<PAGE>
PROSPECTUS FPA PARAMOUNT FUND, INC.
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
November 30, 1998, 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 STATE
SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
[LOGO FPA FUND DISTRIBUTORS, INC.]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, CA90064
NOVEMBER 30, 1998
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FPA PARAMOUNT FUND, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
(310) 473-0225
INVESTMENT First 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) 483-5000
(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
<TABLE>
<CAPTION>
PAGE
<S> <C>
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........................................... 8
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...................................................... 10
Pre-Authorized Investment Plan.......................................... 10
Retirement Plans........................................................ 11
Systematic Withdrawal Plan.............................................. 11
Redemption of Shares...................................................... 11
<CAPTION>
PAGE
<S> <C>
Telephone Transactions.................................................. 12
Reinvestment Privilege.................................................. 12
Dividends, Distributions and Taxes........................................ 12
Dividends............................................................... 12
Capital Gains........................................................... 12
Taxes................................................................... 13
Investment Practices, Risks and Restrictions.............................. 13
Gold Stocks............................................................. 13
Securities of Foreign Issuers........................................... 13
Foreign Currency Transactions........................................... 13
Short Sales Against the Box............................................. 14
Repurchase Agreements................................................... 14
Brokerage Practices..................................................... 14
Portfolio Turnover...................................................... 14
Investment Restrictions................................................. 14
Additional Information.................................................... 15
Common Stock............................................................ 15
Voting Rights........................................................... 15
Shareholder Inquiries................................................... 15
Shareholder Service Agent............................................... 15
Custodian............................................................... 15
Legal Counsel........................................................... 15
Independent Auditors.................................................... 15
</TABLE>
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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............................................................. 0.68%
12b-1 Fees.................................................................. None
Other Expenses (including financial services)............................... 0.24%
---------
Total Fund Operating Expenses............................................... 0.92%
</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: $ 74.00 $ 92.00 $ 113.00 $ 171.00
</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.
3
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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,
----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <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 $ 13.09 $ 14.06 $ 12.04 $ 14.71 $ 14.07
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income.... $ 0.16 $ 0.29 $ 0.30 $ 0.30 $ 0.24 $ 0.25 $ 0.31 $ 0.42 $ 0.56 $ 0.49
Net realized and
unrealized gain (loss)
on investment
securities............. (3.77) 2.30 2.52 1.17 2.54 1.61 0.57 2.83 (0.91) 2.07
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations............. $ (3.61) $ 2.59 $ 2.82 $ 1.47 $ 2.78 $ 1.86 $ 0.88 $ 3.25 $ (0.35) $ 2.56
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment income.... $ (0.20) $ (0.31) $ (0.27) $ (0.29) $ (0.25) $ (0.25) $ (0.36) $ (0.48) $ (0.56) $ (0.45)
Distributions from net
realized capital
gains................ (1.90) (2.87) (0.91) (1.01) (1.52) (0.98) (1.49) (0.75) (1.76) (1.47)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions...... $ (2.10) $ (3.18) $ (1.18) $ (1.30) $ (1.77) $ (1.23) $ (1.85) $ (1.23) $ (2.32) $ (1.92)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value at end of
year................... $ 10.24 $ 15.95 $ 16.54 $ 14.90 $ 14.73 $ 13.72 $ 13.09 $ 14.06 $ 12.04 $ 14.71
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total investment return
*...................... (24.76)% 17.70% 20.42% 11.11% 21.69% 15.08% 6.83% 29.12% (3.02)% 21.07%
Ratios/supplemental data:
Net assets at end of year
(in $000's)............ 385,845 830,733 683,059 595,917 421,382 327,179 279,990 250,980 199,381 217,164
Ratio of expenses to
average net assets..... 0.92% 0.86% 0.87% 0.89% 0.90% 0.89% 0.92% 0.93% 0.95% 0.95%
Ratio of net investment
income to average net
assets................. 1.14% 1.84% 1.94% 2.25% 1.69% 1.83% 2.33% 3.08% 4.30% 3.60%
Portfolio turnover
rate................... 68% 110% 131% 95% 76% 98% 146% 101% 94% 132%
Average brokerage
commissions per
share.................. $0.0550 $0.0676 $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. First Pacific Advisors,
Inc. ("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 seeking capital
appreciation and income and in owning common stocks and other securities.
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. There is no assurance, however, that
the Adviser's practices will reduce risk and in any event shares of the Fund may
decrease in value especially during periods of general decline in market prices
of equity securities.
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 and
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.
Although the Fund may not invest more than 5% of its total assets in the
securities of any one issuer (except the U.S. Government) at the time of
purchase, changes in market prices and the assets of the Fund may from time to
time cause more than 5% or even 10% of the Fund's assets to be invested in
securities of a single company. For example, on October 30, 1998, approximately
47% of the Fund's assets were represented by six issuers in which more than 5%
of the Fund's assets were invested. The largest holding represented
approximately 12% of the Fund's total assets. Such relative concentration is
likely to increase the volatility of the Fund's net asset value per share.
Although the Fund may not invest more than 25% of its total assets in any one
industry at the time of purchase, changes in market prices and the assets of the
Fund may from time to time cause more than 25% of the Fund's assets to be
invested in one industry. For example, on October 30, 1998, approximately 29% of
the Fund's assets were invested in securities of three gold mining companies.
Such relative concentration may increase risk of loss as well as potential for
gain. See "Gold Stocks."
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 "Securities of Foreign Issuers"
and "Foreign Currency Transactions."
5
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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 a security 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 "Portfolio Turnover."
THE FUND AND ITS MANAGEMENT
The Fund is a Maryland corporation and a diversified, open-end management
investment company, generally called a mutual fund, which was organized in 1958.
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 twelve years and portfolio manager of the Fund for over
seventeen 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
$3.3 billion for seven investment companies, including one closed-end investment
company, and 28 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 0.78% 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 0.92% 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
6
<PAGE>
form should be used to change information and authorize these services.
Authorizing 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.
7
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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 generally are priced based on net
asset value for the next business day. However, orders received by certain
retirement plans and certain other financial intermediaries before the NYSE
closes and communicated to the Shareholder Service Agent by 9:30 a.m., Eastern
time, on the following business day are priced at the net asset value for the
prior 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.
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
8
<PAGE>
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 the 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 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
9
<PAGE>
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 a 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 0.15
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.
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
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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. Persons with earned income
ineligible for deductible contributions generally may make non-deductible
contributions and earnings on shares held in an IRA are tax-deferred. The
Taxpayer Relief Act of 1997 expanded opportunities for certain investors to make
deductible contributions to IRAs and also created two new tax-favored accounts,
the Roth IRA and the Education IRA, in which earnings (subject to certain
restrictions) are not taxed even on withdrawal. 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 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. 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, except that redemption orders
received by an authorized dealer, certain retirement plans and certain other
financial intermediaries before the NYSE closes are priced at the closing price
for that day if communicated to the Shareholder Service Agent within the times
specified under "Purchase of Shares." A check for the proceeds is mailed within
seven days after the Shareholder Service Agent receives the
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<PAGE>
request in good order. If Fund shares redeemed were recently purchased by check,
the Shareholder Service Agent may delay payment of the redemption proceeds until
it confirms the purchase check has cleared, usually a period of up to 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 is 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.
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
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<PAGE>
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
GOLD STOCKS. As long as the Fund maintains significant investments in gold
mining companies, an investment in the Fund may involve special considerations.
These include fluctuations in the price of gold; the potential effect of the
concentration of the sources of supply of gold and control over the sale of
gold; changes in U.S. or foreign tax, currency, or mining laws; increased
environmental costs; and unpredictable monetary policies and economic and
political conditions. Also, even gold mining companies with strong balance
sheets are likely to be adversely impacted by lower profitability from lower
gold prices.
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
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
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<PAGE>
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 which 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.
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
14
<PAGE>
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.
Thus, if securities of a given issuer come to constitute more than 5%, or
securities of a given industry come to constitute more than 25%, of the value of
the Fund's assets by reason of changes in value of either the given securities
or other assets, the excess need not be sold. 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.
15
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
November 30, 1998
FPA PARAMOUNT FUND, INC.
This Statement of Additional Information ("Statement") supplements the current
Prospectus of FPA Paramount Fund, Inc. ("Fund") dated November 30, 1998. 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
<TABLE>
<CAPTION>
Page
<S> <C>
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Reports to Shareholders . . . . . . . . . . . . . . . . . . . . . . . 2
Year 2000 Problem . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Policies and Risks. . . . . . . . . . . . . . . . . . . . . . . 2
Securities of Foreign Issuers . . . . . . . . . . . . . . . . . . . . 2
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . . . 2
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . 3
Leverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Gold Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Directors and Officers of the Fund . . . . . . . . . . . . . . . . . . . . 5
Five Percent Shareholders . . . . . . . . . . . . . . . . . . . . . . 7
Investment Advisory Agreement. . . . . . . . . . . . . . . . . . . . . . . 7
Prior Performance Information. . . . . . . . . . . . . . . . . . . . . . . 9
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . 10
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Purchase and Redemption of Shares. . . . . . . . . . . . . . . . . . . . . 11
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Sales Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Authorized Financial Intermediaries . . . . . . . . . . . . . . . . . 12
Sales at Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . 12
Letter of Intent. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
FPA Exchange Privilege. . . . . . . . . . . . . . . . . . . . . . . . 13
Redemption of Shares. . . . . . . . . . . . . . . . . . . . . . . . . 13
Telephone Redemption. . . . . . . . . . . . . . . . . . . . . . . . . 13
Tax Sheltered Retirement Plans . . . . . . . . . . . . . . . . . . . . . . 14
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . . . . . 14
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE>
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.
YEAR 2000 PROBLEM. Like other mutual funds, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used by the Adviser and other service providers
do not properly process and calculate date-related information and data from and
after January 1, 2000. This is commonly known as the "Year 2000 Problem." The
Adviser is taking steps that it believes are reasonably designed to address the
Year 2000 Problem with respect to computer systems that it uses and to obtain
reasonable assurances that comparable steps are being taken by the Fund's other
major service providers. At this time, however, there can be no assurance that
these steps will be sufficient to avoid any adverse impact to the Fund.
INVESTMENT POLICIES AND RISKS
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.
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<PAGE>
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 canceled in which event the Fund would realize no
gain or loss on the short sale, except for brokerage commissions.
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 against the box involving stock or
securities (except conventional debt such as ordinary corporate or United States
Treasury bonds) that could be sold at a gain is treated as a constructive sale
requiring recognition of taxable gain.
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 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.
3
<PAGE>
The Fund has not borrowed for more than nineteen years and has no present
intention to do so.
GOLD STOCKS. As long as the Fund maintains significant investments in gold
mining companies, shares of the Fund may be affected by fluctuations in the
price of gold. The price of gold has recently been subject to substantial
upward and downward movements over short periods of time and may be affected by
unpredictable international monetary and political policies, such as currency
devaluations or reevaluations, economic conditions within an individual country,
trade imbalances or trade or currency restrictions between countries, and world
inflation rates and interest rates. Several central banks recently have sold
gold bullion from their reserves. Sales by central banks and/or rumors of these
sales have had a negative effect on gold prices. The price of gold, in turn, is
likely to affect the market prices of securities of companies mining gold and,
accordingly, the value of the Fund's investments in these securities.
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.
4
<PAGE>
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 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."
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 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, their ages on the date hereof 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., 44, Director and Executive Vice President (1)
Director (since October 1995), Principal 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 and Chief Executive Officer (since January 1997), 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, and Senior Vice President from February 1993 to October
1995, of the Adviser. Treasurer from June 1981 to August 1996 of the Fund, from
May 1982 to August 1996 of Source; from September 1983 to August 1996 of
Perennial; and from July 1984 to August 1996 of Capital and of New Income.
Chief Financial Officer from October 1991 to March 1998, and Executive Vice
President (or Senior Vice President or First Vice President) from October 1991
to January 1997 of the Distributor.
John P. Endicott, 80, 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, 81, 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.
5
<PAGE>
(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, 78, 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, 78, 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, 61, President & Chief Investment Officer
Director and Principal since March 1996 of the Adviser; and Director since
January 1997 of the Distributor. Executive Vice President from November 1981 to
March 1996 of the Adviser; and from September 1983 to August 1995 of Perennial.
Eric S. Ende, 54, Vice President
Senior Vice President (or Vice President) of the Adviser for more than the past
five years, and Chief Investment Officer since May 1997 and Senior Vice
President (or Vice President) for more than the past five years of Source, 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 (or Vice President) of Perennial from May 1985 to
September 1995.
Janet M. Pitman, 55, Vice President
Vice President of the Adviser for more than the past five years, of Source and
of Perennial since April 1996, and of Capital and of New Income since February
1997.
J. Richard Atwood, 38, Treasurer
Senior Vice President, Chief Financial Officer and Treasurer of the Adviser
since January 1997; and Chief Financial Officer since March 1998, 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 July 1988 to January 1995, and Assistant
Treasurer of the Distributor from May 1991 to January 1995. Assistant Treasurer
of the Fund, of Capital, of New Income, of Perennial, and of Source from 1988 to
1995.
Sherry Sasaki, 43, 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, 41, 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, of the Fund 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
6
<PAGE>
$40,000 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 10,000 15,000**
Leonard Mautner 10,000 15,000**
John H. Rubel 10,000 10,000
John P. Shelton 10,000 10,000
</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 eight persons engaged full
time in portfolio management or investment research in addition to 26 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 October 30, 1998, 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 97163, 4800 Deer Lake Drive, East
Floor 2, Jacksonville, Florida 32246-6484, which held 2,629,899 shares (7.3%).
Such broker-dealer advises that the shares are held for the benefit of its
customers.
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.
7
<PAGE>
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 some 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.
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 May 31, 1999, 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, 1996, 1997 and 1998, the Adviser
received gross advisory fees of $4,090,006, $4,896,408, and $4,186,818,
respectively, plus $538,992, $715,380, and $636,434, respectively for costs
incurred in providing financial services to the Fund.
8
<PAGE>
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:
n
P(1 + T) = 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.
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, 1998 was (29.65)%, 6.16%, and 9.65%, 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 (24.76)%, 7.60%, and 10.39%, 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.
9
<PAGE>
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.
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, 1996, 1997 and 1998 totaled $2,681,278, $2,599,684,
and $1,501,914, respectively. During the last fiscal year, $1,220,492 of
commissions were paid on transactions having a total value of $446,174,862 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
10
<PAGE>
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, 1999, 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.
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, 1996, 1997 and 1998, total
underwriting commissions on the sale of Fund shares were $1,737,788, $4,148,190,
and $678,116, respectively. Of such totals, the amount retained each year by
the Distributor, after reallowance to other dealers, was $95,250, $355,286, and
$53,540, 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, Martin Luther King, Jr. 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 80% to 95%, depending on the size of
the investment. During special promotions, the Distributor may reallow up to
100%
11
<PAGE>
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.
AUTHORIZED FINANCIAL INTERMEDIARIES. The Fund has authorized certain financial
intermediaries including one or more brokers to accept on its behalf purchase
and redemption orders; such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf;
the Fund is deemed to have received a purchase or redemption order when an
authorized financial intermediary including an authorized broker or if
applicable a broker's authorized designee accepts the order; and customer orders
are priced at the Fund's net asset value next computed after they are accepted
by an authorized financial intermediary including an authorized broker or the
broker's authorized designee.
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.
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
12
<PAGE>
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 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.
13
<PAGE>
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.
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,
14
<PAGE>
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 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, 1998
<TABLE>
<S> <C>
Net asset value and redemption price per share
(net assets divided by shares outstanding) . . . . . . . . . . .$10.24
Offering price per share
(100/93.5 of per share net asset value). . . . . . . . . . . . .$10.95
</TABLE>
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.
15
<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>
16
<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 -- 5 1/2% 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. -- 5 1/2% 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 -- 4 3/4% 10/1/98
(Collateralized by U.S. Treasury Notes
-- 9 7/8% 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.
17
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
<TABLE>
<S> <C> <C>
ASSETS
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.
18
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
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.
19
<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
------------- ------------
------------- ------------
</TABLE>
See notes to financial statements.
20
<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
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fee to the extent necessary to reimburse the Fund for any annual expenses
(exclusive of interest, taxes, the cost of any supplemental statistical and
research information, and extraordinary expenses such as litigation) in excess
of 1 1/2% of the first $30 million and 1% of the remaining average net assets of
the Fund for the year.
For the 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.
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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. (the "Fund"), including the portfolio of investments, as
of September 30, 1998, 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, 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. at 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 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
October 30, 1998
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