<PAGE> 1
<TABLE>
<CAPTION>
OFFICERS AND DIRECTORS
<S> <C>
DIRECTORS DISTRIBUTOR
George H. Michaelis, Chairman of the Board FPA Fund Distributors, Inc.
John P. Endicott 11400 West Olympic Boulevard, Suite 1200
Leonard Mautner Los Angeles, California 90064
John H. Rubel
John P. Shelton
Joseph Lowitz,Chairman Emeritus COUNSEL
John F. Allard, Director Emeritus
O'Melveny & Myers
Los Angeles, California
OFFICERS
William M. Sams, President and INDEPENDENT AUDITORS
Chief Investment Officer
George H. Michaelis, Executive Vice Ernst & Young LLP
President Los Angeles, California
Christopher Linden, Senior Vice President
Lawrence P. McNeil, Senior Vice President
Eric S. Ende, Vice President CUSTODIAN & TRANSFER AGENT
Julio J. de Puzo, Jr., Treasurer
Sherry Sasaki, Secretary State Street Bank and Trust Company
Christopher H. Thomas, Assistant Treasurer Boston, Massachusetts
INVESTMENT ADVISER SHAREHOLDER SERVICE AGENT
First Pacific Advisors, Inc. Boston Financial Data Services, Inc.
11400 West Olympic Boulevard, Suite 1200 P.O. Box 8500
Los Angeles, California 90064 Boston, Massachusetts 02266-8500
(800) 638-3060
(617) 328-5000
</TABLE>
This report has been prepared for the information of shareholders of FPA
Paramount Fund, Inc., and is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus.
1
<PAGE> 2
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Annual Report covers the twelve months ended September 30, 1995. During
this period, the per share net asset value of your Fund increased 11.1%, while
the unmanaged Standard & Poor's 500 Stock Index (S&P 500) increased 29.8% and
the Dow Jones Industrial Average increased 28.0%. The above changes include
reinvestment of all dividends and distributions during the period.
On September 30, 1994, the net asset value per share was $14.73 and on
September 30, 1995, it was $14.90. During the year, the Fund paid $1.01 from
capital gains (paid January 9, 1995 to shareholders of record on December 30,
1994) and $0.29 from net investment income ($0.11 and $0.18 per share paid
January 9, 1995 and July 15, 1995 to shareholders of record on December 30, 1994
and June 30, 1995, respectively).
THE YEAR IN REVIEW
The recent six-month period provided a continuation of the upward market
momentum we discussed in our March 1995 Semi-Annual Letter to Shareholders. The
stock market has done much better than we anticipated, aided by low interest
rates, low inflation and stringent corporate cost cutting. While the Fund's
performance over the same period has been disappointing relative to that of the
broad markets, we nevertheless continue to experience steady positive returns.
The last year has lulled investors into expecting seemingly daily new market
highs, but we believe that most of the good news is already accounted for and
question where the market can go from here. The stock market has generally been
going up for years, with the S&P registering only TWO negative returns in the
last 14 calendar years. Your Fund has not had a negative return on a calendar
year basis since I came on board in November 1981... that's also 14 years. It
seems a bit unrealistic to expect that this can go on forever; but both
portfolio managers and other investors continue to have high expectations, as
shown by current historically low cash positions in mutual funds of
approximately 7%. The pressure on fund managers to play the performance game on
a quarterly basis, rather than for the long term, has increased greatly over the
last few years due to the market's strength. This has required them to emphasize
stocks that are currently acting well on the premise that they will continue to
do well, regardless of how much the stocks' prices have recently advanced. These
managers will also find themselves in a position to dispose of companies which
have experienced only a mild earnings disappointment, causing these stocks to
take a drastic nosedive. This is called momentum investing. It is our feeling
that in this environment, stocks which have met earnings expectations are
generally fully priced.
WHAT ARE WE DOING NOW?
Our expectations for market conditions are based on our belief that the
economy will slow its growth rate, helping inflation and interest rates to
remain relatively low. Our conclusion is that corporate earnings growth should
ease to perhaps 10% for 1996 and the stock market should probably enjoy a modest
increase. Looking back over my 29 years managing mutual funds, my investment
style leads me to do well in periods when the market declines, remains flat or
shows only a modest increase. I have a tendency to lag when the market makes
2
<PAGE> 3
strong gains. While this has been one of those lagging years, we are confident
that our portfolio positioning will stand us in good stead. As we write this
letter, our five largest positions (Woolworth, IBM, Life Partners Group, Unifi
and ENSCO International), are all companies with excellent chief executive
officers. Three of these holdings (Woolworth, Life Partners Group and Unifi)
have actually declined in price this year and certainly represent excellent
values. Even though the market has racked up a major gain, I am actually finding
stocks to buy and our current cash position of approximately 30% affords me the
luxury to do so. The value-oriented approach to investment management which has
been the reason for our success these past 29 years leads to a contrarian stance
in this marketplace. The average investor sees a company which has experienced a
problem as if it were going out of business and looks at the company growing at
a healthy pace, with no visible problems, as if the sky's the limit. We are not
allowing ourselves to be seduced into this consensus opinion and feel strongly
that we are well-positioned for the future.
Respectfully submitted,
William M. Sams
President
November 10, 1995
Change in Value of a $10,000 Investment in FPA Paramount Fund, Inc. vs. S&P 500
and Lipper Growth & Income Fund Average from October 1, 1985 to
September 30, 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9/30/85 9/30/86 9/30/87 9/30/88 9/30/89 9/30/90 9/30/91 9/30/92 9/30/93 9/30/94 9/30/95
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
FPA Paramount Fund, Inc. 9,350 10,449 15,036 15,294 18,517 17,957 23,187 24,770 28,506 34,689 38,543
FPA Paramount Fund, Inc. (NAV) 10,000 11,175 16,081 16,357 19,804 19,206 24,799 26,492 30,487 37,100 41,222
S&P 500 10,000 13,146 18,840 16,473 21,863 19,813 26,014 28,878 32,632 33,827 43,924
Lipper Growth & Income Fund Average 10,000 12,760 16,727 15,368 19,368 17,209 22,274 24,540 28,546 29,474 36,277
</TABLE>
Past performance is not indicative of future performance. The Standard & Poor's
500 Stock Index (S&P 500) is a broad-based unmanaged index of publicly traded
stocks. The S&P 500 does not reflect any commissions or fees which would be
incurred by an investor purchasing the stocks it represents. 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 Paramount Fund, Inc.,
with an ending value of $38,543, 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 $41,222. The performance of the Fund and of the
Averages is computed on a total return basis which includes reinvestment of all
dividends and distributions.
3
<PAGE> 4
MAJOR PORTFOLIO CHANGES
Six Months Ended September 30, 1995
<TABLE>
<CAPTION>
Shares
--------------
NET PURCHASES
<S> <C>
COMMON STOCKS
Burlington Resources Inc. (1) . . . . . . . . . . . . . . . . . . . 600,000
California Energy Company, Inc. . . . . . . . . . . . . . . . . . . 420,000
Dresser Industries, Inc. . . . . . . . . . . . . . . . . . . . . . 452,200
ENSCO International Incorporated . . . . . . . . . . . . . . . . . 359,200
Leucadia National Corporation . . . . . . . . . . . . . . . . . . . 40,000
Life Partners Group, Inc. . . . . . . . . . . . . . . . . . . . . . 570,000
Provident Life & Accident Insurance Company . . . . . . . . . . . . 392,600
Reebok International Ltd. (1) . . . . . . . . . . . . . . . . . . . 550,000
Service Merchandise Company, Inc. (1) . . . . . . . . . . . . . . . 2,000,000
Unifi, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
UNUM Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Woolworth Corporation . . . . . . . . . . . . . . . . . . . . . . . 506,000
NET SALES
COMMON STOCKS
BankAmerica Corporation (2) . . . . . . . . . . . . . . . . . . . . 450,000
EXEL Limited (2) . . . . . . . . . . . . . . . . . . . . . . . . . 250,000
Hasbro, Inc. (2) . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Kaiser Aluminum Corporation (2) . . . . . . . . . . . . . . . . . . 700,000
Inco Limited (2) . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Magma Copper Company (2) . . . . . . . . . . . . . . . . . . . . . 700,000
Occidental Petroleum Corporation (2) . . . . . . . . . . . . . . . 1,000,000
Sears, Roebuck & Co. (2) . . . . . . . . . . . . . . . . . . . . . 100,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
4
<PAGE> 5
PORTFOLIO OF INVESTMENTS
September 30, 1995
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- --------------------------------------------------------------- ------------ -------------- ---------------
<S> <C> <C> <C>
OIL & GAS SERVICES -- 15.4%
Baker Hughes Incorporated . . . . . . . . . . . . . . . . . . . 800,000 $15,172,936 $16,300,000
Dresser Industries, Inc. . . . . . . . . . . . . . . . . . . . 900,000 19,415,533 21,487,500
ENSCO International Incorporated* . . . . . . . . . . . . . . . 1,551,100 20,091,071 26,368,700
Noble Drilling Corporation* . . . . . . . . . . . . . . . . . . 2,700,000 14,360,000 20,925,000
Schlumberger Limited . . . . . . . . . . . . . . . . . . . . . 100,000 5,321,250 6,525,000
----------- -----------
$74,360,790 $91,606,200
----------- -----------
INSURANCE -- 13.7%
Life Partners Group, Inc. . . . . . . . . . . . . . . . . . . . 1,500,000 $29,155,306 $25,875,000
Provident Life & Accident Insurance Company . . . . . . . . . . 492,600 11,238,754 13,361,775
TIG Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . 1,280,000 24,575,580 34,400,000
UNUM Corporation . . . . . . . . . . . . . . . . . . . . . . . 150,000 7,242,474 7,912,500
----------- -----------
$72,212,114 $81,549,275
----------- -----------
CONSUMER NON-DURABLE GOODS -- 11.4%
Guinness PLC . . . . . . . . . . . . . . . . . . . . . . . . . 2,400,000 $16,861,273 $19,608,000
Reebok International Ltd. . . . . . . . . . . . . . . . . . . . 550,000 19,441,829 18,906,250
Unifi, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000 29,998,233 29,400,000
----------- -----------
$66,301,335 $67,914,250
----------- -----------
RETAILING -- 8.0%
Service Merchandise Company, Inc.* . . . . . . . . . . . . . . 2,000,000 $12,848,335 $14,250,000
Woolworth Corporation* . . . . . . . . . . . . . . . . . . . . 2,106,000 31,521,968 33,169,500
----------- -----------
$44,370,303 $47,419,500
----------- -----------
GEOTHERMAL ENERGY PRODUCTION -- 4.5%
California Energy Company, Inc.* . . . . . . . . . . . . . . . 1,300,000 $21,562,960 $26,650,000
----------- -----------
OIL & GAS PRODUCTION/EXPLORATION -- 4.4%
Burlington Resources Inc. . . . . . . . . . . . . . . . . . . . 600,000 $23,380,812 $23,250,000
Oryx Energy Company* . . . . . . . . . . . . . . . . . . . . . 250,000 3,575,013 3,250,000
----------- -----------
$26,955,825 $26,500,000
----------- -----------
NATURAL GAS PIPELINE -- 3.9%
Coastal Corporation, The . . . . . . . . . . . . . . . . . . . 700,000 $18,311,533 $23,537,500
----------- -----------
MULTI-INDUSTRY -- 2.9%
Leucadia National Corporation . . . . . . . . . . . . . . . . . 290,000 $12,559,247 $17,001,250
----------- -----------
NATURAL GAS UTILITY -- 1.9%
ENSERCH Corporation . . . . . . . . . . . . . . . . . . . . . . 700,000 $ 9,493,361 $11,550,000
----------- -----------
</TABLE>
5
<PAGE> 6
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS-- CONTINUED Amount Cost Value
- --------------------------------------------------------------- ---------- ------------- --------------
<S> <C> <C> <C>
REAL ESTATE INVESTMENT TRUST -- 1.1%
Paragon Group, Inc. . . . . . . . . . . . . . . . . . . . . . . 170,000 $ 3,612,500 $ 2,911,250
Town & Country Trust, The . . . . . . . . . . . . . . . . . . . 300,000 4,943,317 3,937,500
------------ ------------
$ 8,555,817 $ 6,848,750
------------ ------------
PAPER AND FOREST PRODUCTS -- 0.7%
Caraustar Industries, Inc. . . . . . . . . . . . . . . . . . . 200,000 $ 2,935,250 $ 4,000,000
------------ ------------
OTHER COMMON STOCKS -- 1.6% . . . . . . . . . . . . . . . . . . $ 9,425,193 $ 9,560,000
------------ ------------
TOTAL COMMON STOCKS -- 69.5% . . . . . . . . . . . . . . . . . $367,043,728 $414,136,725
============ ------------
SHORT-TERM INVESTMENTS -- 26.8%
Short-term Corporate Notes:
General Mills, Inc. -- 5.7% 10/3/95 . . . . . . . . . . . . . $ 6,000,000 $ 5,998,100
Philip Morris Companies Inc. -- 5.71% 10/12/95 . . . . . . . 15,000,000 14,973,829
General Electric Capital Corp. -- 5.7% 10/13/95 . . . . . . . 1,000,000 998,100
Toyota Motor Credit Corporation -- 5.72% 10/13/95 . . . . . . 2,000,000 1,996,187
Xerox Credit Corporation -- 5.72% 10/13/95 . . . . . . . . . 5,000,000 4,990,466
Motorola, Inc. -- 5.7% 10/18/95 . . . . . . . . . . . . . . . 6,000,000 5,983,850
Grainger (W.W.) Inc. -- 5.72% 10/20/95 . . . . . . . . . . . 7,500,000 7,477,358
AT&T Co. -- 5.67% 10/25/95 . . . . . . . . . . . . . . . . . 22,000,000 21,916,840
Du Pont (E.I) De Nemours & Company
-- 5.71% 10/25/95 . . . . . . . . . . . . . . . . . . . . . 6,000,000 5,977,160
Kellogg Company -- 5.68% 10/25/95 . . . . . . . . . . . . . . 10,000,000 9,962,133
Coca-Cola Company, The -- 5.64% 10/26/95 . . . . . . . . . . 10,500,000 10,458,875
Motorola, Inc. -- 5.72% 10/26/95 . . . . . . . . . . . . . . 10,000,000 9,960,278
PepsiCo, Inc. -- 5.7% 10/30/95 . . . . . . . . . . . . . . . 8,000,000 7,963,267
AT&T Capital Corporation -- 5.7% 11/1/95 . . . . . . . . . . 10,000,000 9,950,917
Anheuser-Busch Companies, Inc. -- 5.7% 11/2/95 . . . . . . . 8,000,000 7,959,467
Unilever Capital Corp. -- 5.64% 11/3/95 . . . . . . . . . . . 30,000,000 29,844,900
Daimler-Benz North America Corp. -- 5.71% 11/8/95 . . . . . . 1,000,000 993,973
State Street Bank Repurchase Agreement -- 5 1/4% 10/2/95
(Collateralized by U.S. Treasury Notes
-- 10 3/8% 2009, market value $2,425,322) . . . . . . . . . . 2,421,000 2,421,706
------------
$159,827,406
------------
TOTAL INVESTMENTS -- 96.3% . . . . . . . . . . . . . . . . . . $573,964,131
Other assets less liabilities -- 3.7% . . . . . . . . . . . . . 21,952,904
------------
TOTAL NET ASSETS -- 100% . . . . . . . . . . . . . . . . . . . $595,917,035
============
</TABLE>
*Non-income producing securities
See notes to financial statements.
6
<PAGE> 7
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Common stocks -- at market value
(identified cost $367,043,728) ..................... $414,136,725
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less) .................... 159,827,406 $573,964,131
------------
Cash ................................................... 213
Receivable for:
Investment securities sold ........................... $ 22,784,652
Dividends ............................................ 252,250
Capital Stock sold ................................... 186,723 23,223,625
------------ ------------
$597,187,969
LIABILITIES
Payable for:
Investment securities purchased ...................... $ 538,693
Advisory fees and financial services ................. 377,252
Capital Stock repurchased ............................ 255,697
Accrued expenses ..................................... 99,292 1,270,934
------------ ------------
NET ASSETS -- equivalent to $14.90 per share on 39,990,539
shares of Capital Stock outstanding .................... $595,917,035
============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.25 per share; authorized
50,000,000 shares; outstanding 39,990,539 shares ..... $ 9,997,635
Additional Paid-in Capital ............................. 508,052,205
Undistributed net realized gain on investments ......... 28,255,081
Undistributed net investment income .................... 2,519,117
Unrealized appreciation of investments ................. 47,092,997
------------
Net assets at September 30, 1995 ....................... $595,917,035
============
</TABLE>
See notes to financial statements.
7
<PAGE> 8
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest................................................................... $ 10,829,607
Dividends.................................................................. 5,978,654
--------------
$ 16,808,261
EXPENSES
Advisory fees.............................................................. $ 3,481,057
Financial services......................................................... 527,855
Transfer agent fees and expenses........................................... 473,367
Custodian fees and expenses................................................ 97,078
Registration fees.......................................................... 62,179
Reports to shareholders.................................................... 30,872
Insurance.................................................................. 30,491
Audit fees................................................................. 27,975
Directors' fees and expenses............................................... 27,206
Legal fees................................................................. 14,650
Other expenses............................................................. 15,961 4,788,691
--------------- --------------
Net investment income................................................ $ 12,019,570
--------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments:
Proceeds from sales of investment securities (excluding
short-term investments with maturities of 60 days or less)............... $ 325,482,094
Cost of investment securities sold......................................... 289,381,273
---------------
Net realized gain on investments....................................... $ 36,100,821
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year............................... $ 34,059,325
Unrealized appreciation at end of year..................................... 47,092,997
---------------
Increase in unrealized appreciation of investments..................... 13,033,672
--------------
Net realized and unrealized gain on investments.................... $ 49,134,493
--------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS.............................................................. $ 61,154,063
==============
</TABLE>
See notes to financial statements.
8
<PAGE> 9
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended September 30,
---------------------------------------------------------------------
1995 1994
--------------------------------- --------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income........................... $ 12,019,570 $ 5,924,614
Net realized gain on investments................ 36,100,821 28,398,702
Increase in unrealized appreciation
of investments................................ 13,033,672 34,522,509
-------------- --------------
Increase in net assets resulting
from operations................................. $ 61,154,063 $ 68,845,825
Distributions to shareholders from:
Net investment income........................... $ (10,886,520) $ (5,916,078)
Net realized capital gains...................... (34,315,309) (45,201,829) (34,111,323) (40,027,401)
-------------- --------------
Capital Stock transactions:
Proceeds from Capital Stock sold................ $ 180,999,941 $ 86,786,782
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions................ 39,028,364 35,904,034
Cost of Capital Stock repurchased............... (61,445,359) 158,582,946 (57,306,390) 65,384,426
-------------- --------------- -------------- --------------
Total increase in net assets...................... $ 174,535,180 $ 94,202,850
NET ASSETS
Beginning of year, including
undistributed net investment income
of $1,386,067 and $1,377,531.................... 421,381,855 327,179,005
--------------- --------------
End of year, including
undistributed net investment income
of $2,519,117 and $1,386,067.................... $ 595,917,035 $ 421,381,855
=============== ==============
CHANGE IN CAPITAL STOCK OUTSTANDING
Shares of Capital Stock sold...................... 12,793,621 6,084,057
Shares issued to shareholders
upon reinvestment of dividends
and distributions............................... 2,920,062 2,683,672
Shares of Capital Stock repurchased............... (4,338,553) (3,999,942)
--------------- --------------
Increase in Capital Stock
outstanding..................................... 11,375,130 4,767,787
=============== ==============
</TABLE>
See notes to financial statements.
9
<PAGE> 10
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year...................... $ 14.73 $ 13.72 $ 13.09 $ 14.06 $ 12.04
-------- -------- ------- -------- --------
Net investment income..................................... $ 0.30 $ 0.24 $ 0.25 $ 0.31 $ 0.42
Net realized and unrealized gain
on investment securities................................ 1.17 2.54 1.61 0.57 2.83
-------- -------- ------- -------- --------
Total from investment operations.......................... $ 1.47 $ 2.78 $ 1.86 $ 0.88 $ 3.25
-------- -------- ------- -------- --------
Less distributions:
Dividends from net investment income.................... $ (0.29) $ (0.25) $ (0.25) $ (0.36) $ (0.48)
Distributions from net realized capital gains........... (1.01) (1.52) (0.98) (1.49) (0.75)
-------- -------- ------- -------- --------
Total distributions..................................... $ (1.30) $ (1.77) $ (1.23) $ (1.85) $ (1.23)
-------- -------- ------- -------- --------
Net asset value at end of year............................ $ 14.90 $ 14.73 $ 13.72 $ 13.09 $ 14.06
======== ======== ======= ======== ========
Total investment return*.................................. 11.11% 21.69% 15.08% 6.83% 29.12%
Ratios/supplemental data:
Net assets at end of year (in $000's)..................... 595,917 421,382 327,179 279,990 250,980
Ratio of expenses to average net assets................... 0.89% 0.90% 0.89% 0.92% 0.93%
Ratio of net investment income to
average net assets...................................... 2.25% 1.69% 1.83% 2.33% 3.08%
Portfolio turnover rate................................... 95% 76% 98% 146% 101%
</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.
- --------------------------------------------------------------------------------
FEDERAL TAX STATUS OF FISCAL YEAR DISTRIBUTIONS TO SHAREHOLDERS
<TABLE>
<CAPTION>
Ordinary Income Long-Term
Per Share ---------------------------- Capital Gain
Payable Date Amount Qualifying Non-Qualifying Distribution
- ------------------------------------ --------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
January 9, 1995..................... $1.12+ 4.1% 59.3% 36.6%
July 15, 1995....................... $0.18 17.6% 82.4% -0-
</TABLE>
+ This amount includes a $1.01 capital gain distribution of which $0.60 was
short-term capital gains and therefore taxable as ordinary income. This is
in addition to the $0.11 income dividend which is also taxable as ordinary
income. Even though payment was made in 1995, this distribution was taxable
to shareholders in 1994 under provisions of the Internal Revenue Code.
Qualifying dividends refers to the amount of dividends which are designated as
qualifying for the 70% dividends received deduction applicable to corporate
shareholders.
A form 1099 will be mailed to each shareholder in January 1996 setting forth
specific amounts to be included in their 1995 tax returns.
10
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS
September 30, 1995
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940, as a
diversified, open-end investment company. 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. Unlisted securities 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.
NOTE 2 -- PURCHASES OF INVESTMENT SECURITIES
Cost of purchases of investment securities (excluding short-term
investments with maturities of 60 days or less) aggregated $356,232,001 for the
year ended September 30, 1995. Realized gains or losses are based on the
specific-certificate identification method. The cost of securities held at
September 30, 1995 was $367,079,634 for federal income tax purposes. Gross
unrealized appreciation and depreciation for all securities at September 30,
1995 for federal income tax purposes was $53,634,101 and $6,577,010,
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
11
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
Continued
Fund. The Agreement provides that the Adviser will 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 September 30, 1995, the Fund paid aggregate fees of
$25,750 to all Directors who are not affiliated persons of the Adviser.
NOTE 4 -- DISTRIBUTOR
For the year ended September 30, 1995, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $457,968 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.
NOTE 5 -- SALES OF FUND SHARES
Shares of the Fund are presently offered for sale only to existing
shareholders and to directors, officers, and employees of the Fund, the Adviser,
and affiliated companies. The discontinuation of sales to new investors reflects
Management's belief that unrestrained growth in the Fund's net assets might
impair investment flexibility. The Fund may resume at any time the sale of its
shares to new investors if, in the Board of Directors' opinion, doing so would
be in the best interests of the Fund and its shareholders.
12
