<PAGE> 1
OFFICERS AND DIRECTORS
DIRECTORS
Donald E. Cantlay
DeWayne W. Moore
Lawrence J. Sheehan
Kenneth L. Trefftzs
OFFICERS
Robert L. Rodriguez, President and
Chief Investment Officer
Christopher Linden, Senior Vice President
Eric S. Ende, Vice President
Julio J. de Puzo, Jr., Treasurer
Sherry Sasaki, Secretary
Christopher H. Thomas, Assistant Treasurer
INVESTMENT ADVISER
First Pacific Advisors, Inc.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
DISTRIBUTOR
FPA Fund Distributors, Inc.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
COUNSEL
O'Melveny & Myers
Los Angeles, California
CUSTODIAN & TRANSFER AGENT
State Street Bank and Trust Company
Boston, Massachusetts
INDEPENDENT AUDITORS
Ernst & Young LLP
Los Angeles, California
SHAREHOLDER SERVICE AGENT
Boston Financial Data Services, Inc.
P.O. Box 8500
Boston, Massachusetts 02266-8500
(800) 638-3060
(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.
1
<PAGE> 2
LETTER TO SHAREHOLDERS
IN MEMORIAM
It is with great sadness that we report that George H. Michaelis, Chairman of
the Board and Chief Executive Officer of First Pacific Advisors, Inc. and
Chairman of the Board of FPA Capital Fund, Inc., was killed in a tragic accident
on March 10. The Directors and employees of both FPA Capital Fund and First
Pacific Advisors join the Fund's shareholders in mourning George's loss. He was
an exceptional investor and a respected colleague, friend, and mentor. George
was a truly outstanding human being who left an indelible mark on the company,
the investment industry and all of us who had the privilege of working with him.
His lasting legacy is that he built an organization and team able to carry on in
his absence.
DEAR FELLOW SHAREHOLDERS:
This Annual Report covers the fiscal year ended March 31, 1996. Your Fund's
net asset value (NAV) per share closed at $27.55. Dividends of $ 0.61 and $2.20
per share were paid on July 15, 1995, and January 8, 1996, to holders of record
on June 30 and December 29, 1995, respectively. The July distribution was
composed of a $0.09 income dividend and a $0.52 long-term capital gains
distribution. The January distribution included an income dividend of $0.17 and
a $2.03 long-term capital gains distribution.
The following table shows the average annual total return for several
different periods ended on that date for the Fund and comparative indices of
securities prices. 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 MARCH 31, 1996
---------------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
FPA Capital Fund, Inc. ..................
(NAV) ................................. 36.84%* 23.16%* 18.27%*
FPA Capital Fund, Inc. ..................
(Net of Sales Charge) ................. 27.95%++ 21.52%++ 17.48%++
Lipper Growth Fund
Average ............................... 28.31% 13.71% 12.38%
Standard & Poor's
500 Stock Index ....................... 32.14% 14.68% 13.89%
Russell 2000 ............................ 29.04% 16.01% 10.40%
</TABLE>
For the calendar year ended December 31, 1995, these same comparisons are
38.39%* for FPA Capital Fund, 30.79% for the Growth Fund average, 37.50% for the
S&P 500, and 28.44% for the Russell 2000.
COMMENTARY
Fiscal 1996 proved to be an excellent year for your Fund. A review of the
preceding performance table shows that it materially outperformed other growth
mutual funds as well as the major market indices. For calendar 1995 it also
slightly outperformed the S&P 500. This was extremely difficult to do since
small cap stocks, as measured by the Russell 2000 index, trailed the S&P 500's
performance by 9.06 percentage points. Stock and sector selection were key
elements in your Fund's superior performance.
In our opinion, calendar 1995 was a truly extraordinary performance year.
The S&P 500's 37.5% return was the largest since 1958's 43.4% return. Only five
other calendar periods during the past seventy years have shown higher returns
than that of 1995. Last year's results even exceeded the 37.3% return of 1975,
when stocks were rebounding from the severest stock market decline since the
Depression. Generally, these earlier high return periods represented rebounds
from depressed price levels that reflected either recessions or a depression.
This was not the case in 1995. We are thankful to be among the minority of
mutual funds who can report that they outperformed the S&P 500 in 1995.
Your Fund's large exposure to the technology and financial service sectors
was critical to last year's performance. At one point, almost 55% of the
portfolio was invested in these areas; however, as prices rose, we began to
reduce our exposure, so that by September 30 they represented 41.9%. This was
fortunate since the fourth quarter was an extremely difficult one for technology
stocks. The Fund's technology holdings had decreased from 32% to a low of 17%.
Due to the severity of the price declines, we began to repurchase some of these
stocks and added three new companies. At March 31, 1996, technology stocks
accounted for 23.4%. We believe they represent good value at an
- ---------------
* 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> 3
average of 11x 1996 earnings' estimates and 2x book value. Obviously, we are not
invested in some of the more speculative areas of technology; some of which,
such as the Internet related stocks, not only discount the future but, in some
cases, probably the hereafter.
We continue to maintain a cautious view towards the stock market. Valuation
levels are still rising. At the end of March, P/E (Price/Earnings) ratios for
the S&P 500 and the Russell 2000 were 17.7x and 24.1x, respectively. These are
UP from the 17x and 22.4x at September 30 last year while your Fund's P/E is
DOWN to 14.6x from 16.5x. To justify the market's high valuation level requires
a benign interest rate environment as well as continued growth in corporate
profitability. In our opinion, if the economy grows much faster than a real rate
of 2.5%, this will likely have negative implications for the interest rate
outlook and the stock market. At a growth rate lower than this, interest rates
must fall fast enough to offset any potential negative effects that might result
from a slowing in corporate profitability growth. There does not appear to be
much margin for error.
The investor consensus appears to be quite "bullish." According to the
Market Vane Corporation's survey, we are at the highest levels of "bullish"
sentiment since 1986. Liquid asset ratios are close to their lowest levels since
1980 for Growth, Aggressive Growth, and Growth and Income funds. Typically, low
liquidity levels usually appear when the stock market is closer to the higher
end of a price range. A recent study by The Leuthold Group compared various
measures of valuation for the S&P 400 to other periods. Utilizing normalized
data, they concluded that the S&P 400 would have to decline 11% to match a 1987
peak valuation level or 21% to match the top quartile of all market valuation
levels since 1926. We do not know if they are correct but we do feel there is a
growing level of speculation in the market. Today's environment warrants a
higher level of caution.
What are we doing in light of the above? We are in the process of reducing
or eliminating some of our higher valuation positions. For example, after the
fiscal year-end, we completed the sale of our NIKE holding. Emotionally, it was
hard to do because we have owned it consistently since 1984. It felt as if we
were forcing one of our children to leave home. This has to be one of the great
investment success stories, since it rose almost sixty-fold from its low in
1984. There is no doubt that this is an excellent company; however, we believe
it is a bit richly priced at 25x earnings, 6x book value and 2.2x revenues. To
remain at or go higher from these valuation measures requires that investors
view this company as another McDonald's or Coke. This we are unwilling to do.
Furthermore, we believe we can eventually redeploy the proceeds into other
companies that may have better upside potential with less downside risk -- our
goal always. Another factor of our strategy is the maintenance of a reasonably
high liquid asset level. Currently, it is at 21%. We will deploy this capital
when we find companies, irrespective of the market's level, that are attractive
on an ABSOLUTE value basis rather than on a RELATIVE value basis. This is
becoming progressively harder to do as the market continues its dramatic climb.
During the second half of the fiscal year, we added three new companies.
Exabyte Corporation and Quantum Corporation are in the data storage industry.
Exabyte is a leading tape storage company. It has a history of high
profitability, though currently it is experiencing some difficulty that we
believe will prove to be short-term in nature. We purchased it at a modest
premium to book value and at 12x 1996 earnings. Quantum is the second largest
independent disc drive manufacturer. It too has experienced some profitability
difficulties from integrating a high-end data storage acquisition. With a market
capitalization of only 21% of revenues, we think its share price discounts these
problems. Finally, Fluke Corporation is a leader in hand-held electronic test
and measurement instruments. It is in the process of a profit recovery. At 1.4x
book value and 13x earnings, we believe its current valuation does not
adequately reflect its profitability improvement. In each case, we added these
companies during periods of price weakness.
Two companies were eliminated from the portfolio. One was a mistake while
the other was a modest success. Micropolis never got its business strategy
together. After two years of "spin-arounds" rather than a turn-around, a change
in business strategy forced us to sell the position at a modest loss. Bay View
Capital Corporation was sold after a nice price increase that reflected a
growing belief in a California economic recovery. This position was acquired
during the midst of the last California recession. It had a strong capital
structure but was never able to attain a consistent level of reasonable
profitability. New management is attempting to do this and we believe they have
a good chance of success. Despite this optimism, we think the
3
<PAGE> 4
current share price already discounts most of this potential success.
We believe the portfolio is in good shape. Its average P/E is 14.6x
trailing twelve month earnings. If we use estimates of 1996 earnings, we believe
it is closer to 13x. With additional portfolio changes, we are attempting to
lower the portfolio's P/E even further. Our companies are financially strong
with a 17.3% Total Debt to Total Capitalization ratio. This compares favorably
to the 35.8% and 48.5% for the Russell 2000 and the S&P 500, respectively. The
portfolio's average return on equity is 18.3%, while those of the Russell 2000
and the S&P 500 are 14.7% and 22.3%, respectively. On a P/BV (Price/Book Value)
basis, your Fund is at 2x versus 2.4x and 3.7x for the Russell 2000 and the S&P
500, respectively.
It has been a pleasure conveying these positive results. We thank you for
your investment and continuing interest in FPA Capital Fund, Inc.
Respectfully submitted,
/s/ ROBERT L. RODRIGUEZ, C.F.A.
- --------------------------------------
Robert L. Rodriguez, C.F.A.
President and Chief Investment Officer
April 27, 1996
- --------------------------------------------------------------------------------
Change in Value of a $10,000 Investment in FPA Capital Fund, Inc. vs. S&P 500
and Lipper Growth Fund Average from April 1, 1986 to March 31, 1996
<TABLE>
<CAPTION>
3/31/86 3/31/87 3/31/88 3/31/89 3/31/90 3/31/91 3/31/92 3/31/93 3/31/94 3/31/95 3/31/96
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA Capital Fund, Inc. 9,350 11,266 11,581 13,002 15,438 17,662 23,636 26,999 30,544 36,582 50,059
FPA Capital Fund, Inc. (NAV) 10,000 12,049 12,386 13,906 16,511 18,890 25,279 28,876 32,667 39,125 53,539
S&P 500 10,000 12,567 11,521 13,584 16,173 18,507 20,550 23,688 24,029 27,775 36,716
Lipper Growth Fund Average 10,000 12,039 11,023 12,614 14,618 16,794 19,320 21,710 22,661 24,637 31,128
</TABLE>
Past performance is not indicative of future performance. The Standard & Poor's
500 Stock Index (S&P 500) is a broad-based unmanaged index of publicly traded
stocks. The S&P 500 does not reflect any commissions or fees which would be
incurred by an investor purchasing the stocks it represents. The Lipper Growth
Fund Average provides an additional comparison of how your Fund performed in
relation to other mutual funds with similar objectives. The Lipper data does not
include sales charges. The performance shown for FPA Capital Fund, Inc., with an
ending value of $50,059, reflects deduction of the current maximum sales charge
of 6.5% of the offering price. In addition, since investors purchase shares of
the Fund with varying sales charges depending primarily on volume purchased, the
Fund's performance at net asset value (NAV) is also shown, as reflected by the
ending value of $53,539. The performance of the Fund and of the Averages is
computed on a total return basis which includes reinvestment of all
distributions.
4
<PAGE> 5
MAJOR PORTFOLIO CHANGES
Six Months Ended March 31, 1996
<TABLE>
<CAPTION>
Shares or
Principal
Amount
-------------
<S> <C>
NET PURCHASES
COMMON STOCKS
Angelica Corporation ........................................ 80,100 shs.
Arrow Electronics, Inc. ..................................... 122,500 shs.
Claire's Stores, Inc. ....................................... 184,950 shs.
Coachmen Industries, Inc. ................................... 15,000 shs.
Comdisco, Inc. .............................................. 23,450 shs.
Countrywide Credit Industries, Inc. ......................... 190,000 shs.
Devon Group, Inc. ........................................... 85,000 shs.
Exabyte Corporation (1) ..................................... 275,000 shs.
Fluke Corporation (1) ....................................... 159,900 shs.
Good Guys, Inc., The ........................................ 175,000 shs.
International Aluminum Corporation .......................... 40,000 shs.
Mac Frugal's Bargains Close-outs Inc. ....................... 650,000 shs.
Marshall Industries ......................................... 110,000 shs.
Quantum Corporation (1) ..................................... 385,000 shs.
Recoton Corporation ......................................... 20,000 shs.
Reebok International Ltd. ................................... 265,000 shs.
Storage Technology Corporation .............................. 23,300 shs.
NET SALES
COMMON STOCKS
Bay View Capital Corporation (2) ............................ 140,000 shs.
Micropolis Corporation (2) .................................. 320,000 shs.
NIKE, Inc. (Class "B") ...................................... 150,000 shs.
United Industrial Corporation ............................... 10,000 shs.
Westcorp .................................................... 40,600 shs.
NON-CONVERTIBLE BOND
Government National Mortgage Association
(REMIC) - 7.99125% 2010 ..................................... $ 2,106,013
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE> 6
PORTFOLIO OF INVESTMENTS
March 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- ----------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
TECHNOLOGY -- 23.4%
Arrow Electronics, Inc.* ...................... 350,000 $ 9,616,980 $16,450,000
Exabyte Corporation* .......................... 275,000 3,776,683 4,485,937
Fluke Corporation ............................. 159,900 5,134,594 6,096,187
Keithley Instruments, Inc. .................... 200,000 1,227,092 2,800,000
Komag, Incorporated* .......................... 327,800 2,833,000 7,949,150
Marshall Industries* .......................... 400,000 6,492,648 12,200,000
Photronics, Inc.* ............................. 75,000 441,250 1,598,438
Quantum Corporation* .......................... 385,000 6,572,237 6,930,000
Seagate Technology, Inc.* ..................... 400,000 4,266,075 21,900,000
Storage Technology Corporation* ............... 500,000 10,773,165 13,062,500
----------- -----------
$51,133,724 $93,472,212
----------- -----------
FINANCIAL -- 21.7%
Comdisco, Inc. ................................ 575,000 $ 6,578,555 $12,721,875
Countrywide Credit Industries, Inc. ........... 550,000 9,459,401 12,168,750
Foremost Corporation of America ............... 50,000 1,672,500 2,750,000
Green Tree Financial Corporation .............. 1,100,000 891,133 37,812,500
Quick & Reilly Group, Inc., The ............... 542,850 2,803,456 16,014,075
UnionFed Financial Corporation (Warrants)* .... 314,286 122,210 --
Westcorp ...................................... 280,001 1,790,553 5,180,015
----------- -----------
$23,317,808 $86,647,215
----------- -----------
RETAILING -- 12.0%
Claire's Stores, Inc. ......................... 559,950 $ 5,050,336 $10,149,094
Good Guys, Inc., The* ......................... 525,000 4,764,000 4,593,750
Mac Frugal's Bargains Close-outs Inc.* ........ 900,000 11,874,821 12,600,000
Ross Stores, Inc. ............................. 820,000 9,868,938 20,602,500
----------- -----------
$31,558,095 $47,945,344
----------- -----------
CONSUMER DURABLES -- 8.1%
Coachmen Industries, Inc.+ .................... 373,000 $ 3,817,368 $ 9,791,250
Fleetwood Enterprises, Inc. ................... 290,000 4,035,995 7,177,500
Flexsteel Industries, Inc. .................... 160,000 2,008,125 1,600,000
Recoton Corporation* .......................... 460,000 7,103,270 8,797,500
Thor Industries, Inc. ......................... 275,000 3,140,956 5,156,250
----------- -----------
$20,105,714 $32,522,500
----------- -----------
CONSUMER NON-DURABLES -- 6.2%
NIKE, Inc. (Class "B") ........................ 90,000 $ 157,187 $ 7,312,500
Rawlings Sporting Goods Company, Inc.* ........ 225,000 2,573,461 1,856,250
Reebok International Ltd. ..................... 565,000 17,871,206 15,608,125
----------- -----------
$20,601,854 $24,776,875
----------- -----------
</TABLE>
6
<PAGE> 7
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS--CONTINUED Amount Cost Value
- ------------------------------------------------ --------- ------------ ------------
<S> <C> <C> <C>
BASIC MATERIALS -- 2.9%
International Aluminum Corporation ............. 200,000 $ 4,117,806 $ 5,350,000
Rouge Steel Company (Class "A") ................ 275,000 5,996,275 6,084,375
------------ ------------
$ 10,114,081 $ 11,434,375
------------ ------------
INDUSTRIAL SERVICES -- 2.1%
Angelica Corporation ........................... 400,000 $ 9,393,476 $ 8,500,000
------------ ------------
DEFENSE -- 1.3%
Diagnostic/Retrieval Systems, Inc. (Class "A")*+ 310,000 $ 1,646,478 $ 2,480,000
Diagnostic/Retrieval Systems, Inc. (Class "B")*+ 200,000 861,240 1,587,500
United Industrial Corporation .................. 197,500 2,671,212 1,036,875
------------ ------------
$ 5,178,930 $ 5,104,375
------------ ------------
PRINTING & PUBLISHING -- 0.9%
Devon Group, Inc.* ............................. 125,000 $ 2,884,000 $ 3,562,500
------------ ------------
TOTAL COMMON STOCKS -- 78.6% ................... $174,287,682 $313,965,396
------------ ------------
PREFERRED STOCK -- 0.4%
Craig Corporation (Class "A")* ................. 160,000 $ 1,906,272 $ 1,760,000
------------ ------------
NON-CONVERTIBLE BONDS -- 5.2%
Federal Home Loan Mortgage Corporation
(CMO)--7% 2020 ................................ $5,000,000 $ 4,981,250 $ 4,920,312
Federal Home Loan Mortgage Corporation
(PAC IO-CMO)--7% 2020 ......................... 3,755,714 979,459 1,046,905
Federal National Mortgage Association
(PAC-REMIC)--8 1/2% 2025 ...................... 7,000,000 7,021,875 7,122,500
Federal National Mortgage Association
(PAC IO-REMIC)--6% 2013 ....................... 6,871,104 483,492 487,419
Government National Mortgage Association
(REMIC)--7.99125% 2010 ........................ 7,122,033 7,122,032 7,175,448
------------ ------------
$ 20,588,108 $ 20,752,584
------------ ------------
</TABLE>
7
<PAGE> 8
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Principal
Amount Cost Value
----------- ------------ ------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENT -- 1.3%
U.S. Treasury Notes-- 4 1/4% 5/15/96 ............................ $ 5,000,000 $ 4,901,719 $ 4,992,188
------------ ------------
TOTAL INVESTMENT SECURITIES -- 85.5% ............................ $201,683,781 $341,470,168
============ ------------
OTHER SHORT-TERM INVESTMENTS -- 14.2%
Amoco Company -- 5.15% 4/2/96 ................................... $15,000,000 $ 14,997,854
Shell Oil Company -- 5.33% 4/2/96 ............................... 6,300,000 6,299,067
Hertz Corporation -- 5.35% 4/3/96 ............................... 2,300,000 2,299,316
Ford Motor Credit Company -- 5.42% 4/4/96 ....................... 19,000,000 18,991,418
Hertz Corporation -- 5.43% 4/4/96 ............................... 6,400,000 6,397,104
American General Corporation -- 5.39% 4/8/96 .................... 6,000,000 5,993,712
State Street Bank Repurchase Agreement -- 4 3/4% 4/1/96
(Collateralized by U.S. Treasury Notes -- 7 3/4% 1999,
market value $1,589,676) ...................................... 1,558,000 1,558,617
------------
$ 56,537,088
------------
TOTAL INVESTMENTS -- 99.7% ...................................... $398,007,256
Other assets less liabilities -- 0.3% ........................... 1,275,011
------------
TOTAL NET ASSETS -- 100.0% ...................................... $399,282,267
============
</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> 9
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $201,683,781) ............................ $341,470,168
Short-term investments -- at cost plus interest earned
(maturities 60 days or less) .............................. 56,537,088 $398,007,256
------------
Cash .......................................................... 99
Receivable for:
Dividends and accrued interest .............................. $ 770,082
Capital Stock sold .......................................... 611,110
Investment securities sold .................................. 427,186 1,808,378
------------ ------------
$399,815,733
LIABILITIES
Payable for:
Advisory fees and financial services ........................ $ 251,981
Capital Stock repurchased ................................... 184,966
Accrued expenses and other liabilities ...................... 96,519 533,466
------------ ------------
NET ASSETS -- equivalent to $27.55 per share on 14,494,465
shares of Capital Stock outstanding ........................... $399,282,267
============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 14,494,465 shares ........... $ 144,945
Additional Paid-in Capital .................................... 249,257,922
Undistributed net realized gain on investments ................ 8,588,993
Undistributed net investment income ........................... 1,504,020
Unrealized appreciation of investments ........................ 139,786,387
------------
Net assets at March 31, 1996 .................................. $399,282,267
============
</TABLE>
See notes to financial statements.
9
<PAGE> 10
STATEMENT OF OPERATIONS
For the Year Ended March 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest .......................................................................... $ 4,955,208
Dividends ......................................................................... 2,417,573
-----------
$ 7,372,781
EXPENSES
Advisory fees ..................................................................... $ 2,244,261
Financial services ................................................................ 337,579
Transfer agent fees and expenses .................................................. 186,391
Custodian fees and expenses ....................................................... 45,115
Registration fees ................................................................. 39,088
Audit fees ........................................................................ 27,850
Postage ........................................................................... 24,366
Directors' fees and expenses ...................................................... 19,980
Legal fees ........................................................................ 16,838
Insurance ......................................................................... 13,920
Reports to shareholders ........................................................... 12,630
Taxes, other than federal income tax .............................................. 800
Other expenses .................................................................... 10,585 2,979,403
------------ -----------
Net investment income ..................................................... $ 4,393,378
-----------
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) ...................... $ 68,223,067
Cost of investment securities sold ................................................ 33,524,187
------------
Net realized gain on investments ................................................ $34,698,880
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year ...................................... $ 80,115,701
Unrealized appreciation at end of year ............................................ 139,786,387
------------
Increase in unrealized appreciation of investments ............................. 59,670,686
-----------
Net realized and unrealized gain on investments ........................... $94,369,566
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ..................................................................... $98,762,944
===========
</TABLE>
See notes to financial statements.
10
<PAGE> 11
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended March 31,
------------------------------------------------------------
1996 1995
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income ..................... $ 4,393,378 $ 897,432
Net realized gain on investments .......... 34,698,880 8,147,392
Increase in unrealized appreciation
of investments .......................... 59,670,686 26,393,925
------------ ------------
Increase in net assets resulting
from operations ........................... $ 98,762,944 $ 35,438,749
Distributions to shareholders from:
Net investment income ..................... $ (3,256,784) $ (732,029)
Net realized capital gains ................ (32,254,690) (35,511,474) (4,658,052) (5,390,081)
------------ ------------
Capital Stock transactions:
Proceeds from Capital Stock sold .......... $123,331,788 $ 55,311,219
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions .......... 29,555,959 4,873,246
Cost of Capital Stock repurchased ......... (53,512,942) 99,374,805 (19,260,877) 40,923,588
------------ ------------ ------------ ------------
Total increase in net assets ................ $162,626,275 $ 70,972,256
NET ASSETS
Beginning of year, including
undistributed net investment income
of $367,426 and $202,023 .................. 236,655,992 165,683,736
------------ ------------
End of year, including undistributed
net investment income
of $1,504,020 and $367,426 ................ $399,282,267 $236,655,992
============ ============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold ................ 4,796,761 2,690,430
Shares issued to shareholders upon
reinvestment of dividends and
distributions ............................. 1,162,515 252,685
Shares of Capital Stock repurchased ......... (2,027,718) (963,643)
------------ ------------
Increase in Capital Stock outstanding ....... 3,931,558 1,979,472
============ ============
</TABLE>
See notes to financial statements.
11
<PAGE> 12
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year ............... $ 22.40 $ 19.30 $ 19.06 $ 18.32 $ 14.60
-------- -------- -------- -------- --------
Net investment income .............................. $ 0.33 $ 0.09 $ 0.04 $ 0.05 $ 0.09
Net realized and unrealized gain
on investment securities ......................... 7.63 3.62 2.30 2.26 4.63
-------- -------- -------- -------- --------
Total from investment operations ................... $ 7.96 $ 3.71 $ 2.34 $ 2.31 $ 4.72
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income ............. $ (0.26) $ (0.08) $ (0.03) $ (0.05) $ (0.10)
Distributions from net realized capital gains .... (2.55) (0.53) (2.07) (1.52) (0.90)
-------- -------- -------- -------- --------
Total distributions .............................. $ (2.81) $ (0.61) $ (2.10) $ (1.57) $ (1.00)
-------- -------- -------- -------- --------
Net asset value at end of year ..................... $ 27.55 $ 22.40 $ 19.30 $ 19.06 $ 18.32
======== ======== ======== ======== ========
Total investment return* ........................... 36.84% 19.77% 13.13% 14.23% 33.82%
Ratios/supplemental data:
Net assets at end of year (in thousands) ........... $399,282 $236,656 $165,684 $134,169 $109,581
Ratio of expenses to average net assets ............ 0.87% 0.95% 1.03% 1.06% 1.08%
Ratio of net investment income to
average net assets ............................... 1.28% 0.48% 0.20% 0.29% 0.55%
Portfolio turnover rate ............................ 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.
See notes to financial statements.
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
March 31, 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 Fund's primary investment
objective is long-term capital growth. Current income is a factor, but a
secondary consideration. 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 year, 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 $103,688,515 for the
year ended March 31, 1996. Realized gains or losses are based on the
specific-certificate identification method. Cost of securities held at March 31,
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 0.1% 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 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 year ended March 31, 1996, the Fund paid aggregate fees of $19,500
to all Directors who are not affiliated persons of the Adviser. Legal fees were
for services rendered by O'Melveny & Myers, counsel for the Fund. A Director of
the Fund is of counsel to, and a retired partner of, that firm.
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE 4 -- DISTRIBUTOR
For the year ended March 31, 1996, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $127,932 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.
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF FPA CAPITAL FUND, INC.
We have audited the accompanying statement of assets and liabilities of FPA
Capital Fund, Inc., including the portfolio of investments, as of March 31,
1996, the related statement of operations for the year then ended, the statement
of changes in 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 Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, including confirmation of securities owned as of March 31, 1996, 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 FPA
Capital Fund, Inc. at March 31, 1996, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
- ---------------------------
ERNST & YOUNG LLP
Los Angeles, California
April 19, 1996
14
