<PAGE> 1
- --------------------------------------------------------------------------------
FPA NEW INCOME, INC. Semi-Annual Report
LOGO
Distributor:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
March 31, 1996
- --------------------------------------------------------------------------------
<PAGE> 2
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
DIRECTORS DISTRIBUTOR
Donald E. Cantlay FPA Fund Distributors, Inc.
DeWayne W. Moore 11400 West Olympic Boulevard,
Lawrence J. Sheehan Suite 1200
Kenneth L. Trefftzs Los Angeles, California 90064
COUNSEL
O'Melveny & Myers
Los Angeles, California
OFFICERS
Robert L. Rodriguez, President and
Chief Investment Officer CUSTODIAN & TRANSFER AGENT
Christopher Linden, Senior Vice President
Eric S. Ende, Vice President State Street Bank and
Julio J. de Puzo, Jr., Treasurer Trust Company
Sherry Sasaki, Secretary Boston, Massachusetts
Christopher H. Thomas, Assistant Treasurer
SHAREHOLDER SERVICE AGENT
INVESTMENT ADVISER Boston Financial Data
Services, Inc.
First Pacific Advisors, Inc. P.O. Box 8500
11400 West Olympic Boulevard, Suite 1200 Boston, Massachusetts
Los Angeles, California 90064 02266-8500
(800) 638-3060
(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
IN MEMORIAM
It is with great sadness that we report that George H. Michaelis,
Chairman of the Board and Chief Executive Officer of First Pacific Advisors,
Inc. and Chairman of the Board of FPA New Income, Inc., was killed in a tragic
accident on March 10. The Directors and employees of both FPA New Income and
First Pacific Advisors join the Fund's shareholders in mourning George's loss.
He was an exceptional investor and a respected colleague, friend, and mentor.
George was a truly outstanding human being who left an indelible mark on the
company, the investment industry, and all of us who had the privilege of
working with him. His lasting legacy is that he built an organization and team
able to carry on in his absence.
DEAR FELLOW SHAREHOLDERS:
This Semi-Annual Report covers the six-month period ended March 31,
1996. Your Fund's net asset value (NAV) closed at $10.94. Income dividends of
$0.16 were paid on October 15, 1995, and January 8, 1996, to holders of record
on September 29 and December 29, 1995, respectively. The January payment also
included a $0.16 capital gains distribution, $0.105 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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
PERIODS ENDED MARCH 31, 1996
----------------------------
1 YEAR 5 YEARS 10 YEARS
-------- -------- -------
<S> <C> <C> <C>
FPA New Income, Inc.
(NAV) . . . . . . . . 11.07%* 10.05%* 9.95%*
FPA New Income, Inc.
(Net of Sales Charge) 6.07%++ 9.04%++ 9.45%++
Lipper Fixed Income Fund
Average . . . . . . . 9.94% 8.64% 8.03%
Lehman Brothers Government/
Corporate Bond Index 10.93% 8.70% 8.50%
</TABLE>
The Fund's total rate of return for the six months was 3.42%* versus
2.60% and 2.21% for the Lipper Average and the Lehman Brothers Index,
respectively. For the calendar year ended December 31, 1995, total returns
were: FPA New Income, Inc., 14.36%*; Lipper Average,15.22%; and the Lehman
Index, 19.24%.
COMMENTARY
For the year ended March 31, 1996, your Fund outperformed the Lipper
Average as well as the Lehman Index. However, this was not the case for
calendar 1995. During the September quarter, interest rates continued to fall,
as reflected by the decline in long Treasury bond yield from 6.50% to 5.95%.
Your Fund did not participate fully in this rally because of our defensive
portfolio positioning. The portfolio's average duration and maturity were at
3.0 and 3.3 years, respectively, at September 30. These were down from the
March levels of 4.0 and 4.9 years, respectively.
We did not expect much economic weakness towards the end of 1995.
Furthermore, we thought that consumer inflation would increase more than it
did. This was the biggest surprise to us and it proved to be a critical error.
We believed that the Federal Reserve's monetary easing would help stimulate the
economy, and therefore cause bond investors to be somewhat more cautious. This
was not the case since fixed income investors became too optimistic regarding
last year's congressional budgetary talks. At one point, it seemed as though
the consensus thought it was a foregone conclusion that meaningful budgetary
reform would occur. A reflection of this optimism can be seen by Market Vane
Corporation's survey of the amount of "bullish sentiment" held by fixed income
professionals. At calendar year-end, the percentage of those "bullish" was at
its highest level since 1986. We did not agree. As we all know, no budgetary
accord was reached and interest rates have risen.
The budgetary gridlock of late last year, severe winter weather early
this year, and recent auto strikes have caused confusion in the bond market.
Governmental reports on the status of the economy were either delayed or
materially impacted by these unusual events. Consequently, there is a wide
dispersion in economic forecasts for growth in 1996.
____________
* 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
We assumed that economic growth in the first half of 1996 would
gradually mount to a level that would be greater than the consensus opinion.
The combination of a reduction in inventory liquidation and a resumption of
consumer spending would work to stimulate the economy. So far, both are
occurring and we think this trend can continue into the third quarter. After
that, economic forecasting becomes increasingly difficult because of the
presidential and congressional elections.
The bond market is now coming to grips with stronger economic growth,
higher inflation and lack of a budgetary resolution. At the time when the
consensus thought all of these were unlikely to occur, the level of bond yields
provided little margin for error. Our strategy was one of protecting principal
while trying to earn a competitive yield, which we accomplished through
investing in what we call "par cushion bonds." (See September Shareholder
Letter.) This strategy continues.
Our aversion to taking extraordinary risk is paying off again. For the
quarter ended March, the Treasury long bond's negative 8.4% total return was
its worst quarterly performance since the negative 10% total return for the
third quarter of 1987. The Lehman Brothers Index was a negative 2.3% total
return. February turned out to be one of the worst months on record.
Generally, most intermediate and long-term fixed income bond funds experienced
NEGATIVE quarterly total returns between 1/2% and 4%, while your Fund achieved
a POSITIVE 0.83% total return. This return may be small, but it continues the
trend where FPA New Income really shines in difficult markets. This positive
relative performance essentially made up for last year's underperformance.
Long Treasury yields are now at 6.8% versus a low of 5.95% and we
continue to believe they will generally trade between 6.25% and 7.5% for the
near future. The recent low below 6% was caused by an unusual level of
speculative activity that was financed by low foreign short-term rates. These
flows are now reversing. Of more significance is the continued growth in
foreign central bank holdings of U.S. Treasury securities. During the twelve
months ended in March, these holdings increased $128 billion to $555 billion.
They effectively financed approximately 85% of the budget deficit. We do not
believe that this is a sustainable trend.
We continue to believe that for long-term rates to go below the 6%
level and stay there, a combination of the following is required: low
inflation, low economic growth and a sound resolution to our budgetary
entitlements' problems. We will only extend the portfolio's duration when we
believe we are being well-compensated for inflation and budgetary financing
risks. At yield levels above 7%, we will consider doing this. We will also
consider adding duration if a sector or sub-sector of the market gets
attractively priced. Recently, this occurred in the mortgage sector with a
class of collateralized mortgage bond (CMO) known as a "Z" bond. These tend to
be fairly long instruments. The one we purchased could have a duration of up
to twenty years. To mitigate this potential risk, we selected a CMO with an
underlying mortgage rate of 8.5%. With any type of rate decline, it will
become very refinanceable. For this risk, we are getting a minimum yield of
8.2% and this return can go higher and the maturity shorter, if the bond pays
off faster. A little less than 3% of the portfolio was invested in this
security.
The portfolio maintains a high-quality orientation. Government/Agency
securities equal 68.2% of the Fund while high-yield bonds are 2.5%.
Convertible securities are at a relatively low 7%. The largest asset class
continues to be mortgage-backed securities, which represent 83% of the
Government/Agency component or 56.9% of the portfolio. Short-term liquidity
totals 16.5%. At March 29, the portfolio's average duration and maturity were
4.06 and 4.75 years, respectively. By comparison, the Lehman Index was at 5.4
and 9.5 years, respectively.
It has been a pleasure conveying these improving results. We thank
you for your investment and continuing interest in FPA New Income, Inc.
Respectfully submitted,
/s/ ROBERT L. RODRIGUEZ
- ---------------------------------------
Robert L. Rodriguez, C.F.A.
President and Chief Investment Officer
April 28, 1996
3
<PAGE> 5
MAJOR PORTFOLIO CHANGES
Six Months Ended March 31, 1996
<TABLE>
<CAPTION>
Principal
Amount
--------------
<S> <C>
NET PURCHASES
NON-CONVERTIBLE BONDS & DEBENTURES
Busse Broadcasting Corporation --11 5/8% 2000 (1) . . . . . . . . . . . . . . . . . . . $ 2,250,000
Federal Home Loan Mortgage Corporation (PAC-REMIC) --7% 2008 (1) . . . . . . . . . . . $ 7,700,000
Federal Home Loan Mortgage Corporation (PAC-IO-REMIC) --6 1/2% 2007 (1) . . . . . . . . $ 16,722,123
Federal Home Loan Mortgage Corporation (REMIC) --7% 2007 (1) . . . . . . . . . . . . . $ 6,248,912
Federal Home Loan Mortgage Corporation (REMIC) --7% 2008 (1) . . . . . . . . . . . . . $ 13,345,142
Federal National Mortgage Association (PAC-REMIC) --7% 2007 (1) . . . . . . . . . . . . $ 3,270,478
Federal National Mortgage Association (REMIC) --7% 2008 (1) . . . . . . . . . . . . . . $ 5,890,456
Federal National Mortgage Association (REMIC) --7% 2023 (1) . . . . . . . . . . . . . . $ 6,406,075
Federal National Mortgage Association (REMIC) --7 1/2% 2024 (1) . . . . . . . . . . . . $ 7,679,758
CONVERTIBLE BONDS & DEBENTURES
Alexander Haagen Properties, Inc. (Class "A") --7 1/2% 2001 (1) . . . . . . . . . . . . $ 1,065,000
Alexander Haagen Properties, Inc. (Class "B") --7 1/2% 2001 (1) . . . . . . . . . . . . $ 1,400,000
Quantum Health Resources, Inc. --4 3/4% 2000 (1) . . . . . . . . . . . . . . . . . . . $ 3,000,000
Quantum Corporation --6 3/8% 2002 (1) . . . . . . . . . . . . . . . . . . . . . . . . . $ 750,000
NET SALES
NON-CONVERTIBLE BONDS & DEBENTURES
Federal National Mortgage Association (PAC-REMIC) --8 1/2% 2024 . . . . . . . . . . . . $ 4,187,428
Figgie International Inc. --10 3/8% 1998 (2) . . . . . . . . . . . . . . . . . . . . . $ 348,000
Government National Mortgage Association (MH) --9 3/4% 2005-6 . . . . . . . . . . . . . $ 508,035
Government National Mortgage Association (REMIC) --7.99125% 2010 . . . . . . . . . . . $ 1,263,608
Kidder Peabody Mortgage Assets (CMO) Series 5 Class G--8.45% 2018 . . . . . . . . . . . $ 1,177,708
U.S. Small Business Administration --9.8% 1998 . . . . . . . . . . . . . . . . . . . . $ 437,119
CONVERTIBLE BONDS & DEBENTURES
Diagnostic/Retrieval Systems, Inc. --8 1/2% 1998 . . . . . . . . . . . . . . . . . . . $ 848,000
Micropolis Corporation --6% 2012 (2) . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,500,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
4
<PAGE> 6
PORTFOLIO OF INVESTMENTS
March 31, 1996
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES Amount Cost Value
- ---------------------------------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
U.S. GOVERNMENT & AGENCIES
MORTGAGE-BACKED SECURITIES -- 56.9%
Federal Home Loan Mortgage Corporation (CMO)
--7% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,060,000 $ 15,681,625 $ 15,804,044
--8% 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,865,000 1,874,325 1,869,663
--8 1/2% 2024 . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 5,031,250 5,050,000
Federal Home Loan Mortgage Corporation (PAC-REMIC)
--7% 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,700,000 7,658,563 7,706,281
Federal Home Loan Mortgage Corporation (PAC-IO-CMO)
--6 1/2% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . 4,171,384 773,705 758,670
--7% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000,000 2,098,373 2,230,000
Federal Home Loan Mortgage Corporation (PAC-IO-REMIC)
--6 1/2% 2007 . . . . . . . . . . . . . . . . . . . . . . . . . 16,722,123 3,340,769 3,333,973
--6 1/2% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . 13,000,000 2,005,975 1,990,625
Federal Home Loan Mortgage Corporation (REMIC)
--6 1/2% 2018 . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 1,527,187 1,464,375
--7% 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600,000 2,652,000 2,614,625
--7% 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,248,912 6,174,706 6,229,384
--7% 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,345,142 13,220,105 13,339,938
--10.15% 2006 . . . . . . . . . . . . . . . . . . . . . . . . . 129,110 189,947 131,047
Federal National Mortgage Association (PAC-REMIC)
--7% 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,270,478 3,233,685 3,274,566
--7 3/4% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000 3,215,625 3,517,500
--8% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,590,000 6,540,575 6,711,503
--8 1/2% 2024 . . . . . . . . . . . . . . . . . . . . . . . . . 1,687,000 1,708,615 1,696,489
--8 1/2% 2025 . . . . . . . . . . . . . . . . . . . . . . . . . 11,000,000 11,056,250 11,192,500
Federal National Mortgage Association (PAC-IO-REMIC)
--6 1/2% 2009 . . . . . . . . . . . . . . . . . . . . . . . . . 14,492,953 2,104,576 2,146,769
--6 1/2% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . 6,000,000 1,506,080 1,477,500
--7% 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,952,534 375,738 380,744
--7% 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,914,724 1,386,159 1,632,831
Federal National Mortgage Association (REMIC)
--7% 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,890,456 5,838,980 5,892,313
--7% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,406,075 6,213,893 6,099,785
--7 1/2% 2024 . . . . . . . . . . . . . . . . . . . . . . . . . 7,679,758 6,921,382 6,866,184
--8% 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 2,010,000 2,032,500
</TABLE>
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES--CONTINUED Amount Cost Value
- ---------------------------------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
Government National Mortgage Association
--7 1/2% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . $ 886,060 $ 847,295 $ 886,891
Government National Mortgage Association II
--10% 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . 190,404 192,296 203,732
Government National Mortgage Association (GPM)
--14% 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . 77,525 78,043 86,780
Government National Mortgage Association (MH)
--7 1/2% 2002 . . . . . . . . . . . . . . . . . . . . . . . . . 333,013 348,831 338,216
--8 1/4% 2006-7 . . . . . . . . . . . . . . . . . . . . . . . . 921,943 967,547 960,549
--8 3/4% 2006 . . . . . . . . . . . . . . . . . . . . . . . . . 1,636,281 1,692,296 1,715,027
--8 3/4% 2011 . . . . . . . . . . . . . . . . . . . . . . . . . 1,926,409 1,991,425 2,025,137
--9% 2010-11 . . . . . . . . . . . . . . . . . . . . . . . . . 3,995,163 4,196,261 4,224,886
--9 1/4% 2005 . . . . . . . . . . . . . . . . . . . . . . . . . 102,250 108,641 108,513
--9 1/4% 2010-11 . . . . . . . . . . . . . . . . . . . . . . . 1,594,260 1,678,949 1,691,908
--9 1/2% 2001 . . . . . . . . . . . . . . . . . . . . . . . . . 195,464 197,175 208,291
--9 3/4% 2005-6 . . . . . . . . . . . . . . . . . . . . . . . . 4,260,589 4,544,673 4,558,830
--9 3/4% 2012-13 . . . . . . . . . . . . . . . . . . . . . . . 1,684,800 1,814,842 1,802,736
--10 1/4% 2003-5 . . . . . . . . . . . . . . . . . . . . . . . 694,244 706,800 749,784
--10 3/4% 1999-2001 . . . . . . . . . . . . . . . . . . . . . . 920,678 969,850 997,785
Government National Mortgage Association (PL)
--10 1/4% 2017 . . . . . . . . . . . . . . . . . . . . . . . . 951,623 1,032,510 1,018,237
Government National Mortgage Association (REMIC)
--7.99125% 2010 . . . . . . . . . . . . . . . . . . . . . . . . 4,273,220 4,273,220 4,305,269
------------- -------------
$ 139,980,742 $ 141,326,380
------------- -------------
U.S. TREASURY -- 9.7%
U.S. Treasury Notes
- --6 7/8% 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,500,000 $ 9,650,234 $ 9,627,656
- --8 1/4% 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800,000 1,706,250 1,927,688
U.S Treasury Notes Strip --0% 2009 . . . . . . . . . . . . . . . 31,000,000 10,761,353 12,610,490
------------- -------------
$ 22,117,837 $ 24,165,834
------------- -------------
U.S. AGENCIES -- 1.6%
Tennessee Valley Authority --8 3/8% 1999 . . . . . . . . . . . . $ 3,400,000 $ 3,222,781 $ 3,612,500
U.S. Small Business Administration --9.8% 1998 . . . . . . . . . 287,915 289,648 296,912
------------- -------------
$ 3,512,429 $ 3,909,412
------------- -------------
TOTAL U.S. GOVERNMENT & AGENCIES -- 68.2% . . . . . . . . . . . . $ 165,611,008 $ 169,401,626
------------- -------------
</TABLE>
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES--CONTINUED Amount Cost Value
- ---------------------------------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
OTHER U.S. GOVERNMENT-BACKED -- 2.0%
Republic of Turkey Trust Certificates--0% 1998 . . . . . . . . . $ 3,000,000 $ 2,362,739 $ 2,568,090
State of Israel Trust Certificates--0% 1998 . . . . . . . . . . . 2,785,000 2,222,731 2,384,044
------------- -------------
$ 4,585,470 $ 4,952,134
------------- -------------
MORTGAGE BONDS
ASSET BACKED -- 2.3%
Green Tree Financial Corporation (CMO)
--6.9% 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,254,553 $ 1,253,768 $ 1,232,010
Merrill Lynch Mortgage Investors, Inc. Class A
(backed by Manufactured Housing First Mortgages)
--8.3% 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . 4,100,000 4,105,516 4,220,437
--9.2% 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . 250,675 249,499 256,864
--9.7% 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . 96,693 98,130 98,113
------------- -------------
$ 5,706,913 $ 5,807,424
------------- -------------
MORTGAGE BACKED -- 1.3%
Drexel Burnham Lambert (CMO) Trust Series B Class B-3
--8.9% 2016 (backed by Federal National
Mortgage Association Bonds) . . . . . . . . . . . . . . . . . . $ 232,945 $ 228,286 $ 232,945
Home Mac Mortgage Securities Corporation (CMO)
--9.15% 2019 (backed by U.S. Government
Agency Bonds) . . . . . . . . . . . . . . . . . . . . . . . . . 543,178 456,270 555,400
Kidder Peabody Mortgage Assets (CMO) Series 5 Class G
--8.45% 2018 (backed by U.S. Government
Agency Bonds) . . . . . . . . . . . . . . . . . . . . . . . . . 2,349,042 2,337,296 2,349,042
------------- -------------
$ 3,021,852 $ 3,137,387
------------- -------------
TOTAL MORTGAGE BONDS -- 3.6% . . . . . . . . . . . . . . . . . . $ 8,728,765 $ 8,944,811
-------------- -------------
CORPORATE BONDS & DEBENTURES
Aztar Corporation --11% 2002 . . . . . . . . . . . . . . . . . . $ 500,000 $ 500,000 $ 495,000
Busse Broadcasting Corporation --11 5/8% 2000 . . . . . . . . . . 2,250,000 2,159,100 2,227,500
Plantronics, Inc. --10% 2001 . . . . . . . . . . . . . . . . . . 3,248,000 3,299,575 3,426,640
RJR Nabisco Incorporated --8 3/8% 2002 . . . . . . . . . . . . . 500,000 467,750 493,750
------------- -------------
TOTAL CORPORATE BONDS
& DEBENTURES -- 2.7% . . . . . . . . . . . . . . . . . . . . . . $ 6,426,425 $ 6,642,890
------------- -------------
TOTAL NON-CONVERTIBLE
BONDS & DEBENTURES -- 76.5% . . . . . . . . . . . . . . . . . . $ 185,351,668 $ 189,941,461
------------- -------------
</TABLE>
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Shares or
Principal
BONDS & DEBENTURES--CONTINUED Amount Cost Value
- ---------------------------------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
CONVERTIBLE SECURITIES
CONVERTIBLE BONDS & DEBENTURES -- 5.8%
Alexander Haagen Properties, Inc. (Class "A")--7 1/2% 2001 . . . $ 1,065,000 $ 923,888 $ 926,550
Alexander Haagen Properties, Inc. (Class "B")--7 1/2% 2001 . . . 1,400,000 1,221,500 1,218,000
Anacomp International, N.V.--9% 1996 . . . . . . . . . . . . . . 780,000 582,500 117,000
Diagnostic/Retrieval Systems, Inc.--8 1/2% 1998 . . . . . . . . . 852,000 615,979 843,480
Diagnostic/Retrieval Systems, Inc.--9% 2003 . . . . . . . . . . . 2,000,000 2,000,000 2,130,000
Fabri-Centers of America, Inc.--6 1/4% 2002 . . . . . . . . . . . 3,631,000 2,762,010 3,095,428
Quantum Health Resources, Inc.--4 3/4% 2000 . . . . . . . . . . . 3,000,000 2,356,250 2,385,000
Quantum Corporation--6 3/8% 2002 . . . . . . . . . . . . . . . . 750,000 779,396 817,500
Storage Technology Corporation--7% 2008 . . . . . . . . . . . . . 2,500,000 3,047,052 2,900,000
------------- -------------
$ 14,288,575 $ 14,432,958
------------- -------------
CONVERTIBLE PREFERRED STOCKS -- 1.2%
Integon Corporation. . . . . . . . . . . . . . . . . . . . . . . 30,000 $ 1,500,000 $ 1,785,000
Network Imaging Corporation . . . . . . . . . . . . . . . . . . . 75,000 1,400,000 1,190,625
------------- -------------
$ 2,900,000 $ 2,975,625
------------- -------------
TOTAL CONVERTIBLE SECURITIES -- 7.0% . . . . . . . . . . . . . . $ 17,188,575 $ 17,408,583
------------- -------------
LIMITED PARTNERSHIP -- 0.0%
Jewel Recovery L.P. . . . . . . . . . . . . . . . . . . . . . . . 18,594 $ 9,297 $ 9,297
------------- -------------
SHORT-TERM INVESTMENTS -- 5.0%
U.S. Treasury Notes -- 4 1/4% 5/15/96 . . . . . . . . . . . . . . $ 9,500,000 $ 9,293,203 $ 9,485,156
U.S. Treasury Notes -- 7 1/4% 11/30/96 . . . . . . . . . . . . . 3,000,000 2,990,156 3,033,750
------------- -------------
$ 12,283,359 $ 12,518,906
------------- -------------
TOTAL INVESTMENT SECURITIES -- 88.5% . . . . . . . . . . . . . . $ 214,832,899 $ 219,878,247
============= -------------
OTHER SHORT-TERM INVESTMENTS -- 10.8%
Short-term Corporate Notes:
Shell Oil Company --5.33% 4/2/96 . . . . . . . . . . . . . . . $ 2,200,000 $ 2,199,674
Hertz Corporation --5.43% 4/4/96 . . . . . . . . . . . . . . . 12,300,000 12,294,434
American General Corporation --5.39% 4/8/96 . . . . . . . . . . 10,800,000 10,788,681
State Street Bank Repurchase Agreement--4 3/4% 4/1/96
(Collateralized by U.S. Treasury Notes--7 3/4% 1999,
market value $1,702,457) . . . . . . . . . . . . . . . . . . . 1,667,000 1,667,660
-------------
$ 26,950,449
-------------
TOTAL INVESTMENTS -- 99.3% . . . . . . . . . . . . . . . . . . . $ 246,828,696
Other assets less liabilities -- 0.7% . . . . . . . . . . . . . . 1,666,658
-------------
TOTAL NET ASSETS -- 100% . . . . . . . . . . . . . . . . . . . . $ 248,495,354
=============
</TABLE>
See notes to financial statements.
8
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $214,832,899) . . . . . . . . . . . . . . . . . . . $ 219,878,247
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less) . . . . . . . . . . . . . . . . . . . 26,950,449 $ 246,828,696
---------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 801
Receivable for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,519,840
Capital Stock sold . . . . . . . . . . . . . . . . . . . . . . . . . . 936,366 3,456,206
--------------- ---------------
$ 250,285,703
LIABILITIES
Payable for:
Investment securities purchased . . . . . . . . . . . . . . . . . . . . $ 940,750
Capital Stock repurchased . . . . . . . . . . . . . . . . . . . . . . . 654,380
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,079
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . 91,140 1,790,349
--------------- ---------------
NET ASSETS -- equivalent to $10.94 per share on 22,723,277
shares of Capital Stock outstanding . . . . . . . . . . . . . . . . . . . $ 248,495,354
===============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $.01 per share; authorized
100,000,000 shares; outstanding 22,723,277 shares . . . . . . . . . . . $ 227,233
Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . 239,026,422
Undistributed net realized gains on investments . . . . . . . . . . . . . 36,626
Undistributed net investment income . . . . . . . . . . . . . . . . . . . 4,159,725
Unrealized appreciation of investments . . . . . . . . . . . . . . . . . 5,045,348
---------------
Net assets at March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . $ 248,495,354
===============
</TABLE>
See notes to financial statements.
9
<PAGE> 11
STATEMENT OF OPERATIONS
For the Six Months Ended March 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,135,755
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,875
-------------
$ 8,312,630
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 575,880
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,970
Transfer agent fees and expenses . . . . . . . . . . . . . . . . . . . 50,246
Custodian fees and expenses . . . . . . . . . . . . . . . . . . . . . . 20,336
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,520
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . 10,260
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,265
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,767
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,796
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . 2,739
Taxes, other than federal income tax . . . . . . . . . . . . . . . . . 800
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,861 754,440
-------------- -------------
Net investment income . . . . . . . . . . . . . . . . . . . . . $ 7,558,190
-------------
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) . . . . . $ 25,701,097
Cost of investment securities sold . . . . . . . . . . . . . . . . . . 25,367,546
--------------
Net realized gain on investments . . . . . . . . . . . . . . . . . $ 333,551
Unrealized appreciation of investments:
Unrealized appreciation at beginning of period . . . . . . . . . . . . $ 5,407,459
Unrealized appreciation at end of period . . . . . . . . . . . . . . . 5,045,348
--------------
Decrease in unrealized appreciation of investments . . . . . . . . (362,111)
-------------
Net realized and unrealized loss on investments . . . . . . . . $ (28,560)
-------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,529,630
=============
</TABLE>
See notes to financial statements.
10
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, 1996 September 30, 1995
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . . $ 7,558,190 $ 10,111,535
Net realized gain on investments . . . . . . 333,551 3,080,818
Increase (decrease) in unrealized
appreciation of investments . . . . . . . . (362,111) 4,526,158
------------ -------------
Increase in net assets resulting
from operations . . . . . . . . . . . . . . . $ 7,529,630 $ 17,718,511
Distributions to shareholders from:
Net investment income . . . . . . . . . . . . $ (6,353,206) $ (9,257,545)
Net realized capital gains . . . . . . . . . (3,355,551) (9,708,757) -- (9,257,545)
------------ -------------
Capital Stock transactions:
Proceeds from Capital Stock sold . . . . . . $ 53,239,055 $ 100,118,255
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions . . . . . . 7,108,463 7,265,944
Cost of Capital Stock repurchased . . . . . . (16,690,978) 43,656,540 (31,535,316) 75,848,883
------------ ------------ ------------- ------------
Total increase in net assets . . . . . . . . . $ 41,477,413 $ 84,309,849
NET ASSETS
Beginning of period, including
undistributed net investment income
of $2,954,741 and $2,100,751 . . . . . . . . 207,017,941 122,708,092
------------ ------------
End of period, including undistributed
net investment income of $4,159,725
and $2,954,741 . . . . . . . . . . . . . . . $248,495,354 $207,017,941
============ ============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold . . . . . . . . . 4,850,872 9,332,648
Shares issued to shareholders
upon reinvestment of dividends
and distributions . . . . . . . . . . . . . . 654,187 693,811
Shares of Capital Stock repurchased . . . . . . (1,523,232) (2,947,243)
------------ ------------
Increase in Capital Stock outstanding . . . . . 3,981,827 7,079,216
============ ============
</TABLE>
See notes to financial statements.
11
<PAGE> 13
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Six
Months
Ended
March
31, Year Ended September 30,
----------------------------------------------
1996 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period . . . . . $ 11.05 $ 10.52 $ 11.32 $10.90 $ 10.47 $ 9.47
------- ------- ------- ------- ------- -------
Net investment income . . . . . . . . . . . . . . $ 0.35 $ 0.67 $ 0.68 $ 0.70 $ 0.73 $ 0.84
Net realized and unrealized gain (loss) on
investment securities . . . . . . . . . . . . . 0.02 0.55 (0.51) 0.49 0.66 1.02
------- ------- ------- ------- ------- -------
Total from investment operations . . . . . . . . $ 0.37 $ 1.22 $ 0.17 $ 1.19 $ 1.39 $ 1.86
------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income . . . . . $ (0.32) $ (0.69) $ (0.70) $ (0.70) $ (0.76) $ (0.85)
Distributions from net realized
capital gains . . . . . . . . . . . . . . . . (0.16) -- (0.27) (0.07) (0.20) (0.01)
------- ------- ------- ------- ------- -------
Total distributions . . . . . . . . . . . . . . $ (0.48) $ (0.69) $ (0.97) $ (0.77) $ (0.96) $ (0.86)
------- ------- ------- ------- ------- -------
Net asset value at end of period . . . . . . . . $ 10.94 $ 11.05 $ 10.52 $ 11.32 $ 10.90 $ 10.47
======= ======= ======= ======= ======= =======
Total investment return* . . . . . . . . . . . . 3.42% 12.14% 1.60% 11.42% 14.10% 20.69%
Ratios/supplemental data:
Net assets at end of period (in $000's) . . . . . 248,495 207,018 122,708 115,062 80,489 41,859
Ratio of expenses to average net assets . . . . . 0.65%+ 0.68% 0.74% 0.73% 0.78% 0.87%
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . 6.47%+ 6.50% 6.41% 6.48% 7.17% 8.46%
Portfolio turnover rate . . . . . . . . . . . . . 15%+ 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. The return for the six months ended March 31, 1996 is
not annualized.
+ Annualized
See notes to financial statements.
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
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 Fund's investment
objective is to seek current income and long-term total return. 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 $62,277,522 for the
six months ended March 31, 1996. Realized gains or losses are based on the
specific-certificate identification method. Cost of investment securities
owned at March 31, 1996 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, 1996, 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.
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE 4 -- DISTRIBUTOR
For the six months ended March 31, 1996, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $102,798 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 29, 1996, the Board of Directors declared a dividend from net
investment income of $0.17 per share payable April 15, 1996 to shareholders of
record on March 29, 1996. For financial statement purposes, this dividend and
distribution was recorded on the ex-dividend date, April 1, 1996.
14
