 Campbell Soup Company 5.500% 3/15/07 600 661 Nabisco Incorporated 7.550% 6/15/15 1,250 1,588 R.J. Reynolds Tobacco Holdings, Inc. 7.750% 5/15/06 1,010 1,039 -------- 4,574 -------- Gaming -- N.M. Horseshoe Gaming Holding Corp. 8.625% 5/15/09 53 56 -------- Gas and Pipeline Utilities -- 2.8% Dynegy Holdings Inc. 6.875% 4/1/11 1,300 1,092 Dynegy Holdings Inc. 8.750% 2/15/12 880 818/B/ The Williams Companies, Inc. 6.250% 2/1/06 1,000 980 The Williams Companies, Inc. 8.625% 6/1/10 82 86 The Williams Companies, Inc. 8.750% 3/15/32 1,250 1,300 -------- 4,276 -------- Health Care -- 0.5% Tenet Healthcare Corporation 7.375% 2/1/13 750 724 -------- Insurance -- 0.9% ACE INA Holdings Inc. 8.300% 8/15/06 1,000 1,164 Provident Companies, Inc. 7.000% 7/15/18 230 230/B/ -------- 1,394 -------- Investment Banking/Brokerage -- 2.8% J.P. Morgan Capital Trust II 7.950% 2/1/27 150 173 J.P. Morgan Chase & Co. 6.625% 3/15/12 590 681
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Maturity Rate Date Par Value ----------------------------------------------------------------------------- Investment Banking/Brokerage -- Continued J.P. Morgan Chase & Co. 5.750% 1/2/13 $ 240 $ 262 Morgan Stanley 6.750% 10/15/13 2,700 3,163 -------- 4,279 -------- Machinery -- 0.1% Terex Corporation 8.875% 4/1/08 212 220/B/ -------- Media -- 4.0% AMFM Inc. 8.000% 11/1/08 210 244 AOL Time Warner Inc. 6.875% 5/1/12 570 651 AOL Time Warner Inc. 7.700% 5/1/32 670 782 Liberty Media Corporation 8.500% 7/15/29 330 390 Liberty Media Corporation 8.250% 2/1/30 165 191/B/ News America Holdings Incorporated 8.875% 4/26/23 1,325 1,694 News America Incorporated 6.750% 1/9/38 930 1,033 Time Warner Entertainment Company, L.P. 8.375% 7/15/33 770 996 Viacom Inc. 5.625% 8/15/12 190 211 -------- 6,192 -------- Medical Care Facilities -- 0.6% HCA Inc. 7.875% 2/1/11 250 280 HCA Inc. 6.300% 10/1/12 180 184 Health Care REIT, Inc. 8.000% 9/12/12 370 398 -------- 862 -------- Oil and Gas -- 3.9% ConocoPhillips 4.750% 10/15/12 250 264 Devon Energy Corporation 7.950% 4/15/32 350 451 Occidental Petroleum Corporation 7.650% 2/15/06 2,000 2,260 Ocean Energy Inc. 4.375% 10/1/07 430 452 Sonat Inc. 7.625% 7/15/11 2,000 1,820 Vintage Petroleum, Inc. 7.875% 5/15/11 250 268 XTO Energy, Inc. 6.250% 4/15/13 480 510/A/ -------- 6,025 --------
7 Semi-Annual Report to Shareholders Schedule of Investments (Continued) (Amounts in Thousands) --------------------------------------------------------------------------------
Maturity Rate Date Par Value ------------------------------------------------------------------------- Paper and Forest Products -- 1.4% Georgia-Pacific Corp. 9.500% 12/1/11 $ 70 $ 77/B/ MeadWestvaco Corporation 6.850% 4/1/12 900 1,039 Weyerhaeuser Company 6.750% 3/15/12 580 659 Weyerhaeuser Company 7.375% 3/15/32 390 448 -------- 2,223 -------- Pharmaceuticals -- 0.5% Bristol-Myers Squibb Company 5.750% 10/1/11 230 256 Eli Lilly and Company 6.000% 3/15/12 400 462 -------- 718 -------- Real Estate -- 0.1% Socgen Real Estate Co. LLC 1.000% 12/29/49 80 93/A,C/ -------- Services -- 0.4% Fuji Co., Ltd. 9.870% 6/30/49 620 653/A,C/ -------- Special Purpose -- 9.3% BAE Systems Holdings Inc. 6.400% 12/15/11 630 705/A/ Conoco Funding Company 6.350% 10/15/11 420 491 DaimlerChrysler NA Holding Corp. 7.300% 1/15/12 575 649 Devon Financing Corporation ULC 6.875% 9/30/11 520 610 Duke Capital Corporation 6.250% 2/15/13 100 106/B/ Gemstone Investors Limited 7.710% 10/31/04 375 373/A/ PNPP II Funding Corporation 9.120% 5/30/16 2,459 3,073 Qwest Capital Funding, Inc. 7.250% 2/15/11 2,000 1,640 Sprint Capital Corporation 6.125% 11/15/08 750 814 Sprint Capital Corporation 8.375% 3/15/12 700 838 Sprint Capital Corporation 6.875% 11/15/28 200 200 Sprint Capital Corporation 8.750% 3/15/32 100 120 TCI Communications Financing III 9.650% 3/31/27 3,000 3,570 Verizon Global Funding Corp. 7.375% 9/1/12 1,000 1,220 -------- 14,409 --------
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Maturity Rate Date Par Value -------------------------------------------------------------------------------- Steel (Producers) -- 0.1% AK Steel Corporation 7.875% 2/15/09 $ 250 $ 213/B/ -------- Telecommunications -- 2.0% AT&T Corp. 6.000% 3/15/09 68 73/B/ AT&T Corp. 8.500% 11/15/31 300 340 Qwest Corporation 7.200% 11/1/04 300 307 Qwest Corporation 6.875% 9/15/33 1,000 920 SBC Communications Inc. 5.875% 8/15/12 1,020 1,150 WorldCom, Inc. - WorldCom Group 7.750% 4/1/07 441 130/B,D/ WorldCom, Inc. - WorldCom Group 8.250% 5/15/31 484 143/D/ -------- 3,063 -------- Telecommunications (Cellular/Wireless) -- 0.9% AT&T Wireless Services Inc. 6.875% 4/18/05 400 433 AT&T Wireless Services Inc. 7.500% 5/1/07 500 576 Motorola, Inc. 7.625% 11/15/10 350 411 Nextel Communications, Inc. 9.375% 11/15/09 46 50/B/ -------- 1,470 -------- Transportation -- 0.9% Continental Airlines, Inc. 7.256% 3/15/20 274 271 Delta Air Lines, Inc. 7.570% 11/18/10 160 165 Delta Air Lines, Inc. 7.111% 9/18/11 90 91 Delta Air Lines, Inc. 6.417% 7/2/12 400 433 Delta Air Lines, Inc. 6.718% 1/2/23 321 347 Northwest Airlines Corporation 7.575% 9/1/20 90 91 United Airlines, Inc. 7.783% 1/1/14 102 81 -------- 1,479 -------- Total Corporate Bonds and Notes (Identified Cost -- $93,500) 102,865 ---------------------------------------------------------------------
9 Semi-Annual Report to Shareholders Schedule of Investments (Continued) (Amounts in Thousands) --------------------------------------------------------------------------------
Maturity Rate Date Par Value -------------------------------------------------------------------------- Mortgage-Backed Securities -- 0.8% Fixed Rate Securities -- 0.8% Glendale Federal Savings Bank 1978-A 9.125% 1/25/08 $ 20 $ 20 Nomura Asset Securities Corporation 1996-MD5 7.120% 4/13/39 1,170 1,311 ------ Total Mortgage-Backed Securities (Identified Cost -- $1,189) 1,331 --------------------------------------------------------------------- U.S. Government and Agency Obligations -- 2.1% Fixed Rate Securities -- 2.1% Fannie Mae 6.500% 8/15/04 1,000 1,059 Freddie Mac 6.250% 7/15/04 1,025 1,079 United States Treasury Bonds 5.375% 2/15/31 165 186/B/ United States Treasury Notes 3.000% 11/15/07 280 289/B/ United States Treasury Notes 2.625% 5/15/08 350 353/B/ United States Treasury Notes 3.875% 2/15/13 270 278/B/ ------ Total U.S. Government and Agency Obligations (Identified Cost -- $3,104) 3,244 --------------------------------------------------------------------- U.S. Government Agency Mortgage-Backed Securities -- 3.1% Fixed Rate Securities -- 3.1% Fannie Mae 8.000% 4/25/06 219 229 Fannie Mae 10.500% 7/1/09 59 66 Fannie Mae 6.000% 4/1/14 8 8 Fannie Mae 14.000% 9/1/17 to 2/1/18 246 300 Fannie Mae 11.500% 11/1/17 106 123 Freddie Mac 10.250% 5/1/09 50 55 Freddie Mac 6.500% 2/1/29 2,335 2,433 Government National Mortgage Association 12.250% 3/20/14 15 17 Government National Mortgage Association 9.000% 9/15/19 37 42
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Maturity Rate Date Par Value ------------------------------------------------------------------------------- Fixed Rate Securities -- Continued Government National Mortgage 7.000% 8/15/25 to Association 6/15/28 $1,046 $ 1,108 Government National Mortgage Association 6.500% 8/15/28 42 44 Government National Mortgage Association 6.000% 12/15/28 320 336 -------- Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost -- $4,485) 4,761 --------------------------------------------------------------------- Yankee Bonds/E/ -- 25.2% Banks -- 3.8% ABN Amro Bank NV 4.650% 6/4/18 580 572/A/ Inter-American Development Bank 4.000% 1/18/05 1,350 1,406 Korea Exchange Bank 13.750% 6/30/10 1,000 1,181/A,B,C/ Royal Bank of Scotland Group plc 8.817% 3/31/49 1,000 1,119 Standard Chartered plc 1.400% 12/29/49 2,550 1,658/F/ -------- 5,936 -------- Foreign Governments -- 8.7% Federative Republic of Brazil 14.500% 10/15/09 290 336 Federative Republic of Brazil 12.000% 4/15/10 210 219 Federative Republic of Brazil 2.188% 4/15/12 180 135/F/ Federative Republic of Brazil 2.188% 4/15/12 280 210/F/ Federative Republic of Brazil 8.000% 4/15/14 1,010 881/B/ Federative Republic of Brazil 11.000% 8/17/40 520 474 Province of Manitoba 9.500% 9/15/18 730 1,147 Quebec Province 7.125% 2/9/24 190 239 Quebec Province 7.500% 9/15/29 160 213 Quebec Province 7.220% 7/22/36 980 1,409 Republic of Bulgaria 8.250% 1/15/15 20 24/A/ Republic of Bulgaria 8.250% 1/15/15 508 599/B/ Republic of Colombia 10.500% 7/9/10 240 276 Republic of Colombia 11.750% 2/25/20 220 274
11 Semi-Annual Report to Shareholders Schedule of Investments (Continued) (Amounts in Thousands) --------------------------------------------------------------------------------
Maturity Rate Date Par Value ----------------------------------------------------------------------------- Foreign Governments -- Continued Republic of Panama 9.625% 2/8/11 $ 170 $ 197 Republic of Panama 9.375% 7/23/12 170 197 Republic of Panama 5.000% 7/17/14 34 31/C/ Republic of Panama 10.750% 5/15/20 120 149 Republic of Peru 5.000% 3/7/17 643 531/C/ Republic of the Philippines 9.875% 1/15/19 430 475 Republic of the Philippines 10.625% 3/16/25 100 116 Russian Federation 8.250% 3/31/10 0.03 0.04/A/ Russian Federation 5.000% 3/31/30 660 640/D/ Russian Federation 5.000% 3/31/30 0.3 0.3/A,C/ Russian Ministry of Finance 3.000% 5/14/06 80 78 United Mexican States 8.375% 1/14/11 1,090 1,306 United Mexican States 11.500% 5/15/26 2,210 3,295 -------- 13,451 -------- Insurance -- 1.1% Axa 8.600% 12/15/30 550 708 Korea Deposit Insurance Corp. 2.500% 12/11/05 400 451/A,G/ XL Capital plc 6.500% 1/15/12 500 572 -------- 1,731 -------- Investment Banking/Brokerage -- 2.2% Credit Suisse First Boston, London 7.900% 5/29/49 3,000 3,408/A,C/ -------- Manufacturing (Diversified) -- 2.7% Tyco International Group SA 6.375% 6/15/05 1,000 1,042/B/ Tyco International Group SA 5.800% 8/1/06 280 289 Tyco International Group SA 6.375% 10/15/11 1,450 1,530/B/ Tyco International Group SA 7.000% 6/15/28 364 368 Tyco International Group SA 6.875% 1/15/29 976 986 -------- 4,215 --------
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Maturity Rate Date Par Value -------------------------------------------------------------------------------------- Oil and Gas -- 1.0% Petroliam Nasional Berhad 7.125% 8/15/05 $ 150 $ 162/A/ Petroliam Nasional Berhad 7.625% 10/15/26 1,260 1,449/A/ -------- 1,611 -------- Special Purpose -- 3.9% Deutsche Telekom International Finance BV 8.750% 6/15/30 1,000 1,274/C/ HSBC Capital Funding LP 4.610% 12/29/49 280 276/C/ PDVSA Finance Ltd. 8.500% 11/16/12 1,010 924 PDVSA Finance Ltd. 1998-1 7.400% 8/15/16 110 90 PDVSA Finance Ltd. 1999-K 9.950% 2/15/20 2,000 1,867 Petrozuata Finance, Inc. 8.220% 4/1/17 1,740 1,522/A/ Redwood Capital II Ltd. 4.290% 1/28/04 100 100/A,F/ -------- 6,053 -------- Telecommunications -- 1.0% British Telecommunications plc 8.375% 12/15/10 660 835 British Telecommunications plc 8.875% 12/15/30 330 450 France Telecom SA 10.000% 3/1/31 160 221 -------- 1,506 -------- Transportation -- 0.8% C P Railway Limited 7.125% 10/15/31 1,000 1,226 -------- Total Yankee Bonds (Identified Cost -- $34,571) 39,137 --------------------------------------------------------------------- Total Long-Term Securities (Identified Cost -- $136,849) 151,338 --------------------------------------------------------------------- Investment of Proceeds From Securities Lending -- 9.0% State Street Navigator Securities Lending Prime Portfolio 13,977 shs 13,977 -------- Total Investment of Proceeds From Securities Lending (Identified Cost -- $13,977) 13,977 ---------------------------------------------------------------------
13 Semi-Annual Report to Shareholders Schedule of Investments (Continued) (Amounts in Thousands) --------------------------------------------------------------------------------
Maturity Rate Date Par Value ----------------------------------------------------------------------------------------------------------------- Short-Term Securities -- 1.0% U.S. Government and Agency Obligations -- 0.1% Freddie Mac 0.000% 7/30/03 $ 100 $ 100/H/ -------- Repurchase Agreements -- 0.9% Merrill Lynch Government Securities, Inc. 1.22%, dated 6/30/03, to be repurchased at $1,368 on 7/1/03 (Collateral: $3,375 Resolution Funding Corp. principal-only security, due 1/15/21, value $1,396) 1,368 1,368 -------- Total Short-Term Securities (Identified Cost -- $1,468) 1,468 --------------------------------------------------------------------- Total Investments -- 107.4% (Identified Cost -- $152,294) 166,783 Other Assets Less Liabilities -- (7.4)% (11,501) -------- Net assets -- 100.0% $155,282 -------- --------------------------------------------------------------------- /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 9.4% of net assets. /B/ All or a portion of this security is on loan. See Note 3 to the financial statements. /C/ Stepped coupon security -- A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends. /D/ Bond is in default at June 30, 2003. /E/ Yankee Bond -- A dollar-denominated bond issued in the U.S. by foreign entities. /F/ Indexed security -- The rates of interest earned on these securities are tied to the London Interbank Offered Rate ("LIBOR") or the one-year Treasury Bill rate. The coupon rates are the rates as of June 30, 2003. /G/ Convertible bond -- Bond may be converted into the issuer's common stock. /H/ Zero coupon bond -- A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity. See notes to financial statements.
14 Statement of Assets and Liabilities June 30, 2003 (Unaudited) (Amounts in Thousands) -------------------------------------------------------------------------------- ASSETS: Investment securities at market value (cost $152,294) $165,315 Short-term securities at cost 1,468 -------- Total investments $166,783 Cash 231 Receivable for accrued interest 2,355 Other assets 836 -------- 170,205 LIABILITIES: Obligation to return collateral for securities loaned 13,977 Accrued expenses 73 Payable for securities purchased 873 -------- 14,923 -------- NET ASSETS -- equivalent to $16.54 per share on 9,389 shares of common stock outstanding $155,282 ======== 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 142,335 Under/(over) distributions of net investment income (121) Accumulated net realized loss on investments (1,515) Unrealized appreciation/(depreciation) of investments 14,489 -------- Net assets applicable to outstanding common stock $155,282 ========
-------- See notes to financial statements. 15 Semi-Annual Report to Shareholders Statement of Operations (Unaudited) (Amounts in Thousands) --------------------------------------------------------------------------------
For the Six Months Ended June 30, 2003 ------------------------ INVESTMENT INCOME: Interest income $ 4,914 ------- EXPENSES: Advisory fees 385 Custodian fees 51 Audit and legal fees 46 Directors' fees and expenses 44 Registration fees 12 Reports to shareholders 28 Taxes, other than federal income taxes 18 Transfer agent and shareholder serving expense 33 Other 5 ------- 622 Less fees waived (12) ------- Total expenses, net of waivers 610 ------- Net Investment Income 4,304 ------- REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS: Net realized gain/(loss) on investments 467 Unrealized appreciation/(depreciation) of investments 13,897 ------- Net realized and unrealized gain/(loss) on investments 14,364 ------- Change in net assets resulting from operations $18,668 =======
-------- See notes to financial statements. 16 Statement of Changes in Net Assets (Amounts in Thousands) --------------------------------------------------------------------------------
For the Six For the Months Ended Year Ended June 30, 2003 December 31, 2002 ------------- ----------------- (Unaudited) Operations: Net investment income $ 4,304 $ 9,406 Net realized gain/(loss) on investments 467 757 Increase/(decrease) in unrealized appreciation of investments 13,897 (1,468) -------- -------- Change in net assets resulting from operations 18,668 8,695 Distributions to shareholders from: Net investment income (4,624) (9,389) -------- -------- Total increase/(decrease) 14,044 (694) Net Assets: Beginning of period 141,238 141,932 -------- -------- End of period (including under/(over) distributed net investment income of $(121) and $199, respectively) $155,282 $141,238 ======== ========
-------- See notes to financial statements. 17 Semi-Annual Report to Shareholders 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.
For the Six For the Years Ended December 31, Months Ended ------------------------------------------------- June 30, 2003 2002 2001 2000 1999 1998 ------------- -------- -------- -------- -------- -------- (Unaudited) PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 15.04 $ 15.12 $ 14.84 $ 14.54 $ 15.56 $ 16.11 -------- -------- -------- -------- -------- -------- Net investment income .46 1.00 1.03 1.08 1.06 1.04 Net realized and unrealized gain/ (loss) on investments 1.53 (.08) .31 .29 (.99) (.06) -------- -------- -------- -------- -------- -------- Total from investment operations 1.99 .92 1.34 1.37 .07 .98 -------- -------- -------- -------- -------- -------- Distributions paid from: Net investment income (.49) (1.00) (1.06) (1.07) (1.05) (1.18) Net realized gain on investments -- -- -- -- (.04) (.35) -------- -------- -------- -------- -------- -------- Total distributions (.49) (1.00) (1.06) (1.07) (1.09) (1.53) -------- -------- -------- -------- -------- -------- Net asset value, end of period $ 16.54 $ 15.04 $ 15.12 $ 14.84 $ 14.54 $ 15.56 ======== ======== ======== ======== ======== ======== Market value per share, end of period $ 15.50 $ 14.35 $ 14.56 $ 13.50 $ 11.88 $ 15.75 ======== ======== ======== ======== ======== ======== TOTAL RETURN: Based on market value per share 11.63%/A/ 5.38% 15.86% 23.34% (18.39)% 6.61% RATIOS TO AVERAGE NET ASSETS: Expenses .83%/B/ .80% .77% .78% .76% .76% Net investment income 5.88%/B/ 6.75% 6.66% 7.48% 7.07% 6.54% SUPPLEMENTAL DATA: Portfolio turnover rate 32%/B/ 43% 116% 78% 242% 378% Net assets at end of period (in thousands) $155,282 $141,238 $141,932 $139,344 $136,485 $146,103
-------- /A/ Not annualized. /B/ Annualized. See notes to financial statements. 18 Notes to Financial Statements (Unaudited) (Amounts in Thousands) -------------------------------------------------------------------------------- NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Pacific American Income Shares, Inc. ("Fund") is registered under the Investment Company Act of 1940 as a diversified, closed-end management investment company. The significant accounting policies of the Fund, which are in accordance with accounting principles generally accepted in the United States of America, include the following: (a) Cash -- Cash includes demand deposits held with the Fund'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, 2003, are reflected in the accompanying Schedule of Investments at their value on June 30, 2003. 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 six months ended June 30, 2003, aggregated $21,507 and $18,079, respectively. Purchases and sales of U.S. government securities for the six months ended June 30, 2003, were $1,680 and $5,901, respectively. (c) Recognition of income, expenses and distributions to shareholders -- The Fund accrues interest income and expenses on a daily basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date. (d) Federal income taxes -- No provision for federal income or excise taxes is required since the Fund intends to continue to qualify as a regulated investment company and distribute substantially all of its taxable income and capital gains to its shareholders. Because federal income tax regulations differ from accounting principles generally accepted in the United States of America, income and capital gains distributions determined in accordance with tax regulations may differ from net investment income and realized gains recognized for 19 Semi-Annual Report to Shareholders Notes to Financial Statements (Continued) (Amounts in Thousands) -------------------------------------------------------------------------------- financial reporting purposes. Accordingly, the character of distributions and composition of net assets for tax purposes differ from those reflected in the accompanying financial statements. The Fund intends to retain realized capital gains that may be offset against available capital loss carryforwards for federal income tax purposes. As of June 30, 2003, the Fund has capital loss carryforwards of $1,326 and $601, which expire in 2007 and 2008, respectively. (e) Use of estimates -- Preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America 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 -- Assets and liabilities initially expressed in non-U.S. currencies are translated into U.S. dollars at the closing daily rate of exchange. Purchases and sales of securities and income and expenses are translated into U.S. dollars at the prevailing market rates on the dates of such transactions. The effects of changes in non-U.S. currency exchange rates on investment securities and other assets and liabilities are included with the net realized and unrealized gain or loss on investment securities. NOTE 2 -- INVESTMENT ADVISORY AGREEMENT AND AFFILIATED PERSONS: The Fund 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 Fund. In return for its advisory services, the Fund pays the Adviser a monthly fee at an annual rate of 0.7% of the average monthly net assets of the Fund 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 Fund of its securities, and extraordinary expenses beyond the control of the Fund) borne by the Fund 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 Fund for any excess. No expense reimbursement is due for the six months ended June 30, 2003. Western Asset Management Company Limited ("WAML") provides the Fund with investment research, advice, management and supervision and a continuous investment program for the Fund's portfolio of non-dollar securities consistent with the Fund's investment objectives and policies. As compensation, the Adviser pays WAML a fee based on the pro rata assets of the Fund managed by WAML during the month. 20 -------------------------------------------------------------------------------- Under the terms of an Administrative Services Agreement among the Fund, the Adviser, and Legg Mason Fund Adviser, Inc. (the "Administrator"), the Adviser (not the Fund) pays the Administrator a monthly fee of $3,000, an annual rate of $36,000. NOTE 3 -- SECURITIES LOANED: The Fund 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 the loaned securities. At June 30, 2003, the market value of the securities on loan to broker-dealers was $13,509, for which the Fund received collateral of $13,977 in cash. Such collateral is in the possession of the Fund's custodian. The cash was invested in the State Street Navigator Securities Lending Prime Portfolio and is included in the Fund's schedule of investments. As with other extensions of credit, the Fund 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 Fund as an unrealized gain or loss. When the contract is closed or delivery is taken, the Fund 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 Fund'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 Fund 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 Fund if the counterparties do not complete the transaction. At June 30, 2003, there were no open forward currency exchange contracts. 21 Semi-Annual Report to Shareholders Notes to Financial Statements (Continued) (Amounts in Thousands) -------------------------------------------------------------------------------- NOTE 5 -- SHAREHOLDER MEETING RESULTS: The Fund's annual meeting of shareholders was held on May 6, 2003. Of the 9,389 shares outstanding, the following shares were voted at the meeting:
For Abstain ----- ------- Election of seven Directors: Ronald J. Arnault 8,427 116 John E. Bryson 8,426 117 Anita L. DeFrantz 8,411 132 William G. McGagh 8,410 132 Ronald L. Olson 8,426 117 William E.B. Siart 8,430 113 Louis A. Simpson 8,429 113
22 Item 2 - Code of Ethics Did the registrant adopt a code of ethics, as of the end of the period covered by this report, which applies to the registrant's principal executive officer, principal financial officer, principle accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party? If not, why not? Briefly describe any amendments or waivers that occurred during the period. State if the code of ethics, including amendments and waivers are on a website and provide the website address. State if the registrant will send a copy of the code of ethics to shareholders at no charge upon request. (NOT REQUIRED UNTIL ANNUAL REPORT AFTER JULY 15, 2003) Item 3 - Audit Committee Financial Expert Did the registrant's board of directors determine that the registrant either: (a) has at least one audit committee financial expert serving on its audit committee; or (b) does not have an audit committee financial expert serving on its audit committee? If yes, disclose the name of the financial expert and whether he/she is "independent." If no, explain why not. (NOT REQUIRED UNTIL ANNUAL REPORT AFTER JULY 15, 2003) Item 4 - Principal Accounting Fees and Services (a) Audit Fees - Disclose the aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. N/A (b) Audit-Related Fees - Disclose the aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item. Describe the nature of the services comprising the fees disclosed under this category. N/A (c) Tax Fees - Disclose the aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. Describe the nature of the services comprising the fees disclosed under this category. N/A (d) All Other Fees - Disclose the aggregate fees billed in each of the last two fiscal years for products or services provided by the principal accountant, other than the services reporting in paragraphs (a) through (c) of this Item. Describe the nature of the services comprising the fees disclosed under this category. N/A (e) (1) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. N/A (2) Disclose the percentage of services described in each of paragraphs (a) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. N/A (f) If greater than 50%, disclose the percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees. N/A (g) Disclose the aggregate non-audit fees billed by the registrant's accountant for services rendered, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant. N/A (h) Disclose whether the registrant's audit committee of the board of directors has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. (NOT REQUIRED UNTIL ANNUAL REPORT AFTER DECEMBER 15, 2003) Item 5 - Reserved Item 6 - Reserved Item 7 - Disclosure of Proxy Voting Policies and Procedures For closed-end management investment companies, describe the policies and procedures that it uses to determine how to vote proxies relating to portfolio securities, including the procedures that the company uses when a vote presents a conflict between the interests of its shareholders, and those of the company's investment adviser; principal underwriter; or any affiliated person of the company, its investment adviser, or its principal underwriter. (NOT REQUIRED UNTIL ANNUAL REPORT AFTER JULY 15, 2003) Item 8 - Reserved Item 9 - Controls and Procedures (a) Disclose the conclusions of the registrant's principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, regarding the effectiveness of the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Act (17 CFR 270.30a-3(c))) as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Exchange Act (17 CFR 240-13a-15(b) or 240.15d-15(b)). WITHIN 90 DAYS OF THE FILING DATE OF THIS FORM N-CSR, THE REGISTRANT'S PRESIDENT AND TREASURER REVIEWED THE REGISTRANT'S DISCLOSURE CONTROLS AND PROCEDURES ("THE PROCEDURES") AND EVALUATED THEIR EFFECTIVENESS. BASED ON THEIR REVIEW, SUCH OFFICERS DETERMINED THAT THE PROCEDURES ENSURE THAT INFORMATION REQUIRED TO BE DISCLOSED BY THE REGISTRANT ON FORM N-CSR IS RECORDED, PROCESSED, SUMMARIZED AND REPORTED WITHIN THE TIME PERIODS REQUIRED BY THE SECURITIES AND EXCHANGE COMMISSION'S RULES AND REGULATIONS. (b) Disclose any change in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR 270.30a-3(d)) that occurred during the registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. THERE WERE NO CHANGES IN THE REGISTRANT'S INTERNAL CONTROL OVER FINANCIAL REPORTING DURING THE REGISTRANT'S LAST HALF-YEAR THAT HAVE MATERIALLY AFFECTED, OR ARE REASONABLY LIKELY TO MATERIALLY AFFECT, THE INTERNAL CONTROL OVER FINANCIAL REPORTING. Item 10 - Exhibits (a) File the exhibits listed below as part of this Form. (a)(1) Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item requirements through filing of an exhibit. (NOT REQUIRED UNTIL ANNUAL REPORT AFTER JULY 15, 2003) (a)(2) A separate certification for each principal execute officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Act (17 CFR 270.30a-2(a)), exactly as set forth bolow: (ATTACHED) (b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act, provide the certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished pursuant to this paragraph will not be deemed "filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or other wise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. (ATTACHED) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Pacific American Income Shares, Inc. By: /s/ James W. Hirschmann ----------------------- James W. Hirschmann President, Pacific American Income Shares, Inc. Date: 8/25/03 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ James W. Hirschmann ----------------------- James W. Hirschmann President, Pacific American Income Shares, Inc. Date: 8/25/03 By: /s/ Marie K. Karpinski ---------------------- Marie K. Karpinski Treasurer and Principal Financial Accounting Officer, Pacific American Income Shares, Inc. Date: 8/25/03