<PAGE> 1
Distributor:
Pacific Global Fund Distributors, Inc.
206 North Jackson Street
Suite 201
Glendale, California 91206
1.800.282.6693
Income
Fund
Annual Report
February 28, 1996
<PAGE> 2
Dear Shareholder
February 28, 1996
After suffering through the worst bear market since 1927, the bond market
reversed itself in early 1995. The market became convinced that the economy was
slowing, inflation was under control and the U.S. Federal Reserve began reducing
interest rates. This ignited a bond rally that saw long-term interest rates
decline from 8.15% in late 1994 to 5.95% by December 31, 1995. The bond rally
also supported an impressive stock rally led by technology and blue chip stocks.
While the Pacific Advisors Income Fund ("Fund") participated in the rally,
the investment strategy was less aggressive, to protect capital in the event
there was a sudden increase in inflation. The Fund had a total return of 11.98%,
for the period January 1, 1995 to December 31, 1995. The investment results are
based on shares purchased at the 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. The Fund made distributions of $0.34 for the year.
The investment strategy of the Fund seeks to invest in securities that will
provide a good return with a minimum of risk to capital. We believe this
strategy works well in most markets but may cause the Fund's performance to lag
in the later stages of a bull market. A rapid drop in long-term interest rates
was the primary reason for the bond and stock market rallies. While the economy
was slowing and inflation remained under control, we did not believe these
fundamentals had changed so significantly to support the rapid decline in
long-term interest rates nor the large increase in the stock market. For these
reasons, we were more selective in our investments to protect capital in the
event of a sudden reversal in the market.
As interest rates decreased during the year, the Fund continued to buy
intermediate term bonds as the bond market rallied. The average maturity for
bonds in the Fund increased to 3.7 years by year end. This enabled the Fund to
profit from the bond rally but with the flexibility to buy shorter or longer
term bonds, as interest rate trends became more clear. Equity investments in the
Fund were 19.20% at December 31, 1995. In the later stages of this bull market,
we anticipate corrections in the market which will provide opportunities for the
Fund to increase its equity position.
Longer term, we expect interest rates to decline through the turn of the
century. In the short term, we anticipate some volatility that may see long-term
interest rates increase before resuming a downward trend towards 5.0% to 6.0%.
Given this scenario, we anticipate purchasing bonds that will increase
our average maturity to about five years. We will continue to purchase stocks
that provide growth in income and price appreciation potential. This investment
strategy should provide inflation protection and growth in income potential in a
declining interest rate environment.
1
<PAGE> 3
We continue to believe that the Fund's investment strategy will provide
good returns without significant volatility or market risk. This is consistent
with the Fund's objective, to provide current income and capital appreciation
while conserving capital. Please contact your financial adviser or Pacific
Advisors Fund Inc., if you have questions or would like more information on the
Fund.
Respectively submitted,
/s/ GEORGE A. HENNING /s/ ALAN E. ROSENFIELD
---------------------------- ---------------------------
George A. Henning Alan E. Rosenfield
Chairman Adviser
MMG Money
Management Group, Inc.
Change in Value of $10,000 Investment*
This chart shows the growth of a $10,000 investment made in Pacific Advisors
Income Fund on February 8, 1993 compared to the growth of the Lehman T-Bond
Index, Intermediate.
[GRAPH]
* 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.
2
<PAGE> 4
Schedule of Investments
December 31, 1995
<TABLE>
<CAPTION>
Shares/Par value Value
---------------- -----
U.S. GOVERNMENT OBLIGATIONS (56.69%)
<S> <C> <C>
U.S. TREASURY NOTES (53.69%)
U.S. Treasury Note 6.50% 9/30/96 $ 10,000 $ 10,091
U.S. Treasury Note 6.50% 4/30/97 100,000 101,688
U.S. Treasury Note 5.75% 9/30/97 75,000 75,680
U.S. Treasury Note 6.50% 8/15/97 15,000 15,300
U.S. Treasury Note 7.75% 11/30/99 115,000 124,595
U.S. Treasury Note 7.125% 2/29/00 45,000 47,925
U.S. Treasury Note 5.75% 10/31/00 100,000 101,531
U.S. Treasury Note 7.875% 11/15/04 85,000 98,441
U.S. Treasury Note 6.50% 8/15/05 30,000 31,959
--------
607,210
--------
TOTAL U.S. GOVERNMENT OBLIGATIONS $607,210
--------
CORPORATE BONDS (13.00%)
AUTOMOBILES AND TRUCKS (4.75%)
Ford Motor 9.07% 7/5/96 $ 50,000 $ 50,886
--------
BANK (6.72%)
Nations Bank 5.125% 9/15/98 45,000 44,445
International Bank Reconstruction
& Development 8.64% 6/18/01 25,000 27,500
--------
71,945
--------
FINANCIAL (1.53%)
Salomon Mtn 9/30/2003
Floating Rate 20,000 16,400
--------
TOTAL CORPORATE BONDS $139,231
--------
</TABLE>
3
<PAGE> 5
<TABLE>
<CAPTION>
Shares/Par Value Value
---------------- -----
<S> <C> <C>
PREFERRED STOCK (4.77%)
Insurance (2.51%)
UNUM Corp. 8.80% Series A 1,000 $ 26,875
--------
Telephone (2.26%)
GTE 8.75% Series B 900 24,187
--------
TOTAL PREFERRED STOCK $ 51,062
--------
COMMON STOCK (14.43%)
HEALTH CARE (4.53%)
Mid Atlantic Medical Services* 2,000 $ 48,500
--------
HEALTH INSURANCE (2.07%)
Oxford Health Plans* 300 22,163
--------
INSURANCE PROPERTY AND CASUALTY (1.89%)
Gainsco Inc. 1,785 20,304
--------
INVESTMENT TRUSTS (4.04%)
Crescent Real Estate Eq 500 17,062
Blackrock Target Term Trust 3,000 26,250
--------
43,312
--------
REAL ESTATE INVESTMENT TRUSTS (REITs) (0.88%)
Bradley Real Estate Inc. 700 9,450
--------
Technology (1.02%)
Microchip Technology* 300 10,950
--------
TOTAL COMMON STOCK $154,679
--------
</TABLE>
- - ---------------------------------
* Non income producing.
4
<PAGE> 6
<TABLE>
<CAPTION>
Shares/Par Value Value
---------------- -----
<S> <C> <C>
TOTAL INVESTMENT SECURITIES (88.90%) $ 952,182
------------
SHORT-TERM INVESTMENTS (8.56%)
United Missouri Bank Money Market Fund 91,651
------------
OTHER ASSETS LESS LIABILITIES (2.55%) 27,320
------------
TOTAL NET ASSETS $ 1,071,153
============
</TABLE>
5
<PAGE> 7
Statement of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investment securities at market value (cost: $900,286) $ 952,182
Short-term investments, at cost, which is equivalent to market 91,651
Other assets 16,375
Accrued income receivable 10,648
Receivable for capital shares sold 327
Organizational expenses, net of amortization (Note 1) 23,984
----------
Total assets 1,095,167
----------
LIABILITIES:
Payable to Investment Adviser (Note 1) 23,984
Payable for capital shares redeemed 30
----------
Total liabilities 24,014
----------
NET ASSETS:
(Equivalent to $9.67 per share on 110,752 shares of Capital Stock
outstanding - 100 million shares authorized) $1,071,153
==========
SUMMARY OF SHAREHOLDER'S EQUITY
Paid-in capital $1,018,977
Undistributed net investment income 236
Undistributed capital gains 44
Unrealized appreciation of investments 51,896
----------
Net assets at December 31, 1995 $1,071,153
==========
</TABLE>
See Accompanying Notes to Financial Statements.
6
<PAGE> 8
Statement of Operations
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 6,967
Interest 42,815
-----------
Total Income 49,782
-----------
EXPENSES:
Transfer Agent Expense 16,753
Fund Accounting Fees 16,466
Amortization Expense 11,124
Investment Advisory Fees 6,344
Custody Fees 5,904
Registration Fees 4,040
Legal Expense 2,310
Distribution Fees (Note 3) 1,758
Audit Fees 1,711
Printing 1,201
Other Expense 936
Director Fees/Meetings 748
-----------
Total Expenses, before reimbursements 69,295
Less Fees Waived and Expenses Reimbursed (Note 3) (53,649)
-----------
Net Expenses 15,646
-----------
NET INVESTMENT INCOME: $ 34,136
-----------
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) $ 1,744,270
Cost of investment securities sold 1,736,123
-----------
Net realized gain on investments 8,147
Net unrealized appreciation (depreciation) of investments:
Beginning of year $ (3,731)
End of year 51,896
-----------
Net unrealized appreciation of investments 55,627
-----------
Net realized and unrealized gain on investments 63,774
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS: $ 97,910
===========
</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
------------------ ------------------
INCREASE IN NET ASSETS:
FROM OPERATIONS:
<S> <C> <C>
Net investment income $ 34,136 $ 11,183
Net realized gain (loss) on investments 8,147 (5,087)
Net unrealized appreciation (depreciation) of investments 55,627 (4,279)
------------------------------
Increase in net assets resulting from operations 97,910 1,817
------------------------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (34,111) (10,974)
Net capital gains (3,016) --
------------------------------
Decrease in net assets resulting from distributions (37,127) (10,974)
------------------------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds of shares sold (38,504 and 67,031 shares) 360,667 611,351
Proceeds from shares sold upon reinvestment
of dividends (3,066 and 1,084 shares) 28,918 9,804
Cost of shares repurchased (1,210 and 12,655 shares) (11,404) (115,021)
------------------------------
Increase in net assets derived from capital
share transactions 378,181 506,134
------------------------------
Increase in net assets 438,964 496,977
NET ASSETS:
BEGINNING OF YEAR
(includes undistributed
net investment income of $211 and $2) 632,189 135,212
------------------------------
END OF YEAR
(includes undistributed
net investment income of $236 and $211) $ 1,071,153 $ 632,189
==============================
</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 Income Fund seeks to provide current income and secondarily,
long-term capital appreciation.
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 Income 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 Income 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.
9
<PAGE> 11
NOTE 3. INVESTMENT MANAGEMENT, DISTRIBUTOR AND OTHER RELATED PARTY
TRANSACTIONS
The Company and Income Fund have entered into an investment
management agreement ("Management Agreement") with Pacific Global Investment
Management Company (the "Manager") and sub-advisory agreement ("Sub-Advisory
Agreements") with MMG Money Management Group, Inc. (the "Adviser"). The
Management Agreement provides for investment management fees, payable monthly,
and calculated at the maximum annual rate of 0.75% for the Income Fund. The
Sub-Advisory Agreement provides for a sub-advisory fee, payable monthly, and
calculated at the maximum annual rate of 0.40% for Income 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 Income 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 sub-advisory fees, respectively,
and/or absorb certain expenses for the Income 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 the Income Fund; $6,344 of management and sub-advisory
fees were waived and $47,305 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
$1,966 of commissions on sales of capital stock of the Income Fund, after
deducting $372 allowed to authorized distributors as commissions.
The Fund has adopted a plan of distribution, whereby the Income
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, $1,758 was accrued or paid.
NOTE 4. PURCHASE AND SALES OF SECURITIES
For the year ended December 31, 1995, the Income Fund had
purchases of securities, other than short-term investments of $2,060,640. 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 $ 8.98 $ 9.06 $ 9.00
------------------------------ ----------------
Income from Investment Operations:
Investment Income 0.45 0.28 0.15
Expenses (0.14) (0.12) (0.09)
------------------------------ ----------------
Net Investment Income 0.31 0.16 0.06
Net realized and unrealized gain (loss) on securities 0.72 (0.07) 0.04
------------------------------ ----------------
Total from Investment Operations 1.03 0.09 0.10
Less Distributions:
Distributions from net investment income (0.31) (0.17) (0.04)
Dividends from net capital gains (0.03) 0.00 0.00
Net Asset Value, End of Period $ 9.67 $ 8.98 $ 9.06
============================== ================
TOTAL INVESTMENT RETURN 11.98% 0.99% 1.21%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $ 1,071 $ 632 $ 135
Ratio of Expenses to Average Net Assets(1) 1.86% 1.75% 1.68%(2)
Ratio of Net Investment Income to Average Net Assets 4.06% 2.17% 0.79%(2)
Portfolio Turnover Ratio 33.40% 37.12% 0.00%(2)
</TABLE>
- - ------------------
1. Without the voluntary fee waivers and reimbursement of expenses, the ratio
of expenses to average daily net assets for the Income Fund would have been
8.25%, 12.73% and 70.32%, 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.
Income Fund
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Pacific Advisors Fund Inc. Income
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. Income 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 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, 1995
12
<PAGE> 14
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
ADVISER:
MMG Money Management, Inc.
2700 North Central Avenue, Suite 310
Phoenix, Arizona 85004
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.
