<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, 1997
<PAGE> 2
OFFICERS AND DIRECTORS
DIRECTORS
Donald E. Cantlay
DeWayne W. Moore
Lawrence J. Sheehan
Kenneth L. Trefftzs
OFFICERS
Robert L. Rodriguez, President and
Chief Investment Officer
Julio J. de Puzo, Jr., Executive Vice President
Eric S. Ende, Vice President
Janet M. Pitman, Vice President
J. Richard Atwood, Treasurer
Sherry Sasaki, Secretary
Christopher H. Thomas, Assistant Treasurer
INVESTMENT ADVISER
First Pacific Advisors, Inc.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
DISTRIBUTOR
FPA Fund Distributors, Inc.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
COUNSEL
O'Melveny & Myers LLP
Los Angeles, California
CUSTODIAN & TRANSFER AGENT
State Street Bank and Trust Company
Boston, Massachusetts
SHAREHOLDER SERVICE AGENT
Boston Financial Data Services, Inc.
P.O. Box 8500
Boston, Massachusetts 02266-8500
(800) 638-3060
(617) 328-5000
This report has been prepared for the information of shareholders of FPA New
Income, Inc., and is not authorized for distribution to prospective investors
unless preceded or accompanied by a prospectus. The financial information
included in this report has been taken from the records of the Fund without
examination by independent auditors.
1
<PAGE> 3
LETTER TO SHAREHOLDERS
DEAR FELLOW SHAREHOLDERS:
This Semi-Annual Report covers the six-month period ended March 31, 1997.
Your Fund's net asset value (NAV) closed at $10.93. Income dividends of $0.17
were paid on October 15, 1996, and January 6, 1997, to holders of record on
September 30 and December 31, 1996, respectively. The January payment also
included a $0.05 short-term capital gains distribution.
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, 1997
----------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
FPA New Income, Inc.
(NAV)..................... 6.83%* 8.63%* 9.66%*
FPA New Income, Inc.
(Net of Sales Charge)..... 2.02%++ 7.63%++ 9.16%++
Lipper "A" Rated Corporate
Debt Fund Average......... 4.23% 6.96% 7.78%
Lehman Brothers Government/
Corporate Bond Index...... 4.46% 7.32% 8.13%
</TABLE>
The Fund's total rate of return for the six months was 3.25%* versus 2.22%
and 2.17% for the Lipper Average and the Lehman Index, respectively. For the
calendar year ended December 31, 1996, total returns were: FPA New Income, Inc.,
7.12%*; Lipper Average, 2.49%; and the Lehman Index, 2.90%. We would like to
point out that we are using a new Lipper Average since the previous one was
discontinued. We selected the "A" Rated Corporate Debt Fund Average since it was
the closest in structure to that of your Fund. The long-term returns were also
very close to those of the previous Average.
COMMENTARY
Calendar 1996 proved to be a difficult year for the bond market. Yields
rose approximately 70 to 80 basis points for the two- to thirty-year segments of
the yield curve. Since September 30, yields have moved up 30 basis points in a
parallel fashion for all maturity segments. Expectations of weaker, then
stronger, economic growth buffeted the bond market. Your Fund managed to migrate
through this volatile period reasonably well. As longer term yields moved past
the 7% level, we began to extend maturities and durations. Since September, the
average portfolio duration has increased from 4.14 years to 4.87 years.
The best performing areas of the bond market, other than short-term
securities, have been mortgage-backed securities and high-yield bonds. We are at
a relatively low exposure to high-yield bonds. We do not like their valuations,
since their yield spreads over similar maturity Treasury bonds are quite narrow.
We feel that we are not being compensated sufficiently for the higher credit
risk. Despite such limitations, we did add selectively in this area. We have
increased the portfolio's exposure to mortgage securities because we believe
they are one of the few areas still providing some measure of value.
Approximately 89% of the government/agency securities or 51% of the portfolio
are agency mortgage-backed securities. An additional 4% is invested in AAA
mortgage-backed securities. We have continued to add to our mortgage "Z" bond
position. These are very long duration securities that provide very attractive
yields in the 8.25% to 8.50% range. They represent 77% of the total derivatives
exposure of 11%.
During the first quarter of calendar 1997, your Fund continued its
historical trend of generating positive total returns during periods when the
bond market experiences negative total returns. Your Fund's total return was a
positive 0.56%* while both the Lehman Index and Lipper Average were a negative
0.86%. Your Fund was able to achieve this positive relative performance because
it was maintaining a somewhat shorter portfolio duration as well as keeping a
"barbell" maturity structure. The "barbell" strategy entails offsetting longer
maturity bonds with higher levels of short-term liquidity. At March 31,
short-term liquidity, or securities with maturities of less than one year,
totaled almost 25% of total assets. We will deploy this liquidity when interest
rates rise more, credit quality spreads expand or stock prices decline
sufficiently to create some attractive convertible and straight bond investment
opportunities.
Long-term Treasury yields are now above the 7% level, which is towards the
higher end of a 6.25% to
- ---------------
* 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
7.50% range that we have been writing about for the last three years. This
recent rise has been fueled by investors' fears of accelerating economic growth.
In our last shareholder letter, we expressed our opinion that economic growth
was likely to come in at higher-than-consensus expectations. Since then,
consumer confidence has risen to its highest level in 25 years and we are at
record levels of employment as a percentage of the adult population. The initial
estimate for first quarter GDP growth was recently reported at 5.6%, the highest
in nine years. This strength now increases the probability that the Fed will
raise short-term rates further. It would not surprise us to see another 50 basis
point rise in the Federal Funds rate, in addition to the initial rise of 25
basis points on March 25. The debate continues as to whether we can have strong
economic growth without any real acceleration in inflation. We still believe the
pressures are building in terms of wage inflation and rising unit labor costs.
The most recent data on wage inflation shows that it grew at a 4% rate over the
past year. Our last shareholder letter argued that benefits inflation was on the
verge of accelerating due to rising medical costs. In a January Foster Higgins
survey of employers, it was reported that employers expect their average
employee health costs to rise about 4% in 1997, after increasing just 2.5% in
1996. More troubling is that they expect costs to accelerate at a 10% rate in
1998.
Fears of accelerating economic growth and rising inflation are likely to
keep longer term interest rates above the 7% level for a period of time. The
magnitude of increase and the length of time that yields stay above 7% will be
heavily influenced by the dimension of recovery of our foreign trading partners'
economies and the continued growth of our own. Both of these will be especially
important in the second half of 1997. We view this positively since we see fear
as one of the key elements in creating attractive buying opportunities.
Our attention is still focused on the budgetary talks. Today, a tentative
agreement has been reached on achieving a balanced budget by the year 2002.
While no real details have been released yet, the details are the key.
Previously proclaimed balanced budget agreements have been based on assumptions
that are too optimistic. The President's most recent budget proposal would
achieve its balance in 2002, with 99% of the cuts occurring in the final two
years, after he has left office. Our initial analysis indicates that economic
growth has to continue unabated throughout this entire period, that is, no
recession can take place. Should this occur, the current economic expansion will
have lasted more than 50% longer than the longest on record. We also want to see
how this budget deals with the growth in entitlement spending. This has been an
extremely contentious issue so that we are a little suspicious that major
changes could be achieved so easily. Finally, we want to examine how other areas
of the budget are dealt with, in particular, defense spending. We have witnessed
negative real growth in this area since 1986. If this budget assumes the same,
as in previous proposals, then by 2002 we will have witnessed sixteen years of
virtually no real (adjusted for inflation) growth. The last time this occurred
was after WW I. We hope that this is real budgetary reform, but we still
maintain a high level of skepticism until we see the finer elements of this
package. A fixed income investor must maintain a more cautious attitude towards
investing since, with bonds unlike stocks, you cannot grow your way out of a
problem.
We are patiently waiting before we deploy more liquidity into longer term
securities. A higher level of yields will be required before this is done. We
thank you for your continued 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
May 2, 1997
3
<PAGE> 5
MAJOR PORTFOLIO CHANGES
Six Months Ended March 31, 1997
<TABLE>
<CAPTION>
Principal
Amount
-----------
<S> <C>
NET PURCHASES
NON-CONVERTIBLE BONDS & DEBENTURES
Federal Home Loan Mortgage Corporation (PAC-REMIC) --7% 2008................................ $ 1,690,000
Federal Home Loan Mortgage Corporation (PAC-REMIC) --7 1/2% 2021 (1)........................ 4,500,000
Federal Home Loan Mortgage Corporation (PAC-REMIC) --7 1/2% 2022 (1)........................ 1,600,000
Federal Home Loan Mortgage Corporation (PAC-REMIC) --9 1/2% 2019 (1)........................ 8,386,815
Federal Home Loan Mortgage Corporation (REMIC) --7% 2008.................................... 3,574,513
Federal Home Loan Mortgage Corporation (REMIC) --7 1/2% 2007 (1)............................ 2,500,000
Federal Home Loan Mortgage Corporation (REMIC) --7 1/2% 2018 (1)............................ 5,424,322
Federal National Mortgage Association (15 YR) --7% 2012 (1)................................. 9,914,094
Federal National Mortgage Association (REMIC) --7% 2008..................................... 4,015,933
Federal National Mortgage Association (REMIC) --7 1/2% 2010 (1)............................. 8,797,529
Federal National Mortgage Association (REMIC) --7 1/2% 2024 ("Z")........................... 6,681,776
Federal National Mortgage Association (REMIC) --7 1/2% 2026 ("Z") (1)....................... 9,739,736
Federal National Mortgage Association (REMIC) --8% 2022 (1)................................. 5,847,012
Government National Mortgage Association II --8% 2027 (1)................................... 9,879,826
Home Mac Mortgage Securities Corporation (CMO) --9.15% 2019................................. 3,106,155
Michaels Stores, Inc. --10 7/8% 2006 (1).................................................... 5,000,000
Residential Funding Mortgage Securities (REMIC) --7% 2023 (1)............................... 4,108,928
Residential Funding Mortgage Securities (REMIC) --7 3/4% 2026 (1)........................... 5,000,000
Trump Atlantic City Associates --11 1/4% 2006............................................... 1,300,000
U.S. Treasury Notes --5 3/4% 1998 (1)....................................................... 8,000,000
CONVERTIBLE BONDS & DEBENTURES
Alexander Haagen Properties, Inc. (Class "A") --7 1/2% 2001................................. $ 2,535,000
Alexander Haagen Properties, Inc. (Class "B") --7 1/2% 2001................................. 525,000
Charming Shoppes, Inc. --7 1/2% 2006........................................................ 3,500,000
Michaels Stores, Inc. --6 3/4% 2003 (1)..................................................... 2,000,000
NET SALES
NON-CONVERTIBLE BONDS & DEBENTURES
Aztar Corporation --11% 2002 (2)............................................................ $ 500,000
Federal Home Loan Mortgage Corporation (CMO) --7% 2020 (2).................................. 16,060,000
Federal Home Loan Mortgage Corporation (CMO) --8% 2010...................................... 659,369
Federal National Mortgage Association (PAC-REMIC) --8 1/2% 2025............................. 2,690,888
Green Tree Financial Corporation (CMO) --6.9% 2004.......................................... 564,351
</TABLE>
- --------------
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
4
<PAGE> 6
PORTFOLIO OF INVESTMENTS
March 31, 1997
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES Amount Cost Value
- --------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
U.S. GOVERNMENT & AGENCIES
MORTGAGE-BACKED SECURITIES -- 51.4%
Federal Home Loan Bank (Indexed Notes) --6.55% 2003................... $ 6,500,000 $ 6,437,505 $ 6,441,094
Federal Home Loan Mortgage Corporation (CMO)
--8% 2010 .......................................................... 8,704 8,748 8,693
--8 1/2% 2024 ...................................................... 5,000,000 5,031,250 5,018,750
Federal Home Loan Mortgage Corporation (PAC-REMIC)
--7% 2008 .......................................................... 9,390,000 9,317,931 9,156,553
--7 1/2% 2021 ...................................................... 4,500,000 4,556,953 4,457,813
--7 1/2% 2022 ...................................................... 1,600,000 1,580,000 1,516,000
--9 1/2% 2019 ...................................................... 8,386,815 8,531,619 8,525,722
Federal Home Loan Mortgage Corporation (PAC-IO-CMO)
--6 1/2% 2020 ...................................................... 4,171,384 565,060 552,708
--7% 2020 .......................................................... 8,000,000 1,734,741 2,017,500
Federal Home Loan Mortgage Corporation (PAC-IO-REMIC)
--6 1/2% 2007 ...................................................... 16,722,123 2,521,524 2,544,898
--6 1/2% 2023 ...................................................... 10,326,311 1,399,583 1,448,910
Federal Home Loan Mortgage Corporation (REMIC)
--6 1/2% 2018 ...................................................... 1,500,000 1,527,187 1,440,000
--7% 2003 .......................................................... 2,600,000 2,652,000 2,578,875
--7% 2007 .......................................................... 6,248,912 6,174,706 6,082,925
--7% 2008 .......................................................... 16,795,602 16,653,729 16,251,041
--7% 2023 .......................................................... 5,000,000 4,487,500 4,493,750
--7 1/2% 2007 ...................................................... 2,500,000 2,507,812 2,504,687
--7 1/2% 2018 ...................................................... 5,424,322 5,416,694 5,385,335
--7 1/2% 2026 ("Z") ................................................ 7,778,196 6,925,367 6,951,763
--10.15% 2006 ...................................................... 80,471 169,066 80,597
Federal National Mortgage Association (15 YR) --7% 2012 .............. 9,914,094 9,974,508 9,743,695
Federal National Mortgage Association (REMIC)
--7% 2008 .......................................................... 9,750,787 9,640,045 9,408,259
--7% 2023 .......................................................... 6,406,075 6,213,893 6,005,695
--7% 2024 ("Z") .................................................... 9,683,624 7,603,869 7,731,769
--7 1/2% 2010 ...................................................... 8,797,529 8,770,037 8,819,523
--7 1/2% 2024 ("Z") ................................................ 14,654,063 13,257,876 13,279,175
--7 1/2% 2026 ("Z") ................................................ 9,739,736 8,597,465 8,443,134
--8% 2011 .......................................................... 2,000,000 2,010,000 2,002,500
--8% 2022 .......................................................... 5,847,012 5,843,357 5,730,072
Federal National Mortgage Association (PAC-IO-REMIC)
--6 1/2% 2009 ...................................................... 10,179,699 1,469,073 1,520,593
--6 1/2% 2020 ...................................................... 6,000,000 1,233,586 1,224,375
--7% 2004 .......................................................... 1,635,131 278,068 288,192
--7% 2017 .......................................................... 9,914,724 793,640 1,075,128
</TABLE>
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES--CONTINUED Amount Cost Value
- ------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Federal National Mortgage Association (PAC-REMIC)
--7% 2007 .......................................... $ 2,194,785 $ 2,170,094 $ 2,136,486
--7 3/4% 2023 ...................................... 3,500,000 3,215,625 3,506,563
--8% 2023 .......................................... 6,590,000 6,540,575 6,602,356
--8 1/2% 2024 ...................................... 1,687,000 1,708,615 1,695,435
--8 1/2% 2025 ...................................... 8,309,112 8,351,602 8,314,305
Government National Mortgage Association --7 1/2% 2023 810,656 775,190 794,696
Government National Mortgage Association II --8% 2027 9,879,826 10,024,936 9,886,001
Government National Mortgage Association (MH)
--7 1/2% 2002 ...................................... 263,871 276,404 264,696
--8 1/4% 2006-7 .................................... 671,735 705,120 689,368
--8 3/4% 2006 ...................................... 1,333,442 1,379,082 1,385,946
--8 3/4% 2011 ...................................... 1,620,095 1,674,773 1,679,836
--9% 2010-11 ....................................... 3,182,927 3,342,772 3,318,201
--9 1/4% 2010-11 ................................... 1,351,978 1,424,042 1,416,197
--9 3/4% 2005-6 .................................... 3,428,613 3,657,215 3,625,758
--9 3/4% 2012-13 ................................... 1,451,732 1,563,774 1,535,207
--10 1/4% 2003-5 ................................... 585,851 596,548 629,790
--10 3/4% 1999-2001 ................................ 593,837 624,608 643,200
Government National Mortgage Association (PL)
--10 1/4% 2017 ..................................... 938,357 1,018,118 997,004
Government National Mortgage Association (REMIC)
--7.99125% 2010 .................................... 3,124,950 3,124,950 3,132,762
------------ ------------
$216,058,435 $214,983,531
------------ ------------
OTHER U.S. GOVERNMENT & AGENCIES -- 6.3%
Tennessee Valley Authority --8 3/8% 1999 ............. $ 3,400,000 $ 3,222,781 $ 3,515,812
U.S. Small Business Administration --9.8% 1998 ....... 266,642 268,216 269,725
U.S. Treasury Notes --5 3/4% 1998 .................... 8,000,000 7,956,875 7,920,000
U.S. Treasury Notes --8 1/4% 2005 .................... 1,800,000 1,706,250 1,869,750
U.S. Treasury Notes Strip --0% 2009 .................. 31,000,000 11,646,971 12,917,700
------------ ------------
$ 24,801,093 $ 26,492,987
------------ ------------
TOTAL U.S. GOVERNMENT & AGENCIES -- 57.7% ............ $240,859,528 $241,476,518
------------ ------------
U.S. GOVERNMENT & AGENCY RELATED -- 2.6%
Home Mac Mortgage Securities Corporation (CMO)
--9.15% 2019 (backed by U.S. Government
Agency bonds) ...................................... $ 3,597,147 $ 3,568,996 $ 3,628,622
Kidder Peabody Mortgage Assets (CMO)--8.45% 2018
(backed by U.S. Government Agency Bonds) ........... 2,162,794 2,151,980 2,162,794
Republic of Turkey Trust Certificates--0% 1998 ....... 3,000,000 2,588,570 2,709,540
State of Israel Trust Certificates--0% 1998 .......... 2,785,000 2,422,573 2,515,356
------------ ------------
$ 10,732,119 $ 11,016,312
------------ ------------
</TABLE>
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES--CONTINUED Amount Cost Value
- ---------------------------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
MORTGAGE BONDS
ASSET BACKED -- 2.4%
Green Tree Financial Corporation (CMO) --6.9% 2004.................... $ 5,742,130 $ 5,685,147 $ 5,740,336
Merrill Lynch Mortgage Investors, Inc. Class A
(backed by Manufactured Housing First Mortgages)
--8.3% 2012 ........................................................ 4,100,000 4,105,516 4,161,500
--9.2% 2011 ........................................................ 135,926 135,289 137,922
--9.7% 2008 ........................................................ 10,586 10,743 10,553
------------ ------------
$ 9,936,695 $ 10,050,311
------------ ------------
MORTGAGE BACKED -- 2.2%
Residential Funding Mortgage Securities (REMIC)
--7% 2023........................................................... $ 4,108,928 $ 4,109,570 $ 4,103,792
--7 3/4% 2026 ...................................................... 5,000,000 5,078,125 4,990,625
------------ ------------
$ 9,187,695 $ 9,094,417
------------ ------------
TOTAL MORTGAGE BONDS -- 4.6% ......................................... $ 19,124,390 $ 19,144,728
------------ ------------
CORPORATE BONDS & DEBENTURES
Busse Broadcasting Corporation --11 5/8% 2000......................... $ 3,250,000 $ 3,176,600 $ 3,371,875
Genesco Inc. --10 3/8% 2003 .......................................... 1,000,000 980,000 1,025,000
Michaels Stores, Inc. --10 7/8% 2006 ................................. 5,000,000 4,386,113 5,137,500
Oregon Steel Mills, Inc. --11% 2003 .................................. 1,000,000 1,000,000 1,067,500
Plantronics, Inc. --10% 2001 ......................................... 3,248,000 3,299,575 3,361,680
RJR Nabisco Incorporated --8 5/8% 2002 ............................... 500,000 467,750 503,750
Trump Atlantic City Associates --11 1/4% 2006 ........................ 7,300,000 7,155,375 6,606,500
------------ ------------
TOTAL CORPORATE BONDS & DEBENTURES -- 5.1% ........................... $ 20,465,413 $ 21,073,805
------------ ------------
TOTAL NON-CONVERTIBLE BONDS & DEBENTURES -- 70.0% .................... $291,181,450 $292,711,363
------------ ------------
CONVERTIBLE SECURITIES
CONVERTIBLE BONDS & DEBENTURES -- 5.0%
Alexander Haagen Properties, Inc. (Class "A")--7 1/2% 2001............ $ 3,600,000 $ 3,256,088 $ 3,384,000
Alexander Haagen Properties, Inc. (Class "B")--7 1/2% 2001 ........... 1,925,000 1,724,187 1,790,250
Charming Shoppes, Inc. --7 1/2% 2006 ................................. 6,500,000 6,393,250 6,532,500
DRS Technologies, Inc. --8 1/2% 1998 ................................. 852,000 615,979 854,130
DRS Technologies, Inc. --9% 2003 ..................................... 2,000,000 2,000,000 2,360,000
Fabri-Centers of America, Inc.--6 1/4% 2002 .......................... 3,631,000 2,762,010 3,449,450
Michaels Stores, Inc.--6 3/4% 2003 ................................... 2,000,000 1,630,000 1,725,000
Quantum Health Resources, Inc.--4 3/4% 2000 .......................... 1,000,000 776,250 900,000
------------ ------------
$ 19,157,764 $ 20,995,330
------------ ------------
</TABLE>
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
Shares or
Principal
CONVERTIBLE SECURITIES--CONTINUED Amount Cost Value
- ---------------------------------------------------------------------- ----------- ------------ ------------
<S> <C>
CONVERTIBLE PREFERRED STOCKS -- 0.6%
Integon Corporation .................................................. 30,000 $ 1,500,000 $ 1,515,000
Network Imaging Corporation .......................................... 75,000 1,400,000 1,068,750
------------ ------------
$ 2,900,000 $ 2,583,750
------------ ------------
TOTAL CONVERTIBLE SECURITIES -- 5.6% ................................. $ 22,057,764 $ 23,579,080
------------ ------------
LIMITED PARTNERSHIP -- 0.0%
Jewel Recovery L.P. .................................................. 18,594 $ 9,297 $ 9,297
------------ ------------
SHORT-TERM INVESTMENTS -- 6.1%
Federal National Mortgage Association (Floating Rate)
-- 5.59% 5/25/99.................................................... $ 5,000,000 $ 4,992,500 $ 4,992,660
Private Export Funding Corp. (Floating Rate)
-- 5.69% 2/28/99 ................................................... 11,250,000 11,248,875 11,210,625
U.S. Treasury Notes -- 6 7/8% 4/30/97 ................................ 9,500,000 9,650,234 9,505,937
------------ ------------
$ 25,891,609 $ 25,709,222
------------ ------------
TOTAL INVESTMENT SECURITIES -- 81.7% ................................. $339,140,120 $342,008,962
============ ------------
OTHER SHORT-TERM INVESTMENTS -- 18.5% Short-term Corporate Notes:
AT&T Corp. --5.22% 4/1/97........................................... $ 9,000,000 $ 9,000,000
General Electric Capital Corp. --5.49% 4/2/97 ...................... 2,373,000 2,372,638
Exxon Asset Management Company --5.3% 4/4/97 ....................... 20,532,000 20,522,932
American Express Credit Corporation --5.27% 4/9/97 ................. 3,809,000 3,804,539
Ford Motor Credit Corporation --5.28% 4/9/97 ....................... 1,985,000 1,982,671
American General Finance Corporation --5.29% 4/10/97 ............... 13,000,000 12,982,808
General Electric Capital Services, Inc. --5.31% 4/16/97 ............ 17,544,000 17,505,184
American Express Credit Corporation --5.33% 4/28/97 ................ 1,917,000 1,909,337
American General Finance Corporation --5.32% 4/28/97 ............... 7,000,000 6,972,070
State Street Bank Repurchase Agreement--5% 4/1/97
(Collateralized by U.S. Treasury Notes--12% 2013,
market value $409,697) ............................................. 399,000 399,055
------------
$ 77,451,234
------------
TOTAL INVESTMENTS -- 100.2% .......................................... $419,460,196
Liabilities less other assets -- (0.2%) .............................. (1,001,939)
------------
TOTAL NET ASSETS -- 100% ............................................. $418,458,257
============
</TABLE>
See notes to financial statements
8
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $339,140,120) ........................................... $342,008,962
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less) .......................................... 77,451,234 $419,460,196
------------
Cash ......................................................................... 79
Receivable for:
Interest ................................................................... $ 3,646,689
Capital Stock sold ......................................................... 3,442,226 7,088,915
------------ ------------
$426,549,190
LIABILITIES
Payable for:
Investment securities purchased ............................................ $ 6,506,952
Capital Stock repurchased .................................................. 1,309,493
Advisory fees .............................................................. 176,208
Accrued expenses and other liabilities ..................................... 98,280 8,090,933
------------ ------------
NET ASSETS -- equivalent to $10.93 per share on 38,301,606
shares of Capital Stock outstanding .......................................... $418,458,257
============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 38,301,606 shares .......................... $ 383,016
Additional Paid-in Capital ................................................... 408,284,789
Undistributed net realized gains on investments .............................. 295,310
Undistributed net investment income .......................................... 6,626,300
Unrealized appreciation of investments ....................................... 2,868,842
------------
Net assets at March 31, 1997 ................................................. $418,458,257
============
</TABLE>
See notes to financial statements.
9
<PAGE> 11
STATEMENT OF OPERATIONS
For the Six Months Ended March 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest ................................................... $13,318,656
Dividends .................................................. 133,125
-----------
$13,451,781
EXPENSES
Advisory fees .............................................. $ 947,391
Registration fees .......................................... 79,937
Transfer agent fees and expenses ........................... 60,874
Custodian fees and expenses ................................ 25,395
Directors' fees and expenses ............................... 14,340
Audit fees ................................................. 11,520
Postage .................................................... 7,653
Reports to shareholders .................................... 4,786
Insurance .................................................. 4,481
Legal fees ................................................. 3,515
Other expenses ............................................. 13,751 1,173,643
----------- -----------
Net investment income .............................. $12,278,138
-----------
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) $35,210,040
Cost of investment securities sold ......................... 34,875,718
-----------
Net realized gain on investments ....................... $ 334,322
Unrealized appreciation of investments:
Unrealized appreciation at beginning of period ............. $ 4,250,868
Unrealized appreciation at end of period ................... 2,868,842
-----------
Decrease in unrealized appreciation of investments ..... (1,382,026)
-----------
Net realized and unrealized loss on investments .... $(1,047,704)
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS .............................................. $11,230,434
===========
</TABLE>
See notes to financial statements.
10
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, 1997 September 30, 1996
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income ............. $ 12,278,138 $ 16,907,824
Net realized gain on investments .. 334,322 1,950,447
Decrease in unrealized
appreciation of investments ..... (1,382,026) (1,156,591)
------------- ------------
Increase in net assets resulting
from operations ................... $ 11,230,434 $ 17,701,680
Distributions to shareholders from:
Net investment income ............. $ (10,995,711) $(14,518,692)
Net realized capital gains ........ (1,692,535) (12,688,246) (3,355,550) (17,874,242)
------------- ------------
Capital Stock transactions:
Proceeds from Capital Stock sold .. $ 108,866,220 $157,921,206
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions .. 8,731,914 12,754,692
Cost of Capital Stock repurchased . (35,978,992) 81,619,142 (39,224,350) 131,451,548
------------- ------------- ------------ -------------
Total increase in net assets ........ $ 80,161,330 $ 131,278,986
NET ASSETS
Beginning of period, including
undistributed net investment income
of $5,343,873 and $2,954,741 ...... 338,296,927 207,017,941
------------- -------------
End of period, including
undistributed net investment income
of $6,626,300 and $5,343,873 ...... $ 418,458,257 $ 338,296,927
============= =============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold ........ 9,948,693 14,518,767
Shares issued to shareholders
upon reinvestment of dividends
and distributions ................. 806,149 1,178,442
Shares of Capital Stock repurchased . (3,283,184) (3,608,711)
------------- -------------
Increase in Capital Stock outstanding 7,471,658 12,088,498
============= =============
</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 Year Ended September 30,
31, -------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period............... $ 10.97 $ 11.05 $ 10.52 $ 11.32 $ 10.90 $ 10.47
-------- -------- -------- -------- ------- --------
Net investment income................................ $ 0.34 $ 0.68 $ 0.67 $ 0.68 $ 0.70 $ 0.73
Net realized and unrealized gain (loss) on
investment securities.............................. 0.01 0.06 0.55 (0.51) 0.49 0.66
-------- -------- -------- -------- ------- --------
Total from investment operations..................... $ 0.35 $ 0.74 $ 1.22 $ 0.17 $ 1.19 $ 1.39
-------- -------- -------- -------- ------- --------
Less distributions:
Dividends from net investment income............... $ (0.34) $ (0.66) $ (0.69) $ (0.70) $ (0.70) $ (0.76)
Distributions from net realized
capital gains.................................... (0.05) (0.16) -- (0.27) (0.07) (0.20)
-------- -------- -------- -------- ------- --------
Total distributions................................ $ (0.39) $ (0.82) $ (0.69) $ (0.97) $ (0.77) $ (0.96)
-------- -------- -------- -------- ------- --------
Net asset value at end of period..................... $ 10.93 $ 10.97 $ 11.05 $ 10.52 $ 11.32 $ 10.90
======== ======== ======== ======== ======= ========
Total investment return*............................. 3.25% 7.00% 12.14% 1.60% 11.42% 14.10%
Ratios/supplemental data:
Net assets at end of period (in $000's).............. 418,458 338,297 207,018 122,708 115,062 80,489
Ratio of expenses to average net assets.............. 0.61%+ 0.63% 0.68% 0.74% 0.73% 0.78%
Ratio of net investment income to
average net assets................................. 6.35%+ 6.44% 6.50% 6.41% 6.48% 7.17%
Portfolio turnover rate.............................. 26%+ 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. The
return for the six months ended March 31, 1997 is not annualized.
+ Annualized
See notes to financial statements.
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
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 period, or if there was not a sale that day, at the last
bid price. Unlisted securities and securities listed on a national
securities exchange for which the over-the-counter market more accurately
reflects the securities' value in the judgment of the Fund's officers, are
valued at the most recent bid price or other ascertainable market value.
Short-term investments with maturities of 60 days or less are valued at cost
plus interest earned which approximates market value.
B. Federal Income Tax
No provision for federal income tax is required because the Fund has
elected to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification and to distribute
each year to its shareholders, in accordance with the minimum distribution
requirements of the Code, all of its taxable net investment income and
taxable net realized gains on investments.
C. Securities Transactions and Related Investment Income
Securities transactions are accounted for on the date the securities are
purchased or sold. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest income and expenses are recorded
on an accrual basis.
D. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported. Actual results could differ
from those estimates.
NOTE 2 -- PURCHASES OF INVESTMENT SECURITIES
Cost of purchases of investment securities (excluding short-term investments
with maturities of 60 days or less) aggregated $139,700,526 for the six months
ended March 31, 1997. Realized gains or losses are based on the
specific-certificate identification method. Cost of investment securities owned
at March 31, 1997 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
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
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, 1997, the Fund paid aggregate fees of
$14,000 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.
Certain officers of the Fund are also officers of the Adviser and FPA Fund
Distributors, Inc.
NOTE 4 -- DISTRIBUTOR
For the six months ended March 31, 1997, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $73,355 in
net Fund share sales commissions after reallowance to other dealers. The
Distributor pays its own overhead and general administrative expenses, the cost
of supplemental sales literature, promotion and advertising.
NOTE 5 -- DISTRIBUTION TO SHAREHOLDERS
On March 31, 1997, the Board of Directors declared a dividend from net
investment income of $0.17 per share payable April 15, 1997 to shareholders of
record on March 31, 1997. For financial statement purposes, this dividend was
recorded on the ex-dividend date, April 1, 1997.
14
