<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1999
SECURITIES ACT FILE NO. 2-28157
INVESTMENT COMPANY ACT NO. 811-01596
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 47 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 25 /X/
----------------------
FPA CAPITAL FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
11400 WEST OLYMPIC BOULEVARD, SUITE 1200
LOS ANGELES, CALIFORNIA 90064
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(310)473-0225
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------------
J. RICHARD ATWOOD, TREASURER
FPA CAPITAL FUND, INC.
11400 WEST OLYMPIC BOULEVARD, SUITE 1200
LOS ANGELES, CALIFORNIA 90064
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------------
COPY TO:
LAWRENCE J. SHEEHAN, ESQ.
O'MELVENY & MYERS LLP
1999 AVENUE OF THE STARS
LOS ANGELES, CALIFORNIA 90067
----------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER REGISTRATION STATEMENT BECOMES EFFECTIVE.
It is proposed that this filing will become effective (check
appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/X/ 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED: COMMON STOCK, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
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<PAGE>
FPA CAPITAL FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A PROSPECTUS CAPTION
- --------- ------------------
<S> <C>
PART A
1. Front and Back Cover Pages.................. Front and Back Cover Pages
2. Risk/Return Summary......................... Risk/Return Summary;
Investment Results
3. Risk/Return Summary: Fee Table.............. Fees and Expenses of the Fund
4. Investment Objectives, Principal Investment
Strategies and Related Risks................ Investment Objectives,
Principal Investment Strategies
and Related Risks
5. Management's Discussion of Fund Performance. Inapplicable
6. Management, Organization and Capital
Structure................................... Management and Organization
7. Shareholder Information..................... Purchase, Pricing and Sale of
Shares; Dividends,
Distributions and Taxes
8. Distribution Arrangements................... Purchase, Pricing and Sale of
Shares
9. Financial Highlights Information............ Financial Highlights
<PAGE>
<CAPTION>
STATEMENT OF ADDITIONAL
PART B INFORMATION CAPTION
- ------ -----------------------
<S> <C>
10. Cover Page and Table of Contents............ Cover Page and Table of
Contents
11. Fund History................................ Fund Organization
12. Description of the Fund and Its Investments
and Risks................................... Investment Objectives and
Policies; Description of
Certain Securities and
Investment Techniques;
Investment Restrictions;
Portfolio Turnover
13. Management of the Fund...................... Directors and Officers of the
Fund
14. Control Persons and Principal
Holders of Securities....................... Control Persons and Five
Percent Shareholders
15. Investment Advisory and Other Services...... Management
16. Brokerage Allocation and Other Practices.... Portfolio Transactions and
Brokerage
17. Capital Stock and Other Securities.......... Capital Stock
18. Purchase, Redemption, and Pricing of Shares. Purchase and Redemption of
Shares
19. Taxation of the Fund........................ Tax Sheltered Retirement Plans;
Dividends, Distributions and
Taxes
20. Underwriters................................ Distributor
21. Calculation of Performance Data............. Prior Performance Information
22. Financial Statements........................ Financial Statements
</TABLE>
<PAGE>
- - FPA Capital Fund, Inc. -
- - -
PROSPECTUS
FPA Capital Fund, Inc.
seeks long-term capital
growth. Current income is
a factor, but a secondary
consideration. The Fund's
investment adviser, First
Pacific Advisors, Inc.,
generally invests the
Fund's assets in common
stocks and other
securities which it
believes have the
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.
THE SECURITIES AND
EXCHANGE COMMISSION HAS
NOT APPROVED OR
DISAPPROVED THESE
SECURITIES OR PASSED UPON
THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE
CONTRARY IS A CRIMINAL
OFFENSE.
AUGUST 2, 1999
[LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, CA 90064
- - -
- - -
<PAGE>
FPA CAPITAL FUND, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
(310) 473-0225
<TABLE>
<S> <C>
INVESTMENT First Pacific Advisors, Inc.
ADVISER: 11400 W. Olympic Boulevard, Suite 1200
Los Angeles, California 90064
DISTRIBUTOR: FPA Fund Distributors, Inc.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
(310) 473-0225
(800) 982-4372 except
Alaska, Hawaii and Puerto Rico
SHAREHOLDER Boston Financial Data
SERVICE AGENT: Services, Inc.
P.O. Box 8115
Boston, Massachusetts 02266-8115
(617) 483-5000
(800) 638-3060 except
Alaska, Hawaii, Massachusetts 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, DISTRIBUTIONS, REDEMPTIONS AND
SHAREHOLDER SERVICE SHOULD BE DIRECTED TO THE SHAREHOLDER SERVICE AGENT.
INQUIRIES CONCERNING SALES SHOULD BE DIRECTED TO FPA FUND DISTRIBUTORS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Risk/Return Summary....................................................... 3
Investment Results........................................................ 5
Fees and Expenses of the Fund............................................. 6
Investment Objectives, Principal Investment Strategies, and Related
Risks................................................................... 7
<CAPTION>
PAGE
<S> <C>
Management and Organization............................................... 8
Purchase, Pricing and Sale of Shares...................................... 9
Exchange of Shares and Shareholder Services............................... 13
Dividends, Distributions and Taxes........................................ 15
Financial Highlights...................................................... 17
</TABLE>
2
<PAGE>
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVES. The Fund's primary investment objective is long-term
growth of capital. Current income is a secondary consideration.
WHO MAY WANT TO INVEST IN THE FUND? You can invest in the Fund only if you are
currently a shareholder. Shares of the Fund are presently offered for sale only
to existing shareholders and to directors, officers and employees of the Fund,
the Adviser, and affiliated companies. The Fund may be appropriate for
investors:
- Seeking long-term growth of capital
- Willing to own shares over the course of a market cycle or longer
PRINCIPAL INVESTMENT STRATEGIES. The Adviser purchases common stocks it
believes undervalued when considering various valuation criteria. The Adviser
deems the following attributes of companies important in its stock selection
process:
- Current as well as future levels of profitability
- Book value
- Replacement cost of assets
- Free cash flow
PRINCIPAL INVESTMENTS. The Fund invests primarily in the common stocks of U.S.
companies in a variety of industries and market segments. The Fund can also
invest in both government and corporate debt securities, preferred stocks and
convertible securities. Up to 15% of the Fund's assets may be invested in
lower-rated or comparable unrated debt securities. No more than 10% of the
Fund's assets will be invested in the securities of foreign issuers.
PRINCIPAL INVESTMENT RISKS. Even though the Adviser attempts to not overpay for
earnings of even the best companies, you can lose money by investing in the Fund
for many reasons, including but not limited to:
- The U.S. or foreign stock market goes down.
- The market favors growth stocks over value stocks or favors companies at a
different capitalization level.
- An adverse event, such as an unfavorable earnings report, depresses the
value of a particular stock.
- Prices of the Fund's foreign securities go down because of unfavorable
changes in foreign currency exchange rates, foreign government actions or
political instability.
- The Adviser's judgments about the attractiveness, value and potential
appreciation of particular stocks prove to be incorrect.
The Adviser's emphasis on a value-oriented investment approach generally results
in the Fund's portfolio being invested primarily in medium or smaller sized
companies. In light of the greater volatility and lower trading volume 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.
3
<PAGE>
Changes in market prices and the assets of the Fund may from time to time cause
more of the Fund's assets to be invested in securities of a single company,
which increases the volatility of the Fund.
If interest rates rise, the market price of fixed-income securities held by the
Fund will fall, and investments in fixed-income securities with longer
maturities generally produce higher yields but are subject to greater market
fluctuation.
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 principal and interest.
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Company or any other government agency, entity
or person.
4
<PAGE>
INVESTMENT RESULTS
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance for the last ten calendar
years. The table shows how the Fund's average annual returns for one calendar
year, five calendar years and ten calendar years compared with those of a
comparable securities market index. Keep in mind that the Fund's past
performance does not indicate how it will perform in the future.
Here are the Fund's results calculated without a sales
charge on a CALENDAR YEAR basis. (If a sales charge were
included, results would be lower.)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
1989 25.25%
<S> <C>
1990 (13.80)%
1991 64.51%
1992 21.57%
1993 16.74%
1994 10.37%
1995 38.39%
1996 37.76%
1997 17.70%
1998 (0.42)%
</TABLE>
The year to date return for the Fund as of March 31, 1999 was (2.26)%.
The Fund's highest/lowest QUARTERLY results during this time period were:
<TABLE>
<S> <C> <C>
HIGHEST 36.98% (Quarter ended 03/31/91)
LOWEST (31.24)% (Quarter ended 09/30/90)
</TABLE>
For the periods ended December 31, 1998:
<TABLE>
<CAPTION>
FUND WITH LIPPER
MAXIMUM GROWTH
SALES CHARGE RUSSELL FUND
AVERAGE ANNUAL TOTAL RETURN DEDUCTED 2000 AVERAGE
- ----------------------------------------------------------------------- -------------- ----------- ---------
<S> <C> <C> <C>
One Year............................................................... (6.89)% (2.55)% 22.86%
Five Years............................................................. 18.19 % 11.86% 19.03%
Ten Years.............................................................. 19.25 % 12.92% 17.16%
</TABLE>
5
<PAGE>
FEES AND EXPENSES OF THE FUND
THE FOLLOWING DESCRIBES THE FEES AND EXPENSES THAT YOU MIGHT PAY IF YOU BUY AND
HOLD SHARES OF THE FUND.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
(fees paid directly from your investment)
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
(expenses that are deducted from Fund assets)
Management Fees........................................................... 0.67%
Distribution (12b-1) Fees................................................. None
Other Expenses (including financial services)............................. 0.19%
---------
Total Annual Fund Operating Expenses...................................... 0.86%
</TABLE>
- ------------
* An account management fee is charged by unaffiliated investment advisers or
broker-dealers to certain accounts entitled to purchase shares without sales
charge.
**Redemptions by wire are subject to a $3.50 charge per wire.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<S> <C>
One year.............. $ 732
Three years........... $ 907
Five years............ $ 1,096
Ten years............. $ 1,642
</TABLE>
6
<PAGE>
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND RELATED RISKS
INVESTMENT OBJECTIVES. The Fund's primary investment objective is long-term
growth of capital. Providing you current income is a secondary consideration.
The Fund seeks to make your investment grow over the long-term by investing
principally in common stocks the Adviser deems to possess above-average ability
to increase in market value.
PRINCIPAL INVESTMENT STRATEGIES. The Fund's Adviser favors investments in
common stocks it believes undervalued when considering various valuation
criteria. The Adviser deems the following important in its stock selection
process: current as well as future levels of profitability, book value,
replacement cost of assets and free cash flow. The Adviser attempts to lessen
price risk by not overpaying for earnings of even the best companies.
Furthermore, investments tend to be 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. When attractive equity
securities meeting these criteria are scarce, holdings of short-term and
long-term debt securities may be increased.
PRINCIPAL RISKS. Your investment in the Fund is subject to a number of risks
related to principal investment strategies, including:
- The Adviser's emphasis on a value-oriented investment approach generally
results in the Fund's portfolio being invested primarily in medium or
smaller sized companies. Smaller companies typically are subject to a
greater degree of change in earnings and business prospects than larger,
more established companies. In addition, securities of smaller companies
are traded in lower volumes than those issued by larger companies and may
be more volatile than those of larger companies. In light of these
characteristics of smaller companies and their securities, the Fund may be
subject to greater risk than that assumed when investing in the equity
securities of larger companies.
- the Adviser's emphasis on a value-oriented investment approach could
result in a portfolio that does not reflect the national economy, differs
significantly from broad market indices and consists of companies
considered by the average investor to be unpopular or unfamiliar;
- like other investment companies, financial and business organizations
around the world, the Fund could be adversely affected if the computer
systems used by the Adviser and its other major service providers do not
properly process and calculate date-related information and data from and
after January 1, 2000. This is commonly known as the "Year 2000 Issue."
The Adviser has assessed its computer systems and the systems compliance
issues of the Fund's major service providers. The Adviser is taking steps
that it believes are reasonably designed to address the Year 2000 Issue
with respect to the computer systems it uses and has obtained satisfactory
assurances that comparable steps are being taken by the Fund's major
service providers. At this time, however, there can be no assurance that
these steps will be sufficient to address all Year 2000 Issues. The
inability of the Adviser or the Fund's other third party providers to
timely complete all necessary procedures to address the Year 2000 Issue
could have a material adverse effect on the Fund's operations. The Adviser
will continue to monitor the status of, and the Fund's exposure to, this
issue. For the year ended March 31, 1999, the Fund incurred no significant
Year 2000 related expenses and it does not expect to incur significant
Year 2000 expenses in the future. The Adviser
7
<PAGE>
is in the process of establishing a contingency plan to address recovery
from unavoided or unavoidable Year 2000 problems, if any, affecting the
Fund.
- the Year 2000 Issue may result in material adverse effects to issuers of
the securities the Fund holds, resulting in decreases in the prices of
equity securities held by the Fund;
- 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 market price of fixed-income securities held by the Fund will rise as
rates fall. Investments in fixed-income securities with longer maturities
generally produce higher yields but are subject to greater market
fluctuation;
- 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 principal and
interest. 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;
- Fund shares could decline in value in response to certain events, such as
changes in markets or economies;
- the prices of equity securities held by the Fund can be affected by events
specifically involving the issuers of these securities;
- the price of debt securities held by the Fund can be affected by changing
interest rates, effective maturities and credit ratings; and
- investing outside the U.S. can also involve additional risks, such as
currency fluctuations or political, social and economic instability.
- For temporary defensive purposes or to meet liquidity needs, the Fund may
take larger than usual positions in cash or high-quality short-term debt
securities (U.S. government or government agency securities, obligations
of domestic banks, prime commercial paper notes and repurchase
agreements). These positions could detract from the achievement of the
Fund's objectives over the short-term.
8
<PAGE>
MANAGEMENT AND ORGANIZATION
DISCONTINUANCE OF SALES TO NEW INVESTORS
The Fund has 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.
INVESTMENT ADVISER
First Pacific Advisors, Inc. is the Fund's investment adviser. The Adviser,
together with its predecessors, has been in the investment advisory business
since 1954 and has served as the Fund's investment adviser since July 11, 1984.
The Adviser manages assets of approximately $3.2 billion for seven investment
companies, including one closed-end investment company, and 26 institutional
accounts. First Pacific Advisors, Inc. is headquartered at 11400 West Olympic
Boulevard, Suite 1200, Los Angeles, California 90064. The Adviser selects
investments for the Fund, provides administrative services and manages the
Fund's business. The total management fee paid by the Fund, as a percentage of
average net assets, for the previous fiscal year was 0.67%.
PORTFOLIO MANAGER
Robert L. Rodriguez, President of the Fund, and Principal, Chief Investment
Officer and director 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 fifteen years.
PURCHASE, PRICING AND SALE OF SHARES
PURCHASE AND INVESTMENT MINIMUMS. You can purchase shares by contacting any
investment dealer authorized to sell the Fund's shares. You can use the account
information form for initial purchases. The minimum initial investment is
$1,500, and each subsequent investment must be at least $100. All purchases made
by check should be in U.S. dollars and made payable to the FPA Funds or State
Street Bank and Trust Company. Third party checks will not be accepted. A charge
may be imposed if a check does not clear.
SHARE PRICE. The Fund calculates its share price, also called net asset value,
as of 4:00 p.m. New York time, which is the normal close of trading on the New
York Stock Exchange ("NYSE"), every day the NYSE is open. Share price is rounded
to the nearest cent per share and equals the market value of all portfolio
securities plus other assets, less all liabilities, divided by the number of
Fund shares outstanding. Orders received by dealers before the NYSE closes on
any business day are priced based on the share price for that day if Boston
Financial Data Services, Inc. receives the order prior to its close of business.
Orders received by Boston Financial Data Services, Inc. after such time
generally are priced based on the share price for the next business day.
However, orders received by certain retirement plans
9
<PAGE>
and certain other financial intermediaries before the NYSE closes and
communicated to Boston Financial Data Services, Inc. by 9:30 a.m., Eastern time,
on the following business day are priced at the share price for the prior
business day. Share prices for sales (redemptions) of Fund shares is the first
share price determined after Boston Financial Data Services, Inc. receives a
properly completed request, except that sale orders received by an authorized
dealer, certain retirement plans and certain other financial intermediaries
before the NYSE closes are priced at the closing price for that day if
communicated to Boston Financial Data Services, Inc. within the times specified
above.
SALES CHARGES. The offering price is the share price plus any applicable sales
charge. A sales charge may apply to your purchase. As indicated in the table
below, your sales charge can be reduced for larger purchases. You, your spouse
and the following related people (and their spouses) can combine your investment
to reduce your sales charge: grandparents, parents, siblings, children or
grandchildren; or by the individual, his or her spouse and a trustee or other
fiduciary purchasing securities for related trusts, estates or fiduciary
accounts, including employee benefit plans.
<TABLE>
<CAPTION>
SALES SALES REALLOWED
SIZE OF INVESTMENT CHARGE(1) CHARGE(2) TO DEALERS(2)
- -------------------------------------------------------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
Less than $10,000......................................................... 6.95% 6.50% 6.00%
$10,000 but less than $25,000............................................. 6.38% 6.00% 5.50%
$25,000 but less than $50,000............................................. 5.54% 5.25% 4.75%
$50,000 but less than $100,000............................................ 4.71% 4.50% 4.25%
$100,000 but less than $250,000........................................... 3.90% 3.75% 3.50%
$250,000 but less than $500,000........................................... 2.04% 2.00% 1.75%
$500,000 but less than $1,000,000......................................... 1.01% 1.00% 0.80%
$1,000,000 and over....................................................... 0.00% 0.00% 0.00%
</TABLE>
- ------------
(1) As a percentage of net amount invested.
(2) As a percentage of public offering price.
REDUCING YOUR SALES CHARGE
INVESTMENTS IN OTHER FPA FUNDS. To determine the sales charge, you can add the
current value, at offering price, of all presently held shares of the FPA Funds,
which are:
- FPA Capital Fund, Inc. (this Fund, which is currently closed to new
investors)
- FPA New Income, Inc.
- FPA Paramount Fund, Inc.
- FPA Perennial Fund, Inc.
If your holdings of other FPA Funds qualify you for a reduced sales charge, you
must provide information to verify your holdings.
LETTER OF INTENT. A letter of intent will allow you to obtain a reduced sales
charge by aggregating investments made during a thirteen-month period. The value
of all presently held shares of the FPA Funds (see above list) can also be used
to determine the applicable sales charge. The account information form contains
the Letter of Intent that must be signed at the time of initial purchase, or
within
10
<PAGE>
30 days. Each investment made under a Letter of Intent during the period
receives the sales charge for the total investment goal. If you do not reach
your investment goal, you must pay the difference between the sales charges
applicable to the amount purchased minus those actually paid.
PURCHASES NOT SUBJECT TO SALES CHARGE. You and your spouse (and your immediate
relatives) can purchase shares without a sales charge, if you fall into one of
the following categories and you represent that the shares you purchase are for
investment and will not be resold except through redemption or repurchase by the
Fund. Immediate relatives include grandparents, parents, siblings, children and
grandchildren of a qualified investor, and the spouse of any immediate relative.
(a) current and former directors, officers and employees of the Adviser,
United Asset Management Corporation (the Adviser and FPA Fund
Distributors, Inc. are indirect wholly owned subsidiaries of United
Asset Management Corporation) and its affiliates;
(b) current and former directors, officers and employees of Angeles
Corporation (the former parent of the Adviser) and its affiliates;
(c) current and former directors of, and partners and employees of legal
counsel to, the investment companies advised by the Adviser;
(d) investment advisory clients of the Adviser and 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 FPA Fund Distributors, Inc. and consents to
the purchases;
(f) any employee benefit plan maintained for the benefit of such qualified
investors; and
(g) directors, officers and employees of a company whose employee benefit
plan holds shares of one or more of the FPA Funds.
Because FPA Fund Distributors, Inc. anticipates that certain purchases will
result in economies of scale in the sales effort and related expenses compared
to sales made through normal distribution channels, upon satisfaction of certain
conditions the following persons can purchase without a sales charge:
(a) trustees or other fiduciaries purchasing shares for employee benefit
plans of employers with 20 or more employees;
(b) trust companies, bank trust departments and registered investment
advisers purchasing for accounts over which they exercise investment
authority and which are held in a fiduciary, agency, advisory, custodial
or similar capacity, provided that the amount collectively invested or
to be invested by such accounts during the subsequent 13-month period in
the Fund or other FPA Funds totals at least $1,000,000;
(c) tax-exempt organizations enumerated in Section 501(c) (3), (9), or (13)
of the Internal Revenue Code; and
(d) accounts upon which an investment adviser, financial planner or
broker-dealer charges an account management or consulting fee, provided
it has entered into an agreement with FPA Fund Distributors, Inc.
regarding those accounts or purchases Fund shares for such accounts
11
<PAGE>
or for its own accounts through an omnibus account maintained by a
broker-dealer that has entered into such an agreement with the Fund or
FPA Fund Distributors, Inc.
If you qualify, you must submit a special application form available from FPA
Fund Distributors, Inc. with your initial purchase, and you must notify FPA Fund
Distributors, Inc. of your eligibility when you place the order. If you place
the order through a broker, the broker may charge you a service fee. No such fee
is charged if you purchase directly from FPA Fund Distributors, Inc. or the
Fund.
SELLING (REDEEMING) YOUR SHARES
You can sell (redeem) for cash without charge any or all of your Fund shares at
any time by sending a written request to Boston Financial Data Services, Inc.
Faxes are not acceptable. You can also place redemption requests through
dealers, but they may charge a fee. If you are selling Fund shares from a
retirement plan, you should consult your plan custodian about procedures.
A check will be mailed to you within seven days after Boston Financial Data
Services, Inc. receives a properly completed request. If Fund shares sold were
recently purchased by check, payment of the redemption proceeds will be delayed
until confirmation that the purchase check has cleared, which may take up to 15
days.
WRITTEN REQUESTS. Requests must be signed by the registered shareholder(s). If
you hold a stock certificate, it must be included with your written request. A
signature guarantee is required if the redemption is:
- Over $10,000;
- Made payable to someone other than the registered shareholder or to
somewhere other than the registered address; or
- If the shareholder is a corporation, partnership, trust or fiduciary.
A signature guarantee can be obtained from a bank or trust company; a broker or
dealer; a credit union; a national securities exchange, registered securities
association or clearing agency; or a savings and loan association. Additional
documents are required for sales by corporations, partnerships, trusts,
fiduciaries, executors or administrators.
TELEPHONE TRANSACTIONS. You must elect the option on the shareholder services
form to have the right to sell your shares by telephone. If you wish to make an
election to have the right to sell your shares via telephone or to change such
an election after opening an account, you will need to complete a request with a
signature guarantee. Sales via telephone are not available for shares held in a
Fund-sponsored retirement account or in certificate form.
When you obtain the right to sell your Fund shares by telephone, you designate a
bank account to which the proceeds of such redemptions are sent. Telephone
redemptions of $5,000 or more are wired unless the designated bank cannot
receive Federal Reserve wires. Telephone redemptions under $5,000 are mailed
unless you request otherwise. There is a $3.50 charge per wire.
Boston Financial Data Services, Inc. uses procedures it considers reasonable to
confirm redemption instructions via telephone, including requiring account
registration verification from the caller and recording telephone instructions.
Neither Boston Financial Data Services, Inc. nor the Fund is liable for
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<PAGE>
losses due to unauthorized or fraudulent instructions if reasonable procedures
are employed; otherwise, they may be liable. During periods of significant
economic or market changes, it may be difficult to sell your shares by
telephone.
The Fund can change or discontinue telephone redemption privileges without
notice.
REINVESTING IN THE FUND WITH PROCEEDS FROM REDEMPTION OF SHARES. If you
reinvest in the Fund within 30 days you do not have to pay a sales charge. Your
reinvestment is made at the first share price determined after Boston Financial
Data Services, Inc. receives your order. You can only do this once for each Fund
investment, and you must provide sufficient information to verify your
reinvestment when you make your purchase. A sale and reinvestment is a taxable
transaction, but losses on the sale are not deductible for federal income tax
purposes.
AUTOMATIC REDEMPTION (SALE) OF YOUR SHARES. If as a result of a redemption your
account value is less than $500, the Fund can direct Boston Financial Data
Services, Inc. to sell your remaining Fund shares. In such case, you will be
notified in writing that your account value is insufficient and be given up to
60 days to increase it to $500.
EXCHANGE OF SHARES AND SHAREHOLDER SERVICES
EXCHANGING YOUR FUND SHARES.
EXCHANGING YOUR SHARES FOR SHARES OF OTHER FPA FUNDS. You can exchange your
shares of the Fund for shares of other FPA Funds.
You can increase an existing account or start a new account in the selected FPA
Fund. Shares of the fund acquired must be registered for sale in your state.
A $5.00 service fee applies to each exchange. In addition, a sales charge
applies unless
- you paid a sales charge on the exchanged shares equivalent to that
applicable to the acquired shares;
- you are otherwise entitled to purchase shares without a sales charge (as
noted under "Purchases Not Subject to Sales Charge"); or
- the shares you are exchanging were acquired by reinvestment.
EXCHANGING YOUR SHARES FOR SHARES OF A MONEY MARKET FUND. FPA Fund
Distributors, Inc. has made arrangements to allow you to exchange your shares
for shares of the money market portfolio of the Cash Equivalent Fund, a no-load
diversified money market mutual fund. Shares of the money market fund you
acquire through exchange plus any shares acquired by reinvestment of dividends
and distributions may be re-exchanged for shares of any FPA Fund without a sales
charge. However, in the case of the Fund, you must have maintained your account
in the Fund in order to re-exchange your shares in the money market fund for
shares in the Fund. If your shares are held in a Fund-sponsored individual
retirement account, you cannot exchange them into shares of the money market
fund.
The $5.00 exchange fee is paid by FPA Fund Distributors, Inc., which receives a
fee from Kemper Financial Services, the administrator of the money market fund,
of 0.15 of 1% per year or more of the
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<PAGE>
average daily net asset value of shares of the money market fund acquired
through this exchange program.
The money market fund is not an FPA Fund and is separately managed. The fact
that you have the ability to exchange your shares for shares of the money market
fund is not a Fund recommendation of the money market fund.
HOW TO EXCHANGE YOUR SHARES. You can exercise your exchange privileges either
by written instructions or telephone (telephone exchange privileges are
available unless you specifically decline them on the account information form).
Exchanges are subject to the following restrictions:
- You are limited to four exchanges in one account during any calendar year;
if we give you notice you have exceeded this limit, any further exchanges
will be null and void;
- Shares must be owned 15 days before exchanging, and cannot be in
certificate form unless you deliver the certificate when you request the
exchange;
- An exchange requires the purchase of shares with a value of at least
$1,000; and
- Exchanges are subject to the same signature and signature guarantee
requirements applicable to the redemption of shares.
Exchanges and purchases are at the share price next determined after receipt of
a proper request by Boston Financial Data Services, Inc. In the case of
exchanges into the money market fund, dividends generally start on the following
business day.
For federal and state income tax purposes, an exchange is treated as a sale and
could result in a capital gain or loss. If the shares exchanged have been held
less than 91 days, the sales charge paid on them is not included in the tax
basis of the exchanged shares, but is carried over and included in the tax basis
of the shares acquired. See the Statement of Additional Information for further
information.
DISCONTINUATION OF THE EXCHANGE PROGRAMS. The Fund and FPA Fund Distributors,
Inc. can change or discontinue the rights to exchange Fund shares into other FPA
Funds or the money market fund upon 60 days' notice. If you have exchanged your
shares into shares of the money market fund, you will have at least 60 days
after being given notice of the end of the exchange program to reacquire Fund
shares without a sales charge.
FOR MORE INFORMATION OR FOR PROSPECTUSES FOR OTHER FPA FUNDS AND/OR THE MONEY
MARKET FUND, PLEASE CONTACT A DEALER OR FPA FUND DISTRIBUTORS, INC. YOU SHOULD
READ THE PROSPECTUSES OF THESE OTHER FUNDS AND CONSIDER DIFFERENCES IN
OBJECTIVES AND POLICIES BEFORE MAKING ANY EXCHANGE.
OTHER SHAREHOLDER SERVICES.
INVESTMENT ACCOUNT. Each shareholder has an investment account in which Boston
Financial Data Services, Inc. holds Fund shares. You will receive a statement
showing account activity after each transaction. Unless you make a written
request, stock certificates will not be issued. Stock certificates are only
issued for full shares.
PRE-AUTHORIZED INVESTMENT PLAN. To make automatic monthly investments of at
least $100, you must complete the optional shareholder services form available
from dealers or FPA Fund Distributors, Inc.
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<PAGE>
Boston Financial Data Services, Inc. will withdraw funds from your bank account
monthly for $100 or more as specified through the Automated Clearing House.
RETIREMENT PLANS. If you are eligible, you can establish an IRA (individual
retirement account) and/or other retirement plan with a $100 minimum initial
investment and an expressed intention to increase the investment to $1,500
within 12 months. Each subsequent investment must be at least $100. Neither the
Fund nor FPA Fund Distributors, Inc. imposes additional fees for these plans,
but the plan custodian does.
You should consult your tax adviser about the implications of establishing a
retirement plan with Fund shares. Persons with earned income ineligible for
deductible contributions generally may make non-deductible contributions into an
IRA. The earnings on shares held in an IRA are generally tax-deferred. In
addition, the Taxpayer Relief Act of 1997 expanded opportunities for certain
investors to make deductible contributions to IRAs and also created two new
tax-favored accounts, the Roth IRA and the Education IRA, in which earnings
(subject to certain restrictions) are not taxed even on withdrawal. Tax matters
are complicated; you should consult your tax adviser. FPA Fund Distributors,
Inc. and dealers have applicable forms and information regarding plan
administration, custodial fees and other plan documents.
SYSTEMATIC WITHDRAWAL PLAN. If you have an account with a value of $10,000 or
more, you can make monthly, quarterly, semi-annual or annual withdrawals of $50
or more by completing the optional shareholder services form. Under this
arrangement, sufficient Fund shares will be sold to cover the withdrawals and
the proceeds will be forwarded to you as directed on the optional shareholder
services form. Dividends and capital gains distributions are automatically
reinvested in the Fund at net asset value. If withdrawals continuously exceed
reinvestments, your account will be reduced and ultimately exhausted. PLEASE
NOTE THAT CONCURRENT WITHDRAWALS AND PURCHASES ARE ORDINARILY NOT IN YOUR BEST
INTEREST BECAUSE OF ADDITIONAL SALES CHARGES, AND YOU WILL RECOGNIZE ANY TAXABLE
GAINS OR LOSSES ON THE AUTOMATIC WITHDRAWALS.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund's investment income consists principally of dividends and interest
earned on its portfolio securities. This income, after payment of expenses, will
be distributed to you semi-annually. Net capital gains realized from the sale of
securities are distributed at least annually. Dividends and capital gain
distributions are automatically reinvested in the Fund at the share price
determined at the close of business the day after the record date, unless before
the record date for receipt of the dividend or capital gain distribution you
request cash payment of dividends and capital gains distributions. You can use
the account information form to request a cash payment.
TAX CONSEQUENCES
Dividends and capital gains are generally taxable whether they are reinvested or
received in cash-- unless you are exempt from taxation or entitled to tax
deferral. Dividends and distributions are taxed at ordinary rates while capital
gains may be taxed at a different rate. Furthermore, capital gains may be taxed
at different rates depending on the length of time the Fund holds its assets.
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<PAGE>
Redemptions from a retirement plan account and an ordinary shareholder account
could have different tax treatment.
You must provide the Fund with a certified correct taxpayer identification
number (generally your social security number) and certify that you are not
subject to backup withholding. You can use the account information form for this
purpose. If you fail to do so, the IRS can require the Fund to withhold 31% of
your taxable distributions and redemptions. Federal law also requires the Fund
to withhold 30% or the applicable tax treaty rate from dividends paid to certain
nonresident aliens, non-U.S. partnership and non-U.S. corporation shareholder
accounts.
Federal tax law generally requires that a holder (such as the Fund) of a debt
security purchased at a discount (including a zero coupon security) accrue a
portion of the discount at which the security was purchased as income each year
even though the holder receives no interest payment in cash on the security
during the year. Periodic adjustments for inflation in the principal value of
inflation-indexed bonds also may give rise to original issue discount which is
includable in the Fund's gross income on a current basis. Similarly, the Fund
generally must recognize as income interest accrued on accrual bonds and other
debt securities even though not paid in cash. As an investment company, the Fund
must pay dividends equal to substantially all of its net investment income each
year. Since most shareholders reinvest dividends declared by the Fund, it is not
expected that cash dividend payments would exceed the total amount of cash
interest the Fund actually receives. Cash distributions are made from the cash
assets of the Fund or by liquidation of portfolio securities, if necessary. If
the principal value of an inflation-indexed bond is adjusted downward in any
period as a result of deflation, the reduction may be treated as a loss to the
extent the reduction exceeds coupon payments received in that period; in that
case, the amount distributable by the Fund may be reduced and amounts
distributed previously in the taxable year may be characterized in some
circumstances as return of capital.
Please see the Statement of Additional Information and consult with your tax
adviser.
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<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five (5) years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Fund purchased at net asset value and assuming reinvestment of all
dividends and distributions. This information has been audited by Ernst & Young
LLP, whose report, along with the Fund's financial statements, are included in
the Statement of Additional Information, which is available upon request.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year.......... $ 38.30 $ 32.28 $ 27.55 $ 22.40 $ 19.30
-------- ------- ------- ------- -------
Net investment income......................... $ .40 $ .49 $ .38 $ .33 $ .09
Net realized and unrealized gain (loss) on
investment securities........................ (4.76) 8.74 6.98 7.63 3.62
-------- ------- ------- ------- -------
Total from investment operations.............. $ (4.36) $ 9.23 $ 7.36 $ 7.96 $ 3.71
-------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income........ $ (.40) $ (.47) $ (.37) $ (.26) $ (.08)
Distributions from net realized capital
gains..................................... (3.20) (2.74) (2.26) (2.55) (.53)
-------- ------- ------- ------- -------
Total distributions........................... $ (3.60) $ (3.21) $ (2.63) $ (2.81) $ (.61)
-------- ------- ------- ------- -------
Net asset value at end of year................ $ 30.34 $ 38.30 $ 32.28 $ 27.55 $ 22.40
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Total investment return*...................... (12.45)% 30.10% 27.30% 36.84% 19.77%
Ratios/supplemental data:
Net assets at end of year (in $000's)......... 513,894 789,436 597,184 399,282 236,656
Ratio of expenses to average net assets....... .86% .83% .84% .87% .95%
Ratio of net investment income to average net
assets....................................... 1.20% 1.38% 1.27% 1.28% .48%
Portfolio turnover rate....................... 19% 24% 21% 21% 11%
</TABLE>
- ------------
* Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge.
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- - -
- --- ---
<TABLE>
<S> <C> <C>
FOR SHAREHOLDER SERVICES CALL FOR RETIREMENT PLAN SERVICES FOR DEALER SERVICES CALL
BOSTON FINANCIAL DATA CALL YOUR EMPLOYER OR PLAN FPA FUND DISTRIBUTORS, INC.
SERVICES, INC. ADMINISTRATOR (310) 473-0225 or
(617) 483-5000 or FOR 24-HOUR INFORMATION GO TO (800) 982-4372 except
(800) 638-3060 except Alaska FUNDMASTER MARKETING GROUP Alaska, Hawaii and
Hawaii, Massachusetts and INTERNET WEB SITE Puerto Rico
Puerto Rico HTTP://WWW.FUNDMASTER.COM
</TABLE>
Telephone conversations may be recorded or monitored for verification, record
keeping and quality assurance purposes.
MULTIPLE TRANSLATIONS
This Prospectus may be translated into other languages. If there are any
inconsistencies or ambiguities, the English text will prevail.
OTHER FUND INFORMATION
ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the Fund, including
the Fund's financial statements.
A current SAI has been filed with the Securities and Exchange Commission ("SEC")
and is incorporated by reference into this Prospectus. The SAI and other related
materials about the Fund are available for review or to be copied at the SEC's
Public Reference Room in Washington, D.C. (1-800-SEC-0330) or on the SEC's
Internet Web Site at http://www.sec.gov.
FOR MORE INFORMATION OR TO REQUEST A FREE COPY OF ANY OF THE DOCUMENTS ABOVE
CONTACT FPA FUND DISTRIBUTORS, INC. AT 11400 WEST OLYMPIC BOULEVARD, SUITE 1200,
LOS ANGELES, CALIFORNIA 90064, AT (800) 982-4372, EXCEPT FROM ALASKA, HAWAII AND
PUERTO RICO (WHERE YOU MAY CALL COLLECT (310) 473-0225).
Securities Act File No. 2-28157
Investment Company Act No. 811-01596
- - -
- --- ---
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FPA CAPITAL FUND, INC.
August 2, 1999
This Statement of Additional Information supplements the current Prospectus of
FPA Capital Fund, Inc. ("Fund") dated August 2, 1999. This Statement does not
present a complete picture of the various topics discussed and should be read in
conjunction with the Fund's Prospectus. Although this Statement of Additional
Information is not itself a Prospectus, it is, in its entirety, incorporated by
reference into the Prospectus. The Fund's Prospectus can be obtained by
contacting your securities dealer or the Fund's principal underwriter, FPA Fund
Distributors, Inc. ("Distributor"), at 11400 West Olympic Boulevard, Suite 1200,
Los Angeles, California 90064; telephone (310) 473-0225 or (800) 982-4372,
except Alaska, Hawaii and Puerto Rico.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Investment Objectives and Policies..................................................... 1
Description of Certain Securities and Investment Techniques............................ 1
Equity Securities.............................................................. 1
Fixed-Income Securities ....................................................... 2
Inflation-Indexed Bonds ....................................................... 2
Mortgage-Backed Securities..................................................... 3
Guaranteed Mortgage Pass-Through Securities.................................... 4
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities .... 4
Stripped Mortgage-Backed Securities............................................ 5
Lower Rated Debt Securities ................................................... 6
Risk Factors Relating to Lower Rated Securities ............................... 7
Securities of Foreign Issuers.................................................. 8
Covered Call Options........................................................... 8
Short Sales Against the Box.................................................... 8
Repurchase Agreements.......................................................... 9
Rule 144A and Other Restricted Securities...................................... 9
Investment Restrictions................................................................ 9
Additional Restrictions........................................................ 11
Fund Organization...................................................................... 11
Directors and Officers of the Fund..................................................... 12
Five Percent Shareholders.............................................................. 16
Management............................................................................. 16
Investment Adviser............................................................. 16
Investment Advisory and Service Agreement...................................... 16
Principal Underwriter.......................................................... 18
Portfolio Transactions and Brokerage................................................... 18
Portfolio Turnover..................................................................... 19
Capital Stock.......................................................................... 19
Common Stock................................................................... 19
Voting Rights.................................................................. 20
</TABLE>
i
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<TABLE>
<S> <C>
Purchase and Redemption of Shares...................................................... 20
Net Asset Value................................................................ 20
Sales Charges.................................................................. 20
Authorized Financial Intermediaries............................................ 20
Sales at Net Asset Value....................................................... 20
Letter of Intent............................................................... 21
FPA Exchange Privilege......................................................... 21
Redemption of Shares........................................................... 22
Telephone Redemption........................................................... 22
Tax Sheltered Retirement Plans......................................................... 23
Dividends, Distributions and Taxes..................................................... 23
Distributor............................................................................ 24
Prior Performance Information.......................................................... 25
Financial Statements................................................................... 27
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The following limitations and guidelines are considered at the time of purchase,
under normal market conditions, and are based on a percentage of FPA Capital
Fund, Inc.'s (the "Fund") net assets unless otherwise noted. This summary is not
intended to reflect all of the Fund's investment limitations.
INVESTMENT OBJECTIVE
- - The Fund's primary objective is long-term growth of capital.
Providing you current income is a secondary consideration. The
Adviser believes that the Fund's goals can best be achieved by
investing primarily 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.
- - Investments in the Fund are not limited by a specific industry, and
substantially all common stocks purchased by the Fund will be listed on
a national securities exchange or the National Association of Securities
Dealers Automated Quotation (NASDAQ) National Market System or National
List.
FIXED-INCOME SECURITIES
- - Up to 15% of the Fund's net assets can be invested in fixed-income
securities, including convertible securities, that are rated BB or
lower, by Standard & Poor's Corporation or Ba or lower by Moody's
Investor Services, Inc.
- - The Fund can invest in inflation-indexed bonds which are fixed-income
securities whose principal value is periodically adjusted to reflect the
rate of inflation.
- - The Fund can invest in mortgage-backed securities which represent an
interest in a pool of mortgage loans. 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. A variety of CMO certificates my be issued in
sequential pay structures. These securities include accrual certificates
(also known as "Z- bonds") which only accrue interest at a specified
rate until all other certificates having an earlier final distribution
date have been retired and are converted thereafter to an
interest-paying security. Up to 5% of the Fund's assets can be invested
in interest-only classes of stripped mortgage-backed securities.
NON-U.S. SECURITIES
- - The Fund can invest up to 10% of its net assets in securities of
foreign issuers.
DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
EQUITY SECURITIES -- The Fund will invest primarily in equity securities. Equity
securities represent an ownership position in a company. The prices of equity
securities fluctuate based on changes in the
1
<PAGE>
financial conditions of their issuers and on market and economic conditions.
These fluctuations can be severe and can generate large losses.
FIXED-INCOME SECURITIES -- The Fund can invest in fixed-income securities. Bonds
and other fixed-income securities are used by issuers to borrow money. Issuers
pay investors interest and generally must repay the amount borrowed at maturity.
Some fixed-income securities, such as zero coupon bonds, do not pay current
interest but are purchased at a discount from their face value. The market price
of fixed-income securities held by the Fund can be expected to vary inversely to
changes in prevailing interest rates and can also be affected by the financial
conditions of the issuers. Investments in fixed-income securities with longer
maturities generally produce higher yields but are subject to greater market
fluctuation.
INFLATION-INDEXED BONDS. -- The Fund can invest in inflation-indexed bonds which
are fixed-income securities whose principal value is periodically adjusted to
reflect the rate of inflation. Such bonds generally are issued at an interest
rate lower than comparable non-indexed bonds, but are expected to retain their
principal value over time. The interest rate on these bonds is fixed at
issuance, but over the life of the bond this interest may be paid on an
increasing principal value, which has been adjusted for inflation.
Inflation-indexed bonds issued by the U.S. Treasury have maturities of five,
ten, and thirty years, although it is anticipated that securities with other
maturities will be issued in the future. If the periodic adjustment rate
measuring inflation falls, the principal value of inflation-indexed bonds will
be adjusted downward, and consequently the interest payable on these securities
(calculated with respect to a smaller principal amount) will be reduced.
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. Any increase in the principal
amount of an inflation-indexed bond is considered taxable ordinary income, even
though investors do not receive their principal until maturity.
Inflation-indexed bonds issued by the U.S. Treasury pay interest on a
semi-annual basis, equal to a fixed percentage of the inflation-adjusted
principal amount. For example, if a Fund purchased an inflation-indexed bond
with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5%
semi-annually), and inflation over the first six months were 1%, the mid-year
par value of the bond would be $1,010 and the first semi-annual interest payment
would be $15.15 ($1,010 times 1.5%). If inflation continued during the second
half of the year and reached 3% by year end, the end-of-year par value of the
bond would be $1,030 and the second semi-annual interest payment would be $15.45
($1,030 times 1.5%).
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in the value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in the value of inflation-indexed bonds.
While these securities are expected to be protected from long-term inflationary
trends, short-term increases in inflation may lead to a decline in value. If
interest rates rise due to reasons other than inflation (for example, due to
changes in currency exchange rates), investors in these securities may not be
protected to the extent that the increase is not reflected in the bond's
inflation measure.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer
Price Index for Urban
2
<PAGE>
Consumers ("CPI-U"), which is calculated monthly by the U.S. Bureau of Labor
Statistics. The CPI-U is a measurement of changes in the cost of living, made up
of components such as housing, food, transportation and energy. There can be no
assurance that the CPI-U will accurately measure the real rate of inflation in
the prices of goods and services.
MORTGAGE-BACKED SECURITIES. -- The Fund can invest in mortgage-backed securities
which represent an interest in a pool of mortgage loans. The primary issuers or
guarantors of mortgage-backed securities are the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), and
the Federal Home Loan Mortgage Corporation ("FHLMC") (securities issued by GNMA,
but not those issued by FNMA or FHLMC, are backed by the "full faith and credit"
of the United States). 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. 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.
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"). Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and
interest by FNMA. 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 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.
3
<PAGE>
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. -- The Fund can invest in mortgage
pass-through securities representing participation interests in pools of
residential mortgage loans originated by United States governmental or private
lenders and guaranteed, to the extent provided in such securities, by a Federal
Agency. Such securities, which are ownership interests in the underlying
mortgage loans, differ from conventional debt securities, which provide for
periodic payment of interest in fixed amounts (usually semiannually) and
principal payments at maturity or on specified dates. Mortgage pass-through
securities provide for monthly payments (not necessarily in fixed amounts) that
are a "pass-through" of the monthly interest and principal payments (including
any prepayments) made by the individual borrowers on the pooled mortgage loans,
net of any fees paid to the guarantor of such securities and the servicer of the
underlying mortgage loans.
The guaranteed mortgage pass-through securities in which the Fund may invest
include those issued or guaranteed by GNMA, FNMA and FHLMC. GNMA certificates
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. FNMA and FHLMC are federally
chartered, privately owned corporations which are instrumentalities of the
United States. FNMA and FHLMC certificates are not backed by the full faith and
credit of the United States.
Certificates for these types of mortgage-backed securities evidence an interest
in a specific pool of mortgages. These certificates are, in most cases,
"modified pass-through" instruments, wherein the issuing agency guarantees the
payment of principal and interest on mortgages underlying the certificates,
whether or not such amounts are collected by the issuer on the underlying
mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES. --
Collateralized mortgage obligations ("CMOs") 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. CMOs issue a series of bonds or certificates in
multiple classes. Each class, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. Principal prepayments on the underlying
pool of mortgages may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates. Changes in estimated
prepayment rates alter the expected life of mortgage-backed securities. In
periods of sharp interest rate movements and/or in periods of supply and demand
imbalances in the market for such securities, the prices of certain CMOs may
fluctuate to a greater extent than would be expected from interest rate
movements alone. For example, an increase in interest rates would not only
likely decrease the value of CMOs owned by the Fund but would also increase the
inherent volatility of the Fund by effectively lengthening the expected life of
these securities.
A variety of CMO certificates may be issued in sequential pay structures. These
securities include accrual certificates (also known as "Z-bonds") which only
accrue interest at a specified rate until all other certificates having an
earlier final distribution date have been retired and are converted thereafter
to an interest-paying security. The market prices of CMOs structured as accrual
bonds are affected to a greater extent by interest rate changes and therefore
tend to be more volatile than securities which pay interest periodically and in
cash.
The Fund may invest in CMOs which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by GNMA, FNMA or FHLMC certificates, but also may be
collateralized by whole loans or private mortgage pass-through securities (such
collateral
4
<PAGE>
is collectively hereinafter referred to as "Mortgage Assets"). Multiclass
pass-through securities are equity interests in a trust composed of Mortgage
Assets. Payments of principal of and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multiclass pass-through securities. CMOs
may be issued by Federal Agencies, or by private originators of, or investors
in, mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. The issuer of a series of CMOs may elect to be treated as a Real
Estate Mortgage Investment Conduit ("REMIC"). REMICs include governmental and/or
private entities that issue a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they issue multiple classes of
securities, but unlike CMOs, which are required to be structured as debt
securities, REMICs may be structured as indirect ownership interests in the
underlying assets of the REMICs themselves. However, the Fund's investment in a
CMO is not effected by the issuer's election to be treated as a REMIC, and all
future references to CMOs shall also be deemed to include REMICs.
In CMOs, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche," is issued at a specific fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semiannual basis. Certain CMOs may have variable or floating interest rates
and others may be Stripped Mortgage Securities.
The principal of and interest on the Mortgage Assets may be allocated among the
several classes of a CMO series in a number of different ways. Generally, the
purpose of the allocation of the cash flow of a CMO to the various classes is to
obtain a more predictable cash flow to certain of the individual tranches than
exists with the underlying collateral of the CMO. As a general rule, the more
predictable the cash flow is on a CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to prevailing market
yields on other mortgage-backed securities. As part of the process of creating
more predictable cash flows on most of the tranches in a series of CMOs, one or
more tranches generally must be created that absorb most of the volatility in
the cash flows on the underlying mortgage loans. The yields on these tranches
are generally higher than prevailing market yields on mortgage-backed securities
with similar maturities. As a result of the uncertainty of the cash flows of
these tranches, the market prices of and yield on these tranches generally are
more volatile.
STRIPPED MORTGAGE-BACKED SECURITIES. -- The Fund can invest in stripped
mortgage-backed securities. Up to 5% of the Fund's net assets can be invested 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. In addition, these securities
tend to be less liquid than other CMOs.
Stripped mortgage-backed 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 Assets. 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
5
<PAGE>
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. 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 (i) issued by the United States
Government or an agency or instrumentality thereof, (ii) backed by fixed-rate
mortgages, and (iii) there appears to be a liquid secondary market for the
security.
LOWER RATED DEBT SECURITIES -- The Fund can 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
Investor Services, 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 the Fund acquires convertible securities or other debt
securities that are rated lower than investment grade or are not rated, there
is a greater risk that payment of principal and interest will not be made on
a timely basis or at all. 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 depends more on the Adviser's credit analysis than it
does 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 if many holders decide 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 it harder to sell them. 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.
The lower-rated securities in which the Fund can invest include debt securities
of companies that are financially troubled, in default or are in bankruptcy or
reorganization ("Deep Discount Securities"). These securities could be rated C,
C1 or D by S&P or C by Moody's or may be unrated. Debt obligations of
6
<PAGE>
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. These 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 before 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 could
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 could stop generating income and lose
value or become worthless. The Adviser will balance the benefits of 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, 1999, 1.1% of the Fund's net assets were invested in convertible
securities, 5.6% of the Fund's net assets were invested in non-convertible
bonds and debentures (of which 86.2% represent U.S. Government and agency
securities), and 0.4% of the Fund's net assets were held in high grade
short-term investments.
RISK FACTORS RELATING TO LOWER RATED SECURITIES
1. 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, the
market prices of high yield bonds structured as zero coupon or
pay-in-kind securities are affected to a greater extent by interest rate
changes and thereby tend to be more volatile than securities that pay
interest periodically and in cash.
2. 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 could 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, can
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.
3. LEGISLATION. New laws and proposed new laws could have a negative impact
on the market for high yield bonds. For example, several years ago
legislation required federally-insured savings and loan associations to
divest their investments in high yield bonds.
7
<PAGE>
4. 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.
5. 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.
SECURITIES OF FOREIGN ISSUERS. -- The Fund can invest up to 10% of its net
assets in securities of foreign issuers. Investments in securities of foreign
issuers can be affected favorably or unfavorably by changes in currency rates
and exchange control regulations. Compared to U.S. companies, there might be
less publicly available information about foreign companies, which generally are
subject to less stringent accounting, auditing and financial reporting standards
and requirements. Securities of some foreign companies might be less liquid or
more volatile than those of U.S. companies. Foreign brokerage commissions and
custodial fees are generally higher than in the United States. Investments in
foreign securities can involve additional risks, including local political or
economic developments, expropriation or nationalization of assets and imposition
of withholding taxes on dividend or interest payments. In the event of a default
on any foreign debt obligation, it could be more difficult for the Fund to
obtain or enforce a judgment against the issuer.
COVERED CALL OPTIONS. -- In an effort to increase potential income, the Fund is
authorized to write (i.e. sell) covered call options listed on a national
securities exchange. 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 could 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 identical securities to those sold short (short sales
"against the box") or if the securities sold are "when issued" or "when
distributed" securities that the Fund expects to receive in a recapitalization,
reorganization, or other exchange for
8
<PAGE>
securities the Fund contemporaneously owns or has the right to obtain at no
added cost. The principal purpose of short sales is to enable the Fund to obtain
the current market price of a security that the Fund desires to sell but which
cannot be currently delivered for settlement. The Fund will not make short sales
or maintain a short position if to do so would cause more than 25% of its total
net assets (exclusive of proceeds from short sales) to be allocated to a
segregated account in connection with short sales.
REPURCHASE AGREEMENTS. -- The Fund can 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 that the seller
agrees to repurchase at a future time and set price, thereby determining the
yield during the holding period. Repurchase agreements are collateralized by the
underlying debt securities and may be considered loans under the Investment
Company Act of 1940 ("Investment Company Act"). In the event of bankruptcy or
other default by the seller, the Fund could experience delays and expenses
liquidating the underlying security, loss from decline in value of such
security, and lack of access to income on such security. The Fund will not
invest more than 10% of its total assets in repurchase agreements that mature in
more than seven days and/or other securities which are not readily marketable.
RULE 144A AND OTHER RESTRICTED SECURITIES. -- The Fund can invest up to 5% of
its net assets in Rule 144A securities or other securities subject to legal or
contractual restrictions on resale.
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. Other securities subject to legal or
contractual restrictions on resale 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.
INVESTMENT RESTRICTIONS
The Fund has adopted investment restrictions stated below. They apply at the
time securities purchased or other relevant action is taken. These restrictions
and the Fund's investment objectives cannot be changed without approval of the
holders of a majority of outstanding Fund shares. The Investment Company Act
defines this majority as the lesser of (a) 67% or more of the voting securities
present in person or represented by proxy at a meeting, if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy; or (b) more than 50% of the outstanding voting securities. In addition to
those described in the Prospectus, these restrictions provide that the Fund will
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;
9
<PAGE>
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.
5. 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;
6. Underwrite the sale of any securities other than Fund shares;
7. Purchase or sell commodities, commodity contracts or real estate;
8. 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;
9. Mortgage, pledge, hypothecate or in any manner transfer, as security for
any indebtedness, any security owned or held by the Fund;
10. Participate on a joint or a joint and several basis in any trading
account in securities;
11. 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;
12. 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;
13. Invest for the purpose of exercising control over or management of any
company;
10
<PAGE>
14. Invest in securities issued by other investment companies;
15. 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;
16. Buy securities on margin;
17. 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;
18. Invest more than 5% of its assets in securities of corporations which
have a record of less than three years continuous operation; or
19. 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 following policies
which its Board of Directors can amend and which apply at the time of purchase
of securities. The Fund will 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.
FUND ORGANIZATION
The Fund is a Maryland corporation and a diversified, open-end management
investment company, generally called a mutual fund, which was organized in 1966.
A mutual fund provides the investor a practical and convenient way to invest in
a diversified portfolio of securities by combining resources with others who
have similar investment goals.
A board of three directors is responsible for overseeing the Fund's affairs.
11
<PAGE>
DIRECTORS AND OFFICERS OF THE FUND
All directors and officers of the Fund are also directors and/or officers of one
or more of four other investment companies advised by the Adviser, which is an
indirect wholly owned subsidiary of United Asset Management Corporation ("UAM").
These investment companies are FPA New Income, Inc., FPA Paramount Fund, Inc.,
FPA Perennial Fund, Inc. and Source Capital, Inc. (collectively, the "FPA Fund
Complex").
The directors and officers of the Fund, their ages on the date hereof and their
principal occupations during the past five years follow. Their address is 11400
West Olympic Boulevard, Suite 1200, Los Angeles, California 90064.
12
<PAGE>
FUND DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE
AGGREGATE COMPENSATION (1) TOTAL
COMPENSATION FROM THE FPA NUMBER
(1) FROM THE FUND COMPLEX OF BOARDS
FUND DURING DURING THE FISCAL ON WHICH
POSITION HELD WITH PRINCIPAL OCCUPATION(S) THE FISCAL YEAR YEAR ENDED DIRECTOR
NAME/AGE FUND DURING PAST 5 YEARS ENDED 3/31/99 3/31/99 SERVED
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Willard H. Altman, 63 Director Former Partner of Ernst & Young $ 7,500 $33,750 4
(Elected 7/98) LLP, independent auditors for the
the Fund. Director of Source
Capital, Inc., of FPA New Income,
Inc. and of FPA Perennial Fund,
Inc. Director of Current Income
Shares, Inc., a closed-end
investment company. Vice President
of Evangelical Council for Financial
Accountability, an accreditation
organization for Christian non-profit
entities.
- -----------------------------------------------------------------------------------------------------------------------------------
Donald E. Cantlay, 77 Director $ 9,000 $18,000 2
(Until 5/99)
- -----------------------------------------------------------------------------------------------------------------------------------
DeWayne W. Moore, 85 Director Former Director, Senior Vice $10,000 $20,000 2
President and Chief Financial Officer
of Guy F. Atkinson Company of
California (construction). Director
of FPA New Income, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Lawrence J. Sheehan, 66* Director Of counsel to, and partner (1969 to $10,000 $41,000 4
1994) of, the law firm of O'Melveny
& Myers LLP, legal counsel to the
Fund. Director of Source Capital,
Inc., of FPA Perennial Fund, Inc. and
of FPA New Income, Inc. Director of TCW
Convertible Securities Fund, Inc., a
closed-end investment company. Trustee
of the World Wide Index Funds, a
mutual fund complex with thirteen
separate investment portfolios.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------------------
(1) No pension or retirement benefits are provided to directors by
the Fund or the FPA Fund Complex.
* Director who is an interested person, as defined in the
Investment Company Act, by virtue of his affiliation with legal
counsel to the Fund in the case of Mr. Sheehan.
13
<PAGE>
OFFICERS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
NAME/AGE POSITION HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert L. Rodriguez, 50 President & Chief Director, Principal and Chief Investment Officer of
Investment Officer First Pacific Advisors, Inc. since March 1996;
President and Chief Investment Officer of FPA
New Income, Inc. for more than the past five
years; and Director and Senior Vice President of
Source Capital, Inc. since March 1996. Director
of FPA Fund Distributors, Inc. since March 1996.
Executive Vice President from January 1996 to
March 1996 and Senior Vice President from
February 1993 to January 1996, of First Pacific
Advisors, Inc.
- ----------------------------------------------------------------------------------------------------------------
Julio J. de Puzo, Jr., 45 Executive Vice President Director (since October 1995), Principal and Chief
Executive Officer (since March 1996) of First
Pacific Advisors, Inc.; Director and President
(since March 1996) of Source Capital, Inc.;
Director and Executive Vice President (since April
1996) of FPA Paramount Fund, Inc. and of FPA
Perennial Fund, Inc.; and Executive Vice President
(since August 1996) of FPA New Income, Inc.
President and Chief Executive Officer (since
January 1997), and Director for more than the past
five years of FPA Fund Distributors, Inc.
Executive Vice President from October 1995 to
March 1996, Chief Administrative Officer from
October 1995 to March 1996, Chief Financial
Officer from June 1991 to March 1996, Treasurer
from June 1991 to March 1996, and Senior Vice
President from February 1993 to October 1995, of
First Pacific Advisors, Inc. Treasurer from July
1984 to August 1996 of the Fund and of FPA New
Income, Inc.; from June 1981 to August 1996 of
FPA Paramount Fund, Inc.; from May 1982 to
August 1996 of Source Capital, Inc.; and from
September 1983 to August 1996 of FPA Perennial
Fund, Inc. Chief Financial Officer from October
1991 to March 1998, and Executive Vice President
(or Senior Vice President or First Vice President)
from October 1991 to January 1997 of FPA Fund
Distributors, Inc.
- ----------------------------------------------------------------------------------------------------------------
Dennis M. Bryan, 37 Vice President Vice President of First Pacific Advisors, Inc. since
January 1996. Investment Analyst of First Pacific
Advisors, Inc. from July 1993 to January 1996.
Student at the University of Southern California
from July 1991 to May 1993.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
NAME/AGE POSITION HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Eric S. Ende, 54 Vice President Senior Vice President of First Pacific Advisors,
Inc. for more than the past five years; President
and Chief Investment Officer of FPA Perennial
Fund, Inc. since September 1995; Chief Investment
Officer since May 1997 and Senior Vice President
for more than the past five years of Source Capital,
Inc.; and Vice President of FPA New Income, Inc.
and of FPA Paramount Fund, Inc. for more than
the past five years. Executive Vice President of
FPA Perennial Fund, Inc. from August 1995 to
September 1995, and Vice President of FPA
Perennial Fund, Inc. from May 1985 to August
1995.
- ----------------------------------------------------------------------------------------------------------------
Janet M. Pitman, 55 Vice President Vice President of First Pacific Advisors, Inc. for
more than the past five years, of Source Capital,
Inc., of FPA Perennial Fund, Inc. and of FPA
Paramount Fund, Inc. since April 1996, and of
FPA New Income, Inc. since February 1997.
- ----------------------------------------------------------------------------------------------------------------
J. Richard Atwood, 39 Treasurer Senior Vice President, Chief Financial Officer and
Treasurer of First Pacific Advisors, Inc. since
January 1997; and Chief Financial Officer since
March 1998, Senior Vice President and Treasurer
of FPA Fund Distributors, Inc. since January
1997. Treasurer of Source Capital, Inc., of FPA
Paramount Fund, Inc., of FPA Perennial Fund,
Inc., and of FPA New Income, Inc. since January
1997. Vice President and Chief Financial Officer
of Transamerica Investment Services, Inc. from
January 1995 to January 1997. Vice President (or
Assistant Vice President) and Controller of First
Pacific Advisors, Inc. from August 1988 to January
1995, and Assistant Treasurer of FPA Fund
Distributors, Inc. from May 1991 to January 1995.
Assistant Treasurer of the Fund, of FPA New
Income, Inc., of FPA Paramount Fund, Inc., of
FPA Perennial Fund, Inc., and of Source Capital,
Inc. from August 1988 to January 1995.
- ----------------------------------------------------------------------------------------------------------------
Sherry Sasaki, 44 Secretary Assistant Vice President and Secretary for more
than the past five years of First Pacific Advisors,
Inc.; and Secretary of Source Capital, Inc., of
FPA New Income, Inc., of FPA Paramount Fund,
Inc., of FPA Perennial Fund, Inc., and of FPA
Fund Distributors, Inc. for more than the past five
years.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
NAME/AGE POSITION HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Christopher H. Thomas, 42 Assistant Treasurer Vice President and Controller of First Pacific
Advisors, Inc. and of FPA Fund Distributors, Inc.
since March 1995, and Assistant Treasurer of FPA
Perennial Fund, Inc., of FPA New Income, Inc., of
Source Capital, Inc., and of FPA Paramount Fund,
Inc. since April 1995. Staff Accountant with the
Office of Inspection of the Securities and Exchange
Commission from 1994 to March 1995. School
Administrator of the Calvary Road Christian
Academy from 1988 to 1993.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
All officers of the Fund are also officers of the Adviser. The Directors and
officers of the Fund as a group own 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 $36,500 in Directors' fees. Such
Directors were also reimbursed for certain travel expenses by the Fund.
FIVE PERCENT SHAREHOLDERS
As of June 30, 1999, no person was known by the Fund to own of record or
beneficially 5% or more of the outstanding Fund shares, except Merrill Lynch,
Pierce, Fenner & Smith, Inc., for the sole benefit of its customers,
Attention: Fund Administration 97224, 4800 Deer Lake Drive, East Floor 2,
Jacksonville, Florida 32246-6484, which held 000,000 shares (0.0%). Such
broker-dealer advises that the shares are held for the benefit of its
customers.
MANAGEMENT
INVESTMENT ADVISER. First Pacific Advisors, Inc., together with its
predecessors, has been in the investment advisory business since 1954,
serving as investment adviser to the Fund since July 11, 1984. Presently, the
investment adviser manages assets of approximately $3.2 billion for seven
investment companies, including one closed-end investment company, and 26
institutional accounts. Currently, the personnel of First Pacific Advisors,
Inc. consists of nine persons engaged full time in portfolio management or
investment research in addition to 27 persons engaged full time in trading,
administrative, financial or clerical activities. FPA Fund Distributors, Inc.
is a wholly owned subsidiary of First Pacific Advisors, Inc., which is itself
a wholly owned subsidiary of United Asset Management Holdings, Inc. United
Asset Management Holdings, Inc. is a wholly owned subsidiary of UAM, a New
York Stock Exchange listed holding company principally engaged, through
affiliated firms, in providing institutional investment management and
acquiring institutional investment management firms. No person is known by
UAM to own or hold with power to vote 25% or more of its outstanding shares
of common stock.
INVESTMENT ADVISORY AND SERVICE 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
16
<PAGE>
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 average net assets are
determined by taking the average of all the daily determinations of net
assets made, in the manner provided in the Fund's Articles of Incorporation,
during a calendar month.
In addition to the advisory fee, the Fund reimburses the Adviser monthly for
costs incurred in providing financial services to the Fund. Such financial
services include (a) maintaining the accounts, books and other documents forming
the basis for the Fund's financial statements, (b) preparing such financial
statements and other Fund documents and reports of a financial nature required
by federal and state laws, (c) calculating daily net assets and (d)
participating in the production of the Fund's registration statements,
prospectuses, proxy materials and reports to shareholders (including
compensation of the Treasurer or other principal financial officer of the Fund,
compensation of personnel working under such person's direction and expenses of
office space, facilities and equipment such persons use to perform their
financial services duties). However, for any fiscal year, the cost of such
financial services paid by the Fund cannot exceed 0.10% of the average daily net
assets of the Fund.
The advisory fee and cost of financial services is reduced in the amount by
which certain defined operating expenses of the Fund (including the advisory fee
and cost of financial services) for any fiscal year exceed 1.50% of the first
$30 million of average net assets, plus 1% of the remaining average net assets.
Such values are calculated at the close of business on the last business day of
each calendar month. Any required reduction or refund is computed and paid
monthly. Operating expenses (as defined in the Advisory Agreement) exclude (a)
interest, (b) taxes, (c) brokerage commissions and (d) any extraordinary
expenses, such as litigation, merger, reorganization or recapitalization, to the
extent such extraordinary
17
<PAGE>
expenses can be excluded under the rules or policies of the states in which Fund
shares are registered for sale. All expenditures, including costs connected with
the purchase, retention or sale of portfolio securities, which are capitalized
in accordance with generally accepted accounting principles applicable to
investment companies, are accounted for as capital items and not as expenses.
This expense limitation provision does not require any payment by the Adviser
beyond the return of the advisory fee and cost of financial services paid to it
by the Fund for a fiscal year.
The Advisory Agreement provides that the Adviser does not have any liability to
the Fund or any of its shareholders for any error of judgment, any mistake of
law or any loss the Fund suffers in connection with matters related to the
Advisory Agreement, except for liability resulting from willful misfeasance, bad
faith or negligence on the part of the Adviser or the reckless disregard of its
duties under the Advisory Agreement.
The Advisory Agreement is renewable annually if specifically approved each year
(a) by the Fund's Board of Directors or by the vote of a majority (as defined in
the Investment Company Act) of the Fund's outstanding voting securities and (b)
by the vote of a majority of the Fund's directors who are not parties to the
Advisory Agreement or interested persons (as defined in the Investment Company
Act) of any such party, by votes cast in person at a meeting called for the
purpose of voting on such approval. The continuation of the Advisory Agreement
to September 30, 2000, has been approved by the Board of Directors and a
majority of the Fund's directors who are not parties to the Advisory Agreement
or interested persons of any such party (as defined in the Investment Company
Act). The Advisory Agreement may be terminated without penalty 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.
For the fiscal years ended March 31, 1997, 1998 and 1999, the Adviser received
gross advisory fees of $3,361,166, $4,622,631 and $4,508,974, respectively, plus
$509,410, $703,482 and $685,996, respectively, for costs incurred in providing
financial services to the Fund.
PRINCIPAL UNDERWRITER. FPA Fund Distributors, Inc. (the "Distributor"), located
at 11400 West Olympic Boulevard, Suite 1200, Los Angeles, California 90064, acts
as principal underwriter of Fund shares pursuant to a Distribution Agreement
dated August 1, 1994 (the "Distribution Agreement"). Please see "Distributor"
for more information.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser makes decisions to buy and sell securities for the Fund, selects
broker-dealers and negotiates commission rates or net prices. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless the Adviser believes better prices and executions are
available elsewhere. Portfolio transactions are effected with broker-dealers
selected for their abilities to give prompt execution at prices favorable to the
Fund. In selecting broker-dealers and in negotiating commissions, the Adviser
considers: 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
18
<PAGE>
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 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 can be used by the Adviser for all advisory accounts. However, the
Adviser might not use all such research services in managing the Fund's
portfolio. In the Adviser's opinion, it is not possible to measure separately
the benefits from research services to each advisory account. Because the volume
and nature of the trading activities of advisory accounts are not uniform, the
amount of commissions in excess of the lowest available rate paid by each
advisory account for brokerage and research services will vary. However, the
Adviser believes the total commissions the Fund pays are not disproportionate to
the benefits it receives on a continuing basis.
The Adviser attempts to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
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, 1997, 1998 and 1999, totaled $199,529, $370,377 and
$376,934, respectively. During the last fiscal year, $328,838 of commissions
were paid on transactions having a total value of $85,812,772 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.
CAPITAL STOCK
COMMON STOCK. Each Fund share outstanding participates equally in dividends,
distributions and liquidation of the Fund's net assets. Fund shares are
transferable, fully paid and non-assessable, and do
19
<PAGE>
not have any preemptive, preferential, subscription or conversion rights. The
Fund has authorized 100 million shares of $0.01 par value Common Stock.
VOTING RIGHTS. The By-Laws of the Fund require shareholder meetings to elect
directors only when required by the Investment Company Act which is likely to
occur infrequently. In addition, a special meeting of the shareholders will be
called, if requested by the holders of 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. Shares of the Fund do not have cumulative voting rights, which means
holders of more than 50% of Fund shares voting for the election of directors can
elect 100% of the directors if they so choose. In such event, holders of the
remaining Fund shares are not able to elect any person or persons to the Fund's
Board of Directors.
PURCHASE AND REDEMPTION OF SHARES
NET ASSET VALUE. 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, Martin Luther King, Jr.
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 or on the National
Association of Securities Dealers Automated Quotations NASDAQ National Market
System ("NASDAQ") at the last sale price or, if there has been no sale that day,
at the last bid price, (b) unlisted securities for which quotations are readily
available at the last representative bid price as supplied by the NASDAQ or by
dealers, 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.
AUTHORIZED FINANCIAL INTERMEDIARIES. The Fund has authorized certain financial
intermediaries including one or more brokers to accept on its behalf purchase
and redemption orders. These brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund is deemed to have received a purchase or redemption order when an
authorized financial intermediary including an authorized broker or if
applicable a broker's authorized designee accepts the order. Customer orders are
priced at the Fund's net asset value next computed after they are accepted by an
authorized financial intermediary, including an authorized broker or the
broker's authorized designee.
SALES AT NET ASSET VALUE. Full-time employees of the Adviser can purchase Fund
shares at net asset value via payroll deduction, provided the minimum initial
investment is $250. Each subsequent investment must be at least $50.
20
<PAGE>
LETTER OF INTENT. To be eligible for reduced sales charges, the investor must
sign at the time of initial purchase, or within 30 days, a Letter of Intent
("LOI") covering investments to be made within a period of 13 months ("Period")
from the initial purchase. The investor then becomes eligible for a reduced
sales charge based on the total amount of the specified intended investment
("LOI Goal"), provided the amount is not less than $10,000. A minimum initial
purchase of $1,500 and minimum subsequent purchases of $100 each are required.
Fund shares can also be purchased to fulfill a letter of intent entered into
with respect to shares of the other FPA Funds. The account information form,
which should be used to establish an LOI, is available from dealers or the
Distributor.
All transactions under an LOI must be indicated as such and must be placed by
the dealer (in the case of an initial purchase) or the shareholder (in the case
of any subsequent purchase) directly through Boston Financial Data Services,
Inc. ("Shareholder Service Agent"). Shareholders should review for accuracy all
confirmations of transactions, especially purchases made pursuant to an LOI.
If the LOI Goal is completed before the end of the Period, any subsequent
purchases within the Period receive the applicable reduced sales charge. In
addition, during the Period, the shareholder can increase his or her LOI Goal,
and all subsequent purchases are treated as a new LOI (including escrow of
additional Fund shares) except as to the Period, which does not change.
Signing an LOI does not bind the shareholder to complete his or her LOI Goal,
but the LOI Goal must be completed to obtain the reduced sales charge. The LOI
is binding on the Fund and the Distributor. However, the Distributor may
withdraw a shareholder's LOI privileges for future purchases upon receiving
information that the shareholder has resold or transferred his or her Fund
shares within the Period.
The LOI requires the Shareholder Service Agent, as escrow agent, to hold 5% of
the LOI Goal in escrow until completion of the LOI Goal within the Period. The
escrowed Fund shares are taken from the first purchase and, if necessary, from
each successive purchase. If the LOI Goal is completed within the Period, the
escrowed Fund shares are promptly delivered to, or as directed by, the
shareholder.
If the LOI Goal is not completed within the Period, the shareholder must pay the
Distributor an amount equal to the sales charge applicable to a single purchase
in the total amount of the purchases made under the LOI minus the sales charges
actually paid. If the Distributor does not receive such unpaid sales charge
within 20 days after requesting payment in writing, the Distributor instructs
the Shareholder Service Agent to redeem escrowed Fund shares sufficient to cover
the unpaid sales charge. Under the LOI, the shareholder irrevocably appoints the
Shareholder Service Agent as his or her attorney with full power of substitution
to surrender for redemption any or all escrowed Fund shares. If the redemption
proceeds are inadequate, the shareholder is liable to the Distributor for the
difference. The Shareholder Service Agent delivers to, or as directed by, the
shareholder all Fund shares remaining after such redemption, together with any
excess cash proceeds.
Any income dividends and capital gains distributions on the escrowed Fund shares
are paid or reinvested as directed by, the shareholder.
FPA EXCHANGE PRIVILEGE. The procedures for exchanging shares between FPA Funds
are described under "Exchanging Your Fund Shares" in the Fund's Prospectus. If
the account registration information for the two FPA Fund accounts involved in
the exchange are different in any respect, the exchange instructions must be in
writing and must contain a signature guarantee as described under "Selling
(Redeeming) Your Shares" in the Fund's Prospectus.
21
<PAGE>
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 will be included. If the
exchanged security was acquired through reinvestment, that security may be
exchanged without a sales charge. If a shareholder exchanges less than all of
his securities, the security requiring no or the lowest incremental sales charge
is deemed exchanged first.
Exchange requests received on a business day before shares of the Funds involved
in the request are priced, are processed on the date of receipt by the
Shareholder Service Agent. "Processing" a request means that shares in the Fund
from which the shareholder is withdrawing an investment will be redeemed at the
net asset value per share next determined after receipt. Shares of the new Fund
into which the shareholder is investing will also normally be purchased at the
net asset value per share, plus any applicable sales charge, next determined
after receipt by the Agent. Exchange requests received on a business day after
the time shares of the Funds involved in the request are priced, are processed
on the next business day as described above.
Boston Financial Data Services, Inc. uses procedures it considers reasonable
to confirm exchange instructions via telephone, including requiring account
registration verification from the caller and recording telephone
instructions. Neither Boston Financial Data Services, Inc. nor the Fund is
liable for losses due to unauthorized or fraudulent instructions if
reasonable procedures are employed; otherwise, they may be liable.
REDEMPTION OF SHARES. Redemptions are not made on days when the NYSE is closed,
including those holidays listed under "Purchase and Redemption of Shares - Net
Asset Value." The right of redemption can be suspended and the payment therefore
may be postponed for more than seven days during any period when (a) the NYSE is
closed for other than customary weekends or holidays; (b) trading on the NYSE is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities it owns is not reasonably practicable or it is not reasonably
practical for the Fund to fairly determine the value of its net assets; or (d)
the Securities and Exchange Commission, by order, so permits. The Articles of
Incorporation of the Fund provide that if the Board of Directors determines that
conditions exist which make payment of the redemption price wholly in cash
unwise or undesirable, the Fund may make payment wholly or partly in securities
or other assets. While the Fund generally does not reserve the right to pay
redemption proceeds "in-kind," it may do so if requested by a large shareholder
and approved by the Board.
TELEPHONE REDEMPTION. Redemptions can be made by telephone once the shareholder
has properly completed and returned to the 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 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 "Selling
(Redeeming) Your Shares" in the Fund's Prospectus. The optional shareholder
services form is available from authorized security 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
22
<PAGE>
and submit any special wire transfer information with the telephone redemption
authorization. If appropriate wire information is not supplied, redemption
proceeds will be mailed to such Designated Bank.
A shareholder can cancel the telephone redemption authorization upon written
notice. If the shareholder has authorized telephone redemptions, neither the
Fund nor the 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 Agent can delay transmitting the proceeds until the purchasing check
has cleared but no more than 15 days from purchase.
Boston Financial Data Services, Inc. uses procedures it considers reasonable
to confirm redemption instructions via telephone, including requiring account
registration verification from the caller and recording telephone
instructions. Neither Boston Financial Data Services, Inc. nor the Fund is
liable for losses due to unauthorized or fraudulent instructions if
reasonable procedures are employed; otherwise, they may be liable.
TAX SHELTERED RETIREMENT PLANS
Through the Distributor, prototype retirement plans are available for purchase
of Fund shares. These include plans for self-employed individuals and plans for
individuals buying shares under an Individual Retirement Account. A penalty tax
applies, in general, to distributions made before age 59-1/2, excess
contributions and failure to start distribution of the account at age 70-1/2.
Borrowing from or against the account could also result in plan
disqualification. Distributions from these retirement plans generally are
taxable as ordinary income when received.
State Street Bank and Trust Company ("Bank") presently acts as custodian for
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 the plan and automatically reinvested in additional Fund shares at net asset
value. All earnings accumulate tax-free until distribution.
The investor should consult his or her own tax adviser concerning the tax
ramifications of establishing, and distributions from, a retirement plan.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund qualified during the last fiscal year for the tax treatment applicable
to regulated investment companies under the Internal Revenue Code ("Code") and
intends to so qualify in the future. Such qualification requires distributing at
least 90% of its investment company taxable income to shareholders and meeting
asset diversification and other requirements of the Code. As long as the Fund so
qualifies, it does not pay federal income tax on its net investment income or on
any net realized capital gains provided such income and capital gains are
distributed to shareholders. If for any taxable year the Fund does not so
qualify, all of its taxable income, including any net realized capital gains,
will be taxed at regular corporate rates (without any deduction for
distributions to shareholders).
The Fund is subject to a 4% excise tax to the extent it does not make certain
distributions to its shareholders. Such distributions must total (1) at least
98% of ordinary income (investment company taxable income subject to certain
adjustments) for any calendar year and (2) 98% of capital gains net income for
the 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
23
<PAGE>
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,
an investor must certify under penalty of perjury that such number is correct
and that he or she is not subject to backup withholding.
Under existing provisions of the Code, dividends paid to shareholders who are
nonresident aliens may be subject to a 30% federal withholding tax applicable to
foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the federal withholding tax.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and Treasury Regulations presently in effect. For the complete
provisions, reference should be made to the pertinent Code sections and Treasury
Regulations. The Code and these Treasury Regulations are subject to change by
legislative or administrative action either prospectively or retroactively.
Each investor should consult his or her own tax adviser as to federal tax laws
and the effect of state and local tax laws which may differ from federal tax
laws.
DISTRIBUTOR
The Distributor acts as principal underwriter of Fund shares pursuant to the
Distribution Agreement. The Distributor receives commissions from the sale of
Fund shares and has the exclusive right to distribute Fund shares through
dealers. From commissions received, the Distributor pays sales commissions to
dealers; its own overhead and general administrative expenses; the cost of
printing and distributing Fund prospectuses; and the cost of printing and
distributing sales literature and advertising relating to the Fund. The Fund
pays expenses attributable to registering Fund shares under federal and state
laws (including registration and filing fees) and related legal and audit
expenses.
24
<PAGE>
The Distribution Agreement is renewable annually if specifically approved each
year (a) by the Fund's Board of Directors or by a vote of a majority (as defined
in the Investment Company Act) of the Fund's outstanding voting securities and
(b) by a majority of the Fund's directors who are not parties to the
Distribution Agreement or interested persons (as defined in the Investment
Company Act) of any such party, by votes cast in person at a meeting called for
such purpose. The continuation of the Distribution Agreement to September 3,
2000 has been approved by the Board of Directors and a majority of the Fund's
directors who are not parties to the Distribution Agreement or interested
persons of any such party (as defined in the Investment Company Act). The
Distribution Agreement terminates if assigned (as defined in the Investment
Company Act) and may be terminated 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, 1997, 1998 and 1999, underwriting
commissions on the sale of Fund shares were $1,426,002, $518,766 and $269,968,
respectively. Of such totals, the amount retained each year by the Distributor,
after reallowance to other dealers, was $59,953, $40,556 and $21,376,
respectively.
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:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment, made at the beginning of the 1, 5 or
10 year period, at the end of such period (or
fractional portion thereof).
Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication, and cover 1, 5 and
10-year periods of a fund's existence or such shorter period dating from the
effectiveness of a fund's registration statement. In calculating the ending
redeemable value, the maximum sales load is deducted from the initial $1,000
payment and all dividends and distributions by a fund are assumed to have been
reinvested at net asset value as described in the Prospectus on the reinvestment
dates during the period. Total return, or "T" in the formula above, is computed
by finding the average annual compounded rates of return over the 1, 5 and
10-year periods (or fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value.
25
<PAGE>
The Fund may also from time to time include in such advertising a total return
figure that is not calculated according to the formula set forth above in order
to compare the performance of the Fund with other measures of investment return.
For example, in comparing the Fund's total return with a stock index such as the
Russell 2000 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 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, 1999 was (18.14)%, 17.31% and 17.97%, 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 (12.45)%, 18.90% and 18.76%,
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.
26
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 1999
<TABLE>
<CAPTION>
COMMON STOCKS Shares Value
- ------------------------------------------------------ ------------ ------------
<S> <C> <C>
TECHNOLOGY -- 26.7%
AVX Corporation....................................... 625,000 $ 10,000,000
Arrow Electronics, Inc.*.............................. 1,319,500 19,792,500
Exabyte Corporation*+................................. 1,176,600 5,588,850
Hutchinson Technology Incorporated*................... 161,100 4,007,362
Keithley Instruments, Inc............................. 168,100 1,092,650
KEMET Corporation*.................................... 1,410,000 16,215,000
Komag, Incorporated*.................................. 1,034,500 4,525,937
Lam Research Corporation*............................. 476,300 13,812,700
Marshall Industries*.................................. 804,200 10,856,700
Seagate Technology, Inc.*............................. 378,200 11,180,538
Storage Technology Corporation*....................... 1,445,600 40,296,100
------------
$137,368,337
------------
RETAILING -- 26.4%
Consolidated Stores Corporation*...................... 1,200,000 $ 36,375,000
Craig Corporation (Class "A")*........................ 269,000 1,916,625
Good Guys, Inc., The*................................. 441,300 1,710,037
Gymboree Corporation, The*+........................... 1,428,800 12,769,900
HomeBase, Inc.*+...................................... 2,049,400 9,094,213
Michaels Stores, Inc.*................................ 1,260,700 31,123,531
Ross Stores, Inc...................................... 973,100 42,633,944
------------
$135,623,250
------------
FINANCIAL -- 15.9%
Comdisco, Inc......................................... 1,400,000 $ 25,025,000
Conseco, Inc.......................................... 1,286,355 39,716,211
Countrywide Credit Industries, Inc.................... 126,100 4,728,750
Foremost Corporation of America....................... 126,100 2,537,762
Horace Mann Educators Corporation..................... 336,200 7,795,638
Westcorp.............................................. 247,100 1,915,025
------------
$ 81,718,386
------------
CONSUMER DURABLES -- 8.5%
Champion Enterprises, Inc.*........................... 168,100 $ 3,256,937
Coachmen Industries, Inc.+............................ 840,500 17,230,250
Flexsteel Industries, Inc............................. 134,500 1,765,313
Recoton Corporation*+................................. 630,400 8,825,600
Thor Industries, Inc.................................. 550,000 12,443,750
------------
$ 43,521,850
------------
</TABLE>
27
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 1999
<TABLE>
<CAPTION>
Shares or
Principal
COMMON STOCKS--CONTINUED Amount Value
- ------------------------------------------------------ ------------ ------------
<S> <C> <C>
CONSUMER NON-DURABLES -- 3.9%
Rawlings Sporting Goods Company, Inc.*................ 189,100 $ 1,560,075
Reebok International Ltd.*............................ 1,176,600 18,678,525
------------
$ 20,238,600
------------
BASIC MATERIALS -- 3.5%
International Aluminum Corporation.................... 168,100 $ 4,181,487
Oregon Steel Mills, Inc............................... 990,100 10,334,169
Rouge Industries, Inc. (Class "A").................... 420,300 3,677,625
------------
$ 18,193,281
------------
ENERGY -- 2.8%
ENSCO International Incorporated...................... 1,063,400 $ 14,156,512
------------
INDUSTRIAL PRODUCTS -- 1.7%
Belden Inc............................................ 504,300 $ 8,604,619
------------
INDUSTRIAL SERVICES -- 1.4%
Angelica Corporation+................................. 504,300 $ 7,060,200
------------
CONSUMER SERVICES -- 1.3%
CPI Corp.............................................. 300,300 $ 6,719,213
------------
DEFENSE -- 0.7%
DRS Technologies, Inc.*+.............................. 428,700 $ 3,429,600
------------
TOTAL COMMON STOCKS -- 92.8%
(Cost $371,670,248)................................. $476,633,848
------------
CONVERTIBLE SECURITIES -- 1.1%
Lam Research Corporation-- 5% 2002.................... $3,474,000 $ 2,892,105
Worthington Industries, Inc.-- 7 1/4% 2000............ 5,146,000 2,988,000
------------
TOTAL CONVERTIBLE SECURITIES
(Cost $5,942,706)................................... $ 5,880,105
------------
</TABLE>
28
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 1999
<TABLE>
<CAPTION>
Principal
Amount Value
------------ ------------
<S> <C> <C>
NON-CONVERTIBLE BONDS & DEBENTURES -- 5.6%
Federal Home Loan Mortgage Corporation
--7% 2020 (PAC-IO-CMO)............................... $ 3,156,714 $ 428,129
Trump Atlantic City Associates -- 11 1/4% 2006........ 4,000,000 3,540,000
U.S. Treasury Inflation-Indexed Notes -- 3 3/8% 2007.. 25,868,293 24,890,148
------------
TOTAL NON-CONVERTIBLE BONDS & DEBENTURES
(Cost $29,383,317)................................. $ 28,858,277
------------
TOTAL INVESTMENT SECURITIES -- 99.5%
(Cost $406,996,271)................................ $511,372,230
------------
SHORT-TERM CORPORATE NOTE -- 0.4% (Cost $1,933,000)
American Express Credit Corporation -- 4.92% 4/1/99... $ 1,933,000 $ 1,933,000
------------
TOTAL INVESTMENTS -- 99.9%
(Cost $408,929,271)................................ $513,305,230
Other assets less liabilities-- 0.1%.................. 589,109
------------
TOTAL NET ASSETS -- 100.0%............................ $513,894,339
------------
------------
</TABLE>
*Non-income producing securities
+Affiliate as defined in the Investment Company Act of 1940 by reason of
ownership of 5% or more of its outstanding voting securities. Following is a
summary of transactions in securities of these affiliates during the year ended
March 31, 1999. Sales are comprised of securities redeemed in-kind (See Note 2).
<TABLE>
<CAPTION>
Purchases Sales Realized Dividend
at Cost at Cost Gain (Loss) Income
---------------------------------------------------
<S> <C> <C> <C> <C>
Angelica Corporation $ 2,289,500 $1,835,139 -- $553,032
Coachmen Industries, Inc. -- 538,059 -- 192,025
DRS Technologies, Inc. -- 133,046 -- --
Exabyte Corporation 3,003,000 2,231,643 -- --
Gymboree Corporation, The 19,141,181 2,031,242 -- --
HomeBase, Inc. 4,906,678 2,208,143 -- --
Recoton Corporation 5,497,350 1,693,297 -- --
</TABLE>
See notes to financial statements.
29
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1999
<TABLE>
<S> <C> <C>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $406,996,271).................. $511,372,230
Short-term investments -- at cost plus
interest earned
(maturities 60 days or less).................... 1,933,000 $513,305,230
------------
Cash................................................ 27
Receivable for:
Investment securities sold........................ $ 8,734,633
Dividends and accrued interest.................... 901,947
Capital Stock sold................................ 256,101 9,892,681
------------ ------------
$523,197,938
LIABILITIES
Payable for:
Capital Stock repurchased......................... $ 5,450,659
Investment securities purchased................... 3,441,161
Advisory fees and financial services.............. 331,557
Accrued expenses and other liabilities............ 80,222 9,303,599
------------ ------------
NET ASSETS ........................................... $513,894,339
------------
------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 16,936,620 shares. $ 169,366
Additional Paid-in Capital.......................... 393,603,915
Undistributed net realized gain on investments...... 13,485,691
Undistributed net investment income................. 2,259,408
Unrealized appreciation of investments.............. 104,375,959
------------
NET ASSETS.......................................... $513,894,339
------------
------------
NET ASSET VALUE, REDEMPTION PRICE AND MAXIMUM
OFFERING PRICE PER SHARE
Net asset value and redemption price per share
(net assets divided by shares outstanding)......... $30.34
------
------
Maximum offering price per share
(100/93.5 of per share net asset value)............ $32.45
------
------
</TABLE>
See notes to financial statements.
30
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended March 31, 1999
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.......................................... $ 10,294,517
Dividends (including $745,057 from
securities of affiliates)....................... 3,515,906
--------------
$ 13,810,423
EXPENSES
Advisory fees..................................... $ 4,508,974
Financial services................................ 685,996
Transfer agent fees and expenses.................. 284,845
Custodian fees and expenses....................... 60,213
Registration fees................................. 56,528
Directors' fees and expenses...................... 36,938
Postage........................................... 33,862
Insurance......................................... 28,392
Audit fees........................................ 27,850
Reports to shareholders........................... 20,577
Legal fees........................................ 18,541
Other expenses.................................... 7,190 5,769,906
------------ --------------
Net investment income..................... $ 8,040,517
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain on investments:
Proceeds from sales of investment securities
(excluding short-term investments with
maturities of 60 days or less)................... $142,864,265
Cost of investment securities sold................ 120,679,871
------------
Net realized gain on investments.............. $ 22,184,394
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year...... $282,880,397
Unrealized appreciation at end of year............ 104,375,959
------------
Decrease in unrealized appreciation
of investments............................... (178,504,438)
Net unrealized appreciation reclassified
on investments redeemed in-kind--Note 2.............. 50,764,552
--------------
Net realized and unrealized
loss on investments...................... $(105,555,492)
--------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS..................................... $ (97,514,975)
--------------
--------------
</TABLE>
See notes to financial statements.
31
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended March 31,
------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income............................ $ 8,040,517 $ 9,718,899
Net realized gain on investments................. 22,184,394 90,751,629
Increase (decrease) in unrealized
appreciation of investments.................... (178,504,438) 84,207,829
Net unrealized appreciation reclassified
on investments redeemed in-kind................ 50,764,552 --
------------ ------------
Increase (decrease) in net assets
resulting from operations........................ $ (97,514,975) $184,678,357
Distributions to shareholders from:
Net investment income............................ $ (8,475,386) $ (9,124,117)
Net realized capital gains....................... (67,364,919) (75,840,305) (53,573,352) (62,697,469)
------------ ------------
Capital Stock transactions:
Proceeds from Capital Stock sold................. $112,648,442 $124,393,171
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions................. 67,687,754 55,553,713
Cost of Capital Stock repurchased................ (282,522,710) (102,186,514) (109,675,323) 70,271,561
------------ ------------ ------------ ------------
Total increase (decrease) in net assets............ $(275,541,794) $192,252,449
NET ASSETS
Beginning of year, including
undistributed net investment income
of $2,694,277 and $2,099,495..................... 789,436,133 597,183,684
------------- -----------
End of year, including undistributed
net investment income
of $2,259,408 and $2,694,277..................... $ 513,894,339 $789,436,133
------------- -----------
------------- -----------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold....................... 3,365,864 3,531,612
Shares issued to shareholders upon
reinvestment of dividends and
distributions.................................... 1,948,828 1,631,634
Shares of Capital Stock repurchased................ (8,989,993) (3,052,450)
------------- -----------
Increase (decrease) in Capital
Stock outstanding................................. (3,675,301) 2,110,796
------------- -----------
------------- -----------
</TABLE>
See notes to financial statements.
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940, as a
diversified, open-end investment company. The Fund's primary investment
objective is long-term capital growth. Current income is a factor, but a
secondary consideration. The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its financial
statements.
A. Security Valuation
Securities listed or traded on a national securities exchange or on the
NASDAQ National Market System are valued at the last sale price on the last
business day of the year, or if there was not a sale that day, at the last
bid price. Unlisted securities are valued at the most recent bid price.
Short-term investments with maturities of 60 days or less are valued at cost
plus interest earned, which approximates market value.
B. Federal Income Tax
No provision for federal income tax is required because the Fund has
elected to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification and to distribute
each year to its shareholders, in accordance with the minimum distribution
requirements of the Code, all of its taxable net investment income and
taxable net realized gains on investments.
C. Securities Transactions and Related Investment Income
Securities transactions are accounted for on the date the securities are
purchased or sold. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest income and expenses are recorded
on an accrual basis.
D. Use of Estimates
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported. Actual results could differ
from those estimates.
NOTE 2 -- PURCHASES OF INVESTMENT SECURITIES
Cost of purchases of investment securities (excluding short-term investments
with maturities of 60 days or less) aggregated $177,708,822 for the year ended
March 31, 1999. Investments with a market value of $106,427,788 and a cost of
$55,663,236, were redeemed in-kind during the year ended March 31, 1999. Net
unrealized appreciation on these investments redeemed in-kind of $50,764,552 was
reclassified to paid-in capital. Realized gains or losses are based on the
specific-certificate identification method. Cost of securities held at March 31,
1999 was the same for federal income tax and financial reporting purposes. Gross
unrealized appreciation and depreciation for all investments at March 31, 1999
for federal income tax purposes was $173,365,399 and $68,989,440, respectively.
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 pays the Adviser an amount equal to 0.1% of the average daily net assets
for each fiscal year in reimbursement for the provision of financial services to
the Fund. 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.
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS
CONTINUED
For the year ended March 31, 1999, the Fund paid aggregate fees of $36,500 to
all Directors who are not affiliated persons of the Adviser. Legal fees were for
services rendered by O'Melveny & Myers LLP, counsel for the Fund. A Director of
the Fund is of counsel to, and a retired partner of, that firm. Certain officers
of the Fund are also officers of the Adviser and FPA Fund Distributors, Inc.
NOTE 4 -- DISTRIBUTOR
For the year ended March 31, 1999, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $21,376 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 5 -- SALES OF FUND SHARES
Shares of the Fund are presently offered for sale only to existing
shareholders and to directors, officers, and employees of the Fund, the Adviser,
and affiliated companies. The discontinuation of 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.
34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF FPA CAPITAL FUND, INC.
We have audited the accompanying statement of assets and liabilities of FPA
Capital Fund, Inc. (the "Fund"), including the portfolio of investments, as of
March 31, 1999, the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights on page 17 of the Prospectus for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements and financial highlights, including confirmation
of securities owned as of March 31, 1999 by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of FPA
Capital Fund, Inc. at March 31, 1999, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights on page 17 of the Prospectus,
for each of the five years in the period then ended in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
April 30, 1999
35
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements (all included in Part B)
Report of Independent Auditors
Portfolio of Investments, March 31, 1999
Statement of Assets and Liabilities, March 31, 1999
Statement of Operations
Year ended March 31, 1999
Statement of Changes in Net Assets
Year ended March 31, 1999
Year ended March 31, 1998
All other financial statements and schedules are inapplicable.
(b) Exhibits
(a) Articles of Incorporation.
(b) By-Laws, as amended February 14, 1994.
(c) Specimen Common Stock Certificate.
(d) Investment Advisory Agreement between Registrant and First Pacific
Advisors, Inc.
(e)(1) Distribution Agreement between Registrant and FPA Fund Distributors,
Inc.
(e)(2) Specimen Selling Group Agreement.
(e)(3) Smith Barney Inc. Mutual Fund Dealer Agreement was filed as Exhibit
6.2 to Post-Effective Amendment No. 45 of Registrant's Registration
Statement on Form N-1A and is incorporated herein by reference.
(g)(1) Custodian Contract between Registrant and State Street Bank and Trust
Company.
(g)(2) Custodian Fee Schedule.
(g)(3) Amendment to the Custodian Contract.
(g)(4) Custodian Fee Schedule Addendum for GNMA Securities Traded through
Participants Trust Company.
(g)(5) Amendment to the Custodian Contract was filed as Exhibit 8.5 to
Post-Effective Amendment No. 44 of Registrant's Registration Statement
on Form N-1A and is incorporated herein by reference.
(g)(6) Amendment to the Custodian Contract was filed as Exhibit 8.6 to
Post-Effective Amendment No. 46 of Registrant's Registration Statement
on Form N-1A and is incorporated herein by reference.
C-1
<PAGE>
(h)(1) Agreement and Articles of Merger dated September 20, 1993.
(h)(2) State Street Bank and Trust Company Universal Individual Retirement
Account Information Kit was filed as Exhibit 14.1 to Post-Effective
Amendment No. 46 of Registrant's Registration Statement on Form N-1A
and is incorporated herein by reference.
(i)(1) Opinion of Counsel was filed as Exhibit 10 to Post-Effective Amendment
No. 43 of Registrant's Registration Statement on Form N-1A and is
incorporated herein by reference.
(i)(2) Consent of Counsel (to be filed by amendment)
(j) Consent of Independent Auditors (filed as page C-7).
(n) Financial Data Schedule.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 25. INDEMNIFICATION.
Registrant's Articles of Incorporation provide that the Corporation shall
indemnify (i) its directors and officers, whether serving the Corporation or at
its request any other entity, to the full extent required or permitted by the
General Laws of the State of Maryland now or hereafter in force, including the
advance of expenses under the procedures and to the full extent permitted by
law, and (ii) other employees and agents to such extent as shall be authorized
by the Board of Directors or the By-Laws and as permitted by law. Nothing
contained herein shall be construed to protect any director or officer of the
Corporation against any liability to the Corporation or to any holders of
securities of the Corporation to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office. The foregoing rights of
indemnification shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. The Board of Directors may take such
action as is necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to time such by-laws,
resolutions or contracts implementing such provisions or such further
indemnification arrangements as may be permitted by law. No amendment of the
charter of the Corporation or repeal of any of its provisions shall limit or
eliminate the right of indemnification provided hereunder with respect to acts
or omissions occurring prior to such amendment or repeal.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
During the last two fiscal years, First Pacific Advisors, Inc., the investment
adviser to Registrant ("Adviser"), has not engaged in any other business of a
substantial nature except as investment adviser to Source Capital, Inc.
("Source"), a registered closed-end investment company; as investment adviser to
FPA New Income, Inc. ("New Income"), FPA Paramount Fund, Inc. ("Paramount"), FPA
Perennial Fund, Inc. ("Perennial"), and FPA Crescent Portfolio, each a
registered open-end investment company; as sub-adviser to the Nationwide Select
Advisers Mid Cap Fund, a registered open-end investment company; and as
investment adviser to institutional accounts. During the last two fiscal years,
no director or officer of the Adviser has engaged for his own account or in the
capacity of director,
C-2
<PAGE>
officer, employee, partner or trustee, in any other business, profession,
vocation or employment of a substantial nature except as described under the
caption "Fund Directors and Officers" in Part B hereof and as set forth below.
<TABLE>
<CAPTION>
Name and Position
with Adviser Other Affiliations (1)
------------------- ------------------
<S> <C>
Julio J. de Puzo, Jr., (2)
Director, Principal &
Chief Executive Officer
Robert L. Rodriguez, (2)
Director, Principal &
Chief Investment Officer
William M. Sams, Officer of Paramount.
Director & Principal
J. Richard Atwood, (2)
Senior Vice President,
Chief Financial Officer
& Treasurer
Eric S. Ende, (2)
Senior Vice President
Steven T. Romick, Officer of Source.
Senior Vice President
Andrew C. Ward, ---
Senior Vice President
Christopher H. Thomas, (2)
Vice President & Controller
Thomas H. Atteberry, ---
Vice President
Dennis M. Bryan, (2)
Vice President
Rikard B. Ekstrand ---
Vice President
Steven R. Geist, Officer of Source and of Perennial.
Vice President
Janet M. Pitman, (2)
Vice President
Mary S. Thomas, ---
Vice President
</TABLE>
C-3
<PAGE>
<TABLE>
<S> <C>
Sherry Sasaki, (2)
Assistant Vice President
& Secretary
Marie McAvenia, ---
Assistant Vice President
</TABLE>
(1) The address of each company named is 11400 W. Olympic Boulevard, Suite
1200, Los Angeles, California 90064.
(2) A description of such person's other affiliations is given under the
caption "Fund Directors and Officers" in Part B hereof.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) FPA Fund Distributors, Inc., the principal underwriter for Registrant, acts
as a principal underwriter for New Income, Paramount and Perennial but does not
act as depositor or investment adviser for any investment company.
(b) The following information is furnished with respect to each director and
officer of FPA Fund Distributors, Inc.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with Positions and Offices
Business Address Principal Underwriter with Registrant
- ----------------- --------------------- ---------------
<S> <C> <C>
Julio J. de Puzo, Jr. (1) President, Chief Executive Exec. Vice President
Officer & Director
Robert L. Rodriguez (1) Director President & Chief
Investment Officer
William M. Sams (1) Director ---
J. Richard Atwood (1) Senior Vice President, Treasurer
Chief Financial Officer
& Treasurer
Andrew C. Ward (1) Senior Vice President ---
Christopher H. Thomas (1) Vice President & Controller Assistant Treasurer
Sherry Sasaki (1) Secretary Secretary
</TABLE>
(1) 11400 W. Olympic Boulevard, Suite 1200, Los Angeles, California 90064
(c) Commissions and other compensation received by each principal underwriter
who is not an affiliated person of Registrant or an affiliated person of such an
affiliated person, directly or indirectly, from Registrant during Registrant's
last fiscal year.
Inapplicable
ITEM 28. LOCATION OF BOOKS AND RECORDS.
The accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
C-4
<PAGE>
thereunder are maintained in the physical possession of Mr. J. Richard Atwood,
Treasurer of Registrant*, except as otherwise stated below:
<TABLE>
<CAPTION>
Subparagraph of Physical Possession
Rule 31a-1 of Required Records
--------------- -------------------
<S> <C>
(b)(2)(iv) Boston Financial Data Services, Inc.,
Shareholder Service Agent for Registrant**
(b)(4) Sherry Sasaki,
Secretary of Registrant*
(f) First Pacific Advisors, Inc.,
Investment Adviser to Registrant*
</TABLE>
------------------
* 11400 W. Olympic Boulevard, Suite 1200, Los Angeles, California 90064
** P.O. Box 8115, Boston, Massachusetts 02266-8115
ITEM 29. MANAGEMENT SERVICES.
There is no management-related service contract under which services are
provided to Registrant which is not discussed in Parts A or B hereof.
ITEM 30. UNDERTAKINGS.
Inapplicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on the 2nd day of June, 1999.
FPA CAPITAL FUND, INC.
By:/s/ Robert L. Rodriguez
------------------------------
Robert L. Rodriguez, President
C-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ROBERT L. RODRIGUEZ President (Principal June 2, 1999
- -------------------------------- Executive Officer)
Robert L. Rodriguez
/s/ J. RICHARD ATWOOD Treasurer (Principal June 2, 1999
- -------------------------------- Financial Officer and
J. Richard Atwood Principal Accounting
Officer)
/s/ WILLARD H. ALTMAN Director June 2, 1999
- --------------------------------
Willard H. Altman
DEWAYNE W. MOORE* Director June 2, 1999
- --------------------------------
DeWayne W. Moore
LAWRENCE J. SHEEHAN* Director June 2, 1999
- --------------------------------
Lawrence J. Sheehan
</TABLE>
*By: /s/ROBERT L. RODRIGUEZ
--------------------------------
Robert L. Rodriguez
Attorney-in-Fact pursuant to Power-of-
Attorney included as page C-7 in
Registrant's Post-Effective Amendment No. 38
to the Registration Statement which was
filed September 24, 1993.
C-6
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Highlights"
and to the use of our report dated April 30, 1999 in Post-Effective Amendment
No. 47 under the Securities Act of 1933 and Amendment No. 25 under the
Investment Company Act of 1940 to the Registration Statement (Form N-1A No.
2-28157) and related Prospectus and Statement of Additional Information of FPA
Capital Fund, Inc.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
June 2, 1999
C-7
<PAGE>
EXHIBIT INDEX
EXHIBIT
(a) Articles of Incorporation.
(b) By-Laws, as amended February 14, 1994.
(c) Specimen Common Stock Certificate.
(d) Investment Advisory Agreement between Registrant and First Pacific
Advisors, Inc.
(e)(1) Distribution Agreement between Registrant and FPA Fund Distributors,
Inc.
(e)(2) Specimen Selling Group Agreement.
(g)(1) Custodian Contract between Registrant and State Street Bank and
Trust Company.
(g)(2) Custodian Fee Schedule.
(g)(3) Amendment to the Custodian Contract.
(g)(4) Custodian Fee Schedule Addendum for GNMA Secuities Traded through
Participants Trust Company.
(h)(1) Agreement and Articles of Merger dated September 20, 1993.
(i)(2) Consent of Counsel (to be filed by amendment)
(j) Consent of Independent Auditors (filed as page C-7).
(n) Financial Data Schedule.
All other applicable exhibits are incorporated herein by reference.
<PAGE>
ARTICLES OF INCORPORATION
OF
FPA CAPITAL FUND, INC.
ARTICLE I
THE UNDERSIGNED, Sherry Sasaki, whose address is 11400 West Olympic
Boulevard, Suite 1200, Los Angeles, California 90064, being at least eighteen
years of age, acting as incorporator, does hereby form a corporation under
the General Laws of the State of Maryland.
ARTICLE II
The name of the corporation (which is hereinafter called the
"Corporation") is:
FPA CAPITAL FUND, INC.
ARTICLE III
(a) The purposes for which the Corporation is formed and the business
and objects to be carried on and promoted by it are:
(1) To engage generally in the business of investing, reinvesting,
owning, holding or trading in securities, as defined in the Investment
Company Act of 1940, as from time to time amended (hereinafter referred
to as the "Investment Company Act"), as an investment company classified
under the Investment Company Act as a management company.
(2) To engage in any one or more businesses or transactions, or to
acquire all or any portion of any entity engaged in any one or more
businesses or transactions, which the Board of Directors may from time
to time authorize or approve, whether or not related to the business
described elsewhere in this article or to any other business at the time
or theretofore engaged in by the Corporation.
<PAGE>
(b) The foregoing enumerated purposes and objects shall be in no way
limited or restricted by reference to, or inference from, the terms of any
other clause of this or any other article of the charter of the Corporation,
and each shall be regarded as independent; and they are intended to be and
shall be construed as powers as well as purposes and objects of the
Corporation and shall be in addition to and not in limitation of the general
powers of corporations under the General Laws of the State of Maryland.
ARTICLE IV
The present address of the principal office of the Corporation in this
State is c/o CT Corporation Systems, 32 South Street, Baltimore, Maryland
21202.
ARTICLE V
The name and address of the resident agent of the Corporation in this
State are Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202. Said resident agent is a Maryland corporation.
ARTICLE VI
(a) The total number of shares of stock of all classes and series which
the Corporation initially has authority to issue is One Hundred Million
(100,000,000) shares of the par value of one cent ($0.01) per share,
amounting in aggregate par value to $1,000,000. All such shares are
designated common stock.
(b) Unless otherwise prohibited by law, so long as the Corporation is
registered as an open-end company under the Investment Company Act, the Board
of Directors shall have the power and authority, without the approval of the
holders of any outstanding shares, to increase or decrease the number of
shares of common stock that the Corporation has authority to issue.
(c) The following is a description of the preferences, conversions and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the shares of
common stock of the Corporation:
2
<PAGE>
(1) DIVIDENDS AND DISTRIBUTIONS. Dividends and capital gains
distributions on the shares may be paid with such frequency, in such
form and in such amount as the Board of Directors may determine by
resolution adopted from time to time, or pursuant to a standing
resolution or resolutions adopted only once or with such frequency as
the Board of Directors may determine, after providing for actual and
accrued liabilities. All dividends and distributions on the shares
shall be distributed pro rata to the holders in proportion to the number
of shares held by such holders at the date and time of record
established for the payment of such dividends or distributions, except
that in connection with any dividend or distribution program or
procedure, the Board of Directors may determine that no dividend or
distribution shall be payable on shares as to which the stockholder's
purchase order and/or payment have not been received by the time or
times established by the Board of Directors under such program or
procedure.
Dividends and distributions may be paid in cash, property or
additional shares, or a combination thereof, as determined by the Board
of Directors or pursuant to any program that the Board of Directors may
have in effect at the time for the election by stockholders of the form
in which dividends or distributions are to be paid. Any such dividend
or distribution paid in shares shall be paid at the current net asset
value thereof.
(2) VOTING. On each matter submitted to a vote of the
stockholders, each holder of shares shall be entitled to one vote for
each share standing in his name on the books of the Corporation.
(3) REDEMPTION BY STOCKHOLDERS. Each holder of shares shall have
the right at such times as may be permitted by the Corporation to
require the Corporation to redeem all or any part of his shares, at a
redemption price per share equal to the net asset value per share next
determined after the shares are properly tendered for redemption, less
such redemption fee or sales charge, if any, as may be established from
time to time by the Board of Directors in its sole discretion. Payment
of the redemption price shall be in cash; provided, however, that
if the Board of Directors determines, which determination shall be
conclusive, that conditions exist which make payment wholly in cash
unwise or undesirable, the Corporation may, to the extent and in the
manner permitted by the Investment Company Act, make payment wholly
3
<PAGE>
or partly in securities or other assets at the value of such securities
or assets used in such determination of net asset value.
Notwithstanding the foregoing, the Corporation may postpone
payment of the redemption price and may suspend the right of the holders
of shares to require the Corporation to redeem shares during any period
or at any time when and to the extent permissible under the Investment
Company Act.
(4) REDEMPTION BY THE CORPORATION. The Board of Directors
may cause the Corporation to redeem at net asset value the shares held
in an account having, because of redemptions or exchanges, a net asset
value on the date of the notice of redemption less than the minimum
initial investment specified by the Board of Directors from time to time
in its sole discretion, provided that at least 60 days prior written
notice of the proposed redemption has been given to the holder of any
such account by mail, postage prepaid, at the address contained in the
books and records of the Corporation and such holder has been given an
opportunity to purchase the required value of additional shares.
(5) NET ASSET VALUE PER SHARE. The net asset value per share
shall be the quotient obtained by dividing the value of the net assets
of the Corporation (being the value of the assets less the liabilities)
by the total number of shares outstanding, all as determined by or under
the direction of the Board of Directors in accordance with generally
accepted accounting principles and the Investment Company Act. Subject
to the applicable provisions of the Investment Company Act, the Board of
Directors, in its sole discretion, may prescribe and shall set forth in
the Bylaws of the Corporation or in a duly adopted resolution of the
Board of Directors such bases and times for determining the value of the
assets belonging to, and the net asset value per share of outstanding
shares, or the net income attributable to such shares, as the Board of
Directors deems necessary or desirable. The Board of Directors shall
have full discretion, to the extent not inconsistent with the Maryland
General Corporation Law and the Investment Company Act, to determine
which items shall be treated as income and which items as capital and
whether any item of expense shall be charged to income or capital. Each
such determination and allocation shall be conclusive and binding for
all purposes.
4
<PAGE>
(d) The Corporation may issue and sell fractions of shares of common
stock having pro rata all the rights of full shares, including, without
limitation, the right to vote and to receive dividends, and wherever the
words "share" or "shares" are used in the charter or Bylaws of the
Corporation, they shall be deemed to include fractions of shares where the
context does not clearly indicate that only full shares are intended.
(e) The Corporation shall not be obligated to issue certificates
representing shares of any class or series of capital stock. At the time of
issue or transfer of shares without certificates, the Corporation shall
provide the stockholder with such information as may be required under the
Maryland General Corporation Law.
ARTICLE VII
The number of directors of the Corporation shall be five, which number
may be increased or decreased pursuant to the Bylaws of the Corporation, but
shall never be less than the minimum number permitted by the General Laws of
the State of Maryland now or hereafter in force. The names of the directors
who will serve until the first annual meeting and until their successors are
elected and qualify are as follows:
Donald E. Cantlay
Lawrence P. McNeil
DeWayne W. Moore
Lawrence J. Sheehan
Kenneth L. Trefftzs
ARTICLE VIII
(a) The following provisions are hereby adopted for the purpose of
defining, limiting, and regulating the powers of the Corporation and of the
directors and stockholders:
(1) The Board of Directors is hereby empowered to authorize the
issuance from time to time of shares of its stock for such consideration
as may be deemed advisable by the Board of Directors and without any
action by the stockholders.
5
<PAGE>
(2) No holder of any stock or any other securities of the
Corporation, whether now or hereafter authorized, shall have any
preemptive right to subscribe for or purchase any stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or
prices and upon such other terms as the Board of Directors, in its sole
discretion, may fix.
(3) The Board of Directors of the Corporation shall, consistent
with applicable law, have power in its sole discretion to determine from
time to time in accordance with sound accounting practice or other
reasonable valuation methods what constitutes annual or other net
profits, earnings, surplus, or net assets in excess of capital; to
determine that retained earnings or surplus shall remain in the hands of
the Corporation; to set apart out of any funds of the Corporation such
reserve or reserves in such amount or amounts and for such proper
purpose or purposes as it shall determine and to abolish any such
reserve or any part thereof; to distribute and pay distributions or
dividends in stock, cash or other securities or property, out of surplus
or any other funds or amounts legally available therefor, at such times
and to the stockholders of record on such dates as it may, from time to
time, determine; and to determine whether and to what extent and at what
times and places and under what conditions and regulations the books,
accounts and documents of the Corporation, or any of them, shall be open
to the inspection of stockholders, except as otherwise provided by
statute or by the Bylaws of the Corporation, and, except as so provided,
no stockholder shall have any right to inspect any book, account or
document of the Corporation unless authorized to do so by resolution of
the Board of Directors.
(4) Notwithstanding any provision of law requiring the
authorization of any action by a greater proportion than a majority of
the total number of shares, such action shall be valid and effective if
authorized by the affirmative vote of the holders of a majority of the
total number or shares outstanding and entitled to vote thereon, except
as otherwise provided in the charter of the Corporation.
(5) The Corporation shall indemnify (i) its directors and
officers, whether serving the Corporation or at its request any other
entity, to the full extent required or permitted by the General Laws of
the State of Maryland now or hereafter in
6
<PAGE>
force, including the advance of expenses under the procedures and to
the full extent permitted by law, and (ii) other employees and agents to
such extent as shall be authorized by the Board of Directors or the
Bylaws of the Corporation and as permitted by law. Nothing contained
herein shall be construed to protect any director or officer of the
Corporation against any liability to the Corporation or its security
holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office. The foregoing rights of
indemnification shall not be exclusive of any other rights to which
those seeking indemnification may be entitled. The Board of Directors
may take such action as is necessary to carry out these indemnification
provisions and is expressly empowered to adopt, approve and amend from
time to time such bylaws, resolutions or contracts implementing such
provisions or such further indemnification arrangements as may be
permitted by law. No amendment of the charter of the Corporation or
repeal of any of its provisions shall limit or eliminate the right of
indemnification provided hereunder with respect to acts or omissions
occurring prior to such amendment or repeal.
(6) The Corporation reserves the right from time to time to make
any amendments of its charter which may now or hereafter be authorized
by law, including any amendments changing the terms or contract rights,
as expressly set forth in its charter, of any of its outstanding stock
by classification, reclassification or otherwise.
(b) The enumeration and definition of particular powers of the Board of
Directors included in the foregoing shall in no way be limited or restricted
by reference to or inference from the terms of any other clause of this or
any other article of the charter of the Corporation, or construed as or
deemed by inference or otherwise in any manner to exclude or limit any powers
conferred upon the Board of Directors under the General Laws of the State of
Maryland now or hereafter in force.
ARTICLE IX
The duration of the Corporation shall be perpetual.
7
<PAGE>
IN WITNESS WHEREOF, the undersigned incorporator of FPA CAPITAL FUND,
INC. hereby executes the foregoing Articles of Incorporation and acknowledges
the same to be her act.
Dated the 30th day of August, 1993.
/s/ Sherry Sasaki
----------------------------------
Sherry Sasaki
8
<PAGE>
As amended, 2/14/94 - Article I, Section 2
FPA CAPITAL FUND, INC.
BY-LAWS
ARTICLE I
STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS. The Corporation is not required to
hold an annual meeting of its stockholders in any year in which the election
of directors is not required to be acted upon under the Investment Company
Act of 1940. If the Corporation is required by the Investment Company Act of
1940 to hold a meeting of stockholders to elect directors, such meeting shall
be held at a date and time set by the Board of Directors in accordance with
the Investment Company Act of 1940 and no later than 120 days after the
occurrence of the event requiring the meeting. Any stockholders' meeting
held in accordance with the preceding sentence shall for all purposes
constitute the annual meeting of stockholders for the fiscal year of the
Corporation in which the meeting is held. Except as the charter or statute
provides otherwise, any business may be considered at an annual meeting
without the purpose of the meeting having been specified in the notice.
Failure to hold an annual meeting does not invalidate the Corporation's
existence or affect any otherwise valid corporate acts.
SECTION 2. SPECIAL MEETINGS. At any time in the interval between
annual meetings, a special meeting of stockholders may be called by the
Chairman of the Board or the President or by a majority of the Board of
Directors by vote at a meeting or in writing (addressed to the Secretary of
the Corporation) with or without a meeting. The Secretary of the Corporation
shall call a special meeting of stockholders on the written request of
stockholders entitled to cast at least ten percent of all the votes entitled
to be cast at the meeting. A request for a special meeting shall state the
purpose of the meeting and the matters proposed to be acted on at it. Unless
requested by stockholders entitled to cast a majority of all the votes
entitled to be cast at the meeting, a special meeting need not be called to
consider any matter which is substantially the same as a matter voted on at
any special meeting of stockholders held in the preceding 12 months.
SECTION 3. PLACE OF MEETINGS. Meetings of stockholders shall be
held at such place in the United States as is set from time to time by the
Board of Directors.
SECTION 4. NOTICE OF MEETINGS; WAIVER OF NOTICE. Not less than
ten nor more than 90 days before each stockholders' meeting, the Secretary
shall give written notice of the meeting to each stockholder entitled to vote
at the meeting and each other stockholder entitled to notice of the meeting.
The notice shall state the time and place of the meeting and, if the meeting
is a special meeting or notice of the purpose is required by statute, the
purpose of the meeting. Notice is given to a stockholder when it is
personally delivered to him, left at his residence or usual place of
business, or mailed to him at his address as it appears on the records of the
Corporation. Notwithstanding the foregoing provisions, each person who is
entitled to notice waives notice if he before or after the meeting signs a
waiver of the notice which is filed with the records of stockholders'
meetings, or is present at the meeting in person or by proxy.
<PAGE>
SECTION 5. QUORUM; VOTING. Unless statute or the charter provides
otherwise, at a meeting of stockholders the presence in person or by proxy of
stockholders entitled to cast a majority of all the votes entitled to be cast
at the meeting constitutes a quorum, and a majority of all the votes cast at
a meeting at which a quorum is present is sufficient to approve any matter
which properly comes before the meeting, except that a plurality of all the
votes cast at a meeting at which a quorum is present is sufficient to elect a
director.
SECTION 6. ADJOURNMENTS. Whether or not a quorum is present, a
meeting of stockholders convened on the date for which it was called may be
adjourned from time to time without further notice by a majority vote of the
stockholders present in person or by proxy to a date not more than 120 days
after the original record date. Any business which might have been
transacted at the meeting as originally notified may be deferred and
transacted at any such adjourned meeting at which a quorum shall be present.
SECTION 7. RECORD DATE AND CLOSING OF TRANSFER BOOKS. The Board
of Directors may set a record date or direct that the stock transfer books be
closed for a stated period for the purpose of making any proper determination
with respect to stockholders, including which stockholders are entitled to
notice of a meeting, vote at a meeting, receive a dividend, or be allotted
other rights. The record date may not be prior to the close of business on
the day the record date is fixed nor, subject to Section 6 of this Article I,
more than 90 days before the date on which the action requiring the
determination will be taken; the transfer books may not be closed for a
period longer than 20 days; and, in the case of a meeting of stockholders,
the record date or the closing of the transfer books shall be at least ten
days before the date of the meeting.
SECTION 8. GENERAL RIGHT TO VOTE; PROXIES. Unless the charter
provides for a greater or lesser number of votes per share or limits or
denies voting rights, each outstanding share of stock, regardless of class or
series, is entitled to one vote on each matter submitted to a vote at a
meeting of stockholders. In all elections for directors, each share of stock
may be voted for as many individuals as there are directors to be elected and
for whose election the share is entitled to be voted. A stockholder may vote
the stock he owns of record either in person or by written proxy signed by
the stockholder or by his duly authorized attorney in fact. Unless a proxy
provides otherwise, it shall not be valid for more than 11 months after its
date.
SECTION 9. LIST OF STOCKHOLDERS. At each meeting of stockholders,
a full, true and complete list of all stockholders entitled to vote at such
meeting, showing the number and class or series of shares held by each and
certified by the transfer agent for such class or series or by the Secretary,
shall be furnished by the Secretary.
SECTION 10. CONDUCT OF BUSINESS AND VOTING. At all meetings of
stockholders, unless the voting is conducted by inspectors, the proxies and
ballots shall be received, and all questions touching the qualification of
voters and the validity of proxies, the acceptance or rejection of votes and
procedures for the conduct of business not otherwise specified by these
By-Laws, the charter or law, shall be decided or determined by the chairman
of the meeting. If demanded by stockholders, present in person or by proxy,
entitled to cast ten percent in number of votes entitled to be cast, or if
ordered by the chairman, the vote upon any election or question shall be
taken by ballot and, upon like demand or order, the voting shall be conducted
by one or more inspectors, in which event the
-2-
<PAGE>
proxies and ballots shall be received, and all questions touching the
qualification of voters and the validity of proxies and the acceptance or
rejection of votes shall be decided, by such inspectors. Unless so demanded
or ordered, no vote need be by ballot and voting need not be conducted by
inspectors. The stockholders at any meeting may choose an inspector or
inspectors to act at such meeting, and in default of such election the
chairman of the meeting may appoint an inspector or inspectors. No candidate
for election as a director at a meeting shall serve as an inspector thereat.
SECTION 11. INFORMAL ACTION BY STOCKHOLDERS. Any action required
or permitted to be taken at a meeting of stockholders may be taken without a
meeting if there is filed with the records of stockholders' meetings an
unanimous written consent which sets forth the action and is signed by each
stockholder entitled to vote on the matter and a written waiver of any right
to dissent signed by each stockholder entitled to notice of the meeting but
not entitled to vote at it.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. ELECTION AND POWERS. The number of directors shall be
fixed from time to time by resolution of the Board of Directors adopted by a
majority of the directors then in office; provided, however, that the number
of directors shall in no event be less than three (3) nor more than nine (9).
The business, affairs and property of the Corporation shall be managed by the
Board of Directors, which may exercise all such powers of the Corporation and
do all such lawful acts and things as are not by statute, the Charter, or
these By-Laws required to be exercised or done by the stockholders. The
members of the Board of Directors shall be elected by the stockholders at
their annual meeting and each Director shall hold office until the annual
meeting next after his election and until his successor shall have been duly
elected and qualified, until he shall have resigned, or until he shall have
been removed as provided in Section 11 of this Article II.
SECTION 2. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice on such dates as the Board may from time
to time determine.
SECTION 3. SPECIAL MEETINGS. Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board,
President or by a majority of the directors either in writing or by vote at a
meeting.
SECTION 4. NOTICE OF SPECIAL MEETINGS. Notice of the place, day
and hour of every special meeting shall be delivered personally to each
director or mailed, telegraphed or cabled to his address on the books of the
Corporation at least one (1) day before the meeting. It shall not be
requisite to the validity of any meeting of the Board of Directors that
notice thereof shall have been given to any director who is present thereat,
or, if absent, waives notice thereof in writing filed with the records of the
meeting either before or after the holding thereof.
SECTION 5. PLACE OF MEETINGS. The Board of Directors may hold its
regular and special meetings at such place or places within or without the
State of Maryland as the Board may from time to time determine.
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As amended, 2/14/94 - Article II, Section 10
SECTION 6. QUORUM AND BOARD ACTION. Except as otherwise provided
by statute or by the Charter: (a) one-half (1/2) of the entire Board of
Directors shall be necessary to constitute a quorum for the transaction of
business at each meeting of the Board; (b) the action of a majority of the
directors present at a meeting at which a quorum is present shall be the
action of the Board; and (c) if at any meeting there be less than a quorum
present, a majority of those directors present may adjourn the meeting from
time to time, but not for a period greater than thirty (30) days at any one
time, without notice other than by announcement at the meeting until a quorum
shall attend. At any such adjourned meeting at which a quorum shall be
present, any business may be transacted which might have been transacted at
the meeting as originally scheduled.
SECTION 7. CHAIRMAN. The Board of Directors may at any time
appoint one of its members as Chairman of the Board, who shall serve at the
pleasure of the Board and who shall perform and execute such duties and
powers as may be conferred upon or assigned to him by the Board or these
By-Laws, but who shall not by reason of performing and executing these duties
and powers be deemed an officer or employee of the Corporation.
SECTION 8. ORGANIZATION. At every meeting of the Board of
Directors, the Chairman of the Board, if one has been selected and is
present, and, if not, the President, or in the absence of the Chairman of the
Board and the President, a Vice President, or in the absence of the Chairman
of the Board, the President and all the Vice Presidents, a chairman chosen by
a majority of the directors present, shall preside; and the Secretary, or in
his absence, an Assistant Secretary, or in the absence of the Secretary and
all the Assistant Secretaries, a person appointed by the chairman, shall act
as secretary.
SECTION 9. VACANCIES. Any vacancy on the Board of Directors
occurring by reason of any increase in the number of directors may be filled
by a majority of the entire Board of Directors. Any vacancy on the Board of
Directors occurring for any other cause may be filled by a majority of the
remaining members of the Board of Directors, whether or not these members
constitute a quorum under Section 6 of this Article II. Any director so
chosen to fill a vacancy shall hold office until the next annual meeting of
stockholders and until his successor shall have been duly elected and
qualified.
SECTION 10. REMOVAL. At any meeting of the stockholders called for
that purpose, the stockholders of the Corporation may remove from office any
director, with or without cause, by the affirmative vote of a majority of the
votes entitled to be cast for the election of directors, and another director
may be elected in the place of the director so removed to serve for the
remainder of the term of the removed director.
Whenever ten or more shareholders of record who have been such for
at least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at
least 1 per centum of the outstanding shares, whichever is less, shall apply
to the Board of Directors in writing, stating that they wish to communicate
with other shareholders with a view to obtaining signatures to a request for
a special meeting to remove any director and accompanied by a form of
communication and request which they wish to transmit, the Board shall within
five business days after receipt of such application either:
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<PAGE>
(a) afford to such applicants access to a list of the names
and addresses of all shareholders as recorded on the books of the
Corporation; or
(b) inform such applicants as to the approximate number of
shareholders of record, and the approximate cost of mailing to them the
proposed communication and form of request.
If the Board elects to follow the course specified in paragraph (b),
the Board, upon the written request of such applicants, accompanied by a
tender of the material to be mailed and of the reasonable expenses of
mailing, shall, with reasonable promptness, mail such material to all
shareholders of record at their addresses as recorded on the books, unless
within five business days after such tender the Board shall mail to such
applicants and file with the Securities and Exchange Commission (the
"Commission") together with a copy of the material to be mailed, a written
statement signed by at least a majority of the directors to the effect that
in their opinion either such material contains untrue statements of fact or
omits to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the
basis of such opinion.
If the Commission shall enter an order refusing to sustain any of
such objections, or if, after the entry of an order sustaining one or more of
such objections, the Commission shall find, after notice and opportunity for
hearing, that all objections so sustained have been met, and shall enter an
order so declaring, the Board shall mail copies of such material to all
shareholders with reasonable promptness after the entry of such order and the
renewal of such tender.
SECTION 11. RESIGNATIONS. Any director may resign at any time by
giving written notice to the Board of Directors, the President or the
Secretary. Any such resignation shall take effect at the time of the receipt
of such notice or at any later time specified therein; and unless otherwise
specified therein, the acceptance of such resignation shall not be necessary
to make it effective.
SECTION 12. COMMITTEES. The Board of Directors may appoint from
among its members an executive and other committees of the Board composed of
two (2) or more directors. To the extent permitted by law, the Board of
Directors may delegate to any such committee or committees any of the powers
of the Board of Directors in the management of the business, affairs and
property of the Corporation and may authorize the seal of the Corporation to
be affixed to all papers which may require it. Such committee or committees
shall have such name or names as may be determined from time to time by
resolution adopted by the Board of Directors. Each committee shall keep
regular minutes of its meetings and report the same to the Board of Directors
when required. The members of a committee present at any meeting, whether or
not they constitute a quorum, may appoint a director to act in the place of
an absent member.
SECTION 13. TELEPHONE CONFERENCE. Members of the Board of
Directors or any committee thereof may participate in a meeting of the Board
or such committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time and participation by such means
shall constitute presence in person at the meeting.
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<PAGE>
SECTION 14. COMPENSATION OF DIRECTORS. Any director, whether or
not he is a salaried officer, employee or agent of the Corporation, may be
compensated for his services as a director or as a member of a committee, or
as Chairman of the Board or chairman of a committee, and in addition may be
reimbursed for transportation and other expenses, all in such manner and
amounts as the directors may from time to time determine.
ARTICLE III
OFFICERS
SECTION 1. NUMBER. The officers of the Corporation shall be a
President, a Secretary and a Treasurer, and may include one or more Vice
Presidents, one or more Assistant Secretaries, and one or more Assistant
Treasurers, and such other officers as the Board of Directors may from time
to time determine. Any officer may hold more than one office in the
Corporation, except that an officer may not serve concurrently as both the
President and a Vice President.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the
Corporation shall be elected by the Board of Directors and, subject to earlier
termination of office, each officer shall hold office for one year and until
his successor shall have been elected and qualified.
SECTION 3. RESIGNATIONS. Any officer may resign at any time by
giving written notice to the Board of Directors or to the President, or the
Secretary of the Corporation. Any such resignation shall take effect at the
date of the receipt of such notice or at any later time specified therein;
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
SECTION 4. REMOVAL. If the Board of Directors in its judgment
finds that the best interests of the Corporation will be served, the Board
may remove any officer of the Corporation at any time.
SECTION 5. PRESIDENT. The President shall be the chief executive
officer of the Corporation and shall have general supervision over the
business and operations of the Corporation, subject, however, to the control
of the Board of Directors. He, or such persons as he shall designate, shall
sign, execute, acknowledge, verify, deliver and accept, in the name of the
Corporation, deeds, mortgages, bonds, contracts and other instruments
authorized by the Board of Directors, except in the case where the signing,
execution, acknowledgement, verification, delivery or acceptance thereof
shall be delegated by the Board to some other officer or agent of the
Corporation; and, in general, he shall have general executive powers as well
as other powers and duties as from time to time may be conferred upon or
assigned to him by the Board.
SECTION 6. THE VICE PRESIDENTS. In the absence or disability of the
President, or when so directed by the President, any Vice President
designated by the Board of Directors may perform any or all of the duties of
the President, and, when so acting, shall have all the powers of, and be
subject to all the restrictions upon, the President; provided, however, that
no Vice President shall act as a member of or as chairman of any committee of
which the President is a member or chairman by designation or ex-officio,
except when designated by the Board. Each Vice President shall
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<PAGE>
perform such other duties as from time to time may be conferred upon or
assigned to him by the Board or the President.
SECTION 7. THE SECRETARY. The Secretary shall record all the votes
of the stockholders and the directors and the minutes of the meetings of the
stockholders and of the Board of Directors in a book or books to be kept for
that purpose; he shall see that notices of meetings of the stockholders and
the Board of Directors are given and that all records and reports are
properly kept and filed by the Corporation as required by law; he shall be
the custodian of the seal of the Corporation and shall see that it is affixed
to all documents to be executed on behalf of the Corporation under its seal,
provided that in lieu of affixing the corporate seal to any document, it
shall be sufficient to meet the requirements of any law, rule or regulation
relating to a corporate seal to affix the world "(SEAL)" adjacent to the
signature of the authorized officer of the Corporation; and, in general, he
shall perform all duties incident to the office of Secretary, and such other
duties as from time to time may be conferred upon or assigned to him by the
Board or the President.
SECTION 8. ASSISTANT SECRETARIES. In the absence or disability of
the Secretary, or when so directed by the Secretary, any Assistant Secretary
may perform any or all of the duties of the Secretary, and, when so acting,
shall have all the powers of, and be subject to all restrictions upon, the
Secretary. Each Assistant Secretary shall perform such other duties as from
time to time may be conferred upon or assigned to him by the Board of
Directors, the President of the Secretary.
SECTION 9. THE TREASURER. Subject to the provisions of any
contract which may be entered into with any custodian pursuant to authority
granted by the Board of Directors, the Treasurer shall have charge of all
receipts and disbursements of the Corporation and shall have or provide for
the custody of its funds and securities; he shall have full authority to
receive and give receipts for all money due and payable to the Corporation,
and to endorse checks, drafts and warrants, in its name and on its behalf,
and to give full discharge for the same; he shall deposit all funds of the
Corporation, except such as may be required for current use, in such banks or
other places of deposit as the Board of Directors may from time to time
designate; and, in general, he shall perform all duties incident to the
office of Treasurer and such other duties as from time to time may be
conferred upon or assigned to him by the Board or the President.
SECTION 10. ASSISTANT TREASURERS. In the absence or disability of
the Treasurer, or when so directed by the Treasurer, any Assistant Treasurer
may perform any or all of the duties of the Treasurer, and, when so acting,
shall have all the powers of, and be subject to all the restrictions upon,
the Treasurer. Each Assistant Treasurer shall perform all such other duties
as from time to time may be conferred upon or assigned to him by the Board of
Directors, the President or the Treasurer.
SECTION 11. COMPENSATION OF OFFICERS. The compensation of all
officers shall be fixed from time to time by the Board of Directors, or any
committee or officer authorized by the Board so to do. No officer shall be
precluded from receiving such compensation by reason of the fact that he is
also a director of the Corporation.
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<PAGE>
ARTICLE IV
STOCK
SECTION 1. CERTIFICATES. Each stockholder shall be entitled upon
written request to a stock certificate or certificates, representing and
certifying the number and kind of full shares held by him, signed by the
President, a Vice President or the Chairman of the Board and countersigned by
the Secretary, an Assistant Secretary, the Treasurer or an Assistant
Treasurer, which signatures may be either manual or facsimile signatures, and
sealed with the seal of the Corporation, which seal may be either facsimile
or any other form of seal. Stock certificates shall be in such form, not
inconsistent with law or with the Charter, as shall be approved by the Board
of Directors.
SECTION 2. TRANSFER OF SHARES. Transfers of shares shall be made on
the books of the Corporation at the direction of the person named on the
Corporation's books or named in the certificate or certificates for such
shares (if issued), or by his attorney lawfully constituted in writing, upon
surrender of such certificate or certificates (if issued) properly endorsed,
together with a proper request for redemption, to the Corporation's Transfer
Agent, with such evidence of the authenticity of such transfer, authorization
and such other matters as the Corporation or its agents may reasonably
require, and subject to such other reasonable terms and conditions as may be
required by the Corporation or its agents; or, if the Board of Directors
shall by resolution so provide, transfer of shares may be made in any other
manner provided by law.
SECTION 3. TRANSFER AGENTS AND REGISTRARS. The Corporation may have
one or more Transfer Agents and one or more Registrars of its stock, whose
respective duties the Board of Directors may, from time to time, define. No
certificate of stock shall be valid until countersigned by a Transfer Agent,
if the Corporation shall have a Transfer Agent, or until registered by a
Registrar, if the Corporation shall have a Registrar. The duties of Transfer
Agent and Registrar may be combined.
SECTION 4. MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES. The
Board of Directors, by standing resolution or by resolutions with respect to
particular cases, may authorize the issuance of a new stock certificate in
lieu of any stock certificate lost, stolen, destroyed or mutilated, upon such
terms and conditions as the Board may direct. The Board may in its discretion
refuse to issue such a new certificate, unless ordered to do so by a court of
competent jurisdiction.
SECTION 5. STOCK LEDGERS. The Corporation shall not be required to
keep original or duplicate stock ledgers at its principal office in the City
of Baltimore, Maryland, but stock ledgers shall be kept at the respective
offices of the Transfer Agents of the Corporation's capital stock.
ARTICLE V
SEAL
The seal of the Corporation shall be in such form as the Board of
Directors shall prescribe.
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<PAGE>
ARTICLE VI
SUNDRY PROVISIONS
SECTION 1. AMENDMENTS.
(a) BY STOCKHOLDERS. By-Laws may be adopted, altered, amended
or repealed in the manner provided in Section 5 of Article I hereof at any
annual or special meeting of the stockholders.
(b) BY DIRECTORS. By-Laws may be adopted, altered, amended or
repealed in the manner provided in Section 6 of Article II hereof by the
Board of Directors at any regular or special meeting of the Board.
SECTION 2. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) INDEMNIFICATION. Any person who was or is a party or is
threatened to be made a party in any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is a current or former
director or officer of the Corporation, or is or was serving while a director
or officer of the Corporation at the request of the Corporation as a director,
officer, partner, trustee, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust, enterprise or employee
benefit plan, shall be indemnified by the Corporation against judgments,
penalties, fines, excise taxes, settlements and reasonable expenses
(including attorney's fees) actually incurred by such person in connection
with such action, suit or proceeding to the full extent permissible under the
General Laws of the State of Maryland, the Securities Act of 1933 and the
Investment Company Act of 1940, as such statutes are now or hereafter in
force, except that such indemnity shall not protect any such person against
any liability to the Corporation or any stockholder thereof to which such
person would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his office.
(b) ADVANCES. Any current or former director or officer of the
Corporation claiming indemnification within the scope of this Section 2 shall
be entitled to advances from the Corporation for payment of the reasonable
expenses incurred by him in connection with proceedings to which he is a
party in the manner and to the full extent permissible under the General Laws
of the State of Maryland, the Securities Act of 1933 and the Investment
Company Act of 1940, as such statutes are now or hereafter in force.
(c) PROCEDURE. On the request of any current or former
director or officer requesting indemnification or an advance under this
Section 2, the Board of Directors shall determine, or cause to be determined,
in a manner consistent with the General Laws of the State of Maryland, the
Securities Act of 1933 and the Investment Company Act of 1940, as such
statutes are now or hereafter in force, whether the standards required by
this Section 2 have been met.
(d) OTHER RIGHTS. The indemnification provided by this Section
2 shall not be deemed exclusive of any other right, in respect of
indemnification or otherwise, to which those seeking such indemnification may
be entitled under any insurance or other agreement, vote of
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<PAGE>
stockholders or disinterested directors or otherwise, both as to action by a
director or officer of the Corporation in his official capacity and as to
action by such person in another capacity while holding such office or
position, and shall continue as to a person who has ceased to be a director
or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
IN WITNESS WHEREOF, the undersigned Secretary of FPA Capital Fund,
Inc. hereby certifies that the foregoing By-Laws were duly adopted by the
Board of Directors of the Corporation on September 20, 1993.
/s/ Sherry Sasaki
--------------------------------
Sherry Sasaki, Secretary
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<PAGE>
FPA CAPITAL FUND, INC.
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF MARYLAND CERTAIN DEFINITIONS
This certifies that is the owner of
CUSIP 302539 10 1
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCKS $.01 PAR VALUE, OF
FPA CAPITAL FUND, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated
/s/ Sherry Sasaki [SEAL] /s/ Robert L. Rodriguez
SECRETARY PRESIDENT
COUNTERSIGNED:
STATE STREET BANK AND TRUST COMPANY
(BOSTON, MASSACHUSETTS)
TRANSFER AGENT
BY
AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
TEN COM--as tenants in common UNIF GIFT MIN ACT--_____Custodian____
TEN ENT--as tenants by the entireties (Cust) (Minor)
JT TEN --as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act__________________________
in common (State)
UNIF TRF MIN ACT--______Custodian (until age___)
(Cust)
________ under Uniform Transfers
(Minor)
to Minors Act_______________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,_____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
/ /
/ /
- --------------------------------------
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
______________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated_________
/x/__________________________________________
/x/_________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By___________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17 Ad-15.
<PAGE>
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, dated August 1, 1994, by and between FPA CAPITAL FUND,
INC., a Maryland corporation (hereinafter referred to as the "Fund"), and FIRST
PACIFIC ADVISORS, INC., a Massachusetts corporation (hereinafter referred to as
the "Manager").
WITNESSETH:
WHEREAS, the Fund is engaged in business as a diversified open-end
investment company registered under the Investment Company Act of 1940, as
amended (hereinafter referred to as the "Investment Company Act"); and
WHEREAS, the Manager is engaged principally in rendering management
and investment advisory services and is registered as an investment adviser
under the Investment Advisers Act of 1940; and
WHEREAS, the Fund desires to retain the Manager to render management
and investment advisory services to the Fund in the manner and on the terms
hereinafter set forth; and
WHEREAS, the Manager is willing to provide management and investment
advisory services to the Fund on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Fund and the Manager hereby agree as follows:
ARTICLE I
DUTIES OF THE MANAGER
The Fund hereby employs the Manager to act as the manager and
investment adviser of the Fund and to furnish, or arrange for affiliates to
furnish, the management and investment advisory services described below,
subject to the supervision of the Board of Directors of the Fund, for the period
and on the terms and conditions set forth in this Agreement. The Manager hereby
accepts such employment and agrees during such period, to render, or arrange for
the rendering of, such services and to assume the obligations herein set forth
for the compensation provided for herein.
(a) INVESTMENT ADVISORY SERVICES. The Manager shall provide the Fund
with such investment research, advice and supervision as the Fund may from time
to time consider necessary for the proper supervision of the assets of the Fund,
shall furnish continuously an investment program for the Fund and shall
determine from time to time which securities shall be purchased, sold or
exchanged and what portion of the assets of the Fund shall be held in the
various securities in which the Fund invests or cash, subject always to the
restrictions of the Articles of Incorporation and By-Laws of the Fund, as
amended from time to time, the provisions of the
<PAGE>
Investment Company Act and the statements relating to the Fund's investment
objectives, investment policies and investment restrictions as the same are
set forth in the currently effective registration statement relating to the
shares of the Fund under the Securities Act of 1933, as amended (the
"Registration Statement"). The Manager shall furnish to the Fund research
and statistical and other factual information and reports with respect to
securities held by the Fund or which the Fund might purchase. It will also
furnish to the Fund such information as may be appropriate concerning
developments which may affect issuers of securities held by the Fund or which
the Fund might purchase or the businesses in which such issuers may be
engaged. Such statistical and other factual information and reports shall
include information and reports on industries, businesses, corporations and
all types of securities, whether or not the Fund has at any time any holdings
in such industries, businesses, corporations or securities. The Manager
shall take, on behalf of the Fund, all actions which it deems necessary to
implement the investment policies determined as provided above, and in
particular to place all orders for the purchase or sale of portfolio
securities for the Fund's account with brokers or dealers selected by the
Manager, and to that end, the Manager is authorized as the agent of the Fund
to give instructions to the custodian of the Fund as to deliveries of
securities and payments of cash for the account of the Fund. In connection
with the selection of such brokers or dealers and the placing of such orders
with respect to assets of the Fund, the Manager will take the following into
consideration: the best net price available; the reliability, integrity and
financial condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of the expected contribution of the
broker-dealer to the investment performance of the Fund on a continuing
basis. Accordingly, the 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 the portfolio execution services
offered. Subject to such policies as the Board of Directors may determine,
the Manager shall not be deemed to have acted unlawfully or to have breached
any duty created by this Agreement or otherwise solely by reason of its
having caused the Fund to pay a broker or dealer that provides brokerage and
research services to the Manager an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction,
if the Manager determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that particular
transaction or the Manager's overall responsibilities with respect to the
Fund. The Manager is further authorized to allocate the orders placed by it
on behalf of the Fund to such brokers and dealers who also provide research
or statistical material, or other services to the Fund or the Manager. Such
allocation shall be in such amounts and proportions as the Manager shall
determine and the Manager will report on said allocations regularly to the
Board of Directors of the Fund indicating the brokers to whom such allocations
have been made and the basis therefor.
(b) MANAGEMENT SERVICES. The Manager shall furnish to the Fund
necessary assistance in the preparation of all reports now or hereafter required
by Federal or other laws, and in the preparation of prospectuses, registration
statements and amendments thereto that may be required by Federal or other laws
or by the rule or regulation of any duly authorized commission or administrative
body. However, nothing herein shall obligate the Manager to pay the costs of
preparation, printing, or mailing of prospectuses being used in connection with
sales of the Fund's shares or otherwise, except as provided in Article II(b)
herein. The Manager also shall furnish to the Fund office space in the offices
of the Manager or in such other place or places as may be agreed upon from time
to time, and all necessary office facilities, simple business equipment,
supplies,
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<PAGE>
utilities and telephone service for managing the affairs and investments and
keeping the general accounts and records of the Fund (exclusive of the
necessary records of the transfer agent, registrar and custodian), and shall
arrange, if desired by the Fund, for members of the Manager's organization to
serve without salaries from the Fund as officers of the Fund.
When Fund portfolio securities are tendered by the Manager or
an affiliate of the Manager, the Manager will arrange to receive the
solicitation fees, less expenses, received and will deduct the net amount of
any such fees received by the Manager, or any affiliate of the Manager, from
the management fee payable by the Fund. The Manager reserves the right, in
its discretion, to purchase statistical information and other services from
other sources, including affiliates of the Manager.
ARTICLE II
ALLOCATION OF CHARGES AND EXPENSES
(a) THE MANAGER. The Manager assumes responsibility for and shall
pay for maintaining the staff and personnel necessary to perform its obligations
under this Agreement, and shall at its own expense, provide the office space,
equipment and facilities which it is obligated to provide under Article I
hereof, except as specified otherwise in Section III(b) hereof.
(b) THE FUND. Except as expressly provided for above, the Fund
assumes responsibility for and shall pay or cause to be paid all other
expenses of the Fund including, without limitation: the charges and expenses
of any registrar and 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 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
shares of the Fund; fees involved in registering and maintaining
registrations of the Fund and of its shares with the Securities and Exchange
Commission and various states and other jurisdictions; all expenses of
shareholders' and directors' meetings and of preparing, printing and mailing
proxy statements and semi-annual reports to shareholders except as set forth
in the Distribution Agreement between the Fund and FPA Fund Distributors,
Inc; fees and travel expenses of independent and unaffiliated directors; the
expense of furnishing, or causing to be furnished, all shareholders a
statement of account after every non-commissionable 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;
and postage.
-3-
<PAGE>
ARTICLE III
COMPENSATION OF THE MANAGER
(a) INVESTMENT MANAGEMENT FEE. For the services rendered, the
facilities furnished and expenses assumed by the Manager, the Fund shall pay to
the Manager compensation at the annual rate of 0.75% of the first $50 million of
the value of the net assets of the Fund, and 0.65% on the excess over $50
million of the value of the net assets of the Fund, calculated as hereinafter
set forth. Compensation under this Agreement shall be calculated and accrued
for each calendar day by applying the annual rate to the net assets of the Fund
as of the close of the last business day preceding the day for which the fee is
being calculated, and dividing the sum so computed by the number of calendar
days in the fiscal year. The fees thus accrued will be payable monthly,
provided that such compensation shall be paid proportionately for any other
period ending with the termination of this Agreement.
(b) COST REIMBURSEMENT. In addition to the above-stated fee, the Fund
shall reimburse the Manager monthly for the costs incurred by the Manager in
providing financial services to the Fund including, among other normal financial
services for the Fund, maintaining the accounts, books and other documents which
constitute the record forming the basis for the Fund's financial statements,
preparation of such financial statements and other Fund documents and reports of
a financial nature required by Federal and state laws, calculating daily net
asset value of the Fund, and participating in the production of the Fund's
registration statements, prospectuses, proxy solicitation materials and reports
to stockholders (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 used
by such personnel in the performance of their financial services duties to the
Fund); provided, however, that such reimbursement shall not exceed for any
fiscal year of the Fund 0.10% of the average net asset value of the Fund. Such
maximum reimbursement shall be calculated in the same manner as the fee referred
to in Section III(a).
(c) EXPENSE LIMITATIONS. In the event the operating expenses of
the Fund, including amounts payable to the Manager pursuant to subsection (a)
hereof (but excluding interest, taxes, and brokerage fees and commissions
payable by the Fund in connection with the purchase or sale of portfolio
securities), for any fiscal year ending on a date on which this Agreement is
in effect exceed one and one-half percent (1 1/2%) of the first Thirty
Million Dollars ($30,000,000) of the average net asset value of the Fund,
plus one percent (1%) of the average net assets of the Fund in excess of
Thirty Million Dollars ($30,000,000) calculated on the basis of the average
of all of the valuations of the net assets of the Fund in effect for the sale
of Fund shares as of the close of business on the last business day of each
month during the fiscal year, the Manager shall thereupon pay to the Fund the
amount by which such expenses exceed such limits.
ARTICLE IV
LIMITATION OF LIABILITY OF THE MANAGER
The Manager shall not be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the management of the Fund, except for willful misfeasance, bad faith or
negligence in the performance of its duties, or by reason of
-4-
<PAGE>
reckless disregard of its obligations and duties hereunder. As used in this
Article IV, the term "Manager" shall include any affiliates of the Manager
performing services for the Fund contemplated hereby and directors, officers and
employees of the Manager and such affiliates.
ARTICLE V
ACTIVITIES OF THE MANAGER
The services of the Manager to the Fund are not to be deemed to be
exclusive, the Manager being free to render services to others so long as its
services hereunder are not impaired thereby. Nothing in this Agreement shall
limit or restrict the right of any director, officer or employee of the Manager
to engage in any other business or to devote his time and attention in part to
the management of other aspects of any other business, whether of a similar or
dissimilar nature.
ARTICLE VI
DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall continue in effect to September 30, 1994. It may
be continued in effect thereafter by mutual consent, provided that such
continuance shall be specifically approved at least annually by (a) the Board of
Directors of the Fund or by a majority of the outstanding shares of the Fund and
(b) by a majority of the directors who are not parties to this Agreement or
interested persons (as defined in the Investment Company Act) of any such party.
This Agreement will terminate upon assignment and may be terminated without
penalty on sixty days' written notice at the option of either party hereto or by
the vote of the shareholders of the Fund. Any notice under this Agreement shall
be given in writing, addressed and delivered, or mailed postpaid, to the other
party at the principal office of such party.
ARTICLE VII
AMENDMENTS OF THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment
is specifically approved by (a) the Board of Directors of the Fund, and by
the vote of a majority of outstanding voting securities of the Fund, and (b)
a majority of those directors who are not parties to this Agreement or
interested persons of any such party cast in person at a meeting called for
the purpose of voting on such approval.
ARTICLE VIII
DEFINITIONS OF CERTAIN TERMS
Any question of interpretation of any term or provision of this
Agreement having a counterpart in or otherwise derived from a term or provision
of the Investment Company Act shall be resolved by reference to such term or
provision of the Act and to interpretations thereof, if any, by the United
States Courts or in the absence of any controlling decision of any such court,
by rules,
-5-
<PAGE>
regulations or orders of the Securities and Exchange Commission issued pursuant
to said Act. In addition, where the effect of a requirement of the Investment
Company Act reflected in any provision of this Agreement is revised by rule,
regulation or order of the Securities and Exchange Commission, such provision
shall be deemed to incorporate the effect of such rule, regulation or order.
ARTICLE IX
GOVERNING LAW
This Agreement shall be construed in accordance with laws of the State
of California and the applicable provisions of the Investment Company Act. To
the extent that the applicable laws of the State of California, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
FPA CAPITAL FUND, INC
[SEAL] By: /s/Robert L. Rodriguez
------------------------------------
Robert L. Rodriguez,
President
FIRST PACIFIC ADVISORS, INC.
[SEAL] By: /s/Christopher Linden
------------------------------------
Christopher Linden,
President
-6-
<PAGE>
DISTRIBUTION AGREEMENT
Agreement dated as of this 1st day of August, 1994, by and between
FPA CAPITAL FUND, INC., a Maryland corporation (hereinafter called the
"Fund"), and FPA FUND DISTRIBUTORS, INC., a California corporation
(hereinafter called the "Distributor").
WITNESSETH:
WHEREAS, the Fund is registered under the Investment Company Act
of 1940, as amended (the "Investment Company Act") as an open-end investment
company and it is a part of the business of the Fund, and affirmatively in
the interest of the Fund, to offer its shares for sale, either continuously,
or from time to time, by means of such arrangements as are determined by its
Board of Directors to be appropriate; and
WHEREAS, the Distributor proposes to engage in the business of
promoting the distribution of shares of investment companies through
securities broker-dealers, and has the ability to create appropriate and
effective sales literature, advertising,and other sales promotional aids; and
WHEREAS, the Fund and the Distributor wish to enter into an
Agreement with each other to promote the growth of the Fund and facilitate
the distribution of its shares;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants set forth herein, the Fund and the Distributor agree as follows:
1. DISTRIBUTOR IS EXCLUSIVE AGENT OF FUND. The Fund hereby
appoints the Distributor as the agent of the Fund exclusively authorized to
act as the principal underwriter and distributor of the shares of Common
Stock of the Fund (sometimes herein referred to as "shares") during the term of
this Agreement. The Distributor agrees to accept such appointment, and to act
as the agent of the Fund in accordance with the terms of this Agreement, as
the principal underwriter and exclusive distributor of the shares of the Fund.
2. TERM OF AGREEMENT. This Agreement shall continue in effect to
September 3, 1995. It may be continued in effect thereafter by mutual
consent, provided that such continuance shall be specifically approved at
least annually by (i) the Board of Directors of the Fund, or by a vote of the
majority (as defined in the Investment Company Act) of the outstanding voting
securities of the Fund, and (ii) by majority of the Directors who are not
parties to this Agreement or interested persons (as defined in the Investment
Company Act) of any such party, cast in person at a meeting called for the
purpose of voting on such approval.
3. DUTIES OF THE FUND.
(a) The Fund agrees that it will use its best efforts to
keep authorized and registered under the Securities Act of 1933, but
unissued, sufficient shares to meet the reasonable
<PAGE>
requirements of the Distributor. The Fund further agrees to use its best
efforts to prepare, file and keep effective registration statements,
prospectuses, and qualifications covering sufficient shares of the Fund to
meet the Distributor's reasonable requirements in all jurisdictions approved
by the Fund and the Distributor in which shares of the Fund may lawfully be
sold.
(b) The Fund will not arbitrarily or without reasonable cause
refuse to accept or confirm orders for the purchase of its shares obtained by
the Distributor as agent of the Fund and submitted by the Distributor to the
Fund (or to another agent of the Fund designated by the Fund to receive
and/or act upon such orders). In all proper cases, the Fund (or its agent) will
confirm orders upon their receipt either through the Distributor as agent for
the Fund or through another agent of the Fund authorized to deliver proper
confirmations. The Fund (or its agent) will make appropriate book entries
and/or will deliver certificates for such shares to the Distributor or to the
designated record owner upon receipt by the Fund (or by its agent) of
payment therefore in cash (or cash equivalent) together with receipt of
proper registry or transfer instructions. The Distributor agrees to cause
such payment and such instructions to be delivered promptly to the Fund (or
to the agent or agents of the Fund designated by it in writing as authorized
to receive such payment and/or such instructions).
(c) The Fund will not during the term of this Agreement
offer any of its shares for sale directly or through any person (as defined
in Sections 2(a)(28) and 2(a)(8) of the Investment Company Act) other than
the Distributor, excepting shares sold or issued at net asset value without
sales charge in accordance with applicable provisions of the Investment
Company Act. Provided, however, that in the event the Distributor should be
unable to continue to distribute shares of the Fund for reasons that do not
apply to the sale of shares of the Fund by any other person, the Fund may at
its option make arrangements for the offer and sale of its shares within the
jurisdiction or jurisdictions in which distribution and sale thereof by the
Distributor has been prevented, except that if the Distributor shall have
removed all material obstacles to resuming the offer and sale within said
jurisdictions within 90 days from its first restraint or inability, then the
right of the Fund to distribute through instrumentalities other than the
Distributor shall be extinguished, subject only to the provisions of paragraph
2 hereof. The Fund further agrees that the Distributor may act as principal
underwriter and distributor for the shares of other investment companies
registered under the Investment Company Act.
(d) The compensation and expenses of the transfer agent
acting for the Fund and acting as plan agent under the Fund's Investor
Service Plans shall be borne by the Fund.
4. DUTIES OF THE DISTRIBUTOR.
(a) The Distributor shall exercise its best efforts lawfully
and properly to promote the sale of shares of the Fund by broker-dealers that
are members in good standing of the National Association of Securities
Dealers, Inc. ("NASD").
(b) The Distributor is, and shall do all things necessary to
continue to be, a broker-dealer in securities registered with the Securities
and Exchange Commission under the Securities Exchange Act of 1934, a member
in good standing of the NASD, and a licensed broker-dealer in the
jurisdictions in which its activities require it to be so licensed.
-2-
<PAGE>
(c) The Distributor shall enter into Selling Group
Agreements with broker-dealer members of the NASD selected by the
Distributor, authorizing such broker-dealers to offer and sell shares of the
Fund to the public upon the terms and conditions set forth therein, which
shall not be inconsistent with the provisions of this Agreement. The
Distributor shall continue each such Selling Group Agreement in effect, or
terminate it, upon its sole discretion. Such Selling Group Agreements shall
provide that the selected dealer shall act as principal and not as an agent
of the Fund.
(d) Upon the Distributor's receipt from broker-dealers that
entered into Selling Group Agreements with it of unconditional orders for the
purchase of shares of the Fund, the Distributor will transmit such orders to
the Fund (or to another agent of the Fund authorized by it in writing to
receive such orders). In so doing, the Distributor will act solely as the
agent of the Fund.
(e) The Distributor agrees that it will not directly or
indirectly withhold orders for the purchase of shares of the Fund or purchase
shares of the Fund in anticipation of orders, and further agrees that in all
its Selling Group Agreements with broker-dealers the Distributor will require
a similar contractual undertaking of the broker-dealer. The Distributor
agrees to pay the Fund, on a monthly basis, the amount of any net dilution
resulting from the cancellation or reversal of a confirmed purchase or
repurchase order for shares of the Fund resulting from the failure of a
Selling Group member to settle the trade. All gains and losses realized each
month from such "fails" shall be netted, and any net gain for a month shall be
carried forward to offset any net losses for any subsequent month in the same
fiscal year of the Fund.
(f) The Distributor will print and distribute copies of the
Fund's prospectuses as from time to time in effect under the Securities Act
of 1933, as amended, and will prepare, print and distribute all advertising and
sales literature relating to the Fund. The Distributor will not publicly
distribute supplemental literature or advertising except such as shall be
lawful under state and federal securities laws and regulations. The
Distributor agrees to file with the Securities and Exchange Commission and/or
the NASD, and with such other regulatory authorities as may be required,
copies of any advertisements, pamphlet, circular, form letter, or other sales
literature relating to the Fund or its shares, addressed to or intended for
distribution to prospective investors, within the time required by such
regulatory authorities. The Distributor will furnish to the Fund at its
principal office a copy of all such material prior to its use, and will not
use any such material to which the Fund reasonably and promptly objects.
(g) The Distributor shall maintain or retain a dealer
service organization suitable to the promotion of the sale of shares of the
Fund by the broker-dealers that have entered into Selling Group Agreements
with the Distributor.
(h) Except with respect to sales and repurchases of shares
of the Fund, the Distributor shall act as principal in all matters relating to
promotion of the growth of the Fund and shall enter into all of its
engagements, agreements, and contracts as principal on its own account.
(i) The Distributor shall act in the performance of its
duties hereunder in a manner that effects compliance with the current
prospectus of the Fund from time to time in effect
-3-
<PAGE>
under the Securities Act of 1933, the Articles of Incorporation and the
By-Laws of the Fund, and with applicable laws and regulations of the United
States and of the individual states within which the Distributor or the Fund
may do business, or in which shares of the Fund are offered for sale, and
will conduct its affairs with relation to the Fund, broker-dealers, and
investors in accordance with the Rules of Fair Practice of the NASD.
5. PUBLIC OFFERING PRICE OF FUND'S SHARES TO BE MAINTAINED.
Except as provided in paragraph 3(c) of this Agreement, the shares of the Fund
shall be offered and sold only at the public offering price thereof described
in the current prospectus of the Fund and shall be composed of the sum of
(i) the current net asset value per share furnished to the Distributor by the
Fund at least once on each day on which the New York Stock Exchange is open
for trading, (ii) the Distributor's commission as set forth in the current
prospectus of the Fund, and (iii) the broker-dealer's mark-up described in the
Selling Group Agreement referred to in paragraph 4(c) hereof.
6. DISTRIBUTOR'S COMMISSIONS. As compensation for its services
hereunder, the Distributor shall be paid, if at all, only such commissions on
sales of shares of the Fund (except shares sold or issued at net asset value
in accordance with Section 3(c) hereof) as is described in the current
prospectus of the Fund and subject to any reductions or quantity discounts
described in such current prospectus.
7. INDEMNIFICATION.
(a) The Fund shall indemnify and hold harmless the
Distributor and each person, if any, who controls the Distributor against any
loss, liability, claim, damage or expense (including the reasonable cost of
investigating or defending any alleged loss, liability, claim, damage or
expense and reasonable counsel fees incurred in connection therewith),
arising by reason of any person acquiring any shares, which may be based upon
the Securities Act, or on any other statute or at common law, on the ground
that the registration statement or related prospectus, as from time to time
amended and supplemented, or an annual or interim report to shareholders of
the Fund, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, unless such statement or omission was made
in reliance upon, and in conformity with, information furnished to the Fund
in connection therewith by or on behalf of the Distributor; provided,
however, that in no case (i) is the indemnity of the Fund in favor of the
Distributor and any such controlling persons to be deemed to protect such
Distributor or any such controlling persons thereof against any liability to
the Fund or its security holders to which the Distributor or any such
controlling persons would otherwise be subject by reason of willful
misfeasance, bad faith or negligence in the performance of their duties or by
reason of the reckless disregard of their obligations and duties under this
Agreement; nor (ii) is the Fund to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the Distributor or such
controlling persons, as the case may be, shall have notified the Fund in
writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been served
upon the Distributor or such controlling persons (or after the Distributor or
such controlling persons shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve it from any liability which it may have to the person against whom
such action is brought otherwise than on account of its indemnity
-4-
<PAGE>
agreement contained in this paragraph. The Fund will be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but if the Fund
elects to assume the defense, such defense shall be conducted by counsel
chosen by it and satisfactory to the Distributor or such controlling person
or persons, defendant or defendants in the suit. In the event the Fund elects
to assume the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or defendants in
the suit, shall bear the fees and expenses of any additional counsel retained
by them, but, in case the Fund does not elect to assume the defense of any
suit, it will reimburse the Distributor or such controlling person or
persons, defendant or defendants in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Fund shall promptly notify
the Distributor of the commencement of any litigation or proceedings against
it or any of its officers or directors in connection with the issuance or
sale of any of the shares.
(b) The Distributor shall indemnify and hold harmless the
Fund and each of its directors and officers and each person, if any, who
controls the Fund against any loss, liability, claim, damage or expense
described in the foregoing indemnity contained in Section 7(a) hereof, but
only with respect to statements or omissions made in reliance upon, and in
conformity with, information furnished to the Fund in writing by or on behalf
of the Distributor for use in connection with the Registration Statement or
related prospectus and statement of additional information, as from time to
time amended, or the annual or interim reports to shareholders. In case any
action shall be brought against the Fund or any person so indemnified, in
respect of which indemnity may be sought against the Distributor, the
Distributor shall have the rights and duties given to the Fund, and the Fund
and each person so indemnified shall have the rights and duties given to the
Distributor by the provisions of Section 7(a) hereof.
8. OTHER PROVISIONS.
(a) The Distributor may, but is not obligated to, act as agent
for the Fund without commission on repurchases of shares of the Fund.
(b) The Agreement shall not be construed as authorizing any
dealer or other person to act as agent either of the Fund or of the
Distributor.
(c) The books and records of the Distributor, insofar as they
relate to sales of shares of the Fund shall be open to inspection during
business hours by the officers and authorized representatives of the Fund, and
the books and records of the Fund relating to the determination of the
offering price of shares shall be open to inspection during business hours by
the officers and authorized representatives of the Distributor.
(d) This Agreement may be terminated at any time without
payment of any penalty by the Board of Directors of the Fund or by the vote
of a majority of the outstanding voting securities of the Fund on 60 days'
written notice to the Distributor, or by the Distributor on like notice to the
Fund. In the absence of the issuance of an Order by the Securities and
Exchange Commission providing an exemption from the provisions of Section
15(b) of the Investment Company Act, this Agreement shall automatically
terminate in the event of its assignment (as defined in the Investment Company
Act) by the Distributor.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers duly authorized and their corporate seal to be
affixed as of the day and year first above written.
FPA CAPITAL FUND, INC.
(Seal)
By /s/ Robert L. Rodriguez
---------------------------
Robert L. Rodriguez,
President
FPA FUND DISTRIBUTORS, INC.
(Seal)
By /s/ Lawrence P. McNeil
---------------------------
Lawrence P. McNeil,
President
-6-
<PAGE>
FPA FUND DISTRIBUTORS, INC.
11400 WEST OLYMPIC BOULEVARD SUITE 1200 LOS ANGELES, CALIFORNIA 90064
(800) 982-4372
SELLING GROUP AGREEMENT FOR FPA FUNDS
Gentlemen:
As the general distributor and agent for FPA Funds (hereinafter
referred to as the "Fund" or collectively as the "Funds"), we invite you to
become a member of the Selling Group to distribute the shares of the Funds on
the following terms:
1. Orders for shares received from you and accepted by us will only be
at the public offering price applicable to each order as established by and
determined in accordance with the then effective Prospectus of the Funds. All
orders are subject to acceptance by us and both we and the Funds reserve the
right in our sole discretion to reject any order. The Funds also reserve the
right to withhold or withdraw shares from sale temporarily or permanently. The
minimum purchase is as expressed in the applicable current prospectus and no
order for less than such amount will be accepted.
2. As members of the Selling Group, you will be allowed a discount
from the regular offering price in accordance with the Commission Schedule in
effect at the time of the order. The Commission Schedule may be amended from
time to time in our sole discretion. A description of the current Commission
Schedule and policies is attached hereto and is effective as of the date hereof.
In the event the Commission Schedule and policies are amended, we will promptly
notify you of the change.
3. The Funds encourage reinvestment of dividends and capital gain
distributions without sales charge, and no commission or compensation shall be
paid to you on account of any such reinvestment.
4. If any shares are repurchased by the Funds or by us, or are
tendered for redemption within seven business days after confirmation by us
of the original purchase order from you for such securities, you shall
forthwith refund to us (or forfeit) the full concession allowed to you on the
original sale, which (when received) is to be paid forthwith by us to the
Funds with our share of the sales charge on the original sale by us. We will
notify you of such repurchase or redemption within ten days of the date on
which a request for redemption or certificates for such securities are
delivered to us or the Funds.
5. We reserve the right to cancel this Agreement at any time, without
notice, if any shares are offered for sale by you at less than the regular
offering price as determined by or for the Funds.
6. We generally are authorized on behalf of the Funds to repurchase
from you shares of the Funds offered by your customers for repurchase. Orders
for such repurchase price are determined in the manner described in the then
effective Prospectus of the Funds.
7. We will be pleased to furnish you, without charge, reasonable
quantities of the prospectuses, shareholders reports, application forms and
other sales material or supplemental literature issued or prepared by us or
the Funds from time to time.
8. As a member of the Selling Group, you act as principal and are not
employed by us as broker, agent or employee; you are not authorized to act for
us nor to make any representations in our behalf; and in purchasing or selling
shares hereunder, you are entitled to rely only upon the information contained
in the then current prospectuses of the Funds. You shall forward to whom any
offer or sale of shares of the Funds is made, at or prior to the time of such
offer or sale, a copy of the then current prospectus with respect to such
shares. In the offer and sale of shares of the Funds you shall not use any
prospectus or supplemental literature not approved in writing by the Funds or
the Distributor. No person is authorized to make any representations concerning
shares of the Funds except those contained in the current prospectus of the
Funds as amended or supplemented. You also agree that every effort shall be
made by you to place orders on an investment basis.
9. Shares purchased shall be delivered or deposited by the Funds only
against receipt by the Funds of the purchase price in collected clearing house
funds, as specified from time to time by the Funds, subject to deduction
<PAGE>
for your discount and our commission on such sale. If payment for the shares
purchased is not received within three days after confirmation of your order,
the sale may be cancelled forthwith by us or the Funds, without any
responsibility or liability on our part or on the part of the Funds. At our
option, we may sell the shares ordered back to the Funds, in which case we may
hold you responsible for any loss, including loss of profit suffered by us,
resulting from your failure to make payment as aforesaid.
10. We shall have no responsibility for the qualification of shares
for sale under the laws regulating the sale of securities in any jurisdiction,
and shall not in any event be liable or responsible (except for liabilities
arising under the Securities Act of 1933) for the issue, form, validity,
enforceability or value of shares, nor for any matter in connection therewith.
No obligation not expressly assumed by us in this Agreement shall be implied
therefrom. You agree to sell shares of the Funds only in states in which you
are authorized to sell such shares and in which such shares are qualified for
sale.
11. Each party to this Agreement represents that it is (and will
continue to be during the life of the Agreement) a member in good standing of
the National Association of Securities Dealers, Inc., and agrees to abide by the
Rules of Fair Practice of the Association. This Agreement shall be construed to
include among its terms each of the provisions required by Section 26 of the
said Rules of Fair Practice to be set forth in a sales agreement, and each
party agrees to be bound by such provisions. You also represent that you are a
properly registered or licensed broker or dealer under applicable federal and
state securities laws and regulations. You agree to notify us immediately if
you cease to be so registered or licensed or a member in good standing of the
Association.
12. Either party hereto may cancel this Agreement by written notice to
the other.
13. This agreement shall be binding upon receipt by us in Los Angeles,
California, of a duplicate copy duly accepted and signed by you, and shall be
construed in accordance with the laws of the State of California.
Dated: 19
-------------- -----
FPA FUND DISTRIBUTORS, INC.
By
--------------------------------------
The undersigned accepts your invitation to become a member of the
Selling Group and agrees to abide by the foregoing terms and conditions. The
undersigned acknowledges receipt of prospectuses for use in connection with this
offering.
Dated: 19
-------------- -----
(Dealer)
--------------------------------
By (Signature)
--------------------------
Print Name
------------------------------
Title
-----------------------------------
Address
---------------------------------
---------------------------------
Phone ( )
----------------------------------
CRD#
------------------------------------
Please return signed copies to:
FPA FUND DISTRIBUTORS, INC.
Mutual Fund Administration
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
<PAGE>
[LOGO]
STATE STREET BANK AND TRUST COMPANY
Custodian Fee Schedule
FPA PARAMOUNT FUND, INC.
FPA PERENNIAL FUND, INC.
* FPA NEW INCOME FUND, INC.
FPA CAPITAL FUND, INC.
SOURCE CAPITAL, INC.
Effective August 1, 1987
- -------------------------------------------------------------------------------
I. ADMINISTRATION
CUSTODY AND PORTFOLIO ACCOUNTING SERVICE - Maintain custody of fund
assets. Settle portfolio purchases and sales. Report buy and sell
fails. Determine and collect portfolio income. Make cash disbursements
and report case transactions. Maintain investment ledgers, provide
selected portfolio transaction, position and income reports.
The administration fee shown below is an annual charge, billed and
payable monthly, based on average monthly net assets.
ANNUAL FEES PER PORTFOLIO
<TABLE>
<CAPTION>
Custody and
Fund Net Assets Portfolio Acct.
--------------- ---------------
<S> <C>
First $20 Million 1/ 40 of 1%
Next $80 Million 1/ 80 of 1%
Excess 1/200 of 1%
Minimum Monthly
Asset Charges $1,000
</TABLE>
* The New Income Fund, Inc. will be subject to a minimum monthly charge
of $250.
II. GLOBAL CUSTODY - Services provided include:
Cash Movements, Foreign Communication, Foreign Exchange (local
currency settlements).
<TABLE>
<CAPTION>
Fund Net Assets Annual Fees
--------------- -----------
<S> <C>
First $50 Million 18 Basis Points
Next $50 Million 15 Basis Points
Over $100 Million 12 Basis Points
Minimum Per Client $5,000.00 Annually
</TABLE>
<PAGE>
III. PORTFOLIO TRADES - FOR EACH LINE ITEM PROCESSED
State Street Bank Repos $ 7.00
DTC or Fed Book Entry $12.00
New York Physical Settlements $30.00
All other trades $16.00
IV. OPTIONS
Option charge for each option written or closing contract,
per issue, per broker $25.00
Option expiration charge, per issue, per broker $15.00
Option exercised charge, per issue, per broker $15.00
V. LENDING OF SECURITIES
Deliver loaned securities versus cash collateral $20.00
Deliver loaned securities versus securities collateral $30.00
Receive/deliver additional cash collateral $ 6.00
Substitutions of securities collateral $30.00
Deliver cash collateral versus receipt of loaned securities $15.00
Deliver securities collateral versus receipt of loaned
securities $25.00
Loan administration -- mark-to-market per day, per loan $ 3.00
VI. INTEREST RATE FUTURES
Transactions -- no security movement $ 8.00
VII. COUPON BONDS
Monitoring for calls and processing coupons -- for each
coupon issue held -- monthly charge $ 5.00
VIII. HOLDINGS CHARGE
For each issue maintained -- monthly charge $ 5.00
<PAGE>
IX. PRINCIPAL REDUCTION PAYMENTS
Per paydown $10.00
X. DIVIDEND CHARGES (For items held at the Request of
Traders over record date in street form) $50.00
XI. SPECIAL SERVICES
Fees for activities of a non-recurring nature such as fund
consolidations or reorganizations, extraordinary security shipments and
the preparation of special reports will be subject to negotiation.
Fees for tax accounting/recordkeeping for options, financial futures,
and other special items will be negotiated separately.
XII. OUT-OF-POCKET EXPENSES
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but
are not limited to the following:
Telephone
Wire Charges ($4.70 per wire in and $4.55 out)
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund Records
Rush Transfer -- $8.00 Each
Transfer Fees
Sub-custodian Charges
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 - $4.25
GNMA Transfer - $15 each
XIII. PAYMENT
The above fees will be charged against the fund's custodian checking
account five (5) days after the invoice is mailed to the fund's offices
and proper fund authorization is granted.
FPA PARAMOUNT FUND, INC.
FPA PERENNIAL FUND, INC.
FPA NEW INCOME FUND, INC.
FPA CAPITAL FUND, INC.
SOURCE CAPITAL, INC.
STATE STREET BANK AND TRUST CO.
By /s/ Julio de Puzo, Jr. By /s/ E.D. Hawkes, Jr.
------------------------------ ------------------------------
Title Treasurer Title Vice President
---------------------------- ----------------------------
Date August 12, 1987 Date August 12, 1987
---------------------------- ----------------------------
<PAGE>
[LOGO]
STATE STREET BANK AND TRUST COMPANY
Custodian Fee Schedule
FPA PARAMOUNT FUND, INC.
FPA PERENNIAL FUND, INC.
* FPA NEW INCOME FUND, INC.
FPA CAPITAL FUND, INC.
SOURCE CAPITAL, INC.
Effective August 1, 1987
- -------------------------------------------------------------------------------
I. ADMINISTRATION
CUSTODY AND PORTFOLIO ACCOUNTING SERVICE - Maintain custody of fund
assets. Settle portfolio purchases and sales. Report buy and sell
fails. Determine and collect portfolio income. Make cash disbursements
and report case transactions. Maintain investment ledgers, provide
selected portfolio transaction, position and income reports.
The administration fee shown below is an annual charge, billed and
payable monthly, based on average monthly net assets.
ANNUAL FEES PER PORTFOLIO
<TABLE>
<CAPTION>
Custody and
Fund Net Assets Portfolio Acct.
--------------- ---------------
<S> <C>
First $20 Million 1/ 40 of 1%
Next $80 Million 1/ 80 of 1%
Excess 1/200 of 1%
Minimum Monthly
Asset Charges $1,000
</TABLE>
* The New Income Fund, Inc. will be subject to a minimum monthly charge
of $250.
II. GLOBAL CUSTODY - Services provided include:
Cash Movements, Foreign Communication, Foreign Exchange (local
currency settlements).
<TABLE>
<CAPTION>
Fund Net Assets Annual Fees
--------------- -----------
<S> <C>
First $50 Million 18 Basis Points
Next $50 Million 15 Basis Points
Over $100 Million 12 Basis Points
Minimum Per Client $5,000.00 Annually
</TABLE>
<PAGE>
III. PORTFOLIO TRADES - FOR EACH LINE ITEM PROCESSED
State Street Bank Repos $ 7.00
DTC or Fed Book Entry $12.00
New York Physical Settlements $30.00
All other trades $16.00
IV. OPTIONS
Option charge of each option written or closing contract,
per issue, per broker $25.00
Option expiration charge, per issue, per broker $15.00
Option exercised charge, per issue, per broker $15.00
V. LENDING OF SECURITIES
Deliver loaned securities versus cash collateral $20.00
Deliver loaned securities versus securities collateral $30.00
Receive/deliver additional cash collateral $ 6.00
Substitutions of securities collateral $30.00
Deliver cash collateral versus receipt of loaned securities $15.00
Deliver securities collateral versus receipt of loaned
securities $25.00
Loan administration -- mark-to-market per day, per loan $ 3.00
VI. INTEREST RATE FUTURES
Transactions -- no security movement $ 8.00
VII. COUPON BONDS
Monitoring for calls and processing coupons -- for each
coupon issue held -- monthly charge $ 5.00
VIII. HOLDINGS CHARGE
For each issue maintained -- monthly charge $ 5.00
<PAGE>
IX. PRINCIPAL REDUCTION PAYMENTS
Per paydown $10.00
X. DIVIDEND CHARGES (For items held at the Request of
Traders over record date in street form) $50.00
XI. SPECIAL SERVICES
Fees for activities of a non-recurring nature such as fund
consolidations or reorganizations, extraordinary security shipments and
the preparation of special reports will be subject to negotiation.
Fees for tax accounting/recordkeeping for options, financial futures,
and other special items will be negotiated separately.
XII. OUT-OF-POCKET EXPENSES
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but
are not limited to the following:
Telephone
Wire Charges ($4.70 per wire in and $4.55 out)
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund Records
Rush Transfer -- $8.00 Each
Transfer Fees
Sub-custodian Charges
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 - $4.25
GNMA Transfer - $15 each
XIII. PAYMENT
The above fees will be charged against the fund's custodian checking
account five (5) days after the invoice is mailed to the fund's offices
and proper fund authorization is granted.
FPA PARAMOUNT FUND, INC.
FPA PERENNIAL FUND, INC.
FPA NEW INCOME FUND, INC.
FPA CAPITAL FUND, INC.
SOURCE CAPITAL, INC.
STATE STREET BANK AND TRUST CO.
By /s/ Julio de Puzo, Jr. By /s/ ED Hawkes, Jr.
------------------------------ ------------------------------
Title Treasurer Title Vice President
---------------------------- ----------------------------
Date August 12, 1987 Date August 12, 1987
---------------------------- ----------------------------
<PAGE>
AMENDMENT TO THE
CUSTODIAN CONTRACT
AGREEMENT made this 27th day of October, 1988 by and between STATE
STREET BANK AND TRUST COMPANY ("Custodian") and FPA CAPITAL FUND, INC. (the
"Fund").
WITNESSETH THAT:
WHEREAS, the Custodian and the Fund are parties to a Custodian Contract
dated August 20, 1984 (as amended to date, the "Contract") which governs the
terms and conditions under which the Custodian maintains custody of the
securities and other assets of the Fund:
NOW THEREFORE, the Custodian and the Fund hereby amend the terms of the
Custodian Contract and mutually agree to the following:
Insert as the final paragraph under RESPONSIBILITY OF CUSTODIAN:
If the Fund requires the Custodian to advance cash or securities
for any purpose or in the event that the Custodian or its nominee
shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the
performance of this Contract, except such as may arise from its or
its nominee's own negligent action, negligent failure to act or
willful misconduct, any property at any time held for the account of
the Fund shall be security therefor and should the Fund fail to
repay the Custodian promptly, the Custodian shall be entitled to
utilize available cash to the extent necessary to obtain
reimbursement, and if insufficient sell other Fund assets, PROVIDED
THAT Custodian shall, with respect to Fund assets as to which
Custodian has perfected its lien and which Custodian proposes to
dispose of pursuant to the foregoing right, give the Fund notice
identifying such assets and the Fund shall have three business days
from receipt of such notice to notify the Custodian if the Fund
wishes the Custodian to dispose of Fund assets of equal value other
than those identified in such notice; in the absence of any
contrary notification from the Fund, Custodian shall be free to
dispose of the Fund assets initially identified to the extent
necessary to realize the amounts to which it is entitled hereunder.
<PAGE>
Replace subsection 7. of Section II.B. DELIVERY OF SECURITIES with the
following new subsection 7.:
7. Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt for
examination in accordance with "street delivery" custom; provided
that in any such case, the Custodian shall have no responsibility
or liability for any loss arising from the delivery of such
securities prior to receiving payment for such securities except as
may arise from the Custodian's own negligence or willful misconduct;
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and on its behalf by a duly authorized officer as of the
day and year first above written.
ATTEST FPA CAPITAL FUND, INC.
/s/ Sherry Sasaki /s/ Julio de Puzo, Jr.
- -------------------------------- -----------------------------------
Secretary Treasurer
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ P. McClure /s/ E.D. Hawkes, Jr.
- -------------------------------- -----------------------------------
Assistant Secretary Vice President
<PAGE>
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE ADDENDUM
FOR GNMA SECURITIES
TRADED THROUGH
PARTICIPANTS TRUST COMPANY
FPA NEW INCOME FUND
FPA PERENNIAL FUND
SOURCE CAPITAL
FPA CAPITAL FUND, INC.
- -------------------------------------------------------------------------------
The fees identified in this addendum replace fees for GNMA securities as
they are converted. All other charges not identified herein remain in force.
<TABLE>
<CAPTION>
Description Amount
----------- ------
<S> <C>
I. Portfolio Trades - For Each Line Item Processed
------------------------------------------------
a. PTC Purchase $25.00
b. PTC Sale $25.00
c. Deposit/Withdrawal of GNMA Certificates $25.00
II. Out-of Pocket Expenses
----------------------
From Participants Trust Company
a. Deposit/Withdrawal of GNMA Certificates for
Same Day Turnarounds $50.00
b. Principal Paydowns Subject to Interim
Accounting by PTC (items settling after
record date) $10.00
c. Interest expense for advancement of monthly
principal and interest payments Variable
</TABLE>
FPA NEW INCOME FUND STATE STREET BANK & TRUST CO.
FPA PERENNIAL FUND
SOURCE CAPITAL
FPA CAPITAL FUND, INC.
By: By: E.D. Hawkes, Jr.
----------------------------- ---------------------------------
Title: Treasurer Title: VICE PRESIDENT
--------------------------- ------------------------------
Signature:/s/ Julio de Puzo, Jr. Signature:/s/ E.D. Hawkes, Jr.
----------------------- --------------------------
Date: February 14, 1990 Date: JAN 10 1990
---------------------------- -------------------------------
<PAGE>
AGREEMENT AND ARTICLES OF MERGER
AGREEMENT AND ARTICLES OF MERGER, dated this 20th day of September,
1993, by and between FPA Capital Fund, Inc., a Maryland corporation
(hereinafter called the "Maryland Corporation" or the "Surviving
Corporation") and FPA Capital Fund, Inc., a Delaware corporation (hereinafter
called the "Delaware Corporation"), said corporations sometimes collectively
called the "Constituent Corporations".
WHEREAS, the Maryland Corporation is a corporation duly organized and
validly existing under the laws of the State of Maryland, has authorized
capital stock consisting of 100,000,000 common shares, having a par value of
$0.01 per share, and owns no interest in land in the State of Maryland; and
WHEREAS, the Maryland Corporation is a wholly-owned subsidiary of the
Delaware Corporation; and
WHEREAS, the Delaware Corporation is a corporation duly organized and
validly existing under the laws of the State of Delaware, has authorized
capital stock consisting of 50,000,000 common shares, having a par value of
$1.00 per share, and owns no interest in land in the State of Maryland; and
WHEREAS, the principal office of the Maryland Corporation in the State
of Maryland is c/o CT Corporation System, 32 South Street, Baltimore,
Maryland 21202. Its principal place of business is 11400 West Olympic
Boulevard, Los Angeles, California 90064; and
WHEREAS, the principal office of the Delaware Corporation in the State
of Delaware is c/o The Corporation Trust Company, 1209 Orange Street,
Wilmington, Delaware 19801. Its principal place of business is 11400 West
Olympic Boulevard, Los Angeles, California 90064; and
WHEREAS, the Board of Directors of each of the Constituent Corporations
has adopted this Agreement and Articles of Merger as a Plan of Reorganization
intended to qualify as such under Section 368(a)(1) of the Internal Revenue
Code of 1986, as amended (the "Code"), and the Constituent Corporations and
their respective Boards of Directors deem it advisable and to the advantage
of the Constituent Corporations and their respective stockholders that the
Delaware Corporation be merged with and into the Maryland Corporation, with
the Maryland Corporation being the Surviving Corporation, under and pursuant
to the laws of the state of Delaware and the State of Maryland on the terms
and conditions herein contained.
NOW, THEREFORE, in consideration of the premises and mutual agreements,
covenants and provisions herein contained, the parties hereto agree to the
terms and conditions of the foregoing merger and the mode of carrying the
same into effect as follows:
<PAGE>
ARTICLE I
1.1 The Delaware Corporation and the Maryland Corporation agree that at
the Effective Time of the merger, as defined in Section 1.2 below, the
Delaware Corporation shall be merged with and into the Maryland Corporation,
and the Maryland Corporation shall be the Surviving Corporation and shall be
governed by the laws of the State of Maryland.
1.2 The merger shall become effective at the time and date that the
later of the following two events has occurred: (i) the filing of this
Agreement and Articles of Merger (the "Agreement") with the State Department
of Assessments and Taxation for the State of Maryland in accordance with the
provisions of Section 3-113 of the Maryland General Corporation Law, and (ii)
the acceptance of this Agreement for filing by the Secretary of the State of
Delaware in accordance with Section 252 of the Delaware General Corporation
Law. The date and time when the merger shall become effective are referred to
herein as the "Effective Time".
1.3 The Articles of Incorporation of the Maryland Corporation in effect
immediately prior to the Effective Time shall continue to be the the Articles
of Incorporation of the Surviving Corporation, until amended in the manner
provided in the By-Laws and in the Maryland General Corporation Law.
1.4 The By-Laws of the Maryland Corporation in effect immediately prior
to the Effective Time of the merger shall continue to be the By-Laws of the
Surviving Corporation, until amended in the manner provided in the By-Laws
and in the Maryland General Corporation Law.
1.5 The persons who constitute the Board of Directors of the Maryland
Corporation immediately prior to the Effective Time shall constitute the
Board of Directors of the Surviving Corporation and shall hold office until
the next annual meeting of stockholders of the Surviving Corporation or until
their respective successors are elected and qualified, provided that they are
elected by the stockholders of the Delaware Corporation at the 1993 Annual
Meeting of Stockholders of the Delaware Corporation (the "1993 Annual
Meeting").
1.6 The persons who serve as the officers of the Maryland Corporation
immediately prior to the Effective Time shall be the officers of the
Surviving Corporation until the next annual meeting of directors of the
Surviving Corporation or until their respective successors are elected and
qualified.
1.7 Ernst & Young, the independent accountants of the Delaware
Corporation immediately prior to the Effective Time, shall serve as
independent accountants to the Surviving Corporation to report upon the
financial condition of the Surviving Corporation for the fiscal year ending
March 31, 1994, provided the appointment of Ernst & Young is approved by
stockholders of the Delaware Corporation at the 1993 Annual Meeting.
-2-
<PAGE>
ARTICLE II
2.1 The manner and basis of converting the issued and outstanding
shares of the common stock of the Delaware Corporation into the shares of the
Surviving Corporation shall be as hereinafter set forth in this Article II.
2.2 Each share or fraction thereof of common stock of the Maryland
Corporation issued and outstanding immediately prior to the Effective Time
shall, as of the Effective Time, forthwith cease to exist and be canceled.
2.3 Each share or fraction thereof of common stock of the Delaware
Corporation issued and outstanding immediately prior to the Effective Time
shall thereupon be converted, without any action on the part of the holder
thereof, into an equal number of whole and fractional shares of common stock
of the Surviving Corporation. Each certificate representing shares of the
Delaware Corporation shall represent the same number of shares of the
Surviving Corporation subject to the right of each holder of a stock
certificate representing shares of the Delaware Corporation to surrender the
same to the Surviving Corporation and to receive in exchange therefor a
certificate representing an equal number of shares of common stock of the
Surviving Corporation. Each such share of common stock of the Surviving
Corporation issued pursuant to this paragraph shall be fully paid and
non-assessable.
2.4 Any transfer taxes payable upon issuance of shares of common stock
of the Surviving Corporation in a name other than that of the registered
holder of the shares of the Delaware Corporation entitled to receive the same
shall be paid by the person to whom such shares are to be issued.
ARTICLE III
3.1 At the Effective Time, the separate existence of the Delaware
Corporation shall cease, except to the extent, if any, continued by statute,
and all the assets, rights, privileges, powers and franchises of the Delaware
Corporation and all debts due on whatever account to it, shall be taken and
deemed to be transferred to and vested in the Surviving Corporation without
further act or deed; and all such assets, rights, privileges, powers and
franchises, and all and every other interest of the Delaware Corporation
shall be thereafter effectually the property of the Surviving Corporation as
they were of the Delaware Corporation; and the title to and interest in any
real estate vested by deed, lease or otherwise, unto either of the
Constituent Corporations, shall not revert or be in any way impaired. The
Surviving Corporation shall be responsible for all of the liabilities and
obligations of the Delaware Corporation, but the liabilities of the
Constituent Corporations or of their stockholders, directors, or officers,
shall not be affected by this merger, nor shall the rights of the creditors
thereof or any persons dealing with such corporation or any liens upon the
property of such corporations, be impaired by this merger, and any such claim
existing or action or proceeding pending by or against either Constituent
Corporation may be prosecuted to judgment as if this merger had not taken
place, or the Surviving Corporation may be proceeded against or substituted in
place of the Delaware Corporation. Except as otherwise specifically set forth
in this Agreement, the identity, existence, purposes, powers, franchise,
rights, immunities and liabilities of the Maryland Corporation shall continue
unaffected and unimpaired by the merger.
-3-
<PAGE>
3.2 All corporate accounts, plans, policies, resolutions, approvals,
and authorizations of stockholders, Board of Directors, Committees of the
Board of Directors, and agents of the Delaware Corporation that are in effect
immediately prior to the Effective Time shall be taken for all purposes as
the acts, plans, policies, resolutions, approvals and authorizations of the
Surviving Corporation and shall be as effective and binding thereon as the
same were with respect to the Delaware Corporation.
3.3 In case at any time after the Effective Time the Surviving
Corporation shall determine that any further conveyance, assignment or other
documents or any further action is necessary or desirable to vest in or
confirm to the Surviving Corporation full title to all cash and securities
and other properties, assets, rights, privileges and franchises of the
Constituent Corporations, the officers and directors of the Constituent
Corporations, at the expense of the Surviving Corporation, shall execute and
deliver all such instruments and take all such action as the Surviving
Corporation may determine to be necessary or desirable in order to vest in
and confirm to the Surviving Corporation title to and possession of all such
cash and securities and other properties, assets, rights, privileges and
franchises and otherwise to carry out the purpose of this Agreement.
3.4 The Surviving Corporation hereby (1) agrees that it may be served
with process in the State of Delaware in any proceeding for the enforcement
of any obligation of the Delaware Corporation, as well as for the enforcement
of any obligation of the Surviving Corporation arising from the merger herein
provided, including any suit or proceeding to enforce the right, if any, of
any stockholder as determined in appraisal proceedings pursuant to the
provisions of Section 262 of the General Corporation Law of the State of
Delaware, (2) irrevocably appoints the Secretary of State of the State of
Delaware as its agent to accept service of process in any such suit or other
proceedings, and (3) specifies the following as the address to which a copy
of such process shall be mailed by the Secretary of State of Delaware: FPA
Capital Fund, Inc., 11400 West Olympic Boulevard, Los Angeles, California
90064, Attention: Corporate Secretary.
ARTICLE IV
4.1 Each of the Constituent Corporations represents and warrants to and
agrees with the other that:
(a) Such Corporation is duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation and is, or
will be, duly qualified as a foreign corporation in the State of California.
(b) Such Corporation has full power and authority to carry on its
business as it is presently being conducted and to enter into the merger
contemplated hereby.
(c) There is no suit, action or legal or administrative
proceeding pending or to its knowledge threatened, against it which, if
adversely determined, might materially and adversely affect its financial
condition or the conduct of its business.
-4-
<PAGE>
(d) At the Effective Time, consummation of the transactions
contemplated hereby will not result in the breach of, or constitute a
default under, any agreement or instrument by which it is bound.
(e) All of its presently outstanding shares, if any, are
validly issued, fully paid and non-assessable.
(f) Immediately prior to the Effective Time, such Corporation
will have good, marketable and unencumbered title to its cash, securities
and other assets.
ARTICLE V
5.1 The obligations of each of the Constituent Corporations to
effectuate the merger hereunder shall be subject to the following conditions:
(a) The representations and warranties of each Constituent
Corporation contained herein shall be true as of and at the Effective
Time with the same effect as though made as of and at such date, and each
Constituent Corporation shall have performed all obligations required by
this Agreement to be performed by it prior to the Effective Time; and
each Constituent Corporation shall have delivered to the other a
certificate dated as of the Effective Time signed by its Chairman,
President or Vice President and by its Secretary or Treasurer to the
foregoing effect.
(b) Each Constituent Corporation shall have delivered to the
other a certified copy of the resolutions of its Board of Directors
approving this Agreement, which resolutions shall be adopted by at least
a majority vote of its directors, including a majority of its directors
who are not "interested persons" of the Delaware Corporation as that
term is defined in the Investment Company Act of 1940 (the "1940 Act").
(c) The Securities and Exchange Commission ("SEC") shall not
have issued an unfavorable advisory report under Section 25(b) of the
1940 Act nor instituted any proceeding seeking to enjoin consummation of
the merger under Section 25(c) of the 1940 Act.
(d) No legal, administrative or other proceedings shall have
been instituted or threatened between the date of this Agreement and the
Effective Time seeking to restrain or otherwise prohibit the merger.
(e) The holders of at least a majority of the outstanding
shares of common stock of the Delaware Corporation shall have voted in
favor of the adoption of this Agreement and the merger contemplated
hereby at the annual meeting of stockholders, and the holders of the
outstanding shares of the Maryland Corporation shall have approved the
adoption of this Agreement and the merger contemplated hereby by written
consent or at an annual or special meeting of stockholders.
-5-
<PAGE>
(f) Each Constituent Corporation shall have received an opinion of
counsel, from O'Melveny & Myers, substantially to the effect that:
(1) The merger of the Delaware Corporation into the Maryland
Corporation will qualify as a reorganization within the meaning of Section
368(a)(1) of the Code and each Constituent Corporation will be a party to
the reorganization within the meaning of Section 368(b) of the Code;
(2) No gain or loss will be recognized to the Delaware
Corporation upon the transfer of its assets to, and assumption of its
liabilities by, the Maryland Corporation;
(3) The basis of the assets of the Delaware Corporation
received by the Maryland Corporation will be the same as the basis of such
assets in the hands of the Delaware Corporation immediately prior to the
merger;
(4) The holding period of the assets of the Delaware
Corporation received by the Maryland Corporation will include the period
during which such assets were held by the Delaware Corporation;
(5) No gain or loss will be recognized by the Maryland
Corporation upon its receipt of the assets of the Delaware Corporation;
(6) No gain or loss will be recognized by the stockholders of
the Delaware Corporation upon their receipt of common stock of the
Surviving Corporation as a consequence of the merger;
(7) The basis of the shares of common stock of the Surviving
Corporation received by stockholders of the Delaware Corporation will be
the same as the basis of the shares of the Delaware Corporation surrendered
by such stockholders;
(8) The holding period of the shares of common stock of the
Surviving Corporation received by stockholders of the Delaware Corporation
will include the holding period of such shares of common stock of the
Delaware Corporation as are surrendered by such stockholders provided that
such shares of the Delaware Corporation were held as a capital asset at the
Effective Time; and
(9) The accumulated earnings and profits of the Delaware
Corporation will become earnings and profits of the Maryland Corporation
available for the subsequent distribution of dividends within the meaning
of Section 316 of the Code.
(g) Each Constituent Corporation shall have received an opinion (or
opinions) of counsel in form and substance satisfactory to it to the effect
that:
(1) the corporate existence, good standing and authorized
common stock of each Constituent Corporation are as stated or referred to
in this Agreement;
-6-
<PAGE>
(2) the shares of common stock of the Surviving Corporation to
be issued pursuant to the terms of this Agreement have been duly authorized
and, when issued and delivered as provided herein, will have been validly
issued, fully paid and non-assessable;
(3) all corporate proceedings required to be taken by or on
the part of each Constituent Corporation to authorize and carry out this
Agreement and to effect the merger contemplated hereby have been duly and
properly taken; and
(4) this Agreement is the legal, valid and binding obligation
of each Constituent Corporation enforceable against it in accordance with
its terms.
ARTICLE VI
6.1 The Maryland Corporation agrees that this Agreement shall be
submitted to its stockholders for approval by unanimous written consent on or
before October 19, 1993, or on such other date as its Board of Directors
shall approve.
6.2 The Delaware Corporation agrees that this Agreement shall be
submitted to its stockholders for approval at a meeting duly called and held
on October 19, 1993, or on such other date as its Board of Directors shall
approve. If this Agreement is adopted by the affirmative vote of at least a
majority of the outstanding shares of common stock of the Delaware
Corporation at such meeting and by the stockholders of the Maryland
Corporation pursuant to Section 6.1, then this Agreement, properly executed
and acknowledged and accompanied by such other certificates or documents as
may be required by law, shall (if not terminated or abandoned pursuant to
Article VII hereof) be filed and recorded as provided under the laws of
Delaware and Maryland.
6.3 If the merger contemplated hereby is consummated and made
effective, all expenses incurred by either of the Constituent Corporations in
connection with this Agreement shall be paid by the Surviving Corporation. If
such merger is not consummated, each of the Constituent Corporations shall
bear such expenses as have been separately incurred by it. Neither of the
Constituent Corporations shall pay the expenses, if any, of its stockholders
arising out of the merger.
ARTICLE VII
7.1 Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated and the merger abandoned at
any time (whether before or after adoption hereof by the stockholders of the
Delaware Corporation) prior to the Effective Time:
(a) by mutual consent of the Constituent Corporations;
(b) by either of the Constituent Corporations if any condition set
forth in Article V hereof has not been fulfilled or waived by it; or
-7-
<PAGE>
(c) by either of the Constituent Corporations if the merger shall
not have become effective on or before December 31, 1993.
7.2 An election by a Constituent Corporation to terminate this
Agreement and abandon the merger shall, be exercised by its Board of Directors.
7.3 In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall without any liability on the part of either
of the Constituent Corporations or persons who are its directors, officers,
or stockholders in respect of this Agreement, become void and have no effect,
provided that this provision shall not protect any director or officer of
either of the Constituent Corporations against any liability to such
corporation or its stockholders to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office.
7.4 At any time prior to the Effective Time, any of the terms or
conditions of this Agreement may be waived by the Constituent Corporation
entitled to the benefit thereof by action by its Board of Directors or its
President, if, in the judgment of the Board of Directors or President taking
such action, such waiver will not have a material adverse effect on the
benefits intended under this Agreement to the stockholders of the Constituent
Corporation on behalf of which such action is taken.
ARTICLE VIII
8.1 The respective representations and warranties of the Constituent
Corporations contained in Article IV hereof shall expire with, and be
terminated by, the merger contemplated by this Agreement, and neither the
respective Constituent Corporations nor any of their directors or officers
shall be under any liability with respect to any such representations or
warranties after the Effective Time. This provision shall not protect any
director or officer of either of the Constituent Corporations against any
liability to such corporation or to its stockholders to which they would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
their office.
ARTICLE IX
9.1 This Agreement embodies the entire agreement between the parties,
and there are no agreements, understandings, restrictions or warranties
among the parties other than those set forth herein or herein provided for.
9.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original but all of such counterparts
together shall constitute but one instrument.
-8-
<PAGE>
IN WITNESS WHEREOF, each of the Constituent Corporations has caused this
Agreement and Articles of Merger to be executed on its behalf by its
President or Vice President and attested to by its Secretary or Assistant
Secretary all as of the day and year first written above.
FPA CAPITAL FUND, INC.
a Delaware corporation
(Corporate Seal)
By/s/ Robert L. Rodriguez
----------------------------
Robert L. Rodriguez, President
Attest:
By/s/ Sherry Sasaki
-----------------------------
Sherry Sasaki, Secretary
FPA CAPITAL FUND, INC.
a Maryland corporation
(Corporate Seal)
By/s/ Robert L. Rodriguez
---------------------------
Robert L. Rodriguez, President
Attest:
By/s/ Sherry Sasaki
-----------------------------
Sherry Sasaki, Secretary
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PAGE>
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<NAME> FPA CAPITAL FUND, INC
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