<PAGE>
FPA Perennial Fund, Inc.
SEMI-ANNUAL REPORT
JUNE 30, 1999
[LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, CA 90064
<PAGE>
OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
<S> <C>
DIRECTORS DISTRIBUTOR
Willard H. Altman FPA Fund Distributors, Inc.
John P. Endicott 11400 West Olympic Boulevard, Suite 1200
Leonard Mautner Los Angeles, California 90064
Julio J. de Puzo, Jr.
Lawrence J. Sheehan
COUNSEL
OFFICERS O'Melveny & Myers LLP
Los Angeles, California
Eric S. Ende, PRESIDENT AND
PORTFOLIO MANAGER
Steven R. Geist, EXECUTIVE VICE CUSTODIAN & TRANSFER AGENT
PRESIDENT AND PORTFOLIO MANAGER
Julio J. de Puzo, Jr., EXECUTIVE VICE State Street Bank and Trust Company
PRESIDENT Boston, Massachusetts
Janet M. Pitman, VICE PRESIDENT
J. Richard Atwood, TREASURER
Sherry Sasaki, SECRETARY
Christopher H. Thomas, ASSISTANT TREASURER
SHAREHOLDER SERVICE AGENT
INVESTMENT ADVISER Boston Financial Data Services, Inc.
P.O. Box 8115
First Pacific Advisors, Inc. Boston, Massachusetts 02266-8115
11400 West Olympic Boulevard, Suite 1200 (800) 638-3060
Los Angeles, California 90064 (617) 483-5000
</TABLE>
This report has been prepared for the information of shareholders of FPA
Perennial Fund, Inc., and is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus. The
financial information included in this report has been taken from the records of
the Fund without examination by independent auditors.
<PAGE>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
After a number of years of relatively weak performance, small-cap stocks
came back to life in the second quarter. Whether this is the start of a
longer-term trend, or just a blip, is still to be determined, but it would
certainly require many more quarters of similar outperformance before the
valuation discrepancies between large and small stocks are fully corrected.
Before discussing the most recent quarter in more detail, it is useful to
briefly review just how extreme this performance difference had become. As shown
in the table below, for the one-year period ended March 31, 1999, the Nasdaq,
dominated by a small number of very large, high PE companies, rose by 34%, while
the small-stock Russell 2000 Index declined 16%.
Year Ended
March 31, 1999
--------------
Nasdaq Composite 34.1%
S&P 500 18.5
Russell 2500 (13.3)
Russell 2000 (16.3)
In contrast, second quarter performance was much more favorable to the
average stock, with double digit gains for the Russell 2000 and Russell 2500.
1999
---------------------------------------
First Quarter Second Quarter First Half
------------- -------------- ----------
Nasdaq 12.3% 9.1% 22.5%
S&P 500 5.0 7.1 12.4
Russell 2500 (4.7) 16.4 10.9
Russell 2000 (5.4) 15.6 9.3
The Perennial Fund has also found the recent environment more favorable -
its 29.2% second quarter gain was the best single quarter in its history! For
the first half of 1999, Perennial was up 16.3%.
1999 YTD 1998 1997
-------- ---- ----
Perennial 13.3% 4.8% 24.3%
Russell 2500 10.9 0.4 24.4
The reader may have already noticed a significant sale of HOLOPHANE common
stock during the quarter. The rest of the position was sold at the end of July.
Holophane is a manufacturer of high-quality lighting fixtures for commercial and
industrial uses - applications like lighting billboards, warehouses and
factories, and highway intersections.
We first purchased Holophane about four years ago, in August 1995 at $18 a
share, and increased the position over the following year. We were attracted by
the Company's leading shares in its niche markets, high returns on capital, and
strong management. Despite these virtues, the stock was trading at only $22 per
share at the end of March, a valuation of just 11x expected 1999 earnings of
$2.00 per share. We held 63,000 shares, Perennial's 8th largest position.
In late June, National Service Industries agreed to buy Holophane for
$38 1/2 per share, a much more reasonable PE of 20x earnings. The pricing of
this acquisition dramatically illustrates how undervalued many high quality
smaller companies had become, and why we were so pleased to be able to
maintain or increase our positions in them at such depressed prices.
OCULAR SCIENCES, a manufacturer of contact lenses, was recently added to
the Perennial portfolio.
There are a number of well-known brands in the contact lens business,
including Johnson & Johnson's Acuvue, Bausch & Lomb, and Ciba. Notably absent
from this list is Ocular Sciences. This is because the widely recognized names
listed above have made a substantial investment in marketing to consumers.
Ocular Sciences, in contrast, markets only to eye care professionals -
optometrists and optical chains.
Eye doctors are looking primarily for two things from their contact lens
suppliers - a high quality product for their patients, and an opportunity to
earn a good profit for themselves.
Ocular Sciences provides what the eye doctors want. They make high quality
contacts which many
1
<PAGE>
patients find more comfortable to wear and easier to insert, and the eye
doctors can earn more from prescribing Ocular Sciences' contacts than from
those of other optical companies.
To understand why this is so, we must realize that eye doctors earn only
about one-third of their revenues from professional services like eye exams. The
remaining two-thirds come from selling products such as eyeglasses or contact
lenses. Therefore, it is extremely important for the eye doctors' financial
health whether or not their patients who wear disposable contact lenses return
to the doctors to periodically refill their contact lens prescriptions.
Ocular Sciences encourages the patients to do so by providing the doctors
with unique or semi-exclusive brands subject to less price comparison and by
not selling its products through alternative distribution channels - drug
stores, mail order, internet retailers.
In addition to providing compelling reasons for eye care professionals to
prescribe its products, Ocular Sciences' business model also has a lower cost
structure than those of its competitors. It avoids the heavy expense of consumer
advertising, and it uses an efficient telemarketing sales force instead of the
costly direct sales force that the others employ.
As a result of Ocular's superior business model, it is steadily gaining
market share (now #2 behind J & J in the key U.S. weekly disposable market), it
earns big operating margins and returns on capital, and its sales and profits
have grown rapidly. In addition, its balance sheet has no debt and $2 per share
in cash.
We made our first purchase of Ocular in February at an average price of $21
per share, a very reasonable 16x last year's $1.30 earnings per share. An
opportunity to add to the position came along unexpectedly in early June when
Ocular decided to provide new and lower guidance for analysts' earnings
estimates. The company indicated that U.S. contact lens industry growth in the
second quarter was likely to be about 1-2%, rather than the 4% which they had
previously estimated. As a result, Ocular's domestic sales and profit growth
would slow, and, on a "worst case" basis, 1999 earnings per share might be only
$1.50, rather than the prior forecast of $1.70.
Wall Street took this news poorly, and marked-down the price of Ocular
Sciences from $27 per share the day before, to $13 1/2 per share the day
after, as many shareholders stampeded for the exits. Over 20 million shares
traded in only a few days -- meaning that most of the 15 million publicly
held shares changed ownership.
Although we were not pleased by this news either, our behavior was quite
different. Even based on the worst case guidance, Ocular's 1999 growth would be
15% in earnings and about 20% in sales, with an operating margin of 25% and
having a balance sheet with no debt and $2 per share in cash. In addition,
Ocular continued to gain market share and strengthen its competitive position.
At a valuation of as low as 9x expected 1999 earnings, we felt Ocular was
unreasonably cheap and had little downside risk. Instead of dumping our stock,
we purchased an additional 50,000 shares, roughly tripling our total position.
Although Ocular's price has subsequently recovered to about $20 per share,
it is clearly too soon to be confident that we have made the correct decision.
But we are hopeful that Ocular Sciences may be another example of how focussing
on the long-term merits of a business enables us to purchase high-quality
companies when they are temporarily out of favor, and as a result provide
superior long-term returns to Perennial shareholders.
I am pleased to report that on August 2, 1999, Perennial's Board of
Directors elected Steven Geist as Portfolio Manager, a role that he and I will
share. This promotion is a recognition of the excellent work that Steve has done
for the Fund since joining First Pacific Advisors over seven years ago. I look
forward to continuing to work closely with Steve in his new position. We will
manage Perennial's portfolio following the same principles and philosophy as
before.
Respectfully submitted,
/s/ Eric S. Ende
Eric S. Ende
President
August 6, 1999
2
<PAGE>
HISTORICAL PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
PERIODS ENDED JUNE 30, 1999
-----------------------------------
1 YEAR 5 YEARS 10 YEARS
------- -------- --------
<S> <C> <C> <C>
FPA Perennial Fund, Inc.
(NAV)............................. 12.41% 17.18% 12.94%
FPA Perennial Fund, Inc.
(Net of Sales Charge)............. 5.10% 15.61% 12.18%
Lipper Growth & Income Fund
Average........................... 14.48% 21.93% 15.35%
Russell 2500 Index.................. 5.35% 17.88% 14.10%
</TABLE>
The table presented above shows the average annual total return, which includes
reinvestment of all distributions, for several different periods ended June 30,
1999 for the Fund and comparative indices of securities prices. The Russell 2500
Index consists of the 2,500 smallest companies in the Russell 3000 total
capitalization universe. This index is a measure of small to medium
capitalization stock performance. The Lipper Growth & Income Fund Average
provides an additional comparison of how your Fund performed in relation to
other mutual funds with similar objectives. The data quoted represents past
performance, and an investment in the Fund may fluctuate so that an investor's
shares when redeemed may be worth more or less than their original cost. Since
investors purchase shares of the Fund with varying sales charges depending
primarily on volume purchased, the returns for the Fund are presented at net
asset value (NAV) and also net of the current maximum sales charge of 6.5% of
the offering price.
3
<PAGE>
MAJOR PORTFOLIO CHANGES
Six Months Ended June 30, 1999
Shares
NET PURCHASES --------
COMMON STOCKS
Crane Co............................................... 9,600
Ocular Sciences, Inc. (1).............................. 77,100
Romac International Inc. (1)........................... 48,100
Zebra Technologies Corporation (Class A) (1)........... 30,100
NET SALES
COMMON STOCKS
Adobe Systems Incorporated............................. 14,000
Allergan, Inc. (2)..................................... 14,600
Belden Inc............................................. 13,600
Black Box Corporation.................................. 11,100
Brown & Brown, Inc..................................... 5,800
Caraustar Industries, Inc. (2)......................... 59,000
Carnival Corporation (2)............................... 35,900
Circuit City Stores, Inc............................... 12,000
DENTSPLY International Inc............................. 9,500
Expeditors International of Washington, Inc. (2)....... 6,200
Galileo International, Inc............................. 22,200
Holophane Corporation.................................. 39,200
Kaydon Corporation..................................... 6,000
KEMET Corporation...................................... 9,000
Nucor Corporation (2).................................. 24,400
Office Depot, Inc. (2)................................. 26,100
O'Reilly Automotive, Inc............................... 6,000
Schlumberger Limited (2)............................... 11,600
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
4
<PAGE>
PORTFOLIO OF INVESTMENTS
June 30, 1999
<TABLE>
<CAPTION>
COMMON STOCKS Shares Value
- ----------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
PRODUCER DURABLE GOODS -- 26.2%
Crane Co..................................................................... 34,000 $ 1,068,875
Denison International plc (ADR)*............................................. 78,200 1,202,325
Donaldson Company, Inc....................................................... 33,100 810,950
Federal Signal Corporation................................................... 20,300 430,106
Graco Inc.................................................................... 60,850 1,787,469
Holophane Corporation*....................................................... 28,400 1,082,750
IDEX Corporation............................................................. 57,300 1,883,737
Kaydon Corporation........................................................... 52,000 1,748,500
Zebra Technologies Corporation (Class A)*.................................... 30,100 1,156,969
--------------
$ 11,171,681
--------------
TECHNOLOGY -- 21.9%
Adobe Systems Incorporated................................................... 28,600 $ 2,349,669
Belden Inc................................................................... 55,400 1,326,138
Channell Commercial Corporation*............................................. 48,900 489,000
Galileo International, Inc................................................... 31,600 1,688,625
KEMET Corporation*........................................................... 84,800 1,945,100
Methode Electronics, Inc. (Class A).......................................... 66,900 1,530,337
--------------
$ 9,328,869
--------------
BUSINESS SERVICES & SUPPLIES -- 15.4%
Applied Graphics Technologies, Inc.*......................................... 98,800 $ 1,247,350
Bacou USA, Inc.*............................................................. 50,500 861,656
HON INDUSTRIES Inc........................................................... 72,200 2,107,337
JLK Direct Distribution Inc. (Class A)*...................................... 97,400 907,038
Manpower Inc................................................................. 44,200 1,000,025
Romac International Inc.*.................................................... 48,100 426,887
--------------
$ 6,550,293
--------------
HEALTH CARE -- 9.4%
DENTSPLY International Inc................................................... 44,400 $ 1,243,200
Landauer, Inc................................................................ 48,100 1,418,950
Ocular Sciences, Inc.*....................................................... 77,100 1,339,613
--------------
$ 4,001,763
--------------
RETAILING -- 7.0%
Circuit City Stores, Inc..................................................... 18,400 $ 1,711,200
O'Reilly Automotive, Inc.*................................................... 25,000 1,259,375
--------------
$ 2,970,575
--------------
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS
June 30, 1999
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS--CONTINUED Amount Value
- ----------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
DISTRIBUTION -- 6.9%
Arrow Electronics, Inc.*..................................................... 48,300 $ 917,700
Black Box Corporation*....................................................... 40,800 2,045,100
--------------
$ 2,962,800
--------------
CONSUMER NON-DURABLE GOODS -- 3.5%
Lancaster Colony Corporation................................................. 43,450 $ 1,499,025
--------------
MATERIALS -- 2.8%
OM Group, Inc................................................................ 34,500 $ 1,190,250
--------------
INSURANCE -- 2.7%
Brown & Brown, Inc........................................................... 30,350 $ 1,153,300
--------------
TOTAL COMMON STOCKS -- 95.8% (Cost $29,769,518).............................. $ 40,828,556
--------------
CONVERTIBLE DEBENTURE -- 0.6% (Cost $705,250)
Reptron Electronics, Inc.-- 6 3/4% 2004...................................... $ 775,000 $ 279,000
--------------
TOTAL INVESTMENT SECURITIES -- 96.4% (Cost $30,474,768)...................... $ 41,107,556
--------------
SHORT-TERM INVESTMENT -- 3.8% (Cost $1,607,179)
State Street Bank Repurchase Agreement -- 4% 7/1/99
(Collateralized by U.S. Treasury Bond -- 8 1/8% 8/15/19,
market value $1,641,484).................................................. $ 1,607,000 $ 1,607,179
--------------
TOTAL INVESTMENTS -- 100.2% (Cost $32,081,947)............................... $ 42,714,735
Other assets and liabilities, net -- (0.2)%.................................. (79,822)
--------------
TOTAL NET ASSETS -- 100%..................................................... $ 42,634,913
--------------
--------------
</TABLE>
*Non-income producing security
See notes to financial statements.
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1999
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $30,474,768)............................................. $ 41,107,556
Short-term investment -- at cost plus interest earned
(maturity 60 days or less)................................................ 1,607,179 $ 42,714,735
--------------
Cash.......................................................................... 440
Receivable for:
Dividends and accrued interest.............................................. $ 51,273
Capital Stock sold.......................................................... 3,208 54,481
-------------- --------------
$ 42,769,656
LIABILITIES
Payable for:
Capital stock repurchased................................................... $ 84,860
Advisory fees and financial services........................................ 28,983
Accrued expenses............................................................ 20,900 134,743
-------------- --------------
NET ASSETS...................................................................... $ 42,634,913
--------------
--------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
25,000,000 shares; outstanding 1,819,916 shares............................. $ 18,199
Additional Paid-in Capital.................................................... 26,056,500
Accumulated net loss.......................................................... (57,389)
Undistributed net realized gain on investments................................ 5,984,815
Unrealized appreciation of investments........................................ 10,632,788
--------------
Net assets at June 30, 1999................................................... $ 42,634,913
--------------
--------------
NET ASSET VALUE, REDEMPTION PRICE AND
MAXIMUM OFFERING PRICE PER SHARE
Net asset value and redemption price per share
(net assets divided by shares outstanding)..................................... $.23.43
--------
--------
Maximum offering price per share
(100/93.5 of per share net asset value)........................................ $.25.06
--------
--------
</TABLE>
See notes to financial statements.
7
<PAGE>
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1999
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................................... $ 47,715
Dividends................................................................... 181,661
------------
$ 229,376
EXPENSES -- Note 3:
Advisory fees............................................................... $ 151,311
Audit fees.................................................................. 23,775
Financial services.......................................................... 20,175
Transfer agent fees and expenses............................................ 20,078
Legal fees.................................................................. 19,195
Registration fees........................................................... 14,765
Custodian fees and expenses................................................. 11,385
Directors' fees and expenses................................................ 10,000
Reports to shareholders..................................................... 9,301
Other expenses.............................................................. 6,780 286,765
-------------- ------------
Net loss............................................................ $ (57,389)
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments:
Proceeds from sales of investment securities (excluding
short-term investments with maturities of 60 days or less)................ $ 14,323,398
Cost of investment securities sold.......................................... 9,281,301
--------------
Net realized gain on investments.......................................... $ 5,042,097
Unrealized appreciation of investments:
Unrealized appreciation at beginning of period.............................. $ 10,137,441
Unrealized appreciation at end of period.................................... 10,632,788
--------------
Increase in unrealized appreciation of investments........................ 495,347
------------
Net realized and unrealized gain on investments..................... $ 5,537,444
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS............................................................... $ 5,480,055
------------
------------
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1999 December 31, 1998
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss)..................... $ (57,389) $ 154,764
Net realized gain on investments................. 5,042,097 6,270,075
Increase (decrease) in unrealized
appreciation of investments.................... 495,347 (4,166,172)
------------- --------------
Increase in net assets resulting
from operations.................................. $ 5,480,055 $ 2,258,667
Distributions to shareholders from:
Net investment income............................ -- $ (245,948)
Net realized capital gains....................... -- -- (9,868,480) (10,114,428)
------------- --------------
Capital Stock transactions:
Proceeds from Capital Stock sold................. $ 851,230 $ 7,941,504
Proceeds from shares issued to
shareholders upon reinvestment of
dividends and distributions.................... -- 9,226,388
Cost of Capital Stock repurchased................ (13,509,374) (12,658,144) (9,700,111) 7,467,781
------------ ------------- ------------- -------------
Total increase (decrease) in net assets............ $ (7,178,089) $ (387,980)
NET ASSETS
Beginning of period, including
undistributed net investment income
of $91,184 at December 31, 1997.................. 49,813,002 50,200,982
------------- -------------
End of period...................................... $ 42,634,913 $ 49,813,002
------------- -------------
------------- -------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold....................... 40,697 379,448
Shares issued to shareholders upon
reinvestment of dividends and
distributions.................................... -- 456,919
Shares of Capital Stock repurchased................ (692,671) (455,757)
------------- -------------
Increase (decrease) in Capital
Stock outstanding................................ (651,974) 380,610
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
Six
Months
Ended Year Ended December 31,
June 30, ------------------------------------------------
1999 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period............... $ 20.15 $ 24.00 $ 22.58 $ 22.36 $ 21.97 $ 23.76
-------- -------- -------- -------- -------- --------
Income from investment operations:
Net investment income (loss)....................... $ (0.03) $ 0.07 $ 0.05 $ 0.10 $ 0.36 $ 0.46
Net realized and unrealized gain (loss)
on investment securities.......................... 3.31 0.82 4.61 3.75 2.95 (0.48)
-------- -------- -------- -------- -------- --------
Total from investment operations..................... $ 3.28 $ 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 period..................... $ 23.43 $ 20.15 $ 24.00 $ 22.58 $ 22.36 $ 21.97
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Total investment return*............................. 16.28% 4.80% 24.30% 20.39% 17.27% (0.03)%
Ratios/supplemental data:
Net assets at end of period (in $000's).............. $42,635 $49,813 $50,201 $45,798 $47,390 $51,965
Ratio of expenses to average net assets.............. 1.45%+ 1.16% 1.16% 1.19% 1.19% 1.13%
Ratio of net investment income (loss) to
average net assets................................. (0.29)%+ 1.47% 0.21% 0.48% 1.63% 1.95%
Portfolio turnover rate.............................. 17%+ 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. The return
for the six months ended June 30, 1999 is not annualized.
+ Annualized
See notes to financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
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 period, or if there was not a sale that day, at the
last bid price. Securities which are unlisted are valued at the most recent
bid price. Short-term investments with maturities of 60 days or less are
valued at cost plus interest earned which approximates market value.
B. Federal Income Tax
No provision for federal income tax is required because the Fund has
elected to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification and to distribute
each year to its shareholders, in accordance with the minimum distribution
requirements of the Code, all of its taxable net investment income and
taxable net realized gains on investments.
C. Securities Transactions and Related
Investment Income
Securities transactions are accounted for on the date the securities
are purchased or sold. Dividend income and distributions to shareholders
are recorded on the ex-dividend date. Interest income and expenses are
recorded on an accrual basis.
D. Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported. Actual results
could differ from those estimates.
NOTE 2 -- PURCHASES OF INVESTMENT SECURITIES
The cost of purchases of investment securities (excluding short-term
investments with maturities of 60 days or less) aggregated $3,472,119 for the
six months ended June 30, 1999. Realized gains or losses are based on the
specific-certificate identification method. The cost of securities held at June
30, 1999 was the same for federal income tax and financial reporting purposes.
Gross unrealized appreciation and depreciation for all investments at June 30,
1999 for federal income tax purposes was $13,738,826 and $3,106,038,
respectively.
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").
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Continued
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 six months ended June 30, 1999, the Fund paid aggregate fees of
$10,000 to all Directors who are not affiliated persons of the Adviser. Legal
fees were for services rendered by O'Melveny & Myers LLP, counsel for the
Fund. A Director of the Fund is of counsel to, and a retired partner of, that
firm. Certain officers of the Fund are also officers of the Adviser and FPA
Fund Distributors, Inc.
NOTE 4 -- DISTRIBUTOR
For the six months ended June 30, 1999, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $660 in net
Fund share sales commissions after reallowance to other dealers. The Distributor
pays its own overhead and general administrative expenses, the cost of printing
prospectuses and the cost of supplemental sales literature, promotion and
advertising.
12
