<PAGE>
FPA Perennial Fund, Inc.
Annual Report
[LOGO]
Distributor:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, CA 90064
December 31, 1999
<PAGE>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
The big gains of the major stock market averages in 1999 conceal some very
significant differences in performance. On the surface, the results of the big
and small stock indexes seem relatively similar.
<TABLE>
<CAPTION>
1999
----
<S> <C>
S&P 500 21.0%
Russell 2500 24.2%
Russell 2000 21.3%
</TABLE>
Within this seemingly solid performance, there were some surprising
differences. First, there were more stocks down than up: 51% of S&P 500 stocks
were down, 52% of Russell 2000 stocks were down. Second, the market's
performance was driven by tech stocks - the tech dominated Nasdaq 100 was up
102% for the year, as were the tech stocks included in the Russell 2000; the 30
biggest gainers in the S&P 500 were all tech stocks.
When we look at the performance of the small and mid-cap indexes, as well
as small and mid-cap managers, we find that "growth" (mostly tech) dramatically
outperformed "value." These disparities in performance are the widest on record.
<TABLE>
<CAPTION>
1999
----
Value Growth
----- ------
<S> <C> <C>
Russell 2500 (1.5)% 43.1%
Russell 2000 1.5% 55.5%
Lipper Small-Cap Funds 6.3 62.6%
Lipper Mid-Cap Funds 9.3 72.9%
</TABLE>
Despite this hostile environment for value-oriented investors, Perennial's
investment results for 1999 were quite good - a gain of over 25%.
In the table below we compare Perennial's performance to both the Russell
2500 Index, as in the past, and the Lipper Small-Cap Value Funds, the category
in which Lipper has placed Perennial based on its style and market cap range.
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Perennial 24.3% 4.8% 25.3%
Russell 2500 24.4% 0.4% 24.2%
Lipper Small-Cap
Value Funds 26.2% (6.6)% 6.3%
</TABLE>
The obvious question for Perennial, as well as for other value oriented
funds which did well, is whether its good 1999 performance was because it
"cheated" - owned stocks with valuation and business parameters at variance with
its stated philosophy - or because it outperformed in a challenging environment
while investing in a manner consistent with its established principles.
In the case of Perennial, we believe that the latter is the case. It is
true that a significant portion of Perennial's strong performance came from a
handful of technology related companies which were up 100-300% in 1999. However,
in contrast to many of the market's best performing companies, which have no
earnings, modest sales, and only a very short operating history, Perennial's
most successful investments during 1999 are long-established companies with
significant revenues and profits, as well as leading market shares. These
companies were purchased at very modest valuations - prices far below their
prior highs.
<TABLE>
<CAPTION>
Year-End Price Purchase
-------------- Price Compared
1998 1999 Gain To Prior High
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Adobe Systems 23 3/8 67 1/4 187% (54)%
Kemet 11 1/4 45 1/16 301% (57)%
Zebra Technologies 26* 58 1/2 125% (42)%
</TABLE>
*Cost- purchased in the first quarter 1999
ADOBE SYSTEMS was first purchased during the Summer of 1998. It is a
leading developer of software which aids in the manipulation of text, graphics
and photographic images. At the time of our purchase, the market was worried
about Adobe's pace of new product introductions, as well as its history of
quarterly earnings surprises. As a result we were able to establish our Adobe
position at an average cost of $17 a share, compared with trough 1998 earnings
of about 90 cents plus a balance sheet with $4 a share in cash and no debt.
In the year and a half since then, Adobe has regained Wall Street's favor.
It is now viewed as an Internet play, having introduced several new products
1
<PAGE>
for web page design, as well as because of the growing importance of Acrobat's
Portable Document Format, an essential tool for the electronic transfer of many
types of information. Earnings have doubled, as has Wall Street's valuation.
Adobe is now selling at over 40x estimated 2000 earnings of $1.90 a share.
We started to trim our Adobe position in August, and have now sold all of
our shares at an average price of about $65. Although we share Wall Street's
enthusiasm for Adobe's prospects, it is selling at a price which leaves no room
for error, and we would prefer to own other high quality companies with
dramatically lower valuations.
KEMET is another major contributor to Perennial's 1999 performance. It is
one of the world's leading producers of tantalum and ceramic capacitors, passive
devices which store and regulate the flow of electricity, and which are used in
vast numbers in electronics products. Like semiconductors and memory chips, the
capacitor industry is a growth cyclical - production and profits have increased
dramatically over time, but not without periods of oversupply and severe
declines in earnings.
The year 1998 was one of these cyclical downturns as the collapse of Asia
and industry overcapacity pushed Kemet's earnings down from a high of $1.70 a
few years earlier to break-even.
Kemet's earnings started to improve in mid 1999, as the recovery in Asia
accelerated and demand for many electronics products, but especially wireless
telecommunications, grew rapidly. Instead of focusing on how low earnings could
go, the market is now evaluating how high peak earnings might be (we believe $3
- - $4 a share is possible) and how long the up cycle will continue. As a result,
Kemet's share price has improved dramatically to a recent high of nearly $60. We
have taken some profits, selling about 40% of our shares, but continue to hold a
substantial position.
ZEBRA TECHNOLOGIES is another example of a company we were able to purchase
when it was deeply out of favor on Wall Street, and whose subsequent price
recovery greatly aided last year's performance.
Despite Zebra's long-held position as the leading manufacturer of bar code
printers, a key component in the rapidly growing automated identification
industry, Wall Street in early 1999 seemed to be interested only in some
temporary problems which Zebra was having in digesting a recent major strategic
acquisition. The resulting price decline of nearly 50% gave us an opportunity to
establish our position at less than 12x expected 1999 earnings (and about 9x
current expectations of 2000 earnings).
As 1999 progressed, Zebra's results began to reflect the significant
strategic benefits of the merger rather than its challenges, and Zebra's stock
price dramatically improved, ending the year at $58 1/2, or more than double our
first quarter cost of $26 per share. Even at a recent price is the mid $60s, we
are continuing to maintain our position, though watching for signs of
overvaluation.
As described above, Perennial achieved its strong 1999 performance without
compromising its investment philosophy. Similarly, in 2000 we will continue to
purchase only companies with established records of earning superior returns on
capital, selling at below market valuations, confident that this will produce
rewarding long-term performance for our shareholders.
Respectfully submitted,
/s/ Eric S. Ende
Eric S. Ende
President and Portfolio Manager
February 15, 2000
2
<PAGE>
HISTORICAL PERFORMANCE
CHANGE IN VALUE OF A $10,000 INVESTMENT IN FPA PERENNIAL FUND, INC.
VS. RUSSELL 2500 INDEX AND LIPPER SMALL-CAP VALUE FUND AVERAGE
FROM JANUARY 1, 1990 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Average Annual Total Return
Years Ended December 31, 1999
FPA Perennial Fund, Inc. ----------------------------------
1 year 5 years 10 years
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
At Net Asset Value 25.31% 18.17% 12.85%
- ----------------------------------------------------------------------------
With Maximum 6.5% Sales Charge 17.16% 16.60% 12.09%
- ----------------------------------------------------------------------------
</TABLE>
[LINE GRAPH]
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Russell 2500 10,000 8,515 12,494 14,512 16,914 16,734 22,042 26,237 32,628 32,752 40,646
FPA Perennial Fund, Inc. (NAV) 10,000 10,097 12,287 13,893 14,538 14,533 17,043 20,518 25,504 26,728 33,492
FPA Perennial Fund, Inc. 9,350 9,441 11,488 12,990 13,593 13,589 15,935 19,185 23,846 24,991 31,315
Lipper Small-Cap Value
Fund Average 10,000 8,435 12,309 14,199 16,435 16,129 20,202 23,539 30,321 28,286 28,657
</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. This index does not reflect any commissions or
fees which would be incurred by an investor purchasing the stocks it represents.
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 Lipper data does not include sales charges. The performance shown for FPA
Perennial Fund, Inc., with an ending value of $31,315, 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 $33,492. The performance of
the Fund and of the Averages is computed on a total return basis which includes
reinvestment of all distributions.
3
<PAGE>
MAJOR PORTFOLIO CHANGES
For the Six Months Ended December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
NET PURCHASES Shares
----------
<S> <C>
COMMON STOCKS
Clayton Homes, Inc. (1).......................................... 106,000
Crane Co......................................................... 26,300
Donaldson Company, Inc........................................... 1,500
Huttig Building Products, Inc. (1)............................... 13,400
Martin Marietta Materials, Inc. (1).............................. 8,000
OM Group, Inc.................................................... 13,000
O'Reilly Automotive, Inc......................................... 10,400
Strayer Education, Inc. (1)...................................... 32,900
<CAPTION>
NET SALES
<S> <C>
COMMON STOCKS
Adobe Systems Incorporated....................................... 47,700
Black Box Corporation............................................ 5,400
Circuit City Stores, Inc......................................... 3,600
Federal Signal Corporation (2)................................... 20,300
Holophane Corporation (2)........................................ 28,400
KEMET Corporation................................................ 23,000
Manpower Inc..................................................... 6,500
Methode Electronics, Inc. (Class A).............................. 2,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
4
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1999
<TABLE>
<CAPTION>
COMMON STOCKS Shares Value
- ----------------------------------------------------------------- ------------- --------------
<S> <C> <C>
PRODUCER DURABLE GOODS -- 23.0%
Crane Co......................................................... 60,300 $ 1,198,463
Denison International plc (ADR)*................................. 78,200 801,550
Donaldson Company, Inc........................................... 34,600 832,562
Graco Inc........................................................ 60,850 2,182,994
IDEX Corporation................................................. 57,300 1,740,487
Kaydon Corporation............................................... 52,000 1,394,250
Zebra Technologies Corporation (Class A)*........................ 30,100 1,760,850
--------------
$ 9,911,156
--------------
TECHNOLOGY -- 19.0%
Adobe Systems Incorporated....................................... 9,500 $ 638,875
Belden Inc....................................................... 55,400 1,163,400
Channell Commercial Corporation*................................. 48,900 559,294
Galileo International, Inc....................................... 31,600 946,025
KEMET Corporation*............................................... 61,800 2,784,863
Methode Electronics, Inc. (Class A).............................. 64,900 2,084,912
--------------
$ 8,177,369
--------------
BUSINESS SERVICES & SUPPLIES -- 14.5%
Applied Graphics Technologies, Inc.*............................. 98,800 $ 852,150
Bacou USA, Inc.*................................................. 50,500 760,656
HON INDUSTRIES Inc............................................... 72,200 1,583,888
JLK Direct Distribution Inc. (Class A)*.......................... 97,400 1,004,438
Manpower Inc..................................................... 37,700 1,418,462
Romac International Inc.*........................................ 48,100 646,344
--------------
$ 6,265,938
--------------
DISTRIBUTION -- 8.5%
Arrow Electronics, Inc.*......................................... 48,300 $ 1,225,613
Black Box Corporation*........................................... 35,400 2,371,800
Huttig Building Products, Inc.*.................................. 13,400 66,162
--------------
$ 3,663,575
--------------
HEALTH CARE -- 8.2%
DENTSPLY International Inc....................................... 44,400 $ 1,048,950
Landauer, Inc.................................................... 48,100 1,052,188
Ocular Sciences, Inc.*........................................... 77,100 1,455,262
--------------
$ 3,556,400
--------------
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1999
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS -- CONTINUED Amount Value
- ----------------------------------------------------------------- ------------- --------------
<S> <C> <C>
RETAILING -- 6.5%
Circuit City Stores, Inc......................................... 33,200 $ 1,496,075
O'Reilly Automotive, Inc.*....................................... 60,400 1,298,600
--------------
$ 2,794,675
--------------
MATERIALS -- 4.6%
Martin Marietta Materials, Inc................................... 8,000 $ 328,000
OM Group, Inc.................................................... 47,500 1,635,781
--------------
$ 1,963,781
--------------
CONSUMER NON-DURABLE GOODS -- 3.3%
Lancaster Colony Corporation..................................... 43,450 $ 1,439,281
--------------
INSURANCE -- 2.7%
Brown & Brown, Inc............................................... 30,350 $ 1,162,784
--------------
CONSUMER DURABLE GOODS -- 2.3%
Clayton Homes, Inc............................................... 106,000 $ 973,875
--------------
EDUCATION -- 1.5%
Strayer Education, Inc........................................... 32,900 $ 649,775
--------------
TOTAL COMMON STOCKS -- 94.1% (Cost $30,176,656).................. $ 40,558,609
--------------
CONVERTIBLE DEBENTURE -- 0.9% (Cost $705,250)
Reptron Electronics, Inc. -- 6 3/4% 2004......................... $ 775,000 $ 387,500
--------------
TOTAL INVESTMENT SECURITIES -- 95.0% (Cost $30,881,906).......... $ 40,946,109
--------------
SHORT-TERM INVESTMENTS -- 4.3% (Cost $1,852,707)
Short-Term Corporate Note:
McGraw-Hill Companies, Inc., The -- 5 1/2% 2/4/00.............. $1,600,000 $ 1,591,689
State Street Bank Repurchase Agreement -- 2 1/2% 1/3/00
(Collateralized by U.S. Treasury Bond -- 7 1/8% 2023,
market value $267,500)......................................... 261,000 261,018
--------------
TOTAL SHORT-TERM INVESTMENTS..................................... $ 1,852,707
--------------
TOTAL INVESTMENTS -- 99.3% (Cost $32,734,613).................... $ 42,798,816
Other assets and liabilities, net -- 0.7%........................ 316,901
--------------
TOTAL NET ASSETS -- 100%......................................... $ 43,115,717
--------------
--------------
</TABLE>
*Non-income producing security
See notes to financial statements.
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $30,881,906).............................. $ 40,946,109
Short-term investments -- at cost plus interest earned
(maturities 60 days or less)............................... 1,852,707 $ 42,798,816
-------------
Cash........................................................... 442
Receivable for:
Capital Stock sold........................................... $ 297,529
Dividends and accrued interest............................... 52,411 349,940
-------------
Prepaid expenses............................................... 4,550
--------------
$ 43,153,748
LIABILITIES
Payable for:
Advisory fees and financial services......................... $ 29,631
Accrued expenses............................................. 8,400 38,031
------------- --------------
NET ASSETS....................................................... $ 43,115,717
--------------
--------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
25,000,000 shares; outstanding 2,108,464 shares.............. $ 21,085
Additional Paid-in Capital..................................... 31,568,004
Undistributed net realized gain on investments................. 1,462,425
Unrealized appreciation of investments......................... 10,064,203
--------------
Net assets at December 31, 1999................................ $ 43,115,717
--------------
--------------
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)...................... $ 20.45
--------------
--------------
Maximum offering price per share
(100/93.5 of per share net asset value)......................... $ 21.87
--------------
--------------
</TABLE>
See notes to financial statements.
7
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest..................................................... $ 111,846
Dividends.................................................... 350,395
--------------
$ 462,241
EXPENSES -- Note 3:
Advisory fees................................................ $ 304,286
Financial services........................................... 40,571
Transfer agent fees and expenses............................. 38,507
Audit fees................................................... 34,025
Custodian fees............................................... 22,070
Directors' fees and expenses................................. 21,063
Legal fees................................................... 20,566
Reports to shareholders...................................... 20,255
Registration fees............................................ 15,820
Other expenses............................................... 6,824 523,987
------------- --------------
Net investment loss..................................... $ (61,746)
--------------
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).... $ 20,618,946
Cost of investment securities sold........................... 11,931,707
-------------
Net realized gain on investments........................... $ 8,687,239
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year................. $ 10,137,441
Unrealized appreciation at end of year....................... 10,064,203
-------------
Decrease in unrealized appreciation of investments......... (73,238)
--------------
Net realized and unrealized gain on investments......... $ 8,614,001
--------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS................................................ $ 8,552,255
--------------
--------------
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------
1999 1998
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss)..................... $ (61,746) $ 154,764
Net realized gain on investments................. 8,687,239 6,270,075
Decrease in unrealized
appreciation of investments.................... (73,238) (4,166,172)
------------- --------------
Increase in net assets resulting
from operations.................................. $ 8,552,255 $ 2,258,667
Distributions to shareholders from:
Net investment income............................ -- $ (245,948)
Net realized capital gains....................... $ (8,105,786) (8,105,786) (9,868,480) (10,114,428)
------------- --------------
Capital Stock transactions:
Proceeds from Capital Stock sold................. $ 3,485,241 $ 7,941,504
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions................. 7,127,651 9,226,388
Cost of Capital Stock repurchased................ (17,756,646) (7,143,754) (9,700,111) 7,467,781
------------- ------------- -------------- -------------
Total decrease in net assets....................... $ (6,697,285) $ (387,980)
NET ASSETS
Beginning of year, including
undistributed net investment income
of $91,184 at January 1, 1998.................... 49,813,002 50,200,982
------------- -------------
End of year........................................ $ 43,115,717 $ 49,813,002
------------- -------------
------------- -------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold....................... 159,188 379,448
Shares issued to shareholders
upon reinvestment of dividends
and distributions................................ 359,353 456,919
Shares of Capital Stock repurchased................ (881,967) (455,757)
------------- --------------
Increase (decrease) in Capital Stock outstanding... (363,426) 380,610
------------- --------------
------------- --------------
</TABLE>
See notes to financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year...................... $ 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
on investment securities............................... 4.89 0.82 4.61 3.75 2.95
---------- ---------- ---------- ---------- ----------
Total from investment operations.......................... $ 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 year............................ $ 20.45 $ 20.15 $ 24.00 $ 22.58 $ 22.36
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total investment return*.................................. 25.31% 4.80% 24.30% 20.39% 17.27%
Ratios/supplemental data:
Net assets at end of year (in thousands).................. $ 43,116 $ 49,813 $ 50,201 $ 45,798 $ 47,390
Ratio of expenses to average net assets................... 1.30% 1.16% 1.16% 1.19% 1.19%
Ratio of net investment income (loss) to
average net assets...................................... (0.15)% 1.47% 0.21% 0.48% 1.63%
Portfolio turnover rate................................... 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.
See notes to financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940 as a
diversified, open-end, management investment company. The Fund's primary
investment objective is long-term growth of capital. Current income is a
secondary consideration. The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its financial
statements.
A. Security Valuation
Securities listed or traded on a national securities exchange or on the
NASDAQ National Market System are valued at the last sale price on the last
business day of the year, or if there was not a sale that day, at the last
bid price. Securities which are unlisted are valued at the most recent bid
price. Short-term investments with maturities 60 days or less are valued at
cost plus interest earned which approximates market value.
B. Federal Income Tax
No provision for federal income tax is required because the Fund has
elected to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification and to distribute
each year to its shareholders, in accordance with the minimum distribution
requirements of the Code, all of its taxable net investment income and
taxable net realized gains on investments.
C. Securities Transactions and Related
Investment Income
Securities transactions are accounted for on the date the securities are
purchased or sold. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest income and expenses are recorded
on an accrual basis.
D. Use of Estimates
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported. Actual results could differ
from those estimates.
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 year ended December 31, 1999,
accumulated net losses of $61,746 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 $6,529,663 for the
year ended December 31, 1999. Realized gains or losses are based on the
specific-certificate identification method. The cost of securities held at
December 31, 1999 was the same for federal income tax and financial reporting
purposes. Gross unrealized appreciation and depreciation for all investments at
December 31, 1999 for federal income tax purposes was $13,631,200 and
$3,566,997, 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.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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, 1999, the Fund paid aggregate fees of $19,500
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 year ended December 31, 1999, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $1,368 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, 1999, and 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 auditing standards generally
accepted in the United States. 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, 1999, 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, 1999, 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 accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Los Angeles, California
January 21, 2000
12
<PAGE>
OFFICERS AND DIRECTORS
DIRECTORS
Willard H. Altman
John P. Endicott
Leonard Mautner
Julio J. de Puzo, Jr.
Lawrence J. Sheehan
OFFICERS
Eric S. Ende, PRESIDENT AND
PORTFOLIO MANAGER
Steven R. Geist, EXECUTIVE VICE
PRESIDENT AND PORTFOLIO MANAGER
Julio J. de Puzo, Jr., EXECUTIVE VICE PRESIDENT
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
INDEPENDENT AUDITORS
Ernst & Young LLP
Los Angeles, California
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.
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