<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FPA PARAMOUNT FUND, INC.
Semi-Annual Report
LOGO
Distributor:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
March 31, 1997
<PAGE> 2
OFFICERS AND DIRECTORS
DIRECTORS DISTRIBUTOR
Julio J. de Puzo, Jr. FPA Fund Distributors, Inc.
John P. Endicott 11400 West Olympic Boulevard,
Leonard Mautner Suite 1200 Los Angeles,
John H. Rubel California 90064
John P. Shelton
Joseph Lowitz, Chairman Emeritus
John F. Allard, Director Emeritus COUNSEL
O'Melveny & Myers LLP
OFFICERS Los Angeles, California
William M. Sams, President and
Chief Investment Officer
Julio J. de Puzo, Jr., Executive Vice
President CUSTODIAN & TRANSFER AGENT
Eric S. Ende, Vice President
Janet M. Pitman, Vice President State Street Bank and Trust
Company Boston, Massachusetts
J. Richard Atwood, Treasurer
Sherry Sasaki, Secretary
Christopher H. Thomas, Assistant Treasurer
INVESTMENT ADVISER SHAREHOLDER SERVICE AGENT
First Pacific Advisors, Inc. Boston Financial Data Services,
Inc. P.O. Box 8500 Boston,
11400 West Olympic Boulevard, Suite 1200 Massachusetts 02266-8500
Los Angeles, California 90064 (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. The
financial information included in this report has been taken from the records of
the Fund without examination by independent auditors.
1
<PAGE> 3
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Semi-Annual Report covers the six months ended March 31, 1997.
During this period, the per share net asset value of your Fund increased 4.4%,
while the unmanaged Standard & Poor's 500 Stock Index (S&P 500) increased 11.3%
and the unmanaged Dow Jones Industrial Average increased 13.1%. 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
March 31, 1997, it was $14.27. During the period, $2.87 from capital gains
($1.82 of which was long-term) and $0.18 from net investment income was paid on
January 6, 1997 to shareholders of record December 31, 1996.
THE SIX MONTHS IN REVIEW
The last quarter of 1996 continued the trend of strong performance for the
stock markets, closing out the year with stellar results and putting together a
record two years, in which equities were the place to be. Cashflows into mutual
funds continued unabated and the decision of many investors, both individual and
institutional, to participate in the index fund phenomenon didn't seem to have a
downside. During this period, the larger stocks led the charge, with the smaller
stocks seeing improvement at year-end. Your Fund acted pretty much as we
expected, outperforming the smaller stock measures and lagging the S&P and Dow
Jones, which are heavily weighted towards the largest cap companies. Also, as
expected, in December the Fund did better relatively when those large-cap
indices dropped.
As we commenced the first quarter of 1997, it looked like a continuation
of the market strength we are all coming to expect as our due, with the large
cap stocks far outrunning their smaller companions in January and even into
February. However, as February progressed we began to see some wobbling and by
the end of March, the wheels seem to have come off the forward momentum
bandwagon. While your Fund's performance lagged in January due to the
predominant contribution of the largest companies to market returns, it began to
gain some ground in February and March as market volatility became more obvious.
This positive relative performance was not enough to close the gap for the
quarter.
As you may be aware, I requested that the Fund's Board of Directors
approve the reopening of the Fund to new shareholders effective January 31,
1997. I continue to believe that such action was appropriate for several
reasons. First, as the Fund has increased in size, I have found myself looking
for investment ideas over the full market capitalization range of stocks,
instead of focusing solely on smaller issues. Since my investment style leads to
the establishment of significant positions (5%) in my favorite stocks, it
follows that as the Fund grows larger some of these 5% positions would consist
of larger cap stocks. This is not an indication of any change in philosophy or
process, but rather of a broadening of my research universe. Secondly, I have
been envisioning increasing market volatility for some time and wanted to be
prepared with cash reserves on hand which would allow me to make purchases when
valuation opportunities arose. Lastly, your Fund has a history of "winning by
not losing", a record of 21 calendar years without a negative return. In this
more volatile market, we believe
2
<PAGE> 4
that investors need to have a viable investment alternative which provides them
a modicum of downside protection and feel that FPA Paramount offers them this
choice. Since the Fund's reopening, we have seen a steady and reasonable flow of
new assets. While we have been able to put some of this new cash to work, we
have also chosen to maintain a comfortable cushion against the markets' swings.
This cushion, in conjunction with our always cautious outlook, has allowed us to
hold our own in terms of performance since the Fund's reopening, especially
against the small- to mid-cap company measures of stock market return.
During the past six months, we were able to take sizable profits for the
Fund in a number of issues from a variety of industries, including IBM,
Provident Companies and Mohawk Industries. As we have discussed with you in
recent letters, this market is a "stock picker's" and we find ourselves looking
for these individual winners, instead of focusing all our firepower on a
particular sector. New additions to the portfolio during the past six months
have been either defensive in nature or special situations.
WHAT ARE WE DOING NOW?
We continue to believe that the economy is showing more strength than
weakness and feel that the Federal Reserve's recent incremental interest rate
adjustment was more of a "shot across the bow" to cool speculation or
"irrational exuberance" in the marketplace than a tool to offset runaway
inflation. A SLIGHTLY more inflationary environment would not necessarily be
detrimental to our economic health and might actually bring markets more in line
with what we used to consider the norm. It could also provide the impetus for
positive momentum among the cyclical stocks. Much depends on the likelihood and
timing of additional rate hikes by Mr. Greenspan. Currently, there is little
evidence of excessive commodity inflation and the recent market turmoil has also
served to cool off some of the exuberance with which we have all been concerned.
Since the future direction of the markets is not yet clear, we will
continue to maintain and perhaps increase the Fund's protective layer of
liquidity. We have also been searching out additional defensive positions. One
area in which we initiated positions for the first time during February 1997 was
the gold/mining sector. At the end of the quarter, we had established a 12%
total position in three high quality companies (Newmont Mining, Homestake
Mining, and Placer Dome) in an industry which has been out-of-favor for an
extended period. If the economy continues its strength, as I believe it will, at
some point in time inflation will increase to a level at which an investment in
gold stocks will become productive.
In our Letter to Shareholders last September, we discussed a new position,
Charming Shoppes. Since establishing the holding last year, we have taken
advantage of opportunities to add to it and continue to feel that the company is
making progress toward being a significantly more competitive player in the low-
to mid-price women's apparel retail industry. During March's decline, the stock
was actually in positive territory. As we have seen with Woolworth in the past,
a world-class manager can make all the difference in turning around such an
out-of-favor company. We feel that the long-term potential for success exists in
this holding and continue to be patient as Dorrit Bern initiates her changes.
Another area on which we are focusing our research is industries which are
experiencing consolidation. This has worked for us in the past few years,
especially in the insurance
3
<PAGE> 5
industry. However, even though there is continuing consolidation in the banking
and brokerage sectors, we want to avoid the interest-sensitive stocks at this
time. They have been market leaders for the last couple of years and we believe
it is too late to jump on that bandwagon at this point. We will look for a few
good ideas among sectors which are experiencing ongoing consolidation to lower
costs and remain in line with their international competition, perhaps steel or
chemicals.
We continue to believe that this is not the time to commit all of the
Fund's assets to the market. We have seen nothing but positive momentum since
1990 and our most recent "correction" has not yet made enough REAL values
available. We will not allow ourselves to be forced into chasing the market with
our cash and will lean more toward the larger, more mundane companies and
industries for the majority of the Fund's portfolio, rather than looking for the
next "hot" trend.
We would like to welcome new shareholders to the Fund and thank all of our
existing shareholders for their continuing support.
Respectfully submitted,
/s/ WILLIAM M. SAMS
William M. Sams
President
April 16, 1997
4
<PAGE> 6
MAJOR PORTFOLIO CHANGES
Six Months Ended March 31, 1997
<TABLE>
<CAPTION>
Shares
---------
<S> <C>
NET PURCHASES
COMMON STOCKS
Amdahl Corporation.......................................................... 359,800
Charming Shoppes, Inc....................................................... 615,100
DSM N.V. (ADR) (1).......................................................... 500,000
Ethyl Corporation (1)....................................................... 3,500,000
Homestake Mining Company (1)................................................ 2,158,000
Inco Limited (1)............................................................ 300,000
Leucadia National Corporation............................................... 370,000
Lone Star Steakhouse & Saloon, Inc. (1)..................................... 1,450,000
Lousiana-Pacific Corporation................................................ 200,000
LTV Corporation, The........................................................ 300,000
Luby's Cafeterias, Inc. (1)................................................. 250,000
Magellan Health Services, Inc............................................... 88,500
Newmont Mining Corporation (1).............................................. 925,000
Placer Dome Inc. (1)........................................................ 1,300,000
NET SALES
COMMON STOCKS
ALLTEL Corporation (2)...................................................... 100,000
Bethlehem Steel Corporation (2)............................................. 300,000
Beverly Enterprises, Inc. (2)............................................... 1,800,000
Browning-Ferris Industries, Inc. (2)........................................ 100,000
Champion International Corporation (2)...................................... 100,000
Ford Motor Company (2)...................................................... 600,000
International Business Machines Corporation (2)............................. 300,000
Intervoice, Inc. (2)........................................................ 260,000
Mohawk Industries, Inc. (2)................................................. 275,000
National Service Industries, Inc. (2)....................................... 100,000
Novell, Inc. (2)............................................................ 1,000,000
Oryx Energy Company (2)..................................................... 500,000
Provident Companies Inc. (2)................................................ 875,000
Telecomunicacoes Brasileiras (ADR) (2)...................................... 100,000
Telefonica Del Peru (ADR) (2)............................................... 361,000
Unifi, Inc.................................................................. 200,000
Wendy's International, Inc.................................................. 50,000
Woolworth Corporation....................................................... 1,165,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
March 31, 1997
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- ---------------------------------------- --------- ------------ ------------
<S> <C> <C> <C>
MINING -- 13.7%
Homestake Mining Company ............... 2,158,000 $ 29,950,800 $ 32,639,750
Inco Limited ........................... 300,000 10,368,020 9,787,500
Newmont Mining Corporation ............. 925,000 37,957,515 35,843,750
Placer Dome Inc. ....................... 1,300,000 26,682,325 23,562,500
------------ ------------
$104,958,660 $101,833,500
------------ ------------
MATERIALS -- 11.8%
DSM N.V. (ADR) ......................... 500,000 $ 11,886,250 $ 12,375,000
Ethyl Corporation ...................... 3,500,000 31,821,818 30,187,500
Louisiana-Pacific Corporation .......... 1,400,000 32,473,109 29,050,000
LTV Corporation, The ................... 800,000 10,792,402 10,100,000
Nucor Corporation ...................... 20,000 955,650 915,000
Temple-Inland, Inc. .................... 105,900 5,484,259 5,559,750
------------ ------------
$ 93,413,488 $ 88,187,250
------------ ------------
RESTAURANTS -- 7.9%
Lone Star Steakhouse & Saloon, Inc. .... 1,450,000 $ 39,082,374 $ 33,168,750
Luby's Cafeterias, Inc. ................ 250,000 4,998,750 4,656,250
Wendy's International, Inc. ............ 1,000,000 18,757,350 20,625,000
------------ ------------
$ 62,838,474 $ 58,450,000
------------ ------------
RETAILING -- 5.7%
Charming Shoppes, Inc.* ................ 2,000,000 $ 11,431,465 $ 10,750,000
Service Merchandise Company, Inc.*+ .... 7,000,000 37,253,335 23,625,000
Woolworth Corporation* ................. 335,000 3,352,200 7,830,625
------------ ------------
$ 52,037,000 $ 42,205,625
------------ ------------
OIL & GAS PRODUCTION/EXPLORATION -- 4.8%
ENSERCH Corporation .................... 1,500,000 $ 26,818,926 $ 30,750,000
ENSERCH Exploration, Inc.* ............. 600,000 6,116,913 5,325,000
------------ ------------
$ 32,935,839 $ 36,075,000
------------ ------------
</TABLE>
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS--CONTINUED Amount Cost Value
- ----------------------------------------------------------- ------------- ------------ ------------
<S> <C> <C> <C>
COMMUNICATIONS & INFORMATION -- 4.1%
Amdahl Corporation* ....................................... 3,245,000 $ 31,516,639 $ 30,421,875
DSC Communications Corporation* ........................... 10,000 215,000 209,375
------------ ------------
$ 31,731,639 $ 30,631,250
------------ ------------
CONSUMER NON-DURABLE GOODS -- 4.1%
Unifi, Inc. ............................................... 1,000,000 $ 24,746,499 $ 30,500,000
------------ ------------
HEALTH CARE -- 4.0%
Magellan Health Services, Inc.* ........................... 1,200,000 $ 21,055,591 $ 29,550,000
------------ ------------
MULTI-INDUSTRY -- 4.0%
Safety-Kleen Corporation .................................. 2,000,000 $ 33,751,843 $ 29,500,000
------------ ------------
INSURANCE -- 3.5%
Leucadia National Corporation ............................. 950,000 $ 21,771,021 $ 26,243,750
------------ ------------
REAL ESTATE INVESTMENT TRUST -- 0.4%
Paragon Group, Inc. ....................................... 170,000 $ 3,612,500 $ 2,890,000
------------ ------------
OTHER COMMON STOCKS-- 0.9% ................................ $ 6,618,789 $ 6,862,500
------------ ------------
TOTAL COMMON STOCKS-- 64.9% ............................... $489,471,343 $482,928,875
============ ------------
SHORT-TERM INVESTMENTS -- 37.7% Short-term Corporate Notes:
Emerson Electric Co.-- 5.23% 4/1/97 ..................... $ 18,000,000 $ 18,000,000
Bell Atlantic Financial Services, Inc. ..................
-- 5.23% 4/2/97 ....................................... 6,200,000 6,199,099
Du Pont (E.I.) De Nemours & Company
-- 5.26% 4/3/97 ....................................... 5,475,000 5,473,400
Emerson Electric Co.-- 5.23% 4/4/97 ..................... 9,801,000 9,796,728
Du Pont (E.I.) De Nemours & Company
-- 5.23% 4/7/97 ....................................... 13,000,000 12,988,668
Xerox Credit Corporation-- 5.3% 4/8/97 .................. 2,500,000 2,497,424
</TABLE>
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Principal
Amount Value
------------ -------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- CONTINUED
American General Finance Corporation-- 5.28% 4/8/97 ..... $ 9,800,000 $ 9,789,939
General Mills, Inc.-- 5.25% 4/8/97 ...................... 5,755,000 5,749,125
Daimler-Benz North America Corp.-- 5.28% 4/11/97 ........ 1,400,000 1,397,947
Abbott Laboratories-- 5.24% 4/11/97 ..................... 6,100,000 6,091,121
Canadian Wheat Board, The-- 5.27% 4/11/97 ............... 6,000,000 5,991,217
PepsiCo, Inc.-- 5.27% 4/15/97 ........................... 2,500,000 2,494,876
MetLife Funding, Inc.-- 5.42% 4/17/97 ................... 21,155,000 21,104,040
Abbott Laboratories-- 5.27% 4/18/97 ..................... 12,000,000 11,970,137
General Electric Company-- 5.25% 4/18/97 ................ 26,200,000 26,135,046
Bell Atlantic Financial Services, Inc.-- 5.28% 4/22/97 .. 9,800,000 9,769,816
PepsiCo, Inc.-- 5.47% 4/22/97 ........................... 3,575,000 3,563,593
Daimler-Benz North America Corp.-- 5.47% 4/23/97 ........ 5,140,000 5,122,818
Heinz (H.J.) Company-- 5.33% 4/23/97 .................... 5,200,000 5,183,062
Southwestern Bell Telephone Company-- 5.23% 4/25/97 ..... 20,000,000 19,930,266
Motorola, Inc.-- 5.47% 4/29/97 .......................... 20,825,000 20,736,401
Kellogg, Company-- 5.5% 5/1/97 .......................... 15,300,000 15,229,875
PepsiCo, Inc.-- 5.52% 5/2/97 ............................ 2,500,000 2,488,117
Southwestern Bell Telephone Company-- 5.27% 5/5/97 ...... 10,000,000 9,950,227
Minnesota Mining and Manufacturing Company-- 5.26% 5/6/97 6,000,000 5,969,316
Caterpillar Financial Services Corporation-- 5.4% 5/13/97 3,200,000 3,179,840
Toyota Motor Credit Corporation-- 5.47% 5/13/97 ......... 10,408,000 10,341,580
Philip Morris Companies Inc.-- 5.5% 5/22/97 ............. 16,600,000 16,470,658
Armstrong World Industries, Inc.-- 5.58% 5/27/97 ........ 5,400,000 5,353,128
State Street Bank Repurchase Agreement -- 5% 4/1/97
(Collateralized by U.S. Treasury Notes --
12% 2013, market value $1,180,483) ...................... 1,152,000 1,152,160
-------------
TOTAL SHORT-TERM INVESTMENTS .............................. $ 280,119,624
-------------
TOTAL INVESTMENTS-- 102.6% ................................ $ 763,048,499
Liabilities less other assets-- (2.6)% .................... (18,994,979)
-------------
TOTAL NET ASSETS-- 100% ................................... $ 744,053,520
=============
</TABLE>
* Non-income producing security
+ Affiliate as defined in the Investment Company Act of 1940 by reason of
ownership of 5% or more of its outstanding voting securities. Transactions in
securities of this affiliate during the period consisted of a purchase of
200,000 shares at a cost of $937,000.
See notes to financial statements.
8
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Common stocks -- at market value
(identified cost $489,471,343) ............................................ $ 482,928,875
Short-term investments-- at cost plus interest earned
(maturities of 60 days or less) ........................................... 280,119,624 $ 763,048,499
-------------
Cash .......................................................................... 981
Receivable for:
Capital Stock sold .......................................................... $ 3,091,550
Dividends ................................................................... 442,812 3,534,362
------------- -------------
$ 766,583,842
LIABILITIES
Payable for:
Investment securities purchased ............................................. $ 20,624,237
Capital Stock repurchased ................................................... 1,213,666
Advisory fees and financial services ........................................ 551,628
Accrued expenses ............................................................ 140,791 22,530,322
------------- -------------
NET ASSETS -- equivalent to $14.27 per share on 52,143,779
shares of Capital Stock outstanding ........................................... $ 744,053,520
=============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.25 per share; authorized
100,000,000 shares; outstanding 52,143,779 shares ........................... $ 13,035,945
Additional Paid-in Capital .................................................... 675,703,849
Undistributed net realized gain on investments ................................ 58,585,658
Undistributed net investment income ........................................... 3,270,536
Unrealized depreciation of investments ........................................ (6,542,468)
-------------
Net assets at March 31, 1997 .................................................. $ 744,053,520
=============
</TABLE>
See notes to financial statements.
9
<PAGE> 11
STATEMENT OF OPERATIONS
For the Six Months Ended March 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest ................................................... $ 6,484,374
Dividends .................................................. 3,071,486
-------------
$ 9,555,860
EXPENSES
Advisory fees .............................................. $ 2,334,361
Financial services ......................................... 317,798
Transfer agent fees and expenses ........................... 224,381
Registration fees .......................................... 39,074
Custodian fees and expenses ................................ 32,139
Audit fees ................................................. 25,200
Directors' fees and expenses ............................... 24,718
Reports to shareholders .................................... 17,704
Legal fees ................................................. 11,448
Insurance .................................................. 7,468
Other expenses ............................................. 11,098 3,045,389
------------- -------------
Net investment income .............................. $ 6,510,471
-------------
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) $ 327,202,452
Cost of investment securities sold ......................... 266,126,428
-------------
Net realized gain on investments ....................... $ 61,076,024
Unrealized appreciation (depreciation) of investments:
Unrealized appreciation at beginning of period ............. $ 32,770,289
Unrealized depreciation at end of period ................... (6,542,468)
-------------
Decrease in unrealized appreciation of investments ..... (39,312,757)
-------------
Net realized and unrealized gain on investments .... $ 21,763,267
-------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS .............................................. $ 28,273,738
=============
</TABLE>
See notes to financial statements.
10
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, 1997 September 30, 1996
--------------------------------- --------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income ............. $ 6,510,471 $ 12,108,460
Net realized gain on investments .. 61,076,024 117,344,002
Decrease in unrealized
appreciation of investments ..... (39,312,757) (14,322,708)
------------- -------------
Increase in net assets
resulting from operations ......... $ 28,273,738 $ 115,129,754
Distributions to shareholders from:
Net investment income ............. $ (7,069,049) $ (10,798,463)
Net realized capital gains ........ (112,712,058) (119,781,107) (35,377,391) (46,175,854)
------------- -------------
Capital Stock transactions:
Proceeds from Capital Stock sold .. $ 117,991,573 $ 62,620,462
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions .. 101,868,456 39,622,458
Cost of Capital Stock repurchased . (67,357,699) 152,502,330 (84,055,296) 18,187,624
------------- ------------- ------------- -------------
Total increase in net assets ........ $ 60,994,961 $ 87,141,524
NET ASSETS
Beginning of period, including
undistributed net investment income
of $3,829,114 and $2,519,117 ...... 683,058,559 595,917,035
-------------- -------------
End of period, including
undistributed net investment income
of $3,270,536 and $3,829,114 ...... $ 744,053,520 $ 683,058,559
============== =============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold ........ 7,880,444 4,079,091
Shares issued to shareholders upon
reinvestment of dividends and
distributions ..................... 7,010,905 2,823,415
Shares of Capital Stock repurchased . (4,046,663) (5,593,952)
-------------- -------------
Increase in Capital Stock
outstanding ....................... 10,844,686 1,308,554
============== =============
</TABLE>
See notes to financial statements.
11
<PAGE> 13
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Six
Months
Ended
March Year Ended September 30,
31, -------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period....... $16.54 $14.90 $14.73 $13.72 $13.09 $14.06
--------- ------- -------- ------- ------- ------
Net investment income........................ $0.15 $0.30 $0.30 $0.24 $0.25 $0.31
Net realized and unrealized gain on
investment securities...................... 0.63 2.52 1.17 2.54 1.61 0.57
--------- ------- -------- ------- ------- ------
Total from investment operations............. $0.78 $2.82 $1.47 $2.78 $1.86 $0.88
--------- ------- -------- ------- ------- ------
Less distributions:
Dividends from net investment income....... $(0.18) $(0.27) $(0.29) $(0.25) $(0.25) $(0.36)
Distributions from net realized
capital gains............................ (2.87) (0.91) (1.01) (1.52) (0.98) (1.49)
--------- ------- -------- ------- ------- ------
Total distributions........................ $(3.05) $(1.18) $(1.30) $(1.77) $(1.23) $(1.85)
--------- ------- -------- ------- ------- ------
Net asset value at end of period............. $14.27 $16.54 $14.90 $14.73 $13.72 $13.09
========= ======= ======== ======= ======= =======
Total investment return*..................... 4.39% 20.42% 11.11% 21.69% 15.08% 6.83%
Ratios/supplemental data:
Net assets at end of period (in $000's)...... 744,054 683,059 595,917 421,382 327,179 279,990
Ratio of expenses to average net assets...... 0.86%+ 0.87% 0.89% 0.90% 0.89% 0.92%
Ratio of net investment income to
average net assets......................... 1.83%+ 1.94% 2.25% 1.69% 1.83% 2.33%
Portfolio turnover rate...................... 136%+ 131% 95% 76% 98% 146%
Average brokerage commissions per share...... $0.0643 $0.0646 - - - -
</TABLE>
* Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge. The
return for the six months ended March 31, 1997 is not annualized.
+ Annualized
See notes to financial statements.
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
March 31, 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 period, 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 $314,889,985 for the
six months ended March 31, 1997. Realized gains or losses are based on the
specific-certificate identification method. Cost of securities held at March 31,
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
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
Continued
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 fee to the extent
necessary to reimburse the Fund for any annual expenses (exclusive of interest,
taxes, the cost of any supplemental statistical and research information, and
extraordinary expenses such as litigation) in excess of 1 1/2% of the first $30
million and 1% of the remaining average net assets of the Fund for the year.
For the six months ended March 31, 1997, the Fund paid aggregate fees of
$24,000 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 six months ended March 31, 1997, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $211,388 in
net Fund share sales commissions after reallowance to other dealers. The
Distributor pays its own overhead and general administrative expenses, the cost
of printing prospectuses and the cost of supplemental sales literature,
promotion and advertising.
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