<PAGE>
[LOGO]
SOURCE CAPITAL, INC.
1999
ANNUAL REPORT
for the year ended December 31
<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
Steven R. Geist, SENIOR VICE PRESIDENT AND
FIXED-INCOME MANAGER
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
INDEPENDENT AUDITORS
Ernst & Young 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>
For the year ended December 31,
------------------------------------------------
1999 1998
-------------------------- --------------------
Total Per Total Per
Net Common Net Common
Assets Share Assets Share
------------ ------------ ------------ ------
<S> <C> <C> <C> <C>
Beginning of year............. $417,776,547 $48.23 $425,490,107 $50.20
Net gain on investments,
realized and unrealized..... 78,227,825 10.27 18,017,166 2.37
Income available to Common
shareholders................ 404,604 0.05 1,891,524 0.25
Distributions to Common
shareholders................ (59,511,247) (7.86) (34,408,899) (4.62)
Proceeds from shares issued
for distributions reinvested
by
shareholders................ 7,490,362 0.01 6,786,649 0.03
------------ ------ ------------ ------
Net changes during year... $ 26,611,544 $ 2.47 $ (7,713,560) $(1.97)
------------ ------ ------------ ------
End of year................... $444,388,091 $50.70 $417,776,547 $48.23
============ ====== ============ ======
Common market price per
share....................... 48 1/4 49 1/16
Common market premium
(discount) to net asset
value....................... (4.8)% 1.7%
Preferred asset coverage...... 821% 771%
Preferred liquidation
preference per share........ $27.50 $27.50
Preferred market price per
share....................... 28 29 13/16
</TABLE>
- --------------------------------------------------------------------------------
DESCRIPTION OF THE COMPANY
SOURCE CAPITAL, INC. is a major diversified, publicly traded investment
company with total net assets of approximately $444,000,000. Its investment
portfolio includes a wide range of securities with primary emphasis on common
stock 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 7,697,644
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.
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:
1999 INVESTMENT PORTFOLIO RETURNS
Total net assets of Source Capital amounted to $444,388,091 at December 31,
1999. After providing for Preferred stock equity, Common equity amounted to
$390,234,761 or $50.70 of net asset value per Common share. This compared with
total net assets of $417,776,547, Common equity of $363,623,217 and net asset
value per Common share of $48.23 one year ago. These changes reflect payments to
Common and Preferred shareholders totaling $64,237,356. As a result, Source
Capital achieved a total investment return during 1999 of 23.1% on its Common
net asset value (21.4% on total net assets) with both figures reflecting the
reinvestment of dividends and distributions.
The table at the bottom of this page compares Source Capital's investment
results with the returns of several well-known indices of securities prices. All
the percentage changes shown represent total investment returns from both income
and appreciation (depreciation) calculated on the basis of reinvesting all
dividends and distributions.
NET INVESTMENT INCOME
As has been the case for the past several years, net investment income has
continued to decline. Most of this decline has occurred on the interest side of
net investment income while the dividend side has remained essentially flat.
Holdings in commercial paper have declined this year as the asset allocation to
equities has increased with a resulting decline in the cash position.
Specifically, net investment income amounted to $1,466,799 and $5,130,713 for
the fourth quarter and full year, respectively, compared with $1,420,270 and
$6,617,633 in 1998. After providing for Preferred dividends, net investment
income per Common share totaled $0.04 and $0.05 for the fourth quarter and full
year, respectively, compared with $0.03 and $0.25 earned in the corresponding
periods of 1998.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SOURCE CAPITAL STOCK MARKET INDICES
-------------------------- ------------------------------------------
TOTAL COMMON RUSSELL S&P
PERIOD NET ASSETS EQUITY 2500 500 DJIA
- --------------------------------------------- ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
1999 +21.4% +23.1% +24.2% +21.0% +27.3%
1998 + 6.4 + 5.8 + 0.4 +28.6 +18.2
1997 +23.0 +25.4 +24.4 +33.4 +24.9
1996 +20.0 +21.9 +19.0 +23.0 +28.9
1995 +18.7 +20.7 +31.7 +37.6 +36.9
1994 + 2.0 + 0.6 - 1.1 + 1.3 + 5.0
1993 + 6.7 + 6.3 +16.5 +10.0 +17.0
1992 +12.5 +13.3 +16.2 + 7.6 + 7.4
1991 +19.7 +22.2 +46.7 +30.5 +24.3
1990 - 1.2 - 3.2 -14.9 - 3.1 - 0.5
1989 +21.1 +23.9 +19.4 +31.7 +32.3
1988 +15.2 +16.8 +22.7 +16.6 +16.2
1987 + 3.0 + 1.7 - 4.7 + 5.3 + 5.6
1986 +12.8 +13.9 +12.0 +18.7 +27.3
1985 +24.2 +28.5 +31.9 +31.7 +33.7
1984 +11.9 +12.8 - 4.1 + 6.3 + 1.4
1983 +18.4 +21.3 +27.7 +22.6 +26.1
1982 +21.6 +26.1 +26.7 +21.6 +27.2
1981 +14.2 +16.0 + 3.0 - 4.9 - 3.7
1980 +19.2 +23.1 +34.3 +32.5 +22.2
1979 +26.6 +35.0 +38.4 +18.6 +10.7
1978 +16.1 +19.7 N/A + 6.6 + 2.8
1977 +13.0 +15.1 N/A - 7.2 -12.9
Annual Compound
Rate of Return:
21 years +14.9 +16.5 +16.5 +17.9 +17.9
23 years +14.8 +16.6 N/A +16.2 +15.7
<CAPTION>
FIXED-INCOME INDICES
---------------------------------
LEHMAN BROTHERS TREASURY
PERIOD GOVT/CORP BOND INDEX BILL YIELDS
- --------------------------------------------- -------------------- -----------
<S> <C> <C>
1999 - 2.2% + 4.7%
1998 + 9.5 + 5.1
1997 + 9.8 + 5.2
1996 + 2.9 + 5.3
1995 +19.2 + 5.7
1994 - 3.5 + 4.2
1993 +11.0 + 3.1
1992 + 7.6 + 3.6
1991 +16.1 + 5.8
1990 + 8.3 + 7.8
1989 +14.2 + 8.2
1988 + 7.6 + 6.2
1987 + 2.3 + 5.9
1986 +15.6 + 6.0
1985 +21.3 + 7.5
1984 +15.0 + 9.6
1983 + 8.0 + 8.6
1982 +31.1 +10.7
1981 + 7.3 +14.1
1980 + 3.0 +11.6
1979 + 2.3 +10.3
1978 + 1.2 + 7.2
1977 + 3.0 + 5.4
Annual Compound
Rate of Return:
21 years + 9.5 + 7.1
23 years + 8.9 + 7.0
</TABLE>
2
<PAGE>
DISTRIBUTIONS TO COMMON SHAREHOLDERS
The distribution rate on Source Capital Common Stock is currently at the $4.40
annual rate which has been in effect since September 1999. Source Capital's
distribution policy, initiated in June 1976, calls for payments to Common
shareholders of approximately 10% of the Common Stock's ongoing net asset value.
Since the adoption of this policy almost 24 years ago, continuing growth in net
asset value has led to 19 increases in the distribution rate totaling 214%. This
growth was achieved despite payments to shareholders in excess of net investment
income of $406,573,763 or $60.62 per Common share, plus payment of federal
income tax on the retained portion of net realized long-term gains of
$36,198,677 or $5.99 per Common share. As we have repeatedly pointed out,
maintenance of the current $4.40 Common distribution rate is dependent on
achieving investment results which will sustain a net asset value of
approximately $44.00.
Capital gains are the eventual result of successful investments. As in recent
years, changes in relative market valuation as well as changing prospects of
individual companies have led us to sell certain holdings in 1999 and these
sales have resulted in the realization of significant net capital gains. We
believe that we have been able to replace these securities both by adding to
existing investments at advantageous prices and by making selected new
investments (primarily equity investments) offering potentially better long-term
investment returns.
As a result of these changes, the Company realized $66,936,690 in net capital
gains in 1999. Distribution of these gains required payment of a special
distribution of $3.56 per share to Common shareholders on December 15, 1999 in
addition to the $1.10 per share regular quarterly distribution to Common
shareholders. Detailed tax information is presented on page 10.
MARKET PRICES AND SHAREHOLDER RETURNS
In the long run, the future returns for Source Capital Common shareholders
will depend primarily on how well we manage the firm's investment portfolio. The
longer the period of time involved, the more important portfolio investment
returns will be in determining shareholder returns. However, in the short run,
changes in the market price of Source Capital Common shares which deviate from
the underlying changes in net asset value can cause shareholder returns to be
either enhanced or diminished. The experience of the past year clearly
illustrates the negative side of this phenomenon as the 1.7% market premium to
net asset value at 12/31/98 decreased to a 4.8% discount one year later, and
shareholder returns were accordingly impaired.
The following table presents 1999 market returns for both Common and Preferred
shareholders:
<TABLE>
<CAPTION>
Common Preferred
Stock Stock
--------- ---------
<S> <C> <C>
Change in Market Value:
NYSE Closing Price
-- 12/31/99............... $48.2500 $28.0000
NYSE Closing Price
-- 12/31/98............... $49.0625 $29.8125
-------- --------
Net change in 1999.......... $(0.8125) $(1.8125)
Distributions in 1999......... 7.8600 2.4000
-------- --------
Total return -- Amount........ $ 7.0475 $ 0.5875
Total return -- Percent....... 14.4% 2.0%
</TABLE>
Common shareholders who participated in the Company's Automatic Reinvestment
Plan experienced a positive return of 15.2% during 1999. Furthermore, on a
long-term basis those shareholders who participated in the Automatic
Reinvestment Plan during each of the 23 years since its inception experienced an
annual compound rate of return of 18.0%.
COMMENTARY
The big gains of the major stock market averages in 1999 conceal some very
significant differences in performance. On the surface, the results of the big
and small stock indexes seem relatively similar.
<TABLE>
<CAPTION>
1999
-------
<S> <C>
S&P 500 21.0%
Russell 2500 24.2%
Russell 2000 21.3%
</TABLE>
Within this seemingly solid performance, there were some surprising
differences. First, there were more stocks down than up: 51% of S&P 500 stocks
were down, 52% of Russell 2000 stocks were down. Second, the market's
performance was driven by tech stocks--the tech dominated Nasdaq 100 was up 102%
for the year, as were the tech stocks included in the Russell 2000; the 30
biggest gainers in the S&P 500 were all tech stocks.
When we look at the performance of the small and mid-cap indexes, as well as
small and mid-cap managers, we find that "growth" (mostly tech) dramatically
outperformed "value." These disparities in performance are the widest on record.
<TABLE>
<CAPTION>
1999
---------------
Value Growth
------ ------
<S> <C> <C>
Russell 2000 (1.5)% 43.1%
Russell 2500 1.5% 55.5%
Lipper Small-Cap Funds 6.3% 62.6%
Lipper Mid-Cap Funds 9.3% 72.9%
</TABLE>
Despite this hostile environment for value-oriented investors, Source's
investment results for 1999 were quite good--a gain of over 23%. This marked the
fourth year of the past five in which Source was up over 20%.
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Source Capital 20.7% 21.9% 25.4% 5.8% 23.1%
Russell 2500 31.7% 19.0% 24.4% 0.4% 24.2%
</TABLE>
3
<PAGE>
The obvious question for Source, as well as for other value oriented funds
which did well, is whether its good 1999 performance was because it
"cheated"--owned stocks with valuation and business parameters at variance with
its stated philosophy--or because it outperformed in a challenging environment
while investing in a manner consistent with its established principles.
In the case of Source, we believe that the latter is the case. It is true that
a significant portion of Source's strong performance came from a handful of
technology related companies which were up 100-300% in 1999. However, in
contrast to many of the market's best performing companies, which have no
earnings, modest sales, and only a very short operating history, Source's most
successful investments during 1999 are long-established companies with
significant revenues and profits, as well as leading market shares. These
companies were purchased at very modest valuations--prices far below their prior
highs.
<TABLE>
<CAPTION>
Year-End Purchase
Price Price
----------------------- Compared To
1998 1999 Gain Prior High
---------- ---------- ---- -----------
<S> <C> <C> <C> <C>
Adobe Systems 23 3/8 67 1/4 187% (54)%
Kemet 11 1/4 45 1/16 301% (57)%
Zebra Technologies 26* 58 1/2 125% (42)%
*Cost--Purchased in the first quarter 1999
</TABLE>
ADOBE SYSTEMS was first purchased during the Summer of 1998. It is a leading
developer of software which aids in the manipulation of text, graphics and
photographic images. At the time of our purchase, the market was worried about
Adobe's pace of new product introductions, as well as its history of quarterly
earnings surprises. As a result we were able to establish our Adobe position at
an average cost of $17 a share, compared with trough 1998 earnings of about 90
cents plus a balance sheet with $4 a share in cash and no debt.
In the year and a half since then, Adobe has regained Wall Street's favor. It
is now viewed as an Internet play, having introduced several new products for
web page design, as well as because of the growing importance of Acrobat's
Portable Document Format, an essential tool for the electronic transfer of many
types of information. Earnings have doubled, as has Wall Street's valuation.
Adobe is now selling at over 40x estimated 2000 earnings of $1.90 a share.
We started to trim our Adobe position in August, and have now sold all of our
shares at an average price of about $65. Although we share Wall Street's
enthusiasm for Adobe's prospects, it is selling at a price which leaves no room
for error, and we would prefer to own other high quality companies with
dramatically lower valuations.
KEMET is another major contributor to Source's 1999 performance. It is one of
the world's leading producers of tantalum and ceramic capacitors, passive
devices which store and regulate the flow of electricity, and which are used in
vast numbers in electronics products. Like semiconductors and memory chips, the
capacitor industry is a growth cyclical--production and profits have increased
dramatically over time, but not without periods of oversupply and severe
declines in earnings.
The year 1998 was one of these cyclical downturns as the collapse of Asia and
industry overcapacity pushed Kemet's earnings down from a high of $1.70 a few
years earlier to break-even.
Kemet's earnings started to improve in mid 1999, as the recovery in Asia
accelerated and demand for many electronics products, but especially wireless
telecommunications, grew rapidly. Instead of focusing on how low earnings could
go, the market is now evaluating how high peak earnings might be (we believe $3
- -$4 a share is possible) and how long the up cycle will continue. As a result,
Kemet's share price has improved dramatically to a recent high of nearly $60. We
have taken some profits, selling about 40% of our shares, but continue to hold a
substantial position.
ZEBRA TECHNOLOGIES, a company we discussed in the Source Third Quarter 1999
Shareholder Letter, is another example of a company we were able to purchase
when it was deeply out of favor on Wall Street, and whose subsequent price
recovery greatly aided last year's performance.
Despite Zebra's long-held position as the leading manufacturer of bar code
printers, a key component in the rapidly growing automated identification
industry, Wall Street in early 1999 seemed to be interested only in some
temporary problems which Zebra was having in digesting a recent major strategic
acquisition. The resulting price decline of nearly 50% gave us an opportunity to
establish our position at less than 12x expected 1999 earnings (and about 9x
current expectations of 2000 earnings).
As 1999 progressed, Zebra's results began to reflect the significant strategic
benefits of the merger rather than its challenges, and Zebra's stock price
dramatically improved, ending the year at $58 1/2, or more than double our first
quarter cost of $26 per share. Even at a recent price in the mid $60's, we are
continuing to maintain our position, though watching for signs of overvaluation.
As described above, Source achieved its strong 1999 performance without
compromising its investment philosophy. Similarly, in 2000 we will continue to
purchase only companies with established records of earning superior returns on
capital, selling at below market valuations, confident that this will produce
rewarding long-term performance for our shareholders.
Respectfully submitted,
/s/ Eric S. Ende
Eric S. Ende
Senior Vice President and
Chief Investment Officer
February 15, 2000
4
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1999
<TABLE>
<CAPTION>
COMMON STOCKS Shares Value
- ------------------------------------------------------------ ---------- ------------
<S> <C> <C>
PRODUCER DURABLE GOODS -- 19.6%
Crane Co.................................................... 546,700 $ 10,865,663
Denison International plc (ADR)*++.......................... 583,300 5,978,825
Donaldson Company, Inc...................................... 312,300 7,514,719
Graco Inc................................................... 556,500 19,964,437
IDEX Corporation............................................ 518,400 15,746,400
Kaydon Corporation.......................................... 421,800 11,309,512
Zebra Technologies Corporation (Class A)*................... 269,900 15,789,150
------------
$ 87,168,706
------------
TECHNOLOGY -- 15.6%
Adobe Systems Incorporated.................................. 91,700 $ 6,166,825
Belden Inc.................................................. 519,500 10,909,500
Channell Commercial Corporation*............................ 265,000 3,030,937
Galileo International, Inc.................................. 291,700 8,732,769
KEMET Corporation*.......................................... 533,200 24,027,325
Methode Electronics, Inc. (Class A)......................... 515,400 16,557,225
------------
$ 69,424,581
------------
BUSINESS SERVICES & SUPPLIES -- 13.8%
Applied Graphics Technologies, Inc.*........................ 744,380 $ 6,420,277
Bacou USA, Inc.*............................................ 448,100 6,749,506
Expeditors International of Washington, Inc................. 87,200 3,820,450
HON INDUSTRIES Inc.......................................... 593,000 13,008,938
JLK Direct Distribution Inc. (Class A)*..................... 730,700 7,535,344
Manpower Inc................................................ 308,500 11,607,313
Office Depot, Inc.*......................................... 538,900 5,894,219
Romac International Inc.*................................... 451,900 6,072,406
------------
$ 61,108,453
------------
DISTRIBUTION -- 7.0%
Arrow Electronics, Inc.*.................................... 370,000 $ 9,388,750
Black Box Corporation*...................................... 317,800 21,292,600
Huttig Building Products, Inc.*............................. 121,488 599,847
------------
$ 31,281,197
------------
HEALTH CARE -- 6.9%
DENTSPLY International Inc.................................. 399,100 $ 9,428,738
Landauer, Inc............................................... 345,000 7,546,875
Ocular Sciences, Inc.*...................................... 722,900 13,644,737
------------
$ 30,620,350
------------
RETAILING -- 5.6%
Circuit City Stores, Inc.................................... 290,600 $ 13,095,163
O'Reilly Automotive, Inc.*.................................. 542,800 11,670,200
------------
$ 24,765,363
------------
MATERIALS -- 3.9%
Martin Marietta Materials, Inc.............................. 72,000 $ 2,952,000
OM Group, Inc............................................... 421,500 14,515,406
------------
$ 17,467,406
------------
CONSUMER NON-DURABLE GOODS -- 2.7%
Lancaster Colony Corporation................................ 360,450 $ 11,939,906
------------
ENTERTAINMENT -- 2.5%
Carnival Corporation........................................ 236,600 $ 11,312,437
------------
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1999
<TABLE>
<CAPTION>
Shares or
Face
COMMON STOCKS (CONTINUED) Amount Value
- ------------------------------------------------------------ ---------- ------------
<S> <C> <C>
INSURANCE -- 2.2%
Brown & Brown, Inc.......................................... 259,350 $ 9,936,347
------------
CONSUMER DURABLE GOODS -- 2.1%
Clayton Homes, Inc.......................................... 994,000 $ 9,132,375
------------
EDUCATION -- 1.4%
Strayer Education, Inc...................................... 312,100 $ 6,163,975
------------
ENERGY -- 1.2%
Schlumberger Limited........................................ 84,500 $ 4,753,125
Transocean Sedco Forex Inc.................................. 16,359 551,094
------------
$ 5,304,219
------------
TOTAL COMMON STOCKS -- 84.5% (Cost $268,704,905)............ $375,625,315
------------
PREFERRED STOCKS -- 1.7% (Cost $8,913,767)
Crown American Realty Trust................................. 59,000 $ 2,087,125
New Plan Excel Realty Trust, Cvt............................ 225,000 4,781,250
Prime Retail, Inc., Cvt. (Series B)......................... 40,000 472,500
------------
$ 7,340,875
------------
CONVERTIBLE BONDS AND DEBENTURES
HEALTH CARE -- 1.9%
IVAX Corporation -- 6 1/2% 2001............................. $1,500,000 $ 1,456,875
NovaCare, Inc. -- 5 1/2% 2000............................... 5,250,000 5,230,312
Quintiles Transnational Corp. -- 4 1/4% 2000................ 2,000,000 1,947,500
------------
$ 8,634,687
------------
PRODUCER DURABLE GOODS -- 1.4%
Checkpoint Systems, Inc. -- 5 1/4% 2005..................... $2,500,000 $ 1,712,500
DRS Technologies, Inc. -- 9% 2003........................... 2,000,000 2,260,000
MascoTech, Inc. -- 4 1/2% 2003.............................. 3,000,000 2,193,750
------------
$ 6,166,250
------------
REAL ESTATE INVESTMENT TRUST -- 1.4%
CenterTrust Retail Properties, Inc.
-- 7 1/2% 2001 (Series A)................................. $1,050,000 $ 987,000
-- 7 1/2% 2001 (Series B)................................. 2,750,000 2,585,000
Rockefeller Center Properties, Inc. -- 0% 2000.............. 3,005,000 2,546,738
------------
$ 6,118,738
------------
TELECOMMUNICATIONS -- 1.4%
World Access, Inc.
-- 4 1/2% 2002............................................ $6,005,000 $ 4,894,075
-- 4 1/2% 2002+........................................... 1,500,000 1,222,500
------------
$ 6,116,575
------------
TRANSPORTATION -- 1.0%
Offshore Logistics, Inc. -- 6% 2003......................... $5,500,000 $ 4,620,000
------------
DISTRIBUTION -- 0.7%
Reptron Electronics, Inc. -- 6 3/4% 2004.................... $5,980,000 $ 3,109,600
------------
CONSUMER NON-DURABLE GOODS -- 0.5%
Bell Sports Corp. -- 4 1/4% 2000............................ $ 385,000 $ 333,025
Central Garden & Pet Co. -- 6% 2003......................... 2,500,000 1,843,750
------------
$ 2,176,775
------------
TECHNOLOGY -- 0.1%
Read-Rite Corporation -- 6 1/2% 2004........................ $1,000,000 $ 420,000
------------
TOTAL CONVERTIBLE BONDS AND DEBENTURES -- 8.4% (Cost
$39,979,554)............................................... $ 37,362,625
------------
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1999
<TABLE>
<CAPTION>
Shares or
Face
NON-CONVERTIBLE BONDS AND DEBENTURES Amount Value
- ------------------------------------------------------------ ---------- ------------
<S> <C> <C>
CORPORATE -- 2.1%
Advantica Restaurant Group, Inc. -- 11 1/4% 2008............ $2,131,100 $ 1,614,308
DLJ Mortgage Acceptance Corp. (Series 1997-E Class B)
-- 7.5481% 2026+........................................... 968,200 703,798
Pathmark Stores, Inc.
-- 11 5/8% 2002........................................... 3,000,000 1,065,000
-- 12 5/8% 2002........................................... 3,000,000 975,000
Trump Atlantic City Associates -- 11 1/4% 2006.............. 4,000,000 3,250,000
United Stationers Inc. -- 8 3/8% 2008....................... 2,000,000 1,840,000
------------
$ 9,448,106
------------
U.S. GOVERNMENT AND AGENCIES -- 0.3%
Federal Home Loan Mortgage Corporation
-- 6 1/2% 2023 (IO)....................................... $2,072,000 $ 223,712
-- 10.15% 2006 (REMIC).................................... 54,800 54,886
Government National Mortgage Association (Mobile Home)
-- 9 3/4% 2010............................................ 1,026,600 1,067,343
------------
$ 1,345,941
------------
TOTAL NON-CONVERTIBLE BONDS
AND DEBENTURES -- 2.4% (Cost $14,249,954)................. $ 10,794,047
------------
TOTAL INVESTMENT SECURITIES -- 97.0% (Cost $331,848,180).... $431,122,862
------------
SHORT-TERM INVESTMENTS -- 2.8% (Cost $12,268,611)
Short-term Corporate Notes:
General Electric Capital Corporation -- 6.45% 1/18/00..... $6,000,000 $ 5,980,825
Grainger (W.W.), Inc. -- 6.3% 1/18/00..................... 3,000,000 2,991,075
Toyota Motor Credit Corporation -- 5.27% 2/1/00........... 2,500,000 2,488,655
State Street Bank Repurchase Agreement -- 2 1/2% 1/3/00
(Collateralized by U.S. Treasury Bonds -- 7 1/8% 2023
market value $829,250)..................................... 808,000 808,056
------------
$ 12,268,611
------------
TOTAL INVESTMENTS -- 99.8% (Cost $344,116,791).............. $443,391,473
Other assets and liabilities, net -- 0.2%................... 996,618
------------
TOTAL NET ASSETS -- 100%.................................... $444,388,091
============
</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. World Access, Inc. was
purchased on July 29, 1999, and DLJ Mortgage Acceptance Corp. was purchased
on September 8, 1997. These restricted securities constituted 0.4% of total
net assets at December 31, 1999.
++ Affiliate as defined in the Investment Company Act of 1940 by reason of
ownership of 5% or more of its outstanding voting securities. There were no
transactions in the securities of this affiliate for the year ended December
31, 1999.
See notes to financial statements.
7
<PAGE>
STATISTICAL PROFILE
(UNAUDITED)
PRINCIPAL COMMON STOCK HOLDINGS
<TABLE>
<CAPTION>
Fundamental Data Valuation Data
------------------------------------------------------- ---------------------------
10 Year Record* Profitability
----------------- Total -------------------------
Growth Yrs. EPS Debt % Ret. on Ret. on P/E Price/Book Div.
Rate Declined Capital Beg. Equity Avg. Assets Ratio Value Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Adobe Systems 14% 2 0% 38% 25% 44.5x 16.7x 0.1%
Applied Graphics Technologies ** ** 46 3 1 17.6 0.5 0.0
Arrow Electronics 25 4 50 10 4 16.5 1.6 0.0
Bacou USA ** ** 46 19 8 9.9 1.5 0.0
Belden 8 2 53 19 7 12.5 2.1 1.0
Black Box 27 0 27 28 16 27.2 6.0 0.0
Brown & Brown 16 1 6 32 12 19.3 5.3 1.4
Carnival 17 0 18 23 13 28.8 5.2 0.9
Channell Commercial 30 1 37 18 9 11.7 1.7 0.0
Circuit City 13 2 19 17 8 31.1 4.9 0.2
Clayton Homes 21 0 9 18 11 8.4 1.3 0.7
Crane 9 1 35 20 9 10.9 2.3 2.0
Denison International (ADR) 1 1 6 14 8 11.0 1.4 0.0
DENTSPLY International ** ** 24 22 10 13.9 2.7 1.1
Donaldson 17 0 29 27 13 17.3 4.2 1.2
Expeditors International 19 1 5 27 12 43.0 8.9 0.2
Galileo International 25 0 59 28 17 13.4 6.9 1.2
Graco 17 2 63 609 24 12.8 14.6 1.6
HON INDUSTRIES 12 2 24 24 12 12.8 2.7 1.7
IDEX 12 1 44 19 8 16.8 2.8 1.8
JLK Direct Distribution (Cl. A) ** ** 3 10 7 12.6 1.1 0.0
Kaydon 11 1 0 21 15 14.0 2.7 1.6
KEMET 10 2 29 11 5 52.4 5.4 0.0
Lancaster Colony 18 0 6 26 19 13.1 3.2 1.9
Landauer 6 1 0 41 25 16.4 7.2 6.4
Manpower 19 1 40 21 6 20.7 4.6 0.5
Martin Marietta Materials 16 0 45 19 8 15.2 2.5 1.3
Methode Electronics (Cl. A) 17 1 0 14 11 33.5 4.4 0.6
Ocular Sciences ** ** 2 25 18 12.0 2.4 0.0
Office Depot 32 1 22 17 8 12.4 2.1 0.0
OM Group 16 0 46 14 6 14.9 1.9 1.2
O'Reilly Automotive 25 0 15 19 8 24.2 2.8 0.0
Romac International ** ** 4 8 6 29.9 2.4 0.0
Schlumberger 2 4 34 7 4 54.6 4.1 1.3
Strayer Education 36 0 0 24 18 16.9 4.0 1.2
Zebra Technologies (Cl.A) 22 1 0 22 18 30.3 5.6 0.0
- -------------------------------------------------------------------------------------------------------------------------------
Source Portfolio 15 1 31 18 9 17.2 2.8 0.9
Russell 2500 10 ** 40 12 5 31.5 2.9 1.3
- -------------------------------------------------------------------------------------------------------------------------------
* 5 to 9 year data used when 10 years not available
**Comparable data not available
</TABLE>
8
<PAGE>
MAJOR PORTFOLIO CHANGES
(UNAUDITED)
Quarter Ended December 31, 1999
<TABLE>
<CAPTION>
Shares or
Face Amount
---------------
<S> <C>
NET PURCHASES
COMMON STOCKS
Clayton Homes, Inc.......................................... 223,500 shs.
Crane Co.................................................... 59,000 shs.
Landauer, Inc............................................... 86,800 shs.
Martin Marietta Materials, Inc.(1).......................... 72,000 shs.
OM Group, Inc............................................... 97,000 shs.
Strayer Education, Inc.(1).................................. 312,100 shs.
PREFERRED STOCKS
Crown American Realty Trust................................. 20,000 shs.
New Plan Excel Realty Trust, Cvt............................ 25,000 shs.
CONVERTIBLE SECURITIES
Checkpoint Systems, Inc. -- 5 1/4% 2005..................... $ 500,000
MascoTech, Inc. -- 4 1/2% 2003.............................. $ 1,000,000
Quintiles Transnational Corp. -- 4 1/4% 2000(1)............. $ 2,000,000
NON-CONVERTIBLE SECURITY
Pathmark Stores, Inc. -- 11 5/8% 2002(1).................... $ 3,000,000
NET SALES
COMMON STOCKS
Adobe Systems Incorporated.................................. 126,800 shs.
Black Box Corporation....................................... 82,000 shs.
Circuit City Stores, Inc.................................... 25,000 shs.
Expeditors International of Washington, Inc................. 65,000 shs.
Federal Signal Corporation(2)............................... 164,700 shs.
KEMET Corporation........................................... 162,000 shs.
Manpower Inc................................................ 43,500 shs.
NON-CONVERTIBLE SECURITY
American Telecasting, Inc. -- 14 1/2% 2008(2)............... $ 3,000,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
9
<PAGE>
FEDERAL INCOME TAX INFORMATION
(UNAUDITED)
CALENDAR 1999
CASH DIVIDENDS AND DISTRIBUTIONS:
<TABLE>
<CAPTION>
(1) (2)
AMOUNT ORDINARY LONG-TERM
PAID INCOME CAPITAL GAIN
DATE PAID PER SHARE DIVIDENDS DISTRIBUTIONS
- --------- ---------- --------- -------------
<S> <C> <C> <C>
PREFERRED STOCK:
03/15/99 $0.60 $ 0.60 --
06/15/99 0.60 0.60 --
09/15/99 0.60 0.60 --
12/15/99 0.60 0.60 --
----- ------- -------
TOTAL $2.40 $ 2.40 --
===== ======= =======
COMMON STOCK:
03/15/99 $1.05 $0.4542 $0.5958
06/15/99 1.05 -- 1.0500
09/15/99 1.10 -- 1.1000
12/15/99 1.10 -- 1.1000
12/15/99 (special year-end) 3.56 -- 3.5600
----- ------- -------
TOTAL $7.86 $0.4542 $7.4058
===== ======= =======
</TABLE>
The amount in column (1) is to be included as dividend income on your tax
return. For corporate shareholders, 39.7% of the amount in column (1) qualifies
for the 70% corporate dividends received deduction.
In accordance with the provisions of the Internal Revenue Code, the amounts in
column (2) are long-term capital gain distributions and all amounts qualify as
20% rate gain distributions.
A Form 1099 has been mailed to all shareholders of record on dividend record
dates setting forth the specific amounts to be included in their 1999 tax
returns. Source Capital did not elect to retain any undistributed long-term
capital gains for the year ended December 31, 1999. Therefore, Common
shareholders will not receive a Form 2439 for 1999.
- --------------------------------------------------------------------------------
NOTICE TO DIVIDEND REINVESTMENT PLAN PARTICIPANTS:
The information above shows the cash distributions paid by Source Capital
during 1999. When additional shares are issued by Source Capital under the
Automatic Reinvestment Plan at a discount from the market price, a participant
in the Plan is treated for federal income tax purposes as having received a
taxable distribution equal to the market value of the shares purchased. In
effect, the discount from market price at which shares are purchased is added to
the amount of the cash distribution to determine the total value of the taxable
distribution. Such value also becomes the participant's tax basis for the shares
purchased under the Plan.
The distribution paid March 15, 1999 was reinvested at a discount from the
market price and the additional taxable amount of this distribution was $2.3281
for each Common share purchased.
10
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, 1999
------------------------------
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(cost $331,848,180) -- Note A......................... $431,122,862
Short-term investments -- at cost plus interest earned
(maturities 60 days or less) -- Note A................ 12,268,611 $443,391,473
------------
Cash...................................................... 916
Receivable for:
Dividends and accrued interest.......................... $ 1,351,605
Investment securities sold.............................. 169,994 1,521,599
------------ ------------
$444,913,988
LIABILITIES
Payable for:
Advisory fees........................................... $ 256,363
Accrued dividends -- Preferred Stock.................... 196,921
Accrued expenses........................................ 72,613 525,897
------------ ------------
TOTAL NET ASSETS -- December 31, 1999....................... $444,388,091
============
Assets applicable to Preferred Stock at a liquidation
preference of
$27.50 per share (asset coverage 821%) -- Note B........ $ 54,153,330
============
Net assets applicable to Common Stock -- $50.70 per
share................................................... $390,234,761
============
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 7,697,644 shares -- Note B.................. 7,697,644
Additional Paid-in Capital................................ 311,296,815
Undistributed net investment income....................... 2,767,658
Undistributed net realized gain on investments............ 17,443,656
Unrealized appreciation of investments.................... 99,274,682
------------
TOTAL NET ASSETS -- December 31, 1999....................... $444,388,091
============
</TABLE>
See notes to financial statements.
11
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<S> <C> <C> <C> <C>
For the year ended December 31,
-----------------------------------------------------------
1999 1998
-------------------------- ---------------------------
INVESTMENT INCOME
Income:
Interest......................................... $ 5,090,412 $ 6,087,760
Dividends........................................ 3,715,842 4,145,775
----------- ------------
$ 8,806,254 $ 10,233,535
Expenses -- Note C:
Advisory fees.................................... $ 2,933,322 $ 2,886,224
Transfer agent fees and expenses................. 265,467 276,110
Reports to shareholders.......................... 192,591 181,622
Directors' fees and expenses..................... 88,567 79,000
Taxes, other than federal income tax............. 65,820 65,800
Custodian fees and expenses...................... 45,575 47,675
Legal and auditing fees.......................... 39,211 39,504
Registration and filing fees..................... 16,930 16,758
Other expenses................................... 28,058 3,675,541 23,209 3,615,902
------------ ----------- ------------ ------------
Net investment income -- Note A.............. $ 5,130,713 $ 6,617,633
----------- ------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain on investments:
Proceeds from sale of investment securities
(excluding short-term corporate notes with
maturities 60 days or less).................... $148,060,551 $135,720,589
Cost of investment securities sold............... 81,123,861 100,213,660
------------ ------------
Net realized gain on investments -- Notes A and
D............................................ $66,936,690 $ 35,506,929
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year..... $ 87,983,547 $105,473,310
Unrealized appreciation at end of year........... 99,274,682 87,983,547
------------ ------------
Increase (decrease) in unrealized appreciation
of investments............................... 11,291,135 (17,489,763)
----------- ------------
Net realized and unrealized gain on
investments................................ $78,227,825 $ 18,017,166
----------- ------------
NET INCREASE IN TOTAL NET
ASSETS RESULTING FROM OPERATIONS................... $83,358,538 $ 24,634,799
=========== ============
</TABLE>
See notes to financial statements.
12
<PAGE>
STATEMENT OF CHANGES IN TOTAL NET ASSETS
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 1998
------------------------------ ------------------------------
INCREASE (DECREASE) IN TOTAL NET ASSETS
Operations:
Net investment income.......................... $ 5,130,713 $ 6,617,633
Net realized gain on investments
-- Notes A and D............................. 66,936,690 35,506,929
Increase (decrease) in unrealized appreciation
of investments............................... 11,291,135 (17,489,763)
------------ ------------
Increase in total net assets resulting
from operations................................ $ 83,358,538 $ 24,634,799
Distributions to Preferred shareholders:
From net investment income..................... (4,726,109) (4,726,109)
Distributions to Common shareholders:
From net investment income..................... $ (709,997) $ (3,043,180)
From net realized capital gains................ (58,801,250) (59,511,247) (31,365,719) (34,408,899)
------------ ------------
Proceeds from shares issued for distributions
reinvested by shareholders -- Note B........... 7,490,362 6,786,649
------------ ------------
Increase (decrease) in total net assets.......... $ 26,611,544 $ (7,713,560)
TOTAL NET ASSETS
Beginning of year, including
undistributed net investment income
of $3,073,051 and $4,224,707................... 417,776,547 425,490,107
------------ ------------
End of year, including
undistributed net investment income
of $2,767,658 and $3,073,051................... $444,388,091 $417,776,547
============ ============
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
NOTICE OF SOURCE OF DISTRIBUTIONS
(Common Stock Only)
Since the sources from which distributions are paid cannot be determined
until the end of each fiscal year, the following information amends the
statements forwarded to Common shareholders with each distribution.
<TABLE>
<CAPTION>
Source of Distributions
-----------------------------
<S> <C> <C> <C>
Amount Net
Paid Investment Net Realized
Date Paid Per Share Income Capital Gains
- ----------------- ----- ------ ------
3/15/99 $1.05 $0.094 $0.956
6/15/99 1.05 -- 1.050
9/15/99 1.10 -- 1.100
12/15/99 1.10 -- 1.100
12/15/99(special) 3.56 -- 3.560
----- ------ ------
$7.86 $0.094 $7.766
===== ====== ======
</TABLE>
The source of distributions for financial reporting purposes differs from
federal income tax reporting. See page 10 for federal income tax information.
13
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of Common Stock outstanding throughout each year
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year.................. $ 48.23 $ 50.20 $ 45.35 $ 42.58 $ 38.52
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income............................... $ 0.67 $ 0.88 $ 1.08 $ 1.30 $ 1.48
Net realized and unrealized gain
on investment securities......................... 10.27 2.37 10.50 8.25 6.84
-------- -------- -------- -------- --------
Total from investment operations.................. $ 10.94 $ 3.25 $ 11.58 $ 9.55 $ 8.32
-------- -------- -------- -------- --------
Distributions to Preferred shareholders:
From net investment income.......................... $ (0.62) $ (0.63) $ (0.65) $ (0.65) $ (0.66)
Distributions to Common shareholders:
From net investment income.......................... (0.09) (0.41) (0.32) (0.51) (0.50)
From net realized gains............................. (7.77) (4.21) (5.76) (5.62) (3.10)
-------- -------- -------- -------- --------
Total distributions............................... $ (8.48) $ (5.25) $ (6.73) $ (6.78) $ (4.26)
-------- -------- -------- -------- --------
Effect of shares issued for distributions
reinvested by shareholders.......................... $ 0.01 $ 0.03 -- -- --
-------- -------- -------- -------- --------
Net asset value at end of year........................ $ 50.70 $ 48.23 $ 50.20 $ 45.35 $ 42.58
======== ======== ======== ======== ========
Per share market value at end of year................. $ 48.25 $ 49.06 $ 51.06 $ 45.50 $ 41.88
Total investment return(1)............................ 15.2% 5.8% 26.9% 24.5% 23.4%
Net asset value total return(2)....................... 23.1% 5.8% 25.4% 21.9% 20.7%
Ratios/supplemental data:
Net assets at end of year (in thousands)............ $444,388 $417,777 $425,490 $382,146 $362,087
Ratio of expenses to average net assets............. 0.87% 0.87% 0.87% 0.89% 0.91%
Ratio of net income to average net assets........... 1.21% 1.59% 1.95% 2.52% 3.04%
Portfolio turnover rate............................. 23.51% 28.34% 27.46% 41.04% 51.44%
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)........................... $225.67 $212.15 $216.07 $194.06 $183.87
Involuntary liquidation preference per share.......... $27.50 $27.50 $27.50 $27.50 $27.50
Average market value per share(4)..................... $28.54 $29.95 $28.72 $28.50 $28.00
</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, 1999 June 30, 1999 September 30, 1999 December 31, 1999
-------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Total investment income...................... $ 2,073,707 $ 2,074,296 $ 2,290,001 $ 2,368,250
Net investment income........................ $ 1,193,353 $ 1,110,058 $ 1,360,503 $ 1,466,799
Income available to Common................... $ 11,826 $ (71,469) $ 178,975 $ 285,272
Per share Common........................... -- $(0.01) $0.02 $0.04
Net realized and unrealized
appreciation (depreciation)................ $(32,237,518) $87,411,808 $(20,078,280) $43,131,815
Per share Common........................... $(4.28) $11.54 $(2.65) $5.66
<CAPTION>
Quarter ended
--------------------------------------------------------------------
March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998
-------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Total investment income...................... $ 2,980,555 $ 2,692,244 $ 2,297,189 $ 2,263,547
Net investment income........................ $ 2,008,371 $ 1,707,018 $ 1,481,974 $ 1,420,270
Income available to Common................... $ 826,844 $ 525,491 $ 300,446 $ 238,743
Per share Common........................... $0.11 $0.07 $0.04 $0.03
Net realized and unrealized
appreciation (depreciation)................ $ 33,352,971 $(5,124,829) $(77,006,794) $66,795,818
Per share Common........................... $4.51 $(0.70) $(10.33) $8.89
</TABLE>
14
<PAGE>
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 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 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 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 corporate notes with maturities of 60 days or less are valued at cost plus
interest earned, which approximates market value. 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 and taxable net realized gain on investments to its
shareholders in accordance with the minimum distribution requirements of the
Code.
3. 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.
4. 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. The ratios of expenses and net income to average net assets do not reflect
the effect of dividend payments to Preferred shareholders.
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, 1999 and 1998, the Company issued
157,584 and 142,801 shares of Common Stock, respectively, under its Reinvestment
Plan for Common and Preferred shareholders.
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, 1999 and 1998, the Company paid aggregate
fees of $87,500 and $79,000, respectively, to all Directors who are not
affiliated persons of the Investment Adviser. During the years ended December
31, 1999 and 1998, the Company incurred legal fees of $6,886 and $7,180,
respectively, payable to O'Melveny & Myers LLP, counsel for the Company. A
Director of the Company is of counsel to, and a retired partner of, that firm.
NOTE D--PURCHASES AND SALES OF SECURITIES
The cost of purchases of investment securities (excluding short-term
corporate notes with maturities of 60 days or less) aggregated $95,788,472 and
$112,593,877 for the years ended December 31, 1999 and 1998, respectively.
Realized gains and losses are based on the specific-certificate identification
method. The cost of investment securities owned at December 31, 1999 was the
same for federal income tax and financial reporting purposes. Gross unrealized
appreciation and depreciation for all investments at December 31, 1999 for
federal income tax purposes was $126,540,968 and $27,266,286, respectively.
NOTE E--QUARTERLY INFORMATION
See page 14 for unaudited quarterly results of investment operations.
15
<PAGE>
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. (the "Company"), including the portfolio of investments, as
of December 31, 1999, 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 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 auditing standards generally
accepted in the United States. 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 and financial highlights. Our procedures included
confirmation of securities owned as of December 31, 1999, 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. as of December 31, 1999, the results of its operations and the
changes in its 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 accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Los Angeles, California
January 21, 2000
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DIVIDEND 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 are paid in or reinvested in shares of Common Stock of the Company
("Dividend Shares"). The Chase Manhattan Bank ("Agent") c/o ChaseMellon
Shareholder Services, L.L.C., Investment Services, P.O. Box 3338, South
Hackensack, New Jersey 07606-1938, 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. The Company reserves the right to amend or terminate the Plan.
Purchases of the Company's shares are 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. The Agent purchases outstanding shares in the market 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. 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,
accepts payment of the dividend, or the remaining portion thereof, in authorized
but unissued shares of Common Stock of the Company on the payment date. Such
shares are 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% of the closing market price per
share on the payment date. There are no brokerage charges with respect to shares
issued directly by the Company to satisfy the dividend reinvestment
requirements. However, each participant pays 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 is the average cost, including brokerage commissions, of
any shares purchased in the open market plus the cost of any shares issued by
the Company.
For Federal income tax purposes, shareholders who reinvest distributions are
treated as receiving distributions in 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 outstanding shares are purchased in
the open market, the taxable distribution equals the cash distribution that
would have been paid. In either event, the cost basis in the shares received
equals the amount recognized as a taxable distribution.
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.
All record holders of Common Stock are also 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").
Under the Cash Plan, shares are purchased in the market and no shares are issued
by the Company. A brochure describing the terms and conditions of the Cash Plan,
including fees and expenses, is available from the Agent.
17
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<TABLE>
<S> <C>
SOURCE CAPITAL, INC.
11400 West Olympic BULK RATE
Boulevard, Suite U.S. POSTAGE
1200 PAID
Los Angeles, CMSS
California 90064
</TABLE>
