<PAGE> 1
DEAR FELLOW SHAREHOLDERS
June 30, 1997
The financial markets continued to be volatile in the first half of the year.
Bond yields remained within the 6.5% to 7.0% interest rate range they have been
in for the past year. Inflation has been the primary force in moving rates up or
down the yield curve. Concerns that the strong economy might increase inflation
kept rates from declining below 6.5%. On the other side, most of the economic
reports seem to indicate that inflation is not an immediate concern which kept
rates from rising above 7.0%.
Equity markets continued to advance until mid-February, when a 14%
correction began which lasted through the end of April. By early May, the equity
markets had regained their bull market momentum. There was evidence however,
that investors were concerned that many larger cap stocks were over valued and
could not maintain their double digit growth rates. Towards the end of the
second quarter, there were indications that some companies were not going to
meet their earnings targets and a shift began from larger cap to mid and smaller
cap stocks.
Pacific Advisors Income Fund ("Fund") had a total return of 3.88%, for the
six months ending June 30, 1997. The investment results are based on shares
purchased at the offering price, after deducting the Fund's current maximum
sales charge, on January 1, 1997 and held through June 30, 1997, with all
dividends and capital gains reinvested and after expense reimbursements. The
Merrill Lynch Intermediate and Long-term Corporate-Bond indexes, which are
unmanaged indices of total returns for corporate bonds, were 3.26% and 3.19%
respectively, for this same period.
Inflation will remain a concern for investors if the economy continues to
grow and unemployment rates stay at a historically low level. However, it does
not appear that inflation will become a major problem in the near term. During
the first two quarters, the economy grew more quickly due in part to inventory
buildup. As inventories have been replenished the economy appears to be slowing.
Global competition, restraint in government spending and productivity gains will
also contribute to lower inflation.
Under this scenario, the Fund began to purchase intermediate term (i.e.,
3-10 years) high quality and high coupon bonds. Most of the bonds purchased are
in the financial services sector. They include Citicorp, Bank of America,
Barnett Bank, Nations Bank and GMAC. The average maturity of the portfolio
increased from 2.4 years at the beginning of 1997, to 5.0 years by June 30.
At the end of June, fixed-income securities were 75% of the Fund's assets.
Corporate bonds represented 48% of the portfolio with 22% of the Fund's assets
in U.S. Treasury Notes. The remaining fixed-income securities were short term
investments.
Strong economic growth has been a primary catalyst for the bull market in
equities over the past three years. While the economy may slow to a more modest
growth rate the outlook for the equity market remains good. The Fund increased
the equity portion of the portfolio from 18% to 25% of the Fund's assets during
1997. Stocks added to the Fund include such household names as Travelers,
General Electric, Mobil, Gap and Microsoft. Over the next several months we
would expect the equity portion of the Fund to remain near its current level.
However, we anticipate adding high quality mid cap stocks that
1
<PAGE> 2
may have a greater potential for appreciation than many large cap stocks that
may be more fully valued.
We continue to believe that the long term outlook for bonds remains
favorable and 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.
In March 1997, Pacific Global Investment Management Company and the Board of
Directors of Pacific Advisors Fund recommended a Co-management Agreement for
your approval. This agreement was approved by shareholders of the Fund in April.
Pacific Global Investment Management Company and Hamilton & Bache, Inc. are now
co-managing the Fund.
The name of the Fund is also being changed to Income & Equity effective
sometime in August or September. The name change more accurately reflects the
investment strategies of the Fund with its blend of fixed-income and equity
investments. There has been no change in the investment objectives and
guidelines for the Fund.
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
------------------------
George A. Henning
Chairman
/s/THOMAS H. HANSON
------------------------
Thomas H. Hanson
Executive Vice President
2
<PAGE> 3
SCHEDULE OF INVESTMENTS
June 30, 1997
(Unaudited)
Par Value/Shares Value
<TABLE>
<CAPTION>
<S> <C> <C>
CORPORATE BONDS (46.26%)
Banks, Money Center (5.40%)
Citicorp Sub Sec 9.5% 2/01/02 50,000 $ 55,004
Union Bank of Switzerland 7.25% 7/15/06 25,000 25,255
------ --------
80,259
------ --------
Banks - Regional (13.39%)
Bank of America Subnotes 10% 2/01/03 45,000 51,140
Bank of New York 8.5% 12/15/04 25,000 27,028
Barnett Bank, Inc. 9.875% 6/01/01 50,000 55,131
Merchants National 9.875% 10/01/99 20,000 21,278
Nations Bank 5.125% 9/15/98 45,000 44,449
------ --------
199,026
------ --------
Electric (6.35%)
Public Service Electricity and
Gas 8.875% 06/01/03 50,000 54,689
PSI Energy, Inc. 6.35% 11/15/06 40,000 39,604
------ --------
94,293
------ --------
Financial Services Diversified (3.65%)
GMAC 9.625% 12/15/01 49,000 54,218
------ --------
Food Retailers (4.78%)
Safeway, Inc. 9.875% 3/15/07 60,000 71,012
------ --------
Insurance - Full Line (7.39%)
American General Financial 8.125% 8/15/09 56,000 59,204
Cigna Corporation 7.40% 5/15/07 25,000 25,168
Cigna Corporation 7.40% 1/15/03 25,000 25,406
------ --------
109,778
------ --------
Office Equipment (1.70%)
Xerox Corporation 7.15% 8/01/04 25,000 25,292
------ --------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
<PAGE> 4
Par Value/Shares Value
<TABLE>
<S> <C> <C>
Pipeline (1.79%)
Union TX Petroleum 8.375% 3/15/05 25,000 $ 26,612
------- --------
US Government Agency (1.81%)
International BK Recon and Dev 8.64% 6/18/01 25,000 26,869
------- --------
TOTAL CORPORATE BONDS (COST: $686,562) 687,359
========
US GOVERNMENT SECURITIES (21.65%)
US Treasury Note (21.65%)
US T - Note 6% 9/30/98 50,000 50,047
US T - Note 6.5% 8/15/97 15,000 15,019
US T - Note 7.125% 2/29/00 45,000 45,984
US T - Note 7.75% 11/30/99 115,000 118,989
US T - Note 7.875% 11/15/04 85,000 91,694
------- --------
321,733
--------
Total US Government Securities (Cost: $310,677) 321,733
========
COMMON STOCK (22.53%)
Cosmetic / Personal Care (1.91%)
Gillette Company 300 28,425
------- --------
Diversified Companies (2.20%)
General Electric Company 500 32,687
------- --------
Financial Services Diversified (2.12%)
Travelers Group, Inc. 500 31,531
------- --------
Financial Services - Specialty (1.47%)
Federal National Mortgage 500 21,813
------- --------
Health Care Provider (1.93%)
Oxford Health Plans* 400 28,700
------- --------
Industrial and Commercial Services (1.17%)
Viad Corporation 900 17,325
------- --------
Investment Companies (0.98%)
Alliance Capital Management L.P. 500 14,625
------- --------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 5
Par Value/Shares Value
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Trusts (1.83%)
Blackrock Target Term 3,000 $ 27,188
------- -----------
Oil - Integrated Majors (1.88%)
Mobil Corporation 400 27,950
------- -----------
Pharmaceuticals (0.97%)
Schering-Plough Corp. 300 14,363
------- -----------
Real Estate Investment Trusts (1.78%)
Bradley Real Estate, Inc. 700 13,475
Franchise Finance Corp of America 500 13,031
------- -----------
26,506
-----------
Retailers Specialty (1.31%)
Gap, Inc. 500 19,437
------- -----------
Software and Processing (2.98%)
Microsoft * 350 44,231
------- -----------
TOTAL COMMON STOCK (Cost: $274,509) 334,781
-----------
PREFERRED STOCK (1.94%)
Insurance - Full Line (0.87%)
Unum Corporation 8.80% PFD A 500 12,969
------- -----------
Telephone Systems (1.07%)
GTE 8.75% PFD B 600 15,900
------- -----------
Total Preferred Stock (Cost: $28,990) 28,869
-----------
TOTAL INVESTMENT SECURITIES (92.38%) $ 1,372,742
SHORT-TERM INVESTMENTS (4.08%)
United Missouri Bank Money Market Fund 60,569
OTHER ASSETS LESS LIABILITIES (3.54%) 52,586
-----------
TOTAL NET ASSETS (100%) $ 1,485,897
===========
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment securities at market value (cost: $1,300,738) $ 1,372,742
Short-term investments, at cost, which is equivalent to market 60,569
Receivable from Investment Manager (Note 3) 27,610
Other Assets 7,030
Accrued income receivable 17,946
Organizational expenses, net of amortization (Note 1) 7,377
----------
Total assets 1,493,274
----------
LIABILITIES
Payable to Investment Manager (Note 1) 7,377
----------
NET ASSETS
(Equivalent to $9.62 per share on 154,512 shares of
Capital Stock outstanding - 100 million shares authorized) $ 1,485,897
==========
SUMMARY OF SHAREHOLDERS' EQUITY
Paid-in-capital $ 1,432,389
Accumulated net capital losses (18,884)
Undistributed net investment income 388
Unrealized appreciation of assets 72,004
----------
Net assets at June 30, 1997 $ 1,485,897
==========
Maximum offering price per share ($9.62/95.25%): $ 10.10
----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
STATEMENT OF OPERATIONS
For the Period January 1, 1997 to June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 4,161
Interest 31,522
--------
Total Income 35,683
--------
EXPENSES
Investment Advisory Fees 5,243
Fund Accounting Fees 8,512
Transfer Agent Expense 9,427
Legal Expense 724
Amortization Expense 5,511
Registration Fees 4,388
Printing 2,564
Audit Fees 841
Custody Fees 2,012
Director Fees/Meetings 341
Distribution Fees (Note 3) 738
Other Expense 3,190
--------
Total Expenses, before reimbursements 43,491
Less Fees Waived and Expenses Reimbursed (Note 3) 31,368
--------
Net Expenses 12,123
--------
NET INVESTMENT INCOME $23,560
=======
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments
Proceeds from sales of investment securities
(excluding short-term investments with
maturities of 60 days or less) $418,882
Cost of investment securities sold 437,803
--------
Net realized loss on investments (18,921)
Net unrealized appreciation of investments
Beginning of period $23,450
End of period 72,004
--------
Net unrealized appreciation of investments 48,554
-------
29,633
=======
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $53,193
=======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
<TABLE>
<CAPTION>
For the period
January 1, 1997 For the year ended
to June 30, 1997 December 31, 1996
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net investment income $ 23,560 $ 40,875
Net realized gain (loss) on investments (18,921) 8,198
Net unrealized appreciation (depreciation) of investments 48,554 (28,446)
----------- -----------
Increase in net assets resulting from operations 53,193 20,627
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income (23,618) (40,665)
Net capital gains (0) (8,205)
----------- -----------
Decrease in net assets resulting from distributions (23,618) (48,870)
----------- -----------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold (34,218 and 27,474 shares) 323,395 259,030
Proceeds from shares purchased by reinvestment
of dividends (1,692 and 3,666 shares) 16,008 34,333
Cost of shares repurchased (10,002 and 13,288 shares) (94,231) (125,123)
----------- -----------
Increase in net assets derived from capital share
transactions (25,908 and 17,852 shares) 245,172 168,240
----------- -----------
Increase in net assets 274,747 139,997
NET ASSETS
BEGINNING OF PERIOD
(includes undistributed net investment income
of $446 and $236) 1,211,150 1,071,153
----------- -----------
END OF PERIOD
(includes undistributed net investment income
of $388 and $446) $ 1,485,897 $ 1,211,150
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 ("Investment
Manager"). 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. During 1997, the Investment Manager assumed the amortization
expense of $5,495 for organizational expenses.
F. USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
9
<PAGE> 10
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
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 the Investment Manager ("Investment
Manager"). The Management Agreement provides for investment management fees,
payable monthly, and calculated at the maximum annual rate of 0.75% of average
net assets for the Income Fund.
From time to time, the Investment Manager may voluntarily waive its
management fees, and/or absorb certain expenses for the Income Fund. Pursuant to
the voluntary waiver of fees and the assumption of expenses by the Investment
Manager, the following amounts were waived or reimbursed for the period from
January 1, 1997 to June 30, 1997 for the Income Fund, $4,915 of investment
management fees were waived and $26,453 was reimbursed by the Investment
Manager.
Fund operating expenses may not fall below the current expense level in
subsequent years until the Investment Manager has fully recouped fees forgone
and expenses paid or assumed, as the Fund will reimburse the Investment Manager
in subsequent years during which the Fund's total assets are greater than
$20,000,000. As of June 30, 1997, the cumulative amounts unrecouped by the
Investment Manager since the commencement of operations is $254,374.
For the period from January 1, 1997 to June 30, 1997, Pacific Global
Fund Distributors, Inc. ("PGFD"), the principal underwriter for the Company,
received $1,876 of commissions on sales of capital stock of the Income Fund,
after deducting $8,452 allowed to authorized distributors as commissions. For
the period from January 1, 1997 to June 30, 1997 PGFD earned $302 in introducing
brokerage fees related to securities transactions for the Income Fund. PGFD is a
wholly-owned subsidiary of the Investment Manager.
The Income Fund has entered into an agreement with Pacific Global
Investor Services, Inc. ("PGIS") to provide fund accounting services at the
monthly fee of three basis points for the first million in net assets or a
minimum of $1,250. In addition, an agreement to provide transfer agent services
has also been entered into at a monthly fee based on the number of accounts or a
minimum of $1,250. The Investment Manager has assumed all payments for these
services, including amounts payable at June 30, 1997. PGIS is a wholly-owned
subsidiary of the Investment Manager.
Certain officers of the Company are also officers of the Investment
Manager, PGFD and PGIS.
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 period from January 1, 1997 to June
30, 1997, $738 was accrued or paid.
NOTE 4. PURCHASE AND SALES OF SECURITIES
For the period from January 1, 1997 to June 30, 1997, the Income Fund
had purchases of securities, other than short-term investments of $837,871. The
cost of securities held is the same for Federal income tax and financial
reporting purposes.
Aggregate gross unrealized appreciation and aggregate gross unrealized
depreciation on securities were $75,775 and $3,771 respectively. Net unrealized
appreciation for tax purposes is $72,004.
10
<PAGE> 11
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
(Unaudited)
<TABLE>
<CAPTION>
For the Year Ended
For the period December 31, For the period
January 1, 1997 -------------------------- February 8, 1993(3)
to June 30, 1997 1996 1995 1994 to December 31, 1993
---------------- ---- ---- ---- --------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $9.42 $9.67 $8.98 $9.08 $9.00
----- ----- ----- ----- -----
Income from Investment Operations
Investment income 0.24 0.47 0.45 0.28 0.15
Expenses (0.08) (0.12) (0.14) (0.12) (0.09)
----- ----- ----- ----- -----
Net investment income 0.16 0.35 0.31 0.16 0.06
Net realized and unrealized gain
(loss) on securities 0.20 (0.19) 0.72 (0.07) 0.04
----- ----- ----- ----- -----
Total from investment operations 0.36 0.16 1.03 0.09 0.10
Less Distributions
From net investment income (0.16) (0.35) (0.31) (0.17) (0.04)
From net capital gains 0.00 (0.06) (0.03) 0.00 0.00
----- ----- ----- ----- -----
Net Asset Value, End of Year $9.62 $9.42 $9.67 $8.98 $9.06
===== ===== ===== ===== =====
TOTAL INVESTMENT RETURN(4) 3.88% 1.78% 11.98% 0.99% 1.21%
Ratios/Supplemental Data
Net Assets, End of Year $1,486 $1,211 $1,071 $632 $135
Ratio of Expenses to Average
Net Assets(1) 0.92% 1.85% 1.86% 1.75% 1.68%(2)
Ratio of Net Investment Income to
Average Net Assets(1) 1.79% 3.75% 4.06% 2.17% 0.79%(2)
Portfolio Turnover Rate 32.17% 28.23% 33.40% 37.12% 0.00%(2)
Average Commission Per Share
Paid on Equity Transactions $ 0.1503 $0.1347 $0.1472 -- --
</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 3.30%, 7.29%, 8.25%, 12.73%, and 70.32%, for the years 1997
through 1993 respectively, and the ratio of net investment income
(loss) to average net assets would have been (0.59%), (1.69%), (2.32%),
(8.80%), and (67.90%), for the years 1997 through 1993 respectively.
(2) Annualized.
(3) Commencement of Operations.
(4) The Fund's maximum sales charge is not included in the total
return computation.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
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, PH.D.
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
(800) 989-6693
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.
pg86.897
