<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1998
FILE NO. 2-87607
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 15 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 15 /X/
----------------------
FPA PERENNIAL FUND, INC.
(Exact Name of Registrant as Specified in Charter)
11400 WEST OLYMPIC BOULEVARD, SUITE 1200
LOS ANGELES, CALIFORNIA 90064
(Address of Principal Executive Offices)
(310)473-0225
(Registrant's Telephone Number, including Area Code)
----------------------
J. RICHARD ATWOOD, Treasurer Copy to:
FPA PERENNIAL FUND, INC. LAWRENCE J. SHEEHAN, ESQ.
11400 West Olympic Boulevard, Suite 1200 O'Melveny & Myers LLP
Los Angeles, California 90064 1999 Avenue of the Stars
(Name and Address of Agent for Service) Los Angeles, California 90067
----------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER REGISTRATION STATEMENT BECOMES EFFECTIVE.
It is proposed that this filing will become effective (check appropriate box)
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Title of Securities Being Registered: Common Stock, $0.01 par value
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<PAGE>
FPA PERENNIAL FUND, INC.
CROSS REFERENCE SHEET
FORM N-1A ITEM PROSPECTUS CAPTION
- ---------------- ------------------
PART A
- ------
1. Cover Page.............................. Cover Page
2. Synopsis................................ Expense Synopsis
3. Condensed Financial Information......... Financial Highlights
4. General Description of Registrant....... Suitability; The Fund and Its
Management; Investment
Objective and Policies;
Investment Practices, Risks
and Restrictions
5. Management of the Fund.................. Cover Page; The Fund and Its
Management; Additional
Information - Shareholder
Service Agent
5A. Management's Discussion of Fund......... Inapplicable
Performance
6. Capital Stock and Securities............ Dividends, Distributions and
Taxes; Additional Information
7. Purchase of Securities Being Offered.... Cover Page; Purchase of
Shares; Shareholder Services;
Redemption of Shares -
Reinvestment Privilege;
Dividends, Distributions and
Taxes
8. Redemption or Repurchase................ Redemption of Shares
9. Pending Legal Proceedings............... Inapplicable
<PAGE>
STATEMENT OF ADDITIONAL
PART B INFORMATION CAPTION
- ------ ----------------------
10. Cover Page.............................. Cover Page
11. Table of Contents....................... Table of Contents
12. General Information and History......... General Information - History
13. Investment Objectives and Policies...... Investment Policies;
Investment Restrictions;
Portfolio Turnover
14. Management of the Fund.................. Directors and Officers of the
Fund
15. Control Persons and Principal Holders... Directors and Officers of the
of Securities Fund
16. Investment Advisory and Other Services.. Directors and Officers of the
Fund; Investment Advisory
Agreement
17. Brokerage Allocation and Other Practices. Portfolio Transactions and
Brokerage
18. Capital Stock and Other Securities...... General Information - Voting
Rights
19. Purchase, Redemption and Pricing of..... Purchase and Redemption of
Securities Being Offered Shares; Tax Sheltered
Retirement Plans
20. Tax Status.............................. Dividends, Distributions and
Taxes
21. Underwriters............................ Distributor
22. Calculation of Performance Data......... Prior Performance Information
23. Financial Statements.................... Financial Statements
ii
<PAGE>
FPA PERENNIAL FUND, INC.
PROSPECTUS
FPA Perennial Fund, Inc. ("Fund") is a mutual fund designed for
individual, partnership and corporate retirement plans. The Fund's primary
investment objective is long-term growth of capital. Current income is a
secondary consideration. The Fund usually invests principally in common
stocks considered by the Fund's investment adviser, First Pacific Advisors,
Inc. ("Adviser"), on the basis of fundamental analysis, to provide attractive
value relative to their market prices.
This Prospectus briefly outlines information prospective investors
should know before purchasing Fund shares. Investors should read and retain
this Prospectus for future reference.
A Statement of Additional Information about the Fund dated May 1, 1998,
which is incorporated by reference in this Prospectus, has been filed with
the Securities and Exchange Commission. It is available at no charge by
contacting FPA Fund Distributors, Inc. ("Distributor") at 11400 West Olympic
Boulevard, Suite 1200, Los Angeles, California 90064: telephone (310)473-0225
or (800)982-4372, except from Alaska, Hawaii and Puerto Rico.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
[LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 WEST OLYMPIC BOULEVARD, SUITE 1200
LOS ANGELES, CA 90064
MAY 1, 1998
<PAGE>
FPA PERENNIAL FUND, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
(310) 473-0225
INVESTMENT First Pacific Advisors, Inc.
ADVISER: 11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
DISTRIBUTOR: FPA Fund Distributors, Inc.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
(310) 473-0225
(800) 982-4372 except
Alaska, Hawaii, and
Puerto Rico
SHAREHOLDER Boston Financial Data Services, Inc.
SERVICE AGENT: P.O. Box 8500
Boston, Massachusetts 02266-8500
(617) 328-5000
(800) 638-3060 except
Alaska, Hawaii
Massachusetts and
Puerto Rico
CUSTODIAN AND State Street Bank and Trust Company
TRANSFER AGENT: 225 Franklin Street
Boston, Massachusetts 02110
INQUIRIES CONCERNING TRANSFER OF REGISTRATION, DISTRIBUTIONS, REDEMPTIONS AND
SHAREHOLDER SERVICE SHOULD BE DIRECTED TO THE SHAREHOLDER SERVICE AGENT.
INQUIRIES CONCERNING SALES SHOULD BE DIRECTED TO THE DISTRIBUTOR.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Expenses Synopsis..................................................... 3
Financial Highlights.................................................. 4
Suitability........................................................... 4
Investment Objectives and Policies.................................... 5
The Fund and Its Management........................................... 6
Advisory Agreement.................................................. 6
FPA Fund Family..................................................... 6
Prior Performance Information....................................... 7
Purchase of Shares.................................................... 7
Net Asset Value..................................................... 8
Table of Sales Charges.............................................. 8
Cumulative Purchase Discount........................................ 8
Letter of Intent.................................................... 8
Sales at Net Asset Value............................................ 9
Shareholder Services.................................................. 9
FPA Exchange Privilege.............................................. 9
Money Market Fund Exchange Privilege................................ 10
How to Exchange Shares.............................................. 10
Investment Account.................................................. 10
Pre-Authorized Investment Plan...................................... 11
Retirement Plans.................................................... 11
Systematic Withdrawal Plan.......................................... 11
Redemption of Shares.................................................. 11
Telephone Transactions.............................................. 12
<CAPTION>
PAGE
<S> <C>
Reinvestment Privilege.............................................. 12
Dividends, Distributions and Taxes.................................... 12
Dividends........................................................... 13
Capital Gains....................................................... 13
Taxes............................................................... 13
Investment Practices, Risks and Restrictions.......................... 13
Fixed-Income Securities............................................. 13
Risks of Lower-Rated Securities..................................... 13
Securities of Foreign Issuers....................................... 14
Covered Call Options................................................ 14
Short Sales Against the Box......................................... 15
Repurchase Agreements............................................... 15
Brokerage Practices................................................. 15
Portfolio Turnover.................................................. 15
Investment Restrictions............................................. 16
Additional Information................................................ 16
Common Stock........................................................ 16
Voting Rights....................................................... 16
Shareholder Inquiries............................................... 16
Shareholder Service Agent........................................... 16
Custodian........................................................... 16
Legal Counsel....................................................... 16
Independent Auditors................................................ 16
</TABLE>
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NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR
IN SUPPLEMENTAL SALES LITERATURE DISTRIBUTED BY THE DISTRIBUTOR IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND OR BY THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
2
<PAGE>
EXPENSE SYNOPSIS
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)............... 6.50%
Deferred Sales Load (as a
percentage of original sales
price or redemption proceeds,
as applicable)................ *
Redemption Fee (as a percentage
of amount redeemed)........... None
Exchange Fee.................... $5.00
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees................. 0.75%
12b-1 Fees...................... None
Other Expenses (including
financial services)........... 0.41%
-----
Total Fund Operating Expenses... 1.16%
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following
expenses on a $1,000 investment,
assuming (1) five percent annual
return and (2) redemption at the
end of each time period: $76.00 $99.00 $125.00 $197.00
</TABLE>
- ------------------------
* An account management fee is charged by unaffiliated investment advisers or
broker-dealers to certain accounts entitled to purchase shares without sales
charge.
The foregoing synopsis is intended to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. See "Purchase of Shares" and "The Fund and Its Management." The
example is included to provide a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a five percent
annual return assumption. This assumption is unrelated to the Fund's prior
performance and is not a projection of future performance. THE EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESSER THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by the Fund's independent
auditors. Their report appears in the Statement of Additional Information. This
information should be read in conjunction with the related financial statements
included in the Statement of Additional Information, which can be obtained
without charge from the Distributor at the address shown on the cover page of
this Prospectus.
For one share outstanding throughout each year
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------
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 $000's)............. 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 -- -- --
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1992 1991 1990 1989 1988
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year.............. $ 22.40 $ 19.82 $ 22.60 $ 19.28 $ 17.16
--------- --------- --------- --------- ---------
Net investment income............................. $ 0.52 $ 0.64 $ 0.77 $ 0.75 $ 0.70
Net realized and unrealized gain (loss) on
investment securities........................... 2.26 3.38 (0.55) 3.88 2.52
--------- --------- --------- --------- ---------
Total from investment operations.................. $ 2.78 $ 4.02 $ 0.22 $ 4.63 $ 3.22
--------- --------- --------- --------- ---------
Less distributions:
Dividends from net investment income.............. $ (0.57) $ (0.73) $ (1.15) $ (0.72) $ (0.65)
Distributions from net realized capital gains..... (0.67) (0.71) (1.85) (0.59) (0.45)
--------- --------- --------- --------- ---------
Total distributions............................... $ (1.24) $ (1.44) $ (3.00) $ (1.31) $ (1.10)
--------- --------- --------- --------- ---------
Net asset value at end of year.................... $ 23.94 $ 22.40 $ 19.82 $ 22.60 $ 19.28
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total investment return*.......................... 13.07% 21.69% 0.97% 25.79% 19.92%
Ratios/supplemental data:
Net assets at end of year (in $000's)............. 76,254 63,757 51,488 55,982 51,607
Ratio of expenses to average net assets........... 1.08% 1.10% 1.14% 1.12% 1.17%
Ratio of net investment income to average net
assets.......................................... 2.37% 3.11% 3.78% 3.45% 3.62%
Portfolio turnover rate........................... 30% 33% 29% 27% 29%
Average brokerage commissions per share........... -- -- -- -- --
</TABLE>
- ------------------------
* Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge.
SUITABILITY
The Fund is designed to serve chiefly as an investment vehicle for
retirement plans and other entities exempt from federal income taxation,
although Fund shares may be purchased by other investors. The Adviser considers
the Fund especially suitable for those investors who are in a position to hold
Fund shares over the course of a market cycle or longer. The Fund's portfolio is
managed with disciplines similar to those applied to corporate pension accounts
managed by the Adviser. Investment decisions are made without regard to tax
considerations other than maintenance of the Fund's qualification as a regulated
investment company under the Internal Revenue Code.
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is long-term growth of capital.
Current income is a secondary consideration. The Adviser believes the Fund's
primary objective can best be achieved by investing in a diversified selection
of common stocks of companies which, in the judgment of the Adviser, possess
attractive value relative to price, show good prospects for growth, and have
quality management. The Fund may also invest in United States Government and
government agency obligations, corporate debt securities, preferred stocks and
convertible securities. There is no assurance that the Fund will succeed in
achieving its investment objectives as there is market risk inherent in seeking
capital growth and in owning common stocks and other securities.
Generally, the Adviser favors investments in common stocks of companies
demonstrating a consistently high return on invested capital with a substantial
portion of earnings reinvested in the business to achieve compounded growth. The
Adviser also searches for companies it deems undervalued when considering book
value, replacement cost of assets and/or other relevant factors.
The Adviser attempts to lessen price risk by not overpaying for earnings of
even the best companies. In the Adviser's opinion, better values and less price
risk may often be found among companies with successful records that are
currently out-of-favor as evidenced by such factors as relatively low
price-earnings ratios. There is no assurance, however, that the Adviser's
practices will reduce risk and in any event shares of the Fund may decrease in
value especially during periods of general decline in market prices of equity
securities.
Investments are not limited to any specific industry, market segment or area
of technology. The Adviser emphasizes investments in securities which it
considers offer the best value. Periodically, larger than usual positions in
cash or high-quality short-term debt securities (U.S. Government or government
agency securities, obligations of domestic banks, prime commercial paper notes
and repurchase agreements) may be held for temporary defensive purposes or to
meet liquidity needs.
Up to 15% of the Fund's net assets may be invested in lower-rated or
comparable unrated debt securities as described under "Investment Practices,
Risks and Restrictions--Fixed-Income Securities" and "--Risks of Lower-Rated
Securities." The Fund may invest up to 25% of its net assets in securities of
foreign issuers provided no more than 10% be invested in such securities not
represented by ADRs listed on The New York Stock Exchange ("NYSE") or the
American Stock Exchange. Such investments involve additional risks and
opportunities compared with securities of U.S. issuers. The Fund can write
covered call options which are listed on a national securities exchange. See
"Investment Practices, Risks and Restrictions" herein and "Investment Policies"
in the Statement of Additional Information.
The Adviser's emphasis on fundamental analysis of a company's prospects and
the inherent value of its securities may result in a portion of the Fund's
portfolio being invested in medium or smaller sized companies or companies
perceived by the average investor to be unpopular or unfamiliar. This should not
imply that values are not available in larger, better known companies. Rather,
it is the Adviser's position that value can be found in companies of all sizes.
Substantially all common stocks the Fund purchases, however, will be either
listed on a national securities exchange or included in the National Association
of Securities Dealers Automated Quotation (NASDAQ) National Market System or
National List. The Adviser's value-oriented investment approach may result in a
portfolio which may not reflect all facets of the national economy and which may
differ significantly from the broad market indices.
5
<PAGE>
Security purchases are based primarily on consideration of fundamental value
and earnings expectations rather than short-term stock market expectations.
However, if earnings prospects change, or the value of a security becomes large
in relation to the Fund's total size or it no longer appears to represent an
unusual value, the Fund can sell all or part of the investment regardless of the
length of time held. See "Investment Practices, Risks and
Restrictions--Portfolio Turnover."
THE FUND AND ITS MANAGEMENT
The Fund is a Maryland corporation and a diversified, open-end management
investment company, generally called a mutual fund, which was organized in 1983.
A mutual fund provides the investor a practical and convenient way to invest in
a diversified portfolio of securities by combining resources with others who
have similar investment goals.
A board of four directors is responsible for overseeing the Fund's affairs.
The Adviser selects investments for the Fund, provides administrative services
and manages the Fund's business. Eric S. Ende, President of the Fund and Senior
Vice President of the Adviser, is primarily responsible for the day-to-day
management of the Fund's portfolio. Mr. Ende has been the Chief Investment
Officer of the Fund since September 1995. Previously, Mr. Ende had served as
Executive Vice President (or Vice President) of the Fund for over twelve years.
The Adviser, together with its predecessors, has been in the investment advisory
business since 1954, serving as investment adviser to the Fund since its
inception. Presently, the Adviser manages assets of approximately $4.5 billion
for seven investment companies, including one closed-end investment company, and
30 institutional accounts. All officers of the Fund are also officers of the
Adviser. Certain officers of the Fund are also officers of the Distributor. The
Adviser and the Distributor are indirect wholly owned subsidiaries of United
Asset Management Corporation ("UAM"), a New York Stock Exchange listed holding
company principally engaged, through affiliated firms, in providing
institutional investment management and acquiring institutional investment
management firms.
ADVISORY AGREEMENT. Under the Investment Advisory Agreement dated June 27,
1991, the Fund pays the Adviser a monthly fee computed on the average daily net
assets of the Fund at the annual rate of 0.75% on the first $50 million of net
assets and 0.65% on net assets over $50 million. In addition, the Adviser
receives an amount equal to 0.10% of the Fund's average daily net assets for
each fiscal year in reimbursement for the provision of financial services to the
Fund. The advisory fee is higher than the fee paid by some other mutual funds.
For the last fiscal year, advisory fees plus the cost of financial services paid
by the Fund equaled 0.85% of the Fund's average net assets.
The Fund also pays for shareholder service agent fees, custodian fees, legal
and audit fees, directors' fees, reports to shareholders and proxy statements,
registration of Fund shares under federal and state laws, and all other expenses
incurred in the operation of the Fund except those assumed by the Adviser. For
the last fiscal year, the Fund's total operating expenses were 1.16% of average
net assets.
FPA FUND FAMILY. The Fund is one of four mutual funds in the FPA Fund
Family (collectively, the "FPA Funds"). FPA Capital Fund, Inc. ("Capital"),
which currently is not open to new investors, seeks long-term capital growth but
current income is also a factor. FPA New Income, Inc. ("New Income"), a
fixed-income fund, seeks current income and long-term total return. FPA
Paramount Fund, Inc. ("Paramount") seeks a high total investment return,
including capital appreciation and income.
6
<PAGE>
The FPA Funds offer exchange privileges and telephone redemptions plus
combined shareholdings for cumulative purchase discounts and letters of intent.
These privileges are more fully described under "Purchase of Shares,"
"Shareholder Services" and "Redemption of Shares." The account information form
should be used to change information and authorize these services. Authorizing
exchange privileges or telephone redemptions requires a signature guarantee,
which is described under "Redemption of Shares." The account information form is
available from authorized securities dealers ("dealers") or the Distributor.
PRIOR PERFORMANCE INFORMATION. From time to time, the Fund's total average
annual return for one, five and ten year periods may be quoted in
advertisements. Other total return quotations, aggregate or average, over other
time periods may also be included. Average annual total return reflects the
average annual percentage change in value of an investment in the Fund over the
measuring period. Aggregate total return reflects the total percentage change in
value over the measuring period. Total return calculations assume that dividends
and capital gain distributions paid by the Fund during the period are reinvested
in Fund shares at net asset value. Quotations of total returns reflect the
maximum sales charge, except that the Fund may also provide, in conjunction with
such quotations, additional quotations that do not reflect a sales charge.
Comparative performance information may also be used from time to time in
advertising or marketing of the Fund's shares. The Fund's total return may be
compared to that of other mutual funds with similar investment objectives and to
stock and other relevant indices or to rankings prepared by independent services
or other financial or industry publications that monitor the performance of
mutual funds. For example, the total return on Fund shares may be compared to
data prepared by Lipper Analytical Services, Inc. or to a stock index such as
the Standard & Poor's 500 Stock Index. Such comparative performance information
may be stated in the same terms in which the comparative data and indices are
stated. For these purposes, the performance of the Fund, as well as the
performance of other mutual funds or indices, would not reflect sales charges,
the inclusion of which would reduce such performance quotations.
Performance figures represent historic earnings, and should not be
considered as representative of future results. The investment return and
principal value of an investment in the Fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. Since performance will fluctuate, performance data for the Fund should not
be used to compare an investment in the Fund's shares with bank deposits,
savings accounts and similar investment alternatives which often provide an
agreed or guaranteed fixed yield for a stated period of time. Investors should
remember that performance is generally a function of the kind and quality of the
securities held in a portfolio, operating expenses and market conditions.
Further information about the Fund's performance is contained in the annual
report to shareholders which may be obtained without charge from the Distributor
at the address shown on the cover page of this Prospectus.
PURCHASE OF SHARES
Fund shares are sold in a continuous offering through dealers. The
Distributor serves as principal underwriter. The account information form should
be used for initial purchases. The minimum initial investment is $1,500. Each
subsequent investment must be at least $100. Minimum investment requirements can
be changed by the Fund or waived by the Distributor. All purchases made by check
should be
7
<PAGE>
in U.S. dollars and made payable to the FPA Funds or State Street Bank and Trust
Company. Third party checks will not be accepted. A charge may be imposed if any
check used for investment does not clear.
The offering price equals the net asset value per share plus the applicable
sales charge. Orders received by dealers before the NYSE closes (currently 4:00
p.m., New York time) on any business day are priced based on the net asset value
for that day if Boston Financial Data Services, Inc. ("Shareholder Service
Agent"), as agent for the Distributor, receives the order prior to its close of
business. Orders received by the Shareholder Service Agent after such time
generally are priced based on net asset value for the next business day.
However, orders received by certain retirement plans and certain other financial
intermediaries before the NYSE closes and communicated to the Shareholder
Service Agent by 9:30 a.m., Eastern time, on the following business day are
priced at the net asset value for the prior business day.
NET ASSET VALUE. Net asset value is computed as of the close of the NYSE on
each day the NYSE is open. Net asset value, rounded to the nearest cent per
share, equals the market value of all portfolio securities plus other assets,
less all liabilities, divided by the number of Fund shares outstanding.
TABLE OF SALES CHARGES. The following table shows the sales charge at
various investment levels. The sales charge applies to purchases made at one
time by any combination of an individual, his or her spouse and these related
investors (and their spouses): grandparents, parents, siblings, children or
grandchildren; or by the individual, his or her spouse and a trustee or other
fiduciary purchasing securities for related trusts, estates or fiduciary
accounts, including employee benefit plans.
<TABLE>
<CAPTION>
SALES SALES REALLOWED TO
SIZE OF INVESTMENT CHARGE(1) CHARGE(2) DEALERS(2)
- -------------------------------------------------------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
Less than $10,000......................................................... 6.95% 6.50% 6.00%
$10,000 but less than $25,000............................................. 6.38% 6.00% 5.50%
$25,000 but less than $50,000............................................. 5.54% 5.25% 4.75%
$50,000 but less than $100,000............................................ 4.71% 4.50% 4.25%
$100,000 but less than $250,000........................................... 3.90% 3.75% 3.50%
$250,000 but less than $500,000........................................... 2.04% 2.00% 1.75%
$500,000 but less than $1,000,000......................................... 1.01% 1.00% 0.80%
$1,000,000 and over....................................................... 0.00% 0.00% 0.00%
</TABLE>
- ------------------------
(1) As a percentage of net amount invested.
(2) As a percentage of public offering price.
CUMULATIVE PURCHASE DISCOUNT. The size of investment may be determined by
adding the amount being invested to the current value, at offering price, of all
presently held shares of the FPA Funds. If such holdings qualify for a reduced
sales charge, information sufficient to permit verification must be furnished to
the Shareholder Service Agent on the account information form or when the order
is placed.
LETTER OF INTENT. A letter of intent ("LOI") allows investors to obtain a
reduced sales charge by aggregating investments made during a 13-month period.
The value of all presently held shares of the FPA Funds may also be used to
determine the applicable sales charge. The account information form contains the
LOI which must be signed at the time of initial purchase, or within 30 days.
Each investment made under an LOI during the period receives the sales charge
for the total investment goal. If the goal is
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not achieved within the period, the shareholder must pay the amount equal to the
sales charge applicable to the purchases made minus those actually paid.
SALES AT NET ASSET VALUE. Fund shares may be purchased at net asset value,
without a sales charge, by these investors and their spouses (and their
immediate relatives): (a) current and former directors, officers and employees
of the Adviser, UAM and its affiliates; (b) current and former directors,
officers and employees of Angeles Corporation (the former parent of the Adviser)
and its affiliates; (c) current and former directors of, and partners and
employees of legal counsel to, the investment companies advised by the Adviser;
(d) investment advisory clients of the Adviser and pension consultants to such
clients and their directors, officers and employees; (e) employees (including
registered representatives) of a dealer which has a selling group agreement with
the Distributor and consents to such purchases; (f) any employee benefit plan
maintained for the benefit of such qualified investors; and (g) directors,
officers and employees of a company whose employee benefit plan holds shares of
one or more of the FPA Funds. Immediate relatives include grandparents, parents,
siblings, children and grandchildren of a qualified investor, and the spouse of
any immediate relative. The foregoing purchasers must represent that the shares
are purchased for investment and will not be resold except through redemption or
repurchase by the Fund.
The Fund also offers shares at net asset value without imposition of a sales
charge to the following persons: (i) trustees or other fiduciaries purchasing
shares for employee benefit plans of employers with 20 or more employees; (ii)
trust companies, bank trust departments and registered investment advisers
purchasing for accounts over which they exercise investment authority and which
are held in a fiduciary, agency, advisory, custodial or similar capacity,
provided that the amount collectively invested or to be invested by such
accounts during the subsequent 13-month period in the Fund and/or the FPA Funds
totals at least $1,000,000; (iii) tax-exempt organizations enumerated in Section
501(c)(3), (9), or (13) of the Internal Revenue Code; and (iv) accounts upon
which an investment adviser, financial planner or broker-dealer charges an
account management or consulting fee, provided such organization has entered
into an agreement with the Distributor regarding such accounts or purchases Fund
shares for such accounts or for its own accounts through an omnibus account
maintained by a broker-dealer that has entered into such an agreement with the
Fund or the Distributor.
No sales charge is imposed because the Distributor anticipates that such
purchases should result in economies in the sales effort and related expenses
compared to sales made through normal distribution channels. A special
application form, which is available from the Distributor, must be submitted
with the initial purchase. All net asset value sales require specific
notification to the Distributor of the purchaser's eligibility at the time the
order is placed. If a purchaser places such an order through a securities
broker, the broker may charge a service fee. No such fee is charged if shares
are purchased directly from the Distributor or the Fund.
SHAREHOLDER SERVICES
FPA EXCHANGE PRIVILEGE. Subject to the following requirements, Fund shares
may be exchanged for shares of another FPA Fund, except FPA Capital Fund, Inc.,
whose shares may only be acquired by existing Capital shareholders. An exchange
may establish a new or increase an existing FPA Fund account. Both accounts must
bear the same registration. A sales charge applies to purchases by exchange
unless (a) a sales charge equivalent to that applicable to the acquired shares
was previously paid; (b) the shareholder is entitled to purchase shares at net
asset value; or (c) the shares being
9
<PAGE>
exchanged were acquired by reinvestment. Shares of the Fund to be acquired must
be registered for sale in the investor's state. A $5.00 service fee applies to
each exchange.
MONEY MARKET FUND EXCHANGE PRIVILEGE. The Distributor has arranged for
shares of the money market portfolio of the Cash Equivalent Fund, a no-load
diversified open-end money market mutual fund ("Money Market Fund") to be
available in exchange for shares of the Fund. Shares of the Money Market Fund so
acquired plus any shares acquired through reinvestment of dividends and
distributions may be re-exchanged for shares of any FPA Fund without sales
charge, provided that in the case of Capital, the investor has maintained his
shareholder account because shares of Capital, are currently offered only to
existing shareholders. The $5.00 exchange fee is paid by the Distributor which
receives a fee from Kemper Financial Services, the administrator for the Money
Market Fund, of 0.15 of 1% per year or more of the average daily net asset value
of shares of the Money Market Fund acquired through this exchange privilege.
This exchange privilege does not constitute an offering or recommendation by the
Fund of the Money Market Fund. The Money Market Fund is separately managed and
is not one of the FPA Funds. FPA Fund investments held in Fund-Sponsored
Individual Retirement Accounts may not be exchanged into the Cash Equivalent
Fund.
HOW TO EXCHANGE SHARES. The above described exchange privileges may be
exercised by sending written instructions to the Shareholder Service Agent. See
"Redemption of Shares" for applicable signature and signature guarantee
requirements. Exchange privileges may also be exercised by telephone as
described under "Redemption of Shares--Telephone Transactions." Only four
exchanges may be made in one account during any calendar year; exchanges
exceeding this limit may be considered null and void, if the investor has been
notified that this limit has been reached. Shares must be owned for 15 days
before exchanging and cannot be in certificate form unless the certificate is
tendered with the request for exchange. An exchange requires the purchase of
shares of the acquired Fund with a value of at least $1,000. Exchange
redemptions and purchases are effected on the basis of the net asset values next
determined after receipt of the request in proper order by the Shareholder
Service Agent. In the case of exchanges into the Money Market Fund, dividends
generally commence on the following business day. For federal and state income
tax purposes, an exchange is treated as a sale and may result in a capital gain
or loss, although if the shares exchanged have been held less than 91 days, the
sales charge paid on such shares is not included in the tax basis of the
exchanged shares, but is carried over and included in the tax basis of the
shares acquired. See the Statement of Additional Information.
Additional information concerning this privilege and prospectuses for other
FPA Funds and/or for the Money Market Fund may be obtained from dealers or the
Distributor. A shareholder should read such prospectuses and consider
differences in objectives and policies before making any exchange. The Fund or
the Distributor can change or discontinue this privilege upon 60 days' advance
notice and investors who had exchanged into the Money Market Fund would be
permitted to reacquire shares of the Fund without sales charge for at least 60
days after notice of termination of the Money Market Fund exchange privilege.
INVESTMENT ACCOUNT. Each shareholder has an investment account in which the
Shareholder Service Agent holds Fund shares. Unless the Shareholder Service
Agent receives a written request, stock certificates will not be issued.
Certificates are only issued for full shares. The shareholder receives a
statement showing account activity after each transaction.
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PRE-AUTHORIZED INVESTMENT PLAN. An investor desiring to make automatic
monthly investments may use the optional shareholder services form, available
from dealers or the Distributor. The Shareholder Service Agent withdraws funds
from the investor's bank account monthly for $100 or more as specified through
the Automated Clearing House.
RETIREMENT PLANS. An eligible investor may establish an IRA (individual
retirement account) and/ or other retirement plan with a $100 minimum initial
investment and an expressed intention to increase the investment to $1,500
within 12 months. Each subsequent investment must be at least $100. Neither the
Fund nor the Distributor imposes additional fees for these plans, but the plan
custodian does. Persons with earned income ineligible for deductible
contributions generally may make non-deductible contributions and earnings on
shares held in an IRA are tax-deferred. The Taxpayer Relief Act of 1997 expanded
opportunities for certain investors to make deductible contributions to IRAs and
also created two new tax-favored accounts, the Roth IRA and the Education IRA,
in which earnings (subject to certain restrictions) are not taxed even on
withdrawal. Investors should consult their tax advisers. Applicable forms and
information regarding plan administration, custodial fees and other plan
provisions are available from the Distributor or dealers.
SYSTEMATIC WITHDRAWAL PLAN. Any shareholder whose account value is $10,000
or more may make monthly, quarterly, semi-annual or annual withdrawals of $50 or
more by completing the optional shareholder services form. Under this plan,
sufficient Fund shares to cover these withdrawals are redeemed and proceeds are
forwarded as directed on the optional shareholder services form. Dividends and
capital gains distributions on Fund shares held under this plan are
automatically reinvested in additional Fund shares at net asset value. If these
withdrawals continuously exceed reinvestments, the shareholder's account is
correspondingly reduced and ultimately exhausted. Concurrent withdrawals and
purchases are ordinarily disadvantageous to the shareholder due to additional
sales charges. The shareholder recognizes any taxable gain or loss on
redemptions.
REDEMPTION OF SHARES
Shareholders can redeem for cash, without charge, any or all of their Fund
shares at any time by sending a written request in proper form to the
Shareholder Service Agent. Facsimile transmissions are not acceptable.
Shareholders can also place redemption requests through dealers, who may charge
a fee. Shareholders redeeming Fund shares from retirement plans should consult
the plan documents concerning federal tax consequences and their plan custodian
regarding procedures.
All persons in whose name the account is established must sign the
redemption request exactly as registered. If the redemption exceeds $10,000, if
the proceeds are not paid to the record owner at the record address, or if the
shareholder is a corporation, partnership, trust or fiduciary, the signature(s)
must be guaranteed by a bank or trust company; a broker or dealer; a credit
union; a national securities exchange, registered securities association or
clearing agency; or a savings and loan association.
In most cases, only a properly signed request with any necessary signature
guarantee is required for a redemption. However, stock certificates if held by
shareholders must accompany requests. Additional documents are required if a
corporation, partnership, trust, fiduciary, executor or administrator requests
the redemption.
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Redemptions are only processed on days the NYSE is open. The redemption
price is the first net asset value determined after the Shareholder Service
Agent receives the redemption request in proper form, except that redemption
orders received by an authorized dealer, certain retirement plans and certain
other financial intermediaries before the NYSE closes are priced at the closing
price for that day if communicated to the Shareholder Service Agent within the
times specified under "Purchase of Shares." A check for the proceeds is mailed
within seven days after the Shareholder Service Agent receives the request in
good order. If Fund shares redeemed were recently purchased by check, the
Shareholder Service Agent may delay payment of the redemption proceeds until it
confirms the purchase check has cleared, usually a period of up to 15 days.
The Fund may direct the Shareholder Service Agent to redeem all Fund shares
of any shareholder whose account value is less than $500 as a result of a
redemption. In such case, the shareholder is notified in writing that the
account value is insufficient and allowed up to 60 days to increase it to $500.
TELEPHONE TRANSACTIONS. Telephone exchange privileges are available unless
declined by an investor on the account information form. Telephone redemption
privileges are available only if elected on the optional shareholder services
form. A properly completed request with a signature guarantee is required if a
telephone redemption election is made or changed after the account is opened.
Telephone redemptions are not available for shares held in a Fund-sponsored
retirement account. Shares held in certificate form cannot be redeemed or
exchanged by telephone. The Shareholder Service Agent (the "Agent") employs
procedures considered by it to be reasonable to confirm that instructions
communicated by telephone are genuine, including requiring account registration
verification from the caller and recording telephone instructions. If reasonable
procedures are employed, neither the Agent nor the Fund is responsible for
following telephone instructions the Agent reasonably believes to be genuine.
The Agent and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if such loss results from a failure to employ reasonable
procedures. Proceeds of telephone redemptions are paid to the bank account the
shareholder designates when establishing this privilege. Telephone redemptions
of $5,000 or more are wired unless the designated bank cannot receive Federal
Reserve wires. Telephone redemptions under $5,000 are mailed unless a wire is
requested. There is a $3.50 charge for wires. During periods of significant
economic or market changes, telephone instructions may be difficult to place. If
an investor is unable to contact the Agent by telephone, instructions may be
sent to the Agent at the address set forth on page 2. The Fund may change or
discontinue telephone redemption privileges without notice.
REINVESTMENT PRIVILEGE. Proceeds from a redemption can be reinvested in
Fund shares within 30 days without paying a sales charge. Such reinvestment is
made at the first net asset value determined after the Shareholder Service Agent
receives the order. This privilege can be exercised only once for each Fund
investment. Information sufficient to permit verification must be furnished to
the Shareholder Service Agent when the purchase is placed. Such redemption and
reinvestment is a taxable transaction but losses on the redemption are not
deductible for federal income tax purposes.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Shareholders may receive dividends and/or capital gains distributions in
addition to any increase or decrease in the value of Fund shares. Dividends and
distributions are automatically reinvested in additional Fund shares at the net
asset value determined at the close of business on the day after the
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record date, unless the Shareholder Service Agent receives a written request for
cash payment before the record date. The account information form may be used
for this purpose.
DIVIDENDS. The Fund's investment income consists principally of dividends
and interest earned on its portfolio securities. All of this income, after
payment of expenses, is distributed semi-annually as dividends to shareholders.
CAPITAL GAINS. When the Fund sells portfolio securities, it realizes
capital gains and losses, depending upon whether the selling price is higher or
lower than the purchase price. Net realized capital gains from sales of
securities equal profits minus losses, including any losses carried forward from
prior years. The Fund distributes any net realized capital gains to shareholders
annually.
TAXES. Because the Fund plans to distribute all of its net investment
income and net realized capital gains to shareholders, it does not expect to pay
any federal income tax. Dividends and distributions paid to shareholders are
subject to federal income tax, and any state and local income tax. Shareholders
are notified annually of the federal tax status of these distributions.
Dividends from net investment income and distributions from short-term capital
gains are taxable to shareholders as ordinary income. Distributions from
long-term capital gains and distributions from mid-term capital gains are
taxable to shareholders as such. All distributions are taxable whether paid in
cash or reinvested. To avoid a 31% federal withholding tax on dividends,
distributions and redemptions, shareholders must certify their taxpayer
identification number to the Shareholder Service Agent. The account information
form may be used for this purpose.
INVESTMENT PRACTICES, RISKS AND RESTRICTIONS
FIXED-INCOME SECURITIES. The market price of fixed-income securities held
by the Fund can be expected to vary inversely to changes in prevailing interest
rates. Investments in fixed-income securities with longer maturities generally
produce higher yields but are subject to greater market fluctuation. The Fund
may invest up to 15% of its net assets in fixed-income securities, including
convertible securities, which are rated BB or lower, by Standard & Poor's
Corporation ("S&P") or Ba or lower by Moody's Investors Service, Inc.
("Moody's"), which ratings are considered by the rating agencies to be
speculative, and unrated securities considered by the Adviser to be of
comparable quality. Debt securities with a rating of BB/Ba or lower are commonly
referred to as "junk bonds." See "Risks of Lower-Rated Securities" below.
RISKS OF LOWER-RATED SECURITIES. To the extent that convertible securities
or other debt securities acquired by the Fund are rated lower than investment
grade or are not rated, there is a greater risk as to the timely repayment of
the principal of, and timely payment of interest on, such securities. Decisions
to purchase and sell these securities are based on the Adviser's evaluation of
their investment potential and not on the ratings assigned by credit agencies.
Because investment in lower-rated securities involves greater investment risk,
achievement of the Fund's investment objective is more dependent on the
Adviser's credit analysis than with respect to the Fund's investments in
higher-rated securities. Lower-rated securities may be more susceptible to real
or perceived adverse economic and competitive industry conditions than
investment grade securities. A projection of an economic downturn, for example,
could cause a decline in the prices of lower-rated securities because the advent
of a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. In addition, the
secondary trading market for lower-rated securities may be less liquid than the
market for higher-rated securities.
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Prices of lower-rated securities may decline rapidly in the event a
significant number of holders decide to sell. Changes in expectations regarding
an individual issuer, an industry or lower-rated securities generally could
reduce market liquidity for such securities and make their sale by the Fund more
difficult, at least in the absence of price concessions. The lower-rated bond
market has grown primarily during a period of long economic expansion and it is
uncertain how it would perform during an extended economic downturn. An economic
downturn or an increase in interest rates could severely disrupt the market for
lower-rated bonds and adversely affect the value of outstanding bonds and the
ability of the issuers to repay principal and interest. See "Risk Factors
Relating to Lower-Rated Securities" in the Statement of Additional Information
for a further discussion.
The lower-rated securities in which the Fund may invest from time to time
include debt securities of companies that are financially troubled, in default
or are in bankruptcy or reorganization ("Deep Discount Securities"). These
securities may be rated C, C1 or D by S&P or C by Moody's or may be unrated.
Debt obligations of such companies are usually available at a deep discount from
the face value of the instrument. The Fund may invest in Deep Discount
Securities when the Adviser believes that existing factors are likely to improve
the company's financial condition. Such factors include a restructuring of debt,
management changes, existence of adequate assets, or other special
circumstances.
A debt instrument purchased at a deep discount, but prior to default, may
currently pay a very high effective yield. In addition, if the financial
condition of the issuer improves, the underlying value of the securities may
increase, resulting in a capital gain. If the issuer defaults on its obligations
or remains in default, or if the plan of reorganization is insufficient for
debt-holders, the Deep Discount Securities may stop generating income and lose
value or become worthless. The Adviser will balance the benefits of Deep
Discount Securities with their risks. While a diversified portfolio may reduce
the overall impact of a Deep Discount Security that is in default or loses its
value, the risk cannot be eliminated.
As of December 31, 1997, 1.2% of the Fund's net assets were invested in
convertible securities and 4.8% of the Fund's net assets were invested in
high-grade, short-term securities.
SECURITIES OF FOREIGN ISSUERS. Investments in securities of foreign issuers
may be affected favorably or unfavorably by changes in currency rates and
exchange control regulations. Compared to U.S. companies, there may be less
publicly available information about foreign companies which generally are
subject to less stringent accounting, auditing and financial reporting standards
and requirements. Securities of some foreign companies may be less liquid or
more volatile than those of U.S. companies. Foreign brokerage commissions and
custodial fees are generally higher than in the United States. Investments in
foreign securities may involve additional risks, including local political or
economic developments, expropriation or nationalization of assets and imposition
of withholding taxes on dividend or interest payments. In the event of a default
on any foreign debt obligation, it may be more difficult for the Fund to obtain
or enforce a judgment against the issuer.
COVERED CALL OPTIONS. When the Fund writes a listed call option, the
purchaser has the right to buy a security from the Fund at a fixed exercise
price any time before the option contract expires, regardless of changes in the
market price of the underlying security. The Fund writes options only on
securities it owns (covered options) and must retain ownership of the underlying
security while the
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option is outstanding. Until the option expires, the Fund cannot profit from a
rise in the market price of the underlying security over the exercise price,
except insofar as the premium which the Fund receives, net of commissions,
represents a profit. The premium paid to the Fund is the consideration for
undertaking this obligation.
The Fund may not write any option which, at the time, would cause its
outstanding options to cover securities comprising more than 10% of its asset
value. Writing option contracts is a highly specialized activity and may limit
investment flexibility at certain times. The maximum term for listed options
exceeds two years, but the Fund expects that most options it writes will not
exceed six months.
SHORT SALES AGAINST THE BOX. The Fund can make short sales of securities or
maintain a short position if the Fund contemporaneously owns or has the right to
obtain at no added cost securities identical to those sold short (short sales
"against the box") or if the securities sold are "when issued" or "when
distributed" securities which the Fund expects to receive in a recapitalization,
reorganization, or other exchange for securities the Fund contemporaneously owns
or has the right to obtain at no added cost. The principal purpose of making
short sales is to enable the Fund to obtain the current market price of a
security which the Fund desires to sell but which cannot be currently delivered
for settlement. The Fund may not make short sales or maintain a short position
if to do so would cause more than 25% of its total net assets (exclusive of
proceeds from short sales) to be allocated to a segregated account in connection
with short sales.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements with
domestic banks or dealers to earn interest on temporarily available cash. A
repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Fund) acquires a debt security which the seller agrees to repurchase at a
future time and set price, thereby determining the yield during the holding
period. Repurchase agreements are collateralized by the underlying debt
securities and may be considered loans under the Investment Company Act of 1940
("Investment Company Act"). In the event of bankruptcy or other default by the
seller, the Fund may experience delays and expenses liquidating the underlying
security, loss from decline in value of such security, and lack of access to
income on such security. The Fund will not invest more than 10% of its total net
assets in repurchase agreements which mature in more than seven days and/or
other securities which are not readily marketable.
BROKERAGE PRACTICES. The Adviser is responsible for placing orders for the
purchase and sale of portfolio securities and negotiating brokerage commissions
on such transactions. Brokerage firms are selected for their professional
capability and the overall value and quality of their execution services. The
Adviser is authorized to pay higher commissions to brokerage firms providing
investment and research information if the Adviser deems such commissions
reasonable in relation to the overall services provided. The Adviser may also
use information received to manage the assets of other advisory accounts. The
Fund does not pay any mark-up over the market price of securities acquired in
principal transactions with dealers.
PORTFOLIO TURNOVER. The Fund purchases securities primarily for investment
rather than short-term trading. However, changes are made in the portfolio
whenever it appears advisable. The Fund's annual portfolio turnover rate is
shown in the table of "Financial Highlights." Greater portfolio activity
increases the Fund's transaction costs, including brokerage commissions.
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INVESTMENT RESTRICTIONS. The Fund has adopted investment restrictions
which, like its investment objectives, cannot be changed without approval by a
majority (as defined in the Investment Company Act) vote of the Fund's
shareholders. These restrictions provide, in part, that the Fund shall not:
1. Purchase any securities which would cause more than 5% of the Fund's total
assets at the time of such purchase to be invested in the securities of any
one issuer, excepting securities issued or guaranteed by the U.S.
Government; or purchase more than 10% of any class of securities of any one
issuer.
2. Concentrate its investment in particular industries by investing more than
25% of the value of its total assets in the securities of companies
primarily engaged in any one industry.
Percentage limitations are calculated and applied at the time of investment.
Additional information concerning the Fund's investment practices and
restrictions is contained in the Statement of Additional Information.
ADDITIONAL INFORMATION
COMMON STOCK. Each Fund share outstanding participates equally in dividend
and liquidation rights. Fund shares are transferable, fully paid and
non-assessable, and do not have any preemptive or conversion rights. The Fund
has authorized 25 million shares of $0.01 par value Common Stock.
VOTING RIGHTS. The By-Laws of the Fund provide that shareholder meetings
are required to be held to elect directors only when required by the Investment
Company Act. Such event is likely to occur infrequently. In addition, a special
meeting of the shareholders will be called, if requested by the holders of ten
percent of the Fund's outstanding shares, for the purposes, and to act upon the
matters, specified in the request (which may include election or removal of
directors). When matters are submitted for a shareholder vote, each shareholder
is entitled to one vote for each share owned.
SHAREHOLDER INQUIRIES. Shareholders who have questions concerning (1) the
Fund may contact the Distributor; (2) their account may contact the Shareholder
Service Agent; and (3) their retirement plan may contact the Shareholder Service
Agent. The applicable addresses and telephone numbers appear on page 2 of this
Prospectus.
SHAREHOLDER SERVICE AGENT. Boston Financial Data Services, Inc., P. O. Box
8500, Boston, Massachusetts 02266-8500, serves as shareholder service and
dividend disbursing agent for the Fund. State Street Bank and Trust Company
serves as transfer agent for the Fund.
CUSTODIAN. All cash and securities of the Fund are held by the Fund's
custodian, State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110.
LEGAL COUNSEL. O'Melveny & Myers LLP, 400 South Hope Street, Los Angeles,
California 90071, provides legal services to the Fund.
INDEPENDENT AUDITORS. Ernst & Young LLP, 515 South Flower Street, Los
Angeles, California 90071, performs annual audits of the Fund's financial
statements.
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STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
FPA PERENNIAL FUND, INC.
This Statement of Additional Information ("Statement") supplements the current
Prospectus of FPA Perennial Fund, Inc. ("Fund") dated May 1, 1998. This
Statement does not present a complete picture of the various topics discussed
and should be read in conjunction with the Fund's Prospectus. Although this
Statement is not itself a Prospectus, it is, in its entirety, incorporated by
reference into the Prospectus. The Fund's Prospectus may be obtained by
contacting your securities dealer or the Fund's principal underwriter, FPA Fund
Distributors, Inc. ("Distributor"), at 11400 West Olympic Boulevard, Suite 1200,
Los Angeles, California 90064; telephone (310) 473-0225 or (800) 982-4372,
except Alaska, Hawaii and Puerto Rico.
TABLE OF CONTENTS
Page
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Reports to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . .2
Year 2000 Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Investment Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Covered Call Options. . . . . . . . . . . . . . . . . . . . . . . . . . .2
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . . . . .3
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . .3
Leverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Debt Security Ratings . . . . . . . . . . . . . . . . . . . . . . . . . .4
Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Commercial Paper Ratings. . . . . . . . . . . . . . . . . . . . . . . . .6
Risk Factors Relating to Lower-Rated Securities. . . . . . . . . . . . . . . .6
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Additional Restrictions . . . . . . . . . . . . . . . . . . . . . . . . .9
Directors and Officers of the Fund . . . . . . . . . . . . . . . . . . . . . .9
Five Percent Shareholders . . . . . . . . . . . . . . . . . . . . . . . 11
Investment Advisory Agreement. . . . . . . . . . . . . . . . . . . . . . . . 12
Prior Performance Information. . . . . . . . . . . . . . . . . . . . . . . . 13
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . . 14
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Purchase and Redemption of Shares. . . . . . . . . . . . . . . . . . . . . . 16
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Sales Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Authorized Financial Intermediaries . . . . . . . . . . . . . . . . . . 16
Sales at Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . . 16
Letter of Intent. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
FPA Exchange Privilege. . . . . . . . . . . . . . . . . . . . . . . . . 17
Redemption of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . 18
Telephone Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . 18
Tax Sheltered Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . 19
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . 19
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
<PAGE>
GENERAL INFORMATION
VOTING RIGHTS. Fund shares do not have cumulative voting rights, which means
holders of more than 50% of Fund shares voting for the election of directors can
elect 100% of the directors if they so choose. In such event, holders of the
remaining Fund shares are not able to elect any person or persons to the Fund's
Board of Directors.
REPORTS TO SHAREHOLDERS. Shareholders receive semi-annual and annual reports
which show the portfolio of investments, major portfolio changes and other
information. Financial statements accompanied by an opinion of independent
auditors are furnished to shareholders after the Fund's fiscal year-end.
Unaudited financial statements prepared by the Fund are provided after the first
six months of the fiscal year.
YEAR 2000 PROBLEM. Like other mutual funds, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used by the Adviser and other service providers
do not properly process and calculate date-related information and data from and
after January 1, 2000. This is commonly known as the "Year 2000 Problem." The
Adviser is taking steps that it believes are reasonably designed to address the
Year 2000 Problem with respect to computer systems that it uses and to obtain
reasonable assurances that comparable steps are being taken by the Fund's other
major service providers. At this time, however, there can be no assurance that
these steps will be sufficient to avoid any adverse impact to the Fund.
INVESTMENT POLICIES
The following supplements information set forth under the captions "Investment
Objectives and Policies" and "Investment Practices, Risks and Restrictions" in
the Prospectus. Readers must also refer to the Prospectus.
COVERED CALL OPTIONS. In an effort to increase potential income, the Fund is
authorized to write (i.e., sell) covered call options listed on national
securities exchanges. Listed call options are presently traded only with
respect to a limited number of larger companies. Since the Fund does not intend
to purchase securities for the purpose of writing options, it may only be able
to write options on a small portion of its portfolio.
The Fund may terminate its obligation under a previously written option, without
delivery of the underlying security, by effecting a closing transaction, which
is the purchase of a call option on the same security with the same exercise
price and expiration date. The Fund's ability to enter into a closing
transaction may be limited. If the Fund cannot close its position, it is unable
to sell the underlying security until the call expires or is exercised.
Accordingly, the Fund may not be able to sell the underlying security at an
advantageous time. The Fund realizes a profit or loss from a closing
transaction if the cost of the transaction is less or more than the option
premium received. Also, because increases in the market price of an option
generally reflect increases in the market price of the underlying security, any
loss realized from a closing transaction is likely to be offset in whole or in
part by the increased value of the underlying security.
The Fund's portfolio turnover rate may increase to the extent underlying
securities are delivered upon exercise of options written by the Fund.
Brokerage commissions associated with writing call options and effecting closing
transactions are normally proportionately higher than those associated with
general securities transactions.
2
<PAGE>
SHORT SALES AGAINST THE BOX. In an effort to increase investment flexibility,
the Fund is authorized to make certain short sales. In a short sale, the Fund
does not immediately deliver the securities sold and does not receive the
proceeds from the sale. The Fund is said to have a short position in the
securities sold until it delivers such securities, at which time it receives the
proceeds of the sale. The Fund must pay the broker the amount of any dividend
paid on the securities while the short position is maintained. To secure its
obligation to deliver the securities sold short, the Fund deposits in escrow in
a segregated account with its custodian an equal amount of the securities sold
short or securities convertible into or exchangeable for such securities.
Common stocks issuable upon conversion of a convertible security sometimes can
be sold at a better price than the convertible security owned by the Fund. In
such circumstances the Fund could sell the common stock short "against the box"
while tendering the convertible security to the issuer for conversion. Upon
receipt of the certificates for the underlying common stock, delivery would be
made to close the short sale.
Similarly, when the Fund expects to receive new securities in a reorganization
in exchange for securities owned by the Fund, and the new securities are traded
on a "when issued" basis, the Fund could sell in the "when issued" market and
deliver the new securities when received following the consummation of the
reorganization. If the reorganization is not consummated, all transactions in
the "when issued" market are canceled in which event the Fund would realize no
gain or loss on the short sale, except for brokerage commissions.
The limited authority to utilize short sales as described above and in the
Prospectus would not subject the Fund to the risk of loss generally associated
with short sales. A short sale "against the box" does eliminate the potential
for gain or loss from subsequent changes in the market price of the security.
It constitutes a form of hedging under which the Fund obtains a current market
price considered attractive by the Adviser, rather than remain subject to future
fluctuations in the price of the security sold short. Such authority would be
utilized only in furtherance of the Fund's primary investment objective of
long-term growth of capital.
For federal income tax purposes, a short sale against the box involving stock or
securities (except conventional debt such as ordinary corporate or United Stated
Treasury bonds) that could be sold at a gain is treated as a constructive sale
requiring recognition of taxable gain.
REPURCHASE AGREEMENTS. The Fund pays for repurchase agreements only upon
physical delivery or evidence of book entry transfer of the underlying debt
security to a segregated account of State Street Bank and Trust Company, the
Fund's custodian, or its agents. The Fund only enters into repurchase
agreements involving securities in which the Fund can otherwise invest. The
underlying security (normally a security of the United States Government, its
agencies or instrumentalities) may have a maturity date exceeding one year.
Repurchase agreements usually mature not more than seven days after purchase by
the Fund. It is the Fund's policy that the market value of the security
collateralizing the repurchase agreement at all times equal or exceed the amount
of the repurchase agreement. The Fund does not bear the risk of a decline in
value of the underlying security unless the seller defaults under its repurchase
obligation. In the event of bankruptcy or other default of a seller, the Fund
might experience both loss and delay in liquidating the underlying security,
including: (a) possible decline in the value of such security while the Fund
seeks to enforce its rights thereto, (b) possible lack of access to income on
such security during this period and (c) expenses of enforcing its rights.
3
<PAGE>
LEVERAGE. The Fund is authorized to borrow from banks in order to raise
additional monies for investment. Such borrowings may be made periodically when
it is expected that the potential return, including capital appreciation and/or
income, from the investment of these funds will exceed the cost. Any return
from investment of the borrowed funds in excess of the interest cost will cause
the net asset value of Fund shares to rise faster than would otherwise be the
case. Conversely, if the return on the investment of the borrowed funds fails
to cover the interest cost, the net asset value will decrease faster than
normal. This speculative factor is known as leverage. This policy permitting
bank borrowing may not be changed without the approval of the holders of a
majority (as defined under "Investment Restrictions") of the Fund's outstanding
voting securities. The Fund may collateralize any bank borrowing by depositing
portfolio securities with, or segregating such securities for, the account of
the lending bank. See "Investment Restrictions."
The amount of money the Fund may borrow is restricted by the Investment Company
Act of 1940 ("Investment Company Act") so that, immediately after such
transaction, the Fund has an asset coverage of at least 300% of the amount
borrowed. Asset coverage means total assets, including borrowings, less
liabilities, excluding borrowings. If the Fund's asset coverage falls below
such requirement due to market fluctuations, redemptions or other reasons, the
Fund must reduce its bank debt as necessary within three business days. To do
this, the Fund may have to sell a portion of its investments at a
disadvantageous time. The amount of any borrowing is also limited by the
applicable Federal Reserve Board's margin limitations.
The Fund has not borrowed since its inception and has no present intention to do
so during the coming year.
RATINGS
DEBT SECURITY RATINGS. Moody's Investor Services, Inc. ("Moody's") and Standard
& Poor's Corporation ("S&P") employ the designations set forth below to rate
debt securities.
MOODY'S
Aaa - Bonds judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as gilt-edge. Interest payments
are protected by a large or an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa - Bonds judged to be of high quality by all standards. Together with the Aaa
group they comprise what are generally known as high-grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present which make the long-term risks
appear somewhat larger.
A - Bonds which possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa - Bonds considered as medium-grade obligations (i.e., they are neither
highly protected nor poorly secured). Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
4
<PAGE>
Ba - Bonds judged to have speculative elements. Their future cannot be
considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during other good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B - Bonds which generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
Ca - Bonds which represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
C - The lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Nonrated - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as
a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
S&P
AAA - Capacity to pay interest and repay principal is extremely strong.
AA - Capacity to pay interest and repay principal is very strong and these bonds
differ from AAA issues only in small degree.
A - Capacity to pay interest and repay principal is strong although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than bonds in higher rated categories.
5
<PAGE>
BBB - Capacity to pay interest and repay principal is adequate. Whereas these
bonds normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal than for bonds in higher rated
categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI - reserved for income bonds on which no interest is being paid.
D - in default, and payment of interest and/or repayment of principal is in
arrears.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
COMMERCIAL PAPER RATINGS. Moody's and S&P employ the designations set forth
below to rate commercial paper.
Moody's designations, all judged to be investment grade, indicate the relative
repayment capacity of rated issuers. Issuers rated Prime-1 have a superior
capacity for repayment of short-term promissory obligations. Issuers rated
Prime-2 have a strong capacity for repayment of short-term promissory
obligations. Issuers rated Prime-3 have an acceptable capacity for repayment of
short-term promissory obligations.
S&P ratings are an assessment of the likelihood of timely payment of debt having
an original maturity of no more than 365 days. Issuers assigned the highest
rating by S&P ("A") are regarded as having the greatest capacity for timely
payment. Issuers in this category are further refined with the designations 1,
2 and 3 to indicate the relative degree of safety. A-1 indicates that the
degree of safety regarding timely payment is either overwhelming (denoted with a
plus sign) or very strong. A-2 indicates that capacity for timely payment is
strong; however, the relative degree of safety is not as high as for issuers
designated A-1. A-3 indicates a satisfactory capacity for timely payment. They
are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
RISK FACTORS RELATING TO LOWER RATED SECURITIES
As described in the Prospectus, the Fund may invest up to 15% of its assets in
convertible securities and other fixed-income securities which are not rated in
the four highest categories by Moody's and S&P. Ratings of debt securities are
described above. The Prospectus discussion of the risks of investing in lower
rated high yield bonds is supplemented as follows:
1. YOUTH AND GROWTH OF THE HIGH YIELD BOND MARKET. The high yield bond market
is relatively new, its growth has paralleled a long economic expansion, and
it has not weathered a lengthy recession in its present size and form. An
economic downturn or increase in interest rates is likely to have a
6
<PAGE>
negative effect on the high yield bond market and on the value of the high
yield bonds in the Fund's portfolio, as well as on the ability of the
bonds' issuers to repay principal and interest.
2. SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and
interest rates affect high yield securities differently from other
securities. The prices of high yield bonds have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic changes or individual issuer developments.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers are likely to experience financial stress which
would adversely affect their ability to service their principal and
interest payment obligations, to meet projected business goals, and to
obtain additional financing. If the issuer of a bond owned by the Fund
defaults, the Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to
result in increased volatility of market prices of high yield bonds and the
Fund's asset value. Furthermore, in the case of high yield bonds
structured as zero coupon or pay-in-kind securities, their market prices
are affected to a greater extent by interest rate changes and thereby tend
to be more volatile than securities which pay interest periodically and in
cash.
3. LIQUIDITY AND VALUATION. To the extent that there is no established retail
secondary market, there may be thin trading of high yield bonds, and there
may be a negative impact on the Fund's Board of Directors' ability to
accurately value high yield bonds and the Fund's assets and on the Fund's
ability to dispose of the bonds. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield bonds, especially in a thinly traded
market. To the extent the Fund owns or may acquire illiquid high yield
bonds, these securities may involve special liquidity and valuation
difficulties.
4. LEGISLATION. New laws and proposed new laws may have a negative impact on
the market for high yield bonds. For example, several years ago
legislation required federally-insured savings and loan associations to
divest their investments in high yield bonds.
5. TAXATION. Special tax considerations are associated with investing in high
yield bonds structured as zero coupon or pay-in-kind securities. The Fund
accrues the interest on these securities as income even though it receives
no cash interest until the security's maturity or payment date. The Fund
is required to distribute such income to its shareholders in order to
maintain its qualification for pass-through treatment under the Internal
Revenue Code. Thus, the Fund may have to dispose of portfolio securities
at a time it otherwise might not want to do so in order to provide the cash
necessary to make distributions to those shareholders who do not reinvest
dividends.
6. CREDIT RATINGS. Certain risks are associated with applying credit ratings
as a method of evaluating high yield bonds. Credit ratings evaluate the
safety of principal and interest payments, not market value risk of high
yield bonds. Since credit rating agencies may fail to timely change the
credit ratings to reflect subsequent events, the Adviser monitors the
issuers of high yield bonds in the Fund's portfolio to determine if the
issuers appear to have sufficient cash flow to meet required principal and
interest payments. The Fund may retain a portfolio security whose rating
has been changed.
INVESTMENT RESTRICTIONS
The Fund has adopted the investment restrictions set forth below, which apply at
the time securities are purchased or other relevant action is taken. These
restrictions and the Fund's investment objectives cannot
7
<PAGE>
be changed without approval of the holders of a majority of outstanding Fund
shares. Such majority is defined in the Investment Company Act as the lesser of
(a) 67% or more of the voting securities present in person or represented by
proxy at a meeting, if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy; or (b) more than 50% of the
outstanding voting securities. Percentage limitations applicable to investments
are calculated and applied at the time of investment. In addition to those
described in the Prospectus, these restrictions provide that the Fund shall not:
1. Purchase securities of other registered investment companies if immediately
after such purchase the Fund will own (a) more than 3% of the total
outstanding voting stock of any such companies, (b) securities issued by
any of such companies having an aggregate value in excess of 5% of the
value of the total assets of the Fund or (c) securities issued by
investment companies having an aggregate value in excess of 10% of the
value of the total assets of the Fund.
2. Purchase or sell real property, including limited partnership interests,
but excluding readily marketable interests in real estate investment trusts
or readily marketable securities of companies which invest in real estate.
3. Engage in short sales, margin purchases, puts, calls, straddles or spreads,
except that the Fund may write covered call options and effect closing
transactions to the extent described in the Prospectus under "Investment
Policies - Covered Call Options," and the Fund may make certain short sales
of securities or maintain a short position if the Fund contemporaneously
owns or has the right to obtain at no added cost securities identical to
those sold short (short sales "against the box") or if the securities sold
are "when issued" or "when distributed" securities which the Fund expects
to receive in a recapitalization, reorganization, or other exchange for
securities the Fund contemporaneously owns or has the right to obtain at no
added cost.
4. Make loans, except that the Fund may invest in repurchase agreements. The
Fund will not invest in repurchase agreements maturing in more than seven
days if any such investment, together with any illiquid securities held by
the Fund, exceeds 10% of the value of its net assets. See "Investment
Policies - Repurchase Agreements." The purchase of publicly distributed
debt securities shall not constitute the making of loans.
5. Participate on a joint or a joint and several basis in any trading account
in securities.
6. Purchase securities for the purpose of exercising control or management.
However, once investments have been acquired, the Fund may exercise its
vote as a shareholder in its best interests even though such vote may
affect management or control of a company.
7. Underwrite the sale of securities of others, except when the Fund might be
deemed to be a statutory underwriter because of its disposing of restricted
securities. The Fund will not purchase restricted securities.
8. Purchase or sell commodities or commodity contracts.
9. Purchase from, or sell to, any officers, directors or employees of the Fund
or its investment adviser or underwriter, or any of their officers or
directors, any securities other than the shares of the Fund's capital
stock. Such persons or firms, however, may act as brokers for the Fund for
customary commissions.
8
<PAGE>
10. Issue any senior securities except that the Fund may borrow from banks to
the extent described above under "Investment Policies - Leverage."
ADDITIONAL RESTRICTIONS. The Fund is also subject to the policies set forth
below which its Board of Directors may amend and which apply at the time of
purchase of securities. These restrictions provide that the Fund shall not:
1. Invest more than 5% of its net assets in warrants valued at the lower of
cost or market, nor more than 2% of its net assets in warrants (valued on
such basis) which are not listed on The New York Stock Exchange ("NYSE") or
the American Stock Exchange. Warrants acquired in units or attached to
other securities are not subject to the foregoing limitations.
2. Purchase interests in oil, gas or other mineral leases, except that it may
acquire securities of public companies which are engaged in such
activities, or invest in arbitrage transactions.
3. Purchase securities of other investment companies except through purchase
in the open market in a transaction involving no commission or profit to a
sponsor or dealer (other than the customary broker's commission) or except
as part of a merger, consolidation or other acquisition.
4. Purchase or retain securities of any issuer if those officers and directors
of the Fund or its investment adviser who own individually more than 0.5%
of the securities of such issuer together own more than 5% of the
securities of such issuer.
5. Invest more than 5% of its total assets in securities of unseasoned issuers
which have been in operation directly or through predecessors for less than
three years, or in equity securities for which market quotations are not
readily available.
6. Pledge, mortgage or hypothecate portfolio securities or other assets to the
extent that the percentage of such encumbered assets plus the sales charge
exceed 15% of the offering price of Fund shares.
DIRECTORS AND OFFICERS OF THE FUND
All directors and officers of the Fund are also directors and/or officers of one
or more of four other investment companies advised by the Adviser, which is an
indirect wholly owned subsidiary of United Asset Management Corporation ("UAM").
These investment companies are FPA Capital Fund, Inc. ("Capital"), FPA New
Income, Inc. ("New Income"), FPA Paramount Fund, Inc. ("Paramount") and Source
Capital, Inc. ("Source") (collectively, the "FPA Fund Complex").
The directors and officers of the Fund and their principal occupations during
the past five years follow. Their address is 11400 West Olympic Boulevard,
Suite 1200, Los Angeles, California 90064.
Julio J. de Puzo, Jr., Director and Executive Vice President (1)
Director (since October 1995), Principal (since March 1996) and Chief Executive
Officer (since March 1996) of the Adviser; Director and President since March
1996 of Source; Director and Executive Vice President since April 1996 of
Paramount; and Executive Vice President since August 1996 of Capital and of New
Income. President (since January 1997), Chief Executive Officer (since January
1997), and Director for more than the past five years of the Distributor.
Executive Vice President from October 1995 to March 1996, Chief Administrative
Officer from October 1995 to March 1996, Chief Financial Officer
9
<PAGE>
from June 1991 to March 1996, Treasurer from June 1991 to March 1996, Senior
Vice President from February 1993 to October 1995, and First Vice President from
April 1985 to February 1993, of the Adviser. Treasurer from June 1981 to August
1996 of the Fund, from May 1982 to August 1996 of Source, from September 1983 to
August 1996 of Paramount, and from July 1984 to August 1996 of Capital and of
New Income. Chief Financial Officer from October 1991 to March 1998, and
Executive Vice President (or Senior Vice President or First Vice President) from
October 1991 to January 1997 of the Distributor.
John P. Endicott, Director
Independent management consultant since January 1983 and from April 1979 to
March 1981; Associate, Case and Company, Inc. (management consultants) from
April 1981 to January 1983; President and Director, Sierracin Corporation
(manufacturer of high technology products) from 1969 to March 1979. Director of
Paramount for more than the past five years.
Leonard Mautner, Director
President, Leonard Mautner Associates (management consultants) for more than the
past five years; General Partner, Goodman & Mautner Ltd. (venture capital
partnership) and President, Goodman & Mautner, Inc. (investment manager) from
1969 to 1979. Director of Paramount for more than the past five years and
Director of MRV Communications Inc. since April 1992.
Lawrence J. Sheehan, Director (1)
Of counsel to, and partner (1969 to 1994) of, the law firm of O'Melveny & Myers
LLP, legal counsel to the Fund. Director of Source, of Capital and of New
Income. Director of TCW Convertible Securities Fund, Inc., a closed-end
investment company.
Eric S. Ende, President and Chief Investment Officer
Senior Vice President (or Vice President) of the Adviser for more than the past
five years, and Chief Investment Officer since May 1997 and Senior Vice
President for more than the past five years of Source, and Vice President of
Capital, of New Income and of Paramount for more than the past five years.
Executive Vice President of the Fund from August 1995 to September 1995, and
Vice President of the Fund from May 1985 to August 1995.
Steven R. Geist, Vice President
Vice President of the Adviser since December 1994, and of Source since August
1996. Investment Analyst of the Adviser from July 1992 to December 1994.
Janet M. Pitman, Vice President
Vice President of the Adviser for more than the past five years, of Source and
of Paramount since April 1996, and of Capital and of New Income since February
1997.
J. Richard Atwood, Treasurer
Senior Vice President, Chief Financial Officer and Treasurer of the Adviser
since January 1997, and Chief Financial Officer (since March 1998), Senior Vice
President and Treasurer of the Distributor since January 1997. Treasurer of
Source, of Paramount, of Capital, and of New Income since January 1997. Vice
President and Chief Financial Officer of Transamerica Investment Services, Inc.
from January 1995 to January 1997. Vice President (or Assistant Vice President)
and Controller of the Adviser from July 1988 to January 1995, and Assistant
Treasurer of the Distributor from May 1991 to January 1995. Assistant Treasurer
of the Fund, of Capital, of New Income, of Paramount, and of Source from 1988 to
1995.
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<PAGE>
Sherry Sasaki, Secretary
Assistant Vice President and Secretary of the Adviser, and Secretary of Source,
of Paramount, of Capital, of New Income, and of the Distributor for more than
the past five years.
Christopher H. Thomas, Assistant Treasurer
Vice President and Controller of the Adviser and of the Distributor since March
1995, and Assistant Treasurer of Capital, of New Income, of Source and of
Paramount since April 1995. Staff Accountant with the Office of Inspection of
the Securities and Exchange Commission from 1994 to March 1995. School
Administrator of the Calvary Road Christian Academy from 1988 to 1993.
- ------------------------------
(1) Director who is an interested person, as defined in the Investment Company
Act, by virtue of his affiliation with the Adviser in the case of Mr. de
Puzo, and by virtue of his affiliation with legal counsel to the Fund in
the case of Mr. Sheehan.
The directors and officers of the Fund as a group own approximately 1.95% of the
outstanding Fund shares. During the last fiscal year, the directors then in
office who were not affiliated with the Adviser received as a group $20,000 in
directors' fees. Such directors are also reimbursed for certain out-of-pocket
expenses by the Fund. The following information relates to director
compensation. The Fund does not pay any salaries to its officers, all of whom
are compensated by the Adviser.
<TABLE>
<CAPTION>
TOTAL COMPENSATION*
AGGREGATE COMPENSATION* FROM THE FPA FUND COMPLEX
NAME OF DIRECTORS FROM THE FUND INCLUDING THE FUND
<S> <C> <C>
Julio J. de Puzo, Jr. $ -0- $ -0-
John P. Endicott 5,000 16,000**
Leonard Mautner 5,000 16,000**
Lawrence J. Sheehan 5,000 36,000***
Kenneth L. Trefftzs (resigned 3/12/98) 5,000 36,000***
</TABLE>
* No pension or retirement benefits are provided to Directors by the Fund or
the FPA Fund Complex.
** Includes compensation from the Fund and from one open-end investment
company.
*** Includes compensation from the Fund, from two open-end investment
companies, and from one closed-end investment company.
Currently, the personnel of the Adviser consists of seven persons engaged full
time in portfolio management or investment research in addition to 26 persons
engaged full time in trading, administrative, financial or clerical activities.
The Adviser is registered as an investment adviser with the Securities and
Exchange Commission, which does not imply supervision by said Commission of the
Adviser's activities. The Adviser's parent company, UAM, is a publicly held
corporation. No person is known by UAM to own or hold with power to vote 25% or
more of its outstanding shares of common stock.
FIVE PERCENT SHAREHOLDERS. As of March 31, 1998, no person was known by the
Fund to own, of record or beneficially, 5% or more of the outstanding Fund
shares, except Bank of New York Custodian for American Federation of Musicians
and Employees Pension Fund, Amivest Corporation Discretionary Investment
Manager, 52 William Street, New York, New York 10005-2802, which held 114,462
shares (5.05%).
11
<PAGE>
INVESTMENT ADVISORY AGREEMENT
The Fund has entered into an Investment Advisory Agreement dated June 27, 1991
("Advisory Agreement"), with the Adviser pursuant to which the Adviser provides
continuing supervision of the Fund's investment portfolio. The Adviser is
authorized, subject to the control of the Fund's Board of Directors, to
determine which securities are to be bought or sold and in what amounts. In
addition to providing investment advisory and management services, the Adviser
furnishes office space, facilities and equipment, and maintains the Fund's books
and records. It also compensates all officers and other personnel of the Fund,
all of whom are employed by the Adviser, subject to reimbursement from the Fund
for personnel involved in providing financial services as indicated below.
Other than the expenses the Adviser specifically assumes under the Advisory
Agreement, the Fund bears all costs of its operation. These costs include
brokerage commissions and other costs of portfolio transactions; fees and
expenses of directors not affiliated with the Adviser; taxes; transfer agent,
dividend disbursement, reinvestment and custodian fees; legal and audit fees;
printing and mailing of reports to shareholders and proxy materials;
shareholders' and directors' meetings; registration of Fund shares under federal
and state laws; printing and engraving stock certificates; trade association
membership fees; premiums for the fidelity bond and errors and omissions
insurance maintained by the Fund; litigation; interest on indebtedness; and
reimbursement of the Adviser's expenses in providing financial services to the
Fund as described below.
For services rendered, the Adviser is paid a monthly fee computed at the annual
rate of 0.75% of the first $50 million, and 0.65% of the excess over $50
million, of the Fund's average net assets. The advisory fee is higher than the
fee paid by some other mutual funds. The average net assets are determined by
taking the average of all the daily determinations of net assets made, in the
manner provided in the Fund's Articles of Incorporation, during a calendar
month.
In addition to the advisory fee, the Fund reimburses the Adviser monthly for
costs incurred in providing financial services to the Fund. Such financial
services include (a) maintaining the accounts, books and other documents which
constitute the record forming the basis for the Fund's financial statements,
(b) preparing such financial statements and other Fund documents and reports of
a financial nature required by federal and state laws, (c) calculating daily net
assets and (d) participating in the production of the Fund's registration
statements, prospectuses, proxy materials and reports to shareholders (including
compensation of the Treasurer or other principal financial officer of the Fund,
compensation of personnel working under such person's direction and expenses of
office space, facilities and equipment such persons use to perform their
financial services duties). However, for any fiscal year, the cost of such
financial services paid by the Fund may not exceed 0.10% of the average daily
net assets of the Fund.
The advisory fee and cost of financial services is reduced in the amount by
which certain defined operating expenses of the Fund (including the advisory fee
and cost of financial services) for any fiscal year exceed 1.50% of the first
$30 million of average net assets, plus 1% of the remaining average net assets.
Such values are calculated at the close of business on the last business day of
each calendar month. Any required reduction or refund is computed and paid
monthly. Operating expenses (as defined in the Advisory Agreement) exclude
(a) interest, (b) taxes, (c) brokerage commissions and (d) any extraordinary
expenses, such as litigation, merger, reorganization or recapitalization, to the
extent such extraordinary expenses are permitted to be excluded by the rules or
policies of the states in which Fund shares are registered for sale. All
expenditures, including costs connected with the purchase, retention or sale of
portfolio securities, which are capitalized in accordance with generally
accepted accounting principles applicable to investment companies, are accounted
for as capital items and not as expenses. This expense limitation provision
does not require any payment by the Adviser beyond the return of the advisory
fee and cost of financial services paid to it by the Fund for a fiscal year.
12
<PAGE>
The Advisory Agreement provides that the Adviser does not have any liability to
the Fund or any of its shareholders for any error of judgment, any mistake of
law or any loss the Fund suffers in connection with matters related to the
Advisory Agreement, except for liability resulting from willful misfeasance, bad
faith or negligence on the part of the Adviser or the reckless disregard of its
duties under the Advisory Agreement.
The Advisory Agreement is renewable annually if such renewal is specifically
approved each year (a) by the Fund's Board of Directors or by the vote of a
majority (as defined in the Investment Company Act) of the Fund's outstanding
voting securities and (b) by the vote of a majority of the Fund's directors who
are not parties to the Advisory Agreement or interested persons (as defined in
the Investment Company Act) of any such party, by votes cast in person at a
meeting called for the purpose of voting on such approval. The continuation of
the Advisory Agreement to April 30, 1999, has been approved by the Board of
Directors and a majority of the Fund's directors who are not parties to the
Advisory Agreement or interested persons of any such party (as defined in the
Investment Company Act). The Advisory Agreement may be terminated without
penalty by the Fund's Board of Directors or the vote of a majority (as defined
in the Investment Company Act) of the Fund's outstanding voting securities on 60
days' written notice to the other party. The Advisory Agreement automatically
terminates in the event of its assignment (as defined in the Investment Company
Act).
For the fiscal years ended December 31, 1995, 1996 and 1997, the Adviser
received gross advisory fees of $363,810, $336,004 and $348,236, respectively,
plus $48,516, $44,801 and $46,431, respectively, for costs incurred in providing
financial services to the Fund.
PRIOR PERFORMANCE INFORMATION
For the purposes of quoting and comparing the performance of the Fund to that of
other mutual funds and to other relevant market indices in advertisements,
performance may be stated in terms of total return. Under regulations adopted
by the Securities and Exchange Commission ("SEC"), funds that intend to
advertise performance must include total return quotations calculated according
to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of the 1, 5 or 10 year
period, at the end of such period (or fractional portion
thereof).
Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication, and cover 1, 5 and 10
year periods of a fund's existence or such shorter period dating from the
effectiveness of a fund's registration statement. In calculating the ending
redeemable value, the maximum sales load is deducted from the initial $1,000
payment and all dividends and distributions by a fund are assumed to have been
reinvested at net asset value as described in the Prospectus on the reinvestment
dates during the period. Total return, or "T" in the formula above, is computed
by finding the average annual compounded rates of return over the 1, 5 and 10
year periods (or fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value.
13
<PAGE>
The Fund may also from time to time include in such advertising a total return
figure that is not calculated according to the formula set forth above in order
to compare the performance of the Fund with other measures of investment return.
For example, in comparing the Fund's total return with a stock index such as the
Standard & Poor's 500 Stock Index, the Fund calculates its aggregate total
return for the specified periods of time by assuming the investment of $10,000
in Fund shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value. The Fund
does not, for these purposes, deduct from the initial value invested any amount
representing sales charges. The Fund, however, discloses the maximum sales
charge and also discloses that inclusion of sales charges would reduce the
performance quoted. Such alternative total return information will be given no
greater prominence in such advertising than the information prescribed under SEC
regulations.
The Fund's average annual total return (calculated in accordance with the SEC
regulations described above) for the one, five and ten-year periods ended
December 31, 1997, was 16.22%, 11.41% and 13.66%, respectively. The Fund's
average annual total return (determined pursuant to the alternative computation
which does not include the maximum initial sales charge of 6.5% of the offering
price) for the same periods was 24.30%, 12.92% and 14.42%, respectively. These
results are based on historical earnings and asset value fluctuations and are
not intended to indicate future performance.
The foregoing information should be considered in light of the Fund's investment
objectives and policies, as well as the risks incurred in the Fund's investment
practices. Future results will be affected by the future composition of the
Fund's portfolio, as well as by changes in the general price level of equity
securities, and general economic and other market conditions. The past 1, 5 and
10 year periods have been ones of generally rising common stock prices subject
to short-term fluctuations.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser makes decisions to buy and sell securities for the Fund, selects
broker-dealers and negotiates commission rates or net prices. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed better prices and executions are available
elsewhere. Portfolio transactions are effected with broker-dealers selected for
their abilities to give prompt execution at prices favorable to the Fund. In
selecting broker-dealers and in negotiating commissions, the Adviser considers
each firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, preference may be given to broker-dealers providing research
services to the Fund or the Adviser. Subject to seeking best execution, the
Adviser may also consider sales of Fund shares as a factor in selecting
broker-dealers to execute portfolio transactions for the Fund. Any solicitation
fees which the Adviser receives in connection with acceptance of an exchange or
tender offer of the Fund's portfolio securities are applied to reduce the
advisory fees.
The Advisory Agreement authorizes the Adviser to pay commissions on security
transactions to broker-dealers furnishing research services in an amount higher
than the lowest available rate. The Adviser must determine in good faith that
such amount is reasonable in relation to the brokerage and research services
provided (as required by Section 28(e) of the Securities Exchange Act of 1934)
viewed in terms of the particular transaction or the Adviser's overall
responsibilities with respect to accounts for which it exercises investment
discretion. The term brokerage and research services is defined to include (a)
providing advice as to the value of securities, the advisability of investing
in, purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; (b) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and performance of accounts; and (c) effecting securities
transactions and performing functions incidental thereto, such as
14
<PAGE>
clearance, settlement and custody. The advisory fee is not reduced as a result
of the Adviser's receipt of such research.
Research services furnished by broker-dealers effecting securities transactions
for the Fund may be used by the Adviser for all advisory accounts. However, the
Adviser may not use all such research services in managing the Fund's portfolio.
In the opinion of the Adviser, it is not possible to measure separately the
benefits from research services to each advisory account. Because the volume
and nature of the trading activities of advisory accounts are not uniform, the
amount of commissions in excess of the lowest available rate paid by each
advisory account for brokerage and research services will vary. However, the
Adviser believes the total commissions the Fund pays are not disproportionate to
the benefits it receives on a continuing basis.
The Adviser attempts to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
other advisory accounts. In some cases, this procedure could have an adverse
effect on the price or amount of securities available to the Fund. The main
factors considered in such allocations are the respective investment objectives,
the relative size of portfolio holdings of the same or comparable securities,
the availability of cash for investment, the size of investment commitments
generally held, and the opinion of the persons responsible for recommending the
investments.
Brokerage commissions paid by the Fund on portfolio transactions for the fiscal
years ended December 31, 1995, 1996 and 1997, totaled $79,604, $47,406 and
$27,196, respectively. During the last fiscal year, $24,000 of commissions were
paid on transactions having a total value of $14,254,510 to brokers selected
because of research services provided to the Adviser.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities for a fiscal year by the average monthly value of
portfolio securities during such fiscal year. Securities maturing in one year
or less at the time of acquisition are not included in this computation. The
turnover rate for prior periods is shown in the Prospectus under the caption
"Financial Highlights." This rate may vary greatly from year to year as well as
within a year.
DISTRIBUTOR
The Distributor acts as principal underwriter of Fund shares pursuant to the
distribution agreement dated September 3, 1991 ("Distribution Agreement"). The
Distributor receives commissions from the sale of Fund shares and has the
exclusive right to distribute Fund shares through dealers. From the commissions
received, the Distributor pays sales commissions to dealers; its own overhead
and general administrative expenses; the cost of printing and distributing
prospectuses used in connection with this offering; and the cost of preparing,
printing and distributing sales literature and advertising relating to the Fund.
The Fund pays expenses attributable to registering Fund shares under federal and
state laws (including registration and filing fees), the cost of preparing the
prospectus (including typesetting and printing copies required for regulatory
filings by the Fund) and related legal and audit expenses.
The Distribution Agreement is renewable annually if such renewal is specifically
approved each year (a) by the Fund's Board of Directors or by a vote of a
majority (as defined in the Investment Company Act) of the Fund's outstanding
voting securities and (b) by a majority of the Fund's directors who are not
parties to the Distribution Agreement or interested persons (as defined in the
Investment Company Act) of any such party, by votes cast in person at a meeting
called for such purpose. The continuation of the Distribution Agreement to
September 3, 1998 has been approved by the Board of Directors and a majority
15
<PAGE>
of the Fund's directors who are not parties to the Distribution Agreement or
interested persons of any such party (as defined in the Investment Company Act).
The Distribution Agreement terminates if assigned (as defined in the Investment
Company Act) and may be terminated, without penalty, by either party on 60 days'
written notice.
The Distributor's obligation under the Distribution Agreement is an agency or
best efforts arrangement pursuant to which the Distributor is required to take
and pay for only those Fund shares sold to the public. The Distributor is not
obligated to sell any stated number of Fund shares.
During the fiscal years ended December 31, 1995, 1996 and 1997, total
underwriting commissions on the sale of Fund shares were $67,564, $98,261 and
$31,200, respectively. Of such totals, the amount retained each year by the
Distributor, after reallowance to other dealers, was $4,400, $5,863 and $2,382,
respectively.
PURCHASE AND REDEMPTION OF SHARES
NET ASSET VALUE. Net asset value is computed as of the close of the NYSE on
each business day during which the NYSE is open. Net asset value, rounded to
the nearest cent per share, is the total market value of all of the Fund's
portfolio securities plus other assets (including any accrued reimbursement of
expenses), less all liabilities, divided by the total number of Fund shares
outstanding. The NYSE is closed not only on weekends but also on customary
holidays, which currently are New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Such computation is made by (a) valuing
securities listed or traded on a national securities exchange or on the NASDAQ
National Market System at the last sale price or, if there has been no sale that
day, at the last bid price, (b) valuing unlisted securities for which quotations
are readily available at the last representative bid price as supplied by the
National Association of Securities Dealers Automated Quotations (NASDAQ) or by
dealers and (c) appraising all other portfolio securities and assets at fair
value as determined in good faith by the Fund's Board of Directors.
SALES CHARGES. The maximum sales charge is 6.5%, as a percentage of the
offering price, but lower sales charges apply for larger purchases. A portion
of the sales charge is allocated to dealers selling Fund shares in amounts
ranging from 80% to 94%, depending on the size of the investment. During
special promotions, the Distributor may reallow up to 100% of the sales charge
to dealers. At such times dealers may be deemed to be underwriters for purposes
of the Securities Act of 1933. Discounts are alike to all dealers.
AUTHORIZED FINANCIAL INTERMEDIARIES. The Fund has authorized certain financial
intermediaries including one or more brokers to accept on its behalf purchase
and redemption orders; such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf;
the Fund is deemed to have received a purchase or redemption order when an
authorized financial intermediary including an authorized broker or if
applicable a broker's authorized designee accepts the order; and customer orders
are priced at the Fund's net asset value next computed after they are accepted
by an authorized financial intermediary including an authorized broker or the
broker's authorized designee.
SALES AT NET ASSET VALUE. Full-time employees of the Adviser may purchase Fund
shares at net asset value via payroll deduction provided the minimum initial
investment is $250. Each subsequent investment must be at least $50.
LETTER OF INTENT. To be eligible, the investor must sign at the time of initial
purchase, or within 30 days, a Letter of Intent ("LOI") covering investments to
be made within a period of 13 months ("Period") from
16
<PAGE>
such initial purchase. The investor thereby becomes eligible for a reduced
sales charge based on the total amount of the specified intended investment
("LOI Goal"), provided such amount is not less than $10,000. A minimum initial
purchase of $1,500 and minimum subsequent purchases of $100 each are required.
Fund shares may also be purchased to fulfill a letter of intent entered into
with respect to shares of the other FPA Funds. The account information form,
which should be used to establish an LOI, is available from dealers or the
Distributor.
All transactions under an LOI must be indicated as such and must be placed by
the dealer (in the case of an initial purchase) or the shareholder (in the case
of any subsequent purchase) directly through Boston Financial Data Services,
Inc. ("Shareholder Service Agent"). Shareholders should review for accuracy all
confirmations of transactions, especially purchases made pursuant to an LOI.
If the LOI Goal is completed before the end of the Period, any subsequent
purchases within the Period receive the reduced sales charge applicable. In
addition, during the Period, the shareholder may increase his or her LOI Goal
and all subsequent purchases are treated as a new LOI (including escrow of
additional Fund shares) except as to the Period, which does not change.
Signing an LOI does not bind the shareholder to complete his or her LOI Goal,
but the LOI Goal must be completed to obtain the reduced sales charge. The LOI
is binding on the Fund and the Distributor. However, the Distributor may
withdraw a shareholder's LOI privileges for future purchases upon receiving
information that the shareholder has resold or transferred his or her Fund
shares within the Period.
The LOI requires the Shareholder Service Agent, as escrow agent, to hold 5% of
the LOI Goal in escrow until completion of the LOI Goal within the Period. The
escrowed Fund shares are taken from the first purchase and, if necessary, from
each successive purchase. If the LOI Goal is completed within the Period, the
escrowed Fund shares are promptly delivered to, or as directed by, the
shareholder.
If the LOI Goal is not completed within the Period, the shareholder must pay the
Distributor an amount equal to the sales charge applicable to a single purchase
in the total amount of the purchases made under the LOI minus the sales charges
actually paid. If the Distributor does not receive such unpaid sales charge
within 20 days after requesting payment in writing, the Distributor instructs
the Shareholder Service Agent to redeem escrowed Fund shares sufficient to cover
the unpaid sales charge. Under the LOI, the shareholder irrevocably appoints
the Shareholder Service Agent as his or her attorney with full power of
substitution in the premises to surrender for redemption any or all escrowed
Fund shares. If the redemption proceeds are inadequate, the shareholder is
liable to the Distributor for the difference. The Shareholder Service Agent
delivers to, or as directed by, the shareholder all Fund shares remaining after
such redemption, together with any excess cash proceeds.
Any income dividends and capital gains distributions on the escrowed Fund shares
are paid to, or as directed by, the shareholder.
FPA EXCHANGE PRIVILEGE. The procedures for exchanging shares between FPA Funds
are set forth under "Purchase of Shares - FPA Exchange Privilege" in the Fund's
Prospectus. If the account registration information for the two FPA Fund
accounts involved in the exchange are different in any respect, the exchange
instructions must be in writing and must contain a signature guarantee as
described under "Redemption of Shares" in the Fund's Prospectus.
By use of the exchange privilege, the investor authorizes the Shareholder
Service Agent ("Agent") to act on telephonic, telegraphic or written exchange
instructions from any person representing himself to be the
17
<PAGE>
investor or the agent of the investor and believed by the Agent to be genuine.
The Agent's records of such instructions are binding.
For purposes of determining the sales charge rate previously paid, all sales
charges paid on the exchanged security and on any security previously exchanged
for such security or for any of its predecessors shall be included. If the
exchanged security was acquired through reinvestment, that security may be
exchanged without a sales charge. If a shareholder exchanges less than all of
his securities, the security requiring no or the lowest incremental sales charge
is deemed exchanged first.
Exchange requests received on a business day prior to the time shares of the
Funds involved in the request are priced, are processed on the date of receipt
by the Shareholder Service Agent. "Processing " a request means that shares in
the Fund from which the shareholder is withdrawing an investment will be
redeemed at the net asset value per share next determined after receipt. Shares
of the new Fund into which the shareholder is investing will also normally be
purchased at the net asset value per share, plus any applicable sales charge,
next determined after receipt by the Shareholder Service Agent. Exchange
requests received on a business day after the time shares of the Funds involved
in the request are priced, are processed on the next business day in the manner
described above.
REDEMPTION OF SHARES. Redemptions are not made on days during which the NYSE is
closed, including those holidays listed under "Purchase and Redemption of Shares
- - Net Asset Value." The right of redemption may be suspended and the payment
therefore may be postponed for more than seven days during any period when
(a) the NYSE is closed for other than customary weekends or holidays;
(b) trading on the NYSE is restricted; (c) an emergency exists as a result of
which disposal by the Fund of securities it owns is not reasonably practicable
or it is not reasonably practical for the Fund to fairly determine the value of
its net assets or (d) the Securities and Exchange Commission, by order, so
permits.
TELEPHONE REDEMPTION. Redemptions may be made by telephone once the shareholder
has properly completed and returned to the Shareholder Service Agent the
optional shareholder services form including the designation of a bank account
to which the redemption payment is to be sent ("Designated Bank"). The proceeds
will not be mailed or wired to other than the Designated Bank. New investors
who wish to establish the telephone redemption privilege must complete the
appropriate section on the optional shareholder services form. Existing
shareholders who wish to establish the telephone redemption privilege or change
the Designated Bank should either enter the new information on an optional
shareholder services form, marking it for "change of information" purposes, or
send a letter identifying the Fund account and specifying the exact information
to be changed. The letter must be signed exactly as the shareholder's name(s)
appear on the account. All signatures require a guarantee as described under
"Redemption of Shares" in the Fund's Prospectus. The optional shareholder
services form is available from authorized securities dealers or the
Distributor.
Shareholders who want to use a savings and loan ("S&L") as their Designated Bank
are advised that if the S&L is not a participant in the Federal Reserve System,
redemption proceeds must be wired through a commercial bank which is a
correspondent of the S&L. As this may delay receipt by the shareholder's
account, it is suggested that shareholders who wish to use an S&L discuss wire
procedures with their S&L and submit any special wire transfer information with
the telephone redemption authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to such Designated Bank.
The shareholder may cancel the telephone redemption authorization upon written
notice. If the shareholder has authorized telephone redemptions, neither the
Fund nor the Shareholder Service Agent is responsible for any unauthorized
telephone redemptions. If the Fund shares to be redeemed by telephone
(technically
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<PAGE>
a repurchase by agreement between the Fund and the shareholder) were recently
purchased by check, the Shareholder Service Agent can delay transmitting the
proceeds until the purchasing check has cleared.
TAX SHELTERED RETIREMENT PLANS
Through the Distributor, prototype retirement plans are available for purchase
of Fund shares. These include plans for self-employed individuals and plans for
individuals buying shares under an Individual Retirement Account. The investor
should be aware that a penalty tax applies, in general, to distributions made
before age 59-1/2, excess contributions and failure to commence distribution of
the account at age 70-1/2. Borrowing from or against the account may also
result in plan disqualification. Distributions from these retirement plans
generally are taxable as ordinary income when received.
State Street Bank and Trust Company ("Bank") presently acts as custodian for
these retirement plans and imposes fees for administering them. Purchases of
Fund shares for a retirement plan must be made by direct remittance to the Bank.
When contributions for any tax-qualified plan are invested in Fund shares, all
dividends and capital gains distributions paid on those Fund shares are retained
in such plan and automatically reinvested in additional Fund shares at net asset
value. All earnings accumulate tax-free until distribution.
The investor should consult his or her own tax adviser concerning the tax
ramifications of establishment of and distributions from a retirement plan.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund qualified during the last fiscal year for the tax treatment applicable
to regulated investment companies under the Internal Revenue Code ("Code") and
intends to so qualify in the future. Such qualification requires distributing
at least 90% of its investment company taxable income to shareholders and
meeting asset diversification and other requirements of the Code. As long as
the Fund so qualifies, it does not pay federal income tax on its net investment
income or on any net realized capital gains provided such income and capital
gains are distributed to shareholders. If for any taxable year the Fund does
not so qualify, all of its taxable income, including any net realized capital
gains, will be taxed at regular corporate rates (without any deduction for
distributions to shareholders).
The Fund is subject to a 4% excise tax to the extent it does not make certain
distributions to its shareholders. Such distributions must total (1) at least
98% of ordinary income (investment company taxable income subject to certain
adjustments) for any calendar year and (2) 98% of capital gains net income for
the year. The Fund intends to distribute sufficient amounts to avoid liability
for this excise tax.
If shares of the Fund are sold or exchanged within 90 days of acquisition, and
shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.
Under federal tax law, any loss a shareholder realizes on redemption of Fund
shares held for less than six months is treated as a long-term capital loss to
the extent of any long-term capital gain distribution which was paid on such
Fund shares.
Prior to purchasing Fund shares, the impact of dividends or capital gains
distributions should be carefully considered. Any such payments made to a
shareholder shortly after purchasing Fund shares reduce the
19
<PAGE>
net asset value of such Fund shares to that extent and unnecessarily increase
sales charges. All or a portion of such dividends or distributions, although in
effect a return of capital, is subject to taxes, possibly at ordinary income tax
rates.
Dividends and distributions declared payable to shareholders of record after
September 30 of any year and paid before February 1 of the following year are
considered taxable income to shareholders on the record date even though paid in
the next year. To the extent determined each year, a portion of the dividends
paid to shareholders from the Fund's net investment income qualifies for the 70%
dividends received deduction for corporations.
Some shareholders may be subject to 31% withholding on reportable dividends,
capital gains distributions and redemption payments ("backup withholding").
Generally, shareholders subject to backup withholding are those for whom a
taxpayer identification number is not on file with the Fund or who, to the
Fund's knowledge, furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that he or she is not subject to backup withholding.
Under existing provisions of the Code, dividends paid to shareholders who are
nonresident aliens may be subject to a 30% federal withholding tax applicable to
foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the federal withholding tax.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and treasury regulations presently in effect. For the complete
provisions, reference should be made to the pertinent Code sections and treasury
regulations. The Code and these treasury regulations are subject to change by
legislative or administrative action either prospectively or retroactively.
Each investor should consult his or her own tax adviser as to federal tax laws
and the effect of state and local tax laws which may differ from federal tax
laws.
FINANCIAL STATEMENTS
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND OFFERING PRICE PER
SHARE - DECEMBER 31, 1997
Net asset value and redemption price per share
(net assets divided by shares outstanding)..................$24.00
Offering price per share
(100/93.5 of per share net asset value).....................$25.67
The offering price is reduced on purchases of $10,000 or more; see "Purchase and
Redemption of Shares - Sales Charge" herein and "Purchase of Shares - Table of
Sales Charges" in the Prospectus.
20
<PAGE>
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>
21
<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>
22
<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. -- 6 3/4% 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 -- 7 1/4% 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.
23
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<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.
24
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<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.
25
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------
1997 1996
--------------------------- ---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
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.
26
<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.
27
<PAGE>
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.
28
<PAGE>
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., 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 on page 4 of the Prospectus for each of the
ten years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 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. at 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 on page 4 of the Prospectus, for
each of the ten years in the period then ended in conformity with generally
accepted accounting principles.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
January 20, 1998
29
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements (all included in Part B)
Report of Independent Auditors
Portfolio of Investments, December 31, 1997
Statement of Assets and Liabilities, December 31, 1997
Statement of Operations
Year ended December 31, 1997
Statement of Changes in Net Assets
Year ended December 31, 1997
Year ended December 31, 1996
All other financial statements and schedules are inapplicable.
(b) Exhibits
1. The Articles of Incorporation were filed as Exhibit 1 of Registrant's
Registration Statement on Form N-1 and are incorporated herein by
reference.
1.1 Certificate of Amendment, dated November 29, 1983, to Articles of
Incorporation was filed as Exhibit 1.1 to Pre-Effective Amendment
No. 1 of Registrant's Registration Statement on Form N-1 and is
incorporated herein by reference.
2. By-Laws were filed as Exhibit 2 of Registrant's Registration
Statement on Form N-1 and are incorporated herein by reference.
2.1 By-Laws Amendment to Article I, effective May 10, 1993, was filed
as Exhibit 2.1 to Post-Effective Amendment No. 10 of Registrant's
Registration Statement on Form N-1A and is incorporated herein by
reference.
4. Specimen Common Stock Certificate was filed as Exhibit 4 to Post-
Effective Amendment No. 2 of Registrant's Registration Statement
on Form N-1A and is incorporated herein by reference.
5. Investment Advisory Agreement, dated June 27, 1991, between Registrant
and First Pacific Advisors, Inc. was filed as Exhibit 5 to Post-
Effective Amendment No. 9 of Registrant's Registration Statement on
Form N-1A and is incorporated herein by reference.
6. Distribution Agreement, dated September 3, 1991, between Registrant
and FPA Fund Distributors, Inc. was filed as Exhibit 6 to Post-
Effective Amendment No. 9 of Registrant's Registration Statement on
Form N-1A and is incorporated herein by reference.
6.1 Specimen Selling Group Agreement was filed as Exhibit 6.1 to Post-
Effective Amendment No. 9 of Registrant's Registration Statement on
Form N-1A and is incorporated herein by reference.
C-1
<PAGE>
6.2 Smith Barney Inc. Mutual Fund Dealer Agreement was filed as Exhibit
6.2 to Post-Effective Amendment No. 14 of Registrant's Registration
Statement on Form N-1A and is incorporated herein by reference.
8. Custodian Agreement between Registrant and State Street Bank and Trust
Company was filed as Exhibit 8 of Registrant's Registration Statement
on Form N-1 and is incorporated herein by reference.
8.1 Amendment to the Custodian Contract, dated November 1, 1988, was filed
as Exhibit 8 to Post-Effective Amendment No. 6 of Registrant's
Registration Statement on Form N-1A and is incorporated herein by
reference.
8.2 Custodian Fee Schedule Addendum for GNMA Securities Traded through
Participants Trust Company was filed as Exhibit 8 to Post-Effective
Amendment No. 7 of Registrant's Registration Statement on Form N-1A
and is incorporated herein by reference.
8.3 Amendment to the Custodian Contract was filed as Exhibit 8.3 to Post-
Effective Amendment No. 11 of Registrant's Registration Statement on
Form N-1A and is incorporated herein by reference.
8.4 Amendment to the Custodian Contract was filed as Exhibit 8.4 to Post-
Effective Amendment No. 13 of Registrant's Registration Statement on
Form N-1A and is incorporated herein by reference.
8.5 Amendment to the Custodian Contract.
11. Consent of Independent Auditors (filed as page C-8).
13. Investment letter, dated January 19, 1984, to Registrant from First
Pacific Advisors, Inc. was filed as Exhibit 13 to Pre-Effective
Amendment No. 1 of Registrant's Registration Statement on Form N-1
and is incorporated herein by reference.
14. State Street Bank and Trust Company Individual Retirement Custodial
Account and Disclosure Statement was filed as Exhibit 14 to Post-
Effective Amendment No. 10 of Registrant's Registration Statement on
Form N-1A and is incorporated herein by reference.
14.1 State Street Bank and Trust Company Universal Individual Retirement
Account Information Kit.
16. Schedule of computations of performance quotations.
17. Financial Data Schedule.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
C-2
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of December 31, 1997
<TABLE>
<CAPTION>
(1) (2)
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Common Stock, $0.01 par value 1,611
</TABLE>
ITEM 27. INDEMNIFICATION.
Item 4 of Part II of Registrant's Registration Statement on Form N-1
(Registration No. 2-87607) is incorporated herein by this reference.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
During the last two fiscal years, First Pacific Advisors, Inc., the
investment adviser to Registrant ("Adviser"), has not engaged in any other
business of a substantial nature except as investment adviser to Source
Capital, Inc. ("Source"), a registered closed-end investment company; as
investment adviser to FPA Capital Fund, Inc. ("Capital"), FPA New Income,
Inc. ("New Income"), FPA Paramount Fund, Inc. ("Paramount") and FPA Crescent
Portfolio, each a registered open-end investment company; as sub-adviser to
the Nationwide Select Advisers Mid Cap Fund, a registered open-end investment
company; and as investment adviser to institutional accounts. During the
last two fiscal years, no director or officer of the Adviser has engaged for
his own account or in the capacity of director, officer, employee, partner or
trustee, in any other business, profession, vocation or employment of a
substantial nature except as described under the caption "Directors and
Officers of the Fund" in Part B hereof and as set forth below.
<TABLE>
<CAPTION>
Name and Position
with Adviser Other Affiliations (1)
------------------ ------------------
<S> <C>
Julio J. de Puzo, Jr., (2)
Director, Principal &
Chief Executive Officer
Robert L. Rodriguez, Director and officer of Source; and
Director, Principal & officer of Capital and New Income.
Chief Investment Officer
William M. Sams, Officer of Paramount.
Director & Principal
J. Richard Atwood, (2)
Senior Vice President,
Chief Financial Officer
& Treasurer
Eric S. Ende, (2)
Senior Vice President
Steven T. Romick, Officer of Source.
Senior Vice President
C-3
<PAGE>
Andrew C. Ward, ---
Senior Vice President
Christopher H. Thomas, (2)
Vice President & Controller
Thomas A. Atteberry, ---
Vice President
Dennis M. Bryan, Officer of Capital.
Vice President
Steven R. Geist, (2)
Vice President
Janet M. Pitman, (2)
Vice President
Mary S. Thomas, ---
Vice President
Sherry Sasaki, (2)
Assistant Vice President
& Secretary
Marie McAvenia, ---
Assistant Vice President
</TABLE>
(1) The address of each company named is 11400 West Olympic Boulevard, Suite
1200, Los Angeles, California 90064.
(2) A description of such person's other affiliations is given under the
caption "Directors and Officers of the Fund" in Part B hereof.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) FPA Fund Distributors, Inc., the principal underwriter for Registrant,
acts as a principal underwriter for Capital, New Income and Paramount but
does not act as depositor or investment adviser for any investment company.
(b) The following information is furnished with respect to each director and
officer of FPA Fund Distributors, Inc.
<TABLE>
<CAPTION>
Name and Principal Positions & Offices Positions and Offices
Business Address with Principal Underwriter with Registrant
- ---------------- -------------------------- ---------------
<S> <C> <C>
Julio J. de Puzo, Jr. (1) President, Chief Executive Director
Officer, & Director & Exec. Vice Pres.
Robert L. Rodriguez (1) Director ---
William M. Sams (1) Director ---
C-4
<PAGE>
J. Richard Atwood (1) Senior Vice President, Treasurer
Chief Financial Officer
& Treasurer
Andrew C. Ward (1) Senior Vice President ---
Christopher H. Thomas (1) Vice President Assistant Treasurer
& Controller
Sherry Sasaki (1) Secretary Secretary
</TABLE>
(1) 11400 West Olympic Boulevard, Suite 1200, Los Angeles, California 90064
(c) Commissions and other compensation received by each principal underwriter
who is not an affiliated person of Registrant or an affiliated person of such
an affiliated person, directly or indirectly, from Registrant during
Registrant's last fiscal year.
Inapplicable.
ITEM 30. LOCATION OF BOOKS AND RECORDS.
The accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained in the physical possession of Mr. J. Richard
Atwood, Treasurer of Registrant*, except as otherwise stated below:
<TABLE>
<CAPTION>
Subparagraph of Physical Possession
Rule 31a-1 of Required Records
-------------- -------------------
<S> <C>
(b)(2)(iv) Boston Financial Data Services, Inc.,
Shareholder Service Agent for Registrant**
(b)(4) Sherry Sasaki,
Secretary of Registrant*
(f) First Pacific Advisors, Inc.,
Investment Adviser to Registrant*
</TABLE>
------------
* 11400 West Olympic Boulevard, Suite 1200, Los Angeles, California 90064
** P.O. Box 8500, Boston, Massachusetts 02266-8500
ITEM 31. MANAGEMENT SERVICES.
There is no management-related service contract under which services are
provided to Registrant which is not discussed in Parts A or B hereof.
ITEMS 32. UNDERTAKINGS.
Inapplicable.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on the 29th day
of April, 1998.
FPA PERENNIAL FUND, INC.
By: /s/ Eric S. Ende
-------------------------------
Eric S. Ende, President
C-6
<PAGE>
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ERIC S. ENDE
- ------------------------------ President April 29, 1998
Eric S. Ende (Principal Executive
Officer)
/s/ J. RICHARD ATWOOD
- ------------------------------ Treasurer April 29, 1998
J. Richard Atwood (Principal Financial
Officer and Principal
Accounting Officer)
JULIO J. DE PUZO, JR.*
- ------------------------------ Director April 29, 1998
Julio J. de Puzo, Jr.
JOHN P. ENDICOTT*
- ------------------------------ Director April 29, 1998
John P. Endicott
LEONARD MAUTNER*
- ------------------------------ Director April 29, 1998
Leonard Mautner
LAWRENCE J. SHEEHAN*
- ------------------------------ Director April 29, 1998
Lawrence J. Sheehan
</TABLE>
*By: /s/ JULIO J. DE PUZO, JR.
--------------------------
Julio J. de Puzo, Jr.
Attorney-in-Fact pursuant to Power-of-
Attorney included as page C-7 on
Registrant's Post-Effective Amendment
No. 14 to the Registration Statement
which was filed May 1, 1997.
C-7
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Additional Information" and to the use of our report dated
January 20, 1998, in Post-Effective Amendment No. 15 under the Securities Act
of 1933 and Amendment No. 15 under the Investment Company Act of 1940 to the
Registration Statement (Form N-1A No. 2-87607) and related Prospectus and
Statement of Additional Information of FPA Perennial Fund, Inc.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
April 29, 1998
C-8
<PAGE>
EXHIBIT INDEX
EXHIBIT
- -------
8.5 Amendment to Custodian Contract.
11. Consent of Independent Auditors (filed as page C-8).
14.1 State Street Bank and Trust Company Universal Individual Retirement
Account Information Kit.
16. Schedule of computations of performance quotations.
17. Financial Data Schedule.
All other applicable exhibits are incorporated herein by reference.
<PAGE>
EXHIBIT 8.5
AMENDMENT TO CUSTODIAN CONTRACT
This Amendment to the Custodian Contract is made as of February 17,
1998 by and between FPA Perennial Fund, Inc. (the "Fund") and State Street Bank
and Trust Company (the "Custodian"). Capitalized terms used in this Amendment
without definition shall have the respective meanings given to such terms in the
Custodian Contract referred to below.
WHEREAS, the Fund and the Custodian entered into a Custodian Contract
dated as of January 19, 1984 (as amended and in effect from time to time, the
"Contract"); and
WHEREAS, the Fund and the Custodian desire to amend certain provisions
of the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund and the Custodian desire to amend and restate
certain other provisions of the Contract relating to the custody of assets of
the Fund held outside of the United States.
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter contained, the parties hereby agree to
amend the Contract, pursuant to the terms thereof, as follows:
I. The amendment to the Contract providing for the maintenance of the Fund's
foreign securities dated August 2, 1993, is hereby deleted, and the
parties hereto agree that it shall be and is replaced in its entirety by
the provisions set forth below.
Articles 1 and 2 do not exist.
3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
3.1. DEFINITIONS.
Capitalized terms in this Article 3 shall have the following meanings:
"Country Risk" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure
(including any Mandatory Securities Depositories operating in the country);
prevailing or developing custody and settlement practices; and laws and
regulations applicable to the safekeeping and recovery of Foreign Assets held in
custody in that country.
"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or
<PAGE>
by other appropriate action of the U.S. Securities and Exchange Commission (the
"SEC")), or a foreign branch of a Bank (as defined in Section 2(a)(5) of the
1940 Act) meeting the requirements of a custodian under Section 17(f) of the
1940 Act, except that the term does not include Mandatory Securities
Depositories.
"Foreign Assets" means any of the Fund's investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Fund's
transactions in such investments.
"Foreign Custody Manager" has the meaning as set forth in section (a)(2) of Rule
17f-5.
"Mandatory Securities Depository" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund determines to place Foreign Assets in a country outside the United States
(i) because required by law or regulation; (ii) because securities cannot be
withdrawn from such foreign securities depository or clearing agency; or (iii)
because maintaining or effecting trades in securities outside the foreign
securities depository or clearing agency is not consistent with prevailing or
developing custodial or market practices.
3.2. DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
The Fund, by resolution adopted by its Board of Directors (the "Board"), hereby
delegates to the Custodian, subject to Section (b) of Rule 17f-5, the
responsibilities set forth in this Article 3 with respect to Foreign Assets held
outside the United States, and the Custodian hereby accepts such delegation, as
Foreign Custody Manager of the Fund.
3.3. COUNTRIES COVERED.
The Foreign Custody Manager shall be responsible for performing the delegated
responsibilities defined below only with respect to the countries and custody
arrangements for each such country listed on Schedule A to this Contract, which
list of countries may be amended from time to time by the Fund with the
agreement of the Foreign Custody Manager. The Foreign Custody Manager shall
list on Schedule A the Eligible Foreign Custodians selected by the Foreign
Custody Manager to maintain the Fund's assets, which list of Eligible Foreign
Custodians may be amended from time to time in the sole discretion of the
Foreign Custody Manager. Mandatory Securities Depositories are listed on
Schedule B to this Contract, which Schedule B may be amended from time to time
by the Foreign Custody Manager. The Foreign Custody Manager will provide
amended versions of Schedules A and B in accordance with Section 3.7 of this
Article 3.
Upon receipt by the Foreign Custody Manager of Proper Instructions to open an
account, or to place or maintain Foreign Assets, in a country listed on Schedule
A, and the fulfillment by the Fund of the applicable account opening
requirements for such country, the Foreign Custody Manager shall be deemed to
have been delegated by the Board responsibility as Foreign Custody Manager with
respect to that country and to have accepted such delegation. Execution of this
Amendment by the Fund
2
<PAGE>
shall be deemed to be a Proper Instruction to open an account, or to place or
maintain Foreign Assets, in each country listed on Schedule A in which the
Custodian currently maintains Foreign Assets pursuant to the terms of the
Contract. Following the receipt of Proper Instructions directing the Foreign
Custody Manager to close the account of the Fund with the Eligible Foreign
Custodian selected by the Foreign Custody Manager in a designated country, the
delegation by the Board to the Custodian as Foreign Custody Manager for that
country shall be deemed to have been withdrawn and the Custodian shall
immediately cease to be the Foreign Custody Manager of the Fund with respect to
that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice of the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
3.4. SCOPE OF DELEGATED RESPONSIBILITIES.
3.4.1. SELECTION OF ELIGIBLE FOREIGN CUSTODIANS.
Subject to the provisions of this Article 3, the Foreign Custody Manager may
place and maintain the Foreign Assets in the care of the Eligible Foreign
Custodian selected by the Foreign Custody Manager in each country listed on
Schedule A, as amended from time to time.
In performing its delegated responsibilities as Foreign Custody Manager to place
or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign
Custody Manager shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to custodians in the country
in which the Foreign Assets will be held by that Eligible Foreign Custodian,
after considering all factors relevant to the safekeeping of such assets,
including, without limitation the factors specified in Rule 17f-5(c)(1).
3.4.2. CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS.
The Foreign Custody Manager shall determine that the contract (or the rules or
established practices or procedures in the case of an Eligible Foreign Custodian
that is a foreign securities depository or clearing agency) governing the
foreign custody arrangements with each Eligible Foreign Custodian selected by
the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
3.4.3. MONITORING.
In each case in which the Foreign Custody Manager maintains Foreign Assets with
an Eligible Foreign Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to monitor (i) the
appropriateness of maintaining the Foreign Assets with such Eligible Foreign
Custodian and (ii) the contract governing the custody arrangements established
by
3
<PAGE>
the Foreign Custody Manager with the Eligible Foreign Custodian (or the rules or
established practices and procedures in the case of an Eligible Foreign
Custodian selected by the Foreign Custody Manager which is a foreign securities
depository or clearing agency that is not a Mandatory
Securities Depository). In the event the Foreign Custody Manager determines
that the custody arrangements with an Eligible Foreign Custodian it has selected
are no longer appropriate, the Foreign Custody Manager shall notify the Board in
accordance with Section 3.7 hereunder.
3.5. GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY.
For purposes of this Article 3, the Board shall be deemed to have considered and
determined to accept such Country Risk as is incurred by placing and maintaining
the Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Fund, and the Board shall be deemed to be monitoring on a
continuing basis such Country Risk to the extent that the Board considers
necessary or appropriate. The Fund and the Custodian each expressly acknowledge
that the Foreign Custody Manager shall not be delegated any responsibilities
under this Article 3 with respect to Mandatory Securities Depositories.
3.6. STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF THE FUND.
In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.
3.7. REPORTING REQUIREMENTS.
The Foreign Custody Manager shall report the withdrawal of the Foreign Assets
from an Eligible Foreign Custodian and the placement of such Foreign Assets with
another Eligible Foreign Custodian by providing to the Board amended Schedules A
or B at the end of the calendar quarter in which an amendment to either Schedule
has occurred. The Foreign Custody Manager shall make written reports notifying
the Board of any other material change in the foreign custody arrangements of
the Fund described in this Article 3 after the occurrence of the material
change.
3.8. REPRESENTATIONS WITH RESPECT TO RULE 17F-5.
The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5.
The Fund represents to the Custodian that the Board has determined that it is
reasonable for the Board to rely on the Custodian to perform the
responsibilities delegated pursuant to this Contract to the Custodian as the
Foreign Custody Manager of the Fund.
4
<PAGE>
3.9. EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN CUSTODY
MANAGER.
The Board's delegation to the Custodian as Foreign Custody Manager of the Fund
shall be effective as of the date hereof and shall remain in effect until
terminated at any time, without penalty, by written notice from the terminating
party to the non-terminating party. Termination will become effective thirty
days after receipt by the non-terminating party of such notice. The provisions
of Section 3.3 hereof shall govern the delegation to and termination of the
Custodian as Foreign Custody Manager of the Fund with respect to designated
countries.
4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD OUTSIDE
THE UNITED STATES.
4.1. DEFINITIONS.
Capitalized terms in this Article 4 shall have the following meanings:
"Foreign Securities System" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"Foreign Sub-Custodian" means a foreign banking institution serving as an
Eligible Foreign Custodian.
4.2. HOLDING SECURITIES.
The Custodian shall identify on its books as belonging to the Fund the foreign
securities held by each Foreign Sub-Custodian or Foreign Securities System.
The Custodian may hold foreign securities for all of its customers, including
the Fund, with any Foreign Sub-Custodian in an account that is identified as
belonging to the Custodian for the benefit of its customers, PROVIDED HOWEVER,
that (i) the records of the Custodian with respect to foreign securities of the
Fund which are maintained in such account shall identify those securities as
belonging to the Fund and (ii), to the extent permitted and customary in the
market in which the account is maintained, the Custodian shall require that
securities so held by the Foreign Sub-Custodian be held separately from any
assets of such Foreign Sub-Custodian or of other customers of such Foreign
Sub-Custodian.
4.3. FOREIGN SECURITIES SYSTEMS.
Foreign securities shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the Foreign
Sub-Custodian in such country pursuant to the terms of this Contract.
4.4. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
5
<PAGE>
4.4.1. DELIVERY OF FOREIGN ASSETS.
The Custodian or a Foreign Sub-Custodian shall release and deliver foreign
securities of the Fund held by such Foreign Sub-Custodian, or in a Foreign
Securities System account, only upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the parties, and
only in the following cases:
(i) upon the sale of such foreign securities for the Fund in
accordance with commercially reasonable market practice in the
country where such Assets are held or traded, including, without
limitations: (A) delivery against expectation of receiving later
payment; or (B) in the case of a sale effected through a Foreign
Securities System, in accordance with the rules governing the
operation of the Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other
similar offers for foreign securities of the Fund;
(iv) to the issuer thereof or its agent when such foreign securities
are called, redeemed, retired or otherwise become payable;
(v) to the issuer thereof, or its agent, for the transfer into the
name of the Custodian (or the name of the respective Foreign
Sub-Custodian or of any nominee of the Custodian or such Foreign
Sub-Custodian) or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units;
(vi) to brokers, clearing banks or other clearing agents for
examination or trade execution in accordance with market custom;
PROVIDED that in any such case the Foreign Sub-Custodian shall
have no responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Foreign Sub-Custodian's
own negligence or willful misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
pursuant to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities,
the surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities;
6
<PAGE>
(ix) for delivery as security in connection with any borrowing by the
Fund requiring a pledge of assets by the Fund;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, BUT ONLY upon receipt of, in
addition to Proper Instructions, a copy of a resolution of the
Board or of an Executive Committee of the Board so authorized by
the Board, signed by an officer of the Fund and certified by its
Secretary or an Assistant Secretary that the resolution was duly
adopted and is in full force and effect (a "Certified
Resolution"), specifying the Foreign Assets to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such Assets
shall be made.
4.4.2. PAYMENT OF FUND MONIES.
Upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out, or direct the
respective Foreign Sub-Custodian or the respective Foreign Securities System to
pay out, monies of the Fund in the following cases only:
(i) upon the purchase of foreign securities for the Fund, unless
otherwise directed by Proper Instructions, by (A) delivering
money to the seller thereof or to a dealer therefor (or an agent
for such seller or dealer) against expectation of receiving later
delivery of such foreign securities; or (B) in the case of a
purchase effected through a Foreign Securities System, in
accordance with the rules governing the operation of such Foreign
Securities System;
(ii) in connection with the conversion, exchange or surrender of
foreign securities of the Fund;
(iii) for the payment of any expense or liability of the Fund including
but not limited to the following payments: interest, taxes,
investment advisory fees, transfer agency fees, fees under this
Contract, legal fees, accounting fees, and other operating
expenses;
(iv) for the purchase or sale of foreign exchange or foreign exchange
contracts for the Fund, including transactions executed with or
through the Custodian or its Foreign Sub-Custodians;
7
<PAGE>
(v) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(vi) (Does not exist.);
(vii) in connection with the borrowing or lending of foreign
securities; and
(viii) for any other proper purpose, BUT ONLY upon receipt of, in
addition to Proper Instructions, a Certified Resolution
specifying the amount of such payment, setting forth the purpose
for which such payment is to be made, declaring such purpose to
be a proper corporate purpose, and naming the person or persons
to whom such payment is to be made.
4.4.3. MARKET CONDITIONS; MARKET INFORMATION.
Notwithstanding any provision of this Contract to the contrary, settlement and
payment for Foreign Assets received for the account of the Fund and delivery of
Foreign Assets maintained for the account of the Fund may be effected in
accordance with the customary established securities trading or processing
practices and procedures in the country or market in which the transaction
occurs, including, without limitation, delivering Foreign Assets to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) with the expectation of receiving later payment for such Foreign Assets
from such purchaser or dealer.
The Custodian shall provide to the Board the information with respect to custody
and settlement practices in countries in which the Custodian employs a Foreign
Sub-Custodian, including without limitation information relating to Foreign
Securities Systems, described on Schedule C hereto at the time or times set
forth on such Schedule. The Custodian may revise Schedule C from time to time,
provided that no such revision shall result in the Board being provided with
substantively less information than had been previously been provided hereunder.
4.5. REGISTRATION OF FOREIGN SECURITIES.
The foreign securities maintained in the custody of a Foreign Custodian (other
than bearer securities) shall be registered in the name of the Fund or in the
name of the Custodian or in the name of any Foreign Sub-Custodian or in the name
of any nominee of the foregoing, and the Fund agrees to hold any such nominee
harmless from any liability as a holder of record of such foreign securities.
The Custodian or a Foreign Sub-Custodian shall not be obliged to accept
securities on behalf of the Fund under the terms of this Contract unless the
form of such securities and the manner in which they are delivered are in
accordance with reasonable market practice.
8
<PAGE>
4.6. BANK ACCOUNTS.
The Custodian shall identify on its books as belonging to the Fund cash
(including cash denominated in foreign currencies) deposited with the Custodian.
Where the Custodian is unable to maintain, or market practice does not
facilitate the maintenance of, cash on the books of the Custodian, a bank
account or bank accounts opened and maintained outside the United States on
behalf of the Fund with a Foreign Sub-Custodian shall be subject only to draft
or order by the Custodian or such Foreign Sub-Custodian, acting pursuant to the
terms of this Contract to hold cash received by or from or for the account of
the Fund.
4.7. COLLECTION OF INCOME.
The Custodian shall use reasonable commercial efforts to collect all income and
other payments with respect to the Foreign Assets held hereunder to which the
Fund shall be entitled and shall credit such income, as collected, to the Fund.
In the event that extraordinary measures are required to collect such income,
the Fund and the Custodian shall consult as to such measures and as to the
compensation and expenses of the Custodian relating to such measures.
4.8. SHAREHOLDER RIGHTS.
With respect to the foreign securities held under this Article 4, the Custodian
will use reasonable commercial efforts to facilitate the exercise of voting and
other shareholder rights, subject always to the laws, regulations and practical
constraints that may exist in the country where such securities are issued. The
Fund acknowledges that local conditions, including lack of regulation, onerous
procedural obligations, lack of notice and other factors may have the effect of
severely limiting the ability of the Fund to exercise shareholder rights.
4.9. COMMUNICATIONS RELATING TO FOREIGN SECURITIES.
The Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities of foreign
securities and expirations of rights in connection therewith) received by the
Custodian via the Foreign Sub-Custodians from issuers of the foreign securities
being held for the account of the Fund. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund written information so
received by the Custodian from issuers of the foreign securities whose tender or
exchange is sought or from the party (or its agents) making the tender or
exchange offer. The Custodian shall not be liable for any untimely exercise of
any tender, exchange or other right or power in connection with foreign
securities or other property of the Fund at any time held by it unless (i) the
Custodian or the respective Foreign Sub-Custodian is in actual possession of
such foreign securities or property and (ii) the Custodian receives Proper
Instructions with regard to the exercise of any such right or power, and both
(i) and (ii) occur at least three business days prior to the date on which the
Custodian is to take action to exercise such right or power.
9
<PAGE>
4.10. LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES SYSTEMS.
Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian
shall, to the extent possible, require the Foreign Sub-Custodian to exercise
reasonable care in the performance of its duties and, to the extent possible, to
indemnify, and hold harmless, the Custodian from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with such
Foreign Sub-Custodian's performance of such obligations. At the election of the
Fund, the Fund shall be entitled to be subrogated to the rights of the Custodian
with respect to any claims against a Foreign Sub-Custodian as a consequence of
any such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost, expense,
liability or claim.
4.11. TAX LAW.
The Custodian shall have no responsibility or liability for any obligations now
or hereafter imposed on the Fund or the Custodian as custodian of the Fund by
the tax law of the United States or of any state or political subdivision
thereof. It shall be the responsibility of the Fund to notify the Custodian of
the obligations imposed on the Fund with respect to the Fund or the Custodian as
custodian of the Fund by the tax law of countries other than those mentioned in
the above sentence, including responsibility for withholding and other taxes,
assessments or other governmental charges, certifications and governmental
reporting. The sole responsibility of the Custodian with regard to such tax law
shall be to use reasonable efforts to assist the Fund with respect to any claim
for exemption or refund under the tax law of countries for which the Fund has
provided such information.
4.12. LIABILITY OF CUSTODIAN.
Except as may arise from the Custodian's own negligence or willful misconduct or
the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be
without liability to the Fund for any loss, liability, claim or expense
resulting from or caused by anything which is (A) part of Country Risk or (B)
part of the "prevailing country risk" of the Fund, as such term is used in SEC
Release Nos. IC-22658; IS-1080 (May 12, 1997) or as such term or other similar
terms are now or in the future interpreted by the SEC or by the staff of the
Division of Investment Management of the SEC.
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian to the same extent as set forth with respect to sub-custodians
generally in the Contract and, regardless of whether assets are maintained in
the custody of a Foreign Sub-Custodian or a Foreign Securities Depository, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism, or any other loss where the Sub-Custodian has
otherwise acted with reasonable care.
10
<PAGE>
II. Except as specifically superseded or modified herein, the terms and
provisions of the Contract shall continue to apply with full force and
effect. In the event of any conflict between the terms of the Contract
prior to this Amendment and this Amendment, the terms of this Amendment
shall prevail. If the Custodian is delegated the responsibilities of
Foreign Custody Manager pursuant to the terms of Article 3 hereof, in
the event of any conflict between the provisions of Articles 3 and 4
hereof, the provisions of Article 3 shall prevail.
IN WITNESS WHEREOF, each of the parties has caused this Amendment
to be executed in its name and behalf by its duly authorized representative as
of the date first above written.
WITNESSED BY: STATE STREET BANK AND TRUST COMPANY
/s/ Glenn Ciotti By: /s/ Ronald E. Logue
Glenn Ciotti Name: Ronald E. Logue
VP & Assoc. Counsel Title: Executive Vice President
WITNESSED BY: FPA PERENNIAL FUND, INC.
/s/ Sherry Sasaki By: /s/ J. Richard Atwood
Sherry Sasaki Name: J. Richard Atwood
Secretary Title: Treasurer
11
<PAGE>
SCHEDULE A
STATE STREET GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Argentina Citibank, N.A. --
Australia Westpac Banking Corporation --
Austria Erste Bank der oesterreichischen --
Sparkasen AG
Bahrain The British Bank of the Middle --
East (as delegate of the
Hongkong and Shanghai Banking
Corporation Limited)
Bangladesh Standard Chartered Bank --
Belgium Generale Bank --
Bermuda The Bank of Bermuda Limited --
Bolivia Banco Boliviano Americano --
Botswana Barclays Bank of Botswana Limited --
Brazil Citibank, N.A. --
Bulgaria ING Bank N.V. --
Canada Canada Trustco Mortgage Company --
Chile Citibank, N.A. --
People's The Hongkong and Shanghai Banking --
Republic Corporation Limited, Shanghai and
of China Shenzhen branches
Colombia Cititrust Colombia S.A. Societe --
Fiduciaria
<PAGE>
SCHEDULE A
STATE STREET GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Croatia Privredana banka Zagreb d.d --
Cyprus Barclays Bank PLC --
Cyprus Offshore Banking Unit
Czech Republic Ceskoslovenska Obchodni --
Banka A.S.
Denmark Den Danske Bank --
Ecuador Citibank, N.A. --
Egypt National Bank of Egypt --
Estonia Hansabank --
Finland Merita Bank Ltd. --
France Banque Paribas --
Germany Dresdner Bank AG --
Ghana Barclays Bank of Ghana Limited --
Greece National Bank of Greece S.A. Bank of Greece
Hong Kong Standard Chartered Bank --
Hungary Citibank Budapest Rt. --
India Deutsche Bank AG; --
The Hongkong and Shanghai
Banking Corporation Limited
<PAGE>
SCHEDULE A
STATE STREET GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Indonesia Standard Chartered Bank --
Ireland Bank of Ireland --
Italy Banque Paribas --
Ivory Coast Societe Generale de Banquers --
en Cote d'Ivoire
Jamaica Scotiabank Trust and Merchant Bank --
Japan The Daiwa Bank, Limited; Japan Securities
The Fuji Bank, Limited Depository Center
Jordan The British Bank of the Middle East --
(as delegate of the Hongkong and
Shanghai Banking Corporation Limited)
Kenya Barclays Bank of Kenya Limited --
Republic of The Hongkong and Shanghai Banking --
Korea Corporation Limited
Latvia Hansabank --
Lebanon The British Bank of the Middle East Custodian and Clearing
(as delegate of the Hongkong and Center of Financial
Shanghai Banking Corporation Limited) Instruments for
Lebanon (MIDCLEAR)
S.A.L.
Lithuania Vilniaus Bankas AB --
Malaysia Standard Chartered Bank --
Malaysia Berhad
Mauritius The Hongkong and Shanghai --
Banking Corporation Limited
<PAGE>
SCHEDULE A
STATE STREET GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Mexico Citibank Mexico, S.A. --
Morocco Banque Commerciale du Maroc --
Namibia (via) Standard Bank of South
Africa --
The Netherlands MeesPierson N.V. --
New Zealand ANZ Banking Group --
(New Zealand) Limited
Norway Christiania Bank og --
Kreditkasse
Oman The British Bank of the Middle --
East (as delegate of the Hongkong
and Shanghai Banking Corporation
Limited)
Pakistan Deutsche Bank AG --
Peru Citibank, N.A. --
Phillippines Standard Chartered Bank --
Poland Citibank Poland S.A. --
Portugal Banco Comercial Portugues --
Romania ING Bank, N.V. --
Russia Credit Suisse First Boston, Zurich --
via Credit Suisse First Boston
Limited, Moscow
Singapore The Development Bank of --
Singapore Limited
<PAGE>
SCHEDULE A
STATE STREET GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Slovak Republic Ceskoslovenska Obchodna --
Banka AS
Slovenia Banka Creditanstalt d.d. --
South Africa Standard Bank of South
Africa Limited --
Spain Banco Santander, S.A. --
Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited
Swaziland Barclays Bank of Swaziland Limited --
Sweden Skandinaviska Enskilda Banken --
Switzerland Union Bank of Switzerland --
Taiwan - R.O.C. Central Trust of China --
Thailand Standard Chartered Bank --
Trinidad & Republic Bank Ltd. --
Tobago
Tunisia Banque Internationale --
Arabe de Tunisie
Turkey Citibank, N.A. --
United Kingdom State Street Bank and Trust --
Uruguay Citibank, N.A. --
Venezuela Citibank, N.A. --
Zambia Barclays Bank of Zambia Limited --
Zimbabwe Barclays Bank of Zimbabwe Limited --
<PAGE>
SCHEDULE A
STATE STREET GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Euroclear (The Euroclear System)
Cedel (Cedel Bank, societe anonyme)
INTERSETTLE (for EASDAQ Securities)
<PAGE>
SCHEDULE B
STATE STREET GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Argentina -Caja de Valores S.A.
-CRYL
Australia -Austraclear Limited
-Reserve Bank Information and Transfer System
Austria -Oesterreichische Kontrolbank AG
(Wertpapiersammelbank Division)
Belgium -Caisse Interprofessionnelle de Depots et de
Virements de Titres S.A.
-Banque Nationale de Belgique
Brazil -Camara de Liquidacao de Sao Paulo, (Calispa)
-Bolsa de Valores de Rio de Janeiro
-All SSB CLIENTS PRESENTLY USE CALISPA
-Central de Custodia e de Liquidacao Financeira
de Titulos
-Banco Central do Brasil, System Especial de
Liquidacao e Custodia
Bulgaria -Central Depository AD
Canada -The Canadian Depository for Securities Limited;
West Canada Depository Trust Company
[DEPOSITORIES LINKED]
People's Republic -Shanghai Securities Central Clearing and Registration
of China Corporation
-Shenzhen Securities Central Clearing Co., Ltd.
Croatia -Ministry of Finance
* Mandatory depositories include entities for which use is mandatory as a
matter of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE B
STATE STREET GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Czech Republic -Stredisko cennych papiru
-Czech National Bank
Denmark -Vaerdipapircentralen - The Danish Securities
Center
Egypt -Misr Company for Clearing, Settlement, and
Central Depository
Estonia -Eesti Vaatrpaberite Keskdepositooruim
Finland -The Finnish Central Securities Depository
France -Societe Interprofessionnelle pour la
Compensation des Valeurs Mobilieres
-Banque de France, Saturne System
Germany -The Deutscher Kassenverein AG
Greece -The Central Securities Depository
(Apothetirion Titlon A.E.)
Hong Kong -The Central Clearing and Settlement System
-The Central Money Markets Unit
Hungary -The Central Depository and Clearing House
(Budapest) Ltd. [MANDATORY FOR GOV'T BONDS
ONLY; SSB DOES NOT USE FOR OTHER SECURITIES]
India -The National Securities Depository Limited
Indonesia -Bank of Indonesia
* Mandatory depositories include entities for which use is mandatory as a
matter of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE B
STATE STREET GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Ireland -The Central Bank of Ireland, The Gilt
Settlement Office
Israel -The Clearing House of the Tel Aviv Stock
Exchange
-Bank of Israel
Italy -Monte Titoli S.p.A
-Banca d'Italia
Japan -Bank of Japan Net System
Republic of Korea -Korea Securities Depository Corporation
Latvia -The Latvian Central Depository
Lebanon -The Central Bank of Lebanon
Lithuania -The Central Securities Depository of
Lithuania
Malaysia -Malaysian Central Depository Sdn. Bhd.
-Bank Negara Malaysia, Scripless Securities
Trading and Safekeeping Systems
Mauritius -The Central Depository & Settlement Co. Ltd.
Mexico -S.D. INDEVAL, S.A. de C.V. (Instituto para
el Deposito de Valores)
The Netherlands -Nederlands Centraal Instituut voor Giraal
Effectenverkeer B.V. ("NECIGEF")
New Zealand -New Zealand Central Securities Depository
Limited
* Mandatory depositories include entities for which use is mandatory as a
matter of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE B
STATE STREET GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Norway -Verdipapirsentralen - The Norwegian Registry
of Securities
Oman -Muscat Securities Market
Peru -Caja de Valores y Liquidaciones (CAVALI,
S.A.)
Phillippines -The Phillippines Central Depository Inc.
-The Book-Entry-System of Bangko Sentral ng
Pilipinas
-The Registry of Sripless Securities of the
Bureau of the Treasury
Poland -The National Depository of Securities
(Krajowy Depozyt Papierow Wartosciowych)
-National Bank of Poland
Portugal -Central de Valores Mobilarios
Romania -National Securities Clearing, Settlement and
Depository Co.
-Bucharest Stock Exchange
-National Bank of Romania
Singapore -The Central Depository (Pvt.) Limited
-Monetary Authority of Singapore
Slovak Republic -Stredisko Cennych Papierov
-National Bank of Slovakia
Slovenia -Klirinsko Depotna Bruzba
South Africa -The Central Depository Limited
Spain -Servicio de Compensacion y Liquidacion de
Valores, S.A.
-Banco de Espana, Anotaciones en Cuenta
* Mandatory depositories include entities for which use is mandatory as a
matter of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE B
STATE STREET GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Sri Lanka -Central Depository System (Pvt) Limited
Sweden -Vardepapperscentralen VPC AB - The Swedish
Central Securities Depository
Switzerland -Schweizerische Effekten - Giro AG
Taiwan - R.O.C. -The Taiwan Securities Central Depository Company,
Ltd.
Thailand -Thailand Securities Depository Company Limited
Tunisia -STICODEVAM
-Central Bank of Tunisia
-Tunisian Treasury
Turkey -Takas ve Saklama Bankasi A.S.
-Central Bank of Turkey
United Kingdom -The Bank of England, The Central Gilts Office;
The Central Moneymarkets Office
Uruguay -Central Bank of Uruguay
Zambia -Lusaka Central Depository
* Mandatory depositories include entities for which use is mandatory as a
matter of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE C
MARKET INFORMATION
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION
- ------------------------------- -----------------
(FREQUENCY)
THE GUIDE TO CUSTODY IN WORLD MARKETS (annually): An overview of safekeeping
and settlement practices
and procedures in each
market in which State
Street Bank and Trust
Company offers custodial
services.
THE DEPOSITORY REVIEW (annually): Information relating to
the operating history and
structure of depositories
located in the markets in
which State Street Bank
and Trust Company offers
custodial services,
including transnational
depositories.
Legal opinions (annually): With respect to each
market in which State
Street Bank and Trust
Company offers custodial
services, opinions
relating to whether local
law restricts (i) access
of a fund's independent
public accountants to
books and records of a
Foreign Sub-Custodian or
Foreign Securities System,
(ii) the Fund's ability to
recover in the event of
bankruptcy or insolvency
of a Foreign Sub-Custodian
or Foreign Securities
System, (iii) the Fund's
ability to recover in the
event of a loss by a
Foreign Sub-Custodian or
Foreign Securities System,
and (iv) the ability of a
foreign investor to
convert cash and cash
equivalents to U.S.
dollars.
Network Bulletins (weekly): Developments of interest
to investors in the
markets in which State
Street Bank and Trust
Company offers custodial
services.
Foreign Custody Advisories (as necessary): With respect to markets in
which State Street Bank
and Trust Company offers
custodial services which
exhibit special custody
risks, developments which
may impact State Street's
ability to deliver
expected levels of
services.
<PAGE>
CSP Draft 11/20/97
TRADOCS: #1052283
COMBINED REGULAR/ROTH PACKAGE
STATE STREET BANK
BFDS
DST
<PAGE>
EXHIBIT 14.1
STATE STREET BANK AND TRUST COMPANY
UNIVERSAL INDIVIDUAL RETIREMENT ACCOUNT
INFORMATION KIT
(EFFECTIVE JANUARY 1, 1998)
<PAGE>
STATE STREET BANK AND TRUST COMPANY
UNIVERSAL IRA INFORMATION KIT
INTRODUCTION
WHAT'S NEW IN THE WORLD OF IRAs?
An Individual Retirement Account ("IRA") has always provided an attractive
means to save money for the future on a tax-advantaged basis. Recent changes to
Federal tax law have now made the IRA an even more flexible investment and
savings vehicle. Among the new changes is the creation of the Roth Individual
Retirement Account ("Roth IRA"), which will be available for use after January
1, 1998. Under a Roth IRA, the earnings and interest on an individual's
nondeductible contributions grow without being taxed, and distributions may be
tax-free under certain circumstances. Most taxpayers (except for those with
very high income levels) will be eligible to contribute to a Roth IRA. A Roth
IRA can be used instead of a Regular IRA, to replace an existing Regular IRA, or
complement a Regular IRA you wish to continue maintaining.
Taxpayers with adjusted gross income of up to $100,000 are eligible to
convert existing IRAs into Roth IRAs. The details on conversion are found in
the description of Roth IRAs in this booklet.
Congress has also made significant changes to Regular IRAs. First,
Congress increased the income levels at which IRA holders who participate in
employer-sponsored retirement plans can make deductible Regular IRA
contributions. Also the rules for deductible contributions by an IRA holder
whose spouse is a participant in an employer-sponsored retirement plan have
been liberalized. Second, the 10% penalty tax for premature withdrawals
(before age 59 1/2) will no longer apply in the case of withdrawals to pay
certain higher education expenses or certain first-time homebuyer expenses.
WHAT'S IN THIS KIT?
In this Kit you will find detailed information about Roth IRAs and about
the changes that have been made to Regular IRAs. You will also find
everything you need to establish and maintain either a Regular or Roth IRA,
or to convert all or part of an existing Regular IRA to a Roth IRA.
The first section of this Kit contains the instructions and forms you
will need to open a new Regular or Roth IRA, to transfer from another IRA to
a State Street Bank and Trust IRA, or to convert a Regular IRA to a Roth IRA.
The second section of this Kit contains our Universal IRA Disclosure
Statement. The Disclosure Statement is divided into three parts:
- Part One describes the basic rules and benefits which are specifically
applicable to your Regular IRA.
- Part Two describes the basic rules and benefits which are specifically
applicable to your Roth IRA.
- Part Three describes important rules and information applicable to all
IRAs.
The third section of this Kit contains the Universal IRA Custodial
Agreement. The Custodial Agreement is also divided into three parts:
- Part One contains provisions specifically applicable to Regular IRAs.
- Part Two contains provisions specifically applicable to Roth IRAs.
- Part Three contains provisions applicable to all IRAs (Regular and
Roth).
WHAT'S THE DIFFERENCE BETWEEN A REGULAR IRA AND A ROTH IRA?
With a Regular IRA, an individual can contribute up to $2,000 per year and
may be able to deduct the contribution from taxable income, reducing income
taxes. Taxes on investment growth and dividends are deferred until the money is
withdrawn. Withdrawals are taxed as additional
<PAGE>
ordinary income when received. Nondeductible contributions, if any, are
withdrawn tax-free. Withdrawals before age 59 1/2 are assessed a 10% penalty in
addition to income tax, unless an exception applies.
With a Roth IRA, the contribution limits are essentially the same as
Regular IRAs, but there is no tax deduction for contributions. All dividends
and investment growth in the account are tax-free. Most important with a Roth
IRA: there is no income tax on qualified withdrawals from your Roth IRA.
Additionally, unlike a Regular IRA, there is no prohibition on making
contributions to Roth IRAs after turning age 70 1/2, and there's no
requirement that you begin making minimum withdrawals at that age.
The following chart highlights some of the major differences between a
Regular IRA and a Roth IRA:
- --------------------------------------------------------------------------------
CHARACTERISTICS REGULAR ROTH
IRA IRA
- --------------------------------------------------------------------------------
ELIGIBILITY - Individuals (and - Individuals (and
their spouses) who their spouses) who
receive compensation receive
- Individuals age compensation
70 1/2 and over MAY - Individuals age
NOT contribute 70 1/2 and over MAY
contribute
- --------------------------------------------------------------------------------
TAX TREATMENT OF - Subject to - No deduction
CONTRIBUTIONS limitations, permitted for
contributions are amounts contributed
deductible
- --------------------------------------------------------------------------------
CONTRIBUTION LIMITS - Individuals may - Individuals may
contribute up to generally
$2,000 annually (or contribute up to
100% of $2,000 (or 100% of
compensation, if compensation, if
less) less)
- Deductibility - Ability to
depends on income contribute phases
level for out at income
individuals who are levels of $95,000
active participants to $110,000
in an employer- (individual
sponsored retirement taxpayer) and
plan $150,000 to
$160,000 (married
taxpayers)
- Overall limit for
contributions to
ALL IRAs (Regular
and Roth combined)
is $2,000 annually
(or 100% of
compensation, if
less)
- --------------------------------------------------------------------------------
EARNINGS - Earnings and - Earnings and
interest are not interest are not
taxed when received taxed when received
by your IRA by your IRA
- --------------------------------------------------------------------------------
ROLLOVER/CONVERSIONS - Individual may - Rollovers from
rollover amounts other Roth IRAs or
held in employer- Regular IRAs ONLY
sponsored retirement - Amounts rolled over
arrangements (or converted) from
(401(k), SEP IRA, another Regular IRA
etc.) tax free to are subject to
Regular IRA income tax in the
year rolled over or
converted
- Tax on amounts
rolled over or
converted in 1998
is spread over four
year period (1998-
2001)
- --------------------------------------------------------------------------------
WITHDRAWALS - Total (principal + - Not taxable as long
earnings) taxable as as a QUALIFIED
income in year DISTRIBUTION--gener
withdrawn (except ally, account open
for any prior non- for 5 years, and
deductible age 591/2
contributions) - Minimum withdrawals
- Minimum withdrawals NOT REQUIRED after
must begin after age age 70 1/2
70 1/2
- --------------------------------------------------------------------------------
IS A ROTH OR A REGULAR IRA RIGHT FOR ME?
We cannot act as your legal or tax advisor and so we cannot tell you which
kind of IRA is right for you. The information contained in this Kit is intended
to provide you with the basic information and material you will need if you
decide whether a Regular or Roth IRA is better for you, or if you want to
convert an existing Regular IRA to a Roth IRA. We suggest that you consult with
your accountant, lawyer or other tax advisor, or with a qualified financial
planner, to determine whether you should open a Regular or Roth IRA or convert
any or all of an existing Regular IRA to a Roth IRA. Your tax advisor can also
advise you as to the state tax consequences that may affect whether a Regular or
Roth IRA is right for you.
SEPS
The State Street Bank Regular IRA may be used in connection with a
simplified employee pension (SEP) plan maintained by your employer. To
establish a Regular IRA as part of your Employer's SEP plan, complete the
Adoption Agreement for a Regular IRA, indicating in the proper box that the IRA
is part of a SEP plan. A Roth IRA should NOT be used in connection with a SEP
plan.
OTHER POINTS TO NOTE.
<PAGE>
The Disclosure Statement in this Kit provides you with the basic
information that you should know about State Street Bank and Trust Company
Regular IRAs and Roth IRAs. The Disclosure Statement provides general
information about the governing rules for these IRAs and the benefits and
features offered through each type of IRA. However, the State Street Bank and
Trust Company Adoption Agreement and the Custodial Agreement, are the primary
documents controlling the terms and conditions of your personal State Street
Bank and Trust Company Regular or Roth IRA, and these shall govern in the case
of any difference with the Disclosure Statement.
YOU or YOUR when used throughout this Kit refer to the person for whom the
State Street Bank and Trust Company Regular or Roth IRA is established. A ROTH
IRA is either a State Street Bank and Trust Company Roth IRA or any Roth IRA
established by any other financial institution. A REGULAR IRA is any non-Roth
IRA offered by State Street Bank and Trust Company or any other financial
institution.
<PAGE>
FPA FUND DISTRIBUTORS, INC.
STATE STREET BANK AND TRUST COMPANY
UNIVERSAL INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
Instructions for Opening Your Regular IRA or Roth IRA
1. Read carefully the applicable sections of the Universal IRA Disclosure
Statement contained in this Kit, the Regular or Roth Individual Retirement
Custodial Account document (as applicable), the Adoption Agreement, and the
prospectus(es) for any Fund(s) you are considering. Consult your lawyer or
other tax adviser if you have any questions about how opening a Regular IRA
or Roth IRA will affect your financial and tax situation.
2. Complete the Adoption Agreement
- Print the identifying information where requested at the top of the
Adoption Agreement.
- For a REGULAR IRA, check the box for Part A and check the other boxes
in Part A to specify the type of Regular IRA you are opening and
provide the registered information.
If this is an IRA to which you expect to make contributions each year,
check Box 1 and enclose a check in the amount of your first
contribution. Be sure to indicate whether this is a contribution for
last year or for the current year.
If this is a transfer directly from another IRA custodian or trustee,
check Box 2. Check the appropriate box to indicate whether the funds
transferred were originally from contributions to an employee
qualified plan or a 403(b) arrangement, or whether any of the funds
were originally from your annual contributions to the IRA. Complete
and sign the Universal IRA Transfer of Assets Form.
If this is a rollover of amounts distributed to you from another IRA
or an employer qualified plan or a 403(b) arrangement, check Box 3.
Check the appropriate box to indicate whether the transfer is coming
from a qualified plan or 403(b) arrangement, or an IRA that held only
funds that were originally from contributions to a qualified plan or
403(b), or whether any of the funds were originally from your annual
contributions to the IRA. Enclose a check for the rollover
contribution amount.
If this is a direct rollover from a qualified plan or 403(b)
arrangement, check Box 4. Complete and sign the Universal IRA
Transfer of Assets Form.
Check Box 5 if applicable (for an IRA that will be used to receive
employer contributions under an employer's simplified employee pension
(or "SEP") plan or under a grandfathered salary reduction SEP plan (or
"SARSEP")).
- For a ROTH IRA, check the box for Part B. Check the other boxes in
Part B to specify the type of Roth IRA you are opening and provide the
requested information.
If this is Roth IRA to which you expect to make contributions each
year, enclose a check in the amount of your first contribution. Be
sure to indicate whether this is a contribution for last year or for
the current year. NOTE: Roth IRAs are available starting January 1,
1998, so you cannot make a contribution for 1997.
If you are converting an existing Regular IRA with the Bank as IRA
custodian or trustee, check Box 2. Indicate your current IRA account
number and how much you are converting. Conversion
1
<PAGE>
of an existing Regular IRA will result in inclusion of taxable amounts
in the existing Regular IRA on your income tax return.
If you are making a rollover or a transfer from an existing Regular
IRA with a different custodian or trustee, check Box 3. A rollover or
transfer from an existing Regular IRA means that the taxable amount in
the existing Regular IRA will be treated as additional income on your
income tax return.
If you are making a rollover or a transfer from another Roth IRA with
a different trustee or custodian, check Box 4. Put the requested
information where indicated.
- In Part C, indicate your investment choices.
- Sign and date the Adoption Agreement in Part D at the end.
3. If you are transferring assets from an existing IRA to this IRA, complete
the Universal Transfer of Assets Form.
4. Complete and sign the Designation of Beneficiary.
5. The Custodian fees for maintaining your IRA are listed in the FEES AND
EXPENSES section of Part Three of the Disclosure Statement or in the
Adoption Agreement. If you are paying by check, enclose a check for the
correct amount payable as specified below. If you do not pay by check, the
correct amount will be taken from your account.
6. Check to be sure you have properly completed all necessary forms and
enclosed a check for the Custodian's fees (unless being withdrawn from your
account) and a check for the first contribution to your Regular or Roth IRA
(if applicable). Your Regular IRA or Roth IRA cannot be accepted without
the properly completed documents or the Custodian fees.
All checks should be payable to "STATE STREET BANK AND TRUST COMPANY"
Send the completed forms and checks to:
FPA Funds
State Street Bank and Trust Company
P.O. Box 8500
Boston, MA 02266-8500
2
<PAGE>
FPA FUND DISTRIBUTORS, INC.
STATE STREET BANK AND TRUST COMPANY
INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
ADOPTION AGREEMENT
I, the person signing this Adoption Agreement (hereinafter called the
"Depositor"), establish an Individual Retirement Account (IRA), which is either
a Regular IRA or a Roth IRA, as indicated below, (the "Account") with State
Street Bank and Trust Company as Custodian ("Bank"). A Regular IRA operates
under Internal Revenue Code Section 408(a). A Roth IRA operates under Internal
Revenue Code Section 408A. I agree to the terms of my Account, which are
contained in the applicable provisions of the document entitled "State Street
Bank and Trust Company Universal Individual Retirement Custodial Account" and
this Adoption Agreement. I certify the accuracy of the information in this
Adoption Agreement. My Account will be effective upon acceptance by Bank.
1. DEPOSITOR INFORMATION / / / /-/ / /-/ / / / /
---------------------------------------- Social Security Number
Print Full Name
---------------------------------------- ------------------------
Address Date of Birth
( )
---------------------------------------- ------------------------
City State Zip Daytime Telephone Number
INSTRUCTIONS: To establish REGULAR IRA, check Box A and complete Part A. To
establish a ROTH IRA, check Box B and complete Part B. In either case, complete
Part C to select your investment choices, and sign at the end of Part D.
/ / A. REGULAR IRA -- By checking this box, I designate my Account as a
Regular IRA under Code Section 408(a). (COMPLETE 1, 2, 3 OR 4 BELOW TO
INDICATE THE TYPE OF REGULAR IRA YOU ARE OPENING. CHECK 5 IF APPLICABLE).
1. / / ANNUAL CONTRIBUTIONS
Current Contribution for the year 19___. Check enclosed for
$ __________.
This contribution does not exceed the maximum permitted amount
as described in the Regular IRA Disclosure Statement.
2. / / TRANSFER
Transfer of existing Regular IRA directly from current Custodian
or Trustee. Complete the Universal IRA Transfer of Assets Form.
/ / The transferring IRA held annual contributions by me (or amounts
transferred or rolled over from another IRA holding annual
contributions).
/ / The transferring IRA held only amounts that were originally
contributions to an employer qualified plan or 403(b) plan.
3. / / ROLLOVER
The requirements for a valid rollover are complex. See the
Regular IRA Disclosure Statement for additional information and
consult your tax advisor for help if needed. Check enclosed for
$ ________.
/ / Rollover of a qualifying rollover distribution to Depositor from
an employer plan or 403(b) arrangement, or rollover from another
Regular IRA which held only assets distributed to Depositor from
an employer plan or 403(b) arrangement and to which Depositor
made no direct contributions.
/ / Rollover of distribution to Depositor from another Regular IRA
that held amounts that originated from annual contributions by
the Depositor.
4. / / DIRECT ROLLOVER
/ / Direct rollover of an eligible distribution from a qualified
plan.
/ / Direct rollover of an eligible distribution from a 403(b) account
or annuity.
Direct rollovers are described in the Regular IRA Disclosure
Statement.
5. / / SEP PROVISION - check here if the Depositor intends to use this
Account in connection with a SEP Plan or grandfathered
SARSEP Plan established by the Depositor's employer.
/ / B. ROTH IRA -- By checking this box, I designate my Account as a Roth
IRA under Code Section 408A. (COMPLETE 1, 2, 3 OR 4 BELOW TO INDICATE
THE TYPE OF ROTH IRA YOU ARE OPENING.)
1. / / ANNUAL CONTRIBUTIONS
Current Contribution for the year
19___. Check enclosed for $ _________. This
contribution does not exceed the maximum permitted amount as
described in the Roth IRA Disclosure Statement.
2. / / CONVERSION of existing Regular IRA with Bank as Custodian or
Trustee to a Roth IRA with Bank.
Current Regular IRA Account No.:_______________
Amount Converted
/ / All
/ / Part (specify how much): $__________________
3. / / ROLLOVER OR TRANSFER from existing Regular IRA with a
custodian or trustee other than Bank to a Roth IRA with
Bank.
4. / / ROLLOVER OR TRANSFER from existing Roth IRA with another
custodian or trustee to a Roth IRA with Bank
Date existing Roth IRA was originally opened:
____________________
Indicate whether any amount in the existing Roth IRA
represents amounts converted or transferred from a Regular
IRA into such other Roth IRA:
/ / Yes / / No
If yes, date of the most recent conversion or transfer into
such other Roth: ________________________
Complete the Universal IRA TRANSFER OF ASSETS FORM if
either 3 or 4 is checked and the transaction is a transfer
(as opposed to a rollover).
<PAGE>
PART C. INVESTMENTS
Invest contributions to my Account as follows:
FPA Capital Fund, Inc.* _____% (*Open to existing shareholders)
FPA New Income, Inc. _____%
FPA Paramount Fund, Inc. _____%
FPA Perennial Fund, Inc. _____%
100%
PART D. ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
TELEPHONE EXCHANGE AUTHORIZATION (Optional)
By signing this Form, I authorize the transfer agent to (1) exchange shares
in my FPA Fund account pursuant to my telephone instructions; and (2)
register FPA shares acquired by exchange exactly as my Fund account from
which such shares were transferred. Furthermore, I hold neither the Funds nor
the transfer agent responsible for the authenticity of the telephone
instructions except as described in the Prospectus.
/ / Telephone exchanges among my FPA Fund accounts are not authorized.
- --------------------------------------------------------------------------------
RIGHTS OF ACCUMULATION (reduced sales charge)
/ / I apply for Cumulative Purchase Discount subject to confirmation of the
following holdings of my account(s) of eligible related investors as
described in the applicable prospectus.
The existing Shareholder Account(s) within the Mutual Fund in which I am
applying is/are listed below.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LETTER OF INTENT (Optional)
/ / I agree to the terms of the Letter of Intent set forth in the Prospectus.
Although I am not obligated to do so, it is my intention to purchase in
FPA shares over a 13-month period an aggregate amount at least equal to
that checked below.
/ / $ 10,000 / / $ 25,000 / / $ 50,000 / / $100,000
/ / $250,000 / / $500,000 / / $1,000,000
- --------------------------------------------------------------------------------
BROKER-DEALER INFORMATION (Mandatory to open all new accounts)
- --------------------------------------------------------------------------------
Broker-Dealer Name
- --------------------------------------------------------------------------------
Branch Office Street Address
- --------------------------------------------------------------------------------
City State Zip
- --------------------------------------------------------------------------------
Representative Name and No.
- --------------------------------------------------------------------------------
Representative Telephone No.
- --------------------------------------------------------------------------------
Authorization Signature
<PAGE>
PART E. CERTIFICATIONS AND SIGNATURES
If the Depositor has indicated a Regular IRA Rollover or Direct Rollover above,
Depositor certifies that the contribution does not include any employee
contributions to any qualified plan (other than accumulated deductible employee
contributions) or 403(b) arrangement; that any assets transferred in kind by
Depositor are the same assets received by the Depositor in the distribution
being rolled over; if the distribution is from another Regular IRA, that
Depositor has not made another rollover within the one-year period immediately
preceding this rollover; that such distribution was received within 60 days of
making the rollover to this Account; and that no portion of the amount rolled
over is a required minimum distribution under the required distribution rules.
If Depositor has indicated a Conversion or a Rollover of an existing Regular IRA
to a Roth IRA, Depositor acknowledges that the amount converted will be treated
as taxable income (except for prior nondeductible contributions) for federal
income tax purposes. If Depositor has indicated a Rollover from another Roth
IRA (Item 4 of Part B above), Depositor certifies that the information given in
Item 4 is correct and acknowledges that adverse tax consequences or penalties
could result from giving incorrect information.
Depositor has received a current prospectus of the Mutual Fund selected above
and read the applicable sections of the "State Street Bank and Trust Company
Universal Individual Retirement Account Disclosure Statement" relating to this
Account (including the Custodian's fee schedule), the Custodial Account
document, and the "Instructions" pertaining to this Adoption Agreement.
Depositor acknowledges receipt of the Universal Individual Retirement Custodial
Account document and Universal IRA Disclosure Statement at least 7 days before
the date inscribed below and acknowledges that Depositor has no further right of
revocation.
I certify, under penalty (1) that the Social Security or Tax I.D. Number
provided above is correct and (2) that I am not subject to backup withholding
either because I have not been notified that I am subject to backup withholding
as a result of a failure to report all interest or dividends or the Internal
Revenue Service has notified me that I am no longer subject to backup
withholding.
------------------------------------- CUSTODIAN ACCEPTANCE. State Street
Bank and Trust Company will accept
Signature of Depositor appointment as Custodian of the
Depositor's Account. However, this
Agreement is not binding upon the
Date Custodian until the Depositor has
------------- received a statement of the
transaction. Receipt by the
Depositor of a confirmation of the
purchase of the Fund shares indicated
above will serve as notification of
State Street Bank and Trust Company's
acceptance of appointment as
Custodian of the Depositor's Account.
STATE STREET BANK AND TRUST COMPANY,
CUSTODIAN
By
----------------------------------
Date
-----------------
RETAIN A PHOTOCOPY OF THE COMPLETED ADOPTION AGREEMENT FOR YOUR RECORDS
<PAGE>
FPA FUND DISTRIBUTORS, INC.
STATE STREET BANK AND TRUST COMPANY INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
UNIVERSAL IRA TRANSFER OF ASSETS FORM
- --------------------------------------------------------------------------------
1. NAME AND ADDRESS OF DEPOSITOR
Name
----------------------------------------------------------------------
Address
-------------------------------------------------------------------
Street City State Zip
Day Telephone No. ( ) Social Security No.
----------------- ---------------------
---------------------------------------------------------------------------
2. IDENTIFICATION OF RECEIVING ACCOUNT
This a transfer to a State Street Bank and Trust Company
/ / Regular IRA* / / SEP IRA / / Roth IRA**
* You may not transfer from a Roth IRA to a Regular IRA or a simplified
employee pension (SEP) IRA. Transfers to a Regular IRA or SEP IRA may
be made from another Regular IRA or SEP IRA, qualified employer plan,
403(b) arrangement.
** Transfers to a Roth IRA are possible only from another Roth IRA or
from a Regular IRA, not from other types of tax-deferred accounts. A
transfer from a Regular IRA will trigger federal income tax on the
taxable amount transferred from the Regular IRA.
If you already have a Regular IRA, SEP IRA or Roth IRA, indicate the
Account No.
---------------
--------------------------------------------------------------------------
3. INSTRUCTIONS TO PRESENT IRA CUSTODIAN OR TRUSTEE (Completed by Depositor)
Name of Custodian/Trustee
--------------------------------------------------
Attn: Mr./Ms.
-------------------------------------------------------------
Address
-------------------------------------------------------------------
Street City State Zip
Identification of Sending Account (including Account No.)
------------------
Please transfer assets from the above account to State Street Bank and
Trust Company. Transfer should be in cash according to the following
instructions:
( ) Transfer the total amount or ( ) Transfer $ _____________
in my Account and retain the balance.
Make check payable to:
State Street Bank and Trust Company
FPA Funds
P.O. Box 8500
Boston, MA 02266-8500
<PAGE>
- --------------------------------------------------------------------------------
4. INVESTMENT INSTRUCTIONS TO STATE STREET BANK AND TRUST COMPANY
(Depositor - check one box and complete if necessary)
( ) Invest the transferred amount in accordance with the investment
instructions in the Adoption Agreement for my State Street Bank and
Trust Company Individual Retirement Custodial Account.
( ) Invest the transferred FPA Capital Fund, Inc.* _____%
amount as follows: (*Open to existing shareholders)
FPA New Income, Inc. _____%
FPA Paramount Fund, Inc. _____%
FPA Perennial Fund, Inc. _____%
Must Total 100%
I acknowledge that I have sole responsibility for my investment choices and
that I have received a current prospectus for each Fund I select. Please
read the prospectus(es) of the Fund(s) you select before investing.
I understand that the requirements for a valid transfer to a Regular IRA,
SEP IRA or Roth IRA are complex and that I have the responsibility for
complying with all requirements and for the tax results of any such
transfer.
- --------------------------------------------------------------------------------
5. SIGNATURE OF DEPOSITOR
The undersigned certifies to the present IRA custodian or trustee that the
undersigned has established a successor Individual Retirement Custodial
Account meeting the requirements of Internal Revenue Code Section 408(a),
408(p) or 408A (as the case may be) to which assets will be transferred,
and certifies to State Street Bank and Trust Company that the IRA from
which assets are being transferred meets the requirements of Internal
Revenue Code Section 408(a), 408(p) or 408A (as the case may be).
------------------ ----------------------------------------------------
Date Signature of Depositor
SIGNATURE GUARANTEE (only if required by current Custodian or Trustee)
Signature guaranteed by:
--------------------------------------------------
Name of Bank or Dealer Firm
--------------------------------------------------
Signature of Officer and Title
- --------------------------------------------------------------------------------
6. ACCEPTANCE BY NEW CUSTODIAN (Completed by State Street Bank and Trust
Company)
State Street Bank and Trust Company agrees to accept transfer of the above
amount for deposit to the Depositor's State Street Bank and Trust Company
Individual Retirement Custodial Account, and requests the liquidation and
transfer of assets as indicated above.
By:
-------------------------- ----------------------------------------
<PAGE>
STATE STREET BANK UNIVERSAL INDIVIDUAL RETIREMENT ACCOUNT
DESIGNATION OF BENEFICIARY
Print Name of Depositor
---------------------------------------------------------
As Depositor, I hereby make the following designation of beneficiary in
accordance with the State Street Bank and Trust Company Regular Individual
Retirement Custodial Account, Roth Individual Retirement Custodial Account or
SIMPLE Individual Retirement Account:
In the event of my death, pay any interest I may have under my Account to the
following Primary Beneficiary or Beneficiaries who survive me. Make payment in
the proportions specified below (or in equal proportions if no different
proportions are specified). If any Primary Beneficiary predeceases me, his
share is to be divided among the Primary Beneficiaries who survive me in the
relative proportions assigned to each such surviving Primary Beneficiary.
PRIMARY BENEFICIARY OR BENEFICIARIES:
<TABLE>
<CAPTION>
Name Relationship Date of Birth Social Security Number Proportion
<S> <C> <C> <C> <C>
- -------------------- -------------------------- ------------------ -------------------------- ----------------
- -------------------- -------------------------- ------------------ -------------------------- ----------------
- -------------------- -------------------------- ------------------ -------------------------- ----------------
- -------------------- -------------------------- ------------------ -------------------------- ----------------
</TABLE>
If none of the Primary Beneficiaries survives me, pay any interest I may have
under my Account to the following Alternate Beneficiary or Beneficiaries who
survive me. Make payment in the proportions specified below (or in equal
proportions if no different proportions are specified). If any Alternate
Beneficiary predeceases me, his share is to be divided among the Alternate
Beneficiaries who survive me in the relative proportions assigned to each such
surviving Alternate Beneficiary.
ALTERNATE BENEFICIARY OR BENEFICIARIES:
<TABLE>
<CAPTION>
Name Relationship Date of Birth Social Security Number Proportion
<S> <C> <C> <C> <C>
- -------------------- -------------------------- ------------------ -------------------------- ----------------
- -------------------- -------------------------- ------------------ -------------------------- ----------------
- -------------------- -------------------------- ------------------ -------------------------- ----------------
- -------------------- -------------------------- ------------------ -------------------------- ----------------
</TABLE>
<PAGE>
I understand that the beneficiaries named herein may be changed or revoked at
any time by filing a new designation in writing with the Custodian. All forms
must be acceptable to the Custodian and dated and signed by the Depositor.
- --------------------------------------------- ------------------------------
Signature of Depositor Date
IMPORTANT: This Designation of Beneficiary may have important tax or estate
planning effects. Also, if you are married and reside in a community property
or marital property state (Arizona, California, Idaho, Louisiana, Nevada, New
Mexico, Texas Washington or Wisconsin), you may need to obtain your spouse's
consent if you have not designated your spouse as primary beneficiary for at
least half of your Account. See your lawyer or other tax professional for
additional information and advice.
- --------------------------------------------------------------------------------
SPOUSAL (This section should be reviewed if the accountholder is
married and designates a beneficiary other than the spouse. It
CONSENT is the accountholder's responsibility to determine if this
section applies. The accountholder may need to consult with
legal counsel. Neither the Custodian nor the Sponsor are
liable for any consequences resulting from a failure of the
accountholder to provide proper spousal consent.)
I am the spouse of the above-named accountholder. I
acknowledge that I have received a full and reasonable
disclosure of my spouse's property and financial obligations.
Due to any possible consequences of giving up my community
property interest in this IRA, I have been advised to see a tax
professional or legal advisor.
I hereby consent to the beneficiary designation(s) indicated
above. I assume full responsibility for any adverse
consequence that may result. No tax or legal advice was given
to me by the Custodian or Sponsor.
-------------------------------- --------------------------
SIGNATURE OF SPOUSE DATE
-------------------------------- --------------------------
SIGNATURE OF WITNESS FOR SPOUSE DATE
- --------------------------------------------------------------------------------
<PAGE>
STATE STREET BANK AND TRUST COMPANY
UNIVERSAL INDIVIDUAL RETIREMENT ACCOUNT
DISCLOSURE STATEMENT
PART ONE: DESCRIPTION OF REGULAR IRAs
SPECIAL NOTE
Part One of the Disclosure Statement describes the rules applicable to
Regular IRAs beginning January 1, 1998. IRAs described in these pages are
called "Regular IRAs" to distinguish them from the new "Roth IRAs" first
available starting in 1998. Roth IRAs are described in Part Two of this
Disclosure Statement.
For Regular IRA contributions for 1997 (including contributions made up
to April 15, 1998 but designated as contributions for 1997), there are
different rules for determining the deductibility of your contribution on
your federal tax return. For contributions for 1997, the "active
participant" limits on deductibility (described below) apply if either spouse
is an active participant in an employer-sponsored plan. Also, the adjusted
gross income ("AGI") levels for partially deductible or nondeductible Regular
IRA contributions (described below) are lower for 1997 ($25,000 for single
taxpayers, with no deduction if your AGI is above $35,000; and $40,000 for
married taxpayers filing jointly, with no deduction if your AGI is above
$50,000). Also, the exceptions to the 10% early withdrawal penalty for
withdrawals to pay certain higher education or first-time homebuyer expenses
do not apply to withdrawals in 1997.
This Part One of the Disclosure Statement describes Regular IRAs. It
does not describe Roth IRAs, a new type of IRA available starting in 1998.
Contributions to a Roth IRA are not deductible (regardless of your AGI), but
withdrawals that meet certain requirements are not subject to federal income
tax, so that dividends and investment growth on amounts held in the Roth IRA
can escape federal income tax. Please see Part Two of this Disclosure
Statement if you are interested in learning more about Roth IRAs.
Regular IRAs described in this Disclosure Statement may be used as part
of a simplified employee pension (SEP) plan maintained by your employer.
Under a SEP your employer may make contributions to your Regular IRA, and
these contributions may exceed the normal limits on Regular IRA contributions.
YOUR REGULAR IRA
This Part One contains information about your Regular Individual
Retirement Custodial Account with State Street Bank and Trust Company as
Custodian. A Regular IRA gives you several tax benefits. Earnings on the
assets held in your Regular IRA are not subject to federal income tax until
withdrawn by you. You may be able to deduct all or part of your Regular IRA
contribution on your federal income tax return. State income tax treatment
of your Regular IRA may differ from federal treatment; ask your state tax
department or your personal tax advisor for details.
Be sure to read Part Three of this Disclosure Statement for important
additional information, including information on how to revoke your Regular
IRA, investments and prohibited transactions, fees and expenses, and certain
tax requirements.
ELIGIBILITY
WHAT ARE THE ELIGIBILITY REQUIREMENTS FOR A REGULAR IRA?
You are eligible to establish and contribute to a Regular IRA for
a year if:
- You received compensation (or earned income if you are self
employed) during the year for personal services you rendered. If
you received taxable alimony, this is treated like compensation
for IRA purposes.
- You did not reach age 70 1/2 during the year.
CAN I CONTRIBUTE TO A REGULAR IRA FOR MY SPOUSE?
For each year before the year when your spouse attains age 70 1/2,
you can contribute to a separate Regular IRA for your spouse, regardless of
whether your spouse had any compensation or earned income in that year. This
is called a "spousal IRA." To make a contribution to a Regular IRA for your
spouse, you must file a joint tax return for the year with your spouse. For
a spousal IRA, your spouse must set up a different Regular IRA, separate from
yours, to which you contribute.
CONTRIBUTIONS
WHEN CAN I MAKE CONTRIBUTIONS TO A REGULAR IRA?
You may make a contribution to your existing Regular IRA or
establish a new Regular IRA for a taxable year by the due date (not including
any extensions) for your federal income tax return for the year. Usually this
is April 15 of the following year.
HOW MUCH CAN I CONTRIBUTE TO MY REGULAR IRA?
For each year when you are eligible (see above), you can contribute
up to the lesser of $2,000 or 100% of your compensation (or earned income, if
you are self-employed). However, under the tax laws, all or a portion of your
contribution may not be deductible.
If you and your spouse have spousal Regular IRAs, each spouse may
contribute up to $2,000 to his or her IRA for a year as long as the combined
compensation of both spouses for the year (as shown on your joint income tax
return) is at least $4,000. If the combined compensation of both spouses is
less than $4,000, the spouse with the higher amount of compensation may
contribute up to that spouse's compensation amount, or $2,000 if less. The
spouse with the
1
<PAGE>
lower compensation amount may contribute any amount up to that spouse's
compensation plus any excess of the other spouse's compensation over the other
spouse's IRA contribution. However, the maximum contribution to either spouse's
Regular IRA is $2,000 for the year.
If you (or your spouse) establish a new Roth IRA and make contributions to
both your Regular IRA and a Roth IRA, the combined limit on contributions to
both your (or your spouse's) Regular IRA and Roth IRA for a single calendar year
is $2,000.
HOW DO I KNOW IF MY CONTRIBUTION IS TAX DEDUCTIBLE?
The deductibility of your contribution depends upon whether you are an
active participant in any employer-sponsored retirement plan. If you are not an
active participant, the entire contribution to your Regular IRA is deductible.
If you are an active participant in an employer-sponsored plan, your
Regular IRA contribution may still be completely or partly deductible on your
tax return. This depends on the amount of your income (see below).
Similarly, the deductibility of a contribution to a Regular IRA for your
spouse depends upon whether your spouse is an active participant in any
employer-sponsored retirement plan. If your spouse is not an active
participant, the contribution to your spouse's Regular IRA will be deductible.
If your spouse is an active participant, the Regular IRA contribution will be
completely, partly or not deductible depending upon your combined income.
An exception to the preceding rules applies to high-income married
taxpayers, where one spouse is an active participant in an employer-sponsored
retirement plan and the other spouse is not. A contribution to the non-active
participant spouse's Regular IRA will be only partly deductible at an adjusted
gross income level on the joint tax return of $150,000, and the deductibility
will be phased out as described below over the next $10,000 so that there will
be no deduction at all with an adjusted gross income level of $160,000 or
higher.
HOW DO I DETERMINE MY OR MY SPOUSE'S "ACTIVE PARTICIPANT" STATUS?
Your (or your spouse's) Form W-2 should indicate if you (or your spouse)
were an active participant in an employer-sponsored retirement plan for a year.
If you have a question, you should ask your employer or the plan administrator.
In addition, regardless of income level, your spouse's "active participant"
status will not affect the deductibility of your contributions to your Regular
IRA if you and your spouse file separate tax returns for the taxable year and
you lived apart at all times during the taxable year.
WHAT ARE THE DEDUCTION RESTRICTIONS FOR ACTIVE PARTICIPANTS?
If you (or your spouse) are an active participant in an employer plan
during a year, the contribution to your Regular IRA (or your spouse's Regular
IRA) may be completely, partly or not deductible depending upon your filing
status and your amount of adjusted gross income ("AGI"). If AGI is any amount
up to the lower limit, the contribution is deductible. If your AGI falls
between the lower limit and the upper limit, the contribution is partly
deductible. If your AGI falls above the upper limit, the contribution is not
deductible.
<TABLE>
<CAPTION>
FOR ACTIVE PARTICIPANTS - 1998
IF YOU ARE IF YOU ARE THEN YOUR REGULAR
SINGLE MARRIED FILING JOINTLY IRA CONTRIBUTION IS
---------------------------------------------------------------------
<S> <C> <C> <C>
Up to Up to Fully
Lower Limit Lower Limit Deductible
($30,000 for 1998) ($50,000 for 1998)
---------------------------------------------------------------------
ADJUSTED More than Lower More than Lower Partly
GROSS Limit Limit Deductible
INCOME but less than but less than
(AGI) Upper Limit Upper Limit
LEVEL ($40,000 for 1998) ($60,000 for 1998)
---------------------------------------------------------------------
Upper Limit or more Upper Limit or more Not
Deductible
---------------------------------------------------------------------
</TABLE>
The Lower Limit and the Upper Limit will change for 1999 and later years. The
Lower Limit and Upper Limit for these years are shown in the following table.
Substitute the correct Lower Limit and Upper Limit in the table above to
determine deductibility in any particular year. (Note: if you are married but
filing separate returns, your Lower Limit is always zero and your Upper Limit is
always $10,000).
2
<PAGE>
TABLE OF LOWER AND UPPER LIMITS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
YEAR SINGLE MARRIED
FILING JOINTLY
-------------------------------------------------------------------------
LOWER LIMIT UPPER LIMIT LOWER LIMIT UPPER LIMIT
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 $31,000 $41,000 $51,000 $61,000
2000 $32,000 $42,000 $52,000 $62,000
2001 $33,000 $43,000 $53,000 $63,000
2002 $34,000 $44,000 $54,000 $64,000
2003 $40,000 $50,000 $60,000 $70,000
2004 $45,000 $55,000 $65,000 $75,000
2005 $50,000 $60,000 $70,000 $80,000
2006 $50,000 $60,000 $75,000 $85,000
2007 and $50,000 $60,000 $80,000 $100,000
later
</TABLE>
HOW DO I CALCULATE MY DEDUCTION IF I FALL IN THE "PARTLY DEDUCTIBLE" RANGE?
If your AGI falls in the partly deductible range, you must calculate the
portion of your contribution that is deductible. To do this, multiply your
contribution by a fraction. The numerator is the amount by which your AGI
exceeds the lower limit (for 1998: $30,000 if single, or $50,000 if married
filing jointly). The denominator is $10,000 (note that the denominator for
married joint filers is $20,000 starting in 2007). Subtract this from your
contribution and then round up to the nearest $10. The deductible amount is the
greater of the amount calculated or $200 (provided you contributed at least
$200). If your contribution was less than $200, then the entire contribution is
deductible.
For example, assume that you make a $2,000 contribution to your Regular IRA
in 1998, a year in which you are an active participant in your employer's
retirement plan. Also assume that your AGI is $57,555 and you are married,
filing jointly. You would calculate the deductible portion of your contribution
this way:
1. The amount by which your AGI exceeds the lower limit of the partly -
deductible range:
($57,555-$50,000) = $7,555
2. Divide this by $10,000: $ 7,555 = 0.7555
--------
$10,000
3. Multiply this by your contribution limit:
0.7555 x $2,000 = $1,511
4. Subtract this from your contribution:
($2,000 - $1,551) = $489
5. Round this up to the nearest $10: = $490
6. Your deductible contribution is the greater of this amount or $200.
Even though part or all of your contribution is not deductible, you
may still contribute to your Regular IRA (and your spouse may contribute to your
spouse's Regular IRA) up to the limit on contributions. When you file your tax
return for the year, you must designate the amount of non-deductible
contributions to your Regular IRA for the year. See IRS Form 8606.
HOW DO I DETERMINE MY AGI?
AGI is your gross income minus those deductions which are available
to all taxpayers even if they don't itemize. Instructions to calculate your AGI
are provided with your income tax Form 1040 or 1040A.
WHAT HAPPENS IF I CONTRIBUTE MORE THAN ALLOWED TO MY REGULAR IRA?
The maximum contribution you can make to a Regular IRA generally is
$2,000 or 100% of compensation or earned income, whichever is less. Any amount
contributed to the IRA above the maximum is considered an "excess contribution."
The excess is calculated using your contribution limit, not the deductible
limit. An excess contribution is subject to excise tax of 6% for each year it
remains in the IRA.
HOW CAN I CORRECT AN EXCESS CONTRIBUTION?
Excess contributions may be corrected without paying a 6% penalty.
To do so, you must withdraw the excess and any earnings on the excess before the
due date (including extensions) for filing your federal income tax return for
the year for which you made the excess contribution. A deduction should not be
3
<PAGE>
taken for any excess contribution. The earnings must be included in your income
for the tax year for which the contribution was made and may be subject to a 10%
premature withdrawal tax if you have not reached age 59 1/2.
WHAT HAPPENS IF I DON'T CORRECT THE EXCESS CONTRIBUTION BY THE TAX RETURN DUE
DATE?
Any excess contribution not withdrawn by the tax return due date
(including any extensions) for the year for which the contribution was made
will be subject to the 6% excise tax. There will be an additional 6% excise tax
for each subsequent year the excess remains in your account.
Under limited circumstances, you may correct an excess contribution
after tax filing time by withdrawing the excess contribution (leaving the
earnings in the account). This withdrawal will not be includable in income nor
will it be subject to any premature withdrawal penalty if (1) your contributions
to all Regular IRAs do not exceed $2,000 and (2) you did not take a deduction
for the excess amount (or you file an amended return (Form 1040X) which removes
the excess deduction).
HOW ARE EXCESS CONTRIBUTIONS TREATED IF NONE OF THE PRECEDING RULES APPLY?
Unless an excess contribution qualifies for the special treatment
outlined above, the excess contribution and any earnings on it withdrawn after
tax filing time will be includable in taxable income and may be subject to a 10%
premature withdrawal penalty. No deduction will be allowed for the excess
contribution for the year in which it is made.
Excess contributions may be corrected in a subsequent year to the
extent that you contribute less than your maximum amount. As the prior excess
contribution is reduced or eliminated, the 6% excise tax will become
correspondingly reduced or eliminated for subsequent tax years. Also, you may
be able to take an income tax deduction for the amount of excess that was
reduced or eliminated, depending on whether you would be able to take a
deduction if you had instead contributed the same amount.
ARE THE EARNINGS ON MY REGULAR IRA FUNDS TAXED?
Any dividends on or growth of the investments held in your Regular
IRA are generally exempt from federal income taxes and will not be taxed until
withdrawn by you, unless the tax exempt status of your Regular IRA is revoked
(this is described in Part Three of this Disclosure Statement).
TRANSFERS/ROLLOVERS
CAN I TRANSFER OR ROLL OVER A DISTRIBUTION I RECEIVE FROM MY EMPLOYER'S
RETIREMENT PLAN INTO A REGULAR IRA?
Almost all distributions from employer plans or 403(b) arrangements
(for employees of tax-exempt employers) are eligible for rollover to a Regular
IRA. The main exceptions are
- payments over the lifetime or life expectancy of the participant
(or participant and a designated beneficiary),
- installment payments for a period of 10 years or more,
- required distributions (generally the rules require distributions
starting at age 70 1/2 or for certain employees starting at
retirement, if later), and
- payments of employee after-tax contributions.
If you are eligible to receive a distribution from a tax qualified
retirement plan as a result of, for example, termination of employment, plan
discontinuance, or retirement, all or part of the distribution may be
transferred directly into your Regular IRA. This is a called a "direct
rollover." Or, you may receive the distribution and make a regular rollover to
your Regular IRA within 60 days. By making a direct rollover or a regular
rollover, you can defer income taxes on the amount rolled over until you
subsequently make withdrawals from your IRA.
The maximum amount you may roll over is the amount of employer
contributions and earnings distributed. You may not roll over any after-tax
employee contributions you made to the employer retirement plan. If you are
over age 70 1/2 and are required to take minimum distributions under the tax
laws, you may not roll over any amount required to be distributed to you under
the minimum distribution rules. Also, if you are receiving periodic payments
over your, or your and your designated beneficiary's life expectancy, or for a
period of at least 10 years, you may not roll over these payments. A rollover
to a regular IRA must be completed within 60 days after the distribution from
the employer retirement plan to be valid.
NOTE: A qualified plan administrator or 403(b) sponsor MUST
WITHHOLD 20% OF YOUR DISTRIBUTION for federal income taxes UNLESS you elect a
direct rollover. Your plan or 403(b) sponsor is required to provide you with
information about direct and traditional rollovers and withholding taxes before
you receive your distribution and must comply with your directions to make a
direct rollover.
The rules governing rollovers are complicated. Be sure to consult
your tax advisor or the IRS if you have a question about rollovers.
ONCE I HAVE ROLLED OVER A PLAN DISTRIBUTION INTO A REGULAR IRA, CAN I
SUBSEQUENTLY ROLL OVER INTO ANOTHER EMPLOYER'S QUALIFIED RETIREMENT PLAN?
Yes. Part or all of an eligible distribution received from a
qualified plan may be transferred from the Regular IRA holding it to another
qualified plan. However, the IRA must have no assets other than those which
were previously distributed to you from the qualified plan. Specifically, the
IRA cannot contain any contributions by you (or your spouse). Also, the new
qualified plan must accept rollovers. Similar rules apply to Regular IRAs
established with rollovers from 403(b) arrangements.
CAN I MAKE A TRADITIONAL ROLLOVER FROM MY REGULAR IRA TO ANOTHER REGULAR IRA?
You may make a rollover from one Regular IRA to another Regular IRA
you have or you establish to receive the rollover. Such a rollover must be
completed within 60 days after the withdrawal from your first Regular IRA.
After making a traditional rollover from one Regular IRA to another, you must
wait a full year (365 days) before you can make another such rollover.
(However, you can instruct a Regular IRA custodian to transfer amounts directly
to another Regular IRA custodian; such a direct transfer does not count as a
rollover.)
4
<PAGE>
WHAT HAPPENS IF I COMBINE ROLLOVER CONTRIBUTIONS WITH MY NORMAL CONTRIBUTIONS IN
ONE IRA?
If you wish to make both a normal annual contribution and a rollover
contribution, you may wish to open two separate Regular IRAs by completing two
Adoption Agreements and two sets of forms. You should consult a tax advisor
before making your annual contribution to the IRA you established with rollover
contributions (or make a rollover contribution to the IRA to which you make your
annual contributions). This is because combining your annual contributions and
rollover contributions originating from an employer plan distribution would
prohibit the future rollover out of the IRA into another qualified plan. If
despite this, you still wish to combine a rollover contribution and the IRA
holding your annual contributions, you should establish the account as a Regular
IRA on the Adoption Agreement (not a Rollover IRA or Direct Rollover IRA) and
make the contributions to that account.
HOW DO ROLLOVERS AFFECT MY CONTRIBUTION OR DEDUCTION LIMITS?
Rollover contributions, if properly made, do not count toward the
maximum contribution. Also, rollovers are not deductible and they do not affect
your deduction limits as described above.
WHAT ABOUT CONVERTING MY REGULAR IRA TO A ROTH IRA?
The rules for converting a Regular IRA to a new Roth IRA, or making a
rollover from a Regular IRA to a new Roth IRA, are described in Part Two below.
WITHDRAWALS
WHEN CAN I MAKE WITHDRAWALS FROM MY REGULAR IRA?
You may withdraw from your Regular IRA at any time. However,
withdrawals before age 59 1/2 may be subject to a 10% penalty tax in addition to
regular income taxes (see below).
WHEN MUST I START MAKING WITHDRAWALS?
If you have not withdrawn your entire IRA by the April 1 following the
year in which you reach 70 1/2, you must make minimum withdrawals in order to
avoid penalty taxes. The rule allowing certain employees to postpone
distributions from an employer qualified plan until actual retirement (even if
this is after age 70 1/2) does not apply to Regular IRAs.
The minimum withdrawal amount is determined by dividing the balance in
your Regular IRA (or IRAs) by your life expectancy or the combined life
expectancy of you and your designated beneficiary. The minimum withdrawal rules
are complex. Consult your tax advisor for assistance.
The penalty tax is 50% of the difference between the minimum withdrawal
amount and your actual withdrawals during a year. The IRS may waive or reduce
the penalty tax if you can show that your failure to make the required minimum
withdrawals was due to reasonable cause and you are taking reasonable steps to
remedy the problem.
HOW ARE WITHDRAWALS FROM MY REGULAR IRA TAXED?
Amounts withdrawn by you are includable in your gross income in the
taxable year that you receive them, and are taxable as ordinary income. Lump
sum withdrawals from a Regular IRA are not eligible for averaging treatment
currently available to certain lump sum distributions from qualified employer
retirement plans.
Since the purpose of a Regular IRA is to accumulate funds for
retirement, your receipt or use of any portion of your Regular IRA before you
attain age 59 1/2 generally will be considered as an early withdrawal and
subject to a 10% penalty tax.
The 10% penalty tax for early withdrawal will not apply if:
- The distribution was a result of your death or
disability.
- The purpose of the withdrawal is to pay certain higher education
expenses for yourself or your spouse, child, or grandchild.
Qualifying expenses include tuition, fees, books, supplies and
equipment required for attendance at a post-secondary educational
institution. Room and board expenses may qualify if the student is
attending at least half-time.
- The withdrawal is used to pay eligible first-time homebuyer
expenses. These are the costs of purchasing, building or rebuilding
a principal residence (including customary settlement, financing or
closing costs). The purchaser may be you, your spouse, or a child,
grandchild, parent or grandparent of you or your spouse. An
individual is considered a "first-time homebuyer" if the individual
(or the individual's spouse, if married) did not have an ownership
interest in a principal residence during the two-year period
immediately preceding the acquisition in question. The withdrawal
must be used for eligible expenses within 120 days after the
withdrawal. (If there is an unexpected delay, or cancellation of
the home acquisition, a withdrawal may be redeposited as a
rollover).
There is a lifetime limit on eligible first-time homebuyer expenses
of $10,000 per individual.
- The distribution is one of a scheduled series of substantially equal
periodic payments for your life or life expectancy (or the joint
lives or life expectancies of you and your beneficiary).
If there is an adjustment to the scheduled series of payments, the
10% penalty tax may apply. The 10% penalty will not apply if you
make no change in the series of payments until the end of five years
or until you reach age 59 1/2, whichever is later. If you make a
change before then, the penalty will apply. For example, if you
begin receiving payments at age 50 under a withdrawal program
providing for substantially equal payments over your life
expectancy, and at age 58 you elect to receive the remaining amount
in your Regular IRA in a lump-sum, the 10% penalty tax will apply to
the lump sum and to the amounts previously paid to you before age
59 1/2.
- The distribution does not exceed the amount of your deductible
medical expenses for the year (generally speaking, medical expenses
paid during a year are
5
<PAGE>
deductible if they are greater than 72% of your adjusted gross income
for that year).
- The distribution does not exceed the amount you paid for health
insurance coverage for yourself, your spouse and dependents. This
exception applies only if you have been unemployed and received federal
or state unemployment compensation payments for at least 12 weeks; this
exception applies to distributions during the year in which you received
the unemployment compensation and during the following year, but not to
any distributions received after you have been reemployed for at least
60 days.
HOW ARE NONDEDUCTIBLE CONTRIBUTIONS TAXED WHEN THEY ARE WITHDRAWN?
A withdrawal of nondeductible contributions (not including earnings)
will be tax-free. However, if you made both deductible and nondeductible
contributions to your Regular IRA, then each distribution will be treated as
partly a return of your nondeductible contributions (not taxable) and partly a
distribution of deductible contributions and earnings (taxable). The nontaxable
amount is the portion of the amount withdrawn which bears the same ratio as your
total nondeductible Regular IRA contributions bear to the total balance of all
your Regular IRAs (including rollover IRAs and SEPs, but not including Roth
IRAs).
For example, assume that you made the following Regular IRA
contributions:
<TABLE>
<CAPTION>
Year Deductible Nondeductible
---- ---------- -------------
<S> <C> <C>
1995 $2,000
1996 $2,000
1997 $1,000 $1,000
1998 $1,000
------ ------
$5,000 $2,000
</TABLE>
In addition assume that your Regular IRA has total investment earnings
through 1998 of $1,000. During 1998 you withdraw $500. Your total account
balance as of 12-31-98 is $7,500 as shown below.
<TABLE>
<S> <C>
Deductible Contributions $5,000
Nondeductible Contributions $2,000
Earnings On IRA $1,000
Less 1998 Withdrawal $ 500
------
Total Account Balance as of 12/31/98 $7,500
</TABLE>
To determine the nontaxable portion of your 1998 withdrawal, the total
1998 withdrawal ($500) must be multiplied by a fraction. The numerator of the
fraction is the total of all nondeductible contributions remaining in the
account before the 1998 withdrawal ($2,000). The denominator is the total
account balance as of 12-31-98 ($7,500) plus the 1998 withdrawal ($500) or
$8,000. The calculation is:
Total Remaining
Nondeductible Contributions $2,000 x $500 = $ 125
- --------------------------- ------
Total Account Balance $8,000
Thus, $125 of the $500 withdrawal in 1998 will not be included in your
taxable income. The remaining $375 will be taxable for 1998. In addition, for
future calculations the remaining nondeductible contribution total will be
$2,000 minus $125, or $1,875.
A loss in your Regular IRA investment may be deductible. You should
consult your tax advisor for further details on the appropriate calculation for
this deduction if applicable.
IS THERE A PENALTY TAX ON CERTAIN LARGE WITHDRAWALS OR ACCUMULATIONS IN MY IRA?
Earlier tax laws imposed a "success" penalty equal to 15% of withdrawals
from all retirement accounts (including IRAs, 401(k) or other employer
retirement plans, 403(b) arrangements and others) in a year exceeding a
specified amount (initially $150,000 per year). Also, there was a 15% estate
tax penalty on excess accumulations remaining in IRAs and other tax-favored
arrangements upon your death. These 15% penalty taxes have been repealed.
IMPORTANT: Please see Part Three below which contains important information
applicable to ALL State Street Bank and Trust Company IRAs.
6
<PAGE>
PART TWO: DESCRIPTION OF ROTH IRAs
SPECIAL NOTE
Part Two of the Disclosure Statement describes the rules generally
applicable to Roth IRAs beginning January 1, 1998.
Roth IRAs are a new kind of IRA available for the first time in 1998.
Contributions to a Roth IRA for 1997 are not permitted. Contributions to a Roth
IRA are not tax-deductible, but withdrawals that meet certain requirements are
not subject to federal income taxes. This makes the dividends on and growth of
the investments held in your Roth IRA tax-free for federal income tax purposes
if the requirements are met.
Regular IRAs, which have existed since 1975, are still available.
Contributions to a Regular IRA may be tax-deductible. Earnings and gains on
amounts while held in a Regular IRA are tax-deferred. Withdrawals are subject
to federal income tax (except for prior after-tax contributions which may be
recovered without additional federal income tax).
This Part Two does not describe Regular IRAs. If you wish to review
information about Regular IRAs, please see Part One of this Disclosure
Statement.
This Disclosure Statement also does not describe IRAs established in
connection with a Simplified Employee Pension (SEP) plan maintained by your
employer. Roth IRAs may not be used in connection with a SEP plan.
YOUR ROTH IRA
Your Roth IRA gives you several tax benefits. While contributions to a
Roth IRA are not deductible, dividends on and growth of the assets held in your
Roth IRA are not subject to federal income tax. Withdrawals by you from your
Roth IRA are excluded from your income for federal income tax purposes if
certain requirements (described below) are met. State income tax treatment of
your Roth IRA may differ from federal treatment; ask your state tax department
or your personal tax advisor for details.
Be sure to read Part Three of this Disclosure Statement for important
additional information, including information on how to revoke your Roth IRA,
investments and prohibited transactions, fees and expenses and certain tax
requirements.
ELIGIBILITY
WHAT ARE THE ELIGIBILITY REQUIREMENTS FOR A ROTH IRA?
Starting with 1998, you are eligible to establish and contribute to a
Roth IRA for a year if you received compensation (or earned income if you are
self employed) during the year for personal services you rendered. If you
received taxable alimony, this is treated like compensation for IRA purposes.
In contrast to a Regular IRA, with a Roth IRA you may continue making
contributions after you reach age 70 1/2.
CAN I CONTRIBUTE TO ROTH IRA FOR MY SPOUSE?
Starting with 1998, if you meet the eligibility requirements you can not
only contribute to your own Roth IRA, but also to a separate Roth IRA for your
spouse out of your compensation or earned income, regardless of whether your
spouse had any compensation or earned income in that year. This is called a
"spousal Roth IRA." To make a contribution to a Roth IRA for your spouse, you
must file a joint tax return for the year with your spouse. For a spousal Roth
IRA, your spouse must set up a different Roth IRA, separate from yours, to which
you contribute.
Of course, if your spouse has compensation or earned income, your spouse
can establish his or her own Roth IRA and make contributions to it in accordance
with the rules and limits described in this Part Two of the Disclosure
Statement.
CONTRIBUTIONS
WHEN CAN I MAKE CONTRIBUTIONS TO A ROTH IRA?
You may make a contribution to your Roth IRA or establish a new Roth IRA
for a taxable year by the due date (not including any extensions) for your
federal income tax return for the year. Usually this is April 15 of the
following year. For example, you will have until April 15, 1999 to establish
and make a contribution to a Roth IRA for 1998.
CAUTION: Since Roth IRAs are available starting January 1, 1998, you
may NOT make a contribution by April 15, 1998 to a Roth IRA for 1997.
HOW MUCH CAN I CONTRIBUTE TO MY ROTH IRA?
For each year when you are eligible (see above), you can contribute up
to the lesser of $2,000 or 100% of your compensation (or earned income, if you
are self-employed).
Your Roth IRA limit is reduced by any contributions for the same year to
a Regular IRA. For example, assuming you have at least $2,000 in compensation
or earned income, if you contribute $500 to your Regular IRA for 1998, your
maximum Roth IRA contribution for 1998 will be $1,500.
If you and your spouse have spousal Roth IRAs, each spouse may
contribute up to $2,000 to his or her Roth IRA for a year as long as the
combined compensation of both spouses for the year (as shown on your joint
income tax return) is at least $4,000. If the combined compensation of both
spouses is less than $4,000, the spouse with the higher amount of compensation
may contribute up to that spouse's compensation amount, or $2,000 if less. The
spouse with the lower compensation amount may contribute any amount up to that
spouse's compensation plus any excess the other spouse's compensation over the
other spouse's Roth IRA contribution. However, the maximum contribution to
either spouse's Roth IRA is $2,000 for the year.
As noted above, the spousal Roth IRA limits are reduced by any
contributions for the same calendar year to a Regular IRA maintained by you or
your spouse.
7
<PAGE>
For taxpayers with high income levels, the contribution limits may be
reduced (see below).
ARE CONTRIBUTIONS TO A ROTH IRA TAX DEDUCTIBLE?
Contributions to a Roth IRA are not deductible. This is a major
difference between Roth IRAs and Regular IRAs. Contributions to a Regular IRA
may be deductible on your federal income tax return depending on whether or not
you are an active participant in an employer-sponsored plan and on your income
level.
ARE THE EARNINGS ON MY ROTH IRA FUNDS TAXED?
Any dividends on or growth of investments held in your Roth IRA are
generally exempt from federal income taxes and will not be taxed until withdrawn
by you, unless the tax exempt status of your Roth IRA is revoked. If the
withdrawal qualifies as a tax-free withdrawal (see below), amounts reflecting
earnings or growth of assets in your Roth IRA will not be subject to federal
income tax.
WHICH IS BETTER, A ROTH IRA OR A REGULAR IRA?
This will depend upon your individual situation. A Roth IRA may be
better if you are an active participant in an employer-sponsored plan and your
adjusted gross income is too high to make a deductible IRA contribution (but not
too high to make a Roth IRA contribution). Also, the benefits of a Roth IRA vs.
a Regular IRA may depend upon a number of other factors including: your current
income tax bracket vs. your expected income tax bracket when you make
withdrawals from your IRA, whether you expect to be able to make nontaxable
withdrawals from your Roth IRA (see below), how long you expect to leave your
contributions in the IRA, how much you expect the IRA to earn in the meantime,
and possible future tax law changes.
Consult a qualified tax or financial advisor for assistance on this
question.
ARE THERE ANY RESTRICTIONS ON CONTRIBUTIONS TO MY ROTH IRA?
Taxpayers with very high income levels may not be able to contribute to
a Roth IRA at all, or their contribution may be limited to an amount less than
$2,000. This depends upon your filing status and the amount of your adjusted
gross income (AGI). The following table shows how the contribution limits are
restricted:
<TABLE>
<CAPTION>
ROTH IRA CONTRIBUTION LIMITS
----------------------------------------------------------------------
IF YOU ARE IF YOU ARE THEN YOU MAY MAKE
SINGLE TAXPAYER MARRIED FILING JOINTLY
----------------------------------------------------------------------
<S> <C> <C> <C>
Up to Up to Full
$95,000 $150,000 Contribution
----------------------------------------------------------------------
ADJUSTED More than $95,000 More than $150,000 Reduced Contribution
GROSS but less than but less than (see explanation
INCOME $110,000 $160,000 below)
(AGI)
LEVEL
----------------------------------------------------------------------
$110,000 $160,000 Zero (No
and up and up Contribution)
----------------------------------------------------------------------
</TABLE>
Note: If you are a married taxpayer filing separately, your maximum
Roth IRA contribution limit phases out over the first $15,000 of adjusted gross
income. If your AGI is $15,000 or more not contribute to a Roth IRA for the
year.
HOW DO I CALCULATE MY LIMIT IF I FALL IN THE "REDUCED CONTRIBUTION" RANGE?
If your AGI falls in the reduced contribution range, you must calculate
your contribution limit. To do this, multiply your normal contribution limit
($2,000 or your compensation if less) by a fraction. The numerator is the
amount by which your AGI exceeds the lower limit of the reduced contribution
range ($95,000 if single, or $150,000 if married filing jointly). The
denominator is $15,000 (single taxpayers) or $10,000 (married filing jointly).
Subtract this from your normal limit and then round up to the nearest $10. The
contribution limit is the greater of the amount calculated or $200.
For example, assume that your AGI for the year is $157,555 and you are
married, filing jointly. You would calculate your Roth IRA contribution limit
this way:
1. The amount by which your AGI exceeds the lower limit of the reduced
contribution deductible range:
($157,555-$150,000) = $7,555
2. Divide this by $10,000: $7,555
-------
$10,000 = 0.7555
3. Multiply this by $2,000 (or your compensation for the year, if
less):
0.7555 x $2,000 = $1,511
4. Subtract this from your $2,000 limit:
($2,000 - $1,551) = $489
5. Round this up to the nearest $10 = $490
6. Your contribution limit is the greater of this amount or $200.
Remember, your Roth IRA contribution limit of $2,000 is reduced by
any contributions for the same year to a Regular IRA. If you fall in the
reduced contribution range, the reduction formula applies to the Roth IRA
contribution limit left after subtracting your contribution for the year to a
Regular IRA.
8
<PAGE>
HOW DO I DETERMINE MY AGI?
AGI is your gross income minus those deductions which are available to
all taxpayers even if they don't itemize. Instructions to calculate your AGI
are provided with your income tax Form 1040 or 1040A.
There are two additional rules when calculating AGI for purposes of Roth
IRA contribution limits. First, if you are making a deductible contribution for
the year to a Regular IRA, your AGI is reduced by the amount of the deduction.
Second, if you are converting a Regular IRA to a Roth IRA in a year (see below),
the amount includable in your income as a result of the conversion is not
considered AGI when computing your Roth IRA contribution limit for the year.
(Note: a bill pending in Congress might affect the first rule -- consult your
tax advisor or the IRS for the latest developments.)
WHAT HAPPENS IF I CONTRIBUTE MORE THAN ALLOWED TO MY ROTH IRA?
The maximum contribution you can make to a Roth IRA generally is $2,000
or 100% of compensation or earned income, whichever is less. As noted above,
your maximum is reduced by the amount of any contribution to a Regular IRA for
the same year and may be further reduced if you have high AGI. Any amount
contributed to the Roth IRA above the maximum is considered an "excess
contribution."
An excess contribution is subject to excise tax of 6% for each year it
remains in the Roth IRA.
HOW CAN I CORRECT AN EXCESS CONTRIBUTION?
Excess contributions may be corrected without paying a 6% penalty. To
do so, you must withdraw the excess and any earnings on the excess before the
due date (including extensions) for filing your federal income tax return for
the year for which you made the excess contribution. The earnings must be
included in your income for the tax year for which the contribution was made
and may be subject to a 10% premature withdrawal tax if you have not reached
age 59 1/2 (unless an exception to the 10% penalty tax applies).
WHAT HAPPENS IF I DON'T CORRECT THE EXCESS CONTRIBUTION BY THE TAX RETURN DUE
DATE?
Any excess contribution not withdrawn by the tax return due date
(including any extensions) for the year for which the contribution was made
will be subject to the 6% excise tax. There will be an additional 6% excise tax
for each subsequent year the excess remains in your account.
For subsequent years, you may reduce the excess contributions in your
account by making a withdrawal equal to the excess. Earnings need not be
withdrawn. To the extent that no earnings are withdrawn, the withdrawal will
not be subject to income taxes or possible penalties for premature withdrawals
before age 59 1/2. Excess contributions may also be corrected in a subsequent
year to the extent that you contribute less than your Roth IRA contribution
limit for the subsequent year. As the prior excess contribution is reduced or
eliminated, the 6% excise tax will become correspondingly reduced or eliminated
for subsequent tax years.
CONVERSION OF EXISTING REGULAR IRA
CAN I CONVERT AN EXISTING REGULAR IRA INTO A ROTH IRA?
Yes, starting in 1998 you can convert an existing Regular IRA into a
Roth IRA if you meet the adjusted gross income (AGI) limits described below.
Conversion may be accomplished either by establishing a Roth IRA and then
transferring the amount in your Regular IRA you wish to convert to the new Roth
IRA. Or, if you want to convert an existing Regular IRA with State Street Bank
as custodian to a Roth IRA, you may give us directions to convert.
You are eligible to convert a Regular IRA to a Roth IRA if, for the year
of the conversion, your AGI is $100,000 or less. The same limit applies to
married and single taxpayers, and the limit is not indexed to cost-of-living
increases. Married taxpayers are eligible to convert a Regular IRA to a Roth
IRA only if they file a joint income tax return; married taxpayers filing
separately are not eligible to convert.
CAUTION: You should be extremely cautious in converting an existing IRA
into a Roth IRA early in a year if there is any possibility that your AGI for
the year will exceed $100,000. Although a bill pending in Congress would permit
you to transfer amounts back to your Regular IRA if your AGI exceeds $100,000,
under the current rules, if you have already converted during a year and you
turn out to have more than $100,000 of AGI, there may be adverse tax results for
you. Consult your tax advisor or the IRS for the latest developments.
WHAT ARE THE TAX RESULTS FROM CONVERTING?
The taxable amount in your Regular IRA you convert to a Roth IRA will be
considered taxable income on your federal income tax return for the year of the
conversion. All amounts in a Regular IRA are taxable except for your prior
non-deductible contributions to the Regular IRA.
If you make the conversion during 1998, the taxable income is spread
over four years. In other words, you would include one quarter of the taxable
amount on your federal income tax return for 1998, 1999, 2000 and 2001.
SHOULD I CONVERT MY REGULAR IRA TO A ROTH IRA?
Only you can answer this question, in consultation with your tax or
financial advisors. A number of factors, including the following, may be
relevant. Conversion may be advantageous if you expect to leave the converted
funds on deposit in your Roth IRA for at least five years and to be able to
withdraw the funds under circumstances that will not be taxable (see below).
The benefits of converting will also depend on whether you expect to be in the
same tax bracket when you withdraw from your Roth IRA as you are now. Also,
conversion is based upon an assumption that Congress will not change the tax
rules for withdrawals from Roth IRAs in the future, but this cannot be
guaranteed.
TRANSFERS/ROLLOVERS
CAN I TRANSFER OR ROLL OVER A DISTRIBUTION I RECEIVE FROM MY EMPLOYER'S
RETIREMENT PLAN INTO A ROTH IRA?
Distributions from qualified employer-sponsored retirement plans or
403(b) arrangements (for employees of tax-exempt employers) are not eligible for
rollover or direct transfer to a Roth IRA. However, in certain circumstances
it may be possible to make a direct rollover of an eligible distribution to a
Regular IRA and then to convert the Regular IRA to Roth IRA (see above).
Consult your tax or financial advisor for further information on this
possibility.
CAN I MAKE A ROLLOVER FROM MY ROTH IRA TO ANOTHER ROTH IRA?
You may make a rollover from one Roth IRA to another Roth IRA you have
or you establish to receive the rollover. Such a rollover must be completed
within 60 days after the withdrawal from your first Roth IRA. After making a
rollover from one Roth IRA to another, you must wait a full year (365 days)
before you can make
9
<PAGE>
another such rollover. (However, you can instruct a Roth IRA custodian to
transfer amounts directly to another Roth IRA custodian; such a direct transfer
does not count as a rollover.)
HOW DO ROLLOVERS AFFECT MY ROTH IRA CONTRIBUTION LIMITS?
Rollover contributions, if properly made, do not count toward the
maximum contribution. Also, you may make a rollover from one Roth IRA to
another even during a year when you are not eligible to contribute to a Roth IRA
(for example, because your AGI for that year is too high).
WITHDRAWALS
WHEN CAN I MAKE WITHDRAWALS FROM MY ROTH IRA?
You may withdraw from your Roth IRA at any time. If the withdrawal
meets the requirements discussed below, it is tax-free. This means that you pay
no federal income tax even though the withdrawal includes earnings or gains on
your contributions while they were held in your Roth IRA.
WHEN MUST I START MAKING WITHDRAWALS?
There are no rules on when you must start making withdrawals from your
Roth IRA or on minimum required withdrawal amounts for any particular year
during your lifetime. Unlike Regular IRAs, you are not required to start making
withdrawals from a Roth IRA by the April 1 following the year in which you reach
age 70 1/2.
After your death, there are IRS rules on the timing and amount of
distributions. In general, the amount in your Roth IRA must be distributed by
the end of the fifth year after your death. However, distributions to a
designated beneficiary that begin by the end of the year following the year of
your death and that are paid over the life expectancy of the beneficiary satisfy
the rules. Also, if your surviving spouse is your designated beneficiary, the
spouse may defer the start of distributions until you would have reached age 70
1/2 had you lived.
WHAT ARE THE REQUIREMENTS FOR A TAX-FREE WITHDRAWAL?
To be tax-free, a withdrawal from your Roth IRA must meet two
requirements. First, the Roth IRA must have been open for 5 or more years
before the withdrawal. Second, at least one of the following conditions must be
satisfied:
- You are age 59 1/2 or older when you make the withdrawal.
- The withdrawal is made by your beneficiary after you die.
- You are disabled (as defined in IRS rules) when you make the
withdrawal.
- You are using the withdrawal to cover eligible first time homebuyer
expenses. These are the costs of purchasing, building or rebuilding
a principal residence (including customary settlement, financing or
closing costs). The purchaser may be you, your spouse or a child,
grandchild, parent or grandparent of you or your spouse. An
individual is considered a "first-time homebuyer" if the individual
(or the individual's spouse, if married) did not have an ownership
interest in a principal residence during the two-year period
immediately preceding the acquisition in question. The withdrawal
must be used for eligible expenses within 120 days after the
withdrawal (if there is an unexpected delay, or cancellation of the
home acquisition, a withdrawal may be redeposited as a rollover).
There is a lifetime limit on eligible first-time homebuyer expenses
of $10,000 per individual.
For a Roth IRA that you set up with amounts rolled over or converted from a
Regular IRA, the 5 year period begins with the year in which the conversion or
rollover was made. (Note: a bill pending in Congress might affect this rule --
consult your tax advisor or the IRS for the latest developments.)
For a Roth IRA that you started with a normal contribution, the 5 year
period starts with the year for which you make the initial normal contribution.
HOW ARE WITHDRAWALS FROM MY ROTH IRA TAXED IF THE TAX-FREE REQUIREMENTS ARE NOT
MET?
If the qualified withdrawal requirements are not met, a withdrawal
consisting of your own prior contribution amounts to your Roth IRA will not be
considered taxable income in the year you receive it, nor will the 10% penalty
apply. To the extent that the nonqualified withdrawal consists of dividends or
gains while your contributions were held in your Roth IRA, the withdrawal is
includable in your gross income in the taxable year you receive it, and may be
subject to the 10% withdrawal penalty. All amounts withdrawn from your Roth IRA
are considered withdrawals of your contributions until you have withdrawn the
entire amount you have contributed. After that, all amounts withdrawn are
considered taxable withdrawals of dividends and gains.
Note that, for purposes of determining what portion of any distribution
is includable in income, all of your Roth IRA accounts are considered as one
single account. Amounts withdrawn from any one Roth IRA account are deemed to
be withdrawn from contributions first. Since all your Roth IRAs are considered
to be one account for this purpose, withdrawals from Roth IRA accounts are not
considered to be from earnings or interest until an amount equal to all
contributions made to all of an individual's Roth IRA accounts is withdrawn.
The following example illustrates this:
A single individual contributes $1,000 a year to his State Street Bank
and Trust Company Roth IRA account and $1,000 a year to the Brand X Roth IRA
account over a period of ten years. At the end of 10 years his account balances
are as follows:
<TABLE>
<CAPTION>
PRINCIPAL CONTRIBUTIONS EARNINGS
<S> <C> <C>
STATE STREET BANK ROTH IRA $10,000 $10,000
BRAND X ROTH IRA $10,000 $10,000
------- -------
TOTAL $20,000 $20,000
</TABLE>
At the end of 10 years, this person has $40,000 in both Roth IRA
accounts, of which $20,000 represents his contributions (aggregated) and $20,000
represents his earnings (aggregated). This individual, who is 40, withdraws
$15,000 from his Brand X Roth IRA (not a qualified withdrawal). We look to the
aggregate amount of all principal contributions - in this case $20,000 - to
determine if the withdrawal is from contributions, and thus non-taxable. In
this example, there is no ($0) taxable income as a result of this withdrawal
because the $15,000 withdrawal is less than the total amount of aggregated
contributions ($20,000). If this individual then withdrew $15,000 from his
State Street Bank Roth IRA, $5,000 would not be taxable (the remaining aggregate
contributions) and $10,000 would be
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<PAGE>
treated as taxable income for the year of the withdrawal, subject to regular
income taxes and the 10% premature withdrawal penalty (unless an exception
applies).
Taxable withdrawals of dividends and gains from a Roth IRA are treated
as ordinary income. Withdrawals of taxable amounts from a Roth IRA are not
eligible for averaging treatment currently available to certain lump sum
distributions from qualified employer-sponsored retirement plans, nor are such
withdrawals eligible for taxable gains tax treatment.
Your receipt of any taxable withdrawal from your Roth IRA before you
attain age 59 1/2 generally will be considered as an early withdrawal and
subject to a 10% penalty tax.
The 10% penalty tax for early withdrawal will not apply if any of the
following exceptions applies:
- The withdrawal was a result of your death or disability.
- The withdrawal is one of a scheduled series of substantially equal
periodic payments for your life or life expectancy (or the joint lives
or life expectancies of you and your beneficiary).
If there is an adjustment to the scheduled series of payments, the 10%
penalty tax will apply. For example, if you begin receiving payments at
age 50 under a withdrawal program providing for substantially equal
payments over your life expectancy, and at age 58 you elect to withdraw
the remaining amount in your Roth IRA in a lump-sum, the 10% penalty tax
will apply to the lump sum and to the amounts previously paid to you
before age 59 1/2 to the extent they were includable in your taxable
income.
- The withdrawal is used to pay eligible higher education expenses. These
are expenses for tuition, fees, books, and supplies required to attend
an institution for post-secondary education. Room and board expenses
are also eligible for a student attending at least half-time. The
student may be you, your spouse, or your child or grandchild. However,
expenses that are paid for with a scholarship or other educational
assistance payment are not eligible expenses.
- The withdrawal is used to cover eligible first time homebuyer expenses
(as described above in the discussion of tax-free withdrawals).
- The withdrawal does not exceed the amount of your deductible medical
expenses for the year (generally speaking, medical expenses paid during
a year are deductible if they are greater than 72% of your adjusted
gross income for that year).
- The withdrawal does not exceed the amount you paid for health insurance
coverage for yourself, your spouse and dependents. This exception
applies only if you have been unemployed and received federal or state
unemployment compensation payments for at least 12 weeks; this exception
applies to distributions during the year in which you received the
unemployment compensation and during the following year, but not to any
distributions received after you have been reemployed for at least 60
days.
WHAT ABOUT THE 15 PERCENT PENALTY TAX?
The rule imposing a 15% penalty tax on very large withdrawals from
tax-favored arrangements (including IRAs, 403(b) arrangements and qualified
employer-sponsored plans), or on excess amounts remaining in such tax-favored
arrangements at your death, has been repealed. This 15% tax no longer applies.
IMPORTANT: The discussion of the tax rules for Roth IRAs in this Disclosure
Statement is based upon the best available information. However, Roth IRAs are
new under the tax laws, and the IRS has not issued regulations or rulings on the
operation and tax treatment of Roth IRA accounts. Also, if enacted, legislation
now pending in Congress will change some of the rules. Therefore, you should
consult your tax advisor for the latest developments or for advice about how
maintaining a Roth IRA will affect your personal tax or financial situation.
Also, please see Part Three below which contains important information
applicable to ALL State Street Bank and Trust Company IRAs.
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<PAGE>
PART THREE: RULES FOR ALL IRAs (REGULAR AND ROTH)
GENERAL INFORMATION
IRA REQUIREMENTS
All IRAs must meet certain requirements. Contributions generally must
be made in cash. The IRA trustee or custodian must be a bank or other person
who has been approved by the Secretary of the Treasury. Your contributions may
not be invested in life insurance or collectibles or be commingled with other
property except in a common trust or investment fund. Your interest in the
account must be nonforfeitable at all times. You may obtain further information
on IRAs from any district office of the Internal Revenue Service.
MAY I REVOKE MY IRA?
You may revoke a newly established Regular or Roth IRA at any time
within seven days after the date on which you receive this Disclosure Statement.
A Regular or Roth IRA established more than seven days after the date of your
receipt of this Disclosure Statement may not be revoked.
To revoke your Regular or Roth IRA, mail or deliver a written notice of
revocation to the Custodian at the address which appears at the end of this
Disclosure Statement. Mailed notice will be deemed given on the date that it is
postmarked (or, if sent by certified or registered mail, on the date of
certification or registration). If you revoke your Regular or Roth IRA within
the seven-day period, you are entitled to a return of the entire amount you
originally contributed into your Regular or Roth IRA, without adjustment for
such items as sales charges, administrative expenses or fluctuations in market
value.
INVESTMENTS
HOW ARE MY IRA CONTRIBUTIONS INVESTED?
You control the investment and reinvestment of contributions to your
Regular or Roth IRA. Investments must be in one or more of the Fund(s)
available from time to time as listed in the Adoption Agreement for your Regular
or Roth IRA or in an investment selection form provided with your Adoption
Agreement or from the Fund Distributor or Service Company. You direct the
investment of your IRA by giving your investment instructions to the Distributor
or Service Company for the Fund(s). Since you control the investment of your
Regular or Roth IRA, you are responsible for any losses; neither the Custodian,
the Distributor nor the Service Company has any responsibility for any loss or
diminution in value occasioned by your exercise of investment control.
Transactions for your Regular or Roth IRA will generally be at the applicable
public offering price or net asset value for shares of the Fund(s) involved next
established after the Distributor or the Service Company (whichever may apply)
receives proper investment instructions from you; consult the current prospectus
for the Fund(s) involved for additional information.
Before making any investment, read carefully the current prospectus for any Fund
you are considering as an investment for your Regular IRA or Roth IRA. The
prospectus will contain information about the Fund's investment objectives and
policies, as well as any minimum initial investment or minimum balance
requirements and any sales, redemption or other charges.
Because you control the selection of investments for your Regular or
Roth IRA and because mutual fund shares fluctuate in value, the growth in value
of your Regular or Roth IRA cannot be guaranteed or projected.
ARE THERE ANY RESTRICTIONS ON THE USE OF MY IRA ASSETS?
The tax-exempt status of your Regular or Roth IRA will be revoked if you
engage in any of the prohibited transactions listed in Section 4975 of the tax
code. Upon such revocation, your Regular or Roth IRA is treated as distributing
its assets to you. The taxable portion of the amount in your IRA will be
subject to income tax (unless, in the case of a Roth IRA, the requirements for a
tax-free withdrawal are satisfied). Also, you may be subject to a 10% penalty
tax on the taxable amount as a premature withdrawal if you have not yet reached
the age of 592.
Any investment in a collectible (for example, rare stamps) by your
Regular or Roth IRA is treated as a withdrawal; the only exception involves
certain types of government-sponsored coins or certain types of precious metal
bullion.
WHAT IS A PROHIBITED TRANSACTION?
Generally, a prohibited transaction is any improper use of the assets in
your Regular or Roth IRA. Some examples of prohibited transactions are:
- Direct or indirect sale or exchange of property between you and your
Regular or Roth IRA.
- Transfer of any property from your Regular or Roth IRA to yourself or
from yourself to your Regular or Roth IRA.
Your Regular or Roth IRA could lose its tax exempt status if you use all
or part of your interest in your Regular or Roth IRA as security for a loan or
borrow any money from your Regular or Roth IRA. Any portion of your Regular or
Roth IRA used as security for a loan will be treated as a distribution in the
year in which the money is borrowed. This amount may be taxable and you may
also be subject to the 10% premature withdrawal penalty on the taxable amount.
FEES AND EXPENSES
CUSTODIAN'S FEES
The following is a list of the fees charged by the Custodian for
maintaining either a Regular IRA or a Roth IRA.
Annual Maintenance Fee per account $13.00
GENERAL FEE POLICIES
- - Fees may be paid by you directly, or the Custodian may deduct them from
your Regular or Roth IRA.
- - Fees may be changed upon 30 days written notice to you.
- - The full annual maintenance fee will be charged for any calendar year
during which you have a Regular or Roth IRA with us. This fee is not
prorated for periods of less than one full year.
<PAGE>
- - The Custodian may charge you for its reasonable expenses for services
not covered by its fee schedule.
OTHER CHARGES
- - There may be sales or other charges associated with the purchase or
redemption of shares of a Fund in which your Regular IRA or Roth IRA is
invested. Before investing, be sure to read carefully the current
prospectus of any Fund you are considering as an investment for your
Regular IRA or Roth IRA for a description of applicable charges.
TAX MATTERS
WHAT IRA REPORTS DOES THE CUSTODIAN ISSUE?
The Custodian will report all withdrawals to the IRS and the recipient
on the appropriate form. For reporting purposes, a direct transfer of assets to
a successor custodian or trustee is not considered a withdrawal.
The Custodian will report to the IRS the year-end value of your account
and the amount of any rollover (including conversions of a Regular IRA to a Roth
IRA) or regular contribution made during a calendar year, as well as the tax
year for which a contribution is made. Unless the Custodian receives an
indication from you to the contrary, it will treat any amount as a contribution
for the tax year in which it is received. It is MOST IMPORTANT that a
contribution between January and April 15th for the prior year be clearly
designated as such.
WHAT TAX INFORMATION MUST I REPORT TO THE IRS?
You must file Form 5329 with the IRS for each taxable year for which you
made an excess contribution or you take a premature withdrawal that is subject
to the 10% penalty tax, or you withdraw less than the minimum amount required
from your Regular IRA. If your beneficiary fails to make required minimum
withdrawals from your Regular or Roth IRA after your death, your beneficiary may
be subject to an excise tax and be required to file Form 5329.
For Regular IRAs, you must also report each nondeductible contribution
to the IRS by designating it a nondeductible contribution on your tax return.
Use Form 8606. In addition, for any year in which you make a nondeductible
contribution or take a withdrawal, you must include additional information on
your tax return. The information required includes: (1) the amount of your
nondeductible contributions for that year; (2) the amount of withdrawals from
Regular IRAs in that year; (3) the amount by which your total nondeductible
contributions for all the years exceed the total amount of your distributions
previously excluded from gross income; and (4) the total value of all your
Regular IRAs as of the end of the year. If you fail to report any of this
information, the IRS will assume that all your contributions were deductible.
This will result in the taxation of the portion of your withdrawals that should
be treated as a nontaxable return of your nondeductible contributions.
WHICH WITHDRAWALS ARE SUBJECT TO WITHHOLDING?
ROTH IRA
Federal income tax will be withheld at a flat rate of 10% of any taxable
withdrawal from your Roth IRA, unless you elect not to have tax withheld.
Withdrawals from a Roth IRA are not subject to the mandatory 20% income tax
withholding that applies to most distributions from qualified plans or 403(b)
accounts that are not directly rolled over to another plan or IRA.
REGULAR IRA
Federal income tax will be withheld at a flat rate of 10% from any
withdrawal from your Regular IRA, unless you elect not to have tax withheld.
Withdrawals from a Regular IRA are not subject to the mandatory 20% income tax
withholding that applies to most distributions from qualified plans or 403(b)
accounts that are not directly rolled over to another plan or IRA.
ACCOUNT TERMINATION
You may terminate your Regular IRA or Roth IRA at any time after its
establishment by sending a completed withdrawal form, or a transfer
authorization form, to:
FPA FUNDS
STATE STREET BANK AND TRUST COMPANY
P.O. Box 8500
Boston, MA 02266-8500
Your Regular IRA or Roth IRA with State Street Bank will terminate upon
the first to occur of the following:
- The date your properly executed withdrawal form (as described above)
withdrawing your total Regular IRA or Roth IRA balance is received and
accepted by the Custodian or, if later, the termination date specified
in the withdrawal form.
- The date the Regular IRA or Roth IRA ceases to qualify under the tax
code. This will be deemed a termination.
- The transfer of the Regular IRA or Roth IRA to another
custodian/trustee.
- The rollover of the amounts in the Regular IRA or Roth IRA to another
custodian/trustee.
Any outstanding fees must be received prior to such a termination of
your account.
The amount you receive from your IRA upon termination of the account
will be treated as a withdrawal, and thus the rules relating to Regular IRA or
Roth IRA withdrawals will apply. For example, if the IRA is terminated before
you reach age 59 1/2, the 10% early withdrawal penalty may apply to the taxable
amount you receive.
IRA DOCUMENTS
REGULAR IRA
The terms contained in Articles I to VII of Part One of the State Street
Bank and Trust Company Universal Individual Retirement Custodial Account
document have been promulgated by the IRS in Form 5305-A for use in establishing
a Regular IRA Custodial Account that meets the requirements of Code Section
408(a) for a valid Regular IRA. This IRS approval relates only to the form of
Articles I to VII and is not an approval of the merits of the Regular IRA or of
any investment permitted by the Regular IRA.
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<PAGE>
ROTH IRA
The terms contained in Articles I through VII of Part Two of the State
Street Bank and Trust Company Universal Individual Retirement Account Custodial
Agreement have not been promulgated or approved by the IRS. It is expected
that, if the IRS issues a model form for establishing a Roth IRA, the Custodian
will adopt the provisions of such model form as an amendment to such Part Two.
Based on our legal advice, State Street Bank believes that the use of a
Universal Individual Retirement Account Information Kit such as this, containing
information and documents for both a Regular IRA or a Roth IRA, will be
acceptable. However, if the IRS makes a ruling, or if Congress enacts
legislation, disallowing the use of a "combined" approach such as this, State
Street Bank will forward to you a Regular IRA or a Roth IRA Kit (as appropriate)
for you to read and, if necessary, an appropriate new Adoption Agreement to
sign. By adopting a Regular IRA or a Roth IRA using these materials, you
acknowledge this possibility and agree to this procedure if necessary. In all
cases, to the extent permitted, State Street Bank will treat your IRA as being
opened on the date your account was opened using the Adoption Agreement in this
Kit.
ADDITIONAL INFORMATION
For additional information you may write to the following address or
call the following telephone number.
FPA Funds
State Street Bank and Trust Company
P.O. Box 8500
Boston, MA 02266-8500
(800) 638-3060
14
<PAGE>
STATE STREET BANK AND TRUST COMPANY UNIVERSAL INDIVIDUAL RETIREMENT ACCOUNT
CUSTODIAL AGREEMENT
PART ONE: PROVISIONS APPLICABLE TO REGULAR IRAs PROVISIONS
The following provisions of Articles I to VII are in the form promulgated by the
Internal Revenue Service in Form 5305-A for use in establishing an individual
retirement custodial account.
ARTICLE I.
The Custodian may accept additional cash contributions on behalf of the
Depositor for a tax year of the Depositor. The total cash contributions are
limited to $2,000 for the tax year unless the contribution is a rollover
contribution described in section 402(c)(but only after December 31, 1992),
403(a)(4), 403(b)(8), 408(d)(3), or an employer contribution to a simplified
employee pension plan as described in section 408(k). Rollover contributions
before January 1, 1993 include rollovers described in section 402(a)(5),
402(a)(6), 402(a)(7), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code or an
employer contribution to a simplified employee pension plan as described in
section 408(k).
ARTICLE II.
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE III.
1. No part of the custodial funds may be invested in life insurance
contracts, nor may the assets of the custodial account be commingled
with other property except in a common trust fund or common investment
fund (within the meaning of section 408(a)(5) of the Code).
2. No part of the custodial funds may be invested in collectibles (within
the meaning of section 408(m) except as otherwise permitted by section
408(m)(3) which provides an exception for certain gold and silver coins
and coins issued under the laws of any state.
ARTICLE IV.
1. Notwithstanding any provisions of this agreement to the contrary, the
distribution of the Depositor's interest in the custodial account shall
be made in accordance with the following requirements and shall
otherwise comply with section 408(a)(6) and Proposed Regulations section
1.408-8, including the incidental death benefit provisions of Proposed
Regulations section 1.401(a)(9)-2, the provisions of which are
incorporated by reference.
2. Unless otherwise elected by the time distributions are required to begin
to the Depositor under paragraph 3, or to the surviving spouse under
paragraph 4, other than in the case of a life annuity, life expectancies
shall be recalculated annually. Such election shall be irrevocable as
to the Depositor and the surviving spouse and shall apply to all
subsequent years. The life expectancy of a nonspouse beneficiary may
not be recalculated.
3. The Depositor's entire interest in the custodial account must be, or
begin to be, distributed by the Depositor's required beginning date, the
April 1 following the calendar year end in which the Depositor reaches
age 702. By that date, the Depositor may elect, in a manner acceptable
to the Custodian, to have the balance in the custodial account
distributed in:
a) A single-sum payment.
b) An annuity contract that provides equal or substantially equal
monthly, quarterly, or annual payments over the life of the
Depositor.
c) An annuity contract that provides equal or substantially equal
monthly, quarterly, or annual payments over the joint and last
survivor lives of the Depositor and his or her designated
beneficiary.
d) Equal or substantially equal annual payments over a specified period
that may not be longer than the Depositor's life expectancy.
e) Equal or substantially equal annual payments over a specified period
that may not be longer than the joint life and last survivor
expectancy of the Depositor and his or her designated beneficiary.
4. If the Depositor dies before his or her entire interest is
distributed to him or her, the entire remaining interest will be
distributed as follows:
a) If the Depositor dies on or after distribution of his or her
interest has begun, distribution must continue to be made in
accordance with paragraph 3.
b) If the Depositor dies before distribution of his or her interest has
begun, the entire remaining interest will, at the election of the
Depositor or, if the Depositor has not so elected, at the election
of the beneficiary or beneficiaries, either
i) Be distributed by the December 31 of the year containing the
fifth anniversary of the Depositor's death, or
ii) Be distributed in equal or substantially equal payments over the
life or life expectancy of the designated beneficiary or
beneficiaries starting by December 31 of the year following the
year of the Depositor's death. If, however, the beneficiary is
the Depositor's surviving spouse, then this distribution is not
required to begin before December 31 of the year in which the
Depositor would have turned age 70 1/2.
c) Except where distribution in the form of an annuity meeting the
requirements of section 408(b)(3) and its related regulations has
irrevocably commenced, distributions are treated as having begun on
the Depositor's required beginning date, even though
15
<PAGE>
payments may actually have been made before that date.
d) If the Depositor dies before his or her entire interest has been
distributed and if the beneficiary is other than the surviving
spouse, no additional cash contributions or rollover contributions
may be accepted in the account.
5. In the case of distribution over life expectancy in equal or substantially
equal annual payments, to determine the minimum annual payment for each
year, divide the Depositor's entire interest in the custodial account as of
the close of business on December 31 of the preceding year by the life
expectancy of the Depositor (or the joint life and last survivor expectancy
of the Depositor and the Depositor's designated beneficiary, or the life
expectancy of the designated beneficiary, whichever applies.) In the case
of distributions under paragraph 3, determine the initial life expectancy
(or joint life and last survivor expectancy) using the attained ages of the
Depositor and designated beneficiary as of their birthdays in the year the
Depositor reaches age 70 1/2. In the case of a distribution in accordance
with paragraph 4(b)(ii), determine life expectancy using the attained age
of the designated beneficiary as of the beneficiary's birthday in the year
distributions are required to commence.
6. The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38, 1988-1 C.B. 524, to satisfy
the minimum distribution requirements described above. This method permits
an individual to satisfy these requirements by taking from one individual
retirement account the amount required to satisfy the requirement for
another.
ARTICLE V.
1. The Depositor agrees to provide the Custodian with information
necessary for the Custodian to prepare any reports required under
section 408(i) and Regulations sections 1.408-5 and 1.408-6.
2. The Custodian agrees to submit reports to the Internal Revenue
Service and the Depositor as prescribed by the Internal Revenue
Service.
ARTICLE VI.
Notwithstanding any other articles which may be added or incorporated,
the provisions of Articles I through III and this sentence will be controlling.
Any additional articles that are not consistent with section 408(a) and the
related regulations will be invalid.
ARTICLE VII.
This agreement will be amended from time to time to comply with the
provisions of the Code and related regulations. Other amendments may be made
with the consent of the persons whose signatures appear on the Adoption
Agreement.
16
<PAGE>
PART TWO: PROVISIONS APPLICABLE TO ROTH IRAs
See Section 25 of Part Three for information about the following provisions of
Articles I to VII.
ARTICLE I.
The Custodian may accept additional cash contributions on behalf of the
Depositor for a tax year of the Depositor. The total cash contributions are
limited to $2,000 for the tax year unless the contribution is a rollover
contribution which is a qualified rollover described in Section 408A(c)(6) of
the Code.
ARTICLE II.
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE III.
1. No part of the custodial funds may be invested in life insurance
contracts, nor may the assets of the custodial account be commingled
with other property except in a common trust fund or common
investment fund (within the meaning of section 408(a)(5) of the
Code).
2. No part of the custodial funds may be invested in collectibles
(within the meaning of section 408(m)) except as otherwise permitted
by section 408(m)(3) which provides an exception for certain coins
issued under specified statutes, coins issued under the laws of any
state, and certain gold, silver, platinum or palladium bullion.
ARTICLE IV.
1. Notwithstanding any provisions of this agreement to the contrary,
the distribution of the Depositor's interest in the custodial
account shall be made in accordance with the following requirements
and shall otherwise comply with section 408(a)(6) as modified by
section 408A(c)(5).
2. Unless otherwise elected by the time distributions are required to
begin to the surviving spouse of the Depositor under paragraph 3,
other than in the case of a life annuity to the surviving spouse,
life expectancy of the surviving spouse shall be recalculated
annually. Such election shall be irrevocable as to the surviving
spouse and shall apply to all subsequent years. The life expectancy
of a nonspouse beneficiary may not be recalculated.
3. If the Depositor dies before his or her entire interest is
distributed to him or her, the entire remaining interest will at the
election of the Depositor or, if the Depositor has not so elected,
at the election of the beneficiary or beneficiaries, either:
a) Be distributed by the December 31 of the year containing the
fifth anniversary of the Depositor's death, or
b) Be distributed in equal or substantially equal payments over the
life or life expectancy of the designated beneficiary or
beneficiaries starting by December 31 of the year following the
year of the Depositor's death. If, however, the beneficiary is
the Depositor's surviving spouse, then this distribution is not
required to begin before December 31 of the year in which the
Depositor would have turned age 70 1/2.
c) If the Depositor dies before his or her entire interest has been
distributed and if the beneficiary is other than the surviving
spouse, no additional cash contributions or rollover
contributions may be accepted in the account.
4. In the case of distribution over life expectancy in equal or
substantially equal annual payments, to determine the minimum annual
payment for each year, divide the Depositor's entire interest in the
custodial account as of the close of business on December 31 of the
preceding year by the life expectancy of the designated beneficiary.
Determine that initial life expectancy using the attained age of the
designated beneficiary as of such beneficiary's birthday in the year
distributions are required to commence.
ARTICLE V.
1. The Depositor agrees to provide the Custodian with information
necessary for the Custodian to prepare any reports required under
section 408(i) and section 408A(d)(3)(E) and regulations thereunder.
2. The Custodian agrees to submit reports to the Internal Revenue
Service and the Depositor as prescribed by the Internal Revenue
Service.
ARTICLE VI.
Notwithstanding any other articles which may be added or incorporated,
the provisions of Articles I through III and this sentence will be controlling.
Any additional articles that are not consistent with section 408A and any
related regulations will be invalid.
ARTICLE VII.
This agreement will be amended from time to time to comply with the
provisions of the Code and related regulations. Other amendments may be made
with the consent of the persons whose signatures appear on the Adoption
Agreement.
17
<PAGE>
PART THREE: PROVISIONS APPLICABLE TO BOTH REGULAR IRAs AND ROTH IRAs
ARTICLE VIII.
1. As used in this Article VIII the following terms have the following
meanings:
"Account" or "Custodial Account" means the individual retirement account
established using the terms of either Part One or Part Two and, in either
event, Part Three of this State Street Bank and Trust Company Universal
Individual Retirement Account Custodial Agreement and the Adoption
Agreement signed by the Depositor. The Account may be a Regular Individual
Retirement Account or a Roth Individual Retirement Account, as specified by
the Depositor. See Section 24 below.
"Custodian" means State Street Bank and Trust Company.
"Fund" means any registered investment company which is advised, sponsored
or distributed by Sponsor provided, however, that such a mutual fund or
registered investment company must be legally offered for sale in the state
of the Depositor's residence.
"Distributor" means the entity which has a contract with the Fund(s) to
serve as distributor of the shares of such Fund(s).
In any case where there is no Distributor, the duties assigned hereunder to
the Distributor may be performed by the Fund(s) or by an entity that has a
contract to perform management or investment advisory services for the
Fund(s).
"Service Company" means any entity employed by the Custodian or the
Distributor, including the transfer agent for the Fund(s), to perform
various administrative duties of either the Custodian or the Distributor.
In any case where there is no Service Company, the duties assigned
hereunder to the Service Company will be performed by the Distributor (if
any) or by an entity specified in the second preceding paragraph.
"Sponsor" means FPA Fund Distributors, Inc.
2. The Depositor may revoke the Custodial Account established hereunder by
mailing or delivering a written notice of revocation to the Custodian
within seven days after the Depositor receives the Disclosure Statement
related to the Custodial Account. Mailed notice is treated as given to the
Custodian on date of the postmark (or on the date of Post Office
certification or registration in the case of notice sent by certified or
registered mail). Upon timely revocation, the Depositor's initial
contribution will be returned, without adjustment for administrative
expenses, commissions or sales charges, fluctuations in market value or
other changes.
The Depositor may certify in the Adoption Agreement that the Depositor
received the Disclosure Statement related to the Custodial Account at least
seven days before the Depositor signed the Adoption Agreement to establish
the Custodial Account, and the Custodian may rely upon such certification.
3. All contributions to the Custodial Account shall be invested and reinvested
in full and fractional shares of one or more Funds. Such investments shall
be made in such proportions and/or in such amounts as Depositor from time
to time in the Adoption Agreement or by other written notice to the Service
Company (in such form as may be acceptable to the Service Company) may
direct.
The Service Company shall be responsible for promptly transmitting all
investment directions by the Depositor for the purchase or sale of shares
of one or more Funds hereunder to the Funds' transfer agent for execution.
However, if investment directions with respect to the investment of any
contribution hereunder are not received from the Depositor as required or,
if received, are unclear or incomplete in the opinion of the Service
Company, the contribution will be returned to the Depositor, or will be
held uninvested (or invested in a money market fund if available) pending
clarification or completion by the Depositor, in either case without
liability for interest or for loss of income or appreciation. If any other
directions or other orders by the Depositor with respect to the sale or
purchase of shares of one or more Funds for the Custodial Account are
unclear or incomplete in the opinion of the Service Company, the Service
Company will refrain from carrying out such investment directions or from
executing any such sale or purchase, without liability for loss of income
or for appreciation or depreciation of any asset, pending receipt of
clarification or completion from the Depositor.
All investment directions by Depositor will be subject to any minimum
initial or additional investment or minimum balance rules applicable to a
Fund as described in its prospectus.
All dividends and capital gains or other distributions received on the
shares of any Fund held in the Depositor's Account shall be (unless
received in additional shares) reinvested in full and fractional shares of
such Fund (or of any other Fund offered by the Sponsor, if so directed).
4. Subject to the minimum initial or additional investment, minimum balance
and other exchange rules applicable to a Fund, the Depositor may at any
time direct the Service Company to exchange all or a specified portion of
the shares of a Fund in the Depositor's Account for shares and fractional
shares of one or more other Funds. The Depositor shall give such
directions by written notice acceptable to the Service Company, and the
Service Company will process such directions as soon as practicable after
receipt thereof (subject to the second paragraph of Section 3 of this
Article VIII).
5. Any purchase or redemption of shares of a Fund for or from the Depositor's
Account will be effected at the public offering price or net asset value of
such Fund (as described in the then effective prospectus for such Fund)
next established after the Service Company has transmitted the Depositor's
investment directions to the transfer agent for the Fund(s).
Any purchase, exchange, transfer or redemption of shares of a Fund for or
from the Depositor's Account will be subject to any applicable sales,
redemption or other charge as described in the then effective prospectus
for such Fund.
6. The Service Company shall maintain adequate records of all purchases or
sales of shares of one or more Funds for the Depositor's Custodial Account.
Any account maintained in
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connection herewith shall be in the name of the Custodian for the benefit
of the Depositor. All assets of the Custodial Account shall be registered
in the name of the Custodian or of a suitable nominee. The books and
records of the Custodian shall show that all such investments are part of
the Custodial Account.
The Custodian shall maintain or cause to be maintained adequate records
reflecting transactions of the Custodial Account. In the discretion of the
Custodian, records maintained by the Service Company with respect to the
Account hereunder will be deemed to satisfy the Custodian's recordkeeping
responsibilities therefor. The Service Company agrees to furnish the
Custodian with any information the Custodian requires to carry out the
Custodian's recordkeeping responsibilities.
Neither the Custodian nor any other party providing services to the
Custodial Account will have any responsibility for rendering advice with
respect to the investment and reinvestment of Depositor's Custodial
Account, nor shall such parties be liable for any loss or diminution in
value which results from Depositor's exercise of investment control over
his Custodial Account. Depositor shall have and exercise exclusive
responsibility for and control over the investment of the assets of his
Custodial Account, and neither Custodian nor any other such party shall
have any duty to question his directions in that regard or to advise him
regarding the purchase, retention or sale of shares of one or more Funds
for the Custodial Account.
8. The Depositor may in writing appoint an investment advisor with respect to
the Custodial Account on a form acceptable to the Custodian and the Service
Company. The investment advisor's appointment will be in effect until
written notice to the contrary is received by the Custodian and the Service
Company. While an investment advisor's appointment is in effect, the
investment advisor may issue investment directions or may issue orders for
the sale or purchase of shares of one or more Funds to the Service Company,
and the Service Company will be fully protected in carrying out such
investment directions or orders to the same extent as if they had been
given by the Depositor.
The Depositor's appointment of any investment advisor will also be deemed
to be instructions to the Custodian and the Service Company to pay such
investment advisor's fees to the investment advisor from the Custodial
Account hereunder without additional authorization by the Depositor or the
Custodian.
9. Distribution of the assets of the Custodial Account shall be made at such
time and in such form as Depositor (or the Beneficiary if Depositor is
deceased) shall elect by written order to the Custodian. Depositor
acknowledges that any distribution of a taxable amount from the Custodial
Account (except for distribution on account of Depositor's disability or
death, return of an "excess contribution" referred to in Code Section 4973,
or a "rollover" from this Custodial Account) made earlier than age 59 1/2
may subject Depositor to an "additional tax on early distributions" under
Code Section 72(t) unless an exception to such additional tax is
applicable. For that purpose, Depositor will be considered disabled if
Depositor can prove, as provided in Code Section 72(m)(7), that Depositor
is unable to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected
to result in death or be of long-continued and indefinite duration. It is
the responsibility of the Depositor (or the Beneficiary) by appropriate
distribution instructions to the Custodian to insure that any applicable
distribution requirements of Code Section 401(a)(9) and Article IV above
are met. If the Depositor (or Beneficiary) does not direct the Custodian
to make distributions from the Custodial Account by the time that such
distributions are required to commence in accordance with such distribution
requirements, the Custodian (and Service Company) shall assume that the
Depositor (or Beneficiary) is meeting the minimum distribution requirements
from another individual retirement arrangement maintained by the Depositor
(or Beneficiary) and the Custodian and Service Company shall be fully
protected in so doing. The Depositor (or the Depositor's surviving spouse)
may elect to comply with the distribution requirements in Article IV using
the recalculation of life expectancy method, or may elect that the life
expectancy of the Depositor and/or the Depositor's surviving spouse, as
applicable, will not be recalculated; any such election may be in such form
as the Depositor (or surviving spouse) provides (including the calculation
of minimum distribution amounts in accordance with a method that does not
provide for recalculation of the life expectancy of one or both of the
Depositor and surviving spouse and instructions for withdrawals to the
Custodian in accordance with such method). Notwithstanding paragraph 2 of
Article IV, unless an election to have life expectancies recalculated
annually is made by the time distributions are required to begin, life
expectancies shall not be recalculated. Neither the Custodian nor any
other party providing services to the Custodial Account assumes any
responsibility for the tax treatment of any distribution from the Custodial
Account; such responsibility rests solely with the person ordering the
distribution.
10. The Custodian assumes (and shall have) no responsibility to make any
distribution except upon the written order of Depositor (or Beneficiary if
Depositor is deceased) containing such information as the Custodian may
reasonably request. Also, before making any distribution or honoring any
assignment of the Custodial Account, Custodian shall be furnished with any
and all applications, certificates, tax waivers, signature guarantees and
other documents (including proof of any legal representative's authority)
deemed necessary or advisable by Custodian, but Custodian shall not be
responsible for complying with any order or instruction which appears on
its face to be genuine, or for refusing to comply if not satisfied it is
genuine, and Custodian has no duty of further inquiry. Any distributions
from the Account may be mailed, first-class postage prepaid, to the last
known address of the person who is to receive such distribution, as shown
on the Custodian's records, and such distribution shall to the extent
thereof completely discharge the Custodian's liability for such payment.
11. a) The term "Beneficiary" means the person or persons designated as
such by the "designating person" (as defined below) on a form
acceptable to the Custodian for use in connection with the Custodial
Account, signed by the designating person, and filed with the
Custodian. The form may name individuals, trusts, estates, or other
entities as either primary or contingent beneficiaries. However, if
the designation does not effectively dispose of the entire Custodial
Account as of the time distribution is to commence, the term
"Beneficiary" shall then mean the designating person's estate with
respect to the assets of the Custodial Account not disposed of by
the designation form. The form last accepted by the Custodian
before such distribution is to commence, provided it was received by
the Custodian (or deposited in the U.S. Mail or with a reputable
delivery service) during the designating person's lifetime, shall be
controlling and,
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whether or not fully dispositive of the Custodial Account, thereupon
shall revoke all such forms previously filed by that person. The term
"designating person" means Depositor during his/her lifetime; after
Depositor's death, it also means Depositor's spouse, but only if the
spouse elects to treat the Custodial Account as the spouse's own
Custodial Account in accordance with applicable provisions of the
Code.
b) When and after distributions from the Custodial Account to Depositor's
Beneficiary commence, all rights and obligations assigned to Depositor
hereunder shall inure to, and be enjoyed and exercised by, Beneficiary
instead of Depositor.
12. a) The Depositor agrees to provide information to the Custodian at such
time and in such manner as may be necessary for the Custodian to
prepare any reports required under Section 408(i) or Section
408A(d)(3)(E) of the Code and the regulations thereunder or otherwise.
b) The Custodian or the Service Company will submit reports to the
Internal Revenue Service and the Depositor at such time and manner and
containing such information as is prescribed by the Internal Revenue
Service.
c) The Depositor, Custodian and Service Company shall furnish to each
other such information relevant to the Custodial Account as may be
required under the Code and any regulations issued or forms adopted by
the Treasury Department thereunder or as may otherwise be necessary
for the administration of the Custodial Account.
d) The Depositor shall file any reports to the Internal Revenue Service
which are required of him by law (including Form 5329), and neither
the Custodian nor Service Company shall have any duty to advise
Depositor concerning or monitor Depositor's compliance with such
requirement.
13. a) Depositor retains the right to amend this Custodial Account document
in any respect at any time, effective on a stated date which shall be
at least 60 days after giving written notice of the amendment
(including its exact terms) to Custodian by registered or certified
mail, unless Custodian waives notice as to such amendment. If the
Custodian does not wish to continue serving as such under this
Custodial Account document as so amended, it may resign in accordance
with Section 17 below.
b) Depositor delegates to the Custodian the Depositor's right so to
amend, provided (i) the Custodian does not change the investments
available under this Custodial Agreement and (ii) the Custodian amends
in the same manner all agreements comparable to this one, having the
same Custodian, permitting comparable investments, and under which
such power has been delegated to it; this includes the power to amend
retroactively if necessary or appropriate in the opinion of the
Custodian in order to conform this Custodial Account to pertinent
provisions of the Code and other laws or successor provisions of law,
or to obtain a governmental ruling that such requirements are met, to
adopt a prototype or master form of agreement in substitution for this
Agreement, or as otherwise may be advisable in the opinion of the
Custodian. Such an amendment by the Custodian shall be communicated
in writing to Depositor, and Depositor shall be deemed to have
consented thereto unless, within 30 days after such communication to
Depositor is mailed, Depositor either (i) gives Custodian a written
order for a complete distribution or transfer of the Custodial
Account, or (ii) removes the Custodian and appoints a successor under
Section 17 below.
Pending the adoption of any amendment necessary or desirable to
conform this Custodial Account document to the requirements of any
amendment to any applicable provision of the Internal Revenue Code or
regulations or rulings thereunder, the Custodian and the Service
Company may operate the Depositor's Custodial Account in accordance
with such requirements to the extent that the Custodian and/or the
Service Company deem necessary to preserve the tax benefits of the
Account.
c) Notwithstanding the provisions of subsections (a) and (b) above, no
amendment shall increase the responsibilities or duties of Custodian
without its prior written consent.
d) This Section 13 shall not be construed to restrict the Custodian's
right to substitute fee schedules in the manner provided by Section 16
below, and no such substitution shall be deemed to be an amendment of
this Agreement.
14. a) Custodian shall terminate the Custodial Account if this Agreement is
terminated or if, within 30 days (or such longer time as Custodian may
agree) after resignation or removal of Custodian under Section 17,
Depositor or Sponsor, as the case may be, has not appointed a
successor which has accepted such appointment. Termination of the
Custodial Account shall be effected by distributing all assets thereof
in a single payment in cash or in kind to Depositor, subject to
Custodian's right to reserve funds as provided in Section 17.
b) Upon termination of the Custodial Account, this custodial account
document shall have no further force and effect (except for Sections
15(f), 17(b) and (c) hereof which shall survive the termination of
the Custodial Account and this document), and Custodian shall be
relieved from all further liability hereunder or with respect to the
Custodial Account and all assets thereof so distributed.
15. a) In its discretion, the Custodian may appoint one or more contractors
or service providers to carry out any of its functions and may
compensate them from the Custodial Account for expenses attendant to
those functions. In the event of such appointment, all rights and
privileges of the Custodian under this Agreement shall pass through to
such contractors or service providers who shall be entitled to enforce
them as if a named party.
b) The Service Company shall be responsible for receiving all
instructions, notices, forms and remittances from Depositor and for
dealing with or forwarding the same to the transfer agent for the
Fund(s).
c) The parties do not intend to confer any fiduciary duties on Custodian
or Service Company (or any other party providing services to the
Custodial Account), and none shall be implied. Neither shall be
liable (or assumes
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any responsibility) for the collection of contributions, the proper
amount, time or tax treatment of any contribution to the Custodial
Account or the propriety of any contributions under this Agreement, or
the purpose, time, amount (including any minimum distribution
amounts), tax treatment or propriety of any distribution hereunder,
which matters are the sole responsibility of Depositor and Depositor's
Beneficiary.
d) Not later than 60 days after the close of each calendar year (or after
the Custodian's resignation or removal), the Custodian or Service
Company shall file with Depositor a written report or reports
reflecting the transactions effected by it during such period and the
assets of the Custodial Account at its close. Upon the expiration of
60 days after such a report is sent to Depositor (or Beneficiary), the
Custodian or Service Company shall be forever released and discharged
from all liability and accountability to anyone with respect to
transactions shown in or reflected by such report except with respect
to any such acts or transactions as to which Depositor shall have
filed written objections with the Custodian or Service Company within
such 60 day period.
e) The Service Company shall deliver, or cause to be delivered, to
Depositor all notices, prospectuses, financial statements and other
reports to shareholders, proxies and proxy soliciting materials
relating to the shares of the Funds(s) credited to the Custodial
Account. No shares shall be voted, and no other action shall be taken
pursuant to such documents, except upon receipt of adequate written
instructions from Depositor.
f) Depositor shall always fully indemnify Service Company, Distributor,
the Fund(s), Sponsor and Custodian and save them harmless from any and
all liability whatsoever which may arise either (i) in connection with
this Agreement and the matters which it contemplates, except that
which arises directly out of the Service Company's, Distributor's,
Fund's, Sponsor's or Custodian's bad faith, gross negligence or
willful misconduct, (ii) with respect to making or failing to make any
distribution, other than for failure to make distribution in
accordance with an order therefor which is in full compliance with
Section 10, or (iii) actions taken or omitted in good faith by such
parties. Neither Service Company nor Custodian shall be obligated or
expected to commence or defend any legal action or proceeding in
connection with this Agreement or such matters unless agreed upon by
that party and Depositor, and unless fully indemnified for so doing to
that party's satisfaction.
g) The Custodian and Service Company shall each be responsible solely for
performance of those duties expressly assigned to it in this
Agreement, and neither assumes any responsibility as to duties
assigned to anyone else hereunder or by operation of law.
h) The Custodian and Service Company may each conclusively rely upon and
shall be protected in acting upon any written order from Depositor or
Beneficiary, or any investment advisor appointed under Section 8, or
any other notice, request, consent, certificate or other instrument or
paper believed by it to be genuine and to have been properly executed,
and so long as it acts in good faith, in taking or omitting to take
any other action in reliance thereon. In addition, Custodian will
carry out the requirements of any apparently valid court order
relating to the Custodial Account and will incur no liability or
responsibility for so doing.
16. a) The Custodian, in consideration of its services under this Agreement,
shall receive the fees specified on the applicable fee schedule. The
fee schedule originally applicable shall be the one specified in the
Adoption Agreement or Disclosure Statement, as applicable. The
Custodian may substitute a different fee schedule at any time upon
30 days' written notice to Depositor. The Custodian shall also
receive reasonable fees for any services not contemplated by any
applicable fee schedule and either deemed by it to be necessary or
desirable or requested by Depositor.
b) Any income, gift, estate and inheritance taxes and other taxes of any
kind whatsoever, including transfer taxes incurred in connection with
the investment or reinvestment of the assets of the Custodial Account,
that may be levied or assessed in respect to such assets, and all
other administrative expenses incurred by the Custodian in the
performance of its duties (including fees for legal services rendered
to it in connection with the Custodial Account) shall be charged to
the Custodial Account. If the Custodian is required to pay any such
amount, the Depositor (or Beneficiary) shall promptly upon notice
thereof reimburse the Custodian.
c) All such fees and taxes and other administrative expenses charged to
the Custodial Account shall be collected either from the amount of any
contribution or distribution to or from the Account, or (at the option
of the person entitled to collect such amounts) to the extent possible
under the circumstances by the conversion into cash of sufficient
shares of one or more Funds held in the Custodial Account (without
liability for any loss incurred thereby). Notwithstanding the
foregoing, the Custodian or Service Company may make demand upon the
Depositor for payment of the amount of such fees, taxes and other
administrative expenses. Fees which remain outstanding after 60 days
may be subject to a collection charge.
17. a) Upon 30 days' prior written notice to the Custodian, Depositor or
Sponsor, as the case may be, may remove it from its office hereunder.
Such notice, to be effective, shall designate a successor custodian
and shall be accompanied by the successor's written acceptance. The
Custodian also may at any time resign upon 30 days' prior written
notice to Sponsor, whereupon the Sponsor shall notify the Depositor
(or Beneficiary) and shall appoint a successor to the Custodian. In
connection with its resignation hereunder, the Custodian may designate
a successor custodian by written notice to the Sponsor or Depositor
(or Beneficiary), and the Sponsor or Depositor (or Beneficiary) will
be deemed to have consented to such successor unless the Sponsor or
Depositor (or Beneficiary) designates a different successor custodian
and provides written notice thereof together with such a different
successor's written acceptance by such date as the Custodian specifies
in its original notice to the Sponsor or Depositor (or Beneficiary)
(provided that the Sponsor or Depositor (or Beneficiary) will have a
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<PAGE>
minimum of 30 days to designate a different successor).
b) The successor custodian shall be a bank, insured credit union, or
other person satisfactory to the Secretary of the Treasury under Code
Section 408(a)(2). Upon receipt by Custodian of written acceptance by
its successor of such successor's appointment, Custodian shall
transfer and pay over to such successor the assets of the Custodial
Account and all records (or copies thereof) of Custodian pertaining
thereto, provided that the successor custodian agrees not to dispose
of any such records without the Custodian's consent. Custodian is
authorized, however, to reserve such sum of money or property as it
may deem advisable for payment of all its fees, compensation, costs,
and expenses, or for payment of any other liabilities constituting a
charge on or against the assets of the Custodial Account or on or
against the Custodian, with any balance of such reserve remaining
after the payment of all such items to be paid over to the successor
custodian.
c) Any Custodian shall not be liable for the acts or omissions of its
predecessor or its successor.
18. References herein to the "Internal Revenue Code" or "Code" and sections
thereof shall mean the same as amended from time to time, including
successors to such sections.
19. Except where otherwise specifically required in this Agreement, any notice
from Custodian to any person provided for in this Agreement shall be
effective if sent by first-class mail to such person at that person's last
address on the Custodian's records.
20. Depositor or Depositor's Beneficiary shall not have the right or power to
anticipate any part of the Custodial Account or to sell, assign, transfer,
pledge or hypothecate any part thereof. The Custodial Account shall not be
liable for the debts of Depositor or Depositor's Beneficiary or subject to
any seizure, attachment, execution or other legal process in respect
thereof except to the extent required by law. At no time shall it be
possible for any part of the assets of the Custodial Account to be used for
or diverted to purposes other than for the exclusive benefit of the
Depositor or his/her Beneficiary except to the extent required by law.
21. When accepted by the Custodian, this Agreement is accepted in and shall be
construed and administered in accordance with the laws of the state where
the principal offices of the Custodian are located. Any action involving
the Custodian brought by any other party must be brought in a state or
federal court in such state.
If in the Adoption Agreement, Depositor designates that the Custodial
Account is a Regular IRA, this Agreement is intended to qualify under Code
Section 408(a) as an individual retirement Custodial Account and to entitle
Depositor to the retirement savings deduction under Code Section 219 if
available. If in the Adoption Agreement Depositor designates that the
Custodial Account is a Roth IRA, this Agreement is intended to qualify
under Code Section 408A as a Roth individual retirement Custodial Account
and to entitle Depositor to the tax-free withdrawal of amounts from the
Custodial Account to the extent permitted in such Code section.
If any provision hereof is subject to more than one interpretation or any
term used herein is subject to more than one construction, such ambiguity
shall be resolved in favor of that interpretation or construction which is
consistent with the intent expressed in whichever of the two preceding
sentences is applicable.
However, the Custodian shall not be responsible for whether or not such
intentions are achieved through use of this Agreement, and Depositor is
referred to Depositor's attorney for any such assurances.
22. Depositor should seek advice from Depositor's attorney regarding the legal
consequences (including but not limited to federal and state tax matters)
of entering into this Agreement, contributing to the Custodial Account, and
ordering Custodian to make distributions from the Account. Depositor
acknowledges that Custodian and Service Company (and any company associated
therewith) are prohibited by law from rendering such advice.
23. If any provision of any document governing the Custodial Account provides
for notice, instructions or other communications from one party to another
in writing, to the extent provided for in the procedures of the Custodian,
Service Company or another party, any such notice, instructions or other
communications may be given by telephonic, computer, other electronic or
other means, and the requirement for written notice will be deemed
satisfied.
24. The legal documents governing the Custodial Account are as follows:
a) If in the Adoption Agreement the Depositor designated the Custodial
Account as a Regular IRA under Code Section 408(a), the provisions of
Part One and Part Three of this Agreement and the provisions of the
Adoption Agreement are the legal documents governing the Depositor's
Custodial Account.
b) If in the Adoption Agreement the Depositor designated the Custodial
Account as a Roth IRA under Code Section 408A, the provisions of Part
Two and Part Three of this Agreement and the provisions of the
Adoption Agreement are the legal documents governing the Depositor's
Custodial Account.
25. Articles I through VII of Part One of this Agreement are in the form
promulgated by the Internal Revenue Service as Form 5305-A. It is
anticipated that, if and when the Internal Revenue Service promulgates
changes to Form 5305-A, the Custodian will amend this Agreement
correspondingly.
Articles I through VII of Part Two of this Agreement have not been
promulgated or approved by the Internal Revenue Service. It is anticipated
that, if and when the Internal Revenue Service promulgates a model form to
establish a Roth IRA Custodial Account, the Custodian will amend this
Agreement to substitute the provisions of such model Roth IRA Custodial
Account form for the provisions of Part Two of this Agreement, and the
Depositor specifically consents to such amendment in accordance with
Section 13(b) hereof.
If, due to change in the applicable tax laws a ruling of the Internal
Revenue Service, it is established that the use of the Adoption Agreement
or this Agreement do not establish a Regular IRA or a Roth IRA (as the case
may be), the Custodian will furnish the Depositor with replacement
documents and the Depositor will if necessary sign such replacement
documents. Depositor acknowledge and agrees to such procedures and to
cooperate with Custodian to preserve the intended tax treatment of the
Account.
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26. If the Depositor maintains an Individual Retirement Account under Code
section 408(a), Depositor may convert or transfer such other IRA to a Roth
IRA under Code section 408A using the terms of this Agreement and the
Adoption Agreement by completing and executing the Adoption Agreement and
giving suitable directions to the Custodian and the custodian or trustee of
such other IRA. Alternatively, the Depositor may convert or transfer such
other IRA to a Roth IRA by use of a reply card or by telephonic, computer
or electronic means in accordance with procedures adopted by the Custodian
or Service Company intended to meet the requirements of Code section 408A,
and the Depositor will be deemed to have executed the Adoption Agreement
and adopted the provisions of this Agreement and the Adoption Agreement in
accordance with such procedures.
27. The Depositor acknowledges that he or she has received and read the current
prospectus for each Fund in which his or her Account is invested and the
Individual Retirement Account Disclosure Statement related to the Account.
The Depositor represents under penalties of perjury that his or her Social
Security number (or other Taxpayer Identification Number) as stated in the
Adoption Agreement is correct.
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CALCULATION OF TOTAL RETURN
The Fund calculates its average annual total return quotations for the 1, 5, and
10 year periods ended on the date of the most recent balance sheet included in
the registration statement, by finding the average annual compounded rates of
return over the 1, 5, and 10 year periods that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5, or 10
year periods at the end of 1, 5, or 10 year
periods (or fractional portion thereof).
These calculations incorporate the following assumptions:
1. The maximum sales load (or other charges deducted from payments)
is deducted from the initial $1000 payment.
2. All dividends and distributions by the Fund are reinvested at the
price stated in the prospectus on the reinvestment dates during
the period, i.e., any sales load charged upon reinvestment of
dividends would be reflected.
3. All recurring fees, if any, charged to all shareholder accounts
are included.
4. The ending redeemable value assumes a complete redemption at the
end of the 1, 5, or 10 year periods and the deduction of all
nonrecurring charges deducted at the end of each period.
EXHIBIT 16
<PAGE>
ONE YEAR CALCULATION
P = 1000
n = 1
ERV = $1,162.21
n
P(1+T) = ERV
1000(1+T) = $1,162.21
T = 16.22%
FIVE YEAR CALCULATION
P = 1000
n = 5
ERV = $1,716.47
n
P(1+T) = ERV
5
1000(1+T) = $1,716.47
T = 11.41%
TEN YEAR CALCULATION
P = 1000
n = 10
ERV = $3,597.13
n
P(1+T) = ERV
10
1000(1+T) = $3,597.13
T = 13.66%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
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