<PAGE> 1
DISTRIBUTOR
PACIFIC GLOBAL FUND DISTRIBUTORS, INC.
206 NORTH JACKSON STREET, SUITE 201
GLENDALE, CALIFORNIA 91206
(800) 989-6693
ANNUAL REPORT | DECEMBER 31, 1997
INCOME
AND EQUITY
FUND
PG36.298
<PAGE> 2
DEAR FELLOW SHAREHOLDERS
December 31, 1997
We are pleased to report that Pacific Advisors Income & Equity Fund ("Fund") had
a total return of 9.60%, for the year ending December 31, 1997. The investment
results are based on shares purchased at the offering price, after deducting the
Fund's current maximum sales charge, 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 up 7.67% and 7.11% respectively, for this same period.
During the year, long-term interest rates on the 30-year US Treasury Bond
declined from a high of 7.2% to 5.9% while inflation remained a mild 2%. Our
investment objective has been to provide investors with a total return that is
2-3% above the current yield on the 30-year US Treasury bond to keep pace with
inflation. We believe the Fund achieved that goal with its 9.6% total return.
Early in the year investors became concerned that the strong economy would
result in higher inflation. In response to this concern interest rates increased
to over 7% and the stock market experienced a 14% correction. In the late
spring, inflation concerns began to subside and interest rates began to decline.
The equity markets regained their bull market momentum which continued until
several countries in Asia announced a currency devaluation. In mid-October a
second correction began in the stock market as a result of the Asian financial
crisis. Interest rates maintained their downward trend as it became apparent
that the Federal Reserve was more concerned with Asia than inflation. By
year-end, interest rates declined to 5.9%.
PORTFOLIO MANAGEMENT
Strong economic growth has been a primary force behind the bull market in
equities over the past three years. It was also the catalyst for inflationary
concerns as unemployment rates declined to 4.6%. While their was no indication
that a recession was approaching it did appear that the economy would begin to
slow after companies completed an inventory building phase in the first part of
the year. It was our belief that the bond market would benefit from a slower
growing economy which would have a negative impact on corporate earnings and
reduce inflationary pressures.
In the early part of 1997, the Fund began to purchase intermediate term
(i.e., 3-10 years) high quality and high coupon corporate bonds. Most of the
bonds purchased were in the financial services sector. They included Citicorp,
Bank of America, Barnett Bank, NationsBank and GMAC. Later in the year the Fund
added investment grade bonds from such companies as Tenneco, Ralston Purina,
Sears Roebuck and Safeway.
At year-end, fixed-income securities were 82% of the Fund's assets.
Corporate bonds represented 68% of the portfolio with 12% of the Fund's assets
in U.S. Treasury notes. The remaining fixed-income securities were short-term
investments. The average matu-
1
<PAGE> 3
rity of the portfolio increased from 2.4 years at the beginning of 1997, to 6.2
years by December 31.
While it appeared that the economy might slow to a more modest growth rate
the outlook for the equity market remained good. The investment allocation for
equities in the Fund was 18% of assets at year-end. The allocation percentage
for equities varies based on our economic forecast. The individual stock
selection is adjusted based on expected performance of individual companies and
industries. The Fund's equity position is diversified with high quality
companies, which currently include such household names as Travelers, General
Electric, Gillette, Home Depot, Mobil, Gap and Microsoft. We believe the equity
position in the Fund provides fixed-income investors the opportunity for capital
appreciation to offset inflation.
OUTLOOK
The Asian financial crisis has had a positive effect for the US bond market. The
strong US currency and economic stability has attracted a substantial increase
in investments from foreign investors. It is expected however, that the economic
problems in Asia will impact the US economy. Imports from Asia will be cheaper
as a result of currency devaluations. It is also anticipated that the demand for
goods and services from Asian countries will decline which will have a negative
impact on multi-national companies. Since Asia accounts for 30% of the Global
Domestic
CHANGE IN VALUE OF $10,000 INVESTMENT*
This chart shows the growth of a $10,000 investment made in Pacific Advisors
Income and Equity Fund on February 8, 1993 compared to the growth of the Lehman
T-Bond Index, Intermediate.
PACIFIC ADVISORS INCOME AND EQUITY FUND
Average Annual
Compound Return*
for period ending
December 31, 1997
One Year
- -------- [GRAPH]
4.81%
Inception
(2/8/93)
- --------
4.09%
* Performance figures represent the change in value of an investment over the
periods shown, and have been restated to include the maximum 4.75% initial sales
charge, assuming reinvestment of dividends and capital gains at net asset value
and after expense reimbursements.
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
Product, it would be unreasonable to assume that their economic problems will
not have a significant impact worldwide.
Under the above scenario, we believe the economy will slow and inflation
will remain low. These economic conditions would be favorable to bonds and may
result in a further decline in interest rates. We believe the Fund is well
positioned with its higher yielding bonds, which will continue to appreciate as
interest rates move lower.
If the corporate earnings growth for multi-national companies slows it
will be difficult for them to maintain the high stock market valuations they
have realized over the last few years. For these reasons, we anticipate adding
high quality mid-cap stocks which have a greater potential for appreciation than
many large cap stocks that may be more fully valued. Over the next several
months we would expect the equity portion of the Fund to remain near its current
level.
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.
Respectively submitted,
/s/ GEORGE A. HENNING
George A. Henning
Chairman
/s/ THOMAS H. HANSON
Thomas H. Hanson
Co-manager
/s/ STEPHEN K. BACHE
Stephen K. Bache, CFA
Co-manager
3
<PAGE> 5
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Principal Amounts Value
----------------- -----
<S> <C> <C>
CORPORATE BONDS - 66.09%
Banks, Money Center - 4.33%
Citicorp Sub Sec 9.5% 2/01/02 $ 50,000 $ 55,661
Union Bank of Switzerland 7.25% 07/15/06 25,000 26,394
-------- --------
82,055
-------- --------
Banks - Regional - 14.84%
Bank of America Subnotes 10% 2/01/03 45,000 52,007
Bank of New York 8.5% 12/15/04 25,000 27,894
Barnett Bank, Inc. 9.875% 6/01/01 75,000 83,321
First Chicago NBD 7.25% 08/15/04 50,000 52,214
Merchants National 9.875% 10/01/99 20,000 21,155
NationsBank 5.125% 9/15/98 45,000 44,742
-------- --------
281,333
-------- --------
Electric - 9.55%
Baltimore Gas & Elec. 8.54% 09/18/06 50,000 57,050
Public Service Electricity & Gas 8.875% 06/01/03 75,000 83,236
PSI Energy, Inc. 6.35% 11/15/06 40,000 40,591
-------- --------
180,877
-------- --------
Financial Services - 5.96%
Associates Corp N.A. 8.55% 07/15/09 50,000 58,090
General Motors Acceptance Corp. 9.625% 12/15/01 49,000 54,746
-------- --------
112,836
-------- --------
Financial Services Diversified - 3.99%
General Electric Capital Corp. 8.5% 07/24/08 65,000 75,519
-------- --------
Food - 4.83%
Ralston Purina 9.25% 10/15/09 75,000 91,456
-------- --------
Food Retailers - 4.43%
Safeway, Inc. 10% 12/01/01 75,000 83,870
-------- --------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 6
<TABLE>
<CAPTION>
Principal Amounts Value
----------------- -----
<S> <C> <C>
CORPORATE BONDS CONTINUED
Industrial - 3.39%
Tenneco Inc. 8.075% 10/01/02 $ 60,000 $ 64,185
---------- ----------
Insurance, Full Line - 7.63%
American General Financial 8.125% 8/15/09 56,000 61,980
CIGNA Corporation 7.40% 5/15/07 25,000 26,376
CIGNA Corporation 7.40% 1/15/03 25,000 26,139
Transamerica Corp. 9.375% 03/01/08 25,000 30,130
---------- ----------
144,625
---------- ----------
Office Equipment - 1.38%
Xerox Corporation 7.15% 8/01/04 25,000 26,150
---------- ----------
Pipeline - 1.45%
Union TX Petroleum 8.375% 3/15/05 25,000 27,439
---------- ----------
Retailers - Broadline - 1.38%
Sears Roebuck Co. 9.5% 06/01/99 25,000 26,144
---------- ----------
Telephone Systems - 1.50%
NYNEX Cap Fund 8.75% 12/01/04 25,000 28,370
---------- ----------
US Government Agency - 1.43%
International Bank Reconstruction and Development 8.64% 6/18/01 25,000 27,026
---------- ----------
TOTAL CORPORATE BONDS
(Cost: $1,228,399) 1,251,885
==========
US GOVERNMENT SECURITIES - 11.31%
US Treasury Note - 11.31%
US T - Note 7.75% 11/30/99 115,000 119,241
US T - Note 7.875% 11/15/04 85,000 95,014
---------- ----------
214,255
---------- ----------
TOTAL US GOVERNMENT SECURITIES
(Cost: $200,398) $ 214,255
==========
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 7
<TABLE>
<CAPTION>
Number of Shares Value
---------------- -----
<S> <C> <C>
COMMON STOCK - 16.07%
Building Materials - 1.55%
Home Depot, Inc. 500 $ 29,437
-------- --------
Cosmetic / Personal Care - 1.59%
Gillette Company 300 30,131
-------- --------
Diversified Companies - 1.94%
General Electric Company 500 36,688
-------- --------
Financial Services Diversified - 2.13%
Travelers Group, Inc. 750 40,406
-------- --------
Financial Services - Specialty - 1.51%
Federal National Mortgage 500 28,531
-------- --------
Investment Companies - 1.05%
Alliance Capital Management L.P. 500 19,906
-------- --------
Oil, Integrated Majors - 1.52%
Mobil Corporation 400 28,875
-------- --------
Pharmaceuticals - 0.98%
Schering - Plough Corp. 300 18,637
-------- --------
Retailers Specialty - 1.40%
Gap, Inc. 750 26,578
-------- --------
Software & Processing - 2.40%
Microsoft* 350 45,238
-------- --------
TOTAL COMMON STOCK
(Cost: $231,384) $304,427
========
PREFERRED STOCK - 1.53%
Insurance, Full Line - 0.69%
Unum Corporation 8.80% PFD A 500 13,188
-------- --------
Telephone Systems - 0.84%
GTE 8.75% PFD B 600 15,900
-------- --------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 8
PREFERRED STOCK continued
<TABLE>
<S> <C>
TOTAL PREFERRED STOCK
(Cost: $28,990) $ 29,088
----------
TOTAL INVESTMENT SECURITIES - 95.00%
(Cost: $1,689,171) $1,799,655
SHORT-TERM INVESTMENTS - 2.00%
United Missouri Bank Money Market Fund 37,893
OTHER ASSETS LESS LIABILITIES - 3.00% 56,736
----------
TOTAL NET ASSETS (100%) $1,894,284
==========
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 9
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<S> <C>
ASSETS
Investment securities at market value (cost: $1,689,171) $ 1,799,655
Short-term investments, at cost, which is equivalent to market 37,893
Receivable from Investment Manager (Note 3) 29,042
Other Assets 8,866
Accrued income receivable 25,552
Receivable for capital shares sold 242
Organizational expenses, net of amortization (Note 1) 1,791
-----------
Total assets 1,903,041
-----------
LIABILITIES
Payable for investment purchased 5,451
Accounts payable 1,435
Accounts payable to related parties (Note 3) 80
Payable to Investment Manager (Note 1) 1,791
-----------
Total liabilities 8,757
-----------
NET ASSETS
(Equivalent to $9.98 per share on 189,873 shares of
Capital Stock outstanding - 100 million shares authorized) $ 1,894,284
-----------
SUMMARY OF SHAREHOLDERS' EQUITY
Paid-in-capital $ 1,783,344
Accumulated undistributed net investment income 463
Distributions of net realized gains on security transactions in excess
of realized gains reported for financial statement purposes (7)
Net unrealized appreciation of investments 110,484
-----------
Net assets at December 31, 1997 $ 1,894,284
===========
Maximum offering price per share ($9.98/95.25%): $ 10.48
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 10
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<S> <C> <C>
Investment Income
Dividends $ 8,625
Interest 72,819
---------
Total Income 81,444
---------
Expenses
Investment Management Fees 12,060
Fund Accounting Fees 17,071
Transfer Agent Expense 19,658
Legal Expense 6,845
Amortization Expense 11,114
Registration Fees 6,731
Printing 4,520
Audit Fees 3,217
Custody Fees 6,308
Director Fees/Meetings 984
Distribution Fees (Note 3) 3,281
Other Expense 4,155
---------
Total Expenses, before reimbursements 95,944
Less Fees Waived and Expenses Reimbursed (Note 3) 68,056
---------
Net Expenses 27,888
---------
Net Investment Income $ 53,556
=========
Net Realized and Unrealized Gain (Loss) on Investments
Net realized loss on investments (44)
Net unrealized appreciation of investments
Beginning of Year $ 23,450
End of Year 110,484
---------
Change in net unrealized appreciation of investments 87,034
---------
86,990
=========
Net Increase in Net Assets Resulting from Operations $ 140,546
=========
</TABLE>
See Accompanying Notes to Financial Statements
9
<PAGE> 11
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 income $ 53,556 $ 40,875
Net realized gain (loss) on investments (44) 8,198
Change in net unrealized appreciation (depreciation) of investments 87,034 (28,446)
----------- -----------
Increase in net assets resulting from operations 140,546 20,627
----------- -----------
From Distributions to Shareholders
Net investment income (53,539) (40,665)
Net capital gains (0) (8,205)
----------- -----------
Decrease in net assets resulting from distributions (53,539) (48,870)
----------- -----------
From Capital Share Transactions
Proceeds from shares sold (78,841 and 27,474 shares) 765,748 259,030
Proceeds from shares purchased by reinvestment
of dividends (3,664 and 3,666 shares) 35,535 34,333
Cost of shares repurchased (21,236 and 13,288 shares) (205,156) (125,123)
----------- -----------
Increase in net assets derived from capital share transactions
(61,269 and 17,852 shares) 596,127 168,240
----------- -----------
Increase in net assets 683,134 139,997
Net Assets
Beginning of Year
(includes undistributed net investment income of $446 and $236) 1,211,150 1,071,153
----------- -----------
End of Year
(includes undistributed net investment income of $463 and $446) $ 1,894,284 $ 1,211,150
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
10
<PAGE> 12
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 Income and Equity
Fund (previously known as 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 and Equity
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. 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.
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 and Equity Fund
in connection with its organization, registration and initial public offer-
11
<PAGE> 13
ing 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 $11,081 for organizational expenses.
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 Income and Equity Fund have entered into an investment
management agreement ("Management Agreement") with Pacific Global Investment
Management Company ("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 and Equity Fund.
In accordance with an Expense Limitation Agreement, with the Company, on
behalf of the Income and Equity Fund, the Investment Manager is required to
reduce its investment management fee in any fiscal year in which all fund
Operating Expenses exceed 1.85% of the average daily net assets of the Fund, and
to reimburse the Income and Equity Fund for any additional expenses that exceed
this limit. This agreement may be terminated at any time by either party. In
addition, from time to time, the Investment Manager and Adviser may voluntarily
waive its management and sub-advisory fees, and/or absorb certain expenses for
the Income and Equity Fund.
Pursuant to the Expense Limitation Agreement, the following amounts were
waived or reimbursed by the Investment Manager for the year ended December 31,
1997 for the Income and Equity Fund: $11,307 of management and sub-advisory fees
were waived and $56,749 was reimbursed by the Investment Manager. These waived
and reimbursed expenses may be subject to future recoupment 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 $291,062.
For the year ended December 31, 1997, Pacific Global Fund Distributors,
Inc. ("PGFD"), the principal underwriter for the Company, received $4,157 of
commissions on sales of capital stock of the Income and Equity Fund, after
deducting $20,067 allowed to authorized distributors as commissions. For the
year ended December 31, 1997 PGFD earned $314 in introducing brokerage fees
related to securities transactions for the Income and Equity Fund. PGFD is a
wholly-owned subsidiary of the Investment Manager.
The Income and Equity 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. The Investment Manager has assumed all payments for these services,
including amounts payable at December 31, 1997.
12
<PAGE> 14
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 Income and
Equity 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 $3,281.
NOTE 4. PURCHASE AND SALES OF SECURITIES
For the year ended December 31,1997, the Income and Equity Fund had
aggregate cost of purchases and proceeds from sales of securities, other than
short-term investments, of $1,481,327 and $446,977 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 $110,559 and $75 respectively. Net unrealized
appreciation for tax purposes is $110,484.
13
<PAGE> 15
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 $ 9.42 $ 9.67 $ 8.98 $ 9.06 $ 9.00
----------- ----------- ----------- ----------- -----------
Income from Investment Operations
Net investment income 0.33 0.35 0.31 0.16 0.06
Net realized and unrealized gains
(losses) on securities 0.56 (0.19) 0.72 (0.07) 0.04
----------- ----------- ----------- ----------- -----------
Total from investment operations 0.89 0.16 1.03 0.09 0.10
----------- ----------- ----------- ----------- -----------
Less Distributions
From net investment income (0.33) (0.35) (0.31) (0.17) (0.04)
From net capital gains 0.00 (0.06) (0.03) 0.00 0.00
----------- ----------- ----------- ----------- -----------
Total distributions (0.33) (0.41) (0.34) (0.17) (0.04)
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Year $ 9.98 $ 9.42 $ 9.67 $ 8.98 $ 9.06
=========== =========== =========== =========== ===========
Total Investment Return(4) 9.60% 1.78% 11.98% 0.99% 1.21%
Ratios/Supplemental Data
Net Assets, End of Year (000's) $ 1,894 $ 1,211 $ 1,071 $ 632 $ 135
Ratio of Expenses to Average Net Assets(1) 1.85% 1.85% 1.86% 1.75% 1.68%(2)
Ratio of Net Investment Income to
Average Net Assets(1) 3.56% 3.75% 4.06% 2.17% 0.79%(2)
Portfolio Turnover Rate 42.30% 28.23% 33.40% 37.12% 0.00%(2)
Average Commission Per Share
Paid on Equity Transactions $ 0.1291 $ 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 and Equity Fund
would have been 6.38%, 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 (0.96%), (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
14
<PAGE> 16
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS
PACIFIC ADVISORS FUND INC.
INCOME AND EQUITY FUND
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Income and Equity 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
Income and Equity 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
15
<PAGE> 17
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.
