<PAGE> 1
LOGO
SOURCE CAPITAL, INC.
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<PAGE> 2
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1996 December 31, 1995
---------------------- ----------------------
Total Per Total Per
Net Common Net Common
Assets Share Assets Share
------------ ------ ------------ ------
<S> <C> <C> <C> <C>
Beginning of period..................................... $362,086,804 $42.58 $329,426,748 $38.52
Net gain on investments, realized and unrealized........ 25,268,752 3.50 49,082,213 6.84
Income available to Common shareholders................. 2,190,452 0.30 5,900,899 0.82
Regular distributions to Common shareholders............ (13,379,404) (1.85) (25,881,498) (3.60)
Proceeds from shares issued for distributions reinvested
by Common shareholders................................ -- -- 3,558,442 --
------------ ------ ------------ ------
Net changes during year.......................... $ 14,079,800 $ 1.95 $ 32,660,056 $ 4.06
------------ ------ ------------ ------
End of period........................................... $376,166,604 $44.53 $362,086,804 $42.58
============ ====== ============ ======
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 December 31, 1994
------------- ----------------- -----------------
<S> <C> <C> <C>
Common market price per share............................ 41 41 7/8 37
Common market discount from net asset value.............. 7.9% 1.7% 3.9%
Preferred asset coverage................................. 695% 669% 608%
Preferred liquidation preference per share............... $ 27.50 $ 27.50 $ 27.50
Preferred market price per share......................... 28 3/8 28 1/2 26 5/8
</TABLE>
- --------------------------------------------------------------------------------
DESCRIPTION OF THE COMPANY
SOURCE CAPITAL, INC. is a major diversified, publicly traded investment
company with total net assets of approximately $376,000,000. Its investment
portfolio includes a wide range of securities with primary emphasis on common
stocks and convertible debentures.
Source Capital has Common and Preferred shares outstanding, both of which are
traded on The New York Stock Exchange. The 1,969,212 outstanding Preferred
shares each have a prior claim of $27.50 on assets and $2.40 per year on income.
The balance of the Company's assets and income are available to the 7,232,110
shares of Common Stock.
Source Capital's investment objective is to seek maximum total return for
Common shareholders from both capital appreciation and investment income to the
extent consistent with protection of invested capital and provision of
sufficient income to meet the dividend requirements of Preferred shareholders.
Source Capital is not a mutual fund. Thus, it does not repurchase its own
shares on demand and does not need to structure its portfolio securities to
provide for possible redemptions. As a publicly traded investment company,
Source Capital's Common and Preferred shares are bought and sold on The New York
Stock Exchange, and the Company is not involved in the transaction.
Source Capital's investment approach emphasizes primarily equity and
equity-related investments in seeking to achieve its growth objective for its
Common shareholders. The desirability of equity versus fixed-income investments
has been increasingly debated in recent years. Source Capital's position is that
without assuming undue risk and recognizing the fixed claim of its Preferred
Stock, properly selected stocks offer the better long-term opportunity for
overall investment return as well as long-term protection from the large but
uncertain threat of inflation. Source Capital's equity investments have been
directed toward companies with highly liquid, relatively unleveraged balance
sheets and a demonstrated long-term ability to earn above average returns on
invested capital. Source Capital's equity investment portfolio is based on
fundamental judgments of long-term returns attainable from income and
appreciation in the securities of such companies and is not derived from overall
economic forecasts or stock market predictions.
Source Capital has a Common Stock Distribution Policy which provides for cash
distributions of approximately 10% of the ongoing net asset value of its Common
shares. Only a portion of such distributions is paid from net investment income.
The remainder is paid from any net realized capital gains and/or paid-in
capital, as determined by each year's results. To the extent the Company
realizes net long-term capital gains for any year in excess of the amounts
distributed under the Company's distribution policy, such excess may be
distributed to shareholders or retained by the Company. Distributions to Common
shareholders are paid quarterly in a fixed amount which is periodically adjusted
after sustained changes in net asset value appear to the Board of Directors
reasonably likely to support the new distribution rate on a continuing basis.
This policy is designed to allow Common shareholders to benefit not only from
income, but a portion of the capital appreciation which has resulted to date.
All distributions are taxable to shareholders as dividend income or capital gain
distributions since the Company has accumulated earnings and profits from prior
years.
Since the policy was adopted in June 1976, at an initial annual rate of $1.40
per share, continued increases in net asset value, despite payments from
capital, have permitted 16 subsequent increases to the current rate of $3.70.
Maintenance of the current $3.70 annualized rate is dependent upon achieving a
total return on the Common Stock from both income and appreciation to sustain a
net asset value of approximately $37.00.
1
<PAGE> 3
LETTER TO SHAREHOLDERS
TO OUR SHAREHOLDERS:
The powerful market advance of 1995 continued until the end of May 1996, only
to pause and then retreat in June and July. The S&P 500 was ahead by 10% through
May, flat in June, and down 4% in July. For the broader indexes, however, the
correction was more traumatic. The Russell 2000, up 15% at May 31, declined 4%
in June and 9% in July. Similarly, the Value Line gave back virtually all of its
9% January - May gain by the end of July.
Source Capital's total net assets increased from $371,791,461 to $376,166,604
during the second quarter. Net asset value per Common share amounted to $44.53
at June 30, 1996 compared with $43.92 at March 31, 1996 and $42.58 at year-end
1995. These changes in net asset value were net of cash distributions of $0.925
paid in both the first and second quarters.
Investment Results, 1996 First Half
For the six months ended June 30, 1996 the net asset value per share of
Source Capital's Common Stock increased by 9.0%, including distributions paid
during the period, while total net assets gained 8.3%. These returns compare
with a 10.2% increase in the Standard & Poor's 500 Stock Average. The foregoing
changes were calculated on the basis of reinvesting all dividends and
distributions.
INVESTMENT RESULTS, 1996 SECOND QUARTER
In the most recent quarter, Source Capital's net asset value per share of
Common Stock increased 3.5%, including the $0.925 distribution paid during the
period, while total net assets gained 3.3%, both on a reinvestment basis. In
comparison, the Standard & Poor's 500 Stock Average increased 4.5% during the
quarter, also on a reinvestment basis.
NET INVESTMENT INCOME
Net investment income amounted to $2,203,094 and $4,553,506 for the second
quarter and six months, respectively, as against $2,777,124 and $5,402,725 in
the comparable periods of 1995. After providing for Preferred dividends, net
investment income per Common share was $0.14 and $0.30 for the quarter and
six-month periods, respectively, compared to the $0.22 and $0.42 earned in the
corresponding periods of 1995.
DISTRIBUTIONS TO COMMON SHAREHOLDERS
A regular quarterly distribution of $0.925 per share was paid on June 15,
1996 to shareholders of record on May 24, 1996. This payment marks the 19th
anniversary of Source Capital's 10% Distribution Policy which calls for total
annual payments approximating 10% of the Common Stock's ongoing net asset value.
Since the adoption of this policy, continuing growth in net asset value has led
to 16 increases in the distribution rate totaling 164% -- from the original
$1.40 rate in June, 1976, to the current $3.70 rate. The growth in the net asset
value which has permitted this continuing expansion in cash distributions has
been achieved despite distributions in excess of net investment income of
242,583,993 or $38.49 per Common share, and payments of federal income tax on
undistributed realized capital gains amounting to $36,198,677 or $5.99 per
Common share. Maintenance of the current $3.70 rate is dependent upon achieving
long-term investment results which sustain a net asset value of approximately
$37.00.
PREFERRED DIVIDENDS
The regular Preferred dividend of $0.60 per share was paid on June 15, 1996,
to shareholders of record on May 24, 1996. The changes in the Company's total
net assets since year-end 1995 have resulted in changes in the Preferred shares'
asset coverage from 669% at December 31, 1995 to 687% at March 31, 1996, and
695% at June 30, 1996. The decrease in net investment income this year led to a
decline in Preferred dividend coverage to 186% for the second quarter and 193%
for the six months, compared to 235% and 229% in the corresponding periods of
1995.
2
<PAGE> 4
MARKET PRICE OF SOURCE CAPITAL SHARES
The market price of Source Capital Common Stock decreased from $41 7/8 to $41
during the first half of 1996. As this $0.875 decrease in market price was less
than the $1.95 gain in the underlying net asset value, the market discount from
net asset value increased to 7.9% at June 30, 1996 from 1.7% at year-end 1995.
The market price of Source Capital Preferred Stock decreased to $28 3/8 at June
30, 1996 from $28 1/2 at year-end 1995 reflecting the increase in interest
rates during the period.
COMMENTARY
I would like to take this opportunity to discuss in greater depth two of the
high-return companies on which the Source portfolio continues to
focus -- Holophane and Tupperware.
We began investing in Holophane during the second quarter of 1996, taking
advantage of a decline in the share price. This decline followed the report of
lower first quarter earnings, the result of weather-related construction delays
and a slow down in sales to retailers. We knew the weather problems were only
temporary, and we believed that sales and profits were recovering, modestly in
the second quarter, and then more significantly in the second half of 1996.
Holophane is the leading producer of highly engineered, premium quality, high
intensity discharge lighting products. Applications are industrial (factories,
warehouses), commercial (retailers, shopping centers, arenas), and outdoor
(highways, billboards). Its products have substantial market shares based on
their superior optical performance, energy efficiency, and low life-cycle costs.
About 40% of sales are customized products which are less subject to price
competition than commodity items. Holophane's operations are extensively
integrated including glass, aluminum, plastic, electricals, and final assembly,
an important advantage in reducing product development time. Holophane also has
its own technically trained factory sales force (competitors use manufacturers'
"reps"), which focuses on lighting projects during the design process, not just
the later bidding stage.
Although Holophane's history as a public company is relatively brief (IPO in
November 1993), current management has been in place since the 1989 LBO and has
performed well. Gross and operating margins have been significantly increased,
and working capital utilization improved. Management has beefed up the sales
force and emphasized new product development. Also, Holophane's considerable
cash flow has been intelligently reinvested in facilities expansion and
upgrades, a closely related acquisition, and significant deleveraging -- in the
past two years alone net debt has been reduced from 36% of total assets to 16%.
Management is also financially committed to the business. The CEO owns 3% of the
company (excluding options) and all officers and directors own 11%.
Holophane's strong competitive position and focused management have produced
impressive returns -- over 30% pre-tax return on operating assets last year and
a 16% operating margin. We expect profitability to continue at comparable rates.
At its recent price of 15 1/2, Holophane is selling for less than 12x expected
1996 earnings of $1.30 - $1.35, a very attractive valuation.
Another new security in Source's portfolio is Tupperware. A name long
familiar to all of us, Tupperware has not been an independent company for many
years, but has been owned by a succession of firms, including Dart, Kraft, and
Premark. We purchased a position in Premark during the first quarter, in
anticipation that an announced break-up of the Company into Tupperware and "new"
Premark would be more highly valued by the market in two pieces than one. This
turned out to be the case and the $51 per share "old" Premark we purchased in
January and February started trading on May 31 as $46 per share Tupperware and
$16 per share "new" Premark. Although the "new" Premark is a collection of
solid, well-run businesses, they are too slow-growing and low-return for us, and
we sold our position in June, concentrating our attention on Tupperware.
3
<PAGE> 5
Tupperware is a manufacturer and "party plan" marketer of modestly priced
household items, originally mostly food storage containers, but now with an
expanded product line, including items for food preparation, decorating and home
storage. Although Tupperware's U.S. business is admittedly undistinguished, its
foreign operations are much more exciting and significant. In 1995, 70% of
assets, 85% of sales, and 95% of profits were realized outside of the U.S. Many
of these regions, especially Latin America and Asia, are rapidly growing -- fast
enough that we believe Tupperware as a whole can generate internal growth of at
least 10% annually. Combined with a 2% dividend and 4% from surplus cash flow,
this gives Tupperware mid-teens total return potential.
Tupperware's management team was upgraded in 1992 when Rick Goings was hired
to run the business. He brought with him extensive experience in international
consumer product marketing (at Avon and Sara Lee), and added others with similar
backgrounds. Management emphasized increased new product flow and improved sales
and distribution. These changes helped to maintain sales growth and improved
Tupperware's already high returns. In 1995 the Company earned 18% on assets,
with a 16% operating margin.
During the month of June we took advantage of an opportunity to double
Source's Tupperware position, as the stock declined from the mid-40s, at the
time of the spin-out, to a low of $39 per share. We found this an attractive
valuation -- less than 15x 1996 estimated earnings -- compared to other high
quality international consumer products companies. We believe the price decline
was due primarily to a post spin-off churning of the shareholder base, as "old"
Premark holders decided whether or not they wanted to hold Tupperware. In
addition, concerns over a strong dollar, which reduces the reported value of
profits earned outside the U.S., and Tupperware's business in Germany (weak in
the first quarter), may have played a role. Tupperware now represents about 3%
of Source's portfolio, our fourth largest position.
Holophane and Tupperware are representative of the other companies in
Source's portfolio -- understandable high return businesses with proven
managements. These characteristics alone should be sufficient to provide Source
shareholders with above average long-term returns without excessive risk.
Furthermore, our practice of seeking to acquire securities of such companies at
reasonable valuations should tend to enhance returns while reducing risk.
I am pleased to report that Steve Geist has been elected a Vice President of
Source Capital. Since joining First Pacific Advisors over four years ago, Steve
has worked closely with me, as well as earlier with George Michaelis. He has
done extensive research on many of the Fund's investments and it is important
that his contribution be recognized. Steve is a graduate of New York University;
he has earned a Master of Science in Electrical Engineering from Purdue
University and received an MBA from UCLA. Prior to entering the investment
business he worked for TRW, Inc. in a wide variety of engineering positions. In
addition, the Source Board of Directors has elected Janet M. Pitman, First
Pacific Advisor's Head Trader as Vice President, and William Jacobs as
Treasurer. We congratulate Steve, Jan and Bill on their election.
Repectfully submitted,
/s/ Eric S. Ende
- ----------------------------
Eric S. Ende
Senior Vice President
July 26, 1996
4
<PAGE> 6
PORTFOLIO OF INVESTMENTS
June 30, 1996
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- ---------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
PRODUCER DURABLE GOODS -- 11.0%
Bandag, Incorporated................................ 26,600 $ 1,331,737 $ 1,276,800
Bandag, Incorporated (Class A)...................... 216,400 9,063,259 10,143,750
Dover Corporation................................... 139,900 4,684,766 6,452,888
Hubbell Incorporated (Class B)...................... 73,682 2,937,035 4,881,432
IDEX Corporation.................................... 171,100 6,454,374 6,501,800
Kaydon Corporation.................................. 152,300 3,265,219 6,548,900
Leggett & Platt, Incorporated....................... 194,100 4,536,512 5,386,275
----------- -----------
$ 32,272,902 $ 41,191,845
----------- -----------
CONSUMER NON-DURABLE GOODS -- 10.4%
Lancaster Colony Corporation........................ 257,700 $ 8,927,314 $ 9,631,538
Newell Co........................................... 161,600 3,888,146 4,949,000
Reebok International Ltd............................ 216,400 7,336,739 7,276,450
Tupperware Corporation*............................. 216,000 8,520,981 9,126,000
Unifi, Inc.......................................... 283,500 6,618,239 7,973,437
----------- -----------
$ 35,291,419 $ 38,956,425
----------- -----------
HEALTH CARE -- 8.0%
Allergan, Inc....................................... 184,800 $ 3,539,171 $ 7,253,400
DENTSPLY International Inc.......................... 146,300 5,204,205 6,217,750
Johnson & Johnson................................... 114,300 2,430,657 5,657,850
Landauer, Inc....................................... 188,100 3,771,405 3,973,613
Pfizer Inc.......................................... 99,500 2,932,124 7,101,812
----------- -----------
$ 17,877,562 $ 30,204,425
----------- -----------
CONSUMER DURABLE GOODS -- 5.4%
Cooper Tire & Rubber Company........................ 292,200 $ 7,029,947 $ 6,501,450
Genuine Parts Company............................... 100,000 3,507,115 4,575,000
Holophane Corporation*.............................. 448,700 7,616,840 7,067,025
Juno Lighting, Inc.................................. 133,100 1,914,439 2,262,700
----------- -----------
$ 20,068,341 $ 20,406,175
----------- -----------
INSURANCE -- 5.2%
Horace Mann Educators Corporation................... 174,200 $ 4,187,654 $ 5,530,850
Marsh & McLennan Companies, Inc..................... 107,500 7,428,267 10,373,750
Progressive Corporation, The........................ 77,700 3,012,104 3,593,625
----------- -----------
$ 14,628,025 $ 19,498,225
----------- -----------
BANKING -- 4.5%
Farmers & Merchants Bank of Long Beach.............. 539 $ 826,728 $ 993,916
Norwest Corporation................................. 162,088 4,722,033 5,652,819
Washington Federal, Inc............................. 231,219 3,388,379 4,739,989
Wells Fargo & Company............................... 23,266 5,809,512 5,557,666
----------- -----------
$ 14,746,652 $ 16,944,390
----------- -----------
MATERIALS -- 4.4%
Caraustar Industries, Inc........................... 316,500 $ 6,135,475 $ 8,387,250
Loctite Corporation................................. 179,200 5,629,146 8,332,800
----------- -----------
$ 11,764,621 $ 16,720,050
----------- -----------
COMMUNICATIONS AND INFORMATION -- 3.2%
Arrow Electronics, Inc.*............................ 134,700 $ 5,928,462 $ 5,808,937
Devon Group, Inc.*.................................. 195,300 3,007,100 6,347,250
----------- -----------
$ 8,935,562 $ 12,156,187
----------- -----------
RETAILING -- 3.1%
Arbor Drugs, Inc.................................... 321,600 $ 5,584,890 $ 6,713,400
Bob Evans Farms, Inc................................ 292,600 5,838,256 4,974,200
----------- -----------
$ 11,423,146 $ 11,687,600
----------- -----------
ENTERTAINMENT -- 2.2%
Carnival Corporation (Class A)...................... 285,700 $ 6,380,622 $ 8,249,588
----------- -----------
BUSINESS SERVICES -- 2.1%
Manpower Inc........................................ 201,200 $ 5,167,853 $ 7,897,100
----------- -----------
</TABLE>
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Shares or
Face
COMMON STOCKS (Continued) Amount Cost Value
------- ----------- -----------
<S> <C> <C> <C>
TRANSPORTATION -- 1.9%
Expeditors International of Washington, Inc......... 231,800 $ 3,142,780 $ 7,185,800
----------- -----------
EDUCATION AND TRAINING -- 1.7%
Franklin Quest Co.*................................. 303,700 $ 6,404,397 $ 6,301,775
----------- -----------
REAL ESTATE INVESTMENT TRUST -- 0.9%
JP Realty, Inc...................................... 153,000 $ 2,905,785 $ 3,270,375
----------- -----------
OTHER COMMON STOCKS -- 3.9%......................... $ 14,329,048 $ 14,823,275
----------- -----------
TOTAL COMMON STOCKS -- 67.9%........................ $205,338,715 $255,493,235
----------- -----------
CONVERTIBLE BONDS AND DEBENTURES
REAL ESTATE INVESTMENT TRUST -- 2.0%
Alexander Haagen Properties Series A -- 7 1/2%
2001.............................................. $ 1,050,000 $ 916,125 $ 921,375
Alexander Haagen Properties Series B -- 7 1/2%
2001.............................................. 1,750,000 1,526,875 1,548,750
Developers Diversified Realty Corporation -- 7%
1999.............................................. 2,500,000 2,430,625 2,506,250
Rockefeller Center Properties, Inc. -- 0% 2000...... 4,455,000 2,762,388 2,695,275
----------- -----------
$ 7,636,013 $ 7,671,650
----------- -----------
HEALTH CARE -- 1.6%
Healthsource Inc. -- 5% 2003++...................... $ 5,000,000 $ 4,072,500 $ 3,862,500
Quantum Health Resources, Inc. -- 4 3/4% 2000...... 2,305,000 1,794,199 2,083,144
----------- -----------
$ 5,866,699 $ 5,945,644
----------- -----------
PRODUCER DURABLE GOODS -- 1.6%
Diagnostic/Retrieval Systems, Inc.
-- 8 1/2% 1998.................................... $ 719,000 $ 627,328 $ 727,089
-- 9% 2003++...................................... 2,000,000 2,000,000 2,610,000
TriMas Corporation -- 5% 2003....................... 2,550,000 2,574,852 2,856,000
----------- -----------
$ 5,202,180 $ 6,193,089
----------- -----------
RETAILING -- 1.7%
Fabri-Centers of America, Inc. -- 6 1/4% 2002....... $ 7,000,000 $ 5,758,119 $ 6,195,000
----------- -----------
ENERGY -- 1.0%
California Energy Company, Inc. -- 5% 2000++........ $ 3,315,000 $ 2,916,413 $ 3,820,537
----------- -----------
TOTAL CONVERTIBLE BONDS
AND DEBENTURES -- 7.9%............................ $ 27,379,424 $ 29,825,920
----------- -----------
U.S. GOVERNMENT AND AGENCIES -- 4.3%
Federal Home Loan Bank
-- 4 1/4% 1998 (Floating Rate Note)............... $ 1,000,000 $ 1,000,000 $ 980,000
Federal Home Loan Mortgage Corporation
-- 6 1/2% 2023 (IO)............................... 6,548,900 926,515 988,475
-- 7% 2023 (CMO).................................. 2,203,400 2,241,995 2,028,505
-- 8 1/2% 2024 (REMIC)............................ 3,000,000 3,018,750 3,016,875
-- 10.15% 2006 (REMIC)............................ 575,700 571,072 583,256
Federal National Mortgage Association
-- 7% 2008 (REMIC)................................ 1,901,500 1,889,574 1,817,121
-- 8% 2011 (REMIC)................................ 1,050,000 1,055,250 1,057,219
Government National Mortgage Association (Mobile
Home)
-- 9 3/4% 2006.................................... 347,900 369,178 367,687
-- 9 3/4% 2010.................................... 2,102,100 2,223,315 2,221,657
-- 10 1/4% 2001-2004.............................. 534,200 568,417 571,260
Government National Mortgage Association
-- 7.99125% 2010 (REMIC).......................... 2,502,900 2,502,878 2,504,464
----------- -----------
$ 16,366,944 $ 16,136,519
----------- -----------
</TABLE>
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
NON-CONVERTIBLE BONDS AND Face
DEBENTURES Amount Cost Value
- ---------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
CORPORATE -- 7.3%
Busse Broadcasting Corp. -- 11 5/8% 2000............ $ 2,000,000 $ 1,919,200 $ 2,025,000
Genesco Inc. -- 10 3/8% 2003........................ 1,150,000 1,127,000 1,150,000
GPA Delaware Inc. -- 8 3/4% 1998.................... 2,000,000 2,012,500 1,992,500
Kidder Peabody Mortgage Assets Trust
-- 8.45% 2018..................................... 1,245,800 1,239,603 1,249,693
Merrill Lynch Mortgage Investors, Inc.
Series 1988-H -- 9.7% 2008........................ 201,100 208,853 203,488
Series 1992-B -- 8.3% 2012........................ 1,600,000 1,625,750 1,638,000
Pacific Lumber Co. -- 10 1/2% 2003.................. 1,000,000 967,500 977,500
Plantronics, Inc. -- 10% 2001....................... 8,470,000 8,611,244 8,808,800
Primark Corporation -- 8 3/4% 2000.................. 6,472,000 6,303,974 6,431,550
Tenet Healthcare Corporation -- 9 5/8% 2002......... 2,800,000 2,800,000 2,978,500
----------- -----------
$ 26,815,624 $ 27,455,031
----------- -----------
TOTAL NON-CONVERTIBLE BONDS AND
DEBENTURES -- 11.6%.............................. $ 43,182,568 $ 43,591,550
----------- -----------
TOTAL INVESTMENT SECURITIES -- 87.4%............... $275,900,707 $328,910,705
=========== -----------
SHORT-TERM INVESTMENTS -- 11.5%
Short-term Corporate Notes:
AT&T Capital Corporation -- 5.28% 7/8/96.......... $ 1,995,000 $ 1,992,952
Minnesota Mining and Manufacturing
Company -- 5.28% 7/8/96........................ 3,000,000 2,996,920
Du Pont (E.I.) De Nemours & Company
-- 5.32% 7/10/96............................... 10,000,000 9,986,700
Bell Atlantic Corporation -- 5.32% 7/10/96........ 2,000,000 1,997,340
Minnesota Mining and Manufacturing Company
-- 5.28% 7/11/96............................... 8,000,000 7,988,267
Shell Oil Company -- 5.28% 7/15/96................ 4,000,000 3,991,787
Toyota Motor Credit Corporation -- 5.31%
7/18/96........................................ 3,000,000 2,992,477
Xerox Corporation -- 5.34% 7/24/96................ 4,500,000 4,484,647
Motorola Credit Corporation -- 5.35% 7/25/96...... 2,000,000 1,992,867
Philip Morris Companies -- 5.36% 7/26/96.......... 2,000,000 1,992,555
Tribune Company -- 5.4% 8/20/96................... 1,000,000 992,500
State Street Bank Repurchase Agreement -- 4 3/4%
7/1/96 (Collateralized by U.S. Treasury
Notes -- 6% 1997 market value $1,861,562)......... 1,824,000 1,824,722
-----------
$ 43,233,734
-----------
TOTAL INVESTMENTS -- 98.9%.......................... $372,144,439
Other assets less liabilities -- 1.1%............... 4,022,165
-----------
TOTAL NET ASSETS -- 100%............................ $376,166,604
===========
</TABLE>
* Non-income producing securities
++ Restricted securities purchased without registration under the Securities Act
of 1933 pursuant to Rule 144A, which generally may be resold only to certain
institutional investors prior to registration.
See notes to financial statements.
7
<PAGE> 9
MAJOR PORTFOLIO CHANGES
Quarter Ended June 30, 1996
<TABLE>
<CAPTION>
Shares or
Face Amount
---------------
<S> <C>
NET PURCHASES
Common Stocks
Arbor Drugs, Inc. .................................................................. 55,000 shs.
Cooper Tire & Rubber Company........................................................ 56,100 shs.
Franklin Quest Co. ................................................................. 37,900 shs.
Holophane Corporation(1)............................................................ 448,700 shs.
IDEX Corporation.................................................................... 77,600 shs.
Lancaster Colony Corporation........................................................ 54,700 shs.
Landauer, Inc.(1)................................................................... 188,100 shs.
Tupperware Corporation(1)........................................................... 104,700 shs.
Convertible Securities
Healthsource Inc. -- 5% 2003(1)..................................................... $ 5,000,000
Non-Convertible Securities
Genesco Inc. -- 10 3/8% 2003(1)..................................................... $ 1,150,000
NET SALES
Common Stocks
Cedar Fair, L.P.(2)................................................................. 54,200 shs.
Dover Corporation................................................................... 16,500 shs.
Emerson Electric Co.(2)............................................................. 94,178 shs.
Expeditors International of Washington, Inc. ....................................... 14,200 shs.
Farmers & Merchants Bank of Long Beach.............................................. 300 shs.
First National Bank of Anchorage, The(2)............................................ 4,390 shs.
Genuine Parts Company............................................................... 31,400 shs.
Golden West Financial Corporation(2)................................................ 126,700 shs.
JP Realty, Inc. .................................................................... 15,800 shs.
Johnson & Johnson................................................................... 74,100 shs.
Kaydon Corporation.................................................................. 38,000 shs.
Lubrizol Corporation, The(2)........................................................ 196,000 shs.
Manpower Inc. ...................................................................... 32,500 shs.
Marsh & McLennan Companies, Inc. ................................................... 44,600 shs.
Newell Co. ......................................................................... 28,000 shs.
Pfizer Inc. ........................................................................ 27,300 shs.
Premark International, Inc.(2)...................................................... 111,300 shs.
Washington Federal, Inc. ........................................................... 57,800 shs.
Convertible Securities
Quantum Health Resources, Inc. -- 4 3/4% 2000....................................... $ 3,300,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
8
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
June 30, 1996
---------------------------
<S> <C> <C>
ASSETS
Investment securities -- at market value (cost $275,900,707) -- Note A... $328,910,705
Short-term investments -- at cost plus interest earned
(maturities 60 days or less) -- Note A................................ 43,233,734
Cash..................................................................... 191
Receivable for:
Dividends and accrued interest........................................ $1,932,233
Investment securities sold............................................ 3,688,356 5,620,589
---------- ------------
$377,765,219
LIABILITIES
Payable for:
Investment securities purchased....................................... $1,109,057
Advisory fees......................................................... 217,973
Accrued dividends -- Preferred Stock.................................. 196,921
Accrued expenses...................................................... 74,664 1,598,615
---------- ------------
TOTAL NET ASSETS -- June 30, 1996.......................................... $376,166,604
===========
Assets applicable to Preferred Stock at a liquidation preference
of $27.50 per share (asset coverage 695%) -- Note B................... $ 54,153,330
===========
Net assets applicable to Common Stock -- $44.53 per share................ $322,013,274
===========
SUMMARY OF SHAREHOLDERS' EQUITY
$2.40 Cumulative Preferred Stock -- par value $3 per share;
authorized 3,000,000 shares; outstanding 1,969,212 shares -- Note B... $ 5,907,636
Common Stock -- par value $1 per share; authorized 12,000,000 shares;
outstanding 7,232,110 shares -- Note B................................ 7,232,110
Additional Paid-in Capital............................................... 289,626,915
Undistributed net realized gain on investments........................... 29,261,415
Unrealized appreciation of investments................................... 53,009,998
Unallocated distributions -- Note A...................................... (8,871,470)
------------
TOTAL NET ASSETS -- June 30, 1996.......................................... $376,166,604
===========
</TABLE>
See notes to financial statements.
9
<PAGE> 11
STATEMENT OF OPERATIONS
For the six months ended June 30, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest............................................................. $ 3,865,808
Dividends............................................................ 2,421,937
-----------
$ 6,287,745
Expenses -- Note C:
Advisory fees........................................................ $ 1,297,836
Reports to shareholders.............................................. 129,229
Transfer agent fees and expenses..................................... 110,118
Legal and auditing fees.............................................. 49,018
Taxes, other than federal income tax................................. 42,270
Directors' fees and expenses......................................... 41,605
Custodian fees and expenses.......................................... 24,806
Registration and filing fees......................................... 20,273
Insurance............................................................ 15,620
Other expenses....................................................... 3,464 1,734,239
------------ -----------
Net investment income -- Note A................................. $ 4,553,506
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Realized gain on investments:
Proceeds from sale of investment securities
(Excluding short-term investments with maturities of
60 days or less)................................................. $117,314,306
Cost of investment securities sold................................... 88,052,891
------------
Net realized gain on investments -- Notes A and D.................. $29,261,415
Unrealized appreciation (depreciation) of investments:
Unrealized appreciation at beginning of period....................... $ 57,002,661
Unrealized appreciation at end of period............................. 53,009,998
------------
Decrease in unrealized appreciation of investments................. (3,992,663)
-----------
Net realized and unrealized gain on investments................. $25,268,752
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............................................... $29,822,258
==========
</TABLE>
See notes to financial statements.
10
<PAGE> 12
STATEMENT OF CHANGES IN TOTAL NET ASSETS
<TABLE>
<CAPTION>
For the six months ended For the year ended
June 30, 1996 December 31, 1995
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN TOTAL
NET ASSETS
Operations:
Net investment income..................... $ 4,553,506 $ 10,627,008
Net realized gain on investments
-- Notes A and D....................... 29,261,415 22,435,045
Increase (decrease) in unrealized
appreciation of investments............ (3,992,663) 26,647,168
------------ -------------
Increase in total net assets
resulting from operations................. $ 29,822,258 $ 59,709,221
Distributions to Preferred shareholders:
From net investment income................ (2,363,054) (4,726,109)
Distributions to Common shareholders:
From net investment income................ $(4,507,934) $ (3,583,417)
From net realized capital gains........... -- (22,298,081)
Unallocated -- Note A..................... (8,871,470) (13,379,404) (25,881,498)
------------ -------------
Proceeds from shares issued for
distributions reinvested by Common
shareholders -- Note B................. -- 3,558,442
------------- -------------
Increase in total net assets................ $ 14,079,800 $ 32,660,056
TOTAL NET ASSETS
Beginning of period, including undistributed
net investment income of $2,317,482
at January 1, 1996........................ 362,086,804 329,426,748
------------- -------------
End of period, including undistributed
net investment income of $2,317,482
at December 31, 1995...................... $376,166,604 $362,086,804
============= =============
</TABLE>
See notes to financial statements.
11
<PAGE> 13
FINANCIAL HIGHLIGHTS
Selected data for a share of Common Stock outstanding throughout each period
<TABLE>
<CAPTION>
Six Months
Ended Year ended December 31,
June 30, ------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of
period............................ $42.58 $38.52 $41.85 $42.87 $41.23 $36.94
-------- ------- ------- ------- ------- -------
Net investment income............... $ 0.63 $ 1.48 $ 1.62 $ 1.94 $ 1.98 $ 2.04
Net realized and unrealized gain
(loss) on investment securities... 3.50 6.84 (0.67) 1.32 3.96 6.59
-------- ------- ------- ------- ------- -------
Total from investment
operations..................... $ 4.13 $ 8.32 $ 0.95 $ 3.26 $ 5.94 $ 8.63
-------- ------- ------- ------- ------- -------
Distributions to Preferred
shareholders:
From net investment income........ $(0.33) $(0.66) $(0.69) $(0.72) $(0.73) $(0.75)
Distributions to Common
shareholders:
From net investment income........ (0.62) (0.50) (1.14) (1.39) (1.02) (1.21)
From net realized gains........... -- (3.10) (2.03) (2.21) (2.58) (2.39)
In excess of net realized gains... -- -- (0.02) -- -- --
From Additional Paid-in Capital... -- -- (0.41) -- -- --
Unallocated....................... (1.23) -- -- -- -- --
-------- ------- ------- ------- ------- -------
Total distributions.......... $(2.18) $(4.26) $(4.29) $(4.32) $(4.33) $(4.35)
-------- ------- ------- ------- ------- -------
Effect of shares issued for
distributions reinvested by Common
shareholders...................... $ -- $ -- $ 0.01 $ 0.04 $ 0.03 $ 0.01
-------- ------- ------- ------- ------- -------
Net asset value at end of period.... $44.53 $42.58 $38.52 $41.85 $42.87 $41.23
======== ======= ======= ======= ======= =======
Per share market value at end of
period............................ $41.00 $41.88 $37.00 $43.25 $47.75 $44.25
Total investment return(1).......... 2.2% 23.4% (6.5%) (1.8%) 17.0% 32.5%
Net asset value total return(2)..... 9.0% 20.7% 0.6% 6.3% 13.3% 22.2%
Ratios/supplemental data:
Net assets at end of period
(in thousands)................. $376,167 $362,087 $329,427 $330,465 $332,574 $317,715
Ratio of expenses to average net
assets......................... 0.93%(3) 0.91% 0.96% 0.95% 0.94% 0.97%
Ratio of net income to average
net assets..................... 2.44%(3) 3.04% 3.36% 3.86% 3.93% 4.22%
Portfolio turnover rate........... 49.83%(3) 51.44% 71.39% 73.91% 69.01% 41.48%
Average brokerage commission
per share...................... $0.0584 -- -- -- -- --
Preferred Stock:
Total shares outstanding(4)......... 1,969,212 1,969,212 1,969,212 1,969,212 1,969,212 1,969,212
Asset coverage per Share(4)......... $191.02 $183.87 $167.29 $167.82 $168.89 $161.34
Involuntary liquidation preference
per share......................... $ 27.50 $ 27.50 $ 27.50 $ 27.50 $ 27.50 $ 27.50
Average market value per share(5)... $ 28.50 $ 28.00 $ 27.89 $ 30.24 $ 29.21 $ 27.01
</TABLE>
(1) Based on market value per share, adjusted for reinvestment of distributions
and taxes
(2) Based on net asset value per share, adjusted for reinvestment of
distributions and taxes
(3) Annualized
(4) Information shown as of the end of the period
(5) The average of all month-end market values during each period
See notes to financial statements.
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
The Company is registered under the Investment Company Act of 1940 as a
diversified, closed-end management investment company. The significant
accounting policies followed by the Company in the preparation of its financial
statements include the following:
1. SECURITIES VALUATION--Securities, including any outstanding written
call options, listed or traded on a national securities exchange or on the
NASDAQ National Market System are valued at the last sale price on the last
business day of the period, or, if there was not a sale that day, at the mean
between the most recent bid and asked prices. Securities which are unlisted are
valued at the mean between the most recent bid and asked prices. Short-term
investments with maturities of 60 days or less are valued at cost plus interest
earned, which approximates market value. Restricted securities and securities
for which market quotations are not readily available are valued at fair value
as determined in good faith by, or under the direction of, the Board of
Directors.
2. FEDERAL INCOME TAX--No provision for federal taxes on net investment
income is considered necessary because the Company has elected to be taxed as a
"regulated investment company" under the Internal Revenue Code, and intends to
maintain this qualification and to distribute each year all of its taxable net
investment income to its shareholders in accordance with the minimum
distribution requirements of the Code.
3. UNALLOCATED DISTRIBUTIONS--Unallocated distributions represent
distributions paid to Common shareholders during the period from source(s) other
than net investment income. Such source(s) will be determined by the results of
operations for the entire fiscal year and will be paid-in capital, except to the
extent of any net realized capital gains for the fiscal year.
4. OTHER--Dividend income is recorded on the ex-dividend date. Interest
income and expenses are recorded on an accrual basis. Dividends payable by the
Company on the Preferred Stock are recorded on an accrual basis and
distributions payable on the Common Stock are recorded on the ex-dividend date.
NOTE B--CAPITAL STOCK
The Preferred Stock is entitled in liquidation to $27.50 per share plus
accrued dividends and may be called for redemption, at the discretion of the
Company, at $27.50 per share plus accrued dividends. Dividends may not be
declared on the Common Stock if Preferred dividends are in arrears or if the
Preferred Stock would not thereafter have an asset coverage of 200% or more.
The Company issued 86,640 shares of Common Stock under its Reinvestment
Plan for Common and Preferred shareholders during the year ended December 31,
1995.
NOTE C--ADVISORY FEES AND OTHER
AFFILIATED TRANSACTIONS
Pursuant to an investment advisory agreement, the Company pays First
Pacific Advisors, Inc. ("Investment Adviser") monthly investment advisory fees
calculated at an annual rate of .725% for the first $100 million of total net
assets, .700% for the next $100 million of total net assets, and .675% for any
total net assets in excess of $200 million. The Agreement obligates the
Investment Adviser to reduce its fee to the extent necessary to reimburse the
Company for any annual expenses (exclusive of interest, taxes, the cost of any
supplementary statistical and research information, legal expenses related to
portfolio securities, and extraordinary expenses such as litigation) in excess
of 1 1/2% of the first $30 million and 1% of the remaining average total net
assets of the Company for the year.
For the six months ended June 30, 1996, the Company paid aggregate fees
of $41,250 to all Directors who are not affiliated persons of the Investment
Adviser. During the six months ended June 30, 1996, the Company incurred legal
fees of $15,392 payable to O'Melveny & Myers LLP, counsel for the Company. A
Director of the Company is of counsel to, and a retired partner of that firm.
NOTE D--PURCHASES AND SALES OF SECURITIES
Cost of purchases of investment securities (excluding short-term
corporate notes with maturities of 60 days or less) aggregated $83,193,173 for
the six months ended June 30, 1996. Cost of investment securities owned at June
30, 1996 was $276,360,631 for federal income tax purposes. Gross unrealized
appreciation and depreciation for all securities at June 30, 1996 for federal
income tax purposes was $55,695,106, and $3,145,032, respectively. Gains and
losses are based on the specific-certificate identification method.
13
<PAGE> 15
SOURCE CAPITAL, INC.
LOGO
DIRECTORS
Wesley E. Bellwood
Julio J. de Puzo, Jr.
David Rees
Robert L. Rodriguez
Lawrence J. Sheehan
Charles W. Stanton
Kenneth L. Trefftzs
OFFICERS
Julio J. de Puzo, Jr., President
Eric S. Ende, Senior Vice President
Christopher Linden, Senior Vice President
Robert L. Rodriguez, Senior Vice President
William D. Jacobs, Treasurer
Steven R. Geist, Vice President
Janet M. Pitman, Vice President
Steven T. Romick, Vice President
Sherry Sasaki, Secretary
Christopher H. Thomas, Assistant Treasurer
INVESTMENT ADVISER
First Pacific Advisors, Inc.
11400 West Olympic Blvd., Suite 1200
Los Angeles, California 90064
CUSTODIAN
State Street Bank and Trust Company
Boston, Massachusetts
COUNSEL
O'Melveny & Myers LLP
Los Angeles, California
TRANSFER AND SHAREHOLDER
SERVICE AGENT
ChaseMellon Shareholder Services, LLC
P.O. Box 590
Ridgefield Park, New Jersey 07660
(800) 279-1241 or (212) 613-7427
REGISTRAR
ChaseMellon Shareholder Services, LLC
Ridgefield Park, New Jersey
STOCK EXCHANGE LISTING
New York Stock Exchange:
Symbols: SOR Common Stock
SOR+ Preferred Stock
14
<PAGE> 16
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SOURCE CAPITAL, INC.
BULK RATE
11400 West Olympic Boulevard, Suite 1200 U.S. POSTAGE
Los Angeles, California 90064 PAID
CMSS
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