<PAGE> 1
<TABLE>
<S> <C>
As filed with the Securities and Exchange Commission Securities Act File No. 33-73600
on April 26, 1996 Investment Company Act File No. 811-1731
</TABLE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
[x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x] Amendment No. 19
Exact Name of Registrant as Specified in Charter
SOURCE CAPITAL, INC.
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
11400 West Olympic Boulevard, Suite 1200, Los Angeles, CA 90064
Registrant's Telephone Number, including Area Code
(310) 473-0225
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
Julio J. de Puzo, Jr., President
11400 West Olympic Boulevard, Suite 1200, Los Angeles, CA 90064
Copy to:
Lawrence J. Sheehan, Esq., O'Melveny & Myers
1999 Avenue of the Stars, Los Angeles, CA 90067
1 of 38 pages
<PAGE> 2
SOURCE CAPITAL, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number and Heading Caption or Location in Part A
- ----------------------- -----------------------------
<S> <C>
PART A
1. Outside Front Cover . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
2. Inside Front and Outside Back Cover Page . . . . . . . . . . . . Inapplicable
3. Fee table and Synopsis . . . . . . . . . . . . . . . . . . . . . Expense Synopsis
4. Financial Highlights . . . . . . . . . . . . . . . . . . . . . . Inapplicable
5. Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . Inapplicable
6. Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . Inapplicable
7. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
8. General Description of the Registrant . . . . . . . . . . . . . . General Description of
the Company
9. Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management of the Company
10. Capital Stock, Long-Term Debt, and Other Securities . . . . . . . Description of Capital Stock;
Taxation
11. Defaults and Arrears on Senior Securities . . . . . . . . . . . . Inapplicable
12. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
13. Table of Contents of the Statement of Additional Information . . Inapplicable
PART B
14. Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
15. Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
16. General Information and History . . . . . . . . . . . . . . . . . Inapplicable
17. Investment Objective and Policies . . . . . . . . . . . . . . . . Investment Objective; Investment Policies;
Risk Factors Relating to Lower-Rated Securities;
Portfolio Transactions and Brokerage
18. Management . . . . . . . . . . . . . . . . . . . . . . . . . . . Management of the Company
19. Control Persons and Principal Holders of Securities . . . . . . . Principal Shareholders of the Company
20. Investment Advisory and Other Services . . . . . . . . . . . . . Investment Advisor; Investment Advisory Agreement;
Custodian, Transfer Agent, Dividend Paying Agent and
Registrar; Independent Auditors
21. Brokerage Allocation and Other Practices . . . . . . . . . . . . Portfolio Transactions and Brokerage
22. Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxation
23. Financial Statements . . . . . . . . . . . . . . . . . . . . . . Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate item in Part C of this Registration Statement.
</TABLE>
2
<PAGE> 3
PART A
EXPENSE SYNOPSIS
<TABLE>
<S> <C>
Shareholder Transaction Expenses*
Sales Load (as a percentage of offering price) None
Reinvestment Plan Fees None
Cash Purchase Plan Fees $5.00
Annual Expenses
(as a percentage of net assets attributable to Common shares)
Management Fees 0.70%
Other Expenses 0.21%
----
Total Annual Expenses 0.91%
</TABLE>
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Example
You would pay the following expenses*
on a $1,000 investment, assuming
(1) five percent annual return: $9.00 $29.00 $50.00 $112.00
</TABLE>
The foregoing information is intended to assist the investor in
understanding the various costs and expenses that an investor in the Company
will bear directly or indirectly. See Item 9 - Management for a description of
the Investment Advisory Agreement and expenses borne by the Company. The
example is included to provide a means for the investor to compare expense
levels of investment companies with different fee structures over varying
investment periods. To facilitate such comparison, all investment companies
are required to utilize a five percent annual return assumption. This
assumption is unrelated to the Company's prior performance and is not a
projection of future performance. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN.
* Excludes brokerage commissions paid on purchases and sales of shares of the
Company.
GENERAL DESCRIPTION OF THE COMPANY
GENERAL
Source Capital, Inc. ("Company") is a publicly traded, closed-end
diversified management investment company, organized as a Delaware corporation
on June 24, 1968.
INVESTMENT OBJECTIVE
The Company's investment objective, which cannot be changed without
shareholder approval, 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. This means that the
Company does not invest in securities offering higher current yields or the
greatest opportunities for capital appreciation if it is perceived that such
investment would create undue risk of loss of capital.
3
<PAGE> 4
INVESTMENT POLICIES
The Company presently invests primarily in publicly traded common stocks
and securities convertible into such common stocks. The Company also invests
in fixed income securities, such as debentures, notes and preferred stocks,
which offer attractive yields or are believed to present opportunities for
capital appreciation. It also holds U.S. Government obligations, commercial
paper, minimum-term investment certificates and cash to the extent that a
temporary defensive position or the availability of assets for possible
investment opportunities is considered advisable from time to time. Short-term
investments also include the purchase of U.S. Government or Government agency
debt securities from a bank subject to a Repurchase Agreement obligating the
bank to repurchase and the Company to resell such securities on a fixed date
(usually within seven days) and at an agreed upon yield to the Company. The
Company may write listed call options which are traded on a national securities
exchange and may lend its portfolio securities to broker-dealers and other
financial institutions as described in further detail below.
The Adviser's emphasis on fundamental analysis of an issuer's prospects
and the inherent value of its securities may result in a portion of the
portfolio being invested in medium or smaller sized companies or companies
perceived by the average investor to be unpopular or unfamiliar. This should
not imply that values are not available in larger, better known companies.
Rather, it is the Adviser's position that value can be found in companies of
all sizes. Substantially all common stocks the Company purchases, however,
will be either listed on a national securities exchange or included in the
National Association of Securities Dealers Automated Quotation ("NASDAQ")
National Market System or National List. The Adviser's value-oriented
investment approach may result in a portfolio which may not reflect all facets
of the national economy and which may differ significantly from the broad
market indices.
The Adviser's value-oriented investment approach may reduce but does not
eliminate the risk of loss from investments in common stocks and other
securities since market prices can be expected to fluctuate with changes in the
business and prospects of an issuer, as well as with general market conditions.
The market price of fixed-income securities held by the Company can be expected
to vary inversely to changes in prevailing interest rates. Investments in
fixed-income securities with longer maturities generally produce higher yields
but are subject to greater market fluctuation. Certain fixed-income
securities, including convertible securities in which the Company invests, are
rated BB or lower, by Standard & Poor's Corporation ("S&P") or Ba or lower by
Moody's Investors Service, Inc. ("Moody's"), which ratings are considered by
the rating agencies to be speculative, or are unrated securities considered by
the Adviser to be of comparable quality. Debt securities with a rating of
BB/Ba or lower are commonly referred to as "junk bonds." See "Risks of
Lower-Rated Debt Securities" below. The Company may employ from time to time
certain investment techniques which involve additional risks. These investment
techniques include purchasing unregistered securities, writing listed call
options, effecting short sales against the box, lending portfolio securities,
investment in foreign securities and repurchase agreements. Each of these
investment techniques and the risks thereof are described under separate
subheadings below.
As noted above, the Company may invest in Convertible Securities, in
debt securities which are not rated in the highest two grades by Moody's and
S&P, and in preferred stocks. As used herein, a convertible security is a
bond, debenture, or note, that may be converted into or exchanged for, or is
accompanied by a warrant or other right to purchase, a specified amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A Convertible Security entitles the
holder to receive interest paid or accrued on the debt security until the
Convertible Security matures or is redeemed, converted or exchanged. Before
conversion, Convertible Securities have characteristics similar to
non-convertible debt securities in that they ordinarily provide a stable stream
of income with generally higher yields than those of common stocks of the same
or similar issuers. Convertible Securities rank senior to common stock in a
corporation's capital structure and, therefore, generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the Convertible
Security sells near its value as a fixed-income security. Prices of
convertible securities generally fluctuate in response to changes in interest
rates as well as to changes in the prices of the underlying common stocks.
RISKS OF LOWER-RATED DEBT SECURITIES
Convertible Securities are generally not investment grade securities
which are those rated within the four highest categories by S&P and Moody's.
Investment grade securities rated BBB by S&P or Baa by Moody's are considered
to have speculative characteristics. To the extent that Convertible Securities
or other debt securities acquired by the Company are rated lower than
investment grade or are comparable unrated securities, there is a
4
<PAGE> 5
greater risk as to the timely repayment of the principal of, and timely payment
of interest on, such securities. The Company may invest up to 30% of its net
assets in Convertible Securities and other debt securities rated BB or lower by
S&P or Ba or lower by Moody's, and comparable unrated securities. Decisions to
purchase and sell these securities are based on the Adviser's evaluation of
their investment potential and not on the ratings assigned by credit agencies.
Because investment in lower rated securities involves greater investment risk,
achievement of the Company's investment objective is more dependent on the
Adviser's credit analysis than with respect to the Company's investments in
higher rated securities. Lower rated securities may be more susceptible to
real or perceived adverse economic and competitive industry conditions than
investment grade securities. A projection of an economic downturn, for
example, could cause a decline in the prices of lower rated securities because
the advent of a recession could lessen the ability of a highly leveraged
company to make principal and interest payments on its debt securities. In
addition, the secondary trading market for lower rated securities may be less
liquid than the market for higher rated securities.
Prices of lower rated securities may decline rapidly in the event a
significant number of holders decide to sell. Changes in expectations
regarding an individual issuer, an industry or lower rated securities generally
could reduce market liquidity for such securities and make their sale by the
Company more difficult, at least in the absence of price concessions. The
lower rated bond market has grown primarily during a period of long economic
expansion and it is uncertain how it would perform during an extended economic
downturn. An economic downturn or an increase in interest rates could severely
disrupt the market for lower rated bonds and adversely affect the value of
outstanding bonds and the ability of the issuers to repay principal and
interest.
The convertible and lower rated securities in which the Company may
invest from time to time include debt securities of companies that are
financially troubled, in default or are in bankruptcy or reorganization ("Deep
Discount Securities"). These securities may be rated C, C1 or D by S&P or C by
Moody's or may be unrated. Debt obligations of such companies are usually
available at a deep discount from the face value of the instrument. The
Company will invest in Deep Discount Securities when the Adviser believes that
existing factors are likely to improve the company's financial condition. Such
factors include a restructuring of debt, management changes, existence of
adequate assets, or other special circumstances.
A debt instrument purchased at a deep discount, but prior to default,
may currently pay a very high effective yield. In addition, if the financial
condition of the issuer improves, the underlying value of the securities may
increase, resulting in a capital gain. If the issuer defaults on its
obligations or remains in default, or if the plan of reorganization is
insufficient for debt-holders, the Deep Discount Securities may stop generating
income and lose value or become worthless. The Adviser will balance the
benefits of Deep Discount Securities with their risks. While a diversified
portfolio may reduce the overall impact of a Deep Discount Security that is in
default or loses its value, the risk cannot be eliminated.
As of December 31, 1995, the average percentage of the Company's assets
invested in fixed income securities (or preferred stocks) within the various
rating categories (based on the S&P ratings if the securities are rated by S&P,
otherwise based on Moody's ratings), and the nonrated debt securities,
determined on a dollar weighted average, were as follows:
<TABLE>
<S> <C>
U. S. Government . . . . . . . . . . . . . . . 5.1%
AAA/aa . . . . . . . . . . . . . . . . . . . . 1.0
AA/Aa . . . . . . . . . . . . . . . . . . . . 2.1
BBB/Baa . . . . . . . . . . . . . . . . . . . 0.7
BB/Ba . . . . . . . . . . . . . . . . . . . . 4.3
B/B . . . . . . . . . . . . . . . . . . . . . 7.2
CCC/Caa . . . . . . . . . . . . . . . . . . . 1.0
Nonrated . . . . . . . . . . . . . . . . . . . 1.6*
Common Stock/Warrants . . . . . . . . . . . . 70.3
Cash and Equivalents . . . . . . . . . . . . . 6.7
_____
Total Net Assets . . . . . . . . . . . . . 100%
=====
</TABLE>
* The nonrated debt securities as a percentage of total net assets are
considered by the Adviser to be comparable to securities rated by S&P
as BB - 1.6%.
5
<PAGE> 6
SPECIAL CONSIDERATIONS AND RISK FACTORS
MARKET PRICE PREMIUM OR DISCOUNT FROM NET ASSET VALUE. Shares of the Company
are listed and traded on the New York Stock Exchange. Since the Company is a
closed-end investment company, shareholders do not have the right to redeem
shares at net asset value. The market price for shares of closed-end
investment companies generally varies from per share net asset value and such
shares frequently trade at a discount from net asset value. Shares of common
stock of the Company have traded at, above and below net asset value since the
commencement of operations. See "Share Price Data." During the past three
years, the Company's common stock has generally traded at a premium above net
asset value. To the extent [that] shares trade at a premium above net asset
value, a reduction in such premium or a change from a premium to a discount
would adversely affect an investor's return.
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Certificate of
Incorporation may be regarded as "anti-takeover" provisions. These provisions
require the affirmative vote or consent of the holders of at least two-thirds
of the outstanding shares of the Company for a merger or consolidation of the
Company with an open-end investment company, a merger or consolidation of the
Company with a closed-end investment company with different voting
requirements, dissolution of the Company, a sale of all or substantially all of
the assets of the Company or an amendment to the Company's Certificate of
Incorporation making the common stock a redeemable security or reducing the
two-thirds vote required by the Certificate of Incorporation. See "Capital
Stock - Anti-Takeover Provisions of the Certificate of Incorporation."
DISTRIBUTIONS. The Company pays quarterly distributions on its common stock
approximating, on an annual basis, 10% of the ongoing net asset value of such
shares. These distributions require payments substantially in excess of the
Company's net investment income. Only the portion of a distribution which
equals the Company's current net investment income should be considered a
dividend. The remainder constitutes a payment out of the Company's net
realized capital gains for each period to the extent available; any excess is
from paid-in capital. See "Capital Stock - Common Dividends and
Distributions."
EFFECTS OF LEVERAGE
Based on total net assets at December 31, 1995, approximately 15.0%
of the Company's capital structure was represented by the Preferred Stock. The
leverage provided by the Preferred Stock increases the potential risk and
return on the Common Stock. Dividends on the Preferred Stock are paid at an
annual rate of $2.40 per share. Based upon the Company's total net assets at
December 31, 1995, the portfolio must experience an annual return of 1.3% in
order to cover this dividend. The following table is provided to assist in
understanding the effects of leverage. The assumed return figures appearing in
the table are hypothetical and actual returns may be greater or less than those
shown below.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Return of Portfolio
(net of expenses) -10.0% -5.0% 0.0% 5.0% 10.0%
------ ----- ----- ---- -----
Corresponding Return to
Common Shareholders -13.29% -7.41% -1.53% 4.34% 10.22%
</TABLE>
6
<PAGE> 7
SHARE PRICE DATA
The following table sets forth the high and low sales price on the New
York Stock Exchange ("NYSE") and the volume of trading in such shares during
each calendar quarter for the last two years. Also set forth are the related
net asset values per share of Common Stock, $1.00 par value ("Common Stock"),
as calculated by First Pacific Advisors, Inc., the Company's investment adviser
("Adviser"), and the premium (discount) to net asset value represented by such
market prices. The liquidation preference of the $2.40 Cumulative Preferred
Stock, $3.00 par value ("Preferred Stock"), is $27.50 per share.
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------------------------------------------------------- ----------------------------
Market Price Net Asset Value Premium Market Price
(Per Share) (Per Share) (Discount) (Per Share)
--------------- ------------------ ----------------- ---------------
For For For For Trading Trading
Quarter Highest Lowest Highest Lowest Volume Volume
Ended Highest Lowest Price Price Price Price (000) Shs. Highest Lowest (000) Shs.
- ------- ------- ------ ------- ------ ------- ------- ---------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3/31/94 46.875 41.00 42.11 39.93 11.32 % 2.68 % 184 29.75 27.50 80
6/30/94 43.875 40.00 40.12 40.72 9.36 % (1.77)% 284 28.375 27.25 43
9/30/94 42.875 40.125 40.08 39.04 6.97 % 2.78 % 146 28.75 27.25 42
12/31/94 41.50 36.75 39.27 38.52 5.68 % (4.60)% 173 27.875 26.50 66
3/31/95 41.375 37.00 39.43 38.52 4.93 % (3.95)% 168 28.25 26.625 50
6/30/95 41.50 39.00 41.46 40.68 0.10 % (3.82)% 251 28.25 27.50 43
9/30/95 42.25 40.25 42.25 41.37 0.0 % (2.71)% 213 28.25 27.75 37
12/31/95 41.875 39.875 42.57 42.27 (1.63)% (5.67)% 282 29.50 28.00 71
3/31/96 44.625 42.125 43.77 43.92 1.95 % (4.09)% 359 28 26.75 46
</TABLE>
On April 19, 1996, the last sale price for shares of Common Stock and
Preferred Stock on the NYSE was $41.125 and $28.50, respectively. The Common
Stock price represented a discount of 5.87% from the net asset value per share
as determined on April 19, 1996, of $43.69. Although shares of Common Stock
of the Company have generally traded at a premium to net asset value from
September 1984 to May 1987, and from June 1990 to November 1994, such shares
traded at a discount from net asset value for many years prior to September
1984, and generally traded at a discount from June 1987 to May 1990, and from
December 1994 to present.
INVESTMENT RESTRICTIONS
The Company has adopted the following investment restrictions which
cannot be changed without approval by the holders of both a majority of the
Preferred Stock and of the Common Stock. Such majority is defined by the Act
as (i) 67% or more of the voting securities present in person or by proxy at
the meeting, if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities, whichever is less. These restrictions provide
that the Company shall not:
1. Purchase any security if such purchase would cause
less than 75% of the value of its total assets to be
represented by cash and cash items (including
receivables), Government securities, securities of
other investment companies and other securities for
the purpose of this calculation limited in respect to
any one issuer to an amount not greater in value than
5% of the value of the total assets of the Company and
to not more than 10% of the outstanding voting
securities of such issuer.
2. Make short sales of securities or maintain a short
position unless the Company contemporaneously owns or
has the right to obtain at no added cost securities
identical to those sold short (short sales "against
the box") or unless the securities sold are "when
issued" or "when distributed" securities which the
Company expects to receive in a recapitalization,
reorganization, or other exchange for securities the
Company contemporaneously owns or has the right to
obtain at no added cost. The Company shall not make
short sales or maintain a short position if to do so
would cause more than 25% of the Company's total net
assets (exclusive of proceeds from short sales) to be
allocated to a segregated account in connection with
short sales. Purchase securities on margin, but the
Company may obtain such short-term credits as may be
necessary for the clearance of purchases and sales of
securities.
7
<PAGE> 8
3. Purchase or retain the securities of any issuer if
those officers and directors of the Company or its
Adviser owning individually more than 1/2 of 1% of
the securities of such issuer together own more than
5% of the securities of such issuer.
4. Engage in transactions in puts, calls or combinations
thereof, but the Company may acquire warrants or other
rights to subscribe to securities of companies issuing
such warrants or rights, or of parents or subsidiaries
of such companies; except that the Company may write
listed call options which are traded on a national
securities exchange. The Company may write options
only on securities which it owns (covered options),
and is required to retain ownership of the underlying
security as long as the option remains outstanding.
The Company may not write any option which would at
the time cause outstanding options written by the
Company to cover securities comprising more than 10%
of the value of the Company's assets.
5. Purchase securities of other investment companies if
immediately after such purchase the Company will own
(a) more than 3% of the total outstanding voting stock
of the acquired company, (b) securities issued by the
acquired company having an aggregate value in excess
of 5% of the value of the total assets of the Company,
or (c) securities issued by all investment companies
having an aggregate value in excess of 10% of the
value of the total assets of the Company. In
addition, the Company may not purchase securities of
an open-end investment company.
6. Invest in commodities, commodity contracts, real
estate, or interests in real estate, although the
Company may purchase securities of companies holding
real estate or interests therein.
7. Issue any Senior Securities (as defined by the Act)
except the Preferred Stock; or borrow in excess of 5%
of the value of its total assets, or pledge its assets
to an extent greater than 10% of the value of its
total assets; provided that any borrowing must be from
banks and must be undertaken only as a temporary
measure for extraordinary or emergency purposes.
8. Make any investment which would cause more than 25% of
its assets to be invested in securities issued by
companies principally engaged in any one industry.
9. Make loans except that the Company may acquire
non-publicly offered debt securities (including
convertible securities and including Repurchase
Agreements) of any company and except that the Company
may in an amount not exceeding 10% of its net assets
acquire debt securities of any person in connection
with the sale or other disposition of securities owned
by the Company. The purchase of a portion of an issue
of publicly distributed bonds, debentures or other
debt securities, whether or not the purchase was made
upon the original issue of the securities is not
considered to be a loan. The Company may lend its
portfolio securities to brokers, dealers and other
financial institutions, provided that such loans are
callable at any time by the Company, and are at all
times secured by cash collateral that is equal to at
least the market value, determined daily, of the
loaned securities. The Company may make loans of
portfolio securities with a market value of up to 20%
of the value of the Company's total assets.
10. Invest in securities of issuers that do not have
outstanding a class of securities for which market
quotations are readily available, except for (i)
non-convertible debt securities and (ii) other
securities acquired in connection with the sale or
other disposition of securities owned by the Company
or which are believed will enhance or protect the
value of securities owned by the Company.
11. Purchase restricted securities, other than debt
securities, from an issuer unless the Company has
obtained the contractual right to call upon the issuer
to file a registration statement with respect to the
restricted securities. The issuer's commitment to
register its securities may be for a limited or for an
unlimited period of time, but if limited it will
encompass a period of at least two years. The Company
may purchase restricted securities from a holder
without obtaining such a contractual right from the
issuer if the value of all such securities does not
exceed 10% of the value of the total assets of the
Company.
8
<PAGE> 9
OPERATING POLICIES
The Company has also adopted the following operating policies. The
Company may not invest more than 5% of the value of its total assets in
securities of companies which (including predecessor companies or operations)
have been in business less than three years. The Company may not invest more
than 5% of its net assets in warrants or rights valued at the lower of cost or
market, nor more than 2% of its net assets in warrants or rights (valued on
such basis) which are not listed on the NYSE or American Stock Exchange.
Warrants or rights acquired in units or attached to other securities are not
subject to the foregoing limitations. The Company may not invest more than 5%
of the value of its total assets in securities of foreign issuers under
circumstances that would subject it to any federal interest equalization tax
then in effect or at prices that reflect any such tax. The Company may not
purchase a restricted security, other than a debt security, if the total value
of restricted securities, other than debt securities, owned by the Company
would exceed 15% of its net assets. The Company may not purchase a restricted
debt security if the total value of restricted debt securities owned by the
Company would exceed 30% of its total assets. While the Company may invest in
securities of an issuer for the purpose of exercising control or management
thereof, it is the Company's operating policy not to do so except where
necessary to realize the value of a prior investment. The operating policies
described in this paragraph may be amended by the Board of Directors without
the vote of shareholders.
SECURITIES OF FOREIGN ISSUERS
Investments in securities of foreign issuers may be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations. Compared to U.S. companies, there may be less publicly available
information about foreign companies and they generally are subject to less
stringent accounting, auditing and financial reporting standards and
requirements. Securities of some foreign companies may be less liquid or more
volatile than those of U.S. companies. Foreign brokerage commissions and
custodial fees are generally higher than in the United States. Investments in
foreign securities may involve additional risks, including local political or
economic developments, expropriation or nationalization of assets and
imposition of withholding taxes on dividend or interest payments. In the event
of a default on any foreign debt obligation, it may be more difficult for the
Company to obtain or enforce a judgment against the issuer.
COVERED CALL OPTIONS
When the Company writes a listed call option, the purchaser has
the right to buy a security from the Company at a fixed exercise price any time
before the option contract expires, regardless of changes in the market price
of the underlying security. The Company writes options only on securities it
owns (covered options) and must retain ownership of the underlying security
while the option is outstanding. Until the option expires, the Company cannot
profit from a rise in the market price of the underlying security over the
exercise price, except insofar as the premium which the Company receives, net
of commissions, represents a profit. The premium paid to the Company is the
consideration for undertaking this obligation.
The Company may not write any option which, at the time, would
cause its outstanding options to cover securities comprising more than 10% of
its asset value. Writing option contracts is a highly specialized activity and
may limit investment flexibility at certain times. The maximum term for listed
options exceeds two years, but the Company expects that most options it writes
will not exceed six months.
SHORT SALES AGAINST THE BOX
The Company can make short sales of securities or maintain a short
position if the Company contemporaneously owns or has the right to obtain at no
added cost securities identical to those sold short (short sales "against the
box") or if the securities sold are "when issued" or "when distributed"
securities which the Company expects to receive in a recapitalization,
reorganization or other exchange for securities the Company contemporaneously
owns or has the right to obtain at no added cost. The principal purpose of
making short sales is to enable the Company to obtain the current market price
of a security which the Company desires to sell but which cannot be currently
delivered for settlement. The Company shall not make short sales or maintain a
short position if to do so would cause more than 25% of its total net assets
(exclusive of proceeds from short sales) to be allocated to a segregated
account in connection with short sales.
REPURCHASE AGREEMENTS
The Company can invest in repurchase agreements with domestic
banks or dealers to earn a return on temporarily available cash. A repurchase
agreement is a short-term investment in which the purchaser (i.e., the Company)
acquires a debt security and the seller agrees to repurchase at a future time
and set price, thereby determining the yield during the holding period.
Repurchase agreements are collateralized by the underlying debt
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<PAGE> 10
securities and may be considered loans under the 1940 Act. In the event of
bankruptcy or other default by the seller, the Company may experience delays
and expenses liquidating the underlying security, loss from decline in value of
such security and lack of access to income on such security.
RESTRICTED SECURITIES
Restricted securities are securities that have been sold in the
United States without registration under the Securities Act of 1933 (including
any securities purchased by the Company pursuant to Rule 144A) and are thus
subject to restrictions on resale. Restricted securities generally may be
resold only in a privately negotiated transaction with a limited number of
purchasers or in a public offering registered under the Securities Act of 1933.
Considerable delay could be encountered in either event. These difficulties
and delays could result in the Company's inability to realize a favorable price
upon disposition of restricted securities, and in some cases, might make
disposition of such restricted securities at the time desired by the Company
impossible. In those instances where the Company determines to have restricted
securities held by it registered prior to sale and the Company does not have a
contractual commitment from the issuer or seller to pay the costs of such
registration, the gross proceeds from the sale of the securities would be
reduced by the registration costs and underwriting discounts in the event of a
public offering. Restricted securities of a class which is publicly traded
normally may be resold beginning two years following the acquisition, subject
to the volume limitations and certain other conditions of Rule 144 under the
Securities Act of 1933. Beginning three years after acquisition, such
securities ordinarily may be resold without restriction. Rule 144A provides a
"safe harbor" for the resale of certain restricted securities among qualified
institutional investors without registration under the Securities Act of 1933
and without any holding period requirement.
MANAGEMENT OF THE COMPANY
GENERAL
A board of seven directors is responsible for overseeing the Company's
affairs. The Adviser selects investments for the Company, provides
administrative services and manages the Company's business. The Adviser,
together with its predecessors, has been in the investment advisory business
since 1954, serving as investment adviser to the Company since its inception.
All officers of the Company are also officers of the Adviser. A number of the
directors and officers of the Company are also directors and/or officers of one
or more of the four open-end investment companies advised by the Adviser.
These investment companies are FPA Capital Fund, Inc. ("Capital"), FPA New
Income, Inc. ("New Income"), FPA Paramount Fund, Inc. ("Paramount"), and FPA
Perennial Fund, Inc. ("Perennial") (collectively, "FPA Fund Complex"). The
directors and officers of the Company and their principal occupations during
the past five years are listed below. Unless otherwise indicated, the address
for each person is 11400 West Olympic Boulevard, Suite 1200, Los Angeles,
California 90064. The Company has no advisory board, executive or investment
committee.
WESLEY E. BELLWOOD, DIRECTOR
500 North State College Boulevard, Orange, California. Chairman of the
Board and director of Wynn's International, Inc. (diversified automotive
aftermarket products manufacturer).
DAVID REES, DIRECTOR
1601 Country Club Drive, Glendale, California. Private investor. First
Vice President and director of the International Institute of Los
Angeles. Formerly, until 1995, Senior Editor of Los Angeles Business
Journal for more than the preceding five years.
*LAWRENCE J. SHEEHAN, DIRECTOR
1999 Avenue of the Stars, Los Angeles, California. Of counsel to, and
partner (1969 to 1994) of, the law firm of O'Melveny & Myers, legal
counsel to the Company. Director of Capital, of New Income, of
Perennial, and of TCW Convertible Securities Fund, Inc., a closed- end
investment company not advised by the Adviser.
CHARLES W. STANTON, DIRECTOR
743-P Avenida Majorca, Laguna Hills, California. Retired. Independent
Architectural and Planning Consultant. Formerly head of the New York
Office of Welton Becket Associates (architectural and engineering firm).
KENNETH L. TREFFTZS, DIRECTOR
11131 Briarcliff Drive, San Diego, California. Private investor.
Director of Capital, of New Income, of Perennial, and of Fremont General
Corporation (financial service company). Director (or Trustee) of the
Pacific Horizon Funds and Horizon Funds, a group of 13 open-end
investment company portfolios not advised by the Adviser. Formerly
Professor of Finance and Chairman of the Department of Finance and
Business Economics, University of Southern California Graduate School of
Business.
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<PAGE> 11
*JULIO J. DE PUZO, JR., PRESIDENT, TREASURER AND DIRECTOR
Principal, since March 1996, Chief Executive Officer since March 1996
and director since October 1995 of the Adviser; and Executive Vice
President (since March 1996), Chief Financial Officer (since October
1991) and director (since May 1991) of FPA Fund Distributors, Inc.
("Fund Distributors"). Treasurer of Capital, New Income, Paramount
and Perennial. Executive Vice President from October 1995 to
March 1996, Chief Administrative Officer from October 1995 to
March 1996, Chief Financial Officer from June 1991 to March 1996,
Treasurer from June 1991 to March 1996, Senior Vice President from
February 1993 to October 1995, and First Vice President from April
1985 to February 1993, of the Adviser; and Senior Vice President
(or First Vice President) from October 1991 to March 1996 of Fund
Distributors.
*ROBERT L. RODRIGUEZ, SENIOR VICE PRESIDENT AND DIRECTOR
Principal, Chief Investment Officer and director of the Adviser since
March 1996; and director of Fund Distributors since March 1996.
President and Chief Investment Officer of Capital and New Income.
Executive Vice President from January 1996 to March 1996, Senior Vice
President from February 1993 to January 1996, and Vice President from
November 1983 to February 1993, of the Adviser.
CHRISTOPHER LINDEN, SENIOR VICE PRESIDENT
Principal and director of the Adviser since March 1996. Senior Vice
President of Capital, New Income, Paramount and Perennial. President
from February 1993 to March 1996, Senior Vice President from November
1980 to February 1993, and director and Chief Operating Officer from
June 1991 to September 1995, of the Adviser; director of Fund
Distributors from May 1991 to September 1995; director and Chairman of
the Board from June 1985 to May 1995, and Chief Operating Officer from
December 1982 to November 1995, of Paramount; and President and Chief
Investment Officer of Perennial from September 1983 to September 1995.
ERIC S. ENDE, SENIOR VICE PRESIDENT
Senior Vice President (or Vice President) of the Adviser for more than
the past five years. President and Chief Investment Officer of
Perennial, and Vice President of Capital, New Income and Paramount.
Executive Vice President from August 1995 to September 1995, and Vice
President from May 1985 to August 1995, of Perennial.
STEVEN T. ROMICK, VICE PRESIDENT
Senior Vice President of the Adviser since March 1996. Director,
Chairman of the Board and Chief Financial Officer of The Crescent Group,
Inc. from May 1990 to February 1996.
SHERRY SASAKI, SECRETARY
Assistant Vice President (since December 1992) and Secretary (or
Assistant Secretary) of the Adviser for more than the past five years;
and Secretary of Fund Distributors. Secretary of Capital, of New
Income, of Paramount, and of Perennial.
CHRISTOPHER H. THOMAS, ASSISTANT TREASURER
Vice President and Controller of the Adviser and of Fund Distributors
since March 1995. Assistant Treasurer of Capital, of New Income, of
Paramount, and of Perennial since April 1995. Staff Accountant with the
Office of Inspection of the Securities and Exchange Commission from 1994
to March 1995. School Administrator of the Calvary Road Christian
Academy from 1988 to 1993.
* Indicates a director who is an interested person under the Act.
The Company does not pay any salaries to its officers, who are
compensated by the Adviser. The following information relates to director
compensation. The five directors who are not affiliated with the Adviser
received as a group $75,000 for the year ended December 31, 1995. Each such
director is also reimbursed for out-of-pocket expenses incurred as a director.
During the year ended December 31, 1995, the Company incurred legal fees of
$14,373 payable to O'Melveny & Myers, legal counsel for the Company. Lawrence
J. Sheehan, a director of the Company, was a partner of that firm.
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<PAGE> 12
<TABLE>
<CAPTION>
TOTAL COMPENSATION*
AGGREGATE COMPENSATION* FROM THE FPA FUND COMPLEX,
NAME OF DIRECTORS FROM THE COMPANY INCLUDING THE COMPANY
--------------------- ------------------------- -----------------------------
<S> <C> <C>
Julio J. de Puzo (1) $ -0- $ -0-
Robert L. Rodriguez (1) -0- -0-
Wesley E. Bellwood 15,000 15,000
David Rees 15,000 15,000
Lawrence J. Sheehan 15,000 29,000**
Charles W. Stanton 15,000 15,000
Kenneth L. Trefftzs 15,000 29,000**
</TABLE>
(1) Director since March 1996.
* No pension or retirement benefits are provided to Directors by
the Company or the FPA Fund Complex.
** Includes compensation from the Company and from three open-end
investment companies.
INVESTMENT ADVISER
First Pacific Advisors, Inc. ("Adviser"), a Massachusetts corporation,
is the successor to a California corporation of the same name which served as
investment adviser to the Company from its organization in 1968 to June 27,
1991. On that date, the Adviser purchased the former adviser's business as a
going concern. The Adviser maintains its principal office at 11400 West
Olympic Boulevard, Suite 1200, Los Angeles, California 90064. The Adviser and
the former adviser are hereinafter sometimes collectively referred to as the
"Adviser."
The Adviser was organized by, and is an indirect wholly owned
subsidiary of, United Asset Management Corporation ("UAM"), which is a holding
company principally engaged, through affiliated firms, in providing
institutional investment management and acquiring institutional investment
management firms. The common stock of UAM is listed on the New York Stock
Exchange. No person is known by UAM to own or hold with power to vote 25% or
more of the outstanding shares of UAM common stock.
The Adviser serves as investment adviser to the following open-end
investment companies (mutual funds): FPA Paramount Fund, Inc. (since July
1978), which had net assets of $575,065,069 at December 31, 1995; FPA Perennial
Fund, Inc. (since commencement of operations in April 1984), which had net
assets of $47,390,332 at December 31, 1995; FPA Capital Fund, Inc. (since July
1984), which had net assets of $353,000,947 at December 31, 1995; and FPA New
Income, Inc. (since July 1984), which had net assets of $233,604,691 at
December 31, 1995. The Adviser also advises institutional accounts. The
Adviser had total assets under management of $3.4 billion at December 31, 1995.
PORTFOLIO MANAGEMENT
Eric S. Ende, whose occupation is described above, has been primarily
responsible for the day-to-day management of the Company's portfolio since
March 1996. For more than ten years prior to March 1996, Mr. Ende assisted
George H. Michaelis who served as President and portfolio manager of the
Company from 1978 until his accidental death in 1996.
INVESTMENT ADVISORY AGREEMENT
The Adviser provides investment management and advisory services to
the Company pursuant to an Investment Advisory Agreement dated June 27, 1991
("Advisory Agreement"). The continuation of the Advisory Agreement to April
30, 1996, was approved by shareholders of the Company on May 1, 1995. The
Advisory Agreement provides that it may be renewed from year to year by (i) the
Board of Directors of the Company or by the vote of a majority (as defined in
the Act) of the outstanding voting securities of the Company, and (ii) by the
vote of a majority of directors who are not interested persons (as defined in
the Act) of the Company or of the Adviser cast in person at a meeting called
for the purpose of voting on such approval. The renewal of the Advisory
Agreement through April 30, 1997, has been approved by the Board of Directors
and a majority of the directors who are not interested persons of the Company
or of the Adviser.
Under the Advisory Agreement, the Adviser provides continuing
supervision of the Company's investment portfolio. The Adviser is authorized,
subject to the control of the Company's Board of Directors, to determine which
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<PAGE> 13
securities are to be bought or sold and in what amounts. In addition to
providing management and investment advisory services, the Adviser furnishes
office space, facilities and equipment. The Adviser also compensates all
officers and other personnel of the Company except directors who are not
affiliated with the Adviser.
For providing these services, the Adviser receives a monthly fee equal
to 1/12 of the annualized percentage indicated below of total net assets. The
annualized percentage is determined by the total net assets of the Company on
the last business day of each month, in accordance with the following table:
0.725% for the first $100 million of total net assets;
0.700% for the next $100 million of total net assets; and
0.675% for the total net assets over $200 million.
This fee is higher than the fee paid by some other investment
companies. For the years ended December 31, 1993, 1994 and 1995, the Adviser
received $2,296,999, $2,305,313 and $2,437,373, respectively, in net advisory
fees from the Company. The total net assets of the Company were $362,086,804
on December 31, 1995.
Other than the expenses specifically assumed by the Adviser under the
Advisory Agreement, all expenses incurred in the operation of the Company are
borne by the Company. Expenses incurred by the Company include brokerage
commissions on portfolio transactions, fees and expenses of directors who are
not affiliated with the Adviser, taxes, transfer agent fees, dividend
disbursement and reinvestment and custodian fees, auditing and legal fees, the
cost of printing and mailing reports and proxy materials to shareholders,
expenses of printing and engraving stock certificates, expense of trade
association memberships, and advertising and public relations expenses. No
advertising or public relations expenses have been incurred by the Company
except in connection with shareholder relations and shareholder communications.
The Advisory Agreement includes a provision for a reduction in the
advisory fees payable to the Adviser in the amount by which certain defined
operating expenses of the Company for any year exceed 1.5% of the first $30
million of average total net assets of the Company, plus 1% of the remaining
average total net assets. Operating expenses, as defined in the Advisory
Agreement, exclude interest, taxes, any expenditures for supplemental
statistical and research information, any uncapitalized legal expenses relating
to specific portfolio securities or any proposed acquisition or disposition
thereof, and extraordinary expenses such as those of litigation, merger,
reorganization or recapitalization. All expenditures, including costs incurred
in connection with the purchase, holding or sale of portfolio securities, which
are capitalized in accordance with generally accepted accounting principles
applicable to investment companies, are accounted for as capital items and not
as expenses. This expense limitation provision does not require any payment by
the Adviser beyond the return of the advisory fees for a year.
The Advisory Agreement provides that the Adviser shall have no
liability to the Company or any shareholders of the Company for any error of
judgment, mistake of law or any loss arising out of any investment, or for any
other act or omission in the performance by the Adviser of its duties under the
Advisory Agreement, except for liability resulting from willful misfeasance,
bad faith or negligence on the part of the Adviser or the reckless disregard of
its duties under the Advisory Agreement. The Advisory Agreement may be
terminated without penalty by the Board of Directors of the Company or the vote
of a majority (as defined in the Act) of the outstanding voting securities of
the Company upon 60 days' written notice to the Adviser or by the Adviser upon
like notice to the Company. The Advisory Agreement will automatically
terminate in the event of its assignment, as that term is defined in the Act.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Investment Advisory Agreement ("Advisory Agreement"), dated
June 27, 1991, the Adviser makes decisions to buy and sell securities for the
Company, selects broker-dealers, and negotiates commission rates or net prices.
In over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed better prices and executions are available
elsewhere. Portfolio transactions are effected with broker-dealers selected
for their abilities to give prompt execution at prices which are favorable to
the Company. If these primary considerations are met, agency transactions for
the Company are typically placed with brokers which provide brokerage and
research services to the Company or the Adviser at commission rates considered
to be reasonable, although higher than the lowest brokerage rates available.
No formula for such allocation exists. The Company thus bears the cost of such
services. While research services may be useful to supplement other available
investment information, the receipt thereof does not necessarily reduce the
expenses of the Adviser. Any solicitation fees which are received by the
Adviser in connection with a tender of portfolio securities of the Company in
acceptance of an exchange or tender offer are applied to reduce the advisory
fees payable by the Company. The Company does not pay any mark-up over the
market price of securities acquired in principal transactions with dealers.
The Advisory Agreement includes direct authorization for the Adviser
to pay commissions on securities transactions to broker-dealers furnishing
research services in an amount higher than the lowest available rate, if the
Adviser determines in good faith that the amount is reasonable in relation to
the brokerage and research services provided (as required by Section 28(e) of
the Securities Exchange Act of 1934), viewed in terms of the particular
transaction or the Adviser's overall responsibilities with respect to accounts
as to which it exercises investment discretion. The term brokerage and
research services is defined to include advice as to the value of securities,
the advisability of investing in, purchasing or selling securities, the
availability of securities or purchasers or sellers of
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<PAGE> 14
securities, furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance of
accounts, and effecting securities transactions, and performing functions
incidental thereto, such as clearance, settlement, and custody.
The Adviser also places portfolio transactions for other advisory
accounts, including other investment companies. Research services furnished by
broker-dealers which effect securities transactions for the Company may be used
by the Adviser in servicing all of its advisory accounts and not all such
research services may be used by the Adviser in the management of the Company's
portfolio. Conversely, research services furnished by broker-dealers which
effect securities transactions for other advisory accounts may be used by the
Adviser in the management of the Company. In the opinion of the Adviser, it is
not possible to measure separately the benefits from research services to each
advisory account. Because the volume and nature of the trading activities of
the advisory accounts are not uniform, the amount of commissions in excess of
the lowest available rate paid by each advisory account for brokerage and
research services will vary. In the opinion of the Adviser, however, total
commissions paid by the Company are not disproportionate to the benefits
received by it on a continuing basis. Brokerage commissions paid by the
Company on portfolio transactions for the years ended December 31, 1993, 1994
and 1995 totaled approximately $219,763, $252,529 and $317,504, respectively.
During the last fiscal year, $278,483 of commissions were paid on transactions
having a total value of $142,875,802 to broker-dealers selected because of
research services provided to the Adviser.
The Adviser seeks to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities for the
Company and another advisory account. In some cases, this procedure could have
an adverse effect on the price or the amount of securities purchased or sold by
the Company. In making such allocations, the main factors considered by the
Adviser are the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and the
opinions of the persons responsible for recommending the investment.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
All cash and securities of the Company are held by the custodian,
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Rules adopted under the Investment Company Act of 1940 permit the
Company to maintain its foreign securities in the custody of certain eligible
foreign banks and securities depositories. Pursuant to these rules, any
foreign securities in the Company's portfolio may be held by foreign
sub-custodians and securities depositories approved by the directors of the
Company in accordance with the regulations of the Securities and Exchange
Commission.
The transfer agent, dividend disbursing agent and registrar for the
Company's shares is Chemical Mellon Shareholder Services, L.L.C., P.O. Box 590,
Ridgefield Park, New Jersey 07660.
INDEPENDENT AUDITORS
Ernst & Young LLP, 515 South Flower Street, Los Angeles, California
90071, performs annual audits of the Company's financial statements.
PRINCIPAL SHAREHOLDERS OF THE COMPANY
On March 1, 1996, no person owned of record, or, to the knowledge of
management, owned beneficially more than 5% of the outstanding Common Stock or
more than 5% of the outstanding Preferred Stock, except Cede & Co., which held
of record 3,841,977 shares of Common Stock (53.12%) and 1,212,188 shares of
Preferred Stock (61.56%), and holds shares as nominee for participants in the
Depository Trust Company, P.O. Box 20, Bowling Green Station, New York, New
York 10004-9998; and Loriot & Co., which held of record 397,795 shares of
Common Stock (5.50%), and holds shares as nominee for participants in the
Company's Automatic Reinvestment Plan, c/o Chemical Mellon Shareholder
Services, Dividend Reinvestment Department, 4 Station Square, Commerce Court,
Pittsburgh, Pennsylvania 15219-1119.
On March 1, 1996, all directors and officers as a group owned less
than 1% of the Company's outstanding Common Stock and less than 1% of the
Company's outstanding Preferred Stock.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 3,000,000
shares of $2.40 Cumulative Preferred Stock, $3.00 par value ("Preferred
Stock"), and 12,000,000 shares of Common Stock, $1.00 par value ("Common
Stock"). As of April 19, 1996, 1,969,212 shares of Preferred Stock and
7,232,110 shares of Common Stock were outstanding, no shares of Common and
Preferred Stock were held by the Company. The Preferred Stock and the
14
<PAGE> 15
Common Stock are fully paid and non-assessable and have no pre-emptive,
conversion or exchange rights. The Company has no outstanding debt securities.
PREFERRED DIVIDENDS
The holders of Preferred Stock are entitled to fixed cumulative
dividends, as and when declared by the Board of Directors, at the rate of $2.40
per annum, payable quarterly on the 15th of March, June, September and
December.
COMMON DIVIDENDS AND DISTRIBUTIONS
The Company's distribution policy with respect to the Common Stock
provides for regular quarterly distributions which, on an annualized basis,
approximate 10% of the net asset value of the Common Stock. The Board of
Directors of the Company reviews the amount of the quarterly distribution at
least once a year and adjusts such amount 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. Since the current distribution policy
was adopted in June 1976, at an initial annual rate of $1.40 per share,
continued increase 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 $37.00.
The distribution policy requires payments substantially in excess of
the current net investment income of the Company after provision for dividends
on the Preferred Stock. Only the portion of a distribution which equals the
Company's current net investment income applicable to the Common Stock should
be considered a dividend. The remainder constitutes a payment out of the
Company's net realized capital gains for the year to the extent available; any
excess will be from paid-in capital. Declaration of distributions on Common
Stock is subject to the limitation that the Preferred Stock have an Asset
Coverage of at least 200% after deducting the amount of the distribution.
For years in which the Company distributes amounts in excess of its
net investment income and net realized capital gains, such distributions will
decrease the Company's total assets and, therefore, have the likely effect of
increasing the Company's expense ratio. In addition, in order to make such
distributions, the Company may have to sell a portion of its investment
portfolio at a time when independent investment judgment might not dictate such
action. Such sales, if they involve assets held for less than three months,
could also adversely affect the Company's status as a regulated investment
company since, in order for the Company to qualify as a regulated investment
company, for each taxable year, less than 30% of the Company's gross income
must be derived from gains realized on the sale or other disposition of stocks
or securities held for less than three months.
Future distribution policy will be influenced by future events,
including compliance with tax and legal requirements as they exist from time to
time.
ASSET COVERAGE
As required by the Act, no dividends or distributions may be declared
on the Common Stock if dividends on the Preferred Stock are in arrears or if
the Preferred Stock would not thereafter have an "Asset Coverage" of at least
200%. The 200% Asset Coverage limitation also applies to any purchase by the
Company of its Common Stock. The Asset Coverage of the Preferred Stock is the
ratio which the value of the total assets of the Company, less all liabilities
and indebtedness not represented by senior securities, bears to the aggregate
amount of senior securities representing indebtedness of the Company plus the
aggregate of the liquidation preference of the Preferred Stock. Based upon
total net assets of $362,086,804 at December 31, 1995, the Asset Coverage of
the Preferred Stock at that date was 669%. If dividends cannot be declared on
the Common Stock because of the 200% Asset Coverage limitation, the Company
expects to pay Special Distributions on the Preferred Stock to the extent
necessary to comply with Subchapter M. Any such Special Distribution would
have the effect of reducing the amounts due to holders of Preferred Stock upon
liquidation of the Company, or upon redemption of the Preferred Stock, but
would not affect the amount of the annual $2.40 cumulative dividend to which
the holders of Preferred Stock are entitled so long as such shares remain
outstanding. Following any Special Distribution the effective yield on the
Preferred Stock as a percentage of its liquidation preference would be
increased, which would be detrimental to the holders of the Common Stock as
long as the Preferred Stock remained outstanding.
VOTING RIGHTS
Except as noted below, the shares of both classes have equal voting
rights of one vote per share and vote together as a single class. In elections
of directors, the holders of the Preferred Stock, as a separate class, vote to
elect two directors and the holders of the Common Stock as a separate class,
vote to elect the remaining directors. The Board of Directors currently
consists of six members, but this number may be changed by the Board. As
required by the Act, if dividends on the Preferred Stock are in arrears in an
amount equal to two full years' dividends, the holders of such shares have the
right to elect a majority of the directors until all accrued dividends have
been paid or otherwise provided for. Each class of shareholders also is
entitled to vote as a class (1) with respect to any reorganization (as defined
in the Act) of the Company adversely affecting such securities and (2) with
respect to the approval of any action requiring a vote of security holders
under Section 13(a) of the Act including, among other
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<PAGE> 16
things, changes in the Company's subclassification as a closed-end investment
company, and changes in its investment objective or its fundamental investment
policies, including those described under "Investment Restrictions."
Both the Preferred Stock and the Common Stock have cumulative voting
rights, which means that, in all elections of directors, each shareholder has
the right to cast a number of votes equal to the number of shares owned
multiplied by the number of directors to be elected by the holders of shares of
such class at such election, and each shareholder may cast the whole number of
votes for one candidate or distribute such votes among candidates as such
shareholder chooses.
ANTI-TAKEOVER PROVISIONS OF THE CERTIFICATE OF INCORPORATION
The Company has provisions in its Certificate of Incorporation that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Company, to cause it to engage in certain transactions
or to modify its structure. The affirmative vote or consent of the holders of
at least two-thirds of the outstanding shares of the Company is required to
authorize any of the following actions: (1) merger or consolidation of the
Company with an open-end investment company; (2) merger or consolidation with a
closed-end investment company, unless such company's charter has the same
voting requirements; (3) dissolution of the Company; (4) sale of all or
substantially all of the assets of the Company; or (5) amendment to the
Certificate of Incorporation of the Company which makes the Common Stock a
redeemable security (as such term is defined in the 1940 Act) or which reduces
the two-thirds vote required to authorize the actions in (1) through (5)
hereof. These two-thirds voting requirements are greater than the minimum
requirements under Delaware law or the 1940 Act.
Reference is made to the Certificate of Incorporation of the Company,
on file with the Securities and Exchange Commission, for the full text of these
provisions. These provisions could have the effect of depriving shareholders
of an opportunity to sell their shares at a premium over prevailing market
prices by discouraging a third party from seeking to obtain control of the
Company in a tender offer or similar transaction.
REDEMPTION
The Preferred Stock may be called for redemption by the Board of
Directors of the Company, in whole or in part, at the redemption price of
$27.50 per share, plus accrued and unpaid dividends to the redemption date,
reduced by the amount, if any, of Special Distributions received with respect
to the Preferred Stock prior to the redemption. If less than all outstanding
Preferred Stock is to be redeemed, the redemption shall be made by lot, or on a
pro rata basis, or in such other manner as will not discriminate unfairly
against any holder of Preferred Stock.
LIQUIDATION RIGHTS
Upon any voluntary or involuntary liquidation of the Company (pursuant
to the vote of each class of shares or otherwise), the holders of Preferred
Stock are entitled, after satisfaction of outstanding liabilities, and before
any distribution may be made on the Common Stock, to an amount equal to $27.50
per share plus accrued and unpaid dividends to the liquidation date, and minus
the amount of any Special Distributions. Upon any liquidation, holders of the
Common Stock, after required payments on the Preferred Stock, receive the
remaining net assets of the Company.
REINVESTMENT PLAN
Holders of record (other than brokers or nominees of banks and other
financial institutions) of Common and Preferred Stock are eligible to
participate in the Dividend Reinvestment Plan ("Plan"), pursuant to which
distributions to shareholders will be paid in or reinvested in shares of Common
Stock of the Company ("Dividend Shares"). Chemical Mellon Shareholder
Services, L.L.C. ("Agent"), P.O. Box 590, Ridgefield Park, New Jersey 07660,
acts as agent for participants under the Plan.
A shareholder may join the Plan by signing and returning an
authorization form which may be obtained from the Agent. A shareholder may
elect to withdraw from the Plan at any time by written notice to the Agent and
thereby elect to receive cash in lieu of Dividend Shares. There is no penalty
for withdrawal from the Plan and shareholders who have previously withdrawn
from the Plan may rejoin at any time.
Purchases of the Company's shares may be made by the Agent, on behalf
of the participants in the Plan, promptly after receipt of funds, and in no
event later than 30 days from such receipt except when restricted under
applicable federal securities laws, from time to time to satisfy dividend
reinvestments under the Plan. Such purchases by the Agent may be made when the
price plus estimated commissions of the Company's Common Stock on the NYSE is
lower than the Company's most recently calculated net asset value per share.
If the Agent determines on the dividend payment date that the shares purchased
as of such date are insufficient to satisfy the dividend reinvestment
requirements, the Agent, on behalf of the participants in the Plan, will obtain
the necessary additional shares as follows. To the extent that outstanding
shares are not available at a cost of less than per share net asset value, the
Agent, on behalf of the participants in the Plan, will accept payment of the
dividend, or the remaining portion thereof, in authorized but unissued shares
of Common Stock of the Company on the dividend payment date. Such shares will
be issued at a per share price equal to the higher of (1) the net asset value
per share on the payment date, or (2) 95%
16
<PAGE> 17
of the closing market price per share on the payment date. If the closing sale
or offer price, plus estimated commissions, of the Common Stock on the NYSE on
the payment date is less than the Company's net asset value per share on such
day, then the Agent will purchase additional outstanding shares on the NYSE or
elsewhere. There are no brokerage charges with respect to shares issued
directly by the Company to satisfy the dividend reinvestment requirements.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Agent's open market purchases of shares. In each
case, the cost per share of shares purchased for each shareholder's account
will be the average cost, including brokerage commissions, of any shares
purchased in the open market plus the cost of any shares issued by the Company.
Shareholders participating in the Plan may receive benefits not
available to shareholders not participating in the Plan. If the market price
plus commissions of the Company's Common Stock is above the net asset value,
participants in the Plan will receive shares of the Company at a discount of up
to 5% from the current market value. However, if the market price plus
commissions is below the net asset value, participants will receive
distributions in shares at prices below the net asset value. Also, since the
Company does not redeem its shares, the price on resale may be more or less
than the net asset value.
In the case of foreign participants whose dividends are subject to
United States income tax withholding and in the case of any participants
subject to 31% federal backup withholding, the Agent will reinvest dividends
after deduction of the amount required to be withheld.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Company reserves the right to amend or terminate the plan.
There is no direct service charge to participants in the Plan; however, the
Company reserves the right to amend the Plan to include a service charge
payable by the participants.
CASH INVESTMENT PLAN
All record holders of Common Stock are offered the opportunity, on a
voluntary basis, to send in cash payments of not less than $100 each up to a
total of $7,500 per month to purchase additional shares of the Common Stock of
the Company through participation in the Cash Investment Plan ("Cash Plan").
The investment date is the 15th of every month.
Under the Cash Plan, the Agent each month invests the aggregated funds
of all the participants for that month in additional shares of the Company's
Common Stock purchased at market price plus brokerage costs and an applicable
service charge. Distributions payable on all shares credited to a
participant's account are automatically reinvested in additional shares
pursuant to the terms of the Reinvestment Plan. Pending investment, a
participant's funds held by the Agent will not bear interest. A participant
may withdraw his or her entire cash payment by written notice received by the
Agent not less than 48 hours before such payment is to be invested.
The price at which the Agent is deemed to have acquired shares for a
participant's account is the average price (including brokerage commissions and
a service charge of $5.00 per transaction) of all shares purchased by it for
all participants in the Cash Plan and as Agent for all participants in the
Reinvestment Plan, with the aggregate funds of all participants used for such
purpose for each investment date. Shares are purchased by the Agent as soon as
practicable, but no later than thirty days, after the investment date. A
brochure describing the terms and conditions of the Cash Plan is available from
the Agent. The Cash Plan may be amended or terminated by the Company.
TAXATION
GENERAL
The Company has qualified, and intends to qualify, each year as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986 ("Code"). In order to qualify as a regulated investment company for any
taxable year, the Company must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and
gains from the sale or other disposition of stock or securities or foreign
currencies or other income derived with respect to its business of investing in
such stock, securities or currencies; (2) derive less than 30% of its gross
income from the sale or other disposition of stock or securities held for less
than three months ("Three-Month Gain Rule"); and (3) distribute at least 90% of
its investment company taxable income (net investment income and the excess of
net short-term capital gain over net long-term capital loss) for the taxable
year.
The Company must also diversify its holdings so that, at the close of
each quarter of its taxable year, (1) at least 50% of the value of its total
assets consists of cash, cash items, Government Securities, and the securities
of other regulated investment companies and other securities limited generally
with respect to any one issuer to not more than 5% of the total assets of the
Company and not more than 10% of the outstanding voting securities of such
issuer, and (2) not more than 25% of the value of its total assets is invested
in the securities (other than Government Securities or the securities of other
regulated investment companies) of any one issuer, or in two or more issuers
which the Company controls and which are engaged in the same or similar trades
or business ("Asset Diversification Test").
17
<PAGE> 18
As a regulated investment company, the Company is not subject to
Federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers from prior years), if any, that it
distributes to its shareholders. The Company intends to distribute to its
shareholders all of its investment company taxable income and, to the extent
described below, net capital gains. The Company is subject to a nondeductible
4% excise tax measured with respect to certain undistributed amounts of
ordinary income and capital gain net income. The Company intends to distribute
sufficient amounts to avoid liability for the excise tax.
At least a portion of the distributions paid by the Company to
shareholders is taxable as dividend income to shareholders. As determined each
year, any remainder is taxable to shareholders as long-term capital gains or
constitute a return of capital. Any such return of capital payment is taxable
to shareholders as dividend income because the Company has accumulated earnings
and profits for federal income tax purposes.
Net investment income distributed as dividends is generally paid first
to the holders of the Preferred Stock. Distributions of net investment income
are reportable by shareholders as dividends taxable at ordinary income tax
rates. To the extent determined each year, a portion of the Company's
distributions from net investment income qualify for the 70% dividends received
deduction for corporations.
To the extent any net realized capital gains of the Company are
included in distributions to shareholders, the portion of any distribution
which is equivalent to any net realized short-term capital gains is taxable to
shareholders as ordinary income dividends, and the portion which is equivalent
to any net realized long-term capital gains is taxable to shareholders as
long-term capital gains. This tax result applies whether or not distributions
are reinvested under the Company's Reinvestment Plan. Such distributions from
net realized long-term capital gains are taxable to a shareholder as long-term
capital gains regardless of the length of time shares of Common Stock of the
Company have been held by the shareholders, but any loss on the sale of shares
held for less than six months is treated as a long-term capital loss to the
extent of any long-term capital gain distribution paid on such shares.
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. To the extent that the Company realizes net long-term capital gains
for any year which are not distributed to shareholders, the Company designates
such gains as undistributed and, accordingly, pays the capital gains tax at the
regular corporate rate (presently 35%) thereon, which payment is available as a
tax credit to holders of Common Stock, as described below.
Each holder of Common Stock on the last day of any taxable year of the
Company for which the Company pays a tax on the undistributed excess of its net
long-term capital gain over its net short-term capital loss is treated as if
the Company had distributed to such shareholder on such last day a pro rata
share (determined without reference to the Preferred Stock) of the long-term
gain on which such tax was paid. Accordingly, each such person (1) includes,
as long-term gain in the tax return for the taxable year in which the last day
of the Company's taxable year falls, a pro rata share (determined without
reference to the Preferred Stock) of the Company's long-term gain on which the
Company paid a tax, and consequently incurs any taxes payable thereon, (2) is
entitled either to a credit on such return for, or a refund of, the tax paid by
the Company on the amount so included in such return, and (3) is entitled to
increase the tax cost basis of the Common Stock by the difference between their
undistributed capital gains and their tax credit. Persons not subject to tax
on capital gains, such as charitable and educational organizations described in
Section 501(a) of the Code and certain non-resident alien individuals and
foreign corporations, are entitled to a refund of their pro rata share of the
tax paid by the Company upon filing appropriate returns or claims for refund.
The Company sends written statements and notices to shareholders
regarding the tax status of all dividends and distributions made during each
calendar year.
Shareholders who reinvest distributions in shares of the Company's
Common Stock will be treated as receiving distributions of an amount equal to
the fair market value, determined as of the payment date, of the shares
received if the shares are purchased from the Company. Such value may exceed
the amount of the cash distribution that would have been paid. If the
outstanding shares are purchased in the open market, the taxable distribution
will equal the cash distribution that would have been paid. In either event,
the cost basis in the shares received will equal the amount recognized as a
taxable distribution.
DISQUALIFICATION AS A REGULATED INVESTMENT COMPANY
If for any taxable year the Company does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and
such distributions will be taxable as ordinary dividends to the extent of the
Company's current and accumulated earnings and profits.
BACKUP WITHHOLDING
The Company generally will be required to withhold tax at the rate of
31% with respect to distributions of investment company taxable income and
capital gain distributions payable to a non-corporate shareholder if the
shareholder fails to provide a correct taxpayer identification number or is
otherwise subject to backup withholding.
18
<PAGE> 19
FOREIGN WITHHOLDING TAXES
To the extent that the Company invests in foreign securities,
dividends and interest received by the Company on such securities may be
subject to foreign withholding taxes. The Company will be entitled to claim a
deduction for such foreign withholding taxes for U.S. Federal income tax
purposes. However, any such taxes will reduce the income available for
distribution to the Company's shareholders.
OTHER TAXATION
Distributions to shareholders who are non-resident aliens may be
subject to a 30% United States withholding tax under provisions of the Code
applicable to foreign individuals and entities unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty law.
Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
19
<PAGE> 20
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . 21
Portfolio of Investment Securities at December 31, 1995 . . . . . . . . . 22
Statement of Assets and Liabilities at December 31, 1995 . . . . . . . . 25
Statement of Operations for the two years ended December 31, 1995 . . . . 26
Statement of Changes in Total Net Assets for
the two years ended December 31, 1995 . . . . . . . . . . . . . . 27
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
20
<PAGE> 21
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF SOURCE CAPITAL, INC.
We have audited the accompanying statement of assets and liabilities of Source
Capital, Inc., including the portfolio of investments, as of December 31, 1995,
and the related statements of operations and changes in total net assets for
each of the two years in the period then ended, and the financial highlights as
it relates to selected data for a share of Common Stock, for each of the five
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1995, 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
Source Capital, Inc. at December 31, 1995, the results of its operations and
the changes in total 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 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Los Angeles, California
January 26, 1996
21
<PAGE> 22
PORTFOLIO OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- ---------------------------------------------------- ---------- ------------ ------------
<S> <C> <C> <C>
PRODUCER DURABLE GOODS -- 11.0%
Bandag, Incorporated................................ 26,600 $ 1,331,737 $ 1,439,725
Bandag, Incorporated (Class A)...................... 216,400 9,063,259 11,469,200
Dover Corporation................................... 147,900 5,008,368 5,453,813
Grainger (W. W.), Inc............................... 61,400 3,541,589 4,067,750
Hubbell Incorporated (Class B)...................... 73,682 2,937,035 4,844,591
Kaydon Corporation.................................. 183,100 4,056,932 5,561,662
Leggett & Platt, Incorporated....................... 153,900 3,624,152 3,732,075
Watts Industries, Inc. (Class A).................... 134,800 3,098,575 3,134,100
------------ ------------
$ 32,661,647 $ 39,702,916
------------ ------------
BANKING -- 9.4%
Farmers & Merchants Bank of Long Beach.............. 1,639 $ 2,546,017 $ 3,032,150
First National Bank of Anchorage, The............... 5,340 2,496,505 8,357,100
Golden West Financial Corporation................... 126,700 5,555,329 7,000,175
Norwest Corporation................................. 136,888 3,917,271 4,517,304
Wachovia Corporation................................ 74,400 2,484,720 3,403,800
Washington Federal, Inc............................. 305,927 5,479,674 7,839,379
------------ ------------
$ 22,479,516 $ 34,149,908
------------ ------------
HEALTH CARE -- 7.6%
Allergan, Inc....................................... 184,800 $ 3,539,171 $ 6,006,000
DENTSPLY International Inc.......................... 107,100 3,645,887 4,284,000
Johnson & Johnson................................... 109,100 4,811,456 9,341,688
Pfizer Inc.......................................... 126,800 3,741,665 7,988,400
------------ ------------
$ 15,738,179 $ 27,620,088
----------- ------------
CONSUMER DURABLE GOODS -- 6.5%
Cooper Tire & Rubber Company........................ 236,100 $ 5,684,831 $ 5,813,962
Genuine Parts Company............................... 129,100 4,595,649 5,293,100
Lancaster Colony Corporation........................ 200,800 6,892,389 7,479,800
Newell Co........................................... 189,600 4,568,821 4,905,900
------------ ------------
$ 21,741,690 $ 23,492,762
------------ ------------
INSURANCE -- 6.3%
Horace Mann Educators Corporation................... 174,200 $ 4,187,654 $ 5,443,750
Marsh & McLennan Companies, Inc..................... 152,100 11,148,778 13,498,875
Progressive Corporation, The........................ 77,700 3,012,104 3,797,588
------------ ------------
$ 18,348,536 $ 22,740,213
------------ ------------
MATERIALS -- 5.8%
Caraustar Industries, Inc........................... 305,300 $ 5,924,075 $ 6,106,000
Loctite Corporation................................. 179,200 5,629,146 8,512,000
Lubrizol Corporation, The........................... 231,700 4,619,255 6,458,638
------------ ------------
$ 16,172,476 $ 21,076,638
------------ ------------
RETAILING -- 4.8%
Arbor Drugs, Inc.................................... 208,800 $ 3,407,763 $ 4,384,800
Bob Evans Farms, Inc................................ 292,600 5,838,256 5,559,400
Gap, Inc., The...................................... 67,700 2,174,139 2,843,400
McDonald's Corporation.............................. 99,400 2,738,895 4,485,425
------------ ------------
$ 14,159,053 $ 17,273,025
------------ ------------
</TABLE>
22
<PAGE> 23
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Shares or
Face
COMMON STOCKS (Continued) Amount Cost Value
- ---------------------------------------------------- ---------- ------------ ------------
<S> <C> <C> <C>
CONSUMER NON-DURABLE GOODS -- 4.7%
Armor All Products Corporation...................... 98,700 $ 1,817,437 $ 1,788,938
Hasbro, Inc......................................... 179,400 6,254,057 5,561,400
Reebok International Ltd............................ 198,000 6,843,435 5,593,500
Unifi, Inc.......................................... 187,100 4,439,929 4,139,588
------------ ------------
$ 19,354,858 $ 17,083,426
------------ ------------
TRANSPORTATION -- 3.7%
Carnival Corporation (Class A)...................... 285,700 $ 6,380,622 $ 6,963,938
Expeditors International of Washington, Inc......... 246,000 3,357,555 6,426,750
------------ ------------
$ 9,738,177 $ 13,390,688
------------ ------------
BUSINESS SERVICES -- 2.7%
Kelly Services, Inc. (Class A)...................... 146,400 $ 3,715,350 $ 4,062,600
Manpower Inc........................................ 203,100 5,313,779 5,712,187
------------ ------------
$ 9,029,129 $ 9,774,787
------------ ------------
COMMUNICATIONS AND INFORMATION -- 2.7%
Arrow Electronics, Inc.*............................ 92,100 $ 4,217,562 $ 3,971,812
Devon Group, Inc.*.................................. 195,300 3,007,100 5,675,906
------------ ------------
$ 7,224,662 $ 9,647,718
------------ ------------
ENTERTAINMENT -- 2.0%
Cedar Fair, L.P..................................... 199,200 $ 3,906,750 $ 7,370,400
------------ ------------
EDUCATION AND TRAINING -- 1.4%
Franklin Quest Co.*................................. 265,800 $ 5,614,691 $ 5,183,100
------------ ------------
REAL ESTATE INVESTMENT TRUST -- 0.9%
JP Realty Inc....................................... 153,800 $ 2,940,140 $ 3,364,375
------------ ------------
OTHER COMMON STOCKS -- 0.8%......................... $ 2,299,577 $ 2,693,625
------------ ------------
TOTAL COMMON STOCKS -- 70.3%........................ $201,409,081 $254,563,669
------------ ------------
CONVERTIBLE BONDS AND DEBENTURES
PRODUCER DURABLE GOODS -- 4.6%
Diagnostic/Retrieval Systems, Inc.
-- 8 1/2% 1998.................................... $1,433,000 $ 1,263,705 $ 1,424,044
-- 9% 2003++...................................... 2,000,000 2,000,000 2,020,000
Johnson Electric Holdings Limited -- 4 1/2% 2000.... 4,500,000 4,558,750 3,982,500
Liebert Corp. -- 8% 2010............................ 2,540,000 4,610,100 7,581,900
TriMas Corporation -- 5% 2003....................... 1,660,000 1,707,102 1,626,800
------------ ------------
$ 14,139,657 $ 16,635,244
------------ ------------
RETAILING -- 1.7%
Fabri-Centers of America, Inc. -- 6 1/4% 2002....... $7,000,000 $ 5,758,119 $ 5,932,500
------------ ------------
REAL ESTATE INVESTMENT TRUST -- 1.4%
Developers Diversified Realty Corporation -- 7%
1999.............................................. 2,500,000 $ 2,430,625 $ 2,481,250
Rockefeller Center Properties, Inc. -- 0% 2000...... 4,455,000 2,619,540 2,505,937
------------ ------------
$ 5,050,165 $ 4,987,187
------------ ------------
HEALTH CARE -- 1.1%
Quantum Health Resources, Inc. -- 4 3/4% 2000....... $5,515,000 $ 4,310,569 $ 4,053,525
------------ ------------
ENERGY -- 0.9%
California Energy Company, Inc. -- 5% 2000 ++....... $3,315,000 $ 2,916,412 $ 3,331,575
------------ ------------
OTHER CONVERTIBLE BONDS
AND DEBENTURES -- 0.5%............................ $ 2,037,500 $ 1,880,000
------------ ------------
TOTAL CONVERTIBLE BONDS
AND DEBENTURES -- 10.2%........................... $ 34,212,422 $ 36,820,031
------------ ------------
</TABLE>
23
<PAGE> 24
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
NON-CONVERTIBLE BONDS AND Face
DEBENTURES Amount Cost Value
- ---------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES -- 4.6%
Federal Home Loan Bank
--5% 1998 (Floating Rate Note).................... $ 1,000,000 $ 1,000,000 $ 980,625
Federal Home Loan Mortgage Corporation
--7% 2023 (CMO)................................... 2,203,400 2,241,995 2,149,692
--8 1/2% 2024 (REMIC)............................. 3,000,000 3,018,750 3,069,375
--10.15% 2006 (REMIC)............................. 717,400 711,560 738,922
Federal National Mortgage Association
--7% 2008 (REMIC)................................. 1,981,000 1,968,644 1,979,762
--9.15% 1999 (Indexed Notes)...................... 295,300 306,005 295,484
Government National Mortgage Association (Mobile Home)
--9 3/4% 2006..................................... 390,300 414,227 418,353
--9 3/4% 2010..................................... 2,390,700 2,528,592 2,562,531
--10 1/4% 2001-2004............................... 595,700 633,541 644,473
Government National Mortgage Association
--7.99125% 2010 (REMIC)........................... 3,590,800 3,590,767 3,633,441
------------ ------------
$ 16,414,081 $ 16,472,658
------------ ------------
CORPORATE -- 7.1%
Home Savings of America, F.A. -- 6.5% 2021.......... $ 122,300 $ 122,310 $ 120,848
Kidder Peabody Mortgage Assets Trust
--8.45% 2018...................................... 1,332,100 1,325,473 1,344,588
Merrill Lynch Mortgage Investors, Inc.
Series 1988-H -- 9.7% 2008........................ 317,900 330,176 324,457
Series 1992-B -- 8.3% 2012........................ 1,600,000 1,625,750 1,672,500
Plantronics, Inc. -- 10% 2001....................... 8,470,000 8,611,244 8,851,150
Primark Corporation -- 8 3/4% 2000.................. 6,472,000 6,303,973 6,633,800
Tenet Healthcare Corporation -- 9 5/8% 2002......... 2,800,000 2,800,000 3,071,250
United International Holdings, Inc. -- 0% 1999...... 6,245,000 3,537,987 3,778,225
------------ ------------
$ 24,656,913 $ 25,796,818
------------ ------------
OTHER NON-CONVERTIBLE BONDS AND
DEBENTURES -- 1.1%................................ $ 4,067,928 $ 4,109,910
------------ ------------
TOTAL NON-CONVERTIBLE BONDS AND
DEBENTURES -- 12.8%............................... $ 45,138,922 $ 46,379,386
------------ ------------
TOTAL INVESTMENT SECURITIES -- 93.3%................ $280,760,425 $337,763,086
============ ------------
SHORT-TERM INVESTMENTS -- 6.2%
Short-term Corporate Notes:
American Telephone and Telegraph Co. -- 5.67%
1/17/96........................................ $ 4,500,000 $ 4,488,660
Coca-Cola Company, The -- 5.55% 1/19/96........... 10,000,000 9,972,250
Philip Morris Companies -- 5.58% 1/19/96.......... 7,000,000 6,980,470
State Street Bank Repurchase Agreement -- 5.5%
01/02/96 (Collateralized by U.S. Treasury
Notes -- 7.25% 2016, market value $1,233,577)..... 1,204,000 1,204,502
------------
$ 22,645,882
------------
TOTAL INVESTMENTS -- 99.5%.......................... $360,408,968
Other assets less liabilities -- 0.5%............... 1,677,836
------------
TOTAL NET ASSETS -- 100%............................ $362,086,804
============
</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.
24
<PAGE> 25
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value (cost $280,760,425) --
Note A............................................................ $337,763,086
Short-term corporate notes -- at cost plus interest earned
(maturities 60 days or less) -- Note A............................ 22,645,882 $360,408,968
------------
Cash................................................................... 579
Receivable for:
Investment securities sold.......................................... $ 370,000
Dividends and accrued interest...................................... 1,792,562 2,162,562
------------ ------------
$362,572,109
LIABILITIES
Payable for:
Advisory fees....................................................... $ 209,994
Accrued dividends -- Preferred Stock................................ 196,921
Accrued expenses.................................................... 78,390 485,305
------------ ------------
TOTAL NET ASSETS -- December 31, 1995.................................... $362,086,804
============
Assets applicable to Preferred Stock at a liquidation preference of
$27.50 per share (asset coverage 669%) -- Note B.................... $ 54,153,330
============
Net assets applicable to Common Stock -- $42.58 per share.............. $307,933,474
============
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 investment income.................................... 2,317,482
Unrealized appreciation of investments................................. 57,002,661
------------
TOTAL NET ASSETS -- December 31, 1995.................................... $362,086,804
============
</TABLE>
See notes to financial statements.
25
<PAGE> 26
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------------------------
1995 1994
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Income:
Interest............................... $ 8,531,983 $ 9,325,751
Dividends.............................. 5,279,736 4,956,817
----------- ------------
$13,811,719 $ 14,282,568
Expenses -- Note C:
Advisory fees.......................... $ 2,437,373 $ 2,305,313
Transfer agent fees and expenses....... 231,315 295,948
Reports to shareholders................ 207,144 249,276
Directors' fees and expenses........... 75,313 75,373
Custodian fees and expenses............ 52,961 53,765
Taxes, other than federal income tax... 65,800 65,840
Legal and auditing fees................ 49,473 75,436
Registration and filing fees........... 21,699 20,380
Other expenses......................... 43,633 3,184,711 44,558 3,185,889
------------ ----------- ------------ ------------
Net investment income -- Note A... $10,627,008 $ 11,096,679
----------- ------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investments:
Proceeds from sale of investment
securities (excluding short-term
corporate notes with maturities 60
days or less)........................ $175,825,101 $217,234,225
Cost of investment securities sold..... 153,390,056 203,274,358
------------ ------------
Net realized gain on investments
-- Notes A and D..................... $22,435,045 $ 13,959,867
Unrealized appreciation of investments:
Unrealized appreciation at beginning of
year................................. $ 30,355,493 $ 48,784,504
Unrealized appreciation at end of
year................................. 57,002,661 30,355,493
------------ ------------
Increase (decrease) in unrealized
appreciation of investments....... 26,647,168 (18,429,011)
----------- ------------
Net realized and unrealized gain
(loss) on investments........... $49,082,213 $ (4,469,144)
----------- ------------
NET INCREASE IN TOTAL NET
ASSETS RESULTING FROM
OPERATIONS................................ $59,709,221 $ 6,627,535
=========== ============
</TABLE>
See notes to financial statements.
26
<PAGE> 27
STATEMENT OF CHANGES IN TOTAL NET ASSETS
<TABLE>
<CAPTION>
For the year ended December 31,
---------------------------------------------------------------
1995 1994
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN TOTAL
NET ASSETS
Operations:
Net investment income.................... $ 10,627,008 $ 11,096,679
Net realized gain on investments
-- Notes A and D...................... 22,435,045 13,959,867
Increase (decrease) in unrealized
appreciation of investments........... 26,647,168 (18,429,011)
------------ ------------
Increase in total net assets resulting from
operations............................... $ 59,709,221 $ 6,627,535
Distributions to Preferred shareholders:
From net investment income............... (4,726,109) (4,726,109)
Distributions to Common shareholders:
From net investment income............... $ (3,583,417) $ (7,753,521)
From net realized capital gains.......... (22,298,081) (13,959,867)
In excess of net realized capital
gains................................. -- (136,964)
From Additional Paid-in Capital.......... -- (25,881,498) (2,834,800) (24,685,152)
------------ ------------
Proceeds from shares issued for
distributions reinvested by Common
shareholders -- Note B................... 3,558,442 5,066,558
Proceeds from shares issued pursuant to
Common Stock Subscription Offer.......... -- 16,678,540
------------ ------------
Increase (decrease) in total net assets.... $ 32,660,056 $ (1,038,628)
TOTAL NET ASSETS
Beginning of year, including undistributed
net investment income of $1,382,951 at
January 1, 1994.......................... 329,426,748 330,465,376
------------ ------------
End of year, including undistributed net
investment income of $2,317,482 at
December 31, 1995........................ $362,086,804 $329,426,748
============ ============
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
27
<PAGE> 28
FINANCIAL HIGHLIGHTS
Selected data for a share of Common Stock outstanding throughout each year
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year....... $38.52 $41.85 $42.87 $41.23 $36.94
------ ------ ------ ------ ------
Net investment income...................... $ 1.48 $ 1.62 $ 1.94 $ 1.98 $ 2.04
Net realized and unrealized gain
(loss) on investment securities.......... 6.84 (0.67) 1.32 3.96 6.59
------ ------ ------ ------ ------
Total from investment operations........... $ 8.32 $ 0.95 $ 3.26 $ 5.94 $ 8.63
------ ------ ------ ------ ------
Distributions to Preferred Shareholders:
From net investment income............... $(0.66) $(0.69) $(0.72) $(0.73) $(0.75)
Distributions to Common Shareholders:
From net investment income............... (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) -- -- --
------ ------ ------ ------ ------
Total distributions................. $(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 year............. $42.58 $38.52 $41.85 $42.87 $41.23
====== ====== ====== ====== ======
Per share market value at end of year...... $41.88 $37.00 $43.25 $47.75 $44.25
Total investment return(1)................. 23.4% (6.5%) (1.8%) 17.0% 32.5%
Net asset value total return(2)............ 20.7% 0.6% 6.3% 13.3% 22.2%
Ratios/supplemental data:
Net assets at end of year (in
thousands)............................ $362,087 $329,427 $330,465 $332,574 $317,715
Ratio of expenses to average net
assets................................ 0.91% 0.96% 0.95% 0.94% 0.97%
Ratio of net income to average net
assets................................ 3.04% 3.36% 3.86% 3.93% 4.22%
Portfolio turnover rate.................. 51.44% 71.39% 73.91% 69.01% 41.48%
Preferred Stock:
Total shares outstanding(3).............. 1,969,212 1,969,212 1,969,212 1,969,212 1,969,212
Asset coverage per Share(3).............. $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
Average market value per share(4)........ $ 28.00 $ 27.89 $ 30.24 $ 29.21 $ 27.01
</TABLE>
(1) Based on market value per share, adjusted for reinvestment of distributions
(2) Based on net asset value per share, adjusted for reinvestment of
distributions
(3) Information shown as of the end of the year
(4) The average of all month-end market values during each year
See notes to financial statements.
- --------------------------------------------------------------------------------
QUARTERLY RESULTS OF INVESTMENT OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Quarter ended
-----------------------------------------------------------------------------
March 31, 1995 June 30, 1995 September 30, 1995 December 31, 1995
-------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Total investment income................. $ 3,393,865 $ 3,630,924 $ 3,137,318 $ 3,649,612
Net investment income................... $ 2,625,601 $ 2,777,124 $ 2,371,074 $ 2,853,209
Income available to Common.............. $ 1,444,074 $ 1,595,597 $ 1,189,546 $ 1,671,682
Per share Common...................... $0.20 $0.22 $0.17 $0.23
Net realized and unrealized
appreciation (depreciation)........... $ 16,681,675 $ 11,555,740 $ 13,599,125 $ 7,245,673
Per share Common...................... $2.34 $1.61 $1.89 $1.00
</TABLE>
<TABLE>
<CAPTION>
Quarter ended
-----------------------------------------------------------------------------
March 31, 1994 June 30, 1994 September 30, 1994 December 31, 1994
-------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Total investment income................. $ 3,547,916 $ 3,708,249 $ 3,575,007 $ 3,451,396
Net investment income................... $ 2,748,135 $ 2,851,533 $ 2,837,210 $ 2,659,801
Income available to Common.............. $ 1,566,608 $ 1,670,006 $ 1,655,683 $ 1,478,273
Per share Common...................... $0.24 $0.24 $0.24 $0.21
Net realized and unrealized
appreciation (depreciation)........... $ (8,323,691) $ (2,964,305) $ 7,196,935 $ (378,084)
Per share Common...................... $(1.26) $(0.36) $1.01 $(0.06)
</TABLE>
28
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
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 investment objective
of the Company 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. 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 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
year, 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 corporate notes 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. OTHER--Securities transactions are accounted for on the date the securities
are purchased or sold. 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.
During the years ended December 31, 1995 and 1994, the Company issued 86,640
and 126,076 shares of Common Stock under its Reinvestment Plan for Common and
Preferred shareholders, respectively. In addition, the Company issued 416,651
shares of Common Stock pursuant to its Common Subscription Offer during the year
ended December 31, 1994.
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 years ended December 31, 1995 and 1994, the Company paid aggregate
fees of $75,000 and $75,000 respectively, to all Directors who are not
affiliated persons of the Investment Adviser. During the years ended December
31, 1995 and 1994, the Company incurred legal fees of $14,373 and $40,851,
respectively, payable to O'Melveny & Myers, 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 $161,525,237 and
$221,177,865 for the years ended December 31, 1995 and 1994, respectively.
Realized gains and losses are based on the specific-certificate identification
method. Cost of investment securities owned at December 31, 1995 was
$281,220,348 for federal income tax purposes. Gross unrealized appreciation and
depreciation for all securities at December 31, 1995 for federal income tax
purposes was $61,084,446 and $4,541,708, respectively.
NOTE E--QUARTERLY INFORMATION
See page 28 for unaudited quarterly results of investment operations.
29
<PAGE> 30
PART C. OTHER INFORMATION
ITEM 24 - FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements (all included in Part A)
Report of Independent Auditors
Portfolio of Investment Securities, December 31, 1995
Statement of Assets and Liabilities, December 31, 1995
Statement of Operations,
Year ended December 31, 1994
Year ended December 31, 1995
Statement of Changes in Total Net Assets,
Year ended December 31, 1994
Year ended December 31, 1995
Consent of Independent Auditors (filed as page C-6 in Part C)
(2) Exhibits
a. The Certificate of Incorporation was filed as Exhibit 1 to
Amendment No. 1 of the Company's Registration Statement
on Form N-2 and is incorporated herein by reference.
a.1 Certificate of Amendment, dated May 20, 1981 to
Certificate of Incorporation was filed as Exhibit 1.1 to
Amendment No. 3 of the Company's Registration Statement on
Form N-2 and is incorporated herein by reference.
a.2 Certificate of Amendment, dated June 1, 1982 to
Certificate of Incorporation was filed as Exhibit 1.2 to
Amendment No. 4 of the Company's Registration Statement on
Form N-2 and is incorporated herein by reference.
b. By-Laws as amended to date were filed as Exhibit 2 to
Amendment No. 1 of the Company's Registration Statement on
Form N-2 and are incorporated herein by reference.
d.1 Specimen Common Stock certificate was filed as Exhibit 4.1
to Amendment No. 6 of the Company's Registration Statement
on Form N-2 and is incorporated herein by reference.
d.2 Specimen Preferred Stock certificate was filed as Exhibit
4.2 to Amendment No. 6 of the Company's Registration
Statement on Form N-2 and is incorporated herein by
reference.
d.3 Subscription Certificate for Rights Offering was filed as
Exhibit d.3 to Amendment No. 17 of the Company's
Registration Statement on Form N-2 and is incorporated
herein by reference.
d.4 Notice of Guaranteed Delivery was filed as Exhibit d.4 to
Amendment No. 17 of the Company's Registration Statement
on Form N-2 and is incorporated herein by reference.
C-1
30
<PAGE> 31
e. Source Capital, Inc. Automatic Reinvestment Plan, as
amended May 4, 1992, was filed as Exhibit 4 to
Post-Effective Amendment No. 1 of the Company's
Registration Statement on Form S-3 (Reg. No. 33-46039) and
is incorporated herein by reference.
g. Investment Advisory Agreement, dated June 27, 1991,
between the Company and First Pacific Advisors, Inc. was
filed as Exhibit 6 to Amendment No. 13 of the Company's
Registration Statement on Form N-2 and is incorporated
herein by reference.
j.1 Custodian Agreement dated March 1, 1973 between the
Company and State Street Bank and Trust Company was filed
as Exhibit 1.8 to the Company's Registration Statement No.
2-58956 on Form S-4 and is incorporated herein by
reference.
j.2 Amendment dated March 22, 1979, to Custodian Agreement
between the Company and State Street Bank and Trust
Company was filed as Exhibit 9.2 to Amendment No. 1 of the
Company's Registration Statement on Form N-2 and is
incorporated herein by reference.
j.3 Amendment No. 2 dated July 21, 1981, to Custodian
Agreement between the Company and State Street Bank and
Trust Company was filed as Exhibit 9.3 to Amendment No. 7
of the Company's Registration Statement on Form N-2 and is
incorporated herein by reference.
j.4 Amendment No. 3 dated September 1, 1985, to Custodian
Agreement between the Company and State Street Bank and
Trust Company was filed as Exhibit 9.4 to Amendment No. 8
of the Company's Registration Statement on Form N-2 and is
incorporated herein by reference.
j.5 Amendment No. 4 dated November 1, 1988, to Custodian
Agreement between the Company and State Street Bank and
Trust Company was filed as Exhibit 9.5 to Amendment No. 10
of the Company's Registration Statement on Form N-2 and is
incorporated herein by reference.
j.6 Custodian Fee Schedule Addendum for GNMA Securities Traded
through Participants Trust Company dated February 14, 1990
was filed as Exhibit 9.6 to Amendment No. 11 of the
Company's Registration Statement on Form N-2 and is
incorporated herein by reference.
j.7 Amendment dated February 5, 1996, to Custodian Agreement
between the Company and State Street Bank and Trust
Company.
l. Opinion and consent of O'Melveny & Myers was filed as
Exhibit l to Amendment No. 17 of the Company's
Registration Statement on Form N-2 and is incorporated
herein by reference.
n. Consent of Independent Auditors (filed as page C-6).
r. Financial Data Schedule.
Exhibits c, f, h, i, k, m, and o-q have been omitted because the
conditions requiring their filing do not exist.
ITEM 25 - MARKETING ARRANGEMENTS
Inapplicable
ITEM 26 - OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Inapplicable
ITEM 27 - PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
C-2
31
<PAGE> 32
ITEM 28 - NUMBER OF HOLDERS OF SECURITIES
As of April 19, 1996:
<TABLE>
<CAPTION>
(1) (2)
Number of Record
Title of Class Holders
-------------- ------------------
<S> <C>
Common Stock, $1.00 par value 15,144
$2.40 Cumulative Preferred
Stock, $3.00 par value 8,101
</TABLE>
ITEM 29 - INDEMNIFICATION
Section 145 of the General Corporation Law of Delaware empowers a
corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative by reason
of the fact that he is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise.
Depending on the character of the proceeding, a corporation may indemnify
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding if the person indemnified acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In the case of an action
by or in the right of the corporation, no indemnification may be made in
respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action was brought shall determine
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper. Section 145
further provides that to the extent a director, officer, employee or agent of a
corporation has been successful in the defense of any action, suit or
proceeding referred to above or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
Article VIII of the By-Laws of the Company provide in effect that each
director and officer shall be indemnified by the Company against reasonable
costs and expenses incurred in connection with any action, suit or proceeding
to which such person may be made a party by reason of holding such office,
except in the case of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office.
There is a directors' and officers' liability insurance policy which is
presently outstanding insuring directors and officers of the Company; the
policy expires in March 1997, and provides limits of $10,000,000 per policy
year. The policy covers losses as defined in the policy in excess of the first
$5,000 for each director or officer.
ITEM 30 - BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
During the last two years, First Pacific Advisors, Inc., the investment
adviser to the Company, has not engaged in any other business of a substantial
nature except as described under "Investment Adviser" in Part A hereof. During
the last two years, no director or officer of First Pacific Advisors, Inc. has
engaged for his or her own account or in the capacity of director, officer,
employee, partner or trustee, in any other business, profession, vocation or
employment of a substantial nature except as described under "Management of the
Company - General" in Part A hereof and as set forth below.
C-3
32
<PAGE> 33
<TABLE>
<CAPTION>
Name and Position with Adviser Other Affiliations*
- ------------------------------ ------------------------------------
<S> <C>
William M. Sams, Officer of FPA Paramount Fund, Inc.
Principal
Lawrence P. McNeil, Officer and/or director of FPA Paramount Fund
Executive Vice President Inc., FPA Perennial Fund, Inc. and FPA Fund
Distributors, Inc., a subsidiary of
First Pacific Advisors, Inc.
Dennis M. Bryan, ---
Vice President
Steven R. Geist, ---
Vice President
Janet M. Pitman, ---
Vice President
Mary S. Thomas, ---
Vice President
Daryl A. Weber, Officer of FPA Fund Distributors, Inc.,
Vice President a subsidiary of First Pacific Advisors,
Inc.
</TABLE>
*The address of each company named is 11400 West Olympic Boulevard, Suite 1200,
Los Angeles, California 90064.
ITEM 31 - LOCATION OF ACCOUNTS AND RECORDS
The accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained in the physical possession of Mr. Julio J. de Puzo,
Jr., Treasurer of the Company**, except as otherwise stated below:
<TABLE>
<CAPTION>
Subparagraph of
Rule 31a-1 Physical Possession of Required Records
- --------------- ----------------------------------------
<S> <C>
(b)(2)(D) Chemical Mellon Shareholder Services, L.L.C.
Transfer Agent for the Company*
(b)(4) Sherry Sasaki
Secretary of the Company**
(f) First Pacific Advisors, Inc.
Investment Adviser to the Company**
</TABLE>
* P.O. Box 590, Ridgefield Park, New Jersey 07660
**11400 W. Olympic Blvd., Suite 1200, Los Angeles, California 90064
C-4
33
<PAGE> 34
ITEM 32 - MANAGEMENT SERVICES
There is no management-related service contract under which services are
provided to the Company which is not discussed in Part A of this Form.
ITEM 33 - UNDERTAKINGS
Inapplicable.
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Amendment to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Los Angeles, and State of California, on the 22nd day of April, 1996.
SOURCE CAPITAL, INC.
By /s/ Julio J. de Puzo, Jr.
--------------------------------
Julio J. de Puzo, Jr., President
C-5
34
<PAGE> 35
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent
Auditors" and to the use of our report dated January 26, 1996, in Post-
Effective Amendment No. 19 to the Registration Statement on Form N-2 of Source
Capital, Inc.
/s/ Ernst & Young LLP
-------------------------------
ERNST & YOUNG LLP
Los Angeles, California
April 24, 1996
C-6
35
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBER
NUMBER DESCRIPTION PAGE
- -------- ----------- ------------
<S> <C> <C>
j.7 Amendment dated February 5, 1996, to
Custodian Agreement between the Company
and State Street Bank and Trust Company.
27 Financial Data Scedule.
</TABLE>
All other applicable exhibits are incorporated herein by reference.
36
<PAGE> 1
AMENDMENT TO CUSTODIAN CONTRACT
Agreement made by and between State Street Bank and Trust Company (the
"Custodian") and Source Capital, Inc. (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a custodian contract
dated March 1, 1973 as amended on March 22, 1979, July 21, 1981, September 1,
1985 and November 1, 1988 (the "Custodian Contract") governing the terms and
conditions under which the Custodian maintains custody of the securities and
other assets of the Fund; and
WHEREAS, the Custodian and the Fund desire to amend the terms and
conditions under which the Custodian maintains the Fund's securities and other
non-cash property in the custody of certain foreign sub-custodians in
conformity with the requirements of Rule 17f-5 under the Investment Company Act
of 1940, as amended;
NOW THEREFORE, in consideration of the premises and covenants contained
herein, the Custodian and the Fund hereby amend the Custodian Contract by the
addition of the following terms and provisions;
1. Notwithstanding any provisions to the contrary set forth in the
Custodian Contract, the Custodian may hold securities and other
non-cash property for all of its customers, including the Fund, with
a foreign sub-custodian in a single account that is identified as
belonging to the Custodian for the benefit of its customers,
provided however, that (i) the records of the Custodian with respect
to securities and other non-cash property of the Fund which are
maintained in such account shall identify by book-entry those
securities and other non-cash property belonging to the Fund and
(ii) the Custodian shall require that securities and other non-cash
property so held by the foreign sub-custodian be held separately
from any assets of the foreign sub-custodian or of others.
2. Except as specifically superseded or modified herein, the terms and
provisions of the Custodian Contract shall continue to apply with
full force and effect.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed as a sealed instrument in its name and behalf by its duly authorized
representative this 5th day of February 1996.
SOURCE CAPITAL, INC.
By: /s/ Julio J. de Puzo, Jr.
---------------------------------
Title: Treasurer
STATE STREET BANK AND TRUST COMPANY
By: /s/ Carol C. Ayotte
---------------------------------
Title: Vice President
EXHIBIT j.7
37
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 303,406,307
<INVESTMENTS-AT-VALUE> 360,408,968
<RECEIVABLES> 2,162,562
<ASSETS-OTHER> 579
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 362,572,109
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 485,305
<TOTAL-LIABILITIES> 485,305
<SENIOR-EQUITY> 5,907,636
<PAID-IN-CAPITAL-COMMON> 296,859,025
<SHARES-COMMON-STOCK> 7,232,110
<SHARES-COMMON-PRIOR> 7,145,470
<ACCUMULATED-NII-CURRENT> 2,317,482
<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
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<OTHER-INCOME> 0
<EXPENSES-NET> 3,184,711
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<REALIZED-GAINS-CURRENT> 22,435,045
<APPREC-INCREASE-CURRENT> 26,647,168
<NET-CHANGE-FROM-OPS> 59,709,221
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 8,309,526
<DISTRIBUTIONS-OF-GAINS> 22,298,081
<DISTRIBUTIONS-OTHER> 0
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<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 86,640
<NET-CHANGE-IN-ASSETS> 32,660,056
<ACCUMULATED-NII-PRIOR> 0
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<INTEREST-EXPENSE> 0
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<AVERAGE-NET-ASSETS> 349,784,715
<PER-SHARE-NAV-BEGIN> 38.52
<PER-SHARE-NII> 1.48
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<PER-SHARE-DISTRIBUTIONS> 3.10
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<PER-SHARE-NAV-END> 42.58
<EXPENSE-RATIO> .91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
