<PAGE> 1
- --------------------------------------------------------------------------------
Semi-Annual Report
FPA CAPITAL FUND, INC.
LOGO
Distributor:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
September 30, 1996
- --------------------------------------------------------------------------------
<PAGE> 2
OFFICERS AND DIRECTORS
DIRECTORS DISTRIBUTOR
Donald E. Cantlay FPA Fund Distributors, Inc.
DeWayne W. Moore 11400 West Olympic Boulevard, Suite
Lawrence J. Sheehan 1200
Kenneth L. Trefftzs Los Angeles, California 90064
COUNSEL
OFFICERS
O'Melveny & Myers LLP
Robert L. Rodriguez, President and Los Angeles, California
Chief Investment Officer
Julio J. de Puzo, Jr.,
Executive Vice President
Christopher Linden, CUSTODIAN & TRANSFER AGENT
Senior Vice President
Eric S. Ende, Vice President State Street Bank and Trust Company
Dennis M. Bryan, Vice President Boston, Massachusetts
William D. Jacobs, Treasurer
Sherry Sasaki, Secretary
Christopher H. Thomas,
Assistant Treasurer SHAREHOLDER SERVICE AGENT
Boston Financial Data Services,
INVESTMENT ADVISER Inc.
P.O. Box 8500
First Pacific Advisors, Inc. Boston, Massachusetts 02266-8500
11400 West Olympic Boulevard, Suite 1200 (800) 638-3060
Los Angeles, California 90064 (617) 328-5000
This report has been prepared for the information of shareholders of FPA
Capital Fund, Inc., and is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus. The
financial information included in this report has been taken from the records
of the Fund without examination by independent auditors.
<PAGE> 3
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Semi-Annual Report covers the six months ended September 30, 1996.
Your Fund's net asset value (NAV) per share closed at $30.76. The NAV reflects
a distribution of $0.74 on July 15, 1996 to shareholders of record on June 28,
1996. This distribution was composed of a $0.17 income dividend and a $0.57
capital gains distribution, $0.56 of which was long-term.
The following table shows the average annual total return for several
different periods ended on that date for the Fund and several comparative
indices. The data quoted represents past performance, and an investment in the
Fund may fluctuate so that an investor's shares when redeemed may be worth more
or less than their original cost.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
PERIODS ENDED SEPTEMBER 30, 1996
--------------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
FPA Capital Fund,
Inc. (NAV) . . . . . . . . 20.14%* 23.65%* 20.63%*
FPA Capital Fund, Inc.
(Net of Sales Charge) . . . 12.33%++ 22.00%++ 19.82%++
Lipper Growth Fund
Average . . . . . . . . . . 15.89% 13.97% 13.68%
Standard & Poor's
500 Stock Index . . . . . . 20.39% 15.24% 14.93%
Russell 2000 . . . . . . . . 13.13% 15.76% 11.91%
</TABLE>
The Fund's six-month return, which includes both the change in NAV and
the reinvestment of distributions paid, was 14.46%*. This compares with total
returns of 7.47% for the Lipper Growth Fund Average, 7.76% for the S&P 500, and
5.36% for the Russell 2000. On a calendar year-to-date basis, these same
comparisons are: 24.60%* for FPA Capital Fund; 13.42% for the Lipper Average;
13.64% for the S&P 500; and 10.73% for the Russell 2000.
COMMENTARY
The beat goes on. The stock market continues to reach new highs and
so does your Fund. We are pleased to convey such positive investment results.
It has been a challenging year in that smaller company stocks have been
underperformers. Your Fund was able to outperform both large and small
capitalization stock indices through stock selection, despite having a
short-term liquidity and bond position averaging between 20% and 30% of the
portfolio. From a longer term perspective, your Fund continues to materially
outperform the indices over five- and ten-year periods. According to Lipper
Analytical Services, Inc., your Fund ranked 9th out of all mutual funds for the
ten-year period ended September 30, 1996. It was also included in an article
in USA TODAY on October 18, 1996, that highlighted the only 13 funds to have
gained at least 1000% since the stock market low of August 1982. This came as
quite a pleasant surprise.
In light of this positive performance, we would like to give
recognition to Dennis Bryan, who has been assisting me for the past three
years. He earned his MBA from the University of Southern California and
studied with Professor Guilford Babcock -- my investment professor from twenty
years earlier. Dennis was a research analyst at a major brokerage firm before
returning to earn his master's degree. His investment experience now totals
almost eight years. He has focused his attention primarily on retailing
companies. For example, one of his picks was Claire's Stores, which we
acquired at a time when retailing stocks were unloved on "Wall Street." He,
too, likes concentrating on out-of-favor situations. We
______________
* Does not reflect deduction of the sales charge which, if
reflected, would reduce the performance shown
++ Reflects deduction of the maximum sales charge of 6.5%
of the offering price
2
<PAGE> 4
recently sold this position and captured a $9.5 million dollar gain -- a return
on investment of "only" 188% for nineteen months. Our investment in retailing
companies has been a positive contributor to your Fund's returns. We look
forward to Dennis' future contributions. At our last board of directors
meeting, he was elected Vice President of your Fund.
Today, optimism and "bullishness" run rampant throughout the stock
market. We can see this by the record level of cash inflows to mutual funds
and the low level of short-term liquidity in those funds. As of September,
short-term liquidity in growth, growth and income, and capital appreciation
funds were near their lowest level in thirty years. Stan Salvigsen of
Comstock Partners recently noted that net inflows to equity mutual funds are at
a rate that would absorb more money than the American public is saving and
commented, "It looks like folks are buying on margin." In light of this, a
recent survey by Louis Harris & Associates, commissioned by Liberty Financial,
found very little in the way of investor concern or fear of a stock market
decline. As an example, 41% think the maximum annual decline over the next 10
years will be less than 10%. An additional 37% see a maximum decline of
between 10% and 20%. In our opinion, this is totally unrealistic. Since 1900,
we have had 106 corrections of 10% or more, which equates to about one a year.
Corrections of 20% or more have occurred about every three years. Even more
startling were investors' future return expectations. A staggering 85% believe
stocks will match or beat the 14% annualized return of the last ten years in
the next ten. To put this in perspective, the ten-year annualized return
periods since 1992 have been among the highest for the past 200 years. We
believe that these views are signs of excess in the stock market.
Our response to these trends is one of caution. We believe that many
of these investors eventually will become quite disappointed. Optimists will
say that we are in a new investment environment and that these new investors
are more committed to long-term investing. It will be argued that much of this
new money is for retirement purposes and therefore, more "sticky." In other
words, it will not leave because of a stock market decline. We have heard this
type of reasoning before, but it was being applied to Japanese investors back
in the late 1980s. They were viewed as being very long-term oriented, and it
was believed they would not sell or panic. According to a recent study by the
Leuthold Group between 1989 and June 1996, the assets in Japanese investment
trusts (mutual funds) had fallen 91.2% in yen terms, while the stock market was
down 46%. Here in the United States, between 1969 and 1974, the Value Line
Index fell 70% while the S&P 500 declined 50% from peak to trough. After that
crash, U.S. investors responded in much the same way as their Japanese
counterparts would do almost twenty years later. Your Fund experienced this
period directly. It was severely hurt in both the 1970 and 1974 "bear"
markets. When we acquired the management contract in 1984, your Fund was among
the bottom 10% of all mutual funds in terms of performance. We experienced a
continuation of the trend of net redemptions for slightly more than three
years. Human nature does not change. Fear has not been nor will it ever be
eliminated from the process of investing. In order to be a successful
long-term investor, one must keep greed and fear under control at all times.
We believe that stock market volatility will probably increase.
Prices have been driven higher by expanding corporate profitability and rising
P/E (Price/Earnings) ratios. During this cycle, corporate profitability has
been impacted positively by three trends that are not likely to continue:
declining interest costs, weak growth in depreciation costs, and reduced
corporate tax rates. If these trends stabilize or reverse direction, total
corporate net income and revenue growth rates should correlate more with future
nominal gross domestic product growth rates, i.e., 5% to 6%. Furthermore,
there is an increasing probability that unit labor costs will be increasing at
a faster level than a corporation's ability to pass on these increases and,
thus, future profit margin levels are more at risk. The present valuation
level of the stock
3
<PAGE> 5
market does not provide much margin for error, should these changes develop.
Taking into consideration this cheerful scenario, we are allowing
short-term liquidity and bonds to build as a percentage of the total portfolio.
On September 30, these two areas accounted for 27.8% versus 20.7% on March 31.
This increase is a function of both contributions to the Fund and the proceeds
from reducing or eliminating positions. Since our March Shareholder Letter, we
eliminated four holdings while adding two -- Horace Mann Educators and CPI
Corp. Horace Mann is the leading property insurance company serving teachers.
We considered this highly efficient and profitable company a bargain at only
10x earnings and 1.5x book value. CPI Corp., the leading portrait studio
photography company, has studios in the stores of Sears, Roebuck and Co. We
purchased the position at less than 11x earnings and 1.3x book value. During
the past month, the company commenced a Dutch auction to buy in approximately
13.7% of the outstanding shares. It is using the proceeds it received from the
sale of a majority stake in its photo finishing subsidiary to Eastman Kodak
Company. We are currently evaluating the proposal. Both these additions
reflect our basic philosophy of investing in companies that are attractive on
an absolute rather than on a relative valuation basis. The difficulty with
this strategy is that, as the stock market moves higher at a faster rate than
the improvement of the underlying fundamentals, our target opportunities become
fewer and fewer. We currently find very few attractive areas that are deeply
out-of-favor. We will continue to search, but we are exercising a higher
degree of caution. In all likelihood, short-term liquidity levels will rise
unless we get a stock market correction or a few select ideas become available.
The portfolio retains a competitive valuation advantage to that of the
market. At the end of September, the Fund's P/E and P/BV (Price/Book Value)
ratios were 16.5x and 2.2x, respectively. By comparison, the P/E ratios of the
S&P 500 and the Russell 2000 were 19.7x and 24.1x, while the P/BV ratios were
3.9x and 2.4x, respectively. In the case of your Fund, during the next quarter
two of the holdings will be dropping unprofitable quarters (due to
restructuring charges) from their latest twelve-month earnings. Were we to
make these adjustments now, your Fund's P/E ratio would be closer to 14x than
16.5x earnings.
This letter has expressed a high level of caution. During a period of
optimism and general excitement, we believe it is our duty to worry more about
the downside risk than the upside opportunity. This helps to keep us balanced
in our investment view of the world. At this time, we would like to thank all
our shareholders for the support and confidence that they have shown in us.
Since we closed the Fund to new shareholders on May 23, 1995, at $282 million,
Fund assets have grown to $493 million at September 30. Thirty-six percent, or
$77 million of this increase, came from additional contributions while the
balance of 64% was from capital appreciation and income earned. We like the
fact that the majority of your Fund's increase in size is the result of
investment performance rather than from a marketing success.
Respectfully submitted,
/s/ ROBERT L. RODRIGUEZ
Robert L. Rodriguez, C.F.A.
President and Chief Investment Officer
October 26, 1996
4
<PAGE> 6
MAJOR PORTFOLIO CHANGES
Six Months Ended September 30, 1996
<TABLE>
<CAPTION>
Shares or
Principal
Amount
---------------
<S> <C>
NET PURCHASES
COMMON STOCKS
Arrow Electronics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,200 shs.
CPI Corp. (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357,300 shs.
Exabyte Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,000 shs.
Horace Mann Educators Corporation (1) . . . . . . . . . . . . . . . . . . . . . . . 200,000 shs.
Mac Frugal's Bargains Close-outs Inc. . . . . . . . . . . . . . . . . . . . . . . . 100,000 shs.
Marshall Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000 shs.
Recoton Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 shs.
Seagate Technology, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 shs.
CORPORATE BOND
Trump Atlantic City Associates
--11 1/4% 2006 (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,000,000
NET SALES
COMMON STOCKS
Claire's Stores, Inc. (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 559,950 shs.
Coachmen Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,900 shs.
Fleetwood Enterprises, Inc. (2) . . . . . . . . . . . . . . . . . . . . . . . . . . 290,000 shs.
Green Tree Financial Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 shs.
NIKE, Inc. (Class "B") (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 shs.
Quick & Reilly Group, Inc., The . . . . . . . . . . . . . . . . . . . . . . . . . . 44,750 shs.
Ross Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,200 shs.
United Industrial Corporation (2) . . . . . . . . . . . . . . . . . . . . . . . . . 197,500 shs.
U.S. GOVERNMENT AGENCIES
Federal National Mortgage Association (PAC IO-REMIC)
--6% 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 891,811
Government National Mortgage Association (REMIC)
--7.99125% 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,385,169
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
September 30, 1996
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- ----------------------------------------------------------------- ---------- -------------- --------------
<S> <C> <C> <C>
TECHNOLOGY -- 21.5%
Arrow Electronics, Inc.* . . . . . . . . . . . . . . . . . . . . 395,200 $ 11,455,357 $ 17,586,400
Exabyte Corporation* . . . . . . . . . . . . . . . . . . . . . . 420,000 5,575,509 6,300,000
Fluke Corporation . . . . . . . . . . . . . . . . . . . . . . . . 159,900 5,134,594 5,896,312
Keithley Instruments, Inc. . . . . . . . . . . . . . . . . . . . 200,000 1,227,092 1,775,000
Komag, Incorporated* . . . . . . . . . . . . . . . . . . . . . . 327,800 2,833,000 6,883,800
Marshall Industries* . . . . . . . . . . . . . . . . . . . . . . 510,000 9,454,467 15,363,750
Photronics, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . 75,000 441,250 2,325,000
Quantum Corporation* . . . . . . . . . . . . . . . . . . . . . . 385,000 6,572,237 6,761,563
Seagate Technology, Inc.* . . . . . . . . . . . . . . . . . . . . 435,000 5,716,300 24,305,625
Storage Technology Corporation* . . . . . . . . . . . . . . . . . 500,000 10,773,165 18,937,500
------------ -------------
$ 59,182,971 $ 106,134,950
------------ -------------
FINANCIAL -- 20.2%
Comdisco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 575,000 $ 6,578,555 $ 16,603,125
Countrywide Credit Industries, Inc. . . . . . . . . . . . . . . . 550,000 9,459,401 14,093,750
Foremost Corporation of America . . . . . . . . . . . . . . . . . 50,000 1,672,500 2,750,000
Green Tree Financial Corporation . . . . . . . . . . . . . . . . 1,025,000 829,038 40,231,250
Horace Mann Educators Corporation . . . . . . . . . . . . . . . . 200,000 5,679,769 6,575,000
Quick & Reilly Group, Inc., The . . . . . . . . . . . . . . . . . 498,100 2,353,846 13,075,125
UnionFed Financial Corporation (Warrants)* . . . . . . . . . . . 314,286 122,210 --
Westcorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294,001 1,790,553 6,357,768
------------ -------------
$ 28,485,872 $ 99,686,018
------------ -------------
RETAILING -- 11.2%
Good Guys, Inc., The* . . . . . . . . . . . . . . . . . . . . . . 525,000 $ 4,764,000 $ 4,200,000
Mac Frugal's Bargains Close-outs Inc.* . . . . . . . . . . . . . 1,000,000 13,166,556 23,625,000
Ross Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 759,800 8,994,288 27,352,800
------------ -------------
$ 26,924,844 $ 55,177,800
------------ -------------
CONSUMER DURABLES -- 6.8%
Coachmen Industries, Inc. . . . . . . . . . . . . . . . . . . . . 681,100 $ 3,311,511 $ 17,538,325
Flexsteel Industries, Inc. . . . . . . . . . . . . . . . . . . . 160,000 2,008,125 1,880,000
Recoton Corporation* . . . . . . . . . . . . . . . . . . . . . . 500,000 7,788,270 7,437,500
Thor Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . 275,000 3,140,956 6,565,625
------------ -------------
$ 16,248,862 $ 33,421,450
------------ -------------
CONSUMER NON-DURABLES -- 4.4%
Rawlings Sporting Goods Company, Inc.* . . . . . . . . . . . . . 225,000 $ 2,573,461 $ 2,165,625
Reebok International Ltd. . . . . . . . . . . . . . . . . . . . . 565,000 17,871,206 19,633,750
------------ -------------
$ 20,444,667 $ 21,799,375
------------ -------------
</TABLE>
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS--CONTINUED Amount Cost Value
- ------------------------ ----------- ------------- -------------
<S> <C> <C> <C>
BASIC MATERIALS -- 2.2%
International Aluminum Corporation . . . . . . . . . . . . . . . 200,000 $ 4,117,806 $ 4,875,000
Rouge Steel Company (Class "A") . . . . . . . . . . . . . . . . . 275,000 5,996,275 5,981,250
------------- -------------
$ 10,114,081 $ 10,856,250
------------- -------------
INDUSTRIAL SERVICES -- 1.7%
Angelica Corporation . . . . . . . . . . . . . . . . . . . . . . 400,000 $ 9,393,476 $ 8,650,000
------------- -------------
CONSUMER SERVICES -- 1.4%
CPI Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357,300 $ 5,282,963 $ 6,699,375
------------- -------------
DEFENSE -- 1.1%
Diagnostic/Retrieval Systems, Inc.*+ . . . . . . . . . . . . . . 510,000 $ 2,507,718 $ 5,546,250
------------- -------------
PRINTING & PUBLISHING -- 0.6%
Devon Group, Inc.* . . . . . . . . . . . . . . . . . . . . . . . 125,000 $ 2,884,000 $ 2,937,500
------------- -------------
TOTAL COMMON STOCKS -- 71.1% . . . . . . . . . . . . . . . . . . $ 181,469,454 $ 350,908,968
------------- -------------
PREFERRED STOCK -- 0.5%
Craig Corporation (Class "A")*+ . . . . . . . . . . . . . . . . . 160,000 $ 1,906,272 $ 2,300,000
------------- -------------
U.S. GOVERNMENT AGENCIES -- 3.9%
Federal Home Loan Mortgage Corporation
(CMO)--7% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000,000 $ 4,981,250 $ 4,892,188
Federal Home Loan Mortgage Corporation
(PAC IO-CMO)--7% 2020 . . . . . . . . . . . . . . . . . . . . . 3,755,714 899,726 1,032,821
Federal National Mortgage Association
(PAC-REMIC)--8 1/2% 2025 . . . . . . . . . . . . . . . . . . . . 7,000,000 7,021,875 7,030,625
Federal National Mortgage Association
(PAC IO-REMIC)--6% 2013 . . . . . . . . . . . . . . . . . . . . 5,979,293 313,215 356,889
Government National Mortgage Association
(REMIC)--7.99125% 2010 . . . . . . . . . . . . . . . . . . . . . 5,736,864 5,736,864 5,754,791
------------- -------------
$ 18,952,930 $ 19,067,314
------------- -------------
CORPORATE BOND -- 2.0%
Trump Atlantic City Associates --11 1/4% 2006 . . . . . . . . . . $10,000,000 $ 9,592,500 $ 9,800,000
------------- -------------
TOTAL INVESTMENT SECURITIES -- 77.5% . . . . . . . . . . . . . . $ 211,921,156 $ 382,076,282
============= -------------
</TABLE>
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Principal
Amount Value
------------- ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 21.9%
Short-term Corporate Notes:
Exxon Asset Management -- 5 1/4% 10/2/96 . . . . . . . . . . . . . . . . . $14,700,000 $ 14,697,856
General Motors Acceptance Corporation -- 5.36% 10/3/96 . . . . . . . . . . 13,600,000 13,595,950
Exxon Asset Management -- 5.42% 10/4/96 . . . . . . . . . . . . . . . . . . 3,400,000 3,398,464
General Electric Company -- 5.41% 10/4/96 . . . . . . . . . . . . . . . . . 23,000,000 22,989,631
General Electric Capital Services, Inc. -- 5.31% 10/7/96 . . . . . . . . . 24,000,000 23,978,760
General Motors Acceptance Corporation -- 5.35% 10/7/96 . . . . . . . . . . 2,200,000 2,198,038
American Express Credit Corp. -- 5.33% 10/8/96 . . . . . . . . . . . . . . 24,000,000 23,975,127
Hertz Corporation -- 5.26% 10/11/96 . . . . . . . . . . . . . . . . . . . . 1,800,000 1,797,370
State Street Bank Repurchase Agreement -- 4 3/4% 10/1/96
(Collateralized by U.S. Treasury Notes -- 5.875% 1997,
market value $1,526,121) . . . . . . . . . . . . . . . . . . . . . . . . . 1,496,000 1,496,198
-------------
$ 108,127,394
-------------
TOTAL INVESTMENTS -- 99.4% . . . . . . . . . . . . . . . . . . . . . . . . . $ 490,203,676
Other assets less liabilities -- 0.6% . . . . . . . . . . . . . . . . . . . . 2,738,352
-------------
TOTAL NET ASSETS -- 100.0% . . . . . . . . . . . . . . . . . . . . . . . . . $ 492,942,028
=============
</TABLE>
*Non-income producing securities
+Affiliate as defined in the Investment Company Act of 1940 by reason of
ownership of 5% or more of its outstanding voting securities.
See notes to financial statements.
8
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $211,921,156) . . . . . . . . . . . . . . . . . . . $ 382,076,282
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less) . . . . . . . . . . . . . . . . . . . 108,127,394 $ 490,203,676
-------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279
Receivable for:
Investment securities sold . . . . . . . . . . . . . . . . . . . . . . $ 1,626,604
Dividends and accrued interest . . . . . . . . . . . . . . . . . . . . 1,005,676
Capital Stock sold . . . . . . . . . . . . . . . . . . . . . . . . . . 578,966 3,211,246
------------- ---------------
$ 493,415,201
LIABILITIES
Payable for:
Advisory fees and financial services . . . . . . . . . . . . . . . . . $ 304,086
Capital Stock repurchased . . . . . . . . . . . . . . . . . . . . . . . 107,102
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . 61,985 473,173
------------- ---------------
NET ASSETS -- equivalent to $30.76 per share on 16,025,877
shares of Capital Stock outstanding . . . . . . . . . . . . . . . . . . . $ 492,942,028
===============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 16,025,877 shares . . . . . . . . . . . $ 160,259
Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . 294,671,716
Undistributed net realized gain on investments . . . . . . . . . . . . . 26,302,939
Undistributed net investment income . . . . . . . . . . . . . . . . . . . 1,651,988
Unrealized appreciation of investments . . . . . . . . . . . . . . . . . 170,155,126
---------------
Net assets at September 30, 1996 . . . . . . . . . . . . . . . . . . . . $ 492,942,028
===============
</TABLE>
See notes to financial statements.
9
<PAGE> 11
STATEMENT OF OPERATIONS
For the Six Months Ended September 30, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,368,011
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,361,402
--------------
$ 4,729,413
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,495,384
Financial services . . . . . . . . . . . . . . . . . . . . . . . . . . 226,212
Transfer agent fees and expenses . . . . . . . . . . . . . . . . . . . 89,291
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,007
Custodian fees and expenses . . . . . . . . . . . . . . . . . . . . . . 25,085
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,040
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,807
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . 11,510
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . 11,296
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,275
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Taxes, other than federal income tax . . . . . . . . . . . . . . . . . 800 1,974,707
------------- -------------
Net investment income . . . . . . . . . . . . . . . . . . . . . $ 2,754,706
--------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments:
Proceeds from sales of investment securities (excluding
short-term investments with maturities of 60 days or less) . . . . . $ 46,766,213
Cost of investment securities sold . . . . . . . . . . . . . . . . . . 20,343,839
-------------
Net realized gain on investments . . . . . . . . . . . . . . . . . $ 26,422,374
Unrealized appreciation of investments:
Unrealized appreciation at beginning of period . . . . . . . . . . . . $ 139,786,387
Unrealized appreciation at end of period . . . . . . . . . . . . . . . 170,155,126
-------------
Increase in unrealized appreciation of investments . . . . . . . . 30,368,739
-------------
Net realized and unrealized gain on investments . . . . . . . . $ 56,791,113
-------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,545,819
=============
</TABLE>
See notes to financial statements.
10
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
September 30, 1996 March 31, 1996
--------------------------- ---------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income . . . . . . . . . $ 2,754,706 $ 4,393,378
Net realized gain on investments . . . 26,422,374 34,698,880
Increase in unrealized appreciation
of investments . . . . . . . . . . . 30,368,739 59,670,686
-------------- --------------
Increase in net assets resulting
from operations . . . . . . . . . . . . $ 59,545,819 $ 98,762,944
Distributions to shareholders from:
Net investment income . . . . . . . . . $ (2,606,738) $ (3,256,784)
Net realized capital gains . . . . . . (8,708,428) (11,315,166) (32,254,690) (35,511,474)
-------------- --------------
Capital Stock transactions:
Proceeds from Capital Stock sold . . . $ 59,063,231 $ 123,331,788
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions . . . 9,367,748 29,555,959
Cost of Capital Stock repurchased . . . (23,001,871) 45,429,108 (53,512,942) 99,374,805
-------------- --------------- -------------- --------------
Total increase in net assets . . . . . . $ 93,659,761 $ 162,626,275
NET ASSETS
Beginning of period, including
undistributed net investment income
of $1,504,020 and $367,426 . . . . . . 399,282,267 236,655,992
--------------- --------------
End of period, including
undistributed net investment income
of $1,651,988 and $1,504,020 . . . . . $ 492,942,028 $ 399,282,267
=============== ==============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold . . . . . . 2,001,692 4,796,761
Shares issued to shareholders
upon reinvestment of dividends
and distributions . . . . . . . . . . . 318,956 1,162,515
Shares of Capital Stock repurchased . . . (789,236) (2,027,718)
--------------- --------------
Increase in Capital Stock outstanding . . 1,531,412 3,931,558
=============== ==============
</TABLE>
See notes to financial statements.
11
<PAGE> 13
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Six
Months
Ended
September Year Ended March 31,
30, -----------------------------------------------
1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period . . . . . $ 27.55 $ 22.40 $ 19.30 $ 19.06 $ 18.32 $ 14.60
-------- -------- -------- -------- -------- --------
Net investment income . . . . . . . . . . . . . . $ 0.17 $ 0.33 $ 0.09 $ 0.04 $ 0.05 $ 0.09
Net realized and unrealized gain on
investment securities . . . . . . . . . . . . . 3.78 7.63 3.62 2.30 2.26 4.63
-------- -------- -------- -------- -------- --------
Total from investment operations . . . . . . . . $ 3.95 $ 7.96 $ 3.71 $ 2.34 $ 2.31 $ 4.72
-------- -------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income . . . . . $ (0.17) $ (0.26) $ (0.08) $ (0.03) $ (0.05) $ (0.10)
Distributions from net realized
capital gains . . . . . . . . . . . . . . . . (0.57) (2.55) (0.53) (2.07) (1.52) (0.90)
-------- -------- -------- -------- -------- --------
Total distributions . . . . . . . . . . . . . . $ (0.74) $ (2.81) $ (0.61) $ (2.10) $ (1.57) $ (1.00)
-------- -------- -------- -------- -------- --------
Net asset value at end of period . . . . . . . . $ 30.76 $ 27.55 $ 22.40 $ 19.30 $ 19.06 $ 18.32
======== ======== ======== ======== ======== ========
Total investment return* . . . . . . . . . . . . 14.46% 36.84% 19.77% 13.13% 14.23% 33.82%
Ratios/supplemental data:
Net assets at end of period (in $000's) . . . . . 492,942 399,282 236,656 165,684 134,169 109,581
Average brokerage commissions
(in $ per share) . . . . . . . . . . . . . . . 0.0600 -- -- -- -- --
Ratio of expenses to average net assets . . . . . 0.86%+ 0.87% 0.95% 1.03% 1.06% 1.08%
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . 1.20%+ 1.28% 0.48% 0.20% 0.29% 0.55%
Portfolio turnover rate . . . . . . . . . . . . . 17%+ 21% 11% 16% 19% 13%
</TABLE>
* Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge. The
return for the six months ended September 30, 1996 is not annualized.
+ Annualized
See notes to financial statements.
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940, as a
diversified, open-end investment company. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
A. Security Valuation
Securities 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 last bid price. Unlisted securities are valued
at the most recent bid price. Short-term investments with maturities
of 60 days or less are valued at cost plus interest earned, which
approximates market value.
B. Federal Income Tax
No provision for federal income tax is required because the
Fund 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 to its shareholders, in accordance with
the minimum distribution requirements of the Code, all of its taxable
net investment income and taxable net realized gains on investments.
C. Securities Transactions and Related Investment Income
Securities transactions are accounted for on the date the securities
are purchased or sold. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Interest income
and expenses are recorded on an accrual basis.
NOTE 2 -- PURCHASES OF INVESTMENT SECURITIES
Cost of purchases of investment securities (excluding short-term
investments with maturities of 60 days or less) aggregated $30,581,214 for the
six months ended September 30, 1996. Realized gains or losses are based on the
specific-certificate identification method. The cost of securities held at
September 30, 1996 was the same for federal income tax and financial reporting
purposes.
NOTE 3 -- ADVISORY FEES AND OTHER AFFILIATED TRANSACTIONS
Pursuant to an Investment Advisory Agreement, advisory fees were paid
by the Fund to First Pacific Advisors, Inc. (the "Adviser"). Under the terms
of this Agreement, the Fund pays the Adviser a monthly fee calculated at the
annual rate of 0.75% of the first $50 million of the Fund's average daily net
assets and 0.65% of the average daily net assets in excess of $50 million. In
addition, the Fund pays the Adviser an amount equal to 0.10% of the average
daily net assets for each fiscal year in reimbursement for the provision of
financial services to the Fund. The Agreement provides that the Adviser will
reimburse the Fund for any annual expenses (exclusive of interest, taxes, the
cost of any supplemental statistical and research information, and
extraordinary expenses such as litigation) in
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
Continued
excess of 1 1/2% of the first $30 million and 1% of the remaining average net
assets of the Fund for the year.
For the six months ended September 30, 1996, the Fund paid aggregate
fees of $11,000 to all Directors who are not affiliated persons of the Adviser.
Legal fees were for services rendered by O'Melveny & Myers LLP, counsel for the
Fund. A Director of the Fund is of counsel to, and a retired partner of, that
firm.
NOTE 4 -- DISTRIBUTOR
For the six months ended September 30, 1996, FPA Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of the Adviser, received
$25,921 in net Fund share sales commissions after reallowance to other dealers.
The Distributor pays its own overhead and general administrative expenses,
the cost of supplemental sales literature, promotion and advertising.
NOTE 5 -- SALES OF FUND SHARES
Shares of the Fund are presently offered for sale only to existing
shareholders and to directors, officers, and employees of the Fund, the
Adviser, and affiliated companies. The discontinuation of sales to new
investors reflects Management's belief that unrestrained growth in the Fund's
net assets might impair investment flexibility. The Fund may resume at any
time the sale of its shares to new investors if, in the Board of Directors'
opinion, doing so would be in the best interests of the Fund and its
shareholders.
14
