<PAGE> 1
OFFICERS AND DIRECTORS
DIRECTORS
George H. Michaelis, Chairman of the Board
John P. Endicott
Leonard Mautner
Lawrence J. Sheehan
Kenneth L. Trefftzs
OFFICERS
Eric S. Ende, President and
Chief Investment Officer
Christopher Linden, Senior Vice President
Lawrence P. McNeil, Senior Vice President
Julio J. de Puzo, Jr., 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
Los Angeles, California
CUSTODIAN & TRANSFER AGENT
State Street Bank and Trust Company
Boston, Massachusetts
INDEPENDENT AUDITORS
Ernst & Young LLP
Los Angeles, California
SHAREHOLDER SERVICE AGENT
Boston Financial Data Services, Inc.
P.O. Box 8500
Boston, Massachusetts 02266-8500
(800) 638-3060
(617) 328-5000
This report has been prepared for the information of shareholders of FPA
Perennial Fund, Inc., and is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus.
1
<PAGE> 2
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
During the year ending December 31, 1995, FPA Perennial Fund increased in
value by 17.3%, adjusted for reinvestment of all dividend and capital gains
distributions. While this represented an excellent absolute return, it fell
below the gains achieved by many of the stock market averages, including the S&P
500 (37.5%), the Russell 2000 (28.4%) and the Value Line (19.3%). The strong
performance of technology and utilities stocks, neither of which the Fund holds,
as well as FPA Perennial's substantial cash position, contributed to its
relative underperformance.
At the end of September, the Board of Directors appointed me as the Fund's
new chief investment officer, replacing Chris Linden. I am sure that all of the
Fund's shareholders will wish to join me in thanking Chris for the dedicated job
he has done leading the Fund since its inception over a decade ago.
At this time of transition, I believe it would be timely to review the
philosophy which has guided the Fund's investment decisions in the past, and to
look forward to what shareholders might expect for the future.
The Fund's objective is to achieve superior returns while minimizing the
risk to shareholders' capital. Over the long term, our aim is to realize returns
above those of the market as a whole, but with less volatility, and with
considerably better downside protection in weak markets.
The key to our quest for superior performance is the selection of
companies which earn a high return on capital, and their purchase at attractive
valuations. Although in the short term stock prices are unpredictable, in the
longer term there is a strong correlation between earning high returns in a
business and realizing high returns on the stock. Only high returns on capital
employed can provide the cash required to support the two pillars of shareholder
return -- earnings growth from reinvestment in the business and acquisitions,
and direct return of capital via dividends or share repurchase.
While seeking out these high return companies, we also apply a number of
tests to ensure that risk is minimized. There are four major types of risk which
we strive to reduce.
- Business Risk - Our high margin companies with strong market positions
are less affected by difficult industry environments than their
competitors. In fact, adversity may actually be an opportunity for
such firms to strengthen their market position.
- Financial Risk - Our preference for financially conservative companies
(low debt, high fixed cost coverage) reduces their earnings volatility
and virtually eliminates the risk of extremely negative developments
(i.e. bankruptcy).
- Valuation Risk - By insisting on buying only companies which trade at
market or less-than-market PEs, we minimize potential price declines.
- Portfolio Risk - By constructing a portfolio of at least 20 companies,
well diversified across industries, we minimize the risk to our
shareholders, compared to a much more concentrated portfolio, or
excessively large company or industry positions.
These investment principles have been proven in practice and will continue
to be the basis for FPA Perennial's management. However, I expect that there
will be several changes in my approach which are outlined as follows:
- A greater emphasis on choosing companies with internal reinvestment
opportunities for the cash flow they generate, enhancing growth and
reducing risk. A company can deploy its excess cash flow in a number
of ways -- reinvestment in its business, diversification,
acquisitions, debt repayment, share repurchase, and dividends. Among
these alternatives, internal reinvestment generally provides the
highest return, yet is much less risky than any of the alternative
operating uses (acquisitions or diversification).
2
<PAGE> 3
- A larger percentage of the portfolio invested in small and medium
capitalization companies, an area of the market where Wall Street
coverage tends to be less efficient, and therefore more attractive
investments can be found.
- A modestly lower cash position, expected to average 5-10%, half of
prior levels.
- An increase in the commitment level to our best ideas by reducing the
number of companies in the portfolio to about 30, rather than the
40-45 which have been typically held in the past.
In total, we expect that these modifications should produce a portfolio of
companies that are somewhat faster growing, though more volatile in the short
run, but which continue to have the traditional FPA Perennial characteristics
discussed earlier.
An example of a recent purchase that fits the investment criteria
described above is Carnival Corp. Carnival is the largest company in the cruise
industry, operating the well known Carnival Cruise Lines and Holland America
Line. It has been adding 1-2 new ships to its fleet annually, increasing market
share and enhancing its competitive position because of the consumer's
preference for new vessels. It outspends its competitors in advertising, and has
the largest sales force calling on travel agents. The industry has been
consolidating and a number of Carnival's competitors are in dire financial
straits. Carnival has the industry's strongest balance sheet and sufficient cash
flow to fund its rapid growth. Its operating margins and return on equity (23%)
lead the industry. Despite its strong competitive position and high returns,
Carnival sells at only a modest PE -- 16x trailing 12 months, and less than 14x
projected 1996 earnings. FPA Perennial owns a 3% position in Carnival,
(purchased at 22 1/4), our 7th largest holding, and will be looking for
opportunities to increase it, as well as to add other companies of similarly
attractive quality and valuation.
The Fund's portfolio of companies like Carnival puts us in a position to
do well in what may be a more challenging future stock market environment. As we
can see in the chart below, FPA Perennial's companies have grown more than 50%
faster than the average S&P Index stock, have half the debt level, earn two and
a half times the return on assets, yet sell at a lower PE. The portfolio
contains superior companies selling at below average valuations.
<TABLE>
<CAPTION>
10-Year Debt as % Return on PE
EPS Growth of Assets Assets Ratio
---------- --------- --------- -----
<S> <C> <C> <C> <C>
FPA Perennial
Holdings* 13% 15% 12% 15x
S&P 400* 8 29 5 17x
</TABLE>
* Industrial companies only (i.e. excludes banks & insurance)
Respectfully submitted,
/s/ ERIC S. ENDE
- ------------------------
Eric S. Ende
President
February 15, 1996
3
<PAGE> 4
HISTORICAL PERFORMANCE
Change in Value of a $10,000 Investment in FPA Perennial Fund, Inc. vs. S&P 500
and Lipper Growth & Income Fund Average from
January 1, 1986 to December 31, 1995
<TABLE>
<CAPTION>
12/31/85 12/31/86 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA Perennial Fund, Inc. 9,350 10,305 10,189 12,219 15,370 15,519 18,885 21,354 22,345
FPA Perennial Fund, Inc. (NAV) 10,000 11,021 10,898 13,068 16,439 16,598 20,198 22,838 23,898
S&P 500 10,000 11,828 12,434 14,491 19,045 18,435 24,071 25,919 28,511
Lipper Growth & Income Fund Average 10,000 11,638 11,871 13,767 17,048 16,334 21,079 22,985 25,752
<CAPTION>
12/31/94 12/31/95
-------- --------
<S> <C> <C>
FPA Perennial Fund, Inc. 22,338 26,195
FPA Perennial Fund, Inc. (NAV) 23,891 28,017
S&P 500 28,890 39,688
Lipper Growth & Income Fund Average 25,544 33,279
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Average Annual Total Return
FPA Perennial Fund, Inc. Years Ended December 31, 1995
-------------------------------------
1 Year 5 Years 10 Years
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
At Net Asset Value 17.27% 11.04% 10.86%
With Maximum 6.5% Sales Charge 9.65% 9.55% 10.12%
- ------------------------------------------------------------------------------
</TABLE>
Past performance is not indicative of future performance. The Standard & Poor's
500 Stock Index (S&P 500) is a broad-based unmanaged index of publicly traded
stocks. The S&P 500 does not reflect any commissions or fees which would be
incurred by an investor purchasing the stocks it represents. The Lipper Growth &
Income 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 Perennial Fund, Inc.,
with an ending value of $26,195, reflects deduction of the current maximum sales
charge of 6.5% 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 $28,017. The performance of the Fund and of the
Averages is computed on a total return basis which includes reinvestment of all
distributions.
4
<PAGE> 5
MAJOR PORTFOLIO CHANGES
For The Six Months Ended December 31, 1995
<TABLE>
<CAPTION>
NET PURCHASES Shares
------
<S> <C>
COMMON STOCKS
Bandag, Incorporated .......................................... 43,000
Caraustar Industries, Inc. .................................... 40,500
Carnival Corporation (Class A) (1) ............................ 55,000
Circuit City Stores, Inc. (1) ................................. 34,000
Cooper Tire & Rubber Company .................................. 22,900
DENTSPLY International, Inc. (1) .............................. 18,000
Devon Group, Inc. (1) ......................................... 62,000
Franklin Quest Co. (1) ........................................ 45,000
Holophane Corporation (1) ..................................... 48,000
Juno Lighting, Inc. ........................................... 44,400
Kaydon Corporation (1) ........................................ 48,200
Lancaster Colony Corporation (1) .............................. 37,000
OM Group, Inc. (1) ............................................ 27,000
Progressive Corporation, The (1) .............................. 12,600
CONVERTIBLE PREFERRED STOCK
Time Warner Financing Trust (Percs) (1) ....................... 33,100
NET SALES
COMMON STOCKS
Abbott Laboratories (2) ....................................... 21,500
Bandag, Incorporated (Class A) ................................ 41,400
Cedar Fair, L.P. .............................................. 14,800
Cross Timbers Oil Company (2) ................................. 41,000
EXEL Limited (2) .............................................. 22,200
First National Bank of Anchorage, The ......................... 665
Gap, Inc., The (2) ............................................ 24,400
Golden West Financial Corporation ............................. 8,400
Guiness PLC (2) ............................................... 109,600
Hasbro, Inc. (2) .............................................. 37,200
Johnson & Johnson ............................................. 17,700
Kimball International, Inc. (Class B) (2) ..................... 23,900
Marsh & McLennan Companies, Inc. .............................. 9,900
McDonald's Corporation (2) .................................... 19,400
Mercantile Bankshares Corporation (2) ......................... 33,050
Minnesota Mining and Manufacturing Company (2) ................ 13,600
VF Corporation (2) ............................................ 16,700
Walgreen Co. (2) .............................................. 35,400
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE> 6
PORTFOLIO OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- ----------------------------------------------------------------- ------ ---------- ----------
<S> <C> <C> <C>
PRODUCER DURABLE GOODS -- 18.2%
Bandag, Incorporated ............................................ 43,000 $2,181,839 $2,327,375
Dover Corporation ............................................... 10,600 301,315 390,875
Emerson Electric Co. ............................................ 14,600 411,647 1,193,550
Grainger (W.W.), Inc. ........................................... 10,200 588,317 675,750
Holophane Corporation* .......................................... 48,000 838,420 1,044,000
Hubbell Incorporated (Class B) .................................. 14,100 720,736 927,075
Kaydon Corporation .............................................. 48,200 1,369,312 1,464,075
Watts Industries, Inc. (Class A) ................................ 26,000 604,775 604,500
---------- ----------
$7,016,361 $8,627,200
---------- ----------
MATERIALS -- 11.2%
Caraustar Industries, Inc. ...................................... 80,000 $1,496,850 $1,600,000
Loctite Corporation ............................................. 30,900 804,069 1,467,750
Lubrizol Corporation, The ....................................... 48,400 928,944 1,349,150
OM Group, Inc. .................................................. 27,000 785,296 894,375
---------- ----------
$4,015,159 $5,311,275
---------- ----------
RETAILING -- 9.2%
Arbor Drugs, Inc. ............................................... 71,850 $ 892,138 $1,508,850
Bob Evans Farms, Inc. ........................................... 54,000 1,078,907 1,026,000
Circuit City Stores, Inc. ....................................... 34,000 988,510 939,250
Toys "R" Us, Inc.* .............................................. 40,000 1,091,195 870,000
---------- ----------
$4,050,750 $4,344,100
---------- ----------
BUSINESS SERVICES & SUPPLIES -- 8.5%
Devon Group, Inc.* .............................................. 62,000 $2,215,933 $1,801,875
Franklin Quest Co. .............................................. 45,000 983,301 877,500
Kelly Services, Inc. (Class A) .................................. 25,000 582,573 693,750
Manpower Inc. ................................................... 23,800 617,763 669,375
---------- ----------
$4,399,570 $4,042,500
---------- ----------
BANKING AND FINANCIAL SERVICES -- 7.2%
Bancorp Hawaii, Inc. ............................................ 28,000 $ 805,514 $1,004,500
First National Bank of Anchorage, The ........................... 205 100,450 313,650
Golden West Financial Corporation ............................... 14,900 591,342 823,225
Washington Federal, Inc. ........................................ 50,000 362,391 1,281,250
---------- ----------
$1,859,697 $3,422,625
---------- ----------
</TABLE>
6
<PAGE> 7
PORTFOLIO OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
COMMON STOCKS--CONTINUED Shares Cost Value
- ----------------------------------------------------------------- ------ ----------- -----------
<S> <C> <C> <C>
HEALTH CARE -- 7.2%
Allergan, Inc. .................................................. 35,000 $ 747,385 $ 1,137,500
DENTSPLY International, Inc. .................................... 18,000 609,500 720,000
Johnson & Johnson ............................................... 5,000 198,873 428,125
Pfizer Inc. ..................................................... 18,000 526,116 1,134,000
----------- -----------
$ 2,081,874 $ 3,419,625
----------- -----------
CONSUMER DURABLE GOODS -- 6.7%
Cooper Tire & Rubber Company .................................... 46,000 $ 1,108,755 $ 1,132,750
Genuine Parts Company ........................................... 21,100 744,999 865,100
Juno Lighting, Inc. ............................................. 72,000 1,216,100 1,152,000
----------- -----------
$ 3,069,854 $ 3,149,850
----------- -----------
CONSUMER NON-DURABLE GOODS -- 6.6%
Lancaster Colony Corporation .................................... 37,000 $ 1,251,531 $ 1,378,250
Newell Co. ...................................................... 15,000 353,550 388,125
Reebok International Ltd. ....................................... 25,000 861,869 706,250
Unifi, Inc. ..................................................... 30,200 713,422 668,175
----------- -----------
$ 3,180,372 $ 3,140,800
----------- -----------
INSURANCE -- 6.1%
Horace Mann Educators Corporation ............................... 30,600 $ 737,113 $ 956,250
Marsh & McLennan Companies, Inc. ................................ 15,000 888,032 1,331,250
Progressive Corporation, The .................................... 12,600 488,443 615,825
----------- -----------
$ 2,113,588 $ 2,903,325
----------- -----------
ENTERTAINMENT -- 4.2%
Carnival Corporation (Class A) .................................. 55,000 $ 1,225,895 $ 1,340,625
Cedar Fair, L.P. ................................................ 18,100 343,900 669,700
----------- -----------
$ 1,569,795 $ 2,010,325
----------- -----------
ENGINEERING AND ARCHITECTURAL
SERVICES -- 1.4%
Dames & Moore, Inc. ............................................. 52,700 $ 662,269 $ 638,987
----------- -----------
ENERGY -- 1.3%
North European Oil Royalty Trust (CBI) .......................... 48,800 $ 388,319 $ 622,200
----------- -----------
TOTAL COMMON STOCKS -- 87.8% .................................... $34,407,608 $41,632,812
----------- -----------
</TABLE>
7
<PAGE> 8
PORTFOLIO OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
Shares or
Principal
Amount Cost Value
----------- ----------- -----------
<S> <C> <C> <C>
CONVERTIBLE PREFERRED STOCK -- 2.2%
Time Warner Financing Trust (Percs) ......................... 33,100 $ 1,026,100 $ 1,034,375
----------- -----------
TOTAL INVESTMENT SECURITIES -- 90.0% ........................ $35,433,708 $42,667,187
=========== -----------
SHORT-TERM INVESTMENTS -- 9.5%
Short-Term Corporate Notes:
Ford Motor Credit Company -- 5.90% 1/08/96 ................ $ 500,000 $ 499,426
AT&T Company -- 5.67% 1/17/96 ............................. 1,200,000 1,197,276
Philip Morris Companies -- 5.58% 1/19/96 .................. 840,000 837,656
Hertz Corporation -- 5.67% 1/26/96 ........................ 1,500,000 1,493,858
State Street Bank Repurchase Agreement -- 5.0% 1/02/96
(Collateralized by U.S. Treasury Notes -- 7.25% 2016,
market value $487,693) .................................... 476,000 476,066
-----------
TOTAL SHORT-TERM INVESTMENTS ................................ $ 4,504,282
-----------
TOTAL INVESTMENTS -- 99.5% .................................. $47,171,469
Other assets less liabilities -- 0.5% ....................... 218,863
-----------
TOTAL NET ASSETS -- 100% .................................... $47,390,332
===========
</TABLE>
* Non-income producing security
See notes to financial statements.
8
<PAGE> 9
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $35,433,708) ....................................... $42,667,187
Short-term investments -- at cost plus interest earned
(maturities 60 days or less) ........................................ 4,504,282 $47,171,469
-----------
Cash .................................................................... 113
Receivable for:
Investment securities sold ............................................ $ 182,900
Dividends and accrued interest ........................................ 80,052
Capital Stock sold .................................................... 1,330 264,282
-----------
Prepaid expenses ........................................................ 7,915
-----------
$47,443,779
LIABILITIES
Payable for:
Advisory fees and financial services .................................. $ 33,527
Capital stock repurchased ............................................. 13,270
Accrued expenses ...................................................... 6,650 53,447
----------- -----------
NET ASSETS -- equivalent to $22.36 per share on 2,119,651
shares of Capital Stock outstanding ..................................... $47,390,332
===========
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
25,000,000 shares; outstanding 2,119,651 shares ....................... $ 21,196
Additional Paid-in Capital .............................................. 32,557,890
Undistributed net investment income ..................................... 354,113
Undistributed net realized gain on investments .......................... 7,223,654
Unrealized appreciation of investments .................................. 7,233,479
-----------
Net assets at December 31, 1995 ......................................... $47,390,332
===========
</TABLE>
See notes to financial statements.
9
<PAGE> 10
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest .............................................................. $ 368,296
Dividends ............................................................. 999,491
----------
$1,367,787
EXPENSES -- Note 3:
Advisory fees ......................................................... $ 363,810
Financial services .................................................... 48,516
Transfer agent fees and expenses ...................................... 46,270
Custodian fees ........................................................ 26,563
Audit fees ............................................................ 27,025
Registration fees ..................................................... 18,730
Reports to shareholders ............................................... 8,164
Legal fees ............................................................ 7,236
Directors' fees and expenses .......................................... 19,741
Other expenses ........................................................ 9,242 575,297
----------- ----------
Net investment income ......................................... $ 792,490
----------
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 60 days or less) ............. $33,094,363
Cost of investment securities sold .................................... 25,863,167
-----------
Net realized gain on investments .................................. $7,231,196
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year .......................... $ 7,513,852
Unrealized appreciation at end of year ................................ 7,233,479
-----------
Decrease in unrealized appreciation of investments .................. (280,373)
----------
Net realized and unrealized gain on investments ............... $6,950,823
----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ......................................................... $7,743,313
==========
</TABLE>
See notes to financial statements.
10
<PAGE> 11
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------
1995 1994
---------------------------- -----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ....................... $ 792,490 $ 1,179,908
Net realized gain on investments ............ 7,231,196 5,882,814
Decrease in unrealized appreciation
of investments ............................ (280,373) (6,912,053)
------------ ------------
Increase in net assets resulting
from operations ............................. $ 7,743,313 $ 150,669
Distributions to shareholders from:
Net investment income ....................... $ (1,028,669) $ (1,525,514)
Net realized capital gains .................. (5,865,116) (6,893,785) (4,866,779) (6,392,293)
------------ ------------
Capital Stock transactions:
Proceeds from Capital Stock sold ............ $ 3,397,740 $ 4,801,772
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions ............ 6,078,112 4,341,556
Cost of Capital Stock repurchased ........... (14,900,189) (5,424,337) (39,237,987) (30,094,659)
------------ ------------ ------------ ------------
Total decrease in net assets .................. $ (4,574,809) $(36,336,283)
NET ASSETS
Beginning of year, including
undistributed net investment income
of $590,292 and $935,898 .................... 51,965,141 88,301,424
------------ ------------
End of year, including
undistributed net investment income
of $354,113 and $590,292 .................... $ 47,390,332 $ 51,965,141
============ ============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold .................. 162,549 217,946
Shares issued to shareholders
upon reinvestment of dividends
and distributions ........................... 314,308 197,266
Shares of Capital Stock repurchased ........... (722,174) (1,765,953)
------------ ------------
Decrease in Capital Stock outstanding ......... (245,317) (1,350,741)
============ ============
</TABLE>
See notes to financial statements.
11
<PAGE> 12
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year ................ $ 21.97 $ 23.76 $ 23.94 $ 22.40 $ 19.82
------- ------- ------- ------- -------
Net investment income ............................... $ 0.36 $ 0.46 $ 0.46 $ 0.52 $ 0.64
Net realized and unrealized gain (loss)
on investment securities .......................... 2.95 (0.48) 0.59 2.26 3.38
------- ------- ------- ------- -------
Total from investment operations .................... $ 3.31 $ (0.02) $ 1.05 $ 2.78 $ 4.02
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income .............. $ (0.44) $ (0.46) $ (0.47) $ (0.57) $ (0.73)
Distributions from net realized capital gains ..... (2.48) (1.31) (0.76) (0.67) (0.71)
------- ------- ------- ------- -------
Total distributions ............................... $ (2.92) $ (1.77) $ (1.23) $ (1.24) $ (1.44)
------- ------- ------- ------- -------
Net asset value at end of year ...................... $ 22.36 $ 21.97 $ 23.76 $ 23.94 $ 22.40
======= ======= ======= ======= =======
Total investment return* ............................ 17.27% (0.03)% 4.64% 13.07% 21.69%
Ratios/supplemental data:
Net assets at end of year (in thousands) ............ $47,390 $51,965 $88,301 $76,254 $63,757
Ratio of expenses to average net assets ............. 1.19% 1.13% 1.02% 1.08% 1.10%
Ratio of net investment income to
average net assets ................................ 1.63% 1.95% 2.03% 2.37% 3.11%
Portfolio turnover rate ............................. 58% 31% 43% 30% 33%
</TABLE>
* Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge.
See notes to financial statements.
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
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 primary
investment objective is long-term growth of capital. Current income is a
secondary consideration. 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 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. Securities which are unlisted are valued at the most recent bid
price. Short-term investments with maturities 60 days or less are valued
at cost plus interest earned which approximates market value.
B. Federal Income Tax
No provision for federal income tax is required because the Fund has
elected to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification and to distribute
each year to its shareholders, in accordance with the minimum distribution
requirements of the Code, all of its taxable net investment income and
taxable net realized gains on investments.
C. Securities Transactions and Related Investment Income
Securities transactions are accounted for on the date the securities
are purchased or sold. Dividend income and distributions to shareholders
are recorded on the ex-dividend date. Interest income and expenses are
recorded on an accrual basis.
NOTE 2 -- PURCHASES OF INVESTMENT SECURITIES
Cost of purchases of investment securities (excluding short-term
investments with maturities of 60 days or less) aggregated $24,491,432 for the
year ended December 31, 1995. Realized gains or losses are based on the
specific-certificate identification method. Cost of investment securities owned
at December 31, 1995 was $35,434,246 for federal income tax purposes. Gross
unrealized appreciation and depreciation for all securities at December 31, 1995
for federal income tax purposes was $8,364,685 and $1,131,744, 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 0.75% of the first $50 million of the Fund's average daily net assets
and 0.65% of the average daily net assets in excess of $50 million. In addition,
the Fund pays the Adviser an amount equal to 0.10% of the average daily net
assets for each fiscal year in reimbursement for the provision of financial
services to 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 $30 million and 1% of the remaining average net assets of the Fund
for the year.
For the year ended December 31, 1995, the Fund paid aggregate fees of
$19,500 to all Directors who are not affiliated persons of the Adviser. Legal
fees were for services rendered
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
by O'Melveny & Myers, counsel for the Fund. A Director of the Fund is of counsel
to, and a retired partner of, that firm.
NOTE 4 -- DISTRIBUTOR
For the year ended December 31, 1995, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $4,400 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 December 26, 1995, the Board of Directors declared a dividend from net
investment income of $0.17 per share and a distribution from net realized
capital gains of $3.41 per share payable January 8, 1996 to shareholders of
record on December 29, 1995. For financial statement purposes, this dividend and
distribution was recorded on the ex-dividend date, January 2, 1996.
_______________________________________________________________________________
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF FPA PERENNIAL FUND, INC.
We have audited the accompanying statement of assets and liabilities of
FPA Perennial Fund, Inc., including the portfolio of investments, as of December
31, 1995, the related statement of operations for the year then ended, the
statements 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, including confirmation of securities owned as of December 31, 1995,
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
Perennial Fund, Inc. at December 31, 1995, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
January 26, 1996
14
