FPA PARAMOUNT FUND INC, 497, 2000-05-09

FPA PARAMOUNT FUND INC
497, 2000-05-09

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FPA PARAMOUNT FUND, INC.
SUPPLEMENT DATED APRIL 30, 2000 TO PROSPECTUS DATED FEBRUARY 1, 2000

MANAGEMENT AND ORGANIZATION

The section entitled, PORTFOLIO MANAGER, is revised as follows:

Eric S. Ende, President and Director of the Fund and Senior Vice President of
the Adviser, and Steven R. Geist, Executive Vice President of the Fund and Vice
President of the Adviser, assumed primary responsibility for the day-to-day
management of the Fund's portfolio on March 31, 2000. Mr. Ende has served as
Vice President of the Fund and senior research analyst and portfolio manager of
the Adviser since 1985, and Mr. Geist has served as senior research analyst and
portfolio manager of the Adviser since 1992.

The new portfolio managers intend to implement the Fund's investment strategies
in ways that produce a portfolio different from earlier Fund portfolios. Among
other differences, the Fund's future portfolios are expected to have greater
company and industry diversification. The new portfolio managers estimate that
it will take three to six months to make the desired portfolio changes in an
orderly way.

<PAGE>

FPA PARAMOUNT FUND, INC.

PROSPECTUS

The primary investment objective of
FPA Paramount Fund, Inc. is a high total
investment return, including capital
appreciation and income. The Fund's
investment adviser, First Pacific Advisors,
Inc., generally invests the Fund's assets in
common stocks and other securities which it
believes have the above-average ability to
increase in market value.

THE SECURITIES AND EXCHANGE
COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR
PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

[LOGO]

DISTRIBUTOR:

FPA FUND DISTRIBUTORS, INC.

11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064

FEBRUARY 1, 2000

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FPA PARAMOUNT FUND, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
(310) 473-0225

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Risk/Return Summary......................................... 3
Investment Results.......................................... 5
Fees and Expenses of the Fund............................... 6
Investment Objective, Principal Investment Strategies, and
Principal Risks........................................... 7
Management and Organization................................. 9
Purchase, Pricing and Sale of Shares........................ 9
Exchange of Shares and Shareholder Services................. 13
Dividends, Distributions and Taxes.......................... 15
Financial Highlights........................................ 17
</TABLE>

2
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RISK/RETURN SUMMARY

INVESTMENT OBJECTIVE. The Fund's primary investment objective is a high total
investment return, from both capital appreciation and income.

WHO MAY WANT TO INVEST IN THE FUND?

- Investors seeking high total investment return

- Investors willing to own shares over the course of a market cycle or
longer

PRINCIPAL INVESTMENT STRATEGIES. The Fund's investment adviser, First Pacific
Advisors, Inc., purchases common stocks using a value discipline and evaluating
each company on its own merits. The Adviser's measures of value include
price/earnings ratios, book value, and replacement cost of assets. The Adviser
looks for the following attributes in companies selected for investment:

- Temporarily out-of-favor or not closely followed by other investors

- Capable management team

- Undervalued in relation to the stock market

- Industry segment leaders

- Consistently high returns on capital

- Substantial portion of earnings reinvested in business

PRINCIPAL INVESTMENTS. The Fund invests primarily in the common stocks of U.S.
companies in a variety of industries and market segments. The Fund can also
invest in fixed-income securities and convertible securities. The Fund generally
holds some assets in high quality short-term debt securities to provide
liquidity. The Fund generally invests in medium and smaller capitalization
issuers although it may purchase securities of larger companies.

Although the Fund may not invest more than 5% of its total assets in the
securities of any one issuer (except the U.S. Government) at the time of
purchase, changes in market prices and the assets of the Fund may from time to
time cause a larger percentage of the Fund's assets to be invested in securities
of a single company. Although the Fund may not invest more than 25% of its total
assets in any one industry at the time of purchase, changes in market prices and
the assets of the Fund may from time to time cause more than 25% of the Fund's
total assets to be invested in one industry. The Fund currently has more than
25% of its total assets invested in each of two industries.

No more than 25% of the Fund's total assets will be invested in the securities
of foreign issuers.

PRINCIPAL INVESTMENT RISKS. Even though the Adviser attempts to lessen price
risk by not overpaying for earnings of even the best companies, you can lose
money by investing in the Fund if any of the following occurs:

- Having relatively high percentages of the Fund's total assets in a single
company or industry may increase the volatility of the Fund's net asset
value per share or share price and may increase the risk of loss as well
as potential for gain.

- The U.S. or foreign market goes down.

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- The market favors growth stocks over value stocks or favors companies at a
different capitalization level.

- The Fund's value-oriented investment approach could result in an emphasis
on medium and smaller sized companies. Investing in smaller companies
generally involves greater risk than investing in larger companies. Also,
the portfolio might not reflect all facets of the national economy and
could differ significantly from broad market indices.

- An adverse event, such as an unfavorable earnings report, depresses the
value of a particular stock.

- Prices of the Fund's foreign securities go down because of unfavorable
changes in foreign currency exchange rates, foreign government actions,
political instability or other factors that can adversely affect
investments in foreign countries.

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Company or any other government agency, entity
or person. Shares of the Fund are subject to significant risks and should not be
considered a complete investment program.

4
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INVESTMENT RESULTS

The bar chart and table below provide an indication of the risk of investing in
the Fund by showing changes in the Fund's performance from year to year and by
showing how the Fund's average annual returns for 1, 5 and 10 years compare with
those of a broad measure of market performance.

Here are the Fund's results calculated without a sales charge on a calendar year
basis. (If a sales charge were included, results would be lower.)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

The Fund's highest/lowest QUARTERLY results during this time period were:

<S> <C> <C>
HIGHEST 16.47% (Quarter ended 3/31/91)
LOWEST (17.75)% (Quarter ended 9/30/98)
</TABLE>

The table below shows how the Fund's average annual returns after deduction of
the maximum sales charge for one, five and ten calendar years compared with
those of the Russell 2500 Index and the Lipper Mid-Cap Value Fund Average.

FOR THE PERIODS ENDED DECEMBER 31, 1999:

<TABLE>
<CAPTION>
LIPPER
MID-CAP VALUE
AVERAGE ANNUAL FUND WITH MAXIMUM FUND
TOTAL RETURN SALES CHARGE DEDUCTED RUSSELL 2500* AVERAGE*
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
One Year............. (4.96)% 24.15% 9.33%
Five Years........... 0.57% 19.43% 16.55%
Ten Years............ 6.53% 15.05% 12.71%
</TABLE>

- ---------------

* 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 mid-capitalization stock performance and is included as
a broad-based comparison to the capitalization characteristics of the Fund's
portfolio. The Lipper Mid-Cap Value Fund Average provides an additional
comparison of how the Fund performed in relation to other mutual funds with
similar objectives. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.

5
<PAGE>
FEES AND EXPENSES OF THE FUND

THE FOLLOWING DESCRIBES THE FEES AND EXPENSES THAT YOU MIGHT PAY IF YOU BUY AND
HOLD SHARES OF THE FUND.

<TABLE>
<S> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)....................... 6.50%
Maximum Deferred Sales Load (as a percentage of
original sales price or redemption proceeds, as
applicable)......................................... *
Redemption Fee (as a percentage of amount
redeemed)........................................... None**
Exchange Fee........................................ $5.00

ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fees..................................... 0.70%
Distribution (12b-1) Fees........................... None
Other Expenses (including financial services)....... 0.33%
------
Total Annual Fund Operating Expenses................ 1.03%
</TABLE>

- ------------

* An account management fee is charged by unaffiliated investment advisers or
broker-dealers to certain accounts entitled to purchase shares without sales
charge.

** Redemptions by wire are subject to a $3.50 charge per wire.

EXAMPLE

This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.

The Example assumes you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:

<TABLE>
<S> <C>
One year $ 748
Three years $ 957
Five years $1,182
Ten years $1,828
</TABLE>

6
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INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES,
AND PRINCIPAL RISKS

INVESTMENT OBJECTIVE. The Fund's primary investment objective is a high total
investment return, from both capital appreciation and income.

PRINCIPAL INVESTMENT STRATEGIES. The Fund's Adviser favors investments in
common stocks it believes undervalued when considering various valuation
criteria. The Adviser deems the following important in its stock selection
process: current as well as future levels of profitability, book value,
replacement cost of assets and free cash flow. The Adviser attempts to lessen
price risk by not overpaying for earnings of even the best companies.
Furthermore, investments tend to be focused in areas which are viewed as
temporarily out-of-favor as evidenced by such factors as low price-to-
normalized earnings ratios and price-to-book value ratios. Normalized earnings
are used in an attempt to reduce the effect of one-time or extraordinary items
that may distort the normal or anticipated recurring earnings from the
operations of the company. The Fund generally holds some assets in high quality
short-term debt securities to provide liquidity. The Fund may also invest in
fixed-income and convertible securities.

The Fund relies on the professional judgment of its Adviser to make decisions
about the Fund's portfolio securities. The Adviser's basic investment philosophy
is to purchase securities on the basis of fundamental value and earnings
expectations rather than short-term stock market expectations.

PRINCIPAL RISKS. Your investment in the Fund is subject to a number of
principal risks related to principal strategies, including:

- Although the Fund may not invest more than 5% of its total assets in the
securities of any one issuer (except the U.S. Government) at the time of
purchase, changes in market prices and the assets of the Fund may from
time to time cause a larger percentage of the Fund's total assets to be
invested in securities of a single company. For example, on December 31,
1999, approximately 76% of the Fund's total assets were represented by
seven issuers in which more than 5% of the Fund's total assets were
invested. The largest holding, Polymer Group, Inc. which is a producer and
marketer of non-woven materials and other fabrics, constituted
approximately 26% of the Fund's total assets. Such relatively high
percentages are likely to increase the volatility of the Fund's net asset
value per share, or share price, and increase the risk of loss as well as
potential for gain.

- Although the Fund may not invest more than 25% of its total assets in any
one industry at the time of purchase, changes in market prices and the
assets of the Fund may from time to time cause a larger percentage of the
Fund's total assets to be invested in one industry. For example, on
December 31, 1999, approximately 29% of the Fund's total assets were
invested in securities of three gold mining companies, Homestake Mining
Company, Newmont Mining Corporation, and Placer Dome Inc. In addition,
shares of three consumer non-durable goods companies, Oakley, Inc.,
Polymer Group, Inc., and Unifi, Inc., constituted approximately 35% of the
Fund's total assets at December 31, 1999. Such relatively high percentages
are likely to increase the volatility of the Fund's net asset value per
share, or share price, and increase the risk of loss as well as potential
for gain.

- The Fund's investments in gold mining companies constituted 29% of its
total assets as of December 31, 1999. There are specific factors to
consider before investing in these companies.

7
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Such factors include (1) fluctuations in gold price, (2) laws affecting
gold supply, (3) environmental costs, and (4) economic and social
conditions. The gold price has varied dramatically over short periods of
time. Relevant economic and social conditions include unpredictable
monetary policies, drop in currency value, inflation rates, and trade
restrictions. Even financially strong mining companies will suffer if the
price of gold drops significantly.

- As of December 31, 1999, the Fund has invested 26% of its total assets in
shares of Polymer Group, Inc. You should know about the issues specific to
this company. Polymer Group, Inc. is in the consumer non-durable goods
sector, heavily indebted and is often impacted by fluctuating raw material
prices. The company relies heavily on a few major customers and depends on
key suppliers. The company also contends against intense competition in
the industry and faces tremendous pressure to continue developing
innovative products. Because the company operates abroad, the company must
also respond to foreign currencies' changing value.

- We can invest 25% of the Fund's total assets in foreign securities. You
should know that there are risks involved with investing in foreign
companies. First, foreign securities are often more susceptible to
changing currency rates and money exchange laws. We also cannot predict
international trade patterns. Second, foreign laws usually protect
investors less than U.S. laws. Domestic companies have to follow uniform
accounting, auditing and financial reporting standards. Foreign laws often
do not. Foreign companies, thus, usually disclose less information than
U.S. companies. In some countries, there is also a threat of expropriation
or diplomatic conflicts. Third, investing in foreign securities could cost
more than investing in domestic companies. Foreign brokers often charge
higher commission and custodial fees than their U.S. counterparts. Foreign
companies also might have to pay foreign government taxes. This could
reduce the securities' dividend or interest yield. Finally, some foreign
securities might be harder to sell because of the additional risks. In the
event of a default on any foreign debt obligation, it could also be
difficult to obtain or enforce judgments against the foreign company. We
can purchase foreign securities as American Depositary Receipts or other
securities representing the foreign shares.

- The Adviser's emphasis on a value-oriented investment approach may result
in the Fund's portfolio being invested in medium and smaller sized
companies the average investor perceives to be unpopular or unfamiliar.
This portfolio may not reflect all facets of the national economy and
differs significantly from the broader market. Securities in smaller
companies may be less liquid than those of larger issuers and the Fund
could have greater difficulty selling the security at an acceptable price,
particularly in periods of market volatility. Smaller companies typically
are subject to a greater degree of change in earnings and business
prospects than larger, more established companies. In addition, securities
of smaller companies are traded in lower volumes than those issued by
larger companies and may be more volatile than those of larger companies.
In light of these characteristics of smaller companies and their
securities, the Fund may be subject to greater risk than that assumed when
investing in the equity securities of larger companies;

- Fund shares could decline in value in response to certain events, such as
changes in markets or economies; and

- The prices of equity securities held by the Fund can be affected by events
specifically involving the issuers of these securities.

8
<PAGE>
MANAGEMENT AND ORGANIZATION

INVESTMENT ADVISER

First Pacific Advisors, Inc. is the Fund's investment adviser. The Adviser,
together with its predecessors, has been in the investment advisory business
since 1954 and has served as the Fund's investment adviser since July 1, 1978.
The Adviser manages assets of approximately $3.1 billion for seven investment
companies, including one closed-end investment company, and 20 institutional
accounts. First Pacific Advisors, Inc. is headquartered at 11400 West Olympic
Boulevard, Suite 1200, Los Angeles, California 90064. The Adviser selects
investments for the Fund, provides administrative services and manages the
Fund's business. The total management fee paid by the Fund, as a percentage of
average net assets, for the previous fiscal year was 0.70%. The Fund also paid
the Adviser 0.10% of its average net assets as a reimbursement for financial
services provided during the year.

PORTFOLIO MANAGER

William M. Sams, President of the Fund and Principal and director of the
Adviser, is primarily responsible for the day-to-day management of the Fund's
portfolio. Mr. Sams has been the Chief Investment Officer of the Fund for over
eighteen years.

PURCHASE, PRICING AND SALE OF SHARES

PURCHASE AND INVESTMENT MINIMUMS. You can purchase shares by contacting any
investment dealer authorized to sell the Fund's shares. You can use the account
information form for initial purchases. The minimum initial investment is
$1,500, and each subsequent investment must be at least $100. All purchases made
by check should be in U.S. dollars and made payable to the FPA Funds or State
Street Bank and Trust Company. Third party checks will not be accepted. A charge
may be imposed if a check does not clear.

SHARE PRICE. The Fund calculates its share price, also called net asset value,
as of 4:00 p.m. New York time, which is the normal close of trading on the New
York Stock Exchange ("NYSE"), every day the NYSE is open. The NYSE is closed
most national holidays and Good Friday. Share price is rounded to the nearest
cent per share and equals the market value of all portfolio securities plus
other assets, less all liabilities, divided by the number of Fund shares
outstanding. Orders received by dealers before the NYSE closes on any business
day are priced based on the share price for that day if Boston Financial Data
Services, Inc. receives the order prior to its close of business at 4:00 p.m.
Eastern time. Orders received by Boston Financial Data Services, Inc. after such
time generally are priced based on the share price for the next business day.
However, orders received by certain retirement plans and certain other financial
intermediaries before the NYSE closes and communicated to Boston Financial Data
Services, Inc. by 9:30 a.m., Eastern time, on the following business day are
priced at the share price for the prior business day. Share prices for sales
(redemptions) of Fund shares is the first share price determined after Boston
Financial Data Services, Inc. receives a properly completed request, except that
sale orders received by an authorized dealer, certain retirement plans and
certain other financial intermediaries before the NYSE closes are priced at the
closing price for that day if communicated to Boston Financial Data Services,
Inc. within the times specified above.

9
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SALES CHARGES. The offering price is the share price plus any applicable sales
charge. A sales charge may apply to your purchase. As indicated in the table
below, your sales charge can be reduced for larger purchases. You, your spouse
and the following related people (and their spouses) can combine investments to
reduce your sales charge: grandparents, parents, siblings, children or
grandchildren; or by the individual, his or her spouse and a trustee or other
fiduciary purchasing securities for related trusts, estates or fiduciary
accounts, including employee benefit plans.

<TABLE>
<CAPTION>
SALES SALES REALLOWED
SIZE OF INVESTMENT CHARGE(1) CHARGE(2) TO DEALERS(2)
- ------------------ --------- --------- -------------
<S> <C> <C> <C>
Less than $10,000.......................................... 6.95% 6.50% 6.00%
$10,000 but less than $25,000.............................. 6.38% 6.00% 5.50%
$25,000 but less than $50,000.............................. 5.54% 5.25% 4.75%
$50,000 but less than $100,000............................. 4.71% 4.50% 4.25%
$100,000 but less than $250,000............................ 3.90% 3.75% 3.50%
$250,000 but less than $500,000............................ 2.04% 2.00% 1.75%
$500,000 but less than $1,000,000.......................... 1.01% 1.00% 0.80%
$1,000,000 and over........................................ 0.00% 0.00% 0.00%
</TABLE>

- ------------

(1) As a percentage of net amount invested.

(2) As a percentage of public offering price.

REDUCING YOUR SALES CHARGE

INVESTMENTS IN OTHER FPA FUNDS. To determine the sales charge, you can add the
current value, at offering price, of all presently held shares of the FPA Funds,
which are:

- FPA Capital Fund, Inc. (which is currently closed to new investors)

- FPA New Income, Inc.

- FPA Paramount Fund, Inc. (this Fund)

- FPA Perennial Fund, Inc.

If your holdings of other FPA Funds qualify you for a reduced sales charge, you
must provide information to verify your holdings.

LETTER OF INTENT. A letter of intent will allow you to obtain a reduced sales
charge by aggregating investments made during a thirteen-month period. The value
of all presently held shares of the FPA Funds (see above list) can also be used
to determine the applicable sales charge. The account information form contains
the Letter of Intent that must be signed at the time of initial purchase, or
within 30 days. Each investment made under a letter of intent during the period
receives the sales charge for the total investment goal. IF YOU DO NOT REACH
YOUR INVESTMENT GOAL, YOU MUST PAY THE DIFFERENCE BETWEEN THE SALES CHARGES
APPLICABLE TO THE AMOUNT PURCHASED MINUS THOSE ACTUALLY PAID.

SALES AT REDUCED SALES CHARGE. Certain retirement plans, exempt from taxation
under Section 401 of the Internal Revenue Code, with open accounts in the Fund
as of July 2, 1990, are permitted to continue to buy Fund shares at a sales
charge equal to one-half of the normal sales charge. Information

10
<PAGE>
sufficient to permit verification must be furnished to Boston Financial Data
Services, Inc. when the order is placed.

PURCHASES NOT SUBJECT TO SALES CHARGE. You and your spouse (and your immediate
relatives) can purchase shares without a sales charge, if you fall into one of
the following categories and you represent that the shares you purchase are for
investment and will not be resold except through redemption or repurchase by the
Fund. Immediate relatives include grandparents, parents, siblings, children and
grandchildren of a qualified investor, and the spouse of any immediate relative.

(a) current and former directors, officers and employees of the Adviser, United
Asset Management Corporation (the Adviser and FPA Fund Distributors, Inc.
are indirect wholly owned subsidiaries of United Asset Management
Corporation) and its affiliates;

(b) current and former directors, officers and employees of Angeles Corporation
(the former parent of the Adviser) and its affiliates;

(c) current and former directors of, and partners and employees of legal counsel
to, the investment companies advised by the Adviser;

(d) investment advisory clients of the Adviser and consultants to such clients
and their directors, officers and employees;

(e) employees (including registered representatives) of a dealer that has a
selling group agreement with FPA Fund Distributors, Inc. and consents to the
purchases;

(f) any employee benefit plan maintained for the benefit of such qualified
investors; and

(g) directors, officers and employees of a company whose employee benefit plan
holds shares of one or more of the FPA Funds.

Because FPA Fund Distributors, Inc. anticipates that certain purchases will
result in economies of scale in the sales effort and related expenses compared
to sales made through normal distribution channels, upon satisfaction of certain
conditions the following persons can purchase without a sales charge:

(a) trustees or other fiduciaries purchasing shares for employee benefit plans
of employers with 20 or more employees;

(b) trust companies, bank trust departments and registered investment advisers
purchasing for accounts over which they exercise investment authority and
which are held in a fiduciary, agency, advisory, custodial or similar
capacity, provided that the amount collectively invested or to be invested
by such accounts during the subsequent 13-month period in the Fund or other
FPA Funds totals at least $1,000,000;

(d) accounts upon which an investment adviser, financial planner or
broker-dealer charges an account management or consulting fee, provided it
has entered into an agreement with FPA Fund Distributors, Inc. regarding
those accounts or purchases Fund shares for such accounts or for its own
accounts through an omnibus account maintained by a broker-dealer that has
entered into such an agreement with the Fund or FPA Fund Distributors, Inc.

11
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If you qualify, you must submit a special application form available from FPA
Fund Distributors, Inc. with your initial purchase, and you must notify FPA Fund
Distributors, Inc. of your eligibility when you place the order. If you place
the order through a broker, the broker may charge you a service fee. No such fee
is charged if you purchase directly from FPA Fund Distributors, Inc. or the
Fund.

SELLING (REDEEMING) YOUR SHARES

You can sell (redeem) for cash without charge any or all of your Fund shares at
any time by sending a written request to Boston Financial Data Services, Inc.
Faxes are not acceptable. You can also place redemption requests through
dealers, but they may charge a fee. If you are selling Fund shares from a
retirement plan, you should consult the plan documentation concerning federal
tax consequences and consult your plan custodian about procedures.

A check will be mailed to you within seven days after Boston Financial Data
Services, Inc. receives a properly completed request (as described below under
"Written Requests"). If Fund shares sold were recently purchased by check,
payment of the redemption proceeds will be delayed until confirmation that the
purchase check has cleared, which may take up to 15 days from the date of
purchase.

WRITTEN REQUESTS. Requests must be signed by the registered shareholder(s). If
you hold a stock certificate, it must be included with your written request. A
signature guarantee is required if the redemption is:

- Over $10,000;

- Made payable to someone other than the registered shareholder or to
somewhere other than the registered address; or

- If the shareholder is a corporation, partnership, trust or fiduciary.

A signature guarantee can be obtained from a bank or trust company; a broker or
dealer; a credit union; a national securities exchange, registered securities
association or clearing agency; or a savings and loan association. Additional
documents are required for sales by corporations, partnerships, trusts,
fiduciaries, executors or administrators.

TELEPHONE TRANSACTIONS. You must elect the option on the account information
form to have the right to sell your shares by telephone. If you wish to make an
election to have the right to sell your shares via telephone or to change such
an election after opening an account, you will need to complete a request with a
signature guarantee. Sales via telephone are not available for shares held in a
Fund-sponsored retirement account or in certificate form.

When you obtain the right to sell your Fund shares by telephone, you designate a
bank account to which the proceeds of such redemptions are sent. Telephone
redemptions of $5,000 or more are wired unless the designated bank cannot
receive Federal Reserve wires, in which case the redemptions are mailed.
Telephone redemptions under $5,000 are mailed to the designated bank unless you
request otherwise. There is a $3.50 charge per wire.

Boston Financial Data Services, Inc. uses procedures it considers reasonable to
confirm redemption instructions via telephone, including requiring account
registration verification from the caller and recording telephone instructions.
Neither Boston Financial Data Services, Inc. nor the Fund is liable for

12
<PAGE>
losses due to unauthorized or fraudulent instructions if there is a reasonable
belief in the authenticity of received instructions and reasonable procedures
are employed; otherwise, they may be liable. During periods of significant
economic or market changes, it may be difficult to sell your shares by
telephone.

The Fund can change or discontinue telephone redemption privileges without
notice.

REINVESTING IN THE FUND WITH PROCEEDS FROM REDEMPTION OF SHARES. If you
reinvest in the Fund within 30 days you do not have to pay a sales charge. Your
reinvestment is made at the first share price determined after Boston Financial
Data Services, Inc. receives your order. You can only do this once for each Fund
investment, and you must provide sufficient information to verify your
reinvestment when you make your purchase. A sale and reinvestment is a taxable
transaction, but losses on the sale are not deductible for federal income tax
purposes.

AUTOMATIC REDEMPTION (SALE) OF YOUR SHARES. If as a result of a redemption your
account value is less than $500, the Fund can direct Boston Financial Data
Services, Inc. to sell your remaining Fund shares. In such case, you will be
notified in writing that your account value is insufficient and be given up to
60 days to increase it to $500.

EXCHANGE OF SHARES AND SHAREHOLDER SERVICES

EXCHANGING YOUR FUND SHARES

EXCHANGING YOUR SHARES FOR SHARES OF OTHER FPA FUNDS. You can exchange your
shares of the Fund for shares of other FPA Funds, except that only existing
shareholders of FPA Capital Fund, Inc., may exchange into that Fund.

You can increase an existing account or start a new account in the selected FPA
Fund. Shares of the Fund acquired must be registered for sale in your state.

A $5.00 service fee applies to each exchange. In addition, a sales charge
applies unless:

- you paid a sales charge on the exchanged shares equivalent to that
applicable to the acquired shares;

- you are otherwise entitled to purchase shares without a sales charge (as
noted under "Purchases Not Subject to Sales Charge"); or

- the shares you are exchanging were acquired by reinvestment.

EXCHANGING YOUR SHARES FOR SHARES OF A MONEY MARKET FUND. FPA Fund
Distributors, Inc. has made arrangements to allow you to exchange your shares
for shares of the money market portfolio of the Cash Equivalent Fund, a no-load
diversified money market mutual fund. Shares of the money market fund you
acquire through exchange plus any shares acquired by reinvestment of dividends
and distributions may be re-exchanged for shares of any FPA Fund without a sales
charge. However, in the case of FPA Capital Fund, Inc., you must have maintained
your account in FPA Capital Fund, Inc. in order to re-exchange your shares in
the money market fund for shares in FPA Capital Fund, Inc.

If your shares are held in a Fund-sponsored Individual Retirement Account, you
cannot exchange them into shares of the money market fund.

13
<PAGE>
The $5.00 exchange fee is paid by FPA Fund Distributors, Inc., which receives a
fee from Kemper Financial Services, the administrator of the money market fund,
of 0.15 of 1% per year or more of the average daily net asset value of shares of
the money market fund acquired through this exchange program.

The money market fund is not an FPA Fund and is separately managed. The fact
that you have the ability to exchange your shares for shares of the money market
fund is not a Fund recommendation of the money market fund.

HOW TO EXCHANGE YOUR SHARES. You can exercise your exchange privileges either
by written instructions or telephone (telephone exchange privileges are
available unless you specifically decline them on the account information form).
Exchanges are subject to the following restrictions:

- You are limited to four exchanges in one account during any calendar year;
if we give you notice you have exceeded this limit, any further exchanges
will be null and void;

- Shares must be owned 15 days before exchanging, and cannot be in
certificate form unless you deliver the certificate when you request the
exchange;

- An exchange requires the purchase of shares with a value of at least
$1,000; and

- Exchanges are subject to the same signature and signature guarantee
requirements applicable to the redemption of shares.

Exchanges and purchases are at the share price next determined after receipt of
a proper request (as described above under "Written Requests") by Boston
Financial Data Services, Inc. In the case of exchanges into the money market
fund, dividends generally start on the following business day.

For federal and state income tax purposes, an exchange is treated as a sale and
could result in a capital gain or loss. If the shares exchanged have been held
less than 91 days, the sales charge paid on them is not included in the tax
basis of the exchanged shares, but is carried over and included in the tax basis
of the shares acquired. See the Statement of Additional Information for further
information.

DISCONTINUATION OF THE EXCHANGE PROGRAMS. The Fund and FPA Fund Distributors,
Inc. can change or discontinue the rights to exchange Fund shares into other FPA
Funds or the money market fund upon 60 days' notice. If you have exchanged your
shares into shares of the money market fund, you will have at least 60 days
after being given notice of the end of the exchange program to reacquire Fund
shares without a sales charge.

FOR MORE INFORMATION OR FOR PROSPECTUSES FOR OTHER FPA FUNDS AND/OR THE MONEY
MARKET FUND, PLEASE CONTACT A DEALER OR FPA FUND DISTRIBUTORS, INC. YOU SHOULD
READ THE PROSPECTUSES OF THESE OTHER FUNDS AND CONSIDER DIFFERENCES IN
OBJECTIVES AND POLICIES BEFORE MAKING ANY EXCHANGE.

OTHER SHAREHOLDER SERVICES

INVESTMENT ACCOUNT. Each shareholder has an investment account in which Boston
Financial Data Services, Inc. holds Fund shares. You will receive a statement
showing account activity after each transaction. Unless you make a written
request, stock certificates will not be issued. Stock certificates are only
issued for full shares.

14
<PAGE>
PRE-AUTHORIZED INVESTMENT PLAN. To make automatic monthly investments of at
least $100, you must complete the account information form available from
dealers or FPA Fund Distributors, Inc. Boston Financial Data Services, Inc. will
withdraw funds from your bank account monthly for $100 or more as specified
through the Automated Clearing House.

RETIREMENT PLANS. If you are eligible, you can establish an IRA (individual
retirement account) and/or other retirement plan with a $100 minimum initial
investment and an expressed intention to increase the investment to $1,500
within 12 months. Each subsequent investment must be at least $100. Neither the
Fund nor FPA Fund Distributors, Inc. imposes additional fees for these plans,
but the plan custodian does.

You should consult your tax adviser about the implications of establishing a
retirement plan with Fund shares. Persons with earned income ineligible for
deductible contributions generally may make non-deductible contributions into an
IRA. The earnings on shares held in an IRA are generally tax-deferred. In
addition, the Taxpayer Relief Act of 1997 expanded opportunities for certain
investors to make deductible contributions to IRAs and also created two new
tax-favored accounts, the Roth IRA and the Education IRA, in which earnings
(subject to certain restrictions) are not taxed even on withdrawal. Tax matters
are complicated; you should consult your tax adviser. FPA Fund Distributors,
Inc. and dealers have applicable forms and information regarding plan
administration, custodial fees and other plan provisions.

SYSTEMATIC WITHDRAWAL PLAN. If you have an account with a value of $10,000 or
more, you can make monthly, quarterly, semi-annual or annual withdrawals of $50
or more by electing this option on the account information form. Under this
arrangement, sufficient Fund shares will be sold to cover the withdrawals and
the proceeds will be forwarded to you as directed on the account information
form. Dividends and capital gains distributions are automatically reinvested in
the Fund at net asset value. If withdrawals continuously exceed reinvestments,
your account will be reduced and ultimately exhausted. PLEASE NOTE THAT
CONCURRENT WITHDRAWALS AND PURCHASES ARE ORDINARILY NOT IN YOUR BEST INTEREST
BECAUSE OF ADDITIONAL SALES CHARGES, AND YOU WILL RECOGNIZE ANY TAXABLE GAINS OR
LOSSES ON THE AUTOMATIC WITHDRAWALS.

DIVIDENDS, DISTRIBUTIONS AND TAXES

DIVIDENDS AND DISTRIBUTIONS

The Fund's investment income consists principally of dividends and interest
earned on its portfolio securities. This income, after payment of expenses, will
be distributed to you semi-annually. Net capital gains realized from the sale of
securities are distributed annually. Dividends and capital gain distributions
are automatically reinvested in the Fund at the share price determined at the
close of business the day after the record date, unless before the record date
for receipt of the dividend or capital gain distribution you request cash
payment of dividends and capital gains distributions. You can use the account
information form to request a cash payment.

TAX CONSEQUENCES

Dividends and capital gains are generally taxable whether they are reinvested or
received in cash -- unless you are exempt from taxation or entitled to tax
deferral. Dividends and distributions are taxed at

15
<PAGE>
ordinary rates while capital gains may be taxed at a different rate.
Furthermore, capital gains may be taxed at different rates depending on the
length of time the Fund holds its assets.

Redemptions from a retirement plan account and an ordinary shareholder account
could have different tax treatment.

You must provide the Fund with a certified correct taxpayer identification
number (generally your social security number) and certify that you are not
subject to backup withholding. You can use the account information form for this
purpose. If you fail to do so, the IRS can require the Fund to withhold 31% of
your taxable distributions and redemptions. Federal law also requires the Fund
to withhold 30% or the applicable tax treaty rate from dividends paid to certain
nonresident aliens, non-U.S. partnership and non-U.S. corporation shareholder
accounts.

Please see the Statement of Additional Information and consult with your tax
adviser.

16
<PAGE>
FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand the Fund's
financial performance for the past five (5) years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Fund purchased at net asset value and assuming reinvestment of all
dividends and distributions. This information has been audited by Ernst & Young
LLP, whose report, along with the Fund's financial statements, are included in
the Statement of Additional Information, which is available upon request.

<TABLE>
<CAPTION>
FOR THE YEARS 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..................................... $ .07 $ .16 $ .29 $ .30 $ .30
Net realized and unrealized gain (loss) on investment
securities.............................................. (.77) (3.77) 2.30 2.52 1.17
-------- -------- -------- -------- --------
Total from investment operations............................ $ (.70) $ (3.61) $ 2.59 $ 2.82 $ 1.47
-------- -------- -------- -------- --------

Less distributions:
Dividends from net investment income...................... $ (.08) $ (.20) $ (.31) $ (.27) $ (.29)
Distributions from net realized capital gains............. -- (1.90) (2.87) (0.91) (1.01)
-------- -------- -------- -------- --------
Total distributions......................................... $ (.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.

17
<PAGE>

FOR SHAREHOLDER SERVICES CONTACT
BOSTON FINANCIAL DATA
SERVICES, INC.
P.O Box 8115
Boston, MA 02266 - 8115
(617) 483-5000 or
(800) 638-3060 except Alaska
Hawaii, Massachusetts and
Puerto Rico

FOR RETIREMENT PLAN SERVICES
CALL YOUR EMPLOYER OR PLAN
ADMINISTRATOR

FOR 24-HOUR INFORMATION GO TO
FUNDMASTER MARKETING GROUP
INTERNET WEB SITE
http://www.fundmaster.com

FOR DEALER SERVICES CONTACT
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic
Boulevard, Suite 1200
Los Angeles, CA 90064
(310) 473-0225 or
(800) 982-4372 except
Alaska, Hawaii and
Puerto Rico

Telephone conversations may be recorded or monitored for verification,
record keeping and quality assurance purposes.

INVESTMENT ADVISER
FIRST PACIFIC ADVISORS, INC.
11400 West Olympic Boulevard,
Suite 1200
Los Angeles, CA 90064

CUSTODIAN AND TRANSFER AGENT
STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110

Inquiries concerning transfer of registration, distributions, redemptions and
shareholder services should be directed to Boston Financial Data Services,
Inc. Inquiries concerning sales should be directed to FPA Fund Distributors,
Inc.

MULTIPLE TRANSLATIONS

This Prospectus may be translated into other languages. If there are any
inconsistencies or ambiguities, the English text will prevail.

OTHER FUND INFORMATION

ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS

Additional information about the Fund's investments is available in the
Fund's annual and semi-annual reports to shareholders. In the Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its
last fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

The SAI contains more detailed information on all aspects of the Fund,
including the Fund's financial statements.

A current SAI has been filed with the Securities and Exchange Commission
("SEC") and is incorporated by reference into this Prospectus. The SAI and
other related materials about the Fund are available for review or to be copied
at the SEC's Public Reference Room in Washington, D.C. (1-202-942-8090) or
from the EDGAR database on the SEC's Internet Web Site at http://www.sec.gov,
and copies of this information may be obtained, upon payment of a duplicating
fee, by electronic request at [email protected] or by writing the Reference
Section of the SEC, Washington, D.C. 20549-6009.

FOR MORE INFORMATION OR TO REQUEST A FREE COPY OF ANY OF THE DOCUMENTS ABOVE
CONTACT FPA FUND DISTRIBUTORS, INC. AT 11400 WEST OLYMPIC BOULEVARD, SUITE
1200, LOS ANGELES, CALIFORNIA 90064, AT (800) 982-4372, EXCEPT FROM ALASKA,
HAWAII AND PUERTO RICO (WHERE YOU MAY CALL COLLECT (310) 473-0225).

Investment Company Act No. 811-852

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION
February 1, 2000
FPA PARAMOUNT FUND, INC.

This Statement of Additional Information supplements the current Prospectus of
FPA Paramount Fund, Inc. ("Fund") dated February 1, 1999. This Statement does
not present a complete picture of the various topics discussed and should be
read in conjunction with the Fund's Prospectus. Although this Statement of
Additional Information is not itself a Prospectus, it is, in its entirety,
incorporated by reference into the Prospectus. The Fund's Prospectus can be
obtained by contacting your securities dealer or the Fund's principal
underwriter, FPA Fund Distributors, Inc. ("Distributor"), at 11400 West Olympic
Boulevard, Suite 1200, Los Angeles, California 90064; telephone (310) 473-0225
or (800) 982-4372, except from Alaska, Hawaii and Puerto Rico.

TABLE OF CONTENTS

Page
Investment Objective, Strategies and Policies............................... 1
Description of Certain Securities and Investment Techniques.................. 1
Equity Securities..................................................... 1
Gold Stocks........................................................... 1
Significant Positions................................................. 2
Securities of Foreign Issuers......................................... 2
Foreign Currency Transactions......................................... 2
Short Sales Against the Box........................................... 3
Repurchase Agreements................................................. 3
Leverage.............................................................. 3
Investment Restrictions...................................................... 3
Fund Organization............................................................ 5
Directors and Officers of the Fund........................................... 5
Five Percent Shareholders.................................................... 9
Management................................................................... 9
Investment Adviser.................................................... 9
Investment Advisory and Service Agreement............................ 10
Principal Underwriter................................................ 11
Portfolio Transactions and Brokerage........................................ 11
Portfolio Turnover.......................................................... 12
Capital Stock............................................................... 12
Common Stock......................................................... 12
Voting Rights........................................................ 12
Purchase and Redemption of Shares........................................... 13
Net Asset Value...................................................... 13
Sales Charges........................................................ 13
Authorized Financial Intermediaries.................................. 13
Sales at Net Asset Value............................................. 13
Letter of Intent..................................................... 13
FPA Exchange Privilege............................................... 14
Redemption of Shares................................................. 15
Telephone Redemption................................................. 15
Tax Sheltered Retirement Plans.............................................. 16
Dividends, Distributions and Taxes.......................................... 16
Distributor................................................................. 17
Prior Performance Information............................................... 18
Financial Statements........................................................ 20

-i-
<PAGE>

INVESTMENT OBJECTIVE, STRATEGIES AND POLICIES

The following limitations and guidelines are considered at the time of purchase,
under normal market conditions, and are based on a percentage of FPA Paramount
Fund, Inc.'s (the "Fund") total assets unless otherwise noted. This summary is
not intended to reflect all of the Fund's investment limitations.

INVESTMENT OBJECTIVE AND STRATEGIES

- - The Fund's primary investment objective is high total investment
return, from both capital appreciation and income. The Fund's
investment adviser, First Pacific Advisors, Inc., purchases common
stocks using a value discipline and evaluating each company on its own
merits. The Adviser's measures of value include price/earnings ratios,
book value, and replacement cost of assets. The Fund invests primarily
in the common stocks of U.S. companies in a variety of industries and
market segments. The Fund can also invest in fixed-income securities
and convertible securities. The Fund holds some assets in high quality
short-term debt securities to provide liquidity.

- - Investments in the Fund are not limited by a specific industry, and
substantially all common stocks purchased by the Fund will be listed on
a national securities exchange or the National Association of
Securities Dealers Automated Quotation (NASDAQ) National Market System
or National List.

- - Although the Fund may not invest more than 5% of its total assets in
the securities of any one issuer (except the U.S. Government) at the
time of purchase, changes in market prices and the assets of the Fund
may from time to time cause more than 5% or even 10% of the Fund's
total assets to be invested in securities of a single company. Although
the Fund may not invest more than 25% of its total assets in any one
industry at the time of purchase, changes in market prices and the
total assets of the Fund may from time to time cause more than 25% of
the Fund's total assets to be invested in one industry.

NON-U.S. SECURITIES

- - The Fund can invest up to 25% of its total assets in securities of
foreign issuers.

DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES

EQUITY SECURITIES -- The Fund will invest primarily in equity securities. Equity
securities represent an ownership position in a company. The prices of equity
securities fluctuate based on changes in the financial conditions of their
issuers and on market and economic conditions. These fluctuations can be severe
and can generate large losses.

GOLD STOCKS -- As long as the Fund maintains significant investments in gold
mining companies, an investment in the Fund can involve special risk
considerations. These include fluctuations in the price of gold; the
potential effect of the concentration of the sources of supply of gold and
control over the sale of gold; changes in U.S. or foreign tax, currency, or
mining laws; increased environmental costs; and unpredictable monetary
policies and economic and political conditions. Also, even gold mining
companies with strong balance sheets are likely to be adversely impacted by
lower profitability from lower gold prices.

The price of gold has recently been subject to substantial upward and downward
movements over short periods of time and may be affected by unpredictable
international monetary and political policies, such as currency devaluations or
reevaluations, economic conditions within an individual country, trade
imbalances or trade or currency restrictions between countries, and world
inflation rates and interest rates. Several central banks recently have sold
gold bullion from their reserves. Sales by central banks and/or rumors of these
sales have had a negative effect on gold prices.

1
<PAGE>

SIGNIFICANT POSITIONS -- As long as the Fund maintains significant positions
in a single company in one issuer, an investment in the Fund can involve
special risk consideration. For example, the Fund holds shares of Polymer
Group, Inc. (26% of net assets at December 31, 1999). The company has
reported that risk factors involved in investing in its securities include
significant leverage from outstanding debt obligations, fluctuations in raw
material prices, reliance on major customers, intense competition in the
company's markets, importance of continued development of innovative
products, dependence on key suppliers, risks of acquisitions and possible
failure to integrate acquired businesses, earnings impacted by currency
fluctuations because of significant operations in foreign countries, and
other matters.

SECURITIES OF FOREIGN ISSUERS -- The Fund can invest up to 25% of its total
assets in securities of foreign issuers. Investments in securities of foreign
issuers can be affected favorably or unfavorably by changes in currency rates
and exchange control regulations. Compared to U.S. companies, there might be
less publicly available information about foreign companies, which generally
are subject to less stringent accounting, auditing and financial reporting
standards and requirements. Securities of some foreign companies might be
less liquid or more volatile than those of U.S. companies. Foreign brokerage
commissions and custodial fees are generally higher than in the United
States. Settlement of transactions in some foreign markets can be delayed or
can be less frequent than in the U.S., which could affect the liquidity of
the Fund's portfolio. Investments in foreign securities can involve
additional risks, including local political or economic developments,
expropriation or nationalization of assets and imposition of withholding
taxes on dividend or interest payments. In the event of a default on any
foreign debt obligation, it could be more difficult for the Fund to obtain or
enforce a judgment against the issuer.

Securities of foreign issuers can be subject to foreign government taxes which
could reduce the dividend or interest yield on such securities. Foreign
investments involve certain risks, such as political or economic instability of
the issuer or of the country of issue, the difficulty of predicting
international trade patterns and the possibility of imposition of exchange
controls. Such securities can also be subject to greater fluctuations in price
than those of domestic corporations or the United States Government. In
addition, there might be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to the uniform accounting, auditing and financial reporting standards
applicable to domestic companies. There is generally less government regulation
of stock exchanges, brokers and listed companies abroad than in the United
States. With respect to certain foreign countries, there is a possibility of
expropriation, confiscatory taxation, or diplomatic developments affecting
foreign investments. Finally, in the event of default on any foreign debt
obligation, it may be more difficult for the Fund to obtain or enforce a
judgment against the issuer.

The Fund can purchase foreign securities in the form of American Depositary
Receipts ("ADRs") or other securities representing underlying shares of foreign
companies. ADRs are receipts typically issued by an American bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. ADRs are publicly traded on exchanges or over-the-counter in the
United States and are issued through "sponsored" or "unsponsored" arrangements.
In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay
some or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid by the ADR holders. In addition, less information is
available in the United States about an unsponsored ADR than about a sponsored
ADR. The Fund can invest in ADRs through both sponsored and unsponsored
arrangements.

FOREIGN CURRENCY TRANSACTIONS -- The value of any of the Fund's portfolio
securities that are traded in foreign markets can be affected by changes in
currency exchange rates and exchange control regulations. In addition, the Fund,
in purchasing or selling securities in foreign markets, will incur costs in
connection with conversions between various currencies. The Fund's foreign
currency exchange transactions generally are conducted on a spot basis (that is,
cash basis) at the spot rate for purchasing or selling currency prevailing in
the foreign currency exchange market. The Fund purchases and sells foreign
currency on a spot basis in

2
<PAGE>

connection with the settlement of transactions in securities traded in such
foreign currency. The cost of currency exchange transactions is generally the
difference between the bid and offer spot rate of the currency being purchased
or sold. The Fund does not purchase and sell foreign currencies as an
investment.

SHORT SALES AGAINST THE BOX -- The Fund can make short sales of securities or
maintain a short position if the Fund contemporaneously owns or has the right to
obtain at no added cost identical securities (short sales "against the box") or
if the securities sold are "when issued" or "when distributed" securities that
the Fund expects to receive in a recapitalization, reorganization, or other
exchange for securities the Fund contemporaneously owns or has the right to
obtain at no added cost. The principal purpose of short sales is to enable the
Fund to obtain the current market price of a security that the Fund desires to
sell but which cannot be currently delivered for settlement. The Fund will not
make short sales or maintain a short position if to do so would cause more than
25% of its total assets (exclusive of proceeds from short sales) to be
allocated to a segregated account in connection with short sales.

The Fund did not effect any short sales in the last fiscal year and has no
present intention to do so during the coming year.

REPURCHASE AGREEMENTS -- The Fund can invest in repurchase agreements with
domestic banks or dealers to earn interest on temporarily available cash. A
repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Fund) acquires a debt security that the seller agrees to repurchase at a
future time and set price, thereby determining the yield during the holding
period. Repurchase agreements are collateralized by the underlying debt
securities and may be considered loans under the Investment Company Act of 1940
("Investment Company Act"). In the event of bankruptcy or other default by the
seller, the Fund could experience delays and expenses liquidating the underlying
security, loss from decline in value of such security, and lack of access to
income on such security. The Fund will not invest more than 10% of its total net
assets in repurchase agreements that mature in more than seven days and/or other
securities which are not readily marketable.

LEVERAGE -- The Fund can borrow from banks to raise additional funds for
investment. Such borrowings may be made periodically when it is expected that
the potential return, including capital appreciation and/or income, from the
investment of these funds will exceed the cost. Any return from investment of
the borrowed funds in excess of the interest cost will cause the net asset value
of Fund shares to rise faster than would otherwise be the case. Conversely, if
the return on the investment of the borrowed funds fails to cover the interest
cost, the net asset value will decrease faster than normal. This speculative
factor is known as leverage. This policy permitting bank borrowing cannot be
changed without the approval of the holders of a majority (as defined under
"Investment Restrictions") of the Fund's outstanding voting securities. The Fund
may collateralize any bank borrowing by depositing portfolio securities with, or
segregating such securities for, the account of the lending bank. See
"Investment Restrictions."

Under the Investment Company Act the Fund must have an asset coverage of at
least 300% of the amount borrowed, immediately after the borrowing. Asset
coverage means total assets, including borrowings, less liabilities, excluding
borrowings. If the Fund's asset coverage falls below this requirement because of
market fluctuations, redemptions or other reasons, the Fund must reduce its bank
debt as necessary within three days (not including Sundays or holidays). To
do this, the Fund may have to sell a portion of its investments at a
disadvantageous time. The amount of any borrowing is also limited by the
applicable Federal Reserve Board's margin limitations.

The Fund has not borrowed for more than twenty years and has no present
intention to do so during the coming year.

INVESTMENT RESTRICTIONS

The Fund has adopted the investment restrictions stated below. They apply at the
time securities are purchased or other relevant action is taken. These
restrictions and the Fund's investment objective cannot be changed without
approval of the holders of a majority of outstanding Fund shares. The Investment
Company Act defines this majority as the lesser of (a) 67% or more of the voting
securities present in person

3
<PAGE>

or represented by proxy at a meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy; or (b) more
than 50% of the outstanding voting securities. In addition to those described in
the Prospectus, these restrictions provide that the Fund shall not:

1. Purchase securities of other investment companies if immediately after
such purchase the Fund will own (a) more than 3% of the total outstanding
voting stock of any such companies, (b) securities issued by any of such
companies having an aggregate value in excess of 5% of the value of the
total assets of the Fund or (c) securities issued by investment companies
having an aggregate value in excess of 10% of the value of the total
assets of the Fund.

2. Purchase, lease, acquire, hold or sell real estate or any illiquid
interest in real estate other than (a) for office space, (b) securities
issued by registered real estate investment trusts or (c) as provided in
paragraph 4 below.

3. Engage in short sales, margin purchases, puts, calls, straddles or
spreads, except that the Fund may make certain short sales of securities
or maintain a short position if the Fund contemporaneously owns or has the
right to obtain at no added cost securities identical to those sold short
(short sales "against the box") or if the securities sold are "when
issued" or "when distributed" securities which the Fund expects to receive
in a recapitalization, reorganization, or other exchange for securities
the Fund contemporaneously owns or has the right to obtain at no added
cost.

4. Make loans to any person or firm, except by the acquisition of outstanding
notes or other evidences of indebtedness secured by first deeds of trust
or mortgages on real property or interest therein, in an aggregate amount
not exceeding 10% of the value of its total assets. However, the making
of time or demand deposits with banks and the purchase of publicly traded
bonds, debentures or other securities of any other issuer of a type
customarily purchased by institutional investors or any government or
governmental issue at original issue or otherwise, shall not be deemed to
be a loan. Investment in repurchase agreements shall not be considered
the making of a loan for purposes of this investment restriction; although
the Fund will not invest in repurchase agreements maturing in more than
seven days if any such investments, together with any other illiquid
securities held by the Fund, would exceed 10% of the Fund's total net
assets.

5. Participate on a joint or a joint and several basis in any trading account
in securities.

6. Invest in companies for the purpose of exercising control or management.
However, once investments have been acquired, the Fund may exercise its
vote as a shareholder in its best interests even though such vote may
affect management or control of a company.

7. Underwrite the sale of securities of others, except when the Fund might be
deemed to be a statutory underwriter because of its disposing of
restricted securities. The Fund will not purchase restricted securities.

8. Purchase or sell commodities or commodity contracts.

9. Purchase from, or sell to, any officers, directors or employees of the
Fund or its adviser or underwriter, or any of their officers or directors,
any securities other than the shares of the Fund's capital stock. Such
persons or firms, however, may act as brokers for the Fund for customary
commissions.

10. Issue any senior securities except that the Fund may borrow from banks
to the extent permitted by the Investment Company Act (see "Leverage"
above).

4
<PAGE>

11. Invest more than 5% of its total assets, based on market value, in the
securities of any one issuer (except the U.S. Government); or acquire more
than 10% of any class of securities of any one issuer.

12. Invest more than 25% of the value of its total assets in any one industry.

Percentage limitations are calculated and applied at the time of investment,
except with respect to restriction number 10 above. Thus, if securities of a
given issuer come to constitute more than 5%, or securities of a given
industry come to constitute more than 25%, of the value of the Fund's assets
by reason of changes in value of either the given securities or other assets,
the excess need not be sold.

FUND ORGANIZATION

The Fund is a Maryland corporation and a diversified, open-end management
investment company, generally called a mutual fund, which was organized in 1958.
A mutual fund provides the investor a practical and convenient way to invest in
a diversified portfolio of securities by combining resources with others who
have similar investment goals.

A board of five directors is responsible for overseeing the Fund's affairs.

DIRECTORS AND OFFICERS OF THE FUND

All directors and officers of the Fund are also directors and/or officers of one
or more of four other investment companies advised by the Adviser, which is an
indirect wholly owned subsidiary of United Asset Management Corporation ("UAM").
These investment companies are FPA Capital Fund, Inc., FPA New Income, Inc., FPA
Perennial Fund, Inc. and Source Capital, Inc. (collectively, the "FPA Fund
Complex").

The directors and officers of the Fund, their ages on the date hereof and their
principal occupations during the past five years follow. Their address is 11400
West Olympic Boulevard, Suite 1200, Los Angeles, California 90064.

5
<PAGE>

FUND DIRECTORS AND OFFICERS
DIRECTORS

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AGGREGATE
COMPENSATION
(1) FROM THE
FUND DURING
POSITION HELD WITH THE FISCAL YEAR
NAME/AGE FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS ENDED 9/30/99

- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Julio J. de Puzo, Jr., 45* Director & Executive Director (since October 1995), Principal and Chief $ -0-
Vice President Executive Officer (since March 1996) of First Pacific
Advisors, Inc.; Director and President (since March
1996) of Source Capital, Inc.; Director and Executive
Vice President (since April 1996) of FPA Perennial
Fund, Inc.; and Director (since December 1999) and
Executive Vice President (since August 1996) of FPA
Capital Fund, Inc. and of FPA New Income, Inc.
President and Chief Executive Officer (since January
1997), and Director for more than the past five years
of FPA Fund Distributors, Inc. Executive Vice President
from October 1995 to March 1996, Chief Administrative
Officer from October 1995 to March 1996, Chief Financial
Officer from June 1991 to March 1996, Treasurer from
June 1991 to March 1996, and Senior Vice President from
February 1993 to October 1995, of First Pacific
Advisors, Inc. Treasurer from June 1981 to August 1996
of the Fund; from July 1984 to August 1996 of FPA
Capital Fund, Inc. and of FPA New Income, Inc.; from
May 1982 to August 1996 of Source Capital, Inc.; and
from September 1983 to August 1996 of FPA Perennial
Fund, Inc. Chief Financial Officer from October 1991
to March 1998, and Executive Vice President (or Senior
Vice President or First Vice President) from October
1991 to January 1997 of FPA Fund Distributors, Inc.

<CAPTION>
- -----------------------------------------
AGGREGATE
COMPENSATION (1)
FROM THE FPA FUND
COMPLEX DURING
THE FISCAL YEAR TOTAL NUMBER OF
ENDED 9/30/99 BOARDS ON WHICH
DIRECTOR SERVES
- -----------------------------------------
<S> <C>
$-0- 5

- -----------------------------------------
</TABLE>

6
<PAGE>

- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John P. Endicott, 81 Director Independent management consultant; Associate, $13,000
Case and Company, Inc. (management consultants)
from April 1981 to January 1983; and President
and Director, Sierracin Corporation
(manufacturer of high technology products) from
1969 to March 1979. Director of FPA Perennial
Fund, Inc. for more than the past five years.
- --------------------------------------------------------------------------------------------------------------------------------
Leonard Mautner, 82 Director President, Leonard Mautner Associates (management $13,000
consultants); General Partner, Goodman & Mautner
Ltd. (venture capital partnership); and
President, Goodman & Mautner, Inc. (investment
manager) from 1969 to 1979. Director of FPA
Perennial Fund, Inc. for more than the past five years.
- --------------------------------------------------------------------------------------------------------------------------------
John H. Rubel, 79 Director President, John H. Rubel and Associates, Inc. $13,000
(management consultants) for more than the past
five years; Senior Vice President, Litton
Industries, Inc. (diversified manufacturing) from
1963 to 1973; Assistant Secretary of Defense
(Research and Engineering) from 1961 to 1963; and
member of the Task Force Commission for the War
on Poverty during 1964.
- --------------------------------------------------------------------------------------------------------------------------------
John P. Shelton, 79 Director Professor Emeritus at UCLA Graduate School of $13,000
Management for more the past five years.
Director of Genisco Systems, Inc. (manufacturer
of hardened computers and electronics).
- --------------------------------------------------------------------------------------------------------------------------------

- -----------------------------------------
$17,500 2

- -----------------------------------------
$13,000 1

- -----------------------------------------
</TABLE>

- -------------------

(1) No pension or retirement benefits are provided to directors by the Fund
or the FPA Fund Complex.
* Director who is an interested person, as defined in the Investment
Company Act, by virtue of his affiliation with the Adviser.

7
<PAGE>

OFFICERS

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Name/Age Position held with Fund Principal Occupation(s) during Past 5 Years

- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
William M. Sams, 62 President & Chief Director and Principal of First Pacific
Investment Officer Advisors, Inc. since March 1996; and Director
of FPA Fund Distributors, Inc. since
January 1997. Executive Vice President from
November 1981 to March 1996 of First Pacific
Advisors, Inc.; and Executive Vice
President from September 1983 to August 1995
of FPA Perennial Fund, Inc.

- --------------------------------------------------------------------------------------------------------------
Eric S. Ende, 55 Vice President Senior Vice President of First Pacific
Advisors, Inc. for more than the past five
years; President (since September 1995) and
Portfolio Manager (since August 1999) of FPA
Perennial Fund, Inc.; Chief Investment
Officer since May 1997 and Senior Vice
President for more than the past five years of
Source Capital, Inc.; and Vice President of
FPA Capital Fund, Inc. and FPA New Income,
Inc. for more than the past five years. Chief
Investment Officer from September 1995 to
August 1999, Executive Vice President from
August 1995 to September 1995, and Vice
President from May 1985 to August 1995, of FPA
Perennial Fund, Inc..

- --------------------------------------------------------------------------------------------------------------
J. Richard Atwood, 39 Treasurer Senior Vice President, Chief Financial Officer
and Treasurer of First Pacific Advisors, Inc.
since January 1997; and Chief Financial
Officer since March 1998, Senior Vice
President and Treasurer since January 1997 of
FPA Fund Distributors, Inc. Treasurer of FPA
Capital Fund, Inc., of FPA New Income, Inc.,
of FPA Perennial Fund, Inc., and of Source
Capital, Inc. since January 1997. Vice
President and Chief Financial Officer of
Transamerica Investment Services, Inc. from
January 1995 to January 1997. Vice President
(or Assistant Vice President) and Controller
of First Pacific Advisors, Inc. from August
1988 to January 1995, and Assistant Treasurer
of FPA Fund Distributors, Inc. from May 1991
to January 1995. Assistant Treasurer of the
Fund, of FPA Capital Fund, Inc., of FPA New
Income, Inc., of FPA Perennial Fund, Inc., and
of Source Capital, Inc. from August 1988 to
January 1995.

- --------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sherry Sasaki, 44 Secretary Assistant Vice President and Secretary for
more than the past five years of First Pacific
Advisors, Inc.; and Secretary of FPA Capital
Fund, Inc., of FPA New Income, Inc., of FPA
Perennial Fund, Inc., of Source Capital, Inc.,
and of FPA Fund Distributors, Inc. for more
than the past five years.

- --------------------------------------------------------------------------------------------------------------
Christopher H. Thomas, 42 Assistant Treasurer Vice President and Controller of First Pacific
Advisors, Inc. and of FPA Fund Distributors,
Inc. since March 1995, and Assistant Treasurer
of FPA Capital Fund, Inc., of FPA New Income,
Inc., of FPA Perennial Fund, Inc., and of
Source Capital, Inc. since April 1995. Staff
Accountant with the Office of Inspection of
the Securities and Exchange Commission from
1994 to March 1995. School Administrator of
the Calvary Road Christian Academy from 1988
to 1993.
- --------------------------------------------------------------------------------------------------------------
</TABLE>

All officers of the Fund are also officers of the Adviser. The Directors and
officers of the Fund as a group own approximately 2.68% of the outstanding Fund
shares. During the last fiscal year, the Directors then in office who were not
affiliated with the Adviser received as a group $52,000 in Directors' fees. Such
Directors were also reimbursed for certain travel expenses by the Fund.

FIVE PERCENT SHAREHOLDERS

As of December 31, 1999, no person was known by the Fund to own of record or
beneficially 5% or more of the outstanding Fund shares.

MANAGEMENT

INVESTMENT ADVISER. First Pacific Advisors, Inc., together with its
predecessors, has been in the investment advisory business since 1954, serving
as investment adviser to the Fund since July 1, 1978. Presently, the investment
adviser manages assets of approximately $3.1 billion for seven investment
companies, including one closed-end investment company, and 20 institutional
accounts. Currently, the personnel of First Pacific Advisors, Inc. consists of
nine persons engaged full time in portfolio management or investment research in
addition to 27 persons engaged full time in trading, administrative, financial
or clerical activities. FPA Fund Distributors, Inc., is a wholly owned
subsidiary of First Pacific Advisors, Inc., which is itself a wholly owned
subsidiary of United Asset Management Holdings, Inc. United Asset Management
Holdings, Inc. is a wholly owned subsidiary of UAM, a New York Stock Exchange
listed holding company principally engaged, through affiliated firms, in
providing institutional investment management and acquiring institutional
investment management firms. No person is known by UAM to own or hold with power
to vote 25% or more of its outstanding shares of common stock.

9
<PAGE>

INVESTMENT ADVISORY AND SERVICE AGREEMENT. The Fund has entered into an
Investment Advisory Agreement dated June 27, 1991 ("Advisory Agreement"), with
the Adviser pursuant to which the Adviser provides continuing supervision of the
Fund's investment portfolio. The Adviser is authorized, subject to the control
of the Fund's Board of Directors, to determine which securities are to be bought
or sold and in what amounts. In addition to providing investment advisory and
management services, the Adviser furnishes office space, facilities and
equipment, and maintains the Fund's books and records. It also compensates all
officers and other personnel of the Fund, all of whom are employed by the
Adviser, subject to reimbursement from the Fund for personnel involved in
providing financial services as indicated below.

Other than the expenses the Adviser specifically assumes under the Advisory
Agreement, the Fund bears all costs of its operation. These costs include
brokerage commissions and other costs of portfolio transactions; fees and
expenses of directors not affiliated with the Adviser; taxes; transfer agent,
dividend disbursement, reinvestment and custodian fees; legal and audit fees;
printing and mailing of reports to shareholders and proxy materials;
shareholders' and directors' meetings; registration of Fund shares under federal
and state laws; printing and engraving stock certificates; trade association
membership fees; premiums for the fidelity bond and errors and omissions
insurance maintained by the Fund; litigation; interest on indebtedness; and
reimbursement of the Adviser's expenses in providing financial services to the
Fund as described below.

For services rendered, the Adviser is paid a monthly fee computed at the annual
rate of 0.75% of the first $50 million, and 0.65% of the excess over $50
million, of the Fund's average net assets. The average net assets are determined
by taking the average of all the daily determinations of net assets made, in the
manner provided in the Fund's Articles of Incorporation, during a calendar
month.

In addition to the advisory fee, the Fund reimburses the Adviser monthly for
costs incurred in providing financial services to the Fund. Such financial
services include (a) maintaining the accounts, books and other documents forming
the basis for the Fund's financial statements, (b) preparing such financial
statements and other Fund documents and reports of a financial nature required
by federal and state laws, (c) calculating daily net assets and (d)
participating in the production of the Fund's registration statements,
prospectuses, proxy materials and reports to shareholders (including
compensation of the Treasurer or other principal financial officer of the Fund,
compensation of personnel working under such person's direction and expenses of
office space, facilities and equipment such persons use to perform their
financial services duties). However, for any fiscal year, the cost of such
financial services paid by the Fund cannot exceed 0.10% of the average daily net
assets of the Fund.

The advisory fee and cost of financial services is reduced in the amount by
which certain defined operating expenses of the Fund (including the advisory fee
and cost of financial services) for any fiscal year exceed 1.50% of the first
$30 million of average net assets, plus 1% of the remaining average net assets.
Such values are calculated at the close of business on the last business day of
each calendar month. Any required reduction or refund is computed and paid
monthly. Operating expenses (as defined in the Advisory Agreement) exclude (a)
interest, (b) taxes, (c) brokerage commissions and (d) any extraordinary
expenses, such as litigation, merger, reorganization or recapitalization, to the
extent such extraordinary expenses can be excluded under the rules or policies
of the states in which Fund shares are registered for sale. All expenditures,
including costs connected with the purchase, retention or sale of portfolio
securities, which are capitalized in accordance with generally accepted
accounting principles applicable to investment companies, are accounted for as
capital items and not as expenses. This expense limitation

10
<PAGE>

provision does not require any payment by the Adviser beyond the return of the
advisory fee and cost of financial services paid to it by the Fund for a fiscal
year.

The Advisory Agreement provides that the Adviser does not have any liability to
the Fund or any of its shareholders for any error of judgment, any mistake of
law or any loss the Fund suffers in connection with matters related to the
Advisory Agreement, except for liability resulting from willful misfeasance, bad
faith or negligence on the part of the Adviser or the reckless disregard of its
duties under the Advisory Agreement.

The Advisory Agreement is renewable annually if specifically approved each year
(a) by the Fund's Board of Directors or by the vote of a majority (as defined in
the Investment Company Act) of the Fund's outstanding voting securities and (b)
by the vote of a majority of the Fund's directors who are not parties to the
Advisory Agreement or interested persons (as defined in the Investment Company
Act) of any such party, by votes cast in person at a meeting called for the
purpose of voting on such approval. The continuation of the Advisory Agreement
to May 31, 2000, has been approved by the Board of Directors and a majority of
the Fund's directors who are not parties to the Advisory Agreement or interested
persons of any such party (as defined in the Investment Company Act). The
Advisory Agreement may be terminated without penalty by the Fund's Board of
Directors or the vote of a majority (as defined in the Investment Company Act)
of the Fund's outstanding voting securities on 60 days' written notice to the
other party. The Advisory Agreement automatically terminates in the event of its
assignment (as defined in the Investment Company Act).

For the fiscal years ended September 30, 1997, 1998 and 1999, the Adviser
received gross advisory fees of $4,896,408, $4,186,818, and $1,637,506,
respectively, plus $715,380, $636,434, and $244,232, respectively for costs
incurred in providing financial services to the Fund.

PRINCIPAL UNDERWRITER. FPA Fund Distributors, Inc. (the "Distributor"), located
at 11400 West Olympic Boulevard, Suite 1200, Los Angeles, California 90064, acts
as principal underwriter of Fund shares pursuant to a Distribution Agreement
dated September 3, 1991 (the "Distribution Agreement"). Please see "Distributor"
for more information.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Adviser makes decisions to buy and sell securities for the Fund, selects
broker-dealers and negotiates commission rates or net prices. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless the Adviser believes better prices and executions are
available elsewhere. Portfolio transactions are effected with broker-dealers
selected for their abilities to give prompt execution at prices favorable to the
Fund. In selecting broker-dealers and in negotiating commissions, the Adviser
considers each firm's reliability, the quality of its execution services on a
continuing basis and its financial condition. When more than one firm is
believed to meet these criteria, preference can be given to broker-dealers
providing research services to the Fund or the Adviser. Subject to seeking best
execution, the Adviser can also consider sales of Fund shares as a factor in
selecting broker-dealers to execute portfolio transactions for the Fund. Any
solicitation fees the Adviser receives in connection with acceptance of an
exchange or tender offer of the Fund's portfolio securities are applied to
reduce the advisory fees.

The Advisory Agreement authorizes the Adviser to pay commissions on security
transactions to broker-dealers furnishing research services in an amount higher
than the lowest available rate. The Adviser must determine in good faith that
such amount is reasonable in relation to the brokerage and research services
provided (as required by Section 28(e) of the Securities Exchange Act of 1934)
viewed in terms of the

11
<PAGE>

particular transaction or the Adviser's overall responsibilities with respect to
accounts for which it exercises investment discretion. The term brokerage and
research services is defined to include (a) providing advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and performance of accounts; and
(c) effecting securities transactions and performing related incidental
functions, such as clearance, settlement and custody. The advisory fee is not
reduced as a result of the Adviser's receipt of such research.

Research services furnished by broker-dealers effecting securities transactions
for the Fund can be used by the Adviser for all advisory accounts. However, the
Adviser might not use all such research services in managing the Fund's
portfolio. In the Adviser's opinion, it is not possible to measure separately
the benefits from research services to each advisory account. Because the volume
and nature of the trading activities of advisory accounts are not uniform, the
amount of commissions in excess of the lowest available rate paid by each
advisory account for brokerage and research services will vary. However, the
Adviser believes the total commissions the Fund pays are not disproportionate to
the benefits it receives on a continuing basis.

The Adviser attempts to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
other advisory accounts. In some cases, this procedure could have an adverse
effect on the price or amount of securities available to the Fund. The main
factors considered in such allocations are the respective investment objectives,
the relative size of portfolio holdings of the same or comparable securities,
the availability of cash for investment, the size of investment commitments
generally held, and the opinion of the persons responsible for recommending the
investments.

Brokerage commissions paid by the Fund on portfolio transactions for the fiscal
years ended September 30, 1997, 1998 and 1999, totaled $2,599,684, $1,501,914
and $795,911, respectively. During the last fiscal year, $565,129 of commissions
were paid on transactions having a total value of $109,352,221 to brokers
selected because of research services provided to the Adviser.

PORTFOLIO TURNOVER

The portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities for a fiscal year by the average monthly value of
portfolio securities during such fiscal year. Securities maturing in one year or
less at the time of acquisition are not included in this computation. The
turnover rate for prior periods is shown in the Prospectus under the caption
"Financial Highlights." This rate may vary greatly from year to year as well as
within a year.

CAPITAL STOCK

COMMON STOCK. Each share of the Fund participates equally in dividend and
liquidation rights. Fund shares are transferable, fully paid and non-assessable,
and do not have any preemptive or conversion rights. The Fund has authorized 100
million shares of $0.25 par value Common Stock.

VOTING RIGHTS. The By-laws of the Fund require shareholder meetings to elect
directors only when required by the Investment Company Act which is likely to
occur infrequently. In addition, a special meeting of the shareholders will be
called, if requested by the holders of 10% of the Fund's outstanding shares, for
the purposes, and to act upon the matters, specified in the request (which may
include election or removal of directors). When matters are submitted for a
shareholder vote, each shareholder is entitled

12
<PAGE>

to one vote for each share owned. Shares of the Fund do not have cumulative
voting rights, which means holders of more than 50% of Fund shares voting for
the election of directors can elect 100% of the directors if they so choose. In
such event, holders of the remaining Fund shares are not able to elect any
person or persons to the Fund's Board of Directors.

PURCHASE AND REDEMPTION OF SHARES

NET ASSET VALUE. Net asset value is computed as of the close of the NYSE on each
business day during which the NYSE is open. Net asset value, rounded to the
nearest cent per share, is the total market value of all of the Fund's portfolio
securities plus other assets (including any accrued reimbursement of expenses),
less all liabilities, divided by the total number of Fund shares outstanding.
The NYSE is closed not only on weekends but also on customary holidays, which
currently are New Year's Day, Martin Luther King, Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Such computation is made by (a) valuing securities listed or
traded on a national securities exchange or on the NASDAQ National Market System
at the last sale price or, if there has been no sale that day, at the last bid
price, (b) valuing unlisted securities for which quotations are readily
available at the last representative bid price as supplied by the National
Association of Securities Dealers Automated Quotations (NASDAQ) or by dealers
and (c) appraising all other portfolio securities and assets at fair value as
determined in good faith by the Fund's Board of Directors.

SALES CHARGES. The maximum sales charge is 6.5% of the offering price, but lower
sales charges apply for larger purchases. A portion of the sales charge is
allocated to dealers selling Fund shares in amounts ranging from 80% to 95%,
depending on the size of the investment. During special promotions, the
Distributor may reallow up to 100% of the sales charge to dealers. At such times
dealers could be deemed to be underwriters for purposes of the Securities Act of
1933. Discounts are alike to all dealers.

AUTHORIZED FINANCIAL INTERMEDIARIES. The Fund has authorized certain financial
intermediaries including one or more brokers to accept on its behalf purchase
and redemption orders. These brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund is deemed to have received a purchase or redemption order when an
authorized financial intermediary including an authorized broker or if
applicable a broker's authorized designee accepts the order. Customer orders are
priced at the Fund's net asset value next computed after they are accepted by an
authorized financial intermediary, including an authorized broker or the
broker's authorized designee.

SALES AT NET ASSET VALUE. Full-time employees of the Adviser can purchase Fund
shares at net asset value via payroll deduction provided the minimum initial
investment is $250. Each subsequent investment must be at least $50.

LETTER OF INTENT. To be eligible for reduced sales charges, the investor must
sign at the time of initial purchase, or within 30 days, a Letter of Intent
("LOI") covering investments to be made within a period of 13 months ("Period")
from the initial purchase. The investor then becomes eligible for a reduced
sales charge based on the total amount of the specified intended investment
("LOI Goal"), provided the amount is not less than $10,000. A minimum initial
purchase of $1,500 and minimum subsequent purchases of $100 each are required.
Fund shares can also be purchased to fulfill a letter of intent entered into
with respect to shares of the other FPA Funds. The account information form,
which should be used to establish an LOI, is available from dealers or the
Distributor.

All transactions under an LOI must be indicated as such and must be placed by
the dealer (in the case of an initial purchase) or the shareholder (in the case
of any subsequent purchase) directly through Boston

13
<PAGE>

Financial Data Services, Inc. ("Shareholder Service Agent"). Shareholders should
review for accuracy all confirmations of transactions, especially purchases made
pursuant to an LOI.

If the LOI Goal is completed before the end of the Period, any subsequent
purchases within the Period receive the applicable reduced sales charge. In
addition, during the Period, the shareholder can increase his or her LOI Goal,
and all subsequent purchases are treated as a new LOI (including escrow of
additional Fund shares) except as to the Period, which does not change.

Signing an LOI does not bind the shareholder to complete his or her LOI Goal,
but the LOI Goal must be completed to obtain the reduced sales charge. The LOI
is binding on the Fund and the Distributor. However, the Distributor may
withdraw a shareholder's LOI privileges for future purchases upon receiving
information that the shareholder has resold or transferred his or her Fund
shares within the Period.

The LOI requires the Shareholder Service Agent, as escrow agent, to hold 5% of
the LOI Goal in escrow until completion of the LOI Goal within the Period. The
escrowed Fund shares are taken from the first purchase and, if necessary, from
each successive purchase. If the LOI Goal is completed within the Period, the
escrowed Fund shares are promptly delivered to, or as directed by, the
shareholder.

If the LOI Goal is not completed within the Period, the shareholder must pay the
Distributor an amount equal to the sales charge applicable to a single purchase
in the total amount of the purchases made under the LOI minus the sales charges
actually paid. If the Distributor does not receive such unpaid sales charge
within 20 days after requesting payment in writing, the Distributor instructs
the Shareholder Service Agent to redeem escrowed Fund shares sufficient to cover
the unpaid sales charge. Under the LOI, the shareholder irrevocably appoints the
Shareholder Service Agent as his or her attorney with full power of substitution
to surrender for redemption any or all escrowed Fund shares. If the redemption
proceeds are inadequate, the shareholder is liable to the Distributor for the
difference. The Shareholder Service Agent delivers to, or as directed by, the
shareholder all Fund shares remaining after such redemption, together with any
excess cash proceeds.

Any income dividends and capital gains distributions on the escrowed Fund shares
are paid or reinvested as directed by, the shareholder.

FPA EXCHANGE PRIVILEGE. The procedures for exchanging shares between FPA Funds
are described under "Exchanging Your Fund Shares" in the Fund's Prospectus. If
the account registration information for the two FPA Fund accounts involved in
the exchange are different in any respect, the exchange instructions must be in
writing and must contain a signature guarantee as described under "Selling
(Redeeming) Your Shares" in the Fund's Prospectus.

By use of the exchange privilege, the investor authorizes the Shareholder
Service Agent to act on telephonic, telegraphic or written exchange
instructions from any person representing himself to be the investor or the
agent of the investor and believed by the Shareholder Service Agent to be
genuine. The Shareholder Service Agent uses procedures it considers
reasonable to confirm exchange instructions via telephone, including
requiring account registration verification from the caller and recording
telephone instructions. Neither the Shareholder Service Agent nor the Fund is
liable for losses due to unauthorized or fraudulent instructions if there is
a reasonable belief in the authenticity of received instructions and
reasonable procedures are employed; otherwise, they may be liable. The
Shareholder Service Agent's records of such instructions are binding.

For purposes of determining the sales charge rate previously paid, all sales
charges paid on the exchanged security and on any security previously exchanged
for such security or for any of its predecessors will be included. If the
exchanged security was acquired through reinvestment, that security may be
exchanged without a sales charge. If a shareholder exchanges less than all of
his securities, the security requiring no or the lowest incremental sales charge
is deemed exchanged first.

14
<PAGE>

Exchange requests received on a business day before shares of the Funds involved
in the request are priced, are processed on the date of receipt by the
Shareholder Service Agent. "Processing " a request means that shares in the Fund
from which the shareholder is withdrawing an investment will be redeemed at the
net asset value per share next determined after receipt. Shares of the new Fund
into which the shareholder is investing will also normally be purchased at the
net asset value per share, plus any applicable sales charge, next determined
after receipt by the Shareholder Service Agent. Exchange requests received on
a business day after the time shares of the Funds involved in the request are
priced, are processed on the next business day as described above.

REDEMPTION OF SHARES. Redemptions are not made on days when the NYSE is closed,
including those holidays listed under "Purchase and Redemption of Shares - Net
Asset Value." The right of redemption can be suspended and the payment therefore
may be postponed for more than seven days during any period when (a) the NYSE is
closed for other than customary weekends or holidays; (b) trading on the NYSE is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities it owns is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets or (d)
the Securities and Exchange Commission, by order, so permits.

TELEPHONE REDEMPTION. Redemptions can be made by telephone once the
shareholder has properly completed and returned to the Shareholder Service
Agent the account information form including the designation of a bank
account to which the redemption payment is to be sent ("Designated Bank").
The proceeds will not be mailed or wired to other than the Designated Bank.
New investors who wish to establish the telephone redemption privilege must
complete the appropriate section on the account information form. Existing
shareholders who wish to establish the telephone redemption privilege or
change the Designated Bank should either enter the new information on an
account information form, marking it for "change of information" purposes, or
send a letter identifying the Fund account and specifying the exact
information to be changed. The letter must be signed exactly as the
shareholder's name(s) appear on the account. All signatures require a
guarantee as described under "Selling (Redeeming) Your Shares" in the Fund's
Prospectus. The account information form is available from authorized
securities dealers or the Distributor.

Shareholders who want to use a savings and loan ("S&L") as their Designated Bank
are advised that if the S&L is not a participant in the Federal Reserve System,
redemption proceeds must be wired through a commercial bank which is a
correspondent of the S&L. As this may delay receipt by the shareholder's
account, it is suggested that shareholders who wish to use an S&L discuss wire
procedures with their S&L and submit any special wire transfer information with
the telephone redemption authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to such Designated Bank.

A shareholder can cancel the telephone redemption authorization upon written
notice. If the shareholder has authorized telephone redemptions, neither the
Fund nor the Shareholder Service Agent is responsible for any unauthorized
telephone redemptions. If the Fund shares to be redeemed by telephone
(technically a repurchase by agreement between the Fund and the shareholder)
were recently purchased by check, the Shareholder Service Agent can delay
transmitting the proceeds until the purchasing check has cleared but no more
than 15 days from purchase.

15
<PAGE>

The Shareholder Service Agent uses procedures it considers reasonable to
confirm redemption instructions via telephone, including requiring account
registration verification from the caller and recording telephone instructions.
Neither the Shareholder Service Agent nor the Fund is liable for losses
due to unauthorized or fraudulent instructions if there is a reasonable belief
in the authenticity of received instructions and reasonable procedures are
employed; otherwise, they may be liable.

TAX SHELTERED RETIREMENT PLANS

Through the Distributor, prototype retirement plans are available for purchase
of Fund shares. These include plans for self-employed individuals and plans for
individuals buying shares under an Individual Retirement Account. A penalty tax
applies, in general, to distributions made before age 59-1/2, excess
contributions and failure to start distribution of the account at age 70-1/2.
Borrowing from or against the account could also result in plan
disqualification. Distributions from these retirement plans generally are
taxable as ordinary income when received.

State Street Bank and Trust Company ("Bank") presently acts as custodian for
these retirement plans and imposes fees for administering them. Purchases of
Fund shares for a retirement plan must be made by direct remittance to the Bank.

When contributions for any tax-qualified plan are invested in Fund shares, all
dividends and capital gains distributions paid on those Fund shares are retained
in such plan and automatically reinvested in additional Fund shares at net asset
value. All earnings accumulate tax-free until distribution.

The investor should consult his or her own tax adviser concerning the tax
ramifications of establishing, and distributions from, a retirement plan.

DIVIDENDS, DISTRIBUTIONS AND TAXES

The Fund qualified during the last fiscal year for the tax treatment applicable
to regulated investment companies under the Internal Revenue Code ("Code") and
intends to so qualify in the future. Such qualification requires distributing at
least 90% of its investment company taxable income to shareholders and meeting
asset diversification and other requirements of the Code. As long as the Fund so
qualifies, it does not pay federal income tax on its net investment income or on
any net realized capital gains provided such income and capital gains are
distributed to shareholders. If for any taxable year the Fund does not so
qualify, all of its taxable income, including any net realized capital gains,
will be taxed at regular corporate rates (without any deduction for
distributions to shareholders).

The Fund is subject to a 4% excise tax to the extent it does not make certain
distributions to its shareholders. Such distributions must total (1) at least
98% of ordinary income (investment company taxable income subject to certain
adjustments) for any calendar year and (2) 98% of capital gains net income for
the year. The Fund intends to distribute sufficient amounts to avoid liability
for this excise tax.

If shares of the Fund are sold or exchanged within 90 days of acquisition, and
shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.

16
<PAGE>

Under federal tax law, any loss a shareholder realizes on redemption of Fund
shares held for less than six months is treated as a long-term capital loss to
the extent of any long-term capital gain distribution which was paid on such
Fund shares.

Prior to purchasing Fund shares, the impact of dividends or capital gains
distributions should be carefully considered. Any such payments made to a
shareholder shortly after purchasing Fund shares reduce the net asset value of
such Fund shares to that extent and unnecessarily increase sales charges. All or
a portion of such dividends or distributions, although in effect a return of
capital, is subject to taxes, possibly at ordinary income tax rates.

Dividends and distributions declared payable to shareholders of record after
September 30 of any year and paid before February 1 of the following year are
considered taxable income to shareholders on the record date even though paid in
the next year. To the extent determined each year, a portion of the dividends
paid to shareholders from the Fund's net investment income qualifies for the 70%
dividends received deduction for corporations.

Some shareholders may be subject to 31% withholding on reportable dividends,
capital gains distributions and redemption payments ("backup withholding").
Generally, shareholders subject to backup withholding are those for whom a
taxpayer identification number is not on file with the Fund or who, to the
Fund's knowledge, furnished an incorrect number. When establishing an account,
an investor must certify under penalty of perjury that such number is correct
and that he or she is not subject to backup withholding.

Under existing provisions of the Code, dividends paid to shareholders who are
nonresident aliens may be subject to a 30% federal withholding tax applicable to
foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the federal withholding tax.

The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and treasury regulations presently in effect. For the complete
provisions, reference should be made to the pertinent Code sections and treasury
regulations. The Code and these treasury regulations are subject to change by
legislative or administrative action either prospectively or retroactively.

Each investor should consult his or her own tax adviser as to federal tax laws
and the effect of state and local tax laws which may differ from federal tax
laws.

DISTRIBUTOR

The Distributor acts as principal underwriter of Fund shares pursuant to the
Distribution Agreement. The Distributor receives commissions from the sale of
Fund shares and has the exclusive right to distribute Fund shares through
dealers. From the commissions received, the Distributor pays sales commissions
to dealers; its own overhead and general administrative expenses; the cost of
printing and distributing Fund prospectuses; and the cost of preparing, printing
and distributing sales literature and advertising relating to the Fund. The Fund
pays expenses attributable to registering Fund shares under federal and state
laws (including registration and filing fees), the cost of preparing the
prospectus (including typesetting and printing copies required for regulatory
filings by the Fund) and related legal and audit expenses.

The Distribution Agreement is renewable annually if specifically approved each
year (a) by the Fund's Board of Directors or by a vote of a majority (as defined
in the Investment Company Act) of the Fund's

17
<PAGE>

outstanding voting securities and (b) by a majority of the Fund's directors who
are not parties to the Distribution Agreement or interested persons (as defined
in the Investment Company Act) of any such party, by votes cast in person at a
meeting called for such purpose. The continuation of the Distribution Agreement
to September 3, 2000 has been approved by the Board of Directors and a majority
of the Fund's directors who are not parties to the Distribution Agreement or
interested persons of any such party (as defined in the Investment Company Act).
The Distribution Agreement terminates if assigned (as defined in the Investment
Company Act) and may be terminated, without penalty, by either party on 60 days'
written notice.

The Distributor's obligation under the Distribution Agreement is an agency or
best efforts arrangement pursuant to which the Distributor is required to take
and pay for only those Fund shares sold to the public. The Distributor is not
obligated to sell any stated number of Fund shares. The Distributor is a
subsidiary of the Adviser.

During the fiscal years ended September 30, 1997, 1998 and 1999, total
underwriting commissions on the sale of Fund shares were $4,148,190, $678,116
and $127,435, respectively. Of such totals, the amount retained each year by the
Distributor, after reallowance to other dealers, was $355,286, $53,540 and
$10,025, respectively.

PRIOR PERFORMANCE INFORMATION

For the purposes of quoting and comparing the Fund's performance to that of
other mutual funds and to other relevant market indices in advertisements,
performance may be stated in terms of total return. Under regulations adopted by
the Securities and Exchange Commission ("SEC"), funds that intend to advertise
performance must include total return quotations calculated according to the
following formula:

P(1 + T) TO THE POWER OF n = ERV

Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)

ERV = ending redeemable value of a hypothetical
$1,000 payment, made at the beginning of the 1,
5 or 10 year period, at the end of such period
(or fractional portion thereof).

Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication, and cover 1, 5 and
10-year periods of a fund's existence or such shorter period dating from the
effectiveness of a fund's registration statement. In calculating the ending
redeemable value, the maximum sales load is deducted from the initial $1,000
payment and all dividends and distributions by a fund are assumed to have been
reinvested at net asset value as described in the Prospectus on the reinvestment
dates during the period. Total return, or "T" in the formula above, is computed
by finding the average annual compounded rates of return over the 1, 5 and
10-year periods (or fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value.

The Fund may also from time to time include in such advertising a total return
figure that is not calculated according to the formula set forth above in order
to compare the performance of the Fund with other measures of investment return.
For example, in comparing the Fund's total return with a stock index such as the
Russell 2500 Index, the Fund calculates its aggregate total return for the
specified periods of time

18
<PAGE>

by assuming the investment of $10,000 in Fund shares and assuming the
reinvestment of each dividend or other distribution at net asset value on the
reinvestment date. Percentage increases are determined by subtracting the
initial value of the investment from the ending value and by dividing the
remainder by the beginning value. The Fund does not, for these purposes, deduct
from the initial value invested any amount representing sales charges. The Fund,
however, discloses the maximum sales charge and also discloses that inclusion of
sales charges would reduce the performance quoted. Such alternative total return
information will be given no greater prominence in such advertising than the
information prescribed under SEC regulations.

The Fund's average annual total return (calculated in accordance with the SEC
regulations described above) for the 1, 5 and 10-year periods ended September
30, 1999, was (12.85)%, 0.65% and 6.82%, respectively. The Fund's average annual
total return (determined pursuant to the alternative computation which does not
include the maximum initial sales charge of 6.5% of the offering price) for the
same periods was (6.79)%, 2.01% and 7.54%, respectively. These results are based
on historical earnings and asset value fluctuations and are not intended to
indicate future performance.

The foregoing information should be considered in light of the Fund's investment
objectives and policies, as well as the risks incurred in the Fund's investment
practices. Future results will be affected by the future composition of the
Fund's portfolio, as well as by changes in the general price level of equity
securities, and general economic and other market conditions. The past 1, 5 and
10-year periods have been ones of generally rising common stock prices subject
to short-term fluctuations.

<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>

20
<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
--81/8% 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 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.

21
<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.

22
<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.

23
<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 ............ $(214,524,792) $(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.

24
<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 identifi cation 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

25
<PAGE>

NOTES TO FINANCIAL STATEMENTS
September 30, 1999

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.

26
<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. (the "Fund"), 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 on page 17 of the Prospectus 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, including 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. at 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 on page 17 of the Prospectus
for each of the five years in the period then ended in conformity with generally
accepted accounting principles.

/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP

Los Angeles, California
November 12, 1999