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As filed pursuant to Rule 497
File No. 2-14660
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PROSPECTUS
FPA Paramount Fund, Inc.
("Fund") seeks a high total
investment return, including
capital appreciation and
income, from a diversified
portfolio of securities.
This Prospectus briefly
outlines information
prospective investors should
know before purchasing Fund
shares. Investors should
read and retain this
Prospectus for future
reference.
A Statement of Additional
Information about the Fund
dated January 31, 1997,
which is incorporated by
reference in this
Prospectus, has been filed
with the Securities and
Exchange Commission. It is
available at no charge by
contacting FPA Fund
Distributors, Inc.
("Distributor") at 11400
West Olympic Boulevard,
Suite 1200, Los Angeles,
California 90064; telephone
(310) 473-0225 or (800)
982-4372, except from Alaska
and Hawaii.
THESE SECURITIES HAVE NOT
BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY
[LOGO] STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND
Distributor: EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR
FPA FUND DISTRIBUTORS, INC. ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE
11400 West Olympic Boulevard CONTRARY IS A CRIMINAL
Suite 1200 OFFENSE.
Los Angeles, CA 90064
JANUARY 31, 1997
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FPA PARAMOUNT FUND, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
(310) 473-0225
INVESTMENT FPA Pacific Advisors, Inc.
ADVISER: 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
(310) 473-0225
(800) 982-4372 except
Alaska and Hawaii
SHAREHOLDER Boston Financial Data
SERVICE AGENT: Services, Inc.
P.O. Box 8500
Boston, Massachusetts 02266-8500
(617) 328-5000
(800) 638-3060 except
Alaska, Hawaii and Massachusetts
CUSTODIAN AND State Street Bank and
TRANSFER AGENT: Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INQUIRIES CONCERNING TRANSFER OF REGISTRATION, DISTRIBUTIONS, REDEMPTIONS AND
SHAREHOLDER SERVICE SHOULD BE DIRECTED TO THE SHAREHOLDER SERVICE AGENT.
INQUIRIES CONCERNING SALES SHOULD BE DIRECTED TO THE DISTRIBUTOR.
TABLE OF CONTENTS
PAGE
Expense Synopsis................. 3
Financial Highlights............. 4
Investment Objective and
Policies....................... 5
The Fund and Its Management...... 6
Advisory Agreement............. 6
FPA Fund Family................ 6
Prior Performance
Information.................... 7
Purchase of Shares............... 7
Net Asset Value................ 8
Table of Sales Charges......... 8
Cumulative Purchase Discount... 8
Letter of Intent............... 8
Sales at Reduced Sales
Charge......................... 9
Sales at Net Asset Value....... 9
Shareholder Services.............. 9
FPA Exchange Privilege.......... 9
Money Market Fund Exchange
Privilege...................... 10
How to Exchange Shares......... 10
Investment Account............. 11
Pre-Authorized Investment
Plan........................... 11
Retirement Plans............... 11
Systematic Withdrawal Plan..... 11
Redemption of Shares............. 11
Telephone Transactions......... 12
Reinvestment Privilege......... 12
Dividends, Distributions and
Taxes.......................... 13
Dividends...................... 13
Capital Gains.................. 13
Taxes.......................... 13
Investment Practices, Risks and
Restrictions................... 13
Securities of Foreign
Issuers........................ 13
Foreign Currency
Transactions................... 14
Short Sales Against the Box.... 14
Repurchase Agreements.......... 14
Brokerage Practices............ 14
Portfolio Turnover............. 15
Investment Restrictions........ 15
Additional Information........... 15
Common Stock................... 15
Voting Rights.................. 15
Shareholder Inquiries.......... 15
Shareholder Service Agent...... 15
Custodian...................... 15
Legal Counsel.................. 15
Independent Auditors........... 15
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No dealer, salesman, or other person has been authorized to give any information
or to make any representations other than those contained in this Prospectus or
in supplemental sales literature distributed by the Distributor in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund or by the Distributor. This Prospectus does not constitute an
offering by the Distributor in any jurisdiction in which such offering may not
lawfully be made.
2
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EXPENSE SYNOPSIS
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)........ 6.50%
Deferred Sales Load (as a percentage of original sales price or
redemption proceeds, as applicable)...................................... *
Redemption Fee (as a percentage of amount redeemed)...................... None
Exchange Fee............................................................. $5.00
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees.......................................................... 0.65%
12b-1 Fees............................................................... None
Other Expenses (including financial services)............................ 0.22%
-------
Total Fund Operating Expenses............................................ 0.87%
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- -------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses
on a $1,000 investment, assuming
(1) five percent annual return and
(2) redemption at the end of each
time period: $ 73.00 $ 91.00 $ 110.00 $ 165.00
</TABLE>
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* An account management fee is charged by unaffiliated investment advisers or
broker-dealers to certain accounts entitled to purchase shares without sales
charge.
The foregoing synopsis is intended to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Purchase of Shares" and "The Fund and Its Management." The
example is included to provide a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a five percent
annual return assumption. This assumption is unrelated to the Fund's prior
performance and is not a projection of future performance. THE EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESSER THAN THOSE SHOWN.
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FINANCIAL HIGHLIGHTS
The following information has been audited by the Fund's independent auditors.
Their report appears in the Statement of Additional Information. This
information should be read in conjunction with the related financial statements
included in the Statement of Additional Information, which can be obtained
without charge from the Distributor at the address shown on the cover page of
this Prospectus.
For one share outstanding throughout each year
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
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1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
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<S> <C> <C> <C> <C> <C> <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 $ 12.04 $ 14.71 $ 14.07 $ 17.14 $ 13.47
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income.. $ 0.30 $ 0.30 $ 0.24 $ 0.25 $ 0.31 $ 0.42 $ 0.56 $ 0.49 $ 0.29 $ 0.34
Net realized and
unrealized gain
(loss) on investment
securities........... 2.52 1.17 2.54 1.61 0.57 2.83 (0.91) 2.07 (0.47) 4.95
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations........... $ 2.82 $ 1.47 $ 2.78 $ 1.86 $ 0.88 $ 3.25 $ (0.35) $ 2.56 $ (0.18) $ 5.29
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income.. $ (0.27) $ (0.29) $ (0.25) $ (0.25) $ (0.36) $ (0.48) $ (0.56) $ (0.45) $ (0.34) $ (0.34)
Distributions from
net realized
capital gains...... (0.91) (1.01) (1.52) (0.98) (1.49) (0.75) (1.76) (1.47) (2.55) (1.28)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions.... $ (1.18) $ (1.30) $ (1.77) $ (1.23) $ (1.85) $ (1.23) $ (2.32) $ (1.92) $ (2.89) $ (1.62)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end
of year.............. $ 16.54 $ 14.90 $ 14.73 $ 13.72 $ 13.09 $ 14.06 $ 12.04 $ 14.71 $ 14.07 $ 17.14
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total investment
return*.............. 20.42% 11.11% 21.69% 15.08% 6.83% 29.12% (3.02)% 21.07% 1.72% 43.90%
Ratios/supplemental
data:
Net assets at end of
year (in $000's)..... 683,059 595,917 421,382 327,179 279,990 250,980 199,381 217,164 137,269 144,918
Ratio of expenses to
average net assets... 0.87% 0.89% 0.90% 0.89% 0.92% 0.93% 0.95% 0.95% 1.01% 1.01%
Ratio of net investment
income to average net
assets............... 1.94% 2.25% 1.69% 1.83% 2.33% 3.08% 4.30% 3.60% 2.10% 2.21%
Portfolio turnover
rate................. 131% 95% 76% 98% 146% 101% 94% 132% 103% 98%
Average brokerage
commissions per
share................ $0.0646 -- -- -- -- -- -- -- -- --
</TABLE>
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* Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge.
4
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INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks a high total investment return, including capital appreciation
and income, from a diversified portfolio of securities. The Adviser believes
this usually can best be achieved by investing in common stocks deemed to
possess above-average ability to increase in market value, although the Fund may
also invest in fixed-income and convertible securities. The Fund generally holds
some assets in high quality short-term debt securities to provide liquidity.
Such investments may be increased when the Adviser considers their expected
total return to be more attractive than that of common stocks. There is no
assurance that the Fund will succeed in achieving its investment objective as
there is market risk inherent in pursuing any investment objective and in owning
securities of the type purchased by the Fund.
The Adviser searches for companies deemed to be undervalued when considering
book value, replacement cost of assets and/or other relevant factors. The
Adviser seeks to obtain good values by not overpaying for the stock of even the
best companies. The Adviser believes price risk can be lessened by avoiding very
high prices paid for earnings of companies heavily favored at the time by
institutions or other investors. The Adviser also believes that better values
and lower price risk may often be found in securities of companies with
successful records that are currently out-of-favor as evidenced by such factors
as relatively low price-earnings ratios.
The Adviser's emphasis on fundamental analysis of each company and the inherent
value of its securities may result in a substantial portion of the Fund's
portfolio being invested in companies the average investor perceives to be
unpopular or unfamiliar. This approach affords the Fund an increased opportunity
for capital gain if additional investor interest develops, but also involves
additional risk of capital loss in the event of adverse developments. The Fund
generally invests in large capitalization issuers as well as in medium or
smaller sized companies. Securities of smaller companies may be subject to
larger, more abrupt or erratic fluctuations in price than securities of larger
companies. The Fund's value-oriented investment approach may result in a
portfolio which does not reflect all facets of the national economy and which
differs significantly from the broader market. The Fund may invest up to 5% of
its assets in securities of selected issuers and such relative concentration may
increase the volatility of the Fund's per share net asset value.
The Fund may invest up to 25% of its net assets in securities of foreign
issuers. Such investments involve additional risks and opportunities compared
with securities of United States issuers. See "Investment Practices, Risks and
Restrictions -- Securities of Foreign Issuers", and -- "Foreign Currency
Transactions."
Security purchases are primarily based on consideration of fundamental value and
earnings expectations rather than short-term stock market expectations. However,
if earnings prospects change, or the value of a security becomes unduly large in
relation to the Fund's total size or it no longer appears to represent an
unusual value, the Fund can sell all or part of the investment regardless of the
length of time held. See "Investment Practices, Risks and
Restrictions -- Portfolio Turnover."
5
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THE FUND AND ITS MANAGEMENT
The Fund is a diversified, open-end management investment company, generally
called a mutual fund, which was incorporated in Delaware on September 8, 1958
and reincorporated in Maryland on January 31, 1986. A mutual fund provides the
investor a practical and convenient way to invest in a diversified portfolio of
securities by combining resources with others who have similar investment goals.
A board of five directors is responsible for overseeing the Fund's affairs. The
Adviser selects investments for the Fund, provides administrative services and
manages the Fund's business. William M. Sams, President of the Fund, and
Principal and director of the Adviser, is primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Sams has been the Chief
Investment Officer of the Fund for eleven years and portfolio manager of the
Fund for over fifteen years. The Adviser, together with its predecessors, has
been in the investment advisory business since 1954, serving as investment
adviser to the Fund since July 1, 1978. Presently, the Adviser manages assets of
approximately $3.8 billion for six investment companies, including one closed-
end investment company, and 39 institutional accounts. All officers of the Fund
are also officers of the Adviser. Certain officers of the Fund are also officers
of the Distributor. The Adviser and the Distributor are indirect wholly owned
subsidiaries of United Asset Management Corporation ("UAM"), a New York Stock
Exchange listed holding company principally engaged, through affiliated firms,
in providing institutional investment management and acquiring institutional
investment management firms.
ADVISORY AGREEMENT. Under the Investment Advisory Agreement dated June 27, 1991,
the Fund pays the Adviser a monthly fee computed on the average daily net assets
of the Fund at the annual rate of 0.75% on the first $50 million of net assets
and 0.65% on net assets over $50 million. In addition, the Adviser is reimbursed
for the cost of providing financial services to the Fund in an amount not
exceeding 0.10% of the Fund's average daily net assets for any fiscal year. The
advisory fee is higher than the fee paid by some other mutual funds. For the
last fiscal year, advisory fees plus the cost of financial services paid by the
Fund equaled 0.74% of the Fund's average net assets.
The Fund also pays for shareholder service agent fees, custodian fees, legal and
audit fees, directors' fees, reports to shareholders and proxy statements,
registration of Fund shares under federal and state laws, and all other expenses
incurred in the operation of the Fund except those assumed by the Adviser. For
the last fiscal year, the Fund's total operating expenses were 0.87% of average
net assets.
FPA FUND FAMILY. The Fund is one of four mutual funds in the FPA Fund Family
(collectively, the "FPA Funds"). FPA Capital Fund, Inc. ("Capital"), which
currently is not open to new investors, seeks long-term capital growth but
current income is also a factor. FPA New Income, Inc. ("New Income"), a
fixed-income fund, seeks current income and long-term total return. FPA
Perennial Fund, Inc. ("Perennial"), which is primarily designed for retirement
plans, seeks long-term growth of capital with current income as a secondary
consideration.
The FPA Funds offer exchange privileges and telephone redemptions plus combined
shareholdings for cumulative purchase discounts and letters of intent. These
privileges are more fully described under "Purchase of Shares," "Shareholder
Services" and "Redemption of Shares." The account information form should be
used to change information and authorize these services. Authorizing
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<PAGE> 7
exchange privileges or telephone redemptions requires a signature guarantee,
which is described under "Redemption of Shares." The account information form is
available from authorized securities dealers ("dealers") or the Distributor.
PRIOR PERFORMANCE INFORMATION. From time to time, the Fund's total average
annual return for 1, 5 and 10 year periods may be quoted in advertisements.
Other total return quotations, aggregate or average, over other time periods may
also be included. Average annual total return reflects the average annual
percentage change in value of an investment in the Fund over the measuring
period. Aggregate total return reflects the total percentage change in value
over the measuring period. Total return calculations assume that dividends and
capital gain distributions paid by the Fund during the period are reinvested in
Fund shares at net asset value. Quotations of total returns reflect the maximum
sales charge, except that the Fund may also provide, in conjunction with such
quotations, additional quotations that do not reflect a sales charge.
Comparative performance information may also be used from time to time in
advertising or marketing of the Fund's shares. The Fund's total return may be
compared to that of other mutual funds with similar investment objectives and to
stock and other relevant indices or to rankings prepared by independent services
or other financial or industry publications that monitor the performance of
mutual funds. For example, the total return on Fund shares may be compared to
data prepared by Lipper Analytical Services, Inc. or to a stock index such as
the Standard & Poor's 500 Stock Index. Such comparative performance information
may be stated in the same terms in which the comparative data and indices are
stated. For these purposes, the performance of the Fund, as well as the
performance of other mutual funds or indices, would not reflect sales charges,
the inclusion of which would reduce such performance quotations.
Performance figures represent historic earnings, and should not be considered as
representative of future results. The investment return and principal value of
an investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Since performance
will fluctuate, performance data for the Fund should not be used to compare an
investment in the Fund's shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Investors should remember that performance is
generally a function of the kind and quality of the securities held in a
portfolio, operating expenses and market conditions.
Further information about the Fund's performance is contained in the annual
report to shareholders which may be obtained without charge from the Distributor
at the address shown on the cover page of this Prospectus.
PURCHASE OF SHARES
Fund shares are sold through dealers in a continuous offering. The Distributor
serves as principal underwriter for Fund shares, which are available for
purchase at the offering price through dealers. The minimum initial investment
is $1,500. Each subsequent investment must be at least $100. Minimum investment
requirements can be changed by the Fund or waived by the Distributor. All
purchases made by check should be in U.S. dollars and made payable to the FPA
Funds or State Street Bank and Trust Company. Third party checks will not be
accepted. A charge may be imposed if any check used for investment does not
clear.
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<PAGE> 8
The offering price equals the net asset value per share plus the applicable
sales charge. Orders received by dealers before the New York Stock Exchange
("NYSE") closes (currently 4:00 p.m., New York time) on any business day are
priced based on the net asset value for that day if Boston Financial Data
Services, Inc. ("Shareholder Service Agent"), as agent for the Distributor,
receives the order prior to its close of business. Orders received by the
Shareholder Service Agent after such time are priced based on net asset value
for the next business day.
NET ASSET VALUE. Net asset value is computed as of the close of the NYSE on each
day the NYSE is open. Net asset value, rounded to the nearest cent per share,
equals the market value of all portfolio securities plus other assets, less all
liabilities, divided by the number of Fund shares outstanding.
TABLE OF SALES CHARGES. The following table shows the sales charge at various
investment levels. The sales charge applies to purchases made at one time by any
combination of an individual, his or her spouse and these related investors (and
their spouses): grandparents, parents, siblings, children or grandchildren; or
by the individual, his or her spouse and a trustee or other fiduciary purchasing
securities for related trusts, estates or fiduciary accounts, including employee
benefit plans.
<TABLE>
<CAPTION>
SALES SALES REALLOWED
SIZE OF INVESTMENT CHARGE(1) CHARGE(2) TO DEALERS(2)
- ------------------------------------------------- ---------- ---------- -------------
<S> <C> <C> <C>
Less than $10,000................................ 6.95% 6.50% 6.00%
$ 10,000 but less than $25,000................. 6.38% 6.00% 5.50%
$ 25,000 but less than $50,000................. 5.54% 5.25% 4.75%
$ 50,000 but less than $100,000................ 4.71% 4.50% 4.25%
$ 100,000 but less than $250,000................. 3.90% 3.75% 3.50%
$ 250,000 but less than $500,000................. 2.04% 2.00% 1.75%
$ 500,000 but less than $1,000,000............... 1.01% 1.00% 0.80%
$1,000,000 and over.............................. 0.00% 0.00% 0.00%
</TABLE>
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(1) As a percentage of net amount invested.
(2) As a percentage of public offering price.
CUMULATIVE PURCHASE DISCOUNT. The size of investment may be determined by adding
the amount being invested to the current value, at offering price, of all
presently held shares of the FPA Funds. If such holdings qualify for a reduced
sales charge, information sufficient to permit verification must be furnished to
the Shareholder Service Agent on the account information form or when the order
is placed.
LETTER OF INTENT. A letter of intent ("LOI") allows investors to obtain a
reduced sales charge by aggregating investments made during a 13-month period.
The value of all presently held shares of the FPA Funds may also be used to
determine the applicable sales charge. The account information form contains the
LOI which must be signed at the time of initial purchase, or within 30 days.
Each investment made under an LOI during the period receives the sales charge
for the total investment goal. If the goal is not achieved within the period,
the shareholder must pay the amount equal to the sales charge applicable to the
purchases made minus the sales charges actually paid.
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<PAGE> 9
SALES AT REDUCED SALES CHARGE. Certain retirement plans, exempt from taxation
under Section 401 of the Internal Revenue Code, with open accounts in the Fund
as of July 2, 1990, are permitted to continue to buy Fund shares at a sales
charge equal to one-half of the normal sales charge. Information sufficient to
permit verification must be furnished to the Shareholder Service Agent when the
order is placed.
SALES AT NET ASSET VALUE. Fund shares may be purchased at net asset value,
without a sales charge, by these investors and their spouses (and their
immediate relatives): (a) current and former directors, officers and employees
of the Adviser, UAM and its affiliates; (b) current and former directors,
officers and employees of Angeles Corporation (the former parent of the Adviser)
and its affiliates; (c) current and former directors of, and partners and
employees of legal counsel to, the investment companies advised by the Adviser;
(d) investment advisory clients of the Adviser and pension consultants to such
clients and their directors, officers and employees; (e) employees (including
registered representatives) of a dealer which has a selling group agreement with
the Distributor and consents to such purchases; (f) any employee benefit plan
maintained for the benefit of such qualified investors; and (g) directors,
officers and employees of a company whose employee benefit plan holds shares of
one or more of the FPA Funds. Immediate relatives include grandparents, parents,
siblings, children and grandchildren of a qualified investor, and the spouse of
any immediate relative. The foregoing purchasers must represent that the shares
are purchased for investment and will not be resold except through redemption or
repurchase by the Fund.
The Fund also offers shares at net asset value without imposition of a sales
charge to the following persons: (i) trustees or other fiduciaries purchasing
shares for employee benefit plans of employers with 20 or more employees; (ii)
trust companies, bank trust departments and registered investment advisers
purchasing for accounts over which they exercise investment authority and which
are held in a fiduciary, agency, advisory, custodial or similar capacity,
provided that the amount collectively invested or to be invested by such
accounts during the subsequent 13-month period in the Fund and/or the FPA Funds
totals at least $1,000,000; (iii) tax-exempt organizations enumerated in Section
501(c)(3), (9), or (13) of the Internal Revenue Code; and (iv) accounts upon
which an investment adviser, financial planner or broker-dealer charges an
account management or consulting fee, provided such organization has entered
into an agreement with the Distributor regarding such accounts or purchases Fund
shares for such accounts or for its own accounts through an omnibus account
maintained by a broker-dealer that has entered into such an agreement with the
Fund or Distributor.
No sales charge is imposed because the Distributor anticipates that such
purchases should result in economies in the sales effort and related expenses
compared to sales made through normal distribution channels. A special
application form, which is available from the Distributor, must be submitted
with the initial purchase. All net asset value sales require specific
notification to the Distributor of the purchaser's eligibility at the time the
order is placed. If a purchaser places such an order through a securities
broker, the broker may charge a service fee. No such fee is charged if shares
are purchased directly from the Distributor or the Fund.
SHAREHOLDER SERVICES
FPA EXCHANGE PRIVILEGE. Subject to the following requirements, Fund shares may
be exchanged for shares of another FPA Fund, except FPA Capital Fund, Inc.,
whose shares may only be acquired
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<PAGE> 10
by existing Capital shareholders. An exchange may establish a new or increase an
existing FPA Fund account. Both accounts must bear the same registration. A
sales charge applies to the purchase by exchange unless (a) a sales charge
equivalent to that applicable to the acquired shares was previously paid; (b)
the shareholder is entitled to purchase shares at net asset value; or (c) the
shares being exchanged were acquired by reinvestment. Shares of the fund to be
acquired, must be registered for sale in the investor's state. A $5.00 service
fee applies to each exchange.
MONEY MARKET FUND EXCHANGE PRIVILEGE. The Distributor has arranged for shares of
the money market portfolio of the Cash Equivalent Fund, a no-load diversified
open-end money market mutual fund ("Money Market Fund") to be available in
exchange for shares of the Fund. Shares of the Money Market Fund so acquired
plus any shares acquired through reinvestment of dividends and distributions may
be re-exchanged for shares of any FPA Fund without sales charge, provided that
in the case of Capital, the investor has maintained his shareholder account
because shares of Capital, are currently offered only to existing shareholders.
The $5.00 exchange fee is paid by the Distributor which receives a fee from
Kemper Financial Services, the administrator for the Money Market Fund, of .15
of 1% per year or more of the average daily net asset value of shares of the
Money Market Fund acquired through this exchange privilege. This exchange
privilege does not constitute an offering or recommendation by the Fund of the
Money Market Fund. The Money Market Fund is separately managed and is not one of
the FPA Funds. FPA mutual fund investments held in Fund-Sponsored Individual
Retirement Accounts may not be exchanged into the Cash Equivalent Fund.
HOW TO EXCHANGE SHARES. The above described exchange privileges may be exercised
by sending written instructions to the Shareholder Service Agent. See
"Redemption of Shares" for applicable signature and signature guarantee
requirements. Exchange privileges may also be exercised by telephone as
described under "Redemption of Shares -- Telephone Transactions." Only four
exchanges may be made in one account during any calendar year; exchanges
exceeding this limit may be considered null and void, if the investor has been
notified that this limit has been reached. Shares must be owned for 15 days
before exchanging and cannot be in certificate form unless the certificate is
tendered with the request for exchange. An exchange requires the purchase of
shares of the acquired fund with a value of at least $1,000. Exchange
redemptions and purchases are effected on the basis of the net asset values next
determined after receipt of the request in proper order by the Shareholder
Service Agent. In the case of exchanges into the Money Market Fund, dividends
generally commence on the following business day. For federal and state income
tax purposes, an exchange is treated as a sale and may result in a capital gain
or loss, although if the shares exchanged have been held less than 91 days, the
sales charge paid on such shares is not included in the tax basis of the
exchanged shares, but is carried over and included in the tax basis of the
shares acquired. See the Statement of Additional Information.
Additional information concerning this privilege and prospectuses for other FPA
Funds and/or for the Money Market Fund may be obtained from dealers or the
Distributor. A shareholder should read such prospectuses and consider
differences in objectives and policies before making any exchange. The Fund or
the Distributor can change or discontinue this privilege upon 60 days' advance
notice and investors who had exchanged into the Money Market Fund would be
permitted to reacquire shares of the Fund without sales charge for at least 60
days after notice of termination of the Money Market Fund exchange privilege.
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<PAGE> 11
INVESTMENT ACCOUNT. Each shareholder has an investment account in which the
Shareholder Service Agent holds Fund shares. Unless the Shareholder Service
Agent receives a written request, stock certificates will not be issued.
Certificates are only issued for full shares. The shareholder receives a
statement showing account activity after each transaction.
PRE-AUTHORIZED INVESTMENT PLAN. Investors desiring to make automatic monthly
investments may use the optional shareholder services form, available from
dealers or the Distributor. The Shareholder Service Agent withdraws funds from
the investor's bank account monthly for $100 or more as specified through the
Automated Clearing House.
RETIREMENT PLANS. An eligible investor may establish an IRA (individual
retirement account) and/or other retirement plan with a minimum initial
investment of $100 and an expressed intention to increase such investment to
$1,500 within 12 months. Each subsequent investment must be at least $100.
Neither the Fund nor the Distributor imposes additional fees for these plans,
but fees are charged by the plan custodian. The Tax Reform Act of 1986
substantially limited categories of persons eligible to make deductible
contributions. However, persons ineligible for deductible contributions
generally may make non-deductible contributions and dividends and capital gains
distributions on shares held in an IRA continue to be tax-deferred. Investors
should consult their tax advisers. Applicable forms and information regarding
plan administration, custodial fees and other plan provisions are available from
the Distributor or dealers.
SYSTEMATIC WITHDRAWAL PLAN. Any shareholder whose account value is $10,000 or
more may make monthly, quarterly, semi-annual or annual withdrawals of $50 or
more by completing the optional shareholder services form. Under this plan,
sufficient Fund shares to cover these withdrawals are redeemed each month and
proceeds are forwarded as directed on the optional shareholder services form.
Dividends and capital gains distributions on Fund shares held under this plan
are automatically reinvested in additional Fund shares at net asset value. If
these withdrawals continuously exceed reinvestments, the shareholder's account
is correspondingly reduced and ultimately exhausted. Concurrent withdrawals and
purchases are ordinarily disadvantageous to the shareholder due to additional
sales charges. The shareholder recognizes any taxable gain or loss on
redemptions.
REDEMPTION OF SHARES
Shareholders can redeem for cash, without charge, any or all of their Fund
shares at any time by sending a written request in proper form to the
Shareholder Service Agent. Facsimile transmissions are not acceptable.
Shareholders can also place redemption requests through dealers, who may charge
a fee. Shareholders redeeming Fund shares from retirement plans should consult
the plan documents concerning federal tax consequences and their plan custodian
regarding procedures.
All persons in whose name the account is established must sign the redemption
request exactly as registered. If the redemption exceeds $10,000, if the
proceeds are not paid to the record owner at the record address, or if the
shareholder is a corporation, partnership, trust or fiduciary, the signature(s)
must be guaranteed by a bank or trust company; a broker or dealer; a credit
union; a national securities exchange, registered securities association or
clearing agency; or a savings and loan association.
In most cases, only a properly signed request with any necessary signature
guarantee is required for a redemption. However, stock certificates, if held by
shareholders, must accompany requests.
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<PAGE> 12
Additional documents are required if a corporation, partnership, trust,
fiduciary, executor or administrator requests the redemption.
Redemptions are only processed on days the NYSE is open. The redemption price is
the first net asset value determined after the Shareholder Service Agent
receives the redemption request in proper form. A check for the proceeds is
mailed within seven days after the Shareholder Service Agent receives the
request in good order. If Fund shares redeemed were recently purchased by check,
redemptions will not be allowed until the investment being redeemed has been in
the account for 15 days.
The Fund may direct the Shareholder Service Agent to redeem all Fund shares of
any shareholder whose account value is less than $500 as a result of a
redemption. In such case, the shareholder is notified in writing that the
account value is insufficient and allowed up to 60 days to increase it to $500.
TELEPHONE TRANSACTIONS. Telephone exchange privileges are available unless
declined by an investor on the account information form. Telephone redemption
privileges are available only if elected on the optional shareholder services
form. A properly completed request with a signature guarantee is required if a
telephone redemption election is made or changed after the account is opened.
Telephone redemptions are not available for shares held in a Fund-sponsored
retirement account. Shares held in certificate form cannot be redeemed or
exchanged by telephone. The Shareholder Service Agent (the "Agent") employs
procedures considered by it to be reasonable to confirm that instructions
communicated by telephone are genuine, including requiring account registration
verification from the caller and recording telephone instructions. If reasonable
procedures are employed, neither the Agent nor the Fund is responsible for
following telephone instructions the Agent reasonably believes to be genuine.
The Agent and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if such loss results from a failure to employ reasonable
procedures. Proceeds of telephone redemptions are paid to the bank account the
shareholder designates when establishing this privilege. Telephone redemptions
of $5,000 or more are wired unless the designated bank cannot receive Federal
Reserve wires. Telephone redemptions under $5,000 are mailed unless a wire is
requested. There is a $3.50 charge for wires. During periods of significant
economic or market changes, telephone instructions may be difficult to place. If
an investor is unable to contact the Agent by telephone, instructions may be
sent to the Agent at the address set forth on page 2. The Fund may change or
discontinue telephone redemption privileges without notice.
REINVESTMENT PRIVILEGE. Proceeds from a redemption can be reinvested in Fund
shares within 30 days without paying a sales charge. Such reinvestment is made
at the first net asset value determined after the Shareholder Service Agent
receives the order. This privilege can be exercised only once for each Fund
investment. Information sufficient to permit verification must be furnished to
the Shareholder Service Agent when the purchase is placed. Such redemption and
reinvestment is a taxable transaction but losses on the redemption are not
deductible for federal income tax purposes.
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<PAGE> 13
DIVIDENDS, DISTRIBUTIONS AND TAXES
Shareholders may receive dividends and/or capital gains distributions in
addition to any increase or decrease in the value of Fund shares. Dividends and
distributions are automatically reinvested in additional Fund shares at the net
asset value determined at the close of business on the day after the record
date, unless the Shareholder Service Agent receives a written request for cash
payment before the record date. The account information form may be used for
this purpose.
DIVIDENDS. The Fund's investment income consists principally of dividends and
interest earned on its portfolio securities. All of this income, after payment
of expenses, is distributed semi-annually as dividends to shareholders.
CAPITAL GAINS. When the Fund sells portfolio securities, it realizes capital
gains and losses, depending upon whether the selling price is higher or lower
than the purchase price. Net realized capital gains from sales of securities
equal profits minus losses, including any losses carried forward from prior
years. The Fund distributes any net realized capital gains to shareholders
annually.
TAXES. Because the Fund plans to distribute all of its net investment income and
net realized capital gains to shareholders, it does not expect to pay any
federal income tax. Dividends and distributions paid to shareholders are subject
to federal income tax, and any state and local income tax. Shareholders are
notified annually of the federal tax status of these distributions. Dividends
from net investment income and distributions from short-term capital gains are
taxable to shareholders as ordinary income. Distributions from long-term capital
gains are taxable to shareholders as such. All distributions are taxable whether
paid in cash or reinvested. To avoid a 31% federal withholding tax on dividends,
distributions and redemptions, shareholders must certify their taxpayer
identification number to the Shareholder Service Agent, as agent for the Fund.
The account information form may be used for this purpose.
INVESTMENT PRACTICES, RISKS AND RESTRICTIONS
SECURITIES OF FOREIGN ISSUERS. The Fund may invest up to 25% of its net assets
in securities of foreign issuers. Investments in securities of foreign issuers
may be affected favorably or unfavorably by changes in currency rates and
exchange control regulations. Compared to U.S. companies, there may be less
publicly available information about foreign companies which generally are
subject to less stringent accounting, auditing and financial reporting standards
and requirements. Securities of some foreign companies may be less liquid or
more volatile than those of U.S. companies. Foreign brokerage commissions and
custodial fees are generally higher than in the United States. Settlement of
transactions in some foreign markets may be delayed or may be less frequent than
in the U.S., which could affect the liquidity of the Fund's portfolio.
Investments in foreign securities may involve additional risks, including local
political or economic developments, expropriation or nationalization of assets
and imposition of withholding taxes on dividend or interest payments.
The Fund may purchase foreign securities in the form of American Depositary
Receipts ("ADRs") or other securities representing underlying shares of foreign
companies. ADRs are receipts typically issued by an American bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. ADRs are publicly traded on exchanges or over-the-counter in the
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<PAGE> 14
United States and are issued through "sponsored" or "unsponsored" arrangements.
In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay
some or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid by the ADR holders. In addition, less information is
available in the United States about an unsponsored ADR than about a sponsored
ADR. The Fund may invest in ADRs through both sponsored and unsponsored
arrangements.
FOREIGN CURRENCY TRANSACTIONS. The value of any of the Fund's portfolio
securities that are traded in foreign markets may be affected by changes in
currency exchange rates and exchange control regulations. In addition, the Fund,
in purchasing or selling securities in foreign markets, will incur costs in
connection with conversions between various currencies. The Fund's foreign
currency exchange transactions generally are conducted on a spot basis (that is,
cash basis) at the spot rate for purchasing or selling currency prevailing in
the foreign currency exchange market. The Fund purchases and sells foreign
currency on a spot basis in connection with the settlement of transactions in
securities traded in such foreign currency. The cost of currency exchange
transactions is generally the difference between the bid and offer spot rate of
the currency being purchased or sold. The Fund does not purchase and sell
foreign currencies as an investment.
SHORT SALES AGAINST THE BOX. The Fund may make short sales of securities or
maintain a short position if the Fund contemporaneously owns or has the right to
obtain at no added cost securities identical to those sold short (short sales
"against the box") or if the securities sold are "when issued" or "when
distributed" securities which the Fund expects to receive in a recapitalization,
reorganization, or other exchange for securities the Fund contemporaneously owns
or has the right to obtain at no added cost. The principal purpose of making
short sales is to enable the Fund to obtain the current market price of a
security which the Fund desires to sell but which cannot be currently delivered
for settlement. The Fund may not make short sales or maintain a short position
if to do so would cause more than 25% of its total net assets (exclusive of
proceeds from short sales) to be allocated to a segregated account in connection
with short sales.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements with
domestic banks or dealers to earn interest on temporarily available cash. A
repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Fund) acquires a debt security and the seller agrees to repurchase at a
future time and set price, thereby determining the yield during the holding
period. Repurchase agreements are collateralized by the underlying debt
securities and may be considered loans under the Investment Company Act of 1940
("Investment Company Act"). In the event of bankruptcy or other default by the
seller, the Fund may experience delays and expenses liquidating the underlying
security, loss from decline in value of such security, and lack of access to
income on such security. The Fund will not invest more than 10% of its total net
assets in repurchase agreements which mature in more than seven days and/or
other securities which are not readily marketable.
BROKERAGE PRACTICES. The Adviser is responsible for placing orders for the
purchase and sale of portfolio securities and negotiating brokerage commissions
on such transactions. Brokerage firms are selected for their professional
capability and the overall value and quality of their execution services. The
Adviser is authorized to pay higher commissions to brokerage firms providing
investment and research information if the Adviser deems such commissions
reasonable in relation to the overall services provided. The Adviser may also
use information received to manage the assets of other advisory accounts. The
Fund does not pay any mark-up over the market price of securities acquired in
principal transactions with dealers.
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<PAGE> 15
PORTFOLIO TURNOVER. The Fund purchases securities primarily for investment
rather than short-term trading. However, changes are made in the portfolio
whenever it appears advisable. The Fund's annual portfolio turnover rate is
shown in the table of "Financial Highlights." In some years this rate exceeds
100%, which is higher than that of many other investment companies. A 100%
turnover rate occurs, for example, if all the Fund's portfolio securities are
replaced during one year. Greater portfolio activity increases the Fund's
transaction costs, including brokerage commissions.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like its investment objective, cannot be changed without approval by a
majority (as defined in the Investment Company Act) vote of the Fund's
shareholders. These restrictions provide, in part, that the Fund shall not:
1. Invest more than 5% of its total assets, based on market value, in the
securities of any one issuer (except the U.S. Government); or acquire more
than 10% of any class of securities of any one issuer.
2. Invest more than 25% of the value of its total assets in any one industry.
Percentage limitations are calculated and applied at the time of investment.
Additional information concerning the Fund's investment practices and
restrictions is contained in the Statement of Additional Information.
ADDITIONAL INFORMATION
COMMON STOCK. Each Fund share outstanding participates equally in dividend and
liquidation rights. Fund shares are transferable, fully paid and non-assessable,
and do not have any preemptive or conversion rights. The Fund has authorized 100
million shares of $0.25 par value Common Stock.
VOTING RIGHTS. The By-Laws of the Fund provide that shareholder meetings are
required to be held to elect directors only when required by the Investment
Company Act. Such event is likely to occur infrequently. In addition, a special
meeting of the shareholders will be called, if requested by the holders of ten
percent of the Fund's outstanding shares, for the purposes, and to act upon the
matters, specified in the request (which may include election or removal of
directors). When matters are submitted for a shareholder vote, each shareholder
is entitled to one vote for each share owned.
SHAREHOLDER INQUIRIES. Shareholders who have questions concerning (1) the Fund
may contact the Distributor; (2) their account may contact the Shareholder
Service Agent; and (3) their retirement plan may contact the Shareholder Service
Agent. The applicable addresses and telephone numbers appear on page 2 of this
Prospectus.
SHAREHOLDER SERVICE AGENT. Boston Financial Data Services, Inc., P. O. Box 8500,
Boston, Massachusetts 02266-8500, serves as shareholder service and dividend
disbursing agent for the Fund. State Street Bank and Trust Company serves as
transfer agent for the Fund.
CUSTODIAN. All cash and securities of the Fund are held by the Fund's custodian,
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110.
LEGAL COUNSEL. O'Melveny & Myers LLP, 400 South Hope Street, Los Angeles,
California 90071, provides legal services to the Fund.
INDEPENDENT AUDITORS. Ernst & Young LLP, 515 South Flower Street, Los Angeles,
California 90071, performs annual audits of the Fund's financial statements.
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<PAGE> 16
As filed pursuant to Rule 497
File No. 2-14660
STATEMENT OF ADDITIONAL INFORMATION
January 31, 1997
FPA PARAMOUNT FUND, INC.
This Statement of Additional Information ("Statement") supplements the current
Prospectus of FPA Paramount Fund, Inc. ("Fund") dated January 31, 1997. This
Statement does not present a complete picture of the various topics discussed
and should be read in conjunction with the Fund's Prospectus. Although this
Statement is not itself a Prospectus, it is, in its entirety, incorporated by
reference into the Prospectus. The Fund's Prospectus may be obtained by
contacting your securities dealer or the Fund's principal underwriter, FPA Fund
Distributors, Inc. ("Distributor"), at 11400 West Olympic Boulevard, Suite
1200, Los Angeles, California 90064; telephone (310) 473-0225 or (800)
982-4372, except from Alaska and Hawaii.
TABLE OF CONTENTS
Page
General Information . . . . . . . . . . . . . . . . . . . . . . . . 2
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . 2
Reports to Shareholders . . . . . . . . . . . . . . . . . . 2
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . 2
Securities of Foreign Issuers . . . . . . . . . . . . . . . 2
Short Sales Against the Box . . . . . . . . . . . . . . . 2
Repurchase Agreements . . . . . . . . . . . . . . . . . . . 3
Leverage . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . 4
Additional Restrictions . . . . . . . . . . . . . . . . . . 5
Directors and Officers of the Fund . . . . . . . . . . . . . . . . 5
Five Percent Shareholders . . . . . . . . . . . . . . . . . 7
Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . 8
Prior Performance Information . . . . . . . . . . . . . . . . . . . 9
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . 10
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . 11
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Purchase and Redemption of Shares . . . . . . . . . . . . . . . . . 12
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . 12
Sales Charges . . . . . . . . . . . . . . . . . . . . . . . 12
Sales at Net Asset Value . . . . . . . . . . . . . . . . . 12
Letter of Intent . . . . . . . . . . . . . . . . . . . . . 12
FPA Exchange Privilege . . . . . . . . . . . . . . . . . . 13
Redemption of Shares . . . . . . . . . . . . . . . . . . . 13
Telephone Redemption . . . . . . . . . . . . . . . . . . . 14
Tax Sheltered Retirement Plans . . . . . . . . . . . . . . . . . . 14
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . 15
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 16
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<PAGE> 17
GENERAL INFORMATION
Voting Rights. Fund shares do not have cumulative voting rights, which means
holders of more than 50% of Fund shares voting for the election of directors
can elect 100% of the directors if they so choose. In such event, the holders
of the remaining Fund shares will not be able to elect any person or persons to
the Fund's Board of Directors.
Reports to Shareholders. Shareholders receive semi-annual and annual reports
which show the portfolio of investments, major portfolio changes and other
information. Financial statements accompanied by an opinion of independent
auditors are furnished to shareholders after the Fund's fiscal year-end.
Unaudited financial statements prepared by the Fund are provided after the
first six months of the fiscal year.
INVESTMENT POLICIES
The following supplements information set forth under the captions "Investment
Objective and Policies" and "Investment Practices, Risks and Restrictions" in
the Prospectus. Readers must also refer to the Prospectus.
Securities of Foreign Issuers. The Fund may invest up to 25% of its net assets
in securities of foreign governments and companies. Securities of foreign
issuers may be subject to foreign government taxes which could reduce the
dividend or interest yield on such securities. Foreign investments involve
certain risks, such as political or economic instability of the issuer or of
the country of issue, the difficulty of predicting international trade patterns
and the possibility of imposition of exchange controls. Such securities may
also be subject to greater fluctuations in price than those of domestic
corporations or the United States Government. In addition, there may be less
publicly available information about a foreign company than about a domestic
company. Foreign companies generally are not subject to the uniform
accounting, auditing and financial reporting standards applicable to domestic
companies. There is generally less government regulation of stock exchanges,
brokers and listed companies abroad than in the United States. With respect to
certain foreign countries, there is a possibility of expropriation,
confiscatory taxation, or diplomatic developments affecting foreign
investments. Finally, in the event of default on any foreign debt obligation,
it may be more difficult for the Fund to obtain or enforce a judgment against
the issuer.
Short Sales Against the Box. In an effort to increase investment flexibility,
the Fund is authorized to make certain short sales. In a short sale, the Fund
does not immediately deliver the securities sold and does not receive the
proceeds from the sale. The Fund is said to have a short position in the
securities sold until it delivers such securities, at which time it receives
the proceeds of the sale. The Fund must pay the broker the amount of any
dividend paid on the securities while the short position is maintained. To
secure its obligation to deliver the securities sold short, the Fund deposits
in escrow in a segregated account with its custodian an equal amount of the
securities sold short or securities convertible into or exchangeable for such
securities.
Common stocks issuable upon conversion of a convertible security sometimes can
be sold at a better price than the convertible security owned by the Fund. In
such circumstances the Fund could sell the common stock short "against the box"
while tendering the convertible security to the issuer for conversion. Upon
receipt of the certificates for the underlying common stock, delivery would be
made to close the short sale.
Similarly, when the Fund expects to receive new securities in a reorganization
in exchange for securities owned by the Fund, and the new securities are traded
on a "when issued" basis, the Fund could sell in the "when issued" market and
deliver the new securities when received following the consummation of the
reorganization. If the reorganization is not consummated, all transactions in
the "when issued" market are cancelled in which event the Fund would realize no
gain or loss on the short sale, except for brokerage commissions.
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<PAGE> 18
The limited authority to utilize short sales as described above and in the
Prospectus would not subject the Fund to the risk of loss generally associated
with short sales. A short sale "against the box" does eliminate the potential
for gain or loss from subsequent changes in the market price of the security.
It constitutes a form of hedging under which the Fund obtains a current market
price considered attractive by the Adviser, rather than remain subject to
future fluctuations in the price of the security sold short. Such authority
would be utilized only in furtherance of the Fund's primary investment
objective to seek a high total investment return, including capital
appreciation and income.
For federal income tax purposes, a short sale is not considered a completed
transaction until the Fund discharges its obligation by delivering the
securities sold. Thus if the Fund sells securities short "against the box" in
December and delivers the securities in January, any capital gain or loss on
the transaction would be realized in January. This principle possibly could be
utilized by the Fund to postpone recognition of capital gain or loss. Special
tax rules prevent conversion of short-term capital gains into long-term capital
gains and, in effect, long-term capital losses into short-term capital losses
by selling short "against the box."
Repurchase Agreements. The Fund pays for repurchase agreements only upon
physical delivery or evidence of book entry transfer of the underlying debt
security to a segregated account of State Street Bank and Trust Company, the
Fund's custodian, or its agent. The Fund only enters into repurchase
agreements involving securities in which the Fund can otherwise invest. The
underlying security (normally a security of the United States Government, its
agencies or instrumentalities) may have a maturity date exceeding one year.
Repurchase agreements usually mature not more than seven days after purchase by
the Fund. It is the Fund's policy that the market value of the security
collateralizing the repurchase agreement at all times equal or exceed the
amount of the repurchase agreement. The Fund does not bear the risk of a
decline in value of the underlying security unless the seller defaults under
its repurchase obligation. In the event of bankruptcy or other default of a
seller, the Fund might experience both loss and delay in liquidating the
underlying security, including: (a) possible decline in the value of such
security while the Fund seeks to enforce its rights thereto, (b) possible lack
of access to income on such security during this period and (c) expenses of
enforcing its rights.
Leverage. The Fund is authorized to borrow from banks in order to raise
additional monies for investment. Such borrowings may be made periodically
when it is expected that the potential return, including capital appreciation
and/or income, from the investment of these funds will exceed the cost. Any
return from investment of the borrowed funds that is in excess of the interest
cost will cause the net asset value of Fund shares to rise faster than would
otherwise be the case. Conversely, if the return on the investment of the
borrowed funds fails to cover the interest cost, the net asset value will
decrease faster than normal. This speculative factor is known as leverage.
This policy permitting bank borrowing may not be changed without the approval
of the holders of a majority (as defined under "Investment Restrictions") of
the Fund's outstanding voting securities. The Fund may collateralize any bank
borrowing by depositing portfolio securities with, or segregating such
securities for, the account of the lending bank. The Fund has undertaken to a
certain State that so long as its shares are registered there it will not
pledge, mortgage or hypothecate its portfolio securities or other assets to the
extent that the percentage of pledged assets plus the sales load exceeds 10% of
the offering price of Fund shares. See "Investment Restrictions."
The amount of money the Fund may borrow is restricted by the Investment Company
Act of 1940 ("Investment Company Act") so that, immediately after such
transaction, the Fund has an asset coverage of at least 300% of the amount
borrowed. Asset coverage means total assets, including borrowings, less
liabilities, excluding borrowings. If the Fund's asset coverage falls below
such requirement due to market fluctuations, redemptions or other reasons, the
Fund must reduce its bank debt as necessary within three business days. To do
this, the Fund may have to sell a portion of its investments at a
disadvantageous time. The amount of any borrowing will also be limited by the
applicable Federal Reserve Board's margin limitations.
The Fund has not borrowed for more than eighteen years and has no present
intention to do so.
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<PAGE> 19
INVESTMENT RESTRICTIONS
The Fund has adopted the investment restrictions set forth below, which apply
at the time securities are purchased or other relevant action is taken. These
restrictions and the Fund's investment objective cannot be changed without
approval of the holders of a majority of outstanding Fund shares. Such
majority is defined in the Investment Company Act as the lesser of (a) 67% or
more of the voting securities present in person or represented by proxy at a
meeting, if the holders of more than 50% of the outstanding voting securities
are present or represented by proxy; or (b) more than 50% of the outstanding
voting securities. Percentage limitations applicable to investments are
calculated and applied at the time of investment. In addition to those
described in the Prospectus, these restrictions provide that the Fund shall
not:
1. Purchase securities of other investment companies if immediately after
such purchase the Fund will own (a) more than 3% of the total
outstanding voting stock of any such companies, (b) securities issued
by any of such companies having an aggregate value in excess of 5% of
the value of the total assets of the Fund or (c) securities issued by
investment companies having an aggregate value in excess of 10% of the
value of the total assets of the Fund.
2. Purchase, lease, acquire, hold or sell real estate or any illiquid
interest in real estate other than (a) for office space, (b)
securities issued by registered real estate investment trusts or (c)
as provided in paragraph 4 below.
3. Engage in short sales, margin purchases, puts, calls, straddles or
spreads, except that the Fund may make certain short sales of
securities or maintain a short position if the Fund contemporaneously
owns or has the right to obtain at no added cost securities identical
to those sold short (short sales "against the box") or if the
securities sold are "when issued" or "when distributed" securities
which the Fund expects to receive in a recapitalization,
reorganization, or other exchange for securities the Fund
contemporaneously owns or has the right to obtain at no added cost.
4. Make loans to any person or firm, except by the acquisition of
outstanding notes or other evidences of indebtedness secured by first
deeds of trust or mortgages on real property or interest therein, in
an aggregate amount not exceeding 10% of the value of its total
assets. However, the making of time or demand deposits with banks and
the purchase of publicly traded bonds, debentures or other securities
of any other issuer of a type customarily purchased by institutional
investors or any government or governmental issue at original issue or
otherwise, shall not be deemed to be a loan. Investment in repurchase
agreements shall not be considered the making of a loan for purposes
of this investment restriction; although the Fund will not invest in
repurchase agreements maturing in more than seven days if any such
investments, together with any other illiquid securities held by the
Fund, would exceed 10% of the Fund's total net assets.
5. Participate on a joint or a joint and several basis in any trading
account in securities.
6. Invest in companies for the purpose of exercising control or
management. However, once investments have been acquired, the Fund
may exercise its vote as a shareholder in its best interests even
though such vote may affect management or control of a company.
7. Underwrite the sale of securities of others, except when the Fund
might be deemed to be a statutory underwriter because of its disposing
of restricted securities. The Fund will not purchase restricted
securities.
8. Purchase or sell commodities or commodity contracts.
9. Purchase from, or sell to, any officers, directors or employees of the
Fund or its adviser or underwriter, or any of their officers or
directors, any securities other than the shares of the Fund's
4
<PAGE> 20
capital stock. Such persons or firms, however, may act as brokers for the Fund
for customary commissions.
10. Issue any senior securities except that the Fund may borrow from banks
to the extent described above under "Investment Policies - Leverage."
Additional Restrictions. The Fund has also undertaken to one or more States to
abide by additional restrictions so long as its securities are registered for
sale in such States. These limitations may change periodically as permitted by
such States. The most restrictive limitations currently in effect are that the
Fund shall not:
1. Invest more than 5% of its net assets in warrants valued at the lower
of cost or market, nor more than 2% of its net assets in warrants
(valued on such basis) which are not listed on The New York Stock
Exchange ("NYSE") or the American Stock Exchange. Warrants acquired
in units or attached to other securities are not subject to the
foregoing limitations.
2. Invest in interests in oil, gas or other mineral leases, except that
it may acquire securities of public companies which are engaged in
such activities, or invest in arbitrage transactions.
3. Invest in the securities of other investment companies except through
purchase in the open market in a transaction involving no commission
or profit to a sponsor or dealer (other than the customary broker's
commission) or except as part of a merger, consolidation or other
acquisition.
4. Purchase or retain securities of any issuer if those officers and
directors of the Fund or its investment adviser who own individually
more than 0.5% of the securities of such issuer together own more than
5% of the securities of such issuer.
5. Invest more than 5% of the value of its total assets in securities of
companies which (including predecessor companies or operations) have
been in business less than three years.
DIRECTORS AND OFFICERS OF THE FUND
Certain directors and all officers of the Fund are also directors and/or
officers of one or more of the four other investment companies advised by the
Adviser, which is an indirect wholly owned subsidiary of United Asset
Management Corporation ("UAM"). These investment companies are FPA Capital
Fund, Inc. ("Capital"), FPA New Income, Inc. ("New Income"), FPA Perennial
Fund, Inc. ("Perennial") and Source Capital, Inc. ("Source") (collectively,
the "FPA Fund Complex").
The directors and officers of the Fund and their principal occupations during
the past five years are listed below. Their address is 11400 West Olympic
Boulevard, Suite 1200, Los Angeles, California 90064.
Julio J. de Puzo, Jr., Director and Executive Vice President (1)
Director (since October 1995), Principal (since March 1996) and Chief Executive
Officer (since March 1996) of the Adviser; Director and President since March
1996 of Source; Director and Executive Vice President since April 1996 of
Perennial; and Executive Vice President since August 1996 of New Income and of
Capital. President (since January 1997), Chief Executive Officer (since January
1997), Chief Financial Officer and Director for more than the past five years of
the Distributor. Executive Vice President from October 1995 to March 1996,
Chief Administrative Officer from October 1995 to March 1996, Chief Financial
Officer from June 1991 to March 1996, Treasurer from June 1991 to March 1996,
Senior Vice President from February 1993 to October 1995, and First Vice
President from April 1985 to February 1993, of the Adviser. Treasurer from June
1981 to August 1996 of the Fund, from May 1982 to August 1996 of Source;
5
<PAGE> 21
from September 1983 to August 1996 of Perennial; and from July 1984 to August
1996 of Capital and of New Income. Executive Vice President (or Senior Vice
President or First Vice President) from October 1991 to January 1997 of the
Distributor.
John P. Endicott, Director
Independent management consultant since January 1983 and from April 1979 to
March 1981; Associate, Case and Company, Inc. (management consultants) from
April 1981 to January 1983; President and Director, Sierracin Corporation
(manufacturer of high technology products) from 1969 to March 1979. Director
of Perennial for more than the past five years.
Leonard Mautner, Director
President, Leonard Mautner Associates (management consultants) for more than
the past five years; General Partner, Goodman & Mautner Ltd. (venture capital
partnership) and President, Goodman & Mautner, Inc. (investment manager) from
1969 to 1979. Director of Perennial for more than the past five years and
Director of MRV Communications Inc. since April 1992.
John H. Rubel, Director
President, John H. Rubel and Associates, Inc. (management consultants) for more
than the past five years; Senior Vice President, Litton Industries, Inc.
(diversified manufacturing) from 1963 to 1973; Assistant Secretary of Defense
(Research and Engineering) from 1961 to 1963; and member of the Task Force
Commission for the War on Poverty during 1964.
John P. Shelton, Director
Professor Emeritus at UCLA Graduate School of Management for more than the past
five years. Director of Genisco Systems, Inc. (manufacturer of hardened
computers and electronics).
William M. Sams, President & Chief Investment Officer
Director and Principal since March 1996 of the Adviser. Executive Vice
President from November 1981 to March 1996 of the Adviser; and from September
1983 to August 1995 of Perennial.
Eric S. Ende, Vice President
Senior Vice President (or Vice President) of the Adviser, and of Source for
more than the past five years, Vice President of Capital and of New Income for
more than the past five years, and President and Chief Investment Officer of
Perennial since September 1995. Executive Vice President of Perennial from
August 1995 to September 1995, and Vice President of Perennial from May 1985 to
August 1995.
6
<PAGE> 22
Janet M. Pitman, Vice President
Vice President of the Adviser for more than the past five years, and since
April 1996 of Source and of Perennial.
J. Richard Atwood, Treasurer
Senior Vice President, Chief Financial Officer and Treasurer of the Adviser, and
Senior Vice President and Treasurer of the Distributor, since January 1997.
Treasurer of Source, of Perennial, of Capital, and of New Income since January
1997. Vice President and Chief Financial Officer of Transamerica Investment
Services, Inc. from January 1995 to January 1997. Vice President (or Assistant
Vice President) and Controller of the Adviser from 1988 to January 1995, and
Assistant Treasurer of Fund Distributors from May 1991 to January 1995.
Assistant Treasurer of the Fund, Capital, New Income, Perennial and Source from
1988 to 1995.
Sherry Sasaki, Secretary
Assistant Vice President and Secretary of the Adviser, and Secretary
of Source, of Perennial, of Capital, of New Income, and of the Distributor
for more than the past five years.
Christopher H. Thomas, Assistant Treasurer
Vice President and Controller of the Adviser and of the Distributor since March
1995, and Assistant Treasurer of Capital, of New Income, of Source and of
Perennial since April 1995. Staff Accountant with the Office of Inspection of
the Securities and Exchange Commission from 1994 to March 1995. School
Administrator of the Calvary Road Christian Academy from 1988 to 1993.
____________________________________
(1) Director who is an interested person, as defined in the Investment Company
Act, by virtue of his affiliation with the adviser.
The Directors and officers of the Fund as a group own less than 1% of the
outstanding Fund shares. During the last fiscal year, the Directors then in
office who were not affiliated with the Adviser received as a group $30,000 in
Directors' fees. Such Directors are also reimbursed for certain out-of-pocket
expenses by the Fund. The following information relates to Director
compensation. The Fund does not pay any salaries to its officers, all of whom
are compensated by the Adviser.
<TABLE>
<CAPTION>
TOTAL COMPENSATION*
AGGREGATE COMPENSATION* FROM THE FPA FUND COMPLEX
NAME OF DIRECTORS FROM THE FUND INCLUDING THE FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Julio J. de Puzo, Jr. $ -0- $ -0-
John P. Endicott 7,500 12,500**
Leonard Mautner 7,500 12,500**
John H. Rubel 7,500 7,500
John P. Shelton 7,500 7,500
</TABLE>
* No pension or retirement benefits are provided to Directors by the
Fund or the FPA Fund Complex.
** Includes compensation from the Fund and one other open-end investment
company.
Currently, the personnel of the Adviser consists of six persons engaged full
time in portfolio management or investment research in addition to 23 persons
engaged full time in trading, administrative, financial or clerical activities.
The Adviser is registered as an investment adviser with the Securities and
Exchange Commission, which does not imply supervision by said Commission of the
Adviser's activities. The Adviser's parent company, UAM, is a publicly held
corporation. No person is known by UAM to own or hold with power to vote 25%
or more of its outstanding shares of common stock.
Five Percent Shareholders. As of December 31, 1996, no person was known by the
Fund to own of record or beneficially 5% or more of the outstanding Fund shares,
except Merrill Lynch, Pierce, Fenner & Smith, Inc., for the sole benefit of its
customers, Attention: Fund Administration, 4800 Deer Lake Drive, Jacksonville,
Florida 32246-6484, which held 3,159,680 shares (8.2%). Such broker-dealer
advises that the shares are held for the benefit of its customers.
7
<PAGE> 23
INVESTMENT ADVISORY AGREEMENT
The Fund has entered into an Investment Advisory Agreement dated June 27, 1991
("Advisory Agreement"), with the Adviser pursuant to which the Adviser provides
continuing supervision of the Fund's investment portfolio. The Adviser is
authorized, subject to the control of the Fund's Board of Directors, to
determine which securities are to be bought or sold and in what amounts. In
addition to providing investment advisory and management services, the Adviser
furnishes office space, facilities and equipment, and maintains the Fund's
books and records. It also compensates all officers and other personnel of the
Fund, all of whom are employed by the Adviser, subject to reimbursement from
the Fund for personnel involved in providing financial services as indicated
below.
Other than the expenses the Adviser specifically assumes under the Advisory
Agreement, the Fund bears all costs of its operation. These costs include
brokerage commissions and other costs of portfolio transactions; fees and
expenses of directors not affiliated with the Adviser; taxes; transfer agent,
dividend disbursement, reinvestment and custodian fees; legal and audit fees;
printing and mailing of reports to shareholders and proxy materials;
shareholders' and directors' meetings; registration of Fund shares under
federal and state laws; printing and engraving stock certificates; trade
association membership fees; premiums for the fidelity bond and errors and
omissions insurance maintained by the Fund; litigation; interest on
indebtedness; and reimbursement of the Adviser's expenses in providing
financial services to the Fund as described below.
For services rendered, the Adviser is paid a monthly fee computed at the annual
rate of 0.75% of the first $50 million, and 0.65% of the excess over $50
million, of the Fund's average net assets. The advisory fee is higher than the
fee paid by most other mutual funds. The average net assets are determined by
taking the average of all the daily determinations of net assets made, in the
manner provided in the Fund's Articles of Incorporation, during a calendar
month.
In addition to the advisory fee, the Fund reimburses the Adviser monthly for
the costs incurred in providing financial services to the Fund. Such financial
services include (a) maintaining the accounts, books and other documents which
constitute the record forming the basis for the Fund's financial statements,
(b) preparing such financial statements and other Fund documents and reports
of a financial nature required by federal and state laws, (c) calculating daily
net assets and (d) participating in the production of the Fund's registration
statements, prospectuses, proxy materials and reports to shareholders
(including compensation of the Treasurer or other principal financial officer
of the Fund, compensation of personnel working under such person's direction
and expenses of office space, facilities and equipment such persons use to
perform their financial services duties). However, for any fiscal year, the
cost of such financial services paid by the Fund may not exceed 0.10% of the
average daily net assets of the Fund.
The advisory fee and cost of financial services is reduced in the amount by
which certain defined operating expenses of the Fund (including the advisory
fee and cost of financial services) for any fiscal year exceed 1.50% of the
first $30 million of average net assets, plus 1% of the remaining average net
assets. Such values are calculated at the close of business on the last
business day of each calendar month. Any required reduction or refund is
computed and paid monthly. Operating expenses (as defined in the Advisory
Agreement) exclude (a) interest, (b) taxes, (c) brokerage commissions and (d)
any extraordinary expenses, such as litigation, merger, reorganization or
recapitalization, to the extent such extraordinary expenses are permitted to be
excluded by the rules or policies of the states in which Fund shares are
registered for sale. All expenditures, including costs connected with the
purchase, retention or sale of portfolio securities, which are capitalized in
accordance with generally accepted accounting principles applicable to
investment companies, are accounted for as capital items and not as expenses.
This expense limitation provision does not require any payment by the Adviser
beyond the return of the advisory fee and cost of financial services paid to it
by the Fund for a fiscal year.
8
<PAGE> 24
The Advisory Agreement provides that the Adviser does not have any liability to
the Fund or any of its shareholders for any error of judgment, any mistake of
law or any loss the Fund suffers in connection with matters related to the
Advisory Agreement, except for liability resulting from willful misfeasance,
bad faith or negligence on the part of the Adviser or the reckless disregard of
its duties under the Advisory Agreement.
The Advisory Agreement is renewable annually if such renewal is specifically
approved each year (a) by the Fund's Board of Directors or by the vote of a
majority (as defined in the Investment Company Act) of the Fund's outstanding
voting securities and (b) by the vote of a majority of the Fund's directors who
are not parties to the Advisory Agreement or interested persons (as defined in
the Investment Company Act) of any such party, by votes cast in person at a
meeting called for the purpose of voting on such approval. The continuation of
the Advisory Agreement to November 30, 1997, has been approved by the Board of
Directors and a majority of the Fund's directors who are not parties to the
Advisory Agreement or interested persons of any such party (as defined in the
Investment Company Act). The Advisory Agreement may be terminated without
penalty by the Fund's Board of Directors or the vote of a majority (as defined
in the Investment Company Act) of the Fund's outstanding voting securities on
60 days' written notice to the other party. The Advisory Agreement
automatically terminates in the event of its assignment (as defined in the
Investment Company Act).
For the fiscal years ended September 30, 1994, 1995 and 1996, the Adviser
received gross advisory fees of $2,305,588, $3,481,057, and $4,090,006,
respectively, plus $347,013, $527,855, and $538,992, respectively, for costs
incurred in providing financial services to the Fund.
PRIOR PERFORMANCE INFORMATION
For the purposes of quoting and comparing the performance of the Fund to that
of other mutual funds and to other relevant market indices in advertisements,
performance may be stated in terms of total return.
Under regulations adopted by the Securities and Exchange Commission ("SEC"),
funds that intend to advertise performance must include total return quotations
calculated according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment, made at the beginning of the 1, 5 or
10 year period, at the end of such period (or
fractional portion thereof).
Under the foregoing formula, the time periods used in advertising are based on
rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication, and cover 1, 5 and 10
year periods of a fund's existence or such shorter period dating from the
effectiveness of a fund's registration statement. In calculating the ending
redeemable value, the maximum sales load is deducted from the initial $1,000
payment and all dividends and distributions by a fund are assumed to have been
reinvested at net asset value as described in the Prospectus on the
reinvestment dates during the period. Total return, or "T" in the formula
above, is computed by finding the average annual compounded rates of return
over the 1, 5 and 10 year periods (or fractional portion thereof) that would
equate the initial amount invested to the ending redeemable value.
9
<PAGE> 25
The Fund may also from time to time include in such advertising a total return
figure that is not calculated according to the formula set forth above in order
to compare the performance of the Fund with other measures of investment
return. For example, in comparing the Fund's total return with a stock index
such as the Standard & Poor's 500 Stock Index, the Fund calculates its
aggregate total return for the specified periods of time by assuming the
investment of $10,000 in Fund shares and assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. The Fund does not, for these purposes, deduct from the initial value
invested any amount representing sales charges. The Fund, however, discloses
the maximum sales charge and also discloses that inclusion of sales charges
would reduce the performance quoted. Such alternative total return information
may be given no greater prominence in such advertising than the information
prescribed under SEC regulations.
The Fund's average annual total return (calculated in accordance with the SEC
regulations described above) for the one, five and ten-year periods ended
September 30, 1996 was 12.59%, 13.36%, and 15.30%, respectively. The
Fund's average annual total return (determined pursuant to the alternative
computation which does not include the maximum initial sales charge of 6.5% of
the offering price) for the same periods was 20.42%, 14.89%, and 16.08%,
respectively. These results are based on historical earnings and asset value
fluctuations and are not intended to indicate future performance.
The foregoing information should be considered in light of the Fund's
investment objectives and policies, as well as the risks incurred in the Fund's
investment practices. Future results will be affected by the future
composition of the Fund's portfolio, as well as by changes in the general price
level of equity securities, and general economic and other market conditions.
The past 1, 5 and 10 year periods have been ones of generally rising common
stock prices subject to short-term fluctuations.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser makes decisions to buy and sell securities for the Fund, selects
broker-dealers and negotiates commission rates or net prices. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed better prices and executions are available
elsewhere. Portfolio transactions are effected with broker-dealers selected
for their abilities to give prompt execution at prices favorable to the Fund.
In selecting broker-dealers and in negotiating commissions, the Adviser
considers each firm's reliability, the quality of its execution services on a
continuing basis and its financial condition. When more than one firm is
believed to meet these criteria, preference may be given to broker-dealers
providing research services to the Fund or the Adviser. Subject to seeking
best execution, the Adviser may also consider sales of Fund shares as a factor
in selecting broker-dealers to execute portfolio transactions for the Fund.
Any solicitation fees which the Adviser receives in connection with acceptance
of an exchange or tender offer of the Fund's portfolio securities are applied
to reduce the Advisory Fees.
The Advisory Agreement authorizes the Adviser to pay commissions on security
transactions to broker-dealers furnishing research services in an amount higher
than the lowest available rate. The Adviser must determine in good faith that
such amount is reasonable in relation to the brokerage and research services
provided (as required by Section 28(e) of the Securities Exchange Act of 1934)
viewed in terms of the particular transaction or the Adviser's overall
responsibilities with respect to accounts for which it exercises investment
discretion. The term brokerage and research services is defined to include (a)
providing advice as to the value of securities, the advisability of investing
in, purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; (b) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and performance of accounts; and (c) effecting securities
transactions and performing functions incidental thereto, such as clearance,
settlement and custody. The advisory fee is not reduced as a result of the
Adviser's receipt of such research.
10
<PAGE> 26
Research services furnished by broker-dealers effecting securities transactions
for the Fund may be used by the Adviser for all advisory accounts. However,
the Adviser may not use all such research services in managing the Fund's
portfolio. In the opinion of the Adviser, it is not possible to measure
separately the benefits from research services to each advisory account.
Because the volume and nature of the trading activities of the advisory
accounts are not uniform, the amount of commissions in excess of the lowest
available rate paid by each advisory account for brokerage and research
services will vary. However, the Adviser believes the total commissions the
Fund pays are not disproportionate to the benefits it receives on a continuing
basis.
The Adviser attempts to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
other advisory accounts. In some cases, this procedure could have an adverse
effect on the price or amount of securities available to the Fund. The main
factors considered in such allocations are the respective investment
objectives, the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held, and the opinion of the persons responsible for
recommending the investments.
Brokerage commissions paid by the Fund on portfolio transactions for the fiscal
years ended September 30, 1994, 1995 and 1996 totaled $1,060,632, $2,008,203,
and $2,681,278, respectively. During the last fiscal year, $2,546,477 of
commissions were paid on transactions having a total value of $865,167,805 to
brokers selected because of research services provided to the Adviser.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of purchases
or sales of portfolio securities for a fiscal year by the average monthly value
of portfolio securities during such fiscal year. Securities maturing in one
year or less at the time of acquisition are not included in this computation.
The turnover rate for prior periods is shown in the Prospectus under the
caption "Financial Highlights." This rate may vary greatly from year to year
as well as within a year.
DISTRIBUTOR
The Distributor acts as the principal underwriter of Fund shares pursuant to
the distribution agreement dated September 3, 1991 ("Distribution Agreement").
The Distributor receives commissions from the sale of Fund shares and has the
exclusive right to distribute Fund shares through dealers. From the
commissions received, the Distributor pays sales commissions to dealers; its
own overhead and general administrative expenses; the cost of printing and
distributing prospectuses used in connection with this offering; and the cost
of preparing, printing and distributing sales literature and advertising
relating to the Fund. The Fund pays expenses attributable to registering Fund
shares under federal and state laws (including registration and filing fees),
the cost of preparing the prospectus (including typesetting and printing copies
required for regulatory filings by the Fund) and related legal and audit
expenses.
The Distribution Agreement is renewable annually if such renewal is
specifically approved each year (a) by the Fund's Board of Directors or by a
vote of a majority (as defined in the Investment Company Act) of the Fund's
outstanding voting securities and (b) by a majority of the Fund's directors who
are not parties to the Distribution Agreement or interested persons (as defined
in the Investment Company Act) of any such party, by votes cast in person at a
meeting called for such purpose. The continuation of the Distribution
Agreement to September 3, 1997, has been approved by the Board of Directors and
a majority of the Fund's directors who are not parties to the Distribution
Agreement or interested persons of any such party (as defined in the Investment
Company Act). The Distribution Agreement terminates if assigned (as defined in
the Investment Company Act) and may be terminated, without penalty, by either
party on 60 days' written notice.
11
<PAGE> 27
The Distributor's obligation under the Distribution Agreement is an agency or
best efforts arrangement pursuant to which the Distributor is required to take
and pay for only those Fund shares sold to the public. The Distributor is not
obligated to sell any stated number of Fund shares.
During the fiscal years ended September 30, 1994, 1995 and 1996, total
underwriting commissions on the sale of Fund shares were $3,537,648,
$7,206,065, and $1,737,788, respectively. Of such totals, the amount
retained each year by the Distributor, after reallowance to other dealers, was
$184,673, $457,968, and $95,250, respectively.
PURCHASE AND REDEMPTION OF SHARES
Net Asset Value. The net asset value is computed as of the close of the NYSE
on each business day during which the NYSE is open. Net asset value, rounded
to the nearest cent per share, is the total market value of all of the Fund's
portfolio securities plus other assets (including any accrued reimbursement of
expenses), less all liabilities, divided by the total number of Fund shares
outstanding. The NYSE is closed not only on weekends but also on customary
holidays, which currently are New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Computation is made by (a) valuing securities listed or traded on a national
securities exchange or on the NASDAQ National Market System at the last sale
price or, if there has been no sale that day, at the last bid price, (b)
valuing unlisted securities for which quotations are readily available at the
last representative bid price as supplied by the National Association of
Securities Dealers Automated Quotations (NASDAQ) or by dealers and (c)
appraising all other portfolio securities and assets at fair value as
determined in good faith by the Fund's Board of Directors.
Sales Charges. The maximum sales charge is 6.5% but lower sales charges apply
for larger purchases. A portion of the sales charge is allocated to dealers
selling Fund shares in amounts ranging from 85% to 95%, depending on the size
of the investment. During special promotions, the Distributor may reallow up
to 100% of the sales charge to dealers. At such times dealers may be deemed to
be underwriters for purposes of the Securities Act of 1933. Discounts are
alike to all dealers.
Sales at Net Asset Value. Full-time employees of the Adviser may purchase Fund
shares at net asset value via payroll deduction, provided the minimum initial
investment is $250. Each subsequent investment must be at least $50.
Letter of Intent. To be eligible, the investor must sign at the time of
initial purchase, or within 30 days, a letter of intent ("LOI") covering
investments to be made within a period of 13 months ("Period") from such
initial purchase. The investor thereby becomes eligible for a reduced sales
charge based on the total amount of the specified intended investment ("LOI
Goal"), provided such amount is not less than $10,000. A minimum initial
purchase of $1,500 and minimum subsequent purchases of $100 each are required.
Fund shares may also be purchased to fulfill a letter of intent entered into
with respect to shares of the other FPA Funds. The account information form,
which should be used to establish an LOI, is available from the Distributor.
All transactions under an LOI must be indicated as such and must be placed by
the dealer (in the case of an initial purchase) or the shareholder (in the case
of any subsequent purchase) directly through Boston Financial Data Services,
Inc. ("Shareholder Service Agent"). Shareholders should review for accuracy
all confirmations of transactions, especially purchases made pursuant to an
LOI.
If the LOI Goal is completed before the end of the Period, any subsequent
purchases within the Period will receive the reduced sales charge applicable.
In addition, during the Period, the shareholder may increase his or her LOI
Goal and all subsequent purchases will be treated as a new LOI (including
escrow of additional Fund shares) except as to the Period, which does not
change.
12
<PAGE> 28
Signing an LOI does not bind the shareholder to complete his or her LOI Goal,
but the LOI Goal must be completed to obtain the reduced sales charge. The LOI
is binding on the Fund and the Distributor. However, the Distributor may
withdraw a shareholder's LOI privileges for future purchases upon receiving
information that the shareholder has resold or transferred his or her Fund
shares within the Period.
The LOI requires the Shareholder Service Agent, as escrow agent, to hold 5% of
the LOI Goal in escrow until completion of the LOI Goal within the Period. The
escrowed Fund shares are taken from the first purchase and, if necessary, from
each successive purchase. If the LOI Goal is completed within the Period, the
escrowed Fund shares will be promptly delivered to, or as directed by, the
shareholder.
If the LOI Goal is not completed within the Period, the shareholder must pay
the Distributor an amount equal to the sales charge applicable to a single
purchase in the total amount of the purchases made under the LOI minus the
sales charges actually paid. If the Distributor does not receive such unpaid
sales charge within 20 days after requesting payment in writing, the
Distributor instructs the Shareholder Service Agent to redeem escrowed Fund
shares sufficient to cover the unpaid sales charge. Under the LOI, the
shareholder irrevocably appoints the Shareholder Service Agent as his or her
attorney with full power of substitution in the premises to surrender for
redemption any or all escrowed Fund shares. If the redemption proceeds are
inadequate, the shareholder is liable to the Distributor for the difference.
The Shareholder Service Agent will deliver to, or as directed by, the
shareholder all Fund shares remaining after such redemption, together with any
excess cash proceeds.
Any income dividends and capital gains distributions on the escrowed Fund
shares are paid to, or as directed by, the shareholder.
FPA Exchange Privilege. The procedures for exchanging shares between FPA Funds
are set forth under "Purchase of Shares - FPA Exchange Privilege" in the Fund's
Prospectus. If the account registration information for the two FPA Fund
accounts involved in the exchange are different in any respect, the exchange
instructions must be in writing and must contain a signature guarantee as
described under "Redemption of Shares" in the Fund's Prospectus.
By use of the exchange privilege, the investor authorizes the Shareholder
Service Agent ("Agent") to act on telephonic, telegraphic or written exchange
instructions from any person representing himself to be the investor or the
agent of the investor and believed by the Agent to be genuine. The Agent's
records of such instructions are binding.
For purposes of determining the sales charge rate previously paid, all sales
charges paid on the exchanged security and on any security previously exchanged
for such security or for any of its predecessors shall be included. If the
exchanged security was acquired through reinvestment, that security charge may
be exchanged without a sales charge. If a shareholder exchanges less than all
of his securities, the security requiring no or the lowest incremental sales
charge is deemed exchanged first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced, are processed on the date of receipt
by the Shareholder Service Agent. "Processing" a request means that shares in
the Fund from which the shareholder is withdrawing an investment will be
redeemed at the net asset value per share next determined after receipt.
Shares of the new Fund into which the shareholder is investing will also
normally be purchased at the net asset value per share, plus any applicable
sales charge, next determined after receipt by the Shareholder Service Agent.
Exchange requests received on a business day after the time shares of the funds
involved in the request are priced, are processed on the next business day in
the manner described above.
Redemption of Shares. Redemptions are not made on days during which the NYSE
is closed, including those holidays listed under "Purchase and Redemption of
Shares - Net Asset Value." The right of redemption may be suspended and the
payment therefore may be postponed for more than seven days during
13
<PAGE> 29
any period when (a) the NYSE is closed for other than customary weekends or
holidays; (b) trading on the NYSE is restricted; (c) an emergency exists as a
result of which disposal by the Fund of securities it owns is not reasonably
practicable or it is not reasonably practical for the Fund to fairly determine
the value of its net assets; or (d) the Securities and Exchange Commission, by
order, so permits.
Telephone Redemption. Redemptions may be made by telephone once the
shareholder has properly completed and returned to the Shareholder Service
Agent the optional shareholder services form including the designation of a
bank account to which the redemption payment is to be sent ("Designated Bank").
The proceeds will not be mailed or wired to other than the Designated Bank.
Shareholders who wish to authorize the telephone redemption privilege or change
the Designated Bank should either enter the new information on an optional
shareholder services form, marking it for "change of information" purposes, or
send a letter identifying the Fund account and specifying the exact information
to be changed. The letter must be signed exactly as the shareholder's name(s)
appear on the account. All signatures require a guarantee as described under
"Redemption of Shares" in the Fund's Prospectus. The optional shareholder
services form is available from authorized securities dealers or the
Distributor.
Shareholders who want to use a savings and loan ("S&L") as their Designated
Bank are advised that if the S&L is not a participant in the Federal Reserve
System, redemption proceeds must be wired through a commercial bank which is a
correspondent of the S&L. As this may delay receipt by the shareholder's
account, it is suggested that shareholders who wish to use an S&L discuss wire
procedures with their S&L and submit any special wire transfer information with
the telephone redemption authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to such Designated Bank.
The shareholder may cancel the telephone redemption authorization upon written
notice. If the shareholder has authorized telephone redemptions, neither the
Fund nor the Shareholder Service Agent is responsible for any unauthorized
telephone redemptions. If the Fund shares to be redeemed by telephone
(technically a repurchase by agreement between the Fund and the shareholder)
were recently purchased by check, the Shareholder Service Agent can delay
transmitting the proceeds until the purchasing check has cleared.
TAX SHELTERED RETIREMENT PLANS
Through the Distributor, prototype retirement plans are available for purchase
of Fund shares. These include plans for self-employed individuals and plans
for individuals buying shares under an Individual Retirement Account. The
investor should be aware that a penalty tax applies, in general, to
distributions made before age 59-1/2, excess contributions and failure to
commence distribution of the account at age 70-1/2. Borrowing from or against
the account may also result in plan disqualification. Distributions from these
retirement plans generally are taxable as ordinary income when received.
State Street Bank and Trust Company ("Bank") presently acts as custodian for
these retirement plans and imposes fees for administering them. Purchases of
Fund shares for a retirement plan must be made by direct remittance to the
Bank.
When contributions for any tax-qualified plan are invested in Fund shares, all
dividends and capital gains distributions paid on those Fund shares are
retained in such plan and automatically reinvested in additional Fund shares at
net asset value. All earnings accumulate tax-free until distribution.
The investor should consult his or her own tax adviser concerning the tax
ramifications of establishment of and distributions from a retirement plan.
14
<PAGE> 30
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund qualified during the last fiscal year for the tax treatment applicable
to regulated investment companies under the Internal Revenue Code ("Code") and
intends to so qualify in the future. Such qualification requires distributing
at least 90% of its investment company taxable income to shareholders and
meeting asset diversification and other requirements of the Code. As long as
the Fund so qualifies, it does not pay federal income tax on its net investment
income or on any net realized capital gains provided such income and capital
gains are distributed to shareholders. If for any taxable year the Fund does
not so qualify, all of its taxable income, including any net realized capital
gains, will be taxed at regular corporate rates (without any deduction for
distributions to shareholders).
The Fund is subject to a 4% excise tax to the extent it does not make certain
distributions to its shareholders. Such distributions must total (1) at least
98% of ordinary income (investment company taxable income subject to certain
adjustments) for any calendar year and (2) 98% of capital gains net income for
the twelve months ended October 31 of such year. The Fund intends to
distribute sufficient amounts to avoid liability for this excise tax.
If shares of the Fund are sold or exchanged within 90 days of acquisition, and
shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.
Under federal tax law, any loss a shareholder realizes on redemption of Fund
shares held for less than six months is treated as a long-term capital loss to
the extent of any long-term capital gain distribution which was paid on such
Fund shares.
Prior to purchasing Fund shares, the impact of dividends or capital gains
distributions should be carefully considered. Any such payments made to a
shareholder shortly after purchasing Fund shares reduce the net asset value of
such Fund shares to that extent and unnecessarily increase sales charges. All
or a portion of such dividends or distributions, although in effect a return of
capital, is subject to taxes, possibly at ordinary income tax rates.
Dividends and distributions declared payable to shareholders of record after
September 30 of any year and paid before February 1 of the following year are
considered taxable income to shareholders on the record date even though paid
in the next year. To the extent determined each year, a portion of the
dividends paid to shareholders from the Fund's net investment income qualifies
for the 70% dividends received deduction for corporations.
Some shareholders may be subject to 31% withholding on reportable dividends,
capital gains distributions and redemption payments ("backup withholding").
Generally, shareholders subject to backup withholding are those for whom a
taxpayer identification number is not on file with the Fund or who, to the
Fund's knowledge, furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that he or she is not subject to backup withholding.
Under existing provisions of the Code, dividends paid to shareholders who are
nonresident aliens may be subject to a 30% federal withholding tax applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the federal withholding tax.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and treasury regulations presently in effect. For the complete
provisions, reference should be made to pertinent Code
15
<PAGE> 31
sections and treasury regulations. The Code and these treasury regulations are
subject to change by legislative or administrative action either prospectively
or retroactively.
Each investor should consult his or her own tax adviser as to federal tax laws
and the effect of state and local tax laws which may differ from federal tax
laws.
FINANCIAL STATEMENTS
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND OFFERING PRICE PER SHARE
- - SEPTEMBER 30, 1996
Net asset value and redemption price per share
(net assets divided by shares outstanding) . . . . . . . . $16.54
Offering price per share
(100/93.5 of per share net asset value) . . . . . . . $17.69
The offering price is reduced on purchases of $10,000 or more; see "Purchase
and Redemption of Shares - Sales Charge" herein and "Purchase of Shares - Table
of Sales Charges " in the Prospectus.
16
<PAGE> 32
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>
17
<PAGE> 33
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>
18
<PAGE> 34
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.
19
<PAGE> 35
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.
20
<PAGE> 36
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.
21
<PAGE> 37
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.
22
<PAGE> 38
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
23
<PAGE> 39
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.
24
<PAGE> 40
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, and 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 on page 4 of the Prospectus for each of the
ten 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. Our procedures included 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 on page 4 of the
Prospectus, for each of the ten years in the period then ended in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
November 1, 1996
25
