<PAGE>
ANNUAL REPORT
FPA PARAMOUNT FUND, INC.
[LOGO]
Distributor:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
SEPTEMBER 30, 1998
<PAGE>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Annual Report covers the fiscal year ended September 30, 1998. During
this period, the per share net asset value of your Fund decreased 24.8%, while
the Russell 2500 decreased 16.4%, the Standard & Poor's 500 Stock Average (S&P
500) increased 9.2%, and the Dow Jones Industrial Average (DJIA) increased 0.5%.
The above changes include reinvestment of all dividends and distributions during
the period. On September 30, 1997, the net asset value per share was $15.95 and
on September 30, 1998, it was $10.24. During the year, the Fund paid $1.90 from
capital gains (paid January 7, 1998 to shareholders of record on December 31,
1997) and $0.20 from net investment income ($0.14 and $0.06 per share paid
January 7, 1998 and July 8, 1998, to shareholders of record December 31, 1997
and June 30, 1998, respectively.)
THE YEAR IN REVIEW
This has been another year in which the large companies have out-performed
the smaller ones. In fact, I have included for the first time the Russell 2500
Index which contains the 2,500 smallest companies out of 3,000 in its total
index, and provides a broader measure of market performance. For the past five
years, the compound annualized return for the 50 largest stocks in the Russell
database was a positive 24.3% versus 10.9% for the smallest 2,500. This same
comparison for the past year is even more dramatic. The 50 largest stocks
returned a positive 18.9% versus a negative 16.4% for the smallest 2,500 stocks
- -- a difference of over 35%. This has been going on way too long and has
rendered the largest companies totally overvalued in relation to their
historical norm on an absolute or relative basis with smaller companies.
Surely, we must be approaching a time when this will change.
Many portfolio managers seem content to buy these overvalued companies at
increasingly higher prices compared to historical standards. I believe they are
paying substantial premiums for a limited number of large companies, which
in the past have demonstrated rapid growth (Dell Computer) or reasonably
predictable earnings (Coca-Cola). However, being a contrarian, value investor,
I have chosen to buy companies that are selling at prices that look very cheap
by past standards. Since 1981, your Fund has always tried to take major
positions in companies which are temporarily out of favor. Usually, these
companies are selling at lower prices because they have a problem (EEX and De
Beers). Other investors are unwilling to hold these stocks, even when the
problems are solvable or are being addressed by management. I select those
companies where I believe there is tremendous upside potential when these
problems are ultimately corrected, and I must be patient since it is virtually
impossible to predict the timing of the turn. Unfortunately, it is taking longer
for these investments to mature in this cycle. One reason is that there is less
pricing power in the economy. In other words, there is too much capacity and
therefore too much competition.
WHAT'S THE ECONOMIC AND MARKET OUTLOOK?
First of all, I expect the economy to experience a slowdown, not a
recession. Outside of the United States, deflation has taken its toll, but that
is being addressed by lowering interest rates (U.S. and Europe) and other
government actions (Japan). Look, deflation does not work politically.
Although it will take some time, the world has started the process of reflating.
Remember, deflation is easier to fix than inflation -- just print money, lower
interest rates, and cut taxes. On the other hand, fixing inflation requires
raising interest rates, cutting spending, or raising taxes, all of which can
be politically unpopular and economically painful. Bond prices probably have
already seen their highs as the market discounts a business pick up in the
future. I sincerely feel that the stock market's greatest risk in the future is
inflation and the contraction of earnings multiples, not deflation as many
believe. But, for the time being, I'm not greatly concerned with either.
1
<PAGE>
Because of rapid government action, the 1998 market panic may turn out to
be a non-event. The market indices have all rallied, even though the Russell
2500 continues to lag the DJIA and S&P 500. If I'm near the mark and the 1998
market decline was only a correction, then order should return and that can only
be good news for smaller companies.
UPDATE ON GOLD
The Fund's three gold stocks (Homestake Mining, Newmont Mining and Placer
Dome) were acquired in 1997 as I became increasingly concerned about the length
of this bull market. Gold stocks had under-performed for quite some time and
always did well when the stock market experienced serious trouble. Since no one
was recommending these stocks, and considering my view of the overall market,
this had to be a great contrarian investment. In fact, I could visualize an
increase in these stocks as the market decreased. My timing proved to be flawed
as the real difference in this market versus prior ones was deflation, not
inflation. All commodities declined, and for the first time since the 1930s
gold was treated as a commodity. As I previously discussed, deflation will not
work politically, and we must inflate our way out. Lately investors have been
increasing their gold purchases as they see the U.S. money supply growing at
over a 7% rate. Gold has, at last, rallied significantly in October from a low
of $274 to $303. Although it has retreated from its highs, I expect it to
stabilize in the near term. Of these three stocks, only one is down for 1998.
In fact, gold stocks are down much less than the average stock. However, one
does not buy gold to hold long term; therefore, I expect this money to be
repositioned into what I do best -- that being, building large 5% positions in
beaten down common stocks which have little or no investor sponsorship.
HOW IS ALL OF THIS GOOD FOR YOUR PORTFOLIO?
HERE ARE A FEW EXAMPLES:
EEX
This oil & gas exploration company operates principally in the deep
water Gulf of Mexico with an exciting array of big potential (200,000,000
barrels plus) drilling prospects. The company hit pay dirt on the first
well it drilled and announced it was expected to produce a minimum of $2 per
share of reserves. The stock price ran from $8.50 to $10.50. The price of
oil declined and the next two wells EEX drilled were dry, which caused the
stock price to retreat to just under $5. However, two more wells are already
set to be drilled and I expect the stock price to rebound. The present
liquidating value of the company is between $4 and $6. If oil returns to $17
per barrel and another discovery is made, this could have a tremendous impact
on the stock price. In any event, the risk-reward sure looks enticing.
DE BEERS
The company controls 70% of the world's diamonds. Recently, demand has
cooled because of the economic problems in Japan and Southeast Asia. The
company also has investments in other publicly traded securities, mostly copper
and gold, which on their own presently equal the current market value of De
Beers itself. In other words, you get the diamond business for free. This has
happened only twice before in the history of the company. I expect that the
current dividend will probably be cut to around $0.80, still providing a yield
of better than 5%. All that is needed is for the world economy to return to
some kind of norm. The high/low prices of the stock for 1998 are
273/8/111/2. The price is now 15. This is a terrific risk-reward situation.
One must have patience.
PAGING NETWORK
Paging Network is currently the largest paging company with over 10 million
pagers. One of the new management's goals is to increase the revenue per pager
with added services such as two-way paging. Even though this will be capital
intensive, the growth potential appears large. The stock has declined from $16
to its present price of $6 during the recent market sell off. Several Wall
Street firms have prepared discounted cash flow models that indicate a $12 to
$15 price. This is a good example of a stock that, with no significant change
in its business, has suffered because of investors' flight to quality, and
it has yet to
2
<PAGE>
recover. Although the stock price movement may be slow for the near term, a
return to a $12 price over the next 12 months is not out of the question.
SUMMARY
These are just a few of your Fund's current holdings that seem to have
excellent risk-reward probabilities. All have current problems or they
wouldn't be selling where they are today. Their chances of recovery are
excellent. As I stated earlier, an alternative in this market is to buy
stocks which appear to have little or no problems, but are selling at levels
that certainly appear full if not excessive. Therefore, I will continue
to do what I do best, which is finding out of favor companies with good
potential for growth at inexpensive prices. This contrarian, value approach
requires patience and I expect it to provide meaningful returns over the long
run. Thank you for your continued support.
Respectfully submitted,
/s/ William M. Sams
William M. Sams
President
November 18, 1998
HISTORICAL PERFORMANCE
CHANGE IN VALUE OF A $10,000 INVESTMENT IN FPA PARAMOUNT FUND, INC. VS. RUSSELL
2500 INDEX, S&P 500 INDEX AND LIPPER GROWTH & INCOME FUND AVERAGE FROM OCTOBER
1, 1988 TO SEPTEMBER 30, 1998
[GRAPH]
<TABLE>
<CAPTION>
9/30/88 9/30/89 9/30/90 9/30/91 9/30/92 9/30/93 9/30/94 9/30/95 9/30/96 9/30/97 9/30/98
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA Paramount
Fund, Inc. 9,350 11,320 10,978 14,175 15,143 17,427 21,207 23,563 28,374 33,396 25,131
FPA Paramount
Fund, Inc. (NAV) 10,000 12,107 11,741 15,160 16,196 18,638 22,681 25,201 30,347 35,718 26,878
S&P 500 Index 10,000 10,992 12,025 15,794 17,528 19,810 20,535 26,655 32,092 45,145 49,273
Lipper Growth &
Income Fund
Average 10,000 12,657 11,270 14,611 16,087 18,716 19,300 23,831 28,071 38,112 37,701
Russell 2500
Index 10,000 12,417 9,401 13,809 15,233 19,809 20,385 25,577 29,629 39,794 33,261
</TABLE>
Past performance is not indicative of future performance. The Russell 2500
Index consists of the 2,500 smallest companies in the Russell 3000 total
capitalization universe. This index is considered a measure of small to medium
capitalization stock performance. The Standard & Poor's 500 Stock Index (S&P
500) is a capitalization-weighed index which covers industrial, utility,
transportation and financial services companies, and represents approximately
75% of the New York Stock Exchange (NYSE) capitalization and 30% of NYSE issues.
This index is considered a measure of large capitalization stock performance.
These indices do not reflect any commissions or fees which would be incurred by
an investor purchasing the stocks they represent. The Lipper Growth & Income
Fund Average provides an additional comparison of how your Fund performed in
relation to other mutual funds with similar objectives. The Lipper data does
not include sales charges. The performance shown for FPA Paramount Fund, Inc.,
with an ending value of $25,131 reflects deduction of the current maximum sales
charge of 6.5% of the offering price. In addition, since investors purchase
shares of the Fund with varying sales charges depending primarily on volume
purchased, the Fund's performance at net asset value (NAV) is also shown, as
reflected by the ending value of $26,878. The performance of the Fund and of
the Averages is computed on a total return basis which includes reinvestment of
all distributions.
3
<PAGE>
MAJOR PORTFOLIO CHANGES
Six Months Ended September 30, 1998
<TABLE>
<CAPTION>
Shares or
Principal
Amount
---------------
<S> <C>
NET PURCHASES
COMMON STOCKS
BRC Holdings, Inc. (1) . . . . . . . . . . . . . . . . 425,000 shs.
CCA Prison Realty Trust (1). . . . . . . . . . . . . . 600,000 shs.
Charming Shoppes, Inc. . . . . . . . . . . . . . . . . 400,000 shs.
De Beers Consolidated Mines Ltd. (ADR) . . . . . . . 350,000 shs.
EEX Corporation. . . . . . . . . . . . . . . . . . . . 1,650,743 shs.
Luby's Cafeterias, Inc.. . . . . . . . . . . . . . . 112,000 shs.
Newmont Mining Corporation . . . . . . . . . . . . . 60,000 shs.
Oakley, Inc. . . . . . . . . . . . . . . . . . . . . . 412,100 shs.
Physician Reliance Network, Inc. (1) . . . . . . . . . 456,900 shs.
Polymer Group, Inc.. . . . . . . . . . . . . . . . . . 569,500 shs.
Service Merchandise Company, Inc.. . . . . . . . . . . 2,500,000 shs.
NET SALES
COMMON STOCKS
Columbia/HCA Healthcare Corporation. . . . . . . . . . 223,000 shs.
DSM N.V. (ADR) (2) . . . . . . . . . . . . . . . . . . 500,000 shs.
Koger Equity, Inc. (2) . . . . . . . . . . . . . . . . 200,000 shs.
Lone Star Steakhouse & Saloon, Inc.. . . . . . . . . . 867,000 shs.
Louisiana-Pacific Corporation (2). . . . . . . . . . . 400,000 shs.
Magellan Health Services, Inc. . . . . . . . . . . . . 400,000 shs.
Morrison Knudsen Corporation (2) . . . . . . . . . . . 100,000 shs.
Nuevo Energy Company (2) . . . . . . . . . . . . . . . 190,000 shs.
Paging Network, Inc. . . . . . . . . . . . . . . . . . 100,000 shs.
Texas Utilities Company (2). . . . . . . . . . . . . . 242,500 shs.
TRICON Global Restaurants, Inc. (2). . . . . . . . . . 1,100,000 shs.
Triton Energy Limited (2). . . . . . . . . . . . . . . 1,150,000 shs.
Venator Group, Inc.. . . . . . . . . . . . . . . . . . 300,000 shs.
U.S. TREASURY OBLIGATION
U.S. Treasury Inflation-Indexed
Notes --33/8% 2007 (2). . . . . . . . . . . . . . . . $30,597,300
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
4
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1998
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
- ----------------------------------------------------------------- ---------- ------------- -------------
<S> <C> <C> <C>
MINING -- 31.4%
De Beers Consolidated Mines Ltd. (ADR) . . . . . . . . . . . . . 850,000 $ 15,327,513 $ 10,678,125
Homestake Mining Company . . . . . . . . . . . . . . . . . . . . 3,300,000 40,306,927 40,012,500
Newmont Mining Corporation . . . . . . . . . . . . . . . . . . . 1,260,000 47,905,809 30,555,000
Placer Dome Inc. . . . . . . . . . . . . . . . . . . . . . . . . 2,900,000 48,764,501 40,056,250
------------- -------------
$ 152,304,750 $ 121,301,875
------------- -------------
CONSUMER NON-DURABLE GOODS -- 10.2%
Oakley, Inc.*. . . . . . . . . . . . . . . . . . . . . . . . . . 1,865,100 $ 20,454,493 $ 17,951,587
Polymer Group, Inc.*+. . . . . . . . . . . . . . . . . . . . . . 2,736,500 28,146,505 21,549,937
------------- -------------
48,600,998 $ 39,501,524
------------- -------------
RETAILING -- 9.7%
Charming Shoppes, Inc.*. . . . . . . . . . . . . . . . . . . . . 3,685,000 $ 19,886,165 $ 15,430,938
Service Merchandise Company, Inc.*+. . . . . . . . . . . . . . . 9,500,000 42,525,597 14,250,000
Venator Group, Inc.* . . . . . . . . . . . . . . . . . . . . . . 900,000 7,969,940 7,818,750
------------- -------------
$ 70,381,702 $ 37,499,688
------------- -------------
HEALTHCARE -- 9.1%
Columbia/HCA Healthcare Corporation. . . . . . . . . . . . . . . 1,047,000 $ 29,857,706 $ 21,005,438
Magellan Health Services, Inc.*. . . . . . . . . . . . . . . . . 800,000 13,686,885 8,650,000
Physician Reliance Network, Inc.*. . . . . . . . . . . . . . . . 456,900 4,279,825 5,368,575
------------- -------------
$ 47,824,416 $ 35,024,013
------------- -------------
OIL & GAS PRODUCTION/EXPLORATION -- 6.3%
Chieftain International, Inc.* . . . . . . . . . . . . . . . . . 150,000 $ 3,179,250 $ 2,559,375
EEX Corporation* . . . . . . . . . . . . . . . . . . . . . . . . 4,500,000 26,069,095 21,937,500
------------- -------------
$ 29,248,345 $ 24,496,875
------------- -------------
INSURANCE -- 4.6%
Leucadia National Corporation. . . . . . . . . . . . . . . . . . 600,000 $ 12,692,393 $ 17,587,500
------------- -------------
COMMUNICATIONS & INFORMATION-- 4.4%
Paging Network, Inc.*. . . . . . . . . . . . . . . . . . . . . . 2,800,000 $ 26,957,402 $ 16,887,500
------------- -------------
RESTAURANTS -- 4.1%
Lone Star Steakhouse & Saloon, Inc.*+. . . . . . . . . . . . . . 1,300,000 $ 29,098,274 $ 9,912,500
Luby's Cafeterias, Inc.. . . . . . . . . . . . . . . . . . . . . 362,000 6,797,470 5,837,250
------------- -------------
$ 35,895,744 $ 15,749,750
------------- -------------
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1998
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS-- CONTINUED Amount Cost Value
- ---------------------------------------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
REAL ESTATE INVESTMENT TRUST -- 2.8%
CCA Prison Realty Trust. . . . . . . . . . . . . . . . . . . . . . . . 600,000 $ 12,361,039 $ 10,800,000
------------- -------------
TECHNOLOGY -- 1.9%
BRC Holdings, Inc.*. . . . . . . . . . . . . . . . . . . . . . . . . . 425,000 $ 7,961,263 $ 7,225,000
------------- -------------
OTHER COMMON STOCKS -- 1.4%. . . . . . . . . . . . . . . . . . . . . . $ 7,525,010 $ 5,392,375
------------- -------------
TOTAL COMMON STOCKS -- 85.9% . . . . . . . . . . . . . . . . . . . . . $ 451,753,062 $ 331,466,100
------------- -------------
-------------
SHORT-TERM INVESTMENTS -- 16.6%
Short-term Corporate Notes:
American General Corporation -- 5.53% 10/1/98. . . . . . . . . . . . $ 5,000,000 $ 5,000,000
Toyota Motor Credit Corporation -- 51/2% 10/2/98 . . . . . . . . . . 7,000,000 6,998,930
Coca-Cola Company, The -- 5.47% 10/5/98. . . . . . . . . . . . . . . 6,000,000 5,996,354
Bell Atlantic Financial Services, Inc. -- 51/2% 10/7/98. . . . . . . 2,000,000 1,998,167
Coca-Cola Company, The -- 5.45% 10/8/98. . . . . . . . . . . . . . . 8,000,000 7,991,522
Emerson Electric Co. -- 5.48% 10/9/98. . . . . . . . . . . . . . . . 15,000,000 14,981,733
Daimler-Benz North America Corporation
-- 5.46% 10/13/98. . . . . . . . . . . . . . . . . . . . . . . . . . 15,000,000 14,972,700
Toys "R" Us, Inc. -- 5.51% 10/22/98. . . . . . . . . . . . . . . . . 2,000,000 1,993,572
Coca-Cola Company, The -- 5.16% 10/29/98 . . . . . . . . . . . . . . 3,000,000 2,987,960
State Street Bank Repurchase Agreement -- 43/4% 10/1/98
(Collateralized by U.S. Treasury Notes
-- 97/8% 2015, market value $1,248,896). . . . . . . . . . . . . . . 1,220,000 1,220,169
TOTAL SHORT-TERM INVESTMENTS . . . . . . . . . . . . . . . . . . . . . $ 64,141,107
-------------
TOTAL INVESTMENTS -- 102.5%. . . . . . . . . . . . . . . . . . . . . . $ 395,607,207
Liabilities less other assets -- (2.5)%. . . . . . . . . . . . . . . . (9,762,427)
-------------
TOTAL NET ASSETS -- 100% . . . . . . . . . . . . . . . . . . . . . . . $ 385,844,780
-------------
-------------
</TABLE>
* Non-income producing securities
+ Affiliate as defined in the Investment Company Act of 1940 by reason of
ownership of 5% or more of its outstanding voting securities. Following is a
summary of transactions in securities of these affiliates during the year
ended September 30, 1998.
<TABLE>
<CAPTION>
Purchases Sales Realized Dividend
at Cost at Cost Gain (Loss) Income
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lone Star Steakhouse & Saloon, Inc. -- $23,809,462 $(17,652,685) --
Polymer Group, Inc. $28,146,505 -- -- --
Service Merchandise Company, Inc. 5,272,262 -- -- --
</TABLE>
See notes to financial statements.
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments at value:
Investment securities -- at market value
(identified cost $451,753,062) . . . . . . . . . . . . . . . . . . . . . . $ 331,466,100
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less). . . . . . . . . . . . . . . . . . . . . . 64,141,107 $ 395,607,207
-------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
Receivable for:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 491,150
Capital Stock sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,745 606,895
------------- --------------
$ 396,214,264
LIABILITIES
Payable for:
Investment securities purchased. . . . . . . . . . . . . . . . . . . . . . . $ 8,575,015
Capital Stock repurchased. . . . . . . . . . . . . . . . . . . . . . . . . . 1,449,309
Advisory fees and financial services . . . . . . . . . . . . . . . . . . . . 248,660
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,500 10,369,484
------------- --------------
NET ASSETS -- equivalent to $10.24 per share on 37,677,392
shares of Capital Stock outstanding. . . . . . . . . . . . . . . . . . . . . . $ 385,844,780
--------------
--------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.25 per share; authorized
100,000,000 shares; outstanding 37,677,392 shares. . . . . . . . . . . . . . $ 9,419,348
Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 496,109,892
Accumulated distributions in excess of net realized capital gains. . . . . . . (524,934)
Undistributed net investment income. . . . . . . . . . . . . . . . . . . . . . 1,127,436
Unrealized depreciation of investments . . . . . . . . . . . . . . . . . . . . (120,286,962)
--------------
Net assets at September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . $ 385,844,780
--------------
--------------
</TABLE>
See notes to financial statements.
7
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1998
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C> <C>
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,201,484
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,515,457
------------
$ 12,716,941
EXPENSES
Advisory fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,186,818
Financial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 636,434
Transfer agent fees and expenses . . . . . . . . . . . . . . . . . . . . . . 577,892
Registration fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,871
Custodian fees and expenses. . . . . . . . . . . . . . . . . . . . . . . . . 56,711
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . 41,301
Reports to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . 32,063
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,750
Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,641
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,299
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,841 5,693,621
------------- ------------
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . $ 7,023,320
------------
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) . . . . . . . . $ 340,720,688
Cost of investment securities sold . . . . . . . . . . . . . . . . . . . . . 336,772,192
-------------
Net realized gain on investments . . . . . . . . . . . . . . . . . . . . $ 3,948,496
Unrealized appreciation (depreciation) of investments:
Unrealized appreciation at beginning of year . . . . . . . . . . . . . . . . $ 51,873,295
Unrealized depreciation at end of year . . . . . . . . . . . . . . . . . . . (120,286,962)
-------------
Decrease in unrealized appreciation of investments . . . . . . . . . . . (172,160,257)
------------
Net realized and unrealized loss on investments. . . . . . . . . . . $(168,211,761)
------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(161,188,441)
------------
------------
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended September 30,
------------------------------------------------------------------
1998 1997
------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
Operations:
Net investment income. . . . . . . . . . . . . . . . $ 7,023,320 $ 13,821,604
Net realized gain on investments . . . . . . . . . . 3,948,496 91,100,936
Increase (decrease) in unrealized
appreciation of investments. . . . . . . . . . . . (172,160,257) 19,103,006
Increase (decrease) in net assets resulting
from operations. . . . . . . . . . . . . . . . . . . $(161,188,441) $124,025,546
Distributions to shareholders from:
Net investment income. . . . . . . . . . . . . . . . $ (9,597,211) $ (13,949,391)
Net realized capital gains . . . . . . . . . . . . . (93,084,048) (102,681,259) (112,712,010) (126,661,401)
------------ -----------
Capital Stock transactions:
Proceeds from Capital Stock sold . . . . . . . . . . $ 36,433,838 $ 171,882,375
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions . . . . . . . . . . 89,093,956 107,501,337
Cost of Capital Stock repurchased. . . . . . . . . . (306,546,410) (181,018,616) (129,073,320) 150,310,392
------------ ----------- ----------- ------------
Total increase (decrease) in net assets. . . . . . . . $(444,888,316) $147,674,537
NET ASSETS
Beginning of year, including
undistributed net investment income
of $3,701,327 and $3,829,114 . . . . . . . . . . . . 830,733,096 683,058,559
------------- -------------
End of year, including
undistributed net investment income
of $1,127,436 and $3,701,327 . . . . . . . . . . . . $ 385,844,780 $ 830,733,096
------------- -------------
------------- -------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold . . . . . . . . . . . . . 2,801,067 11,574,033
Shares issued to shareholders
upon reinvestment of dividends
and distributions. . . . . . . . . . . . . . . . . . 7,263,242 7,390,224
Shares of Capital Stock repurchased. . . . . . . . . . (24,454,493) (8,195,774)
------------- -------------
Increase (decrease) in Capital Stock
outstanding. . . . . . . . . . . . . . . . . . . . . (14,390,184) 10,768,483
------------- -------------
------------- -------------
See notes to financial statements.
</TABLE>
9
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year . . . . . . . . . . . . $ 15.95 $ 16.54 $ 14.90 $14.73 $13.72
------- ------- ------- ------ ------
Net investment income. . . . . . . . . . . . . . . . . . . . $ 0.16 $ 0.29 $ 0.30 $ 0.30 $ 0.24
Net realized and unrealized gain (loss)
on investment securities . . . . . . . . . . . . . . . . . (3.77) 2.30 2.52 1.17 2.54
------- ------- ------- ------ ------
Total from investment operations . . . . . . . . . . . . . . $ (3.61) $ 2.59 $ 2.82 $ 1.47 $ 2.78
------- ------- ------- ------ ------
Less distributions:
Dividends from net investment income . . . . . . . . . . . $ (0.20) $ (0.31) $ (0.27) $(0.29) $(0.25)
Distributions from net realized capital gains. . . . . . . (1.90) (2.87) (0.91) (1.01) (1.52)
------- ------- ------- ------ ------
Total distributions. . . . . . . . . . . . . . . . . . . . $ (2.10) $ (3.18) $ (1.18) $(1.30) $(1.77)
------- ------- ------- ------ ------
Net asset value at end of year . . . . . . . . . . . . . . . $ 10.24 $ 15.95 $ 16.54 $14.90 $14.73
------- ------- ------- ------ ------
------- ------- ------- ------ ------
Total investment return* . . . . . . . . . . . . . . . . . . (24.76)% 17.70% 20.42% 11.11% 21.69%
Ratios/supplemental data:
Net assets at end of year (in $000's). . . . . . . . . . . . 385,845 830,733 683,059 595,917 421,382
Average brokerage commissions per share. . . . . . . . . . . $0.0550 $0.0676 $0.0646 -- --
Ratio of expenses to average net assets. . . . . . . . . . . 0.92% 0.86% 0.87% 0.89% 0.90%
Ratio of net investment income to
average net assets . . . . . . . . . . . . . . . . . . . . 1.14% 1.84% 1.94% 2.25% 1.69%
Portfolio turnover rate. . . . . . . . . . . . . . . . . . . 68% 110% 131% 95% 76%
</TABLE>
- -------------------------------------------------------------------------------
*Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge.
See notes to financial statements.
FEDERAL TAX STATUS OF FISCAL YEAR DISTRIBUTIONS TO SHAREHOLDERS (UNAUDITED)
<TABLE>
<CAPTION>
Ordinary Income Long-Term
Per Share --------------------------- Capital Gain
Payable Date Amount Qualifying Non-Qualifying Distribution
- --------------------- --------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
January 7, 1998. . . $2.04+ 2.2% 45.3% 52.5%
July 8, 1998 . . . . $0.06 29.3% 70.7% -0-
</TABLE>
+ This amount includes a $1.90 capital gain distribution of which $0.83 was
short-term capital gains and therefore taxable as ordinary income. This is
in addition to the $0.14 income dividend which is also taxable as ordinary
income. Even though payment was made in 1998, this distribution was
taxable to shareholders in 1997 under provisions of the Internal Revenue
Code.
Qualifying dividends refers to the amount of dividends which are designated as
qualifying for the 70% dividends received deduction applicable to corporate
shareholders.
A form 1099 will be mailed to each shareholder in January 1999 setting forth
specific amounts to be included in their 1998 tax returns.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 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 year, or if there was not a sale that day, at the
last bid price. Unlisted securities are valued at the most recent bid
price. Short-term investments with maturities of 60 days or less are
valued at cost plus interest earned, which approximates market value.
B. Federal Income Tax
No provision for federal income tax is required because the Fund has
elected to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification and to distribute
each year to its shareholders, in accordance with the minimum distribution
requirements of the Code, all of its taxable net investment income and
taxable net realized gains on investments.
C. Securities Transactions and Related Investment Income
Securities transactions are accounted for on the date the securities
are purchased or sold. Dividend income and distributions to shareholders
are recorded on the ex-dividend date. Interest income and expenses are
recorded on an accrual basis.
D. Use of Estimates
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported. Actual results
could differ from those estimates.
NOTE 2 -- PURCHASES OF INVESTMENT SECURITIES
Cost of purchases of investment securities (excluding short-term
investments with maturities of 60 days or less) aggregated $331,769,423 for
the year ended September 30, 1998. Realized gains or losses are based on
the specific-certificate identification method. The cost of securities
held at September 30, 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 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
11
<PAGE>
fee to the extent necessary to reimburse the Fund for any annual expenses
(exclusive of interest, taxes, the cost of any supplemental
statistical and research information, and extraordinary expenses such as
litigation) in excess of 11/2% of the first $30 million and 1% of the
remaining average net assets of the Fund for the year.
For the year ended September 30, 1998, the Fund paid aggregate fees of
$40,000 to all Directors who are not affiliated persons of the Adviser.
Certain officers of the Fund are also officers of the Adviser and FPA
Fund Distributors, Inc.
NOTE 4 -- DISTRIBUTOR
For the year ended September 30, 1998, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received
$53,540 in net Fund share sales commissions after reallowance to other
dealers. The Distributor pays its own overhead and general administrative
expenses, the cost of supplemental sales literature, promotion and
advertising.
- --------------------------------------------------------------------------------
REPORT OF 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, 1998, the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights, for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1998, 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. as of September 30, 1998, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Los Angeles, California
October 30, 1998
12
<PAGE>
OFFICERS AND DIRECTORS
DIRECTORS
Julio J. de Puzo, Jr.
John P. Endicott
Leonard Mautner
John H. Rubel
John P. Shelton
Joseph Lowitz, CHAIRMAN EMERITUS
John F. Allard, DIRECTOR EMERITUS
OFFICERS
William M. Sams, PRESIDENT AND
CHIEF INVESTMENT OFFICER
Julio J. de Puzo, Jr., EXECUTIVE VICE
PRESIDENT
Eric S. Ende, VICE PRESIDENT
Janet M. Pitman, VICE PRESIDENT
J. Richard Atwood, TREASURER
Sherry Sasaki, SECRETARY
Christopher H. Thomas, ASSISTANT TREASURER
INVESTMENT ADVISER
First Pacific Advisors, Inc.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
DISTRIBUTOR
FPA Fund Distributors, Inc.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
COUNSEL
O'Melveny & Myers LLP
Los Angeles, California
INDEPENDENT AUDITORS
Ernst & Young LLP
Los Angeles, California
CUSTODIAN & TRANSFER AGENT
State Street Bank and Trust Company
Boston, Massachusetts
SHAREHOLDER SERVICE AGENT
Boston Financial Data Services, Inc.
P.O. Box 8500
Boston, Massachusetts 02266-8500
(800) 638-3060
(617) 328-5000
This report has been prepared for the information of shareholders of FPA
Paramount Fund, Inc., and is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus.
13
