<PAGE>
<PAGE>
[LOGO]
SOURCE CAPITAL, INC.
SEMI-ANNUAL REPORT
for the six months ended June 30, 1999
<PAGE>
SOURCE CAPITAL, INC.
[LOGO]
DIRECTORS
Willard H. Altman
Wesley E. Bellwood
Julio J. de Puzo, Jr.
David Rees
Robert L. Rodriguez
Paul G. Schloemer
Lawrence J. Sheehan
OFFICERS
Julio J. de Puzo, Jr., PRESIDENT
Eric S. Ende, SENIOR VICE PRESIDENT AND
CHIEF INVESTMENT OFFICER
Robert L. Rodriguez, SENIOR VICE PRESIDENT
Steven R. Geist, VICE PRESIDENT
Janet M. Pitman, VICE PRESIDENT
Steven T. Romick, VICE PRESIDENT
J. Richard Atwood, TREASURER
Sherry Sasaki, SECRETARY
Christopher H. Thomas, ASSISTANT TREASURER
INVESTMENT ADVISER
First Pacific Advisors, Inc.
11400 West Olympic Blvd., Suite 1200
Los Angeles, California 90064
CUSTODIAN
State Street Bank and Trust Company
Boston, Massachusetts
COUNSEL
O'Melveny & Myers LLP
Los Angeles, California
TRANSFER AND SHAREHOLDER SERVICE AGENT
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
(800) 279-1241 or (201) 329-8660
REGISTRAR
ChaseMellon Shareholder Services, L.L.C.
Ridgefield Park, New Jersey
STOCK EXCHANGE LISTING
New York Stock Exchange:
Symbols: SOR Common Stock
SOR+ Preferred Stock
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1999 December 31, 1998
--------------------------- ---------------------------
Total Total
Net Per Common Net Per Common
Assets Share Assets Share
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Beginning of period.................................................... $ 417,776,547 $ 48.23 $ 425,490,107 $ 50.20
Net gain on investments, realized and unrealized....................... 55,174,291 7.26 18,017,166 2.37
Net investment income.................................................. 2,303,411 0.30 6,617,633 0.88
Regular distributions to Preferred shareholders........................ (2,363,054) (0.31) (4,726,109) (0.63)
Regular distributions to Common shareholders........................... (15,870,936) (2.10) (34,408,899) (4.62)
Proceeds from shares issued for distributions reinvested
by shareholders...................................................... 1,550,724 0.01 6,786,649 0.03
-------------- ----------- -------------- -----------
Net changes during period.......................................... $ 40,794,436 $ 5.16 $ (7,713,560) $ (1.97)
-------------- ----------- -------------- -----------
End of period.......................................................... $ 458,570,983 $ 53.39 $ 417,776,547 $ 48.23
-------------- ----------- -------------- -----------
-------------- ----------- -------------- -----------
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998 December 31, 1997
------------- ----------------- -----------------
<S> <C> <C> <C>
Common market price per share........................................... 49 3/8 49 1/16 51 1/16
Common market premium (discount) to net asset value..................... (7.5)% 1.7% 1.7%
Preferred asset coverage................................................ 847% 771% 786%
Preferred liquidation preference per share.............................. $27.50 $27.50 $27.50
Preferred market price per share........................................ 28 3/16 29 13/16 29
</TABLE>
- --------------------------------------------------------------------------------
DESCRIPTION OF THE COMPANY
SOURCE CAPITAL, INC. is a major diversified, publicly traded investment
company with total net assets of approximately $459,000,000. Its investment
portfolio includes a wide range of securities with primary emphasis on common
stocks and convertible debentures.
Source Capital has Common and Preferred shares outstanding, both of which are
traded on The New York Stock Exchange. The 1,969,212 outstanding Preferred
shares each have a prior claim of $27.50 on assets and $2.40 per year on income.
The balance of the Company's assets and income are available to the 7,575,117
shares of Common Stock.
Source Capital's investment objective is to seek maximum total return for
Common shareholders from both capital appreciation and investment income to the
extent consistent with protection of invested capital and provision of
sufficient income to meet the dividend requirements of Preferred shareholders.
Source Capital is not a mutual fund. Thus, it does not repurchase its own
shares on demand and does not need to structure its portfolio securities to
provide for possible redemptions. As a publicly traded investment company,
Source Capital's Common and Preferred shares are bought and sold on The New York
Stock Exchange, and the Company is not involved in the transaction.
Source Capital's investment approach emphasizes primarily equity and
equity-related investments in seeking to achieve its growth objective for its
Common shareholders. The desirability of equity versus fixed-income investments
has been increasingly debated in recent years. Source Capital's position is that
without assuming undue risk and recognizing the fixed claim of its Preferred
Stock, properly selected stocks offer the better long-term opportunity for
overall investment return as well as long-term protection from the large but
uncertain threat of inflation. Source Capital's equity investments have been
directed toward companies with highly liquid, relatively unleveraged balance
sheets and a demonstrated long-term ability to earn above average returns on
invested capital. Source Capital's equity investment portfolio is based on
fundamental judgments of long-term returns attainable from income and
appreciation in the securities of such companies and is not derived from overall
economic forecasts or stock market predictions.
Source Capital has a Common Stock Distribution Policy which provides for cash
distributions of approximately 10% of the ongoing net asset value of its Common
shares. Only a portion of such distributions is paid from net investment income.
The remainder is paid from any net realized capital gains and/or paid-in
capital, as determined by each year's results. To the extent the Company
realizes net long-term capital gains for any year in excess of the amounts
distributed under the Company's distribution policy, such excess may be
distributed to shareholders or retained by the Company. Distributions to Common
shareholders are paid quarterly in a fixed amount which is periodically adjusted
after sustained changes in net asset value appear to the Board of Directors
reasonably likely to support the new distribution rate on a continuing basis.
This policy is designed to allow Common shareholders to benefit not only from
income, but a portion of the capital appreciation which has resulted to date.
All distributions are taxable to shareholders as dividend income or capital gain
distributions since the Company has accumulated earnings and profits from prior
years.
Since the policy was adopted in June 1976, at an initial annual rate of $1.40
per share, continued increases in net asset value, despite payments from
capital, have permitted 19 subsequent increases to the current rate of $4.40
(effective for the distribution payable September 15, 1999). Maintenance of the
current $4.40 annualized rate is dependent upon achieving a total return on the
Common Stock from both income and appreciation to sustain a net asset value of
approximately $44.00.
1
<PAGE>
LETTER TO SHAREHOLDERS
TO OUR SHAREHOLDERS:
Source Capital's total net assets increased from $379,184,516 to $458,570,983
during the second quarter. Net asset value per Common share amounted to $53.39
at June 30, 1999 compared with $42.91 at March 31, 1999 and $48.23 at year-end
1998. These changes in net asset value were net of cash distributions of $1.05
paid in both the first and second quarters.
INVESTMENT RESULTS, 1999 FIRST HALF
For the six months ended June 30, 1999 the net asset value per share of Source
Capital's Common Stock increased by 15.8%, including distributions paid during
the period, while total net assets gained 14.4%. These returns compare with a
10.9% increase in the Russell 2500 Index. The foregoing changes were calculated
on the basis of reinvesting all dividends and distributions.
INVESTMENT RESULTS, 1999 SECOND QUARTER
In the most recent quarter, Source Capital's net asset value per share of
Common Stock increased 27.1%, including the $1.05 distribution paid during the
period, while total net assets rose 23.5%, both on a reinvestment basis. In
comparison, the Russell 2500 Index increased 16.4% during the quarter, also on a
reinvestment basis.
NET INVESTMENT INCOME
Net investment income amounted to $1,110,058 and $2,303,411 for the second
quarter and six months, respectively, as against $1,707,018 and $3,715,386 in
the comparable periods of 1998. Preferred dividends exceeded net investment
income by $0.01 per Common share for both the quarter and six-month periods
compared to the $0.07 and $0.18 of income in excess of Preferred dividends
earned in the corresponding periods of 1998.
DISTRIBUTIONS TO COMMON SHAREHOLDERS
A regular quarterly distribution of $1.05 per share was paid on June 15, 1999
to shareholders of record on May 28, 1999. This payment marks the 22nd
anniversary of Source Capital's 10% Distribution Policy which calls for total
annual payments approximating 10% of the Common Stock's ongoing net asset value.
Since the adoption of this policy, continuing growth in net asset value has led
to 19 increases in the distribution rate totaling 214%. The most recent increase
in the distribution rate was approved by the Board of Directors on August 2,
1999, raising the annualized rate to $4.40 for the distribution payable
September 15, 1999--the original rate adopted in June 1976 was $1.40. The growth
in the net asset value which has permitted this continuing expansion in cash
distributions has been achieved despite distributions in excess of net
investment income of $360,630,039 or $54.55 per Common share, and payments of
federal income tax on undistributed realized capital gains amounting to
$36,198,677 or $5.99 per Common share. Maintenance of the current $4.40 rate is
dependent upon achieving long-term investment results which sustain a net asset
value of approximately $44.00.
PREFERRED DIVIDENDS
The regular Preferred dividend of $0.60 per share was paid on June 15, 1999,
to shareholders of record on May 28, 1999. The changes in the Company's total
net assets since year-end 1998 have resulted in changes in the Preferred shares'
asset coverage from 771% at December 31, 1998 to 700% at March 31, 1999, and
847% at June 30, 1999. The decrease in net investment income led to a decline in
Preferred dividend coverage to 94% for the second quarter and 97% for the six
months, compared to 144% and 157% for the corresponding periods of 1998.
MARKET PRICE OF SOURCE CAPITAL SHARES
The market price of Source Capital Common Stock increased from $49 1/16 to
$49 3/8 during the first half of 1999. As this $0.31 increase in market price
was less than the $5.16 gain in the underlying net asset value, the market
premium to net asset value of 1.7% at year-end 1998 reverted to a discount of
7.5% at June 30, 1999. The market price of Source Capital Preferred Stock
decreased to $28 3/16 at June 30, 1999 from $29 13/16 at year-end 1998.
COMMENTARY
After a number of years of relatively weak performance, small-cap stocks came
back to life in the second quarter. Whether this is the start of a longer-term
trend, or just a blip, is still to be determined, but it would certainly require
many more quarters of similar outperformance before the valuation discrepancies
between large and small stocks are fully corrected.
Before discussing the most recent quarter in more detail, it is useful to
briefly review just how extreme this performance difference had become. As shown
in the table below, for the one-year period ended March 31, 1999, the Nasdaq,
dominated by a small number of very large, high PE companies, rose 34%, while
the small-stock Russell 2000 Index declined 16%.
<TABLE>
<CAPTION>
Year Ended
March 31, 1999
-----------------
<S> <C>
Nasdaq Composite 34.1%
S & P 500 18.5
Russell 2500 (13.3)
Russell 2000 (16.3)
</TABLE>
In contrast, second quarter performance was much more favorable to the average
stock, with double digit gains for the Russell 2000 and Russell 2500.
<TABLE>
<CAPTION>
1999
-------------------------------------
First Second
Quarter Quarter First Half
----------- ----------- -----
<S> <C> <C> <C>
Nasdaq 12.3% 9.1% 22.5%
S & P 500 5.0 7.1 12.4
Russell 2500 (4.7) 16.4 10.9
Russell 2000 (5.4) 15.6 9.3
</TABLE>
Source Capital also found the second quarter environment much more favorable,
with a 27.1% gain in net asset value per share, bringing first half 1999
performance to 15.8%.
<TABLE>
<CAPTION>
1999
-------------------------------------
First Second
Quarter Quarter First Half 1 Year 3 Years*
----------- ----------- ----- ----- -----------
<S> <C> <C> <C> <C> <C>
Source (8.8)% 27.1% 15.8% 13.5% 19.8%
Russell 2500 (4.7 ) 16.4 10.9 5.4 14.3
</TABLE>
* Annualized
Source shareholders that periodically check the price of their common stock
may be surprised to read of the strong second quarter performance of the
portfolio. This is because there was a significant difference between the
performance of Source's common stock and the underlying net asset value.
2
<PAGE>
As can be seen in the table below, at the end of March Source was trading at a
6.5% premium to net asset value, while at the end of June it was at a 7.5%
discount.
<TABLE>
<CAPTION>
March June
31, 30,
1999 1999
------- -------
<S> <C> <C>
Net Asset Value $42.91 $53.39
Closing Price $45 11/16 $49 3/8
Premium/(Discount) 6.5% (7.5)%
</TABLE>
The result of this swing from premium to discount was that the common stock
greatly underperformed the substantial increase in value of the Source
portfolio. Instead of a total return of 27%, the sum of the increase in net
asset value per share and the quarterly dividend payment, the Source shareholder
realized a return of just over 10%.
<TABLE>
<CAPTION>
$ Per Share Percent
------------- -----------
<S> <C> <C>
Change in NAV $ 10.48 24.4%
Dividend 1.05 2.7
------ -----------
$ 11.53 27.1%
Change in Premium/(Discount) (6.79) (16.7)
------ -----------
$ 4.74 10.4%
------ -----------
------ -----------
</TABLE>
We know of no good reason why this should have happened. The price of Source
common stock fluctuates based on the supply and demand for it, and as a result,
changes in the premium or discount are difficult to forecast or interpret. There
will no doubt be future periods during which the stock OUTPERFORMS the
portfolio.
The reader may have already noticed a significant sale of HOLOPHANE common
stock during the quarter. The rest of the position was sold at the end of July.
Holophane is a manufacturer of high-quality lighting fixtures for commercial and
industrial uses--applications like lighting billboards, warehouses and
factories, and highway intersections.
We first purchased Holophane about three years ago, in April 1996 at $17 a
share, and increased the position over the following year. We were attracted by
the Company's leading shares in its niche markets, high returns on capital, and
strong management. Despite these virtues, the stock was trading at only $22 per
share at the end of March, a valuation of just 11x expected 1999 earnings of
$2.00 per share. We held 535,500 shares, Source's 10th largest position.
In late June, National Service Industries agreed to buy Holophane for $38 1/2
per share, a much more reasonable PE of 20x earnings. The pricing of this
acquisition dramatically illustrates how undervalued many high quality smaller
companies had become, and why we were so pleased to be able to maintain or
increase our positions in them at such depressed prices.
The Source first quarter shareholder letter included an enthusiastic
discussion about a recent purchase, a manufacturer of contact lenses called
OCULAR SCIENCES. We were attracted by Ocular's business model, which enabled it
to gain market share and earn high returns on capital by providing compelling
reasons for eye doctors to prescribe Ocular's contacts instead of competing
products. At that time, Ocular was trading at over $30 per share, well above our
cost of $21, as the market responded enthusiastically to its strong business and
financial results.
This enthusiasm was short-lived, however, when in early June Ocular decided to
provide new and lower guidance for analysts' earnings estimates. The company
indicated that U.S. contact lens industry growth in the second quarter was
likely to be about 1-2%, rather than the 4% which they had previously estimated.
As a result, Ocular's domestic sales and profit growth would slow, and on a
"worst case" basis, 1999 earnings per share might be only $1.50, rather than the
prior forecast of $1.70.
Wall Street took this news poorly, and marked-down the price of Ocular
Sciences from $27 per share the day before, to $13 1/2 per share the day after,
as many shareholders stampeded for the exits. Over 20 million shares traded in
only a few days--meaning that most of the 15 million publicly held shares
changed ownership.
Although we were not pleased by this news either, our behavior was quite
different. Even based on the worst case guidance, Ocular's 1999 growth would be
15% in earnings and about 20% in sales, with an operating margin of 25% and
having a balance sheet with no debt and $2 per share in cash. In addition,
Ocular continued to gain market share and strengthen its competitive position.
At a valuation of as low as 9x expected 1999 earnings, we felt Ocular was
unreasonably cheap and had little downside risk. Instead of dumping our stock,
we purchased an additional 500,000 shares, roughly tripling our total position.
Although Ocular's price has subsequently recovered to about $20 per share, it
is clearly too soon to be confident that we have made the correct decision. But
we are hopeful that Ocular Sciences may be another example of how focussing on
the long-term merits of a business enables us to purchase high-quality companies
when they are temporarily out of favor, and as a result provide superior
long-term returns to Source shareholders.
Respectfully submitted,
/s/ ERIC S. ENDE
Eric S. Ende
Senior Vice President and
Chief Investment Officer
August 6, 1999
3
<PAGE>
PORTFOLIO OF INVESTMENTS
June 30, 1999
<TABLE>
<CAPTION>
COMMON STOCKS Shares Value
- ---------------------------------------------------------------------------------------- ----------- --------------
<S> <C> <C>
PRODUCER DURABLE GOODS -- 21.4%
Crane Co................................................................................ 310,000 $ 9,745,625
Denison International plc (ADR)*++...................................................... 583,300 8,968,238
Donaldson Company, Inc.................................................................. 298,800 7,320,600
Federal Signal Corporation.............................................................. 178,200 3,775,612
Graco Inc............................................................................... 556,500 16,347,188
Holophane Corporation*++................................................................ 269,100 10,259,437
IDEX Corporation........................................................................ 518,400 17,042,400
Kaydon Corporation...................................................................... 421,800 14,183,025
Zebra Technologies Corporation (Class A)*............................................... 269,900 10,374,281
--------------
$ 98,016,406
--------------
TECHNOLOGY -- 17.9%
Adobe Systems Incorporated.............................................................. 292,000 $ 23,989,625
Belden Inc.............................................................................. 519,500 12,435,531
Channell Commercial Corporation*........................................................ 265,000 2,650,000
Galileo International, Inc.............................................................. 291,700 15,587,719
KEMET Corporation*...................................................................... 695,200 15,946,150
Methode Electronics, Inc. (Class A)..................................................... 503,400 11,515,275
--------------
$ 82,124,300
--------------
BUSINESS SERVICES & SUPPLIES -- 14.0%
Applied Graphics Technologies, Inc.*.................................................... 744,380 $ 9,397,798
Bacou USA, Inc.*........................................................................ 448,100 7,645,706
Expeditors International of Washington, Inc............................................. 177,200 4,828,700
HON INDUSTRIES Inc...................................................................... 593,000 17,308,188
JLK Direct Distribution Inc. (Class A)*................................................. 730,700 6,804,644
Manpower Inc............................................................................ 352,000 7,964,000
Office Depot, Inc.*..................................................................... 288,900 6,373,856
Romac International Inc.*............................................................... 451,900 4,010,612
--------------
$ 64,333,504
--------------
HEALTH CARE -- 6.8%
DENTSPLY International Inc.............................................................. 399,100 $ 11,174,800
Landauer, Inc........................................................................... 257,600 7,599,200
Ocular Sciences, Inc.*.................................................................. 722,900 12,560,387
--------------
$ 31,334,387
--------------
RETAILING -- 6.3%
Circuit City Stores, Inc................................................................ 186,000 $ 17,298,000
O'Reilly Automotive, Inc.*.............................................................. 225,600 11,364,600
--------------
$ 28,662,600
--------------
DISTRIBUTION -- 6.0%
Arrow Electronics, Inc.*................................................................ 370,000 $ 7,030,000
Black Box Corporation*.................................................................. 404,400 20,270,550
--------------
$ 27,300,550
--------------
CONSUMER NON-DURABLE GOODS -- 2.7%
Lancaster Colony Corporation............................................................ 360,450 $ 12,435,525
--------------
ENTERTAINMENT -- 2.5%
Carnival Corporation.................................................................... 236,600 $ 11,475,100
--------------
</TABLE>
4
<PAGE>
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
Shares or
Face
COMMON STOCKS (CONTINUED) Amount Value
- ---------------------------------------------------------------------------------------- ----------- --------------
<S> <C> <C>
MATERIALS -- 2.4%
OM Group, Inc........................................................................... 324,500 $ 11,195,250
--------------
INSURANCE -- 2.1%
Brown & Brown, Inc...................................................................... 259,350 $ 9,855,300
--------------
ENERGY -- 1.2%
Schlumberger Limited.................................................................... 84,500 $ 5,381,594
--------------
TOTAL COMMON STOCKS -- 83.3% (Cost $261,554,956)........................................ $ 382,114,516
--------------
PREFERRED STOCKS -- 1.7% (Cost $7,653,567)
Crown American Realty Trust............................................................. 39,000 $ 1,837,875
New Plan Excel Realty Trust, Cvt........................................................ 200,000 5,300,000
Prime Retail, Inc., Cvt. (Series B)..................................................... 40,000 640,000
--------------
$ 7,777,875
--------------
CONVERTIBLE BONDS AND DEBENTURES
REAL ESTATE INVESTMENT TRUST -- 1.9%
CenterTrust Retail Properties, Inc.
-- 7 1/2% 2001 (Series A)............................................................. $ 1,050,000 $ 987,000
-- 7 1/2% 2001 (Series B)............................................................. 2,750,000 2,588,438
Developers Diversified Realty Corporation -- 7% 1999.................................... 2,500,000 2,500,000
Rockefeller Center Properties, Inc. -- 0% 2000.......................................... 3,005,000 2,479,125
--------------
$ 8,554,563
--------------
BUSINESS SERVICES & SUPPLIES -- 1.4%
Reptron Electronics, Inc. -- 6 3/4% 2004................................................ $ 5,980,000 $ 2,272,400
World Access, Inc. -- 4 1/2% 2002....................................................... 6,005,000 4,143,450
--------------
$ 6,415,850
--------------
HEALTH CARE -- 1.4%
IVAX Corporation -- 6 1/2% 2001......................................................... $ 1,500,000 $ 1,447,500
NovaCare, Inc. -- 5 1/2% 2000........................................................... 5,250,000 4,836,562
--------------
$ 6,284,062
--------------
TRANSPORTATION -- 1.0%
Offshore Logistics, Inc. -- 6% 2003..................................................... $ 5,500,000 $ 4,730,000
--------------
PRODUCER DURABLE GOODS -- 0.9%
DRS Technologies, Inc. -- 9% 2003....................................................... $ 2,000,000 $ 2,380,000
Lam Research Corporation -- 5% 2002..................................................... 2,000,000 1,817,500
--------------
$ 4,197,500
--------------
CONSUMER NON-DURABLE GOODS -- 0.4%
Bell Sports Corp. -- 4 1/4% 2000........................................................ $ 385,000 $ 319,550
Central Garden & Pet Co. -- 6% 2003..................................................... 2,000,000 1,590,000
--------------
$ 1,909,550
--------------
TECHNOLOGY 0.1%
Read-Rite Corporation -- 6 1/2% 2004.................................................... $ 1,000,000 $ 425,000
--------------
TOTAL CONVERTIBLE BONDS
AND DEBENTURES -- 7.1% (Cost $36,165,424).............................................. $ 32,516,525
--------------
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NON-CONVERTIBLE BONDS AND DEBENTURES Face Amount Value
- ---------------------------------------------------------------------------------------- ----------- --------------
<S> <C> <C>
CORPORATE -- 2.9%
Advantica Restaurant Group, Inc. -- 11 1/4% 2008........................................ $ 2,131,100 $ 2,072,495
American Telecasting, Inc. -- 14 1/2% 2004.............................................. 2,400,000 2,556,000
DLJ Mortgage Acceptance Corp. (Series 1997-E Class B) -- 7.5481% 2026+.................. 978,000 729,221
Pamida, Inc. -- 11 3/4% 2003............................................................ 1,330,000 1,384,862
Pathmark Stores, Inc. -- 12 5/8% 2002................................................... 3,000,000 3,071,250
Trump Atlantic City Associates -- 11 1/4% 2006.......................................... 4,000,000 3,610,000
--------------
$ 13,423,828
--------------
U.S. GOVERNMENT AND AGENCIES -- 0.4%
Federal Home Loan Mortgage Corporation
-- 6 1/2% 2023 (IO)................................................................... $ 2,401,100 $ 271,250
-- 10.15% 2006 (REMIC)................................................................ 83,600 83,809
Government National Mortgage Association (Mobile Home)
-- 9 3/4% 2010........................................................................ 1,114,000 1,163,434
--------------
$ 1,518,493
--------------
TOTAL NON-CONVERTIBLE BONDS
AND DEBENTURES -- 3.3% (Cost $15,476,120).............................................. $ 14,942,321
--------------
TOTAL INVESTMENT SECURITIES -- 95.4% (Cost $320,850,067)................................ $ 437,351,237
--------------
SHORT-TERM INVESTMENTS -- 4.4% (Cost $20,372,192)
Short-term Corporate Notes:
Grainger (W.W.), Inc. -- 4.88% 7/6/99................................................. $ 4,170,000 $ 4,167,174
Coca-Cola Company, The -- 4.84% 7/16/99............................................... 2,500,000 2,494,958
Toyota Motor Credit Corporation -- 4.99% 7/21/99...................................... 1,500,000 1,495,842
General Electric Capital Corporation -- 5.05% 7/22/99................................. 3,215,000 3,205,529
General Motors Acceptance Corporation -- 5.11% 7/26/99................................ 2,680,000 2,670,490
MetLife Funding, Inc. -- 5.18% 7/30/99................................................ 2,400,000 2,389,985
General Motors Acceptance Corporation -- 5.09% 8/4/99................................. 3,800,000 3,781,195
State Street Bank Repurchase Agreement -- 4% 7/1/99
(Collateralized by U.S. Treasury Bond -- 8 1/8% 8/15/19,
market value $171,498)................................................................ 167,000 167,019
--------------
$ 20,372,192
--------------
TOTAL INVESTMENTS -- 99.8% (Cost $341,222,259).......................................... $ 457,723,429
Other assets and liabilities, net -- 0.2%............................................... 847,554
--------------
TOTAL NET ASSETS -- 100%................................................................ $ 458,570,983
--------------
--------------
</TABLE>
* Non-income producing securities
+ Restricted security 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.
++ Affiliate as defined in the Investment Company Act of 1940 by reason of
ownership of 5% or more of its outstanding voting securities. Following is a
summary of transactions in securities of these affiliates during the six
months ended June 30, 1999.
<TABLE>
<CAPTION>
Purchases at Sales Realized Dividend
Cost at Cost Gain Income
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Denison International plc (ADR).......................................... -- -- -- --
Holophane Corporation.................................................... -- $ 4,841,456 $ 5,266,762 --
</TABLE>
See notes to financial statements.
6
<PAGE>
MAJOR PORTFOLIO CHANGES
Quarter Ended June 30, 1999
<TABLE>
<CAPTION>
Shares or
Face Amount
----------------
<S> <C>
NET PURCHASES
COMMON STOCKS
Landauer, Inc......................................................... 47,800 shs.
Ocular Sciences, Inc.................................................. 500,100 shs.
Romac International Inc............................................... 92,600 shs.
CONVERTIBLE SECURITY
Central Garden & Pet Co. -- 6% 2003................................... $ 1,000,000
NON-CONVERTIBLE SECURITIES
American Telecasting, Inc. -- 14 1/2% 2004(1)......................... $ 2,400,000
Pamida, Inc. -- 11 3/4% 2003(1)....................................... $ 1,330,000
NET SALES
COMMON STOCKS
Adobe Systems Incorporated............................................ 9,000 shs.
Caraustar Industries, Inc.(2)......................................... 400,500 shs.
Carnival Corporation.................................................. 25,000 shs.
Circuit City Stores, Inc.............................................. 9,000 shs.
Expeditors International of Washington, Inc........................... 90,000 shs.
Holophane Corporation................................................. 266,400 shs.
Nucor Corporation(2).................................................. 180,200 shs.
OM Group, Inc......................................................... 18,000 shs.
Wells Fargo & Company(2).............................................. 118,836 shs.
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
June 30, 1999
------------------------------
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(cost $320,850,067) -- Note A.......................................................... $ 437,351,237
Short-term investments -- at cost plus interest earned
(maturities 60 days or less) -- Note A................................................. 20,372,192 $ 457,723,429
--------------
Cash....................................................................................... 135
Receivable for:
Accrued interest......................................................................... $ 1,029,831
Dividends................................................................................ 323,968 1,353,799
-------------- --------------
$ 459,077,363
LIABILITIES
Payable for:
Advisory fees............................................................................ $ 264,345
Accrued dividends -- Preferred Stock..................................................... 196,921
Accrued expenses......................................................................... 45,114 506,380
-------------- --------------
TOTAL NET ASSETS -- June 30, 1999............................................................ $ 458,570,983
--------------
--------------
Assets applicable to Preferred Stock at a liquidation preference of
$27.50 per share (asset coverage 847%) -- Note B......................................... $ 54,153,330
--------------
--------------
Net assets applicable to Common Stock -- $53.39 per share.................................. $ 404,417,653
--------------
--------------
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 7,575,117 shares -- Note B................................................... 7,575,117
Additional Paid-in Capital................................................................. 305,479,704
Undistributed net realized gain on investments............................................. 35,964,883
Unrealized appreciation of investments..................................................... 116,501,170
Unallocated distributions -- Note A........................................................ (12,857,527)
--------------
TOTAL NET ASSETS -- June 30, 1999............................................................ $ 458,570,983
--------------
--------------
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF OPERATIONS
For the six months ended June 30, 1999
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest................................................ $ 2,280,702
Dividends............................................... 1,867,301
-------------
$ 4,148,003
Expenses -- Note C:
Advisory fees........................................... $ 1,424,164
Transfer agent fees and expenses........................ 135,385
Reports to shareholders................................. 115,281
Directors' fees and expenses............................ 40,000
Taxes, other than federal income tax.................... 33,320
Legal and auditing fees................................. 32,402
Custodian fees and expenses............................. 22,280
Registration and filing fees............................ 16,670
Insurance............................................... 16,225
Other expenses.......................................... 8,865 1,844,592
------------- -------------
Net investment income -- Note A..................... $ 2,303,411
-------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Realized gain on investments:
Proceeds from sale of investment securities
(Excluding short-term investments with maturities of
60 days or less)....................................... $ 72,420,216
Cost of investment securities sold...................... 45,763,549
-------------
Net realized gain on investments -- Notes A and D..... $ 26,656,667
Unrealized appreciation of investments:
Unrealized appreciation at beginning of period.......... $ 87,983,547
Unrealized appreciation at end of period................ 116,501,170
-------------
Increase in unrealized appreciation of investments.... 28,517,623
-------------
Net realized and unrealized gain on investments..... $ 55,174,290
-------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS........................................... $ 57,477,701
-------------
-------------
</TABLE>
See notes to financial statements.
9
<PAGE>
STATEMENT OF CHANGES IN TOTAL NET ASSETS
<TABLE>
<CAPTION>
For the six months ended For the year ended
June 30, 1999 December 31, 1998
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN TOTAL NET ASSETS
Operations:
Net investment income........................... $ 2,303,411 $ 6,617,633
Net realized gain on investments
-- Notes A and D.............................. 26,656,667 35,506,929
Increase (decrease) in unrealized
appreciation of investments................... 28,517,623 (17,489,763)
------------- -------------
Increase in total net assets resulting
from operations................................. $ 57,477,701 $ 24,634,799
Distributions to Preferred shareholders:
From net investment income...................... (2,363,054) (4,726,109)
Distributions to Common shareholders:
From net investment income...................... $ (3,013,409) $ (3,043,180)
From net realized capital gains................. -- (31,365,719)
Unallocated -- Note A........................... (12,857,526) (15,870,935) -- (34,408,899)
------------- -------------
Proceeds from shares issued for distributions
reinvested by shareholders -- Note B.......... 1,550,724 6,786,649
------------- -------------
Increase (decrease) in total net assets........... $ 40,794,436 $ (7,713,560)
TOTAL NET ASSETS
Beginning of period, including
undistributed net investment income
of $3,073,051 and $4,224,707.................... 417,776,547 425,490,107
------------- -------------
End of period, including
undistributed net investment income
of $3,073,051 at December 31, 1998.............. $ 458,570,983 $ 417,776,547
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of Common Stock outstanding throughout each period
<TABLE>
<CAPTION>
Six
Months Year ended December 31,
Ended ---------------------------------------------------------
June 30,
1999 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period............ $ 48.23 $ 50.20 $ 45.35 $ 42.58 $ 38.52 $ 41.85
--------- --------- --------- --------- --------- ---------
Income from investment operations:
Net investment income........................... $ 0.30 $ 0.88 $ 1.08 $ 1.30 $ 1.48 $ 1.62
Net realized and unrealized gain (loss)
on investment securities..................... 7.26 2.37 10.50 8.25 6.84 (0.67)
--------- --------- --------- --------- --------- ---------
Total from investment operations................ $ 7.56 $ 3.25 $ 11.58 $ 9.55 $ 8.32 $ 0.95
--------- --------- --------- --------- --------- ---------
Distributions to Preferred shareholders:
From net investment income...................... $ (0.31) $ (0.63) $ (0.65) $ (0.65) $ (0.66) $ (0.69)
Distributions to Common shareholders:
From net investment income...................... (0.40) (0.41) (0.32) (0.51) (0.50) (1.14)
From net realized gains......................... -- (4.21) (5.76) (5.62) (3.10) (2.03)
In excess of net realized gains................. -- -- -- -- -- (0.02)
From Additional Paid-in Capital................. -- -- -- -- -- (0.41)
Unallocated..................................... (1.70) -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total distributions........................... $ (2.41) $ (5.25) $ (6.73) $ (6.78) $ (4.26) $ (4.29)
--------- --------- --------- --------- --------- ---------
Effect of shares issued for distributions
reinvested by shareholders...................... $ 0.01 $ 0.03 -- -- -- $ 0.01
--------- --------- --------- --------- --------- ---------
Net asset value at end of period.................. $ 53.39 $ 48.23 $ 50.20 $ 45.35 $ 42.58 $ 38.52
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Per share market value at end of period........... $ 49.38 $ 49.06 $ 51.06 $ 45.50 $ 41.88 $ 37.00
Total investment return(1)........................ 5.2% 5.8% 26.9% 24.5% 23.4% (6.5)%
Net asset value total return(2)................... 15.8% 5.8% 25.4% 21.9% 20.7% 0.6%
Ratios/supplemental data:
Net assets at end of period (in thousands)...... $458,571 $417,777 $425,490 $382,146 $362,087 $329,427
Ratio of expenses to average net assets......... 0.90%(3) 0.87% 0.87% 0.89% 0.91% 0.96%
Ratio of net income to average net assets....... 1.12%(3) 1.59% 1.95% 2.52% 3.04% 3.36%
Portfolio turnover rate......................... 24.88%(3) 28.34% 27.46% 41.04% 51.44% 71.39%
Preferred Stock:
Total shares outstanding(4)....................... 1,969,212 1,969,212 1,969,212 1,969,212 1,969,212 1,969,212
Asset coverage per share(4)....................... $232.87 $212.15 $216.07 $194.06 $183.87 $167.29
Involuntary liquidation preference per share...... $27.50 $27.50 $27.50 $27.50 $27.50 $27.50
Average market value per share(5)................. $29.15 $29.95 $28.72 $28.50 $28.00 $27.89
</TABLE>
(1) Based on market value per share, adjusted for reinvestment of distributions
and taxes
(2) Based on net asset value per share, adjusted for reinvestment of
distributions and taxes
(3) Annualized
(4) Information shown as of the end of the period
(5) The average of all month-end market values during each period
See notes to financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
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 written
call options, listed or traded on a national securities exchange or on the
NASDAQ National Market System are valued at the last sale price on the last
business day of the period, or, if there was not a sale that day, at the mean
between the most recent bid and asked prices. Securities which are unlisted and
debt and convertible securities listed on a national securities exchange for
which the over-the-counter market more accurately reflects the securities' value
in the judgment of the Company's officers, are valued at the mean between the
most recent bid and asked prices or other ascertainable market value. Short-term
investments with maturities of 60 days or less are valued at cost plus interest
earned, which approximates market value. Restricted securities and securities
for which market quotations are not readily available are valued at fair value
as determined in good faith by, or under the direction of, the Board of
Directors.
2. FEDERAL INCOME TAX--No provision for federal taxes 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 and taxable net realized gain on investments to its shareholders in
accordance with the minimum distribution requirements of the Code.
3. UNALLOCATED DISTRIBUTIONS--Unallocated distributions represent
distributions paid to Common shareholders during the period from source(s) other
than net investment income. Such source(s) will be determined by the results of
operations for the entire fiscal year and will be paid-in capital, except to the
extent of any net realized capital gains for the fiscal year.
4. USE OF ESTIMATES--The preparation of the financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported. Actual results
could differ from those estimates.
5. OTHER--Securities transactions are accounted for on the date
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.
The Company issued 35,057 shares of Common Stock under its Reinvestment
Plan for Common and Preferred shareholders during the six months ended June 30,
1999.
NOTE C--ADVISORY FEES AND OTHER AFFILIATED TRANSACTIONS
Pursuant to an investment advisory agreement, the Company pays First
Pacific Advisors, Inc. ("Investment Adviser") monthly investment advisory fees
calculated at an annual rate of .725% for the first $100 million of total net
assets, .700% for the next $100 million of total net assets, and .675% for any
total net assets in excess of $200 million. The Agreement obligates the
Investment Adviser to reduce its fee to the extent necessary to reimburse the
Company for any annual expenses (exclusive of interest, taxes, the cost of any
supplementary statistical and research information, legal expenses related to
portfolio securities, and extraordinary expenses such as litigation) in excess
of 1 1/2% of the first $30 million and 1% of the remaining average total net
assets of the Company for the year.
For the six months ended June 30, 1999, the Company paid aggregate fees of
$40,000 to all Directors who are not affiliated persons of the Investment
Adviser. During the six months ended June 30, 1999, the Company incurred legal
fees of $3,327 payable to O'Melveny & Myers LLP, counsel for the Company. A
Director of the Company is of counsel to, and a retired partner of, that firm.
The Officers of the Company are also officers of the Investment Adviser.
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 $49,430,047 for the six
months ended June 30, 1999. Cost of investment securities owned at June 30, 1999
was the same for federal income tax and financial reporting purposes. Gains and
losses are based on the specific certificate identification method. Gross
unrealized appreciation and depreciation for all investments at June 30, 1999
for federal income tax purposes was $136,091,382 and $19,590,212, respectively.
NOTE E--YEAR 2000
Like other investment companies, financial and business organizations
around the world, the Company could be adversely affected if the computer
systems used by the Adviser and its other major service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Issue." The Adviser
has assessed its computer systems and the systems compliance issues of the
Company's major service providers. The Adviser is taking steps that it believes
are reasonably designed to address the Year 2000 Issue with respect to the
computer systems it uses and has obtained satisfactory assurances that
comparable steps are being taken by the Company's major service providers. At
this time, however, there can be no assurance that these steps will be
sufficient to address all Year 2000 Issues. The inability of the Adviser or the
Company's other third party providers to timely complete all necessary
procedures to address the Year 2000 Issue could have a material adverse effect
on the Company's operations. The Adviser will continue to monitor the status of,
and the Company's exposure to, this issue. For the six months ended June 30,
1999, the Company incurred no significant Year 2000 related expenses and it does
not expect to incur significant Year 2000 expenses in the future. The Adviser is
in the process of establishing a contingency plan to address recovery from
unavoided or unavoidable Year 2000 problems, if any, affecting the Company.
12
<PAGE>
RESULTS OF ANNUAL MEETING
Following is a list of matters voted upon and the results of those votes
cast at the annual meeting of shareholders held May 3, 1999:
1. With respect to the election of five directors by the holders of Common
Stock, $1.00 par value, and election of two directors by the holders of
$2.40 Cumulative Preferred Stock, $3.00 par value:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
------------ --------------
<S> <C> <C>
COMMON
Wesley E. Bellwood.................................................................................... 5,971,747 74,606
Julio J. de Puzo, Jr.................................................................................. 5,991,213 74,606
David Rees............................................................................................ 5,980,300 74,606
Robert L. Rodriguez................................................................................... 5,983,485 74,606
Lawrence J. Sheehan................................................................................... 5,988,675 74,606
PREFERRED
Willard H. Altman..................................................................................... 1,602,543 28,869
Paul G. Schloemer..................................................................................... 1,603,979 28,869
</TABLE>
2. With respect to continuation of the Investment Advisory Agreement, a
total of 7,416,370 shares voted for, 92,726 shares voted against and
180,724 shares abstained.
3. With respect to the selection of Ernst & Young LLP as independent
auditors for the Company for the fiscal year, a total of 7,559,149 shares
voted for, 33,125 shares voted against and 97,546 shares abstained.
No broker non-votes were received with respect to any of the matters voted
upon above.
13
<PAGE>
<TABLE>
<S> <C>
SOURCE CAPITAL, INC. BULK RATE
11400 West Olympic Boulevard, Suite 1200 U.S. POSTAGE
Los Angeles, California 90064 PAID
CMSS
</TABLE>
