<PAGE> 1
<TABLE>
<CAPTION>
OFFICERS AND DIRECTORS
<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
O'Melveny & Myers
Los Angeles, California
OFFICERS
INDEPENDENT AUDITORS
Robert L. Rodriguez, President and
Chief Investment Officer Ernst & Young LLP
George H. Michaelis, Executive Vice President Los Angeles, California
Christopher Linden, Senior Vice President
Eric S. Ende, Vice President
Julio J. de Puzo, Jr., Treasurer CUSTODIAN & TRANSFER AGENT
Sherry Sasaki, Secretary
Christopher H. Thomas, Assistant Treasurer State Street Bank and Trust Company
Boston, Massachusetts
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.
1
<PAGE> 2
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Annual Report covers the fiscal year ended September 30, 1995. Your
Fund's net asset value (NAV) per share closed at $11.05. During the fiscal
year, income dividends totaling $0.69 were distributed. There were no capital
gain 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 several comparative
indices. The data quoted represents past performance, and an investment in the
Fund may fluctuate so that an investor's shares when redeemed may be worth more
or less than their original cost.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
PERIODS ENDED SEPTEMBER 30, 1995
--------------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
FPA New Income, Inc.
(NAV) . . . . . . . . . . . . . . 12.14%* 11.82%* 10.70%*
FPA New Income, Inc.
(Net of Sales Charge) . . . . . . 7.09%++ 10.79%++ 10.19%++
Lipper Fixed-Income Fund
Average . . . . . . . . . . . . . 10.95% 9.72% 9.23%
Lehman Brothers Government/
Corporate Bond Index . . . . . . . 14.35% 9.89% 9.95%
</TABLE>
The Fund's total rate of return for the fiscal year, which reflects the
change in NAV combined with the reinvestment of dividends and distributions
paid, was 12.14%* versus 10.95% and 14.35% for the Lipper Fixed-Income Fund
Average and the Lehman Brothers Government/Corporate Bond Index, respectively.
For the second half of the fiscal year, the total returns were: FPA New Income,
Inc., 7.39%*; Lipper Average, 6.85%; and the Lehman Brothers Index, 8.53%.
Finally, on a calendar year-to-date basis, the total returns were: FPA New
Income, Inc., 11.49%*; the Lipper Average, 11.17%; and the Lehman Brothers
Index, 13.93%.
COMMENTARY
This fiscal year has been very volatile. It began in the midst of the worst
bond market in seventy years, but in early February the market rallied to become
one of the strongest. Long-term Treasury yields have fallen from over 8% to
6.3%. The yield curve is very flat. Long-term yields are barely 60 basis
points (there are 100 basis points in one percent) above the Federal Funds rate
and 100 basis points more than the three-month Treasury bill. In response to
this rally, we have been shortening the portfolio's average maturity and
duration. At September 30, they were 3.3 and 3 years, respectively, down from
March levels of 4.9 and 4 years.
Recently, your Fund outperformed the average fixed-income fund while lagging
the Lehman Brothers Index return. We did not complete the portfolio's
lengthening strategy earlier in the year and were also somewhat early in
shortening the average maturity. The Fund's average life and duration have
therefore been consistently less than those of the Lehman Index, which in a bond
market rally leads to underperformance. Even so, your Fund achieved 85% of the
Lehman Index's total return with only 68% of its duration. In other words, we
earned this total return with a lower level of risk. This has usually been the
case over the years and it has been a contributing factor to your Fund's
successful long-term record.
The portfolio's increasingly defensive characteristics reflected our belief
that the economy would renew its strength during the second half of the year.
Furthermore, we were concerned that an accelerating economy would drive
inflation above 3%. If correct, higher rates would be a likely outcome and bond
prices would fall. The recently released report on third quarter gross
domestic
_______________
* Does not reflect deduction of the sales charge which, if reflected, would
reduce the performance shown
++ Reflects deduction of the current maximum sales charge of 4.50% of the
offering price
2
<PAGE> 3
product shows evidence of renewed economic strength accompanied by an inflation
level that was less than our expectations. This improving inflation outlook is
helping drive longer term yields down closer to short-term rates. Many
investors believe that this is only a temporary period of renewed economic
growth and that a slowdown will return in the fourth quarter or first half of
next year, accompanied by a lowering of short-term rates by the Federal Reserve
as it begins an easier monetary policy. Investor sentiment indices reflect
these positive expectations since they are at very high levels. We are
naturally cautious when we see this amount of "bullishness." However, we do
think that long-term interest rates might not rise as much as we originally
expected because of the good news on inflation. In light of this, long-term
Treasury bonds will probably move within a 6.25% to 7.5% range over the next
year. We have extended the lower range due to the improving inflation outlook,
but we don't think that longer term rates will fall into the 5% range for any
length of time due to the structural risks still facing the bond market. These
risks revolve around the federal government's growing liabilities in the
entitlements section of the budget. Short-term rates have room to fall but not
to the same extent as in 1993. It would not surprise us to see these rates fall
50 basis points before they would start to re-stimulate the economy.
We also believe that this bond market "bullishness" is being fueled by the
balanced budget talks currently taking place in Washington. There is a growing
consensus that meaningful budgetary reform is on the verge of reality and the
current level of long-term interest rates appears to reflect part of this
optimism. However, we are still quite skeptical. All versions of the proposed
budget in Congress don't really achieve meaningful budget cuts until late 1997
or 1998. What happens if a recession occurs before then? Will Congress stay
the course of budgetary reform or will it focus on the short-term at the expense
of longer term problems? We wish we knew the answers since they would help in
setting our investment strategy. Despite these uncertainties, if longer term
bond yields were materially higher, we would extend the portfolio's average
maturity since there would be a wider margin for error. The Fund's current
portfolio composition reflects our belief that the present level of long-term
rates does not provide a sufficient margin of safety. We are only at the
beginning of a very long road back to fiscal responsibility. It will be a very
arduous one with many opportunities to get sidetracked. Caution is still
required.
We have continued to improve credit quality. While longer term interest
rates are at 6% or below, we will likely maintain our defensive strategy.
Furthermore, yield spreads between credit quality sectors are quite narrow, so
high yield bond holdings total only 2% of the portfolio at fiscal year-end, the
lowest level in years. Convertible securities represent a modest 7%; with the
stock market at record levels, we are finding very few attractive convertibles.
Overall quality is high with 61.9% of total assets invested in Government/Agency
securities and 21.5% in short-term liquidity. Within the portfolio's
Government/Agency component, we increased the mortgage-backed securities
investment to 46.7% from 28.7% at March 31, 1995. Many of these securities are
what we call "par cushion bonds." We purchased them close to par with coupons
of 8% and 8.5%. Their average maturity is determined by how fast the underlying
mortgages pre-pay. Under virtually all interest rate scenarios, we earn a
positive yield spread to that of Treasury securities. Typically, we are buying
them from owners, such as banks or insurance companies, who cannot take this
maturity variability risk. This has been one of the few areas where some pricing
inefficiency has been created. We will deploy our short-term liquidity into
longer term bonds if we get a meaningful rise in interest rates or additional
bond sectors come into disfavor. Currently, the investment environment reflects
very little chaos or controversy that would create potential investment
opportunities. Until fear and uncertainty return, we will patiently wait to
deploy the capital that you have entrusted to us.
During a period when there has been minimal growth in high-quality bond
funds, your Fund continues to attract new investors. We thank you for the
support that you have shown by your investment in FPA New Income, Inc.
Respectfully submitted,
Robert L. Rodriguez, C.F.A.
President and Chief Investment Officer
October 28, 1995
3
<PAGE> 4
HISTORICAL PERFORMANCE
Change in Value of a $10,000 Investment in FPA New Income, Inc. vs. Lehman
Brothers Government/Corporate Bond Index and Lipper Fixed-Income Fund Average
from October 1, 1985 to September 30, 1995
<TABLE>
<CAPTION>
9/30/85 9/30/86 9/30/87 9/30/88 9/30/89 9/30/90 9/30/91 9/30/92 9/30/93 9/30/94 9/30/95
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA New Income, Inc. 9,550 10,934 11,532 13,121 14,504 15,099 18,222 20,792 23,166 23,537 26,393
FPA New Income, Inc. (NAV) 10,000 11,449 12,075 13,739 15,187 15,810 19,081 21,772 24,258 24,646 27,637
Lehman Brothers
Government/Corporate 10,000 12,063 12,022 13,558 15,090 16,112 18,664 21,134 23,553 22,578 25,820
Lipper Fixed-Income Fund Average 10,000 11,786 11,975 13,393 14,652 15,208 17,783 20,185 22,228 21,799 24,186
</TABLE>
Past performance is not indicative of future performance. The Lehman Brothers
Government/Corporate Bond Index is a broad-based unmanaged index of all
government and corporate bonds that are investment grade with at least one year
to maturity. The Lehman Brothers Government/Corporate Bond Index does not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. The Lipper Fixed-Income 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 New Income, Inc., with an ending
value of $26,393, reflects deduction of the current maximum sales charge of 4.5%
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 $27,637. The performance of the Fund and of the Averages is computed
on a total return basis which includes reinvestment of all distributions.
4
<PAGE> 5
MAJOR PORTFOLIO CHANGES
For the Six Months Ended September 30, 1995
<TABLE>
<CAPTION>
Principal
Amount
NET PURCHASES ---------
NON-CONVERTIBLE BONDS
<S> <C>
Federal Home Loan Mortgage Corporation (CMO)--7% 2020 . . . . . . . . . . . . . . . . . . $ 10,000,000
Federal Home Loan Mortgage Corporation (CMO)--8% 2010 (1) . . . . . . . . . . . . . . . . $ 1,865,000
Federal Home Loan Mortgage Corporation (CMO)--8 1/2% 2024 (1) . . . . . . . . . . . . . . $ 5,000,000
Federal Home Loan Mortgage Corporation (PAC-IO-REMIC)--6 1/2% 2023 (1) . . . . . . . . . $ 13,000,000
Federal National Mortgage Association (REMIC)--8% 2011 (1) . . . . . . . . . . . . . . . $ 2,000,000
Federal National Mortgage Association (PAC-IO-REMIC)--6 1/2% 2020 (1) . . . . . . . . . . $ 6,000,000
Federal National Mortgage Association (PAC-REMIC)--8% 2023 (1) . . . . . . . . . . . . . $ 6,590,000
Federal National Mortgage Association (PAC-REMIC)--8 1/2% 2024 (1) . . . . . . . . . . . $ 5,874,428
Federal National Mortgage Association (PAC-REMIC)--8 1/2% 2025 (1) . . . . . . . . . . . $ 11,000,000
Federal National Mortgage Association (PAC-IO-REMIC)--6 1/2% 2009 (1) . . . . . . . . . . $ 15,000,000
Government National Mortgage Association (MH)--9% 2010 (1) . . . . . . . . . . . . . . . $ 1,154,029
Government National Mortgage Association (REMIC)--7.99125% 2010 (1) . . . . . . . . . . . $ 5,536,828
Kidder Peabody Mortgage Assets Trust (CMO) Series 5 Class G--8.45% 2018 (1) . . . . . . . $ 3,526,750
Plantronics, Inc. --10% 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,148,000
CONVERTIBLE DEBENTURE
Diagnostic/Retrieval Systems, Inc.--9% 2003 (1) . . . . . . . . . . . . . . . . . . . . . $ 2,000,000
NET SALES
NON-CONVERTIBLE BONDS
RJR Nabisco Inc.--8% 2000 (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,500,000
U.S. Treasury Notes--7 1/4% 2004 (2) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000,000
U.S. Treasury Notes--7 3/4% 1999 (2) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000,000
U.S. Treasury Notes Strip--0% 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,000,000
CONVERTIBLE DEBENTURES
Quantum Corporation--6 3/8% 2002 (2) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,500,000
Seagate Technology, Inc.--6 3/4% 2012 (2) . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE> 6
PORTFOLIO OF INVESTMENTS
September 30, 1995
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES Amount Cost Value
- ----------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
U.S. GOVERNMENT & AGENCIES
MORTGAGE-BACKED SECURITIES -- 46.7%
Federal Home Loan Mortgage Corporation (CMO)
--7% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,060,000 $15,681,625 $16,004,794
--8% 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,865,000 1,874,325 1,870,245
--8 1/2% 2024 . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 5,031,250 5,076,563
Federal Home Loan Mortgage Corporation (PAC-IO-CMO)
--6 1/2% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . 4,171,384 872,741 862,955
--7% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000,000 2,258,584 2,400,000
Federal Home Loan Mortgage Corporation (PAC-IO-REMIC)
--6 1/2% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . 13,000,000 2,331,809 2,331,875
Federal Home Loan Mortgage Corporation (REMIC)
--6 1/2% 2018 . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 1,527,188 1,456,875
--7% 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600,000 2,652,000 2,593,500
--10.15% 2006 . . . . . . . . . . . . . . . . . . . . . . . . . 159,189 200,020 161,577
Federal National Mortgage Association(REMIC)
--8% 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 2,010,000 2,014,375
Federal National Mortgage Association (PAC-REMIC)
--7 3/4% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000 3,215,625 3,474,844
--8% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,590,000 6,540,575 6,540,575
--8 1/2% 2024 . . . . . . . . . . . . . . . . . . . . . . . . . 5,874,428 5,901,277 5,921,979
--8 1/2% 2025 . . . . . . . . . . . . . . . . . . . . . . . . . 11,000,000 11,056,250 11,061,875
Federal National Mortgage Association (PAC-IO-REMIC)
--6 1/2% 2009 . . . . . . . . . . . . . . . . . . . . . . . . . 15,000,000 2,486,661 2,465,625
--6 1/2% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . 6,000,000 1,631,095 1,606,875
--7% 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,103,118 426,247 420,624
--7% 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,914,724 1,665,225 1,911,683
Government National Mortgage Association
--7 1/2% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . 910,187 870,366 918,720
Government National Mortgage Association II
--10% 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . 208,464 210,628 221,623
Government National Mortgage Association (PL)
--10 1/4% 2017 . . . . . . . . . . . . . . . . . . . . . . . . 957,753 1,039,162 1,016,415
Government National Mortgage Association (GPM)
--14% 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . 77,962 78,483 86,757
Government National Mortgage Association (REMIC)
--7.99125% 2010 . . . . . . . . . . . . . . . . . . . . . . . . 5,536,828 5,536,828 5,545,479
</TABLE>
6
<PAGE> 7
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 . . . . . . . . . . . . . . . . . . . . . . . . . 366,756 384,177 370,424
--8 1/4% 2006-7 . . . . . . . . . . . . . . . . . . . . . . . . 995,819 1,045,117 1,033,162
--8 3/4% 2006 . . . . . . . . . . . . . . . . . . . . . . . . . 1,861,106 1,924,796 1,942,529
--8 3/4% 2011 . . . . . . . . . . . . . . . . . . . . . . . . . 2,060,932 2,130,488 2,153,674
--9% 2010-11 . . . . . . . . . . . . . . . . . . . . . . . . . 4,307,998 4,525,813 4,522,052
--9 1/4% 2011 . . . . . . . . . . . . . . . . . . . . . . . . . 1,412,068 1,483,625 1,487,525
--9 1/2% 2001 . . . . . . . . . . . . . . . . . . . . . . . . . 229,927 231,939 243,435
--9 3/4% 2005-6 . . . . . . . . . . . . . . . . . . . . . . . . 4,768,624 5,086,688 5,060,702
--9 3/4% 2012-13 . . . . . . . . . . . . . . . . . . . . . . . 1,716,980 1,849,511 1,822,145
--10 1/4% 2003-5 . . . . . . . . . . . . . . . . . . . . . . . 740,370 753,837 793,121
--10 3/4% 1999-2001 . . . . . . . . . . . . . . . . . . . . . . 1,063,180 1,120,660 1,141,257
------------ ------------
$ 95,634,615 $ 96,535,859
------------ ------------
U.S. TREASURY -- 13.1%
U.S. Treasury Notes
--6 7/8% 1997 . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,500,000 $ 9,650,234 $ 9,645,469
--7 1/4% 1996 . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 2,990,156 3,046,875
--8 1/4% 2005 . . . . . . . . . . . . . . . . . . . . . . . . . 1,800,000 1,706,250 1,932,187
U.S. Treasury Notes Strip--0% 2009 . . . . . . . . . . . . . . . 31,000,000 10,344,142 12,537,020
------------ ------------
$ 24,690,782 $ 27,161,551
------------ ------------
U.S. AGENCIES -- 2.1%
Tennessee Valley Authority --8 3/8% 1999 . . . . . . . . . . . . $ 3,400,000 $ 3,222,781 $ 3,653,938
U.S. Small Business Administration --9.8% 1998 . . . . . . . . . 725,034 730,029 751,316
------------ ------------
$ 3,952,810 $ 4,405,254
------------ ------------
TOTAL U.S. GOVERNMENT & AGENCIES -- 61.9% $124,278,207 $128,102,664
------------ ------------
OTHER U.S. GOVERNMENT-BACKED -- 2.3%
Republic of Turkey Trust Certificates--0% 1998 . . . . . . . . . $ 3,000,000 $ 2,257,324 $ 2,489,460
State of Israel Trust Certificates--0% 1998 . . . . . . . . . . . 2,785,000 2,129,079 2,311,049
------------ ------------
$ 4,386,403 $ 4,800,509
------------ ------------
MORTGAGE BONDS
ASSET BACKED -- 3.0%
Green Tree Financial Corporation (CMO)
--6.9% 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,408,553 $ 1,407,672 $ 1,396,228
Merrill Lynch Mortgage Investors, Inc. Class A
(backed by Manufactured Housing First Mortgages)
--8.3% 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . 4,100,000 4,105,516 4,233,250
--9.2% 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . 314,521 313,046 323,957
--9.7% 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . 141,858 143,967 145,050
------------ ------------
$ 5,970,201 $ 6,098,485
------------ ------------
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS
Continued
Principal
BONDS & DEBENTURES--CONTINUED Amount Cost Value
- ----------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
MORTGAGE BACKED -- 2.1%
Drexel Burnham Lambert (CMO) Trust Series B Class B-3
--8.9% 2016 (backed by Federal National
Mortgage Association Bonds) . . . . . . . . . . . . . . . . . . $ 252,921 $ 247,862 $ 253,553
Home Mac Mortgage Securities Corporation (CMO)
--9.15% 2019 (backed by U.S. Government
Agency Bonds) . . . . . . . . . . . . . . . . . . . . . . . . . 581,303 488,295 599,469
Kidder Peabody Mortgage Assets Series 5 Class G
--8.45% 2018 (backed by U.S. Government
Agency Bonds) . . . . . . . . . . . . . . . . . . . . . . . . . 3,526,750 3,509,116 3,509,116
------------ ------------
$ 4,245,273 $ 4,362,138
------------ ------------
TOTAL MORTGAGE BONDS -- 5.1% . . . . . . . . . . . . . . . . . . $ 10,215,474 $ 10,460,623
------------ ------------
CORPORATE BONDS & DEBENTURES
Aztar Corporation--11% 2002 . . . . . . . . . . . . . . . . . . . $ 500,000 $ 500,000 $ 475,000
Figgie International Inc.--10 3/8% 1998 . . . . . . . . . . . . . 348,000 356,700 339,300
Plantronics, Inc. --10% 2001 . . . . . . . . . . . . . . . . . . 3,248,000 3,299,575 3,312,960
RJR Nabisco Incorporated--8 5/8% 2002 . . . . . . . . . . . . . . 500,000 467,750 513,750
------------ ------------
TOTAL CORPORATE BONDS
& DEBENTURES -- 2.2% . . . . . . . . . . . . . . . . . . . . . . $ 4,624,025 $ 4,641,010
------------ ------------
TOTAL NON-CONVERTIBLE
BONDS & DEBENTURES -- 71.5% . . . . . . . . . . . . . . . . . . $143,504,109 $148,004,806
------------ ------------
CONVERTIBLE SECURITIES
CONVERTIBLE BONDS & DEBENTURES -- 4.2%
Anacomp International, N.V.--9% 1996 . . . . . . . . . . . . . . $ 780,000 $ 582,500 $ 468,000
Diagnostic/Retrieval Systems, Inc.--8 1/2% 1998 . . . . . . . . . 1,700,000 1,329,096 1,672,375
Diagnostic/Retrieval Systems, Inc.--9% 2003 . . . . . . . . . . . 2,000,000 2,000,000 2,000,000
Fabri-Centers of America, Inc.--6 1/4% 2002 . . . . . . . . . . . 3,631,000 2,762,010 3,168,048
Micropolis Corporation--6% 2012 . . . . . . . . . . . . . . . . . 2,500,000 1,058,875 1,400,000
------------ ------------
$ 7,732,481 $ 8,708,423
------------ ------------
</TABLE>
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Shares or
Principal
Amount Cost Value
----------- ------------ ------------
<S> <C> <C> <C>
CONVERTIBLE PREFERRED STOCKS -- 2.8%
Integon Corporation. . . . . . . . . . . . . . . . . . . . . 30,000 $ 1,500,000 $ 1,650,000
Network Imaging Corporation . . . . . . . . . . . . . . . . . 75,000 1,400,000 1,256,250
Storage Technology Corporation . . . . . . . . . . . . . . . 50,000 3,047,052 2,862,500
------------ ------------
$ 5,947,052 $ 5,768,750
------------ ------------
TOTAL CONVERTIBLE SECURITIES -- 7.0% . . . . . . . . . . . . $ 13,679,533 $ 14,477,173
------------ ------------
LIMITED PARTNERSHIP -- 0.0%
Jewel Recovery L.P. . . . . . . . . . . . . . . . . . . . . . 18,594 $ 9,297 $ 9,297
------------ ------------
SHORT-TERM INVESTMENTS -- 10.1%
U.S. Treasury Bills --6.77% 2/08/96 . . . . . . . . . . . . . $ 3,000,000 $ 2,931,208 $ 2,942,700
U.S. Treasury Notes
-- 4 1/4% 11/30/95 . . . . . . . . . . . . . . . . . . . . . 6,500,000 6,506,510 6,485,781
-- 4 1/4% 12/31/95 . . . . . . . . . . . . . . . . . . . . . 2,000,000 1,999,063 1,993,750
-- 4 1/4% 5/15/96 . . . . . . . . . . . . . . . . . . . . . 9,500,000 9,293,203 9,416,875
------------ ------------
$ 20,729,984 $ 20,839,106
------------ ------------
TOTAL INVESTMENT SECURITIES -- 88.6% . . . . . . . . . . . . $177,922,923 $183,330,382
============ ------------
OTHER SHORT-TERM INVESTMENTS -- 12.6%
Short-term Corporate Notes:
American General Corporation --5.68% 10/2/95 . . . . . . . $ 1,800,000 $ 1,799,716
Anheuser-Bush Companies --5.70% 10/4/95 . . . . . . . . . . 6,600,000 6,596,865
AT&T Capital Corporation --5.75% 10/05/95 . . . . . . . . . 10,100,000 10,093,547
Snap-on Incorporated --5.90% 10/5/95 . . . . . . . . . . . 1,200,000 1,199,213
American General Finance Corporation --5.75% 10/6/95 . . . 5,100,000 5,095,927
State Street Bank Repurchase Agreement--5 1/4% 10/02/95
(Collateralized by U.S. Treasury Notes--10 3/8% 2009,
market value $1,382,173) . . . . . . . . . . . . . . . . . 1,376,000 1,376,402
------------
$ 26,161,670
------------
TOTAL INVESTMENTS -- 101.2% . . . . . . . . . . . . . . . . . $209,492,052
Liabilities less other assets-- (1.2)% . . . . . . . . . . . (2,474,111)
------------
TOTAL NET ASSETS -- 100% . . . . . . . . . . . . . . . . . . $207,017,941
============
</TABLE>
See notes to financial statements.
9
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $177,922,923) . . . . . . . . . . . . . $183,330,382
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less) . . . . . . . . . . . . . 26,161,670 $209,492,052
------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 843
Receivable for:
Capital Stock sold . . . . . . . . . . . . . . . . . . . . $ 2,765,433
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 2,115,620
Investment securities sold . . . . . . . . . . . . . . . . 226 4,881,279
------------ ------------
$214,374,174
LIABILITIES
Payable for:
Investment securities purchased . . . . . . . . . . . . . . $ 7,083,669
Accrued expenses and other liabilities . . . . . . . . . . 103,034
Capital Stock repurchased . . . . . . . . . . . . . . . . . 93,177
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . 76,353 7,356,233
------------ ------------
NET ASSETS -- equivalent to $11.05 per share on 18,741,450
shares of Capital Stock outstanding . . . . . . . . . . . . . $207,017,941
============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 18,741,450 shares . . . . . $ 187,415
Additional Paid-in Capital . . . . . . . . . . . . . . . . . 195,409,700
Undistributed net realized gains on investments . . . . . . . 3,058,626
Undistributed net investment income . . . . . . . . . . . . . 2,954,741
Unrealized appreciation of investments . . . . . . . . . . . 5,407,459
------------
Net assets at September 30, 1995 . . . . . . . . . . . . . . $207,017,941
============
</TABLE>
See notes to financial statements.
10
<PAGE> 11
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,766,991
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394,344
-----------
$11,161,335
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . $ 755,915
Transfer agent fees and expenses . . . . . . . . . . . . . . . . 97,504
Custodian fees and expenses . . . . . . . . . . . . . . . . . . . 38,322
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . 34,064
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,925
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,500
Director's fees and expenses . . . . . . . . . . . . . . . . . . 20,040
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,462
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . 12,784
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,645
Taxes, other than federal income tax . . . . . . . . . . . . . . 7,440
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . 10,199 1,049,800
------------ -----------
Net investment income . . . . . . . . . . . . . . . . . . $10,111,535
-----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments:
Proceeds from sales of investment securities (excluding
short-term investments with maturities of 60 days or less) . . $ 42,030,022
Cost of investment securities sold . . . . . . . . . . . . . . . (38,949,204)
------------
Net realized gain on investments . . . . . . . . . . . . . . $ 3,080,818
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year . . . . . . . . . . $ 881,301
Unrealized appreciation at end of year . . . . . . . . . . . . . 5,407,459
------------
Increase in unrealized appreciation of investments . . . . . 4,526,158
-----------
Net realized and unrealized gain on investments . . . . . $ 7,606,976
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . $17,718,511
===========
</TABLE>
See notes to financial statements.
11
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended September 30,
------------------------------------------------------------
1995 1994
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . $ 10,111,535 $ 7,462,027
Net realized gain (loss) on investments . . 3,080,818 (20,939)
Increase (decrease) in unrealized
appreciation of investments . . . . . . . 4,526,158 (5,558,684)
------------ -----------
Increase in net assets resulting
from operations . . . . . . . . . . . . . . $ 17,718,511 $ 1,882,404
Distributions to shareholders:
From net investment income . . . . . . . . $ (9,257,545) $ (7,361,224)
From net realized capital gains . . . . . . -- (2,686,312)
In excess of net realized gains . . . . . . -- (22,192)
From paid-in capital . . . . . . . . . . . -- (9,257,545) (10,128) (10,079,856)
------------ ------------
Capital Stock transactions:
Proceeds from Capital Stock sold . . . . . $100,118,255 $ 33,309,670
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions . . . . . 7,265,944 8,252,481
Cost of Capital Stock repurchased . . . . . (31,535,316) 75,848,883 (25,719,056) 15,843,095
------------ ------------ ------------ ------------
Total increase in net assets . . . . . . . . $ 84,309,849 $ 7,645,643
NET ASSETS
Beginning of year, including
undistributed net investment income
of $2,100,751 and $1,999,948 . . . . . . . 122,708,092 115,062,449
------------ ------------
End of year, including
undistributed net investment income
of $2,954,741 and $2,100,751 . . . . . . . $207,017,941 $122,708,092
============ ============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold . . . . . . . . 9,332,648 3,087,452
Shares issued to shareholders
upon reinvestment of dividends
and distributions . . . . . . . . . . . . . 693,811 769,224
Shares of Capital Stock repurchased . . . . . (2,947,243) (2,358,789)
------------ ------------
Increase in Capital Stock
outstanding . . . . . . . . . . . . . . . . 7,079,216 1,497,887
============ ============
</TABLE>
See notes to financial statements.
12
<PAGE> 13
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year . . . . . . $ 10.52 $ 11.32 $ 10.90 $ 10.47 $ 9.47
------- ------- ------- ------- --------
Net investment income . . . . . . . . . . . . . . $ 0.67 $ 0.68 $ 0.70 $ 0.73 $ 0.84
Net realized and unrealized gain (loss)
on investment securities . . . . . . . . . . . 0.55 (0.51) 0.49 0.66 1.02
------- ------- ------- ------- --------
Total from investment operations . . . . . . . . $ 1.22 $ 0.17 $ 1.19 $ 1.39 $ 1.86
------- ------- ------- ------- --------
Less distributions:
Dividends from net investment income . . . . . $ (0.69) $ (0.70) $ (0.70) $ (0.76) $ (0.85)
Distributions from net realized
capital gains . . . . . . . . . . . . . . . . -- (0.27) (0.07) (0.20) (0.01)
------- ------- ------- ------- --------
Total distributions . . . . . . . . . . . . . . . $ (0.69) $ (0.97) $ (0.77) $ (0.96) $ (0.86)
------- ------- ------- ------- --------
Net asset value at end of year . . . . . . . . . $ 11.05 $ 10.52 $ 11.32 $ 10.90 $ 10.47
======= ======= ======= ======= ========
Total investment return* . . . . . . . . . . . . 12.14% 1.60% 11.42% 14.10% 20.69%
Ratios/supplemental data:
Net assets at end of year (in $000's) . . . . . . 207,018 122,708 115,062 80,489 41,859
Ratio of expenses to average net assets . . . . . 0.68% 0.74% 0.73% 0.78% 0.87%
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . 6.50% 6.41% 6.48% 7.17% 8.46%
Portfolio turnover rate . . . . . . . . . . . . . 31% 39% 41% 22% 26%
</TABLE>
* Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge.
- ----------------------------------------------------------------------------
FEDERAL TAX STATUS OF FISCAL YEAR DISTRIBUTIONS TO SHAREHOLDERS
<TABLE>
<CAPTION>
Ordinary Income
Per Share -----------------------------
Payable Date Amount Qualifying Non-Qualifying
- --------------------------------- --------- ---------- --------------
<S> <C> <C> <C>
October 15, 1994 . . . . . . . . $0.18 1.1% 98.9%
January 9, 1995 . . . . . . . . . $0.17* 3.0% 97.0%
April 15, 1995 . . . . . . . . . $0.17 3.7% 96.3%
July 15, 1995 . . . . . . . . . . $0.17 3.7% 96.3%
</TABLE>
* Even though payment was made in 1995, this distribution was taxable to
shareholders in 1994 under provisions of the Internal Revenue Code.
Qualifying dividends refers to the amount of dividends which are designated as
qualifying for the 70% dividends received deduction applicable to corporate
shareholders.
A form 1099 will be mailed to each shareholder in January 1996 setting forth
specific amounts to be included in their 1995 tax returns.
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
September 30, 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 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 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 $98,862,351 for the year ended
September 30, 1995. Realized gains or losses are based on the
specific-certificate identification method. Cost of investment securities owned
at September 30, 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 year ended September 30, 1995, the Fund paid aggregate fees of
$19,500 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.
14
