<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-1731
SOURCE CAPITAL, INC.
(Exact name of registrant as specified in charter)
11400 WEST OLYMPIC BLVD., SUITE 1200, LOS ANGELES, CALIFORNIA 90064
(Address of principal executive offices)
J. RICHARD ATWOOD,
11400 WEST OLYMPIC BLVD., SUITE 1200, LOS ANGELES, CALIFORNIA 90064
(Name and address of agent for service)
Registrant's telephone number, including area code: 310-473-0225
Date of fiscal year end: DECEMBER 31
Date of reporting period: JUNE 30, 2003
<Page>
Item 1. Report to Stockholders.
<Page>
[LOGO]
SOURCE CAPITAL, INC.
SEMIANNUAL REPORT
for the six months ended June 30, 2003
<Page>
SOURCE CAPITAL, INC.
[LOGO]
INVESTMENT ADVISER
First Pacific Advisors, Inc.
11400 West Olympic Blvd., Suite 1200
Los Angeles, California 90064-1550
(800) 982-4372 or (310) 473-0225
CUSTODIAN
State Street Bank and Trust Company
Boston, Massachusetts
LEGAL COUNSEL
O'Melveny & Myers LLP
Los Angeles, California
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Los Angeles, California
TRANSFER AND SHAREHOLDER SERVICE AGENT
Mellon Investor Services LLC
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
(800) 279-1241 or (201) 329-8660
REGISTRAR
Mellon Investor Services LLC
Ridgefield Park, New Jersey
STOCK EXCHANGE LISTING
New York Stock Exchange:
Symbols: SOR Common Stock
SOR+ Preferred Stock
<Page>
SUMMARY FINANCIAL INFORMATION
<Table>
<Caption>
Six months ended Year ended
June 30, 2003 December 31, 2002
--------------------- ----------------------
Total Per Total Per
Net Common Net Common
Assets Share Assets Share
------------ ------- ------------- -------
Beginning of period....................................... $395,175,835 $41.90 $ 498,725,575 $ 55.45
------------ ------ ------------- -------
Net gain (loss) on investments, realized and unrealized... $ 58,571,521 $ 7.15 $ (72,665,931) $ (8.97)
Net investment income..................................... 1,814,197 0.22 3,961,461 0.49
Dividends to Preferred shareholders....................... (2,363,054) (0.29) (4,726,109) (0.59)
Distributions to Common shareholders...................... (14,273,330) (1.75) (37,079,161) (4.60)
Proceeds from shares issued for distributions reinvested
by shareholders......................................... 2,661,510 0.02 6,960,000 0.12
------------ ------ ------------- -------
Net changes during period............................. $ 46,410,844 $ 5.35 $(103,549,740) $(13.55)
------------ ------ ------------- -------
End of period............................................. $441,586,679 $47.25 $ 395,175,835 $ 41.90
============ ====== ============= =======
</Table>
<Table>
<Caption>
June 30, 2003 December 31, 2002 December 31, 2001
------------- ----------------- -----------------
Common market price per share............................. $51.80 $52.85 $61.02
Common market premium to net asset value.................. 9.6% 26.1% 10.1%
Preferred asset coverage.................................. 815% 730% 921%
Preferred liquidation preference per share................ $27.50 $27.50 $27.50
Preferred market price per share.......................... $32.60 $30.81 $30.20
</Table>
- --------------------------------------------------------------------------------
DESCRIPTION OF THE COMPANY
SOURCE CAPITAL, INC., is a major diversified, publicly traded investment
company with total net assets approximating $442,000,000. Its investment
portfolio includes a wide range of securities with primary emphasis on common
stocks.
Source Capital has Common and Preferred shares outstanding, both of which are
traded on The New York Stock Exchange. Each of the 1,969,212 outstanding
Preferred shares has a prior claim of $27.50 on assets and $2.40 per year on
income. The balance of the Company's assets and income are available to the
8,199,989 shares of Common Stock outstanding.
Source Capital's investment objective is to seek maximum total return for
Common shareholders from both capital appreciation and investment income to the
extent consistent with protection of invested capital and provision of
sufficient income to meet the dividend requirements of Preferred shareholders.
Source Capital is not a mutual fund. Thus, it does not repurchase its own
shares on demand and does not need to structure its portfolio securities to
provide for possible redemptions. As a publicly traded investment company,
Source Capital's Common and Preferred shares are bought and sold on The New York
Stock Exchange, and the Company is not involved in the transaction.
Source Capital's investment approach emphasizes primarily equity and
equity-related investments in seeking to achieve its growth objective for its
Common shareholders. The desirability of equity versus fixed-income investments
has been increasingly debated in recent years. Source Capital's position is that
without assuming undue risk and recognizing the fixed claim of its Preferred
Stock, properly selected stocks offer the better long-term opportunity for
overall investment return as well as long-term protection from the large but
uncertain threat of inflation. Source Capital's equity investments have been
directed toward companies with highly liquid, relatively unleveraged balance
sheets, and a demonstrated long-term ability to earn above-average returns on
invested capital. Source Capital's equity investment portfolio is based on
fundamental judgments of long-term returns attainable from income and
appreciation in the securities of such companies and is not derived from overall
economic forecasts or stock market predictions.
Source Capital has a Common Stock Distribution Policy that provides for cash
distributions of approximately 10% of the ongoing net asset value of its Common
shares. Only a portion of such distributions is paid from net investment income.
The remainder is paid from any net realized capital gains and/or paid-in
capital, as determined by each year's results. To the extent the Company
realizes net long-term capital gains for any year in excess of the amounts
distributed under the Company's distribution policy, such excess may be
distributed to shareholders or retained by the Company. Distributions to Common
shareholders are paid quarterly in a fixed amount which is periodically adjusted
after sustained changes in net asset value appear to the Board of Directors
reasonably likely to support the new distribution rate on a continuing basis.
This policy is designed to allow Common shareholders to benefit not only from
income, but a portion of the capital appreciation that has resulted to date. All
distributions are taxable to shareholders as dividend income or capital gain
distributions since the Company has accumulated earnings and profits from prior
years.
Since the policy was adopted in June 1976, at an initial annual rate of $1.40
per share, continued increases in net asset value, despite payments from
capital, have permitted 20 subsequent increases and only one decrease to the
current rate of $3.50. Maintenance of the current $3.50 annualized rate is
dependent upon achieving a total return on the Common Stock from both income and
appreciation to sustain a net asset value of approximately $35.00 per share.
1
<Page>
LETTER TO SHAREHOLDERS
TO OUR SHAREHOLDERS:
Source Capital's total net assets increased from $364,269,717 to $441,586,679
during the second quarter. Net asset value per Common share amounted to $47.25
at June 30, 2003, compared with $37.94 at March 31, 2003, and $41.90 at year-end
2002. These changes in net asset value were net of cash distributions of $0.875
paid in both the first and second quarters.
INVESTMENT RESULTS, 2003 FIRST HALF
For the six months ended June 30, 2003, the net asset value per share of
Source Capital's Common Stock increased by 17.7%, as adjusted for reinvestment
of distributions paid during the period, while total net assets rose 15.8%.
These returns compare with a 16.9% increase in the Russell 2500 Index, a measure
of small to medium capitalization stock performance. The foregoing changes were
calculated on the basis of reinvesting all dividends and distributions.
INVESTMENT RESULTS, 2003 SECOND QUARTER
In the most recent quarter, Source Capital's net asset value per share of
Common Stock increased 27.1%, as adjusted for reinvestment of the $0.875
distribution paid during the period, while total net assets rose 23.2%, both on
a reinvestment basis. In comparison, the Russell 2500 Index increased 21.9%
during the quarter, also on a reinvestment basis.
NET INVESTMENT INCOME
Net investment income amounted to $803,977 and $1,814,197 for the second
quarter and six months, respectively, as against $985,022 and $1,803,920 in the
comparable periods of 2002. Preferred dividends exceeded net investment income
by $0.05 and $0.07 for the quarter and six-month periods, respectively, compared
with Preferred dividends in excess of net investment income of $0.02 and $0.07
for the corresponding periods of 2002.
DISTRIBUTIONS TO COMMON SHAREHOLDERS
A regular quarterly distribution of $0.875 per share was paid on June 15,
2003, to shareholders of record on May 23, 2003. This payment marks the 27th
anniversary of Source Capital's 10% Distribution Policy that calls for total
annual payments approximating 10% of the Common Stock's ongoing net asset value.
Since the adoption of this policy, continuing growth in net asset value has led
to 20 increases and only one decrease in the distribution rate--a net increase
of 150% from the original $1.40 rate in June 1976, to the current $3.50 rate.
The growth in the net asset value which has permitted this continuing expansion
in cash distributions has been achieved despite distributions in excess of net
investment income of $541,527,710 or $77.65 per Common share, and payments of
federal income tax on undistributed realized capital gains amounting to
$36,198,677 or $5.99 per Common share. Maintenance of the current $3.50 rate is
dependent upon achieving long-term investment results which sustain a net asset
value of approximately $35.00.
PREFERRED DIVIDENDS
The regular Preferred dividend of $0.60 per share was paid on June 15, 2003,
to shareholders of record on May 23, 2003. The changes in the Company's total
net assets since year-end 2002 have resulted in changes in the Preferred shares'
asset coverage from 730% at December 31, 2002, to 673% at March 31, 2003, and
815% at June 30, 2003. Net investment income provided Preferred dividend
coverage of 68% for the second quarter and 77% for the six months, compared with
83% and 76% for the corresponding periods of 2002.
MARKET PRICE OF SOURCE CAPITAL SHARES
The market price of Source Capital Common Stock decreased from $52.85 to
$51.80 during the first half of 2003. As this $1.05 decrease in market price
opposed the $5.35 rise in the underlying net asset value, the market premium to
net asset value of 26.1% at year-end 2002 decreased to 9.6% at June 30, 2003.
The market price of Source Capital Preferred Stock increased to $32.60 at
June 30, 2003, from $30.81 at year-end 2002.
COMMENTARY
After a miserable first quarter of stock market performance, dominated by
worries about the economy and Iraq, the second quarter showed a dramatic
improvement. Massive fiscal and monetary stimulus has alleviated economic
concerns and driven an extraordinary advance. From the mid-March lows to late
July, the S&P is up over 25% and the Nasdaq almost 40%. While we share some
degree of optimism about an economic recovery, we believe that the best case
outcome has already been largely discounted by the market. As a result, we are
not looking for second half stock market performance anything near as positive
as the year so far.
Source did quite well in the second quarter, up 27.1%, and as a result is now
roughly the same as the benchmark Russell 2500 for the year-to-date period.
Results for the longer three-and five-year periods continue to be highly
favorable for Source.
<Table>
<Caption>
PERIODS ENDED JUNE 30, 2003
---------------------------------------------------
SECOND ONE THREE FIVE
QUARTER YTD YEAR YEARS* YEARS*
------- ---- ---- ------ ------
Source 27.1% 17.7% 3.3% 11.4% 10.0%
Russell 2500 21.9% 16.9% 1.4% (1.4)% 3.7%
S&P 500 15.4% 11.8% 0.3% (11.2)% (1.6)%
Nasdaq 21.0% 21.5% 10.9% (25.8)% (3.1)%
</Table>
* Annualized Returns
Source's fourth largest position, CLAYTON HOMES, has been embroiled in a
somewhat unusual takeover battle for the past four months. In a twist on most
takeover fights, in this case, Clayton management is in favor of selling the
company, while a majority of independent shareholders are opposed.
We last wrote about Clayton in the year-end 2001 Shareholder Letter. At that
time we praised its superior business model, management, and financial strength,
and expressed
2
<Page>
the expectation that Clayton would lead the developing recovery of the
manufactured housing industry.
Unfortunately this industry revival has been delayed by the collapse of much
of the available financing capacity, notably the bankruptcy of Conseco Financial
(formerly Greentree Financial), the industry's largest lender. This made credit
both more difficult to obtain and more expensive, depressing home sales.
Under these circumstances, it was perhaps understandable that the Clayton
family would be sympathetic toward an unsolicited offer to purchase the company
made by Warren Buffett's Berkshire Hathaway. This offer, $12.50 in cash for each
Clayton share, was announced April 1st. The synergies were obvious. Berkshire's
extremely deep pockets would obviate the need to securitize and sell the
mortgages originated by Clayton's financing arm, Vanderbilt Mortgage, thus
protecting Clayton from the vagaries of the asset-backed securities market.
Clayton Homes continued dominance of the industry would be assured, and founder
Jim Clayton could be confident that his company and loyal employees would be in
good hands.
What could be wrong with a deal so clearly beneficial to the Clayton family,
Clayton employees and dealers, as well as Berkshire Hathaway? The overlooked
group was the non-family shareholders, who owned over 70% of the company.
Clayton management and the Clayton Board of Directors may have given inadequate
consideration to their obligation to the majority owners of the company.
The problems were two fold--price and process. The deal was made in March. The
stock market was at a low. Worries about the economy and the Middle East were at
a peak. Simply put, the Clayton family panicked at the bottom of the cycle and
agreed to a sale at a price we believe to be far below the company's true value.
The industry's troubles, while painful for all, were far worse for the weaker
players. With few exceptions, Clayton's competitors were in dire financial
straits--financially leveraged, losing money, and at severe risk of failure.
In contrast, Clayton was making respectable profits, and was financially
strong. Its competitive position was being strengthened by the depressed state
of the industry. The agreed price of $12.50 per share was barely above book
value and completely failed to take into consideration the improved
profitability which Clayton would realize as the industry inevitably recovered
from its cyclical lows. In short, Berkshire would get all the upside, and the
independent shareholders none.
In addition to the problem of undervaluation, the structure of the deal itself
appeared flawed. Berkshire requested, and the Clayton Board surprisingly agreed
to, terms and conditions which were extremely favorable to Berkshire and what we
considered to be highly disadvantageous to the public shareholders. In effect,
the company promised not to solicit competitive offers, and to not even provide
information to others who might be interested in offering a better price.
Upon announcement of the deal the deficiencies just described were immediately
obvious to most of the institutional shareholders of Clayton, and over the
following weeks many publicly announced their opposition to the terms of the
acquisition. I am unaware of any expressions of support for the deal by
independent shareholders.
The shareholders' vote on the proposal was scheduled for July 16th. Shortly
before this, a $9 billion buyout fund named Cerberus Capital had announced that
it might be interested in making an offer if it could perform appropriate due
diligence. At the shareholder meeting, the company failed to obtain a majority
vote for the merger. Approximately 75% of the non-Clayton family shareholders
opposed the proposed merger.
Source Capital and First Pacific Advisors voted their two million shares,
about 1 1/2% of the total outstanding, against the deal.
The company then adjourned the meeting for two weeks, ostensibly to give
Cerberus time to review Clayton's financial data and decide whether to make an
offer. (I will pose the rhetorical question, would Clayton management have
adjourned the meeting if it had received a majority vote for the deal?)
On July 28th it was announced that Cerberus would not be making an offer for
Clayton. No reason was given.
On July 30th the shareholder meeting was reconvened and the merger narrowly
approved. Approximately two-thirds of the independent shareholders continued to
oppose the merger.
We believe the outcome of this contest represented a defeat for responsible
corporate governance as well as for the economic interests of Source and other
independent shareholders. A more open sale process could readily have yielded a
price in excess of $12.50. In addition, an independent Clayton (the desire of
most of the merger-opposing shareholders) would now be trading, we believe, at a
price well above $12.50 per share.
Since Source had purchased its Clayton shares at an average price of about $9,
the merger was, though not ideal, at least a profitable outcome for Source
shareholders. In addition, our period of ownership, since late 1999, was one of
generally poor stock market performance. We will take our $15 million in cash
and strive to re-deploy it into new profitable investments for Source
shareholders.
Respectfully submitted,
/s/ ERIC S. ENDE
Eric S. Ende
President and
Chief Investment Officer
July 31, 2003
As this Shareholder Letter goes to press, continuing litigation in Tennessee
courts has blocked, at least temporarily, the completion of the merger.
August 18, 2003
3
<Page>
PORTFOLIO OF INVESTMENTS
June 30, 2003
<Table>
<Caption>
COMMON STOCKS Shares Value
- ------------------------------------------------------------ ----------- ------------
PRODUCER DURABLE GOODS -- 14.9%
Cognex Corporation*......................................... 430,000 $ 9,610,500
Crane Co.................................................... 435,000 9,844,050
Denison International plc (ADR)*+........................... 579,500 11,155,375
Graco Inc................................................... 343,000 10,976,000
IDEX Corporation............................................ 363,000 13,155,120
Zebra Technologies Corporation (Class A)*................... 146,000 10,977,740
------------
$ 65,718,785
------------
TECHNOLOGY -- 13.4%
Advanced Fibre Communications, Inc.*........................ 600,000 $ 9,762,000
KEMET Corporation*.......................................... 449,800 4,542,980
Plantronics, Inc.*.......................................... 380,000 8,234,600
SanDisk Corporation*........................................ 794,000 32,037,900
TriQuint Semiconductor, Inc.*............................... 1,143,029 4,755,001
------------
$ 59,332,481
------------
BUSINESS SERVICES & SUPPLIES -- 12.0%
Black Box Corporation....................................... 260,800 $ 9,440,960
HON INDUSTRIES Inc.......................................... 431,800 13,169,900
Manpower Inc................................................ 300,000 11,127,000
Office Depot, Inc.*......................................... 795,000 11,535,450
ScanSource, Inc.*........................................... 284,000 7,597,000
------------
$ 52,870,310
------------
ENERGY -- 8.4%
Cal Dive International, Inc.*............................... 575,000 $ 12,535,000
Noble Corporation*.......................................... 385,000 13,205,500
Tidewater Inc............................................... 386,300 11,345,631
------------
$ 37,086,131
------------
HEALTHCARE -- 8.1%
Landauer, Inc............................................... 14,300 $ 598,169
Lincare Holdings Inc.*...................................... 361,000 11,375,110
Ocular Sciences, Inc.*...................................... 722,900 14,349,565
Renal Care Group, Inc....................................... 270,000 9,506,700
------------
$ 35,829,544
------------
RETAILING -- 8.0%
CarMax, Inc.*............................................... 445,006 $ 13,416,931
O'Reilly Automotive, Inc.*.................................. 652,500 21,786,975
Pathmark Stores, Inc., Warrants*............................ 80,898 107,594
------------
$ 35,311,500
------------
BANKING -- 4.8%
National Commerce Financial Corporation..................... 488,900 $ 10,848,691
North Fork Bancorporation, Inc.............................. 310,000 10,558,600
------------
$ 21,407,291
------------
ENTERTAINMENT -- 4.0%
Carnival Corporation........................................ 536,600 $ 17,444,866
------------
</Table>
4
<Page>
PORTFOLIO OF INVESTMENTS
June 30, 2003
<Table>
<Caption>
Shares or
Face
COMMON STOCKS (CONTINUED) Amount Value
- ------------------------------------------------------------ ----------- ------------
CONSUMER DURABLE GOODS -- 3.5%
Clayton Homes, Inc.......................................... 1,216,600 $ 15,268,330
------------
MATERIALS -- 3.2%
Engelhard Corporation....................................... 390,000 $ 9,660,300
OM Group, Inc............................................... 300,000 4,419,000
------------
$ 14,079,300
------------
INSURANCE -- 1.8%
Brown & Brown, Inc.......................................... 251,000 $ 8,157,500
------------
REAL ESTATE INVESTMENT TRUST -- 1.3%
New Plan Excel Realty Trust................................. 279,864 $ 5,975,096
------------
TOTAL COMMON STOCKS -- 83.4% (Cost $271,723,617)............ $368,481,134
------------
<Caption>
PREFERRED STOCKS
REAL ESTATE INVESTMENT TRUST
Crown American Realty Trust................................. 59,000 $ 3,478,050
Duke-Weeks Realty Corp. (Series B).......................... 40,000 2,135,000
ProLogis Trust (Series D)................................... 80,000 2,016,000
------------
TOTAL PREFERRED STOCKS -- 1.7% (Cost $6,411,571)............ $ 7,629,050
------------
<Caption>
CONVERTIBLE BONDS AND DEBENTURES
PRODUCER DURABLE GOODS -- 1.8%
Checkpoint Systems, Inc. -- 5.25% 2005...................... $ 4,000,000 $ 4,030,000
MascoTech, Inc. -- 4.5% 2003................................ 4,200,000 4,095,000
------------
$ 8,125,000
------------
HEALTHCARE -- 0.7%
IVAX Corporation -- 5.5% 2007............................... $ 3,000,000 $ 3,045,000
------------
TECHNOLOGY -- 0.5%
LSI Logic Corporation -- 4% 2006............................ $ 2,000,000 $ 1,875,000
------------
DISTRIBUTION -- 0.4%
Reptron Electronics, Inc. -- 6.75% 2004..................... $ 5,980,000 $ 1,794,000
------------
TOTAL CONVERTIBLE BONDS
AND DEBENTURES -- 3.4% (Cost $16,564,839)................. $ 14,839,000
------------
</Table>
5
<Page>
PORTFOLIO OF INVESTMENTS
June 30, 2003
<Table>
<Caption>
Face
NON-CONVERTIBLE BONDS AND DEBENTURES Amount Value
- ------------------------------------------------------------ ----------- ------------
CORPORATE -- 6.5%
Actuant Corporation -- 13% 2009............................. $ 2,275,000 $ 2,707,250
Advantica Restaurant Group, Inc. -- 11.25% 2008............. 2,131,100 1,672,914
Central Garden & Pet Company -- 9.125% 2013................. 2,000,000 2,140,000
Host Marriott Corporation -- 9.25% 2007..................... 2,000,000 2,185,000
Lear Corporation -- 7.96% 2005.............................. 2,000,000 2,130,000
Manitowoc Company, Inc., The -- 10.5% 2012.................. 2,000,000 2,235,000
Metaldyne Corporation -- 11% 2012........................... 2,000,000 1,640,000
OM Group, Inc. -- 9.25% 2011................................ 4,000,000 3,920,000
Oshkosh Truck Corporation -- 8.75% 2008..................... 2,000,000 2,100,000
Packaged Ice Inc. -- 9.75% 2005............................. 2,000,000 2,012,500
Realty Income Corporation -- 8.25% 2008..................... 2,000,000 2,272,000
Unisys Corporation
-- 7.875% 2008............................................ 1,500,000 1,575,300
-- 8.125% 2006............................................ 2,000,000 2,164,400
------------
$ 28,754,364
------------
U.S. GOVERNMENT AND AGENCIES -- 0.3%
Federal Home Loan Mortgage Corporation
-- 6.5% 2023 (IO)......................................... $ 183,689 $ 10,976
-- 10.15% 2006 (REMIC).................................... 3,314 3,336
Federal National Mortgage Association -- 6% 2029 (IO)....... 4,969,599 590,617
Government National Mortgage Association (Mobile Home)
-- 9.75% 2010............................................. 547,265 583,546
------------
$ 1,188,475
------------
TOTAL NON-CONVERTIBLE BONDS
AND DEBENTURES -- 6.8% (Cost $30,612,972)................. $ 29,942,839
------------
TOTAL INVESTMENT SECURITIES -- 95.3% (Cost $325,312,999).... $420,892,023
------------
<Caption>
SHORT-TERM INVESTMENTS
Short-term Corporate Notes:
General Electric Capital Corporation
-- 1.2% 7/1/03.......................................... $ 5,433,000 $ 5,433,000
-- 1% 7/3/03............................................ 12,000,000 11,999,333
------------
TOTAL SHORT-TERM INVESTMENTS -- 4.0% (Cost $17,432,333)..... $ 17,432,333
------------
TOTAL INVESTMENTS -- 99.3% (Cost $342,745,332).............. $438,324,356
Other assets and liabilities, net -- 0.7%................... 3,262,323
------------
TOTAL NET ASSETS -- 100%.................................... $441,586,679
============
</Table>
* Non-income producing securities
+ Affiliate as defined in the Investment Company Act of 1940 by reason of
ownership of 5% or more of its outstanding voting securities. There were no
transactions in securities of this affiliate during the six months ended
June 30, 2003.
See notes to financial statements.
6
<Page>
MAJOR PORTFOLIO CHANGES
Quarter Ended June 30, 2003
<Table>
<Caption>
Shares or
Face Amount
---------------
NET PURCHASES
COMMON STOCKS
Cal Dive International, Inc........................................... 65,000 shs.
CarMax, Inc........................................................... 45,000 shs.
Cognex Corporation.................................................... 50,000 shs.
North Fork Bancorporation, Inc........................................ 53,700 shs.
ScanSource, Inc....................................................... 4,000 shs.
NON-CONVERTIBLE SECURITIES
Central Garden & Pet Company -- 9.125% 2013(1)........................ $ 2,000,000
Packaged Ice Inc. -- 9.75% 2005(1).................................... $ 2,000,000
NET SALES
COMMON STOCKS
Donaldson Company, Inc.(2)............................................ 103,000 shs.
Graco Inc............................................................. 38,300 shs.
Landauer, Inc......................................................... 69,000 shs.
Manitowoc Company, Inc., The(2)....................................... 280,900 shs.
SanDisk Corporation................................................... 233,000 shs.
Zebra Technologies Corporation (Class A).............................. 7,500 shs.
NON-CONVERTIBLE SECURITIES
Flextronics International Ltd. -- 8.75% 2007(2)....................... $ 2,000,000
United Stationers Inc. -- 8.375% 2008(2).............................. $ 3,000,000
</Table>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
7
<Page>
STATEMENT OF ASSETS AND LIABILITIES
<Table>
<Caption>
June 30, 2003
------------------------------
ASSETS
Investments at value:
Investment securities -- at market
value
(cost $325,312,999) -- Note A........ $420,892,023
Short-term investments -- at cost plus
interest earned
(maturities 60 days or less) --
Note A................................ 17,432,333 $438,324,356
------------
Cash..................................... 304
Receivable for:
Investment securities sold............. $ 2,627,083
Accrued interest and dividends......... 1,131,357 3,758,440
------------ ------------
$442,083,100
LIABILITIES
Payable for:
Advisory fees.......................... $ 254,786
Accrued dividends -- Preferred Stock... 196,921
Accrued expenses....................... 44,714 496,421
------------ ------------
TOTAL NET ASSETS -- June 30, 2003.......... $441,586,679
============
Assets applicable to Preferred Stock at a
liquidation preference of
$27.50 per share (asset coverage
815%) -- Note B........................ $ 54,153,330
============
Net assets applicable to Common Stock --
$47.25 per share....................... $387,433,349
============
SUMMARY OF SHAREHOLDERS' EQUITY
$2.40 Cumulative Preferred Stock -- par
value $3 per share;
authorized 3,000,000 shares;
outstanding 1,969,212 shares --
Note B................................. $ 5,907,636
Common Stock -- par value $1 per share;
authorized 12,000,000 shares;
outstanding 8,199,989 shares --
Note B................................. 8,199,989
Additional Paid-in Capital............... 338,308,264
Unrealized appreciation of investments... 95,579,024
Unallocated distributions -- Note A...... (6,408,234)
------------
TOTAL NET ASSETS -- June 30, 2003.......... $441,586,679
============
</Table>
See notes to financial statements.
8
<Page>
STATEMENT OF OPERATIONS
For the six months ended June 30, 2003
<Table>
INVESTMENT INCOME
Income:
Interest................................................ $ 1,913,009
Dividends............................................... 1,750,471
-------------
$ 3,663,480
Expenses -- Note C:
Advisory fees........................................... $ 1,369,250
Transfer agent fees and expenses........................ 149,725
Reports to shareholders................................. 114,198
Directors' fees and expenses............................ 52,606
Insurance............................................... 38,770
Taxes, other than federal income tax.................... 33,300
Registration and filing fees............................ 32,407
Legal and auditing fees................................. 30,722
Custodian fees and expenses............................. 22,761
Other expenses.......................................... 5,544 1,849,283
------------- -------------
Net investment income -- Note A..................... $ 1,814,197
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on investments:
Proceeds from sale of investment securities
(Excluding short-term investments with maturities of
60 days or less)....................................... $ 50,873,212
Cost of investment securities sold...................... 43,379,516
-------------
Net realized gain on investments -- Notes A and D..... $ 7,493,696
Unrealized appreciation of investments:
Unrealized appreciation at beginning of period.......... $ 44,501,199
Unrealized appreciation at end of period................ 95,579,024
-------------
Increase in unrealized appreciation of investments.... 51,077,825
-------------
Net realized and unrealized gain on investments..... $ 58,571,521
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 60,385,718
=============
</Table>
See notes to financial statements.
9
<Page>
STATEMENT OF CHANGES IN TOTAL NET ASSETS
<Table>
<Caption>
For the six months ended For the year ended
June 30, 2003 December 31, 2002
---------------------------- ----------------------------
INCREASE (DECREASE) IN TOTAL NET ASSETS
Operations:
Net investment income........................... $ 1,814,197 $ 3,961,461
Net realized gain on investments
-- Notes A and D.............................. 7,493,696 22,046,559
Increase (decrease) in unrealized
appreciation of investments................... 51,077,825 (94,712,490)
------------- -------------
Increase (decrease) in total net assets resulting
from operations................................. $ 60,385,718 $ (68,704,470)
Distributions to Preferred shareholders:
From net investment income...................... $ (2,363,054) $ (3,915,783)
From net realized capital gains................. -- (2,363,054) (810,326) (4,726,109)
------------- -------------
Distributions to Common shareholders -- Note A:
From net investment income...................... $ (274,344) --
From net realized capital gains................. (7,590,752) $ (37,079,161)
Unallocated..................................... (6,408,234) (14,273,330) -- (37,079,161)
------------- -------------
Proceeds from shares issued for distributions
reinvested by shareholders -- Note B.......... 2,661,510 6,960,000
------------- -------------
Increase (decrease) in total net assets........... $ 46,410,844 $(103,549,740)
TOTAL NET ASSETS
Beginning of period (including
undistributed net investment income
of $823,201 and $777,523 at December 31, 2002
and 2001, respectively)......................... 395,175,835 498,725,575
------------- -------------
End of period (including
undistributed net investment income
of $823,201 at December 31, 2002)............... $ 441,586,679 $ 395,175,835
============= =============
</Table>
See notes to financial statements.
10
<Page>
FINANCIAL HIGHLIGHTS
Selected data for a share of Common Stock outstanding throughout each period
<Table>
<Caption>
Six
months
ended Year ended December 31,
June 30, ------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period........ $ 41.90 $ 55.45 $ 48.62 $ 50.70 $ 48.23 $ 50.20
---------- ---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income....................... $ 0.22 $ 0.49 $ 0.54 $ 0.70 $ 0.67 $ 0.88
Net realized and unrealized gain (loss)
on investment securities................. 7.15 (8.97) 11.40 4.20 10.27 2.37
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations............ $ 7.37 $ (8.48) $ 11.94 $ 4.90 $ 10.94 $ 3.25
---------- ---------- ---------- ---------- ---------- ----------
Distributions to Preferred shareholders:
From net investment income.................. $ (0.29) $ (0.49) $ (0.59) $ (0.61) $ (0.62) $ (0.63)
From net realized gains..................... -- (0.10) -- -- -- --
Distributions to Common shareholders:
From net investment income.................. (0.03) -- (0.30) -- (0.09) (0.41)
From net realized gains..................... (0.93) (4.60) (4.30) (6.41) (7.77) (4.21)
Unallocated................................. (0.79) -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total distributions....................... $ (2.04) $ (5.19) $ (5.19) $ (7.02) $ (8.48) $ (5.25)
---------- ---------- ---------- ---------- ---------- ----------
Effect of shares issued for distributions
reinvested by shareholders.................. $ 0.02 $ 0.12 $ 0.08 $ 0.04 $ 0.01 $ 0.03
---------- ---------- ---------- ---------- ---------- ----------
Net asset value at end of period.............. $ 47.25 $ 41.90 $ 55.45 $ 48.62 $ 50.70 $ 48.23
========== ========== ========== ========== ========== ==========
Per share market value at end of period....... $ 51.80 $ 52.85 $ 61.02 $ 52.69 $ 48.25 $ 49.06
Total investment return(1).................... 2.0% (6.2)% 26.0% 24.1% 15.2% 5.8%
Net asset value total return(2)............... 17.7% (17.1)% 24.7% 9.6% 23.1% 5.8%
SUPPLEMENTAL DATA:
Total net assets at end of period
(in thousands)............................ $441,586 $395,176 $498,726 $437,611 $444,388 $417,777
Portfolio turnover rate..................... 11.83%(3) 16.62% 25.13% 18.55% 23.51% 28.34%
Ratios based on average net assets applicable to
Common Stock:
Expenses.................................. 1.09%(3) 0.99% 0.97% 1.00% 1.00% 1.00%
Net income................................ 1.07%(3) 0.99% 1.07% 1.46% 1.39% 1.83%
Ratios based on average total net assets:
Expenses.................................. 0.94%(3) 0.87% 0.85% 0.87% 0.87% 0.87%
Net income................................ 0.92%(3) 0.87% 0.95% 1.28% 1.21% 1.59%
PREFERRED STOCK:
Total shares outstanding(4)................... 1,969,212 1,969,212 1,969,212 1,969,212 1,969,212 1,969,212
Asset coverage per share(4)................... $224.25 $200.68 $253.26 $222.23 $225.67 $212.15
Involuntary liquidation preference per
share........................................ $27.50 $27.50 $27.50 $27.50 $27.50 $27.50
Average market value per share(5)............. $31.60 $31.15 $30.05 $27.87 $28.54 $29.95
</Table>
(1) Based on market value per share, adjusted for reinvestment of distributions
(2) Based on net asset value per share, adjusted for reinvestment of
distributions
(3) Annualized
(4) Information shown as of the end of the period
(5) The average of all month-end market values during each period
See notes to financial statements.
11
<Page>
NOTES TO FINANCIAL STATEMENTS
June 30, 2003
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
The Company is registered under the Investment Company Act of 1940 as a
diversified, closed-end management investment company. The investment objective
of the Company is to seek maximum total return for Common shareholders from both
capital appreciation and investment income to the extent consistent with
protection of invested capital and provision of sufficient income to meet the
dividend requirements of Preferred shareholders. The significant accounting
policies followed by the Company in the preparation of its financial statements
include the following:
1. SECURITIES VALUATION--Securities, including any outstanding written
call options, 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 mean
between the most recent bid and asked prices. Securities that are unlisted and
debt and convertible 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 Company's officers, are valued at the mean between
the most recent bid and asked prices 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. Restricted securities and
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.
2. FEDERAL INCOME TAX--No provision for federal taxes is considered
necessary because the Company 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 all of its taxable net investment
income and taxable net realized gain on investments to its shareholders in
accordance with the minimum distribution requirements of the Code.
3. USE OF ESTIMATES--The preparation of the financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported. Actual results
could differ from those estimates.
4. UNALLOCATED DISTRIBUTIONS--Unallocated distributions represent
distributions paid to Common shareholders during the period from source(s) other
than net investment income and net realized capital gains. Such source(s) will
be determined by the results of operations for the entire fiscal year and will
be paid-in capital, except to the extent of any net investment income and net
realized capital gains for the fiscal year.
5. OTHER--Securities transactions are accounted for on the date
securities are purchased or sold. Dividend income is recorded on the ex-dividend
date. Interest income and expenses are recorded on an accrual basis. Dividends
payable by the Company on the Preferred Stock are recorded on an accrual basis
and distributions payable on the Common Stock are recorded on the ex-dividend
date. The distribution allocation at June 30, 2003, is preliminary and may be
revised based on operating results for the entire year.
NOTE B--CAPITAL STOCK
The Preferred Stock is entitled in liquidation to $27.50 per share plus
accrued dividends and may be called for redemption, at the discretion of the
Company, at $27.50 per share plus accrued dividends. Dividends may not be
declared on the Common Stock if Preferred dividends are in arrears or if the
Preferred Stock would not thereafter have an asset coverage of 200% or more.
The Company issued 60,716 shares of Common Stock under its Reinvestment
Plan for Common and Preferred shareholders during the six months ended
June 30, 2003.
NOTE C--ADVISORY FEES AND OTHER AFFILIATED TRANSACTIONS
Pursuant to an investment advisory agreement, the Company pays First
Pacific Advisors, Inc. ("Investment Adviser"), monthly investment advisory fees
calculated at an annual rate of 0.725% for the first $100 million of total net
assets, 0.700% for the next $100 million of total net assets, and 0.675% for any
total net assets in excess of $200 million. The Agreement obligates the
Investment Adviser to reduce its fee to the extent necessary to reimburse the
Company for any annual expenses (exclusive of interest, taxes, the cost of any
supplementary statistical and research information, legal expenses related to
portfolio securities, and extraordinary expenses such as litigation) in excess
of 1 1/2% of the first $30 million and 1% of the remaining average total net
assets of the Company for the year.
For the six months ended June 30, 2003, the Company paid aggregate fees of
$52,500 to all Directors who are not affiliated persons of the Investment
Adviser. During the six months ended June 30, 2003, the Company incurred legal
fees of $3,722 payable to O'Melveny & Myers LLP, counsel for the Company. A
Director of the Company is of counsel to, and a retired partner of, that firm.
The Officers of the Company are also officers of the Investment Adviser.
NOTE D--PURCHASES AND SALES OF SECURITIES
Cost of purchases of investment securities (excluding short-term corporate
notes with maturities of 60 days or less) aggregated $22,929,607 for the six
months ended June 30, 2003. Cost of investment securities owned at June 30,
2003, was the same for federal income tax and financial reporting purposes.
Gains and losses are based on the specific certificate identification method.
Gross unrealized appreciation and depreciation for all investments at June 30,
2003, for federal income tax purposes was $121,356,154 and $25,777,130,
respectively.
12
<Page>
DIRECTORS AND OFFICERS
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE AND FUND COMPLEX
NAME, AGE & POSITION(S) LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER
ADDRESS WITH COMPANY TIME SERVICED DURING THE PAST 5 YEARS DIRECTOR DIRECTORSHIPS
------- ------------ ------------- ------------------------ -------- -------------
Willard H. Altman, Jr. - (67)* Director Term: 1 Year Retired. Formerly, until 6
11400 W. Olympic Blvd. Time Served: 5 Years 1995, Partner of Ernst &
Los Angeles, CA 90064 Young LLP, a public
accounting firm.
Wesley E. Bellwood - (79)* Director Term: 1 Year Retired. Formerly, until 1
11400 W. Olympic Blvd. Time Served: 23 Years 1999, Chairman Emeritus
Los Angeles, CA 90064 and director of Wynn's
International, Inc.
David Rees - (79)* Director Term: 1 Year Private investor. 1 International
11400 W. Olympic Blvd. Time Served: 35 Years Formerly President and Institute of
Los Angeles, CA 90064 Chief Executive Officer Los Angeles
of the International
Institute of
Los Angeles. Formerly,
until 1995, the Senior
Editor of Los Angeles
Business Journal.
Paul G. Schloemer - (75)* Director Term: 1 Year Retired. Formerly 1
11400 W. Olympic Blvd. Time Served: 4 Years President and Chief
Los Angeles, CA 90064 Executive Officer
(1984-1993) of Parker
Hannifin Corporation.
Lawrence J. Sheehan - (71) Director Term: 1 Year Of counsel to, and 5
11400 W. Olympic Blvd. Time Served: 12 Years partner (1969 to 1994)
Los Angeles, CA 90064 of, the firm of
O'Melveny & Myers LLP,
legal counsel to the
Company.
Eric S. Ende - (58) Director, Term: 1 Year Senior Vice President of 3
11400 W. Olympic Blvd. President & Time Served: 3 Years the Adviser.
Los Angeles, CA 90064 Chief
Investment
Officer
Steven R. Geist - (49) Senior Vice Time Served: 7 Years Vice President of the
11400 W. Olympic Blvd. President & Adviser.
Los Angeles, CA 90064 Fixed-Income
Manager
J. Richard Atwood - (43) Treasurer Time Served: 6 Years Principal and Chief First Pacific
11400 W. Olympic Blvd. Operating Officer of the Advisors, Inc.,
Los Angeles, CA 90064 Adviser. President of and FPA Fund
FPA Fund Distributors, Distributors, Inc.
Inc.
Sherry Sasaki - (48) Secretary Time Served: 21 Years Assistant Vice President
11400 W. Olympic Blvd. and Secretary of the
Los Angeles, CA 90064 Adviser and Secretary of
FPA Fund Distributors,
Inc.
Christopher H. Thomas - (46) Assistant Time Served: 8 Years Vice President and FPA Fund
11400 W. Olympic Blvd. Treasurer Controller of the Distributors, Inc.
Los Angeles, CA 90064 Adviser and of FPA Fund
Distributors, Inc.
</Table>
* Audit committee member
RESULTS OF ANNUAL MEETING
Following is a list of matters voted upon and the results of those votes
cast at the annual meeting of shareholders held May 5, 2003:
1. With respect to the election of four directors by the holders of Common
Stock, $1.00 par value, and election of two directors by the holders of
$2.40 Cumulative Preferred Stock, $3.00 par value:
<Table>
<Caption>
VOTES FOR VOTES WITHHELD
--------- --------------
COMMON
Wesley E. Bellwood.......................................... 6,697,188 97,157
Eric S. Ende................................................ 6,714,515 97,157
David Rees.................................................. 6,700,051 97,157
Lawrence J. Sheehan......................................... 6,709,874 97,157
PREFERRED
Willard H. Altman, Jr....................................... 1,718,814 31,353
Paul G. Schloemer........................................... 1,716,598 31,353
</Table>
2. With respect to continuation of the Investment Advisory Agreement, a
total of 8,305,030 shares voted for, 120,818 shares voted against and
125,775 shares abstained.
No broker non-votes were received with respect to any of the matters voted
upon above.
13
<Page>
PRESORTED
SOURCE CAPITAL, INC. STANDARD
11400 West Olympic Boulevard, Suite 1200 U.S. POSTAGE
Los Angeles, California 90064-1550 PAID
MIS
<Page>
Item 2. Code of Ethics. N/A. Item is only applicable for annual reports for
the year ending on or after July 15, 2003.
Item 3. Audit Committee Financial Experts. N/A. Item is only applicable for
annual reports for the year ending on or after July 15, 2003.
Item 4. Principal Accountant Fees and Services. N/A. Item is only
applicable for annual reports for the year ending on or after December
15, 2003.
Item 5. Audit Committee of Listed Registrants. N/A. Item is only applicable
for annual reports for the year ending on or after January 15, 2004.
Item 6. Reserved.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. N/A. Item is only applicable for
annual reports for the year ending on or after July 15, 2003.
Item 8. Reserved.
Item 9. Controls and Procedures.
(a) The Principal Executive Officer and Principal Financial Officer of
Source Capital, Inc. ("Company") have concluded that the Company's
Disclosure Controls and Procedures (as defined in Rule 30a-2(c) under
the Investment Company Act of 1940) are effective based on their
evaluation of the Disclosure Controls and Procedures as of a date
within 90 days of the filing date of this report.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Item 10. Exhibits.
(a) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant
intends to satisfy the Item 2 requirements through filing of an
exhibit. Not applicable.
(b) A separate certification for each Principal Executive Officer and
Principal Financial Officer of the registrant as required by Rule
30a-2 under the Investment Company Act of 1940. Attached hereto.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
SOURCE CAPITAL, INC.
By: /s/ ERIC S. ENDE
-------------------------------
Eric S. Ende, President
Date: September 8, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
SOURCE CAPITAL, INC.
By: /s/ J. RICHARD ATWOOD
-------------------------------
J. Richard Atwood, Treasurer
Date: September 8, 2003