<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1996
FILE NO. 2-87607
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 13 [x]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 13 [x]
----------------------
FPA PERENNIAL FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
11400 WEST OLYMPIC BOULEVARD, SUITE 1200
LOS ANGELES, CALIFORNIA 90064
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(310)473-0225
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------------
JULIO J. DE PUZO, JR., TREASURER COPY TO:
FPA PERENNIAL FUND, INC. LAWRENCE J. SHEEHAN, ESQ.
11400 WEST OLYMPIC BOULEVARD, SUITE 1200 O'MELVENY & MYERS
LOS ANGELES, CALIFORNIA 90064 1999 AVENUE OF THE STARS
(NAME AND ADDRESS OF AGENT FOR SERVICE) LOS ANGELES, CALIFORNIA 90067
----------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER REGISTRATION STATEMENT BECOMES EFFECTIVE.
It is proposed that this filing will become effective (check appropriate box)
[x] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940. NO RULE 24F-2 NOTICE WAS FILED BY THE REGISTRANT FOR ITS LAST FISCAL
YEAR BECAUSE NO SHARES WERE SOLD PURSUANT TO THE RULE DURING SUCH YEAR.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
================================================================================
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER SHARE(1) OFFERING FEE
PRICE(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value.... 735,840 $21.22 $290,000 $100.00
=============================================================================================================
</TABLE>
(1) Based on the offering price per share on April 22, 1996, solely for the
purpose of computing the registration fee.
(2) This calculation is made pursuant to Rule 24e-2 under the Investment
Company Act of 1940. During the last fiscal year, a total of 722,174
shares were redeemed or repurchased. Of such redeemed or repurchased
securities, none have been utilized for reduction prior to this time and
all 722,174 shares are being used for reduction at this time.
<PAGE> 2
FPA PERENNIAL FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-1A Item Prospectus Caption
- ---------------- ------------------
Part A
- ------
<S> <C> <C>
1. Cover Page.............................. Cover Page
2. Synopsis................................ Expense Synopsis
3. Condensed Financial Information......... Financial Highlights
4. General Description of Registrant....... Suitability; The Fund and Its Management;
Investment Objective and Policies; Investment
Practices, Risks and Restrictions
5. Management of the Fund.................. Cover Page; The Fund and Its Management; Additional
Information - Shareholder Service Agent
6. Capital Stock and Securities............ Dividends, Distributions and Taxes; Additional
Information
7. Purchase of Securities Being Offered.... Cover Page; Purchase of Shares; Shareholder
Services; Redemption of Shares - Reinvestment
Privilege; Dividends, Distributions and Taxes
8. Redemption or Repurchase................ Redemption of Shares
9. Pending Legal Proceedings............... Inapplicable
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Statement of Additional
Part B Information Caption
- ------ ----------------------
<S> <C> <C>
10. Cover Page.............................. Cover Page
11. Table of Contents....................... Table of Contents
12. General Information and History......... General Information - History
13. Investment Objectives and Policies...... Investment Policies; Investment Restrictions; Portfolio Turnover
14. Management of the Registrant............ Directors and Officers of the Fund
15. Control Persons and Principal Holders... Directors and Officers of the Fund
of Securities
16. Investment Advisory and Other Services.. Directors and Officers of the Fund; Investment Advisory Agreement
17. Brokerage Allocation.................... Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities...... General Information - Voting Rights
19. Purchase, Redemption and Pricing of..... Purchase and Redemption of Shares;
Securities Being Offered Tax Sheltered Retirement Plans
20. Tax Status.............................. Dividends, Distributions and Taxes
21. Underwriters............................ Distributor
22. Calculation of Yield Quotation of....... Inapplicable
Money Market Funds
23. Financial Statements.................... Financial Statements
</TABLE>
ii
<PAGE> 4
Pursuant to Rule 497(c)
Registration No. 2-87607
- --------------------------------------------------------------------------------
Prospectus
FPA Perennial Fund,
Inc. ("Fund")
is a mutual fund designed
for individual,
partnership and corporate
retirement
plans. The Fund's primary
investment
objective is long-term
growth of capital.
Current income is a
secondary consideration.
The Fund usually invests
principally
in common stocks
considered by the
Fund's investment adviser,
First Pacific
Advisors, Inc.
("Adviser"), on the basis
of fundamental analysis,
to provide attractive
value relative to their
market prices.
This Prospectus briefly
outlines information
prospective investors
should know before
purchasing Fund shares.
Investors should read and
retain this Prospectus for
future reference.
A Statement of
Additional Information
about the Fund dated May
1, 1996,
which is incorporated by
reference in this
Prospectus, has been filed
with the Securities and
Exchange Commission. It is
available at no charge by
contacting FPA
Fund Distributors, Inc.
("Distributor")
at 11400 West Olympic
Boulevard, Suite 1200, Los
Angeles, California
90064; telephone (310)
473-0225 or
(800) 982-4372, except
from Alaska,
Hawaii and Puerto Rico.
THESE SECURITIES HAVE
NOT
BEEN APPROVED OR
DISAPPROVED BY THE
SECURITIES
AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES
[FPA LOGO]
SION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR
Distributor:
ANY STATE SECURITIES
COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF
THIS
FPA FUND DISTRIBUTORS, INC.
PROSPECTUS. ANY
REPRESENTATION TO THE
CONTRARY IS A
11400 West Olympic Boulevard, CRIMINAL OFFENSE.
Suite 1200
Los Angeles, California 90064
May 1, 1996
- --------------------------------------------------------------------------------
<PAGE> 5
FPA PERENNIAL FUND, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
(310) 473-0225
<TABLE>
<S> <C>
INVESTMENT First Pacific Advisors, Inc. SHAREHOLDER Boston Financial Data
ADVISER: 11400 West Olympic Boulevard, Suite 1200 SERVICE AGENT: Services, Inc.
Los Angeles, California 90064 P.O. Box 8500
Boston, Massachusetts 02266-8500
DISTRIBUTOR: FPA Fund Distributors, Inc. (617) 328-5000
11400 West Olympic Boulevard, Suite 1200 (800) 638-3060 except
Los Angeles, California 90064 Alaska, Hawaii,
(310) 473-0225 Massachusetts and
(800) 982-4372 except Puerto Rico
Alaska, Hawaii and
Puerto Rico CUSTODIAN AND State Street Bank and
TRANSFER AGENT: Trust Company
225 Franklin Street
Boston, Massachusetts 02110
</TABLE>
INQUIRIES CONCERNING TRANSFER OF REGISTRATION, DISTRIBUTIONS, REDEMPTIONS AND
SHAREHOLDER SERVICE SHOULD BE DIRECTED TO THE SHAREHOLDER SERVICE AGENT.
INQUIRIES CONCERNING SALES SHOULD BE DIRECTED TO THE DISTRIBUTOR.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C> <C>
Expense Synopsis............................................. 3 Reinvestment Privilege.............................. 12
Financial Highlights......................................... 4 Dividends, Distributions and Taxes.................... 12
Suitability.................................................. 4 Dividends........................................... 13
Investment Objectives and Policies........................... 5 Capital Gains....................................... 13
The Fund and Its Management.................................. 6 Taxes............................................... 13
Advisory Agreement......................................... 6 Investment Practices, Risks and Restrictions.......... 13
FPA Fund Family............................................ 6 Fixed-Income Securities............................. 13
Prior Performance Information.............................. 7 Risks of Lower-Rated Securities..................... 13
Purchase of Shares........................................... 7 Securities of Foreign Issuers....................... 14
Net Asset Value............................................ 8 Covered Call Options................................ 14
Table of Sales Charges..................................... 8 Short Sales Against the Box......................... 15
Cumulative Purchase Discount............................... 8 Repurchase Agreements............................... 15
Letter of Intent........................................... 8 Brokerage Practices................................. 15
Sales at Net Asset Value................................... 8 Portfolio Turnover.................................. 15
Shareholder Services......................................... 9 Investment Restrictions............................. 16
FPA Exchange Privilege..................................... 9 Additional Information................................ 16
Money Market Fund Exchange Privilege....................... 10 Common Stock........................................ 16
How to Exchange Shares..................................... 10 Voting Rights....................................... 16
Investment Account......................................... 10 Shareholder Inquiries............................... 16
Pre-Authorized Investment Plan............................. 10 Shareholder Service Agent........................... 16
Retirement Plans........................................... 11 Custodian........................................... 16
Systematic Withdrawal Plan................................. 11 Legal Counsel....................................... 16
Redemption of Shares......................................... 11 Independent Auditors................................ 16
Telephone Transactions..................................... 12
</TABLE>
- --------------------------------------------------------------------------------
No dealer, salesman, or other person has been authorized to give any information
or to make any representations other than those contained in this Prospectus or
in supplemental sales literature distributed by the Distributor in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund or by the Distributor. This Prospectus does not constitute an
offering by the Distributor in any jurisdiction in which such offering may not
lawfully be made.
2
<PAGE> 6
EXPENSE SYNOPSIS
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price)................................................... 6.50%
Deferred Sales Load (as a percentage of original sales price
or redemption proceeds, as applicable)............................... *
Redemption Fee (as a percentage of amount redeemed).................... None
Exchange Fee........................................................... $5.00
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees........................................................ 0.75%
12b-1 Fees............................................................. None
Other Expenses (including financial services).......................... 0.44%
-----
Total Fund Operating Expenses..................................... 1.19%
</TABLE>
<TABLE>
<CAPTION>
10
1 YEAR 3 YEARS 5 YEARS YEARS
------ ------- ------- -------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on
a $1,000 investment, assuming
(1) five percent annual return and
(2) redemption at the end of each time
period: $76.00 $100.00 $126.00 $200.00
</TABLE>
- ---------------
* An account management fee is charged by unaffiliated investment advisers or
broker-dealers to certain accounts entitled to purchase shares without sales
charge.
The foregoing synopsis is intended to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Purchase of Shares" and "The Fund and Its Management." The
example is included to provide a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a five percent
annual return assumption. This assumption is unrelated to the Fund's prior
performance and is not a projection of future performance. THE EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESSER THAN THOSE SHOWN.
3
<PAGE> 7
FINANCIAL HIGHLIGHTS
The following information has been audited by the Fund's independent auditors.
Their report appears in the Statement of Additional Information. This
information should be read in conjunction with the related financial statements
included in the Statement of Additional Information, which can be obtained
without charge from the Distributor at the address shown on the cover page of
this Prospectus.
For one share outstanding throughout each year
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <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 $ 22.60 $ 19.28 $ 17.16 $ 18.48 $ 18.84
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment
income.............. $ 0.36 $ 0.46 $ 0.46 $ 0.52 $ 0.64 $ 0.77 $ 0.75 $ 0.70 $ 0.67 $ 0.60
Net realized and
unrealized gain
(loss) on investment
securities.......... 2.95 (0.48) 0.59 2.26 3.38 (0.55) 3.88 2.52 (0.78) 1.25
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations.......... $ 3.31 $ (0.02) $ 1.05 $ 2.78 $ 4.02 $ 0.22 $ 4.63 $ 3.22 $ (0.11) $ 1.85
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment income... $ (0.44) $ (0.46) $ (0.47) $ (0.57) $ (0.73) $ (1.15) $ (0.72) $ (0.65) $ (0.63) $ (0.51)
Distributions from
net realized capital
gains............... (2.48) (1.31) (0.76) (0.67) (0.71) (1.85) (0.59) (0.45) (0.58) (1.70)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total
distributions....... $ (2.92) $ (1.77) $ (1.23) $ (1.24) $ (1.44) $ (3.00) $ (1.31) $ (1.10) $ (1.21) $ (2.21)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value at
end of year......... $ 22.36 $ 21.97 $ 23.76 $ 23.94 $ 22.40 $ 19.82 $ 22.60 $ 19.28 $ 17.16 $ 18.48
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total investment
return*............. 17.27% (0.03)% 4.64% 13.07% 21.69% 0.97% 25.79% 19.92% (1.12)% 10.27%
Ratios/supplemental
data:
Net assets at end of
year
(in $000's)......... 47,390 51,965 88,301 76,254 63,757 51,488 55,982 51,607 48,549 62,039
Ratio of expenses to
average
net assets.......... 1.19% 1.13% 1.02% 1.08% 1.10% 1.14% 1.12% 1.17% 1.11% 1.14%
Ratio of net
investment income
to average net
assets.............. 1.63% 1.95% 2.03% 2.37% 3.11% 3.78% 3.45% 3.62% 2.98% 3.71%
Portfolio turnover
rate................ 58% 31% 43% 30% 33% 29% 27% 29% 75% 84%
</TABLE>
- ---------------
* Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge.
SUITABILITY
The Fund is designed to serve chiefly as an investment vehicle for retirement
plans and other entities exempt from federal income taxation, although Fund
shares may be purchased by other investors. The Adviser considers the Fund
especially suitable for those investors who are in a position to hold Fund
shares over the course of a market cycle or longer. The Fund's portfolio is
managed with disciplines similar to those applied to corporate pension accounts
managed by the Adviser. Investment decisions are made without regard to tax
considerations other than maintenance of the Fund's qualification as a regulated
investment company under the Internal Revenue Code.
4
<PAGE> 8
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is long-term growth of capital.
Current income is a secondary consideration. The Adviser believes the Fund's
primary objective can best be achieved by investing in a diversified selection
of common stocks of companies which, in the judgment of the Adviser, possess
attractive value relative to price, show good prospects for growth, and have
quality management. The Fund may also invest in United States Government and
government agency obligations, corporate debt securities, preferred stocks and
convertible securities. Up to 15% of the Fund's net assets may be invested in
lower-rated or comparable unrated debt securities as described under "Investment
Practices, Risks and Restrictions -- Fixed-Income Securities" and -- "Risks of
Lower-Rated Securities." There is no assurance that the Fund will succeed in
achieving its investment objectives as there is market risk inherent in pursuing
any investment objective and in owning securities.
Generally, the Adviser favors investments in common stocks of companies
demonstrating a consistently high return on invested capital with a substantial
portion of earnings reinvested in the business to achieve compounded growth. The
Adviser also searches for companies it deems undervalued when considering book
value, replacement cost of assets and/or other relevant factors.
The Adviser attempts to lessen price risk by not overpaying for earnings of even
the best companies. In the Adviser's opinion, better values and less price risk
may often be found among companies with successful records that are currently
out-of-favor as evidenced by such factors as relatively low price-earnings
ratios.
Investments are not limited to any specific industry, market segment or area of
technology. The Adviser emphasizes investments in securities which it considers
offer the best value. Periodically, larger than usual positions in cash or
high-quality short-term debt securities (U.S. Government or government agency
securities, obligations of domestic banks, prime commercial paper notes and
repurchase agreements) may be held for temporary defensive purposes or to meet
liquidity needs.
The Fund may invest up to 25% of its net assets in securities of foreign issuers
provided no more than 10% be invested in such securities not represented by ADRs
listed on The New York Stock Exchange ("NYSE") or the American Stock Exchange.
Such investments involve additional risks and opportunities compared with
securities of U.S. issuers. The Fund can write covered call options which are
listed on a national securities exchange. See "Investment Practices, Risks and
Restrictions" herein and "Investment Policies" in the Statement of Additional
Information.
The Adviser's emphasis on fundamental analysis of a company's prospects and the
inherent value of its securities may result in a portion of the Fund's portfolio
being invested in medium or smaller sized companies or companies perceived by
the average investor to be unpopular or unfamiliar. This should not imply that
values are not available in larger, better known companies. Rather, it is the
Adviser's position that value can be found in companies of all sizes.
Substantially all common stocks the Fund purchases, however, will be either
listed on a national securities exchange or included in the National Association
of Securities Dealers Automated Quotation (NASDAQ) National Market System or
National List. The Adviser's value-oriented investment approach may result in a
portfolio which may not reflect all facets of the national economy and which may
differ significantly from the broad market indices.
5
<PAGE> 9
Security purchases are based primarily on consideration of fundamental value and
earnings expectations rather than short-term stock market expectations. However,
if earnings prospects change, or the value of a security becomes large in
relation to the Fund's total size or it no longer appears to represent an
unusual value, the Fund can sell all or part of the investment regardless of the
length of time held. See "Investment Practices, Risks and
Restrictions -- Portfolio Turnover."
THE FUND AND ITS MANAGEMENT
The Fund is a diversified, open-end management investment company, generally
called a mutual fund, which was incorporated in Maryland on September 14, 1983.
A mutual fund provides the investor a practical and convenient way to invest in
a diversified portfolio of securities by combining resources with others who
have similar investment goals.
A board of five directors is responsible for overseeing the Fund's affairs. The
Adviser selects investments for the Fund, provides administrative services and
manages the Fund's business. Eric S. Ende, President of the Fund and Senior Vice
President of the Adviser, is primarily responsible for the day-to-day management
of the Fund's portfolio. Mr. Ende has been the Chief Investment Officer of the
Fund since September 1995. Previously, Mr. Ende had served as Executive Vice
President (or Vice President) of the Fund for over ten years. The Adviser,
together with its predecessors, has been in the investment advisory business
since 1954, serving as investment adviser to the Fund since its inception.
Presently, the Adviser manages assets of approximately $3.4 billion for five
investment companies, including one closed-end investment company, and more than
45 institutional accounts. All officers of the Fund are also officers of the
Adviser. Certain officers of the Fund are also officers of the Distributor. The
Adviser and the Distributor are indirect wholly owned subsidiaries of United
Asset Management Corporation ("UAM"), a New York Stock Exchange listed holding
company principally engaged, through affiliated firms, in providing
institutional investment management and acquiring institutional investment
management firms.
ADVISORY AGREEMENT. Under the Investment Advisory Agreement dated June 27, 1991,
the Fund pays the Adviser a monthly fee computed on the average daily net assets
of the Fund at the annual rate of 0.75% on the first $50 million of net assets
and 0.65% on net assets over $50 million. In addition, the Adviser receives an
amount equal to 0.10% of the Fund's average daily net assets for each fiscal
year in reimbursement for the provision of financial services to the Fund. The
advisory fee is higher than the fee paid by some other mutual funds. For the
last fiscal year, advisory fees plus the cost of financial services paid by the
Fund equaled 0.85% of the Fund's average net assets.
The Fund also pays for shareholder service agent fees, custodian fees, legal and
audit fees, directors' fees, reports to shareholders and proxy statements,
registration of Fund shares under federal and state laws, and all other expenses
incurred in the operation of the Fund except those assumed by the Adviser. For
the last fiscal year, the Fund's total operating expenses were 1.19% of average
net assets.
FPA FUND FAMILY. The Fund is one of four mutual funds in the FPA Fund Family
(collectively, the "FPA Funds"). FPA Capital Fund, Inc. ("Capital"), which
currently is not open to new investors, seeks long-term capital growth but
current income is also a factor. FPA New Income, Inc. ("New Income"), a
fixed-income fund, seeks current income and long-term total return. FPA
Paramount Fund, Inc. ("Paramount"), which currently is not open to new
investors, seeks a high total investment return, including capital appreciation
and income.
6
<PAGE> 10
The FPA Funds offer exchange privileges and telephone redemptions plus combined
shareholdings for cumulative purchase discounts and letters of intent. These
privileges are more fully described under "Purchase of Shares," "Shareholder
Services" and "Redemption of Shares." The account information form should be
used to change information and authorize these services. Authorizing exchange
privileges or telephone redemptions requires a signature guarantee, which is
described under "Redemption of Shares." The account information form is
available from authorized securities dealers ("dealers") or the Distributor.
PRIOR PERFORMANCE INFORMATION. From time to time, the Fund's total average
annual return for one, five and ten year periods may be quoted in
advertisements. Other total return quotations, aggregate or average, over other
time periods may also be included. Average annual total return reflects the
average annual percentage change in value of an investment in the Fund over the
measuring period. Aggregate total return reflects the total percentage change in
value over the measuring period. Total return calculations assume that dividends
and capital gain distributions paid by the Fund during the period are reinvested
in Fund shares at net asset value. Quotations of total returns reflect the
maximum sales charge, except that the Fund may also provide, in conjunction with
such quotations, additional quotations that do not reflect a sales charge.
Comparative performance information may also be used from time to time in
advertising or marketing of the Fund's shares. The Fund's total return may be
compared to that of other mutual funds with similar investment objectives and to
stock and other relevant indices or to rankings prepared by independent services
or other financial or industry publications that monitor the performance of
mutual funds. For example, the total return on Fund shares may be compared to
data prepared by Lipper Analytical Services, Inc. or to a stock index such as
the Standard & Poor's 500 Stock Index. Such comparative performance information
may be stated in the same terms in which the comparative data and indices are
stated. For these purposes, the performance of the Fund, as well as the
performance of other mutual funds or indices, would not reflect sales charges,
the inclusion of which would reduce such performance quotations.
Performance figures represent historic earnings, and should not be considered as
representative of future results. The investment return and principal value of
an investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Since performance
will fluctuate, performance data for the Fund should not be used to compare an
investment in the Fund's shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Investors should remember that performance is
generally a function of the kind and quality of the securities held in a
portfolio, operating expenses and market conditions.
Further information about the Fund's performance is contained in the annual
report to shareholders which may be obtained without charge from the Distributor
at the address shown on the cover page of this Prospectus.
PURCHASE OF SHARES
Fund shares are sold in a continuous offering through dealers. The Distributor
serves as principal underwriter. The account information form should be used for
initial purchases. The minimum initial investment is $1,500. Each subsequent
investment must be at least $100. Minimum investment requirements can be changed
by the Fund or waived by the Distributor.
7
<PAGE> 11
The offering price equals the net asset value per share plus the applicable
sales charge. Orders dealers receive before the NYSE closes (currently 4:00
p.m., New York time) on any business day are priced based on the net asset value
for that day if Boston Financial Data Services, Inc. ("Shareholder Service
Agent"), as agent for the Distributor, receives the order prior to its close of
business. Orders received by the Shareholder Service Agent after such time are
priced based on net asset value for the next business day.
NET ASSET VALUE. Net asset value is computed as of the close of the NYSE on
each day the NYSE is open. Net asset value, rounded to the nearest cent per
share, equals the market value of all portfolio securities plus other assets,
less all liabilities, divided by the number of Fund shares outstanding.
TABLE OF SALES CHARGES. The following table shows the sales charge at various
investment levels. The sales charge applies to purchases made at one time by any
combination of an individual, his or her spouse and these related investors (and
their spouses): grandparents, parents, siblings, children or grandchildren; or
by the individual, his or her spouse and a trustee or other fiduciary purchasing
securities for related trusts, estates or fiduciary accounts, including employee
benefit plans.
<TABLE>
<CAPTION>
SALES SALES REALLOWED
SIZE OF INVESTMENT CHARGE(1) CHARGE(2) TO DEALERS(2)
- ------------------------------------------------------- --------- --------- -------------
<S> <C> <C> <C>
Less than $10,000...................................... 6.95% 6.50% 6.00%
$ 10,000 but less than $25,000....................... 6.38% 6.00% 5.50%
$ 25,000 but less than $50,000....................... 5.54% 5.25% 4.75%
$ 50,000 but less than $100,000...................... 4.71% 4.50% 4.25%
$ 100,000 but less than $250,000...................... 3.90% 3.75% 3.50%
$ 250,000 but less than $500,000...................... 2.04% 2.00% 1.75%
$ 500,000 but less than $1,000,000.................... 1.01% 1.00% 0.80%
$1,000,000 and over.................................... 0.00% 0.00% 0.00%
</TABLE>
- ---------------
(1) As a percentage of net amount invested.
(2) As a percentage of public offering price.
CUMULATIVE PURCHASE DISCOUNT. The size of investment may be determined by
adding the amount being invested to the current value, at offering price, of all
presently held shares of the FPA Funds. If such holdings qualify for a reduced
sales charge, information sufficient to permit verification must be furnished to
the Shareholder Service Agent on the account information form or when the order
is placed.
LETTER OF INTENT. A letter of intent ("LOI") allows investors to obtain a
reduced sales charge by aggregating investments made during a 13-month period.
The value of all presently held shares of the FPA Funds may also be used to
determine the applicable sales charge. The account information form contains the
LOI which must be signed at the time of initial purchase, or within 30 days.
Each investment made under an LOI during the period receives the sales charge
for the total investment goal. If the goal is not achieved within the period,
the shareholder must pay the amount equal to the sales charge applicable to the
purchases made minus those actually paid.
SALES AT NET ASSET VALUE. Fund shares may be purchased at net asset value,
without a sales charge, by these investors and their spouses (and their
immediate relatives): (a) current and
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<PAGE> 12
former directors, officers and employees of the Adviser, UAM and its affiliates;
(b) current and former directors, officers and employees of Angeles Corporation
(the former parent of the Adviser) and its affiliates; (c) current and former
directors of, and partners and employees of legal counsel to, the investment
companies advised by the Adviser; (d) investment advisory clients of the Adviser
and pension consultants to such clients and their directors, officers and
employees; (e) employees (including registered representatives) of a dealer
which has a selling group agreement with the Distributor and consents to such
purchases; (f) any employee benefit plan maintained for the benefit of such
qualified investors; and (g) directors, officers and employees of a company
whose employee benefit plan holds shares of one or more of the FPA Funds.
Immediate relatives include grandparents, parents, siblings, children and
grandchildren of a qualified investor, and the spouse of any immediate relative.
The foregoing purchasers must represent that the shares are purchased for
investment and will not be resold except through redemption or repurchase by the
Fund.
The Fund also offers shares at net asset value without imposition of a sales
charge to the following persons: (i) trustees or other fiduciaries purchasing
shares for employee benefit plans of employers with 20 or more employees; (ii)
trust companies, bank trust departments and registered investment advisers
purchasing for accounts over which they exercise investment authority and which
are held in a fiduciary, agency, advisory, custodial or similar capacity,
provided that the amount collectively invested or to be invested by such
accounts during the subsequent 13-month period in the Fund and/or the FPA Funds
totals at least $1,000,000; (iii) tax-exempt organizations enumerated in Section
501(c)(3), (9), or (13) of the Internal Revenue Code; and (iv) accounts upon
which an investment adviser, financial planner or broker-dealer charges an
account management or consulting fee, provided such organization has entered
into an agreement with the Distributor regarding such accounts or purchases Fund
shares for such accounts or for its own accounts through an omnibus account
maintained by a broker-dealer that has entered into such an agreement with the
Fund or Distributor.
No sales charge is imposed because the Distributor anticipates that such
purchases should result in economies in the sales effort and related expenses
compared to sales made through normal distribution channels. A special
application form, which is available from the Distributor, must be submitted
with the initial purchase. All net asset value sales require specific
notification to the Distributor of the purchaser's eligibility at the time the
order is placed. If a purchaser places such an order through a securities
broker, the broker may charge a service fee. No such fee is charged if shares
are purchased directly from the Distributor or the Fund.
SHAREHOLDER SERVICES
FPA EXCHANGE PRIVILEGE. Subject to the following requirements, Fund shares may
be exchanged for shares of another FPA Fund, except FPA Capital Fund, Inc. and
FPA Paramount Fund, Inc., whose shares may only be acquired by existing Capital
and Paramount shareholders, respectively. An exchange may establish a new or
increase an existing FPA Fund account. Both accounts must bear the same
registration. A sales charge applies to purchases by exchange unless (a) a sales
charge equivalent to that applicable to the acquired shares was previously paid;
(b) the shareholder is entitled to purchase shares at net asset value; or (c)
the shares being exchanged were acquired by reinvestment. Shares of the fund to
be acquired must be registered for sale in the investor's state. A $5.00 service
fee applies to each exchange.
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<PAGE> 13
MONEY MARKET FUND EXCHANGE PRIVILEGE. The Distributor has arranged for shares
of the money market portfolio of the Cash Equivalent Fund, a no-load diversified
open-end money market mutual fund ("Money Market Fund") to be available in
exchange for shares of the Fund. Shares of the Money Market Fund so acquired
plus any shares acquired through reinvestment of dividends and distributions may
be re-exchanged for shares of any FPA Fund without sales charge, provided that
in the case of Capital and of Paramount, the investor has maintained his
shareholder account because shares of Capital and of Paramount, are currently
offered only to existing shareholders. The $5.00 exchange fee is paid by the
Distributor which receives a fee from Kemper Financial Services, the
administrator for the Money Market Fund, of .15 of 1% per year or more of the
average daily net asset value of shares of the Money Market Fund acquired
through this exchange privilege. This exchange privilege does not constitute an
offering or recommendation by the Fund of the Money Market Fund. The Money
Market Fund is separately managed and is not one of the FPA Funds. FPA mutual
fund investments held in Fund-Sponsored Individual Retirement Accounts may not
be exchanged into the Cash Equivalent Fund.
HOW TO EXCHANGE SHARES. The above described exchange privileges may be
exercised by sending written instructions to the Shareholder Service Agent. See
"Redemption of Shares" for applicable signature and signature guarantee
requirements. Exchange privileges may also be exercised by telephone as
described under "Redemption of Shares -- Telephone Transactions." Only four
exchanges may be made in one account during any calendar year; exchanges
exceeding this limit may be considered null and void, if the investor has been
notified that this limit has been reached. Shares must be owned for 15 days
before exchanging and cannot be in certificate form unless the certificate is
tendered with the request for exchange. An exchange requires the purchase of
shares of the acquired fund with a value of at least $1,000. Exchange
redemptions and purchases are effected on the basis of the net asset values next
determined after receipt of the request in proper order by the Shareholder
Service Agent. In the case of exchanges into the Money Market Fund, dividends
generally commence on the following business day. For federal and state income
tax purposes, an exchange is treated as a sale and may result in a capital gain
or loss, although if the shares exchanged have been held less than 91 days, the
sales charge paid on such shares is not included in the tax basis of the
exchanged shares, but is carried over and included in the tax basis of the
shares acquired. See the Statement of Additional Information.
Additional information concerning this privilege and prospectuses for other FPA
Funds and/or for the Money Market Fund may be obtained from dealers or the
Distributor. A shareholder should read such prospectuses and consider
differences in objectives and policies before making any exchange. The Fund or
the Distributor can change or discontinue this privilege upon 60 days' advance
notice and investors who had exchanged into the Money Market Fund would be
permitted to reacquire shares of the Fund without sales charge for at least 60
days after notice of termination of the Money Market Fund exchange privilege.
INVESTMENT ACCOUNT. Each shareholder has an investment account in which the
Shareholder Service Agent holds Fund shares. Unless the Shareholder Service
Agent receives a written request, stock certificates will not be issued.
Certificates are only issued for full shares. The shareholder receives a
statement showing account activity after each transaction.
PRE-AUTHORIZED INVESTMENT PLAN. An investor desiring to make automatic monthly
investments may use the optional shareholder services form, available from
dealers or the Distributor. The
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<PAGE> 14
Shareholder Service Agent withdraws funds from the investor's bank account
monthly for $100 or more as specified through the Automated Clearing House.
RETIREMENT PLANS. An eligible investor may establish an IRA (individual
retirement account) and/or other retirement plan with a $100 minimum initial
investment and an expressed intention to increase the investment to $1,500
within 12 months. Each subsequent investment must be at least $100. Neither the
Fund nor the Distributor imposes additional fees for these plans, but the plan
custodian does. The Tax Reform Act of 1986 restricted deductible contributions
to an IRA by participants in an employer-sponsored retirement plan. The maximum
deductible contribution of $2,000 of earned income is phased out for such
participants with an adjusted gross income of $40,000 to $50,000 (joint) or
$25,000 to $35,000 (single). However, persons ineligible for deductible
contributions generally may make non-deductible contributions of earned income
up to $2,000 per year and earnings are tax-deferred. Investors should consult
their tax advisers. Forms and information regarding the plan are available from
dealers or the Distributor.
SYSTEMATIC WITHDRAWAL PLAN. Any shareholder whose account value is $10,000 or
more may make monthly, quarterly, semi-annual or annual withdrawals of $50 or
more by completing the optional shareholder services form. Under this plan,
sufficient Fund shares to cover these withdrawals are redeemed each month and
proceeds are forwarded as directed on the optional shareholder services form.
Dividends and capital gains distributions on Fund shares held under this plan
are automatically reinvested in additional Fund shares at net asset value. If
these withdrawals continuously exceed reinvestments, the shareholder's account
is correspondingly reduced and ultimately exhausted. Concurrent withdrawals and
purchases are ordinarily disadvantageous to the shareholder due to additional
sales charges. The shareholder recognizes any taxable gain or loss on
redemptions.
REDEMPTION OF SHARES
Shareholders can redeem for cash, without charge, any or all of their Fund
shares at any time by sending a written request in proper form to the
Shareholder Service Agent. Facsimile transmissions are not acceptable.
Shareholders can also place redemption requests through dealers, who may charge
a fee. Shareholders redeeming Fund shares from retirement plans should consult
the plan documents concerning federal tax consequences and their plan custodian
regarding procedures.
All persons in whose name the account is established must sign the redemption
request exactly as registered. If the redemption exceeds $10,000, if the
proceeds are not paid to the record owner at the record address, or if the
shareholder is a corporation, partnership, trust or fiduciary, the signature(s)
must be guaranteed by a bank or trust company; a broker or dealer; a credit
union; a national securities exchange, registered securities association or
clearing agency; or a savings and loan association.
In most cases, only a properly signed request with any necessary signature
guarantee is required for a redemption. However, stock certificates if held by
shareholders must accompany requests. Additional documents are required if a
corporation, partnership, trust, fiduciary, executor or administrator requests
the redemption.
Redemptions are only processed on days the NYSE is open. The redemption price is
the first net asset value determined after the Shareholder Service Agent
receives the redemption request in
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<PAGE> 15
proper form. A check for the proceeds is mailed within seven days after the
Shareholder Service Agent receives the request in good order. If Fund shares
redeemed were recently purchased by check, the Shareholder Service Agent can
delay mailing the proceeds for a period of up to 15 days until the purchasing
check has cleared.
The Fund may direct the Shareholder Service Agent to redeem all Fund shares of
any shareholder whose account value is less than $500 as a result of a
redemption. In such case, the shareholder is notified in writing that the
account value is insufficient and allowed up to 60 days to increase it to $500.
TELEPHONE TRANSACTIONS. Telephone exchange privileges are available unless
declined by an investor on the account information form. Telephone redemption
privileges are available only if elected on the optional shareholder services
form. A properly completed request with a signature guarantee is required if a
telephone redemption election is made or changed after the account is opened.
Telephone redemptions are not available for shares held in a Fund-sponsored
retirement account. Shares held in certificate form cannot be redeemed or
exchanged by telephone. The Shareholder Service Agent (the "Agent") employs
procedures considered by it to be reasonable to confirm that instructions
communicated by telephone are genuine, including requiring account registration
verification from the caller and recording telephone instructions. If reasonable
procedures are employed, neither the Agent nor the Fund is responsible for
following telephone instructions the Agent reasonably believes to be genuine.
The Agent and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if such loss results from a failure to employ reasonable
procedures. Proceeds of telephone redemptions are paid to the bank account the
shareholder designates when establishing this privilege. Telephone redemptions
of $5,000 or more are wired unless the designated bank cannot receive Federal
Reserve wires. Telephone redemptions under $5,000 are mailed unless a wire is
requested. There is a $3.50 charge for wires. During periods of significant
economic or market changes, telephone instructions may be difficult to place. If
an investor is unable to contact the Agent by telephone, instructions may be
sent to the Agent at the address set forth on page 2. The Fund may change or
discontinue telephone redemption privileges without notice.
REINVESTMENT PRIVILEGE. Proceeds from a redemption can be reinvested in Fund
shares within 30 days without paying a sales charge. Such reinvestment is made
at the first net asset value determined after the Shareholder Service Agent
receives the order. This privilege can be exercised only once for each Fund
investment. Information sufficient to permit verification must be furnished to
the Shareholder Service Agent when the purchase is placed. Such redemption and
reinvestment is a taxable transaction but losses on the redemption are not
deductible for federal income tax purposes.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Shareholders may receive dividends and/or capital gains distributions in
addition to any increase or decrease in the value of Fund shares. Dividends and
distributions are automatically reinvested in additional Fund shares at the net
asset value determined at the close of business on the day after record date,
unless the Shareholder Service Agent receives a written request for cash payment
before the record date. The account information form may be used for this
purpose.
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<PAGE> 16
DIVIDENDS. The Fund's investment income consists principally of dividends and
interest earned on its portfolio securities. All of this income, after payment
of expenses, is distributed semi-annually as dividends to shareholders.
CAPITAL GAINS. When the Fund sells portfolio securities, it realizes capital
gains and losses, depending upon whether the selling price is higher or lower
than the purchase price. Net realized capital gains from sales of securities
equal profits minus losses, including any losses carried forward from prior
years. The Fund distributes any net realized capital gains to shareholders
annually.
TAXES. Because the Fund plans to distribute all of its net investment income
and net realized capital gains to shareholders, it does not expect to pay any
federal income tax. Dividends and distributions paid to shareholders are subject
to federal income tax, and any state and local income tax. Shareholders are
notified annually of the federal tax status of these distributions. Dividends
from net investment income and distributions from short-term capital gains are
taxable to shareholders as ordinary income.
Distributions from long-term capital gains are taxable to shareholders as such.
All distributions are taxable whether paid in cash or reinvested. To avoid a 31%
federal withholding tax on dividends, distributions and redemptions,
shareholders must certify their taxpayer identification number to the
Shareholder Service Agent, as agent for the Fund. The account information form
may be used for this purpose.
INVESTMENT PRACTICES, RISKS AND RESTRICTIONS
FIXED-INCOME SECURITIES. The market price of fixed-income securities held by
the Fund can be expected to vary inversely to changes in prevailing interest
rates. Investments in fixed-income securities with longer maturities generally
produce higher yields but are subject to greater market fluctuation. The Fund
may invest up to 15% of its net assets in fixed-income securities, including
convertible securities, which are rated BB or lower, by Standard & Poor's
Corporation ("S&P") or Ba or lower by Moody's Investors Service, Inc.
("Moody's"), which ratings are considered by the rating agencies to be
speculative, and unrated securities considered by the Adviser to be of
comparable quality. Debt securities with a rating of BB/Ba or lower are commonly
referred to as "junk bonds." See "Risks of Lower-Rated Securities" below.
RISKS OF LOWER-RATED SECURITIES. To the extent that convertible securities or
other debt securities acquired by the Fund are rated lower than investment grade
or are not rated, there is a greater risk as to the timely repayment of the
principal of, and timely payment of interest on, such securities. Decisions to
purchase and sell these securities are based on the Adviser's evaluation of
their investment potential and not on the ratings assigned by credit agencies.
Because investment in lower-rated securities involves greater investment risk,
achievement of the Fund's investment objective is more dependent on the
Adviser's credit analysis than with respect to the Fund's investments in
higher-rated securities. Lower-rated securities may be more susceptible to real
or perceived adverse economic and competitive industry conditions than
investment grade securities. A projection of an economic downturn, for example,
could cause a decline in the prices of lower-rated securities because the advent
of a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. In addition, the
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<PAGE> 17
secondary trading market for lower-rated securities may be less liquid than the
market for higher-rated securities.
Prices of lower-rated securities may decline rapidly in the event a significant
number of holders decides to sell. Changes in expectations regarding an
individual issuer, an industry or lower-rated securities generally could reduce
market liquidity for such securities and make their sale by the Fund more
difficult, at least in the absence of price concessions. The lower-rated bond
market has grown primarily during a period of long economic expansion and it is
uncertain how it would perform during an extended economic downturn. An economic
downturn or an increase in interest rates could severely disrupt the market for
lower-rated bonds and adversely affect the value of outstanding bonds and the
ability of the issuers to repay principal and interest. See "Risk Factors
Relating to Lower-Rated Securities" in the Statement of Additional Information
for a further discussion.
The lower-rated securities in which the Fund may invest from time to time
include debt securities of companies that are financially troubled, in default
or are in bankruptcy or reorganization ("Deep Discount Securities"). These
securities may be rated C, C1 or D by S&P or C by Moody's or may be unrated.
Debt obligations of such companies are usually available at a deep discount from
the face value of the instrument. The Fund may invest in Deep Discount
Securities when the Adviser believes that existing factors are likely to improve
the company's financial condition. Such factors include a restructuring of debt,
management changes, existence of adequate assets, or other special
circumstances.
A debt instrument purchased at a deep discount, but prior to default, may
currently pay a very high effective yield. In addition, if the financial
condition of the issuer improves, the underlying value of the securities may
increase, resulting in a capital gain. If the issuer defaults on its obligations
or remains in default, or if the plan of reorganization is insufficient for
debt-holders, the Deep Discount Securities may stop generating income and lose
value or become worthless. The Adviser will balance the benefits of Deep
Discount Securities with their risks. While a diversified portfolio may reduce
the overall impact of a Deep Discount Security that is in default or loses its
value, the risk cannot be eliminated.
As of December 31, 1995, 2.2% of the Fund's net assets were invested in
convertible securities and 9.5% of the Fund's net assets were held in high grade
short-term investments.
SECURITIES OF FOREIGN ISSUERS. Investments in securities of foreign issuers may
be affected favorably or unfavorably by changes in currency rates and exchange
control regulations. Compared to U.S. companies, there may be less publicly
available information about foreign companies which generally are subject to
less stringent accounting, auditing and financial reporting standards and
requirements. Securities of some foreign companies may be less liquid or more
volatile than those of U.S. companies. Foreign brokerage commissions and
custodial fees are generally higher than in the United States. Investments in
foreign securities may involve additional risks, including local political or
economic developments, expropriation or nationalization of assets and imposition
of withholding taxes on dividend or interest payments. In the event of a default
on any foreign debt obligation, it may be more difficult for the Fund to obtain
or enforce a judgment against the issuer.
COVERED CALL OPTIONS. When the Fund writes a listed call option, the purchaser
has the right to buy a security from the Fund at a fixed exercise price any time
before the option contract expires, regardless of changes in the market price of
the underlying security. The Fund writes options only on securities it owns
(covered options) and must retain ownership of the underlying security while
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<PAGE> 18
the option is outstanding. Until the option expires, the Fund cannot profit from
a rise in the market price of the underlying security over the exercise price,
except insofar as the premium which the Fund receives, net of commissions,
represents a profit. The premium paid to the Fund is the consideration for
undertaking this obligation.
The Fund may not write any option which, at the time, would cause its
outstanding options to cover securities comprising more than 10% of its asset
value. Writing option contracts is a highly specialized activity and may limit
investment flexibility at certain times. The maximum term for listed options
exceeds two years, but the Fund expects that most options it writes will not
exceed six months.
SHORT SALES AGAINST THE BOX. The Fund can make short sales of securities or
maintain a short position if the Fund contemporaneously owns or has the right to
obtain at no added cost securities identical to those sold short (short sales
"against the box") or if the securities sold are "when issued" or "when
distributed" securities which the Fund expects to receive in a recapitalization,
reorganization, or other exchange for securities the Fund contemporaneously owns
or has the right to obtain at no added cost. The principal purpose of making
short sales is to enable the Fund to obtain the current market price of a
security which the Fund desires to sell but which cannot be currently delivered
for settlement. The Fund may not make short sales or maintain a short position
if to do so would cause more than 25% of its total net assets (exclusive of
proceeds from short sales) to be allocated to a segregated account in connection
with short sales.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements with
domestic banks or dealers to earn interest on temporarily available cash. A
repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Fund) acquires a debt security and the seller agrees to repurchase at a
future time and set price, thereby determining the yield during the holding
period. Repurchase agreements are collateralized by the underlying debt
securities and may be considered loans under the Investment Company Act of 1940
("Investment Company Act"). In the event of bankruptcy or other default by the
seller, the Fund may experience delays and expenses liquidating the underlying
security, loss from decline in value of such security, and lack of access to
income on such security. The Fund will not invest more than 10% of its total net
assets in repurchase agreements which mature in more than seven days and/or
other securities which are not readily marketable.
BROKERAGE PRACTICES. The Adviser is responsible for placing orders for the
purchase and sale of portfolio securities and negotiating brokerage commissions
on such transactions. Brokerage firms are selected for their professional
capability and the overall value and quality of their execution services. The
Adviser is authorized to pay higher commissions to brokerage firms providing
investment and research information if the Adviser deems such commissions
reasonable in relation to the overall services provided. The Adviser may also
use information received to manage the assets of other advisory accounts. The
Fund does not pay any mark-up over the market price of securities acquired in
principal transactions with dealers.
PORTFOLIO TURNOVER. The Fund purchases securities primarily for investment
rather than short-term trading. However, changes are made in the portfolio
whenever it appears advisable. The Fund's annual portfolio turnover rate is
shown in the table of "Financial Highlights." Greater portfolio activity
increases the Fund's transaction costs, including brokerage commissions.
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<PAGE> 19
INVESTMENT RESTRICTIONS. The Fund has adopted investment restrictions which,
like its investment objectives, cannot be changed without approval by a majority
(as defined in the Investment Company Act) vote of the Fund's shareholders.
These restrictions provide, in part, that the Fund shall not:
1. Purchase any securities which would cause more than 5% of the Fund's
total assets at the time of such purchase to be invested in the
securities of any one issuer, excepting securities issued or guaranteed
by the U.S. Government; or purchase more than 10% of any class of
securities of any one issuer.
2. Concentrate its investment in particular industries by investing more
than 25% of the value of its total assets in the securities of companies
primarily engaged in any one industry.
Percentage limitations are calculated and applied at the time of investment.
Additional information concerning the Fund's investment practices and
restrictions is contained in the Statement of Additional Information.
ADDITIONAL INFORMATION
COMMON STOCK. Each Fund share outstanding has one vote at shareholder meetings
and participates equally in dividend and liquidation rights. Fund shares are
transferable, fully paid and non-assessable, and do not have any preemptive or
conversion rights. The Fund has authorized 25 million shares of $0.01 par value
Common Stock.
VOTING RIGHTS. The By-Laws of the Fund provide that shareholder meetings are
required to be held to elect directors only when required by the Investment
Company Act. Such event is likely to occur infrequently. In addition, a special
meeting of the shareholders will be called, if requested by the holders of ten
percent of the Fund's outstanding shares, for the purposes, and to act upon the
matters, specified in the request (which may include election or removal of
directors). When matters are submitted for a shareholder vote, each shareholder
is entitled to one vote for each share owned.
SHAREHOLDER INQUIRIES. Shareholders who have questions concerning (1) the Fund
may contact the Distributor; (2) their account may contact the Shareholder
Service Agent; and (3) their retirement plan may contact the Shareholder Service
Agent. The applicable addresses and telephone numbers appear on page 2.
SHAREHOLDER SERVICE AGENT. Boston Financial Data Services, Inc., P. O. Box 8500,
Boston, Massachusetts 02266-8500, serves as shareholder service and dividend
disbursing agent for the Fund. State Street Bank and Trust Company serves as
transfer agent for the Fund.
CUSTODIAN. All cash and securities of the Fund are held by the Fund's custodian,
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110.
LEGAL COUNSEL. O'Melveny & Myers, 400 South Hope Street, Los Angeles, California
90071, provides legal services to the Fund.
INDEPENDENT AUDITORS. Ernst & Young LLP, 515 South Flower Street, Los Angeles,
California 90071, performs annual audits of the Fund's financial statements.
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STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
FPA PERENNIAL FUND, INC.
This Statement of Additional Information ("Statement") supplements the current
Prospectus of FPA Perennial Fund, Inc. ("Fund") dated May 1, 1996. This
Statement does not present a complete picture of the various topics discussed
and should be read in conjunction with the Fund's Prospectus. Although this
Statement is not itself a Prospectus, it is, in its entirety, incorporated by
reference into the Prospectus. The Fund's Prospectus may be obtained by
contacting your securities dealer or the Fund's principal underwriter, FPA Fund
Distributors, Inc. ("Distributor"), at 11400 West Olympic Boulevard, Suite
1200, Los Angeles, California 90064; telephone (310) 473-0225 or (800)
982-4372, except Alaska, Hawaii and Puerto Rico.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Reports to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Covered Call Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Debt Security Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Commercial Paper Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Risk Factors Relating to Lower-Rated Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Additional Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Directors and Officers of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Five Percent Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Prior Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Purchase and Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Sales Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Sales at Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Letter of Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
FPA Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Telephone Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Tax Sheltered Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
1
<PAGE> 21
GENERAL INFORMATION
Voting Rights. Fund shares do not have cumulative voting rights, which means
holders of more than 50% of Fund shares voting for the election of directors
can elect 100% of the directors if they so choose. In such event, holders of
the remaining Fund shares are not able to elect any person or persons to the
Fund's Board of Directors.
Reports to Shareholders. Shareholders receive semi-annual and annual reports
which show the portfolio of investments, major portfolio changes and other
information. Financial statements accompanied by an opinion of independent
auditors are furnished to shareholders after the Fund's fiscal year-end.
Unaudited financial statements prepared by the Fund are provided after the
first six months of the fiscal year.
INVESTMENT POLICIES
The following supplements information set forth under the captions "Investment
Objectives and Policies" and "Investment Practices, Risks and Restrictions" in
the Prospectus. Readers must also refer to the Prospectus.
Covered Call Options. In an effort to increase potential income, the Fund is
authorized to write (i.e., sell) covered call options listed on national
securities exchanges. Listed call options are presently traded only with
respect to a limited number of larger companies. Since the Fund does not
intend to purchase securities for the purpose of writing options, it may only
be able to write options on a small portion of its portfolio.
The Fund may terminate its obligation under a previously written option,
without delivery of the underlying security, by effecting a closing
transaction, which is the purchase of a call option on the same security with
the same exercise price and expiration date. The Fund's ability to enter into
a closing transaction may be limited. If the Fund cannot close its position,
it is unable to sell the underlying security until the call expires or is
exercised. Accordingly, the Fund may not be able to sell the underlying
security at an advantageous time. The Fund realizes a profit or loss from a
closing transaction if the cost of the transaction is less or more than the
option premium received. Also, because increases in the market price of an
option generally reflect increases in the market price of the underlying
security, any loss realized from a closing transaction is likely to be offset
in whole or in part by the increased value of the underlying security.
The Fund's portfolio turnover rate may increase to the extent underlying
securities are delivered upon exercise of options written by the Fund.
Brokerage commissions associated with writing call options and effecting
closing transactions are normally proportionately higher than those associated
with general securities transactions.
Short Sales Against the Box. In an effort to increase investment flexibility,
the Fund is authorized to make certain short sales. In a short sale, the Fund
does not immediately deliver the securities sold and does not receive the
proceeds from the sale. The Fund is said to have a short position in the
securities sold until it delivers such securities, at which time it receives
the proceeds of the sale. The Fund must pay the broker the amount of any
dividend paid on the securities while the short position is maintained. To
secure its obligation to deliver the securities sold short, the Fund deposits
in escrow in a segregated account with its custodian an equal amount of the
securities sold short or securities convertible into or exchangeable for such
securities.
2
<PAGE> 22
Common stocks issuable upon conversion of a convertible security sometimes can
be sold at a better price than the convertible security owned by the Fund. In
such circumstances the Fund could sell the common stock short "against the box"
while tendering the convertible security to the issuer for conversion. Upon
receipt of the certificates for the underlying common stock, delivery would be
made to close the short sale.
Similarly, when the Fund expects to receive new securities in a reorganization
in exchange for securities owned by the Fund, and the new securities are traded
on a "when issued" basis, the Fund could sell in the "when issued" market and
deliver the new securities when received following the consummation of the
reorganization. If the reorganization is not consummated, all transactions in
the "when issued" market are cancelled in which event the Fund would realize no
gain or loss on the short sale, except for brokerage commissions.
The limited authority to utilize short sales as described above and in the
Prospectus would not subject the Fund to the risk of loss generally associated
with short sales. A short sale "against the box" does eliminate the potential
for gain or loss from subsequent changes in the market price of the security.
It constitutes a form of hedging under which the Fund obtains a current market
price considered attractive by the Adviser, rather than remain subject to
future fluctuations in the price of the security sold short. Such authority
would be utilized only in furtherance of the Fund's primary investment
objective of long-term growth of capital.
For federal income tax purposes, a short sale is not considered a completed
transaction until the Fund discharges its obligation by delivering the
securities sold. Thus, if the Fund should sell securities short "against the
box" in December and deliver the securities in January, any capital gain or
loss on the transaction would be realized in January. This principle possibly
could be utilized by the Fund to postpone recognition of capital gain or loss.
Special tax rules prevent conversion of short-term capital gains into long-term
capital gains and, in effect, long-term capital losses into short-term capital
losses by selling short "against the box."
Repurchase Agreements. The Fund pays for repurchase agreements only upon
physical delivery or evidence of book entry transfer of the underlying debt
security to a segregated account of State Street Bank and Trust Company
("Bank"), the Fund's custodian, or its agents. The Fund only enters into
repurchase agreements involving securities in which the Fund can otherwise
invest. The underlying security (normally a security of the United States
Government, its agencies or instrumentalities) may have a maturity date
exceeding one year. Repurchase agreements usually mature not more than seven
days after purchase by the Fund. It is the Fund's policy that the market value
of the security collateralizing the repurchase agreement at all times equal or
exceed the amount of the repurchase agreement. The Fund does not bear the risk
of a decline in value of the underlying security unless the seller defaults
under its repurchase obligation. In the event of bankruptcy or other default
of a seller, the Fund might experience both loss and delay in liquidating the
underlying security, including: (a) possible decline in the value of such
security while the Fund seeks to enforce its rights thereto, (b) possible lack
of access to income on such security during this period and (c) expenses of
enforcing its rights.
Leverage. The Fund is authorized to borrow from banks in order to raise
additional monies for investment. Such borrowings may be made periodically
when it is expected that the potential return, including capital appreciation
and/or income, from investment of these funds will exceed the cost. Any return
from investment of the borrowed funds in excess of the interest cost will cause
the net asset value of Fund shares to rise faster than would otherwise be the
case. Conversely, if the return on investment of the borrowed funds fails to
cover interest cost, net asset value will decrease faster than normal. This
3
<PAGE> 23
speculative factor is known as leverage. This policy permitting bank borrowing
may not be changed without approval of the holders of a majority (as defined
under "Investment Restrictions") of the Fund's outstanding voting securities.
The Fund may collateralize any bank borrowing by depositing portfolio
securities with, or segregating such securities for, the account of the lending
bank. See "Investment Restrictions."
The amount of money the Fund may borrow is restricted by the Investment Company
Act of 1940 ("Investment Company Act") so that, immediately after such
transaction, the Fund has an asset coverage of at least 300% of the amount
borrowed. Asset coverage means total assets, including borrowings, less
liabilities, excluding borrowings. If the Fund's asset coverage falls below
such requirement due to market fluctuations, redemptions or other reasons, the
Fund must reduce its bank debt as necessary within three business days. To do
this, the Fund may have to sell a portion of its investments at a
disadvantageous time. The amount of any borrowing is also limited by the
applicable Federal Reserve Board's margin limitations.
The Fund has not borrowed since its inception and has no present intention to
do so during the coming year.
RATINGS
Debt Security Ratings. Moody's Investor Services, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P") employ the designations set forth below
to rate debt securities.
MOODY'S
Aaa - Bonds judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as gilt-edge. Interest
payments are protected by a large or an exceptionally stable margin and
principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high-grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A - Bonds which possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa - Bonds considered as medium-grade obligations (i.e., they are neither
highly protected nor poorly secured). Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba - Bonds judged to have speculative elements. Their future cannot be
considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during other
good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
4
<PAGE> 24
B - Bonds which generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa - Bonds of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
Ca - Bonds which represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
C - The lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Nonrated - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as
a matter policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
S&P
AAA - Capacity to pay interest and repay principal is extremely strong.
AA - Capacity to pay interest and repay principal is very strong and these
bonds differ from AAA issues only in small degree.
A - Capacity to pay interest and repay principal is strong although they are
somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than bonds in higher rated categories.
BBB - Capacity to pay interest and repay principal is adequate. Whereas these
bonds normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely
5
<PAGE> 25
to lead to a weakened capacity to pay interest and repay principal than for
bonds in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI - reserved for income bonds on which no interest is being paid.
D - in default, and payment of interest and/or repayment of principal is in
arrears.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate
a particular type of obligation as a matter of policy.
Commercial Paper Ratings. Moody's and S&P employ the designations set forth
below to rate commercial paper.
Moody's designations, all judged to be investment grade, indicate the relative
repayment capacity of rated issuers. Issuers rated Prime-1 have a superior
capacity for repayment of short-term promissory obligations. Issuers rated
Prime-2 have a strong capacity for repayment of short- term promissory
obligations. Issuers rated Prime-3 have an acceptable capacity for repayment
of short-term promissory obligations.
S&P ratings are an assessment of the likelihood of timely payment of debt
having an original maturity of no more than 365 days. Issuers assigned the
highest rating by S&P ("A") are regarded as having the greatest capacity for
timely payment. Issuers in this category are further refined with the
designations 1, 2 and 3 to indicate the relative degree of safety. A-1
indicates that the degree of safety regarding timely payment is either
overwhelming (denoted with a plus sign) or very strong. A-2 indicates that
capacity for timely payment is strong; however, the relative degree of safety
is not as high as for issuers designated A-1. A-3 indicates a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to
the adverse effects of changes in circumstances than obligations carrying the
higher designations.
RISK FACTORS RELATING TO LOWER RATED SECURITIES
As described in the Prospectus, the Fund may invest up to 15% of its assets in
convertible securities and other fixed-income securities which are not rated in
the four highest categories by Moody's and S&P. Ratings of debt securities are
described above. The Prospectus discussion of the risks of investing in lower
rated high yield bonds is supplemented as follows:
1. Youth and Growth of the High Yield Bond Market. Since the high yield bond
market is relatively new, its growth has paralleled a long economic
expansion, and it has not weathered a lengthy recession in its present
size and form. An economic downturn or increase in interest rates is
likely
6
<PAGE> 26
to have a negative effect on the high yield bond market and on the value
of the high yield bonds in the Fund's portfolio, as well as on the
ability of the bonds' issuers to repay principal and interest.
2. Sensitivity to Interest Rate and Economic Changes. The economy and
interest rates affect high yield securities differently from other
securities. The prices of high yield bonds have been found to be less
sensitive to interest rate changes than higher rated investments, but
more sensitive to adverse economic changes or individual issuer
developments. During an economic downturn or substantial period of
rising interest rates, highly leveraged issuers are likely to experience
financial stress which would adversely affect their ability to service
their principal and interest payment obligations, to meet projected
business goals, and to obtain additional financing. If the issuer of a
bond owned by the Fund defaults, the Fund may incur additional expenses
to seek recovery. In addition, periods of economic uncertainty and
changes can be expected to result in increased volatility of market
prices of high yield bonds and the Fund's asset value. Furthermore, in
the case of high yield bonds structured as zero coupon or pay-in-kind
securities, their market prices are affected to a greater extent by
interest rate changes and thereby tend to be more volatile than
securities which pay interest periodically and in cash.
3. Liquidity and Valuation. To the extent that there is no established
retail secondary market, there may be thin trading of high yield bonds,
and there may be a negative impact on the Fund's Board of Directors'
ability to accurately value high yield bonds and the Fund's assets and on
the Fund's ability to dispose of the bonds. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of high yield bonds, especially in a
thinly traded market. To the extent the Fund owns or may acquire
illiquid high yield bonds, these securities may involve special liquidity
and valuation difficulties.
4. Legislation. New laws and proposed new laws may have a negative impact
on the market for high yield bonds. For example, recent legislation
requires federally-insured savings and loan associations to divest their
investments in high yield bonds.
5. Taxation. Special tax considerations are associated with investing in
high yield bonds structured as zero coupon or pay-in-kind securities.
The Fund accrues the interest on these securities as income even though
it receives no cash interest until the security's maturity or payment
date. The Fund is required to distribute such income to its shareholders
in order to maintain its qualification for pass-through treatment under
the Internal Revenue Code. Thus, the Fund may have to dispose of
portfolio securities at a time it otherwise might not want to do so in
order to provide the cash necessary to make distributions to those
shareholders who do not reinvest dividends.
6. Credit Ratings. Certain risks are associated with applying credit
ratings as a method of evaluating high yield bonds. Credit ratings
evaluate the safety of principal and interest payments, not market value
risk of high yield bonds. Since credit rating agencies may fail to
timely change the credit ratings to reflect subsequent events, the
Adviser monitors the issuers of high yield bonds in the Fund's portfolio
to determine if the issuers appear to have sufficient cash flow to meet
required principal and interest payments. The Fund may retain a
portfolio security whose rating has been changed.
INVESTMENT RESTRICTIONS
The Fund has adopted the investment restrictions set forth below, which apply
at the time securities are purchased or other relevant action is taken. These
restrictions and the Fund's investment objectives cannot be changed without
approval of the holders of a majority of outstanding Fund shares. Such
7
<PAGE> 27
majority is defined in the Investment Company Act as the lesser of (a) 67% or
more of the voting securities present in person or represented by proxy at a
meeting, if the holders of more than 50% of the outstanding voting securities
are present or represented by proxy; or (b) more than 50% of the outstanding
voting securities. Percentage limitations applicable to investments are
calculated and applied at the time of investment. In addition to those
described in the Prospectus, these restrictions provide that the Fund shall
not:
1. Purchase securities of other registered investment companies if
immediately after such purchase the Fund will own (a) more than 3% of the
total outstanding voting stock of any such companies, (b) securities
issued by any of such companies having an aggregate value in excess of 5%
of the value of the total assets of the Fund or (c) securities issued by
investment companies having an aggregate value in excess of 10% of the
value of the total assets of the Fund.
2. Purchase or sell real property, including limited partnership interests,
but excluding readily marketable interests in real estate investment
trusts or readily marketable securities of companies which invest in real
estate.
3. Engage in short sales, margin purchases, puts, calls, straddles or
spreads, except that the Fund may write covered call options and effect
closing transactions to the extent described in the Prospectus under
"Investment Policies - Covered Call Options," and the Fund may make
certain short sales of securities or maintain a short position if the
Fund contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short (short sales "against the box")
or if the securities sold are "when issued" or "when distributed"
securities which the Fund expects to receive in a recapitalization,
reorganization, or other exchange for securities the Fund
contemporaneously owns or has the right to obtain at no added cost.
4. Make loans, except that the Fund may invest in repurchase agreements.
The Fund will not invest in repurchase agreements maturing in more than
seven days if any such investment, together with any illiquid securities
held by the Fund, exceeds 10% of the value of its net assets. See
"Investment Policies - Repurchase Agreements." The purchase of publicly
distributed debt securities shall not constitute the making of loans.
5. Participate on a joint or a joint and several basis in any trading
account in securities.
6. Purchase securities for the purpose of exercising control or management.
However, once investments have been acquired, the Fund may exercise its
vote as a shareholder in its best interests even though such vote may
affect management or control of a company.
7. Underwrite the sale of securities of others, except when the Fund might
be deemed to be a statutory underwriter because of its disposing of
restricted securities. The Fund will not purchase restricted securities.
8. Purchase or sell commodities or commodity contracts.
9. Purchase from, or sell to, any officers, directors or employees of the
Fund or its investment adviser or underwriter, or any of their officers
or directors, any securities other than the shares of the Fund's capital
stock. Such persons or firms, however, may act as brokers for the Fund
for customary commissions.
10. Issue any senior securities except that the Fund may borrow from banks to
the extent described above under "Investment Policies - Leverage."
8
<PAGE> 28
Additional Restrictions. The Fund is also subject to the policies set forth
below which its Board of Directors may amend and which apply at the time of
purchase of securities. These restrictions provide that the Fund shall not:
1. Invest more than 5% of its net assets in warrants valued at the lower of
cost or market, nor more than 2% of its net assets in warrants (valued on
such basis) which are not listed on The New York Stock Exchange ("NYSE")
or the American Stock Exchange. Warrants acquired in units or attached
to other securities are not subject to the foregoing limitations.
2. Purchase interests in oil, gas or other mineral leases, except that it
may acquire securities of public companies which are engaged in such
activities, or invest in arbitrage transactions.
3. Purchase securities of other investment companies except through purchase
in the open market in a transaction involving no commission or profit to
a sponsor or dealer (other than the customary broker's commission) or
except as part of a merger, consolidation or other acquisition.
4. Purchase or retain securities of any issuer if those officers and
directors of the Fund or its investment adviser who own individually more
than 0.5% of the securities of such issuer together own more than 5% of
the securities of such issuer.
5. Invest more than 5% of its total assets in securities of unseasoned
issuers which have been in operation directly or through predecessors for
less than three years, or in equity securities for which market
quotations are not readily available.
6. Pledge, mortgage or hypothecate portfolio securities or other assets to
the extent that the percentage of such encumbered assets plus the sales
charge exceed 15% of the offering price of Fund shares.
DIRECTORS AND OFFICERS OF THE FUND
All directors and officers of the Fund are also directors and/or officers of
one or more of the four other investment companies advised by the Adviser,
which is an indirect wholly owned subsidiary of United Asset Management
Corporation ("UAM") . These investment companies are FPA Capital Fund, Inc.
("Capital"), FPA New Income, Inc. ("New Income"), FPA Paramount Fund, Inc.
("Paramount") and Source Capital, Inc. ("Source")(collectively, the "FPA Fund
Complex").
The directors and officers of the Fund and their principal occupations during
the past five years follow. Their address is 11400 West Olympic Boulevard,
Suite 1200, Los Angeles, California 90064.
John P. Endicott, Director
Independent management consultant since January 1983 and from April 1979 to
March 1981; Associate, Case and Company, Inc. (management consultants) from
April 1981 to January 1983; President and Director, Sierracin Corporation
(manufacturer of high technology products) from 1969 to March 1979. Director
of Paramount.
Leonard Mautner, Director
President, Leonard Mautner Associates (management consultants) for more than
the past five years; General Partner, Goodman & Mautner Ltd. (venture capital
partnership) and President, Goodman & Mautner, Inc. (investment manager) from
1969 to 1979. Director of Paramount and Director of MRV Communications Inc.
9
<PAGE> 29
Lawrence J. Sheehan, Director (1)
Of counsel to, and partner (1969 to 1994) of, the law firm of O'Melveny &
Myers, legal counsel to the Fund. Director of Source, of Capital and of New
Income. Director of TCW Convertible Securities Fund, Inc., a closed-end
investment company.
Kenneth L. Trefftzs, Director
Private investor. Former Professor of Finance and Chairman of the Department
of Finance and Business Economics, University of Southern California Graduate
School of Business. Director of Source, of Capital, of New Income and of
Fremont General Corporation (financial service company). Director (or Trustee)
of the Pacific Horizon Funds and Horizon Funds, a group of 13 open-end
investment company portfolios.
Julio J. de Puzo, Jr., Executive Vice President, Treasurer and Director (1)
Director (since October 1995), Principal (since March 1996) and Chief Executive
Officer (since March 1996) of the Adviser; Director (since March 1996),
President (since March 1996) and Treasurer for more than the past five years of
Source; and Treasurer of Paramount, of Capital and of New Income for more than
the past five years. Executive Vice President (since March 1996), Chief
Financial Officer (since October 1991) and Director (since May 1991) of the
Distributor. Executive Vice President from October 1995 to March 1996, Chief
Administrative Officer from October 1995 to March 1996, Chief Financial Officer
from June 1991 to March 1996, Treasurer from June 1991 to March 1996, Senior
Vice President from February 1993 to October 1995, and First Vice President
from April 1985 to February 1993, of the Adviser; and Senior Vice President (or
First Vice President) from October 1991 to March 1996 of the Distributor.
Eric S. Ende, President and Chief Investment Officer
Senior Vice President (or Vice President) of the Adviser and of Source for more
than the past five years, and Vice President of Capital, of New Income and of
Paramount for more than the past five years. Executive Vice President of the
Fund from August 1995 to September 1995, and Vice President of the Fund from
May 1985 to August 1995.
Christopher Linden, Senior Vice President
Director and Principal of the Adviser since March 1996, and Senior Vice
President of Capital, of New Income, of Paramount and of Source for more than
the past five years. President and Chief Investment Officer of the Fund from
September 1983 to September 1995. President from February 1993 to March 1996,
Senior Vice President from November 1980 to February 1993, and Director and
Chief Operating Officer from June 1991 to September 1995, of the Adviser;
Director and Chairman of the Board from June 1985 to May 1995, and Chief
Operating Officer from December 1982 to November 1995, of Paramount; and
Director of the Distributor from May 1991 to September 1995.
Lawrence P. McNeil, Senior Vice President
Executive Vice President (or Senior Vice President) of the Adviser and Senior
Vice President of Paramount for more than the past five years. President,
Chief Executive Officer and Director of the Distributor since May 1991.
Director of Capital and of New Income from July 1984 to May 1995, and Chairman
of the Board of Capital and of New Income from July 1988 to May 1995.
Janet M. Pitman, Vice President
Vice President of the Adviser for more than the past five years. Vice President
of Source since April 1996.
Sherry Sasaki, Secretary
Assistant Vice President (since December 1992) and Secretary (or Assistant
Secretary) of the Adviser, and Secretary of Source, of Paramount, of Capital
and of New Income for more than the past five years. Secretary of the
Distributor since May 1991.
10
<PAGE> 30
Christopher H. Thomas, Assistant Treasurer
Vice President and Controller of the Adviser and of the Distributor since March
1995, and Assistant Treasurer of Capital, of New Income, of Source and of
Paramount since April 1995. Staff Accountant with the Office of Inspection of
the Securities and Exchange Commission from 1994 to March 1995. School
Administrator of the Calvary Road Christian Academy from 1988 to 1993.
___________________________________________
(1) Director who is an interested person, as defined in the Investment
Company Act, by virtue of his affiliation with the Adviser in the case of
Mr. de Puzo, and by virtue of his affiliation with legal counsel to the
Fund in the case of Mr. Sheehan.
The directors and officers of the Fund as a group own approximately 3.8% of the
outstanding Fund shares. During the last fiscal year, the directors then in
office who were not affiliated with the Adviser received as a group $19,500 in
directors' fees. Such directors are also reimbursed for certain out-of-pocket
expenses by the Fund. The following information relates to director
compensation. The Fund does not pay any salaries to its officers, all of whom
are compensated by the Adviser.
<TABLE>
<CAPTION>
TOTAL COMPENSATION*
AGGREGATE COMPENSATION* FROM THE FPA FUND COMPLEX
NAME OF DIRECTORS FROM THE FUND INCLUDING THE FUND
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
George H. Michaelis (1) $ -0- $ -0-
John P. Endicott 5,000 12,000**
Leonard Mautner 4,500 10,750**
Lawrence J. Sheehan 5,000 29,000***
Kenneth L. Trefftzs 5,000 29,000***
</TABLE>
(1) Director and Chairman of the Board through March 1996.
* No pension or retirement benefits are provided to Directors by the Fund
or the FPA Fund Complex.
** Includes compensation from the Fund and from one open-end investment
company.
*** Includes compensation from the Fund, from two open-end investment
companies, and from one closed-end investment company.
Currently, the personnel of the Adviser consists of eight persons engaged full
time in portfolio management or investment research in addition to 24 persons
engaged full time in trading, administrative, financial or clerical activities.
The Adviser is registered as an investment adviser with the Securities and
Exchange Commission, which does not imply supervision by said Commission of the
Adviser's activities. The Adviser's parent company, UAM, is a publicly held
corporation. No person is known by UAM to own or hold with power to vote 25%
or more of its outstanding shares of common stock.
Five Percent Shareholders. As of March 31, 1996, no person was known by the
Fund to own, of record or beneficially, 5% or more of the outstanding Fund
shares.
INVESTMENT ADVISORY AGREEMENT
The Fund has entered into an Investment Advisory Agreement dated June 27, 1991
("Advisory Agreement"), with the Adviser pursuant to which the Adviser provides
continuing supervision of the Fund's investment portfolio. The Adviser is
authorized, subject to the control of the Fund's Board of Directors, to
determine which securities are to be bought or sold and in what amounts. In
addition to
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<PAGE> 31
providing investment advisory and management services, the Adviser furnishes
office space, facilities and equipment, and maintains the Fund's books and
records. It also compensates all officers and other personnel of the Fund, all
of whom are employed by the Adviser, subject to reimbursement from the Fund for
personnel involved in providing financial services as indicated below.
Other than the expenses the Adviser specifically assumes under the Advisory
Agreement, the Fund bears all costs of its operation. These costs include
brokerage commissions and other costs of portfolio transactions; fees and
expenses of directors not affiliated with the Adviser; taxes; transfer agent,
dividend disbursement, reinvestment and custodian fees; legal and audit fees;
printing and mailing of reports to shareholders and proxy materials;
shareholders' and directors' meetings; registration of Fund shares under
federal and state laws; printing and engraving stock certificates; trade
association membership fees; premiums for the fidelity bond and errors and
omissions insurance maintained by the Fund; litigation; interest on
indebtedness; and reimbursement of the Adviser's expenses in providing
financial services to the Fund as described below.
For services rendered, the Adviser is paid a monthly fee computed at the annual
rate of 0.75% of the first $50 million, and 0.65% of the excess over $50
million, of the Fund's average net assets. The advisory fee is higher than the
fee paid by most other mutual funds. The average net assets are determined by
taking the average of all the daily determinations of net assets made, in the
manner provided in the Fund's Articles of Incorporation, during a calendar
month.
In addition to the advisory fee, the Fund reimburses the Adviser monthly for
costs incurred in providing financial services to the Fund. Such financial
services include (a) maintaining the accounts, books and other documents which
constitute the record forming the basis for the Fund's financial statements,
(b) preparing such financial statements and other Fund documents and reports
of a financial nature required by federal and state laws, (c) calculating daily
net assets and (d) participating in the production of the Fund's registration
statements, prospectuses, proxy materials and reports to shareholders
(including compensation of the Treasurer or other principal financial officer
of the Fund, compensation of personnel working under such person's direction
and expenses of office space, facilities and equipment such persons use to
perform their financial services duties). However, for any fiscal year, the
cost of such financial services paid by the Fund may not exceed 0.10% of the
average daily net assets of the Fund.
The advisory fee and cost of financial services is reduced in the amount by
which certain defined operating expenses of the Fund (including the advisory
fee and cost of financial services) for any fiscal year exceed 1.50% of the
first $30 million of average net assets, plus 1% of the remaining average net
assets. Such values are calculated at the close of business on the last
business day of each calendar month. Any required reduction or refund is
computed and paid monthly. Operating expenses (as defined in the Advisory
Agreement) exclude (a) interest, (b) taxes, (c) brokerage commissions and (d)
any extraordinary expenses, such as litigation, merger, reorganization or
recapitalization, to the extent such extraordinary expenses are permitted to be
excluded by the rules or policies of the states in which Fund shares are
registered for sale. All expenditures, including costs connected with the
purchase, retention or sale of portfolio securities, which are capitalized in
accordance with generally accepted accounting principles applicable to
investment companies, are accounted for as capital items and not as expenses.
This expense limitation provision does not require any payment by the Adviser
beyond the return of the advisory fee and cost of financial services paid to it
by the Fund for a fiscal year.
The Advisory Agreement provides that the Adviser does not have any liability to
the Fund or any of its shareholders for any error of judgment, any mistake of
law or any loss the Fund suffers in connection with matters related to the
Advisory Agreement, except for liability resulting from willful misfeasance,
bad faith or negligence on the part of the Adviser or the reckless disregard of
its duties under the Advisory Agreement.
12
<PAGE> 32
The Advisory Agreement is renewable annually if such renewal is specifically
approved each year (a) by the Fund's Board of Directors or by the vote of a
majority (as defined in the Investment Company Act) of the Fund's outstanding
voting securities and (b) by the vote of a majority of the Fund's directors who
are not parties to the Advisory Agreement or interested persons (as defined in
the Investment Company Act) of any such party, by votes cast in person at a
meeting called for the purpose of voting on such approval. The continuation of
the Advisory Agreement to April 30, 1997, has been approved by the Board of
Directors and a majority of the Fund's directors who are not parties to the
Advisory Agreement or interested persons of any such party (as defined in the
Investment Company Act). The Advisory Agreement may be terminated without
penalty by the Fund's Board of Directors or the vote of a majority (as defined
in the Investment Company Act) of the Fund's outstanding voting securities on
60 days' written notice to the other party. The Advisory Agreement
automatically terminates in the event of its assignment (as defined in the
Investment Company Act).
For the fiscal years ended December 31, 1993, 1994 and 1995, the Adviser
received gross advisory fees of $595,928, $447,878 and $363,810, respectively,
plus $83,989, $61,212 and $48,516, respectively, for costs incurred in
providing financial services to the Fund.
PRIOR PERFORMANCE INFORMATION
For the purposes of quoting and comparing the performance of the Fund to that
of other mutual funds and to other relevant market indices in advertisements,
performance may be stated in terms of total return. Under regulations adopted
by the Securities and Exchange Commission ("SEC"), funds that intend to
advertise performance must include total return quotations calculated according
to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of the 1, 5 or 10 year
period, at the end of such period (or fractional
portion thereof).
Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and cover 1, 5
and 10 year periods of a fund's existence or such shorter period dating from
the effectiveness of a fund's Registration Statement. In calculating the
ending redeemable value, the maximum sales load is deducted from the initial
$1,000 payment and all dividends and distributions by a fund are assumed to
have been reinvested at net asset value as described in the Prospectus on the
reinvestment dates during the period. Total return, or "T" in the formula
above, is computed by finding the average annual compounded rates of return
over the 1, 5 and 10 year periods (or fractional portion thereof) that would
equate the initial amount invested to the ending redeemable value.
The Fund may also from time to time include in such advertising a total return
figure that is not calculated according to the formula set forth above in order
to compare the performance of the Fund with other measures of investment
return. For example, in comparing the Fund's total return with a stock index
such as the Standard & Poor's 500 Stock Index, the Fund calculates its
aggregate total return for the specified periods of time by assuming the
investment of $10,000 in Fund shares and assuming the
13
<PAGE> 33
reinvestment of each dividend or other distribution at net asset value on the
reinvestment date. Percentage increases are determined by subtracting the
initial value of the investment from the ending value and by dividing the
remainder by the beginning value. The Fund does not, for these purposes,
deduct from the initial value invested any amount representing sales charges.
The Fund, however, discloses the maximum sales charge and also discloses that
inclusion of sales charges would reduce the performance quoted. Such
alternative total return information will be given no greater prominence in
such advertising than the information prescribed under SEC regulations.
The Fund's average annual total return (calculated in accordance with the SEC
regulations described above) for the one, five and ten-year periods ended
December 31, 1995, was 9.65%, 9.55% and 10.12%, respectively. The Fund's
average annual total return (determined pursuant to the alternative computation
which does not include the maximum initial sales charge of 6.5% of the offering
price) for the same periods was 17.27%, 11.04% and 10.86%, respectively.
These results are based on historical earnings and asset value fluctuations and
are not intended to indicate future performance.
The foregoing information should be considered in light of the Fund's
investment objectives and policies, as well as the risks incurred in the Fund's
investment practices. Future results will be affected by the future
composition of the Fund's portfolio, as well as by changes in the general price
level of equity securities, and general economic and other market conditions.
The past 1, 5 and 10 year periods have been ones of generally rising common
stock prices subject to short-term fluctuations.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser makes decisions to buy and sell securities for the Fund, selects
broker-dealers and negotiates commission rates or net prices. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed better prices and executions are available
elsewhere. Portfolio transactions are effected with broker-dealers selected
for their abilities to give prompt execution at prices favorable to the Fund.
In selecting broker-dealers and in negotiating commissions, the Adviser
considers each firm's reliability, the quality of its execution services on a
continuing basis and its financial condition. When more than one firm is
believed to meet these criteria, preference may be given to broker-dealers
providing research services to the Fund or the Adviser. Subject to seeking
best execution, the Adviser may also consider sales of Fund shares as a factor
in selecting broker-dealers to execute portfolio transactions for the Fund.
Any solicitation fees which the Adviser receives in connection with acceptance
of an exchange or tender offer of the Fund's portfolio securities are applied
to reduce the advisory fees.
The Advisory Agreement authorizes the Adviser to pay commissions on security
transactions to broker-dealers furnishing research services in an amount higher
than the lowest available rate. The Adviser must determine in good faith that
such amount is reasonable in relation to the brokerage and research services
provided (as required by Section 28(e) of the Securities Exchange Act of 1934)
viewed in terms of the particular transaction or the Adviser's overall
responsibilities with respect to accounts for which it exercises investment
discretion. The term brokerage and research services is defined to include (a)
providing advice as to the value of securities, the advisability of investing
in, purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; (b) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and performance of accounts; and (c) effecting securities
transactions and performing functions incidental thereto, such as clearance,
settlement and custody. The advisory fee is not reduced as a result of the
Adviser's receipt of such research.
14
<PAGE> 34
Research services furnished by broker-dealers effecting securities transactions
for the Fund may be used by the Adviser for all advisory accounts. However, the
Adviser may not use all such research services in managing the Fund's
portfolio. In the opinion of the Adviser, it is not possible to measure
separately the benefits from research services to each advisory account.
Because the volume and nature of the trading activities of advisory accounts
are not uniform, the amount of commissions in excess of the lowest available
rate paid by each advisory account for brokerage and research services will
vary. However, the Adviser believes the total commissions the Fund pays are
not disproportionate to the benefits it receives on a continuing basis.
The Adviser attempts to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
other advisory accounts. In some cases, this procedure could have an adverse
effect on the price or amount of securities available to the Fund. The main
factors considered in such allocations are the respective investment
objectives, the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held, and the opinion of the persons responsible for
recommending the investments.
Brokerage commissions paid by the Fund on portfolio transactions for the fiscal
years ended December 31, 1993, 1994 and 1995, totaled $59,320, $59,071 and
$79,604, respectively. During the last fiscal year, $56,365 of commissions
were paid on transactions having a total value of $24,814,254 to brokers
selected because of research services provided to the Adviser.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of purchases
or sales of portfolio securities for a fiscal year by the average monthly value
of portfolio securities during such fiscal year. Securities maturing in one
year or less at the time of acquisition are not included in this computation.
The turnover rate for prior periods is shown in the Prospectus under the
caption "Financial Highlights." This rate may vary greatly from year to year
as well as within a year.
DISTRIBUTOR
The Distributor acts as principal underwriter of Fund shares pursuant to the
distribution agreement dated September 3, 1991 ("Distribution Agreement"). The
Distributor receives commissions from the sale of Fund shares and has the
exclusive right to distribute Fund shares through dealers. From the
commissions received, the Distributor pays sales commissions to dealers; its
own overhead and general administrative expenses; the cost of printing and
distributing prospectuses used in connection with this offering; and the cost
of preparing, printing and distributing sales literature and advertising
relating to the Fund. The Fund pays expenses attributable to registering Fund
shares under federal and state laws (including registration and filing fees),
the cost of preparing the prospectus (including typesetting and printing copies
required for regulatory filings by the Fund) and related legal and audit
expenses.
The Distribution Agreement is renewable annually if such renewal is
specifically approved each year (a) by the Fund's Board of Directors or by a
vote of a majority (as defined in the Investment Company Act) of the Fund's
outstanding voting securities and (b) by a majority of the Fund's directors who
are not parties to the Distribution Agreement or interested persons (as defined
in the Investment Company Act) of any such party, by votes cast in person at a
meeting called for such purpose. The continuation of the Distribution
Agreement to September 3, 1996, has been approved by the Board of Directors and
15
<PAGE> 35
a majority of the Fund's directors who are not parties to the Distribution
Agreement or interested persons of any such party (as defined in the Investment
Company Act). The Distribution Agreement terminates if assigned (as defined in
the Investment Company Act) and may be terminated, without penalty, by either
party on 60 days' written notice.
The Distributor's obligation under the Distribution Agreement is an agency or
best efforts arrangement pursuant to which the Distributor is required to take
and pay for only those Fund shares sold to the public. The Distributor is not
obligated to sell any stated number of Fund shares.
During the fiscal years ended December 31, 1993, 1994 and 1995, total
underwriting commissions on the sale of Fund shares were $324,519, $74,772 and
$67,582, respectively. Of such totals, the amount retained each year by the
Distributor, after reallowance to other dealers, was $20,117, $4,266 and
$4,400, respectively.
PURCHASE AND REDEMPTION OF SHARES
Net Asset Value. Net asset value is computed as of the close of the NYSE on
each business day during which the NYSE is open. Net asset value, rounded to
the nearest cent per share, is the total market value of all of the Fund's
portfolio securities plus other assets (including any accrued reimbursement of
expenses), less all liabilities, divided by the total number of Fund shares
outstanding. The NYSE is closed not only on weekends but also on customary
holidays, which currently are New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Such computation is made by (a) valuing securities listed or traded on a
national securities exchange or on the NASDAQ National Market System at the
last sale price or, if there has been no sale that day, at the last bid price,
(b) valuing unlisted securities for which quotations are readily available at
the last representative bid price as supplied by the National Association of
Securities Dealers Automated Quotations (NASDAQ) or by dealers and (c)
appraising all other portfolio securities and assets at fair value as
determined in good faith by the Fund's Board of Directors.
Sales Charges. The maximum sales charge is 6.5%, as a percentage of the
offering price, but lower sales charges apply for larger purchases. A portion
of the sales charge is allocated to dealers selling Fund shares in amounts
ranging from 80% to 94%, depending on the size of the investment. During
special promotions, the Distributor may reallow up to 100% of the sales charge
to dealers. At such times dealers may be deemed to be underwriters for
purposes of the Securities Act of 1933. Discounts are alike to all dealers.
Sales at Net Asset Value. Full-time employees of the Adviser may purchase Fund
shares at net asset value via payroll deduction provided the minimum initial
investment is $250. Each subsequent investment must be at least $50.
Letter of Intent. To be eligible, the investor must sign at the time of
initial purchase, or within 30 days, a Letter of Intent ("LOI") covering
investments to be made within a period of 13 months ("Period") from such
initial purchase. The investor thereby becomes eligible for a reduced sales
charge based on the total amount of the specified intended investment ("LOI
Goal"), provided such amount is not less than $10,000. A minimum initial
purchase of $1,500 and minimum subsequent purchases of $100 each are required.
Fund shares may also be purchased to fulfill a letter of intent entered into
with respect to shares of the other FPA Funds. The account information form,
which should be used to establish an LOI, is available from dealers or the
Distributor.
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<PAGE> 36
All transactions under an LOI must be indicated as such and must be placed by
the dealer (in the case of an initial purchase) or the shareholder (in the case
of any subsequent purchase) directly through Boston Financial Data Services,
Inc. ("Shareholder Service Agent"). Shareholders should review for accuracy
all confirmations of transactions, especially purchases made pursuant to an
LOI.
If the LOI Goal is completed before the end of the Period, any subsequent
purchases within the Period receive the reduced sales charge applicable. In
addition, during the Period, the shareholder may increase his or her LOI Goal
and all subsequent purchases are treated as a new LOI (including escrow of
additional Fund shares) except as to the Period, which does not change.
Signing an LOI does not bind the shareholder to complete his or her LOI Goal,
but the LOI Goal must be completed to obtain the reduced sales charge. The LOI
is binding on the Fund and the Distributor. However, the Distributor may
withdraw a shareholder's LOI privileges for future purchases upon receiving
information that the shareholder has resold or transferred his or her Fund
shares within the Period.
The LOI requires the Shareholder Service Agent, as escrow agent, to hold 5% of
the LOI Goal in escrow until completion of the LOI Goal within the Period. The
escrowed Fund shares are taken from the first purchase and, if necessary, from
each successive purchase. If the LOI Goal is completed within the Period, the
escrowed Fund shares are promptly delivered to, or as directed by, the
shareholder.
If the LOI Goal is not completed within the Period, the shareholder must pay
the Distributor an amount equal to the sales charge applicable to a single
purchase in the total amount of the purchases made under the LOI minus the
sales charges actually paid. If the Distributor does not receive such unpaid
sales charge within 20 days after requesting payment in writing, the
Distributor instructs the Shareholder Service Agent to redeem escrowed Fund
shares sufficient to cover the unpaid sales charge. Under the LOI, the
shareholder irrevocably appoints the Shareholder Service Agent as his or her
attorney with full power of substitution in the premises to surrender for
redemption any or all escrowed Fund shares. If the redemption proceeds are
inadequate, the shareholder is liable to the Distributor for the difference.
The Shareholder Service Agent delivers to, or as directed by, the shareholder
all Fund shares remaining after such redemption, together with any excess cash
proceeds.
Any income dividends and capital gains distributions on the escrowed Fund
shares are paid to, or as directed by, the shareholder.
FPA Exchange Privilege. The procedures for exchanging shares between FPA Funds
are set forth under "Purchase of Shares - FPA Exchange Privilege" in the Fund's
Prospectus. If the account registration information for the two FPA Fund
accounts involved in the exchange are different in any respect, the exchange
instructions must be in writing and must contain a signature guarantee as
described under "Redemption of Shares" in the Fund's Prospectus.
By use of the exchange privilege, the investor authorizes the Shareholder
Service Agent ("Agent") to act on telephonic, telegraphic or written exchange
instructions from any person representing himself to be the investor or the
agent of the investor and believed by the Agent to be genuine. The Agent's
records of such instructions are binding.
For purposes of determining the sales charge rate previously paid, all sales
charges paid on the exchanged security and on any security previously exchanged
for such security or for any of its predecessors shall be included. If the
exchanged security was acquired through reinvestment, that security may be
exchanged without a sales charge. If a shareholder exchanges less than all of
his securities, the security requiring no or the lowest incremental sales
charge is deemed exchanged first.
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<PAGE> 37
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced, are processed on the date of receipt
by the Shareholder Service Agent. "Processing " a request means that shares in
the Fund from which the shareholder is withdrawing an investment will be
redeemed at the net asset value per share next determined after receipt.
Shares of the new Fund into which the shareholder is investing will also
normally be purchased at the net asset value per share, plus any applicable
sales charge, next determined after receipt by the Shareholder Service Agent.
Exchange requests received on a business day after the time shares of the funds
involved in the request are priced, are processed on the next business day in
the manner described above.
Redemption of Shares. Redemptions are not made on days during which the NYSE
is closed, including those holidays listed under "Purchase and Redemption of
Shares - Net Asset Value." The right of redemption may be suspended and the
payment therefore may be postponed for more than seven days during any period
when (a) the NYSE is closed for other than customary weekends or holidays; (b)
trading on the NYSE is restricted; (c) an emergency exists as a result of which
disposal by the Fund of securities it owns is not reasonably practicable or it
is not reasonably practical for the Fund to fairly determine the value of its
net assets or (d) the Securities and Exchange Commission, by order, so permits.
Telephone Redemption. Redemptions may be made by telephone once the
shareholder has properly completed and returned to the Shareholder Service
Agent the optional shareholder services form including the designation of a
bank account to which the redemption payment is to be sent ("Designated Bank").
The proceeds will not be mailed or wired to other than the Designated Bank.
New investors who wish to establish the telephone redemption privilege must
complete the appropriate section on the optional shareholder services form.
Existing shareholders who wish to establish the telephone redemption privilege
or change the Designated Bank should either enter the new information on an
optional shareholder services form, marking it for "change of information"
purposes, or send a letter identifying the Fund account and specifying the
exact information to be changed. The letter must be signed exactly as the
shareholder's name(s) appear on the account. All signatures require a
guarantee as described under "Redemption of Shares" in the Fund's Prospectus.
The optional shareholder services form is available from authorized securities
dealers or the Distributor.
Shareholders who want to use a savings and loan ("S&L") as their Designated
Bank are advised that if the S&L is not a participant in the Federal Reserve
System, redemption proceeds must be wired through a commercial bank which is a
correspondent of the S&L. As this may delay receipt by the shareholder's
account, it is suggested that shareholders who wish to use an S&L discuss wire
procedures with their S&L and submit any special wire transfer information with
the telephone redemption authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to such Designated Bank.
The shareholder may cancel the telephone redemption authorization upon written
notice. If the shareholder has authorized telephone redemptions, neither the
Fund nor the Shareholder Service Agent is responsible for any unauthorized
telephone redemptions. If the Fund shares to be redeemed by telephone
(technically a repurchase by agreement between the Fund and the shareholder)
were recently purchased by check, the Shareholder Service Agent can delay
transmitting the proceeds until the purchasing check has cleared.
TAX SHELTERED RETIREMENT PLANS
Through the Distributor, prototype retirement plans are available for purchase
of Fund shares. These include plans for self-employed individuals and plans
for individuals buying shares under an Individual Retirement Account. The
investor should be aware that a penalty tax applies, in general, to
distributions
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<PAGE> 38
made before age 59-1/2, excess contributions and failure to commence
distribution of the account at age 70-1/2. Borrowing from or against the
account may also result in plan disqualification. Distributions from these
retirement plans generally are taxable as ordinary income when received.
State Street Bank and Trust Company ("Bank") presently acts as custodian for
these retirement plans and imposes fees for administering them. Purchases of
Fund shares for a retirement plan must be made by direct remittance to the
Bank.
When contributions for any tax-qualified plan are invested in Fund shares, all
dividends and capital gains distributions paid on those Fund shares are
retained in such plan and automatically reinvested in additional Fund shares at
net asset value. All earnings accumulate tax-free until distribution.
The investor should consult his or her own tax adviser concerning the tax
ramifications of establishment of and distributions from a retirement plan.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund qualified during the last fiscal year for the tax treatment applicable
to regulated investment companies under the Internal Revenue Code ("Code") and
intends to so qualify in the future. Such qualification requires distributing
at least 90% of its investment company taxable income to shareholders and
meeting asset diversification and other requirements of the Code. As long as
the Fund so qualifies, it does not pay federal income tax on its net investment
income or on any net realized capital gains provided such income and capital
gains are distributed to shareholders. If for any taxable year the Fund does
not so qualify, all of its taxable income, including any net realized capital
gains, will be taxed at regular corporate rates (without any deduction for
distributions to shareholders).
The Fund is subject to a 4% excise tax to the extent it does not make certain
distributions to its shareholders. Such distributions must total (1) at least
98% of ordinary income (investment company taxable income subject to certain
adjustments) for any calendar year and (2) 98% of capital gains net income for
the year. The Fund intends to distribute sufficient amounts to avoid liability
for this excise tax.
If shares of the Fund are sold or exchanged within 90 days of acquisition, and
shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.
Under federal tax law, any loss a shareholder realizes on redemption of Fund
shares held for less than six months is treated as a long-term capital loss to
the extent of any long-term capital gain distribution which was paid on such
Fund shares.
Prior to purchasing Fund shares, the impact of dividends or capital gains
distributions should be carefully considered. Any such payments made to a
shareholder shortly after purchasing Fund shares reduce the net asset value of
such Fund shares to that extent and unnecessarily increase sales charges. All
or a portion of such dividends or distributions, although in effect a return of
capital, is subject to taxes, possibly at ordinary income tax rates.
Dividends and distributions declared payable to shareholders of record after
September 30 of any year and paid before February 1 of the following year are
considered taxable income to shareholders on the record date even though paid
in the next year. To the extent determined each year, a portion of the
19
<PAGE> 39
dividends paid to shareholders from the Fund's net investment income qualifies
for the 70% dividends received deduction for corporations.
Some shareholders may be subject to 31% withholding on reportable dividends,
capital gains distributions and redemption payments ("backup withholding").
Generally, shareholders subject to backup withholding are those for whom a
taxpayer identification number is not on file with the Fund or who, to the
Fund's knowledge, furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that he or she is not subject to backup withholding.
Under existing provisions of the Code, dividends paid to shareholders who are
nonresident aliens may be subject to a 30% federal withholding tax applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the federal withholding tax.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and treasury regulations presently in effect. For the complete
provisions, reference should be made to the pertinent Code sections and
treasury regulations. The Code and these treasury regulations are subject to
change by legislative or administrative action either prospectively or
retroactively.
Each investor should consult his or her own tax adviser as to federal tax laws
and the effect of state and local tax laws which may differ from federal tax
laws.
FINANCIAL STATEMENTS
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND OFFERING PRICE PER SHARE
- - DECEMBER 31, 1995
<TABLE>
<S> <C>
Net asset value and redemption price per share
(net assets divided by shares outstanding)..................$22.36
Offering price per share
(100/93.5 of per share net asset value).....................$23.91
</TABLE>
The offering price is reduced on purchases of $10,000 or more; see "Purchase
and Redemption of Shares - Sales Charge" herein and "Purchase of Shares - Table
of Sales Charges" in the Prospectus.
20
<PAGE> 40
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>
21
<PAGE> 41
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>
22
<PAGE> 42
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.
23
<PAGE> 43
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.
24
<PAGE> 44
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.
25
<PAGE> 45
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------
1995 1994
------------------------- --------------------------
<S> <C> <C> <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.
26
<PAGE> 46
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
27
<PAGE> 47
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 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.
- --------------------------------------------------------------------------------
28
<PAGE> 48
REPORT TO 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, and 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 on page 4 of the Prospectus for each of the
ten 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. Our procedures included 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 on page 4 of the
Prospectus, for each of the ten years in the period then ended in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
January 26, 1996
29
<PAGE> 49
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements (all included in Part B)
Report of Independent Auditors
Portfolio of Investments, December 31, 1995
Statement of Assets and Liabilities, December 31, 1995
Statement of Operations
Year ended December 31, 1995
Statement of Changes in Net Assets
Year ended December 31, 1994
Year ended December 31, 1995
All other financial statements and schedules are inapplicable.
(b) Exhibits
1. The Articles of Incorporation were filed as Exhibit 1 of
Registrant's Registration Statement on Form N-1 and are
incorporated herein by reference.
1.1 Certificate of Amendment, dated November 29, 1983, to Articles of
Incorporation was filed as Exhibit 1.1 to Pre-Effective Amendment
No. 1 of Registrant's Registration Statement on Form N-1 and is
incorporated herein by reference.
2. By-Laws were filed as Exhibit 2 of Registrant's Registration
Statement on Form N-1 and are incorporated herein by reference.
2.1 By-Laws Amendment to Article I, effective May 10, 1993, was filed
as Exhibit 2.1 to Post-Effective Amendment No. 10 of Registrant's
Registration Statement on Form N-1A and is incorporated herein by
reference.
4. Specimen Common Stock Certificate was filed as Exhibit 4 to
Post-Effective Amendment No. 2 of Registrant's Registration
Statement on Form N-1A and is incorporated herein by reference.
5. Investment Advisory Agreement, dated June 27, 1991, between
Registrant and First Pacific Advisors, Inc. was filed as Exhibit 5
to Post-Effective Amendment No. 9 of Registrant's Registration
Statement on Form N-1A and is incorporated herein by reference.
6. Distribution Agreement, dated September 3, 1991, between
Registrant and FPA Fund Distributors, Inc. was filed as Exhibit 6
to Post-Effective Amendment No. 9 of Registrant's Registration
Statement on Form N-1A and is incorporated herein by reference.
6.1 Specimen Selling Group Agreement was filed as Exhibit 6.1 to
Post-Effective Amendment No. 9 of Registrant's Registration
Statement on Form N-1A and is incorporated herein by reference.
8. Custodian Agreement between Registrant and State Street Bank and
Trust Company was filed as Exhibit 8 of Registrant's Registration
Statement on Form N-1 and is incorporated herein by reference.
C-1
<PAGE> 50
8.1 Amendment to the Custodian Contract, dated November 1, 1988, was
filed as Exhibit 8 to Post-Effective Amendment No. 6 of
Registrant's Registration Statement on Form N-1A and is
incorporated herein by reference.
8.2 Custodian Fee Schedule Addendum for GNMA Securities Traded through
Participants Trust Company was filed as Exhibit 8 to Post-
Effective Amendment No. 7 of Registrant's Registration Statement
on Form N-1A and is incorporated herein by reference.
8.3 Amendment to the Custodian Contract was filed as Exhibit 8.3 to
Post-Effective Amendment No. 11 of Registrant's Registration
Statement on Form N-1A and is incorporated herein by reference.
8.4 Amendment to the Custodian Contract.
10. Opinion of Counsel.
11. Consent of Independent Auditors (filed as page C-8).
13. Investment letter, dated January 19, 1984, to Registrant from
First Pacific Advisors, Inc. was filed as Exhibit 13 to Pre-
Effective Amendment No. 1 of Registrant's Registration Statement
on Form N-1 and is incorporated herein by reference.
14. State Street Bank and Trust Company Individual Retirement
Custodial Account and Disclosure Statement was filed as Exhibit 14
to Post-Effective Amendment No. 10 of Registrant's Registration
Statement on Form N-1A and is incorporated herein by reference.
16. Schedule of computations of performance quotations.
17. Financial Data Schedule.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of December 31, 1995
<TABLE>
<CAPTION>
(1) (2)
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C> <C>
Common Stock, $0.01 par value 2,009
</TABLE>
ITEM 27. INDEMNIFICATION.
Item 4 of Part II of Registrant's Registration Statement on Form N-1
(Registration No. 2-87607) is incorporated herein by this reference.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
During the last two fiscal years, First Pacific Advisors, Inc., the investment
adviser to Registrant ("Adviser"), has not engaged in any other business of a
substantial nature except as investment adviser to Source Capital, Inc.
("Source"), a registered closed-end investment company; as investment adviser
to
C-2
<PAGE> 51
FPA Capital Fund, Inc. ("Capital"), FPA New Income, Inc. ("New Income") and FPA
Paramount Fund, Inc. ("Paramount"), each a registered open-end investment
company; and as investment adviser to institutional accounts. During the last
two fiscal years, no director or officer of the Adviser has engaged for his own
account or in the capacity of director, officer, employee, partner or trustee,
in any other business, profession, vocation or employment of a substantial
nature except as described under the caption "Directors and Officers of the
Fund" in Part B hereof and as set forth below.
<TABLE>
<CAPTION>
Name and Position
with Adviser Other Affiliations (1)
------------ ------------------
<S> <C>
Julio J. de Puzo, Jr., (2)
Director, Principal &
Chief Executive Officer
Robert L. Rodriguez, Officer of Capital and New Income.
Director, Principal &
Chief Investment Officer
Christopher Linden, (2)
Director & Principal
William M. Sams, Officer of Paramount.
Director & Principal
Lawrence P. McNeil, (2)
Executive Vice President
Eric S. Ende, (2)
Senior Vice President
Steven Romick, ---
Senior Vice President
Dennis M. Bryan, ---
Vice President
Steven R. Geist, ---
Vice President
Janet M. Pitman, (2)
Vice President
Mary S. Thomas, ---
Vice President
Daryl A. Weber, ---
Vice President
Christopher H. Thomas, (2)
Vice President & Controller
Sherry Sasaki, (2)
Assistant Vice President
& Secretary
</TABLE>
C-3
<PAGE> 52
(1) The address of each company named is 11400 West Olympic Boulevard, Suite
1200, Los Angeles, California 90064.
(2) A description of such person's other affiliations is given under the
caption "Directors and Officers of the Fund" in Part B hereof.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) FPA Fund Distributors, Inc., the principal underwriter for Registrant, acts
as a principal underwriter for Capital, New Income and Paramount but does not
act as depositor or investment adviser for any investment company.
(b) The following information is furnished with respect to each director and
officer of FPA Fund Distributors, Inc.
<TABLE>
<CAPTION>
Name and Principal Positions & Offices Positions and Offices
Business Address with Principal Underwriter with Registrant
- ---------------- -------------------------- ---------------
<S> <C> <C>
Lawrence P. McNeil (1) President, Chief Executive Senior Vice President
Officer & Director
Robert L. Rodriguez(1) Director ---
Julio J. de Puzo, Jr. (1) Executive Vice President, Treasurer
Chief Financial Officer
& Director
Christopher H. Thomas (1) Vice President Assistant Treasurer
& Controller
Daryl A. Weber (1) Vice President ---
Sherry Sasaki (1) Secretary Secretary
</TABLE>
(1) 11400 West Olympic Boulevard, Suite 1200, Los Angeles, California 90064
(c) Commissions and other compensation received by each principal underwriter
who is not an affiliated person of Registrant or an affiliated person of such
an affiliated person, directly or indirectly, from Registrant during
Registrant's last fiscal year.
Inapplicable.
C-4
<PAGE> 53
ITEM 30. LOCATION OF BOOKS AND RECORDS.
The accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained in the physical possession of Mr. Julio J. de Puzo,
Jr., Treasurer of Registrant*, except as otherwise stated below:
<TABLE>
<CAPTION>
Subparagraph of Physical Possession
Rule 31a-1 of Required Records
-------------- -------------------
<S> <C>
(b)(2)(iv) Boston Financial Data Services, Inc.,
Shareholder Service Agent for Registrant**
(b)(4) Sherry Sasaki,
Secretary of Registrant*
(f) First Pacific Advisors, Inc.,
Investment Adviser to Registrant*
</TABLE>
____________
* 11400 West Olympic Boulevard, Suite 1200, Los Angeles, California 90064
** P.O. Box 8500, Boston, Massachusetts 02266-8500
ITEM 31. MANAGEMENT SERVICES.
There is no management-related service contract under which services are
provided to Registrant which is not discussed in Parts A or B hereof.
ITEMS 32. UNDERTAKINGS.
Inapplicable.
C-5
<PAGE> 54
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Post-Effective Amendment to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on the 29th day of April, 1996.
FPA PERENNIAL FUND, INC.
By: /s/ Eric S. Ende
-----------------------------
Eric S. Ende, President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
(1) Principal Executive Officer:
/s/ Eric S. Ende President April 29, 1996
- -----------------------------------
Eric S. Ende
(2) Principal Financial and
Principal Accounting Officer:
/s/ Julio J. de Puzo, Jr. Treasurer April 29, 1996
- -----------------------------------
Julio J. de Puzo, Jr.
</TABLE>
C-6
<PAGE> 55
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C> <C>
(3) Directors:
JOHN P. ENDICOTT* Director April 29, 1996
- -----------------------------------
John P. Endicott
LEONARD MAUTNER* Director April 29, 1996
- -----------------------------------
Leonard Mautner
/s/ JULIO J. DE PUZO, JR. Director April 29, 1996
- -----------------------------------
Julio J. de Puzo, Jr.
Director April , 1996
- -----------------------------------
Lawrence J. Sheehan
KENNETH L. TREFFTZS* Director April 29, 1996
- -----------------------------------
Kenneth L. Trefftzs
*By: /s/ Christopher Linden
- -----------------------------------
Christopher Linden
Attorney-in-Fact pursuant to Power-of-Attorney
included as page S-2 in Registrant's Post-Effective
Amendment No. 1 to Registration Statement on Form N-1
which was filed with the Commission
on August 9, 1984.
</TABLE>
C-7
<PAGE> 56
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Additional Information" and to the use of our report dated
January 26, 1996, in Post-Effective Amendment No. 13 to the Registration
Statement on Form N-1A and related Statement of Additional Information of FPA
Perennial Fund, Inc.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
April 24, 1996
C-8
<PAGE> 57
EXHIBIT INDEX
EXHIBIT
8.4 Amendment to the Custodian Contract.
10. Opinion of Counsel.
11. Consent of Independent Auditors (filed as page C-8).
16. Schedule of computations of performance quotations.
17. Financial Data Schedule.
All other applicable exhibits are incorporated herein by reference.
<PAGE> 1
EXHIBIT 8.4
AMENDMENT TO CUSTODIAN AGREEMENT
Agreement made by and between State Street Bank and Trust Company
(the "Custodian") and FPA Perennial Fund, Inc. (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a Custodian
Agreement dated January 19, 1984 as amended on November 1, 1988 and August 2,
1993 (the "Custodian Agreement") governing the terms and conditions under which
the Custodian maintains custody of the securities and other assets of the Fund;
and
WHEREAS, the Custodian and the Fund desire to amend the terms and
conditions under which the Custodian maintains the Fund's securities and other
non-cash property in the custody of certain foreign sub-custodians in
conformity with the requirements of Rule 17f-5 under the Investment Company Act
of 1940, as amended;
NOW THEREFORE, in consideration of the premises and covenants
contained herein, the Custodian and the Fund hereby amend the Custodian
Agreement by the addition of the following terms and provisions;
1. Notwithstanding any provisions to the contrary set forth in
the Custodian Agreement, the Custodian may hold securities and other non-cash
property for all of its customers, including the Fund, with a foreign
sub-custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
records of the Custodian with respect to securities and other non-cash property
of the Fund which are maintained in such account shall identify by book-entry
those securities and other non-cash property belonging to the Fund and (ii) the
Custodian shall require that securities and other non-cash property so held by
the foreign sub- custodian be held separately from any assets of the foreign
sub-custodian or of others.
2. Except as specifically superseded or modified herein, the
terms and provisions of the Custodian Agreement shall continue to apply with
full force and effect.
IN WITNESS WHEREOF, each of the parties has caused this instrument
to be executed as a sealed instrument in its name and behalf by its duly
authorized representative this 5th day of February, 1996.
FPA PERENNIAL FUND, INC.
By: /s/JULIO J. DE PUZO, JR.
-----------------------------------
Title: TREASURER
-----------------------------------
STATE STREET BANK AND TRUST COMPANY
By: /s/CAROL C. AYOTTE
-----------------------------------
Title: VICE PRESIDENT
-----------------------------------
<PAGE> 1
EXHIBIT 10
O' MELVENY & MYERS LETTERHEAD
1999 Avenue of the Stars
Los Angeles, California 90067-6035
Telephone (310) 553-6700
Telex 674097 - Facsimile (310) 246-6779
April
23rd
1996
WRITER'S DIRECT DIAL NUMBER
(310) 246-6895 OUR FILE NUMBER
253,714
FPA Perennial Fund, Inc.
11400 West Olympic Boulevard
Los Angeles, California 90064
Gentlemen:
At your request, we have examined the form of Post-Effective Amendment
No. 13 to Registration Statement No. 2-87607 to be filed by you with the
Securities and Exchange Commission on Form N-1A in connection with the
registration under the Securities Act of 1933, as amended, of 735,840
shares of your Common Stock, $0.01 par value (the "Shares"). We are familiar
with the proceedings taken and proposed to be taken by you in connection with
the authorization, issuance and sale of the Shares.
Based upon our examination and upon our knowledge of your corporate
activities, it is our opinion that the Shares will, when issued and sold in the
manner described in the Registration Statement at a price in excess of par
value, be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement.
Respectfully submitted
/s/O'MELVENY & MYERS
<PAGE> 1
EXHIBIT 16
Calculation of Total Return
The Fund calculates its average annual total return quotations for the 1, 5,
and 10 year periods ended on the date of the most recent balance sheet included
in the registration statement, by finding the average annual compounded rates
of return over the 1, 5, and 10 year periods that would equate the initial
amount invested to the ending redeemable value, according to the following
formula:
P(1 + T)n =ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5, or 10 year
periods at the end of 1, 5, or 10 year periods (or
fractional portion thereof).
These calculations incorporate the following assumptions:
1. The maximum sales load (or other charges deducted from payments)
is deducted from the initial $1000 payment.
2. All dividends and distributions by the Fund are reinvested at the
price stated in the prospectus on the reinvestment dates during
the period, i.e., any sales load charged upon reinvestment of
dividends would be reflected.
3. All recurring fees, if any, charged to all shareholder accounts
are included.
4. The ending redeemable value assumes a complete redemption at the
end of the 1, 5, or 10 year periods and the deduction of all
nonrecurring charges deducted at the end of each period.
<PAGE> 2
One Year Calculation
--------------------
P = 1000
n = 1
ERV = $1096.47
n
P(1+T) = ERV
1000(1+T) = $1096.47
T = 9.65%
Five Year Calculation
---------------------
P = 1000
n = 5
ERV = $1578.19
n
P(1+T) = ERV
5
1000(1+T) = $1578.19
T = 9.55%
Ten Year Calculation
--------------------
P = 1000
n = 10
ERV = $2621.09
n
P(1+T) = ERV
10
1000(1+T) = $2621.09
T = 10.12%
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 39,937,990
<INVESTMENTS-AT-VALUE> 47,171,469
<RECEIVABLES> 264,282
<ASSETS-OTHER> 8,028
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 47,443,779
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 53,447
<TOTAL-LIABILITIES> 53,447
<SENIOR-EQUITY> 21,196
<PAID-IN-CAPITAL-COMMON> 32,557,890
<SHARES-COMMON-STOCK> 2,119,651
<SHARES-COMMON-PRIOR> 2,364,968
<ACCUMULATED-NII-CURRENT> 354,113
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,223,654
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,233,479
<NET-ASSETS> 47,390,332
<DIVIDEND-INCOME> 999,491
<INTEREST-INCOME> 368,296
<OTHER-INCOME> 0
<EXPENSES-NET> 575,297
<NET-INVESTMENT-INCOME> 792,490
<REALIZED-GAINS-CURRENT> 7,231,196
<APPREC-INCREASE-CURRENT> (280,373)
<NET-CHANGE-FROM-OPS> 7,743,313
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,028,669
<DISTRIBUTIONS-OF-GAINS> 5,865,116
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 162,549
<NUMBER-OF-SHARES-REDEEMED> 722,174
<SHARES-REINVESTED> 314,308
<NET-CHANGE-IN-ASSETS> (4,574,809)
<ACCUMULATED-NII-PRIOR> 590,292
<ACCUMULATED-GAINS-PRIOR> 5,857,574
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 412,326
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 575,297
<AVERAGE-NET-ASSETS> 48,387,784
<PER-SHARE-NAV-BEGIN> 21.97
<PER-SHARE-NII> .36
<PER-SHARE-GAIN-APPREC> 2.95
<PER-SHARE-DIVIDEND> .44
<PER-SHARE-DISTRIBUTIONS> 2.48
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.36
<EXPENSE-RATIO> 1.19
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
