<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annual Report
FPA Capital Fund, Inc.
LOGO
Distributor:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
March 31, 1997
<PAGE> 2
LETTER TO SHAREHOLDERS
DEAR FELLOW SHAREHOLDERS:
This Annual Report covers the fiscal year ended March 31, 1997. Your
Fund's net asset value (NAV) per share closed at $32.28. Dividends of $0.74
and $1.89 per share were paid on July 15, 1996, and January 6, 1997, to holders
of record on June 28 and December 31, 1996, respectively. The July
distribution was composed of a $0.17 income dividend and a $0.57 capital gains
distribution, $0.56 of which was long-term. The January distribution included
an income dividend of $0.20 and $1.69 capital gains distribution, $1.55 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 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, 1997
----------------------------
1 YEAR 5 YEARS 10 YEARS
----- ------- --------
<S> <C> <C> <C>
FPA Capital Fund, Inc.
(NAV) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.30%* 21.94%* 18.92%*
FPA Capital Fund, Inc.
(Net of Sales Charge) . . . . . . . . . . . . . . . . . . . . . . . . . 19.03%++ 20.31%++ 18.12%++
Lipper Growth Fund
Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.74% 13.39% 11.63%
Standard & Poor's
500 Stock Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.94% 16.46% 13.35%
Russell 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.11% 12.78% 9.40%
</TABLE>
For the calendar year ended December 31, 1996, these same comparisons
are 37.76%* for FPA Capital Fund, 19.24% for the Growth Fund average, 23.25%
for the S&P 500, and 16.49% for the Russell 2000.
COMMENTARY
Fiscal 1997 was another exceptional year for your Fund. Despite a
large liquidity position and a focus on small- to mid-size capitalization
stocks, your Fund was able to outperform the major indices. (See the preceding
table.) This was difficult to do since small-cap stocks, as measured by the
Russell 2000 index, continue their trend of underperforming the S&P 500, a
measure of large-cap performance. Stock selection was key to your Fund's
superior relative performance. More importantly, your Fund continues to
materially outperform the indices over longer periods. As an example, Lipper
Analytical Services, Inc. ranks your Fund 5th out of 686 and 11th out of 355
equity mutual funds for the ten- and fifteen-year periods ended March 31, 1997,
respectively. What is interesting in the ten-year rankings is that the top
four funds are sector funds--three financial service and one technology.
Typically, when such a fund reaches the top, it is late in the cycle for that
particular sector.
Calendar 1996 was a challenging year in that about 40% of all stocks
declined and larger capitalization stocks skewed index returns. For example,
the total return for the 100 largest Nasdaq companies (over-the-counter) was
42.5% while the index itself was up only 22.7% and the median return was just
6.6%. In the case of the S&P 500, the performance of each quintile improved as
market capitalization increased.
This trend of larger stocks outperforming smaller ones has led to an
increasing interest in stock indexation. It reflects a growing belief that
since active portfolio management cannot outperform the market, it is better to
own an index fund; and this is supported by the fact that capitalization-
weighted index funds have outperformed 90% of actively managed equity mutual
funds over the past three years. An active manager would not own the same
percentage of a stock represented in an index since it would be too large a
position in some cases. For example, the largest company in the S&P 500 has 400
times the weighting of the smallest. When an active manager is fired and the
proceeds are re-invested in an index fund, it puts greater buying pressure on
the larger stocks and more selling
__________________
* 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
<PAGE> 3
pressure on the smaller ones. Even if new money is invested in an index fund,
it will place proportionally greater buying pressure on the larger companies in
that index. Such trends do reverse. As an example, between 1984 and 1996 the
capitalization-weighted S&P 500 outperformed the equal-weighted S&P 500 70% of
the time. In contrast, between 1958 and 1983 the equal-weighted outperformed
the capitalization-weighted 73% of the time. Our hope is that increasing
amounts of capital will be invested in index funds. Eventually this would lead
to massive stock market inefficiencies, as index funds do not do any equity
research.
The past two calendar years are among the best on record for the stock
market. Two years of your Fund averaging 38%* total returns is just
unbelievable and to achieve a third year of similar return is extremely
unlikely. We do not believe that the key factors influencing stock prices
going forward will be as favorable as they have been for the last two years.
For example, during this period, the financial and technology groups accounted
for 74% of the profit increase recorded by the S&P 500. Concentrated profit
increases are generally more unstable than well-diversified increases. For
1997, DRI/McGraw-Hill is predicting the S&P 500's earnings per share growth
will average only 4.7% versus an annual rise of 12.6% over the previous two
years. In the fourth quarter of 1996, the Commerce Department's data show that
profit margins for non-financial corporations fell. In the first quarter of
1997, it appears that unit labor costs have risen faster than prices and
therefore, a squeeze on the cost side is developing. As you may recall, during
the past year our shareholder letters addressed the likelihood of such eroding
profit margins and rising labor costs becoming challenges to the ever-rising
stock market.
On March 25, the Federal Reserve increased the Federal Funds rate for
the first time in slightly more than two years. We believe that Alan
Greenspan, chairman of the Federal Reserve, is serious in trying to reduce the
acceleration in inflation and the stock markets' speculative excesses. Both
areas can be potentially destabilizing to the economy should they begin to get
out of control. We have felt for some time that economic growth was building
faster than consensus expectations. Consumer confidence is at its highest
level in 25 years and we are at record levels of employment as a percentage of
the adult population. Given the low level of unemployment, we believe there is
growing risk from accelerating wages and employment costs. The consensus
appears to be shifting towards this viewpoint. In light of this, we expect the
Fed to hike short-term interest rates at least one or possibly two more times
with the increase totaling an additional 50 basis points. The key to the
magnitude of increase is dependent upon the strength and duration of the
economic acceleration. The second half of 1997 should be influenced by the
dimension of recovery of our foreign trading partners' economies. The shape
and level of their yield curves indicate that the odds of accelerating growth
are rising, and this is apt to place additional stress on our interest rate
markets. Finally, we believe the Fed will be monitoring progress on the
budget. The likelihood of meaningful budgetary reform appears to be waning.
The President's budget proposal has 99% of the expenditure cuts occurring in
the final two years, after he has left office. We understand that this is a
negotiating ploy but it does raise questions about a potential compromise with
Congress. Should no real budgetary reform occur by April or May of 1998,
nothing is likely until after the year 2000. This set of events could place
even greater pressure on the Fed.
We see growing risks to the stock market. Liquidity levels at U.S.
equity funds are at 5.3%, the lowest in 21 years. During the ten days after
the 1987 crash, net redemptions amounted to 4.5% of equity mutual fund assets.
In a stock market decline, these meager liquidity reserves could be redeemed
very quickly. Forced sales of securities might occur if the redemptions
continued. It also concerns us that the number of investors in mutual funds
has about doubled in seven years with 67% of the increase in the past four
years. In essence, more than 80% of all the money ever invested has come in
since 1990--the last major decline in share prices.
_______________
* Does not reflect deduction of the sales charge which, if
reflected, would reduce the performance shown
2
<PAGE> 4
Our response to these trends and the rising level of stock valuations has been
to increase your Fund's liquidity and bond holdings to 30%, a new high, from
21% at this time last year.
During the past two weeks, the stock market began a broad-based
decline, as long-term U.S. Treasury bond yields rose above the 7% level. We
believe that Treasury yields above 7% provide serious competition to stocks.
Large and small cap indices are down between 7% and 13% from their peaks.
During the first calendar quarter of 1997, the average equity mutual fund
declined about 2%, while the small- and mid-cap funds were down 6.9% and 5.8%,
respectively. Many growth and momentum-oriented funds declined about 20%. Your
Fund was up 0.6%*. Our defensiveness is beginning to be rewarded. Should this
decline persist, it may give us the opportunity to deploy some of the liquidity
we have been holding. Our feeling is that it will take a more substantial
decline before attractive investments develop and we are patiently waiting.
It has been extremely difficult for us to find new companies at
attractive valuations since the market is richly priced across virtually all
market capitalization ranges. Our latest computer screens show the lowest
level of qualifying companies in five years. In light of this, we added only
one new company, Michaels Stores, Inc., the leading U.S. retailer of arts and
crafts merchandise, since our September shareholder letter. In the past year,
new senior management has been mounting a major business turnaround. Prior to
this period, we had little interest in the company since we believed it to be
mismanaged, with poor management information systems. R. Michael Rouleau, the
new chief executive officer, is a well-respected manager who came from the
Lowe's Companies, where he led a major turnaround. He brought in several new
managers to evaluate and improve all areas of the company's operations. Our
research indicates that they are making the right moves. We acquired the
Fund's position at an average cost of $11.78, at which price the stock sold at
approximately 80% of book value and 20% of revenues. When this stock was in
favor three years ago, it sold as high as $46.50. During the past year, the
chairman purchased, at similar price levels, almost $50 million in stock. If
we are correct in our analysis, within two or three years this company could be
earning $2.50 to $3 per share. We also purchased some of the company's
outstanding debt since it too had become severely depressed in price.
Only one holding, Photronics Inc., has been eliminated since our
September shareholder letter. Valuation was the key factor in the sale
decision. Should the stock decline significantly, we would most likely own it
again. It is a very profitable company with a leading market share position in
the photo mask industry.
The Fund's portfolio retains a competitive valuation advantage to that
of the market. At the end of March, the P/E (Price/Earning) and P/BV
(Price/Book Value) ratios were 16.0x and 2.2X, respectively. By comparison,
the P/E ratios of the Russell 2000 and the S&P 500 were 21.4x and 19.0x, while
the P/BV ratios were 2.3x and 3.4x, respectively. Our companies are
financially strong with a 21.7% total debt to total capitalization ratio. This
compares favorably to 37.7% and 47.4% for the Russell 2000 and the S&P 500.
Finally, the portfolio's average return on equity is 14.3%, while those of the
Russell 2000 and the S&P 500 are 14.4% and 22.4%, respectively.
This shareholder letter continues a more cautionary trend, as the
stock market skyrockets upwards. We are striving to protect your capital so
that we may invest it when we believe the return versus risk ratios are more
heavily skewed in our favor. Ours is a very patient, "pick one stock at a
time" approach. We thank you for your investment and continued support.
Respectfully submitted,
/s/ Robert L. Rodriguez
- -------------------------------
Robert L. Rodriguez, C.F.A.
President and Chief Investment Officer
April 6, 1997
_______________
* Does not reflect deduction of the sales charge which, if reflected,
would reduce the performance shown
3
<PAGE> 5
HISTORICAL PERFORMANCE
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, 1987 to March 31, 1997
<TABLE>
<CAPTION>
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
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA Capital Fund, Inc. 9,350 9,612 10,791 12,812 14,659 19,616 22,408 25,350 30,361
FPA Capital Fund, Inc. (NAV) 10,000 10,280 11,541 13,703 15,678 20,980 23,965 27,112 32,472
S&P 500 10,000 9,164 10,806 12,870 14,717 16,343 18,839 19,112 22,092
Lipper Growth Fund Average 10,000 9,147 10,474 12,145 13,194 15,963 18,052 18,922 20,633
</TABLE>
<TABLE>
<CAPTION>
3/31/96 3/31/97
------- -------
<S> <C> <C>
FPA Capital Fund, Inc. 41,546 52,886
FPA Capital Fund, Inc. (NAV) 44,435 56,563
S&P 500 29,192 35,012
Lipper Growth Fund Average 26,490 30,049
</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 $52,886, 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 $56,563. The performance of
the Fund and of the Averages is computed on a total return basis which includes
reinvestment of all distributions.
4
<PAGE> 6
MAJOR PORTFOLIO CHANGES
Six Months Ended March 31, 1997
<TABLE>
<CAPTION>
Shares or
Principal
Amount
---------
<S> <C>
NET PURCHASES
COMMON STOCKS
Angelica Corporation .............................................................. 100,000 shs.
Coachmen Industries, Inc. ......................................................... 218,900 shs.
Exabyte Corporation ............................................................... 680,000 shs.
Marshall Industries ............................................................... 36,200 shs.
Michaels Stores, Inc. (1) ......................................................... 1,080,000 shs.
Storage Technology Corporation .................................................... 180,000 shs.
CONVERTIBLE SECURITY
Worthington Industries, Inc. -- 7 1/4% 2000(1) .................................... $ 1,348,500
NON-CONVERTIBLE SECURITIES
Michaels Stores, Inc. -- 10 7/8% 2006 (1) ......................................... $ 5,500,000
U.S. Treasury Notes -- 5 3/4% 1998 (1) ............................................ $ 21,000,000
NET SALES
COMMON STOCKS
Green Tree Financial Corporation .................................................. 12,400 shs.
Photronics, Inc. (2) .............................................................. 75,000 shs.
Ross Stores, Inc. ................................................................. 79,600 shs.
Seagate Technology, Inc. .......................................................... 370,000 shs.
NON-CONVERTIBLE SECURITIES
Federal Home Loan Mortgage Corporation (CMO) -- 7% 2020 (2) ....................... $ 5,000,000
Federal National Mortgage Association (PAC-IO-REMIC) -- 6% 2013 ................... $ 978,085
Federal National Mortgage Association (PAC-REMIC) -- 8 1/2% 2025 .................. $ 1,712,383
Government National Mortgage Association (REMIC) -- 7.99125% 2010 ................ $ 528,615
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
March 31, 1997
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- ------------------------------------------------------------------ ---------- -------------- ---------------
<S> <C> <C> <C>
TECHNOLOGY -- 22.7%
Arrow Electronics, Inc.* ........................................ 395,200 $11,455,357 $ 22,279,400
Exabyte Corporation* ............................................ 1,100,000 13,450,664 13,337,500
Fluke Corporation ............................................... 159,900 5,134,594 7,095,562
Keithley Instruments, Inc. ...................................... 200,000 1,227,092 1,575,000
Komag, Incorporated* ............................................ 327,800 2,833,000 9,956,925
Marshall Industries* ............................................ 546,200 10,506,439 17,205,300
Quantum Corporation* ............................................ 385,000 6,572,237 14,870,625
Seagate Technology, Inc.* ....................................... 500,000 3,191,600 22,437,500
Storage Technology Corporation* ................................. 680,000 18,209,895 26,690,000
----------- ------------
$72,580,878 $135,447,812
----------- ------------
FINANCIAL -- 16.3%
Comdisco, Inc. .................................................. 575,000 $ 6,578,555 $ 17,896,875
Countrywide Credit Industries, Inc. ............................. 550,000 9,459,401 13,612,500
Foremost Corporation of America ................................. 50,000 1,672,500 2,900,000
Green Tree Financial Corporation ................................ 1,012,600 818,824 34,175,250
Horace Mann Educators Corporation ............................... 200,000 5,679,769 8,825,000
Quick & Reilly Group, Inc., The ................................. 747,150 2,353,846 15,503,363
Westcorp ........................................................ 294,001 1,790,553 4,263,012
----------- ------------
$28,353,448 $ 97,176,000
----------- ------------
RETAILING -- 14.5%
Good Guys, Inc., The* ........................................... 525,000 $ 4,764,000 $ 3,609,375
Mac Frugal's Bargains Close-outs Inc.* .......................... 1,000,000 13,166,556 26,500,000
Michaels Stores, Inc.* .......................................... 1,080,000 12,720,662 19,845,000
Ross Stores, Inc. ............................................... 1,440,000 8,442,143 36,540,000
----------- ------------
$39,093,361 $ 86,494,375
----------- ------------
CONSUMER DURABLES -- 5.3%
Coachmen Industries, Inc.+ ...................................... 900,000 $ 9,030,404 $ 16,987,500
Flexsteel Industries, Inc. ...................................... 160,000 2,008,125 1,920,000
Recoton Corporation* ............................................ 500,000 7,788,270 6,562,500
Thor Industries, Inc. ........................................... 275,000 3,140,956 6,428,125
----------- ------------
$21,967,755 $ 31,898,125
----------- ------------
CONSUMER NON-DURABLES -- 4.6%
Rawlings Sporting Goods Company, Inc.* .......................... 225,000 $ 2,573,461 $ 2,053,125
Reebok International Ltd. ....................................... 565,000 17,871,206 25,354,375
----------- ------------
$20,444,667 $ 27,407,500
----------- ------------
</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 -- 1.6%
International Aluminum Corporation ........... 200,000 $ 4,117,806 $ 5,050,000
Rouge Steel Company (Class "A") .............. 275,000 5,996,275 4,331,250
------------ ------------
$ 10,114,081 $ 9,381,250
------------ ------------
INDUSTRIAL SERVICES -- 1.5%
Angelica Corporation+ ........................ 500,000 $ 11,311,605 $ 9,187,500
------------ ------------
CONSUMER SERVICES -- 1.0%
CPI Corp. .................................... 357,300 $ 5,282,963 $ 6,029,437
------------ ------------
DEFENSE -- 0.9%
DRS Technologies, Inc.*+ ..................... 510,000 $ 2,507,718 $ 5,418,750
------------ ------------
PRINTING & PUBLISHING -- 0.6%
Devon Group, Inc.* ........................... 125,000 $ 2,884,000 $ 3,687,500
------------ ------------
TOTAL COMMON STOCKS -- 69.0% ................. $214,540,476 $412,128,249
------------ ------------
PREFERRED STOCK -- 0.4%
Craig Corporation (Class "A")*+ .............. 160,000 $ 1,906,272 $ 2,540,000
------------ ------------
CONVERTIBLE SECURITY -- 0.3%
Worthington Industries, Inc. --7 1/4% 2000 ... $ 1,348,500 $ 1,348,500 $ 1,359,375
------------ ------------
NON-CONVERTIBLE BONDS & DEBENTURES -- 7.9%
Federal Home Loan Mortgage Corporation
(PAC-IO-CMO)--7% 2020 ....................... $ 3,755,714 $ 804,848 $ 947,144
Federal National Mortgage Association
(PAC-IO-REMIC)--6% 2013 ..................... 5,001,208 165,703 257,875
Federal National Mortgage Association
(PAC-REMIC)--8 1/2% 2025 .................... 5,287,617 5,304,141 5,290,922
Government National Mortgage Association
(REMIC)--7.99125% 2010 ...................... 5,208,249 5,208,249 5,221,270
Michaels Stores, Inc. -- 10 7/8% 2006 ........ 5,500,000 4,782,390 5,651,250
Trump Atlantic City Associates -- 11 1/4% 2006 10,000,000 9,592,500 9,050,000
U.S. Treasury Notes -- 5 3/4% 1998 ........... 21,000,000 20,886,797 20,790,000
------------ ------------
$ 46,744,628 $ 47,208,461
------------ ------------
</TABLE>
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Principal
Amount Cost Value
<S> <C> <C> <C>
SHORT-TERM INVESTMENT -- 1.2%
Private Export Funding Corp. --5.69% 2/28/99 .................... $ 7,274,000 $ 7,272,182 $ 7,248,541
------------ ------------
TOTAL INVESTMENT SECURITIES -- 78.8% ............................ $271,812,058 $470,484,626
============ ------------
OTHER SHORT-TERM INVESTMENTS -- 21.1%
General Electric Capital Corporation -- 5.26% 4/2/97 ............ 15,000,000 $ 14,997,808
General Electric Capital Corporation -- 5.3% 4/2/97 ............. 7,412,000 7,410,909
General Electric Capital Corporation -- 5.49% 4/2/97 ............ 2,000,000 1,999,695
American General Finance Corporation -- 5.28% 4/3/97 ............ 7,096,000 7,093,919
General Electric Capital Corporation -- 5.28% 4/3/97 ............ 10,700,000 10,696,861
Hertz Corporation -- 5.31% 4/3/97 ............................... 22,000,000 21,993,510
American Express Credit Corporation -- 5.3% 4/4/97 .............. 2,125,000 2,124,062
American Express Credit Corporation -- 5.63% 4/4/97 ............. 1,830,000 1,829,141
Exxon Asset Management Company -- 5.3% 4/4/97 ................... 7,722,000 7,718,589
Hertz Corporation -- 5.62% 4/4/97 ............................... 5,500,000 5,497,424
American Express Credit Corporation -- 5.33% 4/7/97 ............. 12,317,000 12,306,058
Ford Motor Credit Corporation -- 5.6% 4/7/97 .................... 9,200,000 9,191,413
General Electric Capital Services, Inc. -- 5.29% 4/10/97 ........ 16,900,000 16,877,650
General Electric Capital Corporation -- 5.31% 4/14/97 ........... 3,000,000 2,994,248
State Street Bank Repurchase Agreements -- 5% 4/1/97
(Collateralized by U.S. Treasury Bonds -- 9 7/8% -12%,
2013-2015, market value $3,676,154) .......................... 3,597,000 3,597,495
------------
$126,328,782
------------
TOTAL INVESTMENTS -- 99.9% ...................................... $596,813,408
Other assets less liabilities -- 0.1% ........................... 370,276
------------
TOTAL NET ASSETS -- 100.0% ...................................... $597,183,684
============
</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. Following is a
summary of transactions in securities of these affiliates during the year
ended March 31, 1997.
<TABLE>
<CAPTION>
Purchases Sales Realized Dividend
at Cost at Cost Gain Income
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Angelica Corporation $1,918,129 -- -- $427,800
Coachmen Industries, Inc. 6,708,323 $1,495,287 $3,838,583 142,055
Craig Corporation (Class "A") -- -- -- --
DRS Technologies, Inc. -- -- -- --
See notes to financial statements
</TABLE>
8
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $271,812,058) .................................... $470,484,626
Short-term investments -- at cost plus interest earned
(maturities 60 days or less) ...................................... 126,328,782 $596,813,408
Cash .................................................................. 450
Receivable for:
Capital Stock sold .................................................. $ 3,022,862
Dividends and accrued interest ...................................... 1,455,821 4,478,683
------------ ------------
$601,292,541
LIABILITIES
Payable for:
Investment securities purchased ..................................... $ 3,283,561
Advisory fees and financial services ................................ 434,780
Capital Stock repurchased ........................................... 323,644
Accrued expenses and other liabilities .............................. 66,872 4,108,857
------------ ------------
NET ASSETS -- equivalent to $32.28 per share on 18,501,125
shares of Capital Stock outstanding ................................... $597,183,684
------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 18,501,125 shares ................... $ 185,011
Additional Paid-in Capital ............................................ 374,738,671
Undistributed net realized gain on investments ........................ 21,487,939
Undistributed net investment income ................................... 2,099,495
Unrealized appreciation of investments ................................ 198,672,568
------------
Net assets at March 31, 1997 .......................................... $597,183,684
============
</TABLE>
See notes to financial statements.
9
<PAGE> 11
STATEMENT OF OPERATIONS
For the Year Ended March 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest .............................................................. $ 8,157,735
Dividends (including $569,855 from securities of affiliates) .......... 2,706,045
------------
$ 10,863,780
EXPENSES
Advisory fees ......................................................... $ 3,361,166
Financial services .................................................... 509,410
Transfer agent fees and expenses ...................................... 186,901
Registration fees ..................................................... 72,457
Custodian fees and expenses ........................................... 52,048
Postage ............................................................... 27,647
Directors' fees and expenses .......................................... 25,636
Audit fees ............................................................ 25,025
Insurance ............................................................. 22,417
Reports to shareholders ............................................... 11,544
Legal fees ............................................................ 10,410
Other expenses ........................................................ 7,219 4,311,880
------------
Net investment income ......................................... $ 6,551,900
------------
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) .......... $ 83,923,277
Cost of investment securities sold .................................... 34,080,134
------------
Net realized gain on investments (including $3,838,583
from securities of affiliates) ..................................... $ 49,843,143
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year .......................... $139,786,387
Unrealized appreciation at end of year ................................ 198,672,568
------------
Increase in unrealized appreciation of investments ................. 58,886,181
------------
Net realized and unrealized gain on investments ............... $108,729,324
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ......................................................... $115,281,224
============
</TABLE>
See notes to financial statements.
10
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended March 31,
------------------------------------------------------------------
1997 1996
-------------------------------- ------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income ....................... $ 6,551,900 $ 4,393,378
------------- -------------
Net realized gain on investments ............ 49,843,143 34,698,880
Increase in unrealized appreciation
of investments ............................ 58,886,181 59,670,686
------------- -------------
Increase in net assets resulting
from operations ............................. $ 115,281,224 $ 98,762,944
------------- -------------
Distributions to shareholders from:
Net investment income ....................... $ (5,956,425) $ (3,256,784)
Net realized capital gains .................. (36,944,197) (42,900,622) (32,254,690) (35,511,474)
------------- ------------- ------------- -------------
Capital Stock transactions:
Proceeds from Capital Stock sold ............ $ 148,137,956 $123,331,788
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions ............ 36,271,529 29,555,959
Cost of Capital Stock repurchased ........... (58,888,670) 125,520,815 (53,512,942) 99,374,805
------------- ------------- ------------- -------------
Total increase in net assets .................. $ 197,901,417 $ 162,626,275
NET ASSETS
Beginning of year, including
undistributed net investment income
of $1,504,020 and $367,426 .................. 399,282,267 236,655,992
------------- -------------
End of year, including undistributed
net investment income
of $2,099,495 and $1,504,020 ................ $ 597,183,684 $ 399,282,267
============= =============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold .................. 4,727,700 4,796,761
------------- -------------
Shares issued to shareholders upon
reinvestment of dividends and
distributions ............................... 1,169,534 1,162,515
Shares of Capital Stock repurchased ........... (1,890,574) (2,027,718)
------------- -------------
Increase in Capital Stock outstanding ......... 4,006,660 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 YEAR
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
- --------------
Per share operating performance:
Net asset value at beginning of year .......... $ 27.55 $ 22.40 $ 19.30 $ 19.06 $ 18.32
------------- ----------- ----------- ----------- -----------
Net investment income ......................... $ 0.38 $ 0.33 $ 0.09 $ 0.04 $ 0.05
Net realized and unrealized gain
on investment securities .................... 6.98 7.63 3.62 2.30 2.26
------------- ----------- ----------- ----------- -----------
Total from investment operations .............. $ 7.36 $ 7.96 $ 3.71 $ 2.34 $ 2.31
------------- ----------- ----------- ----------- -----------
Less distributions:
Dividends from net investment income ........ $ (0.37) $ (0.26) $ (0.08) $ (0.03) $ (0.05)
Distributions from net realized capital gains (2.26) (2.55) (0.53) (2.07) (1.52)
------------- ----------- ----------- ----------- -----------
Total distributions ......................... $ (2.63) $ (2.81) $ (0.61) $ (2.10) $ (1.57)
------------- ----------- ----------- ----------- -----------
Net asset value at end of year ................ $ 32.28 $ 27.55 $ 22.40 $ 19.30 $ 19.06
============= =========== =========== =========== ===========
Total investment return* ...................... 27.30% 36.84% 19.77% 13.13% 14.23%
Ratios/supplemental data:
Net assets at end of year (in thousands) ...... $ 597,184 $ 399,282 $ 236,656 $ 165,684 $ 134,169
Ratio of expenses to average net assets ....... 0.84% 0.87% 0.95% 1.03% 1.06%
Ratio of net investment income to
average net assets .......................... 1.27% 1.28% 0.48% 0.20% 0.29%
Portfolio turnover rate ....................... 21% 21% 11% 16% 19%
Average brokerage commission per share ........ $ 0.0587 -- -- -- --
</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> 14
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
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.
D. 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.
NOTE 2 -- PURCHASES OF INVESTMENT SECURITIES
Cost of purchases of investment securities (excluding short-term
investments with maturities of 60 days or less) aggregated $104,208,411 for the
year ended March 31, 1997. Realized gains or losses are based on the
specific-certificate identification method. Cost of securities held at March 31,
1997 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, 1997, the Fund paid aggregate fees of
$25,000 to all Directors
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
Continued
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. Certain officers
of the Fund are also officers of the Adviser and FPA Fund Distributors, Inc.
NOTE 4 -- DISTRIBUTOR
For the year ended March 31, 1997, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $59,953 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,
1997, 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, as it relates to selected data for each
share of Capital Stock, 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. Our procedures included confirmation of securities
owned as of March 31, 1997, 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, 1997, 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
Los Angeles, California
April 25, 1997
14
<PAGE> 16
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
Julio J. de Puzo, Jr., Executive Vice President
Dennis M. Bryan, Vice President
Eric S. Ende, Vice President
Janet M. Pitman, Vice President
J. Richard Atwood, 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.
