<PAGE> 1
PACIFIC GLOBAL FUND DISTRIBUTORS, INC. BULK RATE
[LOGO] 206 NORTH JACKSON STREET, SUITE 201 U. S. POSTAGE
GLENDALE, CALIFORNIA 91206 PAID
GLENDALE, CA
PERMIT NO. 1090
ANNUAL REPORT | DECEMBER 31, 1996
[Pacific Advisors Fund Inc. LOGO]
GOVERNMENT
SECURITIES
FUND
<PAGE> 2
Dear Fellow Shareholders
While the equity markets enjoyed a bull market in 1996, the bond market was a
disappointment. In the first six months of 1996, interest rates increased from
near 6.0% to over 7.0%, because of inflation concerns from a stronger than
expected economy. As the economy slowed in the second half of the year interest
rates declined to a range between 6.50-6.75%. For the year of 1996, the price
for long-term bonds declined -7.65%.
For the twelve months ending December 31, 1996, the Pacific Advisors
Government Securities Fund experienced a total return of -3.15%. 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
December 31, 1996, with all dividends and capital gains reinvested and after
expense reimbursements. The Lehman Intermediate and Long-term Treasury-Bond
indexes which are unmanaged indices of total returns for government bonds, were
3.97% and -0.78% 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. As the interest rate outlook improved during the fall, the Fund
increased its long-term investments to approximately 54% of the Fund's assets by
year end.
We believe it is prudent to remain somewhat defensive as interest rates may
temporarily increase from inflation concerns and competition from other global
markets for capital. The stronger than expected U.S. economy is creating
concerns that job inflation could become a problem and force interest rates
higher. While the global markets should prevent job inflation from becoming a
serious problem, the Federal Reserve may choose to increase short term rates to
control the risk of inflation. Additionally, as foreign markets increase
interest rates to attract capital for their economies, U.S. interest rates may
be forced higher.
Long-term interest rates should peak when the U.S. economy begins to show
signs of weakening and prospects for a economic recession increase. When
appropriate, we will continue 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
1
<PAGE> 3
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 exceptional returns for investors after a
difficult 1994, when bond prices declined. We believe that the next few years
should be quite rewarding because of strong deflationary forces worldwide.
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
- -----------------------------
George A. Henning
Chairman
/s/ R. Kelly Kelly
- -----------------------------
R. Kelly Kelly
Adviser
Spectrum Asset Management, Inc.
CHANGE IN VALUE OF $10,000 INVESTMENT*
This chart shows the growth of a $10,000 investment made in Pacific Advisors
Government Securities Fund on February 8, 1993 compared to the growth of the
Lehman T-Bond Index, Intermediate.
PACIFIC ADVISORS
GOVERNMENT
SECURITIES FUND
<TABLE>
<CAPTION>
Govt. Lehman
Year Securities T-Bond (Int.)
------ ---------- -------------
<C> <S> <C> <C>
Average Annual Dec-92 10,000 10,000
Total Return Dec-93 10,036 10,826
for period ending Dec-94 10,021 10,604
December 31, 1996 Dec-95 12,057 12,140
Dec-96 21,677 12,622
One Year
(3.15%)
Inception
(2/8/93)
4.14%
</TABLE>
* Reflects the deduction of the 4.75% maximum sales charge and assumes all
distributions were reinvested at net asset value and after expense
limitations. 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, 1996
<TABLE>
<CAPTION>
Shares/Par Value Value
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (75.80%)
U.S. Treasury Bonds (33.89%)
U.S. Treasury Bond 8.125% 02/15/98 $ 420,000 $ 429,581
U.S. Treasury Bond 7.875% 08/15/01 400,000 426,375
U.S. Treasury Bond 9.375% 02/15/06 350,000 421,094
U.S. Treasury Bond 8.125% 08/15/19 350,000 404,469
U.S. Treasury Bond 8.125% 08/15/21 350,000 406,218
U.S. Treasury Bond 7.250% 08/15/22 300,000 317,343
----------- ----------
2,405,080
----------- ----------
U.S. Treasury Bills (41.91%)
U.S. Treasury Bill 03/06/97 $ 3,000,000 2,973,903
----------- ----------
TOTAL U.S. GOVERNMENT SECURITIES 5,378,983
==========
COMMON STOCK(18.34%)
Natural Gas(8.43%)
Coastal Corp. 3,000 146,625
Enron Corp. 7,000 301,875
Mapco Inc.* 4,400 149,600
----------- ----------
598,100
----------- ----------
Utility - Electric (1.92%)
DQE, Inc. 4,700 136,300
----------- ----------
Utility - Gas & Electric(3.93%)
Illinova Corp. 5,100 140,250
Nipsco Industries Inc. 3,500 138,688
----------- ----------
278,938
----------- ----------
Utility - Telecommunications - Domestic(2.02%)
Lucent Technologies* 3,100 143,375
----------- ----------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
<PAGE> 5
COMMON STOCK CONTINUED
<TABLE>
Shares/Par Value Value
<S> <C> <C>
Utility - Telecommunications - International(2.04%)
Vodafone Group PLC - ADR 3,500 $ 144,812
----------- ----------
TOTAL COMMON STOCKS 1,301,525
TOTAL INVESTMENT SECURITIES (94.14%) $6,680,508
SHORT-TERM INVESTMENTS (3.66%)
United Missouri Bank Money Market Fund 260,063
OTHER ASSETS LESS LIABILITIES (2.20%) 155,756
----------
TOTAL NET ASSETS (100%) $7,096,327
==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 6
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C>
ASSETS
Investment securities at market value (cost: $6,599,869) $6,680,508
Short-term investments, at cost, which is equivalent to market 260,063
Receivable from Investment Manager (Note 3) 61,620
Other assets 24,928
Accrued income receivable 69,333
Receivable for capital shares sold 942
Organizational expenses, net of amortization (Note 1) 12,873
----------
Total assets 7,110,267
----------
LIABILITIES
Payable to Investment Manager (Note 1) 12,873
Accrued expenses 1,067
----------
Total liabilities 13,940
----------
NET ASSETS
(Equivalent to $9.30 per share on 762,959 shares of
Capital Stock outstanding - 100 million shares authorized) $7,096,327
==========
SUMMARY OF SHAREHOLDERS' EQUITY
Paid-in capital $7,012,649
Undistributed net investment income 1,814
Undistributed capital gains 1,225
Unrealized appreciation of investments 80,639
----------
Net assets at December 31, 1996 $7,096,327
==========
Maximum offering price per share ($9.30/95.25%): $ 9.76
----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
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STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 26,986
Interest 302,518
------------
Total Income 329,504
------------
EXPENSES
Investment Advisory Fees 45,364
Fund Accounting Fees 36,348
Transfer Agent Expense 27,902
Legal Expense 20,441
Amortization Expense 11,230
Registration Fees 8,914
Printing 11,537
Audit Fees 4,474
Custody Fees 6,543
Director Fees/Meetings 5,027
Distribution Fees (Note 3) 7,025
Other Expense 5,286
------------
Total Expenses, before reimbursements 190,091
Less Fees Waived and Expenses Reimbursed (Note 3) (83,118)
------------
Net Expenses 106,973
------------
NET INVESTMENT INCOME $ 222,531
============
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) $ 32,223,996
Cost of investment securities sold 32,061,704
------------
Net realized gain on investments 162,292
Net unrealized appreciation (depreciation) of investments
Beginning of year $ 627,552
End of year 80,639
Net unrealized depreciation of investments
(546,913)
------------
Net realized and unrealized loss on investments (384,621)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (162,090)
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 8
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the year ended For the year ended
December 31, 1996 December 31, 1995
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net investment income $ 222,531 $ 178,241
Net realized gain on investments 162,292 148,343
Net unrealized appreciation (depreciation) of investments (546,913) 614,059
----------- -----------
Increase (decrease) in net assets resulting from operations (162,090) 940,643
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income (221,637) (177,183)
Net capital gains (161,531) (110,450)
----------- -----------
Decrease in net assets resulting from distributions (383,168) (287,633)
----------- -----------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold (346,901 and 244,351 shares) 3,319,414 2,303,559
Proceeds from shares purchased by reinvestment
of dividends (37,037 and 26,534 shares) 349,877 260,916
Cost of shares repurchased (195,381 and 57,650 shares) (1,864,681) (566,171)
----------- -----------
Increase in net assets derived from capital share transactions 1,804,610 1,998,304
----------- -----------
Increase in net assets 1,259,352 2,651,314
NET ASSETS
BEGINNING OF YEAR
(includes undistributed net investment income of $920 and $0) 5,836,975 3,185,661
----------- -----------
END OF YEAR
(includes undistributed net investment income of $1,814 and $920) $ 7,096,327 $ 5,836,975
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 9
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
"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 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. 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 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 Funds.
F. USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management 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.
8
<PAGE> 10
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 the Investment Manager. The
Management Agreement provides for investment management fees, payable monthly,
and calculated at the maximum annual rate of 0.65% of average net assets for the
Government Securities Fund. The Investment Manager has entered into a
sub-advisory agreement ("Sub-Advisory Agreements") with Spectrum Asset
Management, Inc. The Investment 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 Investment 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 Investment
Manager and the Adviser may voluntarily waive their management and advisory
fees, respectively, and/or absorb certain expenses for the Government Securities
Fund. In October 1996, the National Securities Market Improvement Act eliminated
state expense limitations for mutual funds. Accordingly, the Investment Manager
will determine in the future the level and extent of expense limitations, fee
waivers, and reimbursements at its discretion.
Pursuant to the Expense Limitation Agreements, the voluntary waiver of
fees and the assumption of expenses by the Investment Manager and the Adviser,
the following amounts were waived or reimbursed for the year ended December 31,
1996 for Government Securities Fund, $25,794 of management and sub-advisory fees
were waived and $57,324 was reimbursed by the Investment Manager.
Fund Operating Expenses may not fall below the expense limitation level
established for subsequent years until the Investment Manager has fully recouped
fees forgone and expenses paid or assumed under the Expense Limitation
Agreement, 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
December 31, 1996, the cumulative amounts unrecouped by the Investment Manager
since commencement of operations is $262,902.
For the year ended December 31, 1996, Pacific Global Fund Distributors,
Inc. ("PGFD"), the principal underwriter for the Company, received $5,592 of
commissions on sales of capital stock of the Government Securities Fund, after
deducting $27,287 allowed to authorized distributors as commissions. PGFD is a
wholly-owned subsidiary of the Investment Manager.
The Company and Government Securities Fund have entered into an agreement
with Pacific Global Investor Services, Inc., ("PGIS") to provide fund accounting
services at the monthly fee of 3 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 the monthly fee based on the number
of accounts or a minimum of $1,250. PGIS is a wholly-owned subsidiary of the
Investment Manager.
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 year ended
December 31, 1996, $7,025 was accrued or paid.
NOTE 4. PURCHASE AND SALES OF SECURITIES
For the year ended December 31, 1996, the Government Securities Fund had
purchases of securities, other than short-term investments of $33,567,382. 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 $122,608 and $41,969, respectively. Net
unrealized appreciation for tax purposes is $80,639.
9
<PAGE> 11
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the Period
For the Year Ended December 31 February 8, 1993(3)
1996 1995 1994 to December 31, 1993
---- ---- ---- --------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Year $ 10.16 $ 8.82 $ 9.00 $ 9.00
-------- -------- -------- --------
Income from Investment Operations:
Investment Income 0.43 0.45 0.22 0.11
Expenses (0.10) (0.14) (0.09) (0.04)
-------- -------- -------- --------
Net Investment Income 0.33 0.31 0.13 0.07
Net realized and unrealized gain (loss) on securities (0.65) 1.53 (0.14) (0.04)
-------- -------- -------- --------
Total from Investment Operations (0.32) 1.84 (0.01) 0.03
-------- -------- -------- --------
Less Distributions
Distributions from net investment income (0.32) (0.31) (0.17) (0.03)
Distributions from net capital gains (0.22) (0.19) 0.00 0.00
Net Asset Value, End of Year $ 9.30 $ 10.16 $ 8.82 $ 9.00
======== ======== ======== ========
TOTAL INVESTMENT RETURN(4) (3.15%) 20.32% (0.15%) 0.36%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000) $ 7,096 $ 5,837 $ 3,185 $ 1,179
Ratio of Expenses to Average Net Assets(1) 1.66% 1.65% 1.60% 1.38%(2)
Ratio of Net Investment Income
to Average Net Assets(1) 3.46% 3.75% 2.09% 1.12%(2)
Portfolio Turnover Ratio 50.49% 57.85% 81.59% 129.16%(2)
Average Commission Per Share
Paid on Equity Transactions $ 0.0770 $ 0.0884 -- --
</TABLE>
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 2.95%, 2.80%, 4.86% and 15.46%, for the years 1996 through
1993 respectively, and the ratio of net investment income (loss) to average
net assets would have been (2.17%), (2.60%), (1.17%), and (12.95%), for the
years 1996 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
10
<PAGE> 12
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS
PACIFIC ADVISORS FUND INC.
GOVERNMENT SECURITIES FUND
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Pacific Advisors Fund Inc. Government
Securities Fund as of December 31, 1996, the related statement of operations for
the year then ended, the statements 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, 1996, 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, 1996 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. Government Securities Fund as of December 31, 1996,
the results of its operations for the year then ended, 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, 1996, 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, 1997
11
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12
<PAGE> 14
THIS PAGE INTENTIONALLY LEFT BLANK
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 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
(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.
