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[PACIFIC ADVISORS LOGO] BULK RATE
Pacific Global Fund Distributors, Inc. U. S. POSTAGE
206 North Jackson Street, Suite 201 PAID
Glendale, California 91206 GLENDALE, CA
PERMIT NO. 1090
PG28.896
[PACIFIC ADVISORS LOGO]
PACIFIC
ADVISORS
Fund Inc.
Government
Securities
Fund
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Semiannual Report
August 29, 1996
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Dear Fellow Shareholders
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August 29, 1996
After experiencing one of the best years for bonds in 1995, the bond market saw
long term interest rates (i.e. 30 year U.S. Treasury Bond) increase from 5.95%
to 6.90% in the first six months of 1996. The increase in interest rates began
as the market realized that the economy was stronger than expected. While the
equity markets continued their upward movement, long term bonds declined by
nearly 7.0% in the first half of the year.
During the first six months of 1996, the Pacific Advisors Government
Securities Fund experienced a total return of -6.40%. The investment results are
based on shares purchased at its offering price, after deducting the Fund's
current maximum sales charge, on January 1, 1996 and held through June 30, 1996,
with all dividends and capital gains reinvested and after expense
reimbursements. While these results are disappointing, the Fund has continued to
maintain its position as one of the top U.S. Government Bond Funds in 1996,
according to Lipper Analytical Services, Inc. The Lehman Intermediate and
Long-term Treasury-Bond indexes which are unmanaged indices of total returns for
government bonds, decreased by -0.05% and -6.65% respectively, for this same
period.
In mid-February, as hints of a stronger-than-expected economy triggered the
decline of long-term bond prices, the Fund's advisers implemented a defensive
"barbell" strategy. The Fund shifted a major portion of its long-term bonds and
public utility stocks into short-term U.S. Treasury Bills and stable money
funds. At June 30, 1996, the Fund was 72% invested in short term assets and 28%
invested in a small number of domestic and foreign utilities and long-term U.S.
Treasury bonds. Since June 30, short term assets have increased to 80% of the
Fund.
We continue to believe that long-term high quality bonds will do well over
the next two to five years because of the strong worldwide deflationary forces.
The temporary increase in interest rates is due to increased credit demands from
a growing U.S. economy and a continuing increase in worldwide liquidity
generated by the central banks.
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Long-term interest rates should peak when the U.S. economy begins to show
signs of weakening and prospects for an economic recession increase. When
appropriate, we will begin buying longer term bonds and utility stocks, that
have strong dividend growth potential. The significant shift to long-term assets
will lock in higher yields and allow the Fund to realize market appreciation as
interests rates decline. We believe this active management of the Fund, will
enable investors to maximize their total rate of return while minimizing their
risk.
In 1995, the bond market produced good returns for investors after a
difficult 1994, when bond prices declined. In a similar way, the bond markets
have declined in the first half of 1996, but we believe that the long-term
outlook for bonds remains favorable. 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.
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Schedule of Investments
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June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Shares/Par Value Value
---------------- -----
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (85.46%)
U.S. Treasury Bonds (16.24%)
U.S. Treasury Bond 8.125% 8/15/19 300,000 $ 336,468
U.S. Treasury Bond 8.125% 8/15/21 300,000 337,688
U.S. Treasury Bond 7.25% 8/15/22 300,000 307,406
----------
981,562
----------
U.S. Treasury Bills (69.22%)
U.S. Treasury Bill 8/01/96 4,200,000 4,183,032
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TOTAL U.S. GOVERNMENT OBLIGATIONS 5,164,594
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COMMON STOCK (11.45%)
Natural Gas (4.06%)
Enron Corp. 6,000 245,250
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Telecommunications (7.39%)
Alltel Corp. 3,800 116,850
Nokia Corp. - ADR A 2,800 103,600
Tele Danmark A/S - ADR 4,700 119,262
Telefonos De Mexico S A 3,200 107,200
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446,912
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TOTAL COMMON STOCK 692,162
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TOTAL INVESTMENT SECURITIES (96.91%) 5,856,756
----------
SHORT TERM INVESTMENTS (1.99%)
United Missouri Bank Money Market Fund 120,122
----------
OTHER ASSETS LESS LIABILITIES (1.10%) 66,670
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TOTAL NET ASSETS $6,043,548
==========
</TABLE>
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Statement of Assets and Liabilities
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June 30, 1996
(Unaudited)
<TABLE>
<S> <C>
ASSETS:
Investment securities at market value (cost: $5,862,488) $ 5,856,756
Short-term investments, at cost, which is equivalent to market 120,122
Other assets 69,522
Accrued income receivable 30,706
Organizational expenses, net of amortization (Note 1) 18,459
-----------
Total assets 6,095,565
-----------
LIABILITIES:
Payable to Investment Adviser (Note 1) 18,459
Payable for capital shares redeemed 33,558
-----------
Total liabilities 52,017
-----------
NET ASSETS:
(Equivalent to $9.51per share on 635,175 shares of
Capital Stock outstanding - 100 million shares authorized) $ 6,043,548
===========
SUMMARY OF SHAREHOLDER'S EQUITY
Paid-in capital $ 5,801,764
Undistributed net investment income 2,836
Undistributed capital gains 244,680
Unrealized depreciation of investments (5,732)
-----------
Net assets at June 30, 1996 $ 6,043,548
===========
</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 $ 22,237
Interest 137,954
------------
Total Income 160,191
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EXPENSES:
Investment Advisory Fees 21,055
Fund Accounting Fees 18,997
Transfer Agent Expense 11,738
Legal Expense 7,740
Registration Fees 5,396
Printing 5,019
Audit Fees 699
Amortization Expense 5,547
Custody Fees 2,141
Director Fees/Meetings 2,122
Distribution Fees (Note 3) 1,393
Other Expense 2,222
------------
Total Expenses, before reimbursements 84,069
Less Fees Waived and Expenses Reimbursed (Note 3) (34,363)
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Net Expenses 49,706
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NET INVESTMENT INCOME: $ 110,485
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NET REALIZED AND UNREALIZED GAIN (LOSS)ON INVESTMENTS:
Net realized gain on investments
Proceeds from sales of investment securities (excluding
short-term investments with maturities 60 days or less) $ 11,917,955
Cost of investment securities sold 11,673,739
------------
Net realized gain on investments 244,216
Net unrealized appreciation (depreciation) of investments:
Beginning of period $ 627,552
End of period (5,732)
------------
Net unrealized depreciation of investments (633,284)
------------
Net realized and unrealized loss on investments (389,068)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS: $ (278,583)
============
</TABLE>
See Accompanying Notes to Financial Statements.
5
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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 income $ 110,485 $ 178,241
Net realized gain on investments 244,216 148,343
Net unrealized appreciation (depreciation) of investments (633,284) 614,059
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Increase in net assets resulting from operations (278,583) 940,643
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From Distributions to Shareholders:
Net investment income (108,569) (177,183)
Net capital gains -- (110,450)
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Decrease in net assets resulting from distributions (108,569) (287,633)
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From Capital Share Transactions:
Proceeds from shares sold (164,102 and 244,351 shares) 1,586,414 2,303,559
Proceeds from shares purchased by reinvestment
of dividends (10,186 and 26,534 shares) 96,977 260,916
Cost of shares repurchased (113,515 and 57,650 shares) (1,089,666) (566,171)
----------------------------------
Increase in net assets derived from capital
share transactions 593,725 1,998,304
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Increase in net assets 206,573 2,651,314
NET ASSETS:
Beginning of Period
(includes undistributed net investment
income of $920 and and $0) 5,836,975 3,185,661
----------------------------------
End of Period
(includes undistributed net investment
income of $920 and $920) $ 6,043,548 $ 5,836,975
==================================
</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 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.
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
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Funds. During 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 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 period January 1, 1996 to
June 30, 1996 for Government Securities Fund, no management and sub-advisory
fees were waived and $34,363 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 $4,274
of commissions on sales of capital stock of the Government Securities Fund,
after deducting $20,672 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 period January
1, 1996 to June 30, 1996, $1,393 was accrued or paid.
NOTE 4. PURCHASE AND SALES OF SECURITIES
For the period ended June 30, 1996, the Government Securities Fund had
purchases of securities, other than short-term investments of $12,518,909. 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
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<S> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 10.16 $ 8.82 $ 9.00 $ 9.00
-------------------------------------------------------------------
Income from Investment Operations:
Investment Income .26 0.45 0.22 0.11
Expenses (0.08) (0.14) (0.09) (0.04)
-------------------------------------------------------------------
Net Investment Income (0.17) 0.31 0.13 0.07
Net realized and unrealized gain (loss)
on securities (0.64) 1.53 (0.14) (0.04)
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Total from Investment Operations (0.47) 1.84 (0.01) 0.03
Less Distributions:
Dividends from net investment income (0.18) (0.31) (0.17) (0.03)
Dividends from net capital gains 0.00 (0.19) 0.00 0.00
Net Asset Value, End of Period $ 9.51 $ 10.16 $ 8.82 $ 9.00
===================================================================
Total Investment Return (6.40%) 20.32% (0.15%) 0.36%
Ratios/Supplemental Data
Net Assets, End of Period (000) $ 6,044 $ 5,837 $ 3,185 $ 1,179%
Ratio of Expenses to Average Net Assets(1) 0.83% 1.65% 1.60% 1.38%(2)
Ratio of Net Income to Average Net Assets 1.84% 3.75% 2.09% 1.12%(2)
Portfolio Turnover Ratio 16.74% 57.85% 81.59% 129.16%(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 Government Securities Fund
would have been 1.40%, 2.80%, 4.86%, and 15.46%, 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
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.
Distributor:
Pacific Global Fund Distributors, Inc.
206 North Jackson Street, Suite 201
Glendale, California 91206
(800) 989-6693
