<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 you should
know before purchasing
Fund shares. You should
read and retain this
Prospectus for future
reference.
THE SECURITIES AND
EXCHANGE COMMISSION HAS
NOT APPROVED OR
DISAPPROVED THESE
SECURITIES OR PASSED UPON
THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE
CONTRARY IS A CRIMINAL
OFFENSE.
MAY 3, 1999
[LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, CA 90064
- - -
- - -
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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 8115
Boston, Massachusetts 02266-8115
(617) 483-5000
(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 FPA FUND DISTRIBUTORS, INC.
TABLE OF CONTENTS
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PAGE
<S> <C>
Risk/Return Summary................................................... 3
Investment Results.................................................... 4
Fees and Expenses of the Fund......................................... 5
Investment Objectives, Principal Investment Strategies, and Related
Risks............................................................... 6
Management and Organization........................................... 7
Purchase, Pricing and Sale of Shares.................................. 7
Exchange of Shares and Shareholder Services........................... 11
Dividends, Distributions and Taxes.................................... 14
Financial Highlights.................................................. 15
</TABLE>
2
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RISK/RETURN SUMMARY
INVESTMENT OBJECTIVES. The Fund's primary investment objective is long-term
growth of capital. Current income is a secondary consideration.
WHO MAY WANT TO INVEST IN THE FUND?
- Investors seeking long-term growth of capital
- Investors willing to own shares over the course of a market cycle or
longer
- Retirement plans and other tax-exempt entities
INVESTMENT STRATEGIES. The Fund's investment adviser, First Pacific
Advisors, Inc., purchases common stocks using a value discipline and evaluating
each company on its own merits. The Adviser's measures of value include
price/earnings ratios, book value, and replacement cost of assets. This value-
oriented investment approach could result in a portfolio which does not reflect
the national economy, differs significantly from broad market indices and
consists of companies considered by the average investor to be unpopular or
unfamiliar. The Adviser looks for the following attributes in companies selected
for investment:
- Industry segment leaders
- Consistently high returns on capital
- Substantial portion of earnings reinvested in business
- Capable management team
- Undervalued in relation to the stock market
- Temporarily out-of-favor or not closely followed by other investors
PRINCIPAL INVESTMENTS. The Fund invests primarily in the common stocks of
U.S. companies in a variety of industries and market segments. The Fund can also
invest in debt securities, preferred stocks and convertible securities. No more
than 25% of the Fund's assets will be invested in the securities of foreign
issuers.
PRINCIPAL INVESTMENT RISKS. Even though the Adviser attempts to lessen
price risk by not overpaying for earnings of even the best companies, you can
lose money by investing in the Fund if any of the following occurs:
- The U.S. or foreign stock market goes down.
- The market favors growth stocks over value stocks or favors companies at a
different capitalization level.
- An adverse event, such as an unfavorable earnings report, depresses the
value of a particular stock.
- Prices of the Fund's foreign securities go down because of unfavorable
changes in foreign currency exchange rates, foreign government actions or
political instability.
- The Adviser's judgments about the attractiveness, value and potential
appreciation of particular stocks prove to be incorrect.
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Company or any other government
agency, entity or person.
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INVESTMENT RESULTS
The following information illustrates how the Fund's results may vary:
Here are the Fund's results calculated without a sales charge on
a CALENDAR YEAR basis. (If a sales charge were included, results
would be lower.)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
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<CAPTION>
1989 25.79%
<S> <C>
1990 0.97%
1991 21.69%
1992 13.07%
1993 4.64%
1994 -0.03%
1995 17.27%
1996 20.39%
1997 24.30%
1998 4.80%
</TABLE>
The Fund's highest/lowest QUARTERLY results during this time period were:
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<S> <C> <C>
(quarter ended
HIGHEST 21.27% 12/31/98)
LOWEST (20.28%) (quarter ended 9/30/98)
</TABLE>
For periods ended December 31, 1998:
<TABLE>
<CAPTION>
FUND WITH
MAXIMUM SALES LIPPER GROWTH &
CHARGE RUSSELL INCOME FUND
AVERAGE ANNUAL TOTAL RETURN DEDUCTED 2500 AVERAGE
- --------------------------------------------------------------------- -------------- ----------- -----------------
<S> <C> <C> <C>
One Years............................................................ (2.01)% 0.38% 15.61%
Five Years........................................................... 11.44 % 14.13% 18.53%
Ten Years............................................................ 12.13 % 14.61% 15.76%
</TABLE>
These results illustrate the potential fluctuations of the Fund's results
over various periods of time. Past results are not an indication of future
results.
4
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FEES AND EXPENSES OF THE FUND
THE FOLLOWING DESCRIBES THE FEES AND EXPENSES THAT YOU MIGHT PAY IF YOU BUY
AND HOLD SHARES OF THE FUND.
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<S> <C>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
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
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees.................................................................. 0.75%
Service (12b-1) Fees............................................................. None
Other Expenses (including financial services).................................... 0.41%
-----
Total Annual Fund Operating Expenses............................................. 1.16%
</TABLE>
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* An account management fee is charged by unaffiliated investment advisers or
broker-dealers to certain accounts entitled to purchase shares without sales
charge.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The Example assumes you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<S> <C>
One year........................................................................ $ 761
Three years..................................................................... $ 995
Five years...................................................................... $ 1,247
Ten years....................................................................... $ 1,967
</TABLE>
5
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INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND RELATED RISKS
INVESTMENT OBJECTIVES. The Fund's primary investment objective is long-term
growth of capital. Providing you current income is a secondary consideration.
The Fund seeks to make your investment grow over the long-term by investing in a
diversified selection of companies both in the U.S. and internationally that the
Adviser judges to be undervalued, to have good growth prospects and to have
quality management. While the Fund, under normal conditions, will invest
principally in equity securities, it also expects to invest in debt securities
as well as preferred stocks and convertible securities on a regular basis.
INVESTMENT STRATEGIES. The Fund's Adviser favors investments in common
stocks with a consistently high return on invested capital and a substantial
portion of earnings reinvested in the business in order to achieve compounded
growth. The Adviser also searches for companies that appear undervalued in light
of book value, replacement cost of assets and other relevant factors.
The Adviser attempts to lessen price risk by not overpaying for earnings of
even the best companies. The Adviser believes that better values and less price
risk can often be found among companies with successful records that are
currently out-of-favor as evidenced by factors such as relatively low
price-earnings ratios.
For temporary defensive purposes or to meet liquidity needs, the Fund may
take 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). These
positions could detract from the achievement of the Fund's objective over the
short-term.
The Fund relies on the professional judgment of its Adviser to make
decisions about the Fund's portfolio securities. The Adviser's basic investment
philosophy is to purchase securities on the basis of fundamental value and
earnings expectations rather than short-term stock market expectations.
RISKS. Your investment in the Fund is subject to a number of risks,
including:
- the Adviser's emphasis on a value-oriented investment approach could
result in a portfolio that does not reflect the national economy, differs
significantly from broad market indices and consists of companies
considered by the average investor to be unpopular or unfamiliar;
- like other investment companies, financial and business organizations
around the world, the Fund could be adversely affected if the computer
systems used by the Adviser and its other major 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 Issue."
The Adviser has assessed its computer systems and the systems compliance
issues of the Fund's major service providers. The Adviser is taking steps
that it believes are reasonably designed to address the Year 2000 Issue
with respect to the computer systems it uses and has obtained satisfactory
assurances that comparable steps are being taken by the Fund's major
service providers. At this time, however, there can be no assurance that
these steps will be sufficient to address all Year 2000 Issues. The
inability of the Adviser or the Fund's other third party providers to
timely complete all necessary procedures to address the Year 2000 Issue
could have a material adverse effect on the Fund's operations. The Adviser
will continue to monitor the status of, and the Fund's exposure to, this
issue. For the year ended December 31, 1998, the Fund incurred no
significant
6
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Year 2000 related expenses and it does not expect to incur significant
Year 2000 expenses in the future. The Adviser is in the process of
establishing a contingency plan to address recovery from unavoided or
unavoidable Year 2000 problems, if any, affecting the Fund.
- Fund shares could decline in value in response to certain events, such as
changes in markets or economies;
- the prices of equity securities held by the Fund can be affected by events
specifically involving the issuers of these securities;
- the price of debt securities held by the Fund can be affected by changing
interest rates, effective maturities and credit ratings; and
- investing outside the U.S. can also involve additional risks, such as
currency fluctuations or political, social and economic instability.
MANAGEMENT AND ORGANIZATION
INVESTMENT ADVISER
First Pacific Advisors, Inc. is the Fund's investment adviser. The Adviser,
together with its predecessors, has been in the investment advisory business
since 1954 and has served as the Fund's investment adviser since the Fund's
inception in 1983. The Adviser manages assets of approximately $3.5 billion for
seven investment companies, including one closed-end investment company, and 25
institutional accounts. First Pacific Advisors, Inc. is headquartered at 11400
West Olympic Boulevard, Suite 1200, Los Angeles, California 90064. The Adviser
selects investments for the Fund, provides administrative services and manages
the Fund's business. The total management fee paid by the Fund, as a percentage
of average net assets, for the previous fiscal year is discussed above under
"Fees and Expenses of the Fund."
PORTFOLIO MANAGER
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.
PURCHASE, PRICING AND SALE OF SHARES
PURCHASE AND INVESTMENT MINIMUMS. You can purchase shares by contacting any
investment dealer authorized to sell the Fund's shares. You must use the account
information form for initial purchases. The minimum initial investment is
$1,500, and each subsequent investment must be at least $100. Minimum investment
requirements can be changed by the Fund or waived by FPA Fund Distributors, Inc.
All purchases made by check should be 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 a check does not clear.
SHARE PRICE. The Fund calculates its share price, also called net asset
value, as of 4:00 p.m. New York time, which is the normal close of trading on
the New York Stock Exchange ("NYSE"), every
7
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day the NYSE is open. Share price is rounded to the nearest cent per share and
equals the market value of all portfolio securities plus other assets, less all
liabilities, divided by the number of Fund shares outstanding. Orders received
by dealers before the NYSE closes on any business day are priced based on the
share price for that day if Boston Financial Data Services, Inc. receives the
order prior to its close of business. Orders received by Boston Financial Data
Services, Inc. after such time generally are priced based on the share price for
the next business day. However, orders received by certain retirement plans and
certain other financial intermediaries before the NYSE closes and communicated
to Boston Financial Data Services, Inc. by 9:30 a.m., Eastern time, on the
following business day are priced at the share price for the prior business day.
Share prices for sales (redemptions) of Fund shares is the first share price
determined after Boston Financial Data Services, Inc. receives a properly
completed request, except that sale 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
Boston Financial Data Services, Inc. within the times specified above. The
offering price is the share price plus any applicable sales charge.
SALES CHARGES. A sales charge may apply to your purchase. As indicated in
the table below, your sales charge can be reduced for larger purchases. You,
your spouse and the following related people (and their spouses) can combine
your investment to reduce your sales charge: 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>
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(1) As a percentage of net amount invested.
(2) As a percentage of public offering price.
REDUCING YOUR SALES CHARGE
INVESTMENTS IN OTHER FPA FUNDS. To determine the sales charge, you can add
the current value, at offering price, of all presently held shares of the FPA
Funds, which are:
- FPA Capital Fund, Inc. (which is currently closed to new investors)
- FPA New Income, Inc.
- FPA Paramount Fund, Inc.
- FPA Perennial Fund, Inc. (this Fund)
8
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If your holdings of other FPA Funds qualify you for a reduced sales charge,
you must provide information to verify your holdings.
LETTER OF INTENT. A letter of intent will allow you to obtain a reduced
sales charge by aggregating investments made during a thirteen-month period. The
value of all presently held shares of the FPA Funds (see above list) can also be
used to determine the applicable sales charge. The account information form
contains the Letter of Intent that must be signed at the time of the initial
purchase, or within 30 days. Each investment made under a letter of intent
during the period receives the sales charge for the total investment goal. IF
YOU DO NOT REACH YOUR INVESTMENT GOAL, YOU MUST PAY THE DIFFERENCE BETWEEN THE
SALES CHARGES APPLICABLE TO THE AMOUNT PURCHASED MINUS THOSE ACTUALLY PAID.
PURCHASES NOT SUBJECT TO SALES CHARGE. You and your spouse (and your
immediate relatives) can purchase shares without a sales charge, if you fall
into one of the following categories and you represent that the shares you
purchase are for investment and will not be resold except through redemption or
repurchase by the Fund. Immediate relatives include grandparents, parents,
siblings, children and grandchildren of a qualified investor, and the spouse of
any immediate relative.
(a) current and former directors, officers and employees of the Adviser,
United Asset Management Corporation (the Adviser and FPA Fund
Distributors, Inc. are indirect wholly-owned subsidiaries of United Asset
Management Corporation) 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 that has a
selling group agreement with FPA Fund Distributors, Inc. and consents to
the 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.
Because FPA Fund Distributors, Inc. anticipates that certain purchases will
result in economies of scale in the sales effort and related expenses compared
to sales made through normal distribution channels, upon satisfaction of certain
conditions the following persons can purchase without a sales charge:
(a) trustees or other fiduciaries purchasing shares for employee benefit
plans of employers with 20 or more employees;
(b) 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
9
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or to be invested by such accounts during the subsequent 13-month period
in the Fund or other FPA Funds totals at least $1,000,000;
(c) tax-exempt organizations enumerated in Section 501(c)(3), (9), or (13)
of the Internal Revenue Code; and
(d) accounts upon which an investment adviser, financial planner or
broker-dealer charges an account management or consulting fee, provided
it has entered into an agreement with FPA Fund Distributors, Inc.
regarding those 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
FPA Fund Distributors, Inc.
If you qualify, you must submit a special application form available from
FPA Fund Distributors, Inc. with your initial purchase, and you must notify FPA
Fund Distributors, Inc. of your eligibility when you place the order. If you
place the order through a broker, the broker may charge you a service fee. No
such fee is charged if you purchase directly from FPA Fund Distributors, Inc. or
the Fund.
SELLING (REDEEMING) YOUR SHARES
You can sell (redeem) for cash without charge any or all of your Fund shares
at any time by sending a written request to Boston Financial Data Services, Inc.
Faxes are not acceptable. You can also place redemption requests through
dealers, but they may charge a fee. If you are selling Fund shares from a
retirement plan, you should consult the plan documentation concerning federal
tax consequences and consult your plan custodian about procedures.
A check will be mailed to you within seven days after Boston Financial Data
Services, Inc. receives a properly completed request. If Fund shares sold were
recently purchased by check, payment of the redemption proceeds will be delayed
until confirmation that the purchase check has cleared, which is usually up to
15 days.
WRITTEN REQUESTS. Requests must be signed by the registered shareholder(s).
If you hold a stock certificate, it must be included with your written request.
A signature guarantee is required if the redemption is:
- Over $10,000;
- Made payable to someone other than the registered shareholder or to
somewhere other than the registered address; or
- If the shareholder is a corporation, partnership, trust or fiduciary.
A signature guarantee can be obtained from 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. Additional
documents are required for sales by corporations, partnerships, trusts,
fiduciaries, executors or administrators.
TELEPHONE TRANSACTIONS. You must elect the option on the shareholder
services form to have the right to sell your shares by telephone. If you wish to
make an election to have the right to sell your shares via telephone or to
change such an election after opening an account, you will need to complete a
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request with a signature guarantee. Sales via telephone are not available for
shares held in a Fund-sponsored retirement account or in certificate form.
When you obtain the right to sell your Fund shares by telephone, you
designate a bank account to which the proceeds of such redemptions are sent.
Telephone redemptions of $5,000 are wired unless the designated bank cannot
receive Federal Reserve wires. Telephone redemptions under $5,000 are mailed
unless you request otherwise. There is a $3.50 charge per wire.
Boston Financial Data Services, Inc. uses procedures it considers reasonable
to confirm redemption instructions via telephone, including requiring account
registration verification from the caller and recording telephone instructions.
Neither Boston Financial Data Services, Inc. nor the Fund is liable for losses
due to unauthorized or fraudulent instructions if reasonable procedures are
employed; otherwise, they may be liable. During periods of significant economic
or market changes, it may be difficult to sell your shares by telephone.
The Fund can change or discontinue telephone redemption privileges without
notice.
REINVESTING IN THE FUND WITH PROCEEDS FROM REDEMPTION OF SHARES. If you
reinvest in the Fund within 30 days you do not have to pay a sales charge. Your
reinvestment is made at the first share price determined after Boston Financial
Data Services, Inc. receives your order. You can only do this once for each Fund
investment, and you must provide sufficient information to verify your
reinvestment when you make your purchase. A sale and reinvestment is a taxable
transaction, but losses on the sale are not deductible for federal income tax
purposes.
AUTOMATIC REDEMPTION (SALE) OF YOUR SHARES. If as a result of a redemption
your account value is less than $500, the Fund can direct Boston Financial Data
Services, Inc. to sell your remaining Fund shares. In such a case, you will be
notified in writing that your account value is insufficient and be given up to
60 days to increase it to $500.
EXCHANGE OF SHARES AND SHAREHOLDER SERVICES
EXCHANGING YOUR FUND SHARES
EXCHANGING YOUR SHARES FOR SHARES OF OTHER FPA FUNDS. You can exchange your
shares of the Fund for shares of the other FPA Funds, except that only existing
shareholders of FPA Capital Fund, Inc., may exchange into that Fund.
You can increase an existing account or start a new account in the selected
FPA Fund. Shares of the Fund acquired must be registered for sale in your state.
A $5.00 service fee applies to each exchange. In addition, a sales charge
applies unless
- you paid a sales charge equivalent to that applicable to the acquired
shares;
- you are otherwise entitled to purchase shares without a sales charge (as
noted under "Purchases Not Subject to Sales Charge"); or
- the shares you are exchanging were acquired by reinvestment.
EXCHANGING YOUR SHARES FOR SHARES OF A MONEY MARKET FUND. FPA Fund
Distributors, Inc. has made arrangements to allow you to exchange your shares
for shares of the money market portfolio of the Cash
11
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Equivalent Fund, a no-load diversified open-end money market mutual fund. Shares
of the money market fund you acquire through exchange plus any shares acquired
by reinvestment of dividends and distributions may be re-exchanged for shares of
any FPA Fund without sales charge. However, in the case of the FPA Capital Fund,
Inc., you must have maintained your account in FPA Capital Fund, Inc. in order
to re-exchange your shares in the money market fund for shares in FPA Capital
Fund, Inc.
If your shares are held in a Fund-sponsored Individual Retirement Account,
you cannot exchange them into shares of the money market fund.
The $5.00 exchange fee is paid by FPA Fund Distributors, Inc., which
receives a fee from Kemper Financial Services, the administrator of 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 program.
The money market fund is not an FPA Fund and is separately managed. The fact
that you have the ability to exchange your shares for shares of the money market
fund is not a Fund recommendation of the money market fund.
HOW TO EXCHANGE YOUR SHARES. You can exercise your exchange privileges
either by written instructions or telephone (telephone exchange privileges are
available unless you specifically decline them on the account information form).
Exchanges are subject to the following restrictions:
- You are limited to four exchanges in one account during any calendar year;
if we give you notice you have exceeded this limit, any further exchanges
will be null and void;
- Shares must be owned 15 days before exchanging, and cannot be in
certificate form unless you deliver the certificate when you request the
exchange;
- An exchange requires the purchase of shares with a value of at least
$1,000; and
- Exchanges are subject to the same signature and signature guarantee
requirements applicable to the redemption of shares.
Exchanges and purchases are at the share price next determined after receipt
of a proper request by Boston Financial Data Services, Inc. In the case of
exchanges into the money market fund, dividends generally start on the following
business day.
For federal and state income tax purposes, an exchange is treated as a sale
and could result in a capital gain or loss. If the shares exchanged have been
held less than 91 days, the sales charge paid on them 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 for further
information.
DISCONTINUATION OF THE EXCHANGE PROGRAMS. The Fund and FPA Fund
Distributors, Inc. can change or discontinue the rights to exchange Fund shares
into other FPA Funds or the money market fund upon 60 days' notice. If you have
exchanged your shares into shares of the money market fund, you will have at
least 60 days after being given notice of the end of the exchange program to
reacquire Fund shares without sales charge.
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FOR MORE INFORMATION OR FOR PROSPECTUSES FOR OTHER FPA FUNDS AND/OR THE
MONEY MARKET FUND, PLEASE CONTACT A DEALER OR FPA FUND DISTRIBUTORS, INC. YOU
SHOULD READ THE PROSPECTUSES OF THESE OTHER FUNDS AND CONSIDER DIFFERENCES IN
OBJECTIVES AND POLICIES BEFORE MAKING ANY EXCHANGE.
OTHER SHAREHOLDER SERVICES
INVESTMENT ACCOUNT. Each shareholder has an investment account in which
Boston Financial Data Services, Inc. holds Fund shares. You will receive a
statement showing account activity after each transaction. Unless you make a
written request, stock certificates will not be issued. Stock certificates are
only issued for full shares.
PRE-AUTHORIZED INVESTMENT PLAN. To make automatic monthly investments of at
least $100, you must complete the optional shareholder services form available
from dealers or FPA Fund Distributors, Inc. Boston Financial Data Services, Inc.
will withdraw funds from your bank account monthly for $100 or more as specified
through the Automated Clearing House.
RETIREMENT PLANS. If you are eligible, you can 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 $1500 within
12 months. Each subsequent investment must be at least $100. Neither the Fund
nor FPA Fund Distributors, Inc. imposes additional fees for these plans, but the
plan custodian does.
You should consult your tax adviser about the implications of establishing a
retirement plan with Fund shares. Persons with earned income ineligible for
deductible contributions generally may make non-deductible contributions into an
IRA. The earnings on shares held in an IRA are generally tax-deferred. In
addition, 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. Tax matters
are complicated; you should consult your tax adviser. FPA Fund Distributors,
Inc. and dealers have applicable forms and information regarding plan
administration, custodial fees and other plan provisions.
SYSTEMATIC WITHDRAWAL PLAN. If you have an account with a value of $10,000
or more, you can make monthly, quarterly, semi-annual or annual withdrawals of
$50 or more by completing the optional shareholder services form. Under this
arrangement, sufficient Fund shares will be sold to cover the withdrawals and
the proceeds will be forwarded to you as directed on the optional shareholder
services form. Dividends and capital gains distributions are automatically
reinvested in the Fund at net asset value. If withdrawals continuously exceed
reinvestments, your account will be reduced and ultimately exhausted. PLEASE
NOTE THAT CONCURRENT WITHDRAWALS AND PURCHASES ARE ORDINARILY NOT IN YOUR BEST
INTEREST BECAUSE OF ADDITIONAL SALES CHARGES, AND YOU WILL RECOGNIZE ANY TAXABLE
GAINS OR LOSSES ON THE AUTOMATIC WITHDRAWALS.
13
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund's investment income consists principally of dividends and interest
earned on its portfolio securities. This income, after payment of expenses, will
be distributed to you semi-annually. Net capital gains realized from the sale of
securities are distributed annually. Dividends and capital gain distributions
are automatically reinvested in the Fund at the share price determined at the
close of business the day after the record date, unless before the record date
for receipt of the dividend or capital gain distribution you request cash
payment of dividends and capital gains distributions. You can use the account
information form to request a cash payment.
TAX CONSEQUENCES
Dividends and capital gains are generally taxable whether they are
reinvested or received in cash-- unless you are exempt from taxation or entitled
to tax deferral. Capital gains may be taxed at different rates depending on the
length of time the Fund holds its assets.
Redemptions from a retirement plan account and an ordinary shareholder
account could have different tax treatment.
You must provide the Fund with a certified correct taxpayer identification
number (generally your social security number) and certify that you are not
subject to backup withholding. You can use the account information form for this
purpose. If you fail to do so, the IRS can require the Fund to withhold 31% of
your taxable distributions and redemptions. Federal law also requires the Fund
to withhold 30% or the applicable tax treaty rate from dividends paid to certain
nonresident aliens, non-U.S. partnership and non-U.S. corporation shareholder
accounts.
Please see the Statement of Additional Information and consult with your tax
adviser.
14
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five (5) years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Fund purchased at net asset value and assuming reinvestment of all
dividends and distributions. This information has been audited by Ernst & Young
LLP, whose report, along with the Fund's financial statements, are included in
the Statement of Additional Information, which is available upon request.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year.......................... $ 24.00 $ 22.58 $ 22.36 $ 21.97 $ 23.76
--------- --------- --------- --------- ---------
Net investment income......................................... $ 0.07 $ 0.05 $ 0.10 $ 0.36 $ 0.46
Net realized and unrealized gain (loss) on investment
securities................................................... 0.82 4.61 3.75 2.95 (0.48)
--------- --------- --------- --------- ---------
Total from investment operations.............................. $ 0.89 $ 4.66 $ 3.85 $ 3.31 $ (0.02)
--------- --------- --------- --------- ---------
Less distributions:
Dividends from net investment income.......................... $ (0.11) $ (0.05) $ (0.22) $ (0.44) $ (0.46)
Distributions from net realized capital gains................. (4.63) (3.19) (3.41) (2.48) (1.31)
--------- --------- --------- --------- ---------
Total distributions........................................... $ (4.74) $ (3.24) $ (3.63) $ (2.92) $ (1.77)
--------- --------- --------- --------- ---------
Net asset value at end of year................................ $ 20.15 $ 24.00 $ 22.58 $ 22.36 $ 21.97
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total investment return*...................................... 4.80% 24.30% 20.39% 17.27% (0.03)%
Ratios/supplemental data:
Net assets at end of year (in $000's)......................... 49,813 50,201 45,798 47,390 51,965
Ratio of expenses to average net assets....................... 1.16% 1.16% 1.19% 1.19% 1.13%
Ratio of net investment income to average net assets.......... 0.32% 0.21% 0.48% 1.63% 1.95%
Portfolio turnover rate....................................... 34% 19% 30% 58% 31%
</TABLE>
- ------------------------
* Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge.
15
<PAGE>
- - -
- --- ---
<TABLE>
<S> <C> <C>
FOR SHAREHOLDER SERVICES CALL FOR RETIREMENT PLAN SERVICES FOR DEALER SERVICES CALL
BOSTON FINANCIAL DATA CALL YOUR EMPLOYER OR PLAN FPA FUND DISTRIBUTORS, INC.
SERVICES, INC. ADMINISTRATOR (310) 473-0225 or
(617) 483-5000 or FOR 24-HOUR INFORMATION GO TO (800) 982-4372 except
(800) 638-3060 except Alaska, FUNDMASTER MARKETING GROUP Alaska,
Hawaii, Massachusetts and INTERNET WEB SITE Hawaii and Puerto Rico
Puerto Rico. HTTP://WWW.FUNDMASTER.COM
</TABLE>
Telephone conversations may be recorded or monitored for
verification, recordkeeping and quality assurance purposes.
MULTIPLE TRANSLATIONS
This Prospectus may be translated into other languages. If there
are any inconsistencies or ambiguities, the English text will prevail.
OTHER FUND INFORMATION
ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS
Contains additional information about the Fund including financial
statements, investment results, portfolio holdings, a statement from
portfolio management discussing market conditions and the Fund's
investment strategies, and the Independent Auditor's report (in the
Annual Report).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the
Fund, including the Fund's financial statements.
A current SAI has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated by reference into this
prospectus. The SAI and other related materials about the Fund are
available for review or to be copied at the SEC's Public Reference
Room in Washington D.C. (1-800-SEC-0330) or on the SEC's Internet Web
Site at http://www.sec.gov.
TO REQUEST A FREE COPY OF ANY OF THE DOCUMENTS ABOVE CONTACT FPA
FUND DISTRIBUTORS, INC. 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.
Investment Company File No. 2-87607
- - -
- --- ---
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 3, 1999
FPA PERENNIAL FUND, INC.
This Statement of Additional Information supplements the current Prospectus of
FPA Perennial Fund, Inc. ("Fund") dated May 3, 1999. 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 of Additional
Information is not itself a Prospectus, it is, in its entirety, incorporated by
reference into the Prospectus. The Fund's Prospectus can be obtained by
contacting your securities dealer or the Fund's principal underwriter, FPA Fund
Distributors, Inc. ("Distributor"), at 11400 West Olympic Boulevard, Suite 1200,
Los Angeles, California 90064; telephone (310) 473-0225 or (800) 982-4372,
except Alaska, Hawaii and Puerto Rico.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Objectives and Policies. . . . . . . . . . . . . . . . . .1
Description of Certain Securities and Investment Techniques . . . . .1
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . 1
Fixed-Income Securities . . . . . . . . . . . . . . . . . . . . 1
Lower Rated Debt Securities . . . . . . . . . . . . . . . . . . 1
Risk Factors Relating to Lower Rated Securities . . . . . . . . 2
Securities of Foreign Issuers.. . . . . . . . . . . . . . . . . 3
Covered Call Options. . . . . . . . . . . . . . . . . . . . . . 3
Short Sales Against the Box.. . . . . . . . . . . . . . . . . . 4
Repurchase Agreements.. . . . . . . . . . . . . . . . . . . . . 4
Leverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . 4
Additional Restrictions.. . . . . . . . . . . . . . . . . . . . 6
Fund Organization . . . . . . . . . . . . . . . . . . . . . . . . . 6
Directors and Officers of the Fund . . . . . . . . . . . . . . . . . 6
Control Persons and Five Percent Shareholders . . . . . . . . . . . 9
Control Persons.. . . . . . . . . . . . . . . . . . . . . . . . 9
Five Percent Shareholders.. . . . . . . . . . . . . . . . . . . 9
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Investment Adviser. . . . . . . . . . . . . . . . . . . . . . . 9
Investment Advisory and Service Agreement.. . . . . . . . . . .10
Principal Underwriter.. . . . . . . . . . . . . . . . . . . . .11
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . .11
i
<PAGE>
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . .12
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . .12
Voting Rights.. . . . . . . . . . . . . . . . . . . . . . . . .12
Purchase and Redemption of Shares . . . . . . . . . . . . . . . . .12
Net Asset Value.. . . . . . . . . . . . . . . . . . . . . . . .12
Sales Charges.. . . . . . . . . . . . . . . . . . . . . . . . .13
Authorized Financial Intermediaries.. . . . . . . . . . . . . .13
Sales at Net Asset Value. . . . . . . . . . . . . . . . . . . .13
Letter of Intent. . . . . . . . . . . . . . . . . . . . . . . .13
FPA Exchange Privilege. . . . . . . . . . . . . . . . . . . . .14
Redemption of Shares. . . . . . . . . . . . . . . . . . . . . .14
Telephone Redemption. . . . . . . . . . . . . . . . . . . . . .14
Tax Sheltered Retirement Plans . . . . . . . . . . . . . . . . . . .15
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . .15
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Prior Performance Information . . . . . . . . . . . . . . . . . . .17
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . .18
</TABLE>
ii
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following limitations and guidelines are considered at the time of purchase,
under normal market conditions, and are based on a percentage of FPA Perennial
Fund, Inc.'s (the "Fund") net assets unless otherwise noted. This summary is
not intended to reflect all of the Fund's investment limitations.
INVESTMENT OBJECTIVE
- The Fund's primary investment objective is long-term growth of
capital. Providing you current income is a secondary consideration.
The Fund seeks to make your investment grow over the long-term by
investing in a diversified selection of companies both in the U.S. and
internationally that the Adviser judges to be undervalued, to have
good growth prospects and to have quality management. While the Fund,
under normal conditions, will invest principally in equity securities,
it also expects to invest in debt securities as well as preferred
stocks and convertible securities on a regular basis.
- Investments in the Fund are not limited by a specific industry, and
substantially all common stocks purchased by the Fund will be listed
on a national securities exchange or the National Association of
Securities Dealers Automated Quotation (NASDAQ) National Market System
or National List.
FIXED-INCOME SECURITIES
- Up to 15% of the Fund's net assets can be invested in fixed-income
securities, including convertible securities, that are rated BB or
lower, by Standard & Poor's Corporation or Ba or lower by Moody's
Investor Services, Inc.
NON-U.S. SECURITIES
- The Fund can 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 American Stock Exchange.
DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
EQUITY SECURITIES - The Fund will invest primarily in equity securities. Equity
securities represent an ownership position in a company. The prices of equity
securities fluctuate based on changes in the financial conditions of their
issuers and on market and economic conditions. These fluctuations can be severe
and can generate large losses.
FIXED-INCOME SECURITIES - The Fund can invest in fixed-income securities. Bonds
and other fixed-income securities are used by issuers to borrow money. Issuers
pay investors interest and generally must repay the amount borrowed at maturity.
Some fixed-income securities, such as zero coupon bonds, do not pay current
interest but are purchased at a discount from their face value. The market
price of fixed-income securities held by the Fund can be expected to vary
inversely to changes in prevailing interest rates and can also be affected by
the financial conditions of the issuers. Investments in fixed-income securities
with longer maturities generally produce higher yields but are subject to
greater market fluctuation.
LOWER RATED DEBT SECURITIES - The Fund can 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
Investor Services, 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."
To the extent the Fund acquires convertible securities or other debt securities
that are rated lower than
1
<PAGE>
investment grade or are not rated, there is a greater risk that payment of
principal and interest will not be made on a timely basis or at all.
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
depends more on the Adviser's credit analysis than it does 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 depress 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.
Prices of lower-rated securities can decline rapidly if many 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 it harder to sell them. 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.
The lower-rated securities in which the Fund can invest include debt securities
of companies that are financially troubled, in default or are in bankruptcy or
reorganization ("Deep Discount Securities"). These securities could be rated C,
C1 or D by S&P or C by Moody's or could 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. These factors could include a restructuring of debt, management
changes, existence of adequate assets, or other special circumstances.
A debt instrument purchased at a deep discount, but before 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 could
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 could 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, 1998, 0.7% of the Fund's net assets were invested in
convertible securities and 5.9% of the Fund's net assets were invested in
high-grade, short-term securities.
RISK FACTORS RELATING TO LOWER RATED SECURITIES
1. 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 that
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 could 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, the market prices of high yield bonds
structured as zero coupon or pay-in-kind securities are affected to a
greater extent by interest rate changes and thereby tend to be more
volatile than securities that pay interest periodically and in cash.
2
<PAGE>
2. 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
could 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, can 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.
3. LEGISLATION. New laws and proposed new laws could 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.
4. 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.
5. 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.
SECURITIES OF FOREIGN ISSUERS. - The Fund can 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 NYSE or American Stock
Exchange. Investments in securities of foreign issuers can be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations. Compared to U.S. companies, there might 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 might 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 can 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 could be more difficult for the Fund
to obtain or enforce a judgment against the issuer.
COVERED CALL OPTIONS. - In an effort to increase potential income, the Fund is
authorized to write (i.e. sell) covered call options listed on a national
securities exchange. 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
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 will 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
3
<PAGE>
activity and could 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 identical securities (short sales "against the box") or
if the securities sold are "when issued" or "when distributed" securities that
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 short sales is to enable the
Fund to obtain the current market price of a security that the Fund desires to
sell but which cannot be currently delivered for settlement. The Fund will 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 can 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 that 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 could 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 that mature in more than seven days and/or
other securities which are not readily marketable.
LEVERAGE. - The Fund can borrow from banks to raise additional funds for
investment. These 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 cannot 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."
Under the Investment Company Act the Fund must have an asset coverage of at
least 300% of the amount borrowed, immediately after the borrowing. Asset
coverage means total assets, including borrowings, less liabilities, excluding
borrowings. If the Fund's asset coverage falls below this requirement because
of 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.
INVESTMENT RESTRICTIONS
The Fund has adopted the investment restrictions stated below. They apply at
the time securities are purchased or other relevant action is taken. These
restrictions and the Fund's investment objectives cannot be changed without
approval of the holders of a majority of outstanding Fund shares. The
Investment Company Act defines this majority 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
4
<PAGE>
outstanding voting securities. In addition to those described in the
Prospectus, these restrictions provide that the Fund will 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.
3. 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.
4. 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.
5. 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 "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.
6. 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 "Repurchase
Agreements." The purchase of publicly distributed debt securities will not
constitute the making of loans.
7. Participate on a joint or a joint and several basis in any trading account
in securities.
8. 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.
9. 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.
10. Purchase or sell commodities or commodity contracts.
11. 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.
5
<PAGE>
12. Issue any senior securities except that the Fund may borrow from banks to
the extent described above under "Leverage."
ADDITIONAL RESTRICTIONS. The Fund is also subject to the following policies
which its Board of Directors can amend and which apply at the time of purchase
of securities. The Fund will 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.
FUND ORGANIZATION
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 five directors is responsible for overseeing the Fund's affairs.
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., FPA New Income, Inc., FPA
Paramount Fund, Inc. and Source Capital, Inc. (collectively, the "FPA Fund
Complex").
The directors and officers of the Fund, their ages on the date hereof and their
principal occupations during the past five years follow. Their address is 11400
West Olympic Boulevard, Suite 1200, Los Angeles, California 90064.
6
<PAGE>
FUND DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE
AGGREGATE COMPENSATION
COMPENSATION (1) FROM THE
(1) FROM THE FPA FUND TOTAL NUMBER
FUND DURING COMPLEX DURING OF BOARDS ON
POSITION HELD PRINCIPAL OCCUPATION(S) DURING FISCAL YEAR FISCAL YEAR WHICH DIRECTOR
NAME/AGE WITH FUND PAST 5 YEARS ENDED 12/31/98 ENDED 12/31/98 SERVES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Willard H. Altman, 63 Director (Elected Former Partner of Ernst & Young $1,500 $23,500 4
8/31/98) LLP, independent auditors for
the Fund. Director of Source
Capital, Inc., FPA Capital
Fund, Inc., FPA New Income,
Inc., and Current Income
Shares, Inc. (a closed-end
investment company). Vice
President of Evangelical
Council for Financial
Accountability, an
accreditation organization for
Christian non-profit entities.
- -----------------------------------------------------------------------------------------------------------------------------------
Julio J. De Puzo, Jr., 45 * Director, Director, Principal and Chief $0 $0 3
Executive Vice Executive Officer of First
President Pacific Advisors, Inc.;
Director and President of
Source Capital, Inc.; Director
and Executive Vice President of
FPA Paramount Fund, Inc.;
Executive Vice President of FPA
Capital Fund, Inc. and FPA New
Income, Inc.; President, Chief
Executive Officer and Director
of FPA Fund Distributors, Inc.;
former Executive Vice
President, former Chief
Administrative Officer, former
Chief Financial Officer, former
Treasurer, former Senior Vice
President, former First Vice
President of First Pacific
Advisors, Inc.; former
Treasurer of the Fund, Source
Capital, Inc., FPA Paramount
Fund, Inc., FPA Capital Fund,
Inc. and FPA New Income, Inc.;
former Chief Financial Officer
and former Executive Vice
President of FPA Fund
Distributors, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
John P. Endicott, 81 Director Independent management $5,000 $16,000 2
consultant; 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 FPA Paramount Fund, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE
AGGREGATE COMPENSATION
COMPENSATION (1) FROM THE
(1) FROM THE FPA FUND TOTAL NUMBER
FUND DURING COMPLEX DURING OF BOARDS ON
POSITION HELD PRINCIPAL OCCUPATION(S) DURING FISCAL YEAR FISCAL YEAR WHICH DIRECTOR
NAME/AGE WITH FUND PAST 5 YEARS ENDED 12/31/98 ENDED 12/31/98 SERVES
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Leonard Mautner, 81 Director President, Leonard Mautner $5,000 $16,000 2
Associates (management
consultants); General Partner,
Goodman & Mautner Ltd. (venture
capital partnership) and
President, Goodman & Mautner,
Inc. (investment manager) from
1969 to 1979; Director of FPA
Paramount Fund, Inc. and
Director of MRV Communications
Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Lawrence J. Sheehan, 66 * Director Of counsel to, and partner $5,000 $44,000 4
(1969 to 1994) of, the law firm
of O'Melveny & Myers LLP, legal
counsel to the Fund. Director
of Source Capital, Inc., FPA
Capital Fund, Inc. and FPA New
Income, Inc. Director of TCW
Convertible Securities Fund,
Inc., a closed-end investment
company. Trustee of the World
Wide Index Funds, a mutual fund
complex with thirteen separate
investment portfolios.
- -----------------------------------------------------------------------------------------------------------------------------------
Kenneth L. Trefftzs, 87 Director $750 $6,750 0
(resigned
3/12/98)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------------
* Director who is an interested person, as defined in the Investment Company
Act, by virtue of his affiliation with First Pacific Advisors, Inc., 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.
(1) No pension or retirement benefits are provided to directors by the Fund or
the FPA Fund Complex.
8
<PAGE>
OFFICERS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
POSITION HELD PRINCIPAL OCCUPATION(s) DURING PAST
NAME/AGE WITH FUND 5 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C>
Eric S. Ende, 54 President and Senior Vice President of First
Chief Pacific Advisors, Inc.; Senior Vice
Investment President and Chief Investment
Officer Officer of Source Capital, Inc.;
Vice President of FPA Capital Fund,
Inc., FPA New Income, Inc. and FPA
Paramount Fund, Inc.; former
Executive Vice President and former
Vice President of the Fund.
- -------------------------------------------------------------------------------
Steven R. Geist, 45 Vice Vice President of First Pacific
President Advisors, Inc. and of Source
Capital, Inc.; Investment Analyst of
First Pacific Advisors, Inc. from
July 1992 to December 1994.
- -------------------------------------------------------------------------------
Janet M. Pitman, 55 Vice Vice President of First Pacific
President Advisors, Inc. and of Source
Capital, Inc., of FPA Paramount
Fund, Inc., FPA Capital Fund, Inc.,
and FPA New Income, Inc.
- -------------------------------------------------------------------------------
J. Richard Atwood, 38 Treasurer Senior Vice President, Chief
Financial Officer and Treasurer of
First Pacific Advisors, Inc.; Senior
Vice President, Chief Financial
Officer and Treasurer of FPA Fund
Distributors, Inc. Treasurer of
Source Capital, Inc., of FPA
Paramount Fund, Inc., of FPA Capital
Fund, Inc. and of FPA New Income,
Inc.; Vice President and Chief
Financial Officer of Transamerica
Investment Services, Inc. from
January 1995 to January 1997. Vice
President and Controller of First
Pacific Advisors, Inc. from July
1988 to January 1995, and Assistant
Treasurer of FPA Fund Distributors,
Inc. from May 1991 to January 1995.
Assistant Treasurer of the Fund, of
FPA Capital Fund, Inc., of FPA New
Income, Inc., of FPA Paramount Fund,
Inc. and of Source Capital, Inc.
from 1988 to 1995.
- -------------------------------------------------------------------------------
Sherry Sasaki, 44 Secretary Assistant Vice President and
Secretary of First Pacific Advisors,
Inc. and Secretary of Source
Capital, Inc., FPA Paramount Fund,
Inc., FPA Capital Fund, Inc., FPA
New Income, Inc. and of FPA Fund
Distributors, Inc.
- -------------------------------------------------------------------------------
Christopher H. Thomas, 42 Assistant Vice President and Controller of
Treasurer First Pacific Advisors, Inc. and FPA
Fund Distributors, Inc.; Assistant
Treasurer of FPA Capital Fund, Inc.,
FPA New Income, Inc., Source
Capital, Inc. and FPA Paramount
Fund, Inc. Staff Accountant with
the Office of Inspection of the
Securities and Exchange Commission
from 1994 to March 1995.
- -------------------------------------------------------------------------------
</TABLE>
All officers of the Fund are also officers of the Adviser The directors and
officers of the Fund as a group own approximately 2.29% of the outstanding
shares of the Fund. During the last fiscal year, the directors then in office
who were not affiliated with the Adviser received as a group $17,250 in
directors' fees. Such directors are also reimbursed for certain out-of-pocket
expenses by the Fund.
CONTROL PERSONS AND FIVE PERCENT SHAREHOLDERS
CONTROL PERSONS. First Pacific Advisors, Inc.'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, 1999, no person was known by the
Fund to own, of record or beneficially, 5% or more of the outstanding shares of
the Fund.
MANAGEMENT
INVESTMENT ADVISER. First Pacific Advisors, Inc., 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 investment adviser manages assets of approximately $3.5 billion for seven
investment companies, including one closed-end investment company, and 25
institutional accounts. Currently, the personnel of First Pacific Advisors,
Inc. consists of nine persons engaged full time in portfolio management or
investment research in addition to 27 persons engaged full time in trading,
administrative, financial or clerical activities. First Pacific Advisors,
Inc., together with the distributor, FPA Fund Distributors, Inc., are
9
<PAGE>
indirectly wholly owned subsidiaries of 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.
INVESTMENT ADVISORY AND SERVICE 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 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 cannot 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 can be excluded under 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.
10
<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 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, 2000, 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, 1996, 1997 and 1998, the Adviser
received gross advisory fees of $336,004, $348,236 and $364,414, respectively,
plus $44,801, $46,431 and $48,796 respectively, for costs incurred in providing
financial services to the Fund.
PRINCIPAL UNDERWRITER. FPA Fund Distributors, Inc. (the "Distributor"), located
at 11400 West Olympic Boulevard, Suite 1200, Los Angeles, California 90064, acts
as principal underwriter of Fund shares pursuant to a Distribution Agreement
dated September 3, 1991 (the "Distribution Agreement"). Please see
"Distributor" for more information.
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 the Adviser believes 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 can be given to broker-dealers
providing research services to the Fund or the Adviser. Subject to seeking best
execution, the Adviser can also consider sales of Fund shares as a factor in
selecting broker-dealers to execute portfolio transactions for the Fund. Any
solicitation fees 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
the 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 related incidental functions, such as clearance,
settlement and custody. The advisory fee is not reduced as a result of the
Adviser's receipt of such research.
11
<PAGE>
Research services furnished by broker-dealers effecting securities transactions
for the Fund can be used by the Adviser for all advisory accounts. However, the
Adviser might not use all such research services in managing the Fund's
portfolio. In the Adviser's opinion, 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, 1996, 1997 and 1998, totaled $47,406, $27,196 and
$41,393, respectively. During the last fiscal year, $38,780 of commissions were
paid on transactions having a total value of $17,522,440 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.
CAPITAL STOCK
COMMON STOCK. Each share of the Fund 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 require shareholder meetings to elect
directors only when required by the Investment Company Act, which is likely to
occur infrequently. In addition, a special meeting of the shareholders will be
called, if requested by the holders of 10% 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.
Shares of the Fund 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.
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
12
<PAGE>
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% 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 could 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. These 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. 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 can 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 for reduced sales charges, 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 the initial purchase. The investor then becomes eligible for a reduced
sales charge based on the total amount of the specified intended investment
("LOI Goal"), provided the 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 can 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 applicable reduced sales charge. In
addition, during the Period, the shareholder can 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
13
<PAGE>
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 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 or reinvested as directed by the shareholder.
FPA EXCHANGE PRIVILEGE. The procedures for exchanging shares between FPA Funds
are described under "Exchanging Your Fund Shares" 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 "Selling
(Redeeming) Your Shares" in the Fund's Prospectus.
By use of the exchange privilege, the investor authorizes the Shareholder
Service Agent ("Agent") to act on telephonic, telegraphic or written exchange
instructions from any person representing himself to be the investor or the
agent of the investor and believed by the Agent to be genuine. The Agent's
records of such instructions are binding.
For purposes of determining the sales charge rate previously paid, all sales
charges paid on the exchanged security and on any security previously exchanged
for such security or for any of its predecessors will 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 before 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 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 as described above.
REDEMPTION OF SHARES. Redemptions are not made on days when the NYSE is closed,
including those holidays listed under "Purchase and Redemption of Shares - Net
Asset Value." The right of redemption can 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 can be made by telephone once the shareholder
has properly completed and returned to the 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
14
<PAGE>
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 "Selling (Redeeming) Your Shares" in the
Fund's Prospectus. The optional shareholder services form is available from
authorized security 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.
A shareholder can cancel the telephone redemption authorization upon written
notice. If the shareholder has authorized telephone redemptions, neither the
Fund nor the Agent is responsible for any unauthorized telephone redemptions.
If the Fund shares to be redeemed by telephone (technically a repurchase by
agreement between the Fund and the shareholder) were recently purchased by
check, the 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. A penalty tax
applies, in general, to distributions made before age 59-1/2, excess
contributions and failure to start distribution of the account at age 70-1/2.
Borrowing from or against the account could 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 the 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 establishing, 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
15
<PAGE>
related mutual fund are acquired, to the extent the sales charge is reduced or
waived on the subsequent acquisition, the sales charge may not be used to
determine the basis in the disposed shares for purposes of determining gain or
loss. To the extent the sales charge is not allowed in determining gain or loss
on the initial shares, it is capitalized in the basis of the subsequent shares.
Under federal tax law, any loss a shareholder realizes on redemption of Fund
shares held for less than six months is treated as a long-term capital loss to
the extent of any long-term capital gain distribution which was paid on such
Fund shares.
Prior to purchasing Fund shares, the impact of dividends or capital gains
distributions should be carefully considered. Any such payments made to a
shareholder shortly after purchasing Fund shares reduce the net asset value of
such Fund shares to that extent and unnecessarily increase sales charges. All
or a portion of such dividends or distributions, although in effect a return of
capital, is subject to taxes, possibly at ordinary income tax rates.
Dividends and distributions declared payable to shareholders of record after
September 30 of any year and paid before February 1 of the following year are
considered taxable income to shareholders on the record date even though paid in
the next year. To the extent determined each year, a portion of the 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.
DISTRIBUTOR
The Distributor acts as principal underwriter of Fund shares pursuant to the
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 Fund prospectuses; 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 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
16
<PAGE>
party, by votes cast in person at a meeting called for such purpose. The
continuation of the Distribution Agreement to September 3, 1999 has been
approved by the Board of Directors and a majority of the Fund's directors who
are not parties to the Distribution Agreement or interested persons of any such
party (as defined in the Investment Company Act). The Distribution Agreement
terminates if assigned (as defined in the Investment Company Act) and may be
terminated, without penalty, by either party on 60 days' written notice.
The Distributor's obligation under the Distribution Agreement is an agency or
best efforts arrangement pursuant to which the Distributor is required to take
and pay for only those Fund shares sold to the public. The Distributor is not
obligated to sell any stated number of Fund shares.
During the fiscal years ended December 31, 1996, 1997 and 1998, total
underwriting commissions on the sale of Fund shares were $98,261, $31,200 and
$21,331 respectively. Of such totals, the amount retained each year by the
Distributor, after reallowance to other dealers, was $5,863, $2,382 and $1,719,
respectively.
PRIOR PERFORMANCE INFORMATION
For the purposes of quoting and comparing the Fund's performance 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.
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
Russell 2500 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
17
<PAGE>
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 1, 5 and 10-year periods ended December 31,
1998, was (2.01%), 11.44% and 12.13%, 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 4.80%, 12.95% and 12.89%, 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.
FINANCIAL STATEMENTS
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND OFFERING PRICE PER SHARE
- - DECEMBER 31, 1998
<TABLE>
<S> <C>
Net asset value and redemption price per share (net assets
divided by shares outstanding) . . . . . . . . . . . . . . . . . . . . . .$20.15
Offering price per share (100/93.5 of per share net asset value) . . . . .$21.55
</TABLE>
18
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1998
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- -------------------------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
PRODUCER DURABLE GOODS -- 20.7%
Crane Co............................................................. 24,400 $ 670,741 $ 736,575
Denison International plc (ADR)*..................................... 78,200 1,282,415 977,500
Donaldson Company, Inc............................................... 37,600 477,740 780,200
Federal Signal Corporation........................................... 23,300 515,245 637,838
Graco Inc............................................................ 57,850 799,144 1,706,575
Holophane Corporation*............................................... 67,600 1,184,295 1,736,475
IDEX Corporation..................................................... 58,350 1,381,766 1,429,575
Kaydon Corporation................................................... 58,000 819,888 2,323,625
--------------- --------------
$ 7,131,234 $ 10,328,363
--------------- --------------
TECHNOLOGY -- 16.7%
Adobe Systems Incorporated........................................... 42,600 $ 1,445,472 $ 1,991,550
Belden Inc........................................................... 69,000 1,735,777 1,461,938
Channell Commercial Corporation*..................................... 48,900 542,192 409,537
Galileo International, Inc........................................... 53,800 1,390,266 2,340,300
KEMET Corporation*................................................... 93,800 1,435,858 1,055,250
Methode Electronics, Inc. (Class A).................................. 68,900 1,084,573 1,076,562
--------------- --------------
$ 7,634,138 $ 8,335,137
--------------- --------------
BUSINESS SERVICES & SUPPLIES -- 15.8%
Applied Graphics Technologies, Inc.*................................. 98,800 $ 2,337,882 $ 1,630,200
Bacou USA, Inc.*..................................................... 45,000 686,724 967,500
Expeditors International of Washington, Inc.......................... 6,200 170,500 260,400
HON INDUSTRIES Inc................................................... 76,900 1,672,179 1,840,794
JLK Direct Distribution Inc. (Class A)*.............................. 97,400 1,838,434 992,262
Manpower Inc......................................................... 48,200 1,485,457 1,214,038
Office Depot, Inc.*.................................................. 26,100 408,375 964,069
--------------- --------------
$ 8,599,551 $ 7,869,263
--------------- --------------
MATERIALS -- 8.5%
Caraustar Industries, Inc............................................ 59,000 $ 1,080,281 $ 1,685,187
Nucor Corporation.................................................... 24,400 1,175,291 1,055,300
OM Group, Inc........................................................ 41,400 848,127 1,511,100
--------------- --------------
$ 3,103,699 $ 4,251,587
--------------- --------------
HEALTH CARE -- 7.9%
Allergan, Inc........................................................ 14,600 $ 273,241 $ 945,350
DENTSPLY International Inc........................................... 53,900 1,037,338 1,387,925
Landauer, Inc........................................................ 49,000 983,036 1,586,375
--------------- --------------
$ 2,293,615 $ 3,919,650
--------------- --------------
</TABLE>
19
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1998
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS -- Continued Amount Cost Value
- -------------------------------------------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
DISTRIBUTION -- 6.7%
Arrow Electronics, Inc.*............................................. 50,300 $ 995,463 $ 1,342,381
Black Box Corporation*............................................... 51,900 1,635,653 1,965,713
--------------- --------------
$ 2,631,116 $ 3,308,094
--------------- --------------
RETAILING -- 6.0%
Circuit City Stores, Inc............................................. 30,400 $ 849,944 $ 1,518,100
O'Reilly Automotive, Inc.*........................................... 31,000 509,767 1,464,750
--------------- --------------
$ 1,359,711 $ 2,982,850
--------------- --------------
ENTERTAINMENT -- 3.5%
Carnival Corporation................................................. 35,900 $ 379,657 $ 1,723,200
--------------- --------------
CONSUMER NON-DURABLE GOODS -- 3.1%
Lancaster Colony Corporation......................................... 48,450 $ 1,088,065 $ 1,556,456
--------------- --------------
INSURANCE -- 2.5%
Poe & Brown, Inc..................................................... 36,150 $ 583,188 $ 1,262,991
--------------- --------------
ENERGY -- 1.1%
Schlumberger Limited................................................. 11,600 $ 774,726 $ 535,050
--------------- --------------
TOTAL COMMON STOCKS -- 92.5%......................................... $ 35,578,700 $ 46,072,641
--------------- --------------
CONVERTIBLE DEBENTURE -- 0.7%
Reptron Electronics, Inc. -- 6 3/4% 2004.............................$ 775,000 $ 705,250 $ 348,750
--------------- --------------
TOTAL INVESTMENT SECURITIES -- 93.2% $ 36,283,950 $ 46,421,391
--------------- --------------
---------------
SHORT-TERM INVESTMENTS -- 5.9%
Short-Term Corporate Notes:
American Express Credit Corporation -- 6% 1/7/99...................$ 1,000,000 $ 999,000
American General Finance Corporation -- 5.28% 1/11/99.............. 1,261,000 1,259,151
State Street Bank Repurchase Agreement -- 4% 1/4/99
(Collateralized by U.S. Treasury Bond -- 7 1/2% 2016,
market value $699,212)............................................. 685,000 685,076
--------------
TOTAL SHORT-TERM INVESTMENTS......................................... $ 2,943,227
--------------
TOTAL INVESTMENTS -- 99.1%............................................ $ 49,364,618
Other assets less liabilities -- 0.9%................................. 448,384
--------------
TOTAL NET ASSETS -- 100%.............................................. $ 49,813,002
--------------
--------------
</TABLE>
*Non-income producing security
See notes to financial statements.
20
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $36,283,950)............................................. $ 46,421,391
Short-term investments -- at cost plus interest earned
(maturities 60 days or less).............................................. 2,943,227 $ 49,364,618
--------------
Cash.......................................................................... 700
Receivable for:
Investment securities sold.................................................. $ 394,483
Capital Stock sold.......................................................... 154,023
Dividends and accrued interest.............................................. 75,002 623,508
-------------- --------------
$ 49,988,826
LIABILITIES
Payable for:
Capital Stock repurchased................................................... $ 131,810
Advisory fees and financial services........................................ 32,614
Accrued expenses ........................................................... 11,400 175,824
-------------- --------------
NET ASSETS -- equivalent to $20.15 per share on 2,471,890
shares of Capital Stock outstanding........................................... $ 49,813,002
--------------
--------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
25,000,000 shares; outstanding 2,471,890 shares............................. $ 24,719
Additional Paid-in Capital.................................................... 38,708,124
Undistributed net realized gain on investments................................ 942,718
Unrealized appreciation of investments........................................ 10,137,441
--------------
Net assets at December 31, 1998............................................... $ 49,813,002
--------------
--------------
</TABLE>
See notes to financial statements.
21
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................................... $ 235,324
Dividends................................................................... 484,745
--------------
$ 720,069
EXPENSES -- Note 3:
Advisory fees............................................................... $ 364,414
Financial services.......................................................... 48,796
Transfer agent fees and expenses............................................ 39,479
Audit fees.................................................................. 27,025
Custodian fees.............................................................. 23,620
Registration fees........................................................... 19,945
Directors' fees and expenses................................................ 17,250
Reports to shareholders..................................................... 16,197
Legal fees.................................................................. 4,329
Other expenses.............................................................. 4,250 565,305
-------------- --------------
Net investment income............................................... $ 154,764
--------------
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)................... $ 18,674,426
Cost of investment securities sold.......................................... 12,404,351
--------------
Net realized gain on investments.......................................... $ 6,270,075
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year................................ $ 14,303,613
Unrealized appreciation at end of year...................................... 10,137,441
--------------
Decrease in unrealized appreciation of investments........................ (4,166,172)
--------------
Net realized and unrealized gain on investments..................... $ 2,103,903
--------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS............................................................... $ 2,258,667
--------------
--------------
</TABLE>
See notes to financial statements.
22
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------------
1998 1997
------------------------------ -------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income............................ $ 154,764 $ 95,681
Net realized gain on investments................. 6,270,075 4,554,526
Increase (decrease) in unrealized
appreciation of investments.................... (4,166,172) 5,436,116
------------- --------------
Increase in net assets resulting
from operations.................................. $ 2,258,667 $ 10,086,323
Distributions to shareholders from:
Net investment income............................ $ (245,948) $ (101,427)
Net realized capital gains....................... (9,868,480) (10,114,428) (6,471,057) (6,572,484)
------------- --------------
Capital Stock transactions:
Proceeds from Capital Stock sold................. $ 7,941,504 $ 2,537,977
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions................. 9,226,388 6,007,187
Cost of Capital Stock repurchased................ (9,700,111) 7,467,781 (7,655,864) 889,300
------------- --------------- -------------- --------------
Total increase (decrease) in net assets............ $ (387,980) $ 4,403,139
NET ASSETS
Beginning of year, including
undistributed net investment income
of $91,184 and $96,930 .......................... 50,200,982 45,797,843
--------------- --------------
End of year, including
undistributed net investment income
of $91,184 at December 31, 1997.................. $ 49,813,002 $ 50,200,982
--------------- --------------
--------------- --------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold....................... 379,448 119,107
Shares issued to shareholders
upon reinvestment of dividends
and distributions................................ 456,919 314,183
Shares of Capital Stock repurchased................ (455,757) (370,541)
--------------- --------------
Increase in Capital Stock outstanding.............. 380,610 62,749
--------------- --------------
--------------- --------------
</TABLE>
See notes to financial statements.
23
<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 $15,327,548 for
the year ended December 31, 1998. Realized gains or losses are based on the
specific-certificate identification method. The cost of securities held at
December 31, 1998 was the same for federal income tax and financial reporting
purposes.
NOTE 3 -- ADVISORY FEES AND OTHER
AFFILIATED TRANSACTIONS
Pursuant to an Investment Advisory Agreement, advisory fees were paid by
the Fund to First Pacific Advisors, Inc. (the "Adviser"). Under the terms of
this Agreement, the Fund 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, 1998, the Fund paid aggregate fees of
$17,250 to all Directors who are not affiliated persons of the Adviser. Legal
fees were for services rendered by O'Melveny & Myers LLP, counsel for the
Fund. A Director of the Fund is of counsel to, and a retired partner of, that
firm. Certain officers of the Fund are also officers of the Adviser and FPA
Fund Distributors, Inc.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- DISTRIBUTOR
For the year ended December 31, 1998, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $1,719 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.
- -------------------------------------------------------------------------------
25
<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. (the "Fund"), including the portfolio of investments, as
of December 31, 1998, 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 15 of the
Prospectus for each of the five years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, including confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of FPA
Perennial Fund, Inc. as of December 31, 1998, 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 15 of
the Prospectus for each of the five years in the period then ended in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
January 22, 1999
26
