<PAGE>
FPA Capital Fund, Inc.
SEMI-ANNUAL REPORT
SEPTEMBER 30, 1997
[LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
<PAGE>
OFFICERS AND DIRECTORS
DIRECTORS DISTRIBUTOR
Donald E. Cantlay FPA Fund Distributors, Inc.
DeWayne W. Moore 11400 West Olympic Boulevard,
Lawrence J. Sheehan Suite 1200
Kenneth L. Trefftzs Los Angeles, California 90064
COUNSEL
OFFICERS
O'Melveny & Myers LLP
Robert L. Rodriguez, PRESIDENT Los Angeles, California
AND CHIEF INVESTMENT OFFICER
Julio J. de Puzo, Jr.,
EXECUTIVE VICE PRESIDENT CUSTODIAN & TRANSFER AGENT
Dennis M. Bryan, VICE PRESIDENT
Eric S. Ende, VICE PRESIDENT State Street Bank and Trust Company
Janet M. Pitman, VICE PRESIDENT Boston, Massachusetts
J. Richard Atwood, TREASURER
Sherry Sasaki, SECRETARY
Christopher H. Thomas, SHAREHOLDER SERVICE AGENT
ASSISTANT TREASURER
Boston Financial Data Services, Inc.
INVESTMENT ADVISER P.O. Box 8500
Boston, Massachusetts 02266-8500
First Pacific Advisors, Inc. (800) 638-3060
11400 West Olympic Boulevard, (617) 328-5000
Suite 1200
Los Angeles, California 90064
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.
1
<PAGE>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Semi-Annual Report covers the six months ended September 30, 1997.
Your Fund's net asset value (NAV) per share closed at $36.97. The NAV reflects
a distribution of $1.37 on July 15, 1997, to shareholders of record on June 30,
1997. This distribution was composed of a $0.22 income dividend and a $1.15
capital gains distribution, $1.13 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.
AVERAGE ANNUAL TOTAL RETURN
PERIODS ENDED SEPTEMBER 30, 1997
1 YEAR 5 YEARS 10 YEARS
FPA Capital Fund,
Inc. (NAV) . . . . . . . . . . . . . . . . 32.61%* 29.27%* 19.05%*
FPA Capital Fund, Inc.
(Net of Sales Charge). . . . . . . . . . . 23.99%++ 27.54%++ 18.25%++
Lipper Growth Fund
Average. . . . . . . . . . . . . . . . . . 33.50% 18.97% 13.64%
Standard & Poor's
500 Stock Index. . . . . . . . . . . . . . 40.67% 20.83% 14.72%
Russell 2000 . . . . . . . . . . . . . . . . 33.19% 20.51% 12.23%
The Fund's six-month return, which includes both the change in NAV and the
reinvestment of distributions paid, was 19.24%*. This compares with total
returns of 28.12% for the Lipper Growth Fund Average, 26.38% for the S&P 500,
and 33.52% for the Russell 2000. On a calendar year-to-date basis, these same
comparisons are: 19.94%* for FPA Capital Fund; 26.64% for the Lipper Average;
29.70% for the S&P 500; and 26.60% for the Russell 2000.
COMMENTARY
We still cannot believe this market. It seems as though it knows only one
direction to go and that is up. Increased risk taking has been a well-rewarded
investment strategy; however, we are not of this opinion. This may help explain
why your Fund's returns for the past six months, year-to-date and one-year time
frames have lagged those of the major indices and the Growth Fund Average. In
the short run, this is a disappointment to us, but we believe we will be
rewarded in the long term, when fear re-enters the mind set of the average
equity investor.
The average U.S. equity mutual fund maintains a liquidity level of 5.6%,
near a 21-year low, despite having almost record cash inflows. In contrast,
your Fund's liquidity and bond holdings total approximately 30%, near a record
high. If we include the potential proceeds from an acquisition in progress,
Quick & Reilly Group, Inc., that total approaches 34%. In the article "Profits"
of the November issue of MONEY magazine, it is pointed out that only 81 out of
2,073 domestic and international equity funds have liquidity levels greater than
20%. We feel privileged to be among this small group that includes some of the
great long-term mutual fund managers. Until we can uncover individual
investment opportunities that provide substantial reward-versus-risk
characteristics, we will maintain an above-average liquidity and bond exposure.
We believe the speculative investment juices are flowing in torrents.
Optimistic outlooks are the norm, and various measures of stock market valuation
reflect this environment. For example, the S&P 500's P/E ratio is at its
highest level in the last fifty years, when measured on a trailing twelve-month
or a forward looking one-year earnings basis. Its current valuation reflects a
common belief that we are in a "new paradigm" for both the economy and the stock
market. According to this belief, new technologies and more efficient
management of corporate resources will result in a new sustained high level of
growth and profitability, without the resumption of inflation or higher interest
rates. Therefore, equities are indeed the place to be and previous measures of
what constitutes attractive valuation characteristics do not apply. We are "in
a new era." Typically, speculative "blow-offs" are accompanied by "new era"
thinking or the most dangerous investment phrase, "This time it's different." A
measure of this optimism can be seen in the results of the "Wise Investor"
survey conducted by Montgomery Asset Management, whose latest quarterly polling
indicated that the respondents expected an average annual return of 34% from
their mutual fund
- -------------------
* 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>
investments over the next 10 years. GRANT'S INTEREST RATE OBSERVER used this
forecast as a proxy for the average rate of return for all investors; the $2.3
trillion of existing mutual fund assets would turn into $42.9 trillion, before
taxes, by the year 2007. We estimate that this would have mutual fund assets
grow from approximately 29% of the value of nominal gross domestic product to
more than 3x, assuming the economy grew at 5%. This appears absurd to us.
Perhaps I have placed your Fund at a competitive disadvantage because I
have a memory of past investment cycles stretching back over twenty-six years.
In some ways, I feel like a dinosaur. I sure hope I am not one. My assistant,
Dennis Bryan, recently wrote that a small increase in the market's
capitalization rate or a modest decline in profit expectations could have a
materially negative impact on the stock market. For example, if we take the
inverse of the S&P 500's P/E ratio of 23x earnings as the capitalization rate, a
modest increase of 1% could lead to a decline of almost 19%, should
profitability remain unchanged. This increase could be driven by either
slightly higher inflation fears or the lowering in earnings' growth
expectations. In our opinion, there is very little margin for error at current
levels of stock market valuation.
Today, few can see any reason why inflation should accelerate or that there
should be earnings difficulties. It is at times when there does not appear any
good reason to be cautious that one should be, an attitude that reflects our
basic contrarian philosophy. It was just ten years ago, on October 19, 1987,
that we witnessed the collapse of another powerful stock market rise. During
that period, your Fund maintained a minor liquidity position since we believed
that there were significant valuation inefficiencies in several stock market
sectors. Your Fund's P/E ratio was barely 12x earnings while that of the stock
market was near 22x. Although we experienced a temporary decline, we recovered
very quickly. The current stock market differs from this earlier one because
the valuation landscape is far flatter at very high levels. This is why we are
having a difficult time discovering new investment ideas and, therefore, we are
maintaining high liquidity levels until better opportunities emerge.
With the pending acquisition of Quick & Reilly Group, Inc. by Fleet
Financial Group, Inc., we are again reminded of October 19, 1987, and how things
have changed since then. It was on that day that we made our initial purchase.
Given the circumstances of escalating fear and plummeting optimism, one might
consider investing in a brokerage firm a risky strategy. However, the company
had never lost money in any quarter since its founding in 1974--another major
crash period. As an extremely profitable company with very little debt and high
liquidity, Quick & Reilly was valued at only 6.7x earnings and 1.3x book value.
The largest competitor we faced while purchasing the stock was the company
itself. This past month, it accepted a takeover offer from Fleet Financial
Group, Inc. At its current price of $38, Quick & Reilly is valued at 18x
earnings and 3.6x book value. Fleet is buying an excellent company, but we
wonder whether Quick & Reilly's share price already discounts its bright
prospects. We are happy to accept this offer since we will have made almost 12x
our original investment.
There have been several operational changes these past ten years that many
believe will prevent another October 19th type of crash. We concur, but there
have also been significant changes that may counter this belief. For example,
mutual funds now trade as if they are stocks. Investors can enter and exit with
a degree of ease that was not the case a decade ago. Today, one can place an
order by computer, telephone, or walk-in to a brokerage firm. The growth in the
use of mutual funds by 401(k) retirement plans and IRA accounts has exploded.
In each case, tax considerations are not an element of the individual's
decision-making process. We have also witnessed the rapid expansion of no-
load/load mutual fund universes at various brokerage firms that can be traded in
an "on-line" fashion. This service gives the investor the opportunity to make
shifts in his investment holdings far more quickly than in the past. In light
of these changes, how have mutual fund managers responded? They have reduced
their liquidity levels from over 9% of total assets in 1987 to 5.6% today.
During the ten-day period after the crash of 1987, mutual fund net redemptions
totaled 4.5% of equity mutual fund assets. We feel the current industry
liquidity level provides little in the way of a margin of safety, should the
stock market experience a dislocation.
We feel as though the current environment reflects a gaming or casino mind
set. Whether by money managers or individual investors, it seems investment
time frames are shortening. John Bogle, chairman and founder of the Vanguard
Group of mutual funds, recently wrote that mutual fund turnover ratios have
risen significantly from levels seen in the 1960s. In the 1950s and 1960s,
mutual fund turnover ratios averaged 10%. During the "go-go days" of the late
'60s, they approached 40%. In 1996 the average turnover ratio was 91%. This
means that the average manager's activity level could result in his changing the
entire portfolio in slightly more than one year. The mutual fund investor can
also participate in the heightened level of activity due to the newer services
previously
3
<PAGE>
mentioned. We are not a party to this trend since our average portfolio
turnover ratio has typically been less than 20%. We have thus realized an
extremely high level of long-term capital gains that is more tax efficient. A
review of the capital gain distribution mix earlier in this letter demonstrates
this point.
The activity level in the Fund was quite low these past six months. We
added only two new holdings while eliminating one. Partial positions were
established in Champion Enterprises, Inc. and Homebase, Inc., both relatively
small because their share prices moved away from our purchase levels. Champion
is the leading U.S. manufacturer of manufactured housing, an industry that has
recently experienced a slowdown as a result of too much inventory at retail. We
believe this is only temporary, and the decline in Champion's share price in
reaction to this slowdown provided us an attractive entry point. The company
has virtually no debt and we purchased it at less than 10x earnings. It has
among the highest operating margins in the industry. Homebase was recently part
of a corporate separation. The original holding company, Waban, was split into
two companies with Homebase representing the home-improvement retailing portion.
Its retail stores are large, at 100,000 square feet on average, and located on
the West Coast, primarily in Southern California. It has very mediocre
profitability but made it through the recent and very deep California recession,
while fending off the entrance of Home Depot, Inc. Homebase has no debt and was
purchased at approximately 75% of book value. We expect its profitability to
improve as the California economy recovers and their newly remodeled stores
become a larger portion of the store base. The only holding eliminated was
Quantum Corp., which has more than tripled during the past year. We believe its
current price discounts some very optimistic expectations.
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 17.8x and 2.5x, respectively. By comparison, the P/E ratios of the
Russell 2000 and the S&P 500 were 27.2x and 23.0x, while the P/BV ratios were
3.0x and 4.0x, respectively. Our companies are financially strong with a 15.7%
average Total-Debt-to-Total-Capitalization ratio. This compares favorably to
the 36.4% and 46.5% for the Russell 2000 and the S&P 500.
Before closing, we would like to bring you up-to-date on a couple aspects
of your Fund. Since it was closed to new shareholders on May 23, 1995, it has
grown from $282 million to $736 million at September 30. Approximately 70% of
the increase has come from capital appreciation and income earned rather than
from additional contributions. This means the benefits from our closing the
Fund have really accrued to the existing shareholders. Another element you may
not be aware of is that the recent change in the capital gains tax law has
reduced the potential taxes on unrealized long-term gains by approximately $19.3
million or $0.97 per share. This was an unexpected side effect of our long-term
investing 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
October 25, 1997
4
<PAGE>
MAJOR PORTFOLIO CHANGES
Six Months Ended September 30, 1997
Shares or
Principal
Amount
---------------
NET PURCHASES
COMMON STOCKS
Champion Enterprises, Inc. (1) . . . . . . . . . . . . . . . 200,000 shs.
Coachmen Industries, Inc.. . . . . . . . . . . . . . . . . . 100,000 shs.
Comdisco, Inc. . . . . . . . . . . . . . . . . . . . . . . . 12,500 shs.
Homebase, Inc. (1) . . . . . . . . . . . . . . . . . . . . . 1,155,800 shs.
Reebok International Ltd.. . . . . . . . . . . . . . . . . . 185,000 shs.
Rouge Industries, Inc. (Class "A") . . . . . . . . . . . . . 225,000 shs.
Storage Technology Corporation . . . . . . . . . . . . . . . 180,000 shs.
NON-CONVERTIBLE SECURITY
U.S. Treasury Inflation-Indexed Notes --3 3/8% 2007 (1). . . $20,259,800
NET SALES
COMMON STOCKS
Michaels Stores, Inc.. . . . . . . . . . . . . . . . . . . . 30,000 shs.
Quick & Reilly Group, Inc., The. . . . . . . . . . . . . . . 74,700 shs.
Quantum Corporation (2). . . . . . . . . . . . . . . . . . . 770,000 shs.
Ross Stores, Inc.. . . . . . . . . . . . . . . . . . . . . . 275,600 shs.
Seagate Technology, Inc. . . . . . . . . . . . . . . . . . . 50,000 shs.
NON-CONVERTIBLE SECURITIES
Federal National Mortgage Association (PAC-REMIC)
--8 1/2% 2025 . . . . . . . . . . . . . . . . . . . . . . . $ 1,931,976
Government National Mortgage Association (REMIC)
--7.99125% 2010 . . . . . . . . . . . . . . . . . . . . . . $ 1,128,542
Michaels Stores, Inc. --10 7/8% 2006 . . . . . . . . . . . . $ 3,500,000
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1997
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL -- 19.3%
Comdisco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 875,000 $ 7,019,787 $ 28,492,187
Countrywide Credit Industries, Inc.. . . . . . . . . . . . . . . . . . . . 550,000 9,459,402 20,040,625
Foremost Corporation of America. . . . . . . . . . . . . . . . . . . . . . 50,000 1,672,500 2,950,000
Green Tree Financial Corporation . . . . . . . . . . . . . . . . . . . . . 1,012,600 818,824 47,592,200
Horace Mann Educators Corporation. . . . . . . . . . . . . . . . . . . . . 200,000 5,679,769 11,225,000
Quick & Reilly Group, Inc., The 672,450 2,076,639 25,174,847
Westcorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294,000 1,790,545 6,725,250
------------ -------------
$ 28,517,466 $ 142,200,109
------------ -------------
TECHNOLOGY -- 17.8%
Arrow Electronics, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . 395,200 $ 11,455,357 $ 22,921,600
Exabyte Corporation* . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,000 13,450,664 12,100,000
Fluke Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159,900 5,134,594 8,634,600
Keithley Instruments, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 200,000 1,227,092 2,400,000
Komag, Incorporated* . . . . . . . . . . . . . . . . . . . . . . . . . . . 327,800 2,833,000 6,678,925
Marshall Industries* . . . . . . . . . . . . . . . . . . . . . . . . . . . 546,200 10,506,439 21,165,250
Seagate Technology, Inc.*. . . . . . . . . . . . . . . . . . . . . . . . . 450,000 2,949,975 16,256,250
Storage Technology Corporation*. . . . . . . . . . . . . . . . . . . . . . 860,000 24,545,790 41,118,750
------------ -------------
$ 72,102,911 $ 131,275,375
------------ -------------
RETAILING -- 15.8%
Good Guys, Inc., The*. . . . . . . . . . . . . . . . . . . . . . . . . . . 525,000 $ 4,764,000 $ 3,871,875
Homebase, Inc.*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,155,800 9,453,075 10,402,200
Mac Frugal's Bargains Close-outs Inc.*++ . . . . . . . . . . . . . . . . . 1,000,000 13,166,556 30,500,000
Michaels Stores, Inc.*++ . . . . . . . . . . . . . . . . . . . . . . . . . 1,050,000 12,296,912 32,090,625
Ross Stores, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,164,400 6,596,689 39,735,150
------------ -------------
$ 46,277,232 $ 116,599,850
------------ -------------
CONSUMER DURABLES -- 5.5%
Champion Enterprises, Inc.*. . . . . . . . . . . . . . . . . . . . . . . . 200,000 $ 2,904,571 $ 3,825,000
Coachmen Industries, Inc.+ . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 10,807,911 19,000,000
Flexsteel Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 160,000 2,008,125 1,960,000
Recoton Corporation* . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 7,788,270 7,125,000
Thor Industries, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . 275,000 3,140,956 8,421,875
------------ -------------
$ 26,649,833 $ 40,331,875
------------ -------------
CONSUMER NON-DURABLES -- 5.3%
Rawlings Sporting Goods Company, Inc.* . . . . . . . . . . . . . . . . . . 225,000 $ 2,573,461 $ 2,221,875
Reebok International Ltd.* . . . . . . . . . . . . . . . . . . . . . . . . 750,000 25,258,933 36,515,625
------------ -------------
$ 27,832,394 $ 38,737,500
------------ -------------
6
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1997
Shares or
Principal
COMMON STOCKS--CONTINUED Amount Cost Value
- ------------------------------------------------------------------------------------------------------------------------------
BASIC MATERIALS -- 1.8%
International Aluminum Corporation . . . . . . . . . . . . . . . . . . . . 200,000 $ 4,117,806 $ 5,487,500
Rouge Industries, Inc. (Class "A") . . . . . . . . . . . . . . . . . . . . 500,000 9,387,725 7,812,500
------------ -------------
$ 13,505,531 $ 13,300,000
------------ -------------
INDUSTRIAL SERVICES -- 1.4%
Angelica Corporation+. . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 $ 11,311,605 $ 9,937,500
------------ -------------
CONSUMER SERVICES -- 1.2%
CPI Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357,300 $ 5,282,963 $ 9,111,150
------------ -------------
DEFENSE -- 1.0%
DRS Technologies, Inc.*+ . . . . . . . . . . . . . . . . . . . . . . . . . 510,000 $ 2,507,718 $ 7,395,000
------------ -------------
PRINTING & PUBLISHING -- 0.7%
Devon Group, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000 $ 2,884,000 $ 5,125,000
------------ -------------
TOTAL COMMON STOCKS -- 69.8% . . . . . . . . . . . . . . . . . . . . . . . $236,871,653 $ 514,013,359
------------ -------------
PREFERRED STOCK -- 0.3%
Craig Corporation (Class "A")*+. . . . . . . . . . . . . . . . . . . . . . 160,000 $ 1,906,272 $ 2,790,000
------------ -------------
CONVERTIBLE SECURITY -- 0.2%
Worthington Industries, Inc. --7 1/4% 2000 . . . . . . . . . . . . . . . . $ 1,348,500 $ 1,348,500 $ 1,392,000
------------ -------------
NON-CONVERTIBLE BONDS AND DEBENTURES -- 8.3%
Federal Home Loan Mortgage Corporation
(PAC-IO-CMO)--7% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,755,714 $ 709,763 $ 847,383
Federal National Mortgage Association
(PAC-IO-REMIC)--6% 2013 . . . . . . . . . . . . . . . . . . . . . . . . . 3,658,213 45,140 133,753
Federal National Mortgage Association
(PAC-REMIC)--8 1/2% 2025. . . . . . . . . . . . . . . . . . . . . . . . . 3,355,641 3,366,127 3,368,225
Government National Mortgage Association
(REMIC)--7.99125% 2010. . . . . . . . . . . . . . . . . . . . . . . . . . 4,079,707 4,079,707 4,095,006
Michaels Stores, Inc. --10 7/8% 2006 . . . . . . . . . . . . . . . . . . . 2,000,000 1,736,365 2,195,000
Trump Atlantic City Associates --11 1/4% 2006. . . . . . . . . . . . . . . 10,000,000 9,592,500 9,700,000
U.S. Treasury Notes --5 3/4% 1998. . . . . . . . . . . . . . . . . . . . . 21,000,000 20,886,797 21,006,562
U.S. Treasury Inflation-Indexed Notes --3 3/8% 2007. . . . . . . . . . . . 20,259,800 19,885,475 19,873,598
------------ -------------
$ 60,301,874 $ 61,219,527
------------ -------------
7
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1997
Principal
Amount Cost Value
------------- ------------ -------------
SHORT-TERM INVESTMENT -- 1.0%
Private Export Funding Corp. --5.34% 2/28/99 . . . . . . . . . . . . . . . $ 7,274,000 $ 7,272,181 $ 7,263,089
------------ -------------
TOTAL INVESTMENT SECURITIES -- 79.6% . . . . . . . . . . . . . . . . . . . $307,700,480 $ 586,677,975
------------ -------------
------------
OTHER SHORT-TERM INVESTMENTS -- 20.3%
Short-term Corporate Notes:
Exxon Asset Management Company -- 5.48% 10/1/97. . . . . . . . . . . . . $ 15,289,000 $ 15,289,000
Hertz Corporation -- 5.49% 10/2/97 . . . . . . . . . . . . . . . . . . . 26,454,000 26,449,966
Ford Motor Credit Corporation -- 5.51% 10/3/97 . . . . . . . . . . . . . 1,758,000 1,757,462
Ford Motor Credit Corporation -- 5.51% 10/3/97 . . . . . . . . . . . . . 5,209,000 5,207,405
Hertz Corporation -- 5.51% 10/3/97 . . . . . . . . . . . . . . . . . . . 10,000,000 9,996,939
American General Corporation -- 5.56% 10/6/97. . . . . . . . . . . . . . 15,760,000 15,747,830
General Electric Capital Corporation -- 5.50% 10/6/97. . . . . . . . . . 10,440,000 10,432,025
American Express Credit Corporation -- 5.52% 10/8/97 . . . . . . . . . . 5,931,000 5,924,634
American General Corporation -- 5.50% 10/8/97. . . . . . . . . . . . . . 9,809,000 9,798,510
General Electric Company -- 5.65% 10/8/97. . . . . . . . . . . . . . . . 1,194,000 1,192,688
General Electric Capital Services, Inc. -- 5.56% 10/9/97 . . . . . . . . 20,127,000 20,102,132
American Express Credit Corporation -- 5.49% 10/10/97. . . . . . . . . . 12,605,000 12,587,700
Ford Motor Credit Corporation --5.52% 10/14/97 . . . . . . . . . . . . . 15,000,000 14,970,100
-------------
$ 149,456,391
-------------
TOTAL INVESTMENTS -- 99.9% . . . . . . . . . . . . . . . . . . . . . . . . $ 736,134,366
Other assets less liabilities -- 0.1%. . . . . . . . . . . . . . . . . . . 521,098
-------------
TOTAL NET ASSETS -- 100.0% . . . . . . . . . . . . . . . . . . . . . . . . $ 736,655,464
-------------
-------------
</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 six-
month period ended September 30, 1997.
Purchases Sales Realized Dividend
at Cost at Cost Gain Income
--------------------------------------------
Angelica Corporation -- -- -- $240,000
Coachmen Industries, Inc. $ 1,777,507 -- -- 100,000
Craig Corporation (Class "A") -- -- -- --
DRS Technologies, Inc. -- -- -- --
++ A portion of these shares were held in escrow for covered call options
written. See Note 6.
See notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $307,700,480) . . . . . . . . . . . . . . . . . . . . . $ 586,677,975
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less). . . . . . . . . . . . . . . . . . . . . 149,456,391 $ 736,134,366
--------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Receivable for:
Dividends and accrued interest $ 1,608,453
Capital Stock sold 945,629 2,554,082
-------------- --------------
$ 738,688,464
LIABILITIES
Payable for:
Advisory fees and financial services . . . . . . . . . . . . . . . . . . . $ 460,525
Capital Stock repurchased. . . . . . . . . . . . . . . . . . . . . . . . . 103,528
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . 53,322
Call options written -- at market value
(premiums received $1,196,460) --Note 6. . . . . . . . . . . . . . . . . 1,415,625 2,033,000
-------------- --------------
NET ASSETS -- equivalent to $36.97 per share on 19,924,771
shares of Capital Stock outstanding. . . . . . . . . . . . . . . . . . . . . $ 736,655,464
--------------
--------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 19,924,771 shares. . . . . . . . . . . . . $ 199,248
Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . . . 423,072,675
Undistributed net realized gain on investments . . . . . . . . . . . . . . . 32,274,496
Undistributed net investment income. . . . . . . . . . . . . . . . . . . . . 2,350,715
Unrealized appreciation of investments . . . . . . . . . . . . . . . . . . . 278,758,330
--------------
Net assets at September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . $ 736,655,464
--------------
--------------
</TABLE>
See notes to financial statements.
9
<PAGE>
STATEMENT OF OPERATIONS
For the Six Months Ended September 30, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,792,606
Dividends (including $340,000 from securities of affiliates) . . . . . . . 1,362,714
--------------
$ 7,155,320
EXPENSES
Advisory fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,168,763
Financial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329,810
Transfer agent fees and expenses . . . . . . . . . . . . . . . . . . . . . 107,742
Registration fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,967
Custodian fees and expenses. . . . . . . . . . . . . . . . . . . . . . . . 29,728
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,273
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,970
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . 14,322
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,925
Reports to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . 10,892
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,641
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800 2,789,833
-------------- --------------
Net investment income. . . . . . . . . . . . . . . . . . . . . . . $ 4,365,487
--------------
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) . . . . . . . $ 49,356,495
Cost of investment securities sold . . . . . . . . . . . . . . . . . . . . 17,063,538
--------------
Net realized gain on investments (including net realized
gains of $323,825 from closing of call options) . . . . . . . . . . . $ 32,292,957
Unrealized appreciation of investments:
Unrealized appreciation at beginning of period . . . . . . . . . . . . . . $ 198,672,568
Unrealized appreciation at end of period . . . . . . . . . . . . . . . . . 278,758,330
--------------
Increase in unrealized appreciation of investments . . . . . . . . . . 80,085,762
--------------
Net realized and unrealized gain on investments. . . . . . . . . . $ 112,378,719
--------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116,744,206
--------------
--------------
</TABLE>
See notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
September 30, 1997 March 31, 1997
------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income. . . . . . . . . . . $ 4,365,487 $ 6,551,900
Net realized gain on investments . . . . . 32,292,957 49,843,143
Increase in unrealized appreciation
of investments . . . . . . . . . . . . . 80,085,762 58,886,181
-------------- ---------------
Increase in net assets resulting
from operations. . . . . . . . . . . . . . $ 116,744,206 $ 115,281,224
Distributions to shareholders from:
Net investment income. . . . . . . . . . . $ (4,114,267) $ (5,956,425)
Net realized capital gains . . . . . . . . (21,506,400) (25,620,667) (36,944,197) (42,900,622)
-------------- ---------------
Capital Stock transactions:
Proceeds from Capital Stock sold . . . . . $ 61,226,614 $ 148,137,956
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions . . . . . 22,329,449 36,271,529
Cost of Capital Stock repurchased. . . . . (35,207,822) 48,348,241 (58,888,670) 125,520,815
-------------- ------------- --------------- --------------
Total increase in net assets . . . . . . . . $ 139,471,780 $ 197,901,417
NET ASSETS
Beginning of period, including
undistributed net investment income
of $2,099,495 and $1,504,020 . . . . . . . 597,183,684 399,282,267
------------- --------------
End of period, including
undistributed net investment income
of $2,350,715 and $2,099,495 . . . . . . . $ 736,655,464 $ 597,183,684
------------- --------------
------------- --------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold . . . . . . . . 1,785,122 4,727,700
Shares issued to shareholders
upon reinvestment of dividends
and distributions. . . . . . . . . . . . . 670,957 1,169,534
Shares of Capital Stock repurchased. . . . . (1,032,433) (1,890,574)
------------- --------------
Increase in Capital Stock outstanding. . . . 1,423,646 4,006,660
------------- --------------
------------- --------------
</TABLE>
See notes to financial statements.
11
<PAGE>
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, --------------------------------------------------
1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period . . . . . . . . . . . . $ 32.28 $ 27.55 $ 22.40 $ 19.30 $ 19.06 $ 18.32
------- ------- ------- ------- ------- -------
Net investment income. . . . . . . . . . . . . . . . . . . . . $ 0.22 $ 0.38 $ 0.33 $ 0.09 $ 0.04 $ 0.05
Net realized and unrealized gain on
investment securities. . . . . . . . . . . . . . . . . . . . 5.84 6.98 7.63 3.62 2.30 2.26
------- ------- ------- ------- ------- -------
Total from investment operations . . . . . . . . . . . . . . . $ 6.06 $ 7.36 $ 7.96 $ 3.71 $ 2.34 $ 2.31
------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income . . . . . . . . . . . . $ (0.22) $ (0.37) $ (0.26) $ (0.08) $ (0.03) $ (0.05)
Distributions from net realized
capital gains. . . . . . . . . . . . . . . . . . . . . . . (1.15) (2.26) (2.55) (0.53) (2.07) (1.52)
------- ------- ------- ------- ------- -------
Total distributions. . . . . . . . . . . . . . . . . . . . . $ (1.37) $ (2.63) $ (2.81) $ (0.61) $ (2.10) $ (1.57)
------- ------- ------- ------- ------- -------
Net asset value at end of period . . . . . . . . . . . . . . . $ 36.97 $ 32.28 $ 27.55 $ 22.40 $ 19.30 $ 19.06
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Total investment return* . . . . . . . . . . . . . . . . . . . 19.24% 27.30% 36.84% 19.77% 13.13% 14.23%
Ratios/supplemental data:
Net assets at end of period (in $000's) 736,655 597,184 399,282 236,656 165,684 134,169
Average brokerage commission per share $0.0538 $0.0587 -- -- -- --
Ratio of expenses to average net assets. . . . . . . . . . . . . 0.84%+ 0.84% 0.87% 0.95% 1.03% 1.06%
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . . . . . . . . . 1.31%+ 1.27% 1.28% 0.48% 0.20% 0.29%
Portfolio turnover rate. . . . . . . . . . . . . . . . . . . . . 19%+ 21% 21% 11% 16% 19%
</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, 1997 is not annualized.
+ Annualized
See notes to financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940, as an
open-end, diversified, management investment company. The Fund's primary
investment objective is long-term capital growth. 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.
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 $52,951,960 for the
six months ended September 30, 1997. Realized gains or losses are based on the
specific-certificate identification method. The cost of securities held at
September 30, 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 0.10% 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
13
<PAGE>
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 six months ended September 30, 1997, the Fund paid aggregate fees
of $14,000 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.
Certain officers of the Fund are also officers of the Adviser and FPA Fund
Distributors, Inc.
NOTE 4 -- DISTRIBUTOR
For the six months ended September 30, 1997, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $25,027 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.
NOTE 6 -- OUTSTANDING CALL OPTIONS
At September 30, 1997, 400,000 shares of Michaels Stores, Inc. (market
value $12,225,200) were held in escrow for 4,000 December @ $30 covered call
option contracts written by the Fund. In addition, 50,000 shares of Mac
Frugal's Bargains Close-outs Inc. (market value $1,525,000) were held in escrow
for 500 October @ $30 covered call option contracts written by the Fund.
Following is a summary of covered call option activity for the six months ended
September 30, 1997:
No. of
Contracts Premiums
--------- ----------
Outstanding, March 31, 1997 -- --
Written during the period 4,800 $1,270,558
Closed during the period 300 74,098
----- ----------
Outstanding, September 30, 1997 4,500 $1,196,460
----- ----------
----- ----------
14
