<PAGE> 1
- - --------------------------------------------------------------------------------
Semi-Annual Report
FPA New Income, Inc.
March 31, 1995
- - --------------------------------------------------------------------------------
<PAGE> 2
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
DIRECTORS DISTRIBUTOR
George H. Michaelis, Chairman of the Board FPA Fund Distributors, Inc.
Donald E. Cantlay 11400 West Olympic Boulevard, Suite 1200
DeWayne W. Moore Los Angeles, California 90064
Lawrence J. Sheehan
Kenneth L. Trefftzs
COUNSEL
OFFICERS O'Melveny & Myers
Los Angeles, California
Robert L. Rodriguez, President and
Chief Investment Officer
George H. Michaelis, Executive Vice
President CUSTODIAN & TRANSFER AGENT
Christopher Linden, Senior Vice President
Eric S. Ende, Vice President State Street Bank and Trust Company
Julio J. de Puzo, Jr., Treasurer Boston, Massachusetts
Sherry Sasaki, Secretary
Christopher H. Thomas, Assistant Treasurer
SHAREHOLDER SERVICE AGENT
INVESTMENT ADVISER Boston Financial Data Services, Inc.
P.O. Box 8500
First Pacific Advisors, Inc. Boston, Massachusetts 02266-8500
11400 West Olympic Boulevard, Suite 1200 (800) 638-3060
Los Angeles, California 90064 (617) 328-5000
</TABLE>
This report has been prepared for the information of shareholders of FPA New
Income, Inc., and is not authorized for distribution to prospective investors
unless preceded or accompanied by a prospectus. The financial information
included in this report has been taken from the records of the Fund without
examination by independent auditors.
1
<PAGE> 3
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Semi-Annual Report covers the six-month period ended March 31,
1995. Your Fund's net asset value (NAV) closed at $10.62 on March 31, 1995.
Income dividends of $0.18 and $0.17 per share were paid on October 15, 1994 and
January 9, 1995, to holders of record on September 30 and December 30, 1994,
respectively. There were no capital gains distributions for the period.
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, 1995
------------------------------------------
1 YEAR 5 YEARS 10 YEARS
-------- --------- --------
<S> <C> <C> <C>
FPA New Income, Inc. (NAV) . . . . . . . . . . . . 5.04%* 10.76%* 11.15%*
FPA New Income, Inc. (Net of Sales Charge) . . . . 0.31%++ 9.75%++ 10.64%++
Lipper Fixed Income Fund Average . . . . . . . . . 2.85% 8.60% 9.47%
Lehman Brothers Government/Corporate Bond Index . . 4.57% 9.01% 10.14%
</TABLE>
The Fund's total rate of return for the six months was 4.41%* versus
3.74% and 5.37% for the Lipper Average and the Lehman Brothers Index,
respectively. For the calendar year ended December 31, 1994, the total returns
were: FPA New Income, Inc., 1.46%*; Lipper Average, -3.28%; and the Lehman
Brothers Index, -3.51%.
COMMENTARY
Most bond fund managers and investors are glad to see 1994 behind
them. During calendar 1994, the bond market experienced its worst performance
in seven decades. The average bond fund declined 3.28% while the Lehman
Brothers Index lost 3.51%. Your Fund's POSITIVE 1.46% total return made it one
of the few fixed-income funds to show a positive total return, according to
Lipper Analytical Services, Inc. This is the Fund's best relative performance
showing since 1987--another period of bond market difficulty. By having a
positive total return last year, your Fund achieved the distinction of becoming
the ONLY non-money market mutual fund in the U.S. to have nineteen straight
years without a loss. Our focus on preservation of capital last year really
paid off.
Since December 30, 1994, a brisk bond market rally has occurred.
Yields have fallen for all maturities, except on the very short end of the
yield curve. The largest declines took place in the two- to five-year maturity
segments. As you know, when yields fall, bond prices rise and this leads to
positive total returns. During the quarter preceding this rally, we lengthened
the portfolio's average maturity from 4.8 years to 6.2 years and its average
duration from 4.1 years to 4.6 years. Because of this shift, your Fund
participated to a larger extent than if it had remained with its shorter
average maturity portfolio. Essentially, we wanted to lock in some of the
relative performance gained in 1994 by narrowing the gap between your Fund's
average maturity and duration and those of the average bond fund and the Lehman
Index. Even with this lengthening, your Fund's average maturity and duration
were still somewhat
_______________
* Does not reflect deduction of the sales charge which, if reflected, would
reduce the performance shown
++ Reflects deduction of the maximum sales charge of 4.50% of the offering
price
2
<PAGE> 4
shorter than the Lehman Index and the average bond fund. During the quarter
ended March 31, 1995, the Fund's total return was 3.81%* while the Lipper
Average and the Lehman Index gained 3.97% and 4.98%, respectively. The Fund
underperformed, but to a lesser extent than if this portfolio shift had not
taken place.
During the December quarter, we lengthened the portfolio's average
maturity because we felt that value had returned to the bond market since
longer term Treasury yields were above 8%. We also believed that it was highly
probable that the economy was in the process of beginning a gradual slowdown.
At that time, the consensus opinion was one of forecasting a continued
strengthening of the economy accompanied by higher interest rate levels. The
economy slowed faster than we thought. First quarter 1995 real gross domestic
product (GDP) growth slowed to an annual rate of 2.8% from the prior quarter's
5.1% level. More importantly, inventory accumulation was at the fastest rate
since 1984. This means that there is a high probability that some of this
inventory is unwanted and, therefore, future production schedules will be
lowered to allow for inventory reduction. These recent economic numbers appear
to confirm to many investors that the Federal Reserve has achieved the
proverbial "soft landing" and, thus, the economy should stay on a moderate
growth tract. If this is the case, the Fed will not have to raise interest
rates any further. One could lengthen a bond portfolio's average maturity and
earn the higher yield without worrying about the risk of rising interest rates.
It now appears that this is becoming the consensus view and that bond portfolio
average maturities are in the process of being lengthened.
It would be wonderful if it were this easy, but it is not. We believe
the recent decline in interest rate levels largely discounts the likelihood of
a slower growth economy. One has to go out to the ten-year maturity range to
get barely 7%. The yield spreads between Fed funds and two- to five-year
Treasuries are the narrowest in years. After this pause, the economy is likely
to regain some forward momentum in response to the lower intermediate and
longer term interest rate levels. The housing sector should be a prime
beneficiary this summer. We could continue discussing all the various items
that might help or hurt the economy but we find that not terribly rewarding.
In the final analysis, we don't want to risk the capital that you have
entrusted to us when longer term yields are in the 6% range. If future
inflation levels remain between 3% and 4%, the yield premium over that range is
not great enough for us to extend maturities.
In light of the above, we have begun reducing the portfolio's average
maturity and duration. As of March 31, 1995, they were 4.9 and 4 years,
respectively. Short-term liquidity has increased to 17.5%. The portfolio's
credit quality is better. High-yield bonds are now at their lowest levels in
years. Yield spreads are extremely tight and, thus, we feel one is not
getting sufficiently compensated for the greater credit risk. Convertible
securities exposure has fallen to 11.1%, as a result of the growth in the Fund
and a lack of attractive investment ideas. U.S. Treasury securities are now
the largest asset class at 29.3% while U.S. Government mortgage-backed
securities total 28.7%. Within the mortgage security segment, derivative
securities represent 5% of the Fund's net assets. These securities, known as
PAC-IOs (Planned Amortization Class--Interest Only), typically enhance the
value of the portfolio if interest rates rise. Our defensiveness also reflects
our concern with some unsettling long-term trends. Recently, the U.S. dollar
hit new lows against the Japanese yen and the German mark. Many have
discounted this as not a dollar problem but
______________
* Does not reflect deduction of the sales charge which, if reflected, would
reduce the performance shown
3
<PAGE> 5
as either a yen or mark problem. They will argue that on a trade-weighted
basis the dollar's exchange rate is basically unchanged. However, it only
looks stable because two of our key trading partners are in worse shape than we
are--Mexico and Canada. We think the dollar's decline has the potential to
become more serious longer term. If we consider currency as just another type
of product, the dollar's exchange rate decline implies that its price had to
be cut because the supply of dollars was greater than the level of demand.
This is particularly true versus the yen. International holders of dollars
have watched their purchasing power decline. For both foreign central
governments and international trade, the dollar is used as a medium of exchange
and a store of value. The dollar serves as a reserve currency for most central
governments; however, since the late 1970s, its status has eroded. It has
declined from 78% to 62% of world currency reserves. Recently, some Asian
countries have been rumored to be lowering their levels of dollar reserves and
replacing them with yen. If this spreads to the international trade area,
total demand for dollars will decline. This has potentially serious
ramifications for the U.S. since we continue to run major budget and current
account deficits.
Our continuing budget deficits are essentially being funded by
foreigners because domestic private saving just covers gross domestic private
investment. We are becoming dependent on short-term capital sources to fund
long-term capital needs. Since the beginning of 1992, U.S. Treasury security
holdings by foreign central banks have climbed from $250 billion to $434
billion. During the last twelve months,they have purchased 30% of all Treasury
securities issued. This trend is unsustainable. The Federal Reserve estimates
that 60% of all U.S. currency circulates outside the U.S. Should foreigners
begin to balk at this trend, the U.S. Government may eventually be forced to
begin borrowing a portion of its debt requirements in a foreign currency. A
potential consequence of this may be that domestic interest rates may remain
higher than they normally would so as to attract and keep foreign capital.
In prior shareholder letters, we wrote about the United States'
growing fiscal budgetary problem. The new Congress claims that it will begin
the long march back to fiscal responsibility. A reduction in entitlement
spending will be instituted this year. Total government spending will start to
be brought under control. Unless these actions occur by September or October,
nothing is likely to really happen until after the next presidential
election--that means 1997. If this occurs, we are likely to see greater
instability in the international currency and financial markets. We hope we
are wrong.
We don't know what the outcome of these various issues will be, but we
would be more willing to risk your capital if there were a greater margin of
safety which reflects a larger yield spread between the level of interest rates
and inflation. Until that occurs, we will patiently wait for either individual
security opportunities or a more attractive level of yields. Thank you for your
investment in FPA New Income, Inc.
Respectfully submitted,
Robert L. Rodriguez, C.F.A.
President and Chief Investment Officer
April 28, 1995
4
<PAGE> 6
MAJOR PORTFOLIO CHANGES
Six Months Ended March 31, 1995
<TABLE>
<CAPTION>
Shares or
Principal
Amount
--------------
<S> <C>
NET PURCHASES
NON-CONVERTIBLE BONDS & DEBENTURES
Federal Home Loan Mortgage Corporation (PAC-IO-CMO) --6 1/2% 2020 (1) . . . . . . . . . $ 4,171,384
Federal National Mortgage Association (PAC-REMIC) --7 3/4% 2023 (1) . . . . . . . . . . $ 3,500,000
Plantronics, Inc. --10% 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600,000
U.S. Treasury Notes --4 1/4% 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,500,000
U.S. Treasury Notes --7 1/4% 1996 (1) . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000,000
U.S. Treasury Notes --7 1/4% 2004 (1) . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000,000
U.S. Treasury Notes --7 3/4% 1999 (1) . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000,000
U.S. Treasury Notes Strip --0% 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000,000
CONVERTIBLE DEBENTURE
Fabri-Centers of America, Inc. --6 1/4% 2002 . . . . . . . . . . . . . . . . . . . . . $ 315,000
CONVERTIBLE PREFERRED STOCKS
Integon Corporation (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 shs.
Network Imaging Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 shs.
Storage Technology Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 shs.
NET SALES
NON-CONVERTIBLE BONDS & DEBENTURES
Aztar Mortgage Funding Inc. --13 1/2% 1996 (2) . . . . . . . . . . . . . . . . . . . . $ 1,462,000
ADT Limited --6% 2002 (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,245,000
Continental Cablevision Inc. --12 7/8% 2004 (2) . . . . . . . . . . . . . . . . . . . . $ 500,000
Dr. Pepper/Seven-Up Companies, Inc. --0/11% 2002 (2) . . . . . . . . . . . . . . . . . $ 2,600,000
RJR Nabisco, Inc. --8% 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000,000
U.S. Treasury Notes --4 1/8% 1995 (2) . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,500,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
March 31, 1995
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES Amount Cost Value
- - ----------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
U.S. GOVERNMENT & AGENCIES
U.S. Treasury -- 29.3%
U.S. Treasury Notes
--4 1/4% 1996 . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,500,000 $ 9,293,203 $ 9,265,469
--6 7/8% 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 9,500,000 9,650,234 9,511,875
--7 1/4% 1996 . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 2,990,156 3,022,500
--7 1/4% 2004 . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 2,843,438 3,001,875
--7 3/4% 1999 . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 2,987,660 3,077,812
--8 1/4% 2005 . . . . . . . . . . . . . . . . . . . . . . . . . 1,800,000 1,706,250 1,863,000
U.S. Treasury Notes Strip--0% 2009 . . . . . . . . . . . . . . . 41,000,000 13,327,594 13,978,540
----------- -----------
$42,798,535 $43,721,071
----------- -----------
Mortgage-Backed Securities -- 28.7%
Federal Home Loan Mortgage Corporation
--9 1/2% 2003 . . . . . . . . . . . . . . . . . . . . . . . . . $ 157,366 $ 157,563 $ 161,300
--10% 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . 10,601 10,404 11,174
--10 1/4% 2001 . . . . . . . . . . . . . . . . . . . . . . . . 12,181 12,242 12,516
Federal Home Loan Mortgage Corporation (CMO)
--7% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,060,000 5,719,125 5,872,519
Federal Home Loan Mortgage Corporation (PAC-IO-CMO)
--6 1/2% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . 4,171,384 969,195 969,195
--7% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000,000 2,415,212 2,575,000
Federal Home Loan Mortgage Corporation (REMIC)
--6 1/2% 2018 . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 1,527,187 1,362,188
--7% 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600,000 2,652,000 2,499,250
--10.15% 2006 . . . . . . . . . . . . . . . . . . . . . . . . . 194,323 210,115 197,238
Federal National Mortgage Association--10% 2003-4 . . . . . . . . 90,762 92,691 95,243
Federal National Mortgage Association (PAC-REMIC)
--7 3/4% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000 3,215,625 3,280,156
Federal National Mortgage Association (PAC-IO-REMIC)
--7% 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,248,538 479,104 472,193
--7% 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,914,724 1,937,526 2,277,288
Government National Mortgage Association
--7 1/2% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . 955,492 913,689 922,348
--9 1/2% 2017 . . . . . . . . . . . . . . . . . . . . . . . . . 78,174 77,173 82,058
Government National Mortgage Association II
--10% 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . 234,218 236,472 246,515
--10 1/2% 2001 . . . . . . . . . . . . . . . . . . . . . . . . 21,902 22,846 23,326
--11% 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . 59,356 63,511 63,511
</TABLE>
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES--CONTINUED Amount Cost Value
- - ----------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Government National Mortgage Association (MH)
--7 1/2% 2002 . . . . . . . . . . . . . . . . . . . . . . . . . 434,960 455,620 428,436
--8 1/4% 2006-7 . . . . . . . . . . . . . . . . . . . . . . . . 1,079,700 1,133,046 1,091,172
--8 3/4% 2006 . . . . . . . . . . . . . . . . . . . . . . . . . 1,983,879 2,051,760 2,038,436
--8 3/4% 2011 . . . . . . . . . . . . . . . . . . . . . . . . . 2,110,968 2,182,213 2,163,742
--9% 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,153,969 3,324,967 3,256,473
--9 1/4% 2011 . . . . . . . . . . . . . . . . . . . . . . . . . 1,504,191 1,579,659 1,560,598
--9 1/2% 2001 . . . . . . . . . . . . . . . . . . . . . . . . . 277,075 279,500 289,543
--9 3/4% 2005-6 . . . . . . . . . . . . . . . . . . . . . . . . 5,358,216 5,715,232 5,612,731
--9 3/4% 2012-13 . . . . . . . . . . . . . . . . . . . . . . . 1,766,140 1,902,434 1,850,032
--10% 1998-9 . . . . . . . . . . . . . . . . . . . . . . . . . 108,745 119,355 114,454
--10 1/4% 2003-5 . . . . . . . . . . . . . . . . . . . . . . . 793,194 807,739 836,820
--10 3/4% 1999-2001 . . . . . . . . . . . . . . . . . . . . . . 1,263,263 1,331,628 1,335,901
Government National Mortgage Association (PL)
--10 1/4% 2017 . . . . . . . . . . . . . . . . . . . . . . . . 963,571 1,045,475 1,016,567
Government National Mortgage Association (GPM)
--14% 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . 78,369 78,892 85,814
----------- -----------
$42,719,200 $42,803,737
----------- -----------
U.S. Agencies -- 2.9%
Tennessee Valley Authority --8 3/8% 1999 . . . . . . . . . . . . $ 3,400,000 $ 3,222,781 $ 3,519,000
U.S. Small Business Administration --9.8% 1998 . . . . . . . . . 754,175 759,388 771,144
----------- -----------
$ 3,982,169 $ 4,290,144
----------- -----------
TOTAL U.S. GOVERNMENT & AGENCIES -- 60.9% . . . . . . . . . . . . $89,499,904 $90,814,952
----------- -----------
OTHER U.S. GOVERNMENT-BACKED -- 3.0%
Republic of Turkey Trust Certificates--0% 1998 . . . . . . . . . $ 3,000,000 $ 2,156,611 $ 2,327,820
State of Israel Trust Certificates--0% 1998 . . . . . . . . . . . 2,785,000 2,039,374 2,160,993
----------- -----------
$ 4,195,985 $ 4,488,813
----------- -----------
MORTGAGE BONDS
Asset Backed -- 4.2%
Green Tree Financial Corporation (CMO)
--6.9% 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,557,308 $ 1,556,334 $ 1,510,589
Merrill Lynch Mortgage Investors, Inc. Class A
(backed by Manufactured Housing First Mortgages)
--8.3% 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . 4,100,000 4,105,516 4,141,000
--9.2% 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . 379,117 377,340 384,093
--9.7% 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . 190,158 192,984 194,436
----------- -----------
$ 6,232,174 $ 6,230,118
----------- -----------
</TABLE>
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES--CONTINUED Amount Cost Value
- - ----------------------------------------------------------------- ----------- ------------- ------------
<S> <C> <C> <C>
Mortgage Backed -- 0.6%
Drexel Burnham Lambert (CMO) Trust Series B Class B-3
--8.9% 2016 (backed by Federal National
Mortgage Association Bonds) . . . . . . . . . . . . . . . . . . $ 280,513 $ 274,902 $ 282,091
Home Mac Mortgage Securities Corporation (CMO)
--9.15% 2019 (backed by U.S. Government
Agency Bonds) . . . . . . . . . . . . . . . . . . . . . . . . . 602,098 505,762 612,635
------------- ------------
$ 780,664 $ 894,726
------------- ------------
TOTAL MORTGAGE BONDS -- 4.8% . . . . . . . . . . . . . . . . . . $ 7,012,838 $ 7,124,844
------------- ------------
CORPORATE BONDS & DEBENTURES
Consumer Non-Durable Goods -- 1.3%
RJR Nabisco Inc. --8% 2000 . . . . . . . . . . . . . . . . . . . $ 1,500,000 $ 1,433,650 $ 1,490,625
RJR Nabisco Inc. --8 5/8% 2002 . . . . . . . . . . . . . . . . . 500,000 467,750 491,250
------------- ------------
$ 1,901,400 $ 1,981,875
------------- ------------
Consumer Durable Goods -- 0.8%
Plantronics, Inc.--10% 2001 . . . . . . . . . . . . . . . . . . . $ 1,100,000 $ 1,099,125 $ 1,102,750
------------ ------------
Financial -- 0.3%
Aztar Corporation--11% 2002 . . . . . . . . . . . . . . . . . . . $ 500,000 $ 500,000 $ 485,000
------------ ------------
Manufacturing -- 0.3%
Figgie International Inc.--10 3/8% 1998 . . . . . . . . . . . . . $ 415,000 $ 425,375 $ 398,400
------------ ------------
TOTAL CORPORATE BONDS
& DEBENTURES -- 2.7% . . . . . . . . . . . . . . . . . . . . . . $ 3,925,900 $ 3,968,025
------------ ------------
TOTAL NON-CONVERTIBLE
BONDS & DEBENTURES -- 71.4% . . . . . . . . . . . . . . . . . . $104,634,627 $106,396,634
------------ ------------
CONVERTIBLE SECURITIES
Convertible Bonds & Debentures -- 8.0%
Anacomp International, N.V.--9% 1996 . . . . . . . . . . . . . . $ 780,000 $ 582,500 $ 733,200
Diagnostic/Retrieval Systems, Inc.--8 1/2% 1998 . . . . . . . . . 1,700,000 1,329,096 1,651,125
Fabri-Centers of America, Inc.--6 1/4% 2002 . . . . . . . . . . . 3,631,000 2,762,010 2,995,575
Micropolis Corporation--6% 2012 . . . . . . . . . . . . . . . . . 2,500,000 1,058,875 1,400,000
Quantum Corporation--6 3/8% 2002 . . . . . . . . . . . . . . . . 2,500,000 2,345,002 2,425,000
Seagate Technology, Inc.--6 3/4% 2012 . . . . . . . . . . . . . . 3,000,000 1,762,975 2,703,750
------------ ------------
$ 9,840,458 $ 11,908,650
------------ ------------
</TABLE>
8
<PAGE> 10
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Shares or
Principal
Amount Cost Value
----------- ------------- ------------
<S> <C> <C> <C>
Convertible Preferred Stocks -- 3.1%
Integon Corporation. . . . . . . . . . . . . . . . . . . . . . . 30,000 $ 1,500,000 $ 1,376,250
Network Imaging Corporation . . . . . . . . . . . . . . . . . . 75,000 1,400,000 825,000
Storage Technology Corporation . . . . . . . . . . . . . . . . . 50,000 3,047,052 2,425,000
------------ ------------
$ 5,947,052 $ 4,626,250
------------ ------------
TOTAL CONVERTIBLE SECURITIES -- 11.1% . . . . . . . . . . . . . . $ 15,787,510 $ 16,534,900
------------ ------------
LIMITED PARTNERSHIP -- 0.0%
Jewel Recovery L.P. . . . . . . . . . . . . . . . . . . . . . . . 18,594 $ 9,297 $ 9,297
------------ ------------
SHORT-TERM INVESTMENTS -- 9.4%
U.S. Treasury Bills --6.77% 2/08/96 . . . . . . . . . . . . . . . $6,000,000 $ 5,668,742 $ 5,689,020
U.S. Treasury Notes
-- 4 1/4% 11/30/95 . . . . . . . . . . . . . . . . . . . . . . 6,500,000 6,506,510 6,414,688
-- 4 1/4% 12/31/95 . . . . . . . . . . . . . . . . . . . . . . 2,000,000 1,999,062 1,969,375
------------ ------------
$ 14,174,314 $ 14,073,083
------------ ------------
TOTAL INVESTMENT SECURITIES -- 91.9% . . . . . . . . . . . . . . $134,605,748 $137,013,914
============ ------------
OTHER SHORT-TERM INVESTMENTS -- 8.6%
Short-term Corporate Notes:
AT&T Capital Corp. --5.78% 4/05/95 . . . . . . . . . . . . . . . . $7,500,000 $ 7,495,183
Phillip Morris Companies Inc. --5.88% 4/5/95 . . . . . . . . . 2,100,000 2,098,628
State Street Bank Repurchase Agreement--5 1/2% 4/03/95
(Collateralized by U.S. Treasury Notes--8 7/8% 2017,
market value $3,147,174) . . . . . . . . . . . . . . . . . . . 3,145,000 3,145,481
------------
$ 12,739,292
------------
TOTAL INVESTMENTS -- 100.5% . . . . . . . . . . . . . . . . . . . $149,753,206
Liabilities less other assets-- (0.5)% . . . . . . . . . . . . . (734,900)
------------
TOTAL NET ASSETS -- 100% . . . . . . . . . . . . . . . . . . . . $149,018,306
============
</TABLE>
See notes to financial statements.
9
<PAGE> 11
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $134,605,748) . . . . . . . . . . . . . . . . . . . . . . . . $137,013,914
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less) . . . . . . . . . . . . . . . . . . . . . . . . 12,739,292 $149,753,206
------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,251
Receivable for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,708,286
Capital Stock sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 896,542
Investment securities sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,172 2,608,000
------------ ------------
$152,363,457
LIABILITIES
Payable for:
Capital Stock repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,284,285
Investment securities purchased . . . . . . . . . . . . . . . . . . . . . . . . . 970,701
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . 90,165 3,345,151
------------ ------------
NET ASSETS -- equivalent to $10.62 per share on 14,026,679
shares of Capital Stock outstanding . . . . . . . . . . . . . . . . . . . . . . . . $149,018,306
============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $.01 per share; authorized
100,000,000 shares; outstanding 14,026,679 shares . . . . . . . . . . . . . . . . $ 140,267
Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,146,454
Accumulated distributions in excess of net realized capital gains . . . . . . . . . (22,192)
Accumulated net realized loss on investments . . . . . . . . . . . . . . . . . . . (48,915)
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . 2,394,526
Unrealized appreciation of investments . . . . . . . . . . . . . . . . . . . . . . 2,408,166
------------
Net assets at March 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . $149,018,306
============
</TABLE>
See notes to financial statements.
10
<PAGE> 12
STATEMENT OF OPERATIONS
For the Six Months Ended March 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,844,146
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,719
----------
$5,017,865
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 330,757
Transfer agent fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . 49,458
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,415
Custodian fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,738
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,157
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,392
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,520
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 10,320
Taxes, other than federal income tax . . . . . . . . . . . . . . . . . . . . . . 7,440
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,355
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,995
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,901 501,448
----------- ----------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . $4,516,417
----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized loss on investments:
Proceeds from sales of investment securities (excluding
short-term investments with maturities of 60 days or less) . . . . . . . . . . $ 15,957,800
Cost of investment securities sold . . . . . . . . . . . . . . . . . . . . . . . (16,006,715)
------------
Net realized loss on investments . . . . . . . . . . . . . . . . . . . . . . $ (48,915)
Unrealized appreciation of investments:
Unrealized appreciation at beginning of period . . . . . . . . . . . . . . . . . $ 881,301
Unrealized appreciation at end of period . . . . . . . . . . . . . . . . . . . . 2,408,166
------------
Increase in unrealized appreciation of investments . . . . . . . . . . . . . 1,526,867
----------
Net realized and unrealized gain on investments . . . . . . . . . . . . . $1,477,952
----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,994,369
==========
</TABLE>
See notes to financial statements.
11
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, 1995 September 30, 1994
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
Operations:
Net investment income . . . . . . . . . . . . . $ 4,516,417 $ 7,462,027
Net realized loss on investments . . . . . . . (48,915) (20,939)
Increase (decrease) in unrealized
appreciation of investments . . . . . . . . . 1,526,867 (5,558,684)
------------ -------------
Increase in net assets resulting
from operations . . . . . . . . . . . . . . . . $ 5,994,369 $ 1,882,404
Distributions to shareholders:
From net investment income . . . . . . . . . . $(4,222,642) $ (7,361,224)
From net realized capital gains . . . . . . . . -- (2,686,312)
In excess of net realized gains . . . . . . . . -- (22,192)
From paid-in capital . . . . . . . . . . . . . -- (4,222,642) (10,128) (10,079,856)
------------ ------------
Capital Stock transactions:
Proceeds from Capital Stock sold . . . . . . . $33,660,692 $ 33,309,670
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions . . . . . . . 3,401,121 8,252,481
Cost of Capital Stock repurchased . . . . . . . (12,523,326) 24,538,487 (25,719,056) 15,843,095
------------- ------------ ------------- ------------
Total increase in net assets . . . . . . . . . . $ 26,310,214 $ 7,645,643
NET ASSETS
Beginning of period, including
undistributed net investment income
of $2,100,751 and $1,999,948 . . . . . . . . . 122,708,092 115,062,449
------------ ------------
End of period, including undistributed
net investment income of $2,394,526
and $2,100,751 . . . . . . . . . . . . . . . . $149,018,306 $122,708,092
============ ============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold . . . . . . . . . . 3,233,613 3,087,452
Shares issued to shareholders upon
reinvestment of dividends and
distributions . . . . . . . . . . . . . . . . . 331,073 769,224
Shares of Capital Stock repurchased . . . . . . . (1,200,241) (2,358,789)
------------ ------------
Increase in Capital Stock outstanding . . . . . . 2,364,445 1,497,887
============ ============
</TABLE>
See notes to financial statements.
12
<PAGE> 14
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK
OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Six
Months
Ended
March Year Ended September 30,
31, ---------------------------------------------------------
1995 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period . . . . $10.52 $11.32 $10.90 $10.47 $ 9.47 $ 9.92
------ ------ ------ ------ ------ ------
Net investment income . . . . . . . . . . . . . $ 0.34 $ 0.68 $ 0.70 $ 0.73 $ 0.84 $ 0.79
Net realized and unrealized gain (loss) on
investment securities . . . . . . . . . . . . 0.11 (0.51) 0.49 0.66 1.02 (0.40)
------ ------ ------ ------ ------ ------
Total from investment operations . . . . . . . $ 0.45 $ 0.17 $ 1.19 $ 1.39 $ 1.86 $ 0.39
------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income . . . . $(0.35) $(0.70) $(0.70) $(0.76) $(0.85) $(0.77)
Distributions from net realized
capital gains . . . . . . . . . . . . . . . -- (0.27) (0.07) (0.20) (0.01) (0.07)
------ ------ ------ ------ ------ ------
Total distributions . . . . . . . . . . . . . $(0.35) $(0.97) $(0.77) $(0.96) $(0.86) $(0.84)
------ ------ ------ ------ ------ ------
Net asset value at end of period . . . . . . . $10.62 $10.52 $11.32 $10.90 $10.47 $ 9.47
====== ====== ====== ====== ====== ======
Total investment return* . . . . . . . . . . . 4.41% 1.60% 11.42% 14.10% 20.69% 4.10%
Ratios/supplemental data:
Net assets at end of period (in $000's) . . . . 149,018 122,708 115,062 80,489 41,859 34,889
Ratio of expenses to average net assets . . . . 0.74%+ 0.74% 0.73% 0.78% 0.87% 0.94%
Ratio of net investment income to
average net assets . . . . . . . . . . . . . 6.68%+ 6.41% 6.48% 7.17% 8.46% 8.48%
Portfolio turnover rate . . . . . . . . . . . . 27%+ 39% 41% 22% 26% 29%
</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 March 31, 1995 is not annualized.
+ Annualized.
See notes to financial statements.
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
March 31, 1995
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940 as a
diversified, open-end, management investment company. 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 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 and securities listed on a national securities exchange for
which the over-the-counter market more accurately reflects the
securities' value in the judgment of the Fund's officers, are valued
at the most recent bid price or other ascertainable market value.
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.
NOTE 2 -- PURCHASES OF INVESTMENT SECURITIES
Cost of purchases of investment securities (excluding short-term
investments with maturities of 60 days or less) aggregated $32,602,687 for the
six months ended March 31, 1995. Realized gains or losses are based on the
specific-certificate identification method. Cost of securities owned at March
31, 1995 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 0.5% of the average daily net assets of the Fund. The Agreement
obligates the Adviser to reduce its fee to the extent necessary to 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 $15 million and
1% of the remaining average net assets of the Fund for the year.
For the six months ended March 31, 1995, the Fund paid aggregate fees
of $10,000 to all Directors who are not affiliated persons of the Adviser.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. A Director of the Fund is of counsel to, and a retired partner of, that
firm.
NOTE 4 -- DISTRIBUTOR
For the six months ended March 31, 1995, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $77,404 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 -- DISTRIBUTION TO SHAREHOLDERS
On March 31, 1995, the Board of Directors declared a dividend from net
investment income of $0.17 per share payable April 15, 1995 to shareholders of
record on March 31, 1995. For financial statement purposes, this income
dividend was recorded on the ex-dividend date, April 3, 1995.
14
<PAGE> 16
- - --------------------------------------------------------------------------------
Distributor:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Blvd., Suite 1200
Los Angeles, California 90064
- - --------------------------------------------------------------------------------
