<PAGE>
FPA PARAMOUNT FUND, INC.
Semi-Annual Report
[LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064 MARCH 31, 2000
<PAGE>
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 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
CUSTODIAN & TRANSFER AGENT
State Street Bank and Trust Company
Boston, Massachusetts
SHAREHOLDER SERVICE AGENT
Boston Financial Data Services, Inc.
P.O. Box 8115
Boston, Massachusetts 02266-8115
(800) 638-3060
(617) 483-5000
- --------------------------------------------------------------------------------
IMPORTANT - CHANGES THAT MAY AFFECT YOUR ACCOUNT
In response to your suggestions and feedback, we have made changes to the Fund's
telephone redemption procedures. The telephone redemption privileges have been
expanded to allow redemption checks to be mailed directly to their address of
record for shareholders who have already authorized this option. The ability to
have redemptions sent directly to your bank is also still available. If you do
not wish to participate in this new option, please write to us and we will
remove the authorization. Please note that we will not mail any telephone
redemption checks to your address of record if it was changed within the prior
30 days. We hope that these changes will simplify your experience with us.
- --------------------------------------------------------------------------------
This report has been prepared for the information of shareholders of FPA
Paramount Fund, Inc., and is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus. The
financial information included in this report has been taken from the records of
the Fund without examination by independent auditors.
1
<PAGE>
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
This Semi-Annual Report covers the six months ended March 31, 2000. During
this period, the per share net asset value of your Fund decreased 15.5%, while
the Russell 2500 Index increased 31.8%, the Standard & Poor's 500 Stock Index
(S&P 500) increased 26.1% and the Dow Jones Industrial Average increased 6.4%.
The above changes include reinvestment of all dividends and distributions during
the period.
At the end of March, Bill Sams elected to retire as President and Portfolio
Manager of the Fund. The Board of Directors have approved Eric Ende and Steve
Geist to succeed him as the Fund's portfolio managers. Bill has had a
distinguished career spanning several decades, including twenty years leading
Paramount Fund, and we join the Fund's shareholders in thanking him for his many
years of dedicated service.
Eric Ende has been a senior research analyst and portfolio manager of the
Fund's investment advisor for the past fifteen years. Eric holds a Bachelor's
Degree from Yale College, a Master's Degree from Oxford University and a Master
of Business Administration from New York University. Steven Geist has been a
senior research analyst and portfolio manager of the Fund's investment advisor
for the past eight years. Steve holds a Bachelor's Degree from New York
University, a Master's Degree from Purdue University, and a Master of Business
Administration from the University of California in Los Angeles.
PORTFOLIO MANAGER'S COMMENTARY
We would like to take this opportunity to discuss the philosophy that will
guide Paramount Fund in the future. Our emphasis will be on owning high-quality
companies - those with a history of earning high returns on capital, with
leading market shares and top-notch management. This will permit shareholders to
benefit from the strong correlation between earning high returns in a business
and realizing high returns on a stock investment. We also seek to minimize risk
by insisting on relatively unleveraged balance sheets, and by not paying high
multiples for the stocks we select. Our investment ideas will be generated on a
fundamental, bottom-up, company-by-company basis, and will include substantial
time spent assessing corporate management.
We expect the companies we purchase to have a proven track record of
intelligent use of cash flow. Ideally, this will be reinvested in the existing
business, but as the supply of cash often exceeds the amount that can be wisely
used in this way, we also look favorably on a history of intelligent,
well-priced acquisitions, as well as opportunistic share repurchase.
Implementation of this investment philosophy will produce a portfolio quite
different from the Paramount portfolios of the past. The future Paramount
portfolio will be much more diversified, with perhaps 30 stock holdings covering
many industries. We are not attracted to turnarounds, highly cyclical businesses
or significant sector concentrations. Turnover will be much lower, with a
typical holding period of three to five years. The companies owned will be
leaders in their industry, with strong balance sheets, and earning high returns
on capital - but not selling at high price/earnings ratios. Finally cash will be
the residual of investment opportunities and will normally be a small percent of
fund assets.
We expect this transition to the "New Paramount" to take three to six
months, as current
2
<PAGE>
positions are gradually sold, subject to market liquidity, and new names are
purchased. During this period, cash levels will be higher than we anticipate for
the long run, both because of the mechanics of the portfolio turnover and to
insure that any shareholder redemptions (which we hope are small) can be readily
funded. We urge all shareholders to be patient. We would like to point out that
we have been successfully managing FPA Perennial Fund in this style since late
1995.
We think that Paramount's shareholders may be interested to see what some
of the new companies purchased for Paramount's portfolio look like. ZEBRA
TECHNOLOGIES is the worldwide leader in bar-code printers, an industry that has
been rapidly expanding because of the substantial productivity improvements it
brings to manufacturing and distribution. O'REILLY AUTOMOTIVE, a retailer of
auto parts, has grown at 20% a year with a proven business model that
competitors are struggling to copy. HON INDUSTRIES is the leader in value-priced
office furniture, with a steadily growing market share and high return on
capital. CLAYTON HOMES has the best record of earnings growth and the most
innovative management in the manufactured housing industry. Together, these four
additions to the portfolio have a historical growth rate of 20%, a return on
equity of 21%, only nominal debt, and a PE of 15x on 1999 earnings and 13x on
the 2000 estimates. These statistics represent growth rates, returns on capital,
and balance sheet quality far better than the average company, but a valuation
far lower--a very desirable combination, and one that we strive for in the
portfolio as a whole.
Our investment philosophy has been carefully developed over time and its
success has been demonstrated by many years of strong performance. We expect
that it will continue to produce competitive results for Paramount shareholders
in future years.
Respectfully submitted,
/s/ Eric S. Ende
Eric S. Ende
President & Portfolio Manager
May 1, 2000
3
<PAGE>
MAJOR PORTFOLIO CHANGES
Six Months Ended March 31, 2000
<TABLE>
<CAPTION>
Shares
----------
<S> <C>
NET PURCHASES
COMMON STOCKS
DBT Online, Inc. (1)................................................ 250,000
Unifi, Inc. (1)..................................................... 150,000
Waste Management, Inc. (1).......................................... 100,000
NET SALES
COMMON STOCKS
EEX Corporation..................................................... 250,000
Homestake Mining Company............................................ 900,000
Koger Equity, Inc. (2).............................................. 300,000
Luby's, Inc. (2).................................................... 150,000
Magellan Health Services, Inc....................................... 59,200
Newmont Mining Corporation (2)...................................... 700,000
Oakley, Inc......................................................... 1,165,100
Paging Network, Inc. (2)............................................ 660,000
Placer Dome Inc..................................................... 25,000
Polymer Group, Inc.................................................. 590,000
Prison Realty Corporation (2)....................................... 720,000
</TABLE>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
4
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
COMMON STOCKS Shares Value
- ----------------------------------------------------------- ------------ -------------
<S> <C> <C>
CONSUMER NON-DURABLE GOODS -- 34.0%
Oakley, Inc.*.............................................. 700,000 $ 7,437,500
Polymer Group, Inc.+....................................... 2,110,000 26,902,500
Unifi, Inc.*............................................... 150,000 1,340,625
-------------
$ 35,680,625
-------------
MINING -- 14.0%
Homestake Mining Company................................... 1,000,000 $ 6,000,000
Placer Dome Inc............................................ 1,075,000 8,734,375
-------------
$ 14,734,375
-------------
HEALTH CARE -- 8.0%
Magellan Health Services, Inc.*+........................... 1,740,800 $ 8,377,600
-------------
OIL & GAS PRODUCTION/EXPLORATION -- 5.6%
EEX Corporation*........................................... 1,750,000 $ 5,906,250
-------------
COMMUNICATIONS & INFORMATION -- 4.4%
DBT Online, Inc.*.......................................... 250,000 $ 4,640,625
-------------
WASTE DISPOSAL SERVICES -- 1.3%
Waste Management, Inc.*.................................... 100,000 $ 1,368,750
-------------
TOTAL COMMON STOCKS-- 67.3% (Cost $117,001,247)............ $ 70,708,225
-------------
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
Principal
Amount Value
----------- ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 33.4%
Short-term Corporate Notes:
Bell Atlantic Network Funding -- 5.82% 4/5/00................... $ 1,000,000 $ 999,354
GTE Funding, Inc. -- 6.06% 4/10/00.............................. 1,000,000 998,485
Bell Atlantic Network Funding -- 5.83% 4/13/00.................. 2,000,000 1,996,113
MetLife Funding, Inc. -- 6.04% 4/17/00.......................... 1,000,000 997,316
Walt Disney Company, The -- 5.76% 4/17/00....................... 1,500,000 1,496,160
Proctor & Gamble Company, The -- 5.84% 4/18/00.................. 2,000,000 1,994,484
Bell Atlantic Network Funding -- 5.96% 4/24/00.................. 2,000,000 1,992,384
General Mills, Inc. -- 6% 4/25/00............................... 2,500,000 2,490,000
Grainger (W. W.), Inc. -- 6.01% 4/25/00......................... 4,000,000 3,983,973
BellSouth Telecommunications Corporation -- 6% 4/26/00.......... 2,000,000 1,991,667
Motorola Credit Corporation -- 5.93% 4/27/00.................... 4,000,000 3,982,869
Schering Corporation -- 5.84% 5/02/00........................... 1,000,000 994,971
Coca-Cola Company, The -- 5.95% 5/8/00.......................... 4,000,000 3,975,539
General Electric Capital Corporation -- 6.06% 5/9/00............ 1,000,000 993,603
Walt Disney Company, The -- 6% 5/9/00........................... 1,000,000 993,667
McGraw-Hill Companies, Inc., The -- 5.9% 5/10/00................ 2,000,000 1,987,217
Walt Disney Company, The -- 6% 5/16/00.......................... 1,800,000 1,786,500
State Street Bank Repurchase Agreement -- 4 3/4% 4/3/00
(Collateralized by U.S. Treasury Bond
-- 5 7/8% 2000, market value $1,495,973)........................ 1,465,000 1,465,193
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $35,119,495)................... $ 35,119,495
------------
TOTAL INVESTMENTS -- 100.7% (Cost $152,120,742)................... $105,827,720
Other assets and liabilities, net -- (0.7)%....................... (710,270)
------------
TOTAL NET ASSETS -- 100%.......................................... $105,117,450
============
</TABLE>
* Non-income producing security
+ Affiliate as defined in the Investment Company Act of 1940 by reason of
ownership of 5% or more of its outstanding voting securities during the
period. Following is a summary of transactions in securities of these
affiliates during the six months ended March 31, 2000.
<TABLE>
<CAPTION>
Purchases Sales Realized Dividend
at Cost at Cost Gain (Loss) Income
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Magellan Health Services, Inc. -- $ 506,752 $ (160,076) --
Polymer Group, Inc. -- 5,932,410 5,008,781 $49,404
</TABLE>
See notes to financial statements.
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 2000
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $117,001,247)............................ $70,708,225
Short-term investments -- at cost plus interest earned
(maturities of 60 days or less)........................... 35,119,495 $ 105,827,720
-----------
Cash.......................................................... 540
Receivable for Capital Stock sold............................. 41
-------------
$ 105,828,301
LIABILITIES
Payable for:
Capital Stock repurchased................................... $ 563,195
Advisory fees and financial services........................ 70,656
Accrued expenses............................................ 77,000 710,851
----------- -------------
NET ASSETS ..................................................... $ 105,117,450
=============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.25 per share; authorized
100,000,000 shares; outstanding 13,195,606 shares........... $ 3,298,902
Additional Paid-in Capital.................................... 276,869,210
Accumulated net realized loss on investments.................. (128,718,184)
Distributions in excess of net investment income.............. (39,456)
Unrealized depreciation of investments........................ (46,293,022)
-------------
NET ASSETS...................................................... $ 105,117,450
=============
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)................... $7.97
=====
Maximum offering price per share
(100/93.5 of per share net asset value)...................... $8.52
=====
</TABLE>
See notes to financial statements.
7
<PAGE>
STATEMENT OF OPERATIONS
For the Six Months Ended March 31, 2000
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest........................................................... $ 429,710
Dividends (including $49,404 from affiliates)...................... 460,386
------------
$ 890,096
EXPENSES
Advisory fees...................................................... $ 493,109
Transfer agent fees and expenses................................... 128,734
Financial services................................................. 72,016
Legal fees......................................................... 27,731
Directors' fees and expenses....................................... 26,296
Audit fees......................................................... 25,200
Registration fees.................................................. 16,068
Reports to shareholders............................................ 15,336
Custodian fees and expenses........................................ 13,172
Insurance.......................................................... 3,047
Other expenses..................................................... 5,010 825,719
------------ ------------
Net investment income.......................................... $ 64,377
------------
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)....... $ 65,477,324
Cost of investment securities sold................................. 87,469,992
------------
Net realized loss on investments............................... $(21,992,668)
Unrealized depreciation of investments:
Unrealized depreciation at beginning of period..................... $(45,741,438)
Unrealized depreciation at end of period........................... (46,293,022)
------------
Unrealized depreciation of investments......................... (551,584)
------------
Net realized and unrealized loss on investments............ $(22,544,252)
------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS...................................................... $(22,479,875)
============
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, 2000 September 30, 1999
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
Operations:
Net investment income..................... $ 64,377 $ 1,342,155
Net realized loss on investments.......... (21,992,668) (106,200,582)
Unrealized appreciation (depreciation)
of investments.......................... (551,584) 74,545,524
------------- -------------
Decrease in net assets
resulting from operations................. $ (22,479,875) $ (30,312,903)
Distributions to shareholders from
net investment income..................... (492,741) (2,080,683)
Capital Stock transactions:
Proceeds from Capital Stock sold.......... $ 629,810 $ 9,987,650
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions.......... 432,066 1,792,858
Cost of Capital Stock repurchased (44,191,798) (43,129,922) (194,011,714) (182,231,206)
------------- ------------- ------------- -------------
Total decrease in net assets................ $ (66,102,538) $(214,624,792)
NET ASSETS
Beginning of period, including
undistributed net investment income
of $388,908 and $1,127,436................ 171,219,988 385,844,780
------------- -------------
End of period, including
undistributed net investment income
of $388,908 at September 30, 1999......... $ 105,117,450 $ 171,219,988
============= =============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold................ 68,928 1,067,385
Shares issued to shareholders upon
reinvestment of dividends and
distributions............................. 47,066 201,047
Shares of Capital Stock repurchased......... (5,016,293) (20,849,919)
------------- -------------
Decrease in Capital Stock
outstanding............................... (4,900,299) (19,581,487)
============= =============
</TABLE>
See notes to financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Six
Months
Ended
March Year Ended September 30,
31, --------------------------------------------------------------
2000 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of period............... $ 9.46 $ 10.24 $ 15.95 $ 16.54 $ 14.90 $ 14.73
---------- ---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income.............................. $ 0.01 $ 0.07 $ 0.16 $ 0.29 $ 0.30 $ 0.30
Net realized and unrealized gain (loss) on
investment securities........................... (1.47) (0.77) (3.77) 2.30 2.52 1.17
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations..................... $ (1.46) $ (0.70) $ (3.61) $ 2.59 $ 2.82 $ 1.47
---------- ---------- ---------- ---------- ---------- ----------
Less distributions:
Dividends from net investment income............... $ (0.03) $ (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................................ $ (0.03) $ (0.08) $ (2.10) $ (3.18) $ (1.18) $ (1.30)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value at end of period..................... $ 7.97 $ 9.46 $ 10.24 $ 15.95 $ 16.54 $ 14.90
========== ========== ========== ========== ========== ==========
Total investment return*............................. (15.48)% (6.79)% (24.76)% 17.70% 20.42% 11.11%
Ratios/supplemental data:
Net assets at end of period (in $000's).............. 105,117 171,220 385,845 830,733 683,059 595,917
Ratio of expenses to average net assets.............. 1.19%+ 1.03% 0.92% 0.86% 0.87% 0.89%
Ratio of net investment income to
average net assets................................. 0.09%+ 0.57% 1.14% 1.84% 1.94% 2.25%
Portfolio turnover rate.............................. 34%+ 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. The
return for the six months ended March 31, 2000 is not annualized.
+ Annualized
See notes to financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 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 period, or if there was not a sale that day, at the last
bid price. Unlisted securities are valued at the most recent bid price.
Short-term investments with maturities of 60 days or less are valued at cost
plus interest earned, which approximates market value.
B. Federal Income Tax
No provision for federal income tax is required because the Fund has
elected to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification and to distribute
each year to its shareholders, in accordance with the minimum distribution
requirements of the Code, all of its taxable net investment income and
taxable net realized gains on investments.
C. Securities Transactions and Related Investment Income
Securities transactions are accounted for on the date the securities are
purchased or sold. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest income and expenses are recorded
on an accrual basis.
D. Use of Estimates
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported. Actual results could differ
from those estimates.
NOTE 2 -- PURCHASES OF INVESTMENT SECURITIES
Cost of purchases of investment securities (excluding short-term investments
with maturities of 60 days or less) aggregated $21,450,120 for the six months
ended March 31, 2000. Realized gains or losses are based on the
specific-certificate identification method. Cost of securities held at March 31,
2000 was the same for federal income tax and financial reporting purposes. Gross
unrealized appreciation and depreciation for all investment securities at March
31, 2000 for federal income tax purposes was $5,149,218 and $51,442,240,
respectively. The Fund currently has accumulated net realized losses in the
amount of $128,718,184 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 Fund, providing, however, that this
reimbursement shall not exceed 0.1% of the average daily net assets for
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Continued
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 six months ended March 31, 2000, the Fund paid aggregate fees of
$24,000 to all Directors who are not affiliated persons of the Adviser. Certain
officers of the Fund are also officers of the Adviser and FPA Fund Distributors,
Inc.
NOTE 4 -- DISTRIBUTOR
For the six months ended March 31, 2000, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $1,494 in
net Fund share sales commissions after reallowance to other dealers. The
Distributor pays its own overhead and general administrative expenses, the cost
of printing prospectuses and the cost of supplemental sales literature,
promotion and advertising.
12
