<PAGE> 1
================================================================================
I,2
FPA PERENNIAL FUND, INC.
Annual Report
LOGO
Distributor:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
December 31, 1996
<PAGE> 2
OFFICERS AND DIRECTORS
DIRECTORS DISTRIBUTOR
John P. Endicott
Leonard Mautner FPA Fund Distributors, Inc.
Julio J. de Puzo, Jr. 11400 West Olympic Boulevard,
Lawrence J. Sheehan Suite 1200
Kenneth L. Trefftzs Los Angeles, California 90064
COUNSEL
OFFICERS O'Melveny & Myers LLP
Los Angeles, California
Eric S. Ende, President and
Chief Investment Officer
Julio J. de Puzo, Jr., Executive
Vice President
Steven R. Geist, Vice President CUSTODIAN & TRANSFER AGENT
Janet M. Pitman, Vice President
J. Richard Atwood, Treasurer
Sherry Sasaki, Secretary
Christopher H. Thomas, State Street Bank and Trust Company
Assistant Treasurer Boston, Massachusetts
INVESTMENT ADVISER
INDEPENDENT AUDITORS
First Pacific Advisors, Inc.
11400 West Olympic Boulevard,
Suite 1200
Los Angeles, California 90064
Ernst & Young LLP
Los Angeles, California
SHAREHOLDER SERVICE AGENT
Boston Financial Data Services, Inc.
P.O. Box 8500
Boston, Massachusetts 02266-8500
(800) 638-3060
(617) 328-5000
This report has been prepared for the information of shareholders of FPA
Perennial Fund, Inc., and is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus.
1
<PAGE> 3
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
During the year ended December 31, 1996, FPA Perennial Fund increased
in value by 20.4%, adjusted for reinvestment of all dividends and capital gain
distributions. This represents a second consecutive year of very high absolute
returns (1995 -1996 total return = 41.2%) as well as a significant improvement
in relative performance. As shown below, Perennial's 1996 return was
comparable to or exceeded that of the relevant stock market and mutual fund
averages, a much better showing than in 1995.
<TABLE>
<CAPTION>
1996 1995
Returns Returns
------- -------
<S> <C> <C>
FPA Perennial 20.4% 17.3%
S&P 500 23.3 37.5
Russell 2500 19.0 31.7
Value Line 13.4 19.3
Lipper Growth &
Income Fund Average 20.8 30.8
Lipper General
Equity Fund Average 19.5 31.1
</TABLE>
When reviewing 1996, we are struck by the narrowness of the stock
market advance. The shares of large, well-known companies performed
extraordinarily well, while medium and smaller companies trailed far behind.
This difference is quite apparent in a comparison of several market averages -
from the large stock Dow Jones Industrials to the small stock Russell 2000.
<TABLE>
<CAPTION>
1996
Returns
-------
<S> <C>
Dow Industrials 28.9%
S&P 500 23.3
S&P MidCap 19.2
Russell 2000 16.5
</TABLE>
Perhaps even more striking is a comparison of S&P 500 returns by
quintile based on market capitalization, from the largest 20% of the companies
to the smallest 20%:
<TABLE>
<CAPTION>
1996
S&P 500 Returns Market Cap Range
------- ------- ----------------
<S> <C> <C>
Largest 20% 30.1% $ 14 - 163 billion
Next 20% 29.4 7 - 14 billion
Middle 20% 19.3 4 - 7 billion
Next 20% 18.7 2.3 - 4 billion
Smallest 20% 8.8 290 million - 2.3 billion
</TABLE>
We are particularly pleased with our portfolio's performance in 1996
because we own virtually none of the really large cap stocks which accounted
for so much of the market's gain, and because our low-beta, high-quality
portfolio would typically have difficulty staying with a market which is up by
so much.
1997 PROSPECTS
We see a number of reasons to be cautious about the outlook for both
the economy and the stock market.
The U. S. economy has continued to perform extraordinarily well, with
moderate growth and virtually no inflation. We are hopeful that this will
continue in 1997, but the increasing age of the expansion and hints of labor
market tightness give rise to at least some concern. On balance, we are a bit
more worried about a weakening economy, with resultant profit pressures, than
about a revival of inflation and higher interest rates. Right now neither is
imminent, but we may not be able to make this statement again at the start of
1998.
Corporate profitability has improved dramatically over the past
several years, driven both by cyclical forces and by permanent structural
changes in the way companies are managed. As a result, profit margins are at
levels not seen for 30 years, and returns on equity are at post-World War II
highs. We believe that much of this improvement has already occurred, and that
future gains will be more modest. Trends in profit growth of the S&P
Industrials support this view as illustrated below:
<TABLE>
<CAPTION>
S&P Industrials
Year Earnings Growth*
---- ----------------
<S> <C>
1994 28%
1995 14
1996 6
* Excluding major charges
</TABLE>
The stock market enters 1997 with back-to-back gains of over 20% for a
two-year total advance of 70%, as measured by the S&P 500. Taking a longer
view, the market's performance of 17% annualized since 1982, a 15-year period,
is far above the trendline equity returns of roughly 10-12%. Much of this
surplus performance was driven by secular
2
<PAGE> 4
declines in interest rates and inflationary expectations, perfectly valid
reasons, but like improvements in corporate profitability, not something likely
to contribute as much to future performance as past.
CARAUSTAR
We would like to talk about Caraustar Industries, a major manufacturer
of paperboard products from recycled raw materials. Caraustar is the largest
holding in Perennial Fund, and is an excellent example of our investment
approach.
We first became aware of Caraustar in 1992, when we attended the
"roadshow" presentation associated with its initial public offering. At the
time, we were attracted by many aspects of the company. It had a history of
earning high returns on capital and had been able to grow steadily through
internal reinvestment of cash flows and intelligent acquisitions. Its major
products had strong market positions. Despite fluctuating raw material costs
and product prices, its operating margin had remained remarkably stable.
In the years following the IPO, Caraustar fulfilled all of our
expectations. Its return on equity averaged 47%, sales grew at 17% a year
while annual income growth was 24%. It strengthened its position in existing
markets while entering closely related new areas.
Despite this excellent performance, Caraustar's stock price
languished, changing little from 1992 to the end of 1995.
<TABLE>
<CAPTION>
Earnings Year-End
Per Share Stock Price
--------- ------------
<S> <C> <C>
1992 1.15 18
1993 1.08 16 1/4
1994 1.38 22 1/4
1995 1.66 20
</TABLE>
We were highly encouraged by Caraustar's earnings growth and viewed its
flat stock price as an increasingly attractive opportunity. Perennial
purchased its first Caraustar shares in early 1995 and steadily increased its
position through January, 1996 at an average cost of 18 3/4. The share price
declined 10% in 1995 despite a 20% increase in earnings. Finally, during 1996,
our patience was rewarded. Earnings increased another 34% (to $2.22), but the
stock market finally took notice and Caraustar's share price rose 66% from 20
to 33 1/4. Despite this dramatic share price gain, we are maintaining our
position as the company's prospects continue to be attractive and its stock
valuation reasonable. We expect 1997 EPS to grow another 10-15% or so, giving
Caraustar a price/earnings ratio of just 12-13x.
Caraustar is typical of the companies in the Fund's portfolio, which
have historical growth rates, returns on capital, and balance sheets better
than the average S&P Index Stock, yet sell at lower PE's. They should provide
rewarding long-term returns to Perennial shareholders.
Respectfully submitted,
/s/ ERIC S. ENDE
- ---------------------------
Eric S. Ende
President
February 15, 1997
3
<PAGE> 5
HISTORICAL PERFORMANCE
Change in Value of a $10,000 Investment in FPA Perennial Fund, Inc. vs. S&P 500
and Lipper Growth & Income Fund Average from January 1, 1987 to December 31,
1996
<TABLE>
<CAPTION>
12/31/86 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA Perennial Fund, Inc. 9,350 9,245 11,087 13,946 14,082 17,136 19,375 20,275 20,268 23,769 28,615
FPA Perennial Fund, Inc. (NAV) 10,000 9,888 11,858 14,916 15,060 18,327 20,722 21,684 21,677 25,421 30,605
S&P 500 10,000 10,512 12,252 16,101 15,586 20,351 21,914 24,105 24,426 33,585 41,394
Lipper Growth & Income Fund
Average 10,000 10,203 11,863 14,701 14,083 18,196 19,851 22,265 22,125 28,982 34,671
</TABLE>
Past performance is not indicative of future performance. The Standard &
Poor's 500 Stock Index (S&P 500) is a broad-based unmanaged index of publicly
traded stocks. The S&P 500 does not reflect any commissions or fees which
would be incurred by an investor purchasing the stocks it represents. The
Lipper Growth & Income Fund Average provides an additional comparison of how
your Fund performed in relation to other mutual funds with similar objectives.
The Lipper data does not include sales charges. The performance shown for FPA
Perennial Fund, Inc., with an ending value of $28,615, reflects deduction of
the current maximum sales charge of 6.5% of the offering price. In addition,
since investors purchase shares of the Fund with varying sales charges
depending primarily on volume purchased, the Fund's performance at net asset
value (NAV) is also shown, as reflected by the ending value of $30,605. The
performance of the Fund and of the Averages is computed on a total return basis
which includes reinvestment of all distributions.
<TABLE>
<CAPTION>
Average Annual Total Return
Years Ended December 31, 1996
------------------------------------------------
FPA Perennial Fund, Inc.
- -----------------------------------
1 year 5 years 10 years
------ ------- --------
<S> <C> <C> <C>
At Net Asset Value 20.39% 10.80% 11.84%
With Maximum 6.5% Sales Charge 12.56% 9.32% 11.09%
</TABLE>
4
<PAGE> 6
MAJOR PORTFOLIO CHANGES
For the Six Months Ended December 31, 1996
<TABLE>
<CAPTION>
Shares
--------------
<S> <C>
NET PURCHASES
COMMON STOCKS
Allergan, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700
Belden Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,800
Channell Commercial Corporation (1) . . . . . . . . . . . . . . . . . . . . . . . . . . 45,900
Cooper Tire & Rubber Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,800
Donaldson Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600
Federal Signal Corporation (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,300
Graco Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,700
IDEX Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500
Kaydon Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100
Manpower Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Strayer Education, Inc. (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,800
TriMas Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,700
NET SALES
COMMON STOCKS
Arbor Drugs, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,900
Bandag, Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Dover Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Hubbell Incorporated (Class B) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . 14,100
Loctite Corporation (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000
Marsh & McLennan Companies, Inc. (2) . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Pfizer Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,900
Reebok International Ltd. (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Toys "R" Us, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,600
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- ----------------------------------------------------------------- --------- ------------- --------------
<S> <C> <C> <C>
PRODUCER DURABLE GOODS -- 24.1%
Belden Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,500 $ 797,372 $ 1,054,500
Channell Commercial Corporation* . . . . . . . . . . . . . . . . 45,900 512,942 568,012
Donaldson Company, Inc. . . . . . . . . . . . . . . . . . . . . . 29,600 755,409 991,600
Dover Corporation . . . . . . . . . . . . . . . . . . . . . . . . 8,100 230,199 407,025
Federal Signal Corporation . . . . . . . . . . . . . . . . . . . 25,300 560,615 654,638
Graco Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,900 640,260 806,050
Holophane Corporation* . . . . . . . . . . . . . . . . . . . . . 68,000 1,192,170 1,292,000
IDEX Corporation . . . . . . . . . . . . . . . . . . . . . . . . 37,500 1,340,020 1,495,313
Kaydon Corporation . . . . . . . . . . . . . . . . . . . . . . . 41,700 1,204,680 1,965,113
Leggett & Platt, Incorporated . . . . . . . . . . . . . . . . . . 20,000 463,035 692,500
Methode Electronics, Inc. (Class A) . . . . . . . . . . . . . . . 23,500 387,750 475,875
TriMas Corporation . . . . . . . . . . . . . . . . . . . . . . . 27,500 620,382 656,562
------------- -------------
$ 8,704,834 $ 11,059,188
------------- -------------
MATERIALS -- 14.4%
Bandag, Incorporated . . . . . . . . . . . . . . . . . . . . . . 37,000 $ 1,876,169 $ 1,752,875
Caraustar Industries, Inc. . . . . . . . . . . . . . . . . . . . 83,000 1,553,625 2,759,750
OM Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 40,500 785,296 1,093,500
Unifi, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,200 713,422 970,175
------------- -------------
$ 4,928,512 $ 6,576,300
------------- -------------
BUSINESS SERVICES & SUPPLIES -- 13.2%
Arrow Electronics, Inc.* . . . . . . . . . . . . . . . . . . . . 19,000 $ 744,901 $ 1,016,500
Bacou USA, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . 38,700 587,318 643,388
Devon Group, Inc.* . . . . . . . . . . . . . . . . . . . . . . . 71,000 2,472,868 1,952,500
Franklin Quest Co.* . . . . . . . . . . . . . . . . . . . . . . . 45,000 983,301 945,000
Manpower Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 29,800 787,623 968,500
Strayer Education, Inc. . . . . . . . . . . . . . . . . . . . . . 21,800 219,019 501,400
------------- -------------
$ 5,795,030 $ 6,027,288
------------- -------------
RETAILING -- 9.6%
Arbor Drugs, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 91,875 $ 760,521 $ 1,596,328
Bob Evans Farms, Inc. . . . . . . . . . . . . . . . . . . . . . . 54,000 1,078,907 729,000
Circuit City Stores, Inc. . . . . . . . . . . . . . . . . . . . . 40,000 1,141,870 1,205,000
Toys "R" Us, Inc.* . . . . . . . . . . . . . . . . . . . . . . . 29,400 774,665 882,000
------------- -------------
$ 3,755,963 $ 4,412,328
------------- -------------
</TABLE>
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--CONTINUED Shares Cost Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HEALTH CARE -- 9.0%
Allergan, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 36,700 $ 801,887 $ 1,307,437
DENTSPLY International Inc. . . . . . . . . . . . . . . . . . . . 21,100 731,950 1,002,250
Landauer, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 1,003,288 1,225,000
Pfizer Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,300 212,634 604,987
------------- -------------
$ 2,749,759 $ 4,139,674
------------- -------------
CONSUMER NON-DURABLE GOODS -- 8.3%
Lancaster Colony Corporation . . . . . . . . . . . . . . . . . . 37,000 $ 1,251,531 $ 1,702,000
Newell Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 353,550 472,500
Tupperware Corporation . . . . . . . . . . . . . . . . . . . . . 30,400 1,234,708 1,630,200
------------- -------------
$ 2,839,789 $ 3,804,700
------------- -------------
INSURANCE -- 6.0%
Horace Mann Educators Corporation . . . . . . . . . . . . . . . . 30,600 $ 737,113 $ 1,235,475
Poe & Brown, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 24,100 583,188 638,650
Progressive Corporation, The . . . . . . . . . . . . . . . . . . 12,600 488,443 848,925
------------- -------------
$ 1,808,744 $ 2,723,050
------------- -------------
CONSUMER DURABLE GOODS -- 5.1%
Cooper Tire & Rubber Company . . . . . . . . . . . . . . . . . . 53,800 $ 1,258,723 $ 1,062,550
Juno Lighting, Inc. . . . . . . . . . . . . . . . . . . . . . . . 80,900 1,342,786 1,294,400
------------- -------------
$ 2,601,509 $ 2,356,950
------------- -------------
ENTERTAINMENT -- 4.0%
Carnival Corporation (Class A) . . . . . . . . . . . . . . . . . 55,000 $ 1,225,895 $ 1,815,000
------------- -------------
ENGINEERING AND ARCHITECTURAL
SERVICES -- 2.0%
Dames & Moore, Inc. . . . . . . . . . . . . . . . . . . . . . . . 64,000 $ 791,371 $ 936,000
------------- -------------
</TABLE>
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS--CONTINUED Amount Cost Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ENERGY -- 1.0%
North European Oil Royalty Trust (CBI) . . . . . . . . . . . 35,000 $ 240,950 $ 459,375
------------ ------------
TOTAL INVESTMENT SECURITIES --
COMMON STOCKS -- 96.7% . . . . . . . . . . . . . . . . . . . $35,442,356 $44,309,853
=========== ===========
SHORT-TERM INVESTMENTS -- 3.2%
Short-Term Corporate Notes:
American General Finance Corporation
-- 5.9% 1/03/97 . . . . . . . . . . . . . . . . . . . . . . $ 1,000,000 $ 999,672
------------
State Street Bank Repurchase Agreement (Dated 12/31/96)
- -- 4 3/4% 1/02/97 (Collateralized by U.S. Treasury Notes
-- 6% 1998, market value $474,164) . . . . . . . . . . . . 460,000 460,061
------------
TOTAL SHORT-TERM INVESTMENTS . . . . . . . . . . . . . . . . $ 1,459,733
------------
TOTAL INVESTMENTS -- 99.9% . . . . . . . . . . . . . . . . . $ 45,769,586
Other assets less liabilities -- 0.1% . . . . . . . . . . . . 28,257
------------
TOTAL NET ASSETS -- 100% . . . . . . . . . . . . . . . . . . $ 45,797,843
============
</TABLE>
*Non-income producing security
See notes to financial statements.
8
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $35,442,356) . . . . . . . . . . . . . . . . . . . . $ 44,309,853
Short-term investments -- at cost plus interest earned
(maturities 60 days or less) . . . . . . . . . . . . . . . . . . . . 1,459,733 $ 45,769,586
------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 922
Receivable for:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77,277
Capital Stock sold . . . . . . . . . . . . . . . . . . . . . . . . . . 20,737 98,014
------------ --------------
$ 45,868,522
LIABILITIES
Payable for:
Advisory fees and financial services . . . . . . . . . . . . . . . . . $ 32,089
Capital Stock repurchased . . . . . . . . . . . . . . . . . . . . . . . 23,709
14,881 70,679
------------ --------------
NET ASSETS -- equivalent to $22.58 per share on 2,028,531
shares of Capital Stock outstanding . . . . . . . . . . . . . . . . . . . $ 45,797,843
==============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
25,000,000 shares; outstanding 2,028,531 shares . . . . . . . . . . . . $ 20,285
Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . 30,355,477
Undistributed net investment income . . . . . . . . . . . . . . . . . . . 96,930
Undistributed net realized gain on investments . . . . . . . . . . . . . 6,457,654
Unrealized appreciation of investments . . . . . . . . . . . . . . . . . 8,867,497
--------------
Net assets at December 31, 1996 . . . . . . . . . . . . . . . . . . . . . $ 45,797,843
==============
</TABLE>
See notes to financial statements.
9
<PAGE> 11
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 123,408
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 627,029
-------------
$ 750,437
EXPENSES -- Note 3:
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 336,004
Financial services . . . . . . . . . . . . . . . . . . . . . . . . . . 44,801
Transfer agent fees and expenses . . . . . . . . . . . . . . . . . . . 43,637
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,025
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,881
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . 19,737
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,357
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . 7,697
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,931
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,182
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,800 534,052
------------- -------------
Net investment income . . . . . . . . . . . . . . . . . . . . . $ 216,385
-------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments:
Proceeds from sales of investment securities (excluding
short-term investments with maturities 60 days or less) . . . . . . . $ 19,204,826
Cost of investment securities sold . . . . . . . . . . . . . . . . . . 12,746,492
-------------
Net realized gain on investments . . . . . . . . . . . . . . . . . . $ 6,458,334
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year . . . . . . . . . . . . . $ 7,233,479
Unrealized appreciation at end of year . . . . . . . . . . . . . . . . 8,867,497
-------------
Increase in unrealized appreciation of investments . . . . . . . . . 1,634,018
-------------
Net realized and unrealized gain on investments . . . . . . . . $ 8,092,352
-------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,308,737
=============
</TABLE>
See notes to financial statements.
10
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------
1996 1995
-------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . . $ 216,385 $ 792,490
Net realized gain on investments . . . . . . 6,458,334 7,231,196
Increase (decrease) in unrealized
appreciation of investments . . . . . . . . 1,634,018 (280,373)
--------------- --------------
Increase in net assets resulting
from operations . . . . . . . . . . . . . . . $ 8,308,737 $ 7,743,313
Distributions to shareholders from:
Net investment income . . . . . . . . . . . . $ (473,568) $ (1,028,669)
Net realized capital gains . . . . . . . . . (7,224,334) (7,697,902) (5,865,116) (6,893,785)
--------------- -------------
Capital Stock transactions:
Proceeds from Capital Stock sold . . . . . . $ 3,446,804 $ 3,397,740
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions . . . . . . 6,824,920 6,078,112
Cost of Capital Stock repurchased . . . . . . (12,475,048) (2,203,324) (14,900,189) (5,424,337)
--------------- ------------- ------------- --------------
Total decrease in net assets . . . . . . . . . $ (1,592,489) $ (4,574,809)
NET ASSETS
Beginning of year, including
undistributed net investment income
of $354,113 and $590,292 . . . . . . . . . . 47,390,332 51,965,141
------------- --------------
End of year, including
undistributed net investment income
of $96,930 and $354,113 . . . . . . . . . . . $ 45,797,843 $ 47,390,332
============= ==============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold . . . . . . . . . 171,914 162,549
Shares issued to shareholders
upon reinvestment of dividends
and distributions . . . . . . . . . . . . . . 360,490 314,308
Shares of Capital Stock repurchased . . . . . . (623,524) (722,174)
------------- --------------
Decrease in Capital Stock outstanding . . . . . (91,120) (245,317)
============= ==============
</TABLE>
See notes to financial statements.
11
<PAGE> 13
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- -------- --------
<S> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year . . . . . . . . $ 22.36 $ 21.97 $ 23.76 $ 23.94 $ 22.40
------- -------- ------- -------- --------
Net investment income . . . . . . . . . . . . . . . . $ 0.10 $ 0.36 $ 0.46 $ 0.46 $ 0.52
Net realized and unrealized gain (loss)
on investment securities . . . . . . . . . . . . . 3.75 2.95 (0.48) 0.59 2.26
------- -------- ------- -------- --------
Total from investment operations . . . . . . . . . . $ 3.85 $ 3.31 $ (0.02) $ 1.05 $ 2.78
------- -------- ------- -------- --------
Less distributions:
Dividends from net investment income . . . . . . . $ (0.22) $ (0.44) $ (0.46) $ (0.47) $ (0.57)
Distributions from net realized capital gains . . . (3.41) (2.48) (1.31) (0.76) (0.67)
------- -------- ------- -------- --------
Total distributions . . . . . . . . . . . . . . . . $ (3.63) $ (2.92) $ (1.77) $ (1.23) $ (1.24)
------- -------- ------- -------- --------
Net asset value at end of year . . . . . . . . . . . $ 22.58 $ 22.36 $ 21.97 $ 23.76 $ 23.94
======= ======== ======= ======== ========
Total investment return* . . . . . . . . . . . . . . 20.39% 17.27% (0.03)% 4.64% 13.07%
Ratios/supplemental data:
Net assets at end of year (in thousands) . . . . . . $45,798 $47,390 $51,965 $88,301 $76,254
Ratio of expenses to average net assets . . . . . . . 1.19% 1.19% 1.13% 1.02% 1.08%
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . . . 0.48% 1.63% 1.95% 2.03% 2.37%
Portfolio turnover rate . . . . . . . . . . . . . . . 30% 58% 31% 43% 30%
Average brokerage commissions per share . . . . . . . $0.0596 -- -- -- --
</TABLE>
* Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge.
See notes to financial statements.
12
<PAGE> 14
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 National Market System are valued at the last sale
price on the last business day of the year, or if there was not a sale
that day, at the last bid price. 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 $12,755,140 for the
year ended December 31, 1996. Realized gains or losses are based on the
specific-certificate identification method. The cost of securities held at
December 31, 1996 was the same for federal income tax and financial reporting
purposes.
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, 1996, 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 by O'Melveny & Myers LLP, counsel for the Fund.
A Director of the Fund is of counsel to, and a retired partner of, that firm.
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
CONTINUED
NOTE 4 -- DISTRIBUTOR
For the year ended December 31, 1996, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $5,863 in
net Fund share sales commissions after reallowance to other dealers. The
Distributor pays its own overhead and general administrative expenses,
the cost of supplemental sales literature, promotion and advertising.
NOTE 5 -- DISTRIBUTION TO SHAREHOLDERS
On December 26, 1996, the Board of Directors declared a dividend from
net investment income of $0.05 per share and a distribution from net realized
capital gains of $3.19 per share payable January 6, 1997 to shareholders of
record on December 31, 1996. For financial statement purposes, this dividend
and distribution was recorded on the ex-dividend date, January 2,
1997.
- -------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF FPA PERENNIAL FUND, INC.
We have audited the accompanying statement of assets and liabilities
of FPA Perennial Fund, Inc., including the portfolio of investments, as of
December 31, 1996, 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, as it relates to selected data
for each share of Capital Stock, for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1996, by correspondence with the custodian. 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, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
February 7, 1997
14
