<PAGE>
FPA PARAMOUNT FUND, INC.
SEMI-ANNUAL REPORT
[LOGO]
DISTRIBUTOR
FPA FUND DISTRIBUTORS, INC.
1400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064 MARCH 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
Those of you who have been in Paramount for years know that I'm a straight
shooter who calls it the way I see it, and this letter will be no exception.
The last six months have been a difficult period for my style of stock picking,
which has been out of favor in a market that has reached heights undreamt of two
or three years ago. Below is an explanation of recent returns and reasons why I
remain confident in our ability to deliver competitive long-term returns.
During the six months ending March 31, 1998, the per share net asset value of
your Fund increased 0.4%, while the unmanaged S&P 500 increased 17.2% and the
unmanaged Dow Jones Industrial Average increased 11.7%. The above changes
include reinvestment of all dividends and distributions during the period.
During 1997, the Fund sold positions in some stocks to capture gains and then
reinvested these profits in a variety of under-valued securities. As a result
of these sales, the Fund paid $1.90 in capital gains, in addition to $0.14 from
net investment income earned (paid January 7, 1998 to shareholders of record
December 31, 1997).
The Fund's recent relative under-performance has certainly been disappointing
but is not unusual for a contrarian investor. As I discussed in my last letter,
contrarians always get out of sync with the market at one time or another, and
I am certainly no exception. Thus, I'm not going to change my style. I've
had a consistent investment approach over the past 32 years of my career, and in
the long run it has worked and it will continue to work.
While I can do little more than provide the standard explanations of how
the market has attained such lofty levels, I can assure you that few investors
truly anticipated these unprecedented moves. Short of new paradigm thinking,
the stock market is at unrealistic levels. One can see signs of this at any
gathering where people are discussing investments that return 15-20% per year
with little or no consideration of risk. These certainly are the best and worst
of times.
Coca-Cola is one of the most dramatic demonstrations of an overvalued stock.
Revenues are growing 7-8% a year, while earnings are growing 15% a year; and
some of these earnings were generated from the non-recurring profits of selling
bottling companies. Coca-Cola is selling at a price-to-earnings ratio of 48.3
times 1998 earnings, which is unrealistic to any historical comparison. This
cycle's "exuberance" is, however, somewhat different from the across-the-board
overvaluations of the late 1960s in the sense that the speculation is
specifically focused on large companies with high multiples and smaller company
story stocks. This provides an opportunity for the Fund to find selective value
in some of the other smaller stocks.
Finding value in these selective, smaller capitalization stocks generally
involves cutting through bad news to get at the fundamentals of the business.
Our recent investment in Triton Energy at an average cost of $31.05 demonstrates
the benefits of Paramount's investment philosophy. The stock was trading in the
$50 range when news broke out that several countries in Southeast Asia, where
1
<PAGE>
Triton is heavily involved, had devalued their currency. Since I knew the
company very well, we were able to take advantage of the dramatic price decline.
Today it is selling at $39.81.
A large investment was made in Paging Network (world's largest paging
company) at $9.65. Today it is $14.38. Why? A new CEO was appointed who
stopped the negative cash flow which appeared to be leading the company into
financial ruin.
Polymer Group, a company which produces non-woven fabric for baby diapers,
had declined from $17 to $10. We committed 5% of the Fund's assets at a cost of
$10.29 because the company has several exciting new products in development. On
top of that, the CEO personally invested $23 million of his own money at $9.50.
What else do you need to know? Today it is at $12.50.
These are three large investments which have produced satisfactory results
to date. Others are Magellan Health Services, Oakley, Leucadia National, and
Columbia/HCA. Charming Shoppes and Lone Star Steakhouse are investments which
are taking longer to mature. Charming Shoppes is currently at $4.86, but has
$1.40 a share in cash, after all long-term debt is paid, and sports a book value
of $4.00 per share. There is very little downside. Lone Star Steakhouse is
having management problems which are certainly fixable. It has no long-term
debt and $135 million in cash. My ill-timed investments in three gold stocks
last year have started to rally back after investors realized that Italy,
France, and Germany were not going to sell any gold in the foreseeable
future. I will close with what has been my most disappointing investment over
the last few years: Service Merchandise. Just this year, the CEO is making
changes that the Board of Directors would not have allowed in the past. This
guy knows what he is doing. I feel the risk versus reward is excellent.
I appreciate your ongoing support and look forward to our next report.
Respectfully submitted,
/s/ William M. Sams
William M. Sams
President
May 19, 1998
2
<PAGE>
MAJOR PORTFOLIO CHANGES
Six Months Ended March 31, 1998
<TABLE>
<CAPTION>
Shares or
Principal
NET PURCHASES Amount
---------------
<S> <C>
COMMON STOCKS
Charming Shoppes, Inc. . . . . . . . . . . . . . . . . . . . 470,000 shs.
De Beers Consolidated Mines Ltd. (ADR) (1) . . . . . . . . . 500,000 shs.
Homestake Mining Company . . . . . . . . . . . . . . . . . . 1,142,000 shs.
Newmont Mining Corporation . . . . . . . . . . . . . . . . . 150,000 shs.
Oakley, Inc. (1) . . . . . . . . . . . . . . . . . . . . . . 1,453,000 shs.
Paging Network, Inc. . . . . . . . . . . . . . . . . . . . . 519,000 shs.
Placer Dome Inc. . . . . . . . . . . . . . . . . . . . . . . 1,200,000 shs.
Polymer Group, Inc. (1). . . . . . . . . . . . . . . . . . . 2,167,000 shs.
TRICON Global Restaurants, Inc. (1). . . . . . . . . . . . . 1,100,000 shs.
Triton Energy Limited (1). . . . . . . . . . . . . . . . . . 1,150,000 shs.
U.S. TREASURY OBLIGATION
U.S. Treasury Inflation-Indexed Notes-- 3d% 2007 (1) . . . . $30,597,300
NET SALES
COMMON STOCKS
Inco Limited (2) . . . . . . . . . . . . . . . . . . . . . . 100,000 shs.
Leucadia National Corporation. . . . . . . . . . . . . . . . 350,000 shs.
Louisiana-Pacific Corporation. . . . . . . . . . . . . . . . 300,000 shs.
Mohawk Industries, Inc. (2). . . . . . . . . . . . . . . . . 600,000 shs.
Safety-Kleen Corporation (2) . . . . . . . . . . . . . . . . 531,500 shs.
Storage Technology Corporation (2) . . . . . . . . . . . . . 100,000 shs.
Texas Utilities Company. . . . . . . . . . . . . . . . . . . 95,000 shs.
Unifi, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . 400,000 shs.
Woolworth Corporation. . . . . . . . . . . . . . . . . . . . 250,000 shs.
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
3
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 1998
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- ------------------------------------------------------------ --------- ------------ ------------
<S> <C> <C> <C>
MINING -- 17.5%
De Beers Consolidated Mines Ltd. (ADR) . . . . . . . . . . . 500,000 $ 10,713,827 $ 10,968,750
Homestake Mining Company . . . . . . . . . . . . . . . . . . 3,300,000 40,306,927 35,887,500
Newmont Mining Corporation . . . . . . . . . . . . . . . . 1,200,000 47,079,207 36,675,000
Placer Dome Inc. . . . . . . . . . . . . . . . . . . . . . . 2,900,000 48,764,501 38,243,750
------------ ------------
$146,864,462 $121,775,000
------------ ------------
RESTAURANTS -- 12.5%
Lone Star Steakhouse & Saloon, Inc.*+. . . . . . . . . . . . 2,167,000 $ 52,907,736 $ 49,163,813
Luby's Cafeterias, Inc.. . . . . . . . . . . . . . . . . . 250,000 4,998,750 4,750,000
TRICON Global Restaurants, Inc.* . . . . . . . . . . . . . . 1,100,000 34,157,550 33,068,750
------------ ------------
$ 92,064,036 $ 86,982,563
------------ ------------
OIL & GAS PRODUCTION/EXPLORATION -- 10.6%
Chieftain International, Inc.* . . . . . . . . . . . . . . . 150,000 $ 3,179,250 $ 3,562,500
EEX Corporation* . . . . . . . . . . . . . . . . . . . . . . 2,849,257 16,796,209 27,958,334
Triton Energy Limited* . . . . . . . . . . . . . . . . . . . 1,150,000 35,705,422 42,262,500
------------ ------------
$ 55,680,881 $ 73,783,334
------------ ------------
HEALTHCARE -- 10.3%
Columbia/HCA Healthcare Corporation. . . . . . . . . . . . . 1,270,000 $ 36,331,375 $ 40,957,500
Magellan Health Services, Inc.*. . . . . . . . . . . . . . . 1,200,000 21,055,591 31,200,000
------------ ------------
$ 57,386,966 $ 72,157,500
------------ ------------
RETAILING -- 8.5%
Charming Shoppes, Inc.*. . . . . . . . . . . . . . . . . . . 3,285,000 $ 18,111,165 $ 15,603,750
Service Merchandise Company, Inc.*+. . . . . . . . . . . . . 7,000,000 37,253,335 14,000,000
Woolworth Corporation* . . . . . . . . . . . . . . . . . . . 1,200,000 26,864,957 30,000,000
------------ ------------
$ 82,229,457 $ 59,603,750
------------ ------------
CONSUMER NON-DURABLE GOODS -- 7.0%
Oakley, Inc.*. . . . . . . . . . . . . . . . . . . . . . . . 1,453,000 $ 15,175,628 $ 16,800,312
Polymer Group, Inc.*+. . . . . . . . . . . . . . . . . . . . 2,167,000 21,053,052 28,306,438
Unifi, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . 100,000 3,577,940 3,725,000
------------ ------------
$ 39,806,620 $ 48,831,750
------------ ------------
</TABLE>
4
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 1998
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS-CONTINUED Amount Cost Value
- ------------------------------------------------------------ --------- ------------ ------------
<S> <C> <C> <C>
COMMUNICATION & INFORMATION -- 6.4%
Paging Network, Inc.*. . . . . . . . . . . . . . . . . . . . 2,900,000 $ 27,982,402 $ 44,587,500
------------ ------------
INSURANCE -- 3.4%
Leucadia National Corporation. . . . . . . . . . . . . . . . 600,000 $ 12,692,393 $ 23,625,000
------------ ------------
MATERIALS -- 3.2%
DSM N.V. (ADR) . . . . . . . . . . . . . . . . . . . . . . . 500,000 $ 11,886,250 $ 13,000,000
Louisiana-Pacific Corporation. . . . . . . . . . . . . . . . 400,000 8,926,305 9,300,000
------------ ------------
$ 20,812,555 $ 22,300,000
------------ ------------
UTILITIES -- 1.4%
Texas Utilities Company. . . . . . . . . . . . . . . . . . . 242,500 $ 10,573,084 $ 9,533,281
------------ ------------
CONSTRUCTION -- 0.2%
Morrison Knudsen Corporation*. . . . . . . . . . . . . . . . 100,000 $ 1,200,000 $ 1,118,750
------------ ------------
OTHER COMMON STOCKS -- 1.6%. . . . . . . . . . . . . . . . . $ 10,984,859 $ 11,304,375
------------ ------------
TOTAL COMMON STOCKS -- 82.6% . . . . . . . . . . . . . . . . $558,277,715 $575,602,803
------------ ------------
U.S. TREASURY OBLIGATION -- 4.3%
U.S. Treasury Inflation-Indexed Notes-- 3d% 2007 . . . . . . $30,597,300 $ 29,932,986 $ 29,669,819
------------ ------------
TOTAL INVESTMENT SECURITIES -- 86.9% . . . . . . . . . . . . $588,210,701 $605,272,622
------------ ------------
------------
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 1998
<TABLE>
<CAPTION>
Principal
SHORT-TERM INVESTMENTS --13.3% Amount Value
Short-term Corporate Notes: ----------- ------------
<S> <C> <C>
MetLife Funding, Inc. -- 5.52% 4/1/98 . . . . . . . . . . . $ 3,000,000 $ 3,000,000
Walt Disney Company, The -- 5.38% 4/2/98. . . . . . . . . . 2,000,000 1,999,701
Coca-Cola Company, The -- 5.45% 4/3/98. . . . . . . . . . . 13,000,000 12,996,064
Emerson Electric Co. -- 5.48% 4/15/98 . . . . . . . . . . . 2,000,000 1,995,738
Amoco Corporation -- 5.43% 4/17/98. . . . . . . . . . . . . 1,500,000 1,496,380
Amoco Corporation -- 5.47% 4/17/98. . . . . . . . . . . . . 18,000,000 17,956,240
Du Pont (E.I.) De Nemours & Company -- 5.47% 4/20/98. . . . 22,000,000 21,936,487
Coca-Cola Company, The -- 5.49% 4/21/98 . . . . . . . . . . 2,000,000 1,993,900
Abbott Laboratories -- 51/2% 4/23/98. . . . . . . . . . . . 2,000,000 1,993,278
Bell Atlantic Financial Services, Inc. -- 5.55% 4/23/98 . . 15,000,000 14,949,125
Walt Disney Company, The -- 5.43% 4/28/98 . . . . . . . . . 2,000,000 1,991,855
Anheuser-Busch Companies, Inc.-- 51/2% 5/1/98 . . . . . . . 1,000,000 995,417
Toys "R" Us, Inc. -- 5.54% 5/1/98 . . . . . . . . . . . . . 1,000,000 995,383
Du Pont (E.I.) De Nemours & Company -- 5.48% 5/4/98 . . . . 1,000,000 994,977
Du Pont (E.I.) De Nemours & Company -- 51/2% 5/6/98 . . . . 6,500,000 6,465,243
Du Pont (E.I.) De Nemours & Company -- 51/2% 5/7/98 . . . . 1,000,000 994,500
------------
$ 92,754,288
------------
TOTAL INVESTMENTS -- 100.2%. . . . . . . . . . . . . . . . . $698,026,910
Liabilities less other assets -- (0.2)%. . . . . . . . . . . (1,196,669)
------------
TOTAL NET ASSETS -- 100% . . . . . . . . . . . . . . . . . . $696,830,241
------------
------------
</TABLE>
* Non-income producing security
+ Affiliate as defined in the Investment Company Act of 1940 by reason of
ownership of 5% or more of its outstanding voting securities. Following is
a summary of transactions in securities of these affiliates during the
period ended March 31, 1998.
<TABLE>
<CAPTION>
Purchases Sales at
at Cost Cost
--------- --------
<S> <C> <C>
Lone Star Steakhouse & Saloon, Inc -- --
Polymer Group, Inc. $21,053,052 --
Service Merchandise Company, Inc. -- --
</TABLE>
See notes to financial statements.
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $588,210,701) . . . . . . . . . . . . $605,272,622
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less). . . . . . . . . . . . 92,754,288 $698,026,910
------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,804
Receivable for:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . $ 905,547
Interest . . . . . . . . . . . . . . . . . . . . . . . . 213,949
Capital Stock sold . . . . . . . . . . . . . . . . . . . 81,805 1,201,301
------------ ------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $699,321,015
LIABILITIES
Payable for:
Capital Stock repurchased. . . . . . . . . . . . . . . . $ 1,962,463
Advisory fees and financial services . . . . . . . . . . 432,611
Accrued expenses . . . . . . . . . . . . . . . . . . . . 95,700 2,490,774
------------ ------------
NET ASSETS -- equivalent to $13.73 per share on 50,763,462
shares of Capital Stock outstanding. . . . . . . . . . . . $696,830,241
------------
------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.25 per share; authorized
100,000,000 shares; outstanding 50,763,462 shares . . . . $ 12,690,865
Additional Paid-in Capital . . . . . . . . . . . . . . . . 648,939,197
Undistributed net realized gain on investments . . . . . . 16,047,233
Undistributed net investment income. . . . . . . . . . . . 2,091,025
Unrealized appreciation of investments . . . . . . . . . . 17,061,921
------------
Net assets at March 31, 1998 . . . . . . . . . . . . . . . $696,830,241
------------
------------
</TABLE>
See notes to financial statements.
7
<PAGE>
STATEMENT OF OPERATIONS
For the Six Months Ended March 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . $ 6,322,686
Dividends. . . . . . . . . . . . . . . . . . . . . . . . 2,139,652
------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,462,338
EXPENSES
Advisory fees. . . . . . . . . . . . . . . . . . . . . . . . $2,372,379
Financial services . . . . . . . . . . . . . . . . . . . 361,135
Transfer agent fees and expenses . . . . . . . . . . . . 281,201
Registration fees. . . . . . . . . . . . . . . . . . . . 71,261
Custodian fees and expenses. . . . . . . . . . . . . . . 30,885
Audit fees . . . . . . . . . . . . . . . . . . . . . . . 27,975
Directors' fees and expenses . . . . . . . . . . . . . . 20,797
Reports to shareholders. . . . . . . . . . . . . . . . . 17,228
Legal fees . . . . . . . . . . . . . . . . . . . . . . . 10,107
Insurance. . . . . . . . . . . . . . . . . . . . . . . . 6,026
Other expenses . . . . . . . . . . . . . . . . . . . . . 14,841 3,213,835
----------- ------------
Net investment income. . . . . . . . . . . . . . . . . $ 5,248,503
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on investments:
Proceeds from sales of investment securities (excluding
short-term investments with maturities of 60 days or less) $92,288,629
Cost of investment securities sold . . . . . . . . . . . 71,768,226
-----------
Net realized gain on investments. . . . . . . . . . . $ 20,520,403
Unrealized appreciation of investments:
Unrealized appreciation at beginning of period . . . . . $51,873,295
Unrealized appreciation at end of period . . . . . . . . 17,061,921
-----------
Decrease in unrealized appreciation of investments. . (34,811,374)
------------
Net realized and unrealized loss on investments . . $(14,290,971)
------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . . . $ (9,042,468)
------------
------------
See notes to financial statements.
</TABLE>
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, 1998 September 30, 1997
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
Operations:
Net investment income. . . . . . . . . . . . . . $ 5,248,503 $ 13,821,604
Net realized gain on investments . . . . . . . . 20,520,403 91,100,936
Increase (decrease) in unrealized
appreciation of investments. . . . . . . . . . (34,811,374) 19,103,006
------------ ------------
Increase (decrease) in net assets
resulting from operations. . . . . . . . . . . . $ (9,042,468) $124,025,546
Distributions to shareholders from:
Net investment income. . . . . . . . . . . . . . $ (6,858,805) $(13,949,391)
Net realized capital gains . . . . . . . . . . . (93,083,788) (99,942,593) (112,712,010) (126,661,401)
------------ ------------
Capital Stock transactions:
Proceeds from Capital Stock sold . . . . . . . . $ 28,486,861 $171,882,375
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions . . . . . . . . 86,761,495 107,501,337
Cost of Capital Stock repurchased. . . . . . . . (140,166,150) (24,917,794) (129,073,320) 150,310,392
------------ ------------- ------------ ------------
Total increase (decrease) in net assets. . . . . . $(133,902,855) $147,674,537
NET ASSETS
Beginning of period, including
undistributed net investment income
of $3,701,327 and $3,829,114 . . . . . . . . . . 830,733,096 683,058,559
------------- ------------
End of period, including
undistributed net investment income
of $2,091,025 and $3,701,327 . . . . . . . . . . $ 696,830,241 $830,733,096
------------- ------------
------------- ------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold . . . . . . . . . . . 2,159,093 11,574,033
Shares issued to shareholders upon
reinvestment of dividends and
distributions. . . . . . . . . . . . . . . . . . 7,076,794 7,390,224
Shares of Capital Stock repurchased. . . . . . . . (10,540,001) (8,195,774)
------------- ------------
Increase (decrease) in Capital Stock
outstanding. . . . . . . . . . . . . . . . . . . (1,304,114) 10,768,483
------------- ------------
------------- ------------
</TABLE>
See notes to financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Six
Months
Ended
March Year Ended September 30,
31, ----------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period . . . . . . $ 15.95 $ 16.54 $ 14.90 $ 14.73 $ 13.72 $ 13.09
-------- -------- -------- -------- -------- --------
Net investment income. . . . . . . . . . . . . . . $ 0.11 $ 0.29 $ 0.30 $ 0.30 $ 0.24 $ 0.25
Net realized and unrealized gain on
investment securities. . . . . . . . . . . . . . (0.29) 2.30 2.52 1.17 2.54 1.61
Total from investment operations . . . . . . . . . $ (0.18) $ 2.59 $ 2.82 $ 1.47 $ 2.78 $ 1.86
-------- -------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income . . . . . . $ (0.14) $ (0.31) $ (0.27) $ (0.29) $ (0.25) $ (0.25)
Distributions from net realized
capital gains. . . . . . . . . . . . . . . . . (1.90) (2.87) (0.91) (1.01) (1.52) (0.98)
Total distributions. . . . . . . . . . . . . . . $ (2.04) $ (3.18) $ (1.18) $ (1.30) $ (1.77) $ (1.23)
-------- -------- -------- -------- -------- --------
Net asset value at end of period . . . . . . . . . $ 13.73 $ 15.95 $ 16.54 $ 14.90 $ 14.73 $ 13.72
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Total investment return* . . . . . . . . . . . . . 0.41% 17.70% 20.42% 11.11% 21.69% 15.08%
Ratios/supplemental data:
Net assets at end of period (in $000's). . . . . . 696,830 830,733 683,059 595,917 421,382 327,179
Ratio of expenses to average net assets. . . . . . 0.90%+ 0.86% 0.87% 0.89% 0.90% 0.89%
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . . 1.47%+ 1.84% 1.94% 2.25% 1.69% 1.83%
Portfolio turnover rate. . . . . . . . . . . . . . 36%+ 110% 131% 95% 76% 98%
Average brokerage commissions per share. . . . . . $ 0.0551 $ 0.0676 $ 0.0646 -- -- --
</TABLE>
* Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge. The
return for the six months ended March 31, 1998 is not annualized.
+ Annualized
See notes to financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940 as a
diversified, open-end, management investment company. The Fund's objective is a
high total investment return, including capital appreciation and income, from a
diversified portfolio of securities. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A. Security Valuation
Securities listed or traded on a national securities exchange or on
the NASDAQ National Market System are valued at the last sale price on the
last business day of the period, or if there was not a sale that day, at
the last bid price. Unlisted securities are valued at the most recent
bid price. Short-term investments with maturities of 60 days or less are
valued at cost plus interest earned, which approximates market value.
B. Federal Income Tax
No provision for federal income tax is required because the Fund has
elected to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification and to distribute
each year to its shareholders, in accordance with the minimum distribution
requirements of the Code, all of its taxable net investment income and
taxable net realized gains on investments.
C. Securities Transactions and Related
Investment Income
Securities transactions are accounted for on the date the
securities are purchased or sold. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Interest income and
expenses are recorded on an accrual basis.
D. Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported. Actual results
could differ from those estimates.
NOTE 2 -- PURCHASES OF INVESTMENT SECURITIES
Cost of purchases of investment securities (excluding short-term
investments with maturities of 60 days or less) aggregated $203,223,096 for the
six months ended March 31, 1998. Realized gains or losses are based on the
specific-certificate identification method. Cost of securities held at March
31, 1998 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
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Continued
pays the Adviser a monthly fee calculated at the annual rate of 0.75% of the
first $50 million of the Fund's average daily net assets and 0.65% of
the average daily net assets in excess of $50 million. In addition, the Fund
reimburses the Adviser monthly for the costs incurred by the Adviser in
providing financial services to the Fund, providing, however, that this
reimbursement shall not exceed 0.1% of the average daily net assets for any
fiscal year. The Agreement obligates the Adviser to reduce its fee to the
extent necessary to reimburse the Fund for any annual expenses
(exclusive of interest, taxes, the cost of any supplemental statistical and
research information, and extraordinary expenses such as litigation) in excess
of 11/2% of the first $30 million and 1% of the remaining average net assets of
the Fund for the year.
For the six months ended March 31, 1998, the Fund paid aggregate fees of
$20,000 to all Directors who are not affiliated persons of the Adviser. Certain
officers of the Fund are also officers of the Adviser and FPA Fund Distributors,
Inc.
NOTE 4 -- DISTRIBUTOR
For the six months ended March 31, 1998, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $36,265 in
net Fund share sales commissions after reallowance to other dealers. The
Distributor pays its own overhead and general administrative expenses, the
cost of printing prospectuses and the cost of supplemental sales literature,
promotion and advertising.
12
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OFFICERS AND DIRECTORS
DIRECTORS
Julio J. de Puzo, Jr.
John P. Endicott
Leonard Mautner
John H. Rubel
John P. Shelton
Joseph Lowitz, CHAIRMAN EMERITUS
John F. Allard, DIRECTOR EMERITUS
OFFICERS
William M. Sams, PRESIDENT AND
CHIEF INVESTMENT OFFICER
Julio J. de Puzo, Jr., EXECUTIVE VICE
PRESIDENT
Eric S. Ende, VICE PRESIDENT
Janet M. Pitman, VICE PRESIDENT
J. Richard Atwood, TREASURER
Sherry Sasaki, SECRETARY
Christopher H. Thomas, ASSISTANT TREASURER
INVESTMENT ADVISER
First Pacific Advisors, Inc.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
DISTRIBUTOR
FPA Fund Distributors, Inc.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
COUNSEL
O'Melveny & Myers LLP
Los Angeles, California
CUSTODIAN & TRANSFER AGENT
State Street Bank and Trust Company
Boston, Massachusetts
SHAREHOLDER SERVICE AGENT
Boston Financial Data Services, Inc.
P.O. Box 8500
Boston, Massachusetts 02266-8500
(800) 638-3060
(617) 328-5000
This report has been prepared for the information of shareholders of FPA
Paramount Fund, Inc., and is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus. The
financial information included in this report has been taken from the records of
the Fund without examination by independent auditors.
13
