<PAGE>
FPA Paramount Fund, Inc.
ANNUAL REPORT
SEPTEMBER 30, 1997
[LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
<PAGE>
OFFICERS AND DIRECTORS
DIRECTORS
Julio J. de Puzo, Jr.
John P. Endicott
Leonard Mautner
John H. Rubel
John P. Shelton
Joseph Lowitz, CHAIRMAN EMERITUS
John F. Allard, DIRECTOR EMERITUS
OFFICERS
William M. Sams, PRESIDENT AND
CHIEF INVESTMENT OFFICER
Julio J. de Puzo, Jr., EXECUTIVE VICE
PRESIDENT
Eric S. Ende, VICE PRESIDENT
Janet M. Pitman, 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
INDEPENDENT AUDITORS
Ernst & Young LLP
Los Angeles, California
CUSTODIAN & TRANSFER AGENT
State Street Bank and Trust Company
Boston, Massachusetts
SHAREHOLDER SERVICE AGENT
Boston Financial Data Services, Inc.
P.O. Box 8500
Boston, Massachusetts 02266-8500
(800) 638-3060
(617) 328-5000
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>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Annual Report covers the fiscal year ended September 30, 1997.
During this period, the per share net asset value of your Fund increased
17.7%, while the Standard & Poor's Stock Average (S&P 500) increased 40.7%
and the Dow Jones Industrial Average increased 37.7%. The above changes
include reinvestment of all dividends and distributions during the period.
On September 30, 1996, the net asset value per share was $16.54 and on
September 30, 1997, it was $15.95. During the year, the Fund paid $2.87 from
capital gains (paid January 6, 1997 to shareholders of record on December 31,
1996) and $0.31 from net investment income ($0.18 and $0.13 per share paid
January 6, 1997 and July 15, 1997 to shareholders of record December 31, 1996
and June 30, 1997, respectively).
THE YEAR IN REVIEW
Economically speaking this past year has been a good one, with a strong
economy supported by low inflation, low interest rates and low unemployment.
The real estate markets are turning up and people feel more comfortable with
their financial status in general. Cocktail party conversation no longer
centers on recession or downside risk and the consensus opinion is that this
year's Christmas season will be the best in a decade. As one of my
colleagues recently said, "THESE are the good old days."
WHY HAS THE STOCK MARKET BEEN
SO STRONG FOR SO LONG?
It is for several reasons:
1.) Interest rates have been relatively stable over an extended period of
time.
2.) If interest rates are stable, that means inflation has been kept under
control.
3.) If interest rates and inflation are not increasing, that usually means final
demand for goods and services is relatively modest along with corporate
profits. However, this has not been the case this time around.
4.) Excess plant capacity, technological innovation (computers and
communications), low wage increases and cheap import prices (strong
American dollars) have kept unit prices in check while overall final demand
for goods and services has been brisk.
5.) Therefore, that explains the modest inflation, but why have corporate
profits been so strong? Company restructuring (employee layoffs, plant
closings and reducing all expenses to the bone) has become very fashionable
and therefore profits have greatly benefited.
WILL THE STOCK MARKET CONTINUE ITS STRONG UPWARD MARCH?
I rather doubt it and certainly not at the same pace of the previous
three years. Why? An increasingly tight labor pool, coupled with rising real
estate prices and health care costs, will slow corporate profits. The recent
currency devaluations in Asia present another economic uncertainty and the
impact will not be known for some time. On top of this, stock prices in
relation to earnings are on the high side of their historical norm. In other
words, slowing corporate profits and high stock prices do not make good
bedfellows. On the other hand, I do expect a continuing expanding economy
and see no recession at this time.
REVIEWING YOUR FUND'S PAST AND WHAT IS BEING DONE NOW IN PREPARING FOR THE
FUTURE
1997 marks the 16th year I have managed your Fund and although we have
never experienced a down year (on a calendar year basis), the periods of
1986, 1995 and 1997 have been ones of substantial underperformance.
Contrarians always get out of sync with the market at one time or another,
and I am certainly no exception. We tend to buy and sell too soon, which
usually produces excellent performance, but seldom in extremely strong
periods as we have recently witnessed. In declining markets, good results
should be obtained. This contrarian way of investing has
2
<PAGE>
generally served my investors well over the 31 years I have managed mutual
funds and I expect it to do so in the future. I appreciate your patience.
That's all well and dandy, Brother Sams, but what does the portfolio look
like today? Our cash position is 39%. Gold stocks currently comprise 14% of
the portfolio. Gold prices are at a 12 year low and if gold prices continue
down, I expect these high quality companies (Newmont, Homestake, Placer Dome)
to acquire other gold companies whose mining costs are too high and whose
balance sheets are debt heavy. Shut down or sell out will be their choice.
We recently established a major position in Columbia/HCA at an average
cost of $28.61 after a decline from a high of $45 this year. Although we
expect the government will fine this hospital chain heavily when all is said
and done for its past deeds, its large cash flow should yield a substantially
higher stock price. Our old friend Woolworth has been repurchased after its
recent significant decline. This well managed retailer represents excellent
value and should do well after the current slowdown in athletic shoe sales
abates. These are two good examples of our contrarian approach of "buy straw
hats in the winter." If they go lower, and they well could, I would expect
to make additional purchases. I expect patience will be a virtue in both of
these cases. Cyclical exposures have been reduced as it appears too late in
the business cycle to hold these issues.
In summary, the large cash and gold positions should afford some
downside protection in case of a market decline, but I would not hesitate
to put that cash to work if other companies like Woolworth and Columbia/HCA
are discovered. I might add that, so far in the recent market correction,
the gold stocks have declined instead of showing their usual strength. I do
not expect this to continue, but it certainly is a disappointment. This is
not the time to run out and load up on stocks, but prudent opportunities like
Columbia/HCA and Woolworth will continue to appear from time to time and we
have the cash to take advantage of them.
I would like to leave you with a final thought. In the investment
business, as in any other, there are optimists and pessimists. An optimist
spends 80% of his time being euphoric and 20% of his time in bankruptcy
court, while a pessimist spends 20% of his time being euphoric and 80% of his
time in his psychiatrist's office. The bottom line for me is that I want to
be an "optimistic pessimist." Erring on the side of caution, while still
willing to make big bets when the value appears, has worked for me
historically and I don't plan to change horses in mid-stream.
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 12, 1997
3
<PAGE>
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, 1987 TO SEPTEMBER 30,
1997
[GRAPH]
<TABLE>
<CAPTION>
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 9/30/97
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA Paramount Fund, Inc. 9,350 9,511 11,515 11,167 14,419 15,404 17,727 21,571 23,968 28,862 33,973
FPA Paramount Fund, Inc.
(NAV) 10,000 10,172 12,315 11,943 15,421 16,474 18,959 23,071 25,634 30,869 36,335
Lipper Growth & Income
Fund Average 10,000 8,747 11,612 10,518 13,813 15,330 17,329 17,963 23,316 28,068 39,481
S&P 500 10,000 9,240 11,701 10,381 13,482 14,861 17,299 17,851 22,037 25,911 34,885
</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 $33,973, 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
$36,335. The performance of the Fund and of the Averages is computed on a
total return basis which includes reinvestment of all dividends and
distributions.
Average Annual Total Return
FPA Paramount Fund, Inc. Years Ended September 30, 1997
-------------------------------
1 Year 5 Years 10 Years
------ ------- --------
At Net Asset Value 17.70% 17.14% 13.77%
With Maximum 6.5% Sales Charge 10.05% 15.57% 13.01%
4
<PAGE>
MAJOR PORTFOLIO CHANGES
Six Months Ended September 30, 1997
Shares
-----------
NET PURCHASES
COMMON STOCKS
Charming Shoppes, Inc. . . . . . . . . . . . . . . . . . . 815,000
Chieftain International, Inc. (1). . . . . . . . . . . . . 150,000
Columbia/HCA Healthcare Corporation (1). . . . . . . . . . 1,270,000
ENSERCH Exploration, Inc.. . . . . . . . . . . . . . . . . 2,249,257
Lone Star Steakhouse & Saloon, Inc.. . . . . . . . . . . . 717,000
Mohawk Industries, Inc. (1). . . . . . . . . . . . . . . . 600,000
Morrison Knudsen Corporation (1) . . . . . . . . . . . . . 100,000
Newmont Mining Corporation . . . . . . . . . . . . . . . . 125,000
Paging Network, Inc. (1) . . . . . . . . . . . . . . . . . 2,381,000
Placer Dome Inc. . . . . . . . . . . . . . . . . . . . . . 400,000
Storage Technology Corporation (1) . . . . . . . . . . . . 100,000
Texas Utilities Company (1). . . . . . . . . . . . . . . . 337,500
Woolworth Corporation. . . . . . . . . . . . . . . . . . . 1,115,000
NET SALES
COMMON STOCKS
Amdahl Corporation (2) . . . . . . . . . . . . . . . . . . 3,245,000
Camden Property Trust (2). . . . . . . . . . . . . . . . . 108,800
DSC Communications Corporation (2) . . . . . . . . . . . . 10,000
ENSERCH Corporation (2). . . . . . . . . . . . . . . . . . 1,500,000
Ethyl Corporation (2). . . . . . . . . . . . . . . . . . . 3,500,000
Inco Limited . . . . . . . . . . . . . . . . . . . . . . . 200,000
Louisiana-Pacific Corporation. . . . . . . . . . . . . . . 700,000
LTV Corporation, The (2) . . . . . . . . . . . . . . . . . 800,000
Micron Technology, Inc. (2). . . . . . . . . . . . . . . . 100,000
Millennium Chemicals Inc. (2). . . . . . . . . . . . . . . 150,000
Nucor Corporation (2). . . . . . . . . . . . . . . . . . . 20,000
Safety-Kleen Corporation . . . . . . . . . . . . . . . . . 1,468,500
Temple-Inland, Inc. (2). . . . . . . . . . . . . . . . . . 105,900
Unifi, Inc.. . . . . . . . . . . . . . . . . . . . . . . . 500,000
Wendy's International, Inc. (2). . . . . . . . . . . . . . 1,000,000
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1997
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- -------------------------------------------------- --------- ------------ ------------
<S> <C> <C> <C>
MINING -- 13.9%
Homestake Mining Company. . . . . . . . . . . . 2,158,000 $ 29,950,800 $ 33,044,375
Inco Limited. . . . . . . . . . . . . . . . . . 100,000 3,057,000 2,506,250
Newmont Mining Corporation . . . . . . . . . . . 1,050,000 42,437,807 47,184,375
Placer Dome Inc. . . . . . . . . . . . . . . . . 1,700,000 33,618,210 32,512,500
------------ ------------
$109,063,817 $115,247,500
------------ ------------
RETAILING -- 9.4%
Charming Shoppes, Inc.*. . . . . . . . . . . . . 2,815,000 $ 15,903,340 $ 17,329,844
Service Merchandise Company, Inc.*+. . . . . . . 7,000,000 37,253,335 28,875,000
Woolworth Corporation* . . . . . . . . . . . 1,450,000 33,209,507 32,081,250
------------ ------------
$ 86,366,182 $ 78,286,094
------------ ------------
HEALTH CARE -- 9.0%
Columbia/HCA Healthcare Corporation. . . . . . . 1,270,000 $ 36,331,375 $ 36,512,500
Magellan Health Services, Inc.*. . . . . . . . 1,200,000 21,055,591 38,100,000
------------ ------------
$ 57,386,966 $ 74,612,500
------------ ------------
RESTAURANTS -- 6.1%
Lone Star Steakhouse & Saloon, Inc.*+. . . . . . 2,167,000 $ 52,907,736 $ 45,236,125
Luby's Cafeterias, Inc.. . . . . . . . . . . . . 250,000 4,998,750 5,203,125
------------ ------------
$ 57,906,486 $ 50,439,250
------------ ------------
CONSUMER NON-DURABLE GOODS -- 4.4%
Mohawk Industries, Inc.* . . . . . . . . . . . . 600,000 $ 12,153,815 $ 16,425,000
Unifi, Inc.. . . . . . . . . . . . . . . . . 500,000 11,791,600 20,468,750
------------ ------------
$ 23,945,415 $ 36,893,750
------------ ------------
COMMUNICATIONS & INFORMATION-- 4.2%
Paging Network, Inc.*. . . . . . . . . . . . . . 2,381,000 $ 22,747,768 $ 30,208,938
Storage Technology Corporation*. . . . . . . . 100,000 3,982,113 4,781,250
------------ ------------
$ 26,729,881 $ 34,990,188
------------ ------------
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1997
<TABLE>
<CAPTION>
COMMON STOCKS - CONTINUED Shares Cost Value
- -------------------------------------------------- --------- ------------ ------------
<S> <C> <C> <C>
INSURANCE -- 3.9%
Leucadia National Corporation . . . . . . . . . 950,000 $ 21,771,021 $ 32,656,250
------------ ------------
MATERIALS -- 3.6%
DSM N.V. (ADR) . . . . . . . . . . . . . . . . . 500,000 $ 11,886,250 $ 12,375,000
Louisiana-Pacific Corporation. . . . . . . . . . 700,000 15,804,625 17,500,000
------------ ------------
$ 27,690,875 $ 29,875,000
------------ ------------
OIL & GAS PRODUCTION/EXPLORATION -- 3.6%
Chieftain International, Inc.* . . . . . . . . . 150,000 $ 3,179,250 $ 3,900,000
ENSERCH Exploration, Inc.* . . . . . . . . . . . 2,849,257 16,796,209 25,643,313
------------ ------------
$ 19,975,459 $ 29,543,313
------------ ------------
MULTI-INDUSTRY -- 1.5%
Safety-Kleen Corporation. . . . . . . . . . . . 531,500 $ 8,580,099 $ 12,722,781
------------ ------------
UTILITIES -- 1.5%
Texas Utilities Company . . . . . . . . . . . . 337,500 $ 16,139,630 $ 12,150,000
------------ ------------
CONSTRUCTION -- 0.1%
Morrison Knudsen Corporation* . . . . . . . . . 100,000 $ 1,200,000 $ 1,212,500
------------ ------------
TOTAL COMMON STOCKS -- 61.2%. . . . . . . . . . $456,755,831 $508,629,126
------------ ------------
------------
</TABLE>
7
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
------------ -----------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 34.0%
Short-term Corporate Notes:
CIT Group Holdings, Inc. -- 5.44% 10/1/97. . . . . . . . . . . $13,000,000 $13,000,000
Du Pont (E.I.) De Nemours & Company -- 5.45% 10/3/97 . . . . . 3,500,000 3,498,940
MetLife Funding, Inc. -- 5.46% 10/3/97 . . . . . . . . . . . . 24,000,000 23,992,720
PepsiCo, Inc. -- 51/2% 10/6/97 . . . . . . . . . . . . . . . . 2,000,000 1,998,472
Sherwin-Williams Company, The -- 51/2% 10/6/97 . . . . . . . . 10,000,000 9,992,361
Xerox Credit Corporation -- 5.49% 10/6/97. . . . . . . . . . . 10,000,000 9,992,375
Bell Atlantic Financial Services, Inc. -- 5.52% 10/7/97. . . . 24,000,000 23,977,920
Du Pont (E.I.) De Nemours & Company -- 5.44% 10/7/97 . . . . . 25,000,000 24,977,333
Du Pont (E.I.) De Nemours & Company -- 5.46% 10/8/97 . . . . 5,000,000 4,994,692
Minnesota Mining & Manufacturing Company -- 5.47% 10/8/97. . . 11,000,000 10,988,300
Coca-Cola Company, The -- 5.43% 10/9/97. . . . . . . . . . . . 3,000,000 2,996,380
Du Pont (E.I.) De Nemours & Company -- 5.45% 10/10/97. . . . 5,000,000 4,993,187
Abbott Laboratories -- 5.47% 10/16/97. . . . . . . . . . . . . 8,000,000 7,981,767
Amoco Corporation -- 5.42% 10/16/97. . . . . . . . . . . . . . 5,000,000 4,988,708
Abbott Laboratories -- 5.45% 10/20/97. . . . . . . . . . . . . 8,000,000 7,976,989
Kimberly-Clark Corporation -- 5.48% 10/27/97 . . . . . . . . . 5,000,000 4,980,211
General Mills, Inc. -- 5.48% 10/31/97. . . . . . . . . . . . . 8,000,000 7,963,467
Amoco Corporation -- 5.45% 11/4/97 . . . . . . . . . . . . . . 4,000,000 3,979,411
Coca-Cola Company, The -- 5.46% 11/6/97. . . . . . . . . . . . 8,500,000 8,453,590
Wal-Mart Stores, Inc. -- 5.45% 11/10/97. . . . . . . . . . . . 21,500,000 21,369,806
Toyota Motor Credit Corporation -- 5.45% 11/17/97. . . . . . . 41,000,000 40,708,274
Walt Disney Company, The -- 5.46% 11/20/97 . . . . . . . . . . 38,000,000 37,711,833
State Street Bank Repurchase Agreement -- 5% 10/1/97
(Collateralized by U.S. Treasury Notes
-- 6% 1998, market value $818,000) . . . . . . . . . . . . . . 797,000 797,111
------------
$282,813,847
------------
TOTAL INVESTMENTS -- 95.2% . . . . . . . . . . . . . . . . . . . $790,942,973
Other assets less liabilities -- 4.8%. . . . . . . . . . . . . . 39,790,123
------------
TOTAL NET ASSETS -- 100% . . . . . . . . . . . . . . . . . . . . $830,733,096
------------
------------
</TABLE>
*Non-income producing securities
+Affiliate as defined in the Investment Company Act of 1940 by reason of
ownership of 5% or more of its outstanding voting securities. Following is
a summary of transactions in securities of these affiliates during the year
ended September 30, 1997.
Purchases Sales Realized Dividend
at Cost at Cost Gain Income
---------------------------------------------
Lone Star Steakhouse
& Saloon, Inc. $52,907,736 -- -- --
Service Merchandise
Company, Inc. 937,000 -- -- --
See notes to financial statements.
8
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Common stocks -- at market value
(identified cost $456,755,831) . . . . . . . . . . . . . . $508,629,126
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less). . . . . . . . . . . . . . 282,313,847 $790,942,973
------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 514
Receivable for:
Investment securities sold . . . . . . . . . . . . . . . . . $ 39,578,398
Capital Stock sold . . . . . . . . . . . . . . . . . . . . 690,392
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . 689,687 40,958,477
------------ ------------
$831,901,964
LIABILITIES
Payable for:
Capital Stock repurchased. . . . . . . . . . . . . . . . . . $ 609,171
Advisory fees and financial services . . . . . . . . . . . . 502,197
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . 57,500 1,168,868
------------ ------------
NET ASSETS -- equivalent to $15.95 per share on 52,067,576
shares of Capital Stock outstanding. . . . . . . . . . . . . . $830,733,096
------------
------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.25 per share; authorized
100,000,000 shares; outstanding 52,067,576 shares. . . . . . $ 13,016,894
Additional Paid-in Capital . . . . . . . . . . . . . . . . . . 673,530,962
Undistributed net realized gain on investments . . . . . . . 88,610,618
Undistributed net investment income. . . . . . . . . . . . . . 3,701,327
Unrealized appreciation of investments . . . . . . . . . . . . 51,873,295
------------
Net assets at September 30, 1997 . . . . . . . . . . . . . . . $830,733,096
------------
------------
</TABLE>
See notes to financial statements.
9
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,776,230
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . 6,476,972
------------
$ 20,253,202
EXPENSES
Advisory fees. . . . . . . . . . . . . . . . . . . . . . . . $ 4,896,408
Financial services . . . . . . . . . . . . . . . . . . . . . 715,380
Transfer agent fees and expenses . . . . . . . . . . . . . . 515,421
Custodian fees and expenses. . . . . . . . . . . . . . . . . 64,710
Registration fees. . . . . . . . . . . . . . . . . . . . . . 54,934
Reports to shareholders. . . . . . . . . . . . . . . . . . . 54,417
Directors' fees and expenses . . . . . . . . . . . . . . . . 45,159
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . 29,148
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . 25,200
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . 19,274
Other expenses . . . . . . . . . . . . . . . . . . . . . 11,547 6,431,598
----------- ------------
Net investment income. . . . . . . . . . . . . . . . . $ 13,821,604
------------
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) $613,528,982
Cost of investment securities sold . . . . . . . . . . . . . 522,428,046
------------
Net realized gain on investments . . . . . . . . . . . . $ 91,100,936
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year . . . . . . . . $32,770,289
Unrealized appreciation at end of year . . . . . . . . . . . 51,873,295
-----------
Increase in unrealized appreciation of investments . . . 19,103,006
------------
Net realized and unrealized gain on investments. . . $110,203,942
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . $124,025,546
------------
------------
</TABLE>
See notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended September 30,
-------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . . $ 13,821,604 $12,108,460
Net realized gain on investments. . . . . . . 91,100,936 117,344,002
Increase (decrease) in unrealized
appreciation of investments . . . . . . . . 19,103,006 (14,322,708)
------------ ------------
Increase in net assets resulting
from operations . . . . . . . . . . . . . . . $124,025,546 $115,129,754
Distributions to shareholders from:
Net investment income . . . . . . . . . . . . $(13,949,391) $(10,798,463)
Net realized capital gains. . . . . . . . . . (112,712,010) (126,661,401) (35,377,391) (46,175,854)
------------ ------------
Capital Stock transactions:
Proceeds from Capital Stock sold. . . . . . . $171,882,375 $ 62,620,462
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions. . . . . . . 107,501,337 39,622,458
Cost of Capital Stock repurchased . . . . . . (129,073,320) 150,310,392 (84,055,296) 18,187,624
------------ ------------ ------------ -------------
Total increase in net assets. . . . . . . . . . $147,674,537 $ 87,141,524
NET ASSETS
Beginning of year, including
undistributed net investment income
of $3,829,114 and $2,519,117. . . . . . . . . 683,058,559 595,917,035
------------ -------------
End of year, including
undistributed net investment income
of $3,701,327 and $3,829,114. . . . . . . . . $830,733,096 $683,058,559
------------ -------------
------------ -------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold. . . . . . . . . . 11,574,033 4,079,091
Shares issued to shareholders
upon reinvestment of dividends
and distributions . . . . . . . . . . . . . . 7,390,224 2,823,415
Shares of Capital Stock repurchased . . . . . . (8,195,774) (5,593,952)
------------ -------------
Increase in Capital Stock
outstanding . . . . . . . . . . . . . . . . . 10,768,483 1,308,554
------------ -------------
------------ -------------
</TABLE>
See notes to financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year . . . . . . . . $16.54 $14.90 $14.73 $13.72 $13.09
------ ------ ------ ------ ------
Net investment income. . . . . . . . . . . . . . . . $ 0.29 $ 0.30 $ 0.30 $ 0.24 $ 0.25
Net realized and unrealized gain
on investment securities . . . . . . . . . . . . . 2.30 2.52 1.17 2.54 1.61
------ ------ ------ ------ ------
Total from investment operations . . . . . . . . . . $ 2.59 $ 2.82 $ 1.47 $ 2.78 $ 1.86
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income . . . . . . . $(0.31) $(0.27) $(0.29) $(0.25) $(0.25)
Distributions from net realized capital gains. . . (2.87) (0.91) (1.01) (1.52) (0.98)
------ ------ ------ ------ ------
Total distributions. . . . . . . . . . . . . . . . $(3.18) $(1.18) $(1.30) $(1.77) $(1.23)
------ ------ ------ ------ ------
Net asset value at end of year . . . . . . . . . . . $15.95 $16.54 $14.90 $14.73 $13.72
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total investment return* . . . . . . . . . . . . . . 17.70% 20.42% 11.11% 21.69% 15.08%
Ratios/supplemental data:
Net assets at end of year (in $000's). . . . . . . . 830,733 683,059 595,917 421,382 327,179
Average brokerage commissions per share. . . . . . . $0.0676 $0.0646 -- -- --
Ratio of expenses to average net assets. . . . . . . 0.86% 0.87% 0.89% 0.90% 0.89%
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . . . 1.84% 1.94% 2.25% 1.69% 1.83%
Portfolio turnover rate. . . . . . . . . . . . . . . 110% 131% 95% 76% 98%
</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 (UNAUDITED)
<TABLE>
<CAPTION>
Long-Term
Per Share Ordinary Income Capital Gain
---------------------------
Payable Date Amount Qualifying Non-Qualifying Distribution
- ------------------------ --------- --------------------------- ------------
<S> <C> <C> <C> <C>
January 8, 1997. . . . . $3.05+ 2.3% 38.0% 59.7%
July 15, 1997 . . . . . $0.13 38.6% 61.4% -0-
</TABLE>
+ This amount includes a $2.87 capital gain distribution of which $1.05 was
short-term capital gains and therefore taxable as ordinary income. This is
in addition to the $0.18 income dividend which is also taxable as ordinary
income. Even though payment was made in 1997, this distribution was
taxable to shareholders in 1996 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 1998 setting forth
specific amounts to be included in their 1997 tax returns.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
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 objective is a
high total investment return, including capital appreciation and income, from a
diversified portfolio of securities. 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.
D. Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported. Actual results
could differ from those estimates.
NOTE 2 -- PURCHASES OF INVESTMENT SECURITIES
Cost of purchases of investment securities (excluding short-term
investments with maturities of 60 days or less) aggregated $538,476,091 for the
year ended September 30, 1997. Realized gains or losses are based on the
specific-certificate identification method. The cost of securities held at
September 30, 1997 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 0.1% of the average daily net assets
for any fiscal year. The Agreement obligates the Adviser to reduce its
13
<PAGE>
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 or the year.
For the year ended September 30, 1997, the Fund paid aggregate fees of
$44,000 to all Directors who are not affiliated persons of the Adviser. Certain
officers of the Fund are also officers of the Adviser and FPA Fund Distributors,
Inc.
NOTE 4 -- DISTRIBUTOR
For the year ended September 30, 1997, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $355,286
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 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, 1997, 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, 1997,
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, 1997, 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
October 31, 1997
14
