<PAGE>
FPA Perennial Fund, Inc.
SEMI-ANNUAL REPORT
JUNE 30, 2000
[LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, CA 90064
<PAGE>
OFFICERS AND DIRECTORS
DIRECTORS
Willard H. Altman, Jr.
John P. Endicott
Leonard Mautner
Lawrence J. Sheehan
OFFICERS
Eric S. Ende, PRESIDENT AND
PORTFOLIO MANAGER
Steven R. Geist, EXECUTIVE VICE
PRESIDENT AND PORTFOLIO MANAGER
J. Richard Atwood, TREASURER
Sherry Sasaki, SECRETARY
Christopher H. Thomas, ASSISTANT TREASURER
INVESTMENT ADVISER
First Pacific Advisors, Inc.
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
COUNSEL
O'Melveny & Myers LLP
Los Angeles, California
CUSTODIAN & TRANSFER AGENT
State Street Bank and Trust Company
Boston, Massachusetts
SHAREHOLDER SERVICE AGENT
Boston Financial Data Services, Inc.
P.O. Box 8115
Boston, Massachusetts 02266-8115
(800) 638-3060
(617) 483-5000
This report has been prepared for the information of shareholders of FPA
Perennial Fund, Inc., and is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus. 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:
The stock market retreated in the second quarter, with all major indexes
declining. Perennial participated in this negative performance, with a decline
of 7.9%, compared to 4.0% for the Russell 2500. For most longer periods
Perennial has done well, with the exception of the past 12 months, when the
outperformance of tech stocks has distorted the results.
<TABLE>
<CAPTION>
Periods ended
June 30, 2000
-----------------------------------
One Three Five
Quarter Year Years * Years *
------- ----- ----- -----
<S> <C> <C> <C> <C>
Perennial (7.9)% 6.2% 12.7% 15.6%
Russell 2500 (4.0)% 18.3% 13.8% 17.0%
</TABLE>
*Annualized
This quarter, I thought it might be of interest to shareholders to discuss
some companies which have been in Perennial's portfolio for a number of years,
but are still probably relatively unfamiliar. They each possess the attributes
we seek -- high returns on capital, good growth prospects, and strong balance
sheets, combined with modest valuations. None of these companies are in
glamorous businesses, but each is the leader in its industry, has a reliable
revenue stream on which it earns high margins, and has demonstrated the ability
to reinvest capital both in its existing business and in closely related
acquisitions.
BACOU USA is the leader in making personal protection equipment -- products
that protect industrial and construction workers from injuries. Starting out
with the North American rights to the well-known Uvex brand of safety glasses,
Bacou used its cash flow to acquire leading brands of other safety products,
notably hearing protection, gloves, and respiratory systems. In each of its
major product categories, Bacou holds the first or second market share position.
Bacou's products are sold principally through industrial safety equipment
distributors or distributors of general industrial supplies like W.W. Grainger.
Having a broader product line gives manufacturers like Bacou more clout with
these distributors, and strengthens its competitive advantage compared to others
who sell only a few products. Attaining and increasing this competitive
advantage is the main stimulus behind Bacou's successful acquisition program.
Bacou USA is majority owned by a private French company, Bacou S.A. The
French firm recently announced that, in order to insure an adequate supply of
capital to continue the industry consolidation acquisition strategy, both in the
U.S. and in Europe, Bacou will put itself up for sale. Both the majority French
shares and the minority shares in Bacou USA would be sold on the same basis. If
the sale process is successful, a fall announcement and year-end closing would
be likely. A transaction price in the high $20s would be a realistic
expectation. Prior to the sale announcement Bacou was trading at $20, compared
with expected 2000 earnings of $1.80 per share. It is now about $24.
DENTSPLY INTERNATIONAL is the leading worldwide manufacturer of dental
products. This is an industry which has had excellent growth rates, driven by
improving technology, an aging population, and rising income levels in
developing countries. Dentsply's leading market shares for most of its products
and its strong cash flows have enabled it to fully participate in this industry
growth. It has invested aggressively in research and development and has
steadily introduced new and innovative products. The company is enhancing the
effectiveness of these products by significantly expanding its sales force,
which calls directly on dentists. Finally, Dentsply has been successful in
expanding the scope of its business through its acquisition program, adding a
number of new product areas to its portfolio, most notably endodontics.
DONALDSON COMPANY is a manufacturer of filtration products for large
engines. Its product mix
1
<PAGE>
includes both air and liquid filters, as well as exhaust and emission control
products. Although investors have traditionally viewed Donaldson as strongly
linked to the U. S. heavy truck cycle, this is in fact no longer the case. Half
of Donaldson's mobile engine business comes from products sold into the
aftermarket, where demand depends on miles driven, not new truck purchases. Much
of the rest of its engine business is with producers of agricultural or
construction equipment (Deere, Caterpillar, etc.) or foreign truck
manufacturers. Although these are cyclical businesses, their cycles are
generally out of phase with U. S. heavy trucks. In addition, Donaldson has a
substantial business providing filters for stationary gas turbine engines, as
well as for machinery in factories. Finally, Donaldson sells specialty filters
to such rapidly growing markets as disk drives and semiconductor manufacturing.
Donaldson's success at diversifying its customer base has produced a decade
of double-digit earnings growth, along with high returns on capital, a record
which we feel is not reflected in its current valuation of just 13x trailing
12-month earnings.
<TABLE>
<CAPTION>
Bacou Dentsply Donaldson Russell 2500
----- -------- --------- ------------
<S> <C> <C> <C> <C>
Recent Price $24 $35 $20 -
Return on Equity 19% 22% 28% 12%
Operating Margin 19% 18% 10% 10%
10 Year EPS
Growth Rate 14% 14% 16% 10%
Debt % Capital 40% 23% 41% 44%
PE 14x 19x 13x 25x
</TABLE>
As can be seen in the table, these companies have demonstrated financial
performance well above the average as represented by the Russell 2500, while
selling at lower valuations. This relationship, which is true of the Perennial
portfolio as a whole, is one of our key investment objectives, and a reason that
we are optimistic about Perennial's future prospects.
Respectfully submitted,
/s/ Eric S. Ende
Eric S. Ende
President
August 5, 2000
2
<PAGE>
HISTORICAL PERFORMANCE
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
PERIODS ENDED JUNE 30, 2000
---------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
FPA Perennial Fund, Inc.
(NAV)..................................... 6.24% 15.57% 12.21%
FPA Perennial Fund, Inc.
(Net of Sales Charge)..................... (0.67)% 14.03% 11.46%
Lipper Small-Cap Value Fund
Average................................... 6.40% 13.57% 12.77%
Russell 2500 Index.......................... 18.34% 17.03% 15.57%
</TABLE>
The table presented above shows the average annual total return, which includes
reinvestment of all distributions, for several different periods ended June 30,
2000 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 Small-Cap Value 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, 2000
<TABLE>
<CAPTION>
Shares
-------
NET PURCHASES
<S> <C>
COMMON STOCKS
Circuit City Stores, Inc.................................................................... 6,000
Clayton Homes Inc........................................................................... 27,400
Donaldson Company, Inc...................................................................... 13,000
Landauer, Inc............................................................................... 9,900
Lincare Holdings Inc. (1)................................................................... 25,000
Manitowoc Company, Inc., The (1)............................................................ 37,500
Martin Marietta Materials, Inc.............................................................. 11,900
National Commerce Bancorporation (1)........................................................ 32,400
Office Depot, Inc. (1)...................................................................... 100,000
O'Reilly Automotive, Inc.................................................................... 63,800
NET SALES
COMMON STOCKS
Adobe Systems Incorporated (2).............................................................. 9,500
Applied Graphics Technologies, Inc. (2)..................................................... 98,800
Black Box Corporation....................................................................... 6,000
Galileo International, Inc. (2)............................................................. 31,600
Huttig Building Products, Inc. (2).......................................................... 13,400
IDEX Corporation............................................................................ 3,000
KEMET Corporation........................................................................... 73,400
Methode Electronics, Inc. (Class A)......................................................... 22,800
OM Group, Inc............................................................................... 1,000
Strayer Education, Inc...................................................................... 1,100
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
4
<PAGE>
PORTFOLIO OF INVESTMENTS
June 30, 2000
<TABLE>
<CAPTION>
COMMON STOCKS Shares Value
----------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
PRODUCER DURABLE GOODS -- 25.8%
Crane Co..................................................................... 60,300 $ 1,466,044
Denison International plc (ADR)*............................................. 78,200 987,275
Donaldson Company, Inc....................................................... 47,600 940,100
Graco Inc.................................................................... 60,850 1,977,625
IDEX Corporation............................................................. 54,300 1,713,844
Kaydon Corporation........................................................... 52,000 1,092,000
Manitowoc Company, Inc., The................................................. 37,500 1,003,125
Zebra Technologies Corporation (Class A)* ................................... 30,100 1,333,806
-----------
$10,513,819
-----------
BUSINESS SERVICES & SUPPLIES -- 13.1%
Bacou USA, Inc.*............................................................. 50,500 $ 1,010,000
HON INDUSTRIES Inc........................................................... 72,200 1,696,700
JLK Direct Distribution Inc. (Class A)*...................................... 97,400 499,175
Kforce.com, Inc.*............................................................ 48,100 333,694
Manpower Inc................................................................. 37,700 1,206,400
Office Depot, Inc.*.......................................................... 100,000 625,000
-----------
$ 5,370,969
-----------
TECHNOLOGY -- 12.0%
Belden Inc................................................................... 55,400 $ 1,419,625
Channell Commercial Corporation*............................................. 48,900 586,800
KEMET Corporation*........................................................... 50,200 1,258,137
Methode Electronics, Inc. (Class A).......................................... 42,100 1,626,113
-----------
$ 4,890,675
-----------
DISTRIBUTION -- 9.4%
Arrow Electronics, Inc.* .................................................... 48,300 $ 1,497,300
Black Box Corporation*....................................................... 29,400 2,327,653
-----------
$ 3,824,953
-----------
HEALTH CARE -- 9.3%
DENTSPLY International Inc................................................... 44,400 $ 1,368,075
Landauer, Inc................................................................ 58,000 902,625
Lincare Holdings Inc.*....................................................... 25,000 615,625
Ocular Sciences, Inc.*....................................................... 77,100 905,925
-----------
$ 3,792,250
-----------
RETAILING -- 7.4%
Circuit City Stores, Inc. ................................................... 39,200 $ 1,300,950
O'Reilly Automotive, Inc.* .................................................. 124,200 1,723,275
-----------
$ 3,024,225
-----------
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS
June 30, 2000
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS-CONTINUED Amount Value
----------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
MATERIALS -- 7.0%
Martin Marietta Materials, Inc............................................... 19,900 $ 804,706
OM Group, Inc................................................................ 46,500 2,046,000
-----------
$ 2,850,706
-----------
INSURANCE -- 3.9%
Brown & Brown, Inc. ......................................................... 30,350 $ 1,578,200
-----------
CONSUMER DURABLE GOODS -- 2.6%
Clayton Homes, Inc. ......................................................... 133,400 $ 1,067,200
-----------
CONSUMER NON-DURABLE GOODS -- 2.0%
Lancaster Colony Corporation ................................................ 43,450 $ 833,697
-----------
EDUCATION -- 1.9%
Strayer Education, Inc. ..................................................... 31,800 $ 763,200
-----------
BANKING -- 1.3%
National Commerce Bancorporation ............................................ 32,400 $ 520,425
-----------
TOTAL COMMON STOCKS -- 95.7% (Cost $30,843,322).............................. $39,030,319
-----------
CONVERTIBLE DEBENTURE -- 1.2% (Cost $705,250)
Reptron Electronics, Inc. --6 3/4% 2004 ..................................... $ 775,000 $ 503,750
-----------
TOTAL INVESTMENT SECURITIES -- 96.9% (Cost $31,548,572)...................... $39,534,069
-----------
SHORT-TERM INVESTMENTS -- 4.1% (Cost $1,660,277)
Short-term Corporate Note:
American General Finance Corporation -- 6.55% 7/11/00...................... $1,000,000 $ 998,181
State Street Bank Repurchase Agreement -- 5 1/4% 7/3/00
(Collateralized by U.S. Treasury Note -- 5.625% 2002,
market value $677,925).................................................... 662,000 662,096
-----------
TOTAL SHORT-TERM INVESTMENTS................................................. $ 1,660,277
-----------
TOTAL INVESTMENTS -- 101.0% (Cost $33,208,849)............................... $41,194,346
Other assets and liabilities, net -- (1.0)%.................................. (391,898)
-----------
TOTAL NET ASSETS -- 100%..................................................... $40,802,448
===========
</TABLE>
*Non-income producing security
See notes to financial statements.
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2000
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $31,548,572)............................................. $39,534,069
Short-term investments -- at cost plus interest earned
(maturity 60 days or less)................................................ 1,660,277 $41,194,346
-----------
Cash.......................................................................... 51
Receivable for:
Dividends and accrued interest.............................................. $ 57,407
Capital Stock sold.......................................................... 1,390 58,797
----------- -----------
$41,253,194
LIABILITIES
Payable for:
Investment securities purchased............................................. $ 385,299
Advisory fees and financial services........................................ 32,193
Accrued expenses............................................................ 21,348
Capital stock repurchased................................................... 11,906 450,746
----------- -----------
NET ASSETS...................................................................... $40,802,448
===========
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
25,000,000 shares; outstanding 2,023,884 shares............................. $ 20,239
Additional Paid-in Capital.................................................... 29,830,051
Undistributed net realized gain on investments................................ 2,966,661
Unrealized appreciation of investments........................................ 7,985,497
-----------
Net assets at June 30, 2000................................................... $40,802,448
===========
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)..................................... $ 20.16
========
Maximum offering price per share
(100/93.5 of per share net asset value)........................................ $ 21.56
========
</TABLE>
See notes to financial statements.
7
<PAGE>
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................................... $ 92,100
Dividends................................................................... 193,298
-----------
$ 285,398
EXPENSES -- Note 3:
Advisory fees............................................................... $ 162,066
Transfer agent fees and expenses............................................ 24,416
Financial services.......................................................... 21,609
Audit fees.................................................................. 21,025
Registration fees........................................................... 15,478
Reports to shareholders..................................................... 13,120
Custodian fees and expenses................................................. 10,273
Directors' fees and expenses................................................ 10,000
Legal fees.................................................................. 4,193
Insurance................................................................... 3,480
Other expenses.............................................................. 1,474 287,134
----------- -----------
Net investment loss................................................. $ (1,736)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments:
Proceeds from sales of investment securities (excluding
short-term investments with maturities of 60 days or less)................ $ 6,121,263
Cost of investment securities sold.......................................... 4,615,291
-----------
Net realized gain on investments.......................................... $ 1,505,972
Unrealized appreciation of investments:
Unrealized appreciation at beginning of period.............................. $10,064,203
Unrealized appreciation at end of period.................................... 7,985,497
-----------
Decrease in unrealized appreciation of investments........................ (2,078,706)
-----------
Net realized and unrealized loss on investments..................... $ (572,734)
-----------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS............................................................... $ (574,470)
===========
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
---------------------------- ----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss.............................. $ (1,736) $ (61,746)
Net realized gain on investments................. 1,505,972 8,687,239
Decrease in unrealized
appreciation of investments.................... (2,078,706) (73,238)
------------- -------------
Increase (decrease) in net assets resulting
from operations.................................. $ (574,470) $ 8,552,255
Distributions to shareholders from
net realized capital gains....................... -- (8,105,786)
Capital Stock transactions:
Proceeds from Capital Stock sold................. $ 1,325,169 $ 3,485,241
Proceeds from shares issued to
shareholders upon reinvestment of
dividends and distributions.................... -- 7,127,651
Cost of Capital Stock repurchased................ (3,063,968) (1,738,799) (17,756,646) (7,143,754)
------------- ------------- ------------- -------------
Total decrease in net assets....................... $ (2,313,269) $ (6,697,285)
NET ASSETS
Beginning of period................................ 43,115,717 49,813,002
------------- -------------
End of period...................................... $ 40,802,448 $ 43,115,717
============= =============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold....................... 62,768 159,188
Shares issued to shareholders upon
reinvestment of dividends and
distributions.................................... -- 359,353
Shares of Capital Stock repurchased................ (147,348) (881,967)
------------- -------------
Decrease in Capital
Stock outstanding................................ (84,580) (363,426)
============= =============
</TABLE>
See notes to financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Six
Months
Ended Year Ended December 31,
June 30, ------------------------------------------------
2000 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period............... $ 20.45 $ 20.15 $ 24.00 $ 22.58 $ 22.36 $ 21.97
------- ------- ------- ------- ------- -------
Income from investment operations:
Net investment income (loss)....................... -- $ (0.03) $ 0.07 $ 0.05 $ 0.10 $ 0.36
Net realized and unrealized gain (loss)
on investment securities.......................... $ (0.29) 4.89 0.82 4.61 3.75 2.95
------- ------- ------- ------- ------- -------
Total from investment operations..................... $ (0.29) $ 4.86 $ 0.89 $ 4.66 $ 3.85 $ 3.31
------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income............... -- -- $ (0.11) $ (0.05) $ (0.22) $ (0.44)
Distributions from net realized
capital gains.................................... -- $ (4.56) (4.63) (3.19) (3.41) (2.48)
------- ------- ------- ------- ------- -------
Total distributions................................ -- $ (4.56) $ (4.74) $ (3.24) $ (3.63) $ (2.92)
------- ------- ------- ------- ------- -------
Net asset value at end of period..................... $ 20.16 $ 20.45 $ 20.15 $ 24.00 $ 22.58 $ 22.36
======= ======= ======= ======= ======= =======
Total investment return*............................. (1.42)% 25.31% 4.80% 24.30% 20.39% 17.27%
Ratios/supplemental data:
Net assets at end of period (in 000s)................ $40,802 $43,116 $49,813 $50,201 $45,798 $47,390
Ratio of expenses to average net assets.............. 1.33%+ 1.30% 1.16% 1.16% 1.19% 1.19%
Ratio of net investment income (loss) to
average net assets................................. 0.00%+ (0.15)% 0.32% 0.21% 0.48% 1.63%
Portfolio turnover rate.............................. 26%+ 16% 34% 19% 30% 58%
</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, 2000 is not annualized.
+ Annualized
See notes to financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
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. Securities 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.
E. Reclassification of Capital Accounts
The Fund accounts for and reports distributions to shareholders in
accordance with the American Institute of Certified Public Accountant's
Statement of Position 93-2: Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain and Return of Capital
Distributions by Investment Companies. Distributions of net investment
income and realized gains are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are due to differing treatments for items such as wash
sales, net operating losses, capital loss carry forwards and net realized
loss on foreign currency transactions. For the six months
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Continued
ended June 30, 2000, accumulated net losses of $1,736 were reclassified to
undistributed net realized gain on investments.
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 $5,281,957 for
the six months ended June 30, 2000. Realized gains or losses are based on
the specific-certificate identification method. The cost of securities held
at June 30, 2000 was the same for federal income tax and financial
reporting purposes. Gross unrealized appreciation and depreciation for all
investments at June 30, 2000 for federal income tax purposes was
$11,160,892 and $3,175,395, 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"). 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, 2000, 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, 2000, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $996 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.
NOTE 5 -- DISTRIBUTION TO SHAREHOLDERS
On June 30, 2000, the Board of Directors declared a distribution from
net realized capital gains of $0.73 per share payable July 10, 2000 to
shareholders of record on June 30, 2000. For financial statement purposes,
this dividend was recorded on the ex-dividend date, July 3, 2000.
NOTE 6 -- CHANGE IN CONTROL OF INVESTMENT ADVISER
United Asset Management Corporation (UAM), the parent of the
Investment Adviser, has entered into an agreement to be acquired by Old
Mutual plc, a United Kingdom-based financial services group with
substantial asset
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Continued
management, insurance and banking businesses. This transaction will
create a change in control of the Investment Adviser and, as required by
the Investment Company Act of 1940, a new investment advisory agreement
must be approved by shareholders upon this event. In anticipation, the
Board of Directors of the Fund has approved a new investment advisory
agreement which will be submitted to shareholders at the annual meeting
scheduled for October 23, 2000. The Board has also approved an interim
investment advisory agreement to take effect should the acquisition of UAM
occur prior to the shareholder meeting date. Both investment advisory
agreements are substantially the same as the current investment advisory
agreement.
13
