<PAGE>
ANNUAL REPORT
FPA New Income, Inc.
[First Pacific Advisors Logo]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
SEPTEMBER 30, 2000
<PAGE>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Annual Report covers the fiscal year ended September 30, 2000. Your
Fund's net asset value (NAV) per share closed at $10.61. During the fiscal year,
your Fund distributed income dividends totaling $0.73. The December 29, 1999
payment also included a $0.09 capital gains distribution of which $0.055 was
long-term.
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, 2000
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
FPA New Income, Inc.
(NAV) ................... 6.56%* 6.43%* 9.09%*
FPA New Income, Inc.
(Net of Sales Charge) .... 1.76% 5.45%++ 8.59%++
Lipper Corporate Debt A
Rated Fund Average ...... 5.34% 5.40% 7.79%
Lehman Brothers
Corporate Bond Index .... 6.74% 6.30% 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 6.56%* versus 5.34% and 6.74% for the Lipper Corporate Debt A Rated
Fund Average and Lehman Brothers Government/Corporate Bond Index, respectively.
For the second half of the fiscal year, the total returns were: FPA New Income,
Inc., 3.73%*; Lipper Average, 3.61%; and the Lehman Brothers Index, 4.36%.
Finally, on a calendar year-to-date basis, the total returns were: FPA New
Income, Inc., 6.85%*; the Lipper Average, 5.79%; and the Lehman Brothers Index,
7.17%.
REDUCTION IN SALES CHARGES
We have reviewed the Fund's current sales charges and determined that a
reduction is appropriate when compared to similar funds and fund complexes.
Effective January 1, 2001, the maximum sales charge will be lowered from 4.5% to
3.5%, with adjustments to the breakpoints.
COMMENTARY
Your Fund continues to outperform other similar quality bond funds for
various measurement periods covering the last ten years, as shown in the above
table. We have slightly underperformed the Lehman Brothers Index, since its
performance was enhanced by a greater exposure to Treasury securities for the
last year versus your Fund. With the decline in Treasury interest rates, the
index's longer average maturity and duration benefited more than your Fund did
from this change in interest-rate level. Treasury bond prices rose while other
bond sectors remained unchanged or declined. This Treasury bond rally was
sparked by the growing fear of a shortage of Treasury bonds due to the growing
federal budgetary surplus. We are still dubious of this argument that Treasury
bonds are going to disappear. Somehow, we believe the federal government will
find a need to continue financing their growing expenditures with debt.
Your Fund's performance was negatively impacted by its exposure to the
asset-backed securities sector. In particular, our holdings in Green Tree
Financial Corporation declined significantly as an announced corporate
charge-off and a proposal to sell Green Tree by its parent, Conseco, Inc., was
not accepted well by the financial markets. We have completed an extensive study
and have determined that the securities we hold continue to perform as
originally anticipated. We are also pleased to see that a change in the
corporate leadership of Conseco has reversed the plan of selling Green Tree. We
were of the opinion that the original plan was flawed and should not be
deployed, and we conveyed this to Conseco. After our analysis was completed, we
added Conseco senior debentures to the portfolio. Since then, the bonds have
risen significantly, as a more balanced view of the company has begun to emerge.
In total, the combined holdings reduced your Fund's performance for the
six-month period ended September 30 by approximately
-------------
* 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>
one percent. We view this as a postponement of an investment return rather than
as a permanent loss.
The high-yield bond market continues to experience difficulty. Total
returns for this sector are slightly negative for the nine-month period ended
September 30. Fortunately, we have had a limited exposure of less than 7% of net
assets dedicated to this sector. (This excludes the Green Tree asset backed
securities that were recently downgraded to less than investment grade.) Our
less-than-investment-grade exposure has focused on the "broken" convertible bond
sector. At March 31, 2000, this sector represented 12% of the Fund versus 9% at
September 30. We reduced or sold several positions after material price
advances. We are still hesitant to increase our exposure to the straight
high-yield sector because we believe this sector will continue to have
difficulty into 2001. Despite the highest yields since the high-yield "bear
market" of 1990, we still think we have not seen the worst. We would like to see
this sector stress tested again by the fears of a potential economic slowdown or
a recession. It will take time for this to occur.
Your Fund's large exposure to Treasury Inflation Protection Securities
(TIPS), 44% of total net assets, continues to moderate the Fund's volatility.
They provide a very attractive investment yield of 7.5%, which is the
combination of the Consumer Price Index (CPI) inflation rate, currently
averaging 3.5%, and the TIPS base yield-to-maturity of 4%. The bond market does
not believe this 3.5% inflation yield increment is sustainable. For example, at
September 30, the nominal ten-year Treasury bond yield was 5.80% while the base
yield-to-maturity of the ten-year TIPS was 3.98%, for a differential of 1.82%.
This differential is what we refer to as the implied inflation rate. In this
case, the market is saying that the CPI will average 1.82% over the next ten
years versus the 3.5% of today. We believe it is unlikely that the CPI will
average less than 2% for the next ten years since this has never occurred for
any material period of time other than during the depths of the Great
Depression. Should the CPI average more than 1.82%, we will earn a higher return
from the TIPS than from the nominal ten-year Treasury bond. We will also earn a
higher return from these securities than if we had a greater portion of the
portfolio invested in short-term money-market securities.
There have not been any significant changes in the asset composition of
the Fund's portfolio since the March shareholder letter. The Fund's modified
duration declined slightly from 4.55 years at March 31, 2000, to 4.25 years at
September 30. To reiterate, modified duration is a measure of how sensitive a
portfolio is to changes in interest rates. The larger the duration number, the
more sensitive the portfolio is to interest-rate changes. The Lehman Brothers
Index's modified duration is 5.41 years and, therefore, it should be more
volatile than your Fund. Your Fund continues to maintain a very high
credit-quality orientation. At September 30, Government/agency securities
totaled 74% 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 3%. Convertible and high-yield securities, included in the
less-than-AA category, total 22%.
For most of this year, the bond market has traded in a very narrow yield
range. Long-term Treasury yields continue to generally move within a 5.50% to
6.50% range. As yields move towards the upper end of this range, we add duration
to the portfolio. Currently, ten- and thirty-year bond yields are near the 5.80%
level. We are not attracted to these low yields. We believe they are
artificially low due to the scarcity issue discussed previously. During the past
three months, yields in the one- to five-year maturity range have declined
approximately 15 basis points (there are 100 basis points in one percentage
point). This reflects a growing belief that the Federal Reserve has finished its
monetary tightening. In our March shareholder letter, we expressed the opinion
that the Fed would have to raise the Fed Funds rate at least another 50 basis
points, which it eventually did. Unlike the consensus, we still believe the Fed
may have to tighten at least one more time in this cycle. Despite recent
economic data that shows that the economy is beginning to decelerate from its
blistering pace earlier in the year, we still see real GDP growing at more than
a 3% rate into the middle of next year. Combining this strength with the
prospect of a more expansionary fiscal policy, the Fed may be forced to tighten
again in the spring of next year. Both Presidential candidates are planning to
expand fiscal policy either through tax cuts or increasing the growth rate of
spending. Either way, this can add to the growth rate of the economy.
Furthermore, we believe the Fed will face the prospect of rising labor cost
inflation as well as a growing likelihood of additional cost-push inflation. It
remains to be seen whether raw material and intermediate cost increases can be
passed on to the consumer. Should this occur, the Fed will have to respond.
So far, this has not been the case.
2
<PAGE>
A looming risk to the interest-rate environment is the growing external
account imbalances that the U.S. economy is developing. In last year's September
shareholder letter, we forecast that the Current Account deficit, a measure of
the flow of goods, services and money into and out of the U.S., was likely to
reach 4% of GDP. As of the second quarter of 2000, this measure was at a record
4.3%. The U.S. has to import approximately $1.25 billion dollars every day of
the year to keep our economy moving. This external supply of funds is offsetting
the record low U.S. savings rate, which turned negative in July for the first
time since the Depression. As the federal government expands its fiscal policy
initiatives, further reduction in our national savings rate may result. Foreign
investors are more than willing to invest in the U.S. since they view our
economy very positively. Should this perception change, a reversal of these
capital inflows could disrupt the economy.
The U.S. dollar has remained very strong throughout the Current Account's
rise. Foreign ownership of U.S. equity and fixed-income assets has increased by
more than 50% since 1995, to where foreign ownership of U.S. assets currently
measures over $6.4 trillion or 66% of U.S. GDP, according to Bridgewater
Associates. It is estimated that the U.S. is now absorbing over 70% of all net
savings in the world. We do not nor do we believe that virtually anyone
understands the implication of these trends. We do not have an answer as to how
these trends will evolve. One can find "experts" on both sides of this issue who
will argue quite eloquently their respective views. Our response is to make sure
that we are being compensated for this potential risk through a higher yield. We
believe the present level of Treasury yields discounts a reasonably optimistic
viewpoint. Since we are unsure as to how these events will unfold, we are
maintaining a duration that is somewhat shorter than the Lehman Brothers Index.
We do expect that the economy will slow down but not significantly until
the second half of next year. This should create some excellent investment
opportunities in spread product, such as in corporate bonds and mortgage
securities, as this slowdown fear develops. We will monitor the status of the
U.S. dollar to see whether these potential capital flow risks will have any
impact on the debt and equity markets. We will keep you informed over time on
this topic.
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
October 15, 2000
-------------------------------------------------------------------------------
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, 1990 TO SEPTEMBER 30, 2000
[Line graph of change in value]
<TABLE>
<CAPTION>
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 9/30/00
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA 10,000 12,069 13,771 15,343 15,589 17,481 18,705 20,489 21,563 22,398 23,868
FPA 9,550 11,526 12,151 14,653 14,887 16,695 17,863 19,567 20,593 21,390 22,794
Lehman 10,000 11,589 13,119 14,625 14,015 16,030 16,748 18,356 20,713 20,378 21,751
Lipper
Fund 10,000 11,675 13,291 14,883 14,222 16,283 16,959 18,595 20,539 20,099 21,174
</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 $22,794, 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 $23,868. 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, 2000
(Unaudited)
<TABLE>
<CAPTION>
Shares or
Principal
Amount
--------------
<S> <C>
NET PURCHASES
NON-CONVERTIBLE BONDS & DEBENTURES
Advantica Restaurant Group, Inc. -11-1/4% 2008................................................. $ 500,000
Conseco Inc. -7.6% 2001 (1).................................................................... $ 500,000
Conseco Inc. -7-7/8% 2000 (1).................................................................. $ 7,830,000
Conseco Inc. -8-1/2% 2002 (1).................................................................. $ 5,260,000
Conseco Inc. -10-1/4% 2002 (1)................................................................. $ 350,000
Federal National Mortgage Association -8% 2015 (1)............................................. $ 1,075,000
Government National Mortgage Association (Z) -8-1/2% 2030 (1)................................. $ 775,000
Jo-Ann Stores, Inc. -10-3/8% 2007 (1).......................................................... $ 1,450,000
Morgan Stanley Dean Witter I Inc. -8.14% 2022 (1).............................................. $ 5,150,000
Oregon Steel Mills, Inc. -11% 2003............................................................. $ 1,750,000
Riviera Holdings Corp. -10% 2004............................................................... $ 558,000
CONVERTIBLE DEBENTURES
Center Trust Retail Properties, Inc. -7-1/2% 2001 (Class B).................................... $ 1,050,000
Charming Shoppes, Inc. -7-1/2% 2006............................................................ $ 2,600,000
CKE Restaurants, Inc. -4-1/4% 2004............................................................. $ 1,500,000
HomeBase, Inc. -5-1/4% 2004.................................................................... $ 850,000
Hutchinson Technology Incorporated -6% 2005 (1)................................................ $ 500,000
PREFERRED STOCK
Crown American Realty Trust.................................................................... 15,300 shs.
NET SALES
NON-CONVERTIBLE BOND
U.S. Treasury Notes Strip -0% 2009............................................................. $ 5,000,000
CONVERTIBLE DEBENTURES
Michaels Stores, Inc. -6-1/4% 2003 (2)......................................................... $ 15,000,000
Offshore Logistics, Inc. -6% 2003.............................................................. $ 1,500,000
Read-Rite Corporation -10% 2004 (2)............................................................ $ 5,027,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
4
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 2000
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES Amount Value
------------------------------------------------------------------------------ -------------- --------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCIES
MORTGAGE-BACKED AGENCIES - 29.0%
Federal Home Loan Mortgage Corporation
-6% 2008.................................................................... $ 26,542,641 $ 25,328,018
-6% 2009.................................................................... 22,316,000 21,249,016
-7% 2008.................................................................... 2,453,541 2,420,572
-7% 2023.................................................................... 5,000,000 4,625,000
-7-1/2% 2021................................................................ 685,317 685,745
-8-1/2% 2026................................................................ 6,819,626 7,094,543
-10.15% 2006................................................................ 5,858 5,859
Federal Home Loan Mortgage Corporation (IO)
-6-1/2% 2007................................................................ 4,442,737 329,735
-6-1/2% 2020................................................................ 877,118 34,982
-6-1/2% 2023................................................................ 3,163,949 294,026
-7% 2020.................................................................... 6,604,866 489,173
Federal Home Loan Mortgage Corporation (Z)
-6-1/2% 2029................................................................ 5,875,595 4,757,397
-7% 2029.................................................................... 5,434,001 4,770,034
-7-1/2% 2026................................................................ 5,403,700 5,273,674
Federal National Mortgage Association
-6-1/2% 2008................................................................ 2,851,816 2,805,474
-7-1/4% 2010................................................................ 6,000,000 6,180,000
-8% 2015.................................................................... 1,075,000 1,075,000
Federal National Mortgage Association (IO)
-6-1/2% 2009................................................................ 3,057,715 464,510
-6-1/2% 2020................................................................ 3,257,114 229,399
-7% 2004.................................................................... 620,296 68,814
Federal National Mortgage Association (Z)
-7% 2019.................................................................... 14,471,721 13,413,477
-7% 2024.................................................................... 12,793,566 11,658,139
-7-1/2% 2024................................................................ 1,734,928 1,709,989
-7-1/2% 2030................................................................ 1,475,631 1,379,714
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 2000
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES-CONTINUED Amount Value
------------------------------------------------------------------------------ -------------- -------------
<S> <C> <C>
Government National Mortgage Association
-7% 2028.................................................................... $ 8,869,036 $ 8,691,653
-7-1/2% 2023................................................................ 393,559 394,666
Government National Mortgage Association (Z)
-7-1/2% 2029................................................................ 9,963,317 9,216,845
-8-1/2% 2030................................................................ 775,000 778,875
Government National Mortgage Association II -8% 2027.......................... 3,197,559 3,240,526
Government National Mortgage Association (MH)
-8-1/4% 2006-7.............................................................. 240,301 243,154
-8-3/4% 2006................................................................ 594,717 608,098
-8-3/4% 2011................................................................ 749,794 765,259
-9% 2010.................................................................... 361,199 371,358
-9% 2011.................................................................... 1,021,447 1,050,176
-9-1/4% 2010-11............................................................. 709,163 729,996
-9-3/4% 2005-6.............................................................. 1,381,933 1,422,096
-9-3/4% 2012-13............................................................. 643,022 661,710
Government National Mortgage Association (PL)
-10-1/4% 2017............................................................... 879,315 896,901
--------------
$ 145,413,603
--------------
U.S. TREASURIES - 44.9%
U.S. Treasury Inflation-Indexed Notes -3-3/8% 2007............................ $ 226,582,720 $ 218,935,553
U.S. Treasury Notes Strip -0% 2009............................................ 10,000,000 5,883,800
--------------
$ 224,819,353
--------------
TOTAL U.S. GOVERNMENT & AGENCIES - 73.9% $ 370,232,956
--------------
MORTGAGE BONDS
ASSET BACKED - 2.9%
Green Tree Financial Corporation
-7.3% 2027 ................................................................. $ 9,966,753 $ 5,836,780
-7-3/4% 2029 ............................................................... 998,188 586,435
-7.77% 2029 ................................................................ 5,500,000 3,487,344
-8% 2028 ................................................................... 2,769,535 1,988,872
-8.44% 2030................................................................. 4,700,000 2,893,437
--------------
$ 14,792,868
--------------
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 2000
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES-CONTINUED Amount Value
------------------------------------------------------------------------------ -------------- --------------
<S> <C> <C>
MORTGAGE BACKED - 2.1%
DLJ Mortgage Acceptance Corp. (Series 1997-E Class B)
-7.5481% 2026*.............................................................. $ 4,785,126 $ 3,468,470
First Financial Mortgage Trust (Series 9 Class A4)
-5.8% 2008.................................................................. 709,386 678,350
Morgan Stanley Dean Witter Capital I Inc. (Series 2000-F1 Class B)
-8.14% 2022*................................................................ 5,150,000 5,141,953
Norwest Asset Securities Corp. (Series 1999-13 Class A "Z")
-6-1/4% 2029................................................................ 1,408,010 1,208,358
--------------
$ 10,497,131
--------------
TOTAL MORTGAGE BONDS - 5.0%................................................... $ 25,289,999
--------------
CORPORATE BONDS & DEBENTURES - 8.8%
Advantica Restaurant Group, Inc. -11-1/4% 2008 $ 11,428,038 $ 6,399,701
Conseco, Inc.
-7.6% 2001 ................................................................ 500,000 455,000
-7-7/8% 2000 .............................................................. 7,830,000 7,722,338
-8-1/2% 2002 .............................................................. 5,260,000 4,260,600
-10-1/4% 2002 ............................................................. 350,000 257,250
Jo-Ann Stores, Inc. -10-3/8% 2007 ........................................... 1,450,000 1,232,500
Oregon Steel Mills, Inc. -11% 2003 .......................................... 15,100,000 11,853,500
Riviera Holdings Corp. -10% 2004 ............................................ 3,592,000 3,286,680
Trump Atlantic City Associates -11-1/4% 2006.................................. 12,400,000 8,494,000
---------------
$ 43,961,569
--------------
TOTAL NON-CONVERTIBLE BONDS & DEBENTURES - 87.7%.............................. $ 439,484,524
--------------
CONVERTIBLE SECURITIES
CONVERTIBLE BONDS & DEBENTURES - 9.0%
Centertrust Retail
Properties, Inc.
-7-1/2% 2001 (Class A) ..................................................... $ 5,558,000 $ 5,419,050
-7-1/2% 2001 (Class B) ..................................................... 7,200,000 6,912,000
Charming Shoppes, Inc. -7-1/2% 2006 .......................................... 9,600,000 8,640,000
CKE Restaurants, Inc. -4-1/4% 2004 ........................................... 19,000,000 8,550,000
DRS Technologies, Inc. -9% 2003 .............................................. 2,000,000 3,500,000
Hutchinson Technology Incorporated -6% 2005 .................................. 500,000 450,000
HomeBase, Inc. -5-1/4% 2004 .................................................. 9,452,000 5,198,600
Offshore Logistics, Inc. -6% 2003 ............................................ 5,500,000 5,458,750
Quantum Health Resources, Inc. -4-3/4% 2000 .................................. 1,000,000 1,000,000
---------------
$ 45,128,400
--------------
</TABLE>
7
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 2000
<TABLE>
<CAPTION>
Shares or
Principal
Amount Value
-------------- --------------
<S> <C> <C>
PREFERRED STOCK - 0.7%
Crown American Realty Trust................................................... 93,800 $ 3,611,300
--------------
TOTAL INVESTMENT SECURITIES - 97.4% (Cost $511,285,298) $ 488,224,224
--------------
SHORT-TERM INVESTMENTS - 3.4%
General Electric Capital Corporation -6.48% 10/3/2000 $ 4,436,000 4,434,403
American General Finance Corporation
-6-1/2 10/4/2000 ........................................................... 6,000,000 5,996,750
-6-1/2 10/6/2000 ........................................................... 6,271,000 $ 6,265,339
--------------
$ 16,696,492
--------------
TOTAL INVESTMENTS - 100.8% (Cost $527,981,790)................................ $ 504,920,716
Other assets and liabilities, net - (0.8)%.................................... (3,837,503)
--------------
TOTAL NET ASSETS - 100%....................................................... $ 501,083,213
==============
</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 Morgan Stanley Dean Witter Capital Inc. was
purchased on August 30, 2000. These restricted securities constituted 1.7% of
total net assets at September 30, 2000.
See notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2000
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities - at market value
(identified cost $511,285,298)............................................ $ 488,224,224
Short-term investments - at cost plus interest earned
(maturities of 60 days or less)........................................... 16,696,492 $ 504,920,716
------------------
Cash.......................................................................... (4,349)
Receivable for:
Interest.................................................................... $ 5,550,141
Capital Stock sold.......................................................... 643,280
Investment securities sold.................................................. 78,196 6,271,617
------------------ -----------------
$ 511,187,984
LIABILITIES
Payable for:
Investment securities purchased ............................................ $ 9,217,052
Capital Stock repurchased .................................................. 549,395
Advisory fees .............................................................. 208,986
Accrued expenses and other liabilities...................................... 129,338 10,104,771
------------------ -----------------
NET ASSETS...................................................................... $ 501,083,213
===============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock - par value $0.01 per share; authorized
100,000,000 shares; outstanding 47,212,377 shares........................... $ 472,124
Additional Paid-in Capital.................................................... 509,347,743
Undistributed net realized gains on investments............................... 3,492,078
Undistributed net investment income........................................... 10,832,342
Unrealized depreciation of investments........................................ (23,061,074)
---------------
Net assets at September 30, 2000.............................................. $ 501,083,213
===============
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.
9
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended September 30, 2000
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest................................................................... $ 39,853,208
Dividends.................................................................. 443,510
---------------
$ 40,296,718
EXPENSES
Advisory fees.............................................................. $ 2,556,015
Transfer agent fees and expenses........................................... 256,121
Reports to shareholders.................................................... 54,789
Custodian fees and expenses................................................ 54,714
Directors' fees and expenses............................................... 38,343
Insurance.................................................................. 32,540
Postage.................................................................... 28,643
Audit fees................................................................. 26,353
Registration fees.......................................................... 24,726
Legal fees................................................................. 13,486
Other expenses............................................................. 16,602 3,102,332
----------------- ---------------
Net investment income.............................................. $ 37,194,386
---------------
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)............... $ 139,227,700
Cost of investment securities sold......................................... 135,546,593
-----------------
Net realized gain on investments....................................... $ 3,681,107
Unrealized depreciation of investments:
Unrealized depreciation at beginning of year............................... $ (14,317,783)
Unrealized depreciation at end of year..................................... (23,061,074)
-----------------
Unrealized depreciation of investments................................. (8,743,291)
---------------
Net realized and unrealized loss on investments.................... $ (5,062,184)
---------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS.............................................................. $ 32,132,202
==============
</TABLE>
See notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
2000 1999
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income........................... $ 37,194,386 $ 36,332,800
Net realized gain on investments................ 3,681,107 4,763,524
Unrealized depreciation of investments.......... (8,743,291) (19,635,007)
-------------- --------------
Increase in net assets resulting
from operations................................. $ 32,132,202 $ 21,461,317
Distributions to shareholders from:
Net investment income........................... $ (35,625,012) $ (37,467,415)
Net realized capital gains...................... (4,441,910) (40,066,922) (3,215,415) (40,682,830)
-------------- --------------
Capital Stock transactions:
Proceeds from Capital Stock sold................ $ 137,500,078 $ 127,033,525
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions................ 34,015,943 35,025,699
Cost of Capital Stock repurchased............... (193,631,573) (22,115,552) (227,450,554) (65,391,330)
-------------- --------------- -------------- --------------
Total decrease in net assets...................... $ (30,050,272) $ (84,612,843)
NET ASSETS
Beginning of year, including
undistributed net investment income
of $9,262,968 and $10,397,583................... 531,133,485 615,746,328
--------------- --------------
End of year, including
undistributed net investment income
of $10,832,342 and $9,262,968................... $ 501,083,213 $ 531,133,485
--------------- --------------
--------------- --------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold...................... 13,208,545 11,732,265
Shares issued to shareholders
upon reinvestment of dividends
and distributions............................... 3,289,487 3,253,664
Shares of Capital Stock repurchased............... (18,609,995) (20,998,240)
--------------- --------------
Decrease in Capital Stock
outstanding..................................... (2,111,963) (6,012,311)
=============== ==============
</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,
--------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year................. $ 10.77 $ 11.13 $ 11.24 $ 10.97 $ 11.05
--------- --------- ---------- --------- --------
Income from investment operations:
Net investment income............................... $ 0.77 $ 0.71 $ 0.67 $ 0.68 $ 0.68
Net realized and unrealized gain (loss)
on investment securities........................... (0.11) (0.30) (0.10) 0.32 0.06
--------- --------- ---------- --------- --------
Total from investment operations..................... $ 0.66 $ 0.41 $ 0.57 $ 1.00 $ 0.74
--------- --------- ---------- --------- --------
Less distributions:
Dividends from net investment income............... $ (0.73) $ (0.71) $ (0.66) $ (0.68) $ (0.66)
Distributions from net realized
capital gains.................................... (0.09) (0.06) (0.02) (0.05) (0.16)
--------- --------- ---------- --------- --------
Total distributions.................................. $ (0.82) $ (0.77) $ (0.68) $ (0.73) $ (0.82)
--------- --------- ---------- --------- --------
Net asset value at end of year....................... $ 10.61 $ 10.77 $ 11.13 $ 11.24 $ 10.97
--------- --------- ---------- --------- --------
--------- --------- ---------- --------- --------
Total investment return*............................. 6.56% 3.87% 5.24% 9.54% 7.00%
Ratios/supplemental data:
Net assets at end of year (in $000's)................ 501,083 531,133 615,746 529,574 338,297
Ratio of expenses to average net assets.............. 0.61% 0.60% 0.59% 0.59% 0.63%
Ratio of net investment income to
average net assets................................. 7.31% 6.43% 6.06% 6.37% 6.44%
Portfolio turnover rate.............................. 21% 24% 47% 29% 16%
</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, 1999..................... $0.17 0.1% 99.9% -
December 29, 1999................... $0.27%+ 0.1% 79.5% 20.4%
April 7, 2000....................... $0.17 - 100% -
July 10, 2000....................... $0.21 - 100% -
</TABLE>
+ This amount includes a $0.09 capital gain distribution of which $0.035 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 2001 setting forth
specific amounts to be included in their 2000 tax returns.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 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 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 $103,924,543 for the
year ended September 30, 2000. Realized gains or losses are based on the
specific-certificate identification method. Cost of investment securities owned
at September 30, 2000 was the same for federal income tax and financial
reporting purposes. Gross unrealized appreciation and depreciation for all
securities at September 30, 2000 for federal income tax purposes was $7,270,895
and $30,331,969, 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, 2000
For the year ended September 30, 2000, the Fund paid aggregate fees of
$37,696 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, 2000, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received
$50,422 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, 2000, the Board of Directors declared a dividend from
net investment income of $0.19 per share payable October 10, 2000 to
shareholders of record on September 30, 2000. For financial statement purposes,
this dividend and distribution was recorded on the ex-dividend date, October 2,
2000.
--------------------------------------------------------------------------------
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,
2000, 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, 2000, 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, 2000, 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 generally accepted in the United States.
/s/ Ernst & Young LLP
Los Angeles, California
October 27, 2000
14
<PAGE>
OFFICERS AND DIRECTORS
DIRECTORS
Willard H. Altman, Jr.
DeWayne W. Moore
Alfred E. Osborne, Jr.
Robert L. Rodriguez
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
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.
