<PAGE>
FPA Perennial Fund, Inc.
ANNUAL REPORT
DECEMBER 31, 1998
[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
O'Melveny & Myers LLP
Los Angeles, California
OFFICERS CUSTODIAN & TRANSFER AGENT
Eric S. Ende, PRESIDENT AND State Street Bank and Trust Company
CHIEF INVESTMENT OFFICER Boston, Massachusetts
Julio J. de Puzo, Jr., EXECUTIVE VICE PRESIDENT
Steven R. Geist, VICE PRESIDENT
Janet M. Pitman, VICE PRESIDENT INDEPENDENT AUDITORS
J. Richard Atwood, TREASURER
Sherry Sasaki, SECRETARY Ernst & Young LLP
Christopher H. Thomas, ASSISTANT TREASURER Los Angeles, California
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) 328-5000
</TABLE>
This report has been prepared for the information of shareholders of FPA
Perennial Fund, Inc., and is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus.
1
<PAGE>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
Three things are certain in life -- death, taxes, and the underperformance
of small-cap stocks. This was demonstrated once again in 1998, and even more
dramatically than in earlier years. (We are referring only to small-cap
underperformance, and will save any discussion of death and taxes for a possible
future shareholder letter.) As a result, the stock indexes dominated by a small
number of very large companies greatly outperformed those indexes more
representative of the great mass of stocks.
<TABLE>
<CAPTION>
1998
----
<S> <C>
Nasdaq 39.6%
S&P 500 28.8%
Russell 2500 0.4%
Russell 2000 (2.6)%
</TABLE>
An alternative way of showing these differences is to look at the 1998
price performance of all publicly traded stocks based on market cap tiers, from
those over $20 billion in size (about 100 companies), to those with market caps
under $250 million (over 5,000 companies). The differences are astounding.
<TABLE>
<CAPTION>
Capitalization Tier 1998 Unweighted Performance
------------------- ---------------------------
<S> <C>
> 20 Billion 25.9%
5-20 Billion 6.2%
2-5 Billion (6.1)%
250 Million - 2 Billion (16.6)%
< 250 Million (24.1)%
</TABLE>
Source: Salomon Smith Barney
Given that most of the stocks in Perennial's portfolio have market caps
between $250 million and $5 billion, we are relatively pleased with Perennial's
performance for 1998 -- a 4.8% gain. This represents the third consecutive year
the portfolio has produced returns comparable to, or in excess of, the Russell
2500, the index which is the closest match to the market cap, and portfolio
weightings of the companies we hold. The Russell 2500 excludes the 500 largest
companies in the Russell 3000 Index, which is comprised of the 3,000 largest
publicly traded U.S. Companies.
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Perennial 20.4% 24.3% 4.8%
Russell 2500 19.0% 24.4% 0.4%
</TABLE>
It is important to realize that the strong performance of the "stock
market" in 1998 was driven by a tiny group of companies, many technology
related, which had extraordinary gains. The ten largest S&P 500 companies were
up 38% in 1998 --they account for 20% of the S&P's market cap. The ten largest
Nasdaq companies, up 115% in 1998, now account for 40% of that index's market
cap. Viewed slightly differently, fifteen companies accounted for over half of
the S&P's gain in 1998, while only ten companies produced over two-thirds of the
Nasdaq's gain.
In selecting the 35-40 companies that are currently in Perennial's
portfolio, we are able to choose among several thousand, all of which are large
enough for us to buy a full position - about $10 million of stock. Most of
these 3,000 or so companies were down in 1998, yet the "market," as determined
by only a few dozen firms, was up dramatically.
Not surprisingly, the result of several years of outsized gain by these
large firms is that they now have extraordinarily high valuations. The ten
largest S&P companies have an average PE of 48x. Of the ten top Nasdaq
companies, the seven which actually made money in the past year had an average
PE of 70x. No Internet companies are included in these average PEs. Their
valuations are much higher - AOL at 310x, Yahoo at 525x, etc. In contrast, the
average Russell 2500 stock has a 25x PE. The average PE in the Perennial
portfolio is 18x.
When we look at the last 75 years of stock market history, we see that
prolonged periods of small stock relative underperformance have eventually been
followed by long periods of outperformance. The obvious question of WHEN this
change will take place is unfortunately impossible to answer. We can be sure,
however, that it will occur.
2
<PAGE>
The 5-year periods of small-stock underperformance which stand out in the
historical record are: 1928-1932, 1970-1974, 1986-1990, and 1994-1998. During
the five years following each of these (excluding of course 1994-1998), small
stocks outperformed large stocks by an average of over 25% a year. Comparing
relative valuations of larger and smaller companies - using Price/Earnings,
Price/Book, and PE/Growth Rate - we find that small stocks are relatively
cheaper than they were in 1990, the most recent time of valuation extremes and
one more relevant to the present than the 1930s.
During the course of 1998, we reduced the number of common stock holdings
from 42 to 35. We believe that this culling of the portfolio has resulted in a
group of stronger businesses, but with no compromise on valuation or any
sacrifice in diversification.
One of the most significant of our new purchases is HON INDUSTRIES, a
manufacturer of office furniture headquartered in Muscatine, Iowa. Hon
dominates the low-end, or "transactional" segment of the office furniture
business, where orders are for small quantities, and price and immediate
delivery are key purchase considerations. This is in contrast to the high-end,
or "contract" furniture segment, dominated by Steelcase, Herman Miller, Knoll
and Haworth. Here the selling process is long, architects and designers are
often involved, and the typical sale is of a large quantity of furniture to a
large corporation.
Jack Michaels, who became Hon's CEO in 1991, has made a number of changes
which have improved Hon's operations, including significant productivity
improvements, expansion of distribution, and strategic acquisitions which
expanded the product line. As a result, since 1991 Hon has steadily increased
its market share, tripled profits and earned a return on equity of over 25%,
while maintaining a strong balance sheet.
Our opportunity to buy Hon at a modest valuation was the result of the
market's concern that furniture industry growth was dramatically slowing from
the strong gains of recent years. While we recognize this possibility, we note
that office furniture has not been an especially cyclical business - the
industry has had only two down years in the past twenty-five. In addition, we
have a high degree of confidence in Hon's ability to outperform its competitors,
to continue to earn excellent returns even in a weaker environment, and to seize
the opportunities that a downturn could present. We therefore were pleased that
we could establish a substantial position in Hon at an average cost of about $22
per share, only 13x 1998 earnings. Hon Industries is now Perennial's fifth
largest position.
Another major new position is Adobe Systems, a software developer in San
Jose, California. Adobe's products dominate the computer manipulation of
graphic and photographic images, as well as desktop publishing. Originally
developed for Macintosh computers, Adobe has adapted its products for PCs as
well, and its competitive strength is comparable in this market segment.
Software is often an area where market share changes are glacial, and recurring
revenue can be realized from selling program upgrades to the large user base.
Adobe's stock was weak last summer because of market worries about its pace
of new product introductions, as well as its history of quarterly earnings
surprises. We were attracted by its strong competitive position and reliable
revenue flow, and felt that the new product story was more likely than not to be
better than Wall Street's abysmal expectations. In addition, with $7 per share
in cash and no debt, Adobe was modestly valued at our average cost of $34 per
share compared to 1998 earnings of $1.85 and 1999 estimates of about $2.40.
Adobe Systems is Perennial's third biggest holding.
In addition to buying new positions in 1998, we also sold some existing
ones. In many cases these were companies which had performed up to our
expectations and whose stock prices fully reflected this. In several others,
three of which I will discuss in more detail, we were disappointed in both the
stock market performance and the operation of the business.
Toys R Us, initially purchased in the first quarter of 1997 is the
best-known specialty store selling toys and other children's products. It has
leading market shares in both the United States and many foreign countries, and
a powerful brand name. At the time of our purchase, Toys R Us was facing a
competitive challenge from its discount store competitors, primarily Wal-Mart
and Target, as well as from the gradual evolution from traditional toys towards
electronic ones. We anticipated that improvements in store layout and
merchandising would permit Toys R Us to hold on to its leading
3
<PAGE>
position, and enhance its profitability. Unfortunately, the changes Toys R Us
made were inadequate to halt its erosion in market share or profits. We sold
our position during the first quarter of 1998 at approximately the same price
that we had paid a year earlier.
A second disappointment was Tupperware, first purchased in early 1996 and
finally sold at a substantial loss during the third quarter of 1998. Although
Tupperware had a long record of steady growth and high profitability in its
foreign operations (but break-even results in its much smaller and less
important U.S. business), our purchase seemed to coincide with a severe
deterioration in the performance of its operations in Asia and Latin America.
Though some of this can be blamed on the economic environment, most of it
appears to us to be the result of management error. More recently, Tupperware's
important European business has also declined, though to a much lesser extent.
We clearly overestimated management's ability (key senior managers had extensive
direct marketing experience including a new CEO who had been hired two years
earlier from Avon) and the inherent strength of the Tupperware business (based
on the powerful brand name and the steady growth and high profitability of its
foreign operations where many markets were largely untapped).
Another company which disappointed us was Franklin Covey, a producer and
marketer of training seminars and products designed to improve individual
productivity through effective time management skills. The heart of the system
was the Franklin Day Planner, sold through a network of retail stores and
catalogs, as well as through corporate training seminars. The company had a
strong balance sheet with no net debt, excess cash, strong cash flow, and
returns-on-equity of 25%.
We invested in the company in mid-1995 at an average cost of $22 per share,
a trailing PE of only 14x. However, subsequent to our initial investment,
problems began to surface as a result of what management was doing with the
excess cash that the company was generating. Starting with a small acquisition
in mid-1994 that appeared to make strategic sense (a training company for the
improvement of oral and written business communication skills), the company
pursued an acquisition strategy to improve sales and expand the product line.
Unfortunately, this led to a number of sales force integration problems that
seemed to be repeated with each subsequent acquisition so that earnings growth
came to a grinding halt. Although still generating decent earnings, the company
was no longer growing the bottom line and the company became mired in a
valuation range at a discount to the market. Although we hung on for several
years, believing management could solve its operating problems, we eventually
liquidated the position in mid-1998 at an average price of $25 - not the result
that we originally envisioned. Companies with strong cash flows must be able to
successfully reinvest that cash flow in the business. When a company chooses to
pursue a new path of growth via acquisition, but has not demonstrated any
previous acquisition experience, close attention must be paid to any signs of
integration difficulties.
We hope that our discussion of companies that we have recently found
attractive as well as those that failed to meet our expectations provides our
shareholders with a better understanding of our investment process. We continue
to focus our investments on soundly financed companies earning high returns on
invested capital. Our approach is based on purchasing high earning power at a
discount and allowing the successful operation of an outstanding business to
generate returns over time. The implementation of this approach requires an
ongoing revalidation of our original judgments regarding a company. The
discussion of three of our sales during 1998 highlights the importance of
management, of successful reinvestment of cash flow, and above all, of a
sustainable high return business.
Respectfully submitted,
/s/ Eric S. Ende
Eric S. Ende
President and
Chief Investment Officer
February 15, 1999
4
<PAGE>
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE
CHANGE IN VALUE OF A $10,000 INVESTMENT IN FPA PERENNIAL FUND, INC. VS. RUSSELL
2500 INDEX, S&P 500 INDEX AND LIPPER GROWTH & INCOME FUND AVERAGE FROM
JANUARY 1, 1989 TO DECEMBER 31, 1998
[GRAPH]
<TABLE>
<CAPTION>
12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93
<S> <C> <C> <C> <C> <C> <C>
S&P 500 10,000 13,169 12,759 16,647 17,916 19,722
Lipper Growth & Income Fund Average 10,000 12,390 11,860 15,339 16,758 18,803
Russell 2500 10,000 11,939 10,166 14,917 17,326 20,193
FPA Perennial Fund, Inc. (NAV) 10,000 12,579 12,701 15,456 17,476 18,287
FPA Perennial Fund, Inc. 9,350 11,761 11,875 14,451 16,340 17,098
<CAPTION>
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
<S> <C> <C> <C> <C> <C>
S&P 500 19,982 27,491 33,803 45,080 57,959
Lipper Growth & Income Fund Average 18,664 24,513 29,680 37,691 43,213
Russell 2500 19,979 26,316 31,324 38,955 39,104
FPA Perennial Fund, Inc. (NAV) 18,281 21,439 25,810 32,082 33,619
FPA Perennial Fund, Inc. 17,093 20,045 24,132 29,996 31,434
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Average Annual Total Return
FPA Perennial Fund, Inc. Years Ended December 31, 1998
---------------------------------
1 year 5 years 10 years
- ------------------------------------------------------------------
<S> <C> <C> <C>
At Net Asset Value 4.80% 12.95% 12.89%
With Maximum 6.5% Sales Charge -2.01% 11.44% 12.13%
- ------------------------------------------------------------------
</TABLE>
Past performance is not indicative of future performance. The Russell 2500
Index consists of the 2,500 smallest companies in the Russell 3000 total
capitalization universe. This index is considered a measure of small to
medium capitalization stock performance. The Standard & Poor's 500 Stock
Index (S&P 500) is a capitalization-weighted index which covers industrial,
utility, transportation and financial services companies, and represents
approximately 75% of the New York Stock Exchange (NYSE) capitalization and
30% of NYSE issues. This index is considered a measure of large
capitalization stock performance. These indices do not reflect any
commissions or fees which would be incurred by an investor purchasing the
stocks they represent. The Lipper Growth & Income Fund Average provides an
additional comparison of how your Fund performed in relation to other mutual
funds with similar objectives. The Lipper data does not include sales
charges. The performance shown for FPA Perennial Fund, Inc., with an ending
value of $31,434, reflects deduction of the current maximum sales charge of
6.5% of the offering price. In addition, since investors purchase shares of
the Fund with varying sales charges depending primarily on volume purchased,
the Fund's performance at net asset value (NAV) is also shown, as reflected
by the ending value of $33,619. The performance of the Fund and of the
Averages is computed on a total return basis which includes reinvestment of
all distributions.
5
<PAGE>
MAJOR PORTFOLIO CHANGES
For the Six Months Ended December 31, 1998
<TABLE>
<CAPTION>
Shares
----------
<S> <C>
NET PURCHASES
COMMON STOCKS
Adobe Systems Incorporated (1) . . . . . . . . . . . . . . . . . . . 42,600
Applied Graphics Technologies, Inc.. . . . . . . . . . . . . . . . . 59,800
Arrow Electronics, Inc.. . . . . . . . . . . . . . . . . . . . . . . 8,800
Belden Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,400
Black Box Corporation. . . . . . . . . . . . . . . . . . . . . . . . 12,100
Crane Co. (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,400
Denison International plc (ADR). . . . . . . . . . . . . . . . . . . 16,500
Expeditors International of Washington, Inc. (1) . . . . . . . . . . 6,200
Galileo International, Inc.. . . . . . . . . . . . . . . . . . . . . 6,500
Graco Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,200
HON INDUSTRIES Inc. (1). . . . . . . . . . . . . . . . . . . . . . . 76,900
IDEX Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 8,600
JLK Direct Distribution Inc. (Class A) . . . . . . . . . . . . . . . 46,000
KEMET Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . 22,600
OM Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,400
NET SALES
COMMON STOCKS
Allergan, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,100
Bob Evans Farms, Inc. (2). . . . . . . . . . . . . . . . . . . . . . 10,000
CVS Corporation (2). . . . . . . . . . . . . . . . . . . . . . . . . 18,890
Caraustar Industries, Inc. . . . . . . . . . . . . . . . . . . . . . 15,000
Carnival Corporation . . . . . . . . . . . . . . . . . . . . . . . . 30,700
Cooper Tire & Rubber Company (2) . . . . . . . . . . . . . . . . . . 71,400
Leggett & Platt, Incorporated (2). . . . . . . . . . . . . . . . . . 38,000
Newell Co. (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Progressive Corporation, The (2) . . . . . . . . . . . . . . . . . . 5,100
Tupperware Corporation (2) . . . . . . . . . . . . . . . . . . . . . 37,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
6
<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>
7
<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.
8
<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.
9
<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.
10
<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.
11
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year 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 thousands) . . . . . . . . . . $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.
See notes to financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Invest-ment 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 prepara-tion of its financial
state-ments.
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 invest-ment 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 maturi-ties 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-certifi-cate identifi-cation 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.
13
<PAGE>
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.
- --------------------------------------------------------------------------------
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, the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included 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 for each of the five years
in the period then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Los Angeles, California
January 22, 1999
14
