<PAGE> 1
Distributor:
Pacific Global Fund Distributors, Inc. [LOGO]
206 North Jackson Street
Suite 201
Glendale, California 91206
1.800.282.6693
Small Cap
Fund
Annual Report
February 28, 1996
<PAGE> 2
Dear Shareholder
February 28, 1996
A sharp decline in interest rates in the first quarter of 1995 ignited a strong
rally in both the stock and bond markets. The momentum for a bull market in
stocks grew as corporations reported strong profits. Long-term interest rates
continued their decline during the year as the economy showed signs of slowing
and inflation remained low. Blue chip and technology sector common stocks were
the market leaders in performance.
The NASDAQ and Russell 2000 Indices, which are unmanaged indices of small
company common stocks went up 39.92% and 26.21% respectively, in 1995. The
impressive gains in these indices were largely the result of advances in the
technology sector. As a result, many stocks outside the technology sector did
not experience the same growth and remained undervalued. The Pacific Advisors
Small Cap Fund ("Fund") is a "small cap value fund". As a value fund, our
investment objective is to look for companies that currently have strong sales
and earnings growth but whose stock is trading at a price below market norms.
Since the price of technology stocks has been high due to the market's
anticipation of high future earnings potential, the Fund does not usually invest
in technology stocks.
In 1995, growth stocks had significantly better returns than value stocks.
However, during the past fifteen years, the performance of Small Company Growth
Funds and Small Company Value Funds has been about the same, according to
Morningstar. This is noteworthy as value funds are less volatile than the
market. Typically, value funds buy stocks at a price/ earnings ratio below the
market average and hold them for two years or more. While growth stocks have had
stronger performance in recent months, we would expect value stocks to perform
better in a slower growth economy.
Performance
For the year ending December 31, 1995, the Fund had a total return of 17.27%.
The return is based on shares purchased at the offering price on January 1, 1995
and held through December 31, 1995. The return reflects the deduction of the
Fund's current maximum sales charge, reinvestment of capital gains and expense
reimbursements. Shareholders received $0.34 in capital gains distributions for
the year.
Portfolio Management
At year end, the Fund held 28 different stocks in the portfolio. About half of
these stocks have been in the Fund for over two years. The portfolio turnover
rate for 1995 was 44.95%. Our investment objective emphasizes buying the stock
of companies with good fundamental value and growth potential. Our strategy is
to purchase early before the market has begun to recognize these stocks. Many of
these companies
<PAGE> 3
are not followed by analysts when we acquire them, so it may take time for these
undervalued stocks to be recognized and appreciate significantly in value. We
anticipate holding most stocks for a three to five year time period.
The Fund's investment adviser continuously monitors the stocks in the
portfolio to determine if there are fundamental changes in the companies which
would affect their future performance. In 1995, 13 stocks were sold which had
become fully valued or experienced a change in their sales and earnings outlook.
Companies such as Swisher International, Natures Sunshine, Work Recovery, SC
Bancorp and Amway Asia Pacific were sold because we believed their fair market
value had been realized. Other stocks, such as Pancho's Mexican Buffet, Santa
Anita Realty, RTI Inc., MMI Medical and Matthew Studio Equipment were sold
because their underlying fundamental value had changed and their long term
outlook was uncertain.
Some of the new stocks added to the portfolio during the year included
Railamerica, Safetytek and Automotive Protection Plans. Railamerica is a
transportation company which has a network of short haul rail lines and has
strong growth potential. Safetytek manufactures medical devices used in
monitoring patients during MRI exams. They are introducing new products in 1996
which should give them strong sales growth in both the domestic and
international markets. Automotive Protection Plans sells warranty products
through automobile dealerships. It has a strong cash position and projected
growth in sales exceeding 25%. During the past year, they signed a contract to
provide warranty services to Honda/Acura dealerships in the United States.
Outlook
The stock market has continued to reach new highs in early 1996. It appears,
however, to be fueled by large amounts of cash being invested rather than the
strength of underlying fundamentals. Corporate earnings growth continued to slow
through the end of 1995, and long-term interest rates have increased since year
end. The long-term interest rate increase appears to be attributable to the
mixed signals the market is receiving on the overall strength of the economy and
on the U.S. Government's resolve to balance the budget. As a result, hedge funds
and foreign investors have been selling long-term U.S. Treasury Bonds. If this
weakening in the bond market continues for any period of time, it may impact the
stock market. The result may be a market correction and/or a change in market
leadership. With the spectacular returns in growth stocks over the past several
months, it will become more difficult for growth stocks to meet market
expectations. At that point, the market cycle should begin to favor value
stocks.
We believe the economy will continue to grow at a moderate rate with low
inflation and, as a result, long-term interest rates should resume their
downward trend later in 1996. A slower growing economy should benefit small cap
value stocks through the turn of the century. The U.S. Congress is still
considering a capital gains tax reduction and expansion of IRA
2
<PAGE> 4
investments. While action on either of these measures is uncertain due to the
presidential election, their passage should benefit small company stocks.
Please contact your financial adviser, or Pacific Advisors Fund, if you have
questions or would like more information on the Small Cap Fund.
Respectfully submitted,
/s/ George A. Henning
George A. Henning
Chairman
Change in Value of $10,000 Investment*
This chart shows the growth of a $10,000 investment made in Pacific Advisors
Small Cap Fund on February 8, 1993 compared to the growth of the NASDAQ and
Russell 2000 Indices.
Pacific Advisors Small Cap Fund
Average Annual Total Return
for period ending December 31, 1995
One Year
17.27%
Inception
(2/8/93)
13.30%
Chart
-----
PAFI NASDAQ RUSSELL 2000
---- ------ ------------
$10,000 $10,000 $10,000
12/93 $12,994 $11,475 $11,700
12/94 $12,478 $11,107 $11,328
12/95 $14,633 $15,542 $14,297
* Reflects the deduction of the 5.75% 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 NASDAQ Stock Index is an unmanaged index of common stocks that is widely
recognized as an indicator of overall market performance for small companies.
The NASDAQ Index does not take capital gains into consideration and unlike the
Fund, does not reflect management fees or expenses.
The Russell 2000 Stock Index is an unmanaged, market weighted measure of stock
market performance. It contains stocks of the 2000 smallest publicly traded
companies. The Russell 2000 Index does not take capital gains into consideration
and unlike the Fund, does not reflect management fees or expenses.
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>
Number of Shares Value
---------------- -----
<S> <C> <C>
COMMON STOCK (96.32%)
Air Transportation (4.91%)
Mercury Air Group Inc. 24,000 $ 210,000
----------
Banking (2.43%)
California State Bank 8,000 104,000
----------
Chemicals (3.15%)
Polymer Research Corp of America* 40,000 135,000
----------
Consumer Apparel (3.59%)
Hyde Athletic Industries "A"* 8,000 30,000
Hyde Athletic Industries "B"* 30,000 123,750
----------
153,750
----------
Containers and Packaging (5.13%)
Dolco Packaging Corp.* 11,400 219,450
----------
Electronics (0.00%)
Tri-Lite Inc.* 7 4
----------
Financial Services Diversified (4.79%)
Mercer International Inc. SBI* 10,000 205,000
----------
Food Products (8.06%)
Vacu-Dry Company* 6,500 30,063
Worthington Foods, Inc. 22,500 315,000
----------
345,063
----------
Food Wholesaling (4.91%)
Western Beef Inc./DEL* 40,000 210,000
----------
</TABLE>
- ----------
*Non income producing
4
<PAGE> 6
<TABLE>
<CAPTION>
Number of Shares Value
---------------- -----
COMMON STOCK continued
<S> <C> <C>
Health and Personal Care Products (7.18%)
Herbalife International Inc. 27,000 $ 232,875
Naturade, Inc.* 44,000 74,250
---------
307,125
---------
Health Care Products and Services (6.77%)
America Service Group Inc.* 38,000 289,750
---------
Hospital Supplies (2.28%)
Hosposable Products, Inc.* 15,000 97,500
---------
Household Furniture and Appliances (4.97%)
Fedders Corp. - Class A 50,000 212,500
---------
Industrial Goods and Equipment (3.50%)
Ocean Bio-Chem, Inc.* 60,000 150,000
---------
Insurance (3.28%)
Automobile Protection Corp.* 50,000 140,625
---------
Medical Equipment (1.75%)
Safetytek Corp.* 5,000 75,000
---------
Machinery (4.56%)
Gleason Corp. 6,000 195,000
---------
Pharmaceuticals (5.05%)
Natural Alternatives Intl.* 27,000 216,000
---------
Printing and Publishing (5.08%)
Courier Corp. 9,300 217,388
---------
Railroad (3.39%)
Railamerica Inc. 40,000 145,000
---------
Real Estate Investment Trusts (REITs) (3.83%)
Excel Realty Trust Inc. 8,000 164,000
---------
</TABLE>
- ---------
* Non income producing
5
<PAGE> 7
<TABLE>
Number of Shares Value
---------------- -----
COMMON STOCK continued
<S> <C> <C>
Restaurants (1.92%)
Nutrition Management Services*
Company - Class A 47,000 $ 82,250
----------
Technology Industries (1.86%)
Refac Technology Dev. Corp. 12,000 79,500
----------
Textiles (3.93%)
Decorator Industries Inc. 21,000 168,000
----------
TOTAL COMMON STOCK $4,121,905
----------
PREFERRED STOCK (0.50%)
Containers and Packaging (0.50%)
Dolco Packaging 9% Series PFD 5,494 $ 21,289
----------
TOTAL PREFERRED STOCK $ 21,289
----------
TOTAL INVESTMENT SECURITIES (96.82%) $4,143,194
----------
SHORT TERM INVESTMENTS (2.11%)
United Missouri Bank Money Market Fund 90,390
----------
OTHER ASSETS LESS LIABILITIES (1.07%) 45,575
----------
TOTAL NET ASSETS $4,279,159
----------
</TABLE>
- ----------
* Non income producing
6
<PAGE> 8
Statement of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investment securities at market value (cost: $3,742,260) $4,143,194
Short-term investments, at cost, which is equivalent to market 90,390
Other assets 38,529
Accrued income receivable 5,051
Receivable for capital shares sold 2,020
Organizational expenses, net of amortization (Note 1) 23,984
----------
Total assets 4,303,168
----------
LIABILITIES:
Payable to Investment Adviser (Note 1) 23,984
Payable for capital shares redeemed 25
----------
Total liabilities 24,009
----------
NET ASSETS:
(Equivalent to $11.82 per share on 362,008 shares of
Capital Stock outstanding - 100 million shares authorized) $4,279,159
==========
SUMMARY OF SHAREHOLDER'S EQUITY
Paid-in capital $3,920,596
Undistributed net investment income (43,523)
Undistributed capital gains 1,152
Unrealized appreciation of investments 400,934
----------
Net assets at December 31, 1995 $4,279,159
==========
</TABLE>
See Accompanying Notes to Financial Statements.
7
<PAGE> 9
Statement of Operations
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 56,884
Interest 11,893
----------
Total Income 68,777
----------
EXPENSES:
Investment Advisory Fees 29,132
Transfer Agent Expense 26,033
Fund Accounting Fees 21,973
Amortization Expense 11,124
Legal Expense 10,323
Custody Fees 9,288
Distribution Fees (Note 3) 8,334
Audit Fees 8,127
Registration Fees 6,380
Printing 4,999
Director Fees/Meetings 3,503
Other Expense 2,819
----------
Total Expenses, before reimbursements 142,035
Less Fees Waived and Expenses Reimbursed (Note 3) (44,937)
----------
Net Expenses 97,098
----------
NET INVESTMENT LOSS: $(28,321)
--------
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) $2,002,170
Cost of investment securities sold 1,955,911
----------
Net realized gain on investments 46,259
Net realized gain from expiration or
closing of option contracts (Note 5) 9,797
Net unrealized appreciation of investments:
Beginning of period $ (121,518)
End of period 400,934
----------
Net unrealized appreciation of investments 522,452
--------
Net realized and unrealized gain on investments 578,508
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS: $550,187
========
</TABLE>
See Accompanying Notes to Financial Statements.
8
<PAGE> 10
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 loss $ (28,321) $ (11,970)
Net realized gain on investments 56,056 260,791
Net unrealized appreciation (depreciation)
of investments 522,452 (398,614)
----------- -----------
Increase (decrease) in net assets resulting from operations 550,187 (149,793)
----------- -----------
From Distributions to Shareholders:
Net capital gains (123,374) (189,197)
----------- -----------
Decrease in net assets resulting from distributions (123,374) (189,197)
----------- -----------
From Capital Share Transactions:
Proceeds from shares sold (91,918 and 119,924 shares) 1,103,741 1,389,720
Proceeds from shares sold upon reinvestment
of dividends (8,539 and 15,829 shares) 104,961 161,454
Cost of shares repurchased (44,778 and 19,039 shares) (525,779) (217,699)
----------- -----------
Increase in net assets derived from capital
share transactions 682,923 1,333,475
----------- -----------
Increase in net assets 1,109,736 994,485
NET ASSETS:
Beginning of Year
(includes no undistributed net investment income) 3,169,423 2,174,938
----------- -----------
End of Year
(includes no undistributed net investment income) $ 4,279,159 $ 3,169,423
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
9
<PAGE> 11
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 Small Cap Fund seeks to provide capital appreciation through
investment in small capitalization companies.
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 Small Cap
Fund declares and distributes dividends of its net investment income, if any,
annually. 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 Small Cap 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 assumed the amortization
expense of $11,124 for organizational expenses.
10
<PAGE> 12
Note 3. Investment Management,
Distributor and Other Related
Party Transactions
The Company and Small Cap Fund have entered into an investment
management agreement ("Management Agreement") with Pacific Global Investment
Management Company (the "Manager"). The Management Agreement provides for
investment management fees, payable monthly, and calculated at the maximum
annual rate of 0.75% for the Small Cap Fund.
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 Small Cap Fund for any additional expenses that
exceed such limit. In addition, from time to time, the Manager may voluntarily
waive their management and advisory fees, respectively, and/or absorb certain
expenses for the Small Cap Fund.
Pursuant to the Expense Limitation Agreements, the voluntary waiver
of fees and the assumption of expenses by the Manager, the following amounts
were waived or reimbursed for the year January 1, 1995 to December 31, 1995 for
Small Cap Fund; $29,132 of management fees were waived and $15,805 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
$35,856 of commissions on sales of capital stock of the Small Cap Fund, after
deducting $7,151 allowed to authorized distributors as commissions.
The Fund has adopted a plan of distribution, whereby the Small Cap
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, $8,334 was accrued or paid.
Note 4. Purchase and Sales of Securities
For the year ended December 31, 1995, the Small Cap Fund had
purchases of securities, other than short-term investments of $2,616,842. The
cost of securities held is the same for Federal income tax and financial
reporting purposes.
Note 5. Covered Call Options Written
As of December 31, 1995, there were no securities held in escrow by
the custodian in connection with covered call options written by the Company.
Written Call Options Transactions
<TABLE>
<CAPTION>
Principal
Amount Premium
--------- -------
<S> <C> <C>
Outstanding
(Beginning of Period) 1,000 $ 2,440
Options Written 3,500 14,178
Options Terminated
(Closing Transactions) 0 0
Options Exercised 3,500 6,821
Options Expired 1,000 9,797
----- -------
Outstanding
(End of Period) 0 $ 0
===== =======
</TABLE>
11
<PAGE> 13
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
------------------- --------------------
Per Share Operating Performance
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $10.35 $11.47 $ 9.00
Income from Investment Operations: ------ ------ ------
Investment Income 0.19 0.19 0.09
Expenses (0.27) (0.23) (0.12)
Income from Investment Operations: ------ ------ ------
Net Investment Income (loss) (0.08) (0.04) (0.03)
Net realized and unrealized gain (loss) on securities 1.89 (0.42) 2.50
Income from Investment Operations: ------ ------ ------
Total from Investment Operations 1.81 (0.46) 2.47
Less Distributions:
Distributions from net capital gains (0.34) (0.66) 0.00
Net Asset Value, End of Period $11.82 $10.35 $11.47
Income from Investment Operations: ====== ====== ======
Total Investment Return 17.27% (3.97%) 29.94%
Ratios/Supplemental Data
Net Assets, End of Period (000)
$4,279 $3,169 $2,175
Ratio of Expenses to Average Net Assets (1) 2.49% 2.45% 2.20% (2)
Ratio of Net Investment Income (loss) to
Average Net Assets (0.71%) (0.42%) (0.32%) (2)
Portfolio Turnover Ratio 44.95% 49.79% 5.91% (2)
</TABLE>
- --------------------------------------------------------------------------------
1. Without the voluntary fee waivers and reimbursement of expenses, the ratio
of expenses to average daily net assets for the Small Cap Fund would have
been 3.64%, 5.40% and 7.20%, for the years 1995 through 1993 respectively.
2. Annualized.
3. Commencement of Operations.
See Accompanying Notes to Financial Statements.
12
<PAGE> 14
Report of Independent Auditors
Board of Directors and Shareholders
Pacific Advisors Fund Inc.
Small Cap Fund
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Pacific Advisors Fund Inc. Small Cap Fund as
of December 31, 1995, the related statement of operations for the year then
ended, and the statement of changes in net assets in 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. Small Cap Fund as of December 31, 1995, the results
of its operations for the year then ended, and the changes in its net assets in
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
13
<PAGE> 15
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
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.
