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PROSPECTUS Rule 497(c)
File No. 2-28157
FPA Capital Fund, Inc.
("Fund") seeks long-term
capital growth. Current
income is a factor, but a
secondary consideration.
The Fund's investment
adviser, First Pacific
Advisors, Inc.
("Adviser"), generally
invests the Fund's assets
in common stocks and other
securities which it
believes have the FPA CAPITAL FUND, INC.
potential to increase in
market value. Fund shares
are presently offered for
sale only to existing
shareholders and to
directors, officers and
employees of the Fund, the
Adviser, and affiliated
companies.
This Prospectus briefly
outlines information
prospective investors
should know before
purchasing Fund shares.
Investors should read and
retain this Prospectus for
future reference.
A Statement of
Additional
Information about the Fund
dated August 1, 1995,
which is incorporated by
reference in this
Prospectus, has been filed
with the Securities and
Exchange Commission. It is
available at no charge by
contacting FPA Fund
Distributors, Inc.
("Distributor") at 11400
West Olympic Boulevard,
Suite 1200, Los Angeles,
California
90064; telephone (310)
473-0225 or (800)
982-4372, except from
Alaska, Hawaii and Puerto
Rico.
THESE SECURITIES HAVE
NOT BEEN APPROVED OR
DISAPPROVED BY THE
SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR
HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY
STATE SECURITIES
COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY
REPRESENTATION TO THE
CONTRARY IS A CRIMINAL
OFFENSE.
AUGUST 1, 1995
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FPA CAPITAL FUND, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
(310) 473-0225
<TABLE>
<S> <C> <C> <C>
INVESTMENT First Pacific Advisors, Inc. SHAREHOLDER Boston Financial Data
ADVISER: 11400 West Olympic Boulevard, Suite 1200 SERVICE AGENT: Services, Inc.
Los Angeles, California 90064 P.O. Box 8500
Boston, Massachusetts 02266-8500
DISTRIBUTOR: FPA Fund Distributors, Inc. (617) 328-5000
11400 West Olympic Boulevard, Suite 1200 (800) 638-3060 except
Los Angeles, California 90064 Alaska, Hawaii,
(310) 473-0225 Massachusetts and
(800) 982-4372 except Puerto Rico
Alaska, Hawaii and
Puerto Rico CUSTODIAN AND State Street Bank and
TRANSFER AGENT: Trust Company
225 Franklin Street
Boston, Massachusetts 02110
</TABLE>
INQUIRIES CONCERNING TRANSFER OF REGISTRATION, DISTRIBUTION, REDEMPTIONS AND
SHAREHOLDER SERVICE SHOULD BE DIRECTED TO THE SHAREHOLDER SERVICE AGENT.
INQUIRIES CONCERNING SALES SHOULD BE DIRECTED TO THE DISTRIBUTOR.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Expense Synopsis...................................... 3
Financial Highlights.................................. 4
Investment Objective and Policies..................... 5
The Fund and Its Management........................... 6
Advisory Agreement.................................. 6
FPA Fund Family..................................... 6
Prior Performance Information....................... 7
Purchase of Shares.................................... 8
Net Asset Value..................................... 8
Table of Sales Charges.............................. 8
Cumulative Purchase Discount........................ 8
Letter of Intent.................................... 9
Sales at Net Asset Value............................ 9
Shareholder Services.................................. 10
FPA Exchange Privilege.............................. 10
Money Market Fund Exchange Privilege................ 10
How to Exchange Shares.............................. 10
Investment Account.................................. 11
Pre-Authorized Investment Plan...................... 11
Retirement Plans.................................... 11
Systematic Withdrawal Plan.......................... 11
Redemption of Shares.................................. 11
Telephone Transactions.............................. 12
Reinvestment Privilege.............................. 12
Dividends, Distributions and Taxes.................... 12
Dividends........................................... 13
Capital Gains....................................... 13
Taxes............................................... 13
Investment Practices, Risks and Restrictions.......... 13
Fixed-Income Securities............................. 13
Mortgage-Backed Securities.......................... 13
Lower-Rated Securities and Related Risks............ 14
Securities of Foreign Issuers....................... 15
Covered Call Options................................ 15
Short Sales Against the Box......................... 15
Repurchase Agreements............................... 15
Brokerage Practices................................. 16
Portfolio Turnover.................................. 16
Investment Restrictions............................. 16
Other Investment Restrictions....................... 16
Additional Information................................ 16
Common Stock........................................ 16
Voting Rights....................................... 17
Shareholder Inquiries............................... 17
Shareholder Service Agent........................... 17
Custodian........................................... 17
Legal Counsel....................................... 17
Independent Auditors................................ 17
</TABLE>
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No dealer, salesman, or other person has been authorized to give any information
or to make any representations other than those contained in this Prospectus or
in supplemental sales literature distributed by the Distributor in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund or by the Distributor. This Prospectus does not constitute an
offering by the Distributor in any jurisdiction in which such offering may not
lawfully be made.
2
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EXPENSE SYNOPSIS
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SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............................................ 6.50%
Deferred Sales Load (as a percentage of original sales price or
redemption proceeds, as applicable)............................................ *
Redemption Fee (as a percentage of amount redeemed)............................... None
Exchange Fee...................................................................... $5.00
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees................................................................ 0.66%
12b-1 Fees..................................................................... None
Other Expenses (including financial services).................................. 0.29%
-----
Total Fund Operating Expenses.................................................. 0.95%
</TABLE>
<TABLE>
<CAPTION>
3
1 YEAR YEARS 5 YEARS 10 YEARS
------ ------ ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses
on a $1,000 investment, assuming
(1) five percent annual return and
(2) redemption at the end of each
time period: $74.00 $93.00 $114.00 $174.00
</TABLE>
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* Purchases of $1 million or more are not subject to any sales load at the time
of purchase, but a contingent deferred sales charge of 0.80% is imposed on
certain redemptions made within one year of the purchase. An account
management fee is charged by unaffiliated investment advisers or broker-
dealers to certain accounts entitled to purchase shares without sales charge.
The foregoing synopsis is intended to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Purchase of Shares" and "The Fund and Its Management." The
example is included to provide a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a five percent
annual return assumption. This assumption is unrelated to the Fund's prior
performance and is not a projection of future performance. THE EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESSER THAN THOSE SHOWN.
3
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FINANCIAL HIGHLIGHTS
The following information has been audited by the Fund's independent auditors.
Their report appears in the Statement of Additional Information. This
information should be read in conjunction with the related financial statements
included in the Statement of Additional Information.
For one share outstanding throughout each year
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
--------- ------- ------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per share operating
performance:
Net asset value at
beginning of year....... $ 19.30 $ 19.06 $ 18.32 $14.60 $13.27 $12.38 $12.32 $13.70 $13.18 $10.05
-------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Net investment income.... $ .09 $ .04 $ .05 $ .09 $ .16 $ .19 $ .22 $ .22 $ .31 $ .37
Net realized and
unrealized gain on
investment securities... 3.62 2.30 2.26 4.63 1.64 2.09 1.20 .03 2.05 3.11
-------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.............. $ 3.71 $ 2.34 $ 2.31 $ 4.72 $ 1.80 $ 2.28 $ 1.42 $ .25 $ 2.36 $ 3.48
-------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income....... $ (.08) $ (.03) $ (.05) $ (.10) $ (.18) $ (.23) $ (.21) $ (.47) $ (.37) $ (.35)
Distributions from net
realized capital
gains................... (.53) (2.07) (1.52) (.90) (.29) (1.16) (1.15) (1.16) (1.47) --
-------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Total distributions...... $ (.61) $ (2.10) $ (1.57) $(1.00) $ (.47) $(1.39) $(1.36) $(1.63) $(1.84) $ (.35)
-------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Net asset value at end of
year.................... $ 22.40 $ 19.30 $ 19.06 $18.32 $14.60 $13.27 $12.38 $12.32 $13.70 $13.18
======== ======= ======= ====== ====== ====== ====== ====== ====== ======
Total investment
return(1)............... 19.77% 13.13% 14.23% 33.82% 14.41% 18.73% 12.27% 2.80% 20.49% 35.86%
Ratios/supplemental data:
Net assets at end of year
(in $000's)............. 236,656 165,684 134,169 109,581 88,428 76,825 67,102 58,077 58,289 51,697
Ratio of expenses to
average net assets...... .95% 1.03% 1.06% 1.08% 1.21% 1.17% .92% .89% .89% .95%
Ratio of net investment
income to average net
assets.................. .48% .20% .29% .55% 1.32% 1.37% 1.77% 1.66% 2.55% 3.38%
Portfolio turnover
rate.................... 11% 16% 19% 13% 12% 21% 22% 31% 44% 34%
---------------
(1) Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge.
</TABLE>
4
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term growth of capital. While
current income is a factor in selecting investments, it is a secondary
consideration. The Adviser believes that the Fund's goals can best be achieved
by investing principally in common stocks the Adviser deems to possess above-
average ability to increase in market value. The Fund may also invest in United
States Government and government agency obligations, corporate debt securities,
preferred stocks and convertible securities. Up to 15% of the Fund's net assets
may be invested in lower-rated or comparable unrated debt securities as
described under "Investment Practices, Risks and Restrictions: -- "Fixed-Income
Securities" and -- "Lower-Rated Securities and Related Risks." There is no
assurance that the Fund will succeed in achieving its investment objectives as
there is market risk inherent in pursuing the Fund's investment objective and in
owning securities of the type purchased by the Fund.
The Adviser selects 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 concentrated 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.
The Adviser's emphasis on fundamental analysis of a company's prospects and the
inherent value of its securities generally results in the Fund's portfolio being
invested primarily in medium or smaller sized companies perceived by the average
investor to be unpopular or unfamiliar. Substantially all common stocks the Fund
purchases, however, are either listed on a national securities exchange or
included in the National Association of Securities Dealers Automated Quotation
("NASDAQ") National Market System. The Adviser's value-oriented investment
approach may result in a portfolio which may not reflect all facets of the
national economy and which may differ significantly from the broad market
indices. 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 volume 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.
Although the Fund may not invest more than 5% of its total assets in the
securities of any one issuer (except the U.S. Government) at the time of
purchase, changes in market prices and the assets of the Fund may from time to
time cause more than 5% or even 10% of the Fund's assets to be invested in
securities of a single company. Such relative concentration is likely to
increase the volatility of the Fund's net asset value per share.
The Fund may invest up to 10% of its net assets in securities of foreign
issuers. Such investments involve additional risks and opportunities compared
with securities of United States issuers. The Fund can write covered call
options which are listed on a national securities exchange. See "Investment
Practices, Risks and Restrictions" herein and "Investment Policies" in the
Statement of Additional Information.
Security purchases are based primarily on consideration of fundamental value and
earnings expectations rather than short-term stock market expectations. However,
if earnings prospects change, or the value of a security becomes large in
relation to the Fund's total size or it no longer appears to represent an
unusual value, the Fund can sell all or part of the investment regardless of the
length of time held. See "Investment Practices, Risks and
Restrictions -- Portfolio Turnover."
5
<PAGE> 6
THE FUND AND ITS MANAGEMENT
The Fund is a diversified, open-end management investment company, generally
called a mutual fund, which was incorporated in Delaware on June 24, 1966, and
reincorporated in Maryland on August 1, 1994. 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.
On May 23, 1995, the Fund discontinued indefinitely the sale of its shares to
new investors, except directors, officers and employees of the Fund, the Adviser
and affiliated companies. The Fund continues to accept additional investments
from existing shareholders, and continues to reinvest dividends and capital
gains distributions with respect to the accounts of existing shareholders who
elect such options. The decision to discontinue sales to new investors reflects
management's belief that unrestrained growth in the Fund's net assets might
impair investment flexibility. The Fund may recommence at any time the offering
of shares to new investors if in the Board of Directors' opinion doing so would
be in the best interests of the Fund and its shareholders.
A board of five directors is responsible for overseeing the Fund's affairs. The
Adviser selects investments for the Fund, provides administrative services and
manages the Fund's business. Robert L. Rodriguez, President of the Fund and
Senior Vice President of the Adviser, is primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Rodriguez has been the Chief
Investment Officer of the Fund for over eleven years. The Adviser, together with
its predecessors, has been in the investment advisory business since 1954,
serving as investment adviser to the Fund since July 11, 1984. Presently, the
Adviser manages assets of approximately $4.0 billion for five investment
companies, including one closed-end investment company, and more than 50
institutional accounts. All officers of the Fund are also officers of the
Adviser. Certain officers of the Fund are also officers of the Distributor. The
Adviser and the Distributor are indirect wholly owned subsidiaries of United
Asset Management Corporation ("UAM"), a New York Stock Exchange listed holding
company principally engaged, through affiliated firms, in providing
institutional investment management and acquiring institutional investment
management firms.
ADVISORY AGREEMENT. Under the Investment Advisory Agreement dated August 1,
1994, the Fund pays the Adviser a monthly fee computed on the average daily net
assets of the Fund at the annual rate of 0.75% on the first $50 million of net
assets and 0.65% on net assets over $50 million. In addition, the Adviser
receives an amount equal to 0.10% of the Fund's average daily net assets for
each fiscal year in reimbursement for the provision of financial services to the
Fund. The advisory fee is higher than the fee paid by most other mutual funds.
For the last fiscal year, advisory fees plus the cost of financial services paid
by the Fund equaled 0.76% of the Fund's average net assets.
The Adviser pays for office space, facilities, business equipment and salaries,
including the salaries of the Fund's officers. The Fund pays all other expenses,
including the expense of the continuous public offering of Fund shares (such as
registering Fund shares for sale), preparation of prospectuses and reports to
shareholders and printing those prospectuses and reports furnished to existing
shareholders, the cost of transfer agency services, postage, custodial fees,
taxes, and legal and audit expenses. For the last fiscal year, the Fund's total
operating expenses were 0.95% of average net assets. The Fund also pays
brokerage commissions on portfolio transactions.
FPA FUND FAMILY. The Fund is one of four mutual funds in the FPA Fund Family
(collectively, the "FPA Funds"). FPA New Income, Inc. ("New Income"), a
fixed-income fund, seeks current income and long-term total return. FPA
Paramount Fund, Inc. ("Paramount"), which currently is not open to new
investors, seeks a high total investment return, including capital appreciation
and income. FPA Perennial
6
<PAGE> 7
Fund, Inc. ("Perennial"), which is primarily designed for retirement plans,
seeks long-term growth of capital with current income as a secondary
consideration.
The FPA Funds offer exchange privileges and telephone redemptions plus combined
shareholdings for cumulative purchase discounts and letters of intent. These
privileges are more fully described under "Purchase of Shares," "Shareholder
Services" and "Redemption of Shares." The account information form should be
used to change information and authorize these services. Authorizing exchange
privileges or telephone redemptions requires a signature guarantee, which is
described under "Redemption of Shares." The account information form is
available from authorized securities dealers ("dealers") or the Distributor.
PRIOR PERFORMANCE INFORMATION. From time to time, the Fund's total average
annual return for 1, 5 and 10 year periods may be quoted in advertisements.
Other total return quotations, aggregate or average, over other time periods may
also be included. Average annual total return reflects the average annual
percentage change in value of an investment in the Fund over the measuring
period. Aggregate total return reflects the total percentage change in value
over the measuring period. Total return calculations assume that dividends and
capital gain distributions paid by the Fund during the period are reinvested in
Fund shares at net asset value. Quotations of total returns reflect the maximum
sales charge, except that the Fund may also provide, in conjunction with such
quotations, additional quotations that do not reflect a sales charge.
Comparative performance information may also be used from time to time in
advertising or marketing of the Fund's shares. The Fund's total return may be
compared to that of other mutual funds with similar investment objectives and to
stock and other relevant indices or to rankings prepared by independent services
or other financial or industry publications that monitor the performance of
mutual funds. For example, the total return on Fund shares may be compared to
data prepared by Lipper Analytical Services, Inc. or to a stock index such as
the Standard & Poor's 500 Stock Index. Such comparative performance information
may be stated in the same terms in which the comparative data and indices are
stated. For these purposes, the performance of the Fund, as well as the
performance of other mutual funds or indices, would not reflect sales charges,
the inclusion of which would reduce such performance quotations.
Performance figures represent historic earnings, and should not be considered as
representative of future results. The investment return and principal value of
an investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Since performance
will fluctuate, performance data for the Fund should not be used to compare an
investment in the Fund's shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Investors should remember that performance is
generally a function of the kind and quality of the securities held in a
portfolio, operating expenses and market conditions.
Further information about the Fund's performance is contained in the annual
report to shareholders which may be obtained without charge from the Distributor
at the address shown on the cover page of this Prospectus.
7
<PAGE> 8
PURCHASE OF SHARES
Fund shares are sold through dealers in a continuous offering to the classes of
investors described on the cover page of this Prospectus. The Distributor serves
as principal underwriter for Fund shares, which are available for purchase at
the offering price through dealers. The minimum initial investment is $1,500.
Each subsequent investment must be at least $100. Minimum investment
requirements can be changed by the Fund or waived by the Distributor.
Offering price equals net asset value per share plus the applicable sales
charge. Orders received by dealers before the New York Stock Exchange ("NYSE")
closes (currently 4:00 p.m., New York time) on any business day are priced based
on net asset value for that day if Boston Financial Data Services, Inc.
("Shareholder Service Agent"), as agent for the Distributor, receives the order
prior to its close of business. Orders received by the Shareholder Service Agent
after such time are priced based on net asset value for the next business day.
NET ASSET VALUE. Net asset value is computed as of the close of the NYSE on each
day the NYSE is open. Net asset value, rounded to the nearest cent per share,
equals the market value of all portfolio securities plus other assets, less all
liabilities, divided by the number of Fund shares outstanding.
TABLE OF SALES CHARGES. The following table shows the sales charge at various
investment levels. The sales charge applies to purchases made at one time by any
combination of an individual, his or her spouse and these related investors (and
their spouses): grandparents, parents, siblings, children or grandchildren; or
by the individual, his or her spouse and a trustee or other fiduciary purchasing
securities for related trusts, estates or fiduciary accounts, including employee
benefit plans.
<TABLE>
<CAPTION>
SALES SALES REALLOWED
SIZE OF INVESTMENT CHARGE(1) CHARGE(2) TO DEALERS(2)
------------------ --------- --------- -------------
<S> <C> <C> <C>
Less than $10,000...................................... 6.95% 6.50% 6.00%
$ 10,000 but less than $25,000....................... 6.38% 6.00% 5.50%
$ 25,000 but less than $50,000....................... 5.54% 5.25% 4.75%
$ 50,000 but less than $100,000...................... 4.71% 4.50% 4.25%
$ 100,000 but less than $250,000...................... 3.90% 3.75% 3.50%
$ 250,000 but less than $500,000...................... 2.04% 2.00% 1.75%
$ 500,000 but less than $1,000,000.................... 1.01% 1.00% 0.80%
$1,000,000 and over.................................... 0.00(3) 0.00(3) 0.00(4)
</TABLE>
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(1) As a percentage of net amount invested.
(2) As a percentage of public offering price.
(3) No sales charge is payable on investments of $1 million or more. However, a
contingent deferred sales charge of 0.80% on the lesser of purchase or
redemption price is imposed if, within one year of purchase, a redemption
reduces the account value to less than the original investment. Such
contingent deferred sales charge is withheld from redemption proceeds and
paid to the Distributor.
(4) The Distributor may pay a dealer concession for orders of $1 million or
more. The terms are negotiated when the order is placed.
CUMULATIVE PURCHASE DISCOUNT. The size of investment may be determined by adding
the amount being invested to the current value, at offering price, of all
presently held shares of the FPA Funds. If such
8
<PAGE> 9
holdings qualify for a reduced sales charge, information sufficient to permit
verification must be furnished to the Shareholder Service Agent on the account
information form or when the order is placed.
LETTER OF INTENT. A letter of intent ("LOI") allows investors to obtain a
reduced sales charge by aggregating investments made during a 13-month period.
The value of all presently held shares of the FPA Funds may also be used to
determine the applicable sales charge. The minimum initial purchase for an LOI
is $1,500. The account information form contains the LOI which must be signed at
the time of initial purchase, or within 30 days. Each investment made under an
LOI during the period receives the sales charge for the total investment goal.
If the goal is not achieved within the period, the shareholder must pay the
amount equal to the sales charge applicable to the purchases made minus those
actually paid.
SALES AT NET ASSET VALUE. Fund shares may be purchased at net asset value,
without a sales charge, by these investors and their spouses (and their
immediate relatives): (a) current and former directors, officers and employees
of the Adviser, UAM and its affiliates; (b) current and former directors,
officers and employees of Angeles Corporation (the former parent of the Adviser)
and its affiliates; (c) current and former directors of, and partners and
employees of legal counsel to, the investment companies advised by the Adviser;
(d) investment advisory clients of the Adviser and pension consultants to such
clients and their directors, officers and employees; (e) employees (including
registered representatives) of a dealer which has a selling group agreement with
the Distributor and consents to such purchases; and (f) any employee benefit
plan maintained for the benefit of such qualified investors. Immediate relatives
include grandparents, parents, siblings, children and grandchildren of a
qualified investor, and the spouse of any immediate relative. The foregoing
purchasers must represent that the shares are purchased for investment and will
not be resold except through redemption or repurchase by the Fund.
The Fund also offers shares at net asset value without imposition of a sales
charge to the following persons: (i) trustees or other fiduciaries purchasing
shares for employee benefit plans of employers with 100 or more employees; (ii)
trust companies, bank trust departments and registered investment advisers
purchasing for accounts over which they exercise investment authority and which
are held in a fiduciary, agency, advisory, custodial or similar capacity,
provided that the amount collectively invested or to be invested by such
accounts during the subsequent 13-month period in the Fund and/or the FPA Funds
totals at least $1,000,000; (iii) tax-exempt organizations enumerated in Section
501(c) (3), (9), or (13) of the Internal Revenue Code; and (iv) accounts upon
which a registered investment adviser or broker-dealer charges an account
management fee, provided such organization has entered into an agreement with
the Distributor regarding such accounts or purchases Fund shares through an
omnibus account maintained by a broker-dealer that has entered into such an
agreement.
No sales charge is imposed because the Distributor anticipates that such
purchases should result in economies in the sales effort and related expenses
compared to sales made through normal distribution channels. A special
application form, which is available from the Distributor, must be submitted
with the initial purchase. All net asset value sales require specific
notification to the Distributor of the purchaser's eligibility at the time the
order is placed. If a purchaser places such an order through a securities
broker, the broker may charge a service fee. No such fee is charged if shares
are purchased directly from the Distributor or the Fund.
9
<PAGE> 10
SHAREHOLDER SERVICES
FPA EXCHANGE PRIVILEGE. Subject to the following requirements, Fund shares may
be exchanged for shares of another FPA Fund, except FPA Paramount Fund, Inc.,
whose shares may only be acquired by existing Paramount shareholders. An
exchange may establish a new or increase an existing FPA Fund account. Both
accounts must bear the same registration. A sales charge applies to the purchase
by exchange unless (a) a sales charge equivalent to that applicable to the
acquired shares was previously paid; (b) the shareholder is entitled to purchase
shares at net asset value; or (c) the shares being exchanged were acquired by
reinvestment. Shares of the fund to be acquired must be registered for sale in
the investor's state. A $5.00 service fee applies to each exchange.
MONEY MARKET FUND EXCHANGE PRIVILEGE. The Distributor has arranged for shares of
the money market portfolio of the Cash Equivalent Fund, a no-load diversified
open-end money market mutual fund ("Money Market Fund") to be available in
exchange for shares of the Fund. Shares of the Money Market Fund so acquired
plus any shares acquired through reinvestment of dividends and distributions may
be re-exchanged for shares of any FPA Fund without sales charge, provided that
in the case of the Fund and of Paramount, the investor has maintained his
shareholder account because shares of the Fund and of Paramount are currently
offered only to existing shareholders. The $5.00 exchange fee is paid by the
Distributor which receives a fee from Kemper Financial Services, the
administrator for the Money Market Fund, of .15 of 1% per year or more of the
average daily net asset value of shares of the Money Market Fund acquired
through this exchange privilege. This exchange privilege does not constitute an
offering or recommendation by the Fund of the Money Market Fund. The Money
Market Fund is separately managed and is not one of the FPA Funds. FPA mutual
fund investments held in Fund-Sponsored Individual Retirement Accounts may not
be exchanged into the Cash Equivalent Fund.
HOW TO EXCHANGE SHARES. The above described exchange privileges may be exercised
by sending written instructions to the Shareholder Service Agent. See
"Redemption of Shares" for applicable signature and signature guarantee
requirements. Exchange privileges may also be exercised by telephone as
described under "Redemption of Shares -- Telephone Transactions." Only four
exchanges may be made in one account during any calendar year; exchanges
exceeding this limit may be considered null and void, if the investor has been
notified that this limit has been reached. Shares must be owned for 15 days
before exchanging and cannot be in certificate form unless the certificate is
tendered with the request for exchange. An exchange requires the purchase of
shares of the acquired fund with a value of at least $1,000. Exchange
redemptions and purchases are effected on the basis of the net asset values next
determined after receipt of the request in proper order by the Shareholder
Service Agent. In the case of exchanges into the Money Market Fund, dividends
generally commence on the following business day. For federal and state income
tax purposes, an exchange is treated as a sale and may result in a capital gain
or loss, although if the shares exchanged have been held less than 91 days, the
sales charge paid on such shares is not included in the tax basis of the
exchanged shares, but is carried over and included in the tax basis of the
shares acquired. See the Statement of Additional Information.
Additional information concerning this privilege and prospectuses for other FPA
Funds and/or for the Money Market Fund may be obtained from dealers or the
Distributor. A shareholder should read such prospectuses and consider
differences in objectives and policies before making any exchange. The Fund or
the Distributor can change or discontinue this privilege upon 60 days' advance
notice and investors who had exchanged into the Money Market Fund would be
permitted to reacquire shares of the Fund
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<PAGE> 11
without sales charge for at least 60 days after notice of termination of the
Money Market Fund exchange privilege.
INVESTMENT ACCOUNT. Each shareholder has an investment account in which the
Shareholder Service Agent holds Fund shares. Unless the Shareholder Service
Agent receives a written request, stock certificates will not be issued.
Certificates are only issued for full shares. The shareholder receives a
statement showing account activity after each transaction.
PRE-AUTHORIZED INVESTMENT PLAN. An investor desiring to make automatic monthly
investments may use the optional shareholder services form, available from
dealers or the Distributor. The Shareholder Service Agent withdraws funds from
the investor's bank account monthly for $100 or more as specified through the
Automated Clearing House.
RETIREMENT PLANS. An eligible investor may establish an IRA (individual
retirement account) and/or other retirement plan with a $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 the Distributor imposes additional fees for these plans, but the plan
custodian does. The Tax Reform Act of 1986 restricted deductible contributions
to an IRA by participants in an employer-sponsored retirement plan. The maximum
deductible contribution of $2,000 of earned income is phased out for such
participants with an adjusted gross income of $40,000 to $50,000 (joint) or
$25,000 to $35,000 (single). However, persons ineligible for deductible
contributions generally may make non-deductible contributions of earned income
up to $2,000 per year and earnings are tax-deferred. Investors should consult
their tax advisers. Forms and information regarding the plan are available from
dealers or the Distributor.
SYSTEMATIC WITHDRAWAL PLAN. Any shareholder whose account value is $10,000 or
more may make monthly, quarterly, semi-annual or annual withdrawals of $50 or
more by completing the optional shareholder services form. Under this plan,
sufficient Fund shares to cover these withdrawals are redeemed each month and
proceeds are forwarded as directed on the optional shareholder services form.
Dividends and capital gains distributions on Fund shares held under this plan
are automatically reinvested in additional Fund shares at net asset value. If
these withdrawals continuously exceed reinvestments, the shareholder's account
is correspondingly reduced and ultimately exhausted. Concurrent withdrawals and
purchases are ordinarily disadvantageous to the shareholder due to additional
sales charges. The shareholder recognizes any taxable gain or loss on
redemptions.
REDEMPTION OF SHARES
Shareholders can redeem for cash, without charge, any or all of their Fund
shares at any time by sending a written request in proper form to the
Shareholder Service Agent. Facsimile transmissions are not acceptable.
Shareholders can also place redemption requests through dealers, who may charge
a fee. Shareholders redeeming Fund shares from retirement plans should consult
the plan documents concerning federal tax consequences and their plan custodian
regarding procedures.
All persons in whose name the account is established must sign the redemption
request exactly as registered. If the redemption exceeds $10,000, if the
proceeds are not paid to the record owner at the record address, or if the
shareholder is a corporation, partnership, trust or fiduciary, the signature(s)
must be guaranteed by a bank or trust company; a broker or dealer; a credit
union; a national securities exchange, registered securities association or
clearing agency; or a savings and loan association.
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<PAGE> 12
In most cases, only a properly signed request with any necessary signature
guarantee is required for a redemption. However, stock certificates, if held by
shareholders, must accompany requests. Additional documents are required if a
corporation, partnership, trust, fiduciary, executor or administrator requests
the redemption.
Redemptions are only processed on days the NYSE is open. The redemption price is
the first net asset value determined after the Shareholder Service Agent
receives the redemption request in proper form. A check for the proceeds is
mailed within seven days after the Shareholder Service Agent receives the
request in good order. If Fund shares redeemed were recently purchased by check,
the Shareholder Service Agent can delay mailing the proceeds for a period of up
to 15 days until the purchasing check has cleared.
The Fund may direct the Shareholder Service Agent to redeem all Fund shares of
any shareholder whose account value is less than $500 as a result of a
redemption. In such case, the shareholder is notified in writing that the
account value is insufficient and allowed up to 60 days to increase it to $500.
TELEPHONE TRANSACTIONS. Telephone exchange privileges are available unless
declined by an investor on the account information form. Telephone redemption
privileges are available only if elected on the optional shareholder services
form. A properly completed request with a signature guarantee is required if a
telephone redemption election is made or changed after the account is opened.
Telephone redemptions are not available for shares held in a Fund-sponsored
retirement account. Shares held in certificate form cannot be redeemed or
exchanged by telephone. The Shareholder Service Agent (the "Agent") employs
procedures considered by it to be reasonable to confirm that instructions
communicated by telephone are genuine, including requiring account registration
verification from the caller and recording telephone instructions. If reasonable
procedures are employed, neither the Agent nor the Fund is responsible for
following telephone instructions the Agent reasonably believes to be genuine.
The Agent and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if such loss results from a failure to employ reasonable
procedures. Proceeds of telephone redemptions are paid to the bank account the
shareholder designates when establishing this privilege. Telephone redemptions
of $5,000 or more are wired unless the designated bank cannot receive Federal
Reserve wires. Telephone redemptions under $5,000 are mailed unless a wire is
requested. There is a $3.50 charge for wires. During periods of significant
economic or market changes, telephone instructions may be difficult to place. If
an investor is unable to contact the Agent by telephone, instructions may be
sent to the Agent at the address set forth on page 2. The Fund may change or
discontinue telephone redemption privileges without notice.
REINVESTMENT PRIVILEGE. Proceeds from a redemption can be reinvested in Fund
shares within 30 days without paying a sales charge. Such reinvestment is made
at the first net asset value determined after the Shareholder Service Agent
receives the order. This privilege can be exercised only once for each Fund
investment. Information sufficient to permit verification must be furnished to
the Shareholder Service Agent when the purchase is placed. Such redemption and
reinvestment is a taxable transaction but losses on the redemption are not
deductible for federal income tax purposes.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Shareholders may receive dividends and/or capital gains distributions in
addition to any increase or decrease in the value of Fund shares. Dividends and
distributions are automatically reinvested in additional Fund shares at the net
asset value determined at the close of business on the day after record
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<PAGE> 13
date, unless the Shareholder Service Agent receives a written request for cash
payment before the record date. The account information form may be used for
this purpose.
DIVIDENDS. The Fund's investment income consists principally of dividends and
interest earned on its portfolio securities. All of this income, after payment
of expenses, is distributed semi-annually as dividends to shareholders.
CAPITAL GAINS. When the Fund sells portfolio securities, it realizes capital
gains and losses, depending upon whether the selling price is higher or lower
than the purchase price. Net realized capital gains from sales of securities
equal profits minus losses, including any losses carried forward from prior
years. The Fund distributes any net realized capital gains to shareholders at
least annually.
TAXES. Because the Fund plans to distribute all of its net investment income and
net realized capital gains to shareholders, it does not expect to pay any
federal income tax. Dividends and distributions paid to shareholders are subject
to federal income tax, and any state and local income tax. Shareholders are
notified annually of the federal tax status of these distributions. Dividends
from net investment income and distributions from short-term capital gains are
taxable to shareholders as ordinary income. Distributions from long-term capital
gains are taxable to shareholders as such. All distributions are taxable whether
paid in cash or reinvested. To avoid a 31% federal withholding tax on dividends,
distributions and redemptions, shareholders must certify their taxpayer
identification number to the Shareholder Service Agent, as agent for the Fund.
The account information form may be used for this purpose.
INVESTMENT PRACTICES, RISKS AND RESTRICTIONS
FIXED-INCOME SECURITIES. The market price of fixed-income securities held by the
Fund can be expected to vary inversely to changes in prevailing interest rates.
Investments in fixed-income securities with longer maturities generally produce
higher yields but are subject to greater market fluctuation.
MORTGAGE-BACKED SECURITIES. The Fund may invest in mortgage-backed securities
which represent an interest in a pool of mortgage loans. The primary government
issuers or guarantors of mortgage-backed securities are GNMA, FNMA and FHLMC.
Mortgage-backed securities are also issued by certain private, nongovernmental
corporations, such as financial institutions. Mortgage-backed securities provide
a monthly payment consisting of interest and principal payments. Additional
payments may be made out of unscheduled repayments of principal resulting from
the sale of the underlying residential property, refinancing or foreclosure, net
of fees or costs that may be incurred. Prepayments of principal on
mortgage-related securities may tend to increase due to refinancing of mortgages
as interest rates decline. Prompt payment of principal and interest on GNMA
mortgage pass-through certificates is backed by the full faith and credit of the
United States. FNMA guaranteed mortgage pass-through certificates and FHLMC
participation certificates are solely the obligations of those entities but are
supported by the discretionary authority of the U.S. Government to purchase the
agencies' obligations. Collateralized Mortgage Obligations are a type of bond
secured by an underlying pool of mortgages or mortgage pass-through certificates
that are structured to direct payments on underlying collateral to different
series or classes of the obligations.
To the extent that the Fund purchases mortgage-backed securities at a premium,
prepayments may result in some loss of the Fund's principal investment to the
extent of the premium paid. In addition, like other debt securities, the value
of mortgage-related securities will generally fluctuate in response to market
interest rates.
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<PAGE> 14
The Fund may invest up to 5% of its net assets in interest-only classes of
stripped mortgage-backed securities. The prices of these securities are likely
to be volatile in the event of changes in mortgage prepayment rates, or
expectations related thereto, as described in the Statement of Additional
Information.
LOWER-RATED SECURITIES AND RELATED RISKS. The Fund may invest up to 15% of its
net assets in fixed-income securities, including convertible securities, which
are rated BB or lower, by Standard & Poor's Corporation ("S&P") or Ba or lower
by Moody's Investors Service, Inc. ("Moody's"), which ratings are considered by
the rating agencies to be speculative, and unrated securities considered by the
Adviser to be of comparable quality. Debt securities with a rating of BB/Ba or
lower are commonly referred to as "junk bonds."
To the extent that convertible securities or other debt securities acquired by
the Fund are rated lower than investment grade or are not rated, there is a
greater risk as to the timely repayment of the principal of, and timely payment
of interest on, such securities. Decisions to purchase and sell these securities
are based on the Adviser's evaluation of their investment potential and not on
the ratings assigned by credit agencies. Because investment in lower-rated
securities involves greater investment risk, achievement of the Fund's
investment objective is more dependent on the Adviser's credit analysis than
with respect to the Fund's investments in higher-rated securities. Lower-rated
securities may be more susceptible to real or perceived adverse economic and
competitive industry conditions than investment grade securities. A projection
of an economic downturn, for example, could cause a decline in the prices of
lower-rated securities because the advent of a recession could lessen the
ability of a highly leveraged company to make principal and interest payments on
its debt securities. In addition, the secondary trading market for lower-rated
securities may be less liquid than the market for higher-rated securities.
Prices of lower-rated securities may decline rapidly in the event a significant
number of holders decides to sell. Changes in expectations regarding an
individual issuer, an industry or lower-rated securities generally could reduce
market liquidity for such securities and make their sale by the Fund more
difficult, at least in the absence of price concessions. The lower-rated bond
market has grown primarily during a period of long economic expansion and it is
uncertain how it would perform during an extended economic downturn. An economic
downturn or an increase in interest rates could severely disrupt the market for
lower-rated bonds and adversely affect the value of outstanding bonds and the
ability of the issuers to repay principal and interest. See "Risk Factors
Relating to Lower-Rated Securities" in the Statement of Additional Information
for a further discussion.
The lower-rated securities in which the Fund may invest from time to time
include debt securities of companies that are financially troubled, in default
or are in bankruptcy or reorganization ("Deep Discount Securities"). These
securities may be rated C, C1 or D by S&P or C by Moody's or may be unrated.
Debt obligations of such companies are usually available at a deep discount from
the face value of the instrument. The Fund may invest in Deep Discount
Securities when the Adviser believes that existing factors are likely to improve
the company's financial condition. Such factors include a restructuring of debt,
management changes, existence of adequate assets, or other special
circumstances.
A debt instrument purchased at a deep discount, but prior to default, may
currently pay a very high effective yield. In addition, if the financial
condition of the issuer improves the underlying value of the securities may
increase, resulting in a capital gain. If the issuer defaults on its obligations
or remains in default, or if the plan of reorganization is insufficient for
debt-holders, the Deep Discount Securities may stop generating income and lose
value or become worthless. The Adviser will balance the benefits of
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<PAGE> 15
Deep Discount Securities with their risks. While a diversified portfolio may
reduce the overall impact of a Deep Discount Security that is in default or
loses its value, the risk cannot be eliminated.
As of March 31, 1995, none of the Fund's net assets were invested in convertible
securities, 6.1% of the Fund's net assets were invested in U.S. Government and
agency securities, and 9.6% of the Fund's net assets were held in high grade
short-term investments.
SECURITIES OF FOREIGN ISSUERS. Investments in securities of foreign issuers may
be affected favorably or unfavorably by changes in currency rates and exchange
control regulations. Compared to U.S. companies, there may be less publicly
available information about foreign companies which generally are subject to
less stringent accounting, auditing and financial reporting standards and
requirements. Securities of some foreign companies may be less liquid or more
volatile than those of U.S. companies. Foreign brokerage commissions and
custodial fees are generally higher than in the United States. Investments in
foreign securities may involve additional risks, including local political or
economic developments, expropriation or nationalization of assets and imposition
of withholding taxes on dividend or interest payments. In the event of a default
on any foreign debt obligation, it may be more difficult for the Fund to obtain
or enforce a judgment against the issuer.
COVERED CALL OPTIONS. When the Fund writes a listed call option, the purchaser
has the right to buy a security from the Fund at a fixed exercise price any time
before the option contract expires, regardless of changes in the market price of
the underlying security. The Fund writes options only on securities it owns
(covered options) and must retain ownership of the underlying security while the
option is outstanding. Until the option expires, the Fund cannot profit from a
rise in the market price of the underlying security over the exercise price,
except insofar as the premium which the Fund receives, net of commissions,
represents a profit. The premium paid to the Fund is the consideration for
undertaking this obligation.
The Fund may not write any option which, at the time, would cause its
outstanding options to cover securities comprising more than 10% of its asset
value. Writing option contracts is a highly specialized activity and may limit
investment flexibility at certain times. The maximum term for listed options
exceeds two years, but the Fund expects that most options it writes will not
exceed six months.
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 securities identical to those sold short (short sales
"against the box") or if the securities sold are "when issued" or "when
distributed" securities which the Fund expects to receive in a recapitalization,
reorganization, or other exchange for securities the Fund contemporaneously owns
or has the right to obtain at no added cost. The principal purpose of making
short sales is to enable the Fund to obtain the current market price of a
security which the Fund desires to sell but which cannot be currently delivered
for settlement. The Fund may not make short sales or maintain a short position
if to do so would cause more than 25% of its total net assets (exclusive of
proceeds from short sales) to be allocated to a segregated account in connection
with short sales.
REPURCHASE AGREEMENTS. The Fund may invest up to 20% of its total assets 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 and 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
15
<PAGE> 16
of bankruptcy or other default by the seller, the Fund may experience delays and
expenses liquidating the underlying security, loss from decline in value of such
security, and lack of access to income on such security. The Fund will not
invest more than 10% of its total assets in repurchase agreements which mature
in more than seven days and/or other securities which are not readily
marketable.
BROKERAGE PRACTICES. The Adviser is responsible for placing orders for the
purchase and sale of portfolio securities and negotiating brokerage commissions
on such transactions. Brokerage firms are selected for their professional
capability and the overall value and quality of their execution services. The
Adviser is authorized to pay higher commissions to brokerage firms providing
investment and research information if the Adviser deems such commissions
reasonable in relation to the overall services provided. The Adviser may also
use information received to manage the assets of other advisory accounts. The
Fund does not pay any mark-up over the market price of securities acquired in
principal transactions with dealers.
PORTFOLIO TURNOVER. The Fund purchases securities primarily for investment
rather than short-term trading. However, changes are made in the portfolio
whenever it appears advisable. The Fund's annual portfolio turnover rate is
shown in the table of "Financial Highlights." Greater portfolio activity
increases the Fund's transaction costs, including brokerage commissions.
INVESTMENT RESTRICTIONS. The Fund has adopted investment restrictions which,
like its investment objectives, cannot be changed without approval by a majority
(as defined in the Investment Company Act) vote of the Fund's shareholders.
These restrictions provide, in part, that the Fund shall not:
1. Borrow any amount other than as a temporary measure for extraordinary or
emergency purposes as determined by the Fund's Board of Directors;
2. Concentrate more than 25% of the value of its assets in a particular
industry;
3. Purchase the securities of any one issuer (except securities issued by the
United States of America, or any instrumentality thereof) if the holdings of
the Fund in the securities of such issuer exceed 5% of the market value of
the Fund's total assets; or
4. Purchase the securities of any one issuer causing the Fund's holdings to
exceed 10% of the outstanding voting securities of such issuer or 10% of any
class of securities of such issuer.
Percentage limitations are calculated and applied at the time of investment.
Additional information concerning the Fund's investment practices and
restrictions is contained in the Statement of Additional Information.
OTHER INVESTMENT RESTRICTIONS. The Fund has adopted certain investment
restrictions that may be changed by the Board of Directors. One of these
restrictions provides that the Fund shall not purchase Rule 144A securities in
an amount exceeding 5% of the Fund's net assets or purchase other securities
subject to legal or contractual restrictions on resale in an amount exceeding 5%
of the Fund's net assets. See the Statement of Additional Information.
ADDITIONAL INFORMATION
COMMON STOCK. Each Fund share outstanding has one vote at shareholder meetings
and participates equally in dividends, distributions and liquidation of the
Fund's net assets. Fund shares are transferable, fully paid and non-assessable,
and do not have any preemptive, preferential, subscription or conversion rights.
The Fund has authorized 100 million shares of $0.01 par value Common Stock.
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<PAGE> 17
VOTING RIGHTS. The By-Laws of the Fund provide that shareholder meetings are
required to be held to elect directors only when required by the Investment
Company Act. Such event is likely to occur infrequently. In addition, a special
meeting of the shareholders will be called, if requested by the holders of ten
percent of the Fund's outstanding shares, for the purposes, and to act upon the
matters, specified in the request (which may include election or removal of
directors). When matters are submitted for a shareholder vote, each shareholder
is entitled to one vote for each share owned.
SHAREHOLDER INQUIRIES. Shareholders who have questions concerning (1) the Fund
may contact the Distributor; (2) their account may contact the Shareholder
Service Agent; and (3) their retirement plan may contact the Shareholder Service
Agent. The applicable addresses and telephone numbers appear on page 2.
SHAREHOLDER SERVICE AGENT. Boston Financial Data Services, Inc., P. O. Box 8500,
Boston, Massachusetts 02266-8500, serves as shareholder service and dividend
disbursing agent for the Fund. State Street Bank and Trust Company serves as
transfer agent for the Fund.
CUSTODIAN. All cash and securities of the Fund are held by the Fund's custodian,
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110.
LEGAL COUNSEL. O'Melveny & Myers, 400 South Hope Street, Los Angeles, California
90071, provides legal services to the Fund.
INDEPENDENT AUDITORS. Ernst & Young LLP, 515 South Flower Street, Los Angeles,
California 90071, performs annual audits of the Fund's financial statements.
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--------------------------------------------------------------------------------
Distributor:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
--------------------------------------------------------------------------------
<PAGE> 19
STATEMENT OF ADDITIONAL INFORMATION Rule 497(c)
File No. 2-28157
August 1, 1995
FPA CAPITAL FUND, INC.
This Statement of Additional Information ("Statement") supplements the current
Prospectus of FPA Capital Fund, Inc. ("Fund") dated August 1, 1995. This
Statement does not present a complete picture of the various topics discussed
and should be read in conjunction with the Fund's Prospectus. Although this
Statement is not itself a Prospectus, it is, in its entirety, incorporated by
reference into the Prospectus. The Fund's Prospectus may be obtained by
contacting your securities dealer or the Fund's principal underwriter, FPA Fund
Distributors, Inc. ("Distributor"), at 11400 West Olympic Boulevard, Suite
1200, Los Angeles, California 90064; telephone (310) 473-0225 or (800)
982-4372, except from Alaska, Hawaii and Puerto Rico.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Report to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Stripped Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Securities of Foreign Issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Covered Call Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Rule 144A and Other Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . 5
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Debt Security Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Commercial Paper Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Risk Factors Relating to Lower-Rated Securities . . . . . . . . . . . . . . . . . . . . . . . . 8
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Additional Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Directors and Officers of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Five Percent Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Prior Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Purchase and Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Sales Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Sales at Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Letter of Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
FPA Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Telephone Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Tax Sheltered Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
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<PAGE> 20
GENERAL INFORMATION
Voting Rights. Fund shares do not have cumulative voting rights, which means
holders of more than 50% of Fund shares voting for the election of directors
can elect 100% of the directors if they so choose. In such event, holders of
the remaining Fund shares are not able to elect any person or persons to the
Fund's Board of Directors.
Reports to Shareholders. Shareholders receive semi-annual and annual reports
which show the portfolio of investments, major portfolio changes and other
information. Financial statements accompanied by an opinion of independent
auditors are furnished to shareholders after the Fund's fiscal year-end.
Unaudited financial statements prepared by the Fund are provided after the
first six months of the fiscal year.
INVESTMENT POLICIES
The following supplements information set forth under the captions "Investment
Objective and Policies" and "Investment Practices, Risks and Restrictions" in
the Prospectus. Readers must also refer to the Prospectus.
Mortgage-Backed Securities. The mortgage-backed securities in which the Fund
may invest may include those backed by the full faith and credit of the United
States. Government National Mortgage Association ("GNMA"), the principal U.S.
guarantor of such securities, is a wholly-owned U.S. Government corporation
within the Department of Housing and Urban Development. The Fund may also
invest in government-related mortgage- backed securities which are not backed
by the full faith and credit of the United States such as those issued by
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC"). FNMA is a government-sponsored corporation owned
entirely by private stockholders, which is subject to general regulation by the
Secretary of Housing and Urban Development. Pass-through securities issued by
FNMA are guaranteed as to timely payment of principal and interest by FNMA.
FHLMC is a corporate instrumentality of the United States, the stock of which
is owned by the Federal Home Loan Banks. Participation certificates
representing interests in mortgages from FHLMC's national portfolio are
guaranteed as to the timely payment of interest and ultimate collection of
principal by FHLMC. The Fund may also invest in mortgage-backed securities
issued by certain private non-governmental corporations, such as financial
institutions.
The average maturity of pass-through pools of mortgage-backed securities varies
with the maturities of the underlying mortgage instruments. In addition, a
pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and the age of the mortgage. Because prepayment rates of
individual mortgage pools vary widely, it is not possible to accurately predict
the average life of a particular pool. Common industry practice, for example,
is to assume that prepayments will result in a 7-to-9 year average life for
pools of fixed-rate 30-year mortgages. Pools of mortgages with other
maturities of different characteristics will have varying average life
assumptions.
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<PAGE> 21
Stripped Mortgage-Backed Securities. The Fund may invest in stripped
mortgage-backed securities. These securities represent beneficial ownership
interests in either periodic principal distributions (the principal-only or
"PO" class) or interest distributions (the interest only or "IO" class) on
mortgage-backed certificates. The certificates underlying the stripped
mortgage-backed securities represent all or part of the beneficial interest in
pools of fixed-rate mortgage loans. The Fund may invest in IO securities in
order to enhance yield or to benefit from anticipated appreciation in value of
the securities at times when the Adviser believes that interest rates will
remain stable or increase. In periods of rising interest rates, the value of
IO securities may be expected to increase because of the diminished expectation
that the underlying mortgages will be prepaid. In this situation, the expected
increase in the value of IO securities may offset all or a portion of any
decline in value of other debt securities owned by the Fund. Investing in
stripped mortgage-backed securities involves the risks normally associated with
investing in mortgage-backed securities. See "Mortgage-Backed Securities"
above. In addition, the yields on IO and PO securities are extremely sensitive
to the prepayment experience on the mortgage loans underlying the certificates
collateralizing the securities. If a decline in the level of prevailing
interest rates results in a rate of principal prepayments higher than
anticipated, distributions of principal will be accelerated, thereby reducing
the yield to maturity on IO securities and increasing the yield to maturity on
PO securities. Conversely, if an increase in the level of prevailing interest
rates results in a rate of principal prepayments lower than anticipated,
distributions of principal will be deferred, thereby increasing the yield to
maturity on IO securities and decreasing the yield to maturity on PO
securities. Sufficiently high prepayments rates could result in the Fund's not
fully recovering its initial investment in an IO security. There can be no
assurance that the Fund will be able to effect a trade of a stripped
mortgage-backed security at a time when it wishes to do so. Stripped
mortgage-backed securities will be considered illiquid securities unless both
(i) issued by the United States Government or an agency or instrumentality
thereof, and (ii) there appears to be a liquid secondary market for the
security.
Securities of Foreign Issuers. The Fund may invest up to 10% of its net assets
in securities of foreign governments and companies. Securities of foreign
issuers may be subject to foreign government taxes which could reduce the
dividend or interest yield on such securities. Foreign investments involve
certain risks, such as political or economic instability of the issuer or of
the country of issue, the difficulty of predicting international trade patterns
and the possibility of imposition of exchange controls. Such securities may
also be subject to greater fluctuations in price than those of domestic
corporations or the United States Government. In addition, there may be less
publicly available information about a foreign company than about a domestic
company. Foreign companies generally are not subject to the uniform
accounting, auditing and financial reporting standards applicable to domestic
companies. There is generally less government regulation of stock exchanges,
brokers and listed companies abroad than in the United States. With respect to
certain foreign countries, there is a possibility of expropriation,
confiscatory taxation, or diplomatic developments affecting foreign
investments. Finally, in the event of default on any foreign debt obligation,
it may be more difficult for the Fund to obtain or enforce a judgment against
the issuer.
Covered Call Options. In an effort to increase potential income, the Fund is
authorized to write (i.e., sell) covered call options listed on national
securities exchanges. Listed call options are presently traded only with
respect to a limited number of larger companies. Since the Fund does not
intend to purchase securities for the purpose of writing options, it may only
be able to write options on a small portion of its portfolio.
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The Fund may terminate its obligation under a previously written option,
without delivery of the underlying security, by effecting a closing
transaction, which is the purchase of a call option on the same security with
the same exercise price and expiration date. The Fund's ability to enter into
a closing transaction may be limited. If the Fund cannot close its position,
it is unable to sell the underlying security until the call expires or is
exercised. Accordingly, the Fund may not be able to sell the underlying
security at an advantageous time. The Fund realizes a profit or loss from a
closing transaction if the cost of the transaction is less or more than the
option premium received. Also, because increases in the market price of an
option generally reflect increases in the market price of the underlying
security, any loss realized from a closing transaction is likely to be offset
in whole or in part by the increased value of the underlying security.
The Fund's portfolio turnover rate may increase to the extent underlying
securities are delivered upon exercise of options written by the Fund.
Brokerage commissions associated with writing call options and effecting
closing transactions are normally proportionately higher than those associated
with general securities transactions.
Short Sales Against the Box. In an effort to increase investment flexibility,
the Fund is authorized to make certain short sales. In a short sale, the Fund
does not immediately deliver the securities sold and does not receive the
proceeds from the sale. The Fund is said to have a short position in the
securities sold until it delivers such securities, at which time it receives
the proceeds of the sale. The Fund must pay the broker the amount of any
dividend paid on the securities while the short position is maintained. To
secure its obligation to deliver the securities sold short, the Fund deposits
in escrow in a segregated account with its custodian an equal amount of the
securities sold short or securities convertible into or exchangeable for such
securities.
Common stocks issuable upon conversion of a convertible security sometimes can
be sold at a better price than the convertible security owned by the Fund. In
such circumstances the Fund could sell the common stock short "against the box"
while tendering the convertible security to the issuer for conversion. Upon
receipt of the certificates for the underlying common stock, delivery would be
made to close the short sale.
Similarly, when the Fund expects to receive new securities in a reorganization
in exchange for securities owned by the Fund, and the new securities are traded
on a "when issued" basis, the Fund could sell in the "when issued" market and
deliver the new securities when received following the consummation of the
reorganization. If the reorganization is not consummated, all transactions in
the "when issued" market are cancelled in which event the Fund would realize no
gain or loss on the short sale, except for brokerage commissions.
The limited authority to utilize short sales as described above and in the
Prospectus would not subject the Fund to the risk of loss generally associated
with short sales. A short sale "against the box" does eliminate the potential
for gain or loss from subsequent changes in the market price of the security.
It constitutes a form of hedging under which the Fund obtains a current market
price considered attractive by the Adviser, rather than remain subject to
future fluctuations in the price of the security sold short. Such authority
would be utilized only in furtherance of the Fund's primary investment
objective to seek long-term capital growth.
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<PAGE> 23
For federal income tax purposes, a short sale is not considered a completed
transaction until the Fund discharges its obligation by delivering the
securities sold. Thus, if the Fund should sell securities short "against the
box" in December and deliver the securities in January, any capital gain or
loss on the transaction would be realized in January. This principle possibly
could be utilized by the Fund to postpone recognition of capital gain or loss.
Special tax rules prevent conversion of short-term capital gains into long-term
capital gains and, in effect, long-term capital losses into short-term capital
losses by selling short "against the box."
Repurchase Agreements. The Fund pays for repurchase agreements only upon
physical delivery or evidence of book entry transfer of the underlying debt
security to a segregated account of State Street Bank and Trust Company
("Bank"), the Fund's custodian, or its agent. The Fund only enters into
repurchase agreements involving securities in which the Fund can otherwise
invest. The underlying security (normally a security of the U.S. Government,
its agencies or instrumentalities) may have a maturity date exceeding one year.
Repurchase agreements usually mature not more than seven days after purchase by
the Fund. It is the Fund's policy that the market value of the security
collateralizing the repurchase agreement at all times equal or exceed the
amount of the repurchase agreement. The Fund does not bear the risk of a
decline in value of the underlying security unless the seller defaults under
its repurchase obligation. In the event of bankruptcy or other default of a
seller, the Fund might experience both loss and delay in liquidating the
underlying security, including: (a) possible decline in the value of such
security while the Fund seeks to enforce its rights thereto, (b) possible lack
of access to income on such security during this period and (c) expenses of
enforcing its rights.
Rule 144A and Other Restricted Securities. The Fund may invest up to 5% of its
net assets in Rule 144A securities. Rule 144A was adopted under the Securities
Act of 1933 (the "1933 Act") to allow a broader institutional trading market
for securities subject to restriction on resale to the general public. The
Rule provides a "safe harbor" for the resale of certain restricted securities
among qualified institutional investors without registration under the 1933
Act. The Fund may also invest up to 5% of its net assets in other securities
subject to legal or contractual restrictions on resale. Such restricted
securities generally may be resold only in a privately negotiated transaction
with a limited number of purchasers or in a public offering registered under
the 1933 Act. Considerable delay could be encountered in either event. These
difficulties and delays could result in the Fund's inability to realize a
favorable price upon disposition of restricted securities, and in some cases
may make disposition of such restricted securities at the time desired by the
Fund impossible.
RATINGS
Debt Security Ratings. Moody's Investor Services, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P") employ the designations set forth below
to rate debt securities.
MOODY'S
Aaa - Bonds judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as gilt-edge. Interest
payments are protected by a large or an exceptionally stable margin and
principal is secure. While the various protective elements are likely to
change,
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<PAGE> 24
such changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa - Bonds judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high-grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A - Bonds which possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa - Bonds considered as medium-grade obligations (i.e., they are neither
highly protected nor poorly secured). Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba - Bonds judged to have speculative elements. Their future cannot be
considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during other
good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds which generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa - Bonds of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
Ca - Bonds which represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
C - The lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Nonrated - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter policy.
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<PAGE> 25
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
S&P
AAA - Capacity to pay interest and repay principal is extremely strong.
AA - Capacity to pay interest and repay principal is very strong and these
bonds differ from AAA issues only in small degree.
A - Capacity to pay interest and repay principal is strong although they are
somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than bonds in higher rated categories.
BBB - Capacity to pay interest and repay principal is adequate. Whereas these
bonds normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal than for bonds in higher rated
categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI - reserved for income bonds on which no interest is being paid.
D - in default, and payment of interest and/or repayment of principal is in
arrears.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate
a particular type of obligation as a matter of policy.
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<PAGE> 26
Commercial Paper Ratings. Moody's and S&P employ the designations set forth
below to rate commercial paper.
Moody's designations, all judged to be investment grade, indicate the relative
repayment capacity of rated issuers. Issuers rated Prime-1 have a superior
capacity for repayment of short-term promissory obligations. Issuers rated
Prime-2 have a strong capacity for repayment of short- term promissory
obligations. Issuers rated Prime-3 have an acceptable capacity for repayment
of short-term promissory obligations.
S&P ratings are an assessment of the likelihood of timely payment of debt
having an original maturity of no more than 365 days. Issuers assigned the
highest rating by S&P ("A") are regarded as having the greatest capacity for
timely payment. Issuers in this category are further refined with the
designations 1, 2 and 3 to indicate the relative degree of safety. A-1
indicates that the degree of safety regarding timely payment is either
overwhelming (denoted with a plus sign) or very strong. A-2 indicates that
capacity for timely payment is strong; however, the relative degree of safety
is not as high as for issuers designated A-1. A-3 indicates a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to
the adverse effects of changes in circumstances than obligations carrying the
higher designations.
RISK FACTORS RELATING TO LOWER RATED SECURITIES
As described in the Prospectus, the Fund may invest up to 15% of its assets in
convertible securities and other fixed-income securities which are not rated in
the four highest categories by Moody's and S&P. Ratings of debt securities are
described above. The Prospectus discussion of the risks of investing in lower
rated high yield bonds is supplemented as follows:
1. Youth and Growth of the High Yield Bond Market. Since the high yield bond
market is relatively new, its growth has paralleled a long economic
expansion, and it has not weathered a lengthy recession in its present
size and form. An economic downturn or increase in interest rates is
likely to have a negative effect on the high yield bond market and on the
value of the high yield bonds in the Fund's portfolio, as well as on the
ability of the bonds' issuers to repay principal and interest.
2. Sensitivity to Interest Rate and Economic Changes. The economy and
interest rates affect high yield securities differently from other
securities. The prices of high yield bonds have been found to be less
sensitive to interest rate changes than higher rated investments, but
more sensitive to adverse economic changes or individual issuer
developments. During an economic downturn or substantial period of
rising interest rates, highly leveraged issuers are likely to experience
financial stress which would adversely affect their ability to service
their principal and interest payment obligations, to meet projected
business goals, and to obtain additional financing. If the issuer of a
bond owned by the Fund defaults, the Fund may incur additional expenses
to seek recovery. In addition, periods of economic uncertainty and
changes can be expected to result in increased volatility of market
prices of high yield bonds and the Fund's asset value. Furthermore, in
the case of high yield bonds structured as zero coupon or pay-in-kind
securities, their market prices are affected to a greater extent by
interest rate changes and thereby tend to be more volatile than
securities which pay interest periodically and in cash.
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<PAGE> 27
3. Liquidity and Valuation. To the extent that there is no established
retail secondary market, there may be thin trading of high yield bonds,
and there may be a negative impact on the Fund's Board of Directors'
ability to accurately value high yield bonds and the Fund's assets and on
the Fund's ability to dispose of the bonds. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of high yield bonds, especially in a
thinly traded market. To the extent the Fund owns or may acquire
illiquid high yield bonds, these securities may involve special liquidity
and valuation difficulties.
4. Legislation. New laws and proposed new laws may have a negative impact
on the market for high yield bonds. For example, recent legislation
requires federally-insured savings and loan associations to divest their
investments in high yield bonds.
5. Taxation. Special tax considerations are associated with investing in
high yield bonds structured as zero coupon or pay-in-kind securities.
The Fund accrues the interest on these securities as income even though
it receives no cash interest until the security's maturity or payment
date. The Fund is required to distribute such income to its shareholders
in order to maintain its qualification for pass-through treatment under
the Internal Revenue Code. Thus, the Fund may have to dispose of
portfolio securities at a time it otherwise might not want to do so in
order to provide the cash necessary to make distributions to those
shareholders who do not reinvest dividends.
6. Credit Ratings. Certain risks are associated with applying credit
ratings as a method of evaluating high yield bonds. Credit ratings
evaluate the safety of principal and interest payments, not market value
risk of high yield bonds. Since credit rating agencies may fail to
timely change the credit ratings to reflect subsequent events, the
Adviser monitors the issuers of high yield bonds in the Fund's portfolio
to determine if the issuers appear to have sufficient cash flow to meet
required principal and interest payments. The Fund may retain a
portfolio security whose rating has been changed.
INVESTMENT RESTRICTIONS
The Fund has adopted the investment restrictions set forth below, which apply
at the time securities are purchased or other relevant action is taken. These
restrictions and the Fund's investment objective cannot be changed without
approval of the holders of a majority of outstanding Fund shares. Such
majority is defined in the Investment Company Act of 1940 ("Investment Company
Act") as the lesser of (a) 67% or more of the voting securities present in
person or represented by proxy at a meeting, if the holders of more than 50% of
the outstanding voting securities are present or represented by proxy; or (b)
more than 50% of the outstanding voting securities. Percentage limitations
applicable to investments are calculated and applied at the time of investment.
In addition to those described in the Prospectus, these restrictions provide
that the Fund shall not:
1. Issue any class of senior security nor sell any senior security of which
it is the issuer, except that the Fund is permitted to borrow from any
bank; provided that such borrowing may only be as a temporary measure for
extraordinary or emergency purposes, but not for investment purposes and
shall not, in the aggregate, exceed 10% of its total assets taken at cost
or 5% of its total assets taken at current value, whichever is less; and
provided that immediately after such borrowing, there is an asset
coverage of at least 300% for all borrowings of the Fund;
9
<PAGE> 28
2. Underwrite the sale of any securities other than Fund shares;
3. Purchase or sell commodities, commodity contracts or real estate;
4. Lend money or securities to any person, firm, or corporation for any
purpose whatsoever; provided, however, that the following are not
construed as the making of a loan: (a) the acquisition of a portion of
publicly distributed bonds, debentures, notes and other obligations or
evidence of interest in or indebtedness of any corporation, domestic or
foreign, or of any government or municipality; (b) the acquisition of
obligations of, or obligations guaranteed by, national or state banks or
bank holding companies (including certificates of deposit and bankers
acceptances); and (c) the entry into repurchase agreements if the
following conditions are met: (1) that the securities or instruments
subject to the agreement are of the type in which the Fund may otherwise
invest, (2) that at the time the repurchase agreement is made the value
of the securities or instruments involved is equal to the purchase price,
(3) that not more than 20% of the Fund's total assets, at the time the
agreement is made, will be invested pursuant to such agreements, and (4)
that such agreements with any one entity, together with any other
investments in that entity, shall not exceed in the aggregate 5% of the
Fund's total assets, at market value, computed at the time the agreement
is made;
5. Mortgage, pledge, hypothecate or in any manner transfer, as security for
any indebtedness, any security owned or held by the Fund;
6. Participate on a joint or a joint and several basis in any trading
account in securities;
7. Purchase from or sell to any officer or director of the Fund, or firms of
which any of them are members, any securities other than Fund shares; but
such persons or firms may act as brokers for the Fund for customary
commissions;
8. Purchase or retain any securities of any issuer if those officers and
directors of the Fund or of its manager or investment adviser owning
individually more than 0.5% of the securities of such issuer together own
beneficially more than 5% of the securities of such issuer;
9. Invest for the purpose of exercising control over or management of any
company;
10. Invest in securities issued by other investment companies;
11. Effect short sales of securities, 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;
12. Buy securities on margin;
13. Purchase or sell securities other than Fund shares through any brokerage
or investment organization in which any officer or director of the Fund
is a partner, officer, director or shareholder;
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<PAGE> 29
14. Invest more than 5% of its assets in securities of corporations which
have a record of less than three years continuous operation; or
15. Write options, except the Fund may write covered call options and effect
closing transactions; provided the Fund shall: (i) write options only on
securities which it owns and which are traded on a national securities
exchange; (ii) retain ownership of the underlying security for the
duration of said options and (iii) not write any option which would, at
the time, cause outstanding options written by the Fund to cover
securities comprising more than 10% of the value of the Fund's assets.
Additional Restrictions. The Fund is also subject to the policies set forth
below which its Board of Directors may amend and which apply at the time of
purchase of securities. These restrictions provide that the Fund shall not:
1. Invest more than 10% of total net assets in repurchase agreements with
maturities over seven days and/or other securities which are not readily
marketable;
2. Purchase warrants exceeding 2% of total assets;
3. Invest in oil, gas or other mineral exploration or development programs;
or
4. Purchase Rule 144A securities in an amount exceeding 5% of the Fund's net
assets or purchase other securities subject to legal or contractual
restrictions on resale in an amount exceeding 5% of the Fund's net
assets.
DIRECTORS AND OFFICERS OF THE FUND
All directors and officers of the Fund are also directors and/or officers of
one or more of the 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 New Income, Inc. ("New
Income"), FPA Paramount Fund, Inc. ("Paramount"), FPA Perennial Fund, Inc.
("Perennial") and Source Capital, Inc. ("Source") (collectively, the "FPA Fund
Complex").
The directors and officers of the Fund and their principal occupations during
the past five years follow. Their address is 11400 West Olympic Boulevard,
Suite 1200, Los Angeles, California 90064.
Donald E. Cantlay, Director
General Partner of Cee'n'Tee Co. (commercial real estate) for more than the
past five years. Director of New Income, of Transamerica Cash Reserve, Inc.
("Cash Reserve"), of Transamerica Income Shares, Inc. ("Income Shares"), of
California Trucking Association and of Western Highway Institute. Member of
the Board of Regents of Loyola Marymount University.
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<PAGE> 30
George H. Michaelis, Director, Chairman of the Board & Executive Vice
President (1)
Director, Chairman of the Board (or President), Chief Executive Officer and
Chief Investment Officer of the Adviser, Director and Chairman of the Board of
Perennial, Director (since May 1995), Chairman of the Board (since May 1995)
and Executive Vice President of New Income and of Paramount, and Director and
President of Source for more than the past five years. Director of the
Distributor since May 1991. Director of UAM from May 1992 to May 1993.
DeWayne W. Moore, Director
Former Director, Senior Vice President and Chief Financial Officer of Guy F.
Atkinson Company of California (construction). Director of New Income, of Cash
Reserve and of Income Shares.
Lawrence J. Sheehan, Director (1)
Of counsel to, and partner (1969 to 1994) of, the law firm of O'Melveny &
Myers, legal counsel to the Fund. Director of Source, of Perennial and of New
Income. Director of TCW Convertible Securities Fund, Inc., a closed-end
investment company. Director (or Trustee) of the American Capital Funds, a
group of 29 open-end investment company portfolios.
Kenneth L. Trefftzs, Director
Private investor. Former Professor of Finance and Chairman of the Department
of Finance and Business Economics, University of Southern California Graduate
School of Business. Director of Source, of Perennial, of New Income and of
Fremont General Corporation (financial service company). Director (or Trustee)
of the Pacific Horizon Funds and Horizon Funds, a group of 13 open-end
investment company portfolios.
Robert L. Rodriguez, President & Chief Investment Officer
Senior Vice President (or Vice President) of the Adviser, and President (or
Executive Vice President) and Chief Investment Officer of New Income for more
than the past five years.
Christopher Linden, Senior Vice President
Director (since June 1991), President (or Senior Vice President) for more than
the past five years and Chief Operating Officer (since June 1991) of the
Adviser, Senior Vice President of New Income and of Source, President and Chief
Investment Officer of Perennial, and Senior Vice President and Chief Operating
Officer of Paramount for more than the past five years. Director of the
Distributor since May 1991. Director and Chairman of the Board of Paramount
from June 1985 to May 1995.
Eric S. Ende, Vice President
Senior Vice President (or Vice President) of the Adviser, and Vice President of
New Income, of Paramount, of Perennial and of Source for more than the past
five years.
Julio J. de Puzo, Jr., Treasurer
Chief Financial Officer (since June 1991 ), Treasurer (since June 1991) and
Senior Vice President (or First Vice President) for more than the past five
years of the Adviser and Treasurer of Source, of New Income, of Paramount and
of Perennial for more than the past five years. Director (since May 1991),
Senior Vice President (or First Vice President) (since October 1991) and Chief
Financial Officer (since October 1991) of the Distributor.
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Sherry Sasaki, Secretary
Assistant Vice President (since December 1992) and Secretary (or Assistant
Secretary) of the Adviser, and Secretary (or Assistant Secretary) of Source, of
New Income, of Paramount and of Perennial for more than the past five years.
Secretary of the Distributor since May 1991.
Christopher H. Thomas, Assistant Treasurer
Vice President and Controller of the Adviser and of the Distributor since March
1995, and Assistant Treasurer of Capital, of New Income, of Source and of
Paramount since April 1995. Staff Accountant with the Office of Inspection of
the Securities and Exchange Commission from 1994 to March 1995. School
Administrator of the Calvary Road Christian Academy from 1988 to 1993.
(1) Director who is an interested person, as defined in the Investment
Company Act, by virtue of his affiliation with the Adviser, in the case
of Mr. Michaelis, and by virtue of his affiliation with legal counsel to
the Fund, in the case of Mr. Sheehan.
The Directors and officers of the Fund as a group own less than 1% of the
outstanding Fund shares. During the last fiscal year, the Directors
then in office who were not affiliated with the Adviser received as a group
$20,000 in Directors' fees. Such Directors are also reimbursed for certain
travel expenses by the Fund. The following information relates to Director
compensation. The Fund does not pay any salaries to its officers, all of whom
are compensated by the Adviser.
<TABLE>
<CAPTION>
TOTAL COMPENSATION*
AGGREGATE COMPENSATION* FROM THE FPA FUND COMPLEX
NAME OF DIRECTORS FROM THE FUND INCLUDING THE FUND
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
George H. Michaelis $ -0- $ -0-
Donald E. Cantlay 5,000 9,250**
DeWayne W. Moore 5,000 9,250**
Lawrence J. Sheehan 5,000 29,250***
Kenneth L. Trefftzs 5,000 29,250***
</TABLE>
* No pension or retirement benefits are provided to Directors by the Fund
or the FPA Fund Complex.
** Includes compensation from the Fund and from one open-end investment
company.
*** Includes compensation from the Fund, from two open-end investment
companies, and from one closed-end investment company.
Currently, the personnel of the Adviser consists of seven persons engaged full
time in portfolio management or investment research in addition to 23 persons
engaged full time in trading, administrative, financial or clerical activities.
The Adviser is registered as an investment adviser with the Securities and
Exchange Commission, which does not imply supervision by said Commission of the
Adviser's activities. The Adviser's parent company, UAM, is a publicly held
corporation. No person is known by UAM to own or hold with power to vote 25%
or more of its outstanding shares of common stock.
13
<PAGE> 32
Five Percent Shareholders. As of June 30, 1995, no person was known by the
Fund to own of record or beneficially 5% or more of the outstanding Fund
shares, except Transamerica Corporation, 600 Montgomery Street, San Francisco,
California 94111-2701, which held 616,276 shares (5.16%) of the outstanding
Fund shares.
INVESTMENT ADVISORY AGREEMENT
The Fund has entered into an Investment Advisory Agreement dated August 1, 1994
("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 the
charges and expenses of any custodian or depository appointed by the Fund for
the safekeeping of its cash, portfolio securities and other property; the
charges and expenses of auditors; the charges and expenses of any stock
transfer or dividend agent or agents appointed by the Fund; brokers'
commissions chargeable to the Fund in connection with portfolio securities
transactions to which the Fund is a party; all taxes, including issuance and
transfer taxes, and corporate fees payable by the Fund to federal, state or
other governmental agencies; the cost of stock certificates representing Fund
shares; fees involved in registering and maintaining registrations of the Fund
and of Fund shares with the Securities and Exchange Commission ("SEC") and
various states and other jurisdictions; all expenses of shareholders' and
directors' meetings and of preparing, printing and mailing proxy statements and
semi-annual and annual reports to shareholders except as set forth in the
Distribution Agreement between the Fund and the Distributor; fees and travel
expenses of independent and unaffiliated directors; the expense of furnishing,
or causing to be furnished, to all shareholders a statement of account after
every transaction affecting their account, including the expense of mailing;
charges and expenses of legal counsel in connection with matters relating to
the Fund, including, without limitation, legal services rendered in connection
with the Fund's corporate and financial structure and relations with its
shareholders, issuance of Fund shares, and registrations and qualifications of
securities under federal, state and other laws; association dues; interest
payable on Fund borrowings; postage; 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 advisory fee is higher than the
fee paid by most other mutual funds. The average net assets are determined by
taking the average of all the daily determinations of net assets made, in the
manner provided in the Fund's Articles of Incorporation, during a calendar
month.
14
<PAGE> 33
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 which
constitute the record forming the basis for the Fund's financial statements,
(b) preparing such financial statements and other Fund documents and reports of
a financial nature required by federal and state laws, (c) calculating daily
net assets and (d) participating in the production of the Fund's registration
statements, prospectuses, proxy materials and reports to shareholders
(including compensation of the Treasurer or other principal financial officer
of the Fund, compensation of personnel working under such person's direction
and expenses of office space, facilities and equipment such persons use to
perform their financial services duties). However, for any fiscal year, the
cost of such financial services paid by the Fund may not exceed 0.10% of the
average daily net assets of the Fund.
The advisory fee and cost of financial services is reduced in the amount by
which certain defined operating expenses of the Fund (including the advisory
fee and cost of financial services) for any fiscal year exceed 1.50% of the
first $30 million of average net assets, plus 1% of the remaining average net
assets. Such values are calculated at the close of business on the last
business day of each calendar month. Any required reduction or refund is
computed and paid monthly. Operating expenses (as defined in the Advisory
Agreement) exclude (a) interest, (b) taxes, (c) brokerage commissions and (d)
any extraordinary expenses, such as litigation, merger, reorganization or
recapitalization, to the extent such extraordinary expenses are permitted to be
excluded by the rules or policies of the states in which Fund shares are
registered for sale. All expenditures, including costs connected with the
purchase, retention or sale of portfolio securities, which are capitalized in
accordance with generally accepted accounting principles applicable to
investment companies, are accounted for as capital items and not as expenses.
This expense limitation provision does not require any payment by the Adviser
beyond the return of the advisory fee and cost of financial services paid to it
by the Fund for a fiscal year.
The Advisory Agreement provides that the Adviser does not have any liability to
the Fund or any of its shareholders for any error of judgment, any mistake of
law or any loss the Fund suffers in connection with matters related to the
Advisory Agreement, except for liability resulting from willful misfeasance,
bad faith or negligence on the part of the Adviser or the reckless disregard of
its duties under the Advisory Agreement.
The Advisory Agreement is renewable annually if such renewal is specifically
approved each year (a) by the Fund's Board of Directors or by the vote of a
majority 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 September 30,
1996, 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 upon 60 days' written notice at the
option of either party or by the vote of the Fund's shareholders. The Advisory
Agreement automatically terminates in the event of its assignment.
15
<PAGE> 34
For the fiscal years ended March 31, 1993, 1994 and 1995, the Adviser received
gross advisory fees of $786,332, $1,006,089 and $1,231,401, respectively, plus
$113,282, $147,091 and $181,754, respectively, for costs incurred in providing
financial services to the Fund.
PRIOR PERFORMANCE INFORMATION
For the purposes of quoting and comparing the performance of the Fund to that
of other mutual funds and to other relevant market indices in advertisements,
performance may be stated in terms of total return. Under regulations adopted
by the Securities and Exchange Commission ("SEC"), funds that intend to
advertise performance must include total return quotations calculated according
to the following formula:
P(1 + T)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 will cover
1, 5 and 10 year periods of a fund's existence or such shorter period dating
from the effectiveness of a fund's Registration Statement. In calculating the
ending redeemable value, the maximum sales load is deducted from the initial
$1,000 payment and all dividends and distributions by a fund are assumed to
have been reinvested at net asset value as described in the Prospectus on the
reinvestment dates during the period. Total return, or "T" in the formula
above, is computed by finding the average annual compounded rates of return
over the 1, 5 and 10 year periods (or fractional portion thereof) that would
equate the initial amount invested to the ending redeemable value.
The Fund may also from time to time include in such advertising a total return
figure that is not calculated according to the formula set forth above in order
to compare the performance of the Fund with other measures of investment
return. For example, in comparing the Fund's total return with a stock index
such as the Standard & Poor's 500 Stock Index, the Fund calculates its
aggregate total return for the specified periods of time by assuming the
investment of $10,000 in Fund shares and assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. The Fund does not, for these purposes, deduct from the initial value
invested any amount representing sales charges. The Fund, however, discloses
the maximum sales charge and also discloses that inclusion of sales charges
would reduce the performance quoted. Such alternative total return information
will
16
<PAGE> 35
be given no greater prominence in such advertising than the information
prescribed under SEC regulations.
The Fund's average annual total return (calculated in accordance with the SEC
regulations described above) for the one, five and ten-year periods ended March
31, 1995 was 11.98%, 17.24% and 17.39%, 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 19.77%, 18.83% and 18.18%, 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser makes decisions to buy and sell securities for the Fund, selects
broker-dealers and negotiates commission rates or net prices. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed better prices and executions are available
elsewhere. Portfolio transactions are effected with broker-dealers selected
for their abilities to give prompt execution at prices favorable to the Fund.
In selecting broker-dealers and in negotiating commissions, the Adviser
considers: the best net price available; each firm's reliability, integrity
and financial condition; the size of and difficulty in executing the order; and
the value of the firm's expected contribution to the Fund's investment
performance on a continuing basis. Accordingly, the net price to the Fund in
any transaction may be less favorable than that available from another
broker-dealer if the difference is reasonably justified by other aspects of its
services. Subject to policies determined by the Fund's Board of Directors, the
Adviser shall not be deemed to have acted unlawfully or to have breached any
duty created by the Advisory Agreement or otherwise solely because the Fund
paid a broker-dealer providing brokerage and research services commissions for
effecting a transaction in excess of the commission another broker-dealer would
have charged for the same transaction. The Adviser must determine in good
faith that such commission was reasonable relative to the value of the
brokerage and research services provided, considering either that particular
transaction or the Adviser's overall responsibilities to the Fund. The Adviser
is further authorized to allocate orders it places for the Fund to
broker-dealers providing products or services which assist in making investment
decisions. The Adviser shall allocate the amounts and proportions of such
costs and shall regularly report on such allocations to the Fund's Board of
Directors.
Brokerage and research services are defined by Section 28(e) of the Securities
Exchange Act of 1934 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
17
<PAGE> 36
trends, portfolio strategy and performance of accounts; and (c) effecting
securities transactions and performing functions incidental thereto, such as
clearance, settlement and custody.
Research services furnished by broker-dealers effecting securities transactions
for the Fund may be used by the Adviser for all advisory accounts. However, the
Adviser may not use all such research services in managing the Fund's
portfolio. In the opinion of the Adviser, it is not possible to measure
separately the benefits from research services to each advisory account.
Because the volume and nature of the trading activities of 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
another advisory account. 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 amount 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 March 31, 1993, 1994 and 1995 totaled $77,874, $107,570 and
$67,585, respectively. During the last fiscal year, $66,660 of commissions
were paid on transactions having a total value of $23,780,490 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 the 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.
DISTRIBUTOR
FPA Fund Distributors Inc., a wholly owned subsidiary of the Adviser, acts as
the principal underwriter of Fund shares pursuant to a distribution agreement
dated August 1, 1994 ("Distribution Agreement"). The Distributor receives
commissions from the sale of Fund shares and has the exclusive right to
distribute Fund shares through dealers. From commissions received, the
Distributor pays its own overhead and general administrative expenses, the cost
of printing and distributing prospectuses used in connection with this
offering, except for those furnished to existing shareholders, and the cost of
advertising and sales literature. The Fund pays expenses attributable to the
registration of Fund shares under federal and state laws and the compensation
and expenses of the Fund's transfer agent.
18
<PAGE> 37
The Distribution Agreement is renewable annually if such renewal is
specifically approved each year (a) by the Fund's Board of Directors or by a
vote of a majority (as defined in the Investment Company Act) of the Fund's
outstanding voting securities and (b) by a majority of the Fund's directors who
are not parties to the Distribution Agreement or interested persons (as defined
in the Investment Company Act) of any such party, by votes cast in person at a
meeting called for such purpose. The continuation of the Distribution
Agreement to September 3, 1996, 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 at any time on 60 days'
written notice, without penalty, by the Fund's Board of Directors, the vote of
a majority of the Fund's outstanding voting securities or the Distributor.
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.
For the fiscal years ended March 31, 1993, 1994 and 1995, underwriting
commissions on the sale of Fund shares were $390,964, $373,464 and $1,510,397,
respectively. Of such totals, the amount retained each year by the
Distributor, after reallowance to other dealers, was $20,542, $19,504 and
$68,274, respectively.
PURCHASE AND REDEMPTION OF SHARES
Net Asset Value. The net asset value is computed as of the close of the New
York Stock Exchange ("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 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, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Computation is made by valuing (a)
securities listed or traded on a national securities exchange at the last sale
price or, if there has been no sale that day, at the last bid price, (b)
over-the-counter securities on the basis of the last bid price, and (c)
securities for which there are no readily available market quotations and all
other assets at fair value in such manner as determined in good faith by the
Fund's Board of Directors.
Sales Charges. The maximum sales charge is 6.5%, as a percentage of the
offering price, but lower sales charges apply to larger purchases. A portion
of the sales charge is allocated to dealers selling Fund shares in amounts
ranging from 80% to 94%, 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 may be deemed to be underwriters for
purposes of the Securities Act of 1933. Discounts are alike to all dealers.
19
<PAGE> 38
Sales at Net Asset Value. Full-time employees of the Adviser may purchase Fund
shares at net asset value via payroll deduction, provided the minimum initial
investment is $250. Each subsequent investment must be at least $50.
Letter of Intent. To be eligible, the investor must sign at the time of
initial purchase, or within 30 days, a letter of intent ("LOI") covering
investments to be made within a period of 13 months ("Period") from such
initial purchase. The investor thereby becomes eligible for a reduced sales
charge based on the total amount of the specified intended investment ("LOI
Goal"), provided such amount is not less than $10,000. A minimum initial
purchase of $1,500 and minimum subsequent purchases of $100 each are required.
Fund shares may also be purchased to fulfill a letter of intent entered into
with respect to shares of the other FPA Funds. The account information form,
which should be used to establish an LOI, is available from 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 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 reduced sales charge applicable. In
addition, during the Period, the shareholder may 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 in the premises to surrender for
redemption any or all escrowed Fund shares. If the redemption proceeds are
inadequate, the shareholder is liable to the Distributor for the difference.
The Shareholder Service Agent delivers to, or as directed by, the shareholder
all Fund shares remaining after such redemption, together with any excess cash
proceeds.
20
<PAGE> 39
Any income dividends and capital gains distributions on the escrowed Fund
shares are paid to, or as directed by, the shareholder.
FPA Exchange Privilege. The procedures for exchanging shares between FPA Funds
are set forth under "Purchase of Shares - FPA Exchange Privilege" in the Fund's
Prospectus. If the account registration information for the two FPA Fund
accounts involved in the exchange are different in any respect, the exchange
instructions must be in writing and must contain a signature guarantee as
described under "Redemption of Shares" in the Fund's Prospectus.
By use of the exchange privilege, the investor authorizes the Shareholder
Service Agent ("Agent") to act on telephonic, telegraphic or written exchange
instructions from any person representing himself to be the investor or the
agent of the investor and believed by the Agent to be genuine. The Agent's
records of such instructions are binding.
For purposes of determining the sales charge rate previously paid, all sales
charges paid on the exchanged security and on any security previously exchanged
for such security or for any of its predecessors shall be included. If the
exchanged security was acquired through reinvestment, that security may be
exchanged without a sales charge. If a shareholder exchanges less than all of
his securities, the security requiring no or the lowest incremental sales
charge is deemed exchanged first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced, are processed on the date of receipt
by the Shareholder Service Agent. "Processing" a request means that shares in
the Fund from which the shareholder is withdrawing an investment will be
redeemed at the net asset value per share next determined after receipt.
Shares of the new Fund into which the shareholder is investing will also
normally be purchased at the net asset value per share, plus any applicable
sales charge, next determined after receipt by the Shareholder Service Agent.
Exchange requests received on a business day after the time shares of the funds
involved in the request are priced, are processed on the next business day in
the manner described above.
Redemption of Shares. Redemptions are not made on days during which the NYSE
is closed, including those holidays listed under "Purchase and Redemption of
Shares - Net Asset Value." The right of redemption may be suspended and the
payment therefore may be postponed for more than seven days during any period
when (a) the NYSE is closed for other than customary weekends or holidays; (b)
trading on the NYSE is restricted; (c) an emergency exists as a result of which
disposal by the Fund of securities it owns is not reasonably practicable or it
is not reasonably practical for the Fund to fairly determine the value of its
net assets; or (d) the Securities and Exchange Commission, by order, so
permits.
Telephone Redemption. Redemptions may be made by telephone once the
shareholder has properly completed and returned to the Shareholder Service
Agent the optional shareholder services form, including the designation of a
bank account to which the redemption payment is to be sent ("Designated Bank").
The proceeds will not be mailed or wired to other than the Designated Bank.
New investors who wish to establish the telephone redemption privilege must
complete the appropriate section on the optional shareholder services form.
Existing shareholders who wish to establish the telephone redemption privilege
or change the Designated Bank should either enter the
21
<PAGE> 40
new information on an optional shareholder services form, marking it for
"change of information" purposes, or send a letter identifying the Fund account
and specifying the exact information to be changed. The letter must be signed
exactly as the shareholder's name(s) appear on the account. All signatures
require a guarantee as described under "Redemption of Shares" in the Fund's
Prospectus. The optional shareholder services form is available from
authorized securities dealers or the Distributor.
Shareholders who want to use a savings and loan ("S&L") as their Designated
Bank are advised that if the S&L is not a participant in the Federal Reserve
System, redemption proceeds must be wired through a commercial bank which is a
correspondent of the S&L. As this may delay receipt by the shareholder's
account, it is suggested that shareholders who wish to use an S&L discuss wire
procedures with their S&L and submit any special wire transfer information with
the telephone redemption authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to such Designated Bank.
The shareholder may cancel the telephone redemption authorization upon written
notice. If the shareholder has authorized telephone redemptions, neither the
Fund nor the Shareholder Service Agent is responsible for any unauthorized
telephone redemptions. If the Fund shares to be redeemed by telephone
(technically a repurchase by agreement between the Fund and the shareholder)
were recently purchased by check, the Shareholder Service Agent can delay
transmitting the proceeds until the purchasing check has cleared.
TAX SHELTERED RETIREMENT PLANS
Through the Distributor, prototype retirement plans are available for purchase
of Fund shares. These include plans for self-employed individuals and plans
for individuals buying shares under an Individual Retirement Account. The
investor should be aware that a penalty tax applies, in general, to
distributions made before age 59-1/2, excess contributions and failure to
commence distribution of the account at age 70-1/2. Borrowing from or against
the account may also result in plan disqualification. Distributions from these
retirement plans generally are taxable as ordinary income when received.
State Street Bank and Trust Company ("Bank") presently acts as custodian for
retirement plans and imposes fees for administering them. Purchases of Fund
shares for a retirement plan must be made by direct remittance to the Bank.
When contributions for any tax-qualified plan are invested in Fund shares, all
dividends and capital gains distributions paid on those Fund shares are
retained in such plan and automatically reinvested in additional Fund shares at
net asset value. All earnings accumulate tax-free until distribution.
The investor should consult his or her own tax adviser concerning the tax
ramifications of establishment of and distributions from a retirement plan.
22
<PAGE> 41
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 12 months ended October 31 of such year. The Fund intends to distribute
sufficient amounts to avoid liability for this excise tax.
If shares of the Fund are sold or exchanged within 90 days of acquisition, and
shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.
Under federal tax law, any loss a shareholder realizes on redemption of Fund
shares held for less than six months is treated as a long-term capital loss to
the extent of any long-term capital gain distribution which was paid on such
Fund shares.
Prior to purchasing Fund shares, the impact of dividends or capital gains
distributions should be carefully considered. Any such payments made to a
shareholder shortly after purchasing Fund shares reduce the net asset value of
such Fund shares to that extent and unnecessarily increase sales charges. All
or a portion of such dividends or distributions, although in effect a return of
capital, is subject to taxes, possibly at ordinary income tax rates.
Dividends and distributions declared payable to shareholders of record after
September 30 of any year and paid before February 1 of the following year are
considered taxable income to shareholders on the record date even though paid
in the next year. To the extent determined each year, a portion of the
dividends paid to shareholders from the Fund's net investment income qualifies
for the 70% dividends received deduction for corporations.
Some shareholders may be subject to 31% withholding on reportable dividends,
capital gains distributions and redemption payments ("backup withholding").
Generally, shareholders subject to backup withholding are those for whom a
taxpayer identification number is not on file with the Fund or who, to the
Fund's knowledge, furnished an incorrect number. When establishing an account,
23
<PAGE> 42
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.
FINANCIAL STATEMENTS
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND OFFERING PRICE PER SHARE
- March 31, 1995
<TABLE>
<S> <C>
Net asset value and redemption price per share
(net assets divided by shares outstanding).................. $22.40
Offering price per share
(100/93.5 of per share net asset value)..................... $23.96
</TABLE>
The offering price is reduced on purchases of $10,000 or more; see "Purchase
and Redemption of Shares - Sales Charge" herein and "Purchase of Shares - Table
of Sales Charges" in the Prospectus.
24
<PAGE> 43
PORTFOLIO OF INVESTMENTS
March 31, 1995
<TABLE>
<CAPTION>
COMMON STOCKS Shares Cost Value
----------------------------------------------------------------- ------- ----------- -----------
<S> <C> <C> <C>
TECHNOLOGY -- 24.3%
Arrow Electronics, Inc.* . . . . . . . . . . . . . . . . . . . . 227,500 $ 4,615,708 $ 9,583,438
Coherent, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 436,750 1,312,500
Keithley Instruments, Inc. . . . . . . . . . . . . . . . . . . . 100,000 1,227,092 1,287,500
Komag, Incorporated* . . . . . . . . . . . . . . . . . . . . . . 360,000 5,726,625 11,340,000
Marshall Industries* . . . . . . . . . . . . . . . . . . . . . . 290,000 3,022,230 7,540,000
Micropolis Corporation* . . . . . . . . . . . . . . . . . . . . . 320,000 2,225,812 1,560,000
Photronics, Inc.* . . . . . . . . . . . . . . . . . . . . . . . . 270,000 1,800,145 6,007,500
Seagate Technology, Inc.* . . . . . . . . . . . . . . . . . . . . 400,000 4,266,075 11,150,000
Storage Technology Corporation* . . . . . . . . . . . . . . . . . 400,000 8,299,239 7,650,000
----------- -----------
$31,619,676 $57,430,938
----------- -----------
FINANCIAL -- 24.1%
Bay View Capital Corporation . . . . . . . . . . . . . . . . . . 160,000 $ 2,585,527 $ 3,600,000
Comdisco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 305,500 4,301,574 8,172,125
Countrywide Credit Industries, Inc. . . . . . . . . . . . . . . . 360,000 5,585,361 6,255,000
Green Tree Financial Corporation . . . . . . . . . . . . . . . . 600,000 975,070 24,600,000
Quick & Reilly Group, Inc., The . . . . . . . . . . . . . . . . . 290,000 3,929,773 10,295,000
UnionFed Financial Corporation* . . . . . . . . . . . . . . . . . 731,300 4,604,124 205,678
UnionFed Financial Corporation (Warrants)* . . . . . . . . . . . 314,286 122,210 --
Westcorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364,073 2,595,173 4,004,803
----------- -----------
$24,698,812 $57,132,606
----------- -----------
CONSUMER DURABLES -- 8.0%
Coachmen Industries, Inc. . . . . . . . . . . . . . . . . . . . . 288,900 $ 2,537,449 $ 5,019,637
Fleetwood Enterprises, Inc. . . . . . . . . . . . . . . . . . . . 290,000 4,035,995 6,851,250
Flexsteel Industries, Inc. . . . . . . . . . . . . . . . . . . . 160,000 2,008,125 1,760,000
Thor Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . 270,000 3,048,386 5,332,500
----------- -----------
$11,629,955 $18,963,387
----------- -----------
CONSUMER NON-DURABLES -- 6.7%
NIKE, Inc. (Class B) . . . . . . . . . . . . . . . . . . . . . . 120,000 $ 2,545,110 $ 8,955,000
Rawlings Sporting Goods Company, Inc.* . . . . . . . . . . . . . 222,000 2,549,281 2,414,250
Reebok International Ltd. . . . . . . . . . . . . . . . . . . . . 125,000 4,323,699 4,453,125
----------- -----------
$ 9,418,090 $15,822,375
----------- -----------
</TABLE>
25
<PAGE> 44
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
COMMON STOCKS--CONTINUED Shares Cost Value
----------------------------------------------------------------- ------- ----------- ------------
<S> <C> <C> <C>
RETAILING -- 5.3%
Claire's Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . 250,000 $ 2,946,839 $ 3,281,250
Good Guys, Inc., The* . . . . . . . . . . . . . . . . . . . . . . 250,000 2,483,575 2,875,000
Ross Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 585,000 7,237,688 6,361,875
------------ ------------
$ 12,668,102 $ 12,518,125
------------ ------------
BASIC MATERIALS -- 4.9%
International Aluminum Corporation . . . . . . . . . . . . . . . 160,000 $ 3,105,406 $ 5,320,000
Rouge Steel Company (Class A) . . . . . . . . . . . . . . . . . . 260,000 5,671,480 6,370,000
------------ ------------
$ 8,776,886 $ 11,690,000
------------ ------------
HEALTH CARE -- 4.4%
PLC Systems Inc.* . . . . . . . . . . . . . . . . . . . . . . . . 25,000 $ 99,375 $ 143,750
Puritan-Bennett Corporation . . . . . . . . . . . . . . . . . . . 438,000 4,429,827 10,183,500
------------ ------------
$ 4,529,202 $ 10,327,250
------------ ------------
INDUSTRIAL SERVICES -- 2.2%
Angelica Corporation . . . . . . . . . . . . . . . . . . . . . . 190,000 $ 4,444,809 $ 5,225,000
------------ ------------
DEFENSE -- 1.6%
Diagnostic/Retrieval Systems, Inc. (Class A)*+ . . . . . . . . . 310,000 $ 1,646,478 $ 1,627,500
Diagnostic/Retrieval Systems, Inc. (Class B)*+ . . . . . . . . . 200,000 861,240 1,100,000
United Industrial Corporation . . . . . . . . . . . . . . . . . . 207,500 2,853,722 1,115,313
------------ ------------
$ 5,361,440 $ 3,842,813
------------ ------------
INSURANCE -- 0.8%
Foremost Corporation of America . . . . . . . . . . . . . . . . . 50,000 $ 1,672,500 $ 1,825,000
------------ ------------
PRINTING AND PUBLISHING -- 0.5%
Devon Group, Inc.* . . . . . . . . . . . . . . . . . . . . . . . 40,000 $ 557,125 $ 1,160,000
------------ ------------
TOTAL COMMON STOCKS -- 82.8% . . . . . . . . . . . . . . . . . . $115,376,597 $195,937,494
------------ ------------
</TABLE>
26
<PAGE> 45
PORTFOLIO OF INVESTMENTS
Continued
<TABLE>
<CAPTION>
Shares or
Principal
Amount Cost Value
----------- ------------ ------------
<S> <C> <C> <C>
PREFERRED STOCK -- 0.6%
Craig Corporation (Class A)* . . . . . . . . . . . . . . . . . 160,000 $ 1,906,272 $ 1,440,000
------------ ------------
NON-CONVERTIBLE BONDS -- 3.0%
Federal Home Loan Mortgage Corporation
(PAC Interest Only-CMO) --7% 2020 . . . . . . . . . . . . . . $ 3,755,714 $ 1,128,774 $ 1,208,870
Federal National Mortgage Association,
(PAC Interest Only-REMIC) --6% 2013 . . . . . . . . . . . . . 6,871,104 836,231 837,416
U.S. Treasury Notes --4 1/4% 1996 . . . . . . . . . . . . . . . 5,000,000 4,901,719 4,876,562
------------ ------------
$ 6,866,724 $ 6,922,848
------------ ------------
SHORT-TERM INVESTMENT -- 3.1%
U.S. Treasury Bill -- 6.765% 2/8/96 . . . . . . . . . . . . . . $ 7,800,000 $ 7,369,860 $ 7,395,726
------------ ------------
TOTAL INVESTMENT SECURITIES -- 89.5% . . . . . . . . . . . . . $131,519,453 $211,696,068
============ ------------
OTHER SHORT-TERM INVESTMENTS -- 9.6%
Short-term Corporate Notes:
AT&T Capital Corporation -- 5.78% 4/5/95 . . . . . . . . . . $ 6,000,000 $ 5,996,147
Philips Petroleum -- 6.15% 4/7/95 . . . . . . . . . . . . . . 11,500,000 11,488,213
Unilever Capital Corp. -- 5.93% 5/1/95 . . . . . . . . . . . 3,300,000 3,283,692
State Street Bank Repurchase Agreement -- 5.5% 4/3/95
(Collateralized by U.S. Treasury Notes -- 8.875% 2017,
market value $2,033,383) . . . . . . . . . . . . . . . . . . 2,030,000 2,030,310
------------
$ 22,798,362
------------
TOTAL INVESTMENTS -- 99.1% . . . . . . . . . . . . . . . . . . . $234,494,430
Other assets less liabilities -- 0.9% . . . . . . . . . . . . . . 2,161,562
------------
TOTAL NET ASSETS -- 100% . . . . . . . . . . . . . . . . . . . . $236,655,992
============
</TABLE>
* Non-income producing securities
+ Affiliate as defined in the Investment Company Act of 1940 by reason of
ownership of 5% or more of its outstanding voting securities.
See notes to financial statements.
27
<PAGE> 46
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $131,519,453) . . . . . . . . . . . . . . . . . . $211,696,068
Short-term investments -- at cost plus interest earned
(maturities 60 days or less) . . . . . . . . . . . . . . . . . . . 22,798,362 $234,494,430
------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,685
Receivable for:
Dividends and accrued interest . . . . . . . . . . . . . . . . . . . $ 489,129
Investment securities sold . . . . . . . . . . . . . . . . . . . . . 1,400,000
Capital Stock sold . . . . . . . . . . . . . . . . . . . . . . . . . 2,669,047 4,558,176
------------ ------------
$239,056,291
LIABILITIES
Payable for:
Investment securities purchased . . . . . . . . . . . . . . . . . . . $ 772,725
Advisory fees and financial services . . . . . . . . . . . . . . . . 145,585
Accrued expenses and other liabilities . . . . . . . . . . . . . . . 63,993
Capital Stock repurchased . . . . . . . . . . . . . . . . . . . . . . 1,287,996
Call options written -- at value (premiums received $69,086) . . . . 130,000 2,400,299
------------ ------------
NET ASSETS -- equivalent to $22.40 per share on 10,562,907
shares of Capital Stock outstanding . . . . . . . . . . . . . . . . . . $236,655,992
============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 10,562,907 shares . . . . . . . . . . $ 105,629
Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . 149,922,433
Undistributed net realized gain on investments . . . . . . . . . . . . 6,144,803
Undistributed net investment income . . . . . . . . . . . . . . . . . . 367,426
Unrealized appreciation of investments . . . . . . . . . . . . . . . . 80,115,701
------------
Net assets at March 31, 1995 . . . . . . . . . . . . . . . . . . . . . $236,655,992
============
</TABLE>
See notes to financial statements.
28
<PAGE> 47
STATEMENT OF OPERATIONS
For the Year Ended March 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,822,469
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 832,841
-----------
$ 2,655,310
EXPENSES
Advisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,231,401
Financial services . . . . . . . . . . . . . . . . . . . . . . . . . . 181,754
Transfer agent fees and expenses . . . . . . . . . . . . . . . . . . . 130,971
Registration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,941
Custodian fees and expenses . . . . . . . . . . . . . . . . . . . . . . 29,815
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,850
Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,580
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . 20,589
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,529
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,351
Taxes, other than federal income tax . . . . . . . . . . . . . . . . . 15,057
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . 12,244
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,796 1,757,878
----------- -----------
Net investment income . . . . . . . . . . . . . . . . . . . . . $ 897,432
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments:
Proceeds from sales of investment securities (excluding
short-term investments with maturities of 60 days or less) . . . . . $23,067,903
Cost of investment securities sold . . . . . . . . . . . . . . . . . . 14,920,511
-----------
Net realized gain on investments . . . . . . . . . . . . . . . . . . $ 8,147,392
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year . . . . . . . . . . . . . $53,721,776
Unrealized appreciation at end of year . . . . . . . . . . . . . . . . 80,115,701
-----------
Increase in unrealized appreciation of investments . . . . . . . . . 26,393,925
-----------
Net realized and unrealized gain on investments . . . . . . . . $34,541,317
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,438,749
===========
</TABLE>
See notes to financial statements.
29
<PAGE> 48
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended March 31,
---------------------------------------------------------
1995 1994
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income . . . . . . . . . . . . $ 897,432 $ 303,019
Net realized gain on investments . . . . . . 8,147,392 10,494,350
Increase in unrealized appreciation
of investments . . . . . . . . . . . . . . 26,393,925 6,691,694
------------ ------------
Increase in net assets resulting
from operations . . . . . . . . . . . . . . . $ 35,438,749 $ 17,489,063
Distributions to shareholders from:
Net investment income . . . . . . . . . . . . $ (732,029) $ (218,382)
Net realized capital gains . . . . . . . . . (4,658,052) (5,390,081) (15,256,468) (15,474,850)
------------ ------------
Capital Stock transactions:
Proceeds from Capital Stock sold . . . . . . $ 55,311,219 $ 29,050,766
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions . . . . . . 4,873,246 13,977,369
Cost of Capital Stock repurchased . . . . . . (19,260,877) 40,923,588 (13,527,575) 29,500,560
------------ ------------ ------------ ------------
Total increase in net assets . . . . . . . . . $ 70,972,256 $ 31,514,773
NET ASSETS
Beginning of year, including
undistributed net investment income
of $202,023 and $117,386 . . . . . . . . . . 165,683,736 134,168,963
------------ ------------
End of year, including undistributed
net investment income of $367,426
and $202,023 . . . . . . . . . . . . . . . . $236,655,992 $165,683,736
============ ============
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold . . . . . . . . . 2,690,430 1,483,225
Shares issued to shareholders upon
reinvestment of dividends and
distributions . . . . . . . . . . . . . . . . 252,685 757,857
Shares of Capital Stock repurchased . . . . . . (963,643) (695,170)
------------ ------------
Increase in Capital Stock outstanding . . . . . 1,979,472 1,545,912
============ ============
</TABLE>
See notes to financial statements.
30
<PAGE> 49
NOTES TO FINANCIAL STATEMENTS
March 31, 1995
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940, as a
diversified, open-end investment company. 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 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.
NOTE 2 -- PURCHASES OF INVESTMENT SECURITIES
Cost of purchases of investment securities (excluding short-term
investments with maturities of 60 days or less) aggregated $37,069,930 for the
year ended March 31, 1995. Realized gains or losses are based on the
specific-certificate identification method. Cost of securities held at March
31, 1995 was the same for federal income tax and financial reporting purposes.
NOTE 3 -- ADVISORY FEES AND OTHER AFFILIATED TRANSACTIONS
Pursuant to an Investment Advisory Agreement, advisory fees were paid by
the Fund to First Pacific Advisors, Inc. (the "Adviser"). Under the terms of
this Agreement, the Fund pays the Adviser a monthly fee calculated at the
annual rate of 0.75% of the first $50 million of the Fund's average daily net
assets and 0.65% of the average daily net assets in excess of $50 million. In
addition, the Fund reimburses the Adviser monthly for the costs incurred by the
Adviser in providing financial services to the Fund, providing, however, that
this reimbursement shall not exceed 0.1% of the average daily net assets for
any fiscal year. The Agreement provides that the Adviser will 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 March 31, 1995, the Fund paid aggregate fees of $20,000
to all Directors who are not affiliated persons of the Adviser. Legal fees
were for services rendered by O'Melveny & Myers, counsel for the Fund. A
Director of the Fund is of counsel to, and a retired partner of, that firm.
NOTE 4 -- OUTSTANDING CALL OPTIONS
Outstanding covered call options written by the Company at March 31, 1995
were as follows:
<TABLE>
<CAPTION>
Shares
Subject Premiums Market
to Call Security Received Value
------- ------------- -------- --------
<S> <C> <C> <C>
20,000 Coherent Inc. $69,086 $130,000
May @ 20
</TABLE>
At March 31, 1995, the shares subject to call were held in escrow for such
options.
31
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS
Continued
NOTE 5 -- DISTRIBUTOR
For the year ended March 31, 1995, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $68,274 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.
NOTE 6 -- SALES OF FUND SHARES
On May 18, 1995, the Fund announced that it will discontinue sales of its
shares to new investors, effective the close of business on the date net assets
reach $280 million. Subsequently, shares of the Fund will be offered for sale
only to existing shareholders and to directors, officers, and employees of the
Fund, the Adviser, and affiliated companies. The policy to limit sales to new
investors reflects management's belief that unrestrained growth in the Fund's
net assets might impair investment flexibility. The Fund may resume at any
time the sale of its shares to new investors if, in the Board of Directors'
opinion, doing so would be in the best interests of the Fund and its
shareholders.
32
<PAGE> 51
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF FPA CAPITAL FUND, INC.
We have audited the statement of assets and liabilities of FPA Capital Fund,
Inc., including the portfolio of investments, as of March 31, 1995, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the financial highlights on page 4 of the Prospectus for each of the ten years
in the period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 31, 1995, 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
Capital Fund, Inc. at March 31, 1995, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights on page 4 of the Prospectus for
each of the ten years in the period then ended in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
April 21, 1995
33
