<PAGE>
[GRAPHIC]
ANNUAL REPORT -- DECEMBER 31, 1998
[LOGO]
PACIFIC
ADVISORS
-
FUND INC.
BALANCED fund
GOVERNMENT SECURITIES fund
INCOME AND EQUITY fund
SMALL CAP fund
<PAGE>
PACIFIC ADVISORS
table of contents
MESSAGE FROM THE CHAIRMAN..................................................... 1
BALANCED FUND................................................................. 3
GOVERNMENT SECURITIES FUND.................................................... 6
INCOME AND EQUITY FUND........................................................ 9
SMALL CAP FUND................................................................12
SCHEDULES OF INVESTMENTS......................................................16
STATEMENTS OF ASSETS AND LIABILITIES..........................................26
STATEMENTS OF OPERATIONS......................................................27
STATEMENTS OF CHANGES IN NET ASSETS...........................................29
NOTES TO FINANCIAL STATEMENTS.................................................31
FINANCIAL HIGHLIGHTS..........................................................35
REPORT OF INDEPENDENT AUDITORS................................................39
<PAGE>
MESSAGE
from the chairman
[GRAPHIC]
Fellow Shareholders,
In 1998, we experienced first hand the impact of global events on the U.S.
economy. Economic problems in Asia, Russia and Latin America had an impact
throughout the world as the demand for goods and services deteriorated. Almost
overnight deflation replaced inflation as a major global concern. As a result,
interest rates in the U.S. declined as international investors sought safety in
U.S. government bonds. The 30-year U.S. Treasury bond fell below 5% for the
first time in 1998.
Lower interest rates benefited bond funds as they experienced excellent
results with far less volatility than the equity market. The Pacific Advisors
U.S. Government Securities Fund was the number 1 government bond fund in 1998,
according to Lipper Analytical Services Inc. Its total return of 17.82% was more
than double the average return of 8.42% for that sector. Our Income & Equity
Fund also had an excellent year and was recognized by Morningstar as being in
the top 1% of all bond funds in its category. It is interesting to note that
these relatively small funds outperformed the largest bond funds, none of which
had a total return of more than 10%.
The stock market continued its bull market run as the U.S. economy continued
to grow despite problems overseas. However, the market experienced greater
volatility as it reacted throughout the year to news from Asia, Russia and
Brazil. The market also followed the actions of the Federal Reserve Bank as it
made interest rate adjustments in response to the changing global economy.
However, the great returns of 26.67% and 39.63% posted by the S&P500 and NASDAQ
Indices, respectively, masked an otherwise dismal year for many stocks. For most
stocks 1998 was a bear market as over 60% of the stocks in the S&P 500 and 80%
in the NASDAQ Indices saw their stock price decline over 20% from their 52 week
high. Furthermore over 60% of the stocks in the NASDAQ Index saw price declines
of over 40% from their 52-week high.
The winners in the stock market were the largest of the large cap and the
hot technology and Internet sectors. Large cap stocks grew as a result of their
greater liquidity and brand name recognition. Technology stocks performed well
as the result of superior growth of such companies as Microsoft and Dell
Computers. Internet stocks experienced great results even though many companies
had no proven track record or earnings. The success of Amazon, Yahoo and E-Bay
created a great deal of excitement as investors looked for the next success
story.
As we look forward into 1999, we expect that the poor global economy will
continue to reduce demand for goods and services. As a result many companies
will need to maintain or reduce prices to remain competitive. The result of a
slowing economy will be lower profits and lower returns in the stock market.
While selective stocks should perform well the overall market indices will
probably experience much lower returns.
The bond markets should remain favorable. Interest rates may increase
temporarily during the first half of 1999 as individual countries attempt to fix
their economies. However, deflation will remain a global concern which should
result in further interest rate declines as world central banks try to avoid a
recession.
As an investor, it is important for you to maintain a well-diversified
long-term investment plan. While short-term gyrations in the market may be
uncomfortable, a well-balanced investment plan should work well over the longer
term.
In May of 1999, Pacific Advisors Fund will introduce a Growth Fund. This
Fund will invest primarily in stocks of the S&P 500 Index and the largest 100
stocks in the NASDAQ Index. We believe this new Fund will enable Pacific
Advisors Fund to offer our shareholders a more diversified portfolio of
investments in the equity market. Tom Hanson, who currently co-manages the Small
Cap and Income & Equity Funds will be the Advisor for this Fund.
During this past year, Pacific Advisors Fund has been reviewing its computer
hardware and software systems to evaluate our readiness for Y2K. Our goal is to
provide uninterrupted high quality of service to
1
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MESSAGE
from the chairman continued
our shareholders. We believe that our internal systems do not suffer from Y2K
programming problems and will remain operational after December 31, 1999. In
addition, we have also contacted our major service providers to determine if
they are taking steps to avoid Y2K problems with their own internal systems.
While it is nevertheless possible that Y2K problems may arise, we will continue
to monitor their progress and make every reasonable effort to minimize the
potential impact of Y2K on the funds.
In closing, we want to thank you for giving us the opportunity to work with
you in your investment program. We remain committed to providing you with high
quality investment portfolios and services to meet your financial goals.
Sincerely,
[SIGNATURE]
George A. Henning
Chairman of the Board and President
2
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PACIFIC ADVISORS
Balanced Fund
INVESTS PRIMARILY IN LARGE AND MEDIUM CAP COMMON STOCKS WITH AT LEAST 25% OF THE
ASSETS IN FIXED-INCOME SECURITIES.
INTERVIEW WITH PORTFOLIO MANAGER
STEPHEN K. BACHE, CFA
Q HOW DID THE FUND PERFORM IN 1998?
A For the year ended December 31, 1998, the Fund's total return was 7.76%
for Class A shares and -1.28% for Class C shares(1). For the same year the
Fund's benchmarks, the S&P 500(2) and the Lehman Intermediate Treasury Bond
Index(3), returned 28.58% and 8.42%, respectively.
Even though the Fund had a positive return for the year, it underperfomed
its benchmarks for two reasons. First, our overall outlook was for a weaker
equity market than occurred following the October correction. We were
specifically concerned with the narrow selection of stocks the market seemed to
be overvaluing. In response, we took a more defensive position by increasing the
portfolio's bond holdings in order to capitalize on long-term gains.
Secondly, and lending support to our above mentioned concern, the high
return produced by the S&P 500 resulted from the performance of a small group of
stocks, unrepresentative of the equity market as a whole. In fact approximately
60% of the stocks in the S&P 500 actually experienced a decline of over 20% in
value during 1998. In contrast, the Fund continued to focus on sound stocks
which may currently be out of favor in the market, but which offer a better
prospect for long-term growth and appreciation.
Q WHY DID THE FUND MAINTAIN A MORE DEFENSIVE STRATEGY IN 1998?
A At the beginning of the year, we anticipated a decline in corporate
profits and felt that many stocks had become overvalued by the market. These
factors led us to trim some of our stock positions in the early part of the
year. While a few select groups of stocks increased in value over the course of
the year, most stocks depreciated in price. Our goal is to provide more
consistent returns by capitalizing on long-term growth. We look to buy companies
that are dominant in their industries, have strong growth potential, and are
selling at a price consistent with or below their actual value. We believe these
types of companies provide the potential for more consistent growth as opposed
to companies that may simply be part of a short-lived market trend.
Despite the continued and surprising growth in the economy, interest
rates continued to decline in 1998. This led to a more favorable bond market,
and in order to capitalize on declining interest rates, we increased our bond
position by buying high-quality corporate bonds such as Chase Manhattan,
McDonnell Douglas, Bell South and Cleveland Electric. By the end of the year,
the Fund was almost equally weighted in bonds and equities, reflecting both the
favorability in the bond market and the increased volatility in the equity
market.
Q WHAT ECONOMIC EVENTS HAD THE MOST IMPACT ON THE FUND'S PERFORMANCE THIS
YEAR?
A Several of the stocks in the Fund's portfolio performed well and made
significant contributions to the Fund's total return. Nokia, the Fund's largest
investment position by year-end, increased in value by becoming the leading
distributor of cellular phones. Their successful switch from analog to digital
technology led to an increase in their market share. Time Warner also posted
significant gains as it reemerged as the leader in cable services. The common
stock doubled in value when its bonds were upgraded to investment-grade quality.
Pfizer also posted strong results during the year due to the success of Viagra
and a number of other proprietary drugs.
Despite the stellar performances of some investments, global financial
crises continued to negatively impact the Fund's performance. Although Asian
markets began the slow process of recovery, we continued to feel the effects of
their financial fallout. Economic problems in Russia and
3
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PACIFIC ADVISORS
Balanced Fund continued
Latin America created additional pressure on global financial markets.
Q WHAT IS YOUR INVESTMENT OUTLOOK FOR 1999?
A Despite the many factors working against it, the economy remained
surprisingly strong throughout 1998. The economy will probably maintain this
momentum through the first half of 1999. By mid-year, however, we expect to see
slowing in the economy resulting from the federal government's surplus and a
continuing decline in corporate profits. We also anticipate a mediocre and more
volatile equity market; and while there will be some strong performers, it is
difficult to anticipate which companies will come out on top. We also expect
some decline in interest rates during the latter part of the year, which will
continue to support a more favorable bond market.
The economy will undoubtedly continue to feel the affects of
international financial crises. While Asia has probably seen the worst of its
troubles, it is far from a full recovery and does not appear positioned to make
any dramatic improvements in 1999. The devaluation of Brazil's currency and the
persistent financial difficulties in Russia will also put pressure on our
economy.
Q WHAT IMPACT DO YOU BELIEVE Y2K WILL HAVE ON THE MARKET?
A Although we don't anticipate significant financial problems as a result
of Y2K, uncertainty still remains about what kind of problems it will generate.
At the outset, we actually anticipate that Y2K will help keep the economy strong
as companies build up their inventories in anticipation of delivery problems in
the new year. This, however, may lead to a false sense of prosperity since the
build-up will not represent an actual increase in demand.
One effect we have already seen is the increase in time and energy
companies are spending to determine and solve Y2K problems. This takes away from
the resources companies would have otherwise focused on stimulating growth.
While we do not anticipate a major financial crisis, the uncertainty surrounding
Y2K and its effects will undoubtedly impact the market's volatility.
Q HOW IS THE FUND CURRENTLY POSITIONED?
A In light of our outlook for the year, the Fund has continued to increase
its bond position while trimming some of its stock positions. We don't expect an
immediate decline in short-term interest rates, but we do believe economic
forces will eventually push rates lower. Consequently, the Fund strengthened its
position in intermediate bonds in order to capitalize on their potential for
appreciation when rates decline. While we have trimmed our stock positions in
preparation for a more volatile stock market, we continue to maintain positions
in solid companies poised to weather the volatility and provide the Fund with
long-term growth.
-------------------------------------------------------
INVESTMENT MIX as of 12/31/98
<TABLE>
<S> <C>
1. EQUITIES 48.73%
2. CORPORATE BONDS 47.53%
3. CASH 3.74%
</TABLE>
1 Inception April 1, 1998
2 The Standard & Poor's 500 Index is an unmanaged measure of 500 widely held
common stocks listed on the New York Stock Exchange, American Stock Exchange and
Over-the-Counter market. The Index returns assume reinvestment of dividends but,
unlike the Fund's returns, does not reflect the effects of management fees or
expenses.
3 The Lehman T-Bond Index is an unmanaged index of intermediate term
government bonds since 12/31/80.
4
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CHANGE IN VALUE OF $10,000 INVESTMENT(1)
This chart shows the growth of a $10,000 investment made in Pacific Advisors
Balanced Fund, Class A shares, on February 8, 1993 compared to the growth of the
Standard & Poor's (S&P) 500 and Lehman Intermediate T-Bond Indices.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BALANCED FUND
BALANCED FUND S&P 500 INDEX LEHMAN T-BOND INDEX
<S> <C> <C> <C>
2/8/93 $9,425 $10,000 $10,000
12/93 $9,423 $10,706 $10,826
12/94 $9,195 $10,541 $10,604
12/95 $9,996 $14,137 $12,140
12/96 $11,587 $17,348 $12,622
12/97 $13,353 $22,728 $13,590
12/98 $14,379 $28,789 $14,764
</TABLE>
Average Annual Compounded Return for period ending December 31, 1998 (Class A
shares)
<TABLE>
<S> <C>
One Year 1.53%
Five Year 7.57%
Inception 6.35%
</TABLE>
- ----------------------------------
1 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 Standard & Poor's 500 Index is an unmanaged measure of 500 widely held
common stocks listed on the New York Stock Exchange, American Stock Exchange and
Over-the-Counter market. The Index returns assume reinvestment of dividends but,
unlike the Fund's returns, does not reflect the effects of management fees or
expenses.
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 share when redeemed, may be worth more or less than
their original cost.
5
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PACIFIC ADVISORS
Government Securities Fund
INVESTS PRIMARILY IN FIXED-INCOME SECURITIES GUARANTEED BY THE U.S. GOVERNMENT
OR ITS INSTRUMENTALITIES. THE FUND MAY ALSO INVEST IN DIVIDEND-PAYING COMMON
STOCKS FOR GROWTH IN INCOME.
INTERVIEW WITH PORTFOLIO MANAGER
R. "KELLY" KELLY
FOR THE YEAR ENDED DECEMBER 31, 1998 THE FUND HAD A TOTAL RETURN OF 17.82% FOR
CLASS A SHARES AND 12.48% FOR CLASS C SHARES(1). IN COMPARISON THE FUND'S
BENCHMARK, THE LEHMAN INTERMEDIATE TREASURY BOND INDEX(2), RETURNED 8.42% FOR
THE YEAR. THE TOTAL RETURN FOR A SHARES RANKED THE FUND #1 OUT OF 184 GOVERNMENT
BOND FUNDS, ACCORDING TO LIPPER ANALYTICAL SERVICES INC. (WALL STREET JOURNAL
1/14/99).
DURING THE PAST 5 YEARS THE FUND HAS CONSISTENTLY OUTPERFORMED OTHER FUNDS IN
ITS CATEGORY. LIPPER RANKED IT AS ONE OF THE TOP FUNDS BASED ON ITS 5-YEAR
RETURN. THE WALL STREET JOURNAL (1/14/99) REPORTED THAT THE FUND'S 5 YEAR TOTAL
RETURN OF 9.19% FOR CLASS A SHARES, COMPARED FAVORABLY TO AN AVERAGE TOTAL
RETURN OF 6.15% FOR THE OTHER FUNDS IN ITS CATEGORY.
Q WHAT FACTORS HAVE CONTRIBUTED TO THE FUND'S SUCCESS IN 1998 AND DURING
THE PAST FIVE YEARS?
A The main factor contributing to the Fund's success is our strategy to
anticipate the trend in interest rates and invest the Fund's assets accordingly.
Early in the year we recognized that global economies had created an excess
supply of goods and services relative to the amount of world demand. This
situation forced companies to cut prices in order to remain competitive at a
time when they were already experiencing a decline in profitability. These
forces created a deflationary environment and a decrease in the expected rate of
inflation.
Foreseeing a decline in inflationary expectations, we predicted a decline
in interest rates and increased the Fund's investment in long-term U.S.
government bonds. Our commitment to following the trend in interest rates, and
adjusting our investments accordingly, has led to a greater total return for the
Fund.
Q HOW DOES THE FUND'S INVESTMENT STRATEGY DIFFER FROM OTHER BOND FUNDS?
A Typically bond funds employ a ladder strategy, dividing the fund's assets
among bonds of different maturities. These funds generally make little effort to
anticipate the movement of interest rates in order to capitalize on those
shifts.
Our investment strategy differs because we are willing to move from
long-term to short-term bonds when interest rates are rising, and from
short-term to long-term bonds when they are declining. We describe this type of
investing as a barbell strategy.
Our Fund is also unique because we invest approximately 20% of the
portfolio in high-quality utility stocks with increasing dividends, such as
Ericsson, Ipalco and NIPSCO. This offers the Fund some protection against
inflation. As these companies increase their dividends, the Fund benefits from
increased income and capital appreciation.
Q IN THE PAST YEAR, WHICH EVENTS HAVE HAD THE MOST IMPACT ON INTEREST RATES
AND THE ECONOMY IN GENERAL?
A As we mentioned earlier, 1998 revealed an excess supply of goods and
services in many global markets, including the United States. This deflationary
trend resulted in a decrease in profits and prices for many corporations. As the
potential for deflation increased, interest rates declined as global central
banks created more liquidity.
In addition, several global economies, such as Russia and Brazil, faced
major financial crises during the year. These events led investors to move
6
<PAGE>
their money into U.S. government bonds, which offered more safety and liquidity.
As the demand for these bonds increased, their prices went up and interest rates
were driven down.
Q IS IT POSSIBLE FOR RATES TO GO EVEN LOWER?
A Deflationary pressures and global crises triggered a decline in interest
rates during 1998. As these conditions persist, interest rates will probably
decline further, but not until we see a slowdown in the U.S. economy.
Before we see a slowdown, interest rates may increase slightly in
response to concerns about the continuing strength of the U.S. economy, and
Japan's desire to stimulate its economy. Other countries are already
experiencing a surplus of goods and are lowering prices to remain more
competitive. As prices around the world and at home decrease, a further decline
in interest rates is likely to follow.
Q HOW HAVE DEFLATIONARY CONCERNS IMPACTED THE MARKET?
A As we have already shown, deflation adversely affects corporate
profitability, which hurts the prices of lower quality bonds. As a result of
their relative stability, high-quality bonds, such as U.S. government bonds,
increase in value. At the same time declining interest rates make long-term
bonds more attractive. This creates a market which highly values high-quality,
long-term bonds.
Q WHY IS THERE GREATER CONCERN OVER DEFLATION RATHER THAN INFLATION?
A Deflation creates major concerns because it tends to be contagious. The
symptoms of deflation are the inability of corporations to increase prices and
maintain sufficient profitability. Eventually, corporations postpone buying
equipment and hiring workers in order to remain competitive. On a larger scale,
countries may devalue their currencies to help businesses remain competitive.
Devaluation increases imports to more developed economies, such as the U.S. This
places greater pressure on U.S. corporations, which can lead to a deflationary
trend in our economy. This can lead to a vicious circle.
Although we do not anticipate such an event at this time, deflation, in a
worst case scenario, can lead to economic recessions and even a global
depression.
Q WHAT ARE YOUR EXPECTATIONS FOR THE ECONOMY IN 1999?
A We anticipate a slowdown in the momentum of the U.S. economy in response
to declining corporate profitability and decreasing price pressures. After a
slight increase in the beginning of the year, we expect a continued decline in
interest rates in response to the slowdown in the economy. This trend is likely
to increase as major economies, such as the U.S. and Britain, begin to slow as
well. These events will increase the pressure for interest rates to move lower.
In accordance with our expectations for the coming year, we have a high
percentage of the Fund's investments in long-term U.S. government bonds.
1 Inception April 1, 1998
2 The Lehman T-Bond Index is an unmanaged index of intermediate term
government bonds since 12/31/80.
7
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PACIFIC ADVISORS
Government Securities Fund continued
-------------------------------------------------------
INVESTMENT MIX as of 12/31/98
<TABLE>
<S> <C>
1. U.S. TREASURY BONDS 68.61%
2. EQUITIES 27.56%
3. CASH 3.83%
</TABLE>
CHANGE IN VALUE OF $10,000 INVESTMENT(2)
This chart shows the growth of a $10,000 investment made in Pacific Advisors
Government Securities Fund, Class A shares, on February 8, 1993 compared to the
growth of the Lehman Intermediate T-Bond Index.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES FUND
GOVERNMENT SECURITIES FUND LEHMAN TBOND INDEX
<S> <C> <C>
2/8/93 $9,525 $10,000
Dec-93 $9,557 $10,826
Dec-94 $9,543 $10,604
Dec-95 $11,600 $12,140
Dec-96 $11,235 $12,622
Dec-97 $12,552 $13,590
Dec-98 $14,789 $14,764
</TABLE>
Average Annual Compounded Return for period ending December 31, 1998 (Class A
shares)
<TABLE>
<S> <C>
One Year 12.25%
Five Year 8.13%
Inception 6.86%
</TABLE>
- ----------------------------------
2 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 share when redeemed, may be worth more or less than
their original cost.
8
<PAGE>
PACIFIC ADVISORS
Income and Equity Fund
INVESTS PRIMARILY IN INVESTMENT-GRADE FIXED-INCOME SECURITIES. THE FUND MAY ALSO
INVEST IN STOCKS FOR LONG-TERM CAPITAL APPRECIATION.
INTERVIEW WITH PORTFOLIO MANAGERS
THOMAS H. HANSON
STEPHEN K. BACHE, CFA
FOR THE YEAR ENDED DECEMBER 31, 1998, THE FUND HAD A TOTAL RETURN OF 12.14% FOR
CLASS A SHARES AND 6.41% FOR CLASS C SHARES(1). BOTH SHARE CLASSES OUTPERFORMED
THEIR BENCHMARK, THE LEHMAN INTERMEDIATE TREASURY BOND INDEX(2), WHICH RETURNED
8.42% FOR THE SAME PERIOD.
IN ADDITION TO OUTPERFORMING ITS BENCHMARK, THE FUND HAS CONSISTENTLY
OUTPERFORMED MANY OF THE LARGER FUNDS IN ITS CATEGORY. AS OF DECEMBER 31, 1998,
MORNINGSTAR RANKED THE FUND IN THE TOP 1% OF THE 490 FUNDS IN ITS CLASS. IN ITS
JANUARY 4TH EDITION, THE WALL STREET JOURNAL LISTED THE 1998 YEAR-TO-DATE
RETURNS FOR THE TOP 25-30 BOND FUNDS. NONE OF THE LISTED FUNDS HAD A TOTAL
RETURN OF MORE THAN 10%. THE FUND BETTERED THE TOP PERFORMANCE OF THESE FUNDS BY
MORE THAN 2%; PROVING THAT BIGGER ISN'T ALWAYS BETTER.
Q WHY DID THE FUND OUTPERFORM MANY OF THE LARGER FUNDS IN ITS CATEGORY?
A A major factor contributing to the Fund's outstanding performance has
been our commitment to keeping the Fund's assets fully invested throughout the
year. With, on average 96% of the assets fully invested, the Fund was
consistently at work to provide greater returns.
Approximately 75% of the Fund's portfolio has been invested in
high-quality, corporate bonds with maturities from 3 to 15 years. By investing
in bonds with intermediate maturities, the Fund was able to achieve greater
market appreciation as a result of declining interest rates throughout the year.
Appreciation and interest income from these bonds enabled the Fund to generate a
higher total return.
Our ability to invest a minority of the Fund's assets, 15-20%, in stocks,
added further to the Fund's success. The capital appreciation in these
high-quality stocks significantly enhanced the Fund's total return performance.
Q ARE THERE ANY REAL BENEFITS TO BEING A SMALLER FUND WHEN IT COMES TO
IMPLEMENTING INVESTMENT STRATEGY?
A A major advantage as a smaller fund is our ability to buy odd-lot bonds.
Typically, bonds are sold in $100,000 increments. As a smaller fund, we
typically have more flexibility, than larger funds to purchase odd lots, which
are often sold at a significant discount. Using this advantage, we were able to
purchase such quality bonds as GTE, General Electric, Atlantic Richfield and
Caterpillar at a discount.
Q WHY IS THE FUND'S INVESTMENT STRATEGY FOCUSED ON TOTAL RETURN AS OPPOSED
TO YIELD?
A The Fund focuses on total return in order to protect the principal
investment while capitalizing on yield. First, we look to optimize yield by
selecting securities in which we can get the maximum yield at the shortest
possible maturity. This provides high current income without risking the value
of principal by being invested for a longer period of time than necessary.
In addition to providing current income the Fund seeks to take advantage
of meaningful capital appreciation. In order to do this we may sell a security
that has significantly appreciated in value, prior to maturity, to take
advantage of this appreciation. Furthermore, the Fund's ability to invest a
minority position in stocks adds to the potential for capital appreciation,
which supplements current income and increases total return.
Q HOW HAS THE INVESTMENT MIX CHANGED OVER THE PAST YEAR?
A In the second half of the year, as stock market conditions began to show
signs of weakness, the Fund decreased its equity exposure from over 20% to
10-12%. We accomplished this
9
<PAGE>
PACIFIC ADVISORS
Income and Equity Fund continued
by reducing the Fund's current exposure in existing positions and allocating new
money to bond investments. Despite this reduction, the equity portion of the
Fund's portfolio still contains such quality stocks as General Electric,
Microsoft, Home Depot and Mobil.
The money taken out of stocks was reallocated to corporate bonds and
higher yielding preferred stocks, offered by insurance companies such as UNUM
and Torchmark and other companies such as GTE and Price Enterprises. These
investments offer the dividend income of a bond, but because they are an equity
have an increased potential for capital appreciation.
Q WHAT KINDS OF BONDS HAVE BEEN MOST SUCCESSFUL FOR THE FUND AND WHY?
A The Fund has had the most success by investing in bonds with higher
coupon rates and intermediate maturities. High coupon rate bonds are more
attractive because as interest rates decline the bond appreciates more in value.
In 1998, as interest rates declined, these bonds experienced significant
appreciation. This strategy works toward increasing total return by providing
both income and capital appreciation.
Q WHAT IS YOUR INVESTMENT OUTLOOK FOR 1999?
A In the coming year we anticipate that interest rates will continue to
remain relatively low despite some fluctuation in the early part of the year. In
light of this expectation, we have maintained the bond position at approximately
75% of the Fund's portfolio.
In the equity market we anticipate a slight uptrend along with an
increase in volatility. We have begun to add to our equity position and expect
to increase it by approximately 5-10% in order to capitalize on sound stocks
which have the potential for capital appreciation.
-------------------------------------------------------
INVESTMENT MIX as of 12/31/98
<TABLE>
<S> <C>
1. CORPORATE BONDS 74.29%
2. EQUITIES 17.78%
3. GOVERNMENT BONDS 6.41%
4. CASH 1.52%
</TABLE>
1 Inception April 1, 1998
2 The Lehman T-Bond Index is an unmanaged index of intermediate term
government bonds since 12/31/80.
10
<PAGE>
CHANGE IN VALUE OF $10,000 INVESTMENT(3)
This chart shows the growth of a $10,000 investment made in Pacific Advisors
Income and Equity Fund, Class A shares, on February 8, 1993 compared to the
growth of the Lehman Intermediate T-Bond Index.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INCOME AND EQUITY FUND
<S> <C> <C>
INCOME AND EQUITY FUND LEHMAN TBOND INDEX
2/8/93 $9,525 $10,000
12/93 $9,630 $10,826
12/94 $9,725 $10,604
12/95 $10,905 $12,140
12/96 $11,100 $12,622
12/97 $12,166 $13,590
12/98 $13,643 $14,764
</TABLE>
Average Annual Compounded Return for period ending December 31, 1998 (Class A
shares)
<TABLE>
<S> <C>
One Year 6.79%
Five Year 6.27%
Inception 5.41%
</TABLE>
- ----------------------------------
3 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 share when redeemed, may be worth more or less than
their original cost.
11
<PAGE>
PACIFIC ADVISORS
Small Cap Fund
INVESTS PRIMARILY IN SMALL COMPANY STOCKS WITH AN AVERAGE MARKET CAP BELOW $150M
WITH A LOW P/E AND HIGH EARNINGS MOMENTUM.
INTERVIEW WITH PORTFOLIO MANAGERS
THOMAS H. HANSON
GEORGE A. HENNING
1998 WAS A DISAPPOINTING YEAR FOR SMALL CAP STOCKS. HOWEVER, IT IS IMPORTANT FOR
INVESTORS TO REMEMBER THAT IN A WELL-DIVERSIFIED PORTFOLIO, NOT ALL SECTORS WILL
PERFORM EQUALLY WELL AT THE SAME TIME. AS THE MARKET CYCLE CHANGES DIFFERENT
SECTORS WILL PERFORM BETTER AND OVER THE LONG TERM ENHANCE THEIR INVESTMENT
RETURNS. IT IS VERY DIFFICULT TO ACCURATELY PREDICT WHEN MARKET CHANGES WILL
OCCUR. IN PARTICULAR, THE SMALL CAP SECTOR OFTEN RECOVERS VERY QUICKLY WHICH
REWARDS INVESTORS WHO MAINTAIN A LONG-TERM STRATEGY OF INVESTING IN A
WELL-DIVERSIFIED PORTFOLIO.
Q HOW DID THE FUND PERFORM IN 1998?
A For the twelve months ending December 31, 1998, the Fund had a loss of
- -16.66% for Class A shares and a loss of -25.88% for Class C Shares(1). During
the same period the Russell 2000(2), which is the benchmark index for the Fund,
had a loss of -3.45%.
Q WHAT FACTORS CONTRIBUTED TO THE NEGATIVE PERFORMANCE IN 1998?
A Following the collapse of the Asian economies in late 1997, small cap
stocks struggled to attract capital, as investors favored large cap stocks such
as General Electric and IBM. Many investors perceived that these stocks offered
more liquidity, price stability and predictable earnings. Investors therefore
believed these large multi-national companies could weather an economic crisis
more easily because of their diversified operations. As economic problems in
Russia and Latin America emerged later in the year, this investment strategy
gained even more momentum.
Technology stocks were also in favor because of the success of companies
such as Microsoft, Dell, Amazon.com and America Online. Initial Public Offerings
in newer technology companies attracted considerable interest because of the
hope they might be the next Microsoft or Amazon.com.
The NASDAQ and S&P 500 Indices were up 39.63% and 26.67%, respectively.
However, these results mask the bear market most stocks experienced in 1998.
During 1998, 80% of the NASDAQ stocks and 60% of the S&P 500 stocks were down
over 20% from their 52-week high. Furthermore, over 60% of the NASDAQ stocks
were down more than 40% from their 52-week high. As a result most stocks in the
mid, small and micro cap sectors experienced severe price declines.
Q DID SMALLER CAP COMPANIES HAVE POORER EARNINGS RESULTS IN COMPARISON TO
LARGE CAP STOCKS?
A No, in fact many smaller companies had very good results in 1998. They
benefited from the strong U.S. economy without having much exposure to foreign
markets. However, the market discounted these stocks because it was perceived
they offered less liquidity and price stability. For example, Interstate
National Dealer Services, a provider of vehicle warranty products, had record
growth in revenues and earnings but saw its stock price retreat from a high of
$13.37 to near $6.25 as the crisis in Russia and Latin America emerged during
the last six months of the year.
In contrast, larger companies such as Coca Cola saw their value hold
steady despite lower earnings. Other companies, such as Amazon.com saw their
stock price skyrocket even though they continued to have losses. Clearly the
market carried a strong bias towards the largest companies in the S&P 500 and
technology stocks.
12
<PAGE>
Q WHY DID THE FUND NOT INVEST IN MORE TECHNOLOGY AND INTERNET STOCKS?
A Most of the stocks in these categories were either too large or did not
meet the investment criteria for the Fund; meaning they were new companies with
no proven track record. The companies that accounted for most of the technology
sector growth were larger cap companies. They included such companies as Dell,
Microscoft, Intel and Sun Microsystems. Most Internet stocks that did well were
also larger cap companies such as Amazon.com, eBay Inc., Netscape and Yahoo!.
The Fund did invest in companies that provide services over the Internet
but, because of their small size, they actually saw their price decline even
though they had positive earnings. Telescan, for example, a provider of
financial data via the Internet saw its price decline from a high of $10.00 to
$4.00 during the last six months of 1998, with no significant change in its
operating results. We continued to hold the position because we believed it
would grow and perhaps merge with a larger financial services company. While our
strategy was not rewarded in 1998, the company announced in early 1999 that NBC
was buying a 10% position in the company and the stock price reached a new high
of $22.94.
The Fund has focused its investments in areas that have had good growth
such as healthcare, e-commerce and information technology. Stocks in these areas
include Health Care Services (maintenance service provider to nursing homes);
Interstate National Dealer Services; Vista Information Solutions (real estate
data base provider for property insurers); and Cerprobe (a manufacturer of probe
cards for testing semi-conductor chips).
Q WHAT CHANGES IN THE MARKET WILL HELP SMALL CAP STOCKS PERFORM BETTER?
A Most analysts agree that the U.S. stock market is nearing the end of a
long bull market. Historically, towards the end of a bull market, larger cap and
more speculative stocks tend to outperform other sectors. While we experienced a
significant correction in the late summer and early fall, the recovery from this
correction was very narrow. The entire rebound from October through the end of
the year was the result of growth in approximately 150 stocks out of a total
market in excess of 6,000 stocks. This group of stocks cannot continue to carry
the rest of the market. This suggests another correction will occur perhaps in
the first half of 1999. Following a correction, we would expect to see smaller
cap stocks perform better. Again, historically small cap stocks tend to perform
much better than other sectors at the beginning of a new bull market cycle.
Q WHAT IS YOUR OUTLOOK FOR THE SMALL CAP SECTOR IN 1999?
A We believe the economy will slow in 1999, in response to the poor global
economic conditions particularly in Asia, Russia and Latin America. This
economic slowdown will force many companies to lower prices to sell their goods
or services which will result in lower earnings. As this trend develops,
interest rates will probably decline further. Under this scenario, investors
should begin to look to smaller companies in markets which have less pricing
pressure or offer specialty products that have greater demand.
Many companies in the technology sector will probably lose much of their
appeal as the market determines which of these companies can offer long-term
growth potential and generate profits. While this sector should retain its
prominence, we would expect investors to become more selective in their stock
purchases.
It is difficult to predict when a market cycle will change. The catalyst
for change could come from economic developments in Japan, Brazil or Russia or
it could be an entirely new event. We believe, however, that as this bull market
comes to a close, individual stock selection based on good revenue growth and
earnings will return to favor with investors.
1 Inception April 1, 1998
2 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.
13
<PAGE>
PACIFIC ADVISORS
Small Cap Fund continued
-------------------------------------------------------
INVESTMENT MIX as of 12/31/98
<TABLE>
<S> <C>
1. COMMON STOCKS 98.29%
2. CASH 1.71%
</TABLE>
CHANGE IN VALUE OF $10,000 INVESTMENT(4)
This chart shows the growth of a $10,000 investment made in Pacific Advisors
Small Cap Fund, Class A shares, on February 8, 1993 compared to the growth of
the Russell 2000 Index.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SMALL CAP FUND
SMALL CAP FUND RUSSELL 2000
<S> <C> <C>
2/8/93 $9,425 $10,000
12/93 $11,319 $11,700
12/94 $10,870 $11,328
12/95 $12,771 $14,297
12/96 $18,352 $16,407
12/97 $19,628 $19,774
12/98 $16,379 $19,092
</TABLE>
Average Annual Compounded Return for period ending December 31, 1998 (Class A
shares)
<TABLE>
<S> <C>
One Year -21.46%
Five Year 6.37%
Inception 9.83%
</TABLE>
- ----------------------------------
4 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 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 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 share when redeemed, may be worth more or less than
their original cost.
14
<PAGE>
PACIFIC ADVISORS
financial statements
[GRAPHIC]
15
<PAGE>
PACIFIC ADVISORS BALANCED FUND
SCHEDULE OF INVESTMENTS
December 31,1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Net Number of
Assets Shares Value
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
COMMON STOCK - 44.13%
Aerospace & Defense
Boeing Company 0.96% 2,000 $ 65,250
- ---------------------------------------------------------------------------
Communications
Nokia Corporation - ADR A 5.32% 3,000 361,313
- ---------------------------------------------------------------------------
Entertainment
GC Companies, Inc.* 0.92% 1,500 62,437
TCI Liberty Media "A"* 2.03% 3,000 138,188
Time Warner, Inc. 2.74% 3,000 186,188
Viacom, Inc.* 4.35% 4,000 296,000
- ---------------------------------------------------------------------------
10.04% 682,813
- ---------------------------------------------------------------------------
Forest Products
Rayonier Inc.* 1.01% 1,500 68,906
- ---------------------------------------------------------------------------
Financial Services - Diversified
Convergys Corporation* 1.32% 4,000 89,500
Household International
Corporation 1.16% 2,000 79,250
- ---------------------------------------------------------------------------
2.48% 168,750
- ---------------------------------------------------------------------------
Financial Services - Specialty
Federal National Mortgage 2.72% 2,500 185,000
- ---------------------------------------------------------------------------
Gas - Integrated
Enron Corporation 2.52% 3,000 171,188
- ---------------------------------------------------------------------------
Industrial & Commercial Services
Pinkerton's Inc.* 1.41% 4,500 95,906
Reliance Steel 1.63% 4,000 110,500
- ---------------------------------------------------------------------------
3.04% 206,406
- ---------------------------------------------------------------------------
Insurance - Specialty
Farm Family Holdings,
Inc.* 2.00% 4,000 136,000
- ---------------------------------------------------------------------------
Iron & Steel
Oregon Steel Mills, Inc. 0.79% 4,500 53,437
- ---------------------------------------------------------------------------
Oilfield Equipment & Services
Cooper Cameron* 0.90% 2,500 61,250
- ---------------------------------------------------------------------------
Pharmaceuticals
Pfizer Inc. 2.77% 1,500 188,156
- ---------------------------------------------------------------------------
Publishing
Dun & Bradstreet
Corporation 1.16% 2,500 78,906
R H Donnelley Corporation 1.93% 9,000 131,063
Thomas Nelson, Inc. 0.99% 5,000 67,500
- ---------------------------------------------------------------------------
4.08% 277,469
- ---------------------------------------------------------------------------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
PACIFIC ADVISORS BALANCED FUND
SCHEDULE OF INVESTMENTS
December 31,1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Net Number of
Assets Shares Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK CONTINUED
Railroads
GATX Corporation 1.11% 2,000 $ 75,750
- ---------------------------------------------------------------------------
Real Estate
Catellus Development
Corporation* 2.11% 10,000 143,125
- ---------------------------------------------------------------------------
Real Estate Investment Trusts (REITs)
Redwood Trust, Inc. 0.62% 3,000 42,000
- ---------------------------------------------------------------------------
Trucking
CNF Transportation
Incorporated 1.66% 3,000 112,687
- ---------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost: $1,842,333) 2,999,500
--------------
<CAPTION>
% of Net Principal
Assets Amounts Value
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
CORPORATE BONDS - 46.88%
Banks - Regional
Banc One Corporation
9.875% 03/01/09 3.16% $ 165,000 214,688
Chase Manhattan
Corporation 7.875%
08/01/04 2.94% 200,000 200,219
Nations Bank 10.875%
03/15/03 4.61% 264,000 313,330
- ---------------------------------------------------------------------------
10.71% 728,237
- ---------------------------------------------------------------------------
Food Retailers
Safeway, Inc. 9.65%
01/15/04 1.71% 100,000 116,346
Safeway, Inc. 9.875%
03/15/07 4.63% 252,000 314,591
- ---------------------------------------------------------------------------
6.34% 430,937
- ---------------------------------------------------------------------------
Insurance - Full Line
CIGNA Corporation 7.40%
05/15/07 3.52% 225,000 239,401
- ---------------------------------------------------------------------------
Insurance - Life
Equitable of Iowa 8.5%
02/15/05 1.24% 75,000 84,491
- ---------------------------------------------------------------------------
Insurance - Property & Casualty
Chubb Corporation 8.75%
11/15/99 0.74% 50,000 50,502
- ---------------------------------------------------------------------------
Oil - Secondary
Occidental Petroleum 9.25%
08/01/19 4.17% 250,000 283,672
- ---------------------------------------------------------------------------
Utility - Electric
Alabama Power 9.0%
12/01/24 1.98% 125,000 134,506
Cleveland Electric
Illuminating 7.625%
08/01/02 2.84% 185,000 192,877
Illinois Power 8% 02/15/23 1.46% 94,000 98,954
Niagra Mohawk Power 9.75%
11/01/05 4.88% 275,000 331,618
Public Service Electric &
Gas 6.875 01/01/03 1.70% 110,000 115,597
- ---------------------------------------------------------------------------
12.86% 873,552
- ---------------------------------------------------------------------------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
PACIFIC ADVISORS BALANCED FUND
SCHEDULE OF INVESTMENTS
December 31,1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Net Principal
Assets Amounts Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS CONTINUED
Utility - Telephone
Bellsouth
Telecommunications 5.85%
11/15/45 1.50% $ 100,000 $ 101,992
Nynex Corporation 9.55%
05/01/10 4.10% 239,151 278,474
Sprint Spectrum L P 11%
08/15/06 1.70% 100,000 115,500
- ---------------------------------------------------------------------------
7.30% 495,966
- ---------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost: $3,110,760) 3,186,758
--------------
<CAPTION>
% of Net Number of
Assets Shares Value
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
PREFERRED STOCK - 3.94%
Real Estate Investment Trusts (REITs)
Price Enterprises -
Preferred Class A 3.94% 19,400 267,962
- ---------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost: $262,330) 267,962
--------------
TOTAL INVESTMENT SECURITIES -
94.95%
(Cost: $5,215,423) $ 6,454,220
--------------
SHORT-TERM INVESTMENTS - 3.69%
United Missouri Bank Money
Market Fund 251,091
OTHER ASSETS LESS LIABILITIES - 1.36% 92,529
--------------
TOTAL NET ASSETS - 100% $ 6,797,840
- ---------------------------------------------------------------------------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
18
<PAGE>
PACIFIC ADVISORS GOVERNMENT SECURITIES FUND
SCHEDULE OF INVESTMENTS
December 31,1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Net Principal
Assets Amounts Value
<S> <C> <C> <C>
- --------------------------------------------------------------------------
US GOVERNMENT SECURITIES - 65.78%
US Treasury Bond 8.125%
08/15/21 4.33% $ 200,000 $ 270,687
US Treasury Bond 7.25%
08/15/22 3.99% 200,000 249,313
US Treasury Bond 7.125%
02/15/23 5.92% 300,000 370,125
US Treasury Bond 6.25%
08/15/23 5.01% 280,000 313,250
US Treasury Bond 7.50%
11/15/24 5.19% 250,000 324,141
US Treasury Bond 7.625%
02/15/25 5.27% 250,000 329,141
US Treasury Bond 6.875%
08/15/25 4.85% 250,000 303,281
US Treasury Bond 6.00%
02/15/26 5.24% 300,000 327,375
US Treasury Bond 6.75%
08/15/26 5.75% 300,000 359,531
US Treasury Bond 6.625%
02/15/27 6.24% 330,000 390,328
US Treasury Bond 5.50%
08/15/28 5.87% 350,000 366,844
US Treasury Bond -
Stripped 08/15/25 3.82% 1,000,000 239,059
US Treasury Bond -
Stripped 02/15/27 4.30% 1,200,000 269,015
- --------------------------------------------------------------------------
TOTAL US GOVERNMENT SECURITIES
(Cost: $3,768,380) 4,112,090
-------------
<CAPTION>
% of Net Number of
Assets Shares Value
<S> <C> <C> <C>
- --------------------------------------------------------------------------
COMMON STOCK - 26.42%
Communications
Ericsson 1.91% 5,000 119,688
- --------------------------------------------------------------------------
Utilities - Diversified
Sierra Pacific Resources 3.95% 6,500 247,000
- --------------------------------------------------------------------------
Utilities - Electric
CMS Energy Corporation 3.87% 5,000 242,188
DQE, Inc. 4.43% 6,300 276,806
IPALCO Enterprises, Inc. 4.44% 5,000 277,187
Nipsco Indusries, Inc. 3.90% 8,000 243,500
- --------------------------------------------------------------------------
16.64% 1,039,681
- --------------------------------------------------------------------------
Utilities - Telephone Systems
TECO Energy, Inc. 3.92% 8,700 245,231
- --------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost: $1,423,242) 1,651,600
-------------
TOTAL INVESTMENT SECURITIES -
92.20%
(Cost: $5,191,622) $ 5,763,690
-------------
SHORT-TERM INVESTMENTS - 3.68%
United Missouri Bank Money
Market Fund 230,014
OTHER ASSETS LESS LIABILITIES - 4.12% 257,271
-------------
TOTAL NET ASSETS - 100% $ 6,250,975
- --------------------------------------------------------------------------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
19
<PAGE>
PACIFIC ADVISORS INCOME AND EQUITY FUND
SCHEDULE OF INVESTMENTS
December 31,1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Net Principal
Assets Amounts Value
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
CORPORATE BONDS - 73.39%
Banks - Money Centers
Citicorp Subordinate
Securities 9.5% 02/01/02 1.64% $ 50,000 $ 54,953
Union Bank of
Switzerland-NY 7.25%
07/15/06 0.82% 25,000 27,438
- ---------------------------------------------------------------------------
2.46% 82,391
- ---------------------------------------------------------------------------
Banks - Regional
Banc One Corp 9.875%
03/0109 0.47% 12,000 15,614
Banc One Corp 7.25%
08/15/04 2.38% 74,000 79,532
Bank of America
Subordinate Notes 10.0%
02/01/03 1.56% 45,000 52,175
Bank of New York 8.5%
12/15/04 1.20% 35,000 40,131
InterAmerican Development
Bank 8.4% 09/01/09 0.37% 10,000 12,378
NCNB Corporation 9.5%
06/01/04 0.88% 25,000 29,402
- ---------------------------------------------------------------------------
6.86% 229,232
- ---------------------------------------------------------------------------
Consumer - Non-cyclical
Procter & Gamble 8.50%
08/10/09 0.74% 20,000 24,929
- ---------------------------------------------------------------------------
Financial Services
Associates Corporation
N.A. 8.55% 07/15/09 1.80% 50,000 60,234
Associates Corporation
N.A. 8.15% 08/01/09 1.05% 30,000 35,225
General Motors Acceptance
Corporation 9.625%
12/15/01 1.63% 49,000 54,503
General Motors Acceptance
Corporation 8.875%
06/01/10 0.86% 23,000 28,949
- ---------------------------------------------------------------------------
5.34% 178,911
- ---------------------------------------------------------------------------
Financial Services - Diversified
General Electric Capital
Corporation 7.875%
12/01/06 0.62% 18,000 20,817
General Electric Capital
Corporation 8.5% 07/24/08 2.73% 75,000 91,219
- ---------------------------------------------------------------------------
3.35% 112,036
- ---------------------------------------------------------------------------
Financial Services - Specialty
Ford Capital B.V. 9.5%
06/01/10 2.70% 72,000 90,513
- ---------------------------------------------------------------------------
Food
Ralston Purina 9.25%
10/15/09 4.54% 123,000 152,049
- ---------------------------------------------------------------------------
Food Retailers
Safeway, Inc 10.0%
12/01/01 2.48% 75,000 83,173
Safeway, Inc 9.875%
03/15/07 1.84% 49,000 61,171
- ---------------------------------------------------------------------------
4.32% 144,344
- ---------------------------------------------------------------------------
Gas - Integrated
Coastal Corporation 10.25
10/15/04 3.41% 95,000 114,175
- ---------------------------------------------------------------------------
Industrial
Caterpillar, Inc. 9.0%
04/15/06 1.57% 44,000 52,665
Tenneco Corporation 10.2%
03/15/08 3.40% 90,000 113,917
- ---------------------------------------------------------------------------
4.97% 166,582
- ---------------------------------------------------------------------------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
20
<PAGE>
PACIFIC ADVISORS INCOME AND EQUITY FUND
SCHEDULE OF INVESTMENTS
December 31,1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Net Principal
Assets Amounts Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS CONTINUED
Insurance
American General Financial
8.125% 08/15/09 3.85% $ 111,000 $ 129,019
CIGNA Corporation 7.40%
01/15/03 0.78% 25,000 26,138
CIGNA Corporation 7.40%
5/15/07 0.79% 25,000 26,600
Progressive Corporation
7.30% 06/01/06 0.47% 15,000 16,196
Transamerica Corporation
9.375% 03/01/08 2.54% 70,000 85,056
- ---------------------------------------------------------------------------
8.43% 283,009
- ---------------------------------------------------------------------------
Office Equipment
Xerox Corporation 7.15%
08/01/04 0.81% 25,000 27,033
- ---------------------------------------------------------------------------
Oil - Integrated Majors Industrial
Atlantic Richfield 9.125%
03/01/11 4.18% 109,000 139,756
- ---------------------------------------------------------------------------
Oil - Pipelines
Union Pacific Resources
7.0% 10/15/06 1.49% 50,000 49,867
- ---------------------------------------------------------------------------
Real Estate
Secured Finance 9.05%
12/15/04 3.44% 100,000 115,158
- ---------------------------------------------------------------------------
Retailers - Broadline
Dayton Hudson Co. 10.0%
01/01/11 0.80% 20,000 26,832
Sears Roebuck Co. 9.5%
06/01/99 0.76% 25,000 25,388
- ---------------------------------------------------------------------------
1.56% 52,220
- ---------------------------------------------------------------------------
US Government Agency
International Bank
Reconstruction &
Development
8.64% 06/18/01 0.81% 25,000 27,041
- ---------------------------------------------------------------------------
Utilities - Electric
Atlantic City Electric
6.625% 08/01/13 0.47% 15,000 15,670
Baltimore Gas & Electric
8.54% 09/18/06 2.09% 60,000 70,047
Niagara Mohawk Power 9.75%
11/01/05 0.90% 25,000 30,147
Pacific Gas & Electric
8.375% 05/01/25 0.66% 20,000 22,153
PSI Energy, Inc. 6.35%
11/15/06 1.25% 40,000 41,831
Public Service Electric &
Gas 7.375% 03/01/14 1.29% 40,000 43,048
Public Service Electric &
Gas 8.875% 06/01/03 2.52% 75,000 84,395
- ---------------------------------------------------------------------------
9.18% 307,291
- ---------------------------------------------------------------------------
Utilities - Gas
ANR Pipeline 7.0% 06/01/25 0.46% 15,000 15,497
Consolidated Natural Gas
6.625% 12/01/13 0.62% 20,000 20,601
- ---------------------------------------------------------------------------
1.08% 36,098
- ---------------------------------------------------------------------------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
21
<PAGE>
PACIFIC ADVISORS INCOME AND EQUITY FUND
SCHEDULE OF INVESTMENTS
December 31,1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Net Principal
Assets Amounts Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS CONTINUED
Utilities - Telephone Systems
New York Telephone Co.
8.625% 11/15/10 1.38% $ 37,000 $ 46,043
New York Telephone Co.
7.0% 06/15/13 1.48% 45,000 49,566
NYNEX Cap Fund 8.75%
12/01/04 0.86% 25,000 28,780
- ---------------------------------------------------------------------------
3.72% 124,389
- ---------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost: $2,380,919) 2,457,024
--------------
<CAPTION>
% of Net Number of
Assets Shares Value
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
COMMON STOCK - 10.22%
Building Materials
Home Depot, Inc. 1.83% 1,000 61,188
- ---------------------------------------------------------------------------
Diversified Companies
General Electric 1.52% 500 51,031
- ---------------------------------------------------------------------------
Financial Services - Diversified
Citigroup, Inc. 0.74% 500 24,750
- ---------------------------------------------------------------------------
Investment Companies
Alliance Capital
Management L.P. 0.77% 1,000 25,750
- ---------------------------------------------------------------------------
Oil - Integrated Majors
Mobil Corporation 1.04% 400 34,850
- ---------------------------------------------------------------------------
Pharmaceuticals
Schering-Plough
Corporation 0.99% 600 33,150
- ---------------------------------------------------------------------------
Retailers - Specialty
Gap, Inc. 1.26% 750 42,187
- ---------------------------------------------------------------------------
Software & Processing Equipment
Microsoft* 2.07% 500 69,344
- ---------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost: $160,134) 342,250
--------------
PREFERRED STOCK - 7.34%
Insurance
American General
Financial, LLC 0.93% 1,200 31,275
Torchmark Capital, LLC
Series A 0.92% 1,200 30,750
Unum Corporation Series A 1.16% 1,500 38,719
- ---------------------------------------------------------------------------
3.01% 100,744
- ---------------------------------------------------------------------------
Real Estate Investment Trusts (REITs)
Price Enterprises Class A 2.48% 6,000 82,875
- ---------------------------------------------------------------------------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
22
<PAGE>
PACIFIC ADVISORS INCOME AND EQUITY FUND
SCHEDULE OF INVESTMENTS
December 31,1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Net Number of
Assets Shares Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK CONTINUED
Utility - Telephone Systems
GTE 8.75% Series B 0.93% 1,200 $ 31,275
GTE 9.25% Series Z 0.92% 1,200 30,750
- ---------------------------------------------------------------------------
1.85% 62,025
- ---------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost: $249,630) 245,644
--------------
<CAPTION>
% of Net Principal
Assets Amount Value
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
US GOVERNMENT SECURITIES - 6.01%
US Treasury Note 7.75%
11/30/99 3.07% $ 100,000 102,719
US Treasury Note 7.875%
11/15/04 2.94% 85,000 98,467
- ---------------------------------------------------------------------------
TOTAL US GOVERNMENT SECURITIES
(Cost: $185,325) 201,186
--------------
FOREIGN GOVERNMENT SECURITIES -
0.32%
Foreign Government Agency Bonds
Ontario Global Bond 7.0%
08/04/05 0.32% 10,000 10,874
- ---------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT SECURITIES
(Cost: $10,327) 10,874
--------------
TOTAL INVESTMENT SECURITIES -
97.28%
(Cost: $2,986,335) $ 3,256,978
--------------
SHORT-TERM INVESTMENTS - 1.51%
United Missouri Bank Money
Market Fund 50,565
OTHER ASSETS LESS LIABILITIES - 1.21% 40,391
--------------
TOTAL NET ASSETS - 100% $ 3,347,934
- ---------------------------------------------------------------------------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
23
<PAGE>
PACIFIC ADVISORS SMALL CAP FUND
SCHEDULE OF INVESTMENTS
December 31,1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Net Number of
Assets Shares Value
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
COMMON STOCK - 98.23%
Airlines
Mercury Air Group, Inc.* 0.84% 10,000 $ 80,000
- ---------------------------------------------------------------------------
Building Materials
Q.E.P. Company, Inc.* 4.56% 50,000 437,500
Republic Group, Inc. 3.88% 18,500 371,156
- ---------------------------------------------------------------------------
8.44% 808,656
Chemicals
Ocean Bio-Chem, Inc.* 1.31% 100,000 125,000
Polymer Research
Corporation of America* 1.02% 30,000 97,500
- ---------------------------------------------------------------------------
2.33% 222,500
- ---------------------------------------------------------------------------
Computer Software & Processing Equipment
Managed Care Solutions,
Inc.* 1.52% 34,200 145,350
Telescan, Inc.* 2.87% 30,100 274,662
Vista Information
Solutions* 2.59% 32,000 248,000
- ---------------------------------------------------------------------------
6.98% 668,012
- ---------------------------------------------------------------------------
Cosmetic/Personal Care
American Safety Razor
Corporation* 4.39% 35,000 420,000
Herbalife Class A 1.24% 8,333 118,745
Herbalife Class B 0.78% 6,500 74,344
Natural Alternatives
International* 4.83% 42,000 462,000
Nature's Sunshine 4.46% 28,000 427,000
- ---------------------------------------------------------------------------
15.70% 1,502,089
- ---------------------------------------------------------------------------
Electrical Components & Equipment
Tridex Corporation* 1.43% 47,500 136,563
- ---------------------------------------------------------------------------
Food
Worthington Foods, Inc. 7.94% 40,000 760,000
- ---------------------------------------------------------------------------
Health Care Provider
America Service Group* 2.72% 20,000 260,000
Children's Comprehensive
Services* 2.95% 20,000 282,500
- ---------------------------------------------------------------------------
5.67% 542,500
- ---------------------------------------------------------------------------
Home Construction
Modtech, Inc.* 4.30% 27,000 411,750
- ---------------------------------------------------------------------------
Industrial & Commercial Services
Diversified Corporate
Resources, Inc.* 1.53% 29,200 146,000
Healthcare Services Group* 5.72% 60,000 547,500
RCM Technologies, Inc.* 2.77% 10,000 265,000
Rentrak Corporation* 1.01% 35,000 96,250
- ---------------------------------------------------------------------------
11.03% 1,054,750
- ---------------------------------------------------------------------------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
24
<PAGE>
PACIFIC ADVISORS SMALL CAP FUND
SCHEDULE OF INVESTMENTS
December 31,1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Net Number of
Assets Shares Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK CONTINUED
Insurance - Specialty
Interstate National Dealer
Services* 9.09% 80,000 $ 870,000
Warrantech Corporation* 2.23% 55,000 213,125
- ---------------------------------------------------------------------------
11.32% 1,083,125
- ---------------------------------------------------------------------------
Medical Equipment, Devices, & Supplies
Biosource* 1.34% 43,700 128,369
Meridian Medical
Technologies, Inc.* 2.66% 55,000 254,375
- ---------------------------------------------------------------------------
4.00% 382,744
- ---------------------------------------------------------------------------
Railroads
Railamerica, Inc.* 7.54% 85,000 722,500
- ---------------------------------------------------------------------------
Restaurants
Panchos Mexican
Restaurants* 0.77% 112,000 73,506
- ---------------------------------------------------------------------------
Semiconductor & Related
Cerprobe Corporation* 6.32% 45,000 604,687
- ---------------------------------------------------------------------------
Transportation Equipment
DSP Technology, Inc.* 0.88% 12,000 84,000
IMPCO Technologies* 2.74% 20,000 262,500
- ---------------------------------------------------------------------------
3.62% 346,500
- ---------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost: $7,894,440) 9,399,882
--------------
TOTAL INVESTMENT SECURITIES -
98.23%
(Cost: $7,894,440) $ 9,399,882
--------------
SHORT-TERM INVESTMENTS - 1.71%
United Missouri Bank Money
Market Fund 163,676
OTHER ASSETS LESS LIABILITIES - 0.06% 5,991
--------------
TOTAL NET ASSETS - 100% $ 9,569,549
- ---------------------------------------------------------------------------
</TABLE>
* Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
25
<PAGE>
PACIFIC ADVISORS FUND INC.
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC ADVISORS
----------------------------------------------------------
INCOME
GOVERNMENT AND SMALL
BALANCED SECURITIES EQUITY CAP
FUND FUND FUND FUND
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Investment securities
At cost $ 5,215,423 $ 5,191,622 $ 2,986,335 $ 7,894,440
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
At market value $ 6,454,220 $ 5,763,690 $ 3,256,978 $ 9,399,882
Short-term
investments, at
cost, which is
equivalent to
market 251,091 230,014 50,565 163,676
Other assets 8,290 9,953 1,632 17,645
Accrued income receivable 75,431 76,595 45,865 537
Receivable from Investment
Manager (Note 3) - 40,247 15,710 -
Receivable for capital
shares sold 25,456 142,799 22,729 63,307
------------- ------------- ------------- -------------
Total assets 6,814,488 6,263,298 3,393,479 9,645,047
------------- ------------- ------------- -------------
LIABILITIES
Payable for investments
purchased - - 38,941 44,490
Accounts payable 10,955 8,925 6,465 19,298
Accounts payable to
related parties (Note
3). 3,726 3,398 139 5,841
Payable to Investment
Manager (Note 1) 1,967 - - 5,869
------------- ------------- ------------- -------------
Total Liabilities 16,648 12,323 45,545 75,498
------------- ------------- ------------- -------------
NET ASSETS $ 6,797,840 $ 6,250,975 $ 3,347,934 $ 9,569,549
------------- ------------- ------------- -------------
SUMMARY OF SHAREHOLDERS'
EQUITY
Paid in capital $ 5,557,514 $ 5,677,799 $ 3,074,575 $ 8,063,701
Accumulated undistributed
net investment income
(loss) 5,633 1,075 2,676 -
Accumulated undistributed
net realized gains
(losses) on security
transactions - 33 40 406
Distributions in excess of
net realized gains on
security transactions (4,104 ) - - -
Net unrealized
appreciation
(depreciation) of
investments 1,238,797 572,068 270,643 1,505,442
------------- ------------- ------------- -------------
Net assets at December 31,
1998 $ 6,797,840 $ 6,250,975 $ 3,347,934 $ 9,569,549
------------- ------------- ------------- -------------
CLASS A:
Net assets $ 6,419,364 $ 5,456,251 $ 2,646,044 $ 9,330,324
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares authorized 50,000,000 50,000,000 50,000,000 50,000,000
Shares outstanding 506,045 515,194 246,282 655,549
Net asset value and
redemption price per
share $ 12.69 $ 10.59 $ 10.74 $ 14.23
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Maximum offering price per
share $ 13.46 $ 11.12 $ 11.28 $ 15.10
Sales load 5.75% 4.75% 4.75% 5.75%
CLASS C:
Net assets $ 378,476 $ 794,724 $ 701,890 $ 239,225
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares authorized 50,000,000 50,000,000 50,000,000 50,000,000
Shares outstanding 30,010 75,655 66,115 16,798
Net asset value and
redemption price per
share $ 12.61 $ 10.50 $ 10.62 $ 14.24
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
26
<PAGE>
PACIFIC ADVISORS FUND INC.
STATEMENTS OF OPERATIONS
For the year ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC ADVISORS
-------------------------------------------------------
BALANCED FUND GOVERNMENT SECURITIES FUND
--------------------------- --------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 42,815 $ 36,244
Interest 187,061 205,222
------------- ------------
Total Income 229,876 241,466
------------- ------------
EXPENSES
Investment Management Fees 49,824 33,771
Transfer Agent Expense 26,066 21,036
Fund Accounting Fees 34,310 27,033
Legal Expense 31,567 22,857
Audit Fees 22,230 15,510
Registration Fees 17,918 19,870
Printing 30,374 24,376
Custody Fees 7,578 6,902
Director Fees/Meetings 1,910 1,263
Distribution Fees (Note 3) 12,924 11,182
Amortization Expense (Note
1) 1,868 1,985
Other Expense 6,207 5,166
------------- ------------
Total Expenses,
before
reimbursements 242,776 190,951
Less fees waived and
expenses reimbursed
(Note 3) 24,912 110,295
------------- ------------
Net Expenses 217,864 80,656
------------- ------------
NET INVESTMENT INCOME (LOSS) $ 12,012 $ 160,810
------------ ------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net Realized gain (loss)
on investments 153,998 378,940
Net unrealized
appreciation
(depreciation) of
investments
Beginning of year $ 960,871 $ 314,546
End of year 1,238,797 572,068
------------- ------------
Change in net
unrealized
appreciation
(depreciation)
of
investments 277,926 257,522
------------ ------------
431,924 636,462
------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS $ 443,936 $ 797,272
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
27
<PAGE>
PACIFIC ADVISORS FUND INC.
STATEMENTS OF OPERATIONS
For the year ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC ADVISORS
----------------------------------------------------------
INCOME AND EQUITY FUND SMALL CAP FUND
-------------------------- ------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 12,297 $ 19,389
Interest 125,980 13,984
------------ --------------
Total Income 138,277 33,373
------------ --------------
EXPENSES
Investment Management Fees 20,070 85,496
Transfer Agent Expense 19,478 47,801
Fund Accounting Fees 19,802 58,584
Legal Expense 12,111 60,843
Audit Fees 7,894 42,068
Registration Fees 10,810 32,539
Printing 8,096 48,257
Custody Fees 7,214 8,946
Director Fees/Meetings 674 3,620
Distribution Fees (Note 3) 7,448 28,370
Amortization Expense (Note
1) 1,824 1,996
Other Expense 2,776 11,047
------------ --------------
Total Expenses, before
reimbursements 118,197 429,567
Less fees waived and
expenses reimbursed
(Note 3) 71,380 -
------------ --------------
Net Expenses 46,817 429,567
------------ --------------
NET INVESTMENT INCOME (LOSS) $ 91,460 $ (396,194 )
------------ --------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net Realized gain (loss)
on investments 30,423 235,446
Net Unrealized
appreciation
(depreciation) of
investments
Beginning of year $ 110,484 $ 3,321,532
End of year 270,643 1,505,442
------------ --------------
Change in net
unrealized
appreciation
(depreciation)
of
investments 160,159 (1,816,090 )
------------ --------------
190,582 (1,580,644 )
------------ --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS $ 282,042 $ (1,976,838 )
------------ --------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
28
<PAGE>
PACIFIC ADVISORS FUND INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC ADVISORS FUND
------------------------------------------------------
GOVERNMENT SECURITIES
BALANCED FUND FUND
---------------------------- ------------------------
Year ended Year ended Year ended Year ended
December 31, December 31, December December 31,
1998 1997 31, 1998 1997
-------------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
FROM OPERATIONS
Net investment income
(loss) $ 12,012 $ (1,189 ) $ 160,810 $ 187,675
Net realized gain (loss)
on investments 153,998 96,101 378,940 56,573
Change in net unrealized
appreciation
(depreciation) of
investments 277,926 511,147 257,522 233,907
-------------- ------------ ---------- ------------
Increase (decrease) in net
assets resulting from
operations 443,936 606,059 797,272 478,155
-------------- ------------ ---------- ------------
FROM DISTRIBUTIONS TO
SHAREHOLDERS
Class A:
Net investment income - (5,013 ) (146,241) (187,473 )
Net capital gains (150,322) (96,179 ) (332,026) (57,411 )
Class C:
Net investment income (172) - (15,510) -
Net capital gains (8,044) - (47,268) -
-------------- ------------ ---------- ------------
Decrease in net assets
resulting from
distributions (158,538) (101,192 ) (541,045) (244,884 )
-------------- ------------ ---------- ------------
FROM CAPITAL SHARE
TRANSACTIONS (NOTE 5)
Proceeds from shares sold 1,207,016 2,162,179 3,206,684 760,764
Proceeds from shares
purchased by
reinvestment of
dividends 141,953 91,190 459,455 215,344
Cost of shares repurchased (429,120) (353,082 ) (1,610,336) (4,366,761 )
-------------- ------------ ---------- ------------
Increase (decrease) in net
assets derived from
capital share
transactions 919,849 1,900,287 2,055,803 (3,390,653 )
-------------- ------------ ---------- ------------
Increase (decrease) in net
assets 1,205,247 2,405,154 2,312,030 (3,157,382 )
NET ASSETS
Beginning of year 5,592,593 3,187,439 3,938,945 7,096,327
-------------- ------------ ---------- ------------
End of year $ 6,797,840 $ 5,592,593 $6,250,975 $ 3,938,945
-------------- ------------ ---------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
29
<PAGE>
PACIFIC ADVISORS FUND INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACIFIC ADVISORS FUND
----------------------------------------------------------
INCOME AND EQUITY FUND SMALL CAP FUND
---------------------------- ----------------------------
Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS
FROM OPERATIONS
Net investment income
(loss) $ 91,460 $ 53,556 $ (396,194) $ (280,055 )
Net realized gain (loss)
on investments 30,423 (44 ) 235,446 65,239
Change in net unrealized
appreciation
(depreciation) of
investments 160,159 87,034 (1,816,090) 916,243
-------------- ------------ ------------- -------------
Increase (decrease) in net
assets resulting from
operations 282,042 140,546 (1,976,838) 701,427
-------------- ------------ ------------- -------------
FROM DISTRIBUTIONS TO
SHAREHOLDERS
Class A:
Net investment income (74,762) (53,539 ) - -
Net capital gains (24,021) - (229,623) (64,399 )
Class C:
Net investment income (14,485) - - -
Net capital gains (6,355) - (5,886) -
-------------- ------------ ------------- -------------
Decrease in net assets
resulting from
distributions (119,623) (53,539 ) (235,509) (64,399 )
-------------- ------------ ------------- -------------
FROM CAPITAL SHARE
TRANSACTIONS (NOTE 5)
Proceeds from shares sold 1,428,550 765,748 2,235,324 3,511,363
Proceeds from shares
purchased by
reinvestment of
dividends 79,419 35,535 182,048 51,981
Cost of shares repurchased (216,738) (205,156 ) (1,760,436) (1,624,170 )
-------------- ------------ ------------- -------------
Increase (decrease) in net
assets derived from
capital share
transactions 1,291,231 596,127 656,936 1,939,174
-------------- ------------ ------------- -------------
Increase (decrease) in net
assets 1,453,650 683,134 (1,555,411) 2,576,202
NET ASSETS
Beginning of year 1,894,284 1,211,150 11,124,960 8,548,758
-------------- ------------ ------------- -------------
End of year $ 3,347,934 $ 1,894,284 $ 9,569,549 $ 11,124,960
-------------- ------------ ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
30
<PAGE>
PACIFIC ADVISORS FUND INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
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 orgainizational 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: Balanced Fund, Government
Securities Fund, Income and Equity Fund and Small Cap Fund. Each fund is a
separate investment portfolio of the Company with a distinct investment
objective, investment program, policies and restrictions. The Balanced Fund
seeks to achieve long-term capital appreciation and income consistent with
reduced market risk. The Government Securities Fund seeks to provide high
current income, preservation of capital, and rising future income, consistent
with prudent investment risk. The Income and Equity Fund seeks to provide
current income and secondarily, long-term capital appreciation. The Small Cap
Fund seeks to provide capital appreciation through investment in small
capitalization companies.
Effective April 1, 1998 the Funds offer Class A and Class C shares, each
of which has equal rights as to assets and voting privileges except that Class A
and Class C each has exclusive voting rights with respect to its distribution
plan. Investment income, realized and unrealized capital gains and losses, and
the common expenses of each Fund are allocated on a pro rata basis to each class
based on the relative net assets of each class to the total net assets of the
Fund. Each Class of shares differs in its respective service and distribution
expenses and may differ in its transfer agent, registration, and certain other
class-specific fees and expenses.
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 the 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 maturitiy 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 Balanced Fund and
the Small Cap Fund declare and distribute dividends of their net investment
income , if any, annually. The Government Securities Fund and Income and Equity
Fund declare and distribute dividends of their 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. 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 in the financial
statements and footnotes. Actual results could differ from those estimates.
NOTE 3. INVESTMENT MANAGEMENT, DISTRIBUTOR AND OTHER RELATED PARTY TRANSACTIONS
The Company and the Funds have entered into investment management
agreements ("Manangement Agreements") with the Investment Manager. The
Management Agreements provide 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 and 0.75% of average net assets for the Balanced,
Income and Equity and Small Cap Funds. The Investment Manager has entered into
sub-advisory agreements ("Sub-Advisory Agreements") with Hamilton & Bache, Inc.
and Spectrum Asset Management, Inc. ("Advisors") for the Balanced and Government
Securities Funds respectively. It has also entered into a co-management
agreement ("Co-management Agreement") with Hamilton and Bach, Inc. ("Advisor")
for the Income and Equity Fund. The Investment Manager is solely responsible for
the payment of these fees to the Advisors.
In accordance with Expense Limitation agreements, with the Company, on
behalf of the Government Securities and Income and Equity Funds, the Investment
Manager is required to reduce its investment management fees in any fiscal year
in which all fund operating expenses exceed 1.65% and 1.85%, respectively, of
average daily net assets of the respective Funds, and to reimburse the
Government Securities and Income and Equity Funds for any additional amounts
that exceed these limits. These agreements may be terminated by either party. In
addition, from time to time, the Investment Manager and Advisors may voluntarily
waive their management and sub-advisory fees, and/or absorb certain expenses for
the Funds.
31
<PAGE>
PACIFIC ADVISORS FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
Pursuant to the Expense Limitation Agreements, voluntary waiver of fees
and the assumption of expenses by the Investment Manager, the following amounts
were waived or reimbursed for the year ended December 31, 1998.
<TABLE>
<CAPTION>
Management Expense
Fees Reimbursements
<S> <C> <C>
Balanced Fund $ 24,912 $ -
Government Securities Fund 31,359 78,936
Income and Equity Fund 18,816 52,564
</TABLE>
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 levels in
subsequent years until the Investment Manager has fully recouped fees forgone
and expenses paid or assumed, as each 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
on a fund by fund basis. As of December 31, 1998 the cummulative amounts
unrecouped by the Investment Manager since the commencement of operations are:
<TABLE>
<S> <C>
Balanced Fund $260,760
Government Securities Fund 476,476
Income and Equity Fund 362,442
Small Cap Fund 217,445
</TABLE>
For the year ended December 31, 1998, Pacific Global Fund Distributors,
Inc. ("PGFD"), the principal underwriter for the Company, received commissions
on sales of capital stock, after deducting amounts allowed to authorized
distributors as commissions. The amounts are as follows.
<TABLE>
<CAPTION>
Underwriting Commissions
Fees Retained Paid
<S> <C> <C>
Balanced Fund $ 2,622 $ 13,006
Government Securities Fund 5,225 23,811
Income and Equity Fund 2,505 13,272
Small Cap Fund 12,241 60,760
</TABLE>
PGFD is a wholly-owned subsidiary of the Investment Manager.
The Company and the Funds have entered into agreements 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, agreements to provide transfer agent
services have 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.
The Company has adopted a plan of distribution, whereby the Funds may
pay a service fee to qualified recipients in an amount up to 0.25% and 1.00% per
annum of each Fund's daily net assets for A share and C shares respectively. For
the year ended December 31, 1998, total service fees were:
<TABLE>
<S> <C>
Balanced Fund $ 12,924
Government Securities Fund 11,182
Income and Equity Fund 7,448
Small Cap Fund 28,370
</TABLE>
NOTE 4 - YEAR 2000
Like other investment companies, financial and business organizations
and individuals around the world, the Fund could be adversely affected if the
computer systems it uses and those used by the Fund's brokers and other major
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000. This is commonly known as the "Year
2000 Issue."
The Fund has assessed its computer systems and the systems compliance
issues of its brokers and other major service providers. The Fund has taken
steps that it believes are reasonably designed to address the Year 2000 issue
with respect to the computer systems it uses and has obtained satisfactory
assurances that comparable steps are being taken by its brokers and other major
service providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any material adverse impact on the Fund. The
inability of the Fund or its third party providers to timely complete all
necessary procedures to address the Year 2000 Issue could have a material
adverse effect on the Fund's operations. Management will continue to monitor the
status of and its exposure to this issue. For the year ended December 31, 1998,
the Fund incurred no significant Year 2000 related expenses and it does not
expect to incur significant Year 2000 expenses in the future.
The Fund is in the process of establishing a contingency plan to address
recovery from unavoided or unavoidable Year 2000 problems, if any.
32
<PAGE>
PACIFIC ADVISORS FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 5. PURCHASE AND SALES OF SECURITIES
The following summarizes purchases and sales of investment securities,
other than short-term investments, and aggregate gross unrealized appreciation
and depreciation by each Fund for the year ended and as of December 31, 1998
<TABLE>
<CAPTION>
Gross Gross Net Unrealized
Cost of Proceeds Unrealized Unrealized Appreciation
Purchases From Sales Appreciation Depreciation (Depreciation)
<S> <C> <C> <C> <C> <C>
Balanced Fund $ 4,093,475 $ 3,271,418 $ 1,309,751 $ 70,954 $ 1,238,797
Government Securities
Fund 3,705,594 2,361,088 576,754 4,686 572,068
Income and Equity Fund 1,682,535 392,402 275,799 5,156 270,643
Small Cap Fund 5,133,826 5,135,562 2,593,227 1,087,785 1,505,442
</TABLE>
NOTE 6. CAPITAL SHARE TRANSACTIONS
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1998 December 31, 1997
----------------------- ------------------------
Shares Amount Shares Amount
-------- ------------- -------- --------------
<S> <C> <C> <C> <C>
BALANCED FUND
Class A
Shares sold 65,239 $ 830,434 187,918 $ 2,162,179
Reinvestment of distributions 10,614 133,736 7,644 91,190
-------- ------------- -------- --------------
75,853 964,170 195,562 2,253,369
Shares repurchased (33,511) (425,402 ) (30,811) (353,082 )
-------- ------------- -------- --------------
Net increase (decrease) 42,342 $ 538,768 164,751 $ 1,900,287
-------- ------------- -------- --------------
Class C
Shares sold 29,657 $ 376,582 - $ -
Reinvestment of distributions 656 8,217 - -
-------- ------------- -------- --------------
30,313 384,799 - -
Shares repurchased (303) (3,718 ) - -
-------- ------------- -------- --------------
Net increase (decrease) 30,010 $ 381,081 - $ -
-------- ------------- -------- --------------
GOVERNMENT SECURITIES FUND
Class A
Shares sold 218,063 $ 2,343,958 81,886 $ 760,764
Reinvestment of distributions 38,067 397,397 22,761 215,344
-------- ------------- -------- --------------
256,130 2,741,355 104,647 976,108
Shares repurchased (140,050) (1,496,807 ) (468,492) (4,366,761 )
-------- ------------- -------- --------------
Net increase (decrease) 116,080 $ 1,244,548 (363,845) $ (3,390,653 )
-------- ------------- -------- --------------
Class C
Shares sold 80,090 $ 862,726 - $ -
Reinvestment of distributions 5,980 62,058 - -
-------- ------------- -------- --------------
86,070 924,784 - -
Shares repurchased (10,415) (113,529 ) - -
-------- ------------- -------- --------------
Net increase (decrease) 75,655 $ 811,255 - $ -
-------- ------------- -------- --------------
</TABLE>
33
<PAGE>
PACIFIC ADVISORS FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 6. CAPITAL SHARE TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1998 December 31, 1997
------------------------ ------------------------
Shares Amount Shares Amount
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
INCOME AND EQUITY FUND
Class A
Shares sold 70,114 $ 736,108 78,841 $ 765,748
Reinvestment of distributions 5,544 58,579 3,664 35,535
-------- -------------- -------- --------------
75,658 794,687 82,505 801,283
Shares repurchased (19,249) (201,807 ) (21,236) (205,156 )
-------- -------------- -------- --------------
Net increase (decrease) 56,409 $ 592,880 61,269 $ 596,127
-------- -------------- -------- --------------
Class C
Shares sold 65,537 $ 692,442 - $ -
Reinvestment of distributions 1,978 20,840 - -
-------- -------------- -------- --------------
67,515 713,282 - -
Shares repurchased (1,400) (14,931 ) - -
-------- -------------- -------- --------------
Net increase (decrease) 66,115 $ 698,351 - $ -
-------- -------------- -------- --------------
SMALL CAP FUND
Class A
Shares sold 114,853 $ 1,925,336 211,910 $ 3,511,363
Reinvestment of distributions 12,485 176,162 3,024 51,981
-------- -------------- -------- --------------
127,338 2,101,498 214,934 3,563,344
Shares repurchased (107,128) (1,711,220 ) (98,652) (1,624,170 )
-------- -------------- -------- --------------
Net increase (decrease) 20,210 $ 390,278 116,282 $ 1,939,174
-------- -------------- -------- --------------
Class C
Shares sold 19,103 $ 309,988 - $ -
Reinvestment of distributions 417 5,886 - -
-------- -------------- -------- --------------
19,520 315,874 - -
Shares repurchased (2,722) (49,216 ) - -
-------- -------------- -------- --------------
Net increase (decrease) 16,798 $ 266,658 - $ -
-------- -------------- -------- --------------
</TABLE>
34
<PAGE>
PACIFIC ADVISORS FUND INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED FUND
--------------------------------------------------------------------------------------------
Class A
----------------------------------------------------------------- Class C
For the year ended December 31, ---------------------
----------------------------------------------------------------- April 1, 1998 to
1998 1997 1996 1995 1994 December 31, 1998
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------- ---------------------
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of
period $ 12.06 $ 10.66 $ 9.31 $ 8.75 $ 8.99 $ 13.09
--------- --------- --------- --------- --------- ---------------------
Income from investing
operations
Net investment
income 0.03 - 0.09 0.18 0.02 (0.04)
Net realized and
unrealized
gains
(losses) on
securities 0.90 1.62 1.39 0.57 (0.24) (0.13)
--------- --------- --------- --------- --------- ---------------------
Total from investment
operations 0.93 1.62 1.48 0.75 (0.22) (0.17)
--------- --------- --------- --------- --------- ---------------------
Less distributions
From net
investment
income - (0.01) (0.09) (0.18) (0.02) (0.01)
From net capital
gains (0.30) (0.21) (0.04) (0.01) - (0.30)
--------- --------- --------- --------- --------- ---------------------
Total distributions (0.30) (0.22) (0.13) (0.19) (0.02) (0.31)
--------- --------- --------- --------- --------- ---------------------
Net asset value, end
of period $ 12.69 $ 12.06 $ 10.66 $ 9.31 $ 8.75 $ 12.61
--------- --------- --------- --------- --------- ---------------------
TOTAL INVESTMENT RETURN 7.76%(2) 15.24%(2) 15.92%(2) 8.70%(2) (2.41)%(2) (1.28)%(1)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
year (000's) $ 6,420 $ 5,593 $ 3,187 $ 2,219 $ 1,341 $ 378
Ratio of net
investment
income to
average net
assets
With expense
reductions 0.22% (0.03)% 1.12% 2.46% 0.93% (0.64)%(1)
Without
expense
reductions (0.18)% (0.50)% (0.76)% (0.62)% (15.11)% (0.91)%(1)
Ratio of expenses to
average net
assets
With expense
reductions 3.48% 3.28% 2.48% 2.24% 1.83% 3.12%(1)
Without
expense
reductions 3.88% 3.75% 4.36% 5.31% 17.85% 3.39%(1)
Portfolio turnover
rate 53.97% 64.13% 65.94% 41.23% 60.68% N/A
</TABLE>
- --------------------------------------------------------------------------------
1 Not Annualized
2 The Fund's maximum sales charge is not included in the total return
computation.
N/A Not Applicable
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
35
<PAGE>
PACIFIC ADVISORS FUND INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES FUND
---------------------------------------------------------------------------------------------
Class A
------------------------------------------------------------------ Class C
For the year ended December 31, ---------------------
------------------------------------------------------------------ April 1, 1998 to
1998 1997 1996 1995 1994 December 31, 1998
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------ ---------------------
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of
period $ 9.87 $ 9.30 $ 10.16 $ 8.82 $ 9.00 $ 10.24
---------- --------- --------- --------- --------- ---------------------
Income from investing
operations
Net investment
income 0.34 0.35 0.33 0.31 0.13 0.23
Net realized and
unrealized
gains
(losses) on
securities 1.38 0.71 (0.65) 1.53 (0.14) 1.02
---------- --------- --------- --------- --------- ---------------------
Total from investment
operations 1.72 1.06 (0.32) 1.84 (0.01) 1.25
---------- --------- --------- --------- --------- ---------------------
Less distributions
From net
investment
income (0.33) (0.35) (0.32) (0.31) (0.17) (0.32)
From net capital
gains (0.67) (0.14) (0.22) (0.19) - (0.67)
---------- --------- --------- --------- --------- ---------------------
Total distributions (1.00) (0.49) (0.54) (0.50) (0.17) (0.99)
---------- --------- --------- --------- --------- ---------------------
Net asset value, end
of period $ 10.59 $ 9.87 $ 9.30 $ 10.16 $ 8.82 $ 10.50
---------- --------- --------- --------- --------- ---------------------
TOTAL INVESTMENT RETURN 17.82%(2) 11.72%(2) (3.15)%(2) 20.32%(2) (0.15)%(2) 12.48%(1)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
year (000's) $ 5,456 $ 3,939 $ 7,096 $ 5,837 $ 3,185 $ 795
Ratio of net
investment
income to
average net
assets
With expense
reductions 3.32% 3.36% 3.46% 3.75% 2.09% 2.05%(1)
Without
expense
reductions 1.04% 1.51% (2.17)% (2.60)% (1.17)% 0.63%(1)
Ratio of expenses to
average net
assets
With expense
reductions 1.66% 1.65% 1.66% 1.65% 1.60% 1.06%(1)
Without
expense
reductions 3.94% 3.51% 2.95% 2.80% 4.86% 2.48%(1)
Portfolio turnover
rate 41.98% 68.52% 50.49% 57.85% 81.59% N/A
</TABLE>
- --------------------------------------------------------------------------------
1 Not Annualized
2 The Fund's maximum sales charge is not included in the total return
calculation.
N/A Not Applicable
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
36
<PAGE>
PACIFIC ADVISORS FUND INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME AND EQUITY FUND
---------------------------------------------------------------------------------------------
Class A
------------------------------------------------------------------ Class C
For the year ended December 31, ---------------------
------------------------------------------------------------------ April 1, 1998 to
1998 1997 1996 1995 1994 December 31, 1998
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------ ---------------------
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of
period $ 9.98 $ 9.42 $ 9.67 $ 8.98 $ 9.06 $ 10.39
---------- --------- --------- --------- --------- ---------------------
Income from investing
operations
Net investment
Income 0.37 0.33 0.35 0.31 0.16 0.22
Net realized and
unrealized
gains
(losses) on
securities 0.83 0.56 (0.19) 0.72 (0.07) 0.43
---------- --------- --------- --------- --------- ---------------------
Total from investment
operations 1.20 0.89 0.16 1.03 0.09 0.65
---------- --------- --------- --------- --------- ---------------------
Less distributions
From net
investment
income (0.34) (0.33) (0.35) (0.31) (0.17) (0.32)
From net capital
gains (0.10) - (0.06) (0.03) - (0.10)
---------- --------- --------- --------- --------- ---------------------
Total distributions (0.44) (0.33) (0.41) (0.34) (0.17) (0.42)
---------- --------- --------- --------- --------- ---------------------
Net asset value, end
of period $ 10.74 $ 9.98 $ 9.42 $ 9.67 $ 8.98 $ 10.62
---------- --------- --------- --------- --------- ---------------------
TOTAL INVESTMENT RETURN 12.14%(2) 9.60%(2) 1.78%(2) 11.98%(2) 0.99% (2) 6.41%(1)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
year (000's) $ 2,646 $ 1,894 $ 1,211 $ 1,071 $ 632 $ 702
Ratio of net
investment
income to
average net
assets
With expense
reductions 3.68% 3.56% 3.75% 4.06% 2.17% 2.16%(1)
Without
expense
reductions 0.83% (0.96)% (1.69)% (2.32)% (8.80)% 0.31%(1)
Ratio of expenses to
average net
assets
With expense
reductions 1.83% 1.85% 1.85% 1.86% 1.75% 1.43%(1)
Without
expense
reductions 6.38% 7.29% 8.25% 12.73% 3.28%
Portfolio turnover
rate 16.72% 42.30% 28.23% 33.40% 37.12% N/A
</TABLE>
- --------------------------------------------------------------------------------
1 Not Annualized
2 The Fund's maximum sales charge is not included in the total return
calculation.
N/A Not Applicable
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
37
<PAGE>
PACIFIC ADVISORS FUND INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL CAP FUND
---------------------------------------------------------------------------------------------
Class A
------------------------------------------------------------------ Class C
For the year ended December 31, ---------------------
------------------------------------------------------------------ April 1, 1998 to
1998 1997 1996 1995 1994 December 31, 1998
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------ ---------------------
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of
period $ 17.51 $ 16.47 $ 11.82 $ 10.35 $ 11.47 $ 19.70
---------- --------- --------- --------- --------- ---------------------
Income from investing
operations
Net investment
expense (0.58) (0.38) (0.21) (0.08) (0.04) (0.29)
Net realized and
unrealized
gains
(losses) on
securities (2.34) 1.52 5.35 1.89 (0.42) (4.81)
---------- --------- --------- --------- --------- ---------------------
Total from investment
operations (2.92) 1.14 5.14 1.81 (0.46) (5.10)
---------- --------- --------- --------- --------- ---------------------
Less distributions
From net
investment
income - - - - - -
From net capital
gains (0.36) (0.10) (0.49) (0.34) (0.66) (0.36)
---------- --------- --------- --------- --------- ---------------------
Total distributions (0.36) (0.10) (0.49) (0.34) (0.66) (0.36)
---------- --------- --------- --------- --------- ---------------------
Net asset value, end
of period $ 14.23 $ 17.51 $ 16.47 $ 11.82 $ 10.35 $ 14.24
---------- --------- --------- --------- --------- ---------------------
TOTAL INVESTMENT RETURN (16.66)%(2) 6.95%(2) 43.70%(2) 17.27%(2) (3.97)%(2) (25.88)%(1)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
year (000's) $ 9,331 $ 11,125 $ 8,549 $ 4,279 $ 3,169 $ 239
Ratio of net
investment
income to
average net
assets
With expense
reductions (3.71)% (2.82)% (2.06)% (0.71)% (0.42)% (3.68)%(1)
Without
expense
reductions (3.71)% (2.99)% (2.39)% (1.88)% (3.37)% (3.68)%(1)
Ratio of expenses to
average net
assets
With expense
reductions 4.02% 3.18% 2.91% 2.49% 2.45% 3.85%(1)
Without
expense
reductions 4.02% 3.35% 3.24% 3.64% 5.40% 3.85%(1)
Portfolio turnover
rate 49.63% 30.72% 51.83% 44.95% 49.79% N/A
</TABLE>
- --------------------------------------------------------------------------------
1 Not Annualized
2 The Fund's maximum sales charge is not included in the total return
calculation.
N/A Not Applicable
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
38
<PAGE>
PACIFIC ADVISORS
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
Pacific Advisors Fund Inc.
We have audited the statements of assets and liabilities, including the
schedules of investments, of Pacific Advisors Fund Inc. (comprising,
respectively, the Balanced Fund, Government Securities Fund, Income and Equity
Fund and Small Cap Fund) (the "Fund"), as of December 31, 1998, the related
statements 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 each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund'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, 1998, 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
each of the respective portfolios constituting Pacific Advisors Fund Inc. as of
December 31, 1998, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended
and their financial highlights for each of the five years in the period then
ended, in conformity with generally accepted accounting principles.
[SIGNATURE]
Los Angeles, California
January 29, 1999
39
<PAGE>
PACIFIC ADVISORS
notes
[GRAPHIC]
<PAGE>
PACIFIC ADVISORS
Fund Inc
[GRAPHIC]
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
BALANCED FUND ADVISER
HAMILTON & BACHE, INC.
206 NORTH JACKSON STREET, SUITE 201
GLENDALE, CALIFORNIA 91206
GOVERNMENT SECURITIES FUND 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.
<PAGE>
<TABLE>
<C> <S> <C>
PACIFIC GLOBAL FUND DISTRIBUTORS, INC.
[LOGO] 206 NORTH JACKSON STREET, SUITE 201 BULK RATE
GLENDALE, CALIFORNIA 91206 U. S. POSTAGE
PAID
GLENDALE, CA
PERMIT NO. 1090
</TABLE>
pg101.898
