<PAGE>
SEMI-ANNUAL REPORT
FPA New Income, Inc.
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
MARCH 31, 1999
<PAGE>
LETTER TO SHAREHOLDERS
DEAR FELLOW SHAREHOLDERS:
This Semi-Annual Report covers the six-month period ended March 31, 1999. Your
Fund's net asset value (NAV) closed at $10.88. Income dividends of $0.17 and
$0.18 were paid on October 7, 1998, and December 29, 1998, to holders of record
on September 30, 1998 and December 22, 1998, respectively. The December payment
also included a $0.06 capital gains distribution of which $0.05 was long-term.
The following table shows the average annual total return for several different
periods ended on that date for the Fund and comparative indices of securities
prices. The data quoted represents past performance, and an investment in the
Fund may fluctuate so that an investor's shares when redeemed may be worth more
or less than their original cost.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
PERIODS ENDED MARCH 31, 1999
----------------------------
1 YEAR 5 YEARS 10 YEARS
-------- --------- ---------
<S> <C> <C> <C>
FPA New Income, Inc.
(NAV)....................................... 3.16%* 7.15%* 9.38%*
FPA New Income, Inc.
(Net of Sales Charge)....................... (1.48)%++ 6.17%++ 8.88%++
Lipper Corporate Debt Fund
"A" Rated Average........................... 5.03% 7.05% 8.62%
Lehman Brothers Government/
Corporate Bond Index....................... 6.55% 7.73% 9.08%
</TABLE>
The Fund's total rate of return for the six months was 1.50%* versus
(0.89)% and (1.07)% for the Lipper Average and the Lehman Brothers
Government/Corporate Index, respectively. For the calendar year ended December
31, 1998, total returns were: FPA New Income, Inc., 3.86%*; Lipper Average,
7.50%; and the Lehman Index, 9.47%.
COMMENTARY
What a difference six months makes. Your Fund is now outperforming the
Lehman Brothers Index. The bond market's NEGATIVE 1.19% return for the three
months ended March 31 is its worst performance period in the last three years.
As in prior periods of bond market difficulty, your Fund is rising to the top,
with a POSITIVE 1.30% return. It is one of only a few high-quality bond funds
that is showing positive investment returns.
We believe we are gradually being vindicated for our bond market strategy.
During the past year, we argued that the economy was likely to be far stronger
than consensus expectations, despite the Asian crisis. For a short period, this
did not seem reasonable. With the Russian collapse last summer, bond yields fell
to levels that we viewed as unrealistic and unsustainable. The "bulls" on
interest rates believed that the economy was about to slow dramatically and that
we were on the verge of severe disinflation or possibly deflation. The reality
is that the economy accelerated. Third and fourth quarter real GDP (gross
domestic product) grew at the annual rate of 3.7% and 6%, respectively.
Economists are now revising their first-quarter 1999 real GDP estimates upward.
No longer are we hearing about an imminent Federal Reserve lowering of
short-term interest rates.
We believe that bond managers in general, who performed well in the second
half of last year, were rewarded for a scenario that did not occur. In essence,
they got paid for being wrong. We did not think that we were being compensated
sufficiently to risk your capital with these low yields. It still amazes us that
the ten-year and thirty-year Treasury bond yields fell to 4.16% and 4.72% while
the Fed Funds rate was 4.75%. Purchasers of these longer-maturity bonds were
essentially betting that short-term rates would fall at least 100 basis points
(there are 100 basis points in 1%) to 3.75%. If this did not occur, these
longer-term rates would have to reverse course and rise above the yield on
short-term securities. Since then, the ten-year and thirty-year Treasury bond
yields have risen to 5.20% and 5.65% while the Fed Funds rate has remained
unchanged. Bond market returns have turned negative because of the approximately
60 basis-point rise in intermediate and longer-term Treasury bond yields since
the beginning of 1999.
Because of your Fund's defensive positioning, in February alone we recouped
approximately one half of the relative underperformance that occurred last year
in August and September. Our mortgage holdings and our inflation indexed bonds
were meaningful contributors to your Fund's positive performance. For example,
the mortgage I.O. (interest only) position appreciated approximately 26%. I.O.s
are mortgage securities that actually increase in value should interest rates
rise. Last year they declined rapidly as interest rates fell. Investors feared
that the underlying mortgages were likely to be refinanced. This fear was
actually greater than reality since the mortgage rates supporting these
securities are, for the most part, between 6.50% and 6.75%. They were never
really refinanceable throughout the year. The assumptions we used in evaluating
these securities have proven 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
1
<PAGE>
be very accurate, so far. We continue to increase the Treasury Inflation Index
Protection Security (TIPS) bond position. It now represents 35% of the total
portfolio versus 23% last September. As interest rates increased, the prices of
our TIPS have remained essentially unchanged, while the ten-year Treasury bond
price fell almost five points. TIPS now provide a yield greater than the yields
on short- and long-term Treasury bonds but with considerably better principal
protection.
Why are TIPS performing so well? These securities are a combination of the
qualities of a typical yield-to-maturity bond plus an addition to the principal
value for the changes in the Consumer Price Index (CPI) of three months ago. In
our case, we were recently purchasing additional securities with a yield-
to-maturity of 3.94%. To this yield will be added the change in the CPI. Over
the past year, the CPI increased 1.6%, so that if it remains at that rate of
change level, our total yield will be 5.54%. During the past year, the CPI has
been held down by the decline in energy prices. Excluding energy, the CPI would
have been up 2.3%. We believe that the trough in CPI inflation was reached last
year. It took an Asian and Russian crisis to drive down the demand for energy
and other raw material goods. This led to a decline in commodity prices and
contributed to holding down the inflation rate in the United States. As these
regions gradually recover, increased demand should return. With the recent
upturn in energy prices, should it remain close to current price levels, the CPI
is likely to exit this year above the 2% level. This would equate to the TIPS
yielding approximately 6% if the bond price does not change. Should interest
rates rise because of growing inflation fears, the TIPS price could remain the
same or increase, given the bond's positive sensitivity to rising inflation.
We increased the portfolio's convertible and high-yield bond holdings to
19% from 14% as of September 30, 1998. We responded to the opportunities created
by both the stock and high-yield bond markets' decline in September and October.
Yield spreads in the high-yield sector doubled in less than three months: the
fastest we have seen in twenty-five years. These events also hit the
asset-backed securities market by causing the widest yield spreads in ten years.
In some cases, yield spreads trebled from where they were just eighteen months
ago. In our opinion, this spread widening caused a very favorable risk/reward
environment, and we expanded our allocation to these market sectors.
After these changes, the portfolio still retains its high-quality asset-mix
orientation, with an average AA2 Moody's credit rating. As of March 31,
Government/Agency-rated securities totaled 68%. AAA- and AA-rated securities,
excluding cash and equivalents, totaled 4%, with the remaining 19% rated less
than AA. Short-term liquidity totals 9%. The Fund's average modified duration
was 2.89 years at March 31, 1999, versus 2.60 years at September 30, 1988 and
2.85 years at March 31, 1998.
We anticipate maintaining the current portfolio configuration, unless
Treasury bond yields rise to a level that encourages us to lengthen the
portfolio's duration. If longer-term Treasury bond yields rise closer to 6%, we
will re-evaluate our I.O. position. At that yield level, we may decide to
institute a hedge so that we do not experience the same degree of negative
performance again, should interest rates decline below 5%.
It is still our expectation that the economy will remain strong for the
foreseeable future. The unemployment rate fell to a 29-year low of 4.2% in
March. Consumer confidence remains close to all-time records. Even the hard-hit
manufacturing sector is beginning to show signs of recovery from the impacts of
the Asian problem. Asia shows signs of stabilization and recovery. Latin America
also seems to be stabilizing after the Brazilian crisis. The biggest question is
what is going to happen to Europe. Recently, it showed signs of renewed economic
weakness. Changes in some governmental posts increase the likelihood that easier
monetary and fiscal policies will occur. This bodes well for 2000. Should these
trends continue, our export account will improve and add to future U.S. economic
growth. Longer term, we are still concerned about the growing challenges to the
budget from increased healthcare and defense spending. We view the current
budgetary surplus as being in a very tenuous position. Only small changes in
spending or tax receipts can put it back into deficit.
In closing, we thank you for your investment and continued support.
Respectfully submitted,
Robert L. Rodriguez, C.F.A.
President & Chief Investment Officer
April 4, 1999
<PAGE>
MAJOR PORTFOLIO CHANGES
Six Months Ended March 31, 1999
<TABLE>
<CAPTION>
Principal
Amount
-----------
NET PURCHASES
NON-CONVERTIBLE BONDS & DEBENTURES
<S> <C>
Federal Home Loan Mortgage Corporation (REMIC)--5.85% 2017 (1) ...... $ 9,110,870
Federal Home Loan Mortgage Corporation (REMIC)--6% 2008 (1) ......... $11,250,000
Federal National Mortgage Association (REMIC)--6 1/2% 2008 (1) ...... $ 3,277,993
Green Tree Financial Corporation (CMO)--7.77% 2029 (1) .............. $ 5,500,000
Green Tree Financial Corporation (CMO)--8% 2028 (1) ................. $ 3,270,000
Oregon Steel Mills, Inc.--11% 2003 .................................. $ 5,000,000
U.S. Treasury Inflation-Indexed Notes--3 3/8% 2007 .................. $60,599,825
CONVERTIBLE DEBENTURES
Lam Research Corporation--5% 2002 ................................... $ 5,000,000
Michaels Stores, Inc.--6 3/4% 2003 (1) .............................. $17,250,000
NET SALES
NON-CONVERTIBLE BONDS & DEBENTURES
Busse Broadcasting Corporation--11 5/8% 2000(2) ..................... $ 3,250,000
Federal Home Loan Mortgage Corporation (CMO)--7 1/2% 2004 (2) ....... $ 6,776,772
Federal Home Loan Mortgage Corporation (PAC-REMIC)--7% 2008 (2) ..... $ 3,842,715
Federal Home Loan Mortgage Corporation (PAC-REMIC)--8% 2019 ......... $ 4,192,481
Federal Home Loan Mortgage Corporation (REMIC)--7% 2007 (2) ......... $ 6,248,912
Federal Home Loan Mortgage Corporation (REMIC)--7% 2008 ............. $ 5,218,638
Federal National Mortgage Association (REMIC)--7 1/2% 2024 ("Z") .... $ 8,875,443
Federal National Mortgage Association (REMIC)--7 1/2% 2026 ("Z") (2) $ 5,564,317
Federal National Mortgage Association (REMIC)--8% 2022 (2) .......... $ 3,132,619
Green Tree Financial Corporation (CMO)--6.9% 2004 (2) ............... $ 6,327,615
Green Tree Financial Corporation (CMO)--7 1/4% 2005 ................. $ 3,209,038
Michaels Stores, Inc.--10 7/8% 2006 (2) ............................. $ 5,000,000
Plantronics, Inc.--10% 2001 (2) ..................................... $ 3,248,000
Residential Funding Mortgage Securities (REMIC)--7% 2012 (2) ........ $ 4,985,383
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
3
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 1999
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES Amount Value
- ----------------------------------------------------- ----------- -----------
<S> <C> <C>
U.S. GOVERNMENT & AGENCIES
MORTGAGE-BACKED SECURITIES -- 28.6%
Federal Home Loan Bank (Indexed Notes)--6.55% 2003 .. $ 661,615 $ 661,615
Federal Home Loan Mortgage Corporation (PAC-REMIC)
--7 1/2% 2021 ..................................... 1,904,782 1,933,354
--8% 2019 ......................................... 807,519 807,013
Federal Home Loan Mortgage Corporation (PAC-IO-CMO)
--6 1/2% 2020 ..................................... 2,229,054 167,527
--7% 2020 ......................................... 8,000,000 1,085,000
Federal Home Loan Mortgage Corporation (PAC-IO-REMIC)
--6 1/2% 2007 ..................................... 10,531,309 909,968
--6 1/2% 2023 ..................................... 5,099,407 612,724
Federal Home Loan Mortgage Corporation (REMIC)
--5.85% 2017 ...................................... 9,110,870 9,110,870
--6% 2008 ......................................... 28,333,917 28,183,901
--6% 2009 ......................................... 22,316,000 22,120,735
--7% 2008 ......................................... 2,565,287 2,573,304
--7% 2023 ......................................... 5,000,000 4,985,938
--7 1/2% 2026 ("Z") ............................... 9,032,756 9,038,401
--8 1/2% 2026 ..................................... 9,079,031 9,486,171
--10.15% 2006 ..................................... 20,861 21,031
Federal National Mortgage Association (PAC-IO-REMIC)
--6% 2027 ......................................... 41,473,035 9,888,727
--6% 2028 ......................................... 25,857,157 6,044,110
--6 1/2% 2009 ..................................... 4,761,760 726,911
--6 1/2% 2020 ..................................... 5,873,314 595,589
--7% 2004 ......................................... 1,016,222 132,109
--7% 2017 ......................................... 3,930,118 161,504
Federal National Mortgage Association (REMIC)
--4.38% 2022 ...................................... 18,500,000 17,690,625
--6 1/2% 2008 ..................................... 3,277,993 3,257,506
--7% 2024 ("Z") ................................... 11,134,289 10,847,237
--7 1/2% 2024 ("Z") ............................... 5,354,196 5,354,196
</TABLE>
4
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 1999
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES--CONTINUED Amount Value
- ---------------------------------------------------------------- -------------- ------------
<S> <C> <C>
Government National Mortgage Association--7 1/2% 2023........... $ 529,587 $ 545,640
Government National Mortgage Association II--8% 2027............ 4,907,248 5,097,402
Government National Mortgage Association (MH)
--8 1/4% 2006-7............................................... 402,105 415,425
--8 3/4% 2006................................................. 899,231 950,937
--8 3/4% 2011................................................. 944,452 978,983
--9% 2010..................................................... 552,971 575,954
--9% 2011..................................................... 1,302,151 1,356,272
--9 1/4% 2010-11.............................................. 934,194 973,605
Government National Mortgage Association (MH)
--9 3/4% 2005-6............................................... 2,075,421 2,172,058
--9 3/4% 2012-13.............................................. 879,643 920,601
Government National Mortgage Association (PL)
--10 1/4% 2017................................................ 907,280 943,571
-------------
$161,326,514
-------------
OTHER U.S. GOVERNMENT & AGENCIES -- 39.1%
Tennessee Valley Authority--8 3/8% 1999......................... $ 3,400,00 $ 3,456,651
U.S. Treasury Inflation-Indexed Notes--3 3/8% 2007.............. 206,349,070 198,546,496
U.S. Treasury Notes--8 1/4% 2005................................ 1,800,000 1,860,187
U.S. Treasury Notes Strip--0% 2009.............................. 31,000,000 17,232,590
-------------
$221,095,924
-------------
TOTAL U.S. GOVERNMENT & AGENCIES-- 67.7%........................ $382,422,438
-------------
MORTGAGE BONDS
ASSET BACKED -- 3.4%
Green Tree Financial Corporation (CMO)
--7 1/4% 2005................................................. $ 9,971,228 $ 9,880,863
--7 3/4% 2029................................................. 1,000,000 850,938
--7.77% 2029.................................................. 5,500,000 5,056,563
--8% 2028..................................................... 3,270,000 3,117,741
Merrill Lynch Mortgage Investors, Inc. (Class A)--8.3% 2012..... 259,681 259,762
-------------
$ 19,165,867
-------------
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 1999
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES--CONTINUED Amount Value
- --------------------------------------------------------------------- ------------- ----------
<S> <C> <C>
MORTGAGE BACKED -- 1.4%
DLJ Mortgage Acceptance Corp. (Series 1997-E Class "B")
--7.5481% 2026*.................................................... $ 5,017,182 $ 3,980,820
Prudential Home Mortgage Securities Corp. (Series 1993-F Class "1B1")
--6.6582% 2000*.................................................... 4,119,503 4,119,503
------------
$ 8,100,323
------------
TOTAL MORTGAGE BONDS -- 4.8%......................................... $ 27,266,190
------------
CORPORATE BONDS & DEBENTURES -- 7.1%
Advanta Corporation
--6.0075% 2000 (Floating Rate)..................................... $ 1,200,000 $ 1,131,000
--6.65% 2000....................................................... 2,400,000 2,311,500
--6.658% 1999...................................................... 3,400,000 3,298,000
Advantica Restaurant Group, Inc.--11 1/4% 2008....................... 10,928,038 11,119,279
Oregon Steel Mills, Inc.--11% 2003................................... 13,350,000 14,100,938
Trump Atlantic City Associates--11 1/4% 2006......................... 9,000,000 7,965,000
------------
$ 39,925,717
-------------
TOTAL NON-CONVERTIBLE BONDS & DEBENTURES-- 79.6% $449,614,345
-------------
CONVERTIBLE SECURITIES
CONVERTIBLE BONDS & DEBENTURES -- 10.8%
Centertrust Retail Properties, Inc.
--7 1/2% 2001 (Class "A").......................................... $ 4,588,000 $ 4,255,370
--7 1/2% 2001 (Class "B").......................................... 5,800,00 5,336,000
Charming Shoppes, Inc. --7 1/2% 2006................................. 7,000,00 6,230,000
DRS Technologies, Inc.--9% 2003...................................... 2,000,000 2,060,000
HomeBase, Inc.--5 1/4% 2004.......................................... 8,302,000 5,935,930
Lam Research Corporation--5% 2002.................................... 15,000,000 12,487,500
Michaels Stores, Inc.--6 3/4% 2003................................... 17,250,000 16,128,750
Offshore Logistics, Inc.--6% 2003.................................... 2,000,000 1,740,000
Quantum Health Resources, Inc.--4 3/4% 2000.......................... 1,000,000 887,500
Read-Rite Corporation--6 1/2% 2004................................... 10,055,000 5,831,900
------------
$ 60,892,950
------------
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 1999
<TABLE>
<CAPTION>
Shares or
Principal
CONVERTIBLE SECURITIES--CONTINUED Amount Value
- --------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCK -- 0.1%
Treev Inc. (Series A) ............................................... 75,000 $ 553,125
------------
TOTAL CONVERTIBLE SECURITIES -- 10.9%................................ $ 61,446,075
------------
OTHER PREFERRED AND COMMON STOCK -- 0.7%
Crown American Realty Trust (Preferred)................................ 78,500 $ 3,748,375
Treev Inc. (Common).................................................... 3,999 7,498
------------
$ 3,755,873
------------
SHORT-TERM INVESTMENTS -- 5.3%
Federal National Mortgage Association (Floating Rate)
--4.682% 5/25/99..................................................... $ 5,000,000 $ 4,996,500
--5.1% 6/30/99....................................................... 10,000,000 9,988,000
Federal Home Loan Bank (Floating Rate)--4.967% 8/18/99................. 15,000,000 14,970,000
------------
$ 29,954,500
------------
TOTAL INVESTMENT SECURITIES-- 96.5% (Cost $550,618,866) $544,770,793
------------
OTHER SHORT-TERM INVESTMENTS -- 2.8%
Short-term Corporate Notes:
American Express Credit Corporation--4.82% 4/1/99.................. $ 4,000,000 $ 4,000,000
General Electric Capital Services, Inc.--4.83% 4/5/99.............. 11,002,000 10,996,096
State Street Bank Repurchase Agreement--4% 4/1/99
(Collateralized by U.S. Treasury Notes --13 1/4% 2014
market value $675,931)........................................... 659,000 659,073
------------
OTHER SHORT-TERM INVESTMENTS (Cost $15,655,169)...................... $ 15,655,169
------------
TOTAL INVESTMENTS-- 99.3% (Cost $566,274,035)........................ $560,425,962
Other assets less liabilities-- 0.7%................................. 4,123,806
------------
TOTAL NET ASSETS-- 100%.............................................. $564,549,768
------------
------------
</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 1.4% of total net assets at March 31, 1999.
See notes to financial statements.
7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments at value:
Investment securities -- at market value
(identified cost $550,618,866)............................................ $544,770,793
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less)........................................... 15,655,169 $560,425,962
------------
Cash.......................................................................... 672
Receivable for:
Interest.................................................................... 5,567,403
Investment securities sold.................................................. 4,634,753
Capital Stock sold.......................................................... 970,611 11,172,767
------------ ------------
$571,599,401
LIABILITIES
Payable for:
Investment securities purchased............................................. 5,076,415
Capital Stock repurchased................................................... 1,615,258
Advisory fees............................................................... 241,946
Accrued expenses and other liabilities...................................... 116,014 7,049,633
------------ ------------
NET ASSETS...................................................................... $564,549,768
------------
------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 51,871,670 shares........................... $ 518,717
Additional Paid-in Capital.................................................... 559,034,746
Undistributed net realized gains on investments............................... 1,618,490
Undistributed net investment income........................................... 9,225,888
Unrealized depreciation of investments........................................ (5,848,073)
------------
NET ASSETS.................................................................... $564,549,768
------------
------------
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)................................... $10.88
------
------
Maximum offering price per share
(100/95.5 of per share net asset value)...................................... $11.39
------
------
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF OPERATIONS
For the Six Months Ended March 31, 1999
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C> <C>
Interest.................................................................... $ 19,394,511
Dividends................................................................... 231,625
-------------
$ 19,626,136
EXPENSES
Advisory fees............................................................... $ 1,454,024
Transfer agent fees and expenses............................................ 123,674
Registration fees........................................................... 45,347
Custodian fees and expenses................................................. 30,337
Directors' fees and expenses................................................ 20,221
Reports to shareholders..................................................... 18,319
Postage..................................................................... 14,445
Audit fees.................................................................. 12,500
Insurance................................................................... 6,759
Legal fees.................................................................. 2,111
Other expenses.............................................................. 16,980 1,744,717
---------------- -------------
Net investment income............................................... $ 17,881,419
-------------
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)................ $ 115,360,337
Cost of investment securities sold.......................................... 113,231,204
-------------
Net realized gain on investments........................................ $ 2,129,133
Unrealized appreciation (depreciation) of investments:
Unrealized appreciation at beginning of period.............................. $ 5,317,224
Unrealized depreciation at end of period.................................... (5,848,073)
-------------
Decrease in unrealized appreciation of investments...................... (11,165,297)
------------
Net realized and unrealized loss on investments..................... $ (9,036,164)
-------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS............................................................... $ 8,845,255
-------------
-------------
</TABLE>
See notes to financial statements.
9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, 1999 September 30, 1998
------------------------- -------------------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C> <C> <C>
Operations:
Net investment income..................$ 17,881,419 $ 35,993,477
Net realized gain on investments....... 2,129,133 2,862,505
Decrease in unrealized
appreciation of investments.......... (11,165,297) (9,176,172)
------------- --------------
Increase in net assets resulting
from operations........................ $ 8,845,255 $ 29,679,810
Distributions to shareholders from:
Net investment income..................$ (19,053,114) $ (33,893,211)
Net realized capital gains............. (3,215,415) (22,268,529) (1,183,945) (35,077,156)
------------- -------------
Capital Stock transactions:
Proceeds from Capital Stock sold.......$ 69,201,353 $ 236,277,210
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions....... 19,254,446 30,352,091
Cost of Capital Stock repurchased...... (126,229,085) (37,773,286) (175,059,444) 91,569,857
------------ ----------- ------------- ------------
Total increase (decrease) in net assets.. $(51,196,560) $ 86,172,511
NET ASSETS
Beginning of period, including
undistributed net investment income
of $10,397,583 and $8,297,317.......... 615,746,328 529,573,817
------------- -------------
End of period, including
undistributed net investment income
of $9,225,888 and $10,397,583.......... $564,549,768 $ 615,746,328
------------ -------------
------------ -------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold............. 6,370,214 21,199,452
Shares issued to shareholders
upon reinvestment of dividends
and distributions...................... 1,784,552 2,740,769
Shares of Capital Stock repurchased...... (11,619,747) (15,730,014)
------------ -------------
Increase (decrease) in Capital
Stock outstanding....................... (3,464,981) 8,210,207
------------ -------------
------------ -------------
</TABLE>
See notes to financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Six Months
Ended Year Ended September 30,
March 31, ----------------------------------------------
1999 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period............. $ 11.13 $ 11.24 $ 10.97 $ 11.05 $ 10.52 $ 11.32
------- ------- ------- ------- ------- -------
Net investment income.............................. $ 0.34 $ 0.67 $ 0.68 $ 0.68 $ 0.67 $ 0.68
Net realized and unrealized gain (loss) on
investment securities............................ (0.18) (0.10) 0.32 0.06 0.55 (0.51)
------- ------- ------- ------- ------- -------
Total from investment operations................... $ 0.16 $ 0.57 $ 1.00 $ 0.74 $ 1.22 $ 0.17
------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income............. $ (0.35) $ (0.66) $ (0.68) $ (0.66) $ (0.69) $ (0.70)
Distributions from net realized
capital gains.................................. (0.06) (0.02) (0.05) (0.16) -- (0.27)
------- ------- ------- ------- ------- -------
Total distributions.............................. $ (0.41) $ (0.68) $ (0.73) $ (0.82) $ (0.69) $ (0.97)
------- ------- ------- ------- ------- -------
Net asset value at end of period................... $ 10.88 $ 11.13 $ 11.24 $ 10.97 $ 11.05 $ 10.52
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Total investment return*........................... 1.50% 5.24% 9.54% 7.00% 12.14% 1.60%
Ratios/supplemental data:
Net assets at end of period (in $000's)............ 564,550 615,746 529,574 338,297 207,018 122,708
Ratio of expenses to average net assets............ 0.60%+ 0.59% 0.59% 0.63% 0.68% 0.74%
Ratio of net investment income to
average net assets............................... 6.11%+ 6.06% 6.37% 6.44% 6.50% 6.41%
Portfolio turnover rate............................ 37%+ 47% 29% 16% 31% 39%
</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, 1999 is not annualized.
+ Annualized
See notes to financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 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 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 $122,281,869 for the
six months ended March 31, 1999. Realized gains or losses are based on the
specific-certificate identification method. Cost of investment securities owned
at March 31, 1999 was the same for federal income tax and financial reporting
purposes. Gross unrealized appreciation and depreciation for all investment
securities at March 31, 1999 for federal income tax purposes was $10,598,033 and
$16,446,106, 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.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
For the six months ended March 31, 1999, the Fund paid aggregate fees of
$20,000 to the four Directors who were 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, 1999, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $40,862 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, 1999, the Board of Directors declared a dividend from net
investment income of $0.17 per share payable April 8, 1999 to shareholders of
record on March 31, 1999. For financial statement purposes, this dividend was
recorded on the ex-dividend date, April 1, 1999.
13
<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
CUSTODIAN & TRANSFER AGENT
State Street Bank and Trust Company
Boston, Massachusetts
SHAREHOLDER SERVICE AGENT
Boston Financial Data Services, Inc.
P.O. Box 8115
Boston, Massachusetts 02266-8500
(800) 638-3060
(617) 483-5000
We were saddened by the death on May 5, 1999 of Donald E. Cantlay, Director of
FPA New Income, Inc. since 1981. We will miss his candor and good counsel.
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.
