<PAGE>
- - FPA Perennial Fund, Inc. -
- - -
ANNUAL REPORT
DECEMBER 31, 1997
[LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, CA 90064
- - -
- - -
<PAGE>
OFFICERS AND DIRECTORS
DIRECTORS DISTRIBUTOR
FPA Fund Distributors, Inc.
John P. Endicott 11400 West Olympic Boulevard,
Leonard Mautner Suite 1200
Julio J. de Puzo, Jr. Los Angeles, California 90064
Lawrence J. Sheehan
Kenneth L. Trefftzs COUNSEL
O'Melveny & Myers LLP
Los Angeles, California
OFFICERS CUSTODIAN & TRANSFER AGENT
Eric S. Ende, PRESIDENT AND State Street Bank and Trust Company
CHIEF INVESTMENT OFFICER Boston, Massachusetts
Julio J. de Puzo, Jr., EXECUTIVE
VICE PRESIDENT
Steven R. Geist, VICE PRESIDENT INDEPENDENT AUDITORS
Janet M. Pitman, VICE PRESIDENT
J. Richard Atwood, TREASURER Ernst & Young LLP
Sherry Sasaki, SECRETARY Los Angeles, California
Christopher H. Thomas, ASSISTANT
TREASURER
SHAREHOLDER SERVICE AGENT
INVESTMENT ADVISER Boston Financial Data Services, Inc.
P.O. Box 8500
First Pacific Advisors, Inc. Boston, Massachusetts 02266-8500
11400 West Olympic Boulevard, Suite 1200 (800)638-3060
Los Angeles, California 90064 (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>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
During the year ended December 31, 1997, FPA Perennial Fund increased in
value by 24.3%, adjusted for reinvestment of all dividends and capital gain
distributions. This represents a third consecutive year of very high absolute
returns (1995 - 1997 total return = 75.5%). As shown below, Perennial's 1997
return was comparable to those of most of the relevant stock market and mutual
fund averages, a continuation of 1996's competitive results.
<TABLE>
<CAPTION>
1997 1996 1995
Returns Returns Returns
------- ------- -------
<S> <C> <C> <C>
FPA Perennial 24.3% 20.4% 17.3%
Russell 2500 24.4 19.0 31.7
S&P 500 33.4 23.3 37.5
Value Line 21.1 13.4 19.3
Lipper Growth &
Income Fund Average 27.0 20.8 30.8
Lipper General
Equity Fund Average 24.3 19.5 31.1
</TABLE>
Much as in 1996, last year's stock market advance was notably narrow, with
significant outperformance by the largest market-cap companies. This
performance disparity can be seen most clearly by comparing S&P 500 returns by
quintile based on market capitalization, from the largest 20% of the companies
to the smallest 20%.
<TABLE>
<CAPTION>
1997
S&P 500 Performance* Market Cap Range
- ------- ------------ ----------------
<S> <C> <C>
Largest 20% 39.5% $ 18 - 240 billion
Next 20% 34.5 9 - 18 billion
Middle 20% 32.0 5 - 9 billion
Next 20% 14.4 2.7 - 5 billion
Smallest 20% 12.5 340 million - 2.7 billion
</TABLE>
*Excludes Dividends
Our portfolio's performance in 1997 was especially gratifying because we
own virtually none of the largest cap stocks which accounted for so much of the
market's gain, and because our low-beta, high- quality portfolio would typically
find it difficult to keep up with such a strong market - as was the case in
1995.
1998 PROSPECTS
A year ago we expressed our caution about the prospects for the stock
market and the economy, arguing that the economic recovery and some evidence of
labor market tightness could eventually produce profit pressure and stock market
weakness. Although the stock market's 1997 performance clearly demonstrated
that we were premature, it seems certain that recent events in Asia have
heightened the risks to the profit growth of many U.S. companies. This clearly
could have adverse implications for equity returns in 1998. Also supporting
this point is the following table, which compares S&P profit growth with stock
price growth for 1995-1997. Market valuation levels have increased
significantly over the past three years, driven by an economic environment in
which very little went wrong.
<TABLE>
<CAPTION>
Cumulative
1997 1996 1995 Gain
---- ---- ---- ----
<S> <C> <C> <C> <C>
S&P Operating Earnings 12% 4% 18% 37%
S&P 500 Index 33 23 38 126
</TABLE>
Our investment approach continues to emphasize the ownership of high-return
companies, purchased and held at relatively attractive valuations. We believe
that this strategy will continue to produce rewarding returns, achieved with
significantly lower risk than the market averages.
Our current portfolio reflects this approach. Its component companies have
a history of outstanding growth, earn high returns and have relatively
unleveraged balance sheets. Despite these superior characteristics, the
companies are priced at valuation levels well below those of the market as a
whole.
<TABLE>
<CAPTION>
Portfolio S&P Industrials
--------- ---------------
<S> <C> <C>
EPS Growth Rate (10 Year) 17% 9%
Return on Assets 11% 5%
Debt % Capital 23% 54%
PE Ratio 18x 24x
</TABLE>
2
<PAGE>
TECHNOLOGY
One of the most dynamically growing parts in the U.S. economy over the past
decade has been technology. This has also been an area of the stock market
where we have found it difficult to participate, in part because the rapid
changes in specific products and corporate market shares make historical company
performance a poor guide to future success. Our under-representation in
technology has been a cause of increasing concern, however, as its importance to
the economy, and its contribution to overall stock market returns has increased
over time.
One approach we have developed to deal with this problem is to search out
companies which can fully participate in the growth of the technology sectors of
the economy, yet not take the significant product and company specific risks
which have made many portfolio investments in this area so risky. The companies
we have identified and purchased which fit these requirements manufacture
products like connectors, wire and cable, passive devices, electronics
enclosures, or distribute electronic components. They can be described as
"chicken techs."
ARROW ELECTRONICS is the world-wide leader in distribution of electronics
components. It carries products from most major suppliers and sells to a wide
variety of customers, mostly original equipment manufacturers making electronics
products. Because of this supplier and customer diversification, changes in the
fortunes of individual companies will have little effect on Arrow.
Distributors have become increasingly important in the industry as
components manufacturers have concluded that reaching small and medium-sized
customers with a direct sales force is too expensive. While the manufacturers
concentrate on a small number of very large customers, Arrow and other
distributors take care of servicing the rest. As the result of this industry
trend, the dynamic growth in the use of electronics in society, and key
acquisitions, Arrow's revenues have grown at a 35% rate over the past five
years, from $1.6 billion in 1992 to over $7 billion in 1997.
BELDEN is a leading manufacturer of specialty wire and cable products
for a wide variety of applications. Some typical uses for Belden products
are computer related products (office networks, peripheral interconnections,
internal wiring), audio-video (broadcast TV and radio, music production,
sports arenas and stadiums, cable TV), and industrial (factory automation,
fire and security systems, instrumentation and control). A number of these
areas, notably computer networking and industrial automation and controls
have been dynamic growth areas, enabling Belden to benefit from the rapid
pace of innovation in the electronics and computer industries.
Belden has also been astute in its acquisition program, broadening its
product line and geography, while demonstrating an ability to improve the
profitability of the businesses it has purchased.
KEMET is one of the leading producers of ceramic and tantalum capacitors,
passive devices which store and regulate the flow of electricity. Capacitors
are ubiquitous in electronics applications and products, and KEMET's products
are used in computers, telecommunications equipment, automotive and industrial
electronics, and military and aerospace systems. Not only does KEMET benefit
from the growth of these applications, but the increasing complexity of
electronics products also demands an increased number of capacitors. As a
result, KEMET has grown sales at a 14% annual rate over the past five years,
despite the rapid unit price declines which are common in electronics
components.
METHODE ELECTRONICS is a manufacturer of electronics connectors and
automotive controls, each area representing about half of Methode's sales.
Automotive electronics has grown rapidly in the last two decades, driven by
increased use of remote motors, sensors, controls, music and security systems,
and diagnostics. Methode is an important supplier of many of these devices or
systems, and its business has also grown quickly, both in the U.S. and, more
recently, in Europe.
Electronics connectors are crucial to all electronics, and as these
products have become smaller and more sophisticated, so have their connectors.
Though it shares some of the technological dynamism of its electronics
customers, the connector business has been characterized by much greater
stability in profitability and market share. This has made investment in
Methode, and possibly other connector companies in the future, more comfortable
for us.
3
<PAGE>
Operating in its dynamic market place, and helped by some acquisitions,
Methode's sales have grown at an 18% annual rate over the past five years, and
earnings have risen steadily as well.
CHANNELL COMMERCIAL is a manufacturer of thermoplastic enclosures used by
cable TV and telephone companies, most often at curbside. Though clearly not a
high tech product, Channell's enclosures play an important role in protecting
its customers' electronics from water, humidity, vandalism, and accidental
damage, while still permitting service and maintenance access. As Channell's
customers expand their product offerings - cable companies enter the telephone
and data transmission business, and phone companies add cable services - they
are demanding larger and more sophisticated enclosures from
Channell. We expect this will enable Channell to extend its record of rapid
income and sales growth.
These five companies accounted for 9% of Perennial's investments at the end
of 1997. We hope to increase this percent over time as we find other companies
with similarly attractive economic and financial characteristics.
Respectfully submitted,
/s/ Eric S. Ende
- --------------------------------------
Eric S. Ende
President and Chief Investment Officer
February 2, 1998
- --------------------------------------------------------------------------------
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, 1988 TO DECEMBER 31,
1997
[CHART]
<TABLE>
<CAPTION>
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 12/31/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA Perennial Fund,
Inc. 9,350 11,213 14,104 14,241 17,330 19,595 20,504 20,498 24,038 28,939 35,972
FPA Perennial Fund,
Inc. (NAV) 10,000 11,992 15,085 15,231 18,535 20,957 21,930 21,923 25,709 30,951 38,472
S&P 500 10,000 11,652 15,319 14,829 19,354 20,843 22,929 23,232 31,948 39,373 52,516
Lipper Growth & Income
Fund Average 10,000 11,625 14,403 13,787 17,832 19,481 21,858 21,696 28,496 34,503 43,610
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
Years Ended December 31, 1997
FPA Perennial Fund, Inc.
1 year 5 years 10 years
------ ------- --------
<S> <C> <C> <C>
At Net Asset Value 24.30% 12.92% 14.42%
With Maximum 6.5% Sales Charge 16.22% 11.41% 13.66%
</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 $35,972, 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 $38,472. The performance of
the Fund and of the Averages is computed on a total return basis which includes
reinvestment of all distributions.
4
<PAGE>
MAJOR PORTFOLIO CHANGES
For the Six Months Ended December 31, 1997
<TABLE>
<CAPTION>
Shares or
Principal
Amount
--------------
NET PURCHASES
<S> <C>
COMMON STOCKS
Cooper Tire & Rubber Company. . . . . . . . . . . . . . . . 5,900 shs.
Denison International plc (ADR) (1) . . . . . . . . . . . . 42,400 shs.
Galileo International, Inc. (1) . . . . . . . . . . . . . . 47,300 shs.
KEMET Corporation (1) . . . . . . . . . . . . . . . . . . . 28,100 shs.
Manpower Inc. . . . . . . . . . . . . . . . . . . . . . . . 18,600 shs.
Methode Electronics, Inc. (Class A) . . . . . . . . . . . . 8,700 shs.
Nucor Corporation . . . . . . . . . . . . . . . . . . . . . 8,200 shs.
CONVERTIBLE DEBENTURE
Reptron Electronics, Inc. --6 3/4% 2004 (1). . . . . . . . . $775,000
NET SALES
COMMON STOCKS
Arbor Drugs, Inc. . . . . . . . . . . . . . . . . . . . . . 18,750 shs.
Bandag, Incorporated (2). . . . . . . . . . . . . . . . . . 22,200 shs.
Bob Evans Farms, Inc. . . . . . . . . . . . . . . . . . . . 15,800 shs.
Caraustar Industries, Inc.. . . . . . . . . . . . . . . . . 6,000 shs.
Carnival Corporation (Class A). . . . . . . . . . . . . . . 6,200 shs.
Dames & Moore, Inc. (2) . . . . . . . . . . . . . . . . . . 50,000 shs.
Devon Group, Inc. . . . . . . . . . . . . . . . . . . . . . 3,000 shs.
Donaldson Company, Inc. . . . . . . . . . . . . . . . . . . 8,700 shs.
Franklin Covey Co.. . . . . . . . . . . . . . . . . . . . . 5,000 shs.
Horace Mann Educators Corporation (2) . . . . . . . . . . . 10,600 shs.
Juno Lighting, Inc. . . . . . . . . . . . . . . . . . . . . 30,400 shs.
Kaydon Corporation. . . . . . . . . . . . . . . . . . . . . 6,000 shs.
Progressive Corporation, The. . . . . . . . . . . . . . . . 3,700 shs.
Strayer Education, Inc. . . . . . . . . . . . . . . . . . . 5,700 shs.
Unifi, Inc. (2) . . . . . . . . . . . . . . . . . . . . . . 14,900 shs.
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- ------------------------------------------------------- ---------- -------------- --------------
<S> <C> <C> <C>
PRODUCER DURABLE GOODS -- 21.8%
Denison International plc (ADR)*. . . . . . . . . . . . 42,400 $ 721,313 $ 731,400
Donaldson Company, Inc. . . . . . . . . . . . . . . . . 19,300 490,582 869,706
Federal Signal Corporation. . . . . . . . . . . . . . . 23,300 515,245 503,863
Graco Inc.. . . . . . . . . . . . . . . . . . . . . . . 36,100 717,626 1,346,981
Holophane Corporation*. . . . . . . . . . . . . . . . . 69,100 1,212,795 1,710,225
IDEX Corporation. . . . . . . . . . . . . . . . . . . . 51,250 1,212,524 1,787,344
Kaydon Corporation. . . . . . . . . . . . . . . . . . . 60,000 848,458 1,957,500
Leggett & Platt, Incorporated . . . . . . . . . . . . . 19,500 451,380 816,562
TriMas Corporation. . . . . . . . . . . . . . . . . . . 35,900 812,761 1,234,062
------------- -------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,982,684 $ 10,957,643
------------- -------------
BUSINESS SERVICES & SUPPLIES -- 18.7%
Arrow Electronics, Inc.*. . . . . . . . . . . . . . . . 30,400 $ 588,770 $ 986,100
Bacou USA, Inc.*. . . . . . . . . . . . . . . . . . . . 38,700 587,318 677,250
Devon Group, Inc.*. . . . . . . . . . . . . . . . . . . 67,000 2,315,396 3,082,000
Franklin Covey Co.* . . . . . . . . . . . . . . . . . . 40,000 863,681 880,000
Galileo International, Inc. . . . . . . . . . . . . . . 47,300 1,225,767 1,306,663
Kennametal Inc. . . . . . . . . . . . . . . . . . . . . 9,100 315,771 471,494
Manpower Inc. . . . . . . . . . . . . . . . . . . . . . 39,500 1,244,268 1,392,375
Strayer Education, Inc. . . . . . . . . . . . . . . . . 18,600 124,000 613,800
------------- -------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,264,971 $ 9,409,682
------------- -------------
RETAILING -- 10.1%
Arbor Drugs, Inc. . . . . . . . . . . . . . . . . . . . 55,312 $ 305,243 $ 1,023,272
Bob Evans Farms, Inc. . . . . . . . . . . . . . . . . . 24,200 440,960 535,425
Circuit City Stores, Inc. . . . . . . . . . . . . . . . 31,200 874,792 1,109,550
O'Reilly Automotive, Inc.*. . . . . . . . . . . . . . . 31,000 509,768 813,750
Toys "R" Us, Inc.*. . . . . . . . . . . . . . . . . . . 35,100 900,766 1,103,456
Viking Office Products, Inc.* . . . . . . . . . . . . . 21,000 296,050 458,063
------------- -------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,327,579 $ 5,043,516
------------- -------------
MATERIALS -- 9.9%
Caraustar Industries, Inc.. . . . . . . . . . . . . . . 75,000 $ 1,395,625 $ 2,568,750
Nucor Corporation . . . . . . . . . . . . . . . . . . . 21,700 1,055,485 1,048,381
OM Group, Inc.. . . . . . . . . . . . . . . . . . . . . 37,000 717,046 1,355,125
------------- -------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,168,156 $4,972,256
------------- -------------
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
COMMON STOCKS--CONTINUED Shares Cost Value
- ------------------------------------------------------- --------- ------------- ------------
<S> <C> <C> <C>
HEALTH CARE -- 7.7%
Allergan, Inc.. . . . . . . . . . . . . . . . . . . . . 38,900 $ 865,594 $ 1,305,581
DENTSPLY International Inc. . . . . . . . . . . . . . . 38,000 654,062 1,159,000
Landauer, Inc.. . . . . . . . . . . . . . . . . . . . . 50,000 1,003,288 1,400,000
------------ ------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,522,944 $ 3,864,581
------------ ------------
CONSUMER NON-DURABLE GOODS -- 7.1%
Lancaster Colony Corporation. . . . . . . . . . . . . . 33,800 $ 1,147,690 $ 1,905,475
Newell Co.. . . . . . . . . . . . . . . . . . . . . . . 15,000 353,550 637,500
Tupperware Corporation. . . . . . . . . . . . . . . . . 37,000 1,492,892 1,031,375
------------ ------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,994,132 $ 3,574,350
------------ ------------
TECHNOLOGY -- 6.7%
Belden Inc. . . . . . . . . . . . . . . . . . . . . . . 30,600 $ 870,248 $ 1,078,650
Channell Commercial Corporation*. . . . . . . . . . . . 48,900 542,192 611,250
KEMET Corporation*. . . . . . . . . . . . . . . . . . . 28,100 520,870 544,437
Methode Electronics, Inc. (Class A) . . . . . . . . . . 68,900 1,084,573 1,119,625
------------ ------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,017,883 $ 3,353,962
------------ ------------
ENTERTAINMENT -- 3.8%
Carnival Corporation (Class A). . . . . . . . . . . . . 34,800 $ 761,136 $ 1,927,050
------------ ------------
CONSUMER DURABLE GOODS -- 3.5%
Cooper Tire & Rubber Company. . . . . . . . . . . . . . 57,700 $ 1,337,385 $ 1,406,438
Juno Lighting, Inc. . . . . . . . . . . . . . . . . . . 20,500 298,386 358,750
------------ ------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,635,771 $ 1,765,188
------------ ------------
INSURANCE -- 3.4%
Poe & Brown, Inc. . . . . . . . . . . . . . . . . . . . 24,100 $ 583,188 $ 1,075,462
Progressive Corporation, The. . . . . . . . . . . . . . 5,300 205,036 635,338
------------ ------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 788,224 $ 1,710,800
------------ ------------
</TABLE>
7
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS--CONTINUED Amount Cost Value
- --------------------------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
ENERGY -- 1.0%
North European Oil Royalty Trust (CBI). . . . . . . . . 30,300 $ 192,023 $ 488,588
----------- -----------
TOTAL COMMON STOCKS -- 93.7%. . . . . . . . . . . . . . $32,655,503 $47,067,616
----------- -----------
CONVERTIBLE DEBENTURE -- 1.2%
Reptron Electronics, Inc. --63/4% 2004. . . . . . . . . $ 775,000 $ 705,250 $ 596,750
----------- -----------
TOTAL INVESTMENT SECURITIES -- 94.9%. . . . . . . . . . $33,360,753 $47,664,366
----------- -----------
----------- -----------
SHORT-TERM INVESTMENTS -- 4.8%
Short-term Corporate Note:
Winn-Dixie Stores, Inc. -- 6% 1/06/98 . . . . . . . . $ 2,000,000 $ 1,998,333
State Street Bank Repurchase Agreement -- 5% 1/02/98
(Dated 12/31/97; to be repurchased at $408,113;
collateralized by U.S. Treasury Bond -- 71/4% 2016,
market value $417,295). . . . . . . . . . . . . . . . 408,000 408,057
-----------
TOTAL SHORT-TERM INVESTMENTS. . . . . . . . . . . . . . $ 2,406,390
-----------
TOTAL INVESTMENTS -- 99.7%. . . . . . . . . . . . . . . $50,070,756
Other assets less liabilities -- 0.3% . . . . . . . . . 130,226
-----------
TOTAL NET ASSETS -- 100%. . . . . . . . . . . . . . . . $50,200,982
-----------
-----------
</TABLE>
*Non-income producing security
See notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $33,360,753) . . . . . . . . . . . . . . . $47,664,366
Short-term investments -- at cost plus interest earned
(maturities 60 days or less). . . . . . . . . . . . . . . . 2,406,390 $50,070,756
-----------
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 974
Receivable for:
Investment securities sold. . . . . . . . . . . . . . . . . . $ 104,609
Dividends and accrued interest. . . . . . . . . . . . . . . . 83,183
Capital Stock sold. . . . . . . . . . . . . . . . . . . . . . 1,232 189,024
----------- -----------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50,260,754
LIABILITIES
Payable for:
Advisory fees and financial services. . . . . . . . . . . . . $ 34,861
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . 16,630
Capital stock repurchased . . . . . . . . . . . . . . . . . . 8,281 59,772
----------- -----------
NET ASSETS -- equivalent to $24.00 per share on 2,091,280
shares of Capital Stock outstanding . . . . . . . . . . . . . . $50,200,982
-----------
-----------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
25,000,000 shares; outstanding 2,091,280 shares . . . . . . . $ 20,913
Additional Paid-in Capital. . . . . . . . . . . . . . . . . . . 31,244,149
Undistributed net investment income . . . . . . . . . . . . . . 91,184
Undistributed net realized gain on investments. . . . . . . . . 4,541,123
Unrealized appreciation of investments. . . . . . . . . . . . . 14,303,613
-----------
-----------
Net assets at December 31, 1997 . . . . . . . . . . . . . . . . $50,200,982
-----------
-----------
</TABLE>
See notes to financial statements.
9
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest. . . . . . . . . . . . . . . . . . . . . . . . $ 96,442
Dividends . . . . . . . . . . . . . . . . . . . . . . . 538,856
-----------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 635,298
EXPENSES -- Note 3:
Advisory fees . . . . . . . . . . . . . . . . . . . . . $ 348,236
Financial services. . . . . . . . . . . . . . . . . . . 46,431
Transfer agent fees and expenses. . . . . . . . . . . . 37,940
Audit fees. . . . . . . . . . . . . . . . . . . . . . . 27,025
Custodian fees. . . . . . . . . . . . . . . . . . . . . 21,902
Directors' fees and expenses. . . . . . . . . . . . . . 20,242
Registration fees . . . . . . . . . . . . . . . . . . . 17,835
Reports to shareholders . . . . . . . . . . . . . . . . 13,381
Legal fees. . . . . . . . . . . . . . . . . . . . . . . 3,403
Other expenses. . . . . . . . . . . . . . . . . . . . . 3,222 539,617
----------- -----------
Net investment income . . . . . . . . . . . . . $ 95,681
-----------
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) $14,956,385
Cost of investment securities sold. . . . . . . . . . . 10,401,859
-----------
Net realized gain on investments. . . . . . . . . . . $ 4,554,526
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year. . . . . . $ 8,867,497
Unrealized appreciation at end of year. . . . . . . . . 14,303,613
-----------
Increase in unrealized appreciation of investments. . 5,436,116
-----------
Net realized and unrealized gain on investments $ 9,990,642
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . $10,086,323
-----------
-----------
</TABLE>
See notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------------
1997 1996
---------------------------- ---------------------------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C> <C> <C>
Operations:
Net investment income . . . . . . . . . . . . . . . . $ 95,681 $ 216,385
Net realized gain on investments. . . . . . . . . . . 4,554,526 6,458,334
Increase in unrealized
appreciation of investments . . . . . . . . . . . . 5,436,116 1,634,018
------------ -------------
Increase in net assets resulting
from operations . . . . . . . . . . . . . . . . . . . $ 10,086,323 $ 8,308,737
Distributions to shareholders from:
Net investment income . . . . . . . . . . . . . . . . $ (101,427) $ (473,568)
Net realized capital gains. . . . . . . . . . . . . . (6,471,057) (6,572,484) (7,224,334) (7,697,902)
------------ -------------
Capital Stock transactions:
Proceeds from Capital Stock sold. . . . . . . . . . . $ 2,537,977 $ 3,446,804
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions. . . . . . . . . . . 6,007,187 6,824,920
Cost of Capital Stock repurchased . . . . . . . . . . (7,655,864) 889,300 (12,475,048) (2,203,324)
------------ ------------- ------------- -------------
Total increase (decrease) in net assets . . . . . . . . $ 4,403,139 $ (1,592,489)
NET ASSETS
Beginning of year, including
undistributed net investment income
of $96,930 and $354,113 . . . . . . . . . . . . . . . 45,797,843 47,390,332
------------- -------------
End of year, including
undistributed net investment income
of $91,184 and $96,930. . . . . . . . . . . . . . . . $ 50,200,982 $ 45,797,843
------------- -------------
------------- -------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold. . . . . . . . . . . . . . 119,107 171,914
Shares issued to shareholders
upon reinvestment of dividends
and distributions . . . . . . . . . . . . . . . . . . 314,183 360,490
Shares of Capital Stock repurchased . . . . . . . . . . (370,541) (623,524)
------------- -------------
Increase (decrease) in Capital Stock outstanding. . . . 62,749 (91,120)
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year. . . . . . . $22.58 $22.36 $21.97 $23.76 $23.94
------ ------ ------ ------ ------
Net investment income . . . . . . . . . . . . . . $ 0.05 $ 0.10 $ 0.36 $ 0.46 $ 0.46
Net realized and unrealized gain (loss)
on investment securities. . . . . . . . . . . . 4.61 3.75 2.95 (0.48) 0.59
------ ------ ------ ------ ------
Total from investment operations. . . . . . . . . $ 4.66 $ 3.85 $ 3.31 $(0.02) $ 1.05
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income. . . . . . $(0.05) $(0.22) $(0.44) $(0.46) $(0.47)
Distributions from net realized capital gains . (3.19) (3.41) (2.48) (1.31) (0.76)
------ ------ ------ ------ ------
Total distributions . . . . . . . . . . . . . . $(3.24) $(3.63) $(2.92) $(1.77) $(1.23)
------ ------ ------ ------ ------
Net asset value at end of year. . . . . . . . . . $24.00 $22.58 $22.36 $21.97 $23.76
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total investment return*. . . . . . . . . . . . . 24.30% 20.39% 17.27% (0.03)% 4.64%
Ratios/supplemental data:
Net assets at end of year (in thousands). . . . . $50,201 $45,798 $47,390 $51,965 $88,301
Ratio of expenses to average net assets . . . . . 1.16% 1.19% 1.19% 1.13% 1.02%
Ratio of net investment income to
average net assets. . . . . . . . . . . . . . . 0.21% 0.48% 1.63% 1.95% 2.03%
Portfolio turnover rate . . . . . . . . . . . . . 19% 30% 58% 31% 43%
Average brokerage commissions per share . . . . . $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.
See notes to financial statements.
12
<PAGE>
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.
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 $8,320,256 for the
year ended December 31, 1997. Realized gains or losses are based on the
specific-certificate identification method. The cost of securities held at
December 31, 1997 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, 1997, the Fund paid aggregate fees of
$20,000 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.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- DISTRIBUTOR
For the year ended December 31, 1997, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $2,382 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, 1997, 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 $2.17 per share payable January 7, 1998 to shareholders of
record on December 31, 1997. For financial statement purposes, this dividend
and distribution was recorded on the ex-dividend date, January 2, 1998.
REPORT OF 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. (the "Fund"), including the portfolio of investments, as of
December 31, 1997, 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 for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, including confirmation of securities owned as of December 31, 1997,
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. as of December 31, 1997, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
- -------------------------------
Los Angeles, California
January 20, 1998
14
