<PAGE> 1
Distributor:
Pacific Global Fund Distributors, Inc.
206 North Jackson Street
Suite 201 [GRAPHIC]
Glendale, California 91206
1.800.282.6693
PACIFIC
ADVISORS
FUNDING
GOVERNMENT SECURITIES
FUND
ANNUAL REPORT
FEBRUARY 28, 1996
<PAGE> 2
DEAR SHAREHOLDER
- - --------------------------------------------------------------------------------
February 28, 1996
1995 was an outstanding bull market for bonds in sharp contrast to the bear bond
market of 1994. The bond market experienced an impressive rally as long-term
interest rates dropped from over 8.15% in late 1994, to 5.95% by year end 1995.
In 1994, the Pacific Advisors Government Securities Fund ("Fund"), utilizing
a defensive strategy, was ranked third in performance for the year. In 1995, the
Fund became more assertive in its investment strategy which produced a total
return of 20.32%, for the period January 1, 1995 to December 31, 1995. These
results maintained the Fund's position as one of the top 15 U.S. Government Bond
Funds in 1995, according to Lipper Analytical Services, Inc. It was the only
fund ranked as one of the top 15 government bond funds in 1994 to repeat in
1995. The investment results are based on shares purchased at its offering
price, after deducting the Fund's current maximum sales charge, on January 1,
1995 and held through December 31, 1995, with all dividends and capital gains
reinvested and after expense reimbursements.
According to Lipper Analytical Services, Inc., government bond funds had an
average total rate of return of 17.34%, in 1995. The Lehman Intermediate and
Long-term Treasury-Bond indexes which are unmanaged indices of total returns for
government bonds, increased by 14.48% and 30.72% respectively for this same
period.
In early 1995, the market began to anticipate lower interest rates due to a
belief that the economy was slowing and the Federal Reserve would lower interest
rates to avoid a recession. With inflation under control and congress acting on
legislation to reduce the budget deficit, the stage was set for a strong rally
in bond prices. During the first six months of 1995, the bond market experienced
an unusually high demand for long-term bonds which caused long-term interest
rates to decline more rapidly than the market anticipated. This was caused in
part by the japanese banks which began buying a significant share of U.S.
Government Obligations (i.e. U.S. Treasury Bonds, Notes and Bills) to help
strengthen the U.S. Dollar's exchange rate with the Japanese Yen. In the third
quarter, long-term interest rates increased temporarily as the economy showed
more strength than anticipated. Long-term
interest rates resumed their downward trend in the fourth quarter, as the
economy showed signs of slowing and the market anticipated a reduction in
short-term interest rates by the U.S. Federal Reserve. The interest rate for the
30 year U.S. Treasury Bond declined to 5.95% by December 31, 1995.
Beginning in November, 1994, it appeared that long-term rates were nearing
their peak at 8.15%. At that time, the Fund began to buy long-term U.S.
Treasury Bonds. By the end of 1995, 79.12% of the Fund's assets were invested
in long-term bonds and
1
<PAGE> 3
public utility common stocks. The remaining twenty percent of the Fund's assets
were invested in short-term investments which gives the Fund the ability to make
adjustments in response to further interest rate developments. The average
maturity of the Fund increased from 2 years to 20.45 years during this same
period.
The Fund continues to invest using a "Barbell" investment strategy. One end
of the Barbell has short-term U.S. Treasury Bills and money market funds and
long-term (i.e. 30 year) U.S. Treasury Bonds are on the other end. This strategy
locks in the higher interest rates and the opportunity for capital gains if
interest rates decline, as expected, over the next few years. When it appears
that long-term rates may increase temporarily, we will sell some portion of our
long-term position and take profits. As long-term rates near another peak we
would again be more heavily weighted in long-term bonds.
We continue to believe that long-term interest rates will decline to a target
of 5.0% or less by the turn of the century. This interest rate decline should
occur as the result of world wide deflationary forces, which should keep
inflation under control. If, during 1996, the U. S. Government impasse continues
or the economy shows signs of unexpected strength, we may experience more
volatility in long-term interest rates. Temporary interest rate increases, due
to cyclical pressures, may provide the last opportunity to purchase long bonds
before long-term interest rates continue their decline into 2000 AD. Our
investment strategy is to purchase U.S. Treasury bonds as interest rates move
higher and hold them until the 1999-2000 time frame.
Approximately 26% of the Fund has been invested in the common stocks of
public utility companies that have above average dividend growth. This utility
strategy offers the potential for growth in income which is unavailable in
bonds. This growth in income is intended to provide some protection against
inflation.
In 1995, the bond market produced above average returns for investors. While
the bond markets may experience some short term volatility, we believe that the
long term outlook is good. Our goal continues to be an emphasis on protecting
the Fund's capital and profit from the long-term potential of declining interest
rates.
Please contact your financial advisor or Pacific Advisors Fund, if you have
questions or would like more information on the Fund.
Sincerely,
/s/ George A. Henning /s/ R. Kelly Kelly
---------------------- -----------------------
George A. Henning R. Kelly Kelly
Chairman Adviser
Spectrum Asset
Management, Inc.
2
<PAGE> 4
- - -------------------------------------------------------------------------------
CHANGE IN VALUE OF $10,000 INVESTMENT*
This chart shows the growth of a $10,000 investment made in Pacific Advisors
Government Securities Fund on February 8, 1993 compared to the growth of the
Lehman T-Bond Index, Intermediate.
PACIFIC ADVISORS GOVERNMENT SECURITIES FUND
Average Annual Total Return
for period ending December 31, 1995
One Year
20.32%
Inception
(2/8/93)
6.67%
<TABLE>
<CAPTION>
PAFI LEHMAN
-------- ----------
<S> <C> <C>
$10,000 $10,000
12/93 $10,036 $10,826
12/94 $10,021 $10,604
12/95 $12,057 $12,140
</TABLE>
* Reflects the deduction of the 4.75% maximum sales charge and assumes all
distributions were reinvested at net asset value and after expense
reimbursements. The results show annualized returns for 1993, since February
8, 1993 was the inception date of the Fund.
The Lehman T-Bond Index is an unmanaged index of intermediate government bonds
since 12/31/80.
Past performance does not guarantee future results. Share price and return
fluctuate, so that your shares when redeemed, may be worth more or less than
their original cost.
3
<PAGE> 5
SCHEDULE OF INVESTMENTS
- - --------------------------------------------------------------------------------
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Shares/Par Value Value
---------------- -----
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (70.03%)
U.S. TREASURY BONDS (56.23%)
U.S. Treasury Bond 9.00% 11/15/18 $ 300,000 $ 408,843
U.S. Treasury Bond 8.125% 8/15/19 300,000 377,250
U.S. Treasury Bond 8.50% 2/15/20 300,000 392,156
U.S. Treasury Bond 7.875% 2/15/21 300,000 369,281
U.S. Treasury Bond 8.125% 8/15/21 300,000 380,061
U.S. Treasury Bond 7.25% 8/15/22 300,000 347,344
U.S. Treasury Bond 6.25% 8/15/23 300,000 308,344
U.S. Treasury Bond 7.50% 11/15/24 300,000 360,375
U.S. Treasury Bond 6.875% 8/15/25 300,000 338,437
----------
3,282,091
----------
U.S. TREASURY BILLS (3.39%)
U.S. Treasury Bill 3/14/96 200,000 198,028
----------
U.S. TREASURY NOTES (10.41%)
U.S. Treasury Note 7.00% 9/30/96 600,000 607,687
----------
TOTAL U.S. GOVERNMENT OBLIGATIONS $4,087,806
----------
COMMON STOCK (26.00%)
NATURAL GAS (3.00%)
Enron Corp. 4,600 175,375
----------
TELECOMMUNICATIONS (6.41%)
Cincinnati Bell, Inc. 6,000 208,500
Tele Denmark A/S - ADR 6,000 165,750
----------
374,250
----------
TELECOMMUNICATIONS - TELEPHONE COMPANIES (1.51%)
GTE Corp. 2,000 88,000
----------
</TABLE>
4
<PAGE> 6
<TABLE>
<CAPTION>
Shares/Par Value Value
---------------- -----
COMMON STOCK continued
<S> <C> <C>
UTILITIES - GAS & ELECTRIC (9.05%)
Public Service Of New Mexico 10,000 $ 176,250
Illinova Corp. 6,000 180,000
Nipsco Industries Inc. 4,500 172,125
-----------
528,375
-----------
UTILITIES - TELECOMMUNICATIONS (6.03%)
SBC Communications 3,000 172,500
Teco Energy, Inc. 7,000 179,375
-----------
351,875
-----------
TOTAL COMMON STOCK $ 1,517,875
-----------
TOTAL INVESTMENT SECURITIES (96.03%) $ 5,605,681
-----------
SHORT-TERM INVESTMENTS (5.11%)
United Missouri Bank Money Market Fund 298,111
-----------
OTHER ASSETS LESS LIABILITIES (-1.14%) (66,817)
-----------
TOTAL NET ASSETS $ 5,836,975
===========
</TABLE>
5
<PAGE> 7
STATEMENT OF ASSETS AND LIABILITIES
- - --------------------------------------------------------------------------------
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investment securities at market value (cost: $4,978,129) $5,605,681
Short-term investments, at cost, which is equivalent to market 298,111
Other assets 40,413
Accrued income receivable 80,569
Receivable for capital shares sold 10,307
Organizational expenses, net of amortization (Note 1) 23,984
----------
Total assets 6,059,065
----------
LIABILITIES:
Payable for investments purchased 198,076
Payable to Investment Adviser (Note 1) 23,984
Payable for capital shares redeemed 30
----------
Total liabilities 222,090
----------
NET ASSETS:
(Equivalent to $10.16 per share on 574,402 shares of
Capital Stock outstanding - 100 million shares authorized) $5,836,975
==========
SUMMARY OF SHAREHOLDER'S EQUITY
Paid-in capital $5,208,039
Undistributed net investment income 920
Undistributed capital gains 464
Unrealized appreciation of investments 627,552
----------
Net assets at December 31, 1995 $5,836,975
==========
</TABLE>
See Accompanying Notes to Financial Statements.
6
<PAGE> 8
STATEMENT OF OPERATIONS
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C> <C>
Dividends $ 36,567
Interest 220,200
-----------
Total Income 256,767
-----------
EXPENSES:
Investment Advisory Fees 30,937
Transfer Agent Expense 23,816
Fund Accounting Fees 18,089
Legal Expense 13,293
Amortization Expense 11,124
Audit Fees 8,274
Custody Fees 7,272
Registration Fees 6,763
Printing 5,627
Director Fees/Meetings 4,353
Other Expense 2,905
Distribution (Note 3) 856
-----------
Total Expenses, before reimbursements 133,309
Less Fees Waived and Expenses Reimbursed (Note 3) (54,783)
-----------
Net Expenses 78,526
-----------
NET INVESTMENT INCOME: $ 178,241
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments
Proceeds from sales of investment securities (excluding short-term
investments with maturities 60 days or less) $ 5,865,635
Cost of investment securities sold 5,717,292
-----------
Net realized gain on investments 148,343
Net unrealized appreciation of investments:
Beginning of year $ 13,493
End of year 627,552
-----------
Net unrealized appreciation of investments 614,059
-----------
Net realized and unrealized gain on investments 762,402
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS: $ 940,643
===========
</TABLE>
See Accompanying Notes to Financial Statements.
7
<PAGE> 9
STATEMENT OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended For the year ended
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income $ 178,241 $ 45,711
Net realized gain (loss) on investments 148,343 (35,098)
Net unrealized appreciation of investments 614,059 17,070
----------------------------------
Increase in net assets resulting from operations 940,643 27,683
----------------------------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (177,183) (45,976)
Net capital gains (110,450) --
----------------------------------
Decrease in net assets resulting from distributions (287,633) (45,976)
----------------------------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds of shares sold (244,351and 238,739 shares) 2,303,559 2,100,465
Proceeds from shares sold upon reinvestment
of dividends (26,534 and 4,738 shares) 260,916 41,741
Cost of shares repurchased (57,650 and 13,319 shares) (566,171) (117,358)
----------------------------------
Increase in net assets derived from capital
share transactions 1,998,304 2,024,848
----------------------------------
Increase in net assets 2,651,314 2,006,555
NET ASSETS:
BEGINNING OF YEAR
(includes undistributed
net investment income of $0 and $126) 3,185,661 1,179,106
----------------------------------
END OF YEAR
(includes undistributed
net investment income of $920 and $0) $ 5,836,975 $ 3,185,661
==================================
</TABLE>
See Accompanying Notes to Financial Statements.
8
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION
Pacific Advisors Fund Inc. (the "Company") is an open-end
diversified management investment company registered under the Investment
Company Act of 1940, as amended. The Company was organized on May 18, 1992 as a
Maryland corporation and had no operations prior to February 8, 1993, other than
those relating to organizational matters including the sale of 2,778 shares of
stock of each of its four series ("Funds") at $9.00 per share to the Company's
investment manager, Pacific Global Investment Management Company. The Company
currently offers four Funds: Small Cap Fund, Balanced Fund, Income Fund, and
Government Securities Fund. Each Fund is a separate investment portfolio of the
Company with a distinct investment objective, investment program, policies, and
restrictions. The Government Securities Fund seeks to provide high current
income, preservation of capital, and rising future income, consistent with
prudent investment risk.
The Investment Manager paid the organizational and other initial
expenses of the Fund incurred prior to the initial offering of the Fund's
shares. However, the Fund has agreed to reimburse the Investment Manager for
such expenses. The organizational costs will be deferred and amortized by each
Fund over a period during which it is expected that a benefit will be realized,
but no longer than five years from the date of the Funds' commencement of
operations. Prepaid expenses will be amortized over a period not to exceed
twelve months.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
A. SECURITY VALUATION - Securities listed on a national securities
exchange and certain over-the-counter ("OTC") issues traded on the NASDAQ
national market system are valued at the last quoted sale price at the close of
the NYSE. OTC issues not quoted on NASDAQ system and other equity securities for
which no sale price is available, are valued at the last bid price as obtained
from published sources (including Quotron), where available, and otherwise from
brokers who are market makers for such securities. Debt securities with a
maturity of less than 60 days are valued on an amortized cost basis.
B. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security
transactions are accounted for on the trade date. The cost of investments sold
is determined by use of the specific identification method for both financial
reporting and Federal income tax purposes. Dividends are recorded on the
ex-dividend date. Interest income is recorded on an accrual basis.
C. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - The Government
Securities Fund declares and distributes dividends of its net investment income,
if any, quarterly. The Board of Directors will determine the amount and timing
of such payments.
D. FEDERAL INCOME TAXES - No provision is made for Federal taxes
since the Company intends to qualify as a regulated investment company and to
make the requisite distributions to its shareholders, which will be sufficient
to relieve it from Federal income and excise taxes.
E. ORGANIZATIONAL COSTS - Costs incurred by the Government
Securities Fund in connection with its organization, registration and
initial public offering of shares have been deferred and are being
amortized using the straight-line method over a five-year period in
accordance with the Expense Limitation Agreement for each of the Funds.
During 1995 the Investment Manager
9
<PAGE> 11
assumed the amortization expense of $11,124 for organizational expenses.
NOTE 3. INVESTMENT MANAGEMENT,
DISTRIBUTOR AND OTHER RELATED
PARTY TRANSACTIONS
The Company and Government Securities Fund have entered into an
investment management agreement ("Management Agreement") with Pacific Global
Investment Management Company (the "Manager") and sub-advisory agreement
("Sub-Advisory Agreement") with Spectrum Asset Management, Inc. (the "Adviser").
The Management Agreement provides for investment management fees, payable
monthly, and calculated at the maximum annual rate of 0.65% for the Government
Securities Fund. The Sub-Advisory Agreement provides for a sub-advisory fee,
payable monthly, and calculated at the maximum annual rate of 0.35% for
Government Securities Fund. The Manager is solely responsible for the payment of
these fees to the Adviser.
In accordance with its expense limitation agreements ("Expense
Limitation Agreements") with the Company, on behalf of each Fund, the Manager is
required to reduce its investment management fee in any fiscal year in which all
Fund Operating Expenses exceed the lowest applicable limit actually enforced by
any state, and to reimburse the Government Securities Fund for any additional
expenses that exceed such limit. In addition, from time to time, the Manager and
the Adviser may voluntarily waive their management and advisory fees,
respectively, and/or absorb certain expenses for the Government Securities Fund.
Pursuant to the Expense Limitation Agreements, the voluntary
waiver of fees and the assumption of expenses by the Manager and the Adviser,
the following amounts were waived or reimbursed for the year January 1, 1995 to
December 31, 1995 for Government Securities Fund; $30,937 of management and
sub-advisory fees were waived and $23,846 was reimbursed by the Manager.
For the year January 1, 1995 to December 31, 1995, Pacific Global
Fund Distributors, Inc., the principal underwriter for the Company, received
$11,731 of commissions on sales of capital stock of the Government Securities
Fund, after deducting $2,249 allowed to authorized distributors as commissions.
The Fund has adopted a plan of distribution, whereby the
Government Securities Fund may pay a service fee in an amount up to 0.25% per
annum of the Fund's average daily net assets to qualified recipients. For the
year January 1, 1995 to December 31, 1995, $856 was accrued or paid.
NOTE 4. PURCHASE AND SALES OF SECURITIES
For the year ended December 31, 1995, the Government Securities
Fund had purchases of securities, other than short-term investments of
$7,847,931. The cost of securities held is the same for Federal income tax and
financial reporting purposes.
10
<PAGE> 12
FINANCIAL HIGHLIGHTS
- - -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
For the Year Ended For the Period
December 31 February 8, 1993 (3)
1995 1994 to December 31, 1993
------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $ 8.82 $ 9.00 $ 9.00
------------------------------- ------------
Income from Investment Operations:
Investment Income 0.45 0.22 0.11
Expenses (0.14) (0.09) (0.04)
------------------------------- ------------
Net Investment Income 0.31 0.13 0.07
Net realized and unrealized gain (loss) on securities 1.53 (0.14) (0.04)
------------------------------- ------------
Total from Investment Operations 1.84 (0.01) 0.03
Less Distributions:
Distributions from net investment income (0.31) (0.17) (0.03)
Dividends from net capital gains (0.19) 0.00 0.00
Net Asset Value, End of Period $ 10.16 $ 8.82 $ 9.00
=============================== ============
TOTAL INVESTMENT RETURN 20.32% (0.15%) 0.36%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 5,837 $ 3,185 $ 1,179
Ratio of Expenses to Average Net Assets (1) 1.65% 1.60% 1.38% (2)
Ratio of Net Investment Income to Average Net Assets 3.75% 2.09% 1.12% (2)
Portfolio Turnover Ratio 57.85% 81.59 129.16% (2)
</TABLE>
- - --------------------------------------------------------------------------------
1. Without the voluntary fee waivers and reimbursement of expenses, the ratio
of expenses to average daily net assets for the Government Securities Fund
would have been 2.80%, 4,86% and 15.46%, for the years 1995 through 1993
respectively.
2. Annualized.
3. Commencement of Operations.
See Accompanying Notes to Financial Statements.
11
<PAGE> 13
REPORT OF INDEPENDENT AUDITORS
- - --------------------------------------------------------------------------------
BOARD OF DIRECTORS AND SHAREHOLDERS
PACIFIC ADVISORS FUND INC.
GOVERNMENT SECURITIES FUND
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Pacific Advisors Fund Inc. Government
Securities Fund as of December 31, 1995, the related statement of operations for
the year then ended, and the statement of changes in net assets for each of the
two years in the period then ended, and the financial highlights for the years
ended December 31, 1995 and 1994, and for the period February 8, 1993
(commencement of operations) to December 31, 1993. These financial statements
and financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Pacific Advisors Fund Inc. Government Securities Fund as of December 31, 1995,
the results of its operations for the year then ended, and the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for the years ended December 31, 1995 and 1994, and for the period
February 8, 1993 (commencement of operations) to December 31, 1993, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
January 29, 1996
12
<PAGE> 14
PACIFIC ADVISORS FUND INC.
- - --------------------------------------------------------------------------------
DIRECTORS:
George A. Henning, Chairman
Victoria L. Breen
Thomas M. Brinker
Kathleen M. Fishkin
L. Michael Haller III
Siegfred S. Kagawa
Takashi Makinodan, Ph.D.
Gerald E. Miller
Louise K. Taylor
OFFICERS:
George A. Henning, President
Thomas H. Hanson, Vice President, Secretary and Treasurer
Victoria L. Breen, Assistant Secretary
Paul W. Henning, Assistant Treasurer
INVESTMENT MANAGER:
Pacific Global Investment Management Company
206 North Jackson Street, Suite 201
Glendale, California 91206
ADVISER:
Spectrum Asset Management, Inc.
450 Newport Center Drive, Suite 420
Newport Beach, California 92660
TRANSFER AGENT AND ADMINISTRATOR:
Pacific Global Investor Services, Inc.
206 North Jackson Street, Suite 201
Glendale, California 91206
DISTRIBUTOR:
Pacific Global Fund Distributors, Inc.
206 North Jackson Street, Suite 201
Glendale, California 91206
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless
accompanied or preceded by a current effective prospectus of the Fund, which
contains information concerning the investment policies of the Fund as well as
other pertinent information.
