<PAGE>
[LOGO]
SOURCE CAPITAL, INC.
SEMI-ANNUAL REPORT
for the six months ended June 30, 2000
<PAGE>
SOURCE CAPITAL, INC.
[LOGO]
DIRECTORS
Willard H. Altman, Jr.
Wesley E. Bellwood
Eric S. Ende
David Rees
Paul G. Schloemer
Lawrence J. Sheehan
OFFICERS
Eric S. Ende, 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
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, 2000 December 31, 1999
--------------------------- ---------------------------
Total Total
Net Per Common Net Per Common
Assets Share Assets Share
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Beginning of period.................................................... $ 444,388,091 $ 50.70 $ 417,776,547 $ 48.23
Net gain (loss) on investments, realized and unrealized................ (14,023,032) (1.81) 78,227,825 10.27
Income available to Common shareholders................................ 603,663 0.08 404,604 0.05
Regular distributions to Common shareholders........................... (17,351,391) (2.25) (59,511,247) (7.86)
Proceeds from shares issued for distributions reinvested
by shareholders...................................................... 3,120,918 -- 7,490,362 0.01
-------------- --------- -------------- ---------
Net changes during period.......................................... $ (27,649,842) $ (3.98) $ 26,611,544 $ 2.47
-------------- --------- -------------- ---------
End of period.......................................................... $ 416,738,249 $ 46.72 $ 444,388,091 $ 50.70
============== ========= ============== =========
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999 December 31, 1998
------------- ----------------- -----------------
<S> <C> <C> <C>
Common market price per share........................................... 49 9/16 48 1/4 49 1/16
Common market premium (discount) to net asset value..................... 6.1% (4.8)% 1.7%
Preferred asset coverage................................................ 770% 821% 771%
Preferred liquidation preference per share.............................. $27.50 $27.50 $27.50
Preferred market price per share........................................ 27 13/16 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 $417,000,000. 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 7,760,207
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 20 subsequent increases to the current rate of $4.60.
Maintenance of the current $4.60 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 $46.00.
1
<PAGE>
LETTER TO SHAREHOLDERS
TO OUR SHAREHOLDERS:
Source Capital's total net assets decreased from $456,768,629 to $416,738,249
during the second quarter. Net asset value per Common share amounted to $46.72
at June 30, 2000 compared with $52.12 at March 31, 2000 and $50.70 at year-end
1999. These changes in net asset value were net of cash distributions of $1.10
and $1.15 paid in the first and second quarters, respectively.
INVESTMENT RESULTS, 2000 FIRST HALF
For the six months ended June 30, 2000 the net asset value per share of Source
Capital's Common Stock decreased by 2.4%, including distributions paid during
the period, while total net assets declined 2.7%. These returns compare with a
5.7% increase in the Russell 2500 Index. The foregoing changes were calculated
on the basis of reinvesting all dividends and distributions.
INVESTMENT RESULTS, 2000 SECOND QUARTER
In the most recent quarter, Source Capital's net asset value per share of
Common Stock decreased 8.3%, including the $1.15 distribution paid during the
period, while total net assets declined 10.0%, both on a reinvestment basis. In
comparison, the Russell 2500 Index decreased 4.0% during the quarter, also on a
reinvestment basis.
NET INVESTMENT INCOME
Net investment income amounted to $1,534,863 and $2,966,717 for the second
quarter and six months, respectively, as against $1,110,058 and $2,303,411 in
the comparable periods of 1999. After providing for Preferred dividends, net
investment income per Common share was $0.05 and $0.08 for the quarter and
six-month periods, respectively, compared to each of the corresponding periods
of 1999 when Preferred dividends exceeded net investment income by $0.01.
DISTRIBUTIONS TO COMMON SHAREHOLDERS
A regular quarterly distribution of $1.15 per share was paid on June 15, 2000
to shareholders of record on May 26, 2000. This payment marks the 24th
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 20 increases in the distribution rate totaling 229%--from the original $1.40
rate in June 1976, to the current $4.60 rate. The growth in the net asset value
which has permitted this continuing expansion in cash distributions has been
achieved despite distributions in excess of net investment income of
$423,925,154 or $62.87 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 $4.60 rate is dependent upon achieving
long-term investment results which sustain a net asset value of approximately
$46.00.
PREFERRED DIVIDENDS
The regular Preferred dividend of $0.60 per share was paid on June 15, 2000,
to shareholders of record on May 26, 2000. The changes in the Company's total
net assets since year-end 1999 have resulted in changes in the Preferred shares'
asset coverage from 821% at December 31, 1999 to 843% at March 31, 2000, and
770% at June 30, 2000. The increase in net investment income led to a rise in
Preferred dividend coverage to 130% for the second quarter and 126% for the six
months, compared to 94% and 97% for the corresponding periods of 1999.
MARKET PRICE OF SOURCE CAPITAL SHARES
The market price of Source Capital Common Stock increased from $48 1/4 to
$49 9/16 during the first half of 2000. As this $1.31 increase in market price
was more than the $3.98 decline in the underlying net asset value, the market
discount from net asset value of 4.8% at year-end 1999 reverted to a premium of
6.1% at June 30, 2000. The market price of Source Capital Preferred Stock
decreased to $27 13/16 at June 30, 2000 from $28 at year-end 1999.
COMMENTARY
The stock market retreated in the second quarter, with all major indexes
declining. Source participated in this negative performance, with a decline of
8.3%, compared to 4% for the Russell 2500. For most longer periods Source has
done well, with the exception of the past 12 months, when the outperformance of
tech stocks has distorted the results.
<TABLE>
<CAPTION>
Periods Ending June 30, 2000
--------------------------------------------------
Three
Quarter One Year Years* Five Years*
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Source (8.3)% 2.4% 11.7% 15.7%
Russell 2500 (4.0) 18.3 13.8 17.0
</TABLE>
* Annualized
This quarter, I thought it might be of interest to shareholders to discuss
some companies which have been in Source Capital's portfolio for a number of
years, but are still probably relatively unfamiliar. They each possess the
attributes we seek--high returns on capital, good growth prospects, and strong
balance sheets, combined with modest valuations.
None of these companies are in glamorous businesses, but each is the leader in
its industry, has a reliable revenue stream on which it earns high margins, and
has demonstrated the ability to reinvest capital both in its existing business
and in closely related acquisitions.
BACOU USA is the leader in making personal protection equipment--products that
protect industrial and construction workers from injuries. Starting out with the
North American rights to the well-known Uvex brand of safety glasses, Bacou used
its cash flow to acquire leading brands of other safety products, notably
hearing protection, gloves, and respiratory systems. In each of its major
product categories, Bacou holds the first or second market share position.
Bacou's products are sold principally through industrial safety equipment
distributors or distributors of general industrial supplies like W.W. Grainger.
Having a broader product line gives manufacturers like Bacou more clout with
these distributors, and strengthens its competitive advantage compared to others
who sell only a few products. Attaining and increasing this competitive
advantage is the main stimulus behind Bacou's successful acquisition program.
Bacou USA is majority owned by a private French company, Bacou S.A. The French
firm recently announced that, in order to insure an adequate supply of capital
to continue the industry consolidation acquisition strategy, both in the U.S.
and in Europe, Bacou will put itself up for sale. Both the majority French
shares and the minority shares in Bacou USA would be sold on the same basis. If
the sale process is successful, a fall announcement and year-end closing would
be likely. A transaction price in the high $20s would be a realistic
expectation. Prior to the sale announcement Bacou was trading at $20, compared
with expected 2000 earnings of $1.80 per share. It is now about $24.
2
<PAGE>
DENTSPLY INTERNATIONAL is the leading worldwide manufacturer of dental
products. This is an industry which has had excellent growth rates, driven by
improving technology, an aging population, and rising income levels in
developing countries. Dentsply's leading market shares for most of its products
and its strong cash flows have enabled it to fully participate in this industry
growth. It has invested aggressively in research and development and has
steadily introduced new and innovative products. The company is enhancing the
effectiveness of these products by significantly expanding its sales force,
which calls directly on dentists. Finally, Dentsply has been successful in
expanding the scope of its business through its acquisition program, adding a
number of new product areas to its portfolio, most notably endodontics.
DONALDSON COMPANY is a manufacturer of filtration products for large engines.
Its product mix includes both air and liquid filters, as well as exhaust and
emission control products. Although investors have traditionally viewed
Donaldson as strongly linked to the U.S. heavy truck cycle, this is in fact no
longer the case. Half of Donaldson's mobile engine business comes from products
sold into the aftermarket, where demand depends on miles driven, not new truck
purchases. Much of the rest of its engine business is with producers of
agricultural or construction equipment (Deere, Caterpillar, etc.) or foreign
truck manufacturers. Although these are cyclical businesses, their cycles are
generally out of phase with U.S. heavy trucks. In addition, Donaldson has a
substantial business providing filters for stationary gas turbine engines, as
well as for machinery in factories. Finally, Donaldson sells specialty filters
to such rapidly growing markets as disk drives and semiconductor manufacturing.
Donaldson's success at diversifying its customer base has produced a decade of
double-digit earnings growth, along with high returns on capital, a record which
we feel is not reflected in its current valuation of just 13x trailing 12-month
earnings.
<TABLE>
<CAPTION>
Bacou Dentsply Donaldson Russell 2500
----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Recent Price $ 24 $ 35 $ 20 --
Return on Equity 19% 22% 28% 12%
Operating Margin 19% 18% 10% 10%
10 Year EPS Growth Rate 14% 14% 16% 10%
Debt % Capital 40% 23% 41% 44%
PE 14x 19x 13x 25x
</TABLE>
As can be seen in the table, these companies have demonstrated financial
performance well above the average as represented by the Russell 2500, while
selling at lower valuations. This relationship, which is true of the Source
portfolio as a whole, is one of our key investment objectives, and a reason that
we are optimistic about Source's future prospects.
Respectfully submitted,
/s/ ERIC S. ENDE
Eric S. Ende
President and
Chief Investment Officer
August 5, 2000
3
<PAGE>
PORTFOLIO OF INVESTMENTS
June 30, 2000
<TABLE>
<CAPTION>
COMMON STOCKS Shares Value
---------------------------------------------------------------------------------------- ----------- --------------
<S> <C> <C>
PRODUCER DURABLE GOODS -- 22.4%
Crane Co................................................................................ 546,700 $ 13,291,644
Denison International plc (ADR)*++...................................................... 630,900 7,965,112
Donaldson Company, Inc.................................................................. 420,400 8,302,900
Graco Inc............................................................................... 556,500 18,086,250
IDEX Corporation........................................................................ 496,400 15,667,625
Kaydon Corporation...................................................................... 421,800 8,857,800
Manitowoc Company, Inc., The............................................................ 337,500 9,028,125
Zebra Technologies Corporation (Class A)*............................................... 269,900 11,959,944
--------------
$ 93,159,400
--------------
BUSINESS SERVICES & SUPPLIES -- 11.4%
Bacou USA, Inc.*........................................................................ 448,100 $ 8,962,000
Expeditors International of Washington, Inc............................................. 58,200 2,764,500
HON INDUSTRIES Inc...................................................................... 593,000 13,935,500
JLK Direct Distribution Inc. (Class A)*................................................. 730,700 3,744,838
Kforce.com, Inc.*....................................................................... 451,900 3,135,056
Manpower Inc............................................................................ 308,500 9,872,000
Office Depot, Inc.*..................................................................... 803,500 5,021,875
--------------
$ 47,435,769
--------------
TECHNOLOGY -- 9.8%
Belden Inc.............................................................................. 519,500 $ 13,312,187
Channell Commercial Corporation*........................................................ 265,000 3,180,000
KEMET Corporation*...................................................................... 449,800 11,273,113
Methode Electronics, Inc. (Class A)..................................................... 338,200 13,062,975
--------------
$ 40,828,275
--------------
HEALTH CARE -- 8.2%
DENTSPLY International Inc.............................................................. 399,100 $ 12,297,269
Landauer, Inc.++........................................................................ 510,000 7,936,875
Lincare Holdings Inc.*.................................................................. 215,000 5,294,375
Ocular Sciences, Inc.*.................................................................. 722,900 8,494,075
--------------
$ 34,022,594
--------------
DISTRIBUTION -- 7.7%
Arrow Electronics, Inc.*................................................................ 370,000 $ 11,470,000
Black Box Corporation*.................................................................. 260,800 20,648,025
--------------
$ 32,118,025
--------------
RETAILING -- 6.6%
Circuit City Stores, Inc................................................................ 351,600 $ 11,668,725
O'Reilly Automotive, Inc.*.............................................................. 1,129,000 15,664,875
--------------
$ 27,333,600
--------------
MATERIALS -- 6.1%
Martin Marietta Materials, Inc.......................................................... 185,000 $ 7,480,937
OM Group, Inc........................................................................... 412,500 18,150,000
--------------
$ 25,630,937
--------------
INSURANCE -- 3.2%
Brown & Brown, Inc...................................................................... 259,350 $ 13,486,200
--------------
</TABLE>
4
<PAGE>
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
Shares or
Face
COMMON STOCKS (CONTINUED) Amount Value
---------------------------------------------------------------------------------------- ----------- --------------
<S> <C> <C>
ENTERTAINMENT -- 2.6%
Carnival Corporation.................................................................... 546,600 $ 10,658,700
--------------
CONSUMER DURABLE GOODS -- 2.3%
Clayton Homes, Inc...................................................................... 1,216,600 $ 9,732,800
--------------
CONSUMER NON-DURABLE GOODS -- 1.8%
Lancaster Colony Corporation............................................................ 390,450 $ 7,491,759
--------------
EDUCATION -- 1.7%
Strayer Education, Inc.................................................................. 298,200 $ 7,156,800
--------------
BANKING -- 1.1%
National Commerce Bancorporation........................................................ 294,700 $ 4,733,619
--------------
TOTAL COMMON STOCKS -- 84.9% (Cost $287,972,751)........................................ $ 353,788,478
--------------
PREFERRED STOCKS -- 2.2% (Cost $10,015,878)
Crown American Realty Trust............................................................. 59,000 $ 2,227,250
New Plan Excel Realty Trust, Cvt........................................................ 225,000 5,006,250
ProLogis Trust (Series A)............................................................... 80,000 1,865,000
--------------
$ 9,098,500
--------------
CONVERTIBLE BONDS AND DEBENTURES
PRODUCER DURABLE GOODS -- 1.8%
Checkpoint Systems, Inc. -- 5 1/4% 2005................................................. $ 4,000,000 $ 2,580,000
DRS Technologies, Inc. -- 9% 2003....................................................... 2,000,000 2,610,000
MascoTech, Inc. -- 4 1/2% 2003.......................................................... 3,000,000 2,253,750
--------------
$ 7,443,750
--------------
TRANSPORTATION -- 1.7%
Offshore Logistics, Inc. -- 6% 2003..................................................... $ 7,500,000 $ 6,918,750
--------------
REAL ESTATE INVESTMENT TRUST -- 1.5%
CenterTrust Retail Properties, Inc.
-- 7 1/2% 2001 (Series A)............................................................. $ 1,050,000 $ 1,015,219
-- 7 1/2% 2001 (Series B)............................................................. 2,750,000 2,667,500
Rockefeller Center Properties, Inc. -- 0% 2000.......................................... 3,005,000 2,550,494
--------------
$ 6,233,213
--------------
TELECOMMUNICATIONS -- 1.3%
World Access, Inc. -- 4 1/2% 2002....................................................... $ 7,505,000 $ 5,666,275
--------------
DISTRIBUTION -- 1.0%
Reptron Electronics, Inc. -- 6 3/4% 2004................................................ $ 5,980,000 $ 4,036,500
--------------
CONSUMER NON-DURABLE GOODS -- 0.5%
Bell Sports Corp. -- 4 1/4% 2000........................................................ $ 385,000 $ 367,675
Central Garden & Pet Co. -- 6% 2003..................................................... 2,500,000 1,712,500
--------------
$ 2,080,175
--------------
BUSINESS SERVICES & SUPPLIES -- 0.3%
Office Depot, Inc. -- 0% 2008........................................................... $ 2,000,000 $ 1,407,500
--------------
TOTAL CONVERTIBLE BONDS
AND DEBENTURES -- 8.1% (Cost $35,317,367).............................................. $ 33,786,163
--------------
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
NON-CONVERTIBLE BONDS AND DEBENTURES Face Amount Value
---------------------------------------------------------------------------------------- ----------- --------------
<S> <C> <C>
CORPORATE -- 3.1%
Advantica Restaurant Group, Inc. -- 11 1/4% 2008........................................ $ 2,131,100 $ 1,417,181
DLJ Mortgage Acceptance Corp. (Series 1997-E Class B) -- 7.5481% 2026+.................. 941,000 669,948
Pathmark Stores, Inc.
-- 11 5/8% 2002....................................................................... 3,000,000 720,000
-- 12 5/8% 2002....................................................................... 3,000,000 720,000
Realty Income Corporation -- 8 1/4% 2008................................................ 2,000,000 1,790,000
Tenet Healthcare Corporation -- 8% 2005................................................. 2,000,000 1,925,000
Trump Atlantic City Associates -- 11 1/4% 2006.......................................... 4,000,000 2,840,000
United Stationers Inc. -- 8 3/8% 2008................................................... 3,000,000 2,760,000
--------------
$ 12,842,129
--------------
U.S. GOVERNMENT AND AGENCIES -- 0.2%
Federal Home Loan Mortgage Corporation
-- 6 1/2% 2023 (IO)................................................................... $ 1,751,200 $ 171,152
-- 10.15% 2006 (REMIC)................................................................ 36,100 36,134
Government National Mortgage Association (Mobile Home)
-- 9 3/4% 2010........................................................................ 939,000 961,301
--------------
$ 1,168,587
--------------
TOTAL NON-CONVERTIBLE BONDS
AND DEBENTURES -- 3.3% (Cost $18,683,074).............................................. $ 14,010,716
--------------
TOTAL INVESTMENT SECURITIES -- 98.5% (Cost $351,989,070)................................ $ 410,683,857
--------------
SHORT-TERM INVESTMENTS -- 1.5% (Cost $6,138,315)
Short-term Corporate Note:
Grainger (W.W.), Inc. -- 6.6% 7/31/00................................................. $ 4,000,000 $ 3,978,000
State Street Bank Repurchase Agreement -- 5 1/4% 7/3/00
(Collateralized by U.S. Treasury Note -- 5.625% 2002
(Market Value $2,205,713)............................................................. 2,160,000 2,160,315
--------------
$ 6,138,315
--------------
TOTAL INVESTMENTS -- 100.0% (Cost $358,127,385)......................................... $ 416,822,172
Other assets and liabilities, net -- 0.0%............................................... (83,923)
--------------
TOTAL NET ASSETS -- 100%................................................................ $ 416,738,249
==============
</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, 2000.
<TABLE>
<CAPTION>
Purchases Sales Realized Dividend
at Cost at Cost Gain Income
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Denison International plc (ADR)....................................... $ 546,450 -- -- --
Landauer, Inc......................................................... 3,046,639 -- -- $ 306,145
</TABLE>
See notes to financial statements.
6
<PAGE>
MAJOR PORTFOLIO CHANGES
Quarter Ended June 30, 2000
<TABLE>
<CAPTION>
Shares or
Face Amount
----------------
<S> <C>
NET PURCHASES
COMMON STOCKS
Carnival Corporation.................................................. 85,000 shs.
Circuit City Stores, Inc.............................................. 83,000 shs.
Denison International plc (ADR)....................................... 47,600 shs.
Donaldson Company, Inc................................................ 76,600 shs.
Lancaster Colony Corporation.......................................... 30,000 shs.
Landauer, Inc......................................................... 122,900 shs.
Lincare Holdings Inc.(1).............................................. 215,000 shs.
Martin Marietta Materials, Inc........................................ 46,400 shs.
National Commerce Bancorporation(1)................................... 294,700 shs.
Office Depot, Inc..................................................... 264,600 shs.
PREFERRED STOCK
ProLogis Trust (Series A)............................................. 64,400 shs.
CONVERTIBLE SECURITY
Office Depot, Inc. -- 0% 2008(1)...................................... $ 2,000,000
NON-CONVERTIBLE SECURITIES
Realty Income Corporation -- 8 1/4% 2008.............................. $ 690,000
Tenet Healthcare Corporation -- 8% 2005(1)............................ $ 2,000,000
NET SALES
COMMON STOCKS
Black Box Corporation................................................. 54,000 shs.
Expeditors International of Washington, Inc........................... 20,000 shs.
Galileo International, Inc.(2)........................................ 291,700 shs.
Huttig Building Products, Inc.(2)..................................... 121,488 shs.
IDEX Corporation...................................................... 22,000 shs.
KEMET Corporation..................................................... 45,000 shs.
OM Group, Inc......................................................... 9,000 shs.
PREFERRED STOCK
Prime Retail, Inc., Cvt. (Series B)(2)................................ 40,000 shs.
CONVERTIBLE SECURITY
Quintiles Transnational Corp. -- 4 1/4% 2000(2)....................... $ 2,000,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
June 30, 2000
------------------------------
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(cost $351,989,070) -- Note A.......................................................... $ 410,683,857
Short-term investments -- at cost plus interest earned
(maturities 60 days or less) -- Note A................................................. 6,138,315 $ 416,822,172
--------------
Cash....................................................................................... 366
Receivable for:
Accrued interest and dividends........................................................... $ 1,617,972
Investment securities sold............................................................... 951,702 2,569,674
-------------- --------------
$ 419,392,212
LIABILITIES
Payable for:
Investment securities purchased.......................................................... $ 2,141,678
Advisory fees............................................................................ 240,824
Accrued dividends -- Preferred Stock..................................................... 196,921
Accrued expenses......................................................................... 74,540 2,653,963
-------------- --------------
TOTAL NET ASSETS -- June 30, 2000............................................................ $ 416,738,249
==============
Assets applicable to Preferred Stock at a liquidation preference of
$27.50 per share (asset coverage 770%) -- Note B......................................... $ 54,153,330
==============
Net assets applicable to Common Stock -- $46.72 per share.................................. $ 362,584,919
==============
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 7,760,207 shares -- Note B................................................... 7,760,207
Additional Paid-in Capital................................................................. 314,355,170
Undistributed net investment income........................................................ 3,371,321
Undistributed net realized gain on investments............................................. 26,649,128
Unrealized appreciation of investments..................................................... 58,694,787
--------------
TOTAL NET ASSETS -- June 30, 2000............................................................ $ 416,738,249
==============
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF OPERATIONS
For the six months ended June 30, 2000
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest................................................ $ 2,735,364
Dividends (including $306,145 from securities of
affiliates)............................................ 2,219,002
------------
$ 4,954,366
Expenses -- Note C:
Advisory fees........................................... $ 1,528,472
Reports to shareholders................................. 137,321
Transfer agent fees and expenses........................ 134,503
Directors' fees and expenses............................ 45,000
Taxes, other than federal income tax.................... 33,320
Legal and auditing fees................................. 30,672
Insurance............................................... 28,251
Custodian fees and expenses............................. 23,129
Registration and filing fees............................ 16,722
Other expenses.......................................... 10,259 1,987,649
------------ ------------
Net investment income -- Note A..................... $ 2,966,717
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Realized gain on investments:
Proceeds from sale of investment securities
(Excluding short-term investments with maturities of
60 days or less)....................................... $ 70,558,101
Cost of investment securities sold...................... 44,001,238
------------
Net realized gain on investments -- Notes A and D..... $ 26,556,863
Unrealized appreciation of investments:
Unrealized appreciation at beginning of period.......... $ 99,274,682
Unrealized appreciation at end of period................ 58,694,787
------------
Decrease in unrealized appreciation of investments.... (40,579,895)
------------
Net realized and unrealized loss on investments..... $(14,023,032)
------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS........................................... $(11,056,315)
============
</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, 2000 December 31, 1999
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN TOTAL NET ASSETS
Operations:
Net investment income........................... $ 2,966,717 $ 5,130,713
Net realized gain on investments
-- Notes A and D.............................. 26,556,863 66,936,690
Increase (decrease) in unrealized
appreciation of investments................... (40,579,895) 11,291,135
------------ ------------
Increase (decrease) in total net assets resulting
from operations................................. $(11,056,315) $ 83,358,538
Distributions to Preferred shareholders:
From net investment income...................... (2,363,054) (4,726,109)
Distributions to Common shareholders:
From net investment income...................... -- $ (709,997)
From net realized capital gains................. $(17,351,391) (17,351,391) (58,801,250) (59,511,247)
------------ ------------
Proceeds from shares issued for distributions
reinvested by shareholders -- Note B.......... 3,120,918 7,490,362
------------ ------------
Increase (decrease) in total net assets........... $(27,649,842) $ 26,611,544
TOTAL NET ASSETS
Beginning of period, including
undistributed net investment income
of $2,767,658 and $3,073,051.................... 444,388,091 417,776,547
------------ ------------
End of period, including
undistributed net investment income
of $3,371,321 and $2,767,658.................... $416,738,249 $444,388,091
============ ============
</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,
2000 1999 1998 1997 1996 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period............ $ 50.70 $ 48.23 $ 50.20 $ 45.35 $ 42.58 $ 38.52
-------- -------- -------- -------- -------- --------
Income from investment operations:
Net investment income........................... $ 0.39 $ 0.67 $ 0.88 $ 1.08 $ 1.30 $ 1.48
Net realized and unrealized gain (loss)
on investment securities..................... (1.81) 10.27 2.37 10.50 8.25 6.84
-------- -------- -------- -------- -------- --------
Total from investment operations................ $ (1.42) $ 10.94 $ 3.25 $ 11.58 $ 9.55 $ 8.32
-------- -------- -------- -------- -------- --------
Distributions to Preferred shareholders:
From net investment income...................... $ (0.31) $ (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......................... (2.25) (7.77) (4.21) (5.76) (5.62) (3.10)
-------- -------- -------- -------- -------- --------
Total distributions........................... $ (2.56) $ (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 period.................. $ 46.72 $ 50.70 $ 48.23 $ 50.20 $ 45.35 $ 42.58
======== ======== ======== ======== ======== ========
Per share market value at end of period........... $ 49.56 $ 48.25 $ 49.06 $ 51.06 $ 45.50 $ 41.88
Total investment return(1)........................ 7.4% 15.2% 5.8% 26.9% 24.5% 23.4%
Net asset value total return(2)................... (2.4)% 23.1% 5.8% 25.4% 21.9% 20.7%
Ratios/supplemental data:
Net assets at end of period (in thousands)...... $416,738 $444,388 $417,777 $425,490 $382,146 $362,087
Ratio of expenses to average net assets......... 0.90%(3) 0.87% 0.87% 0.87% 0.89% 0.91%
Ratio of net income to average net assets....... 1.34%(3) 1.21% 1.59% 1.95% 2.52% 3.04%
Portfolio turnover rate......................... 30.01%(3) 23.51% 28.34% 27.46% 41.04% 51.44%
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)....................... $211.63 $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 $27.50
Average market value per share(5)................. $27.88 $28.54 $29.95 $28.72 $28.50 $28.00
</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, 2000
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. 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
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 62,563 shares of Common Stock under its Reinvestment
Plan for Common and Preferred shareholders during the six months ended
June 30, 2000.
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, 2000, the Company paid aggregate fees of
$45,000 to all Directors who are not affiliated persons of the Investment
Adviser. During the six months ended June 30, 2000, the Company incurred legal
fees of $3,772 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 $64,142,128 for the six
months ended June 30, 2000. Cost of investment securities owned at June 30, 2000
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, 2000
for federal income tax purposes was $95,628,187 and $36,933,400, respectively.
NOTE E--CHANGE IN CONTROL OF INVESTMENT ADVISER
United Asset Management Corporation (UAM), the parent of the Investment
Adviser, has entered into an agreement to be acquired by Old Mutual plc, a
United Kingdom-based financial services group with substantial asset management,
insurance and banking businesses. This transaction will create a change in
control of the Investment Adviser and, as required by the Investment Company Act
of 1940, a new investment advisory agreement must be approved by shareholders
upon this event. In anticipation, the Board of Directors of the Company has
approved a new investment advisory agreement which will be submitted to
shareholders at the special meeting scheduled for October 23, 2000. The Board
has also approved an interim investment advisory agreement to take effect should
the acquisition of UAM occur prior to the shareholder meeting date. Both
investment advisory agreements are substantially the same as the current
investment advisory agreement approved by shareholders on May 1, 2000.
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 1, 2000:
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.................................................................................... 6,398,942 62,166
Eric S. Ende.......................................................................................... 6,403,127 62,166
David Rees............................................................................................ 6,403,674 62,166
Robert L. Rodriguez................................................................................... 6,405,026 62,166
Lawrence J. Sheehan................................................................................... 6,405,711 62,166
PREFERRED
Willard H. Altman, Jr................................................................................. 1,707,638 12,119
Paul G. Schloemer..................................................................................... 1,709,196 12,119
</TABLE>
2. With respect to continuation of the Investment Advisory Agreement, a
total of 8,015,271 shares voted for, 45,860 shares voted against and
124,867 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 8,097,601 shares
voted for, 26,202 shares voted against and 62,195 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>
