<PAGE> 1
BULK RATE
U. S. POSTAGE
PAID
GLENDALE, CA
PERMIT NO. 1090
[LOGO]
Pacific Global Fund Distributors, Inc.
206 North Jackson Street, Suite 201
Glendale, California 91206
ANNUAL REPORT | DECEMBER 31, 1997
[LOGO]
PACIFIC
ADVISORS
FUND INC.
SMALL CAP
FUND
<PAGE> 2
DEAR FELLOW SHAREHOLDERS
December 31, 1997
In 1997, the bull market continued its strong performance but favored the larger
cap stocks in the Standard & Poor's 500 and NASDAQ markets. In contrast,
micro-cap stocks, which are considered to be stocks with a market capitalization
of under $250 million, did not perform as well as larger cap stocks. In the
early part of 1997, the stock market experienced a correction that resulted in a
14% decline in NASDAQ. This correction was caused by inflationary fears as a
result of strong economic growth in the US. By late April, the market had
reached its low and began to regain its bull market momentum.
When several Asian countries announced currency devaluations in mid-October,
the stock market began another correction. Investors became concerned that the
economic problems in Asia would negatively affect multi-national companies and
the US economy. As the Asian markets appeared to stabilize, investor fears
subsided and the stock market began a year-end rally but clearly favored large
cap stocks. Many small and micro cap stocks did not recover by year-end.
Investors seemed to believe that larger cap stocks were more diversified and
would be better positioned to manage through the Asian crisis.
PERFORMANCE
For the year ending December 31, 1997, the Pacific Advisors Small Cap Fund
("Fund") had a total return of 6.95%. The return reflects the deduction of the
Fund's current maximum sales charge, reinvestment of capital gains and after
expense reimbursements.
By comparison, the NASDAQ and Russell 2000 Indices, which are unmanaged
indices of smaller company common stocks, increased 21.64% and 20.52%
respectively, for the same period. These indices by formula are weighted towards
the larger stocks in the index. In contrast, the Fund is weighted towards
smaller stocks with an average market capitalization of about $75 million.
PORTFOLIO MANAGEMENT
We are disappointed that the Fund's performance did not keep pace with the
overall stock market. We believe the lag in the market is temporary and was the
result of investor bias towards large cap stocks as the Asian crisis emerged in
October.
As we have stated previously, our investment time horizon is three to five
years for stocks in the Fund. We have a buy and hold investment strategy
recognizing that it may take smaller stocks more time to become fully valued.
The performance of the Fund during the past three years and since inception in
1993 was 22.71% and 17.58%, respectively. The Fund's long-term investment
strategy generated a low portfolio turnover rate of 30.72% in 1997, which
resulted in a low capital gains distribution of $0.10 per share. The 1997
changes in the capital gains tax, which have a lower tax rate for longer holding
periods, is expected to make small cap stocks more attractive to investors. We
believe the Fund is well positioned to take advantage of this tax law change.
During market corrections we carefully review the individual performance of
each stock and make adjustments as appropriate. Since the Fund typically holds
30 to 40 stocks, we are able to visit many of the companies to review their
performance and growth projections for the year. Our ability to closely monitor
the performance of the Fund's equities gives us the confidence to selectively
buy more shares of stock in companies that have become more undervalued by
market corrections.
During the last six months of the year we added stocks that should continue
to perform well in a slowing, more domestic-oriented economy. In the summer we
began acquiring the stock of Cruise America and Modtech, Inc. Cruise America is
a leader in the RV leasing business. Their business has experienced exceptional
growth as older citizens and tourists from other countries rent RVs to visit
tourist destinations. With the aging demographics, we believe this market will
continue to grow. In the fall, Cruise America announced plans to merge into
Budget Rent A Car. The merger was completed in January 1998. Modtech, Inc. is a
manufacturer of portable classrooms. The demand
1
<PAGE> 3
for portable classrooms has grown rapidly as many states are mandating smaller
classes and schools must purchase temporary classrooms until they can plan and
build more permanent facilities. Both of these stocks have generated unrealized
gains of over 30%, since their purchase.
OUTLOOK
The economy has begun to show signs of slowing as indicated by the interest rate
decline from a peak of 7.2% in April to 5.9% by year-end. Most economic
forecasts do not expect the US economy to repeat the 3.7% growth rate achieved
in 1997. Economists do expect inflation to remain at 2% or lower. It is clear
that the economic problems in Asia will impact the global economy, since it
accounts for over 30% of the Global Domestic Product. Imports from Asia will be
cheaper which should help keep inflation low. However, the demand for goods and
services in Asia will diminish as their economies recover. The lower demand
should have the greatest impact on large multi-national companies and can be
expected to have a negative impact on earnings. Slower growth and lower earnings
will make it difficult for large multi-national companies to maintain the high
stock market valuations they have attained in recent years.
Under this scenario, as well as changes in the capital gains tax, we would
expect investors to shift their focus to undervalued mid and smaller cap stocks.
Many of these companies have limited exposure in Asia and may grow faster as
they continue to enter new and emerging markets that are too small for the
larger companies. The relatively low stock price for many of these companies
make them attractive and they should outperform larger cap stocks. While we
attempt to keep abreast of market trends, our primary focus continues to be on
individual companies and their potential for growth in value.
Respectfully submitted,
/s/ GEORGE A. HENNING
-----------------------------------------
George A. Henning
Chairman
/s/ Thomas H. Hanson
-----------------------------------------
Thomas H. Hanson
Executive Vice President
CHANGE IN VALUE OF $10,000 INVESTMENT*
This chart shows the growth of a $10,000 investment made in Pacific Advisors
Small Cap Fund on February 8, 1993 compared to the growth of the NASDAQ and
Russell 2000 Indices.
PACIFIC ADVISORS SMALL CAP FUND
Average Annual Compound Return*
for period ending December 31, 1997
One Year
- ----------
1.93%
Inception [GRAPH]
(2/8/93)
- ----------
16.16%
NASDAQ
Russell 2000
PAFI
* Performance figures represent the change in value of an investment over the
periods shown, and have been restated to include the maximum 5.75% initial
sales charge, assuming reinvestment of dividends and capital gains at net
asset value and after expense reimbursements.
The NASDAQ Stock Index is an unmanaged index of common stocks that is
widely recognized as an indicator of overall market performance for small
companies. The NASDAQ Index does not take capital gains into consideration
and unlike the Fund, does not reflect management fees or expenses.
The Russell 2000 Stock Index is an unmanaged, market weighted measure of
stock market performance. It contains stocks of the 2000 smallest publicly
traded companies. The Russell 2000 Index does not take capital gains into
consideration and unlike the Fund, does not reflect management fees or
expenses.
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, 1997
<TABLE>
<CAPTION>
Number of Shares Value
<S> <C> <C>
COMMON STOCK - 98.72%
Airlines - 1.81%
Mercury Air Group, Inc. 35,000 $ 201,250
- ------------------------------------------------------------------------------------------
Automobile Parts & Equipment - 3.82%
Cruise America Inc.* 45,000 424,688
- ------------------------------------------------------------------------------------------
Building Materials - 3.76%
Elcor Corporation 4,950 118,800
Q.E.P. Company, Inc.* 40,000 300,000
- ------------------------------------------------------------------------------------------
418,800
- ------------------------------------------------------------------------------------------
Chemicals - 2.16%
Ocean Bio - Chem, Inc.* 110,000 151,250
Polymer Research* 42,000 89,250
- ------------------------------------------------------------------------------------------
240,500
- ------------------------------------------------------------------------------------------
Computers and Related Equipment - 3.18%
PC Service Source, Inc.* 33,000 162,937
Compass Plastics & Tech., Inc.* 25,000 190,625
- ------------------------------------------------------------------------------------------
353,562
- ------------------------------------------------------------------------------------------
Cosmetic / Personal Care - 20.05%
American Safety Razor Corp.* 23,000 460,000
Chai Na Ta Corporation* 14,000 27,125
Herbalife International Class A 8,333 174,993
Herbalife International Class B* 16,667 358,341
Natural Alternatives Corp.* 60,000 637,500
Nature's Sunshine 22,000 572,000
- ------------------------------------------------------------------------------------------
2,229,959
- ------------------------------------------------------------------------------------------
Electrical Components and Equipment - 5.28%
Transact Technologies, Inc.* 32,000 356,000
Tridex Corporation* 47,500 231,563
- ------------------------------------------------------------------------------------------
587,563
- ------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
<PAGE> 5
<TABLE>
<CAPTION>
Number of Shares Value
COMMON STOCK CONTINUED
<S> <C> <C>
Factory Equipment - 2.10%
DSP Technology, Inc.* 24,000 $ 234,000
- ------------------------------------------------------------------------------------------
Food - 7.64%
Armanino Foods of Distinction* 88,000 $79,754
Green Mountain Coffee, Inc.* 30,000 210,000
Worthington Foods, Inc. 40,000 560,000
- ------------------------------------------------------------------------------------------
849,754
- ------------------------------------------------------------------------------------------
Health Care Provider - 5.42%
American Service Group* 40,000 602,500
- ------------------------------------------------------------------------------------------
Home Construction - 1.23%
Modtech, Inc.* 7,000 136,500
- ------------------------------------------------------------------------------------------
Industrial and Commercial Service - 6.29%
Healthcare Services Group* 40,000 505,000
Itex Corporation* 40,000 195,000
- ------------------------------------------------------------------------------------------
700,000
- ------------------------------------------------------------------------------------------
Insurance - Specialty - 16.70%
Automobile Protection Corp.* 100,000 668,750
Interstate National Dealer Services* 75,000 750,000
Warrantech Corp.* 45,000 438,750
- ------------------------------------------------------------------------------------------
1,857,500
- ------------------------------------------------------------------------------------------
Medical Equip, Devices, & Supplies - 2.16%
Biosource Intl., Inc.* 7,000 44,625
Meridian Medical Technologies, Inc.* 5,000 46,250
Wyant Corporation* 23,000 149,500
- ------------------------------------------------------------------------------------------
240,375
- ------------------------------------------------------------------------------------------
Office Equipment - 1.26%
Ergobilt, Inc.* 15,000 140,625
- ------------------------------------------------------------------------------------------
Railroads - 4.92%
Railamerica, Inc.* 85,000 547,187
- ------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 6
<TABLE>
<CAPTION>
Number of Shares Value
COMMON STOCK CONTINUED
<S> <C> <C>
Restaurants - 2.26%
Panchos Mexican Restaurants 130,000 $ 251,875
- ------------------------------------------------------------------------------------------
Semiconductor and Related - 7.16%
Cerprobe Corporation* 35,000 608,125
Chips and Technologies, Inc. 10,000 144,375
LTX Corp.* 10,000 44,375
- ------------------------------------------------------------------------------------------
796,875
- ------------------------------------------------------------------------------------------
Software and Processing - 1.52%
Vista Information Solutions* 45,000 168,750
- ------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost: $7,660,731) 10,982,263
-----------
TOTAL INVESTMENT SECURITIES - 98.72%
(Cost: $7,660,731) $10,982,263
-----------
SHORT-TERM INVESTMENTS - 1.27%
United Missouri Bank Money Market Fund 141,212
OTHER ASSETS LESS LIABILITIES - 0.01% 1,485
-----------
TOTAL NET ASSETS - 100% $11,124,960
==========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 7
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<S> <C>
ASSETS
Investment securities at market value (cost: $7,660,731) $10,982,263
Short-term investments, at cost, which is equivalent to market 141,212
Receivable from Investment Manager (Note 3) 33,182
Other Assets 45,479
Accrued income receivable 1,367
Receivable for capital shares sold 25,189
Organizational expenses, net of amortization (Note 1) 1,791
-----------
Total assets 11,230,483
-----------
LIABILITIES
Payable for investments purchased 83,623
Accounts payable 6,625
Accounts payable to related parties (Note 3) 13,484
Payable to Investment Manager (Note 1) 1,791
-----------
Total liabilities 105,523
-----------
NET ASSETS
(Equivalent to $17.51 per share on 635,339 shares of
Capital Stock outstanding - 100 million shares authorized) $11,124,960
===========
SUMMARY OF SHAREHOLDERS' EQUITY
Paid-in-capital $ 7,802,959
Accumulated undistributed net realized gains on security transactions 469
Net unrealized appreciation of investments 3,321,532
-----------
Net assets at December 31, 1997 $11,124,960
===========
Maximum offering price per share ($17.51/94.25%): $ 18.58
-----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 8
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 27,860
Interest 7,986
----------
Total Income 35,846
----------
EXPENSES
Investment Management Fees 80,003
Fund Accounting Fees 49,038
Transfer Agent Expense 48,309
Legal Expense 44,630
Amortization Expense 11,286
Registration Fees 15,753
Printing 19,639
Audit Fees 20,716
Custody Fees 7,483
Director Fees/Meetings 6,524
Distribution Fees (Note 3) 23,535
Other Expense 6,021
----------
Total Expenses, before reimbursements 332,937
Less Fees Waived and Expenses Reimbursed (Note 3) 17,036
----------
Net Expenses 315,901
----------
NET INVESTMENT LOSS $ (280,055)
============
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 65,239
Net unrealized appreciation of investments
Beginning of Year $2,405,289
End of Year 3,321,532
----------
Change in net unrealized appreciation of investments 916,243
-------
981,482
=======
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 701,427
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 9
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended December 31
<TABLE>
<CAPTION>
1997 1996
-------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net investment loss $ (280,055) $ (127,609)
Net realized gain on investments 65,239 240,687
Change in net unrealized appreciation of investments 916,243 2,004,355
-------------------------------
Increase in net assets resulting from operations 701,427 2,117,433
-------------------------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net capital gains (64,399) (242,210)
-------------------------------
Decrease in net assets resulting from distributions (64,399) (242,210)
-------------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold (211,910 and 188,810 shares) 3,511,363 2,836,753
Proceeds from shares purchased by reinvestment
of dividends (3,024 and 13,164 shares) 51,981 207,993
Cost of shares repurchased (98,652 and 44,925 shares) (1,624,170) (650,370)
-------------------------------
Increase in net assets derived from capital share
transactions (116,282 and 157,049 shares) 1,939,174 2,394,376
-------------------------------
Increase in net assets 2,576,202 4,269,599
NET ASSETS
Beginning of Year
(includes no undistributed net investment income) 8,548,758 4,279,159
-------------------------------
End of Year
(includes no undistributed net investment income) $11,124,960 $ 8,548,758
===============================
</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 ("Investment
Manager"). The Company currently offers four Funds: Small Cap Fund, Balanced
Fund, Income and Equity 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. 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 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. Income dividends and capital gains distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments of income and gain on various investment securities held by the
Funds, timing differences and differing characterization of distributions made
by the Funds. Permanent items have been reclassified within the paid-in capital
component of net assets.
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.
9
<PAGE> 11
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.
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 the 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
Small Cap Fund.
Pursuant to an Expense Limitation Agreement, with the Company, on behalf
of this Fund, the Investment Manager has agreed to reimburse the Small Cap Fund
$17,036 for expenses incurred for the year ended December 31, 1997. These
reimbursed expenses may be subject to future recoupments 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. Such recoupments, if any, are limited to a period of five years
from the date on which the first reimbursement is made to the Investment
Manager. As of December 31, 1997, the cumulative amounts unrecouped by the
Investment Manager since the commencement of operations is $217,445.
For the year ended December 31, 1997, Pacific Global Fund Distributors,
Inc. ("PGFD"), the principal underwriter for the Company, received $26,005 of
commissions on sales of capital stock of the Small Cap Fund, after deducting
$123,811 allowed to authorized distributors as commissions. For the year ended
December 31, 1997 PGFD earned $43,400 in introducing brokerage fees related to
securities transactions for the Small Cap Fund. PGFD is a wholly-owned
subsidiary of the Investment Manager.
The Company and the Small Cap 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 one hundred
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 rate of $18.00
per year per open account and $2.00 per year per closed account with a minimum
charge of $1,250 per month. PGIS is a wholly-owned subsidiary of the Investment
Manager.
Accounts payable to related parties consists of management fees payable
to the Investment Manager and fund accounting and transfer agent fees payable to
PGIS.
Certain officers of the Company are also officers of the Investment
Manager, PGFD and PGIS.
The Company 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 year ended December
31, 1997, service fees totaled $23,535.
NOTE 4. PURCHASE AND SALES OF SECURITIES
For the year ended December 31, 1997, the Small Cap Fund had aggregate
cost of purchases and proceeds from sales of securities, other than short-term
investments of $4,663,744 and $2,966,805 respectively. 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 $3,743,620 and $422,088 respectively. Net
unrealized appreciation for tax purposes is $3,321,532.
10
<PAGE> 12
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
for the period
For the year ended December 31 February 8, 1993(3)
1997 1996 1995 1994 to December 31, 1993
-------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $ 16.47 $ 11.82 $ 10.35 $ 11.47 $ 9.00
-------------------------------------------------- --------
Income from Investment Operations
Net investment expense (0.38) (0.21) (0.08) (0.04) (0.03)
Net realized and unrealized
gains (losses) on securities 1.52 5.35 1.89 (0.42) 2.50
-------------------------------------------------- --------
Total from investment operations 1.14 5.14 1.81 (0.46) 2.47
-------------------------------------------------- --------
Less Distributions
From net capital gains (0.10) (0.49) (0.34) (0.66) 0.00
-------------------------------------------------- --------
Net Asset Value, End of Year $ 17.51 $ 16.47 $ 11.82 $ 10.35 $ 11.47
================================================== ========
TOTAL INVESTMENT RETURN(4) 6.95% 43.70% 17.27% (3.97)% 29.94%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000's) $ 11,125 $ 8,549 $ 4,279 $ 3,169 $ 2,175
Ratio of Expenses to Average
Net Assets(1) 3.18% 2.91% 2.49% 2.45% 2.20%(2)
Ratio of Net Investment Income to
Average Net Assets(1) (2.82)% (2.06)% (.071)% (0.42)% (0.32)%
Portfolio Turnover Rate 30.72% 51.83% 44.95% 49.79% 5.91%(2)
Average Commission Per Share
Paid on Equity Transactions $ 0.0809 $ 0.0807 $ 0.0833 -- --
</TABLE>
(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 3.35%, 3.24%, 3.64%, 5.40% and 7.20% for the years 1997
through 1993 respectively, and the ratio of net investment income (loss)
to average net assets would have been (2.99%), (2.39%), (1.88%),
(3.37%), and (5.32%) 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> 13
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS
PACIFIC ADVISORS FUND INC.
SMALL CAP FUND
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Small Cap Fund (one of the portfolios
constituting Pacific Advisors Fund Inc.) as of December 31, 1997, and 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, 1997, 1996, 1995, and
1994 and for the period from 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, 1997 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 Small Cap Fund of Pacific Advisors Fund Inc. as of December 31,
1997, and 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, 1997, 1996, 1995, and 1994
and the period from February 8, 1993 (commencement of operations) to December
31, 1993, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
January 23, 1998
12
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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, 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.
