<PAGE>
ANNUAL REPORT
FPA Paramount Fund, Inc.
[First Pacific Advisors Logo]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
SEPTEMBER 30, 2000
<PAGE>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Annual Report covers the fiscal year ended September 30, 2000. During this
period, the per share net asset value of your Fund decreased 21.7%, while the
Lipper Mid-Cap Value Fund Average increased 24.2%, the Russell 2500 Index
increased 29.5% and the S&P 500 Stock Index increased 13.3%. For the six months
ended September 30, 2000, the net asset value of your Fund decreased 7.4%, as
compared to an increase of 4.9% for the Lipper Average, and decreases of 1.7%
and 3.6% for the Russell 2500 and the S&P 500, respectively. The above changes
include reinvestment of all dividends and distributions during the period.
REDUCTION IN SALES CHARGES
We have reviewed the Fund's current sales charges and determined that a
reduction is appropriate when compared to similar funds and fund complexes.
Effective January 1, 2001, the maximum sales charge will be lowered from 6.50%
to 5.25%, with adjustments to the breakpoints.
COMMENTARY
In the Semi-Annual Report to shareholders covering the six months ended
March 31, 2000, we reported on some significant events affecting FPA Paramount
Fund. Bill Sams announced his retirement as President and Portfolio Manger of
the Fund and the Board of Directors approved Eric Ende and Steven Geist as the
new Portfolio Managers. At that time we described the changes in strategy we
intended to implement and how this would affect the Fund's portfolio. Now in
this Annual Report to shareholders, we will describe how the process is
proceeding.
Our first task was to sell all the stocks in Paramount's portfolio at the
time of the manager change - the natural consequence of the very significant
differences in investment philosophy between the current and prior managers.
Second quarter performance was hindered by this portfolio restructuring. The
liquidation process was completed by mid-May.
We have worked steadily to reinvest the proceeds of the stock sales. As of
September, shares in 26 companies worth $40 million had been purchased,
amounting to about 55% of the Fund's total assets. We target companies which are
industry leaders, with good balance sheets and carrying high returns on capital
- but not selling at high price-earnings ratios.
We would like to describe some of the companies added to Paramount's
portfolio. Carnival is the leading company in the cruise industry, with the best
margins and balance sheet, and a history of steady growth and increasing market
share. MANPOWER is a worldwide leader in providing temporary employees with 80%
of its business outside the United States. KNIGHT TRANSPORTATION is a
Phoenix-based trucking company which has combined consistent rapid growth with
the best operating margins in the industry. DENTSPLY is the leading manufacturer
of dental products, with a history of product innovation and steady growth.
These companies, as well as the others added to the portfolio, have
financial characteristics far superior to those of the average company, as shown
in the chart below, which compares Paramount's portfolio to the Russell 2500 in
several key measures of financial performance and valuation.
<TABLE>
<CAPTION>
10-Yr. Return
EPS on Debt %
Growth Equity Capital PE
------ ------- ------- --
<S> <C> <C> <C> <C>
Paramount 18% 21% 27% 14x
Russell 2500 10% 13% 42% 25x
</TABLE>
The stocks in Paramount's portfolio have grown faster and earn higher
returns, yet have less balance sheet leverage and sell at lower PE's than the
average for the Index - just what we are looking for in the companies we
consider for inclusion in the portfolio.
In the months ahead we expect to continue to build the Paramount portfolio,
looking for opportunities to add attractive companies selling at modest
valuations. Our objective is to eventually
1
<PAGE>
become fully invested, with a relatively small cash residual.
Another aspect of the Fund that is worth discussing at this time is its
large-tax loss carry forward and how this can benefit shareholders. As a
consequence of the liquidation of a number of positions at a loss, and of the
shrinkage in the Fund's total size, Paramount has realized capital losses of
over $180 million - a very large amount compared to its $75 million of total
assets.
As most shareholders are aware, Federal tax law requires all mutual funds
to pass through to their shareowners any net realized capital gains - on which
the shareowners must pay income taxes. Paramount's large tax loss carry forward
will enable it to offset future realized gains for several years and it will not
have to make taxable capital gain distributions. This tax deferral feature for
capital gains makes your investment in Paramount similar to having an IRA or
401(k), and is a very desirable and unusual benefit for its shareholders.
We are pleased with the restructuring of the Paramount portfolio that is
underway. We believe that the high quality which we are buying will produce
rewarding long-term returns for its shareholders.
Respectfully submitted,
/s/ Eric S. Ende
----------------
Eric S. Ende
President
November 16, 2000
2
<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, 1990 TO
SEPTEMBER 30, 2000
[Line graph of change in value]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 9/30/00
FPA 9,350 12,073 12,897 14,842 18,061 20,068 24,166 27,443 21,401 19,948 15,615
FPA 10,000 12,912 13,794 15,874 19,317 21,463 25,846 30,421 22,889 21,334 16,701
Lipper 10,000 14,071 15,166 19,039 19,252 22,437 26,123 35,248 28,981 35,148 43,669
Russell 10,000 14,689 16,203 21,071 21,684 27,207 31,517 42,330 35,379 43,085 55,809
</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 it represents. The Lipper Mid-Cap Value 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 $15,615 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 $16,701. The performance of the Fund and of the
Averages is computed on a total return basis which includes reinvestment of
all distributions.
3
<PAGE>
MAJOR PORTFOLIO CHANGES
Six Months Ended September 30, 2000
(Unaudited)
<TABLE>
<S> <C>
SHARES
NET PURCHASE
COMMON STOCK
Bacou USA, Inc. (1)......................................................................... 48,400
Black Box Corporation (1)................................................................... 30,000
Carnival Corporation (1).................................................................... 90,000
CEC Entertainment, Inc. (1)................................................................. 20,000
Circuit City Stores, Inc. (1)............................................................... 80,000
Clayton Homes, Inc. (1)..................................................................... 160,000
Crane Co. (1)............................................................................... 55,000
Denison International plc (ADR) (1)......................................................... 110,000
DENTSPLY International Inc. (1)............................................................. 30,000
Donaldson Company, Inc. (1)................................................................. 73,000
Graco, Inc. (1)............................................................................. 60,000
HON INDUSTRIES Inc. (1)..................................................................... 65,000
IDEX Corporation (1)........................................................................ 40,000
Kaydon Corporation (1)...................................................................... 55,000
Lancaster Colony Corporation (1)............................................................ 50,000
Landauer, Inc. (1).......................................................................... 95,000
Lincare Holdings Inc. (1)................................................................... 37,500
Manitowoc Company, Inc., The (1)............................................................ 105,000
Manpower Inc. (1)........................................................................... 50,400
Martin Marietta Materials, Inc. (1)......................................................... 45,000
National Commerce Bancorporation (1)........................................................ 95,000
OM Group, Inc. (1).......................................................................... 35,000
Ocular Sciences, Inc. (1)................................................................... 85,000
Office Depot, Inc. (1)...................................................................... 160,000
O'Reilly Automotive, Inc. (1)............................................................... 144,600
Zebra Technologies Corporation (Class A) (1)................................................ 45,800
NET SALES
COMMON STOCKS
DBT Online, Inc. (2)........................................................................ 250,000
EEX Corporation (2)......................................................................... 1,750,000
Homestake Mining Company (2)................................................................ 1,000,000
Magellan Health Services, Inc. (2).......................................................... 1,740,800
Oakley, Inc. (2)............................................................................ 700,000
Placer Dome Inc. (2)........................................................................ 1,075,000
Polymer Group, Inc. (2)..................................................................... 2,110,000
Unifi, Inc. (2)............................................................................. 150,000
Waste Management, Inc. (2).................................................................. 100,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
4
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 2000
<TABLE>
<CAPTION>
COMMON STOCKS Shares Value
-------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
PRODUCER DURABLE GOODS -- 17.6%
Crane Co........................................................................ 55,000 $ 1,258,125
Denison International plc (ADR)*................................................ 110,000 1,450,625
Donaldson Company, Inc.......................................................... 73,000 1,606,000
Graco, Inc...................................................................... 60,000 1,935,000
IDEX Corporation................................................................ 40,000 1,117,500
Kaydon Corporation.............................................................. 55,000 1,265,000
Manitowoc Company, Inc., The.................................................... 105,000 2,021,250
Zebra Technologies Corporation (Class A)*....................................... 45,800 2,201,263
-----------
$12,854,763
-----------
BUSINESS SERVICES & SUPPLIES -- 7.8%
Bacou USA, Inc.*................................................................ 48,400 $ 1,255,375
HON INDUSTRIES Inc.............................................................. 65,000 1,600,625
Manpower Inc.................................................................... 50,400 1,609,650
Office Depot, Inc.*............................................................. 160,000 1,250,000
-----------
$ 5,715,650
-----------
HEALTH CARE -- 6.7%
DENTSPLY International Inc. .................................................... 30,000 $ 1,048,125
Landauer, Inc................................................................... 95,000 1,790,750
Lincare Holdings Inc.*.......................................................... 37,500 1,075,781
Ocular Sciences, Inc.*.......................................................... 85,000 1,020,000
-----------
$ 4,934,656
-----------
RETAILING -- 5.4%
Circuit City Stores, Inc........................................................ 80,000 $ 1,840,000
O'Reilly Automotive, Inc.*...................................................... 144,600 2,114,775
-----------
$ 3,954,775
-----------
MATERIALS -- 4.4%
Martin Marietta Materials, Inc.................................................. 45,000 $ 1,722,600
OM Group, Inc................................................................... 35,000 1,526,875
-----------
$ 3,249,475
-----------
ENTERTAINMENT -- 3.9%
Carnival Corporation............................................................ 90,000 $ 2,216,250
CEC Entertainment, Inc.*........................................................ 20,000 640,000
-----------
$ 2,856,250
-----------
BANKING -- 2.6%
National Commerce Bancorporation................................................ 95,000 $ 1,894,062
-----------
CONSUMER DURABLE GOODS -- 2.2%
Clayton Homes, Inc.............................................................. 160,000 $ 1,600,000
-----------
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 2000
<TABLE>
<CAPTION>
Shares or
Principal
Amount Value
-------------- -------------
<S> <C> <C>
DISTRIBUTION -- 1.9%
Black Box Corporation*.......................................................... 30,000 $ 1,398,750
------------
CONSUMER NON-DURABLE GOODS -- 1.7%
Lancaster Colony Corporation.................................................... 50,000 $ 1,228,125
------------
TOTAL COMMON STOCKS-- 54.2% (Cost $40,893,613).................................. $ 39,686,506
------------
SHORT-TERM INVESTMENTS -- 43.9%
Short-term Corporate Notes:
Federal Home Loan Bank-- 6.38% 10/2/00........................................ $7,000,000 $ 6,998,760
Coca-Cola Company, The-- 6.47% 10/5/00........................................ 1,000,000 999,281
Grainger (W.W.), Inc.-- 6.48% 10/6/00......................................... 2,400,000 2,397,840
General Electric Capital Corporation-- 6.47% 10/10/00......................... 2,000,000 1,996,765
AT&T Co.-- 6.47% 10/16/00..................................................... 1,000,000 997,304
General Electric Capital Corporation-- 6.48% 10/18/00......................... 1,000,000 996,940
Federal National Mortgage Association-- 6.42% 10/25/00........................ 14,000,000 13,940,080
AT&T Co.-- 6.49% 10/31/00..................................................... 1,000,000 994,592
Coca Cola Company, The-- 6.44% 11/2/00........................................ 2,000,000 1,988,551
State Street Bank Repurchase Agreement -- 5 1/4% 10/2/00
(Collateralized by U.S. Treasury Bond
--9.88% 2015, market value $835,908).......................................... 818,000 818,238
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $32,128,351)................................. $ 32,128,351
------------
TOTAL INVESTMENTS-- 98.1% (Cost $73,021,964).................................... $ 71,814,857
Other assets and liabilities, net-- 1.9%........................................ 1,419,894
------------
TOTAL NET ASSETS-- 100%......................................................... $ 73,234,751
============
</TABLE>
*Non-income producing securities
9
Following is a summary of transactions in securities of affiliates, as defined
in the Investment Company Act of 1940 by reason of ownership of 5% or more of
its outstanding voting securities, during the year ended September 30, 2000.
<TABLE>
<CAPTION>
Purchases Sales Realized Dividend
at Cost at Cost Gain (Loss) Income
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Magellan Health Services, Inc. - $22,544,569 $(18,117,000) -
Polymer Group, Inc. - 27,685,692 9,307,528 $91,604
</TABLE>
See notes to financial statements.
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2000
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $40,893,613)....................................... $39,686,506
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less)..................................... 32,128,351 $ 71,814,857
-----------
Cash.................................................................... 554
Receivable for:
Capital Stock sold.................................................... $ 1,933,411
Dividends............................................................. 24,235 1,957,646
----------- -------------
$ 73,773,057
LIABILITIES
Payable for:
Investment securities purchased....................................... $ 380,442
Capital Stock repurchased............................................. 126,891
Accrued expenses...................................................... 30,973 538,306
----------- -------------
NET ASSETS................................................................ $ 73,234,751
=============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.25 per share; authorized
100,000,000 shares; outstanding 9,990,903 shares...................... $ 2,497,726
Additional Paid-in Capital.............................................. 253,522,880
Accumulated net realized loss on investments............................ (182,165,084)
Undistributed net investment income..................................... 586,336
Unrealized depreciation of investments.................................. (1,207,107)
-------------
NET ASSETS................................................................ $ 73,234,751
=============
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)............................. $ 7.33
=======
Maximum offering price per share
(100/93.5 of per share net asset value)................................ $ 7.84
=======
</TABLE>
See notes to financial statements.
7
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended September 30, 2000
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest............................................................... $ 1,997,631
Dividends.............................................................. 632,133
------------
$ 2,629,764
EXPENSES
Advisory fees.......................................................... $ 788,065
Transfer agent fees and expenses....................................... 231,516
Financial services..................................................... 113,548
Directors' fees and expenses........................................... 47,999
Legal fees............................................................. 36,793
Reports to shareholders................................................ 29,841
Custodian fees and expenses............................................ 28,241
Audit fees............................................................. 25,200
Registration fees...................................................... 20,448
Insurance.............................................................. 9,857
Other expenses......................................................... 5,010
------------
1,336,518
Reimbursement from Investment Adviser.................................. (50,134) 1,286,384
------------ ------------
Net investment income.......................................... $ 1,343,380
------------
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)........... $129,031,670
Cost of investment securities sold..................................... 204,471,238
------------
Net realized loss on investments................................... $(75,439,568)
Change in unrealized appreciation/depreciation of investments:
Unrealized depreciation at beginning of year........................... $(45,741,438)
Unrealized depreciation at end of year................................. (1,207,107)
------------
Change in unrealized appreciation/depreciation of investments 44,534,331
------------
Net realized and unrealized loss on investments................ $(30,905,237)
------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS.......................................................... $(29,561,857)
============
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------
2000 1999
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
Operations:
Net investment income....................... $ 1,343,380 $ 1,342,155
Net realized gain (loss) on investments....... (75,439,568) (106,200,582)
Change in unrealized
appreciation/depreciation
of investments............................. 44,534,331 74,545,524
--------------- -------------
Decrease in net assets
resulting from operations................... $ (29,561,857) $(30,312,903)
Distributions to shareholders from
net investment income....................... (1,145,952) (2,080,683)
Capital Stock transactions:
Proceeds from Capital Stock sold............ $ 6,739,643 $ 9,987,650
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions............ 1,011,958 1,792,858
Cost of Capital Stock repurchased............. (75,029,029) (67,277,428) (194,011,714) (182,231,206)
------------ ------------ ------------- -------------
Total decrease in net assets.................. $ (97,985,237) $(214,624,792)
NET ASSETS
Beginning of year, including
undistributed net investment income
of $388,908 and $1,127,436.................. 171,219,988 385,844,780
----------------- ----------------
End of year, including
undistributed net investment income
of $586,336 and $388,908.................... $ 73,234,751 171,219,988
================= ================
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold.................. 896,777 1,067,385
Shares issued to shareholders upon
reinvestment of dividends and
distributions............................... 127,162 201,047
Shares of Capital Stock repurchased............................ (9,128,941) (20,849,919)
----------------- ----------------
Decrease in Capital Stock
outstanding................................. (8,105,002) (19,581,487)
================= ================
</TABLE>
See notes to financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year...................... $ 9.46 $ 10.24 $ 15.95 $ 16.54 $ 14.90
-------- -------- ------- -------- --------
Income from investment operations:
Net investment income.................................... $ 0.13 $ 0.07 $ 0.16 $ 0.29 $ 0.30
Net realized and unrealized gain (loss)
on investment securities................................ (2.17) (0.77) (3.77) 2.30 2.52
-------- -------- ------- -------- --------
Total from investment operations.......................... $ (2.04) $ (0.70) $ (3.61) $ 2.59 $ 2.82
-------- -------- ------- -------- --------
Less distributions:
Dividends from net investment income.................... $ (0.09) $ (0.08) $ (0.20) $ (0.31) $ (0.27)
Distributions from net realized capital gains........... -- -- (1.90) (2.87) (0.91)
-------- -------- ------- ------- --------
Total distributions..................................... $ (0.09) $ (0.08) $ (2.10) $ (3.18) $ (1.18)
-------- -------- ------- -------- --------
Net asset value at end of year............................ $ 7.33 $ 9.46 $ 10.24 $ 15.95 $ 16.54
======== ======== ======= ======== ========
Total investment return*.................................. (21.73)% (6.79)% (24.76)% 17.70% 20.42%
Ratios/supplemental data:
Net assets at end of year (in $000's)..................... 73,235 171,220 385,845 830,733 683,059
Ratio of expenses to average net assets:
Before reimbursement from Investment Adviser 1.22% 1.03% 0.92% 0.86% 0.87%
After reimbursement from Investment Adviser 1.17% 1.03% 0.92% 0.86% 0.87%
Ratio of net investment income to average net assets:
Before reimbursement from Investment Adviser 1.18% 0.57% 1.14% 1.84% 1.94%
After reimbursement from Investment Adviser 1.22% 0.57% 1.14% 1.84% 1.94%
Portfolio turnover rate................................... 76% 21% 68% 110% 131%
</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>
Per Share Ordinary Income Long-Term
--------------------------------------
Payable Date Amount Qualifying Non-Qualifying Capital Gain
-------------------------------- ---------------- ----------------- ------------------- --------------------
<S> <C> <C> <C> <C>
December 29, 1999............... $0.03 47.3% 52.7% -0-
July 10, 2000................... $0.06 31.7% 68.3% -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 2001 setting forth
specific amounts to be included in their 2000 tax returns.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
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 $62,343,732 for the
year ended September 30, 2000. Realized gains or losses are based on the
specific-certificate identification method. The cost of securities held at
September 30, 2000 was the same for federal income tax and financial reporting
purposes. Gross unrealized appreciation and depreciation for all securities at
September 30, 2000 for federal income tax purposes was $1,920,128 and
$3,127,235, respectively. The Fund currently has accumulated net realized losses
in the amount of $182,165,085 which can be carried forward to offset future
gains. The ability to carry these losses forward ultimately expires in 2008.
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
11
<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, 2000, the Fund paid aggregate fees of
$44,000 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, 2000, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $2,368 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.
12
<PAGE>
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, 2000, 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 auditing standards generally
accepted in the United States. 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, 2000, 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, 2000, 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 accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Los Angeles, California
October 27, 2000
13
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OFFICERS AND DIRECTORS
DIRECTORS
Eric S. Ende
John P. Endicott
Leonard Mautner
John H. Rubel
John P. Shelton
Joseph Lowitz, CHAIRMAN EMERITUS
John F. Allard, DIRECTOR EMERITUS
OFFICERS
Eric S. Ende, PRESIDENT AND
PORTFOLIO MANAGER
Steven R. Geist, EXECUTIVE VICE
PRESIDENT AND PORTFOLIO MANAGER
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.
