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[Pacific Advisors Logo]
Pacific Global Fund Distributors, Inc. Bulk Rate
206 North Jackson Street, Suite 201 U.S. Postage
Glendale, California 91206 Paid
Glendale, CA
Permit No. 1090
PG27.896
[Pacific Advisors Logo]
Pacific
Advisors
Fund Inc.
SMALL CAP
FUND
----------------------------------
Semiannual Report
August 29, 1996
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Dear Fellow Shareholders
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August 29, 1996
In the early weeks of 1996, we began to see interest rates increase due to
concerns that the U.S. Government could not agree on a budget for 1996, and
prospects for a balanced budget were declining. During this same period, the
stock market continued a correction in the technology sector which had begun in
late 1995. Blue chip stocks also retreated as earnings projections for 1996,
were lowered. As the year progressed, the U.S. Dollar continued to show strength
and economic growth was stronger than expected. These changes in the market
place resulted in capital shifting towards the smaller cap stocks which were
undervalued and showed growth potential that was stronger than expected in blue
chip and technology stocks.
PERFORMANCE
For the six months ending June 30, 1996, the Pacific Advisors Small Cap Fund had
a total return of 21.57%. The return is based on shares purchased at the
offering price on January 1, 1996 and held through June 30, 1996. The return
reflects the deduction of the Fund's current maximum sales charge, reinvestment
of capital gains and expense reimbursements. By comparison, the NASDAQ and
Russell 2000 Indices, which are unmanaged indices of small company common stocks
increased 12.63% and 10.05% respectively, for the first six months of 1996.
PORTFOLIO MANAGEMENT
The Fund has continued to focus on a specific segment of the small cap
market-strong companies with market capitalizations under $120 million. Although
the "micro-cap" market can be more volatile on a short term basis, over the past
18 years (from December 1978 through December 1995) micro cap stocks have
outperformed both small and large cap stocks in all but one year, according to
Ibbotson Associates. At the end of June, the Fund held 29 different stocks in
the portfolio. The smaller number of stocks in the Fund allows it to benefit
from the outstanding performance of good companies rather than representing a
more indexed approach to investing.
In February, DOLCO Packaging was sold to a private company and we realized
a significant gain on this sale. Several companies whose stock has been in the
Fund since 1993, have experienced outstanding price appreciation in 1996. These
stocks include such companies as America Service Group, Worthington Foods and
Herbalife.
During this period the Fund began acquiring stock in three warranty
companies; Automobile Protection Corporation, Interstate National Dealer
Services and Warrantech. These companies are experiencing strong growth in the
sale of warranty products for new and used automobiles, as well as consumer
products. The profit margins are quite good and the commissions earned by
dealers and stores represent a significant portion of their profits.
Other positions added to the Fund include Healthcare Services Group, which
provides janitorial and laundry services to nursing homes nationwide and Casey's
General Stores, a midwestern company with over 900 stores in smaller communities
not
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served by 7 Eleven or other convenience store chains. The Fund has also taken
smaller positions in BioSource, Utah Medical and Safetytech which are medical
technology or service stocks with proven technology. These stocks had become
undervalued during the technology correction.
In the early part of July, a broad market correction began which caused the
year to date gains for the NASDAQ and Russell 2000 Indices to decline to 2.70%
and 0.01% respectively, through July 31, 1996. The Fund declined (3.85%) in
July, resulting in a year to date return of 18.19%. We believe that the lower
volatility experienced by the Fund was due in part to the lower than average P/E
ratio of stocks held in the Fund and strong earnings reported by several
companies. The Fund has benefited from its investment objective which emphasizes
buying the stock of companies with good fundamental value and growth potential.
OUTLOOK
At the present time their appears to be some temporary confusion in the market.
Mixed signals on the strength of the economy, the U.S. elections in November and
concern for wage inflation are but some of the contributing factors in the
market's volatility. We believe that the economy will grow at a moderate growth
rate with low inflation and, as a result, long-term interest rates should resume
their downward trend late in 1996 or early 1997. A slower growing economy should
benefit small cap value stocks through the turn of the century.
This optimism is supported by earnings projections from firms such as
Merrill Lynch, which expect small cap companies to experience earnings growth
rates of 19.6%, during the next five years. This growth rate is over 6% higher
than the projected growth rate of 12.7%, for large cap companies. Historically,
small cap stock valuations have reached a cycle peak when the average P/E ratio
of the New Horizon Fund is twice the average of the S&P 500 Index. In June, the
average P/E ratio for the New Horizon Fund was about 1.5 times the S&P 500
Index.. While the market will probably remain volatile at least through the
coming elections, we believe the longer term outlook is positive for the Fund.
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
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.
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Schedule of Investments
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June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Number of Shares Value
---------------- -----
<S> <C> <C>
COMMON STOCK (94.66%)
Agricultural Supplies (4.15%)
Arcadian Corp 13,000 $ 256,750
-------------
Air Transportation (2.97%)
Mercury Air Group Inc. 23,000 184,000
-------------
Banking (1.55%)
California State Bank 6,000 96,000
-------------
Chemicals (3.19%)
Polymer Research Corp of America* 54,500 197,562
-------------
Consumer Apparel (2.72%)
Hyde Athletic Industries "B"* 30,000 168,750
-------------
Consumer Products (7.83%)
American Safety Razor Corp* 18,000 182,250
Boyds Wheels, Inc.* 5,000 64,375
Casey's General Stores 12,000 238,500
-------------
485,125
-------------
Diversified Companies (9.71%)
Interstate National Dealer Services* 75,000 295,312
Warrantech* 70,000 306,250
-------------
601,562
-------------
Food Products (6.26%)
Worthington Foods, Inc. 22,500 388,125
-------------
Food Wholesaling (4.59%)
Western Beef Inc./DEL* 35,000 284,375
-------------
</TABLE>
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<TABLE>
<CAPTION>
COMMON STOCK continued Number of Shares Value
---------------- -----
<S> <C> <C>
Health and Personal Care Products (6.64%)
Herbalife International Inc. 25,000 368,750
Naturade, Inc.* 40,000 42,500
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411,250
-------------
Health Care Products and Services (15.51%)
America Service Group Inc.* 38,000 646,000
Healthcare Services Group* 35,000 315,000
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961,000
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Hospital Supplies (3.65%)
Biosource* 5,000 45,156
Hosposable Products, Inc.* 25,000 181,250
-------------
226,406
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Household Furniture and Appliances (0.95%)
Fedders Corp. - Class A 10,000 58,750
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Industrial Goods and Equipment (2.42%)
Ocean Bio-Chem, Inc.* 63,000 149,625
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Insurance (3.20%)
Automobile Protection Corp.* 50,000 198,435
-------------
Medical Equipment (2.07%)
Safetytek Corp.* 5,000 52,500
Utah Medical Products* 6,000 75,750
-------------
128,250
-------------
Pharmaceuticals (4.29%)
Natural Alternatives Intl.* 28,000 266,000
-------------
Printing and Publishing (3.98%)
Courier Corp. 13,700 246,600
-------------
Railroad (4.24%)
Railamerica Inc.* 75,000 262,500
-------------
Technology Industries (0.86%)
Refac Technology Dev. Corp. 7,000 53,375
-------------
</TABLE>
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<TABLE>
<CAPTION>
COMMON STOCK continued Number of Shares Value
---------------- -----
<S> <C> <C>
Textiles (3.55%)
Decorator Industries 26,666 219,995
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Restaurants (0.33%)
Nutrition Management Services*
Company - Class A 10,000 20,625
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TOTAL COMMON STOCK 5,865,060
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TOTAL INVESTMENT SECURITIES (94.66%) 5,865,060
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SHORT-TERM INVESTMENTS (4.96%)
United Missouri Bank Money Market Fund 307,042
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OTHER ASSETS LESS LIABILITIES (0.38%) 23,635
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TOTAL NET ASSETS $ 6,195,737
=============
</TABLE>
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* Non income producing.
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Statement of Assets and Liabilities
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June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investment securities at market value (cost: $4,657,925) $ 5,865,060
Short-term investments, at cost, which is equivalent to market 307,042
Other assets 51,583
Accrued income receivable 1,743
Receivable for capital shares sold 12,384
Organizational expenses, net of amortization (Note 1) 18,459
--------------
Total assets 6,256,271
==============
LIABILITIES:
Payable for investments purchased 42,050
Payable to Investment Adviser (Note 1) 18,459
Payable for capital shares redeemed 25
--------------
Total liabilities 60,534
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NET ASSETS:
(Equivalent to $14.37 per share on 431,234 shares of
Capital Stock outstanding - 100 million shares authorized) $ 6,195,737
==============
SUMMARY OF SHAREHOLDER'S EQUITY
Paid-in capital $ 4,920,253
Accumulated net investment loss (81,349)
Undistributed net capital gains 149,698
Unrealized appreciation of investments 1,207,135
--------------
Net assets at June 30, 1996 $ 6,195,737
==============
</TABLE>
See Accompanying Notes to Financial Statements.
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STATEMENT OF OPERATIONS
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For the Six Months Ended June 30, 1996
(Unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 23,097
Interest 4,558
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Total Income 27,655
----------
EXPENSES:
Investment Advisory Fees 17,083
Fund Accounting Fees 12,591
Transfer Agent Expense 11,096
Legal Expense 6,764
Registration Fees 5,706
Printing 5,163
Audit Fees 4,520
Amortization Expense 5,544
Custody Fees 2,556
Director Fees/Meetings 1,789
Distribution Fees (Note 3) 2,754
Other Expense 2,718
----------
Total Expenses, before reimbursements 78,284
Less Fees Waived and Expenses Reimbursed (Note 3) (12,803)
----------
Net Expenses 65,481
----------
NET INVESTMENT LOSS: $(37,826)
--------
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) $1,556,853
Cost of investment securities sold 1,408,307
----------
Net realized gain on investments 148,546
Net unrealized appreciation of investments:
Beginning of period $ 400,934
End of period 1,207,135
----------
Net unrealized appreciation of investments 806,201
--------
Net realized and unrealized gain on investments 954,747
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS: $916,921
========
</TABLE>
See Accompanying Notes to Financial Statements.
7
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Statement of Changes in Net Assets
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(Unaudited)
<TABLE>
<CAPTION>
For the Period
January 1, 1996 For the year ended
to June 30, 1996 December 31, 1995
---------------- ------------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment loss $ (37,826) $ (28,321)
Net realized gain on investments 148,546 56,056
Net unrealized appreciation (depreciation)
of investments 806,201 522,452
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Increase in net assets resulting from operations 916,921 550,187
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FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net capital gains -- (123,374)
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Decrease in net assets resulting from distributions -- (123,374)
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FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold (87,654 and 91,918 shares) 1,245,610 1,103,741
Proceeds from shares purchased by reinvestment
of dividends (0 and 8,539 shares) -- 104,961
Cost of shares repurchased (18,428 and 44,778 shares) (245,953) (525,779)
------------------------------
Increase in net assets derived from capital
share transactions 999,657 682,923
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Increase in net assets 1,916,578 1,109,736
------------------------------
NET ASSETS:
BEGINNING OF PERIOD
(includes no undistributed net investment income) 4,279,159 3,169,423
------------------------------
END OF PERIOD
(includes no undistributed net investment income) $ 6,195,737 $ 4,279,159
==============================
</TABLE>
See Accompanying Notes to Financial Statements.
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Notes to Financial Statements
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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.
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
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1996 the Investment Manager assumed the amortization expense of $5,525 for
organizational expenses.
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 period January 1, 1996 to June 30,
1996 for Small Cap Fund, no management fees were waived and $12,803 was
reimbursed by the Manager.
For the period January 1, 1996 to June 30, 1996, Pacific Global
Fund Distributors, Inc., the principal underwriter for the Company, received
$3,321 of commissions on sales of capital stock of the Small Cap Fund, after
deducting $17,825 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 period January 1, 1996
to June 30, 1996, $2,754 was accrued or paid.
NOTE 4. PURCHASE AND SALES OF SECURITIES
For the period ended June 30, 1996, the Small Cap Fund had
purchases of securities, other than short-term investments of $2,323,972. The
cost of securities held is the same for Federal income tax and financial
reporting purposes.
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FINANCIAL HIGHLIGHTS
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(For a Share Outstanding Throughout the Period)
(Unaudited)
<TABLE>
<CAPTION>
For the Period For the Year Ended For the Period
January 1, 1996 December 31 February 8, 1993 (3)
to June 30, 1996 1995 1994 to December 31, 1993
----------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $11.82 $10.35 $11.47 $ 9.00
-----------------------------------------------------------
Income from Investment Operations:
Investment Income 0.07 0.19 0.19 0.09
Expenses (0.17) (0.27) (0.23) (0.12)
-----------------------------------------------------------
Net Investment Income (0.10) (0.08) (0.04) (0.03)
Net realized and unrealized gain (loss)
on securities 2.65 1.89 (0.42) 2.50
-----------------------------------------------------------
Total from Investment Operations 2.55 1.81 (0.46) 2.47
Less Distributions:
Distributions from net capital gains 0.00 (0.34) (0.66) 0.00
Net Asset Value, End of Period $14.37 $11.82 $10.35 $ 11.47
===========================================================
Total Investment Return 21.57% 17.27% (3.97%) 29.94%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $6,196 $4,279 $3,169 $ 2,175
Ratio of Expenses to Average Net Assets 1 1.25% 2.49% 2.45% 2.20%(2)
Ratio of Net Income (loss) to Average Net Assets (0.72%) (0.71%) (0.42%) (0.32%)(2)
Portfolio Turnover Ratio 31.27% 44.95% 49.79% 5.91%(2)
</TABLE>
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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 1.50%, 3.64%, 5.40% and 7.20%, for the years 1996 through 1993
respectively.
2. Annualized.
3. Commencement of Operations.
See Accompanying Notes to Financial Statements.
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Pacific Advisors Fund Inc.
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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 and Secretary
Victoria L. Breen, Assistant Secretary
Paul W. Henning, 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
genera 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.
Distributor:
Pacific Global Fund Distributors, Inc.
206 North Jackson Street, Suite 201
Glendale, California 91206
(800) 989-6693
