-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VSoFTkq5Z/9xshDKqsdjQqMcxXQy17mds3ovFdUVczFV6J5+2wPM7OTHdrvVPa4B sPtdhFy/vgpwxo5pWbMaJw== 0000950169-97-000792.txt : 19970912 0000950169-97-000792.hdr.sgml : 19970911 ACCESSION NUMBER: 0000950169-97-000792 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970828 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC AMERICAN INCOME SHARES INC CENTRAL INDEX KEY: 0000075398 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 952808650 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-02351 FILM NUMBER: 97671608 BUSINESS ADDRESS: STREET 1: 117 E COLORADO BLVD CITY: PASADENA STATE: CA ZIP: 91109 BUSINESS PHONE: 8185844328 MAIL ADDRESS: ZIP: 91109 N-30D 1 LEGG MASON PAIS SAR THE BOARD OF DIRECTORS NORMAN BARKER, JR.*+ Chairman JOHN E. BRYSON* RICHARD C. GILMAN+ WILLIAM G. McGAGH RONALD L. OLSON* WILLIAM E. B. SIART LOUIS A. SIMPSON+ OFFICERS W. CURTIS LIVINGSTON III President KENT S. ENGEL Vice President & Portfolio Manager SCOTT F. GRANNIS Vice President ILENE S. HARKER Vice President DONNA E. BARNES Secretary STEVEN T. SARUWATARI Treasurer MARIE K. KARPINSKI Assistant Treasurer REFERENCES INVESTMENT ADVISER Western Asset Management Company 117 East Colorado Boulevard Pasadena, California 91105 TRANSFER AGENT Boston EquiServ 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 PACIFIC AMERICAN INCOME SHARES, INC. SEMI-ANNUAL REPORT 1997 Dear Shareholders: MARKET REVIEW AND PERFORMANCE The bond market in the first half of this year continued to experience relatively volatile yields. The ebbs and flows of the economy accounted for most of the ups and downs in rates. Investors' concerns have centered mainly around the belief that excessive growth would eventually generate rising inflation pressures. Perhaps the most significant event of this year, therefore, has been the recent acceptance by a majority of market participants that even as growth has accelerated, inflation has continued to fall, reaching levels today that we have not seen since the 1950s. Despite the challenging environment for bonds, there were pockets of opportunity for which the fund was well positioned. Yield premiums on corporate issues--both in the investment-grade and particularly in the high-yield arenas--continued to decline, as strong economic fundamentals bolstered the outlook for credit quality improvements, and investors hungered for yield against a global backdrop of generally low interest rates. A modest exposure to emerging market debt was rewarded as Latin American countries such as Mexico and Argentina began to evidence signs of resurging economic strength, causing the sector to again generate very impressive returns. Finally, the fund benefited from a moderate exposure to mortgage-backed securities, the top-performing sector of the broad bond market. With the impact of low inflation beginning to overcome concerns about economic growth, interest rates have declined in recent months and demand for higher yielding securities has improved, allowing Pacific American's (PAI) share price to trend higher, from 14 3/8 at the end of 1996 to 15 1/4 by the end of June. And, as an apparent result of increased demand for yield in an environment of gradually narrowing credit spreads, the fund's discount to net asset value narrowed from 9% to 4% over this period. For the first half of 1997 the fund performed quite well, continuing to deliver a high level of income to shareholders. On a total return basis, the fund exceeded the returns of the broad investment grade bond market as measured by the Lehman Brothers Aggregate Bond Index by a comfortable margin, 5.0% (net) vs. 3.1%, and it performed well against funds with similar income goals. According to Lipper Analytical Services, for the year ending June 30, 1997, PAI's return ranked first out of its universe of 16 competitive closed-end investment grade bond funds. Its long-term competitive record remains excellent: for periods ending June 30, 1997, PAI ranked first for the past five years, and second for the past ten years. As we anticipated in our last letter, regular dividends of $0.295 per share were paid out to shareholders. ECONOMIC OUTLOOK AND PORTFOLIO STRATEGY Currently, we are seeing the most benign inflation the economy has had since the mid-50s and -60s, when bond yields were 4% and mortgages were 5%. Year-to-date through June, the CPI is up at a 1.4% annual pace, and the PPI is falling at a 3.4% pace; at the end of last year, these indices were registering 3.3% and 2.8%, respectively. With inflation collapsing and interest rates only moderately lower, real interest rates have risen significantly. In addition, most commodity and precious metals prices are falling, and the dollar has risen over 10% in the past year. As if to confirm that 1 monetary conditions are tight, it appears that the rise in rates earlier this year was sufficient to produce a substantial economic slowdown in the second quarter. This view of the world leads us to the conclusion that interest rates are still attractive relative to inflation, particularly those offered by longer maturity securities. Although we plan to continue structuring the portfolio to benefit from a climate of gradually declining interest rates, we do find some value in holding a modest exposure to selected mortgage-backed securities which offer high quality and a minimum of exposure to prepayment risks. A disinflating and growing economy like we have now should still be supportive of corporate bonds, but rising deflationary risks and narrow spreads argue for gradually upgrading the portfolio's overall quality. As global yields continue to decline, the extra spreads offered by emerging market debt will continue to be attractive to investors, and we believe that a moderate exposure to the debt securities of countries such as Mexico and Argentina will continue to enhance the fund's overall yield. BOARD OF DIRECTORS At PAI's annual meeting of shareholders, held on April 8, 1997, all directors who had served in the previous year were re-elected along with a new director, William Siart. Mr. Siart is the immediate past Chairman of First Interstate Bancorp. Ronald Arnault, former Chief Financial Officer for ARCO will also be joining the Board this fall and will stand for re-election for a full term at next year's annual meeting. These changes to Pacific American's Board reflect the retirement of Gordon Hough this past spring and the scheduled retirement of Norman Barker at the end of this year. We are pleased to continue the high standards set by the existing directors with the addition of these two prominent and capable executives. It is a pleasure to review our performance and once again note that we have attained value for our shareholders. We pledge, therefore, to continue our efforts to avoid excessive risk and to concentrate on strategies which we believe will benefit the portfolio in the fullness of time. Please let us know if we can answer any questions for you. Sincerely, /s/ W. Curtis Livingston, III - ----------------------------- W. Curtis Livingston, III President 2 PACIFIC AMERICAN INCOME SHARES, INC. - -------------------------------------------------------------------------------- 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.
- ---------------------------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS June 30, 1997 (Unaudited) (Amounts in Thousands) - ---------------------------------------------------------------------------------------------------- Market Par Value - ---------------------------------------------------------------------------------------------------- INVESTMENT SECURITIES -- 102.0% FINANCIAL AND LEASING -- 5.3% Dean Witter Discover, 6.75%, due 10-15-13 $2,700 $ 2,509 J.P. Morgan Capital Trust II, 7.95%, due 2-1-27 300 300 Western Financial Savings Bank, 8.5%, due 7-1-03 5,000 5,001 ------- 7,810 ------- FOREIGN AND INTERNATIONAL -- 7.3% Republic of Argentina, 6.75%, due 3-31-05 1,208 1,134(A,E) Republic of Argentina, 11.38%, due 1-30-17 600 667(A) Exide Holdings, 9.13%, due 4-15-04 4,500 2,651 Geberit International SA, 10.13%, due 4-16-07 2,600 1,617 Hydro Quebec, 8.05%, due 7-7-24 1,500 1,626(A) United Mexican States, 7.88%, due 8-6-01 1,400 1,404(A,E) United Mexican States, 11.38%, due 9-15-16 1,600 1,798(A) ------- 10,897 ------- INDUSTRIALS AND MISCELLANEOUS -- 27.0% Auburn Hills Trust, 12%, due 5-1-20 2,094 3,108(E) Cablevision Industries, 9.25%, due 4-1-08 2,000 2,126 Ford Motor Co., 7.70%, due 5-15-97 1,500 1,512 GMAC Zero Coupon Units, 0%, due 6-15-15 4,300 1,217(F) Gulf States Utilities, 8.25%, due 4-1-04 3,200 3,362 Harrahs Operations, Inc., 8.75%, due 3-15-00 2,500 2,550 K Mart Corp., 7.95%, due 2-1-23 3,000 2,715
3 PACIFIC AMERICAN INCOME SHARES, INC. - --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (Continued) (Amounts in Thousands) - ---------------------------------------------------------------------------------------------------- Market Par Value - ---------------------------------------------------------------------------------------------------- Loews Corporation, 7.63%, due 6-1-23 $ 2,242 $ 2,133 MFS Communications, 0%, due 1-15-04 1,100 1,024(F) News America Holdings Incorporated, 8.88%, due 4-26-23 2,635 2,827 News America Holdings Incorporated, 8.45%, due 8-1-34 930 1,010 Northrop Grumman Corp., 9.38%, due 10-15-24 2,000 2,195 RJR Nabisco, Inc., 8.75%, due 8-15-05 400 406 RJR Nabisco, Inc., 8.75%, due 7-15-07 4,280 4,334 Rogers Cable System, LTD., 10%, due 3-15-05 1,000 1,080 Safeway Inc., 10%, due 12-1-01 1,500 1,660 TCI Communications Inc., 8.75%, due 8-1-15 440 461 Tele Communications, Inc., 9.25%, due 1-15-23 800 834 Time Warner, Inc., 9.15%, due 2-1-23 3,000 3,313 Union Acceptance Corp., 1997-B A2, 6.70%, due 6-10-03 1,500 1,479 US West Capital Funding, Inc., 7.95%, due 2-1-97 700 705 ------- 40,051 ------- U.S. GOV'T MORTGAGE-BACKED SECURITIES -- 29.1% Federal Home Loan Mortgage Corp., 10.75%, due 7-1-00 42 43 Federal Home Loan Mortgage Corp., 10.25%, due 5-1-09 301 325 Federal Home Loan Mortgage Corp., 11.88%, due 6-15-13 413 449 Federal National Mortgage Assoc., 8%, due 4-25-06 3,000 3,070 Federal National Mortgage Assoc., 10.50%, due 7-1-09 265 287 Federal National Mortgage Assoc., 7%, due 12-1-26 14,166 13,891 Federal National Mortgage Assoc., 7%, due 12-1-26 9,900 9,699(B) Federal National Mortgage Assoc., 7.50%, due 12-1-26 3,000 3,007(B) Federal National Mortgage Assoc., 7%, due 1-1-27 976 956 Gov't Nat'l Mortgage Assoc., 12.25%, due 3-20-14 203 228 Gov't Nat'l Mortgage Assoc., 9%, due 9-15-19 156 167 Gov't Nat'l Mortgage Assoc., 8%, due 10-15-26 4,581 4,689 Resolution Trust Corporation, 9.40%, due 5-25-24 4,000 4,053 Resolution Trust Corporation, 8%, due 4-25-25 2,415 2,404 ------- 43,268 -------
4 PACIFIC AMERICAN INCOME SHARES, INC. - --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (Continued) (Amounts in Thousands) - ---------------------------------------------------------------------------------------------------- Market Par Value - ---------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES -- 4.6% Asset Securitization Corp., 7.42%, due 4-14-29 $2,400 $ 2,475 C.S. First Boston Mortgage, 7.24%, due 6-20-29 3,000 3,036 Glendale Federal Savings and Loan Assoc., 9.13%, due 1-25-08 155 155 Nomura Asset Securities Corp., 7.12%, due 4-13-36 1,170 1,177 Valley Federal S&L, Manufactured Housing, 13.25%, due 1-15-99 26 26(C) ------- 6,869 ------- UTILITIES - GAS AND ELECTRIC -- 17.6% Connecticut Light &Power Co., 7.88%, due 6-1-01 3,250 3,268 First PV Funding Corporation, 10.15%, due 1-15-16 1,682 1,773 Long Island Lighting Co., 9.75%, due 5-1-21 5,000 5,067 Niagra Mohawk Power, 7.75%, due 5-15-06 3,000 2,966 Niagra Mohawk Power, 8.75%, due 4-1-22 2,500 2,504 North Atlantic Energy Corp., 9.05%, due 6-1-02 2,024 2,048 PNPP II Funding Corp., 9.12%, due 5-30-16 2,459 2,422(D) Sithe/Independence Funding Corporation, 9%, due 12-30-13 4,000 4,382 Systems Energy Resources, 7.43%, due 1-15-11 1,818 1,762 ------- 26,192 ------- U.S. GOVERNMENT AND AGENCIES -- 10.7% Resolution Funding Corporation, 8.88%, due 4-15-30 3,175 3,937 U.S. Treasury Bonds, 6.63%, due 2-15-07 3,715 3,635 U.S. Treasury Bonds, 6.50%, due 11-15-26 960 921 U.S. Treasury Notes, 6%, due 6-30-99 5,700 5,692 U.S. Treasury Notes, 6.63%, due 7-31-01 1,450 1,464 U.S. Treasury Notes, 7.5%, due 2-15-05 235 249 ------- 15,898 -------
5 PACIFIC AMERICAN INCOME SHARES, INC. - --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (Continued) (Amounts in Thousands) - ---------------------------------------------------------------------------------------------------- Market Shares Value - ---------------------------------------------------------------------------------------------------- EQUITIES -- 0.4% News Corp - Trust Originated Preferred Security, 5%, due 11-12-16 520 $ 345 News Corp - Warrants 5 180(G) Time Warner Inc., 10.25% Preferred Stock 1 3 -------- 528 -------- Total Investment Securities 151,513 -------- Par --- SHORT-TERM SECURITIES -- 2.0% Repurchase Agreement -- 2.0% J.P. Morgan, Inc. 6.05% dated 6-30-97, to be repurchased at $3,041 on 7-1-97 (Collateral $2,880 Federal National Mortgage Association Mortgage-backed securities, 7.65% due 3-10-05, value $3,185) $3,040 3,040 -------- Total Short-term Securities 3,040 -------- Total Investments-- 104.0% 154,553 Other Assets Less Liabilities-- (4.0%) (6,003) -------- Net Assets-- 100.0% $148,550 -------- - ----------------------------------------------------------------------------------------------------
(A) Security is denominated and traded in U.S. dollars. (B) When-issued security -- Security issued on a delayed delivery basis. Final settlement and maturity not yet determined. (C) The Company purchased Valley Federal S&L Manufactured Housing Participation Certificates at 99.5, in a private placement transaction on January 30, 1984. This investment is restricted as to resale and amounted to approximately $26 (less than .1% of net assets) at June 30, 1997. Restricted securities have been valued at fair value in accordance with valuation methods approved by the Board of Directors. Such approved methods reflect the Board's consideration of, among other things, the financial condition of the issuer, current interest rates and the maturity of the security. The Company will bear the costs incurred, if any, in connection with any future disposition of these securities. (D) Rule 144A security -- A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified buyers. (E) Variable rate security--The rate shown is the rate as of June 30, 1997. (F) Zero-coupon bond -- A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity. (G) Non-income producing. See notes to financial statements. 6 PACIFIC AMERICAN INCOME SHARES, INC. - --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES June 30, 1997 (Unaudited) (Amounts in Thousands) - ------------------------------------------------------------------------------------------------- ASSETS Investment securities at market value (Cost $146,906) $151,513 Short-term securities 3,040 -------- Total investments $154,553 Cash 7,217 Receivable for: Sales of investments 8,734 Accrued interest 2,204 Appreciation of forward currency contracts 74 -------- 11,012 Other assets 14 -------- 172,796 LIABILITIES: Payable for securities purchased 23,856 Accrued expenses 61 Dividend payable 269 Investment advisory fee payable 60 -------- 24,246 -------- NET ASSETS -- equivalent to $15.94 per share on 9,319 shares of Common Stock outstanding $148,550 ======== SUMMARY OF STOCKHOLDERS' EQUITY: Common Stock, par value $.01 per share:authorized 10,000 shares; issued and outstanding 9,319 shares 93 Capital surplus 141,491 Overdistributed net investment income (165) Undistributed net realized gain on investments 2,450 Unrealized appreciation of investments and forward currency contracts 4,681 -------- Net assets applicable to outstanding Common Stock $148,550 ======== See notes to financial statements. 7 PACIFIC AMERICAN INCOME SHARES, INC. - --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (Unaudited) (Amounts in Thousands) - ------------------------------------------------------------------------------------------------- For the Six Months Ended June 30, 1997 ------------------------- INVESTMENT INCOME: Income: Interest $5,763 Dividends 105 ------ 5,868 Expenses: Advisory fee $383 Transfer agent and shareholder servicing expense 25 Custodian fee 35 Directors' fees and expenses 31 Legal and auditing fees 21 Printing, stationery, and reports to shareholders 19 Taxes, other than federal income taxes 22 Registration fees 8 Other expenses 2 Less fees waived (12) ---- 534 ------ Net investment income 5,334 REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on investments 1,434 Unrealized appreciation of investments 301 ------ Net realized and unrealized gain on investments 1,735 ------ Increase in net assets resulting from operations $7,069 ======
See notes to financial statements. 8 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, 1997 Dec. 31, 1996 ------------- ------------- (Unaudited) Operations: Net investment income $ 5,334 $ 10,641 Net realized gain on investments 1,434 3,370 Increase (decrease) in unrealized appreciation of investments 301 (4,913) -------- -------- Change in net assets resulting from operations 7,069 9,098 Distributions to shareholders from: Net investment income (5,498) (10,997) Net realized gain on investments -- (2,749) -------- -------- Total increase (decrease) 1,571 (4,648) Net Assets: Beginning of period 146,979 151,627 -------- -------- End of period (including overdistributed net investment income of $165 and $0, respectively) $148,550 $146,979 ======== ========
See notes to financial statements. 9 PACIFIC AMERICAN INCOME SHARES, INC. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- Contained below is per share operating performance data for a share of common stock outstanding throughout each period, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements and market price data for the Company's shares.
For the Six For the Years Ended December 31, Months Ended ------------------------------------------------------ June 30, 1997 1996 1995 1994 1993 1992 ------------- ------ ------ ------ ------ ------ (Unaudited) PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $15.77 $16.27 $14.30 $16.25 $15.94 $16.06 ------ ------ ------ ------ ------ ------ Net investment income 0.57 1.14 1.18 1.23 1.27 1.38 Net realized and unrealized gain (loss) on investments 0.19 (.16) 1.99 (1.90) .84 .39 ------ ------ ------ ------ ------ ------ Total from investment operations 0.76 .98 3.17 (.67) 2.11 1.77 ------ ------ ------ ------ ------ ------ Distributions paid from: Net investment income (0.59) (1.18) (1.20) (1.20) (1.28) (1.40) Net realized gain on investments -- (.30) -- (.08) (.52) -- Dilutive effect of stock issuance -- -- -- -- -- (.49) ------ ------ ------ ------ ------ ------ Net asset value, end of period $15.94 $15.77 $16.27 $14.30 $16.25 $15.94 ====== ====== ====== ====== ====== ====== Market value per share, end of period $15.25 $14.375 $15.25 $13.125 $16.375 $15.625 ====== ======= ====== ======= ======= ======= TOTAL RETURN: Based on market value per share 10.28%(B) 4.16% 25.92% (12.75%) 16.57% 8.17% RATIOS TO AVERAGE NET ASSETS: Expenses 0.73%(A) .72% .81% .76% .72%(C) .79% Net investment income 7.33%(A) 7.22 7.62% 8.20% 7.71% 8.31% SUPPLEMENTAL DATA: Portfolio turnover rate 216.20%(A) 326.30% 131.73% 116.19% 130.25% 83.51% Net assets at end of period (in thousands) $148,550 $146,979 $151,627 $133,239 $151,424 $142,311
- -------------- (A) Annualized (B) Not annualized (C) Exclusive of expenses relating to Convertible Notes which were converted in 1993. See notes to financial statements. 10 PACIFIC AMERICAN INCOME SHARES, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) (Amounts in Thousands) - -------------------------------------------------------------------------------- NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 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, 1997 are reflected in the accompanying Schedule of Investments at their value on June 30, 1997. In valuing portfolio securities, securities listed or traded on a national securities exchange are valued at the last sales price on the last business day of the period. Each security traded in the over-the-counter market, including listed debt securities whose primary market is believed to be over-the-counter, is generally valued at the mean of the bid prices at the time of computation. Prices are obtained from at least two dealers regularly making a market in the security, unless such prices can be obtained from only a single market maker. The method of valuing restricted securities is described in Note C to the Schedule of Investments. The difference between cost and market value is reflected separately as unrealized appreciation of investments. Short-term securities are generally stated at cost plus interest earned, which approximates market value. The net realized gain or loss on investment transactions is determined for federal income tax and financial reporting purposes on the basis of identified cost. Purchases and sales of securities other than short-term and U.S. government securities for the six months ended June 30, 1997 aggregated $32,889 and $37,413, respectively. Purchases and sales of U.S. government securities were $128,384 and $129,687, respectively, for the six months ended June 30, 1997. As of June 30, 1997, unrealized appreciation for federal income tax and financial reporting purposes aggregated $4,607 of which $5,058 related to appreciated securities and $451 related to depreciated securities. The aggregate cost of investment securities owned for federal income tax purposes was $146,906 at June 30, 1997. (c) Recognition of income, expense and distributions to shareholders -- The Company accrues interest income and expenses on a daily basis. Dividends are recorded on the ex-dividend date. (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. 11 PACIFIC AMERICAN INCOME SHARES, INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Continued) (Amounts in Thousands) - -------------------------------------------------------------------------------- NOTE 2 -- INVESTMENT ADVISORY AGREEMENT AND AFFILIATED PERSONS The Company has entered into an investment advisory agreement with Western Asset Management Company ("Adviser"), which is a wholly owned subsidiary of Legg Mason, Inc., pursuant to which the Adviser provides investment advice and administrative services to the Company. In return for its advisory services, the Company pays the Adviser a monthly fee at an annual rate of 0.7% of the average monthly net assets of the Company up to $60,000 and 0.4% of such net assets in excess of $60,000. If expenses (including the Adviser's fee but excluding interest, taxes, brokerage fees, the expenses of any offering by the Company of its securities and extraordinary expenses beyond the control of the Company) borne by the Company in any fiscal year exceed 1.5% of average net assets up to $30,000 and 1% of average net assets over $30,000, the Adviser will reimburse the Company for any excess. No expense reimbursement is due for the six months ended June 30, 1997. NOTE 3 -- SECURITIES LOANED At June 30, 1997, the market value of the securities on loan to broker-dealers was $21,971, for which the Company received collateral of $22,429 in cash. Such collateral is in the possession of the Company's custodian. As with other extensions of credit, the Company may bear the risk of delay in recovery or even loss of rights to the collateral should the borrower of the securities fail financially. NOTE 4 -- FORWARD CURRENCY EXCHANGE CONTRACTS Forward foreign currency contracts are marked-to-market daily using foreign currency exchange rates supplied by an independent pricing service. The change in a contract's market value is recorded by the Company as an unrealized gain or loss. When the contract is closed or delivery is taken, the Company records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The use of forward foreign currency contracts does not eliminate fluctuations in the underlying prices of the Company's securities, but it does establish a rate of exchange that can be achieved in the future. These forward foreign currency contracts involve market risk in excess of amounts reflected in the Financial Statements. Although forward foreign currency contracts used for hedging purposes limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency increase. In addition, the Company could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts. The adviser will enter into forward foreign currency contracts only with parties approved by the Board of Directors because there is a risk of loss to the Company if the counterparties do not complete the transaction. At June 30, 1997, open forward currency exchange contracts were as follows: Contract to Settlement -------------------------- Unrealized Date Receive Deliver Gain/(Loss) ---------------------------------------------------------------- 10/17/97 USD 4,179 DEM 7,100 74 12 NOTE 5 -- QUARTERLY RESULTS OF OPERATIONS: (Amounts in Thousands, except per share amounts)
Three Months Ended ------------------------------------------------------------ June 30, 1997 March 31, 1997 Dec. 31, 1996 Sept. 30, 1996 ============================================================ Investment income Total $3,004 $2,864 $3,034 $2,861 Net investment income Total 2,737 2,597 2,774 2,598 Per Share .294 .279 .298 .279 Net realized and unrealized gain (loss) on investments Total 4,288 (2,553) 3,377 830 Per Share .460 (.274) .362 .089 Three Months Ended ------------------------------------------------------------ June 30, 1996 March 31, 1996 Dec. 31, 1995 Sept. 30, 1995 ============================================================ Investment income Total $2,874 $2,940 $2,982 $3 ,072 Net investment income Total 2,605 2,664 2,684 2,737 Per Share .279 .286 .288 .294 Net realized and unrealized gain (loss) on investments Total (1,640) (4,110) 9,609 (4,538) Per Share (1.75) (.441) 1.031 (.487)
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