<PAGE>
FPA CAPITAL FUND, INC.
SEMI-ANNUAL REPORT
[LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 WEST OLYMPIC BOULEVARD, SUITE 1200
LOS ANGELES, CALIFORNIA 90064 SEPTEMBER 30, 1998
<PAGE>
OFFICERS AND DIRECTORS
DIRECTORS
Willard H. Altman
Donald E. Cantlay
DeWayne W. Moore
Lawrence J. Sheehan
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 LLP
Los Angeles, California
CUSTODIAN & TRANSFER AGENT
State Street Bank and Trust Company
Boston, Massachusetts
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. The financial
information included in this report has been taken from the records of the Fund
without examination by independent auditors.
<PAGE>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Semi-Annual Report covers the six months ended September 30, 1998.
Your Fund's net asset value (NAV) per share closed at $27.00. The NAV reflects
a distribution of $3.07 on July 8, 1998, to shareholders of record on June 30,
1998. This distribution was composed of a $0.26 income dividend and a $2.81
capital gains distribution, $2.755 of which was long-term.
The following table shows the average annual total returns for several
different periods ended September 30 for the Fund and comparative indices. The
data quoted represents past performance, and an investment in the Fund may
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
PERIODS ENDED SEPTEMBER 30, 1998
-------------------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
FPA Capital Fund,
Inc. (NAV). . . . . . . . . . . . . (16.50)%* 16.82%* 17.34%*
FPA Capital Fund, Inc.
(Net of Sales Charge) . . . . . . . (21.93)%++ 15.26%++ 16.55%++
Lipper Growth Fund
Average . . . . . . . . . . . . . . (1.45)% 14.72% 14.96%
Russell 2000. . . . . . . . . . . . . (19.02)% 9.10% 11.15%
Standard & Poor's
500 Stock Index . . . . . . . . . . 9.15% 19.99% 17.29%
</TABLE>
The Fund's six-month return, which includes both the changes in NAV and the
reinvestment of distributions paid, was -23.47%*. This compares with total
returns of -11.84% for the Lipper Growth Fund Average, -23.87% for the Russell
2000, and -6.86% for the S&P 500. On a calendar year-to-date basis, these same
comparisons are: -14.92%* for FPA Capital Fund; -0.21% for the Lipper Average;
- -16.21% for the Russell 2000; and 6.14% for the S&P 500.
COMMENTARY
We now know that this market is no longer like the "Energizer Bunny," and
serves to prove that batteries and markets do have a finite life. As it turned
out, we wrote our highly cautionary shareholder letter on April 21, 1998, the
exact day the broader market hit its peak. In our opinion, we are in the midst
of a "bear" market. In the initial stages, there is a certain degree of
randomness that hits a portfolio's performance. Your Fund was not spared in
this rout; however, it did slightly outperform the Russell 2000 during the nine
months ended September 30. We did poorly versus the average growth fund and the
S&P 500. It was particularly frustrating this last quarter since your Fund
declined 23.64%* versus the 20.15% decline of the Russell 2000 (a measure of
small stock performance). We entered this period with a portfolio P/E ratio
considerably less than that of the market, as well as having approximately 30%
in short-term liquidity and bonds. This high level of defensiveness did not
moderate the decline as much as we had anticipated. We did not do as well as the
average fund in the Lipper Growth category since we refused to follow the crowd
and buy the most favored companies. This is the price one pays sometimes for
being a contrarian. We believe that our value discipline will eventually be
rewarded as our performance diverges from the pack in a positive way.
As we have explained in previous shareholder letters, your Fund focuses
primarily on small and mid-size companies, and these stocks were especially hard
hit in the initial stages of the "bear" market. During the nine months ended
September 30, stocks declined across a broad front with 50% of more than 10,000
stocks falling at least 40% from their highs. In contrast, only 21% of the S&P
500's stocks fell at least 40%, during this same time frame. When we dissect
this decline, the one underlying conclusion is: bigger was better. The largest
stocks in the S&P 500 generally did better than the balance of the stocks in
that index. If we look at the Nasdaq market of "over-the-counter" stocks, the
largest stocks did better. For example, the Nasdaq 100, comprised of the
largest 100 stocks in the Nasdaq market, had a negative total return of 8.2%
from its high, while the balance of the Nasdaq stocks had a negative total
return of 23.6%. The total returns from their respective highs of the Russell
2000 and the S&P 500 were -25.6% and -14.01%. Your Fund's total return was
- -26.96%*. We calculated these total returns from their respective highs, which
did not occur on the same day. This analysis is an approximation of how the
various markets performed.
- -----------------
* 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>
We believe there are four questions you would like to have answered: What
caused this decline? How long will it last? What is our response? Why do we
believe we will be successful?
We believe this decline reflects the realization on the part of
investors that economic and corporate earnings growth will be much lower than
previously anticipated. Investors have been forced to return to reality.
For the past year, we have been growing more cautious in our communications
with you. We wrote that the investment environment reflects "a gaming or
casino mind set" (September 1997 shareholder letter) and that earnings
expectations were exceedingly optimistic and therefore, "At current valuation
levels, we do not believe the market can withstand virtually any earnings
disappointments later this year." (March 1998 shareholder letter) The "Asian
contagion" is finally starting to depress corporate earnings. We have also
seen growing pressures in the international market, as witnessed by the
collapse of the Russian economy and the subsequent default on their
government debt obligations. The combination of these has thrown the
financial markets into a state of disarray. What we did not know was how
widespread speculation had grown. In just the last few weeks, we have read
about several hedge funds that have blown up because of their aggressive
investment and financing strategies. Fear and aversion to risk are beginning
to rise to high levels. Liquidity is now no longer viewed with contempt.
It is impossible to forecast how long this market decline will last or how
deep it will be. Previous "bear" markets have generally lasted from one to two
years. In our opinion, the last true "bear" market occurred in 1981 and 1982.
The market declines of 1987 and 1990 were severe but very short-lived, and were
caused by outside events that were over quickly. The Federal Reserve was able
to lower interest rates dramatically in order to stabilize and then spur
economic growth. In contrast, the events that are impacting the economy and the
financial markets currently are likely to be of a much longer duration and,
therefore, will have a more sustained impact. It will take time for the
international economy to recover. The slowdown in international economic
activity is deeper and more widespread than we previously anticipated. As a
result, the mending process should take longer. It is also unclear whether the
"Asian contagion" will hit Latin America. Should it spread to Brazil and then
to Mexico, the risk of a U.S. economic recession, as opposed to the current
profit recession, would rise materially. Unlike the 1987 and 1990 periods, U.S.
interest rates are already low; therefore, the beneficial impact from an
additional Fed lowering of interest rates should be less than in prior periods.
This potential recession risk as well as the continuation of subdued corporate
profitability growth should limit the stock market's potential rise from current
levels. In our opinion, earnings expectations for 1999 are still excessively
optimistic with a forecast growth rate of 18%, as measured by the First Call
survey. We believe these expectations are in the process of being lowered. It
takes time for analysts to get their numbers closer to the mark. Usually, the
stock market gets to the answer faster than analysts do.
Our response to this environment is one of gradually growing optimism. As
fear re-enters the marketplace, a greater number of investment opportunities are
a logical outcome. Over the next year, we do believe the financial markets and
the economy will be quite challenging and the uncertainty this creates will lead
to a higher level of investor anxiety. It is this anxiety and fear we hope to
take advantage of in our future investment selections. We have already begun
this process. During the six months ended September 30, we have gradually
accelerated the deployment of capital. We have committed approximately $82
million, or 33% of the liquidity and bonds, that we had as of March 31. This
process is continuing at an accelerating rate as the market declines. During
the chaos in the early part of October, we became quite aggressive. At the end
of September, liquidity and bonds represented 25%, while as of October 16 they
totaled 21%. These percentages tend to understate the activity, because asset
values were falling almost as fast as we were deploying capital. If we
calculated the current liquidity and bonds as a percentage of the total assets
as of March 31, they would represent 15% instead of the 30% reported. We intend
to invest the liquidity as we have always done, one stock at a time.
We are encouraged since we believe absolute value opportunities are now
reappearing. Since April, the number of companies qualifying in our computer
screens for value has increased sixfold. The new low list has recently grown to
over 1,000 companies versus less than a handful at the market's peak. In
response, we added three new positions while increasing our investment exposure
to eleven existing holdings. Proceeds from the acquisition of two of our
holdings, Devon Group and Fluke, are being recycled into new investments. Our
new company holdings are Gymboree, Kemet and Lam Research. All are leaders in
their respective fields and were acquired at price levels that were at either
modest premiums or discounts to book value. All have very strong balance sheets
with modest levels of debt. Gymboree is a
3
<PAGE>
leading retailer of premium-quality young children's clothing that is
experiencing, in our opinion, temporary operating difficulties. It is selling
at its lowest valuation ever. Kemet is a leading producer of capacitors, but
its price is suffering from the slowdown in sales of computers and electronics.
This is a "backdoor" way to participate in the growth of technology. The more
complex the electronics, the greater the number of capacitors required. Lam
Research is the second largest producer of semiconductor capital equipment. Its
share price has collapsed from $73 to $10 due to the slowdown in semiconductor
capital equipment spending. We have been acquiring the position at these lower
price levels since we believe there will be an eventual equipment recovery and
Lam will be a successful participant.
Most of the investments that we are making or considering today are in
companies that have large international exposure or are being significantly
impacted by the Asian debacle. We are attracted to them since we believe
there will be an eventual recovery in the international economy. The
consensus investment thinking is to avoid these types of investments because
there is so much economic uncertainty. It was not so long ago that having a
large international exposure was viewed as an advantage, especially if it was
in Asia. Now we believe investment psychology has swung so decidedly negative
against these kinds of companies that one is essentially getting a free call
option on the eventual international recovery. We believe this investment
strategy shares many similarities to our "California" investment theme five
years ago. We hope it will work equally well. Only time will tell.
The seeds of our future success lie not only in recent purchases, but also
in the existing portfolio. We believe this combination is setting the stage for
another period of robust performance. We are encouraged since our value screens
are uncovering the highest level of potential investment opportunities in the
last five years. Unlike our last letter, when we wrote, "Even though our
portfolio P/E is substantially less than the market comparisons, we are still
uncomfortable with its absolute level," today, we are convinced that your Fund
is at its most attractive valuation level since 1990. Its competitive valuation
advantage is at one of its widest levels ever. At the end of September, the
Fund's P/E and P/BV (Price/Book Value) ratios were 12.8x and 1.7x, respectively.
By comparison, the P/E ratios of the Russell 2000 and the S&P 500 were 20.6x and
24.4x, while the P/BV ratios were 2.2x and 3.9x, respectively. Our companies
are financially strong with a 22.3% average Total-Debt-to-Total-Capitalization
ratio. This compares favorably to the 38.7% and the 45.8% for the Russell 2000
and the S&P 500.
On a relative valuation basis, small-capitalization stocks, when compared
to large-capitalization stocks, are at their cheapest levels since 1990. We are
still somewhat cautious since the absolute valuation levels remain very high for
both the Russell 2000 and S&P 500. By comparison, your Fund's valuation
characteristics are at their lowest levels since 1990. We hope that this will
help provide some downside protection should the stock market experience another
sharp decline. However, as we have written in previous letters, low portfolio
valuation characteristics alone may not provide sufficient downside protection,
if fear and panic re-enter the market. What they do provide is a sound basis
from which to launch a recovery, when reason and confidence return. An example
of this was in 1991, when your Fund exploded to the upside.
We hope that we have addressed some of your questions and concerns
satisfactorily. It is far more interesting for Dennis Bryan and me to come to
the office these days since there are so many more potential investment
opportunities. We thank you for your continued support.
Respectfully submitted,
/s/ Robert L. Rodriguez
Robert L. Rodriguez, C.F.A.
President and Chief Investment Officer
October 17, 1998
4
<PAGE>
MAJOR PORTFOLIO CHANGES
Six Months Ended September 30, 1998
<TABLE>
<CAPTION>
Shares or
Principal
Amount
---------
<S> <C>
NET PURCHASES
COMMON STOCKS
Angelica Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 shs.
Arrow Electronics, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . 670,000 shs.
Consolidated Stores Corporation. . . . . . . . . . . . . . . . . . . . . . 235,886 shs.
Exabyte Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 shs.
Gymboree Corporation, The (1). . . . . . . . . . . . . . . . . . . . . . . 1,625,000 shs.
HomeBase, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 808,500 shs.
KEMET Corporation (1). . . . . . . . . . . . . . . . . . . . . . . . . . . 1,091,700 shs.
Komag, Incorporated. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,255,100 shs.
Lam Research Corporation (1) . . . . . . . . . . . . . . . . . . . . . . . 460,000 shs.
Oregon Steel Mills, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 187,200 shs.
Recoton Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000 shs.
Reebok International Ltd.. . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 shs.
CONVERTIBLE SECURITIES
Lam Research Corporation --5% 2002 (1) . . . . . . . . . . . . . . . . . . $ 9,250,000
Worthington Industries, Inc.--7 1/4% 2000. . . . . . . . . . . . . . . . . $ 4,774,000
NON-CONVERTIBLE SECURITY
U.S. Treasury Inflation-Indexed Notes --3 3/8% 2007. . . . . . . . . . . . $ 850,080
NET SALES
COMMON STOCKS
Devon Group, Inc. (2). . . . . . . . . . . . . . . . . . . . . . . . . . . 41,800 shs.
Fluke Corporation (2). . . . . . . . . . . . . . . . . . . . . . . . . . . 319,800 shs.
NON-CONVERTIBLE SECURITIES
Federal National Mortgage Association (IO-REMIC)
--6% 2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,620,436
Government National Mortgage Association (REMIC) --7.99125% 2010 (2) . . . $ 1,315,208
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1998
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- ----------------------------------------------------------- --------- ------------ ------------
<S> <C> <C> <C>
TECHNOLOGY -- 20.5%
Arrow Electronics, Inc.*. . . . . . . . . . . . . . . . . 1,570,000 $ 24,477,997 $ 20,606,250
Exabyte Corporation*+ . . . . . . . . . . . . . . . . . . 1,400,000 16,453,664 9,100,000
Keithley Instruments, Inc.. . . . . . . . . . . . . . . . 200,000 1,227,092 1,012,500
KEMET Corporation*. . . . . . . . . . . . . . . . . . . . 1,091,700 13,734,177 12,145,162
Komag, Incorporated*. . . . . . . . . . . . . . . . . . . 2,582,900 16,850,164 7,910,131
Lam Research Corporation* . . . . . . . . . . . . . . . . 460,000 4,865,000 4,600,000
Marshall Industries*. . . . . . . . . . . . . . . . . . . 548,300 10,556,440 12,096,869
Seagate Technology, Inc.* . . . . . . . . . . . . . . . . 450,000 2,949,975 11,278,125
Storage Technology Corporation* . . . . . . . . . . . . . 1,720,000 24,545,790 43,752,500
------------ ------------
$115,660,299 $122,501,537
------------ ------------
RETAILING -- 17.7%
Consolidated Stores Corporation*. . . . . . . . . . . . . 925,000 $ 14,292,772 $ 18,153,125
Craig Corporation (Class "A")*. . . . . . . . . . . . . . 320,000 1,906,272 2,300,000
Goodguys, Inc., The*. . . . . . . . . . . . . . . . . . . 525,000 4,764,000 3,084,375
Gymboree Corporation, The*+ . . . . . . . . . . . . . . . 1,625,000 18,824,305 12,187,500
HomeBase, Inc.*+. . . . . . . . . . . . . . . . . . . . . 2,438,500 18,257,615 16,307,469
Michaels Stores, Inc.*. . . . . . . . . . . . . . . . . . 820,500 10,871,291 20,922,750
Ross Stores, Inc. . . . . . . . . . . . . . . . . . . . . 1,164,400 6,596,689 33,330,950
------------ ------------
$ 75,512,944 $106,286,169
------------ ------------
FINANCIAL -- 15.5%
Comdisco, Inc.. . . . . . . . . . . . . . . . . . . . . . 1,650,000 $ 6,382,842 $22,481,250
Conseco, Inc. . . . . . . . . . . . . . . . . . . . . . . 1,530,555 17,209,985 46,777,587
Countrywide Credit Industries, Inc. . . . . . . . . . . . 150,000 2,156,915 6,243,750
Foremost Corporation of America . . . . . . . . . . . . . 150,000 1,672,500 2,746,875
Horace Mann Educators Corporation . . . . . . . . . . . . 400,000 5,679,769 12,000,000
Westcorp. . . . . . . . . . . . . . . . . . . . . . . . . 294,000 1,790,545 2,535,750
------------ ------------
$ 34,892,556 $ 92,785,212
------------ ------------
CONSUMER DURABLES -- 8.3%
Champion Enterprises, Inc.* . . . . . . . . . . . . . . . 200,000 $ 2,904,571 $ 4,650,000
Coachmen Industries, Inc.+. . . . . . . . . . . . . . . . 1,000,000 10,807,911 19,875,000
Flexsteel Industries, Inc.. . . . . . . . . . . . . . . . 160,000 2,008,125 1,740,000
Recoton Corporation*+ . . . . . . . . . . . . . . . . . . 750,000 13,285,620 14,625,000
Thor Industries, Inc. . . . . . . . . . . . . . . . . . . 412,500 3,140,956 8,765,625
------------ ------------
$ 32,147,183 $ 49,655,625
------------ ------------
BASIC MATERIALS -- 3.9%
International Aluminum Corporation. . . . . . . . . . . . 200,000 $ 4,117,806 $ 5,675,000
Oregon Steel Mills, Inc.. . . . . . . . . . . . . . . . . 1,178,000 20,475,812 13,841,500
Rouge Industries, Inc. (Class "A"). . . . . . . . . . . . 500,000 9,387,725 3,750,000
------------ ------------
$ 33,981,343 $ 23,266,500
------------ ------------
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1998
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS--CONTINUED Amount Cost Value
- ----------------------------------------------------------- ---------- ------------ ------------
<S> <C> <C> <C>
CONSUMER NON-DURABLES -- 3.6%
Rawlings Sporting Goods Company, Inc.*. . . . . . . . . . 225,000 $ 2,573,461 $ 2,475,000
Reebok International Ltd.*. . . . . . . . . . . . . . . . 1,400,000 37,379,051 18,987,500
------------ ------------
$ 39,952,512 $ 21,462,500
------------ ------------
INDUSTRIAL SERVICES -- 1.6%
Angelica Corporation+ . . . . . . . . . . . . . . . . . . 600,000 $ 13,601,105 $ 9,637,500
------------ ------------
CONSUMER SERVICES -- 1.4%
CPI Corp. . . . . . . . . . . . . . . . . . . . . . . . . 357,300 $ 5,282,963 $ 8,463,544
------------ ------------
DEFENSE -- 0.8%
DRS Technologies, Inc.*+. . . . . . . . . . . . . . . . . 510,000 $ 2,507,718 $ 4,940,625
------------ ------------
TOTAL COMMON STOCKS -- 73.3%. . . . . . . . . . . . . . . $353,538,623 $438,999,212
------------ ------------
CONVERTIBLE SECURITIES -- 1.7%
Lam Research Corporation --5% 2002. . . . . . . . . . . . $9,250,000 $ 7,688,804 $ 6,937,500
Worthington Industries, Inc. --7 1/4% 2000. . . . . . . . 6,122,500 3,504,500 2,913,125
------------ ------------
$ 11,193,304 $ 9,850,625
------------ ------------
NON-CONVERTIBLE BONDS AND DEBENTURES -- 21.0%
Federal Home Loan Mortgage Corporation
--7% 2020 (PAC-IO-CMO) . . . . . . . . . . . . . . . . . $3,755,714 $ 505,997 $ 643,752
Federal National Mortgage Association
--6% 2013 (PAC-IO-REMIC). . . . . . . . . . . . . . . . 760,103 -- 4,632
--6% 2028 (IO-REMIC) . . . . . . . . . . . . . . . . . . 31,879,564 11,130,027 8,649,818
Michaels Stores, Inc. --10 7/8% 2006. . . . . . . . . . . 2,000,000 1,736,365 2,180,000
Trump Atlantic City Associates --11 1/4% 2006 . . . . . . 10,000,000 9,592,500 8,200,000
U.S. Treasury Notes --5 3/4% 1998 . . . . . . . . . . . . 21,000,000 20,886,797 21,059,063
U.S. Treasury Inflation-Indexed Notes --3 3/8% 2007 . . . 86,522,520 84,513,702 85,197,644
------------ ------------
$128,365,388 $125,934,909
------------ ------------
</TABLE>
7
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1998
<TABLE>
<CAPTION>
Principal
Amount Cost Value
--------- ------------ ------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENT -- 1.2%
Private Export Funding Corp. --4.823% 2/28/99 . . . . . . $7,274,000 $ 7,272,182 $ 7,252,178
------------ ------------
TOTAL INVESTMENT SECURITIES -- 97.2%. . . . . . . . . . . $500,369,497 $582,036,924
------------ ------------
------------
OTHER SHORT-TERM INVESTMENTS -- 4.1%
Short-term Corporate Notes:
American Express Credit Corporation --5.54% 10/1/98 . . $4,810,000 $ 4,810,000
American Express Credit Corporation --5.7% 10/1/98. . . 2,665,000 2,665,000
General Electric Capital Services, Inc. --5.51% 10/5/98 7,852,000 7,847,193
American General Finance Corporation --5.53% 10/6/98. . 9,166,000 9,158,960
------------
$ 24,481,153
------------
TOTAL INVESTMENTS -- 101.3% . . . . . . . . . . . . . . . $606,518,077
Liabilities less other assets -- (1.3)% . . . . . . . . . (7,755,429)
------------
TOTAL NET ASSETS -- 100%. . . . . . . . . . . . . . . . . $598,762,648
------------
------------
</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, 1998.
<TABLE>
<CAPTION>
Purchases Sales Realized Dividend
at Cost at Cost Gain Income
---------------------------------------------------------
<S> <C> <C> <C> <C>
Angelica Corporation $ 2,289,500 -- -- $288,000
Coachmen Industries, Inc. -- -- -- 100,000
DRS Technologies, Inc. -- -- -- --
Exabyte Corporation 3,003,000 -- -- --
Gymboree Corporation, The 18,824,305 -- -- --
HomeBase, Inc. 4,906,677 -- -- --
Recoton Corporation 5,497,350 -- -- --
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $500,369,497). . . . . . . . . . . . $582,036,924
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less) . . . . . . . . . . . 24,481,153 $606,518,077
------------
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Receivable for:
Dividends and accrued interest. . . . . . . . . . . . . $2,416,083
Capital Stock sold. . . . . . . . . . . . . . . . . . . 345,289 2,761,372
------------ ------------
$609,279,503
LIABILITIES
Payable for:
Investment securities purchased . . . . . . . . . . . . $ 8,221,147
Capital Stock repurchased . . . . . . . . . . . . . . . 1,830,491
Advisory fees and financial services. . . . . . . . . . 394,920
Accrued expenses and other liabilities. . . . . . . . . 70,297 10,516,855
------------ ------------
NET ASSETS -- equivalent to $27.00 per share on 22,176,279
shares of Capital Stock outstanding . . . . . . . . . . . $598,762,648
------------
------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 22,176,279 shares . . . $ 221,763
Additional Paid-in Capital. . . . . . . . . . . . . . . . 505,930,425
Undistributed net realized gain on investments. . . . . . 8,308,221
Undistributed net investment income . . . . . . . . . . . 2,634,812
Unrealized appreciation of investments. . . . . . . . . . 81,667,427
------------
Net assets at September 30, 1998. . . . . . . . . . . . . $598,762,648
------------
------------
</TABLE>
See notes to financial statements.
9
<PAGE>
STATEMENT OF OPERATIONS
For the Six Months Ended September 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,879,808
Dividends (including $388,000 from securities of affiliates). . . 1,727,525
-------------
$ 8,607,333
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,507,096
Financial services. . . . . . . . . . . . . . . . . . . . . . . . 381,861
Transfer agent fees and expenses. . . . . . . . . . . . . . . . . 142,346
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . 53,978
Custodian fees and expenses . . . . . . . . . . . . . . . . . . . 32,684
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,325
Directors' fees and expenses. . . . . . . . . . . . . . . . . . . 16,717
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . 16,061
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,925
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,606
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,020
Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 800 3,212,419
------------ -------------
Net investment income . . . . . . . . . . . . . . . . . . $ 5,394,914
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments:
Proceeds from sales of investment securities (excluding
short-term investments with maturities of 60 days or less). . . $ 16,520,721
Cost of investment securities sold. . . . . . . . . . . . . . . . 7,929,458
------------
Net realized gain on investments. . . . . . . . . . . . . . . $ 8,591,263
Unrealized appreciation of investments:
Unrealized appreciation at beginning of period. . . . . . . . . . $282,880,397
Unrealized appreciation at end of period. . . . . . . . . . . . . 81,667,427
------------
Decrease in unrealized appreciation of investments. . . . . . (201,212,970)
-------------
Net realized and unrealized loss on investments . . . . . $(192,621,707)
-------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . $(187,226,793)
-------------
-------------
</TABLE>
See notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
September 30, 1998 March 31, 1998
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . . . $ 5,394,914 $ 9,718,899
Net realized gain on investments. . . . . . . . 8,591,263 90,751,629
Increase (decrease) in unrealized
appreciation of investments. . . . . . . . . . (201,212,970) 84,207,829
------------ ------------
Increase (decrease) in net assets
resulting from operations . . . . . . . . . . . $(187,226,793) $184,678,357
Distributions to shareholders from:
Net investment income . . . . . . . . . . . . . $ (5,454,379) $ (9,124,117)
Net realized capital gains. . . . . . . . . . . (58,949,258) (64,403,637) (53,573,352) (62,697,469)
------------ ------------
Capital Stock transactions:
Proceeds from Capital Stock sold. . . . . . . . $77,435,373 $124,393,171
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions. . . . . . . . 57,545,821 55,553,713
Cost of Capital Stock repurchased . . . . . . . (74,024,249) 60,956,945 (109,675,323) 70,271,561
------------ ------------- ------------ ------------
Total increase (decrease) in net assets . . . . . $(190,673,485) $192,252,449
NET ASSETS
Beginning of period, including
undistributed net investment income
of $2,694,277 and $2,099,495. . . . . . . . . . 789,436,133 597,183,684
------------- ------------
End of period, including
undistributed net investment income
of $2,634,812 and $2,694,277. . . . . . . . . . $598,762,648 $789,436,133
------------- ------------
------------- ------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold. . . . . . . . . . . 2,179,329 3,531,612
Shares issued to shareholders
upon reinvestment of dividends
and distributions . . . . . . . . . . . . . . . 1,603,394 1,631,634
Shares of Capital Stock repurchased . . . . . . . (2,218,365) (3,052,450)
------------- ------------
Increase in Capital Stock outstanding . . . . . . 1,564,358 2,110,796
------------- ------------
------------- ------------
</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
30, Year Ended March 31,
-----------------------------------------------------
1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period. . . . . . $38.30 $32.28 $27.55 $22.40 $19.30 $19.06
------ ------ ------ ------ ------ ------
Net investment income . . . . . . . . . . . . . . $ 0.25 $ 0.49 $ 0.38 $ 0.33 $ 0.09 $ 0.04
Net realized and unrealized gain (loss) on
investment securities . . . . . . . . . . . . . (8.48) 8.74 6.98 7.63 3.62 2.30
------ ------ ------ ------ ------ ------
Total from investment operations. . . . . . . . . $(8.23) $9.23 $7.36 $7.96 $3.71 $2.34
------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income. . . . . . $(0.26) $(0.47) $(0.37) $(0.26) $(0.08) $(0.03)
Distributions from net realized
capital gains . . . . . . . . . . . . . . . . (2.81) (2.74) (2.26) (2.55) (0.53) (2.07)
------ ------ ------ ------ ------ ------
Total distributions . . . . . . . . . . . . . . . $(3.07) $(3.21) $(2.63) $(2.81) $(0.61) $(2.10)
------ ------ ------ ------ ------ ------
Net asset value at end of period. . . . . . . . . $27.00 $38.30 $32.28 $27.55 $22.40 $19.30
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Total investment return*. . . . . . . . . . . . . (23.47)% 30.10% 27.30% 36.84% 19.77% 13.13%
Ratios/supplemental data:
Net assets at end of period (in $000's) . . . . . 598,763 789,436 597,184 399,282 236,656 165,684
Ratio of expenses to average net assets . . . . . 0.88%+ 0.83% 0.84% 0.87% 0.95% 1.03%
Ratio of net investment income to
average net assets. . . . . . . . . . . . . . . 1.47%+ 1.38% 1.27% 1.28% 0.48% 0.20%
Portfolio turnover rate . . . . . . . . . . . . . 5%+ 24% 21% 21% 11% 16%
Average brokerage commission per share. . . . . . $0.0501 $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. The
return for the six months ended September 30, 1998 is not annualized.
+ Annualized
See notes to financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
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 $102,668,399 for the
six months ended September 30, 1998. Realized gains or losses are based on the
specific-certificate identification method. The cost of securities held at
September 30, 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 0.10% of the average
daily net assets for each fiscal year in reimbursement for the provision of
financial services to the Fund. The Agreement provides that the Adviser will
reimburse the Fund for any annual expenses (exclusive of interest, taxes, the
cost of any
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Continued
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, 1998, the Fund paid aggregate fees
of $16,500 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, 1998, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $13,695 in
net Fund share sales commissions after reallowance to other dealers. The
Distributor pays its own overhead and general administrative expenses, the
cost of supplemental sales literature, promotion and advertising.
NOTE 5 -- SALES OF FUND SHARES
Shares of the Fund are presently offered for sale only to
existing shareholders and to directors, officers, and employees of the
Fund, the Adviser, and affiliated companies. The discontinuation of sales to
new investors reflects Management's belief that unrestrained growth in the
Fund's net assets might impair investment flexibility. The Fund may resume
at any time the sale of its shares to new investors if, in the Board of
Directors' opinion, doing so would be in the best interests of the Fund and
its shareholders.
14
