<PAGE>
FPA Capital Fund, Inc.
Annual Report
[LOGO]
DISTRIBUTORS
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064 MARCH 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
DEAR FELLOW SHAREHOLDERS:
This Annual Report covers the fiscal year ended March 31, 1998. Your
Fund's net asset value (NAV) per share closed at $38.30. Dividends of $1.37 and
$1.84 per share were paid on July 15, 1997, and January 7, 1998, to holders of
record on June 30 and December 31, 1997, respectively. The July distribution
was composed of a $0.22 income dividend and $1.15 capital gains distribution,
$1.13 of which was long-term. The January distribution included $0.25 of income
and $1.59 of long-term capital gains.
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, 1998
----------------------------
1 YEAR 5 YEARS 10 YEARS
-------- --------- --------
<S> <C> <C> <C>
FPA Capital Fund, Inc.
(NAV) . . . . . . . . . . . . . . . . . . . 30.10%* 25.15%* 21.75%*
FPA Capital Fund, Inc.
(Net of Sales Charge) . . . . . . . . . . . 21.64%++ 23.48%++ 20.94%++
Lipper Growth Fund
Average . . . . . . . . . . . . . . . . . . 42.90% 18.90% 16.90%
Russell 2000. . . . . . . . . . . . . . . . . 42.01% 17.67% 14.85%
Standard & Poor's
500 Stock Index . . . . . . . . . . . . . . 48.11% 22.44% 18.92%
</TABLE>
The Fund's six-month total return was 9.11%*. This compares with total
returns of 11.51% for the Lipper Growth Fund Average, 6.36% for the Russell
2000, and 17.21% for the S&P 500. On a calendar-year basis, these same
comparisons are 17.70%* for FPA Capital Fund, 25.17% for the Lipper Growth Fund
Average, 22.36% for the Russell 2000, and 33.38% for the S&P 500.
COMMENTARY
This market is like the "Energizer Bunny," it just keeps going and going
and going. The investment returns being generated are absolutely
spectacular--without precedence. Smaller capitalization stocks, as reflected by
the Russell 2000 index, continue to provide attractive total returns, but they
still trail the investment returns of larger capitalization stocks.
Our investment strategy has grown somewhat more defensive, and this has led
to your Fund's recent relative underperformance. This conservative stance can
be seen by the growing level of short-term liquidity and bonds that have
increased to 30% from the low 20% range during the past year. The higher
liquidity is a reflection of the lack of investment opportunities that meet our
criteria rather than an implied forecast of what we think the stock market will
do in the near term. We do not have any idea when we will re-deploy this
liquidity. As always, our focus is on the long term and not the short run, and
this can place us at odds with the current environment.
The past six months have been active from a takeover point of view. Two
have been completed in your portfolio: Mac Frugal's Bargains Close-outs by
Consolidated Stores and Quick & Reilly Group by Fleet Financial Group. Devon
Group is in the process of being acquired by Applied Graphics Technologies for a
combination of stock and cash. Since these announcements, we have sold a
portion of Mac Frugal's Bargains Close-outs and Devon Group, and we sold all of
Fleet Financial Group. We find it very difficult to hold financial service
stocks with P/E multiples approaching or exceeding 20x earnings. Many consider
Fleet an acquisition target, but we believe that we have already made most of
the easy money through our original holding of Quick & Reilly. We expect to be
out of Devon in the near future. Consolidated Stores has recently declined and,
therefore, we expect to maintain the existing position for the time being.
- --------------------
* 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
1
<PAGE>
Your Fund's performance was negatively impacted by its holding of Green
Tree Financial when the stock declined 44% to $26.19 between September 30 and
December 31, 1997. Green Tree was forced to take special charges on its
servicing portfolio that related to escalating mortgage prepayments that were
higher than originally assumed. These charges negatively impacted previously
reported profitability since "gain-on-sale" accounting was used. At one point,
it appeared as though few investors had any confidence in this accounting
methodology despite its required use in asset securitization sales. After a
lengthy re-examination of Green Tree to revalidate our reasons for continuing to
hold this company, we proceeded to increase the position by 65%, at an average
cost of $24.93. We believed that the market was massively undervaluing its
market position and delivery systems. The problems that investors feared were,
in our opinion, temporary. Apparently another investor viewed the situation
similarly; on April 7 Green Tree accepted a takeover bid from Conseco for stock.
At the time of closing, should Conseco be at its current price of $50, the
exchange value for Green Tree will be $45.83. We are currently reviewing
Conseco to determine whether we will continue to hold the stock after the
acquisition. There do not appear to be any roadblocks to the completion of this
acquisition.
During the past year, we reduced our exposure to technology and financial
service stocks. Despite this, technology is still our largest investment sector
while retailing has become our second largest. One of the largest sector
increases was in basic materials, as reflected in the addition of our only new
equity holding during the past six months, Oregon Steel Mills. As a result of a
major strike at one of its primary mills, the stock declined from the high $20s
to the high teens. We were able to establish a position over several months as
existing holders decided to sell. Our analysis shows that the current negative
profitability impact from the strike will prove to be temporary. Oregon Steel
has modern mills that have been recently replaced or remodeled. The company's
primary end markets are quite strong with long backlogs, and it is a prime
beneficiary of high demand for new or expanded natural gas pipelines. The stock
was acquired at approximately 1.3x book value. Earnings are currently
depressed, and we believe they can recover to the $3.50 to $4 range in two or
three years. While we are waiting, we will receive a 3% dividend yield.
The portfolio continues to maintain a competitive valuation advantage to
that of the market. At the end of March, the Fund's P/E and P/BV (Price/Book
Value) ratios were 18.3x and 2.8x, respectively. By comparison, the P/E ratios
of the Russell 2000 and the S&P 500 were 27.0x and 26.3x, while the P/BV ratios
were 3.0x and 4.6x, respectively. Our companies are financially strong with a
19.9% average Total-Debt-to-Total-Capitalization ratio. This compares favorably
to the 38.4% and 47.3% for the Russell 2000 and the S&P 500. Even though our
portfolio P/E is substantially less than the market comparisons, we are still
uncomfortable with its absolute level. We are trying to lower it, but we know
that will be extremely difficult to do in this market environment.
We continue to grow more cautious as this market races to higher levels.
In light of this, we thought it would be wise to step back and take a longer
view of the stock market. If we assume that earnings for the S&P 500 grow
between 5% and 7% over the next five and ten years and that the stock market
compounds at 10%--the long-term average--then the market's P/E ratio will rise
to between 35x and 44x, respectively. Does this seem plausible? The key is
determining the appropriate growth rate for earnings. In attempting to do this,
we looked to the bond market for guidance. Over the next ten years, the
Treasury Inflation Index Bond implies an average Consumer Price Inflation of
1.8%. The consensus economic growth rate for real gross domestic product (GDP)
is between 2% and 2.5% longer term. By adding these numbers together, we get an
estimated nominal growth rate for the economy between 3.8% and 4.3%. Over the
last ten and fifteen years, nominal GDP growth has averaged 5.45% and 6.28%,
with real GDP being 2.38% and 3.08%, respectively. S&P 500 earnings have grown
8.59% and 7.96% during these same periods. Corporate profit margins are at
twenty-five-year highs and, therefore, are not likely to provide much help in
improving profitability growth. Using the ratios of S&P 500 earnings growth to
nominal GDP growth for the last ten and fifteen years on our estimates of future
nominal GDP growth results in an estimate of the S&P 500 earnings growth of 5%
to 7%. Should the stock
2
<PAGE>
market rise faster than this range of growth, its P/E will rise. We believe
paying the current P/E valuations, let alone these potential P/E ratios, is
quite excessive relative to the potential growth rate of earnings.
For the stock market to continue at its torrid pace, or even a 10% growth
rate, requires that earnings growth accelerates or that interest rates decline
significantly. If interest rates were to decline materially, this would likely
indicate a slowing in the economy--bad news for corporate profits and possibly
stocks. If corporate profits accelerate, this would likely indicate an
acceleration in the economy--bad news for bonds. In summary, we believe there
is a disconnect between the stock market and the bond market, which means that
the risks are rising.
Earnings estimates for the first quarter of calendar 1998, as measured by
First Call, have declined from an expected growth rate of slightly more than 10%
to almost zero growth. In essence, the fundamentals have deteriorated while
stock prices have increased and interest rates have remained almost unchanged.
To justify higher prices, analysts have lowered first quarter earnings numbers
and raised earnings expectations for the subsequent quarters. All this is being
done before we have seen any real impact from the Asian crisis. In general, it
looks as though investors are looking over the "valley" of lower earnings. At
current valuation levels, we do not believe the market can withstand virtually
any earnings disappointments later this year.
Why are investment managers rushing to buy stocks despite these growing
risks? We believe the stock market has to some degree been transformed from a
"valuation-driven" market to a "fee-driven" market. In other words, investment
managers are unwilling to hold virtually any amount of short-term liquidity. If
they do, they are afraid that the client or the consultant will take this
liquidity away and thus, the managers will earn less fee income. Being fully
invested is justified on the basis that the client has made the asset allocation
decision and the managers' job is to pick the best stocks available for their
respective investment styles. We believe this operating strategy is widespread
and helps to explain some of the rapid shifting among stock sectors. Liquidity
levels of public and private pension plans are the lowest in fifteen and forty
years, respectively. In the case of equity mutual funds, liquidity levels have
now reached a twenty-two-year low of 4.6%. For similar reasons, these managers
must remain fully invested or run the risk of being fired. To put this
liquidity level in perspective, in the ten days after the October 19, 1987
crash, 4.5% of equity mutual funds were redeemed. We see this as leaving little
margin for error.
It has been shown that the stock market has generated below-average
investment returns after periods of high valuation. We believe this one will be
no different than prior episodes. If our analysis is correct, holding a higher
level of liquidity and bonds will prove to be a prudent longer term strategy.
It will give us the flexibility to take advantage of individual securities when
fear re-enters the market. We believe that holding liquidity will not be as
much of a penalty as it has been over the past fifteen years when it
underperformed various stock market indices by 7 to 11 percentage points
annually. In our scenario, one would give up only about one to two percentage
points of performance annually. By selecting one or two stocks carefully each
year, we are confident we can achieve competitive returns with substantially
less risk.
We know the strategy that we have outlined is at odds with what is
currently popular in the stock market today. Being "out-of-step" is not unusual
for us, given our "contrarian" investment style. Patience is a key element in
successful long-term investing. We are trying to be very patient so that we may
invest wisely the capital which you have entrusted to us. 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 21, 1998
3
<PAGE>
HISTORICAL PERFORMANCE
<TABLE>
<CAPTION>
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, 1988 TO MARCH 31, 1998
[GRAPH]
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 3/31/97 3/31/98
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA Capital Fund, Inc. 9,350 10,497 12,463 14,259 19,082 21,797 24,659 29,534 40,415 51,448 66,931
FPA Capital Fund, Inc. (NAV) 10,000 11,227 13,330 15,251 20,408 23,313 26,373 31,587 43,224 55,025 71,584
S&P 500 10,000 11,785 14,038 16,057 17,828 20,556 20,850 24,098 24,098 28,901 56,565
Lipper Growth Fund Average 10,000 11,451 13,284 15,350 17,649 19,887 20,794 22,655 29,126 32,723 47,643
</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 $66,931, 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 $71,584. The performance of the Fund and of
the Averages is computed on a total return basis which includes reinvestment of
all distributions.
4
<PAGE>
MAJOR PORTFOLIO CHANGES
Six Months Ended March 31, 1998
<TABLE>
<CAPTION>
Shares or
Principal
Amount
-------------
<S> <C>
NET PURCHASES
COMMON STOCKS
Arrow Electronics, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,600 shs.
Green Tree Financial Corporation . . . . . . . . . . . . . . . . . . . . . . . . 657,400 shs.
Homebase, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474,200 shs.
Oregon Steel Mills, Inc. (1) . . . . . . . . . . . . . . . . . . . . . . . . . . 990,800 shs.
Reebok International Ltd.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 shs.
NON-CONVERTIBLE SECURITIES
Federal National Mortgage Association -- 6% 2028 (IO-REMIC) (1) . . . . . . . . $34,500,000
U.S. Treasury Inflation-Indexed Notes -- 3/8% 2007 . . . . . . . . . . . . . . . $65,412,640
NET SALES
COMMON STOCKS
Comdisco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 shs.
Countrywide Credit Industries, Inc.. . . . . . . . . . . . . . . . . . . . . . . 400,000 shs.
Devon Group, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,200 shs.
Fleet Financial Group, Inc. (2). . . . . . . . . . . . . . . . . . . . . . . . . 293,479 shs.
Mac Frugal's Bargains Close-outs Inc.. . . . . . . . . . . . . . . . . . . . . . 216,900 shs.
Michaels Stores, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,500 shs.
Quick & Reilly Group, Inc., The (2). . . . . . . . . . . . . . . . . . . . . . . 164,700 shs.
NON-CONVERTIBLE SECURITIES
Federal National Mortgage Association -- 8 1/2% 2025 (PAC-REMIC) (2) . . . . . . $ 3,355,641
Government National Mortgage Association -- 7.99125% 2010 (REMIC). . . . . . . . $ 2,764,499
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 1998
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- -------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
TECHNOLOGY -- 18.1%
Arrow Electronics, Inc.*. . . . . . . . . . . . . 900,000 $ 14,460,249 $ 24,356,250
Exabyte Corporation*. . . . . . . . . . . . . . . 1,100,000 13,450,664 9,487,500
Fluke Corporation . . . . . . . . . . . . . . . . 319,800 5,134,594 7,635,225
Keithley Instruments, Inc.. . . . . . . . . . . . 200,000 1,227,092 1,662,500
Komag, Incorporated*. . . . . . . . . . . . . . . 327,800 2,833,000 4,753,100
Marshall Industries*. . . . . . . . . . . . . . . 546,200 10,506,439 18,229,425
Seagate Technology, Inc.* . . . . . . . . . . . . 450,000 2,949,975 11,362,500
Storage Technology Corporation* . . . . . . . . . 860,000 24,545,790 65,413,750
------------ ------------
$ 75,107,803 $142,900,250
------------ ------------
RETAILING -- 17.0%
Consolidated Stores Corporation*. . . . . . . . . 689,114 $ 9,051,379 $ 29,588,833
Craig Corporation (Class "A")*. . . . . . . . . . 320,000 1,906,272 3,640,000
Good Guys, Inc., The* . . . . . . . . . . . . . . 525,000 4,764,000 5,545,313
Homebase, Inc.* . . . . . . . . . . . . . . . . . 1,630,000 13,350,938 13,651,250
Michaels Stores, Inc.*. . . . . . . . . . . . . . 820,500 10,871,291 30,666,188
Ross Stores, Inc. . . . . . . . . . . . . . . . . 1,164,400 6,596,689 51,379,150
------------ ------------
$ 46,540,569 $134,470,734
------------ ------------
FINANCIAL -- 14.7%
Comdisco, Inc.. . . . . . . . . . . . . . . . . . 865,000 $ 6,892,298 $ 37,735,625
Countrywide Credit Industries, Inc. . . . . . . . 150,000 2,156,915 7,978,125
Foremost Corporation of America . . . . . . . . . 150,000 1,672,500 3,675,000
Green Tree Financial Corporation. . . . . . . . . 1,670,000 17,209,985 47,490,625
Horace Mann Educators Corporation . . . . . . . . 400,000 5,679,769 14,050,000
Westcorp. . . . . . . . . . . . . . . . . . . . . 294,000 1,790,545 4,924,500
------------ ------------
$ 35,402,012 $115,853,875
------------ ------------
CONSUMER DURABLES -- 7.5%
Champion Enterprises, Inc.* . . . . . . . . . . . 200,000 $ 2,904,571 $ 5,337,500
Coachmen Industries, Inc.+. . . . . . . . . . . . 1,000,000 10,807,911 27,000,000
Flexsteel Industries, Inc.. . . . . . . . . . . . 160,000 2,008,125 2,220,000
Recoton Corporation*. . . . . . . . . . . . . . . 500,000 7,788,270 13,125,000
Thor Industries, Inc. . . . . . . . . . . . . . . 275,000 3,140,956 11,257,813
------------ ------------
$ 26,649,833 $ 58,940,313
------------ ------------
BASIC MATERIALS -- 4.6%
International Aluminum Corporation. . . . . . . . 200,000 $ 4,117,806 $ 6,987,500
Oregon Steel Mills, Inc.. . . . . . . . . . . . . 990,800 18,240,664 21,797,600
Rouge Industries, Inc. (Class "A"). . . . . . . . 500,000 9,387,725 7,781,250
------------ ------------
$ 31,746,195 $ 36,566,350
------------ ------------
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 1998
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS-Continued Amount Cost Value
- -------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
CONSUMER NON-DURABLES -- 3.9%
Rawlings Sporting Goods Company, Inc.*. . . . . . 225,000 $ 2,573,461 $ 3,065,625
Reebok International Ltd.*. . . . . . . . . . . . 900,000 29,825,125 27,450,000
------------ ------------
$ 32,398,586 $ 30,515,625
------------ ------------
INDUSTRIAL SERVICES -- 1.5%
Angelica Corporation+ . . . . . . . . . . . . . . 500,000 $ 11,311,605 $ 11,531,250
------------ ------------
CONSUMER SERVICES -- 1.1%
CPI Corp. . . . . . . . . . . . . . . . . . . . . 357,300 $ 5,282,963 $ 9,044,156
------------ ------------
DEFENSE -- 0.9%
DRS Technologies, Inc.*+. . . . . . . . . . . . . 510,000 $ 2,507,718 $ 7,076,250
------------ ------------
PRINTING & PUBLISHING -- 0.3%
Devon Group, Inc.*. . . . . . . . . . . . . . . . 41,800 $ 606,400 $ 2,455,750
------------ ------------
TOTAL COMMON STOCKS -- 69.6%. . . . . . . . . . . $267,553,684 $549,354,553
------------ ------------
CONVERTIBLE SECURITY -- 0.2%
Worthington Industries, Inc. -- 7 1/4% 2000 . . . $ 1,348,500 $ 1,348,500 $ 1,348,500
------------ ------------
NON-CONVERTIBLE BONDS & DEBENTURES -- 16.5%
Federal Home Loan Mortgage Corporation
--7% 2020 (PAC-IO-CMO) . . . . . . . . . . . . . $3,755,714 $ 610,073 $ 737,059
Federal National Mortgage Association
--6% 2013 (PAC-IO-REMIC) . . . . . . . . . . . . 2,490,319 -- 52,919
--6% 2028 (IO-REMIC) . . . . . . . . . . . . . . 34,500,000 11,428,125 11,827,031
Government National Mortgage Association
--7.99125% 2010 (REMIC). . . . . . . . . . . . . 1,315,208 1,315,208 1,315,208
Michaels Stores, Inc. -- 10 7/8% 2006 . . . . . . 2,000,000 1,736,365 2,230,000
Trump Atlantic City Associates -- 11 1/4% 2006. . 10,000,000 9,592,500 10,275,000
U.S. Treasury Notes -- 5 3/4% 1998. . . . . . . . 21,000,000 20,886,797 21,039,374
U.S. Treasury Inflation-Indexed Notes --
3 3/8% 2007. . . . . . . . . . . . . . . . . . . 85,672,440 83,887,122 83,075,494
------------ ------------
$129,456,190 $130,552,085
------------ ------------
</TABLE>
7
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Cost Value
------------- ------------- -------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENT -- 0.9%
Private Export Funding Corp. --5.468% 2/28/99. . . . $7,274,000 $ 7,272,182 $ 7,255,815
------------ ------------
TOTAL INVESTMENT SECURITIES -- 87.2% . . . . . . . . $405,630,556 $688,510,953
------------ ------------
------------
OTHER SHORT-TERM INVESTMENTS -- 13.4%
Short-term Corporate Notes:
General Electric Capital Corporation -- 5.54% 4/1/98 $4,954,000 $ 4,954,000
General Motors Acceptance Corporation -- 5.52% 4/1/98 6,690,000 6,690,000
American Express Credit Corporation -- 5.54% 4/2/98 3,852,000 3,851,407
Ford Motor Credit Corporation -- 5.57% 4/2/98. . . 2,738,000 2,737,576
Ford Motor Credit Corporation -- 5.57% 4/2/98. . . 1,974,000 1,973,695
General Electric Capital Corporation -- 5.57% 4/2/98 2,776,000 2,775,570
General Electric Capital Services, Inc. -- 5.54% 4/3/98 20,316,000 20,309,747
General Electric Capital Services, Inc. -- 5.53% 4/6/98 6,652,000 6,646,891
General Motors Acceptance Corporation -- 5.55% 4/6/98 14,000,000 13,989,208
Ford Motor Credit Corporation -- 5.65% 4/7/98. . . 1,303,000 1,301,773
General Electric Capital Services, Inc. -- 5.53% 4/7/98 11,000,000 10,989,862
General Electric Capital Corporation -- 5.6% 4/8/98 2,636,000 2,633,130
General Electric Financial Assurance
Company -- 5.54% 4/8/98. . . . . . . . . . . . . 10,000,000 9,989,228
American Express Credit Corporation -- 5.51% 4/9/98 9,470,000 9,458,405
American General Corporation -- 5.54% 4/9/98 . . . 1,656,000 1,653,961
Ford Motor Credit Corporation -- 5.54% 4/10/98 . . 5,750,000 5,742,036
------------
$105,696,489
------------
TOTAL INVESTMENTS -- 100.6%. . . . . . . . . . . . . $794,207,442
Liabilities less other assets -- (0.6)%. . . . . . . (4,771,309)
------------
TOTAL NET ASSETS -- 100.0% . . . . . . . . . . . . . $789,436,133
------------
------------
</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, 1998.
<TABLE>
<CAPTION>
Purchases Sales Realized Dividend
at Cost at Cost Gain Income
----------------------------------------
<S> <C> <C> <C> <C>
Angelica Corporation -- -- -- $480,000
Coachmen Industries, Inc. $1,777,507 -- -- 200,000
DRS Technologies, Inc. -- -- -- --
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $405,630,556). . . . . . . . . . . . $688,510,953
Short-term investments -- at cost plus interest earned
(maturities 60 days or less). . . . . . . . . . . . . 105,696,489 $794,207,442
------------
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . 454
Receivable for:
Investment securities sold. . . . . . . . . . . . . . . $ 6,516,171
Dividends and accrued interest. . . . . . . . . . . . . 2,103,770
Capital Stock sold. . . . . . . . . . . . . . . . . . . 976,733 9,596,674
------------ ------------
$803,804,570
LIABILITIES
Payable for:
Investment securities purchased . . . . . . . . . . . . $ 12,920,609
Capital Stock repurchased . . . . . . . . . . . . . . . 867,826
Advisory fees and financial services. . . . . . . . . . 500,630
Accrued expenses and other liabilities. . . . . . . . . 79,372 14,368,437
------------ ------------
NET ASSETS -- equivalent to $38.30 per share on 20,611,921
shares of Capital Stock outstanding . . . . . . . . . . . $789,436,133
------------
------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 20,611,921 shares . . . $ 206,119
Additional Paid-in Capital. . . . . . . . . . . . . . . . 444,989,124
Undistributed net realized gain on investments. . . . . . 58,666,216
Undistributed net investment income . . . . . . . . . . . 2,694,277
Unrealized appreciation of investments. . . . . . . . . . 282,880,397
------------
Net assets at March 31, 1998. . . . . . . . . . . . . . . $789,436,133
------------
------------
</TABLE>
See notes to financial statements.
9
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended March 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,529,826
Dividends (including $680,000 from securities of affiliates) 3,026,935
------------
$ 15,556,761
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . $ 4,622,631
Financial services. . . . . . . . . . . . . . . . . . . . . 703,482
Transfer agent fees and expenses. . . . . . . . . . . . . . 227,530
Registration fees . . . . . . . . . . . . . . . . . . . . . 66,307
Custodian fees and expenses . . . . . . . . . . . . . . . . 60,032
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . 34,549
Directors' fees and expenses. . . . . . . . . . . . . . . . 32,556
Audit fees. . . . . . . . . . . . . . . . . . . . . . . . . 27,850
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 23,861
Reports to shareholders . . . . . . . . . . . . . . . . . . 21,355
Legal fees. . . . . . . . . . . . . . . . . . . . . . . . . 11,061
Other expenses. . . . . . . . . . . . . . . . . . . . . . . 6,648 5,837,862
------------ ------------
Net investment income . . . . . . . . . . . . . . . . . . $ 9,718,899
------------
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) $134,685,950
Cost of investment securities sold. . . . . . . . . . . . . 43,934,321
------------
Net realized gain on investments . . . . . . . . . . . $ 90,751,629
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year. . . . . . . . $198,672,568
Unrealized appreciation at end of year. . . . . . . . . . . 282,880,397
------------
Increase in unrealized appreciation of investments . . . 84,207,829
------------
Net realized and unrealized gain on investments . $174,959,458
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . $184,678,357
------------
------------
</TABLE>
See notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended March 31,
------------------------------------------------------------
1998 1997
------------------------------ ----------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . . . $ 9,718,899 $ 6,551,900
Net realized gain on investments. . . . . . . . 90,751,629 49,843,143
Increase in unrealized appreciation
of investments. . . . . . . . . . . . . . . . 84,207,829 58,886,181
------------ ------------
Increase in net assets resulting
from operations . . . . . . . . . . . . . . . . $184,678,357 $115,281,224
Distributions to shareholders from:
Net investment income . . . . . . . . . . . . . $ (9,124,117) $ (5,956,425)
Net realized capital gains. . . . . . . . . . . (53,573,352) (62,697,469) (36,944,197) (42,900,622)
------------ ------------
Capital Stock transactions:
Proceeds from Capital Stock sold. . . . . . . . $124,393,171 $148,137,956
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions. . . . . . . . 55,553,713 36,271,529
Cost of Capital Stock repurchased . . . . . . . (109,675,323) 70,271,561 (58,888,670) 125,520,815
------------ ------------ ------------ ------------
Total increase in net assets. . . . . . . . . . . $192,252,449 $197,901,417
NET ASSETS
Beginning of year, including
undistributed net investment income
of $2,099,495 and $1,504,020. . . . . . . . . . 597,183,684 399,282,267
------------ ------------
End of year, including undistributed
net investment income
of $2,694,277 and $2,099,495. . . . . . . . . . $789,436,133 $597,183,684
------------ ------------
------------ ------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold. . . . . . . . . . . 3,531,612 4,727,700
Shares issued to shareholders upon
reinvestment of dividends and
distributions . . . . . . . . . . . . . . . . . 1,631,634 1,169,534
Shares of Capital Stock repurchased . . . . . . . (3,052,450) (1,890,574)
------------ ------------
Increase in Capital Stock outstanding . . . . . . 2,110,796 4,006,660
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year. . . . . $32.28 $27.55 $22.40 $19.30 $19.06
------- ------- ------- ------- -------
Net investment income . . . . . . . . . . . . $ 0.49 $ 0.38 $ 0.33 $ 0.09 $ 0.04
Net realized and unrealized gain
on investment securities. . . . . . . . . . 8.74 6.98 7.63 3.62 2.30
------- ------- ------- ------- -------
Total from investment operations. . . . . . . $ 9.23 $ 7.36 $ 7.96 $ 3.71 $ 2.34
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income. . . . $(0.47) $(0.37) $(0.26) $(0.08) $(0.03)
Distributions from net realized capital gains (2.74) (2.26) (2.55) (0.53) (2.07)
------- ------- ------- ------- -------
Total distributions . . . . . . . . . . . . . $(3.21) $(2.63) $(2.81) $(0.61) $(2.10)
------- ------- ------- ------- -------
Net asset value at end of year. . . . . . . . $38.30 $32.28 $27.55 $22.40 $19.30
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total investment return*. . . . . . . . . . . 30.10% 27.30% 36.84% 19.77% 13.13%
Ratios/supplemental data:
Net assets at end of year (in thousands). . . $789,436 $597,184 $399,282 $236,656 $165,684
Ratio of expenses to average net assets . . . 0.83% 0.84% 0.87% 0.95% 1.03%
Ratio of net investment income to
average net assets. . . . . . . . . . . . . 1.38% 1.27% 1.28% 0.48% 0.20%
Portfolio turnover rate . . . . . . . . . . . 24% 21% 21% 11% 16%
Average brokerage commission per share. . . . $ 0.0589 $ 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>
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
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 $177,752,819 for the
year ended March 31, 1998. Realized gains or losses are based on the
specific-certificate identification method. Cost of securities held at March
31, 1998 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, 1998, the Fund paid aggregate fees of $32,000
to all Directors
13
<PAGE>
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, 1998, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $40,556 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 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,
1998, 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, 1998, 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, 1998, 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 30, 1998
14
<PAGE>
OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
<S><C>
DIRECTORS DISTRIBUTOR
Donald E. Cantlay FPA Fund Distributors, Inc.
DeWayne W. Moore 11400 West Olympic Boulevard, Suite 1200
Lawrence J. Sheehan Los Angeles, California 90064
COUNSEL
O'Melveny & Myers LLP
OFFICERS Los Angeles, California
Robert L. Rodriguez, PRESIDENT AND
CHIEF INVESTMENT OFFICER CUSTODIAN & TRANSFER AGENT
Julio J. de Puzo, Jr., EXECUTIVE VICE PRESIDENT
Dennis M. Bryan, VICE PRESIDENT State Street Bank and Trust Company
Eric S. Ende, VICE PRESIDENT Boston, Massachusetts
Janet M. Pitman, VICE PRESIDENT
J. Richard Atwood, TREASURER
Sherry Sasaki, SECRETARY INDEPENDENT AUDITORS
Christopher H. Thomas, ASSISTANT TREASURER
Ernst & Young LLP
Los Angeles, California
SHAREHOLDER SERVICE AGENT
INVESTMENT ADVISER
Boston Financial Data Services, Inc.
First Pacific Advisors, Inc. P.O. Box 8500
11400 West Olympic Boulevard, Suite 1200 Boston, Massachusetts 02266-8500
Los Angeles, California 90064 (800) 638-3060
(617) 328-5000
</TABLE>
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.
