<PAGE>
FPA New Income, Inc.
ANNUAL REPORT
SEPTEMBER 30, 1999
[LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
<PAGE>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Annual Report covers the fiscal year ended September 30, 1999. Your
Fund's net asset value (NAV) per share closed at $10.77. During the fiscal year,
your Fund distributed income dividends totaling $0.71. The December 29, 1998
payment also included a $0.06 capital gains distribution of which $0.05 was
long-term in nature.
The following table shows the average annual total return for several
different periods ended September 30 for the Fund and 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, 1999
------------------------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
FPA New Income, Inc.
(NAV).................................... 3.87%* 7.52%* 8.83%*
FPA New Income, Inc.
(Net of Sales Charge).................... (0.80)%++ 6.53%++ 8.33%++
Lipper Corporate Debt
A Rated Fund Average..................... (2.19)% 7.01% 7.66%
Lehman Brothers Government/
Corporate Bond Index ..................... (1.62)% 7.77% 8.08%
</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 3.87%* versus -2.19% and -1.62% for the Lipper "A" Rated Bond 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., 2.34%*; Lipper Average, -1.25%; and the Lehman Brothers Index, -0.57%.
Finally, on a calendar year-to-date basis, the total returns were: FPA New
Income, Inc., 3.67%*; the Lipper Average, -2.18%; and the Lehman Brothers Index,
- -1.75%.
COMMENTARY
Your Fund's relative performance has improved significantly during this
past fiscal year. A dramatic turnaround in performance occurred because we were
unwilling to risk your capital last year at yield levels that we believed did
not compensate us for the risk involved. During the previous fiscal year, it was
very frustrating for us to watch the better investment returns of other
high-quality bond funds. Despite this frustration, our investment discipline
would not allow us to play the game of chasing yields to lower and lower levels.
As a result of the recent relative performance recovery, your Fund has
outperformed the Lipper Average and the Lehman Brothers Index from the beginning
of calendar 1998 through September 30, 1999, but with considerably less
volatility.
We still believe that last fall many investors were speculating rather than
investing when the long-term Treasury bond yield hit its low of 4.70%. According
to the ISI (International Strategy & Investment) survey at that time, the
average bond portfolio duration went to a record high relative to its respective
benchmark duration. Optimism was rampant. With the current decline of the bond
market, 1999 is rapidly becoming the second worst year of performance for bonds.
This year very few high-quality bond funds are showing positive investment
returns. Your Fund continues to be the only fund, either bond or stock, that has
not had a down year in twenty-four years (excluding money market funds). Our
basic philosophy of "winning by not losing" is paying off again.
Your Fund's positive performance is the direct result of having essentially
a defensive portfolio configuration. We began the year with a 2.6-year modified
duration versus the 5.2 years of the Lehman Index. The higher the duration
number, the more sensitive your portfolio is to changes in interest rates. On
average, we tend to have a shorter portfolio duration than our benchmark index
until we believe we are being compensated by higher yield levels to extend
maturities and, therefore, our duration. Two areas helped the portfolio's
performance: Treasury Inflation Protection Securities (TIPS) and Interest Only
(IO) securities. TIPS have been the best-performing conventional straight bonds
this year. The gradual rise in inflation is making the TIPS' embedded call
option on inflation more valuable. This rising call-option
- ---------------
* 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>
value helps to offset the negative effects of rising interest rates. These bonds
continue to yield more than their nominal bond counterparts and, therefore,
continue to be undervalued. We have deployed approximately 39% of your Fund's
assets in these securities. Another positive contributor has been our IO
holdings. An IO's value typically moves in the same direction as interest rates.
In this case, as interest rates rose, IO prices increased while the average bond
fell in price. Finally, our high-yield/convertible securities holdings were also
positive contributors to investment performance. During the year, we eliminated
our position in Lam Research convertible bonds. We originally purchased them
with yields ranging from 10.5% to 15%. Lam Research's stock price rose
dramatically in 1999 and this performance helped to drive up the price of the
convertible bonds. We liquidated the position at yields between approximately 5%
and 7%.
Your Fund's modified duration has been increased somewhat. As of September
30, it is 3.73 years versus 2.89 years as of March 31, 1999. As rates have
increased, we have gradually begun to add some longer-term securities to the
portfolio. For example, we increased our position in FNMA 7% Mortgage "Z" bonds
at yield levels of 7.60% to 7.70%. These are very long duration instruments. We
were attracted to them when mortgage yield spreads widened considerably and
these higher yield levels began to compensate us for principal risk. We also
added a new position, CKE Restaurants 4.25% 3/15/04, to our "busted" convertible
bond holdings. These bonds were added at yields between 12% and 17%. The recent
decline in the stock market appears to be causing weakness in the high-yield and
convertible bond markets. Lower bond prices, higher yields, and wider yield
spreads are occurring with greater frequency. We are maintaining some
flexibility to increase our exposure to lower credit-rated securities should
opportunities present themselves. After these changes, the portfolio retains its
high-quality asset-mix orientation, with an average AA1 Moody's credit rating.
As of September 30, Government/agency securities totaled 76% of net assets. AAA-
and AA-rated securities, excluding cash and equivalents, totaled 1%, with the
remaining 22% rated less than AA. Short-term liquidity totals 1%. Convertible
and high-yield securities, included in the less than AA category, total 19%.
A recent survey of advisory sentiment by Market Vane is close to its lowest
level in ten years. Pessimism is growing, which is positive from a contrarian
viewpoint. Thirty-year Treasury bond yields are currently 6.35%. Should they
approach 6.50%, we will likely add duration to the portfolio. We want to do this
in stages since we believe that there are still several challenges facing the
bond market.
We believe that pressures will continue to build for at least another
25-basis-point increase in the Fed Funds rate, totaling 75 for this cycle. At a
minimum, we believe the Fed has to take back last year's 75-basis-point
decrease. We are seeing the emergence of economic recovery overseas, which
should put further pressure on the Fed. We still do not see our economy slowing
to any material degree. Inventory/sales ratios are at all-time low levels. So
far, the anticipated inventory build-up because of Y2K concerns has not
occurred. Unless it took place in September, we will most likely enter early
next year with low inventories and high consumer confidence. This should bolster
economic activity.
We expect consumer spending to remain robust since, according to the
Conference Board's survey, the consumer views the availability of jobs as
plentiful and easy to get. Initial unemployment claims and growth in the labor
force are at the lowest levels in forty years. The sluggishness in labor force
growth appears to be more a function of the lack of qualified workers. Should
this negative trend continue, an acceleration in unit labor costs may begin to
emerge. Unless productivity remains high, employment cost inflation may start to
erode corporate profit margins if companies are not able to pass these increased
costs forward. We see a potential impact of these trends on the Consumer Price
Index. In our March Letter to Shareholders, we stated that the CPI is likely to
exit this year above the 2% level. For the twelve months ended August, the CPI
averaged 2.6%. We see the CPI continuing at this level or higher for at least
the next six months. The extreme confidence that investors exhibited last year
regarding the continuation of disinflation or even deflation is now beginning to
reverse itself as discussion is growing about the possibility of rising
inflation. We see this as an emerging positive trend. Fear always creates better
opportunities for attractive purchases.
One last area that may keep the bond market volatile is the growing U.S.
Current Account deficit. This measures trade flows as well as capital
flows--call it goods, services and money. The deficit now is averaging 3.6% of
GDP and appears to be heading for a record 4%. Unless it begins to reverse or
stabilize,
2
<PAGE>
it may start to negatively impact the value of the dollar. The significance to
the bond market is that foreigners currently hold about 35% of the outstanding
marketable Treasury debt, the highest percentage on record. If the value of the
dollar erodes due to the Current Account deficit, foreigners may liquidate some
of their Treasury holdings, thus driving prices down and yields up. Rarely does
anyone know how to forecast these trends, but we would like to have a somewhat
higher yield level to compensate us for this potential risk.
It is a pleasure to report substantially better and positive results,
especially when most others are experiencing losses. This has been our trademark
over the years. We have typically excelled in declining markets. We thank you
for your investment and continued support.
Respectfully submitted,
/s/ Robert L. Rodriguez
Robert L. Rodriguez, C.F.A.
President & Chief Investment Officer
October 28, 1999
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE
CHANGE IN VALUE OF A $10,000 INVESTMENT IN FPA NEW INCOME, INC. VS. LEHMAN
BROTHERS GOVERNMENT/CORPORATE BOND INDEX AND LIPPER CORPORATE DEBT A RATED
FUND AVERAGE FROM OCTOBER 1, 1989 TO SEPTEMBER 30, 1999
[GRAPH]
<TABLE>
<CAPTION>
9/30/89 9/30/90 9/30/91 9/30/92 9/30/93 9/30/94 9/30/95 9/30/96 9/30/97 9/30/98 9/30/99
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA New Income, Inc. (NAV) 10,000 10,410 12,564 14,335 15,972 16,228 18,198 19,472 21,330 22,447 23,317
FPA New Income, Inc. 9,550 9,942 11,998 13,690 15,254 15,498 17,379 18,596 20,370 21,437 22,268
Lehman Brothers Government
/Corporate 10,000 10,678 12,375 14,008 15,616 14,965 17,117 17,884 19,601 22,118 21,759
Lipper Corporate Debt A Rated
Fund Average 10,000 10,491 12,226 13,895 15,535 14,817 16,937 17,632 19,328 21,338 20,920
</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 Corporate Debt A Rated 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 $22,268, 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 $23,317. The performance of the Fund and of the Averages is computed on
a total return basis which includes reinvestment of all distributions.
3
<PAGE>
MAJOR PORTFOLIO CHANGES
For the Six Months Ended September 30, 1999
(Unaudited)
<TABLE>
<S> <C>
NET PURCHASES
NON-CONVERTIBLE BONDS & DEBENTURES
Federal Home Loan Mortgage Corporation (Z)--6 1/2% 2029 (1).......................................................$ 5,333,082
Federal Home Loan Mortgage Corporation (Z)--7% 2029 (1)...........................................................$ 4,915,019
Federal National Mortgage Association (Z)--7% 2019 (1)............................................................$ 13,111,641
Government National Mortgage Association--7% 2028 (1).............................................................$ 9,825,724
U.S. Treasury Inflation-Indexed Notes--3 3/8% 2007................................................................$ 8,271,170
CONVERTIBLE DEBENTURE
CKE Restaurants, Inc.--4 1/4% 2004 (1)............................................................................$ 12,000,000
NET SALES
NON-CONVERTIBLE BONDS & DEBENTURES
Federal Home Loan Mortgage Corporation--6% 2008...................................................................$ 1,694,196
Federal Home Loan Mortgage Corporation (Z)--7 1/2% 2026...........................................................$ 1,863,925
Federal National Mortgage Association (Z)--7 1/2% 2024............................................................$ 3,695,380
CONVERTIBLE DEBENTURE
Lam Research Corporation--5% 2002 (2).............................................................................$ 15,000,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
4
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1999
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES Amount Value
- ------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
U.S. GOVERNMENT & AGENCIES
MORTGAGE-BACKED SECURITIES -- 33.3%
Federal Home Loan Mortgage Corporation
--5.85% 2017 ............................................................... $ 9,110,870 $ 9,056,774
--6% 2008 .................................................................. 26,642,721 25,762,273
--6% 2009 .................................................................. 22,316,000 21,318,754
--7% 2008 .................................................................. 2,453,541 2,430,539
--7% 2023 .................................................................. 5,000,000 4,800,000
--7 1/2% 2021 .............................................................. 1,149,739 1,158,721
--8 1/2% 2026 .............................................................. 7,929,853 8,237,135
--10.15% 2006 .............................................................. 13,456 13,473
Federal Home Loan Mortgage Corporation (IO)
--6 1/2% 2007 .............................................................. 8,044,424 685,345
--6 1/2% 2020 .............................................................. 1,764,835 113,198
--6 1/2% 2023 .............................................................. 4,437,568 503,211
--7% 2020 .................................................................. 8,000,000 920,000
Federal Home Loan Mortgage Corporation (Z)
--6 1/2% 2029 .............................................................. 5,333,082 4,399,792
--7% 2029 .................................................................. 4,915,019 4,483,419
--7 1/2% 2026 .............................................................. 7,168,831 7,108,344
Federal National Mortgage Association
--5.16% 2022 ............................................................... 18,500,000 17,667,500
--6 1/2% 2008 .............................................................. 2,867,198 2,833,149
Federal National Mortgage Association (IO)
--6% 2027 .................................................................. 38,536,034 10,933,559
--6% 2028 .................................................................. 23,765,747 6,657,760
--6 1/2% 2009 .............................................................. 4,159,415 646,985
--6 1/2% 2020 .............................................................. 4,976,693 466,371
--7% 2004 .................................................................. 862,420 111,306
--7% 2017 .................................................................. 2,343,119 59,126
Federal National Mortgage Association (Z)
--7% 2019 .................................................................. 13,111,641 12,275,774
--7% 2024 .................................................................. 11,529,717 10,448,807
--7 1/2% 2024 .............................................................. 1,658,816 1,599,722
5
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1999
<CAPTION>
Principal
BONDS & DEBENTURES--CONTINUED Amount Value
- ------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
Government National Mortgage Association
--7% 2028 ...................................................................... $ 9,825,724 $ 9,610,786
--7 1/2% 2023 .................................................................. 457,560 459,275
Government National Mortgage Association II--8% 2027 ............................. 3,875,107 3,950,187
Government National Mortgage Association (MH)
--8 1/4% 2006-7 ................................................................ 348,339 355,306
--8 3/4% 2006 .................................................................. 782,738 810,623
--8 3/4% 2011 .................................................................. 839,414 858,824
--9% 2010 ...................................................................... 497,004 512,225
--9% 2011 ...................................................................... 1,204,111 1,240,987
--9 1/4% 2010-11 ............................................................... 873,492 905,156
--9 3/4% 2005-6 ................................................................ 1,777,391 1,849,041
--9 3/4% 2012-13 ............................................................... 762,704 793,451
Government National Mortgage Association (PL)
--10 1/4% 2017 ................................................................. 898,441 923,149
------------
$176,960,047
------------
OTHER U.S. GOVERNMENT & AGENCIES -- 42.7%
Tennessee Valley Authority--8d% 1999 ............................................. $ 3,400,000 $ 3,400,000
U.S. Treasury Inflation-Indexed Notes--3d% 2007 .................................. 214,620,240 204,895,260
U.S. Treasury Notes--8 1/4% 2005 ................................................. 1,800,000 1,829,813
U.S. Treasury Notes Strip--0% 2009 ............................................... 31,000,000 16,691,950
------------
$226,817,023
------------
TOTAL U.S. GOVERNMENT & AGENCIES-- 76.0% ......................................... $403,777,070
------------
MORTGAGE BONDS
ASSET BACKED -- 3.4%
Green Tree Financial Corporation
--7 1/4% 2005 .................................................................. $ 9,716,854 $ 9,388,909
--7 3/4% 2029 .................................................................. 1,000,000 805,000
--7.77% 2029 ................................................................... 5,500,000 4,840,000
--8% 2028 ...................................................................... 3,048,511 2,876,081
------------
$ 17,909,990
------------
6
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1999
<CAPTION>
Principal
BONDS & DEBENTURES--CONTINUED Amount Value
- ------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
MORTGAGE BACKED -- 1.6%
DLJ Mortgage Acceptance Corp. (Series 1997-E Class B)
--7.5481% 2026* ................................................................ $ 4,959,717 $ 3,655,078
First Financial Mortgage Trust (Series 9 Class A4)
--5.8% 2008 .................................................................... 1,000,000 977,500
Norwest Asset Securities Corp. (Series 1999-13 Class A"Z")
--6 3/4% 2029 .................................................................. 1,316,355 1,115,611
Prudential Home Mortgage Securities Corp. (Series 1993-F Class 1B1)
--6.65995% 2000* ............................................................... 2,942,698 2,932,582
------------
$ 8,680,771
------------
TOTAL MORTGAGE BONDS-- 5.0% ...................................................... $ 26,590,761
------------
CORPORATE BONDS & DEBENTURES -- 7.3%
Advanta Corporation
--5.6075% 2000 (Floating Rate) ................................................. $ 1,600,000 $ 1,582,000
--6.65% 2000 ................................................................... 2,400,000 2,384,714
--6.658% 1999 .................................................................. 3,400,000 3,396,600
Advantica Restaurant Group, Inc.--11 1/4% 2008 ................................... 10,928,038 10,053,795
Oregon Steel Mills, Inc.--11% 2003 ............................................... 13,350,000 13,817,250
Trump Atlantic City Associates--11 1/4% 2006 ..................................... 9,000,000 7,650,000
------------
$ 38,884,359
------------
TOTAL NON-CONVERTIBLE BONDS & DEBENTURES-- 88.3% ................................. $469,252,190
------------
CONVERTIBLE SECURITIES
CONVERTIBLE BONDS & DEBENTURES -- 10.5%
Centertrust Retail Properties, Inc.
--7 1/2% 2001 (Class A) ........................................................ $ 4,858,000 $ 4,627,245
--7 1/2% 2001 (Class B) ........................................................ 5,800,000 5,365,000
Charming Shoppes, Inc.--7 1/2% 2006 .............................................. 7,000,000 6,370,000
CKE Restaurants, Inc.--4 1/4% 2004 ............................................... 12,000,000 7,680,000
DRS Technologies, Inc.--9% 2003 .................................................. 2,000,000 2,240,000
HomeBase, Inc.--5 1/4% 2004 ...................................................... 8,302,000 5,728,380
Michaels Stores, Inc.--6 3/4% 2003 ............................................... 17,250,000 16,775,625
Offshore Logistics, Inc.--6% 2003 ................................................ 2,000,000 1,675,000
Quantum Health Resources, Inc.--4 3/4% 2000 ...................................... 1,000,000 915,000
Read-Rite Corporation--6 1/2% 2004 ............................................... 10,055,000 4,273,375
------------
$ 55,649,625
------------
7
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1999
<CAPTION>
Shares or
Principal
CONVERTIBLE SECURITIES--CONTINUED Amount Value
- -------------------------------------------------------------------- ------------- --------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCK -- 0.1%
Treev Inc. (Series A) .............................................. 66,000 $ 449,625
------------
TOTAL CONVERTIBLE SECURITIES-- 10.6% ............................... $ 56,099,250
------------
OTHER PREFERRED STOCK -- 0.6%
Crown American Realty Trust ........................................ 78,500 $ 3,238,125
------------
TOTAL INVESTMENT SECURITIES-- 99.5% (Cost $542,907,348) ............ $528,589,565
------------
SHORT-TERM INVESTMENT -- 0.2%
State Street Bank Repurchase Agreement --4 1/4% 10/1/99
(Collateralized by U.S. Treasury Notes --8 1/8% 2021
market value $783,544, Cost $767,091) .......................... $ 767,000 $ 767,091
------------
TOTAL INVESTMENTS-- 99.7% (Cost $543,674,439) ...................... $529,356,656
Other assets and liabilities, net-- 0.3% ........................... 1,776,829
------------
TOTAL NET ASSETS-- 100% ............................................ $531,133,485
------------
------------
</TABLE>
* Restricted securities purchased without registration under the Securities
Act of 1933 pursuant to Rule 144A, which generally may be resold only to
certain institutional investors prior to registration. DLJ Mortgage
Acceptance Corp. was purchased on September 8, 1997 and Prudential Home
Mortgage Securities Corp. was purchased on May 20, 1998. These restricted
securities constituted 1.2% of total net assets at September 30, 1999.
See notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments at value:
Investment securities -- at market value
(identified cost $542,907,348) .............................. $528,589,565
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less) ............................. 767,091 $529,356,656
------------
Cash ............................................................ 503
Receivable for:
Interest ...................................................... $ 5,515,399
Capital Stock sold ............................................ 725,922
Investment securities sold .................................... 66,311 6,307,632
------------ ------------
$535,664,791
LIABILITIES
Payable for:
Capital Stock repurchased ..................................... $ 4,175,174
Advisory fees ................................................. 225,947
Accrued expenses and other liabilities ........................ 130,185 4,531,306
------------ ------------
NET ASSETS ........................................................ $531,133,485
------------
------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 49,324,340 shares ............. $ 493,243
Additional Paid-in Capital ...................................... 531,442,176
Undistributed net realized gains on investments ................. 4,252,881
Undistributed net investment income ............................. 9,262,968
Unrealized depreciation of investments .......................... (14,317,783)
------------
Net assets at September 30, 1999 ................................ $531,133,485
------------
------------
NET ASSET VALUE, REDEMPTION PRICE AND MAXIMUM
OFFERING PRICE PER SHARE
Net asset value and redemption price per share
(net assets divided by shares outstanding) ..................... $ 10.77
------------
------------
Maximum offering price per share
(100/95.5 of per share net asset value) ........................ $ 11.28
------------
------------
</TABLE>
See notes to financial statements.
9
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest ...................................................... $ 39,220,123
Dividends ..................................................... 479,000
------------
. ................................................................. $ 39,699,123
EXPENSES
Advisory fees ................................................. $ 2,846,976
Transfer agent fees and expenses .............................. 253,280
Custodian fees and expenses ................................... 57,813
Registration fees ............................................. 50,685
Directors' fees and expenses .................................. 36,150
Insurance ..................................................... 31,067
Audit fees .................................................... 24,920
Postage ....................................................... 22,523
Reports to shareholders ....................................... 22,319
Legal fees .................................................... 3,611
Other expenses ................................................ 16,979 3,366,323
------------ ------------
Net investment income ................................. $ 36,332,800
------------
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) .. $176,943,008
Cost of investment securities sold ............................ 172,179,484
------------
Net realized gain on investments .......................... $ 4,763,524
Unrealized appreciation (depreciation) of investments:
Unrealized appreciation at beginning of year .................. $ 5,317,224
Unrealized depreciation at end of year ........................ (14,317,783)
------------
Decrease in unrealized appreciation of investments ........ (19,635,007)
------------
Net realized and unrealized loss on investments ....... $ 14,871,483)
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ................................................. $ 21,461,317
------------
------------
</TABLE>
See notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
1999 1998
----------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ........................ $ 36,332,800 $ 35,993,477
Net realized gain on investments ............. 4,763,524 2,862,505
Decrease in unrealized
appreciation of investments ................. (19,635,007) (9,176,172)
------------- -------------
Increase in net assets resulting
from operations .............................. $ 21,461,317 $ 29,679,810
Distributions to shareholders from:
Net investment income ........................ $ (37,467,415) $ (33,893,211)
Net realized capital gains ................... (3,215,415) (40,682,830) (1,183,945) (35,077,156)
------------- -------------
Capital Stock transactions:
Proceeds from Capital Stock sold ............. $ 127,033,525 $ 236,277,210
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions ............. 35,025,699 30,352,091
Cost of Capital Stock repurchased ............ (227,450,554) (65,391,330) (175,059,444) 91,569,857
------------- ------------- ------------- -------------
Total increase (decrease) in net assets ........ $ (84,612,843) $ 86,172,511
NET ASSETS
Beginning of year, including
undistributed net investment income
of $10,397,583 and $8,297,317 ................ 615,746,328 529,573,817
------------- -------------
End of year, including
undistributed net investment income
of $9,262,968 and $10,397,583 ................ $ 531,133,485 $ 615,746,328
------------- -------------
------------- -------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold ................... 11,732,265 21,199,452
Shares issued to shareholders
upon reinvestment of dividends
and distributions ............................ 3,253,664 2,740,769
Shares of Capital Stock repurchased ............ (20,998,240) (15,730,014)
------------- -------------
Increase (decrease) in Capital Stock
outstanding .................................. (6,012,311) 8,210,207
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year .......... $ 11.13 $ 11.24 $ 10.97 $ 11.05 $ 10.52
----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income ........................ $ 0.71 $ 0.67 $ 0.68 $ 0.68 $ 0.67
Net realized and unrealized gain (loss)
on investment securities .................... (0.30) (0.10) 0.32 0.06 0.55
----------- ----------- ----------- ----------- -----------
Total from investment operations .............. $ 0.41 $ 0.57 $ 1.00 $ 0.74 $ 1.22
----------- ----------- ----------- ----------- -----------
Less distributions:
Dividends from net investment income ........ $ (0.71) $ (0.66) $ (0.68) $ (0.66) $ (0.69)
Distributions from net realized
capital gains ............................. (0.06) (0.02) (0.05) (0.16) --
----------- ----------- ----------- ----------- -----------
Total distributions ........................... $ (0.77) $ (0.68) $ (0.73) $ (0.82) $ (0.69)
----------- ----------- ----------- ----------- -----------
Net asset value at end of year ................ $ 10.77 $ 11.13 $ 11.24 $ 10.97 $ 11.05
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Total investment return* ...................... 3.87% 5.24% 9.54% 7.00% 12.14%
Ratios/supplemental data:
Net assets at end of year (in $000's) ......... 531,133 615,746 529,574 338,297 207,018
Ratio of expenses to average net assets ....... 0.60% 0.59% 0.59% 0.63% 0.68%
Ratio of net investment income to
average net assets .......................... 6.43% 6.06% 6.37% 6.44% 6.50%
Portfolio turnover rate ....................... 24% 47% 29% 16% 31%
</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 (UNAUDITED)
<TABLE>
<CAPTION>
Long-Term
Per Share Ordinary Income Capital Gain
Payable Date Amount Qualifying Non-Qualifying Distribution
- ----------------------------------------------- --------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
October 7, 1998 ............................... $ 0.17 0.1% 99.9% --
December 29, 1998 ............................. $ 0.24+ 0.1% 79.1% 20.8%
April 8, 1999 ................................. $ 0.17 0.1% 99.9% --
July 8, 1999 .................................. $ 0.19 0.1% 99.9% --
</TABLE>
+ This amount includes a $0.06 capital gain distribution of which $0.01 was
short-term capital gains and therefore taxable as ordinary income. This is
in addition to the $0.18 income dividend which is also taxable as ordinary
income.
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 2000 setting forth
specific amounts to be included in their 1999 tax returns.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
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. Securities for which market quotations are not
readily available are valued at fair value as determined in good faith by, or
under the direction of, the Board of Directors.
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
these 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 $173,518,631 for the
year ended September 30, 1999. Realized gains or losses are based on the
specific-certificate identification method. Cost of investment securities owned
at September 30, 1999 was the same for federal income tax and financial
reporting purposes. Gross unrealized appreciation and depreciation for all
securities at September 30, 1999 for federal income tax purposes was $1,978,029
and $16,295,812, respectively.
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.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
For the year ended September 30, 1999, the Fund paid aggregate fees of
$35,584 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 year ended September 30, 1999, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $70,027 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, 1999, the Board of Directors declared a dividend from net
investment income of $0.17 per share payable October 7, 1999 to shareholders of
record on September 30, 1999. For financial statement purposes, this dividend
and distribution was recorded on the ex-dividend date, October 1, 1999.
- --------------------------------------------------------------------------------
REPORT OF 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,
1999, the related statement of operations for the year then ended, the statement
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 and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1999, 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. as of September 30, 1999, 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 12, 1999
14
<PAGE>
OFFICERS AND DIRECTORS
DIRECTORS
Willard H. Altman
DeWayne W. Moore
Lawrence J. Sheehan
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
INDEPENDENT AUDITORS
Ernst & Young 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) 483-5000
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.
