<PAGE>
FPA CAPITAL FUND, INC.
ANNUAL REPORT
[LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064 MARCH 31, 2000
<PAGE>
LETTER TO SHAREHOLDERS
DEAR FELLOW SHAREHOLDERS:
This Annual Report covers the fiscal year ended March 31, 2000. Your Fund's
net asset value (NAV) per share closed at $33.28. Distributions of $0.99 and
$3.26 per share were paid on July 8, 1999, and December 29, 1999, to holders of
record on June 30 and December 21, 1999, respectively. The July distribution was
composed of a $0.16 income dividend and $0.83 capital gains distribution, $0.15
of which was long-term. The December distribution included an income dividend of
$0.06 and a $3.20 capital gains distribution, $2.05 of which was long-term.
The following table shows the average annual total return for several
different periods ended on that date for the Fund and comparative indices of
securities prices. The data quoted represents past performance, and an
investment in the Fund may fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
AVERAGE ANNUAL TOTAL RETURN
PERIODS ENDED MARCH 31, 2000
----------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
FPA Capital Fund, Inc.
(NAV)..................... 25.39%* 19.99%* 19.41%*
FPA Capital Fund, Inc.
(Net of Sales Charge)..... 17.24%++ 18.39%++ 18.61%++
Lipper Mid-Cap Value Fund
Average................... 21.24% 16.30% 13.90%
Russell 2000 Index.......... 37.29% 17.24% 14.43%
Standard & Poor's
500 Stock Index........... 17.94% 26.76% 18.84%
The Fund's six-month total return, which includes both the changes in NAV
and the reinvestment of distributions paid, was 14.60%*. This compares with
total returns of 17.08% for the Lipper Mid-Cap Value Fund Average, 26.83% for
the Russell 2000, and 17.51% for the S&P 500. On a calendar year basis, these
same comparisons are 14.24%* for FPA Capital Fund, 9.33% for the Mid-Cap Value
Fund average, 21.26% for the Russell 2000, and 21.04% for the S&P 500.
COMMENTARY
Before discussing the Fund's performance, outlook and portfolio changes,
we believe that many of our shareholders may have become confused about
their Fund's investment performance, especially when they compare their
purchase cost to the Fund's share price in their local newspaper. We believe
this since some recent shareholder correspondence indicates that these
individuals are making a common mistake of not including the dividends
received, when comparing the current share price to a price paid several
years earlier. For example, your Fund's NAV closed on March 31, 1997, at
$32.28 versus the March 31, 2000, close of $33.28. At first glance, it looks
as though there has not been much in the way of share price appreciation. To
get a more accurate picture, you would have to add a total of $11.06 in
dividend distributions that you either reinvested into more shares or
collected as cash distributions. Over longer time periods, this dividend
oversight can lead to erroneous conclusions. The above performance table
provides you with the actual long-term returns, which are different than if
you just compared prices at two different points in time. We hope this helps
clarify any misunderstandings that you might have. For a more detailed
explanation, you may call us at (800) 982-4372.
We strongly believe that the value style of investing is not dead, it
appears more likely to be in a state of hibernation. Your Fund has achieved
respectable absolute investment returns over one-, five-, and ten-year periods,
as demonstrated by the above performance table. The last two years have been
particularly difficult because of the tidal wave of money that has been directed
towards the aggressive high-technology funds. Various studies recently have
shown that the performance differential between value and growth stocks is the
widest on record. The Frank Russell Company has tried to segment stocks into
their growth and value components and then create indexes reflective of each. We
believe the segmentation process has flaws, but it does give a sense of what is
occurring. For example, for the year ending March 31, 2000, the Russell 2000
Value Index's total return was 13.3% versus 59.0% for the Russell 2000 Growth
Index. The exaggerated performance of the growth
- ---------------
* 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
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component in the Russell 2000 Index was the primary reason that the overall
index outperformed your Fund for this same time period. The Russell 2000's
performance was skewed by a small number of stocks, especially in the second
half of calendar 1999, when the skewing was extreme. The top 100 stocks
contributed 15.1% of the index's 11% return. In other words, the approximately
1900 remaining stocks returned a negative 4.1% return. Despite these challenges,
your Fund still outperformed the Lipper Mid-Cap Value Fund Average and the S&P
500 for the fiscal year.
A recent Sanford C. Bernstein & Co., Inc. survey of investment consulting
firms concerning performance by manager style shows that the last two years were
the worst for value managers in twenty years. Value managers underperformed
growth managers by 26 and 19 percentage points in 1999 and 1998, respectively.
These performance differences between styles do even out over time. Between 1980
and 1999, growth managers, on average, outperformed value managers, with an
annualized performance of 18.6% versus 16.7%. However, if you use the period
1969 to 1999, the performance differential narrows to 13.6% versus 13.4%, with
value style managers slightly in the lead. Many of today's investors fail to
realize how these investment style shifts do occur and, thus, they assume that
today's trends will continue. Over the years, investors have to be reintroduced
to this concept. For the record, this study showed that value style managers
outperformed growth managers for five consecutive years ending in 1996.
An example of style shift preference just occurred during March. The
Russell 2000 Value Index was up 3.8% while the Russell 2000 Growth Index was
down 10.5%. On March 9, your Fund's calendar year-to-date performance was a
negative 1.2% versus a positive 20.3% for the Russell 2000, or an
underperformance differential of 21.5%. It was, in a word, painful. By the end
of March, this trend had changed, as your Fund's 7.3% total return was slightly
above the Russell 2000's 7.1% return. This is the largest performance reversal
in the shortest period of time that I have ever witnessed in my almost thirty
years of being an investment professional. We hope this recent volatility will
remind investors why they have different fund styles in their overall portfolio
mix, and hope that the redemption of value style funds will slow. For the three
months ended January 2000, growth stock funds attracted a net $88.2 billion
while value-oriented funds had net redemptions of $25.9 billion. Your Fund has
been experiencing a similar trend. We were never a part of the large inflow
cycle from the past five years and, thus, our redemption cycle has been very
manageable.
During the past two years, various stock market measures of performance
have been driven by stocks with high growth expectations. As an example, our
friends at Pecaut and Company point out that money-losing companies,
representing 15% of the companies in the Russell 2000, gained 52% on average in
1999, while the other 85%, representing money-making companies, fell 2% on
average. The most extreme examples of this trend have been the Internet stocks.
In January of this year, I attended the Donaldson, Lufkin & Jenrette (DLJ)
Internet conference. Every one of the thirty-two company presentations I
attended forecast that they would achieve break-even profitability, at the
operating line before taxes, by 2002 or 2003. A major problem for these
companies is that they are all generating large negative operating cash flows
that require continued corporate access to the capital markets for funds to
complete their business expansions. Should this not occur, they will be in
financial trouble. Again, we believe that most of these business endeavors are
nothing more than highly speculative situations that will end with many of them
going out of business.
Beyond the loss-plagued Internet stocks, valuations for anticipated
high-growth situations are at unprecedented levels. Radio Corporation of America
(RCA) was among the highest P/E ratio stocks in the 1929 market at 73x. During
the late 1960s and early 1970s, Polaroid was the first large capitalization
stock to reach 95x earnings. None of the major Nifty-Fifty stocks of the early
1970s reached 100x earnings. In contrast, the top 100 stocks of the Nasdaq had
an average P/E ratio of more than 150x earnings at quarter-end. We approached
these high-valuation stocks somewhat differently. We analyzed the operating and
stock market performances of Microsoft and Cisco Systems for the past ten years,
and made growth assumptions for them and the U.S. economy for the next ten
years. We biased down the expected growth and valuation assumptions for each of
these companies. The result was that Microsoft's market valuation is estimated
to increase to 36% of nominal GDP versus 6% today (a modern record). Cisco's
expected market valuation rises to 48% of nominal GDP from 4%. The combination
of these two estimates equals 84% of GDP in ten years. We think that the odds of
this happening are not great. We
2
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believe that growth stock investors are assuming some extremely optimistic
growth and profitability assumptions to justify today's share prices.
In light of these trends, we have been reducing your Fund's exposure to
technology and technology-related stocks. We have liquidated the following: AVX,
Comdisco, Keithley Instruments, Komag, Lam Research, and Seagate. We have almost
eliminated the Kemet position as well. Your Fund's recent large capital gains
distributions reflect the profits realized from the sales of these long-term
holdings. We cannot, in good conscience, continue to hold companies that have
valuations far in excess of what we consider as reasonable and prudent. We are
attempting to moderate the downside risk in the portfolio, should a large
decline in technology stocks occur. In place of these companies, we are
increasing our exposure to interest-rate sensitive stocks, as rates have
increased. We have added to some of our existing holdings as well as
establishing two new ones: Fleetwood Enterprises and Centex Corporation.
Fleetwood is among the largest manufactured-housing and recreational-vehicle
producers. We purchased it at 85% of book value, 6x earnings, with a dividend
yield of almost 5%. These valuation characteristics are similar to the lows of
1990. In that year, the manufactured-housing industry was at a 26-year low in
conjunction with a recession. We are not even close to those conditions today.
We recently purchased Centex, the largest U.S. homebuilder, at 4.5x earnings and
78% of book value. In our opinion, its share price is essentially discounting a
recession worse than 1990 but not quite as bad as that of 1981-82. This is hard
to believe, given the valuations being accorded technology stocks. We have
argued the point with clients that, if technology stocks are appropriately
valued, this implies that U.S. and foreign economies are not likely to
experience a recession in the foreseeable future. In this scenario, Centex's
earnings would probably not decline and, therefore, the stock should not be at
this depressed price level. If Centex is the appropriately valued security, a
recession is more likely to be on the horizon. This scenario would be very
negative for technology stock prices since their anticipated earnings growth
rates would be too high to justify current share price levels. We do not believe
that this dichotomy can be sustained for any appreciable length of time.
Other than for technology and other types of high-expectation-growth
stocks, the broader market has been in a "bear" market since February of 1998.
The average stock has made little headway since then. The BANK CREDIT ANALYST
publication breaks the S&P 500 into technology and non-technology indexes. The
S&P 500 non-technology index is actually down from February 1998. During the
past month, technology stocks in general have experienced meaningful price
declines. It appears to us that these stocks were experiencing a speculative
"blow-off" in early March. Contributions into equity mutual funds in general
and technology funds in particular are at record levels. Despite these inflows,
liquidity levels in technology funds are close to a record low. There is an
increasing possibility that technology stocks may be entering their own "bear"
market. If this is a correct assessment, more pain is likely to be felt in this
sector, as redemptions become a growing challenge.
After recent changes, the FPA Capital Fund portfolio continues to
maintain a competitive valuation advantage over the market. At the end of
March, the Fund's P/E and P/BV (Price /Book Value) ratios were 17.7x and
1.7x, respectively. By comparison, the P/E ratios of the Russell 2000 and the
S&P 500 were 30.8x and 29.9x, while the P/BV ratios were 2.8x and 5.7x,
respectively. Our companies are financially strong, with a 28.4% average
Total-Debt/Total-Capitalization ratio, which compares favorably to the 33.7%
and 39.5% for the Russell 2000 and the S&P 500. The portfolio's median market
capitalization was $404 million, while its weighted average market
capitalization was $1.7 billion. The Russell 2000's median and average market
capitalizations were $450 million and $1.6 billion, while those of the S&P
500 were $7.7 billion and $156.3 billion, respectively.
We thank you for your continued investment and support during these
challenging times for value managers.
Respectfully submitted,
/s/ Robert L. Rodriguez
Robert L. Rodriguez, CFA
President and Chief Investment Officer
April 9, 2000
3
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<TABLE>
<CAPTION>
[GRAPH]
HISTORICAL PERFORMANCE
CHANGE IN VALUE OF A $10,000 INVESTMENT IN FPA CAPITAL FUND, INC. VS. RUSSELL 2000, S&P
500 AND LIPPER MID-CAP VALUE FUND AVERAGE FROM APRIL 1, 1990 TO MARCH 31, 2000
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 3/31/99 3/31/00
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA Capital Fund, Inc. (NAV) 10,000 11,441 15,310 17,489 19,785 23,697 32,427 41,279 53,704 47,018 58,947
S&P 500 10,000 11,440 12,705 14,640 14,853 17,165 22,679 27,176 40,217 47,637 56,186
FPA Capital Fund, Inc. 9,350 10,697 14,315 16,352 18,499 22,157 30,319 38,596 50,214 43,962 55,115
Lipper Mid-Cap Value Fund Average 10,000 10,677 12,926 14,849 16,479 17,384 22,436 23,582 33,489 28,044 38,495
Russell 2000 10,000 10,670 12,911 14,783 16,394 17,279 22,577 23,819 34,526 30,324 36,761
</TABLE>
Past performance is not indicative of future performance. The Russell 2000 Index
consists of the smallest companies in the Russell 3000 total capitalization
universe. This index is considered a measure of small capitalization stock
performance. The Standard & Poor's 500 Stock Index (S&P 500) is a
capitalization-weighted index which covers industrial, utility, transportation
and financial service companies, and represents approximately 75% of the New
York Stock Exchange (NYSE) capitalization and 30% of NYSE issues. This index is
considered a measure of large capitalization stock performance. These indices do
not reflect any commissions or fees which would be incurred by an investor
purchasing the stocks they represent. The Lipper Mid-Cap Value 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 $55,115 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 $58,947. The performance of the Fund and of the Averages is computed on
total return basis which includes reinvestment of all distributions.
4
<PAGE>
MAJOR PORTFOLIO CHANGES
Six Months Ended March 31, 2000
NET PURCHASES SHARES
COMMON STOCKS -------
CPI Corp............................................................. 33,100
Centex Corporation (1)............................................... 537,100
Champion Enterprises, Inc............................................ 808,300
Conseco, Inc......................................................... 218,900
Consolidated Stores Corporation...................................... 134,100
Countrywide Credit Industries, Inc................................... 518,200
Fleetwood Enterprises, Inc. (1)...................................... 904,900
Horace Mann Educators Corporation.................................... 429,100
Ross Stores, Inc..................................................... 60,500
NET SALES
COMMON STOCKS
AVX Corporation (2).................................................. 625,000
Comdisco, Inc. (2)................................................... 866,700
ENSCO International Incorporated..................................... 63,400
Foremost Corporation of America (2).................................. 126,100
Gymboree Corporation, The............................................ 350,000
Keithley Instruments, Inc. (2)....................................... 168,100
KEMET Corporation.................................................... 1,350,000
Reebok International Ltd............................................. 668,200
Seagate Technology, Inc. (2)......................................... 75,000
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
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<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS
March 31, 2000
COMMON STOCKS Shares Value
- ---------------------------------------------- -------------- --------------
<S> <C> <C>
TECHNOLOGY -- 27.3%
Arrow Electronics, Inc.*................................ 1,319,500 $ 46,512,375
Avnet, Inc.............................................. 766,935 48,316,905
Exabyte Corporation*--.................................. 1,176,600 8,750,963
Hutchinson Technology Incorporated*..................... 624,300 11,003,287
KEMET Corporation*...................................... 60,000 3,795,000
Storage Technology Corporation*......................... 1,445,600 23,039,250
--------------
$ 141,417,780
--------------
RETAILING -- 23.9%
Consolidated Stores Corporation*........................ 1,609,100 $ 18,303,513
Craig Corporation (Class "A")*.......................... 269,000 1,193,688
Good Guys, Inc., The*................................... 441,300 1,820,362
Gymboree Corporation, The*--............................ 1,078,800 4,450,050
HomeBase, Inc.*--....................................... 2,049,400 4,098,800
Michaels Stores, Inc.*.................................. 1,260,700 51,373,525
Ross Stores, Inc........................................ 1,760,500 42,362,031
--------------
$ 123,601,969
--------------
CONSUMER DURABLES -- 13.8%
Centex Corporation...................................... 537,100 $ 12,789,694
Champion Enterprises, Inc.*............................. 1,903,600 10,945,700
Coachmen Industries, Inc.--............................. 840,500 11,609,406
Fleetwood Enterprises, Inc.............................. 904,900 13,347,275
Flexsteel Industries, Inc............................... 134,500 1,647,625
Recoton Corporation*--.................................. 630,400 7,446,600
Thor Industries, Inc.................................... 555,000 13,493,438
--------------
$ 71,279,738
--------------
FINANCIAL -- 10.0%
Conseco, Inc............................................ 1,534,900 $ 17,555,419
Countrywide Credit Industries, Inc...................... 644,300 17,557,175
Horace Mann Educators Corporation....................... 729,100 13,442,781
Westcorp................................................ 247,100 3,459,400
--------------
$ 52,014,775
--------------
</TABLE>
6
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<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS
March 31, 2000
Shares or
Principal
COMMON STOCKS-CONTINUED Amount Value
- ---------------------------------------------- -------------- --------------
<S> <C> <C>
ENERGY -- 7.0%
ENSCO International Incorporated....................... 1,000,000 $ 36,125,000
--------------
INDUSTRIAL PRODUCTS -- 2.7%
Belden Inc. 504,300 $ 13,868,250
--------------
CONSUMER NON-DURABLES -- 2.5%
CPI Corp............................................... 330,000 $ 7,693,125
Rawlings Sporting Goods Company, Inc.*................. 189,100 850,950
Reebok International Ltd.*............................. 508,400 4,702,700
--------------
$ 13,246,775
--------------
BASIC MATERIALS -- 2.2%
International Aluminum Corporation..................... 168,100 $ 2,626,562
Oregon Steel Mills, Inc................................ 990,100 3,836,638
Rouge Industries, Inc. (Class "A")..................... 752,300 4,748,894
--------------
$ 11,212,094
--------------
BUSINESS SERVICES & SUPPLIES -- 2.0%
Angelica Corporation+.................................. 504,300 $ 5,011,481
Manpower Inc. ......................................... 150,000 5,325,000
--------------
$ 10,336,481
--------------
DEFENSE -- 0.8%
DRS Technologies, Inc.*................................ 428,700 $ 4,260,206
--------------
TOTAL COMMON STOCKS -- 92.2% (Cost $390,392,380)....... $ 477,363,068
--------------
NON-CONVERTIBLE BONDS & DEBENTURES -- 5.5%
Federal Home Loan Mortgage Corporation (IO)
--7% 2020............................................. $ 3,156,714 $ 276,212
Trump Atlantic City Associates -- 11--% 2006........... 4,000,000 2,620,000
U.S. Treasury Inflation-Indexed Notes -- 3--% 2007..... 26,561,320 25,548,670
--------------
TOTAL NON-CONVERTIBLE BONDS & DEBENTURES
(Cost $29,882,705).................................. $ 28,444,882
--------------
TOTAL INVESTMENT SECURITIES -- 97.7%
(Cost $420,275,085)................................. $ 505,807,950
--------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS
March 31, 2000
Principal
Amount Value
- ---------------------------------------------- -------------- --------------
<S> <C> <C>
SHORT-TERM CORPORATE NOTES -- 2.3%
American Express Credit Corporation --6.2% 4/3/00.... $ 3,949,000 $ 3,947,640
Ford Motor Credit Corporation
--6.05% 4/4/00...................................... 3,956,000 3,954,006
--6.06% 4/5/00...................................... 2,371,000 2,369,403
--6.04% 4/6/00...................................... 1,878,000 1,876,424
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $12,147,473) $ 12,147,473
--------------
TOTAL INVESTMENTS -- 100.0%
(Cost $432,422,558)................................. $ 517,955,423
Other assets and liabilities, net ..................... (55,296)
--------------
TOTAL NET ASSETS -- 100.0%............................. $ 517,900,127
--------------
--------------
*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 during the year
ended March 31, 2000. Following is a summary of transactions in securities of
these affiliates during the year ended March 31, 2000.
Purchases Sales Realized Dividend
at Cost at Cost Gain (Loss) Income
--------------------------------------------------
Angelica Corporation -- -- -- $484,128
Coachmen Industries, Inc. -- -- -- 168,100
Exabyte Corporation -- -- -- --
Gymboree Corporation -- $5,005,090 $(3,692,634) --
HomeBase, Inc. -- -- -- --
Marshall Industries $580,515 See Below -- --
Recoton Corporation -- -- -- --
All of the common stock of Marshall Industries was converted into Avnet, Inc.
in a non-taxable acquisition during the year ended March 31, 2000.
See notes to financial statements.
</TABLE>
8
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<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 2000
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $420,275,085)......................... $ 505,807,950
Short-term investments -- at cost plus interest earned
(maturities 60 days or less)........................... 12,147,473 $ 517,955,423
---------------
Cash....................................................... 259
Receivable for:
Dividends and accrued interest........................... $ 900,067
Capital Stock sold....................................... 95,309
Investment securities sold............................... 82,431 1,077,807
-------------- ---------------
$ 519,033,489
LIABILITIES
Payable for:
Capital Stock repurchased................................ $ 728,086
Advisory fees and financial services..................... 320,280
Accrued expenses and other liabilities................... 84,996 1,133,362
-------------- ---------------
NET ASSETS .................................................. $ 517,900,127
---------------
---------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 15,561,521 shares........ $ 155,615
Additional Paid-in Capital................................. 347,703,815
Undistributed net realized gain on investments............. 83,912,524
Undistributed net investment income........................ 595,308
Unrealized appreciation of investments..................... 85,532,865
---------------
NET ASSETS................................................. $ 517,900,127
---------------
---------------
NET ASSET VALUE, REDEMPTION PRICE AND MAXIMUM
OFFERING PRICE PER SHARE
Net asset value and redemption price per share
(net assets divided by shares outstanding)................ $33.28
-------
-------
Maximum offering price per share
(100/93.5 of per share net asset value)................... $35.59
-------
-------
See notes to financial statements.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended March 31, 2000
<S> <C> <C>
INVESTMENT INCOME
Interest...................................................... $ 2,939,100
Dividends (including $652,228 from securities of affiliates).. 3,592,761
-------------
$ 6,531,861
EXPENSES
Advisory fees................................................. $ 3,538,917
Financial services............................................ 536,756
Transfer agent fees and expenses.............................. 281,941
Custodian fees and expenses................................... 48,690
Reports to shareholders....................................... 39,594
Directors' fees and expenses.................................. 33,913
Postage....................................................... 32,899
Audit fees.................................................... 29,150
Insurance..................................................... 28,567
Registration fees............................................. 26,775
Legal fees.................................................... 26,255
Other expenses................................................ 5,854 4,629,311
------------- -------------
Net investment income................................. $ 1,902,550
-------------
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).. $ 218,049,704
Cost of investment securities sold............................ 83,060,579
-------------
Net realized gain on investments.......................... $ 134,989,125
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year.................. $ 104,375,959
Unrealized appreciation at end of year........................ 85,532,865
-------------
Decrease in unrealized appreciation of investments........ (18,843,094)
--------------
Net realized and unrealized gain on investments....... $ 116,146,031
-------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS................................................. $ 118,048,581
-------------
-------------
See notes to financial statements.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED MARCH 31,
--------------------------------------------------------------
2000 1999
---------------------------- -------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income........................ $ 1,902,550 $ 8,040,517
Net realized gain on investments............. 134,989,125 22,184,394
Decrease in unrealized
appreciation of investments................ (18,843,094) (178,504,438)
Net unrealized appreciation reclassified
on investments redeemed in-kind............ -- 50,764,552
------------- --------------
Increase (decrease) in net assets
resulting from operations.................... $ 118,048,581 $ (97,514,975)
Distributions to shareholders from:
Net investment income........................ $ (3,566,650) $ (8,475,386)
Net realized capital gains................... (64,562,292) (68,128,942) (67,364,919) (75,840,305)
------------- --------------
Capital Stock transactions:
Proceeds from Capital Stock sold............. $ 41,936,498 $ 112,648,442
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions............. 59,105,054 67,687,754
Cost of Capital Stock repurchased............ (146,955,403) (45,913,851) (282,522,710) (102,186,514)
------------- ------------- -------------- -------------
Total increase (decrease) in net assets........ $ 4,005,788 $(275,541,794)
NET ASSETS
Beginning of year, including
undistributed net investment income
of $2,259,408 and $2,694,277................. 513,894,339 789,436,133
------------- -------------
End of year, including undistributed
net investment income
of $595,308 and $2,259,408................... $ 517,900,127 $ 513,894,339
------------- -------------
------------- -------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold....................... 1,301,816 3,365,864
Shares issued to shareholders upon
reinvestment of dividends and
distributions.................................... 1,945,279 1,948,828
Shares of Capital Stock repurchased................ (4,622,194) (8,989,993)
------------- -------------
Decrease in Capital
Stock outstanding (1,375,099) (3,675,301)
------------- -------------
------------- -------------
See notes to financial statements.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
Year Ended March 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year.................. $ 30.34 $ 38.30 $ 32.28 $ 27.55 $ 22.40
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income............................... $ 0.12 $ 0.40 $ 0.49 $ 0.38 $ 0.33
Net realized and unrealized gain (loss)
on investment securities.......................... 7.07 (4.76) 8.74 6.98 7.63
-------- -------- -------- -------- --------
Total from investment operations...................... $ 7.19 $ (4.36) $ 9.23 $ 7.36 $ 7.96
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income................ $ (0.22) $ (0.40) $ (0.47) $ (0.37) $ (0.26)
Distributions from net realized capital gains....... (4.03) (3.20) (2.74) (2.26) (2.55)
-------- -------- -------- -------- ---------
Total distributions................................. $ (4.25) $ (3.60) $ (3.21) $ (2.63) $ (2.81)
-------- -------- -------- -------- --------
Net asset value at end of year........................ $ 33.28 $ 30.34 $ 38.30 $ 32.28 $ 27.55
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total investment return*.............................. 25.39% (12.45)% 30.10% 27.30% 36.84%
Ratios/supplemental data:
Net assets at end of year (in thousands).............. $517,900 $513,894 $789,436 $597,184 $399,282
Ratio of expenses to average net assets............... 0.86% 0.86% 0.83% 0.84% 0.87%
Ratio of net investment income to
average net assets.................................. 0.35% 1.20% 1.38% 1.27% 1.28%
Portfolio turnover rate............................... 18% 19% 24% 21% 21%
* 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.
</TABLE>
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 2000
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 $96,339,393 for
the year ended March 31, 2000. Realized gains or losses are based on the
specific-certificate identification method. Cost of securities held at March
31, 2000 was the same for federal income tax and financial reporting
purposes. Gross unrealized appreciation and depreciation for all investments
at March 31, 2000 for federal income tax purposes was $179,257,353 and
$93,724,488, respectively.
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, 2000, the Fund paid aggregate fees of $33,280
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
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Continued
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, 2000, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $9,764 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. (the "Fund"), including the portfolio of investments, as of
March 31, 2000, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and financial highlights. Our procedures included
confirmation of securities owned as of March 31, 2000, 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, 2000 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 accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Los Angeles, California
April 24, 2000
14
<PAGE>
OFFICERS AND DIRECTORS
DIRECTORS
Willard H. Altman
DeWayne W. Moore
Alfred E. Osborne, Jr.
Lawrence J. Sheehan
OFFICERS
Robert L. Rodriguez, PRESIDENT AND
CHIEF INVESTMENT OFFICER
Dennis M. Bryan, VICE PRESIDENT
Eric S. Ende, 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
INDEPENDENT AUDITORS
Ernst & Young LLP
Los Angeles, California
SHAREHOLDER SERVICE AGENT
Boston Financial Data Services, Inc.
P.O. Box 8115
Boston, Massachusetts 02266-8115
(800) 638-3060
(617) 483-5000
- -------------------------------------------------------------------------------
IMPORTANT -- CHANGES THAT MAY AFFECT YOUR ACCOUNT
In response to your suggestions and feedback, we have made changes to the Fund's
telephone redemption procedures. The telephone redemption privileges have been
expanded to allow redemption checks to be mailed directly to their address of
record for shareholders who have already authorized this option. The ability to
have redemptions sent directly to your bank is also still available. If you do
not wish to participate in this new option, please write to us and we will
remove the authorization. Please note that we will not mail any telephone
redemption checks to your address of record if it was changed within the prior
30 days. We hope that these changes will simplify your experience with us.
- -------------------------------------------------------------------------------
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.
15
