<PAGE>
LETTER TO SHAREHOLDERS
DEAR FELLOW SHAREHOLDERS:
This Semi-Annual Report covers the six-month period ended March 31, 2000.
Your Fund's net asset value (NAV) closed at $10.61. Income dividends of $0.17
and $0.18 were paid on October 7, 1999, and December 29, 1999, to holders of
record on September 30 and December 21, 1999, respectively. The December payment
also included a $0.09 capital gains distribution of which $0.055 was long-term
in nature.
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, 2000
------------------------------
1 YEAR 5 YEARS 10 YEARS
-------- --------- ----------
<S> <C> <C> <C>
FPA New Income, Inc.
(NAV)..................... 5.13%* 7.17%* 8.95%*
FPA New Income, Inc.
(Net of Sales Charge)..... 0.40%++ 6.19%++ 8.45%++
Lipper Corporate Debt Fund
"A" Rated Average......... 0.36% 6.30% 7.67%
Lehman Brothers Government/
Corporate Bond Index...... 1.70% 7.13% 8.07%
</TABLE>
The Fund's total rate of return for the six months was 2.73%* versus 1.63%
and 2.27% for the Lipper Average and the Lehman Brothers Index, respectively.
For the calendar year ended December 31, 1999, total returns were: FPA New
Income, Inc., 3.39%*; Lipper Average, -2.61%; and the Lehman Index, -2.15%.
COMMENTARY
Your Fund continues to provide superior relative performance, when compared
to both the Lehman Index and the Lipper Average, for measurement periods ranging
from six months to ten years. This is a direct result of your Fund taking a
defensive portfolio posture during 1998 and 1999. In the short run, this led to
a period of substandard performance but, as you can see, when you do not lose
money, you can recoup this underperformance very quickly. We are proud of the
fact that your Fund is the only bond or stock fund that has not had a calendar
year of negative performance in twenty-five years. This was difficult to
accomplish during the last five years, since the only two negative total return
years for bonds in the last sixty years occurred during 1994 and 1999. Our basic
philosophy of "winning by not losing" rewarded us again in 1999.
As interest rates rose and investor pessimism grew, we began a process of
gradually lengthening the average maturity and average modified duration of the
portfolio. The Fund's modified duration increased to 4.55 years at March 31,
2000, from 3.73 years at September 30, 1999, and 2.89 years at March 31, 1999.
High-quality bond and Treasury yields rose to their highest levels in three
years in January and February. In response to these trends, we increased our
exposure to mortgage securities via mortgage Z bonds while eliminating our
mortgage IO position. IO securities generally increase in value as interest
rates rise. In bond parlance, they have negative duration and convexity.
Valuations for these securities rose dramatically and were a material
contributor to your Fund's positive performance in 1999. As they rose in value,
we decided that the risk versus return tradeoff had reached a level that was
unacceptable. In their place, we added mortgage Z bonds. These are very long
duration securities, which means that they are highly sensitive to changes in
interest-rate levels. The Z bonds were added at yields ranging from 8.15% to
8.30%. We believe that these yield levels provide an attractive yield premium
over potential inflation. Should rates decline, they will generate an attractive
total rate of return. They now account for 10% of the Fund's portfolio. We also
made some minor adjustments to our convertible and high-yield holdings.
As a result of the above changes, the portfolio retains its high-quality
mix orientation, with an average AA2 Moody's credit rating. As of March 31,
Government/Agency securities totaled 72% of net assets. Securities rated less
than AA equaled 24%. Convertible and high-yield securities, included in the less
than AA category, total 19%. Short-term liquidity totals 4%. We continue to
maintain 42% of total assets in Treasury Inflation Protection Securities (TIPS).
We remain invested in TIPS because we believe they provide an attractive
combination of yield and
- ---------------
* 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>
reduced principal volatility. The BANK CREDIT ANALYST publication recently
commented that ten-year TIPS provide a higher return with less volatility than a
two-year Treasury security. A TIPS' yield-to-maturity is enhanced by the
inflation increment it will earn, as measured by the Consumer Price Index (CPI).
The CPI is now running at 3.1%, the fastest in three years. This means our TIPS
are yielding in excess of 7%--4% from the base yield-to-maturity and the 3.1%
inflation increment. We believe CPI will rise even higher to approximately 3.5%
later this year. At that point, the debate will center on how fast it will
decline. We expect it to remain in the 3% range for the next year as inflation
pressures mount in the economy.
Despite the government's data indicating that there is little wage
inflation, we believe that it is accelerating. The temporary-help services firm
Manpower Inc. has among the best databases on employee compensation levels.
Their employee work contracts have shown considerably faster growth rates in
employment costs during the past year than the government's data. Corporate
profit margins have been falling since 1997, and now they face growing cost-push
pressures from healthcare, employment contract settlements, and rising raw
material costs. We are beginning to see corporations regain some of their
pricing power, as they attempt to offset some of these cost pressures. Since
1997, U.S. commodity costs and other import costs have been held down by the
effects of the Asian crisis. The Asian deflation is now history since most of
these countries are recovering from this difficult period. Import costs for the
U.S. are now rising as it faces intensified competition from recovering foreign
economies. During the next year, we believe we will hear more on these topics.
We are not expecting huge inflation increases, but we do believe that the
general consensus is still too optimistic.
Since February, the Treasury bond market has staged an impressive rally.
This rally is the direct result of the announcement that the U.S. Treasury will
begin repurchasing outstanding Treasury debt because of its growing budget
surplus. High-quality bond prices have benefited little from this announcement.
Their yield spreads, the yield differential between a Treasury bond and a
non-Treasury bond of similar maturity, have widened as their bond prices failed
to keep pace with the Treasury market rally. We view this as a temporary
situation. At some point, these higher yield spreads will encourage investors to
switch a portion of their Treasury holdings into these other sectors. We
recently did some of this sector reallocation by switching a portion of our
nine-year Treasury strips into ten-year FNMA agency debt. We increased our yield
by approximately 80 basis points (there are 100 basis points in one percentage
point) while reducing our duration by three years. The result is more yield with
less principal volatility risk.
Corporate debt spreads are widening in both the investment grade and
high-yield sectors. In addition to the reason cited above, there are growing
fears of corporate event risk and bond fund redemptions. Corporations are
leveraging their balance sheets in order to repurchase stock. Furthermore, many
of these company's share prices have not participated in the stock market rally
of the last two years and, thus, there is a growing fear that these companies
could be taken over or possibly consider completing a leveraged buyout. In
either case, the bondholder may suffer a rating agency downgrade due to
increased balance sheet leverage. High-yield bond spreads have widened because
of bond fund redemptions. These funds are losing assets as investors are
attracted to the excitement of the stock market--especially technology stocks.
These trends are starting to impact the less than investment grade portion of
your Fund. Subsequent to March 31, we were able to reduce a portion of our
Michaels convertible bond holding because of the positive impact from the
underlying stock's rally. The liquidity raised will provide us flexibility to
take advantage of this yield-widening trend. In some cases, we are witnessing
yield levels that have not been seen since 1990--the last major "bear" market in
high-yield bonds.
Finally, we would like to make a few brief comments about future Federal
Reserve interest-rate policy. Since June of last year, the Fed has raised
short-term interest rates 125 basis points. We still believe that this is not
enough to slow the economy materially. Other than for a few selected areas of
the economy, yields are not much higher than where they
2
<PAGE>
were three years ago, when the economy was experiencing robust growth. With
Asia's recovery, U.S. export growth will likely accelerate and add to domestic
economic growth. We believe that the Fed will raise the Fed Fund's rate another
fifty basis points this year. With a flat yield curve, these increases should
negatively impact longer-term rates to some degree. This has typically been the
outcome in earlier flat yield curve periods. We believe the longer-term
securities that we have purchased compensate us for this potential risk through
their high yields. A major caveat to this expectation is the status of the stock
market. Should the recent decline continue, this may temper the Fed's interest
rate policy because of the potentially negative impact it might have on the
economy. We are hopeful that this uncertainty will create more attractive
investment opportunities.
In closing, we thank you for your investment and continued support.
Respectfully submitted,
/s/ Robert L. Rodriguez
Robert L. Rodriguez, CFA
President & Chief Investment Officer
April 21, 2000
3
<PAGE>
MAJOR PORTFOLIO CHANGES
Six Months Ended March 31, 2000
<TABLE>
<CAPTION>
Principal
Amount
------
<S> <C>
NET PURCHASES
NON-CONVERTIBLE BONDS & DEBENTURES
Federal National Mortgage Association --7 1/4% 2010 (1).........$ 6,000,000
Government National Mortgage Association (Z) --7 1/2% 2029 (1)...$ 9,169,807
Green Tree Financial Corporation --7.3% 2027 (1).................$ 9,966,753
U.S. Treasury Inflation-Indexed Notes --3 3/8% 2007..............$ 6,839,440
CONVERTIBLE DEBENTURES
CKE Restaurants, Inc.--4 1/4% 2004...............................$ 5,500,000
Offshore Logistics, Inc.--6% 2003................................$ 5,000,000
NET SALES
NON-CONVERTIBLE BONDS & DEBENTURES
Federal Home Loan Mortgage Corporation --5.85% 2017 (2)..........$ 9,110,870
Federal National Mortgage Association (IO) --6% 2027 (2).........$38,536,034
Federal National Mortgage Association (IO) --6% 2028 (2).........$23,765,747
Federal National Mortgage Association --5.16% 2022 (2)...........$18,500,000
Green Tree Financial Corporation --7 1/4% 2005 (2)...............$ 9,716,854
U.S. Treasury Notes Strip --0% 2009..............................$16,000,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
4
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES Amount Value
- ------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCIES
MORTGAGE-BACKED AGENCIES -- 28.3%
Federal Home Loan Mortgage Corporation
--6% 2008.................................................................... $ 26,542,641 $ 24,998,757
--6% 2009.................................................................... 22,316,000 20,921,250
--7% 2008.................................................................... 2,453,541 2,402,170
--7% 2023.................................................................... 5,000,000 4,871,875
--7 1/2% 2021................................................................ 880,878 883,079
--8 1/2% 2026................................................................ 7,385,347 7,599,984
--10.15% 2006................................................................ 9,109 9,112
Federal Home Loan Mortgage Corporation (IO)
--6 1/2% 2007................................................................ 5,913,603 480,711
--6 1/2% 2020................................................................ 1,323,316 67,768
--6 1/2% 2023................................................................ 3,808,338 387,974
--7% 2020.................................................................... 8,000,000 700,000
Federal Home Loan Mortgage Corporation (Z)
--6 1/2% 2029................................................................ 5,508,771 4,506,864
--7% 2029.................................................................... 5,089,573 4,532,902
--7 1/2% 2026................................................................ 6,122,460 5,879,476
Federal National Mortgage Association
--6 1/2% 2008................................................................ 2,851,816 2,769,826
--7 1/4% 2010................................................................ 6,000,000 6,031,875
Federal National Mortgage Association (IO)
--6 1/2% 2009................................................................ 3,596,828 542,053
--6 1/2% 2020................................................................ 4,129,552 335,687
--7% 2004.................................................................... 703,155 88,773
--7% 2017.................................................................... 802,215 6,894
Federal National Mortgage Association (Z)
--7% 2019.................................................................... 13,577,293 12,665,070
--7% 2024.................................................................... 11,939,188 10,909,435
--7 1/2% 2024................................................................ 1,625,021 1,557,990
--7 1/2% 2030................................................................ 1,421,485 1,337,084
Government National Mortgage Association
--7% 2028.................................................................... 9,390,939 9,068,125
--7 1/2% 2023................................................................ 415,044 411,670
Government National Mortgage Association (Z)--7 1/2% 2029...................... 9,169,807 8,476,340
Government National Mortgage Association II--8% 2027........................... 3,469,353 3,499,710
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES--CONTINUED Amount Value
- ------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Government National Mortgage Association (MH)
--8 1/4% 2006-7.............................................................. $ 285,916 $ 287,702
--8 3/4% 2006................................................................ 683,507 704,011
--8 3/4% 2011................................................................ 769,907 779,529
--9% 2010.................................................................... 463,034 472,005
--9% 2011.................................................................... 1,118,323 1,139,992
--9 1/4% 2010-11............................................................. 778,066 793,628
--9 3/4% 2005-6.............................................................. 1,606,733 1,651,921
--9 3/4% 2012-13............................................................. 668,892 687,705
Government National Mortgage Association (PL)--10 1/4% 2017.................... 889,128 914,691
------------
$143,373,638
------------
U.S. GOVERNMENT -- 43.7%
U.S. Treasury Inflation-Indexed Notes--3 3/8% 2007............................. $221,459,680 $213,016,530
U.S. Treasury Notes Strip--0% 2009............................................. 15,000,000 8,351,400
------------
$221,367,930
------------
TOTAL U.S. GOVERNMENT & AGENCIES-- 72.0%...................................... $364,741,568
------------
MORTGAGE BONDS
ASSET-BACKED -- 4.2%
Green Tree Financial Corporation
--7.3% 2027.................................................................. $ 9,966,753 $ 8,418,792
--7 3/4% 2029................................................................ 998,188 847,212
--7.77% 2029................................................................. 5,500,000 4,992,969
--8% 2030.................................................................... 2,929,526 2,778,471
--8.44% 2030................................................................. 4,700,000 4,197,687
------------
$ 21,235,131
------------
MORTGAGE-BACKED -- 1.1%
DLJ Mortgage Acceptance Corp. (Series 1997-E Class B)
--7.5481% 2026*.............................................................. $ 4,919,699 $ 3,558,133
First Financial Mortgage Trust (Series 9 Class A4)
--5.8% 2008.................................................................. 826,156 815,570
Norwest Asset Securities Corp. (Series 1999-13 Class A "Z")
--6 3/4% 2029................................................................ 1,361,411 1,122,739
------------
$ 5,496,442
------------
TOTAL MORTGAGE BONDS-- 5.3%.................................................... $ 26,731,573
------------
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
Shares or
Principal
BONDS & DEBENTURES--CONTINUED Amount Value
- ------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
CORPORATE BONDS & DEBENTURES -- 6.1%
Advantica Restaurant Group, Inc.--11 1/4% 2008................................. $ 10,928,038 $ 7,540,346
Oregon Steel Mills, Inc.--11% 2003............................................. 13,350,000 12,549,000
Riviera Holdings Corp.--10% 2004............................................... 3,034,000 2,700,260
Trump Atlantic City Associates--11 1/4% 2006................................... 12,400,000 8,122,000
------------
$ 30,911,606
------------
TOTAL NON-CONVERTIBLE BONDS & DEBENTURES-- 83.4%............................... $422,384,747
CONVERTIBLE BONDS & DEBENTURES -- 12.3% ------------
Centertrust Retail Properties, Inc.
--7 1/2% 2001 (Class A)...................................................... $ 5,558,000 $ 5,134,202
--7 1/2% 2001 (Class B)...................................................... 6,150,000 5,627,250
Charming Shoppes, Inc.--7 1/2% 2006............................................ 7,000,000 6,650,000
CKE Restaurants, Inc.--4 1/4% 2004............................................. 17,500,000 9,100,000
DRS Technologies, Inc.--9% 2003................................................ 2,000,000 2,220,000
HomeBase, Inc.--5 1/4% 2004.................................................... 8,602,000 4,301,000
Michaels Stores, Inc.--6 3/4% 2003............................................. 15,000,000 16,725,000
Offshore Logistics, Inc.--6% 2003.............................................. 7,000,000 6,142,500
Quantum Health Resources, Inc.--4 3/4% 2000.................................... 1,000,000 910,000
Read-Rite Corporation--10% 2004................................................ 5,027,000 5,316,053
------------
$ 62,126,005
------------
PREFERRED AND COMMON STOCK -- 0.6%
Crown American Realty Trust (Preferred)........................................ 78,500 $ 2,914,312
Read-Rite Corporation (Common)................................................. 57,473 269,405
------------
$ 3,183,717
------------
TOTAL INVESTMENT SECURITIES -- 96.3% (Cost $502,688,591) $487,694,469
------------
SHORT-TERM INVESTMENTS -- 2.6% (Cost $13,199,685)
American Express Credit Corporation--6.2% 4/3/00............................... $ 4,942,000 $ 4,940,298
General Electric Capital Corporation--5.95% 4/3/00............................. 3,161,000 3,159,955
General Electric Capital Services, Inc.--6.04% 4/4/00.......................... 5,102,000 5,099,432
------------
$ 13,199,685
------------
TOTAL INVESTMENTS-- 98.9% (Cost $515,888,276).................................. $500,894,154
Other assets and liabilities, net-- 1.1%....................................... 5,366,828
------------
TOTAL NET ASSETS-- 100%........................................................ $506,260,982
============
</TABLE>
* Restricted security purchased on September 8, 1997 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. This
restricted security constituted 0.7% of total net assets at March 31, 2000.
See notes to financial statements.
7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 2000
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $502,688,591)........................................... $487,694,469
Short-term investments-- at cost plus interest earned
(maturities of 60 days or less).......................................... 13,199,685 $500,894,154
------------
Cash......................................................................... 825
Receivable for:
Interest................................................................... $ 5,151,573
Capital Stock sold......................................................... 1,560,768
Investment securities sold................................................. 419,867 7,132,208
------------ -----------------
$508,027,187
LIABILITIES
Payable for:
Capital Stock repurchased.................................................. $ 1,419,663
Advisory fees.............................................................. 213,343
Accrued expenses and other liabilities..................................... 133,199 1,766,205
------------ ---------
NET ASSETS..................................................................... $506,260,982
------------
------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 47,704,956 shares.......................... $ 477,050
Additional Paid-in Capital................................................... 514,636,272
Accumulated net realized loss on investments................................. (3,340,375)
Undistributed net investment income.......................................... 9,482,157
Unrealized depreciation of investments....................................... (14,994,122)
------------
NET ASSETS................................................................... $506,260,982
============
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).................................. $ 10.61
============
Maximum offering price per share
(100/95.5 of per share net asset value)..................................... $ 11.11
============
</TABLE>
See notes to financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Six Months Ended March 31, 2000
INVESTMENT INCOME
<S> <C> <C>
Interest .................................................................. $ 18,830,708
Dividends ................................................................. 227,635
--------------
$ 19,058,343
EXPENSES
Advisory fees.............................................................. $ 1,292,225
Transfer agent fees and expenses........................................... 119,453
Reports to shareholders.................................................... 30,487
Custodian fees and expenses................................................ 27,609
Registration fees.......................................................... 18,821
Directors' fees and expenses............................................... 17,984
Postage.................................................................... 16,302
Audit fees................................................................. 13,213
Legal fees................................................................. 12,365
Insurance.................................................................. 5,297
Other expenses............................................................. 16,602 1,570,358
-------------- --------------
Net investment income.............................................. $ 17,487,985
--------------
NET REALIZED AND UNREALIZED 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)............... $ 101,144,563
Cost of investment securities sold......................................... 104,295,956
---------------
Net realized loss on investments....................................... $ (3,151,393)
Unrealized depreciation of investments:
Unrealized depreciation at beginning of period............................. $ (14,317,783)
Unrealized depreciation at end of period................................... (14,994,122)
---------------
Change in unrealized depreciation of investments....................... (676,339)
--------------
Net realized and unrealized loss on investments.................... $ (3,827,732)
--------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS.............................................................. $ 13,660,253
==============
</TABLE>
See notes to financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended Year Ended
March 31, 2000 September 30, 1999
------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income............................ $ 17,487,985 $ 36,332,800
Net realized gain (loss) on investments.......... (3,151,393) 4,763,524
Change in unrealized
appreciation of investments.................... (676,339) (19,635,007)
------------- ---------------
Increase in net assets resulting
from operations.................................. $ 13,660,253 $ 21,461,317
Distributions to shareholders from:
Net investment income............................ $ (17,268,796) $ (37,467,415)
Net realized capital gains....................... (4,441,863) (21,710,659) (3,215,415) (40,682,830)
---------------- --------------
Capital Stock transactions:
Proceeds from Capital Stock sold................. $ 71,501,256 $ 127,033,525
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions................. 18,501,956 35,025,699
Cost of Capital Stock repurchased................ (106,825,309) (16,822,097) (227,450,554) (65,391,330)
---------------- ------------ -------------- ------------
Total decrease in net assets....................... $(24,872,503) $ (84,612,843)
NET ASSETS
Beginning of period, including
undistributed net investment income
of $9,262,968 and $10,397,583.................... 531,133,485 615,746,328
------------ ------------
End of period, including
undistributed net investment income
of $9,482,157 and $9,262,968..................... $506,260,982 $ 531,133,485
============ =============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold....................... 6,820,822 11,732,265
Shares issued to shareholders
upon reinvestment of dividends
and distributions................................ 1,780,968 3,253,664
Shares of Capital Stock repurchased................ (10,221,174) (20,998,240)
--------------- ---------------
Decrease in Capital
Stock outstanding................................. (1,619,384) (6,012,311)
============ =============
</TABLE>
See notes to financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
Six
Months
Ended
March
31, Year Ended September 30,
----------------------------------------------
2000 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period............... $10.77 $11.13 $11.24 $10.97 $11.05 $10.52
------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income.............................. $ 0.36 $ 0.71 $ 0.67 $ 0.68 $ 0.68 $ 0.67
Net realized and unrealized gain (loss) on
investment securities............................ (0.08) (0.30) (0.10) 0.32 0.06 0.55
------ ------ ------ ------ ------ ------
Total from investment operations..................... $ 0.28 $ 0.41 $ 0.57 $ 1.00 $ 0.74 $ 1.22
------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income............... $(0.35) $(0.71) $(0.66) $(0.68) $(0.66) $(0.69)
Distributions from net realized
capital gains.................................... (0.09) (0.06) (0.02) (0.05) (0.16) --
------ ------ ------ ------ ------ ------
Total distributions................................ $(0.44) $(0.77) $(0.68) $(0.73) $(0.82) $(0.69)
------ ------ ------ ------ ------ ------
Net asset value at end of period..................... $10.61 $10.77 $11.13 $11.24 $10.97 $11.05
====== ====== ====== ====== ====== ======
Total investment return*............................. 2.73% 3.87% 5.24% 9.54% 7.00% 12.14%
Ratios/supplemental data:
Net assets at end of period (in $000's).............. 506,261 531,133 615,746 529,574 338,297 207,018
Ratio of expenses to average net assets.............. 0.61%+ 0.60% 0.59% 0.59% 0.63% 0.68%
Ratio of net investment income to
average net assets+................................ 6.81%+ 6.43% 6.06% 6.37% 6.44% 6.50%
Portfolio turnover rate+............................. 25%+ 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. The
return for the six months ended March 31, 2000 is not annualized.
+ Annualized
See notes to financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 2000
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 $64,007,199 for the
six months ended March 31, 2000. Realized gains or losses are based on the
specific-certificate identification method. Cost of investment securities owned
at March 31, 2000 was the same for federal income tax and financial reporting
purposes. Gross unrealized appreciation and depreciation for all investment
securities at March 31, 2000 for federal income tax purposes was $9,040,894 and
$24,035,016, 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.
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NOTES TO FINANCIAL STATEMENTS
March 31, 2000
For the six months ended March 31, 2000, the Fund paid aggregate fees of
$17,696 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, 2000, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $26,973 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, 2000, the Board of Directors declared a dividend from net
investment income of $0.17 per share payable April 7, 2000 to shareholders of
record on March 31, 2000. For financial statement purposes, this dividend was
recorded on the ex-dividend date, April 3, 2000.
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OFFICERS AND DIRECTORS
DIRECTORS
Willard H. Altman
DeWayne W. Moore
Alfred E. Osborne, Jr.
Lawrence J. Sheehan
OFFICERS
Robert L. Rodriguez, PRESIDENT AND
CHIEF INVESTMENT OFFICER
Eric S. Ende, 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
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IMPORTANT - CHANGES THAT MAY AFFECT YOUR ACCOUNT
In response to your suggestions and feedback, we have made changes to the Fund's
telephone redemption procedures. The telephone redemption privileges have been
expanded to allow redemption checks to be mailed directly to their address of
record for shareholders who have already authorized this option. The ability to
have redemptions sent directly to your bank is also still available. If you do
not wish to participate in this new option, please write to us and we will
remove the authorization. Please note that we will not mail any telephone
redemption checks to your address of record if it was changed within the prior
30 days. We hope that these changes will simplify your experience with us.
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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.
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