<PAGE>
- - FPA Perennial Fund, Inc. -
- - -
SEMI-ANNUAL REPORT
JUNE 30, 1998
[LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, CA 90064
- - -
- - -
<PAGE>
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
DIRECTORS DISTRIBUTOR
Willard H. Altman FPA Fund Distributors, Inc.
John P. Endicott 11400 West Olympic Boulevard, Suite 1200
Leonard Mautner Los Angeles, California 90064
Julio J. de Puzo, Jr.
Lawrence J. Sheehan
OFFICERS COUNSEL
Eric S. Ende, PRESIDENT AND O'Melveny & Myers LLP
CHIEF INVESTMENT OFFICER Los Angeles, California
Julio J. de Puzo, Jr., EXECUTIVE VICE
PRESIDENT
Steven R. Geist, VICE PRESIDENT
Janet M. Pitman, VICE PRESIDENT CUSTODIAN & TRANSFER AGENT
J. Richard Atwood, TREASURER
Sherry Sasaki, SECRETARY State Street Bank and Trust Company
Christopher H. Thomas, ASSISTANT TREASURER Boston, Massachusetts
INVESTMENT ADVISER SHAREHOLDER SERVICE AGENT
First Pacific Advisors, Inc. Boston Financial Data Services, Inc.
11400 West Olympic Boulevard, Suite 1200 P.O. Box 8500
Los Angeles, California 90064 Boston, Massachusetts 02266-8500
(800) 638-3060
(617) 328-5000
</TABLE>
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. The
financial information included in this report has been taken from the records of
the Fund without examination by independent auditors.
<PAGE>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
During the six months ended June 30, 1998, FPA Perennial Fund increased in
value by 8.4%, adjusted for reinvestment of all dividends and capital gains
distributions. This represents a continuation of the period of very high
absolute returns which began 3 1/2 years ago (1995 - Present total return =
+90%). As shown below, Perennial returns in recent periods continue to be
comparable to those of relevant stock market and mutual fund averages.
<TABLE>
<CAPTION>
1998 YTD 1997 1996
-------- ---- ----
<S> <C> <C> <C>
FPA Perennial 8.4% 24.3% 20.4%
Russell 2500 5.7% 24.4% 19.0%
Lipper General Equity
Fund Average 11.8% 24.3% 9.5%
Lipper Growth & Income
Fund Average 12.1% 27.0% 20.8%
</TABLE>
We have periodically noted in the past how narrow the market's gains have
been, with larger stocks greatly outperforming smaller ones. This disparity
continued into 1998, as shown in the following comparison.
<TABLE>
<CAPTION>
January-June 1998
Market Cap Range Performance
---------------- -----------
<S> <C>
Over $20 Billion +16.6%
5 - 20 Billion 9.0%
2 - 5 Billion 3.6%
250 Million - 2 Billion 1.1%
Under $250 Million (2.0)%
Source: Salomon Smith Barney
</TABLE>
We should take this opportunity to emphasize that Perennial's stock
selection process is not market-cap driven. Rather we seek out high return,
relatively unleveraged businesses which can be purchased at reasonable
valuations and held for long periods. For a number of years, this approach has
identified mostly mid-and small-cap stocks, and only a few larger-cap names.
Most of the bigger companies, in our opinion, are too expensive, and offer
little opportunity for us to add value by identifying mispriced or misunderstood
companies.
Considering that most of the companies in Perennial's portfolio have market
caps between $250 million and $5 billion, we are gratified with the Fund's
performance so far this year. We are also pleased that we have been able to
continue to meet our objective of owning better companies selling at lower
valuations. As shown on the table below, the companies in the portfolio have
grown faster, earned better returns, and possess superior balance sheets, yet
are priced at lower PE ratios than the average Russell 2500 Index company.
<TABLE>
<CAPTION>
Perennial Russell 2500 Index
--------- ------------------
<S> <C> <C>
EPS Growth (10 year) 17% 9%
Return on Assets 10% 6%
Debt% of Capital 28% 47%
PE Ratio (last 12 months) 19x 26x
</TABLE>
In this shareholder report, I would like to discuss two companies which we
have purchased over the past few months. Although they are in different
businesses -- one sells computer networking products and the other metal working
consumables and related products -- there are surprising similarities in their
operations. Each is a catalog distributor to mostly smaller companies, offering
high service levels, an extensive product selection, and valuable technical
knowledge.
These companies also have very attractive financial characteristics. In
addition to the high
1
<PAGE>
returns on capital, unleveraged balance sheets, and below-market valuations that
we always look for, each company has significant future growth opportunities in
its existing businesses.
BLACK BOX is a direct marketer via catalog of computer communications,
networking and connectivity equipment. Its catalog includes over 7000 items,
many of them hard to find, and mostly carrying the Black Box private label. It
ships orders the same day they are received, with a 95% fulfillment rate.
The key element of Black Box's business, which distinguishes it from other
marketers of similar products, is its unparalleled levels of technical support.
Black Box provides free 24-hour, 7-day access to highly skilled computer
professionals whose job is to solve customers' problems (often with the aid of
Black Box products). What's more this help is fast. The typical industry
response to service calls is to start the customer with 10 minutes on hold.
Black Box answers the phone in 20 seconds.
Black Box has steadily grown sales at a 15-20% rate, while maintaining low
20s operating margins and earning high returns on capital. We believe this
happy combination is sustainable into the future.
We established our position in Black Box during the second quarter, buying
stock in the low 30s. Earnings in 1998 are expected to be about $2.00 per
share, which we feel gives this high quality and dynamic business an attractive
valuation.
JLK DIRECT DISTRIBUTION is a leading distributor of a broad range of metal
cutting consumables and related products, including cutting tools, abrasives,
measuring instruments, hand tools, and general workshop supplies. The company
had its initial public offering just a year ago, as a partial spin-out from
Kennametal, which still owns 80%. Kennametal is the second largest world-wide
producer of cutting tools.
JLK operates two somewhat related, but distinct businesses, J&L Industrial
Supply and Full Service Supply. Of the two, J&L is the more exciting and
important.
J&L Industrial Supply is a direct marketer of metal cutting products to
small and medium size businesses. Kennametal purchased it about 10 years ago to
give it access to customers which it could not economically reach with its own
direct sales force. It has been able to grow rapidly and profitably because of
the significant competitive advantages it has over its mostly small and sleepy
competitors. J&L offers superior selection -- a 110,000 product catalog, with
good-better-best alternatives. It provides rapid fulfillment, shipping 99% of
domestic orders on the day received for overnight or second day delivery.
Customers with more urgent requirements can pick-up their order at J&L showrooms
located in 25 major U.S. markets. As the exclusive distributor of Kennametal
product to smaller businesses, J&L can offer a premier brand, giving it instant
credibility with potential customers. Finally, J&L is a source of technical
metal cutting knowledge, both from its telemarketing staff, and from sales reps
based in major market showrooms.
Full Service Supply serves large manufacturers, like General Motors,
Deere, Rockwell, and Pratt & Whitney, by letting them outsource the entire
process of acquiring and inventorying metal working and related products at
manufacturing facilities. Full Service Supply's logistics expertise,
purchasing power, and technical knowledge can realize significant customer
savings. This has resulted in rapid growth of this business, and Full Service
Supply now services about 50 customers at over 100 site locations.
2
<PAGE>
We have been attracted by JLK Direct since before it became a public
company. We purchased shares of Kennamental in early 1997, more interested in
its distribution operations than in its core manufacturing business. At the
time of JLK's June 1997 IPO, our desire to participate was frustrated by the
high level of interest it generated among investors, i.e. it was a "hot deal"
where we could not buy much stock and where the price in the aftermarket quickly
rose to a premium we were unwilling to pay.
Fortunately, recent events have given us a better opportunity to own a
share of this business. As the result of a too aggressive acquisition program,
JLK management found itself over extended, and unable to both rapidly assimilate
its purchases as well as continue the dynamic growth of its base business. The
consequence was a flattening of earnings growth and a significant slowing in
revenue growth. The unforgiving growth and momentum oriented shareholders
reacted dramatically to these disappointments and drove the price of JLK from
$39 to $20 in six weeks, with most of the publicly held shares changing hands.
We established our position during this period at an average cost of $22
per share, believing that JLK's current difficulties will be overcome and that
the inherent superiority of its business model and its talented management will
enable it to return to its prior record of rapid growth and high returns on
capital.
As can be seen from the table below, Black Box and JLK have the superior
returns and balance sheets, as well as the faster growth, which we are always
striving to find. In addition, their valuations are also more attractive than
average, with PE's on estimated 1998 and hoped-for 1999 earnings well below that
of the average Russell 2500 Index Company.
<TABLE>
<CAPTION>
Black JKL Direct Russell 2500
Box Distribution Index
--- ------------ -----
<S> <C> <C> <C>
Revenue Growth
Rate(5Yr.) 17% 29% 11%
Return on Equity 33% 24% 15%
Operating Income/
Assets 34% 23% 11%
Debt% of Capital 7% 1% 47%
Recent Price 32 20 -
PE (98) 16x 18x 24x
PE (99) 13x 13x 21x
Market Cap $600 Million $500 Million $650 Million
</TABLE>
We are excited by the prospects of these two recently purchased companies,
and optimistic that they will provide rewarding long-term returns to Perennial
shareholders.
Respectfully submitted,
/s/ Eric S. Ende
Eric S.Ende
President
July 14, 1998
3
<PAGE>
HISTORICAL PERFORMANCE
<TABLE>
<CAPTION>
Average Annual Total Return
Periods Ended June 30, 1998
---------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
FPA Perennial Fund, Inc. (NAV). . . . . . . . . . 19.94% 14.69% 13.48%
FPA Perennial Fund, Inc. (Net of Sales Charge). . 12.14% 13.16% 12.72%
Lipper Growth & Income Fund Average . . . . . . . 22.86% 19.03% 15.78%
Standard & Poor's 500 Stock Index . . . . . . . . 30.30% 23.13% 18.56%
Russell 2500 Stock Index. . . . . . . . . . . . . 18.10% 17.30% 15.09%
</TABLE>
The table presented above shows the average annual total return, which includes
reinvestment of all distributions, for several different periods ended June 30,
1998 for the Fund and comparative indices of securities prices. The data quoted
represents past performance, and an investment in the Fund may fluctuate so that
an investor's shares when redeemed may be worth more or less than their original
cost. Since investors purchase shares of the Fund with varying sales charges
depending primarily on volume purchased, the returns for the Fund are presented
at net asset value (NAV) and also net of the current maximum sales charge of
6.5% of the offering price.
4
<PAGE>
MAJOR PORTFOLIO CHANGES
Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
NET PURCHASES SHARES
------
<S> <C>
COMMON STOCKS
Arrow Electronics, Inc. . . . . . . . . . . . . . . . . 11,100
Bacou USA, Inc. . . . . . . . . . . . . . . . . . . . . 4,600
Belden Inc. . . . . . . . . . . . . . . . . . . . . . . 10,000
Black Box Corporation (1) . . . . . . . . . . . . . . . 39,800
Cooper Tire & Rubber Company . . . . . . . . . . . . . 13,700
Denison International plc (ADR) . . . . . . . . . . . . 19,300
DENTSPLY International Inc. . . . . . . . . . . . . . . 15,900
JLK Direct Distribution Inc. (Class A) (1). . . . . . . 51,400
KEMET Corporation . . . . . . . . . . . . . . . . . . . 43,100
Manpower Inc. . . . . . . . . . . . . . . . . . . . . . 8,700
Nucor Corporation . . . . . . . . . . . . . . . . . . . 2,700
Schlumberger Limited (1). . . . . . . . . . . . . . . . 11,600
Viking Office Products, Inc.. . . . . . . . . . . . . . 6,000
NET SALES
COMMON STOCKS
Allergan, Inc.. . . . . . . . . . . . . . . . . . . . . 7,200
Bob Evans Farms, Inc. . . . . . . . . . . . . . . . . . 14,200
CVS Corporation . . . . . . . . . . . . . . . . . . . . 3,800
Franklin Covey Co. (2). . . . . . . . . . . . . . . . . 40,000
Juno Lighting, Inc. (2) . . . . . . . . . . . . . . . . 20,500
Kennametal Inc. (2) . . . . . . . . . . . . . . . . . . 9,100
Lancaster Colony Corporation. . . . . . . . . . . . . . 2,250
North European Oil Royalty Trust (CBI) (2). . . . . . . 30,300
Strayer Education, Inc. (2) . . . . . . . . . . . . . . 18,600
Toys "R" Us, Inc. (2) . . . . . . . . . . . . . . . . . 35,100
TriMas Corporation (2). . . . . . . . . . . . . . . . . 35,900
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE>
PORTFOLIO OF INVESTMENTS
June 30, 1998
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- ------------------------------------ ------ ---- -----
<S> <C> <C> <C>
PRODUCER DURABLE GOODS - 21.1%
Denison International plc (ADR)* . . . . . . . . . 61,700 $1,066,788 $ 1,218,575
Donaldson Company, Inc.. . . . . . . . . . . . . . 37,600 477,740 888,300
Federal Signal Corporation . . . . . . . . . . . . 23,300 515,245 566,481
Graco Inc. . . . . . . . . . . . . . . . . . . . . 52,650 693,066 1,836,169
Holophane Corporation* . . . . . . . . . . . . . . 67,600 1,184,295 1,723,800
IDEX Corporation . . . . . . . . . . . . . . . . . 49,750 1,174,275 1,716,375
Kaydon Corporation . . . . . . . . . . . . . . . . 58,000 819,888 2,048,125
Leggett & Platt, Incorporated. . . . . . . . . . . 38,000 439,725 950,000
---------- -----------
$6,371,022 $10,947,825
---------- -----------
TECHNOLOGY - 15.7%
Arrow Electronics, Inc.* . . . . . . . . . . . . . 41,500 $ 878,083 $ 902,625
Belden Inc.. . . . . . . . . . . . . . . . . . . . 40,600 1,197,979 1,243,375
Black Box Corporation* . . . . . . . . . . . . . . 39,800 1,317,691 1,320,863
Channell Commercial Corporation* . . . . . . . . . 48,900 542,192 537,900
Galileo International, Inc.. . . . . . . . . . . . 47,300 1,225,767 2,131,456
KEMET Corporation* . . . . . . . . . . . . . . . . 71,200 1,180,787 936,725
Methode Electronics, Inc. (Class A). . . . . . . . 68,900 1,084,573 1,067,950
---------- -----------
$7,427,072 $ 8,140,894
---------- -----------
BUSINESS SERVICES & SUPPLIES - 11.6%
Applied Graphics Technologies, Inc.* . . . . . . . 39,000 $1,849,125 $ 1,784,250
Bacou USA, Inc.* . . . . . . . . . . . . . . . . . 43,300 660,884 901,181
JLK Direct Distribution Inc. (Class A)* . . . . . 51,400 1,149,859 1,124,375
Manpower Inc.. . . . . . . . . . . . . . . . . . . 48,200 1,485,457 1,382,738
Viking Office Products, Inc.*. . . . . . . . . . . 27,000 427,050 847,125
---------- -----------
$5,572,375 $ 6,039,669
---------- -----------
MATERIALS - 9.2%
Caraustar Industries, Inc. . . . . . . . . . . . . 74,000 $1,375,875 $ 2,136,750
Nucor Corporation. . . . . . . . . . . . . . . . . 24,400 1,175,291 1,122,400
OM Group, Inc. . . . . . . . . . . . . . . . . . . 37,000 717,046 1,526,250
---------- -----------
$3,268,212 $ 4,785,400
---------- -----------
HEALTHCARE - 8.2%
Allergan, Inc. . . . . . . . . . . . . . . . . . . 31,700 $648,979 $ 1,470,088
DENTSPLY International Inc.. . . . . . . . . . . . 53,900 1,037,338 1,347,500
Landauer, Inc. . . . . . . . . . . . . . . . . . . 49,000 983,036 1,463,875
---------- -----------
$2,669,353 $ 4,281,463
---------- -----------
CONSUMER NON-DURABLE GOODS - 7.0%
Lancaster Colony Corporation . . . . . . . . . . . 48,450 $1,088,065 $ 1,835,044
Newell Co. . . . . . . . . . . . . . . . . . . . . 15,000 353,550 747,187
Tupperware Corporation . . . . . . . . . . . . . . 37,000 1,492,892 1,040,625
---------- -----------
$2,934,507 $ 3,622,856
---------- -----------
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS--CONTINUED Amount Cost Value
- ----------------------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
RETAILING - 6.7%
Bob Evans Farms, Inc.. . . . . . . . . . . . . . . . . . . 10,000 $ 169,350 $ 211,875
CVS Corporation. . . . . . . . . . . . . . . . . . . . . . 18,890 163,804 735,529
Circuit City Stores, Inc.. . . . . . . . . . . . . . . . . 30,400 849,944 1,425,000
O'Reilly Automotive, Inc.* . . . . . . . . . . . . . . . . 31,000 509,767 1,116,000
----------- -----------
$ 1,692,865 $ 3,488,404
----------- -----------
ENTERTAINMENT - 5.1%
Carnival Corporation . . . . . . . . . . . . . . . . . . . 66,600 $ 726,906 $ 2,639,025
----------- -----------
INSURANCE - 4.0%
Poe & Brown, Inc.. . . . . . . . . . . . . . . . . . . . . 36,150 $ 583,188 $ 1,344,328
Progressive Corporation, The . . . . . . . . . . . . . . . 5,100 197,273 719,100
----------- -----------
$ 780,461 $ 2,063,428
----------- -----------
CONSUMER DURABLE GOODS - 2.8%
Cooper Tire & Rubber Company . . . . . . . . . . . . . . . 71,400 $ 1,638,064 $ 1,472,625
----------- -----------
ENERGY - 1.5%
Schlumberger Limited . . . . . . . . . . . . . . . . . . . 11,600 $ 774,726 $ 792,425
----------- -----------
TOTAL COMMON STOCKS - 92.9%. . . . . . . . . . . . . . . . $33,855,563 $48,274,014
----------- -----------
CONVERTIBLE DEBENTURE - 1.2%
Reptron Electronics, Inc. - 6 3/4% 2004 . . . . . . . . . $ 775,000 $ 705,250 $ 596,750
----------- -----------
TOTAL INVESTMENT SECURITIES - 94.1%. . . . . . . . . . . . $34,560,813 $48,870,764
----------- -----------
-----------
SHORT-TERM INVESTMENTS - 6.4%
Short-term Corporate Notes:
General Electric Capital Corporation - 5.56% 7/6/98. . . $2,000,000 $ 1,998,455
General Electric Capital Services, Inc. - 5.58% 7/7/98 . 1,000,000 999,070
State Street Bank Repurchase Agreement - 5% 7/01/98
(Collateralized by U.S. Treasury Notes - 6 1/8% 2001
Market value $356,016) . . . . . . . . . . . . . . . . . 344,000 344,048
-----------
$ 3,341,573
-----------
TOTAL INVESTMENTS - 100.5% . . . . . . . . . . . . . . . . $52,212,337
Liabilities less other assets - (0.5)% . . . . . . . . . . (266,353)
-----------
TOTAL NET ASSETS - 100%. . . . . . . . . . . . . . . . . . $51,945,984
-----------
-----------
</TABLE>
* Non-income producing security
See notes to financial statements.
7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities - at market value
(identified cost $34,560,813). . . . . . . . . . . . $48,870,764
Short-term investments - at cost plus interest earned
(maturities of 60 days or less). . . . . . . . . . . 3,341,573 $52,212,337
-----------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 904
Receivable for:
Investment securities sold. . . . . . . . . . . . . . $ 166,828
Dividend and accrued interest . . . . . . . . . . . . 79,133
Capital Stock sold. . . . . . . . . . . . . . . . . . 100 246,061
----------- -----------
$52,459,302
LIABILITIES
Payable for:
Investment securities purchased . . . . . . . . . . . $ 425,923
Advisory fees and financial services. . . . . . . . . 36,551
Capital stock repurchased . . . . . . . . . . . . . . 35,123
Accrued expenses. . . . . . . . . . . . . . . . . . . 15,721 513,318
----------- -----------
NET ASSETS - equivalent to $23.62 per share on 2,199,205
shares of Capital Stock outstanding . . . . . . . . . $51,945,984
-----------
-----------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock - par value $0.01 per share; authorized
25,000,000 shares; outstanding 2,199,205 shares. . . . $ 21,992
Additional Paid-in Capital . . . . . . . . . . . . . . . 33,563,125
Undistributed net investment income. . . . . . . . . . . 76,234
Undistributed net realized gain on investments . . . . . 3,974,682
Unrealized appreciation on investments . . . . . . . . . 14,309,951
-----------
Net assets at June 30, 1998. . . . . . . . . . . . . . . $51,945,984
-----------
-----------
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest. . . . . . . . . . . . . . . . . . . . . . . $ 131,558
Dividends . . . . . . . . . . . . . . . . . . . . . . 274,042
----------
$ 405,600
EXPENSES -- NOTE 3:
Advisory fees . . . . . . . . . . . . . . . . . . . . . $ 195,478
Financial services. . . . . . . . . . . . . . . . . . 26,247
Audit fees. . . . . . . . . . . . . . . . . . . . . . 23,775
Transfer agent fees and expenses. . . . . . . . . . . 20,910
Registration fees . . . . . . . . . . . . . . . . . . 17,385
Custodian fees and expenses . . . . . . . . . . . . . 11,256
Reports to shareholders . . . . . . . . . . . . . . . 10,279
Directors' fees and expenses. . . . . . . . . . . . . 8,250
Legal fees. . . . . . . . . . . . . . . . . . . . . . 3,417
Other expenses. . . . . . . . . . . . . . . . . . . . 2,035 319,032
----------- ----------
Net investment income . . . . . . . . . . . . . . $ 86,568
----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments:
Proceeds from sales of investment securities (excluding
short-term investments with maturities of 60 days
or less) . . . . . . . . . . . . . . . . . . . . . $10,857,798
Cost of investment securities sold. . . . . . . . . . . 6,883,115
-----------
Net realized gain on investments. . . . . . . . . $3,974,683
Unrealized appreciation of investments:
Unrealized appreciation at beginning of period . . . . $14,303,613
Unrealized appreciation at end of period . . . . . . . 14,309,951
-----------
Increase in unrealized appreciation of
investments . . . . . . . . . . . . . . . . 6,338
----------
Net realized and unrealized gain on
investments . . . . . . . . . . . . . . . $3,981,021
----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . . $4,067,589
----------
----------
</TABLE>
See notes to financial statements.
9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
--------------------------- --------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income. . . . . . . . . . . . . . . . . . $ 86,568 $ 95,681
Net realized gain on investments . . . . . . . . . . . . 3,974,683 4,554,526
Increase in unrealized
appreciation of investments. . . . . . . . . . . . . . 6,338 5,436,116
----------- -----------
Increase in net assets resulting
from operations. . . . . . . . . . . . . . . . . . . . $ 4,067,589 $10,086,323
Distributions to shareholders from:
Net investment income. . . . . . . . . . . . . . . . . . $ (101,518) $ (101,427)
Net realized capital gains . . . . . . . . . . . . . . . (4,541,124) (4,642,642) (6,471,057) (6,572,484)
----------- -----------
Capital Stock transactions:
Proceeds from Capital Stock sold . . . . . . . . . . . . $ 2,649,158 $ 2,537,977
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions . . . . . . . . . . . . 4,304,818 6,007,187
Cost of Capital Stock repurchased. . . . . . . . . . . . (4,633,921) 2,320,055 (7,655,864) 889,300
----------- ----------- ----------- -----------
Total increase in net assets . . . . . . . . . . . . . . . $ 1,745,002 $ 4,403,139
NET ASSETS
Beginning of period, including
undistributed net investment income
of $91,184 and $96,930 . . . . . . . . . . . . . . . . . 50,200,982 45,797,843
----------- -----------
End of period, including
undistributed net investment income
of $76,234 and $91,184 . . . . . . . . . . . . . . . . . $51,945,984 $50,200,982
----------- -----------
----------- -----------
CHANGE IN CAPITAL STOCK OUTSTANDING
Shares of Capital Stock sold . . . . . . . . . . . . . . . 115,568 119,107
Shares issued to shareholders upon
reinvestment of dividends and
distributions. . . . . . . . . . . . . . . . . . . . . . 196,657 314,183
Shares of Capital Stock repurchased. . . . . . . . . . . . (204,300) (370,541)
----------- -----------
Increase in Capital Stock
outstanding. . . . . . . . . . . . . . . . . . . . . . . 107,925 62,749
----------- -----------
----------- -----------
</TABLE>
See notes to financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Six
Months
Ended
June Year Ended December 31,
30, -----------------------------------------------
1998 1997 1996 1995 1994 1993
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period . . . . . . . . . . $ 24.00 $ 22.58 $ 22.36 $ 21.97 $ 23.76 $ 23.94
-------- ------- ------- ------- ------- -------
Net investment income. . . . . . . . . . . . . . . . . . . $ 0.04 $ 0.05 $ 0.10 $ 0.36 $ 0.46 $ 0.46
Net realized and unrealized gain (loss) on
investment securities. . . . . . . . . . . . . . . . . . 1.80 4.61 3.75 2.95 (0.48) 0.59
-------- ------- ------- ------- ------- -------
Total from investment operations . . . . . . . . . . . . . $ 1.84 $ 4.66 $3.85 $ 3.31 $ (0.02) $ 1.05
-------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income . . . . . . . . . . $ (0.05) $ (0.05) $ (0.22) $( 0.44) $ (0.46) $ (0.47)
Distributions from net realized
capital gains. . . . . . . . . . . . . . . . . . . . . (2.17) (3.19) (3.41) (2.48) (1.31) (0.76)
-------- ------- ------- ------- ------- -------
Total distributions. . . . . . . . . . . . . . . . . . . $ (2.22) $ (3.24) $ (3.63) $ (2.92) $ (1.77) $ (1.23)
-------- ------- ------- ------- ------- -------
Net asset value at end of period . . . . . . . . . . . . . $ 23.62 $ 24.00 $ 22.58 $ 22.36 $ 21.97 $ 23.76
-------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- -------
Total investment return* . . . . . . . . . . . . . . . . . 8.40% 24.30% 20.39% 17.27% (0.03)% 4.64%
Ratios/supplemental data:
Net assets at end of period (in $000's). . . . . . . . . . 51,946 50,201 45,798 47,390 51,965 88,301
Ratio of expenses to average net assets. . . . . . . . . . 1.21%+ 1.16% 1.19% 1.19% 1.13% 1.02%
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . . . . . . 0.33%+ 0.21% 0.48% 1.63% 1.95% 2.03%
Portfolio turnover rate. . . . . . . . . . . . . . . . . . 33%+ 19% 30% 58% 31% 43%
Average brokerage commissions per share. . . . . . . . . . $ 0.0568 $0.0586 $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. The
return for the six months ended June 30, 1998 is not annualized.
+ Annualized
See notes to financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
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 objective. 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 period, 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 of 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.
D. Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported. Actual results
could differ from those estimates.
NOTE 2 - PURCHASES OF INVESTMENT SECURITIES
The cost of purchases of investment securities (excluding short-term
investments with maturities of 60 days or less) aggregated $8,083,175 for the
six months ended June 30, 1998. Realized gains or losses are based on the
specific-certificate identification method. The cost of securities held at
June 30, 1998 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
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
CONTINUED
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 six months ended June 30, 1998, the Fund paid aggregate fees of
$8,250 to all Directors who are not affiliated persons of the Adviser. Legal
fees were for services rendered by O'Melveny & Myers LLP, counsel for the Fund.
A Director of the Fund is of counsel to, and a retired partner of, that firm.
Certain officers of the Fund are also officers of the Adviser and FPA Fund
Distributors, Inc.
NOTE 4 - DISTRIBUTOR
For the six months ended June 30, 1998, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $1,187 in
net Fund share sales commissions after reallowance to other dealers. The
Distributor pays its own overhead and general administrative expenses, the cost
of printing prospectuses and the cost of supplemental sales literature,
promotion and advertising.
13
