<PAGE>
ANNUAL REPORT
FPA PARAMOUNT FUND, INC.
[LOGO]
Distributor:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
SEPTEMBER 30, 1999
<PAGE>
OFFICERS AND DIRECTORS
DIRECTORS
Julio J. de Puzo, Jr.
John P. Endicott
Leonard Mautner
John H. Rubel
John P. Shelton
Joseph Lowitz, CHAIRMAN EMERITUS
John F. Allard, DIRECTOR EMERITUS
OFFICERS
William M. Sams, PRESIDENT AND
CHIEF INVESTMENT OFFICER
Julio J. de Puzo, Jr., EXECUTIVE VICE
PRESIDENT
Eric S. Ende, VICE PRESIDENT
Janet M. Pitman, VICE PRESIDENT
J. Richard Atwood, TREASURER
Sherry Sasaki, SECRETARY
Christopher H. Thomas, ASSISTANT
TREASURER
INVESTMENT ADVISER
First Pacific Advisors, Inc.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
DISTRIBUTOR
FPA Fund Distributors, Inc.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
COUNSEL
O'Melveny & Myers LLP
Los Angeles, California
INDEPENDENT AUDITORS
Ernst & Young LLP
Los Angeles, California
CUSTODIAN & TRANSFER AGENT
State Street Bank and Trust Company
Boston, Massachusetts
SHAREHOLDER SERVICE AGENT
Boston Financial Data Services, Inc.
P.O. Box 8500
Boston, Massachusetts 02266-8500
(800) 638-3060
(617) 483-5000
This report has been prepared for the information of shareholders of FPA
Paramount Fund, Inc., and is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus.
<PAGE>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Annual Report covers the fiscal year ended September 30, 1999. During
this period, the per share net asset value of your Fund decreased 6.8%, while
the Lipper Mid-Cap Value Fund Average increased 14.1%, the Russell 2500
increased 21.8% and the Standard & Poor's 500 Stock Index (S&P 500) increased
27.8%. For the six months ended September 30, 1999, the net asset value of your
Fund increased 15.6%, as compared to increases of 4.0%, 8.9% and 0.4% for the
Lipper Average, the Russell 2500 and the S&P 500, respectively. The above
changes include reinvestment of all dividends and distributions during the
period. On September 30, 1998, the net asset value per share was $10.24 and on
September 30, 1999, it was $9.46. During the year, the Fund paid $0.08 from net
investment income ($0.04 per share paid December 29, 1998 and July 8, 1999, to
shareholders of record on December 22, 1998 and June 30, 1999, respectively.)
THE YEAR IN REVIEW
The stock market continues to be very narrowly focused. If we look at the
S&P 500, only 10 stocks contributed more than 95% of the Index's return since
the beginning of l999. This is further illustrated by the return on the 5
largest stocks in the S&P 500 Index. Even though they accounted for only 12% of
the market cap of the Index at the beginning of the year, they contributed more
than 47% of the Index's return. On average, 56% to 67% of small-, mid- and
large-cap stocks are down since the beginning of 1999. In addition, 58% of the
stocks in the S&P Small Cap Index are down at least 20% from their highs for the
year ended 9/30/99. Comparing the Small Cap Index to the S&P 500, for the same
period, 25% of small-cap stocks versus only 12% of large-cap stocks are down at
least 40%. Only a few large-cap stocks and growth-oriented companies with a
technology emphasis have continued to drive the major stock indices to new
heights.
I have been managing equity portfolios for 33 years; and yet, I have never
witnessed a market that has gone to such extreme valuation differences for such
a LONG PERIOD OF TIME. The level of speculation taking place in the internet
stocks is extremely disturbing. Blue chip and technology stocks are selling at
excessive valuations. Although these areas are producing the most rapid growth,
there is no room left for disappointment. For our portfolio to substantially
outperform, a change in market leadership will need to occur. Indeed, because of
these high valuations in technology and large-cap stocks, I feel the market will
either decline or broaden to include smaller stocks, both of which should be
advantageous for your Fund. I have generally chosen to stay put with a portfolio
of smaller stocks because of their low valuation in relation to what I believe
to be favorable earnings prospects.
WHAT ABOUT THE NEW YEAR?
There have been several positive developments in the portfolio. Our largest
position, Polymer Group, has responded very favorably to investment demand
caused by the exciting outlook for its non-woven cloth product called Miratec.
Non-woven products cost substantially less and are just as durable, if not more
so, than woven and appear to have many uses. Applications include infant car
seats, furniture upholstery, outdoor furniture pads, pillow ticking, office
panel fabrics, comforters and decorative bedding, table linens, handbags, and a
broad range of apparel. Miratec is now commercial, and Polymer is the only
company that has it. Although the outlook is outstanding, I have modestly
reduced the position because of its size. Also, our gold positions have
responded to an agreement by fifteen European Central Banks to limit their
lending and sales over the next five years. This has greatly reduced the
uncertainty of how much gold is out there for sale. We decreased our gold
position by
2
<PAGE>
approximately one quarter as we sold into the rally in gold stocks, and we are
prepared to sell more upon further strength in this sector. I might add that, if
there is a significant market correction, the gold sector should provide a
buffer on the downside.
Recent additions to the portfolio after our fiscal year end include DBT
Online, Global Industries, Unifi, and Waste Management. DBT Online is an
internet related company that even I can live with. Its revenues are growing
around 40% per year, and it has never lost money, unlike many of its brethren.
DBT is engaged in electronic information retrieval that provides on-line,
real-time access to public records. The Company has one of the largest data
bases in existence, having a file on almost every person in the U.S. Its
software allows a person to locate where an individual lives, his driver's
license number, social security number, house and other mortgages, marital
status, phone number, and the phone numbers of surrounding neighbors. You can
quickly see why the company's major customers are law enforcement agencies,
private investigative firms, insurance firms and prospective employers. DBT
stays away from credit information as it is highly regulated.
Global Industries provides construction services, including pipeline
construction, platform installation and removal, construction support and diving
services to the offshore oil and gas industry in the Gulf of Mexico and
international areas. The company should benefit from the recovery in the
drilling cycle and is expected to generate an annual growth rate of 30%.
Unifi is engaged in the processing of synthetic yarns. The Company has a
significant market share position that gives it pricing power in a difficult
textile environment. The Company also has strategic long-term initiatives to
enrich its sales mix through additional value-added processing(dyeing and
twisting,) and specialty yarn spinning.
Waste Management is the largest U.S. waste disposal company, and its
landfills represent valuable assets. The company has badly missed its earnings
numbers, recently fired its CEO, and investors are now waiting for a huge
write-off. A new CEO must be hired, assets sold, with the proceeds used to pay
down debt. The stock has declined from $60 and we recently purchased it at an
average cost of $18.68 which should reflect most, if not all, the negatives.
Free cash flow should be around $1.50 - $2.00 per share in the year 2000. Under
new management, this company has the potential to generate significant returns
to its shareholders.
We are encouraged by the Fund's improving performance over the last six
months. Hopefully, that trend will continue throughout the new year. Thank you
for staying put. I can assure you that I am working hard to reward those
shareholders that have continued to support me during a period where our
contrarian, value oriented style has been out of favor. I know that your
patience has been severely tested, but I believe that it will be rewarded as the
market broadens and our holdings of companies with favorable earnings prospects
and low valuations are recognized in the market.
Respectfully submitted,
/s/ William M. Sams
William M. Sams
President
November 16, 1999
3
<PAGE>
HISTORICAL PERFORMANCE
CHANGE IN VALUE OF A $10,000 INVESTMENT IN FPA PARAMOUNT FUND, INC. VS.
RUSSELL 2500 INDEX AND LIPPER MID-CAP VALUE FUND AVERAGE FROM OCTOBER 1,
1989 TO SEPTEMBER 30, 1999
[GRAPH]
<TABLE>
<CAPTION>
Average Annual Total Return
FPA Paramount Fund, Inc. Years Ended September 30, 1999
-------------------------------
1 Year 5 Years 10 Years
- ------------------------------------------------------------------
<S> <C>
At Net Asset Value -6.79% 2.01% 7.54%
With Maximum 6.5% Sales Charge -12.85% 0.65% 6.82%
</TABLE>
<TABLE>
<CAPTION>
9/30/89 9/30/90 9/30/91 9/30/92 9/30/93 9/30/94 9/30/95 9/30/96 9/30/97 9/30/98 9/30/99
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FPA Paramount Fund, Inc. 9,350 9,068 11,708 12,508 14,394 17,516 19,462 23,436 27,584 20,755 19,348
FPA Paramount Fund, Inc. (NAV) 10,000 9,698 12,522 13,377 15,395 18,734 20,815 25,065 29,502 22,197 20,693
Lipper Mid-Cap Value Fund Average 10,000 7,814 11,034 11,948 15,059 15,303 17,911 20,961 29,360 24,885 28,353
Russell 2500 Index 10,000 7,571 11,121 12,268 15,953 16,417 20,598 23,861 32,048 26,786 32,618
</TABLE>
Past performance is not indicative of future performance. The Russell 2500 Index
consists of the 2,500 smallest companies in the Russell 3000 total
capitalization universe. This index is considered a measure of small to medium
capitalization stock performance. This index does not reflect any commissions or
fees which would be incurred by an investor purchasing the stocks they
represent. The Lipper Mid-Cap Fund Average provides an additional comparison of
how your Fund performed in relation to other mutual funds with similar
objectives. The Lipper data does not include sales charges. The performance
shown for FPA Paramount Fund, Inc., with an ending value of $19,348 reflects
deduction of the current maximum sales charge of 6.5% of the offering price. In
addition, since investors purchase shares of the Fund with varying sales charges
depending primarily on volume purchased, the Fund's performance at net asset
value (NAV) is also shown, as reflected by the ending value of $20,693. The
performance of the Fund and of the Averages is computed on a total return basis
which includes reinvestment of all distributions.
4
<PAGE>
MAJOR PORTFOLIO CHANGES
Six Months Ended September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
SHARES
----------------
<S> <C>
NET PURCHASE
COMMON STOCK
Prison Realty Corporation ................................... 120,000
NET SALES
COMMON STOCKS
Chieftain International, Inc. (2) ........................... 150,000
Homestake Mining Company .................................... 1,100,000
Lone Star Steakhouse & Saloon, Inc. (2) ..................... 550,000
Newmont Mining Corporation .................................. 560,000
Paging Network, Inc. ........................................ 3,140,000
Placer Dome Inc. ............................................ 900,000
Polymer Group, Inc. ......................................... 36,500
Service Merchandise Company, Inc. (2) ....................... 1,751,400
Stanley Works, The (2) ...................................... 200,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1999
<TABLE>
<CAPTION>
COMMON STOCKS Shares Value
- ------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
MINING -- 30.3%
Homestake Mining Company............................................................. 1,900,000 $ 17,456,250
Newmont Mining Corporation........................................................... 700,000 18,112,500
Placer Dome Inc...................................................................... 1,100,000 16,362,500
------------
$ 51,931,250
------------
CONSUMER NON-DURABLE GOODS -- 30.0%
Oakley, Inc.*........................................................................ 1,865,100 $ 11,540,306
Polymer Group, Inc.*+................................................................ 2,700,000 39,825,000
------------
$ 51,365,306
------------
HEALTH CARE -- 7.7%
Magellan Health Services, Inc.*+..................................................... 1,800,000 $ 13,162,500
------------
REAL ESTATE INVESTMENT TRUST -- 7.3%
Koger Equity, Inc.................................................................... 300,000 $ 4,800,000
Prison Realty Corporation............................................................ 720,000 7,740,000
------------
$ 12,540,000
------------
OIL & GAS PRODUCTION/EXPLORATION -- 3.5%
EEX Corporation*..................................................................... 2,000,000 $ 5,875,000
------------
RESTAURANTS -- 1.0%
Luby's, Inc.......................................................................... 150,000 $ 1,725,000
------------
COMMUNICATIONS & INFORMATION -- 0.4%
Paging Network, Inc.*................................................................ 660,000 $ 680,625
------------
TOTAL COMMON STOCKS-- 80.2% (Cost $183,021,119)...................................... $137,279,681
------------
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1999
<TABLE>
<CAPTION>
Principal
Amount Value
------------ ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 6.5%
Short-term Corporate Notes:
General Electric Capital Corporation-- 5.28% 10/1/99................................. $1,000,000 $ 1,000,000
Grainger (W.W.), Inc.-- 5.31% 10/4/99................................................ 1,000,000 999,558
MetLife Funding, Inc.-- 5.33% 10/4/99................................................ 1,500,000 1,499,334
MetLife Funding, Inc.-- 5.32% 10/8/99................................................ 1,500,000 1,498,448
AT&T Co.-- 5.26% 10/18/99............................................................ 1,500,000 1,496,274
GTE Funding, Inc.-- 5.31% 10/19/99................................................... 1,000,000 997,345
Bell Atlantic Financial Services, Inc.-- 5.3% 10/22/99............................... 2,500,000 2,492,271
State Street Bank Repurchase Agreement -- 4 1/4% 10/1/99
(Collateralized by U.S. Treasury Notes
--8 1/8% 2021, market value $1,142,419).............................................. 1,116,000 1,116,132
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $11,099,362)........................................ $ 11,099,362
------------
TOTAL INVESTMENTS-- 86.7% (Cost $194,120,481).......................................... $148,379,043
Other assets and liabilities, net -- 13.3%............................................. 22,840,945
------------
TOTAL NET ASSETS-- 100%................................................................ $171,219,988
------------
------------
</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 affiliates during the year ended
September 30, 1999.
<TABLE>
<CAPTION>
Purchases Sales Realized Dividend
at Cost at Cost Gain (Loss) Income
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Magellan Health Services, Inc. $8,857,683 -- -- --
Polymer Group, Inc. -- $ 460,813 $ (6,603) --
Service Merchandise Company, Inc. -- 42,525,597 (40,188,607) --
</TABLE>
See notes to financial statements.
7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $183,021,119)......................................................... $ 137,279,681
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less)........................................................ 11,099,362 $148,379,043
-------------
Cash....................................................................................... 469
Receivable for:
Investment securities sold............................................................... $ 23,702,007
Dividends................................................................................ 105,000
Capital Stock sold....................................................................... 1,699 23,808,706
------------- ------------
$172,188,218
LIABILITIES
Payable for:
Capital Stock repurchased................................................................ $ 794,628
Advisory fees and financial services..................................................... 107,102
Accrued expenses......................................................................... 66,500 968,230
------------- ------------
NET ASSETS................................................................................... $171,219,988
------------
------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.25 per share; authorized
100,000,000 shares; outstanding 18,095,905 shares........................................ $ 4,523,976
Additional Paid-in Capital................................................................. 318,774,058
Accumulated net realized loss on investments............................................... (106,725,516)
Undistributed net investment income........................................................ 388,908
Unrealized depreciation of investments..................................................... (45,741,438)
------------
NET ASSETS................................................................................... $171,219,988
------------
------------
NET ASSET VALUE, REDEMPTION PRICE AND MAXIMUM
OFFERING PRICE PER SHARE
Net asset value and redemption price per share
(net assets divided by shares outstanding)................................................ $ 9.46
------
------
Maximum offering price per share
(100/93.5 of per share net asset value)................................................... $10.12
------
------
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest................................................................................ $ 1,049,874
Dividends............................................................................... 2,722,340
-------------
$ 3,772,214
EXPENSES
Advisory fees........................................................................... $ 1,637,506
Transfer agent fees and expenses........................................................ 317,170
Financial services...................................................................... 244,232
Directors' fees and expenses............................................................ 55,081
Legal fees.............................................................................. 33,068
Custodian fees and expenses............................................................. 31,560
Reports to shareholders................................................................. 30,786
Audit fees.............................................................................. 27,975
Registration fees....................................................................... 22,609
Insurance............................................................................... 17,576
Other expenses.......................................................................... 12,496 2,430,059
------------- -------------
Net investment income........................................................... $ 1,342,155
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized loss on investments:
Proceeds from sales of investment securities (excluding
short-term investments with maturities of 60 days or less)............................ $ 210,134,467
Cost of investment securities sold...................................................... 316,335,049
-------------
Net realized loss on investments.................................................... $(106,200,582)
Change in unrealized appreciation/depreciation of investments:
Unrealized depreciation at beginning of year............................................ $(120,286,962)
Unrealized depreciation at end of year.................................................. (45,741,438)
-------------
Change in unrealized appreciation/depreciation of investments....................... 74,545,524
-------------
Net realized and unrealized loss on investments................................. $ (31,655,058)
-------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS........................................................................... $ (30,312,903)
-------------
-------------
</TABLE>
See notes to financial statements.
9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
1999 1998
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
Operations:
Net investment income................................ $ 1,342,155 $ 7,023,320
Net realized gain (loss) on investments.............. (106,200,582) 3,948,496
Change in unrealized
appreciation/depreciation
of investments...................................... 74,545,524 (172,160,257)
------------- --------------
Decrease in net assets
resulting from operations............................ $ (30,312,903) $(161,188,441)
Distributions to shareholders from:
Net investment income................................ $ (2,080,683) $ (9,597,211)
Net realized capital gains........................... -- (2,080,683) (93,084,048) (102,681,259)
------------- --------------
Capital Stock transactions:
Proceeds from Capital Stock sold..................... $ 9,987,650 $ 36,433,838
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions..................... 1,792,858 89,093,956
Cost of Capital Stock repurchased.................... (194,011,714) (182,231,206) (306,546,410) (181,018,616)
------------- ------------- -------------- -------------
Total decrease in net assets........................... $(214,624,792) $(444,888,316)
NET ASSETS
Beginning of year, including
undistributed net investment income
of $1,127,436 and $3,701,327......................... 385,844,780 830,733,096
------------- -------------
End of year, including
undistributed net investment income
of $388,908 and $1,127,436........................... $ 171,219,988 $ 385,844,780
------------- -------------
------------- -------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold........................... 1,067,385 2,801,067
Shares issued to shareholders upon
reinvestment of dividends and
distributions........................................ 201,047 7,263,242
Shares of Capital Stock repurchased.................... (20,849,919) (24,454,493)
------------- -------------
Decrease in Capital Stock
outstanding.......................................... (19,581,487) (14,390,184)
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year................................ $ 10.24 $ 15.95 $ 16.54 $ 14.90 $ 14.73
-------- --------- -------- -------- --------
Income from investment operations:
Net investment income.............................................. $ 0.07 $ 0.16 $ 0.29 $ 0.30 $ 0.30
Net realized and unrealized gain (loss)
on investment securities.......................................... (0.77) (3.77) 2.30 2.52 1.17
-------- --------- -------- -------- --------
Total from investment operations.................................... $ (0.70) $ (3.61) $ 2.59 $ 2.82 $ 1.47
-------- --------- -------- -------- --------
Less distributions:
Dividends from net investment income.............................. $ (0.08) $ (0.20) $ (0.31) $ (0.27) $ (0.29)
Distributions from net realized capital gains..................... -- (1.90) (2.87) (0.91) (1.01)
-------- --------- -------- -------- --------
Total distributions............................................... $ (0.08) $ (2.10) $ (3.18) $ (1.18) $ (1.30)
-------- --------- -------- -------- --------
Net asset value at end of year...................................... $ 9.46 $ 10.24 $ 15.95 $ 16.54 $ 14.90
-------- --------- -------- -------- --------
-------- --------- -------- -------- --------
Total investment return*............................................ (6.79)% (24.76)% 17.70% 20.42% 11.11%
Ratios/supplemental data:
Net assets at end of year (in $000's)............................... 171,220 385,845 830,733 683,059 595,917
Ratio of expenses to average net assets............................. 1.03% 0.92% 0.86% 0.87% 0.89%
Ratio of net investment income to
average net assets................................................ 0.57% 1.14% 1.84% 1.94% 2.25%
Portfolio turnover rate............................................. 21% 68% 110% 131% 95%
</TABLE>
*Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge.
See notes to financial statements.
- --------------------------------------------------------------------------------
FEDERAL TAX STATUS OF FISCAL YEAR DISTRIBUTIONS TO SHAREHOLDERS (UNAUDITED)
<TABLE>
<CAPTION>
Ordinary Income Long-Term
Per Share ----------------------------- Capital Gain
Payable Date Amount Qualifying Non-Qualifying Distribution
- -------------------------------- --------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
December 29, 1998............... $0.04 36.4% 63.6% -0-
July 8, 1999.................... $0.04 50.5% 49.5% -0-
</TABLE>
Qualifying dividends refers to the amount of dividends which are designated as
qualifying for the 70% dividends received deduction applicable to corporate
shareholders.
A form 1099 will be mailed to each shareholder in January 2000 setting forth
specific amounts to be included in their 1999 tax returns.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
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 $47,603,106 for the
year ended September 30, 1999. Realized gains or losses are based on the
specific-certificate identification method. The cost of securities held at
September 30, 1999 was the same for federal income tax and financial reporting
purposes. Gross unrealized appreciation and depreciation for all securities at
September 30, 1999 for federal income tax purposes was $14,909,017 and
$60,650,455, respectively. The Fund currently has accumulated net realized loses
in the amount of $106,725,516 which can be carried forward to offset future
gains. The ability to carry these losses forward ultimately expires in 2007.
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
12
<PAGE>
Fund, providing, however, that this reimbursement shall not exceed 0.1% of the
average daily net assets for any fiscal year. The Agreement obligates the
Adviser to reduce its fee to the extent necessary to reimburse the Fund for any
annual expenses (exclusive of interest, taxes, the cost of any supplemental
statistical and research information, and extraordinary expenses such as
litigation) in excess of 1 1/2% of the first $30 million and 1% of the remaining
average net assets of the Fund for the year.
For the year ended September 30, 1999, the Fund paid aggregate fees of
$52,000 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, 1999, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $10,025 in
net Fund share sales commissions after reallowance to other dealers. The
Distributor pays its own overhead and general administrative expenses, the cost
of supplemental sales literature, promotion and advertising.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF FPA PARAMOUNT FUND, INC.
We have audited the accompanying statement of assets and liabilities of FPA
Paramount Fund, Inc., including the portfolio of investments, as of September
30, 1999, the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights, for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1999, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of FPA
Paramount Fund, Inc. as of September 30, 1999, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Los Angeles, California
November 12, 1999
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