<PAGE> 1
- --------------------------------------------------------------------------------
FPA NEW INCOME INC. Annual Report
LOGO
Distributor:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
September 30, 1996
- --------------------------------------------------------------------------------
<PAGE> 2
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Annual Report covers the fiscal year ended September 30, 1996. Your
Fund's net asset value (NAV) per share closed at $10.97. During the fiscal
year, income dividends totaling $0.66 and $0.16 in capital gains, $0.105 of
which were long-term, were distributed.
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, 1996
--------------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
FPA New Income, Inc.
(NAV) . . . . . . . . . . . . . . 7.00%* 9.16%* 9.95%*
FPA New Income, Inc.
(Net of Sales Charge) . . . . . . 2.19%++ 8.16%++ 9.45%++
Lipper Fixed-Income Fund
Average . . . . . . . . . . . . . 5.41% 7.49% 8.02%
Lehman Brothers Government/
Corporate Bond Index . . . . . . 4.50% 7.65% 8.38%
</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 7.00%* versus 5.41% and 4.50% for the Lipper Fixed-Income Fund
Average and Lehman Brothers Government/Corporate Bond Index, respectively. For
the second half of the fiscal year, the total returns were: FPA New Income,
Inc., 3.47%*; the Lipper Average, 2.73%; and the Lehman Brothers Index, 2.24%.
Finally, on a calendar year-to-date basis, the total returns were: FPA New
Income, Inc., 4.32%*; the Lipper Average, 1.83%; and the Lehman Bothers Index,
- -0.15%.
COMMENTARY
This was a good year in terms of your Fund's relative performance. Your
Fund is again one of the select few high-quality bond funds that achieved
positive investment returns. The relative performance versus the Lipper Index
is understated since that index has a large increment of high-yield bond funds,
which, on average, had the best performance. High-quality bond funds either
barely broke even or had negative returns over the past year.
The superior performance of high-yield bond funds says something about
the current investment environment. High-yield bonds (i.e., junk bonds) have
been prime beneficiaries of the strong stock market. Aversion to risk is quite
low in the financial markets, and the highest risk sectors among equity mutual
funds have attracted the greatest capital inflows from investors this year. A
similar trend is occurring among bond funds. The only area that is attracting
significant capital inflow is the high-yield sector, in marked contrast to the
late 1980s and early 1990s, when investors had virtually no interest in
high-yield bond funds. During this period, they were actually under net
redemption. This year, high-quality bond funds are barely attracting any net
new inflows; your Fund has been the exception. Net new purchases have
increased the Fund's size by 35% and 64%, over the past six and twelve months
ended September 30, respectively.
Your Fund's performance was enhanced by its defensive position entering
1996. This means that the portfolio's average maturity and duration (a measure
of volatility) were shorter than those of the average high-quality bond fund.
The Fund's investment performance would therefore be less negatively impacted
should interest rates rise. Our defensiveness was in marked contrast to the
overwhelming "bullishness" that existed at the beginning of the year. The
consensus expected long-term rates to decline further, but this was not the
case. The 30-year U.S. Treasury bond rose from just under 6% to a high of 7.2%
before returning to 6.6%, as of the date of this shareholder
_______________
* 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
1
<PAGE> 3
letter. As rates increased, we began to extend modestly the portfolio's
duration and average maturity. During the twelve months ended September 30,
1996, the Fund's average modified duration increased from 2.94 to 4.14 years,
while its average maturity shifted from 3.3 years to 4.9 years, respectively.
By lengthening the portfolio's duration when long-term interest rates moved
above the 7% level, we were able to lock in higher yields and better position
the portfolio to benefit from a decline in rates. We outlined this strategy in
our March Shareholder Letter. Unfortunately, a portion of this portfolio
lengthening process was offset by the dramatic growth in your Fund's size. New
cash inflows diluted the impact of recent bond purchases. Finally, exposure to
convertible bonds enhanced your Fund's performance, although several positions
were sold because of price appreciation. At September 30, convertibles account
for 4.6% of the portfolio, the lowest exposure in years. Despite lengthening
the portfolio's duration and average maturity, they still are somewhat shorter
than the Lehman Brothers Index. Thus, if interest rates continue their recent
decline, your Fund's future performance may possibly lag for a period of time.
We continue to believe that longer term bond yields will move within a
6.25% to 7.5% range. Should rates move to either end of this range, we will
adjust the portfolio's duration composition accordingly. Above the 7% level,
we feel that we are just starting to be compensated for some of the
uncertainties in the economy and the financial system. Below 6.25%, we see
little margin for error.
We are currently very frustrated bond managers and see very little reward
for taking credit risk today. Yield spreads are quite narrow in virtually all
sectors of the bond market. Typically, one is rewarded for taking on
increasing levels of credit risk by larger and larger yield spreads. This is
still true, but the differential in spreads has narrowed considerably. Because
of this, the portfolio's high-yield holdings total only 4.5%.
Government/Agency securities are the dominant class, at 52.1% of the portfolio.
Within that segment, mortgage-backed securities represent 89.4%. We will bide
our time while waiting for better tactical investment opportunities. In light
of this difficult environment, we are being forced to place a heavier emphasis
on rate anticipation shifts in the portfolio's average maturity and duration
composition. This is especially true given the relatively tight yield trading
range. Our response has been one of deploying a "barbell" portfolio strategy,
mixing longer term securities, such as mortgage-backed "Z" bonds, with varying
levels of short-term liquidity, which currently total 32.1%. Depending upon the
level of interest rates, we either increase or decrease one end of the
"barbell."
We still maintain a somewhat defensive portfolio structure because of the
uncertainties facing the bond market. The recent bond market rally has been a
function of the growing belief that the economy is slowing. Consensus
expectations have been whipsawed by shifting economic statistics, with the
latest indicating a slowing trend. We still believe that future economic
growth will come in at somewhat higher than consensus expectations. Personal
income growth, consumer confidence, low unemployment rates, and recovering
foreign economies indicate that the U.S. economy is not likely to slow
materially over the next six to twelve months. Should this prove true, we
would anticipate upward pressures on interest rates. In addition, two other
risks concern us: inflation and fiscal policy. The consensus currently
believes that inflation is not a problem. We believe that we are near a point
at which unit labor costs will begin rising at a faster than consensus rate.
Wage pressures continue to build, as they have done for the past three years,
although they have been offset by productivity growth and slower employee
benefits inflation, primarily a slowing in health care cost increases. We
think that much of this improvement has already occurred because of the shift
of employees to health maintenance organizations. Productivity growth has
also been slowing and it would be quite unusual for it to re-accelerate in the
sixth year of an economic expansion. The most experienced and trained workers
are already working, which leaves the least productive or unskilled to be
brought into the work
2
<PAGE> 4
force. The other risk, fiscal policy, is a wild card. The rate of growth in
mandatory entitlement spending is still not being addressed by the Federal
government, and unless this topic is attacked earnestly in the next twelve to
eighteen months, it appears nothing will then occur until after the turn of the
century. Bond investors would likely regard this as negative and thus might
start to build in a fiscal policy risk premium to bond yields. We will be
watching closely to see how this unfolds.
Until we get higher long-term bond yields and/or wider corporate
spreads, we will wait patiently before extending the duration of the capital
that you have entrusted to us, as we want to be sure that there is a sufficient
margin of safety. Thank you for your support and investment in FPA New Income,
Inc.
Respectfully submitted,
/s/ ROBERT L. RODRIGUEZ
Robert L. Rodriguez, C.F.A.
President and Chief Investment Officer
November 5, 1996
________________________________________________________________________________
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, 1986 to September 30, 1996
<TABLE>
<CAPTION>
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 9/30/96
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA New Income, Inc. 9,550 10,072 11,460 12,668 13,188 15,916 18,160 20,234 20,558 23,054 24,668
FPA New Income, Inc. (NAV) 10,000 10,547 12,000 13,265 13,809 16,666 19,016 21,188 21,527 24,140 25,830
Lehman Brothers
Government/Corporate 10,000 9,966 11,240 12,510 13,357 15,472 17,519 19,525 18,717 21,403 22,366
Lipper Fixed-Income
Fund Average 10,000 10,129 11,253 12,214 12,654 14,630 16,594 18,321 18,034 20,165 21,622
</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 $24,668, 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 $25,830. The performance of the Fund and of the Averages
is computed on a total return basis which includes reinvestment of all
distributions.
3
<PAGE> 5
MAJOR PORTFOLIO CHANGES
For the Six Months Ended September 30, 1996
<TABLE>
<CAPTION>
Principal
Amount
-----------
<S> <C>
NET PURCHASES
NON-CONVERTIBLE BONDS
Busse Broadcasting Corporation --11 5/8% 2000 . . . . . . . . . . . . . . . . . . . . . . $ 1,000,000
Federal Home Loan Bank (Indexed Amortization Notes) --6.55% 2003 (1) . . . . . . . . . . $ 6,500,000
Federal Home Loan Mortgage Corporation (REMIC)--7% 2023 (1) . . . . . . . . . . . . . . . $ 5,000,000
Federal Home Loan Mortgage Corporation (REMIC)--7 1/2% 2026 (1) . . . . . . . . . . . . . $ 7,492,789
Federal National Mortgage Corporation (REMIC)--7% 2024 (1) . . . . . . . . . . . . . . . $ 9,351,511
Green Tree Financial Corporation (CMO) --6.9% 2004 . . . . . . . . . . . . . . . . . . . $ 5,051,928
Genesco Inc. --10 3/8% 2003 (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000,000
Oregon Steel Mills, Inc. --11% 2003 (1) . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000,000
Trump Atlantic City Associates --11 1/4% 2006 (1) . . . . . . . . . . . . . . . . . . . . $ 6,000,000
CONVERTIBLE DEBENTURE
Charming Shoppes, Inc.--7 1/2% 2006 (1) . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000,000
NET SALES
NON-CONVERTIBLE BONDS
Federal Home Loan Mortgage Corporation (PAC-IO-REMIC) --6 1/2% 2023 . . . . . . . . . . . $ 1,143,977
Federal Home Loan Mortgage Corporation (CMO) --8% 2010 . . . . . . . . . . . . . . . . . $ 1,196,927
Federal National Mortgage Corporation (PAC-REMIC) --7% 2007 . . . . . . . . . . . . . . . $ 803,233
Federal National Mortgage Corporation (PAC-IO-REMIC) --6 1/2% 2009 . . . . . . . . . . . $ 2,516,356
Government National Mortgage Association (MH) --9% 2010-11 . . . . . . . . . . . . . . . $ 514,529
Government National Mortgage Association (MH) --9 3/4% 2005-6 . . . . . . . . . . . . . . $ 441,295
Government National Mortgage Association (REMIC) --7.99125% 2010 . . . . . . . . . . . . $ 831,102
CONVERTIBLE DEBENTURES
Anacomp International, N.V. --9% 1996 (2) . . . . . . . . . . . . . . . . . . . . . . . . $ 780,000
Quantum Corporation--6 3/8% 2002 (2) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 750,000
Quantum Health Resources, Inc. --4 3/4% 2000 . . . . . . . . . . . . . . . . . . . . . . $ 2,000,000
Storage Technology Corporation --7% 2008 (2) . . . . . . . . . . . . . . . . . . . . . . $ 2,500,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
4
<PAGE> 6
PORTFOLIO OF INVESTMENTS
September 30, 1996
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES Amount Cost Value
- ----------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
U.S. GOVERNMENT & AGENCIES
MORTGAGE-BACKED SECURITIES -- 46.6%
Federal Home Loan Bank (Indexed Amortization Notes)
--6.55% 2003 . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,500,000 $ 6,437,505 $ 6,437,031
Federal Home Loan Mortgage Corporation (CMO)
--7% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,060,000 15,681,625 15,713,706
--8% 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . 668,073 671,414 666,820
--8 1/2% 2024 . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 5,031,250 5,046,875
Federal Home Loan Mortgage Corporation (PAC-REMIC)
--7% 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,700,000 7,658,563 7,482,375
Federal Home Loan Mortgage Corporation (PAC-IO-CMO)
--6 1/2% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . 4,171,384 673,134 659,600
--7% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000,000 1,935,995 2,200,000
Federal Home Loan Mortgage Corporation (PAC-IO-REMIC)
--6 1/2% 2007 . . . . . . . . . . . . . . . . . . . . . . . . . 16,722,123 2,941,808 2,947,274
--6 1/2% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . 11,856,023 1,683,533 1,719,123
Federal Home Loan Mortgage Corporation (REMIC)
--6 1/2% 2018 . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 1,527,188 1,449,375
--7% 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600,000 2,652,000 2,577,250
--7% 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,248,912 6,174,706 6,073,161
--7% 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,221,089 13,096,827 12,752,205
--7% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 4,487,500 4,515,625
--7 1/2% 2026 . . . . . . . . . . . . . . . . . . . . . . . . . 7,492,789 6,639,960 6,734,144
--10.15% 2006 . . . . . . . . . . . . . . . . . . . . . . . . . 102,880 179,606 103,909
Federal National Mortgage Association (PAC-REMIC)
--7% 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,467,245 2,439,489 2,397,854
--7 3/4% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000 3,215,625 3,430,000
--8% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,590,000 6,540,575 6,631,188
--8 1/2% 2024 . . . . . . . . . . . . . . . . . . . . . . . . . 1,687,000 1,708,615 1,693,326
--8 1/2% 2025 . . . . . . . . . . . . . . . . . . . . . . . . . 11,000,000 11,056,250 11,048,125
Federal National Mortgage Association (PAC-IO-REMIC)
--6 1/2% 2009 . . . . . . . . . . . . . . . . . . . . . . . . . 11,976,597 1,757,544 1,800,232
--6 1/2% 2020 . . . . . . . . . . . . . . . . . . . . . . . . . 6,000,000 1,376,741 1,381,875
--7% 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,796,601 325,691 336,301
--7% 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,914,724 1,097,357 1,363,275
Federal National Mortgage Association (REMIC)
--7% 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,734,854 5,684,351 5,518,819
--7% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,406,075 6,213,893 6,065,752
--7% 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,351,511 7,271,755 7,659,472
--7 1/2% 2024 . . . . . . . . . . . . . . . . . . . . . . . . . 7,972,287 7,213,911 7,199,972
--8% 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 2,010,000 2,011,250
</TABLE>
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES Amount Cost Value
- ----------------------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
Government National Mortgage Association
--7 1/2% 2023 . . . . . . . . . . . . . . . . . . . . . . . . . 844,652 807,698 833,830
Government National Mortgage Association (GPM)
--14% 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . 77,054 77,569 85,048
Government National Mortgage Association (MH)
--7 1/2% 2002 . . . . . . . . . . . . . . . . . . . . . . . . . 293,771 307,725 295,240
--8 1/4% 2006-7 . . . . . . . . . . . . . . . . . . . . . . . . 818,924 859,559 840,933
--8 3/4% 2006 . . . . . . . . . . . . . . . . . . . . . . . . . 1,473,411 1,523,861 1,528,664
--8 3/4% 2011 . . . . . . . . . . . . . . . . . . . . . . . . . 1,693,162 1,750,306 1,755,597
--9% 2010-11 . . . . . . . . . . . . . . . . . . . . . . . . . 3,480,634 3,654,622 3,637,262
--9 1/4% 2010-11 . . . . . . . . . . . . . . . . . . . . . . . 1,504,234 1,584,333 1,579,446
--9 3/4% 2005-6 . . . . . . . . . . . . . . . . . . . . . . . . 3,819,294 4,074,029 4,048,452
--9 3/4% 2012-13 . . . . . . . . . . . . . . . . . . . . . . . 1,512,584 1,629,336 1,603,339
--10 1/4% 2003-5 . . . . . . . . . . . . . . . . . . . . . . . 634,114 645,446 676,124
--10 3/4% 1999-2001 . . . . . . . . . . . . . . . . . . . . . . 743,718 782,921 799,497
Government National Mortgage Association (PL)
--10 1/4% 2017 . . . . . . . . . . . . . . . . . . . . . . . . 945,163 1,025,502 1,001,873
Government National Mortgage Association (REMIC)
--7.99125% 2010 . . . . . . . . . . . . . . . . . . . . . . . . 3,442,118 3,442,118 3,452,875
------------ ------------
$157,549,436 $157,754,094
U.S. TREASURY -- 4.3%
U.S. Treasury Notes--8 1/4% 2005 . . . . . . . . . . . . . . . . $ 1,800,000 $ 1,706,250 $ 1,886,625
U.S. Treasury Notes Strip--0% 2009 . . . . . . . . . . . . . . . 31,000,000 11,195,403 12,730,150
------------ ------------
$ 12,901,653 $ 14,616,775
------------ ------------
U.S. AGENCIES -- 1.2%
Tennessee Valley Authority --8 3/8% 1999 . . . . . . . . . . . . $ 3,400,000 $ 3,222,781 $ 3,551,937
U.S. Small Business Administration --9.8% 1998 . . . . . . . . . 287,915 289,648 295,293
------------ ------------
$ 3,512,429 $ 3,847,230
------------ ------------
TOTAL U.S. GOVERNMENT & AGENCIES -- 52.1% $173,963,518 $176,218,099
------------ ------------
OTHER U.S. GOVERNMENT-BACKED -- 1.5%
Republic of Turkey Trust Certificates--0% 1998 . . . . . . . . . $ 3,000,000 $ 2,473,078 $ 2,631,600
State of Israel Trust Certificates--0% 1998 . . . . . . . . . . . 2,785,000 2,320,502 2,443,002
------------ ------------
$ 4,793,580 $ 5,074,602
------------ ------------
</TABLE>
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES Amount Cost Value
- ----------------------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
MORTGAGE BONDS
ASSET BACKED -- 3.1%
Green Tree Financial Corporation (CMO)
--6.9% 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,306,481 $ 6,243,899 $ 6,209,913
Merrill Lynch Mortgage Investors, Inc. Class A
(backed by Manufactured Housing First Mortgages)
--8.3% 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . 4,100,000 4,105,516 4,182,000
--9.2% 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . 183,069 182,210 186,044
--9.7% 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . 51,227 51,989 51,707
------------ ------------
$ 10,583,614 $ 10,629,664
------------ ------------
MORTGAGE BACKED -- 0.9%
Drexel Burnham Lambert (CMO) Trust Series B Class B-3
--8.9% 2016 (backed by Federal National
Mortgage Association Bonds) . . . . . . . . . . . . . . . . . . $ 195,228 $ 191,323 $ 195,228
Home Mac Mortgage Securities Corporation (CMO)
--9.15% 2019 (backed by U.S. Government
Agency Bonds) . . . . . . . . . . . . . . . . . . . . . . . . . 490,992 412,433 500,812
Kidder Peabody Mortgage Assets (CMO) Series 5 Class G
--8.45% 2018 (backed by U.S. Government
Agency Bonds) . . . . . . . . . . . . . . . . . . . . . . . . . 2,162,794 2,151,980 2,162,794
------------ ------------
$ 2,755,736 $ 2,858,834
------------ ------------
TOTAL MORTGAGE BONDS -- 4.0% . . . . . . . . . . . . . . . . . . $ 13,339,350 $ 13,488,498
------------ ------------
CORPORATE BONDS & DEBENTURES
Aztar Corporation--11% 2002 . . . . . . . . . . . . . . . . . . . $ 500,000 $ 500,000 $ 510,000
Busse Broadcasting Corporation --11 5/8% 2000 . . . . . . . . . . 3,250,000 3,176,600 3,282,500
Genesco Inc. --10 3/8% 2003 . . . . . . . . . . . . . . . . . . . 1,000,000 980,000 1,002,500
Oregon Steel Mills, Inc. --11% 2003 . . . . . . . . . . . . . . . 1,000,000 1,000,000 1,056,250
Plantronics, Inc. --10% 2001 . . . . . . . . . . . . . . . . . . 3,248,000 3,299,575 3,353,560
RJR Nabisco Incorporated --8 5/8% 2002 . . . . . . . . . . . . . 500,000 467,750 501,875
Trump Atlantic City Associates--11 1/4% 2006 . . . . . . . . . . 6,000,000 5,945,625 5,880,000
------------ ------------
TOTAL CORPORATE BONDS
& DEBENTURES -- 4.6% . . . . . . . . . . . . . . . . . . . . . . $ 15,369,550 $ 15,586,685
------------ ------------
TOTAL NON-CONVERTIBLE
BONDS & DEBENTURES -- 62.2% . . . . . . . . . . . . . . . . . . $207,465,998 $210,367,884
------------ ------------
CONVERTIBLE SECURITIES
CONVERTIBLE BONDS & DEBENTURES -- 3.8%
Alexander Haagen Properties Inc. (Class "A")--7 1/2% 2001 . . . . $ 1,065,000 $ 923,888 $ 963,825
Alexander Haagen Properties Inc. (Class "B")--7 1/2% 2001 . . . . 1,400,000 1,221,500 1,274,000
</TABLE>
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Shares or
Principal
CONVERTIBLE SECURITIES -- CONTINUED Amount Cost Value
- ----------------------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
Charming Shoppes, Inc.--7 1/2% 2006 . . . . . . . . . . . . . . . $ 3,000,000 3,000,000 3,150,000
Diagnostic/Retrieval Systems, Inc.--8 1/2% 1998 . . . . . . . . . 852,000 615,979 856,260
Diagnostic/Retrieval Systems, Inc.--9% 2003 . . . . . . . . . . . 2,000,000 2,000,000 2,620,000
Fabri-Centers of America, Inc.--6 1/4% 2002 . . . . . . . . . . . 3,631,000 2,762,010 3,068,195
Quantum Health Resources, Inc.--4 3/4% 2000 . . . . . . . . . . . 1,000,000 776,250 912,500
------------ ------------
$ 11,299,627 $ 12,844,780
------------ ------------
CONVERTIBLE PREFERRED STOCKS -- 0.8%
Integon Corporation. . . . . . . . . . . . . . . . . . . . . . . 30,000 $ 1,500,000 $ 1,680,000
Network Imaging Corporation . . . . . . . . . . . . . . . . . . . 75,000 1,400,000 1,087,500
------------ ------------
$ 2,900,000 $ 2,767,500
------------ ------------
TOTAL CONVERTIBLE SECURITIES -- 4.6% . . . . . . . . . . . . . . $ 14,199,627 $ 15,612,280
------------ ------------
LIMITED PARTNERSHIP -- 0.0%
Jewel Recovery L.P. . . . . . . . . . . . . . . . . . . . . . . . 18,594 $ 9,297 $ 9,297
------------ ------------
SHORT-TERM INVESTMENTS -- 3.7%
U.S. Treasury Notes--7 1/4% 11/30/96 . . . . . . . . . . . . . . $ 3,000,000 $ 2,990,156 $ 3,008,438
U.S. Treasury Notes--6 7/8% 4/30/97 . . . . . . . . . . . . . . . 9,500,000 9,650,234 9,568,281
------------ ------------
$ 12,640,390 $ 12,576,719
------------ ------------
TOTAL INVESTMENT SECURITIES -- 70.5% . . . . . . . . . . . . . . $234,315,312 $238,566,180
============ ------------
OTHER SHORT-TERM INVESTMENTS -- 28.4%
Short-term Corporate Notes:
Exxon Asset Management Company--5 1/4% 10/1/96 . . . . . . . . $16,000,000 $ 16,000,000
Ford Motor Credit Company--5.16% 10/3/96 . . . . . . . . . . . 11,600,000 11,596,674
General Electric Capital Services, Inc.--5.34% 10/3/96 . . . . 2,300,000 2,299,318
American General Finance Corporation --5.31% 10/7/96 . . . . . 14,000,000 13,987,610
General Motors Acceptance Corporation--5.35% 10/7/96 . . . . . 16,600,000 16,585,198
Hertz Corporation--5.36% 10/8/96 . . . . . . . . . . . . . . . 16,600,000 16,582,699
American Express Credit Corporation--5.28% 10/10/96 . . . . . . 8,650,000 8,638,582
General Electric Capital Services, Inc.--5.32% 10/10/96 . . . . 8,650,000 8,638,496
State Street Bank Repurchase Agreement--4 3/4% 10/1/96
(Collateralized by U.S. Treasury Notes--5 7/8% 1997,
market value $1,601,922) . . . . . . . . . . . . . . . . . . . 1,566,000 1,566,207
------------
$ 95,894,784
------------
TOTAL INVESTMENTS -- 98.9% . . . . . . . . . . . . . . . . . . . $334,460,964
Other assets less liabilities-- 1.1% . . . . . . . . . . . . . . 3,835,963
------------
TOTAL NET ASSETS -- 100% . . . . . . . . . . . . . . . . . . . . $338,296,927
============
</TABLE>
See notes to financial statements.
8
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $234,315,312) . . . . . . . . . . . . . . . . . . . $238,566,180
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less) . . . . . . . . . . . . . . . . . . . 95,894,784 $334,460,964
------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316
Receivable for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,886,217
Capital Stock sold . . . . . . . . . . . . . . . . . . . . . . . . . . 1,414,419 4,300,636
------------ ------------
$338,761,916
LIABILITIES
Payable for:
Capital Stock repurchased . . . . . . . . . . . . . . . . . . . . . . . $ 219,811
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,228
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . 108,950 464,989
------------ ------------
NET ASSETS -- equivalent to $10.97 per share on 30,829,948
shares of Capital Stock outstanding . . . . . . . . . . . . . . . . . . . $338,296,927
============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 30,829,948 shares . . . . . . . . . . . $ 308,299
Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . 326,740,364
Undistributed net realized gains on investments . . . . . . . . . . . . . 1,653,523
Undistributed net investment income . . . . . . . . . . . . . . . . . . . 5,343,873
Unrealized appreciation of investments . . . . . . . . . . . . . . . . . 4,250,868
------------
Net assets at September 30, 1996 . . . . . . . . . . . . . . . . . . . . $338,296,927
============
</TABLE>
See notes to financial statements.
9
<PAGE> 11
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,240,477
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319,298
-----------
$18,559,775
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,283,864
Transfer agent fees and expenses . . . . . . . . . . . . . . . . . . . 111,491
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,924
Custodian fees and expenses . . . . . . . . . . . . . . . . . . . . . . 45,234
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,040
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,615
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . 21,556
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,736
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . 13,113
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,717
Taxes, other than federal income tax . . . . . . . . . . . . . . . . . 800
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,861 1,651,951
----------- -----------
Net investment income . . . . . . . . . . . . . . . . . . . . . $16,907,824
-----------
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) . . . . . $52,256,522
Cost of investment securities sold . . . . . . . . . . . . . . . . . . 50,306,075
-----------
Net realized gain on investments . . . . . . . . . . . . . . . . . $ 1,950,447
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year . . . . . . . . . . . . . $ 5,407,459
Unrealized appreciation at end of year . . . . . . . . . . . . . . . . 4,250,868
-----------
Decrease in unrealized appreciation of investments . . . . . . . . (1,156,591)
-----------
Net realized and unrealized gain on investments . . . . . . . . $ 793,856
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,701,680
===========
</TABLE>
See notes to financial statements.
10
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended September 30,
------------------------------------------------------------
1996 1995
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . $ 16,907,824 $ 10,111,535
Net realized gain on investments . . . . . 1,950,447 3,080,818
Increase (decrease) in unrealized
appreciation of investments . . . . . . . (1,156,591) 4,526,158
------------ ------------
Increase in net assets resulting
from operations . . . . . . . . . . . . . . $ 17,701,680 $ 17,718,511
Distributions to shareholders:
From net investment income . . . . . . . . $(14,518,692) $ (9,257,545)
From net realized capital gains . . . . . . (3,355,550) (17,874,242) -- (9,257,545)
------------ ------------
Capital Stock transactions:
Proceeds from Capital Stock sold . . . . . $157,921,206 $100,118,255
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions . . . . . 12,754,692 7,265,944
Cost of Capital Stock repurchased . . . . . (39,224,350) 131,451,548 (31,535,316) 75,848,883
------------ ------------ ------------ ------------
Total increase in net assets . . . . . . . . $131,278,986 $ 84,309,849
NET ASSETS
Beginning of year, including
undistributed net investment income
of $2,954,741 and $2,100,751 . . . . . . . 207,017,941 122,708,092
------------ ------------
End of year, including
undistributed net investment income
of $5,343,873 and $2,954,741 . . . . . . . $338,296,927 $207,017,941
============ ============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold . . . . . . . . 14,518,767 9,332,648
Shares issued to shareholders
upon reinvestment of dividends
and distributions . . . . . . . . . . . . . 1,178,442 693,811
Shares of Capital Stock repurchased . . . . . (3,608,711) (2,947,243)
------------ ------------
Increase in Capital Stock
outstanding . . . . . . . . . . . . . . . . 12,088,498 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 YEAR
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year . . . . . . $ 11.05 $ 10.52 $ 11.32 $ 10.90 $ 10.47
------- ------- ------- ------- --------
Net investment income . . . . . . . . . . . . . . $ 0.68 $ 0.67 $ 0.68 $ 0.70 $ 0.73
Net realized and unrealized gain (loss)
on investment securities . . . . . . . . . . . 0.06 0.55 (0.51) 0.49 0.66
------- ------- ------- ------- --------
Total from investment operations . . . . . . . . $ 0.74 $ 1.22 $ 0.17 $ 1.19 $ 1.39
------- ------- ------- ------- --------
Less distributions:
Dividends from net investment income . . . . . $ (0.66) $ (0.69) $ (0.70) $ (0.70) $ (0.76)
Distributions from net realized
capital gains . . . . . . . . . . . . . . . . (0.16) -- (0.27) (0.07) (0.20)
------- ------- ------- ------- --------
Total distributions . . . . . . . . . . . . . . . $ (0.82) $ (0.69) $ (0.97) $ (0.77) $ (0.96)
------- ------- ------- ------- --------
Net asset value at end of year . . . . . . . . . $ 10.97 $ 11.05 $ 10.52 $ 11.32 $ 10.90
======= ======= ======= ======= ========
Total investment return* . . . . . . . . . . . . 7.00% 12.14% 1.60% 11.42% 14.10%
Ratios/supplemental data:
Net assets at end of year (in $000's) . . . . . . 338,297 207,018 122,708 115,062 80,489
Ratio of expenses to average net assets . . . . . 0.63% 0.68% 0.74% 0.73% 0.78%
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . 6.44% 6.50% 6.41% 6.48% 7.17%
Portfolio turnover rate . . . . . . . . . . . . . 16% 31% 39% 41% 22%
</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 Long-Term
Per Share --------------------------- Capital Gain
Payable Date Amount Qualifying Non-Qualifying Distribution
- --------------------------------- ------ ---------- -------------- ------------
<S> <C> <C> <C> <C>
October 15, 1995 . . . . . . . . $0.16 3.7% 96.3% -0-
January 8, 1996 . . . . . . . . . $0.32+ 1.4% 65.8% 32.8%
April 15, 1996 . . . . . . . . . $0.17 1.6% 98.4% -0-
July 15, 1996 . . . . . . . . . . $0.17 1.6% 98.4% -0-
</TABLE>
+ This amount includes a $0.16 capital gain distribution of which $0.055 was
short-term capital gains and therefore taxable as ordinary income. This is
in addition to the $0.16 income dividend which is also taxable as ordinary
income. Even though payment was made in 1996, this distribution was taxable
to shareholders in 1995 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 1997 setting forth
specific amounts to be included in their 1996 tax returns.
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
September 30, 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 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 $106,698,464 for the
year ended September 30, 1996. Realized gains or losses are based on the
specific-certificate identification method. Cost of investment securities
owned at September 30, 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 year ended September 30, 1996, the Fund paid aggregate fees of
$21,000 to all Directors who are not affiliated persons of the Adviser. Legal
fees were for services rendered by O'Melveny & Myers LLP, counsel for the Fund.
A Director of the Fund is of counsel to, and a retired partner of, that firm.
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
NOTE 4 -- DISTRIBUTOR
For the year ended September 30, 1996, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $183,468 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 September 30, 1996, the Board of Directors declared a dividend from net
investment income of $0.17 per share payable October 15, 1996 to shareholders
of record on September 30, 1996. For financial statement purposes, this
dividend and distribution was recorded on the ex-dividend date, October 1,
1996.
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF FPA NEW INCOME, INC.
We have audited the accompanying statement of assets and liabilities of FPA
New Income, Inc., including the portfolio of investments, as of September 30,
1996, the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, including confirmation of securities owned as of
September 30, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
FPA New Income, Inc. at September 30, 1996, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
November 1, 1996
14
<PAGE> 16
DIRECTORS DISTRIBUTOR
Donald E. Cantlay FPA Fund Distributors, Inc.
DeWayne W. Moore 11400 West Olympic Boulevard, Suite 1200
Lawrence J. Sheehan Los Angeles, California 90064
Kenneth L. Trefftzs
COUNSEL
O'Melveny & Myers LLP
Los Angeles, California
OFFICERS
Robert L. Rodriguez, President and INDEPENDENT AUDITORS
Chief Investment Officer
Julio J. de Puzo, Jr., Executive
Vice President Ernst & Young LLP
Christopher Linden, Senior Vice Los Angeles, California
President
Eric S. Ende, Vice President
William D. Jacobs, Treasurer
Sherry Sasaki, Secretary CUSTODIAN & TRANSFER AGENT
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 (800) 638-3060
Suite 1200 (617) 328-5000
Los Angeles, California 90064
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.
