<PAGE> 1
- --------------------------------------------------------------------------------
FPA PARAMOUNT FUND, INC. Annual Report
[LOGO]
Distributor:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
September 30, 1996
- --------------------------------------------------------------------------------
<PAGE> 2
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
DIRECTORS DISTRIBUTOR
Julio J. de Puzo, Jr. 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 LLP
Los Angeles, California
OFFICERS
William M. Sams, President and INDEPENDENT AUDITORS
Chief Investment Officer
Julio J. de Puzo, Jr., 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
Janet M. Pitman, Vice President
William D. Jacobs, Treasurer State Street Bank and Trust Company
Sherry Sasaki, Secretary Boston, Massachusetts
Christopher H. Thomas, Assistant Treasurer
SHAREHOLDER SERVICE AGENT
INVESTMENT ADVISER Boston Financial Data Services, Inc.
P.O. Box 8500
First Pacific Advisors, Inc. Boston, Massachusetts 02266-8500
11400 West Olympic Boulevard, Suite 1200 (800) 638-3060
Los Angeles, California 90064 (617) 328-5000
</TABLE>
This report has been prepared for the information of shareholders of FPA
Paramount Fund, Inc., and is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus.
1
<PAGE> 3
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Annual Report covers the twelve months ended September 30, 1996.
During this period, the per share net asset value of your Fund increased 20.4%,
while the unmanaged Standard & Poor's 500 Stock Index (S&P 500) also increased
20.4% and the Dow Jones Industrial Average increased 25.7%. The above changes
include reinvestment of all dividends and distributions during the period.
On September 30, 1995, the net asset value per share was $14.90 and on
September 30, 1996, it was $16.54. During the year, the Fund paid $0.91 from
capital gains (paid January 8, 1996 to shareholders of record on December 29,
1995) and $0.27 from net investment income ($0.12 and $0.15 per share paid
January 8, 1996 and July 15, 1996 to shareholders of record December 29, 1995
and June 28, 1996, respectively).
THE YEAR IN REVIEW
The last twelve months have provided a continuation of the bull market
atmosphere which has been in place for much of the last 15 years. While we
have been among the few who have preached tales of caution and reversion to the
market returns of 8-10% that were the historic mean for most of the 20th
century, the market has continued to fly in the face of history and straight
upward. The '80s gave us unprecedented annual returns of 17% and we were sure
the '90s would produce a different environment. However, while we have seen
some years of less spectacular returns, we have also experienced the blow-out
years of 1991 and 1995. . . and here we go again, three quarters into 1996 and
another healthy year in the making.
What is driving this market? We have now seen several years of improving
economic conditions, without the threat of significant inflation and higher
interest rates. As evidenced by the recent re-election of Bill Clinton,
people feel pretty good about the quality of their lives and don't want to mess
with success. The ever-increasing cashflows into mutual funds show that the
investing public is putting its money back into the U.S. economy through
investment in American businesses. Corporations have improved their
profitability through cost-cutting and there doesn't seem to be much farther
they can go in that direction. For the last several years, the most active
investors have been the earnings momentum players -- they get into a stock as
earnings improve and dump it when earnings start to slow. This style has been
very successful during the cost-cutting trend and has been a major component in
the market surge. However, we believe that most of the corporate restructuring
has been taken into account and we already see a relative weakening in earnings
growth. We don't know what the future holds for the momentum players, but we
do know that their participation in the marketplace has made it very difficult
for value investors to find bargains and we hope that some moderation in the
growth of earnings will provide us with increased investment opportunities.
The twelve months ended September 30 provided a number of ups and downs for
your Fund. As we discussed in our March 31 letter, 1995 was not kind to us and
this less than satisfactory situation continued into the early months of the
first quarter of 1996. While we continued to believe that our positioning in
the portfolio was correct, the market didn't seem to agree. Then, as the
quarter progressed, our focus sectors -- energy and retail -- picked up
sponsorship and our returns took a turn for the better. In effect, almost
everything that didn't work in 1995 began to bear fruit in 1996 and we closed
the first quarter with a healthy edge over the broad markets, a lead which we
extended and held through the end of September.
At this time, I would like to briefly address the issue of performance in
the current environment. While we all believe we are long-term investors, the
tendency today seems to be to focus on a much shorter horizon -- a year or
2
<PAGE> 4
even a month. If an investment or a Fund doesn't do well over the short-term,
it is quickly replaced in the portfolio. There are several problems with this
type of investing. First, short-term shifts can essentially negate the
advantages of a manager's long-term investing strategy. If he buys stock in a
company which is in bad shape but has future potential, like Woolworth in 1994
or Champion International in the late 1980s, the potential may not be
recognized for a couple of years and the impatient short-term investor will
miss the upside. Secondly, investors very often use inappropriate performance
benchmarks for comparative purposes. The most readily available gauges of
market returns are the Dow Jones Industrial Average and the S&P 500. The Dow
Jones is composed of 30 very large corporations, hardly a measurement of the
activity in the broad market. The S&P 500, while certainly containing a larger
number of stocks, has been progressively heavily weighted towards the largest
capitalization, high growth companies in America. An investor must determine
if these benchmarks are valid for their specific investments. During the last
year, we have seen very strong performance in both the S&P 500 and the Dow
Jones. The Fund did relatively well, matching the S&P 500 and lagging the Dow
Jones, which are both fully invested, with no cash compared to the Fund's 30%
to 40% over the same period. Lastly, returns are the exciting part of the
equation. Being "up" is what we all want! However, we must also remember the
risk side of things -- the potential for being "down" and losing your principal
still exists and we believe it will raise its ugly head at some point. A
manager who can provide solid returns and do so without exposing the Fund to
excessive downside risk is an important component in a well-diversified
portfolio.
As mentioned, during the past year the energy sector, specifically the
drillers and oil and gas service stocks provided the Fund with much of its
positive momentum. We have liquidated these successful holdings (Baker
Hughes, Dresser Industries, ENSCO International) reducing our energy
sector exposure to a couple of exploration/production companies and under 7%
of the portfolio compared to 30% a year ago. One of our insurance holdings,
Life Partners Group, which had not fared well in 1995, was acquired by Conseco
in early 1996, providing additional profits. Our retailing picks, especially
Woolworth, came through for us as well.
WHAT ARE WE DOING NOW?
I believe that the economy will continue to ebb and flow, with a bias to
the stronger side. This has also provided a boost to the retail industry,
where the Fund is well-represented. We have increased our position in Service
Merchandise Company, now one of our top five holdings, and have established a
new position in Charming Shoppes, a women's apparel retailer. This company
fell on hard times last year, but has a highly qualified new CEO, Dorrit Bern,
in place. She was responsible for turning around the clothing and home
furnishings divisions at Sears and has already made great strides in changing
the focus of Charming Shoppes to make it more competitive in the retail arena.
As the Fund has grown in size this past year, we have seen some changes in
our portfolio makeup. While our investment philosophy and strategy remain the
same, value-oriented and somewhat risk-averse, the size of the companies we now
select for investment has increased. We continue to find "values," but need to
bottom-fish in a slightly larger pond -- adding companies like IBM and
Louisiana Pacific, where the availability of stock is greater and the impact on
the portfolio more in line with its asset size. The portfolio is still
composed of many out-of-favor issues, like IBM. This company is well-managed,
has cut costs, has a global market share, a brand name, and $700 million in
monthly cashflow. It is amazing to find a company with these qualities trading
at 10 times estimated 1997 earnings. During the past few months, we have found
enough of these value opportunities to reduce our cash holding to the 30-35%
level. I believe that we will
3
<PAGE> 5
continue to identify potential holdings that the momentum players have either
ignored or tossed aside.
I think we can all feel fortunate in the fact that, since I became
portfolio manager in 1981, we have yet to experience a down calendar year.
Still, I feel that this is a time not for excessive optimism, but rather one
for caution. I am just happy that every now and then we can still find
companies that appear to be overlooked by the investment community.
Thank you very much for your past support and I hope I can continue to
earn it in the future.
Respectfully submitted,
/s/ WILLIAM M. SAMS
William M. Sams
President
November 11, 1996
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HISTORICAL PERFORMANCE
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, 1986 to September 30,
1996
<TABLE>
<CAPTION>
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 9/30/96
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA Paramount Fund, Inc. 9,350 13,455 13,686 16,570 16,069 20,749 22,166 25,508 31,041 34,490 41,533
FPA Paramount Fund, Inc. (NAV) 10,000 14,390 14,638 17,722 17,186 22,191 23,707 27,282 33,199 36,888 44,420
S&P 500 10,000 14,331 12,531 16,631 15,071 19,788 21,967 24,823 25,731 33,402 40,213
Lipper Growth & Income
Fund Average 10,000 13,127 12,068 15,240 13,538 17,488 19,254 22,349 23,056 28,459 33,370
</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 $41,533, 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 $44,420. The
performance of the Fund and of the Averages is computed on a total return basis
which includes reinvestment of all dividends and distributions.
4
<PAGE> 6
MAJOR PORTFOLIO CHANGES
Six Months Ended September 30, 1996
<TABLE>
<CAPTION>
Shares
----------
<S> <C>
NET PURCHASES
COMMON STOCKS
Amdahl Corporation (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,885,200
Bethlehem Steel Corporation (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Beverly Enterprises, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400,000
Champion International Corporation (1) . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Charming Shoppes, Inc. (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,384,900
ENSERCH Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
ENSERCH Exploration, Inc. (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
International Business Machines Corporation . . . . . . . . . . . . . . . . . . . . . . 250,000
Louisiana-Pacific Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
LTV Corporation, The (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Magellan Health Services, Inc. (1) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,111,500
Novell, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Provident Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000
Safety-Kleen Corporation (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000
Service Merchandise Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800,000
Telecomunicacoes Brasileiras ADR (1) . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Telefonica Del Peru ADR (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361,000
Temple-Inland, Inc. (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,900
Wendy's International, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000
NET SALES
COMMON STOCKS
AMSCO International, Inc. (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 906,000
Burlington Resources Inc. (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
CalEnergy Company, Inc. (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000
Caraustar Industries, Inc. (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000
DSC Communications Corporation (2) . . . . . . . . . . . . . . . . . . . . . . . . . . 139,000
ENSCO International, Incorporated (2) . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Ford Motor Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Life Partners Group, Inc. (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,230,000
Noble Drilling Corporation (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950,000
Reebok International Ltd. (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550,000
Woolworth Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
September 30, 1996
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- -------------------------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
COMMUNICATIONS & INFORMATION -- 13.8%
ALLTEL Corporation . . . . . . . . . . . . . . . . . . . . . . 100,000 $ 2,982,318 $ 2,787,500
Amdahl Corporation* . . . . . . . . . . . . . . . . . . . . . . 2,885,200 28,939,218 27,229,075
International Business Machines Corporation . . . . . . . . . . 300,000 33,757,290 37,350,000
Novell, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 11,861,650 11,000,000
Telecomunicacoes Brasileiras ADR . . . . . . . . . . . . . . . 100,000 6,348,710 7,850,000
Telefonica Del Peru ADR . . . . . . . . . . . . . . . . . . . . 361,000 7,814,440 8,257,875
------------ ------------
$ 91,703,626 $ 94,474,450
------------ ------------
RETAILING -- 13.6%
Charming Shoppes, Inc.* . . . . . . . . . . . . . . . . . . . . 1,384,900 $ 8,652,500 $ 8,309,400
Service Merchandise Company, Inc.*+ . . . . . . . . . . . . . . 6,800,000 36,316,335 31,450,000
Wendy's International, Inc. . . . . . . . . . . . . . . . . . . 1,050,000 19,670,840 22,575,000
Woolworth Corporation* . . . . . . . . . . . . . . . . . . . . 1,500,000 19,188,543 30,937,500
------------ ------------
$ 83,828,218 $ 93,271,900
------------ ------------
INSURANCE -- 6.9%
Leucadia National Corporation . . . . . . . . . . . . . . . . . 580,000 $ 12,559,247 $ 14,065,000
Provident Companies Inc. . . . . . . . . . . . . . . . . . . . 875,000 22,497,525 32,812,500
------------ ------------
$ 35,056,772 $ 46,877,500
------------ ------------
MATERIALS -- 6.8%
Bethlehem Steel Corporation* . . . . . . . . . . . . . . . . . 300,000 $ 4,101,000 $ 3,000,000
Champion International Corporation . . . . . . . . . . . . . . 100,000 4,360,712 4,587,500
Louisiana-Pacific Corporation . . . . . . . . . . . . . . . . . 1,200,000 28,071,804 27,300,000
LTV Corporation, The . . . . . . . . . . . . . . . . . . . . . 500,000 6,984,797 5,812,500
Temple-Inland, Inc. . . . . . . . . . . . . . . . . . . . . . . 105,900 5,484,259 5,586,225
------------ ------------
$ 49,002,572 $ 46,286,225
----------- -----------
OIL & GAS PRODUCTION/EXPLORATION -- 6.7%
Oryx Energy Company* . . . . . . . . . . . . . . . . . . . . . 500,000 $ 6,829,768 $ 8,875,000
ENSERCH Corporation . . . . . . . . . . . . . . . . . . . . . . 1,500,000 26,818,926 31,312,500
ENSERCH Exploration, Inc.* . . . . . . . . . . . . . . . . . . 600,000 6,116,913 5,475,000
------------ ------------
$ 39,765,607 $ 45,662,500
------------ ------------
</TABLE>
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- --------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
HEALTH CARE -- 6.2%
Beverly Enterprises, Inc.* . . . . . . . . . . . . . . . . . . 1,800,000 $ 22,509,019 $ 19,575,000
Magellan Health Services, Inc.* . . . . . . . . . . . . . . . . 1,111,500 19,328,906 23,063,625
------------ ------------
$ 41,837,925 $ 42,638,625
------------ ------------
CONSUMER NON-DURABLE GOODS -- 5.3%
National Service Industries, Inc. . . . . . . . . . . . . . . . 100,000 $ 3,513,100 $ 3,500,000
Unifi, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000 29,998,233 33,000,000
------------ ------------
$ 33,511,333 $ 36,500,000
------------ ------------
MULTI-INDUSTRY -- 5.2%
Browning-Ferris Industries, Inc. . . . . . . . . . . . . . . . 100,000 $ 3,066,500 $ 2,500,000
Safety-Kleen Corporation . . . . . . . . . . . . . . . . . . . 2,000,000 33,751,843 33,000,000
------------ ------------
$ 36,818,343 $ 35,500,000
------------ ------------
CONSUMER DURABLE GOODS -- 3.8%
Ford Motor Company . . . . . . . . . . . . . . . . . . . . . . 600,000 $ 18,421,800 $ 18,750,000
Mohawk Industries, Inc.* . . . . . . . . . . . . . . . . . . . 275,000 3,801,590 7,046,875
------------ ------------
$ 22,223,390 $ 25,796,875
------------ ------------
REAL ESTATE INVESTMENT TRUST -- 0.4%
Paragon Group, Inc. . . . . . . . . . . . . . . . . . . . . . . 170,000 $ 3,612,500 $ 2,635,000
------------ ------------
OTHER COMMON STOCKS -- 0.6% . . . . . . . . . . . . . . . . . . $ 3,347,500 $ 3,835,000
------------ ------------
TOTAL COMMON STOCKS -- 69.3% . . . . . . . . . . . . . . . . . $440,707,786 $473,478,075
============ ------------
</TABLE>
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Principal
Amount Value
----------- ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 34.7%
Short-term Corporate Notes:
Philip Morris Companies Inc. -- 5.24% 10/2/96 . . . . . . . . $ 15,900,000 $ 15,897,686
Weyerhaeuser Mortgage Company -- 5.34% 10/4/96 . . . . . . . 25,800,000 25,788,519
Motorola, Inc. -- 5.32% 10/7/96 . . . . . . . . . . . . . . . 11,700,000 11,689,626
Walt Disney Company, The -- 5.24% 10/7/96 . . . . . . . . . . 700,000 699,389
Xerox Corporation -- 5.34% 10/8/96 . . . . . . . . . . . . . 1,000,000 998,962
Whirlpool Corporation -- 5.38% 10/9/96 . . . . . . . . . . . 22,700,000 22,672,860
Motorola Credit Corporation -- 5.33% 10/10/96 . . . . . . . . 21,200,000 21,171,751
Coca Cola Company, The -- 5.25% 10/15/96 . . . . . . . . . . 3,200,000 3,191,600
Raytheon Company -- 5.30% 10/15/96 . . . . . . . . . . . . . 20,500,000 20,457,747
Tribune Company -- 5.37% 10/15/96 . . . . . . . . . . . . . . 8,000,000 7,983,293
Xerox Corporation -- 5.28% 10/17/96 . . . . . . . . . . . . . 12,900,000 12,869,728
Toyota Motor Credit Corporation -- 5.33% 10/22/96 . . . . . . 6,900,000 6,878,547
Minnesota Mining & Manufacturing Company
-- 5.27% 10/23/96 . . . . . . . . . . . . . . . . . . . . . 24,295,000 24,216,757
AT&T Company -- 5.30% 10/24/96 . . . . . . . . . . . . . . . 5,000,000 4,983,069
Motorola, Inc. -- 5.40% 10/24/96 . . . . . . . . . . . . . . 3,700,000 3,687,235
American General Finance Corporation
-- 5.26% 10/25/96 . . . . . . . . . . . . . . . . . . . . . 3,500,000 3,487,727
Tribune Company -- 5.28% 10/25/96 . . . . . . . . . . . . . . 9,000,000 8,968,320
J.P. Morgan Co., Inc. -- 5.27% 10/28/96 . . . . . . . . . . . 22,800,000 22,709,883
Motorola, Inc. -- 5.27% 10/29/96 . . . . . . . . . . . . . . 1,100,000 1,095,491
Xerox Credit Corporation -- 5.28% 10/30/96 . . . . . . . . . 4,205,000 4,187,115
Walt Disney Company, The -- 5.34% 11/1/96 . . . . . . . . . . 11,000,000 10,949,418
State Street Bank Repurchase Agreement -- 4 3/4% 10/1/96
(Collateralized by U.S. Treasury Notes
-- 5 7/8% 1997, market value $2,450,890) . . . . . . . . . . 2,401,000 2,401,317
------------
$236,986,040
------------
TOTAL INVESTMENTS -- 104.0% . . . . . . . . . . . . . . . . . . $710,464,115
Liabilities less other assets -- (4.0)% . . . . . . . . . . . . (27,405,556)
------------
TOTAL NET ASSETS -- 100% . . . . . . . . . . . . . . . . . . . $683,058,559
============
</TABLE>
+Affiliate as defined in the Investment Company Act of 1940 by reason of
ownership of 5% or more of its outstanding voting securities.
*Non-income producing securities
See notes to financial statements.
8
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Common stocks -- at market value
(identified cost $440,707,786) . . . . . . . . . . . . . . . . . . $473,478,075
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less) . . . . . . . . . . . . . . . . . . 236,986,040 $710,464,115
------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377
Receivable for:
Capital Stock sold . . . . . . . . . . . . . . . . . . . . . . . . . $ 645,561
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,130 720,691
------------ ------------
$711,185,183
LIABILITIES
Payable for:
Investment securities purchased . . . . . . . . . . . . . . . . . . . $ 27,458,812
Advisory fees and financial services . . . . . . . . . . . . . . . . 443,641
Capital Stock repurchased . . . . . . . . . . . . . . . . . . . . . . 138,946
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 85,225 28,126,624
------------ ------------
NET ASSETS -- equivalent to $16.54 per share on 41,299,093
shares of Capital Stock outstanding . . . . . . . . . . . . . . . . . . $683,058,559
============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.25 per share; authorized
100,000,000 shares; outstanding 41,299,093 shares . . . . . . . . . . $ 10,324,773
Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . 525,912,691
Undistributed net realized gain on investments . . . . . . . . . . . . 110,221,692
Undistributed net investment income . . . . . . . . . . . . . . . . . . 3,829,114
Unrealized appreciation of investments . . . . . . . . . . . . . . . . 32,770,289
------------
Net assets at September 30, 1996 . . . . . . . . . . . . . . . . . . . $683,058,559
============
</TABLE>
See notes to financial statements.
9
<PAGE> 11
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,471,533
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,051,992
------------
$ 17,523,525
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,090,006
Financial services . . . . . . . . . . . . . . . . . . . . . . . . . 538,992
Transfer agent fees and expenses . . . . . . . . . . . . . . . . . . 463,567
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . 97,918
Custodian fees and expenses . . . . . . . . . . . . . . . . . . . . . 61,314
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . 35,057
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . 32,013
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,525
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,000
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,441
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,232 5,415,065
------------ ------------
Net investment income . . . . . . . . . . . . . . . . . . . . . $ 12,108,460
------------
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) . . . . $558,934,025
Cost of investment securities sold . . . . . . . . . . . . . . . . . 441,590,023
------------
Net realized gain on investments . . . . . . . . . . . . . . . . $117,344,002
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year . . . . . . . . . . . . $ 47,092,997
Unrealized appreciation at end of year . . . . . . . . . . . . . . . 32,770,289
------------
Decrease in unrealized appreciation of investments . . . . . . . (14,322,708)
------------
Net realized and unrealized gain on investments . . . . . . . $103,021,294
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $115,129,754
============
</TABLE>
See notes to financial statements.
10
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended September 30,
-------------------------------------------------------------
1996 1995
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . $ 12,108,460 $ 12,019,570
Net realized gain on investments . . . . . 117,344,002 36,100,821
Increase (decrease) in unrealized
appreciation of investments . . . . . . . (14,322,708) 13,033,672
------------ ------------
Increase in net assets resulting
from operations . . . . . . . . . . . . . . $115,129,754 $ 61,154,063
Distributions to shareholders from:
Net investment income . . . . . . . . . . . $(10,798,463) $(10,886,520)
Net realized capital gains . . . . . . . . (35,377,391) (46,175,854) (34,315,309) (45,201,829)
------------ ------------
Capital Stock transactions:
Proceeds from Capital Stock sold . . . . . $ 62,620,462 $ 180,999,941
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions . . . . . 39,622,458 39,028,364
Cost of Capital Stock repurchased . . . . . (84,055,296) 18,187,624 (61,445,359) 158,582,946
------------ ------------ ------------ ------------
Total increase in net assets . . . . . . . . $ 87,141,524 $174,535,180
NET ASSETS
Beginning of year, including
undistributed net investment income
of $2,519,117 and $1,386,067 . . . . . . . 595,917,035 421,381,855
------------ ------------
End of year, including
undistributed net investment income
of $3,829,114 and $2,519,117 . . . . . . . $683,058,559 $595,917,035
============ ============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold . . . . . . . . 4,079,091 12,793,621
Shares issued to shareholders
upon reinvestment of dividends
and distributions . . . . . . . . . . . . . 2,823,415 2,920,062
Shares of Capital Stock repurchased . . . . . (5,593,952) (4,338,553)
------------ ------------
Increase in Capital Stock
outstanding . . . . . . . . . . . . . . . . 1,308,554 11,375,130
============ ============
</TABLE>
See notes to financial statements.
11
<PAGE> 13
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year . . . . . . . . $ 14.90 $ 14.73 $ 13.72 $ 13.09 $ 14.06
------- ------- ------- ------- -------
Net investment income . . . . . . . . . . . . . . . . $ 0.30 $ 0.30 $ 0.24 $ 0.25 $ 0.31
Net realized and unrealized gain
on investment securities . . . . . . . . . . . . . 2.52 1.17 2.54 1.61 0.57
------- ------- ------- ------- -------
Total from investment operations . . . . . . . . . . $ 2.82 $ 1.47 $ 2.78 $ 1.86 $ 0.88
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income . . . . . . . $ (0.27) $ (0.29) $ (0.25) $ (0.25) $ (0.36)
Distributions from net realized capital gains . . . (0.91) (1.01) (1.52) (0.98) (1.49)
------- ------- ------- ------- -------
Total distributions . . . . . . . . . . . . . . . . $ (1.18) $ (1.30) $ (1.77) $ (1.23) $ (1.85)
------- ------- ------- ------- -------
Net asset value at end of year . . . . . . . . . . . $ 16.54 $ 14.90 $ 14.73 $ 13.72 $ 13.09
======= ======= ======= ======= =======
Total investment return* . . . . . . . . . . . . . . 20.42% 11.11% 21.69% 15.08% 6.83%
Ratios/supplemental data:
Net assets at end of year (in $000's) . . . . . . . . 683,059 595,917 421,382 327,179 279,990
Average brokerage commissions per share . . . . . . . 0.0646 -- -- -- --
Ratio of expenses to average net assets . . . . . . . 0.87% 0.89% 0.90% 0.89% 0.92%
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . . . 1.94% 2.25% 1.69% 1.83% 2.33%
Portfolio turnover rate . . . . . . . . . . . . . . . 131% 95% 76% 98% 146%
</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 8, 1996 . . . . . . . . . $1.03+ 3.9% 34.9% 61.2%
July 15, 1996 . . . . . . . . . . $0.15 34.0% 66.0% -0-
</TABLE>
+ This amount includes a $0.91 capital gain distribution of which $0.28 was
short-term capital gains and therefore taxable as ordinary income.
This is in addition to the $0.12 income dividend which is also taxable as
ordinary income. Even though payment was made in 1996, this distribution was
taxable to shareholders in 1995 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 1997 setting forth
specific amounts to be included in their 1996 tax returns.
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
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 $515,254,081 for the
year ended September 30, 1996. Realized gains or losses are based on the
specific-certificate identification method. The cost of securities held at
September 30, 1996 was the same for federal income tax and financial reporting
purposes.
NOTE 3 -- ADVISORY FEES AND OTHER AFFILIATED TRANSACTIONS
Pursuant to an Investment Advisory Agreement, advisory fees were paid by
the Fund to First Pacific Advisors, Inc. (the "Adviser"). Under the terms of
this Agreement, the Fund pays the Adviser a monthly fee calculated at the
annual rate of 0.75% of the first $50 million of the Fund's average daily net
assets and 0.65% of the average daily net assets in excess of $50 million. In
addition, the Fund reimburses the Adviser monthly for the costs incurred by the
Adviser in providing financial services to the Fund, providing, however, that
this reimbursement shall not exceed 0.10% of the average daily net assets for
any fiscal year. 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
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
1% of the remaining average net assets of the Fund for the year.
For the year ended September 30, 1996, the Fund paid aggregate fees of
$30,000 to all Directors who are not affiliated persons of the Adviser.
NOTE 4 -- DISTRIBUTOR
For the year ended September 30, 1996, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $119,910
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.
________________________________________________________________________________
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF FPA PARAMOUNT FUND, INC.
We have audited the accompanying statement of assets and liabilities of FPA
Paramount Fund, Inc., including the portfolio of investments, as of September
30, 1996, the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, including confirmation of securities owned as of
September 30, 1996, 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 Paramount Fund, Inc. at September 30, 1996, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
November 1, 1996
14
