<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1999
SECURITIES ACT FILE NO. 2-30393
INVESTMENT COMPANY ACT FILE NO. 811-1735
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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. 41 |X|
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO. 22 |X|
----------------------
FPA NEW INCOME, 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 COPY TO:
FPA NEW INCOME, INC. LAWRENCE J. SHEEHAN, ESQ.
11400 WEST OLYMPIC BOULEVARD, SUITE 1200 O'MELVENY & MYERS LLP
LOS ANGELES, CALIFORNIA 90064 1999 AVENUE OF THE STARS
(NAME AND ADDRESS OF AGENT FOR SERVICE) 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
<PAGE>
FPA NEW INCOME, INC.
CROSS REFERENCE SHEET
FORM N-1A PROSPECTUS CAPTION
- --------- ------------------
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>
STATEMENT OF ADDITIONAL
PART B INFORMATION CAPTION
- ------ -----------------------
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....................... 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
<PAGE>
FPA New Income, Inc.
PROSPECTUS
FPA New Income, Inc. seeks current
income and long-term total return. The
Fund's investment adviser, First Pacific
Advisors, Inc., invests the Fund's assets
primarily in fixed-income securities, with
emphasis on obligations issued or
guaranteed by the United States
Government and its agencies and instrumentalities.
THE SECURITIES AND EXCHANGE
COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR
PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
[Logo]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
FEBRUARY 1, 2000
<PAGE>
FPA NEW INCOME, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
(310) 473-0225
<TABLE>
<S> <C>
INVESTMENT First Pacific Advisors, Inc.
ADVISER: 11400 West Olympic Boulevard,
Suite 1200
Los Angeles, California 90064
DISTRIBUTOR: FPA Fund Distributors, Inc.
11400 West Olympic Boulevard,
Suite 1200
(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
Principal Risks........................................... 7
Management and Organization................................. 10
Purchase, Pricing and Sale of Shares........................ 11
Exchange of Shares and Shareholder Services................. 15
Dividends, Distributions and Taxes.......................... 17
Financial Highlights........................................ 19
</TABLE>
2
<PAGE>
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE. The Fund's primary investment objective is current income
and long-term total return.
WHO MAY WANT TO INVEST IN THE FUND?
- - Investors seeking current income and long-term total return
- - Investors willing to own shares over the course of a market cycle or longer
PRINCIPAL INVESTMENT STRATEGIES. The Adviser purchases primarily fixed-income
securities, with an emphasis on obligations issued or guaranteed by the United
States Government and its agencies and instrumentalities. The Fund can also
invest in corporate debt securities, preferred stocks and convertible
securities.
PRINCIPAL INVESTMENTS. At least 65% of the Fund's assets are invested in income
producing securities. The Adviser generally invests a significant portion (50%
or more) of the Fund's assets in debt obligations issued or guaranteed by the
United States Government and its agencies and instrumentalities, including
mortgage-backed securities.
The Fund's current operating policy is to invest at least 75% of its total
assets, calculated at market value at the time of investment, in the following
types of securities:
- - securities issued or guaranteed by the United States Government, its agencies
or instrumentalities;
- - marketable, non-convertible debt securities rated at the time of purchase
within the two highest grades as determined by either Moody's Investors
Service, Inc. ("Moody's") (Aaa and Aa) or by Standard & Poor's Corporation
("S&P") (AAA and AA);
- - commercial paper of U.S. issuers which at the time of investment is (a) rated
in the highest category by Moody's (Prime-1) or S&P (A-1) or (b) issued by a
company which, at the date of investment, has any outstanding debt securities
rated at least Aa by Moody's or AA by S&P; and
- - repurchase agreements with a member bank of the Federal Reserve System or a
U.S. securities dealer.
Up to 25% of the Fund's assets, calculated at market value at the time of
investment, may be invested in: (a) non-convertible debt securities which are
not rated in the highest two grades by Moody's or S&P; (b) convertible debt
securities; and (c) preferred stocks in an amount not exceeding 5% of the Fund's
assets. Up to 30% of the Fund's assets may be invested, or committed for
investment, in securities offered on a delayed delivery basis. Up to 15% of the
Fund's net assets may be invested in interest only and principal only classes of
stripped mortgage securities, collateralized mortgage obligations structured as
accrual certificates, also known as Z-Bonds, and inverse floaters. The Fund may
invest up to 10% of its net assets in securities of foreign issuers.
PRINCIPAL INVESTMENT RISKS. Even though the Adviser attempts to lessen price
risk, you can lose money by investing in the Fund if any of the following
occurs:
- - If interest rates rise, the market price of fixed-income securities held by
the Fund will fall.
3
<PAGE>
- - Investments in fixed-income securities with longer maturities generally
produce higher yields but are subject to greater market fluctuation.
- - To the extent that convertible debt securities or other debt securities
acquired by the Fund are rated lower than investment grade or are not rated,
there is greater risk as to the timely repayment of principal and interest.
- - The prices of derivatives, such as interest only and principal only stripped
mortgage securities, Z-Bonds and inverse floaters, are likely to be more
volatile in reaction to actual or expected changes in interest rates or in
mortgage prepayment rates.
- - 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 securities prove to be incorrect.
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 by showing changes in the Fund's performance from year to year and by
showing how the Fund's average annual returns for 1, 5 and 10 years compare with
those of a broad measure of market performance. 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 the Lehman Brothers Government/Corporate
Bond Average and the Lipper Corporate Debt Fund "A" Rated Average. This average
is considered a measure of bond performance and is included as a broad-based
comparison to the capitalization characteristics of the Fund's portfolio. The
Lipper Average provides an additional comparison of how the Fund performed in
relation to other mutual funds with similar objectives. Keep in mind that the
Fund's past performance does not indicate how it will perform in the future.
- --------------------------------------------------------------------------------
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>
<S> <C>
1989 12.23%
1990 8.38%
1991 18.80%
1992 11.12%
1993 10.17%
1994 1.46%
1995 14.36%
1996 7.12%
1997 8.31%
1998 3.56%
</TABLE>
The year to date return for the Fund as of September 30, 1999 was 3.67%.
The Fund's highest/lowest QUARTERLY results during this time period were:
<TABLE>
<S> <C> <C>
HIGHEST 6.91% (Quarter ended 6/30/89)
LOWEST (0.84)% (Quarter ended 9/30/90)
</TABLE>
FOR THE PERIODS ENDED SEPTEMBER 30, 1999:
<TABLE>
<CAPTION>
FUND WITH LEHMAN BROTHERS
MAXIMUM GOVERNMENT/ LIPPER CORPORATE
AVERAGE ANNUAL SALES CHARGE CORPORATE DEBT FUND "A" RATED
TOTAL RETURN DEDUCTED BOND AVERAGE AVERAGE
- ------------ -------- ----------------- ---------------------
<S> <C> <C> <C>
One Year................................. (0.80)% (1.62)% (2.19)%
Five Years............................... 6.53% 7.77% 7.01%
Ten Years................................ 8.33% 8.08% 7.66%
</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 FEES
(fees paid directly from your investment)
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)....................... 4.50%
Maximum Deferred Sales Load (as a percentage of
original sales price or redemption proceeds, as
applicable)......................................... *
Redemption Fee (as a percentage of amount
redeemed)........................................... None**
Exchange Fee........................................ $5.00
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fees..................................... 0.50%
Distribution (12b-1) Fees........................... None
Other Expenses...................................... 0.10%
-------
Total Annual Fund Operating Expenses................ 0.60%
</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........................... $ 509
Three years........................ $ 634
Five years......................... $ 770
Ten years.......................... $1,166
</TABLE>
6
<PAGE>
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND PRINCIPAL RISKS
INVESTMENT OBJECTIVES.
The Fund's primary investment objective is current income and long-term total
return.
PRINCIPAL INVESTMENT STRATEGIES. At least 65% of the Fund's assets are invested
in income producing securities. The Fund generally invests a significant portion
(50% or more) of its assets in debt obligations issued or guaranteed by the
United States Government and its agencies and instrumentalities, including
mortgage-backed securities. There is no assurance that the Fund will succeed in
achieving its investment objective. Fund shares are not insured or guaranteed,
and share prices may be higher or lower than their original cost.
The Fund invests primarily in fixed-income securities, including convertible
securities. The market price of fixed-income securities held by the Fund
generally can be expected to vary inversely to changes in prevailing interest
rates. Investments in fixed-income securities with longer maturities generally
produce higher yields but are subject to greater market fluctuation. The average
maturity, which is likely to vary substantially from time to time, of the debt
securities owned by the Fund on September 30, 1999 was 3.7 years.
The Fund's current operating policy is to invest at least 75% of its total
assets, calculated at market value at the time of investment, in the following
types of securities:
(1) securities issued or guaranteed by the United States Government, its
agencies or instrumentalities;
(2) marketable, non-convertible debt securities rated at the time of purchase
within the two highest grades as determined by either Moody's Investors
Service, Inc. ("Moody's") (Aaa and Aa) or by Standard & Poor's Corporation
("S&P") (AAA and AA) (see "Debt Security Ratings" in the Statement of
Additional Information);
(3) commercial paper of U.S. issuers which at the time of investment is
(a) rated in the highest category by Moody's (Prime-1) or S&P (A-1) or
(b) issued by a company which, at the date of investment, has any
outstanding debt securities rated at least Aa by Moody's or AA by S&P; and
(4) repurchase agreements with a member bank of the Federal Reserve System or a
U.S. securities dealer. A repurchase agreement is a short-term investment.
The Fund acquires a debt security that the seller agrees to repurchase at a
future time and set price. If the seller declares bankruptcy or defaults,
the Fund may incur delays and expenses liquidating the security. Such
security may also decline in value and fail to provide income. 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 that are not readily
marketable.
Up to 25% of the Fund's assets, calculated at market value at the time of
investment, may be invested in: (a) non-convertible debt securities which are
not rated in the highest two grades by Moody's or S&P; (b) convertible debt
securities; and (c) preferred stocks in an amount not exceeding 5% of the Fund's
assets. Such debt securities may include so-called junk bonds. Up to 30% of the
Fund's net assets may be invested, or committed for investment, in securities
offered on a delayed delivery basis. Up to 15% of the Fund's net assets may be
invested in interest only and principal only classes of stripped mortgage
securities, collateralized mortgage obligations structured as accrual
certificates, also known as Z-Bonds,
7
<PAGE>
and inverse floaters. The prices of these derivative securities are likely to be
volatile in the event of changes in interest rates or in mortgage prepayment
rates, or expectations related thereto. The Fund may invest up to 10% of its net
assets in securities of foreign issuers. Such investments involve additional
risks and opportunities compared with securities of United States issuers. The
foregoing limitations may be changed by the Board of Directors.
A Convertible Security is a bond, debenture, or note that may be exchanged for
particular common stocks in the future at a predetermined price or formula. A
Convertible Security entitles the holder to receive interest paid or accrued on
the debt security until the Convertible Security matures or is redeemed. Prior
to redemption, Convertible Securities provide benefits similar to
non-convertible debt securities in that they generally provide a stable income
stream with higher yields than those of comparable common stocks. Convertible
Securities entail less risk than the corporation's common stocks. The extent to
which the risk is reduced, however, largely depends on whether the Convertible
Security can sell near its value as a fixed-income security.
Convertible Securities are generally not investment grade. This means that S&P
and Moody's do not rate Convertible Securities within the four highest
categories. The risks against repayment of the principal and interest increase
when debt securities are rated lower than investment grade or are not rated. The
Fund may purchase Convertible Securities and other debt securities rated BB or
lower by S&P or Ba or lower by Moody's. The rating agencies give these ratings
when the issuer's continuing ability to make principal and interest payments is
speculative. Debt securities rated BB or lower by S&P or Ba or lower by Moody's
are, thus, commonly referred to as junk bonds. The Adviser decides to purchase
and sell these securities based on their investment potential and not on the
ratings assigned by credit agencies.
The Fund may sometimes invest in debt securities even though the issuing
companies are financially troubled. These securities are called Deep Discount
Securities and are deeply discounted from their face value. Deep Discount
Securities may be rated C, CI or D by S&P or C by Moody's or may be unrated. The
Fund will invest in Deep Discount Securities when the Adviser believes that the
company's financial conditions are likely to improve. A debt instrument
purchased at a deep discount, but prior to default, may pay a very high
effective yield. If the issuer's financial condition improves, the underlying
value of the securities may increase and result in a capital gain. If the issuer
cannot meet its debt obligations, however, the Deep Discount Securities may stop
generating income and lose its value or become worthless. The Adviser will
balance the benefits of Deep Discount Securities with their risks. A diversified
portfolio may reduce the overall impact of a Deep Discount Security in default
or reduced in value, but the risk cannot be eliminated.
Both interest-only Stripped Mortgage Securities and inverse floaters are highly
sensitive to changes in interest and prepayment rates. As a result, such
securities are extremely volatile. The Adviser, however, believes that the
volatility of the individual security value is tempered when the securities are
combined. Together, interest-only Stripped Mortgage Securities and inverse
floaters could produce higher yields than more traditional securities while
maintaining a relatively low degree of volatility. This is because factors
affecting the value of these securities may or generally balance each other out.
The value of inverse floaters fall as interest rates rise but the value of
interest-only Stripped Mortgage-Backed Securities rise and vice versa. The
accuracy of this technique, of course, is dependent on the Adviser's ability to
forecast interest rates and to allocate the investments accordingly.
8
<PAGE>
Adjustable Rate Mortgages (ARMs) contain maximum and minimum rates beyond which
the mortgage interest rate may not vary over the lifetime of the security. Some
ARMs restrict the maximum amount of adjustment for the mortgage interest rate
during any single adjustment period. Alternatively, certain ARMs also limits any
changes in the required monthly payment. If a monthly payment is not sufficient
to pay the interest accruing on an ARM, excess interest is added to the
principal balance of the mortgage loan. The insufficient amount is, then, repaid
through future monthly payments. The adjustable interest rate feature of the
mortgages underlying ARMs generally buffers the ARMs' market value against sharp
responses to normal interest rate fluctuations. Since the interest rates on the
mortgages are reset periodically, the securities' yields will gradually align
themselves to reflect the changes in market rates.
PRINCIPAL RISKS. Your investment in the Fund is subject to a number of risks
related to principal investment strategies, including:
- - 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. New
laws and proposed new laws could negatively impact the market for high-yield
bonds. In addition, the secondary trading market for lower-rated securities
may be less liquid than the market for higher-rated securities;
- - the price of debt securities held by the Fund can be affected by changing
interest rates, effective maturities and credit ratings;
- - 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;
- - 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;
- - Fund shares could decline in value in response to certain events, such as
changes in markets or economies;
9
<PAGE>
- - factors that affect mortgage-backed securities' value include: (1) the types
and amounts of insurance carried by the mortgagor, (2) the amount of time the
mortgage loan has been outstanding, (3) the loan-to-value ratio of each
mortgage and the amount of overcollateralization of a mortgage pool;
- - mortgage-backed securities reflect an interest on monthly payments made by the
borrowers who take out the underlying mortgage loans. Even though the
underlying mortgage loans are for specified periods of time, the borrowers can
often pay them off sooner. The mortgage-backed security, thus, will be
prepaid. Given the higher cost of delaying payment, a borrower is more likely
to prepay a mortgage with a higher interest rate. The likelihood of prepayment
will have several consequences. Some higher yielding securities might be
converted to cash in times of declining interest rates, so the Fund would be
forced to accept lower interest rates when that cash is used to purchase
additional securities. The increase in prepayment also limits market price
appreciation of mortgage-backed securities when interest rates decline. In
addition, a mortgage-backed security may be subject to redemption at the
option of the issuer;
- - during periods of extreme fluctuations in interest rates, the resulting
fluctuations of ARM rates could affect the ARMs' market value. Most ARMs
generally have annual reset limits or "caps" of 100 to 200 basis points.
Fluctuations in interest rates above these levels, thus, could cause the
mortgage-backed securities to "cap out" and to behave more like long-term,
fixed-rate debt securities. During periods of declining interest rates, of
course, the coupon rates may readjust downward and result in lower yields.
Because of this feature, the value of ARMs will likely not rise during periods
of declining interest rates to the same extent as fixed-rate instruments;
- - special tax considerations are associated with investing in high yield bonds
structured as zero coupon or pay-in-kind securities. The Fund does not receive
any cash interest on such bonds until the bond matures, but the interest on
these securities are accrued as income. Similarly, the inflation accretion
income recorded on inflation-indexed notes is not received until maturity. The
Internal Revenue Code requires the Fund to distribute such income to its
shareholders. Thus, the Fund may have to dispose of securities when it might
not want to in order to provide the cash necessary to make distributions to
those shareholders who do not reinvest dividends;
- - the prices of equity securities held by the Fund can be affected by events
specifically involving the issuers of these securities; and
- - investing outside the U.S. can also involve additional risks, such as currency
fluctuations or political, social and economic instability.
MANAGEMENT AND ORGANIZATION
INVESTMENT ADVISER
First Pacific Advisors, Inc. is the Fund's investment adviser. The Adviser,
together with its predecessors, has been in the investment advisory business
since 1954 and has served as the Fund's investment adviser since July 11, 1984.
The Adviser manages assets of approximately $3.2 billion for six investment
companies, including one closed-end investment company, and 22 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
10
<PAGE>
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 0.50%.
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 not
calculated on days when the NYSE is not 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 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
11
<PAGE>
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.......................................... 4.71% 4.50% 4.00%
$10,000 but less than $25,000.............................. 4.43% 4.25% 3.75%
$25,000 but less than $50,000.............................. 4.17% 4.00% 3.50%
$50,000 but less than $100,000............................. 3.90% 3.75% 3.25%
$100,000 but less than $250,000............................ 3.36% 3.25% 2.75%
$250,000 but less than $500,000............................ 2.04% 2.00% 1.75%
$500,000 but less than $1,000,000.......................... 1.01% 1.00% 0.80%
$1,000,000 and over........................................ 0.00% 0.00% 0.00%
</TABLE>
- ------------
(1) As a percentage of net amount invested.
(2) As a percentage of public offering price.
REDUCING YOUR SALES CHARGE
INVESTMENTS IN OTHER FPA FUNDS. To determine the sales charge, you can add the
current value, at offering price, of all presently held shares of the FPA Funds,
which are:
- - FPA Capital Fund, Inc. (which is currently closed to new investors)
- - FPA New Income, Inc. (this Fund)
- - 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 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.
12
<PAGE>
(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 that has a selling group
agreement with FPA Fund Distributors, Inc. and consents to the purchases;
(f) any employee benefit plan maintained for the benefit of such qualified
investors; and
(g) directors, officers and employees of a company whose employee benefit plan
holds shares of one or more of the FPA Funds.
Because FPA Fund Distributors, Inc. anticipates that certain purchases will
result in economies of scale in the sales effort and related expenses compared
to sales made through normal distribution channels, upon satisfaction of certain
conditions the following persons can purchase without a sales charge:
(a) trustees or other fiduciaries purchasing shares for employee benefit plans
of employers with 20 or more employees;
(b) trust companies, bank trust departments and registered investment advisers
purchasing for accounts over which they exercise investment authority and
which are held in a fiduciary, agency, advisory, custodial or similar
capacity, provided that the amount collectively invested or to be invested
by such accounts during the subsequent 13-month period in the Fund or other
FPA Funds totals at least $1,000,000;
(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 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
13
<PAGE>
retirement plan, you should consult the plan documentation concerning federal
tax consequences and consult your plan custodian about procedures.
A check will be mailed to you within seven days after Boston Financial Data
Services, Inc. receives a properly completed request. 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 losses
due to unauthorized or fraudulent instructions if there is a reasonable belief
in the authenticity of received instructions and reasonable procedures are
employed; otherwise, they may be liable. During periods of significant economic
or market changes, it may be difficult to sell your shares by telephone.
The Fund can change or discontinue telephone redemption privileges without
notice.
REINVESTING IN THE FUND WITH PROCEEDS FROM REDEMPTION OF SHARES. If you
reinvest in the Fund within 30 days you do not have to pay a sales charge. Your
reinvestment is made at the first share price determined after Boston Financial
Data Services, Inc. receives your order. You can only do this once for each Fund
investment, and you must provide sufficient information to verify your
reinvestment when you make your purchase. A sale and reinvestment is a taxable
transaction, but losses on the sale are not deductible for federal income tax
purposes.
14
<PAGE>
AUTOMATIC REDEMPTION (SALE) OF YOUR SHARES. If as a result of a redemption your
account value is less than $500, the Fund can direct Boston Financial Data
Services, Inc. to sell your remaining Fund shares. In such case, you will be
notified in writing that your account value is insufficient and be given up to
60 days to increase it to $500.
EXCHANGE OF SHARES AND SHAREHOLDER SERVICES
EXCHANGING YOUR FUND SHARES
EXCHANGING YOUR SHARES FOR SHARES OF OTHER FPA FUNDS. You can exchange your
shares of the Fund for shares of other FPA Funds, except that only existing
shareholders of FPA Capital Fund, Inc., may exchange into that Fund.
You can increase an existing account or start a new account in the selected FPA
Fund. Shares of the Fund acquired must be registered for sale in your state.
A $5.00 service fee applies to each exchange. In addition, a sales charge
applies unless:
- - you paid a sales charge on the exchanged shares equivalent to that applicable
to the acquired shares;
- - you are otherwise entitled to purchase shares without a sales charge (as noted
under "Purchases Not Subject to Sales Charge"); or
- - the shares you are exchanging were acquired by reinvestment.
EXCHANGING YOUR SHARES FOR SHARES OF A MONEY MARKET FUND. FPA Fund
Distributors, Inc. has made arrangements to allow you to exchange your shares
for shares of the money market portfolio of the Cash Equivalent Fund, a no-load
diversified money market mutual fund. Shares of the money market fund you
acquire through exchange plus any shares acquired by reinvestment of dividends
and distributions may be re-exchanged for shares of any FPA Fund without a sales
charge. However, in the case of FPA Capital Fund, Inc., you must have maintained
your account in FPA Capital Fund, Inc. in order to re-exchange your shares in
the money market fund for shares in FPA Capital Fund, Inc.
If your shares are held in a Fund-sponsored individual retirement account, you
cannot exchange them into shares of the money market fund.
The $5.00 exchange fee is paid by FPA Fund Distributors, Inc., which receives a
fee from Kemper Financial Services, the administrator of the money market fund,
of 0.15 of 1% per year or more of the average daily net asset value of shares of
the money market fund acquired through this exchange program.
The money market fund is not an FPA Fund and is separately managed. The fact
that you have the ability to exchange your shares for shares of the money market
fund is not a Fund recommendation of the money market fund.
HOW TO EXCHANGE YOUR SHARES. You can exercise your exchange privileges either
by written instructions or telephone (telephone exchange privileges are
available unless you specifically decline them on the account information form).
Exchanges are subject to the following restrictions:
- - You are limited to four exchanges in one account during any calendar year; if
we give you notice you have exceeded this limit, any further exchanges will be
null and void;
15
<PAGE>
- - 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. 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
16
<PAGE>
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 quarterly. 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.
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
17
<PAGE>
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.
18
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five (5) years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Fund purchased at net asset value and assuming reinvestment of all
dividends and distributions. This information has been audited by Ernst & Young
LLP, whose report, along with the Fund's financial statements, are included in
the Statement of Additional Information, which is available upon request.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value at beginning of year.............. $ 11.13 $ 11.24 $ 10.97 $ 11.05 $ 10.52
------- ------- ------- ------- -------
Income from investment operations:
Net investment income........................... $ .71 $ .67 $ .68 $ .68 $ .67
Net realized and unrealized gain (loss) on
investment securities......................... (.30) (.10) .32 .06 .55
------- ------- ------- ------- -------
Total from investment operations.................. $ .41 $ .57 $ 1.00 $ .74 $ 1.22
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income............ $ (.71) $ (.66) $ (.68) $ (.66) $ (.69)
Distributions from net realized capital gains... (.06) (.02) (.05) (.16) --
------- ------- ------- ------- -------
Total distributions............................... $ (.77) $ (.68) $ (.73) $ (.82) $ (.69)
------- ------- ------- ------- -------
Net asset value at end of year.................... $ 10.77 $ 11.13 $ 11.24 $ 10.97 $ 11.05
======= ======= ======= ======= =======
Total investment return*.......................... 3.87% 5.24% 9.54% 7.00% 12.14%
Ratios/supplemental data:
Net assets at end of year (in $000's)............. 531,133 615,746 529,574 338,297 207,018
Ratio of expenses to average net assets........... 0.60% 0.59% 0.59% 0.63% 0.68%
Ratio of net investment income to average net
assets.......................................... 6.43% 6.06% 6.37% 6.44% 6.50%
Portfolio turnover rate........................... 24% 47% 29% 16% 31%
</TABLE>
- ------------
* Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge.
19
<PAGE>
FOR SHAREHOLDER SERVICES CALL
BOSTON FINANCIAL DATA
SERVICES, INC.
(617) 483-5000 or
(800) 638-3060 except Alaska
Hawaii, Massachusetts and
Puerto Rico
FOR RETIREMENT PLAN SERVICES
CALL YOUR EMPLOYER OR PLAN
ADMINISTRATOR
FOR 24-HOUR iNFORMATION GO TO
FUNDMASTER MARKETING GROUP
INTERNET WEB SITE
http://www.fundmaster.com
FOR DEALER SERVICES CALL
FPA FUND DISTRIBUTORS, INC.
(310) 473-0225 or
(800) 982-4372 except
Alaska, Hawaii and
Puerto Rico
Telephone conversations may be recorded or monitored for verification,
record keeping and quality assurance purposes.
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 and copies of this
information may be obtained, upon payment of a duplicating fee, by writing the
Reference Section of the SEC, Washington, D.C. 20549-6009.
FOR MORE INFORMATION OR TO REQUEST A FREE COPY OF ANY OF THE DOCUMENTS ABOVE
CONTACT FPA FUND DISTRIBUTORS, INC. AT 11400 WEST OLYMPIC BOULEVARD, SUITE
1200, LOS ANGELES, CALIFORNIA 90064, AT (800) 982-4372, EXCEPT FROM ALASKA,
HAWAII AND PUERTO RICO (WHERE YOU MAY CALL COLLECT (310) 473-0225).
Investment Company Act No. 811-1735
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FPA NEW INCOME, INC.
February 1, 2000
This Statement of Additional Information supplements the current Prospectus of
FPA New Income, Inc. ("Fund") dated February 1, 2000. 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, Strategies and Policies..................................................................1
Description of Certain Securities and Investment Techniques.....................................................2
Fixed-Income Securities ................................................................................2
U.S. Government Securities .............................................................................2
Inflation-Indexed Bonds ................................................................................3
Zero Coupon Securities .................................................................................3
Mortgage-Backed Securities..............................................................................4
Guaranteed Mortgage Pass-Through Securities.............................................................4
Collateralized Mortgage Obligations, Multiclass Pass-Through Securities
and Accrual Certificates (Z-Bonds).................................................................5
Private Mortgage Pass-Through Securities................................................................7
Stripped Mortgage Securities............................................................................7
Inverse Floaters........................................................................................8
Risks of Mortgage-Backed Securities.....................................................................8
Asset-Backed Securities................................................................................10
Convertible Securities and Lower Rated Debt Securities ................................................10
Risk Factors Relating to Lower Rated Securities .......................................................11
Securities of Foreign Issuers..........................................................................12
Delayed Delivery.......................................................................................13
Short Sales Against the Box............................................................................13
Repurchase Agreements..................................................................................13
Common Stocks..........................................................................................14
Debt Security Ratings..................................................................................14
Moody's...........................................................................................14
S&P...............................................................................................15
Commercial Paper Ratings..........................................................................15
Investment Restrictions........................................................................................16
Fund Organization..............................................................................................18
Directors and Officers of the Fund.............................................................................18
Five Percent Shareholders......................................................................................23
-i-
<PAGE>
Management.....................................................................................................23
Investment Adviser.....................................................................................23
Investment Advisory and Service Agreement..............................................................24
Principal Underwriter..................................................................................25
Portfolio Transactions and Brokerage...........................................................................25
Portfolio Turnover.............................................................................................26
Capital Stock..................................................................................................26
Common Stock...........................................................................................26
Voting Rights..........................................................................................26
Purchase and Redemption of Shares..............................................................................26
Net Asset Value........................................................................................26
Sales Charges..........................................................................................26
Authorized Financial Intermediaries....................................................................27
Sales at Net Asset Value...............................................................................27
Letter of Intent.......................................................................................27
FPA Exchange Privilege.................................................................................28
Redemption of Shares...................................................................................28
Telephone Redemption...................................................................................28
Tax Sheltered Retirement Plans.................................................................................29
Dividends, Distributions and Taxes.............................................................................30
Distributor....................................................................................................31
Prior Performance Information..................................................................................31
Financial Statements...........................................................................................33
</TABLE>
ii
<PAGE>
INVESTMENT OBJECTIVES, STRATEGIES AND POLICIES
The following limitations and guidelines are considered at the time of purchase,
under normal market conditions, and are based on a percentage of FPA New Income,
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 AND STRATEGIES
- - The Fund's primary investment objective is current income and long-term
return.
- - At least 65% of the Fund's assets are invested in income producing
securities. The Fund generally invests 50% or more of its assets in
debt obligations issued or guaranteed by the United States Government
and its agencies and instrumentalities, including mortgage-backed
securities.
- - The Fund's current operating policy is to invest at least 75% of its
total assets, calculated at market value at the time of investment, in
the following types of securities: (1) securities issued or guaranteed
by the United States Government, its agencies or instrumentalities; (2)
marketable, non-convertible debt securities rated at the time of
purchase within the two highest grades as determined by either Moody's
Investors Service, Inc. ("Moody's") (Aaa and Aa) or by Standard &
Poor's Corporation ("S&P") (AAA and AA) (see "Ratings" in the Statement
of Additional Information); (3) commercial paper of U.S. issuers which
at the time of investment is (a) rated in the highest category by
Moody's (Prime-1) or S&P (A-1) or (b) issued by a company which, at the
date of investment, has any outstanding debt securities rated at least
Aa by Moody's or AA by S&P; and (4) repurchase agreements with a member
bank of the Federal Reserve System or a U.S. securities dealer (see
"Repurchase Agreements").
- - Up to 25% of the Fund's net assets can be invested in non-convertible
debt securities which are not rated in the highest two grades by
Moody's or S&P; convertible debt securities and preferred stocks in an
amount not exceeding 5% of the Fund's assets. Such debt securities may
include so-called junk bonds.
- - Up to 30% of the Fund's net assets can be invested, or committed for
investment, in securities offered on a delayed delivery basis.
- - 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 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. Up to 15% of the Fund's assets can be
invested in interest-only and principal-only classes of stripped
mortgage securities, Z-bonds, and inverse floaters.
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- - The Fund can invest up to 10% of its net assets in securities of
foreign issuers.
At September 30, 1999, the percentage of the Fund's total net assets invested in
debt securities (including convertible securities) within the various rating
categories (based on the higher of the S&P or Moody's ratings) were as follows:
<TABLE>
<S> <C>
U. S. Government & Agencies................... 76%
AAA/AA........................................ 1
BBB........................................... 3
BB/Ba......................................... 5*
B/B........................................... 12*
Nonrated...................................... 1**
Preferred Stock............................... 1
Cash and Equivalents.......................... 1
------
Total Net Assets..... 100%
------
------
</TABLE>
- -----------------
* Includes Convertible Securities
** The nonrated debt securities as a percentage of total net assets were
considered by the Adviser to be comparable to securities rated by S&P as B.
DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
FIXED-INCOME SECURITIES -- The Fund will invest primarily in fixed-income
securities, including convertible 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.
U.S. GOVERNMENT SECURITIES -- The Fund invests in securities issued or
guaranteed by the United States Government, its agencies or instrumentalities.
U.S. Treasury obligations include bonds, notes and bills which are backed by the
full faith and credit of the United States. Some Government agencies and
instrumentalities ("Federal Agencies") such as the Government National Mortgage
Association ("GNMA") issue debt securities which are supported by the full faith
and credit of the United States; others, such as those of the Export-Import Bank
of the United States, are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Federal National Mortgage Association
("FNMA"), are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; still others, such as those of the Federal
Home Loan Mortgage Corporation ("FHLMC"), are supported only by the credit of
the instrumentality. The guaranteed mortgage pass-through securities in which
the Fund may invest include those issued or guaranteed by GNMA, FNMA and FHLMC.
FNMA and FHLMC are federally chartered, privately owned corporations which are
instrumentalities of the United States. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government- sponsored
instrumentalities if it is not obligated to do so by law.
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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. See also
"Dividends, Distributions and Taxes in the Prospectus."
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 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.
ZERO COUPON SECURITIES -- The Fund may invest in zero coupon U.S. Government
securities which do not entitle the holder to any periodic payments of interest
prior to maturity. Accordingly, such securities usually trade at a deep discount
from their face or par value and are subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of comparable
maturities which make periodic distributions of interest. On the other hand,
because there are no periodic interest payments
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<PAGE>
to be reinvested prior to maturity, zero coupon securities eliminate the
reinvestment risk and lock in a rate of return to maturity. Current federal tax
law requires that a holder (such as the Fund) of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year
even though the Fund received no interest payment in cash on the security during
the year. See also "Dividends, Distributions and Taxes in the Prospectus."
MORTGAGE-BACKED SECURITIES -- The Fund may invest in mortgage-backed securities
which include (a) obligations issued or guaranteed by Federal Agencies, such as
GNMA, FNMA and FHLMC; (b) collateralized mortgage obligations ("CMOs"),
including real estate mortgage investment conduits, issued by domestic or
foreign private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by Federal Agencies; and (c)
obligations issued by domestic or foreign private issuers that represent an
interest in or are collateralized by whole mortgage loans or mortgage-backed
securities without a government guarantee but usually having some form of
private credit enhancement.
The Fund may invest in both fixed rate and adjustable rate mortgage securities
("ARMS"), which are pass-through mortgage securities collateralized by mortgages
with adjustable rather than fixed rates. ARMs eligible for inclusion in a
mortgage pool generally provide for a fixed initial mortgage interest rate for
either the first three, six, twelve or thirteen, twenty-four, thirty-six or
longer scheduled monthly payments. Thereafter, the interest rates are subject to
periodic adjustment based on changes to a designated benchmark. ARMS will reset
off of a variety of short-term indices including, but not limited to, LIBOR
(London Interbank Offered Rate), 90-day United States Treasury Bills and the
11th District Cost of Funds Index ("COFI"). Fixed rate investments may be of
varying maturities.
The mortgage-backed securities in which the Fund may invest may include those
backed by the full faith and credit of the United States. 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 FNMA and
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.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES -- The Fund may 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
4
<PAGE>
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.
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, MULTICLASS PASS-THROUGH SECURITIES AND
ACCRUAL CERTIFICATES (Z-BONDS) -- 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 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. The market prices of CMOs structured as accrual
certificates (also known as "Z-Bonds") are affected to a greater extent by
interest rate changes and therefore tend to be more volatile than securities
which pay current interest in cash. See also "Dividends, Distributions and
Taxes." Accrual bonds have characteristics similar in some respects to those of
zero coupon U.S. Government securities and can be subject to greater volatility.
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
5
<PAGE>
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.
The Fund will not invest in CMO and REMIC residuals. See "Multiple Class
Pass-Through Securities and Collateralized Mortgage Obligations" in the
Statement of Additional Information for further discussion.
The Fund may invest in multiple class securities issued by U.S. Government
agencies and instrumentalities such as FNMA or FHLMC, or by private issuers,
including collaterized mortgage obligations ("CMOs") and REMIC pass-through or
participation certificates. A REMIC is a CMO that qualifies for special tax
treatment under the Internal Revenue Code and invests in certain mortgages
principally secured by interests in real property and other permitted
investments.
CMOs and REMIC pass-through certificates ("REMIC Certificates") are types of
multiple class pass-through securities. Investors may purchase beneficial
interests in REMICs, which are known as "regular" interests or "residual"
interests. The Fund does not intend to purchase residual interests in REMICs.
The REMIC Certificates represent beneficial ownership interests in a REMIC
trust, generally consisting of mortgage loans or FNMA, FHLMC or GNMA guaranteed
mortgage pass-through certificates (the "Mortgage Assets").
CMOs and REMIC Certificates are issued in multiple classes. Each class of CMOs
or REMIC Certificates, often referred to as a "tranche," is issued at a specific
adjustable or fixed interest rate and must be fully retired no later than its
final distribution date. Principal prepayments on the Mortgage Loans or the
Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or all
of the classes of CMOs or REMIC Certificates to be retired substantially earlier
than their final distribution dates. Generally, interest is paid or accrues on
all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among the
several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs and REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay or
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, and planned
amortization class ("PAC") certificates, which are
6
<PAGE>
parallel pay REMIC Certificates which generally require that specified amounts
of principal be applied on each payment date to one or more classes of REMIC
Certificates (the"PAC Certificates"), even though all other principal payments
and prepayments of the Mortgage Assets are then required to be applied to one or
more other classes of the Certificates. The scheduled principal payments for the
PAC Certificates generally have the highest priority on each payment date after
interest due has been paid to all classes entitled to receive interest
currently. Shortfalls, if any, are added to the amount payable on the next
payment date. The PAC Certificate payment schedule is taken into account in
calculating the final distribution date of each class of PAC. In order to create
PAC tranches, one or more ("companion") tranches generally must be created that
absorb most of the prepayment risk or volatility in the underlying mortgage
assets. These tranches tend to have market prices and yields that are much more
volatile than the PAC classes which provide fixed principal payments within a
specified range (or "collar") of prepayment speeds on the underlying mortgages.
Targeted amortization class ("TAC") certificates are structured to provide a
targeted amount of principal prepayments on the underlying mortgages with any
excess being paid to the TAC support class certificates. TAC certificates thus
have "call protection" but are not protected against slower than expected
prepayments which extend the expected duration of the certificates.
Other CMO tranches that may be acquired include "sticky" and "non-sticky" jump
bonds. These are securities whose principal payment priorities change, depending
upon one or more trigger events. A sticky bond's principal priority would change
once, while a non-sticky bond's principal priority could change several times.
These descriptions can also be applied to some forms of accrual and companion
tranches.
The highest risk tranches in which the Fund may invest are expected to be
inverse floaters and non-sticky accrual bonds. These securities have structures
whose average lives may change significantly or the coupon interest rate paid
may be highly variable. Such investments may be utilized as an alternative to
purchasing longer-term bonds.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES -- Private mortgage pass-through
securities are structured similarly to the GNMA, FNMA and FHLMC mortgage
pass-through securities and are issued by domestic and foreign private issuers
such as originators of and investors in Mortgage Assets, including savings and
loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. These securities usually are
backed by a pool of conventional fixed rate or adjustable rate Mortgage Assets.
Since private mortgage pass-through securities typically are not guaranteed by
an entity having the credit status of GNMA, FNMA and FHLMC, such securities
generally are structured with one or more types of credit enhancement. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquencies or losses in excess of those anticipated could
adversely affect the return on an investment in these securities.
STRIPPED MORTGAGE SECURITIES -- The Fund may invest in Stripped Mortgage
Securities which may be issued by Federal Agencies, or by private originators
of, or investors in, Mortgage Assets. Stripped Mortgage Securities usually are
structured with two classes that receive different proportions of the interest
and principal distribution on a pool of Mortgage Assets. A common type of
Stripped Mortgage Security will have one class receiving some of the interest
and most of the principal from the Mortgage Assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
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extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). PO classes generate income through the accretion
of the deep discount at which such securities are purchased, and, while PO
classes do not receive periodic payments of interest, they receive monthly
payments associated with scheduled amortization and principal prepayment from
the Mortgage Assets underlying the PO class. The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying Mortgage Assets, and a rapid rate of
principal payments may have a material adverse effect on such security's yield
to maturity. If the underlying Mortgage Assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities.
The Fund may purchase Stripped Mortgage Securities for income, or for hedging
purposes to protect the Fund's portfolio against interest rate fluctuations. For
example, since an IO class will tend to increase in value as interest rates
rise, it may be utilized to hedge against a decrease in value of other
fixed-income securities in a rising interest rate environment. Yields on IO
classes are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped. There can be no assurance that the Fund will be able to effect a trade
of a Stripped Mortgage Security at a time when it wishes to do so. Stripped
Mortgage 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.
INVERSE FLOATERS -- Inverse floaters constitute a class of CMOs with a coupon
rate that moves inversely to a designated index, such as LIBOR or COFI. Inverse
floaters have coupon rates that typically change at a multiple of the changes of
the relevant index rate. Any rise in the index rate (as a consequence of an
increase in interest rates) causes a drop in the coupon rate on an inverse
floater while any drop in the index rate causes an increase in the coupon rate
of an inverse floater. In some circumstances, the coupon on an inverse floater
could decrease to zero. In addition, like most other fixed-income securities,
the value of inverse floaters will decrease as interest rates increase. Inverse
floaters exhibit greater price volatility than the majority of mortgage-backed
securities. In addition, some inverse floaters display extreme sensitivity to
changes in prepayments. As a result, the yield to maturity of an inverse floater
is sensitive not only to changes in interest rates but also to changes in
prepayment rates on the related underlying Mortgage Assets. Inverse floaters may
be used alone or in tandem with interest-only Stripped Mortgage Securities.
RISKS OF MORTGAGE-BACKED SECURITIES
CREDIT AND MARKET RISKS. Investments in fixed rate and floating rate
mortgage-backed securities entail normal credit risks (i.e., the risk of
non-payment of interest and principal) and market risks (i.e., the risk that
interest rates and other factors will cause the value of the instrument to
decline). Many issuers or servicers of mortgage-backed securities guarantee
timely payment of interest and principal on the securities, whether or not
payments are made when due on the underlying mortgages. This kind of guarantee
generally increases the quality of a security, but does not mean that the
security's market value and yield will not change. Like bond investments, the
value of fixed rate mortgage-backed securities will tend to rise when interest
rates fall, and fall when rates rise. Floating rate mortgage-backed securities
will generally tend to have minimal changes in price when interest rates rise or
fall. The value of all mortgage-backed securities may also change because of
changes in the market's perception of the creditworthiness
8
<PAGE>
of the organization that issued or guarantees them. In addition, the
mortgage-backed securities market in general may be adversely affected by
changes in governmental legislation or regulation. Fluctuations in the market
value of mortgage-backed securities after their acquisition usually do not
affect cash income from such securities but are reflected in the Fund's net
asset value. The liquidity of mortgage-backed securities varies by type of
security; at certain times the Fund may encounter difficulty in disposing of
investments. Other factors that could affect the value of a mortgage-backed
security include, among other things, the types and amounts of insurance which a
mortgagor carries, the amount of time the mortgage loan has been outstanding,
the loan-to-value ratio of each mortgage and the amount of overcollateralization
of a mortgage pool.
PREPAYMENT AND REDEMPTION RISK Mortgage-backed securities reflect an interest in
monthly payments made by the borrowers who receive the underlying mortgage
loans. Although the underlying mortgage loans are for specified periods of time,
such as 20 or 30 years, the borrowers can, and typically do, pay them off
sooner. In such an event, the mortgage-backed security which represents an
interest in such underlying mortgage loan will be prepaid. A borrower is more
likely to prepay a mortgage which bears a relatively high rate of interest. This
means that in times of declining interest rates some higher yielding securities
held by the Fund might be converted to cash, and the Fund would be forced to
accept lower interest rates when that cash is used to purchase additional
securities. The increased likelihood of prepayment when interest rates decline
also limits market price appreciation of mortgage-backed securities. In
addition, a mortgage-backed security may be subject to redemption at the option
of the issuer.
RISKS OF STRIPPED MORTGAGE SECURITIES AND INVERSE FLOATERS. Both interest-only
Stripped Mortgage Securities and inverse floaters are highly sensitive to
changes in interest and prepayment rates. As a result, each individually is
highly volatile. The Adviser believes that in combination, interest-only
Stripped Mortgage Securities and inverse floaters may at times produce higher
yields than more traditional securities such as U.S. Treasuries or
mortgage-backed securities while maintaining a relatively low degree of
volatility. This results from the fact that changes in the value of inverse
floaters tend to be inversely proportional to the direction of interest rates as
is the case with traditional fixed-income securities, while the value of
interest-only stripped mortgage-backed securities often is directly proportional
to the direction of interest rates, so that used in combination, inverse
floaters and interest-only Stripped Mortgage Securities can serve as a hedging
device for the Fund. However, effective use of this hedging technique is
dependent upon the Adviser's ability to correctly hedge the securities by
forecasting interest rate volatility and corresponding prepayment rates. In the
event that these assumptions are erroneous, the Fund's yield and total return
may be reduced.
RISKS OF ADJUSTABLE RATE MORTGAGES. ARMs contain maximum and minimum rates
beyond which the mortgage interest rate may not vary over the lifetime of the
security. In addition, certain ARMs provide for additional limitations on the
maximum amount by which the mortgage interest rate may adjust for any single
adjustment period. Alternatively, certain ARMs contain limitations on changes in
the required monthly payment. In the event that a monthly payment is not
sufficient to pay the interest accruing on an ARM, any such excess interest is
added to the principal balance of the mortgage loan, which is repaid through
future monthly payments. The adjustable interest rate feature of the mortgages
underlying ARMs generally acts as a buffer to reduce sharp changes in the market
value of ARMs in response to normal interest rate fluctuations. As the interest
rate on the mortgages underlying ARMs are reset periodically, yields of the
securities will gradually align themselves to reflect changes in market rates.
During periods of rising interest rates, however, changes in the coupon rate lag
behind changes in the market rate. During
9
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periods of extreme fluctuations in interest rates, the resulting fluctuation of
ARM rates could affect the market value of investments in ARMs. Since most ARMs
generally have annual reset limits or "caps" of 100 to 200 basis points,
fluctuation in interest rates above these levels could cause such
mortgage-backed securities to "cap out" and to behave more like long-term,
fixed-rate debt securities. During periods of declining interest rates, of
course, the coupon rates may readjust downward, resulting in lower yields.
Because of this feature, the value of ARMs is unlikely to rise during periods of
declining interest rates to the same extent as fixed-rate instruments.
ASSET-BACKED SECURITIES -- The Fund may invest in asset-backed securities which
have structural characteristics similar to mortgage-backed securities but have
underlying assets that are not mortgage loans or interests in mortgage loans.
Various types of assets, primarily automobile and credit card receivables, are
securitized in pass-through structures similar to mortgage pass-through
structures. In general, the collateral supporting asset-backed securities is of
shorter maturity than mortgage loans and is likely to experience substantial
prepayments. As with mortgage-related securities, asset-backed securities are
often backed by a pool of assets representing the obligations of a number of
different parties and use similar credit enhancement techniques. The cash flow
generated by the underlying assets is applied to make required payments on the
securities and to pay related administrative expenses. The amount of residual
cash flow resulting from a particular issue of asset-backed securities depends
on, among other things, the characteristics of the underlying assets, the coupon
rates on the securities, prevailing interest rates, the amount of administrative
expenses and the actual prepayment experience on the underlying assets. Certain
asset-backed securities do not have the benefit of the same security interest in
the related collateral as do mortgage-backed securities. Credit card receivables
are generally unsecured, and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owned on the credit cards, thereby
reducing the balance due. In addition, some issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables.
CONVERTIBLE SECURITIES AND LOWER RATED DEBT SECURITIES -- The Fund may invest up
to 25% of its assets in Convertible Securities, in debt securities which are not
rated in the highest two grades by Moody's and S&P, and in preferred stocks (in
an amount not exceeding 5% of its assets). As used herein, a Convertible
Security is a bond, debenture, or note that may be converted into or exchanged
for a specified amount of common stock of the same or a different issuer within
a particular period of time at a specified price or formula. A Convertible
Security entitles the holder to receive interest paid or accrued on the debt
security until the Convertible Security matures or is redeemed, converted or
exchanged. Before conversion, Convertible Securities have characteristics
similar to non-convertible debt securities in that they ordinarily provide a
stable stream of income with generally higher yields than those of common stocks
of the same or similar issuers. Convertible Securities rank senior to common
stock in a corporation's capital structure and, therefore, generally entail less
risk than the corporation's common stock, although the extent to which such risk
is reduced depends in large measure upon the degree to which the Convertible
Security sells near its value as a fixed-income security.
Convertible Securities are generally not investment grade, that is, not rated
within the four highest categories by S&P and Moody's. To the extent that
Convertible Securities or other debt securities acquired by the Fund are rated
lower than investment grade or are not rated, there is a greater risk as to the
timely repayment of the principal of, and timely payment of interest on, such
securities. The Fund may purchase
10
<PAGE>
Convertible Securities and other debt securities rated BB or lower by S&P or Ba
or lower by Moody's which ratings are considered by the rating agencies to be
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. Debt securities rated BB or lower by S&P or Ba or lower
by Moody's are commonly referred to as junk bonds. Decisions to purchase and
sell these securities are based on the Adviser's evaluation of their investment
potential and not on the ratings assigned by credit agencies. Because investment
in lower rated securities involves greater investment risk, achievement of the
Fund's investment objective is more dependent on the Adviser's credit analysis
than with respect to the Fund's investments in higher rated securities. Lower
rated securities may be more susceptible to real or perceived adverse economic
and competitive industry conditions than investment grade securities. A
projection of an economic downturn, for example, could cause a decline in the
prices of lower rated securities because the advent of a recession could lessen
the ability of a highly leveraged company to make principal and interest
payments on its debt securities. In addition, the secondary trading market for
lower rated securities may be less liquid than the market for higher rated
securities.
Prices of lower rated securities may decline rapidly in the event a significant
number of holders 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 their sale by the Fund more
difficult, at least in the absence of price concessions. The lower rated bond
market has grown primarily during a period of long economic expansion and it is
uncertain how it would perform during an extended economic downturn. An economic
downturn or an increase in interest rates could severely disrupt the market for
lower rated bonds and adversely affect the value of outstanding bonds and the
ability of the issuers to repay principal and interest.
The lower rated securities in which the Fund may invest may from time to time
include debt securities of companies that are financially troubled, in default
or are in bankruptcy or reorganization ("Deep Discount Securities"). These
securities may be rated C, CI or D by S&P or C by Moody's or may be unrated.
(See "Ratings" in the Statement of Additional Information). Debt obligations of
such companies are usually available at a deep discount from the face value of
the instrument. The Fund will invest in Deep Discount Securities when the
Adviser believes that existing factors are likely to improve the company's
financial condition. Such factors include a restructuring of debt, management
changes, existence of adequate assets, or other special circumstances.
A debt instrument purchased at a deep discount, but prior to default, may
currently pay a very high effective yield. In addition, if the financial
condition of the issuer improves, the underlying value of the securities may
increase, resulting in a capital gain. If the issuer defaults on its obligations
or remains in default, or if the plan of reorganization is insufficient for
debtholders, the Deep Discount Securities may 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.
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
11
<PAGE>
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.
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 governments and companies. Investments in securities of
foreign issuers may be affected favorably or unfavorably by changes in currency
rates and exchange control regulations. Compared to U.S. companies, there may be
less publicly available information about foreign companies which generally are
subject to less stringent accounting, auditing and financial reporting standards
and requirements. Securities of some foreign companies may be less liquid or
more volatile than those of U.S. companies. Foreign brokerage commissions and
custodial fees are generally higher than in the United States. Investments in
foreign securities may involve additional risks, including local political or
economic developments, expropriation or nationalization of assets and imposition
of withholding taxes on dividend or interest payments. In the event of a default
on any foreign debt obligation, it may be more difficult for the Fund to obtain
or enforce a judgment against the issuer.
12
<PAGE>
Securities of foreign issuers may be subject to foreign government taxes which
could reduce the dividend or interest yield on such securities. Foreign
investments involve certain risks, such as political or economic instability of
the issuer or of the country of issue, the difficulty of predicting
international trade patterns and the possibility of imposition of exchange
controls. Such securities may also be subject to greater fluctuations in price
than those of domestic corporations or the United States Government. In
addition, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to the uniform accounting, auditing and financial reporting standards
applicable to domestic companies. There is generally less government regulation
of stock exchanges, brokers and listed companies abroad than in the United
States. With respect to certain foreign countries, there is a possibility of
expropriation, confiscatory taxation, or diplomatic developments affecting
foreign investments. Finally, in the event of default on any foreign debt
obligation, it may be more difficult for the Fund to obtain or enforce a
judgment against the issuer.
DELAYED DELIVERY -- Some securities in which the Fund may invest are offered on
a delayed delivery (including a "when issued") basis. That is, delivery and
payment for the securities is scheduled to occur on a future settlement date but
the price, interest rate and settlement date is fixed at the time of commitment.
The Fund will not enter into a transaction with a scheduled delivery date over
one year after the commitment date. At all times the Fund maintains in a
segregated account, cash or liquid, high grade money market instruments in an
amount equal to any open commitments. However, the Fund can meet its obligations
to pay for delayed delivery securities from the sale of the securities
themselves, which may have a value greater or lesser than the Fund's payment
obligation, thus producing a realized gain or loss.
SHORT SALES AGAINST THE BOX -- The Fund can make short sales of securities or
maintain a short position if the Fund contemporaneously owns or has the right to
obtain at no added cost securities identical to those sold short (short sales
"against the box") or if the securities sold are "when issued" or "when
distributed" securities which the Fund expects to receive in a recapitalization,
reorganization, or other exchange for securities the Fund contemporaneously owns
or has the right to obtain at no added cost. The principal purpose of making
short sales is to enable the Fund to obtain the current market price of a
security which the Fund desires to sell but which cannot be currently delivered
for settlement. For example, common stocks issuable upon conversion of a
convertible security sometimes can be sold at a better price than the
convertible security owned by the Fund. In such circumstances the Fund could
sell the common stock short "against the box" while tendering the convertible
security to the issuer for conversion. Upon receipt of the certificates for the
underlying common stock, delivery would be made to close the short sale. The
Fund may not make short sales or maintain a short position if to do so would
cause more than 25% of its total assets (exclusive of proceeds from short sales)
to be allocated to a segregated account in connection with short sales.
REPURCHASE AGREEMENTS -- The Fund may invest in repurchase agreements with
domestic banks or dealers to earn interest on temporarily available cash. A
repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Fund) acquires a debt security which 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 may experience delays and expenses liquidating the underlying
security, loss from decline in value of such security, and lack of access to
income on such security. The Fund will not invest more than 10% of its total
assets in repurchase agreements which mature in more than seven days and/or
other securities which are not readily marketable.
13
<PAGE>
COMMON STOCKS -- Although the Adviser does not intend to purchase common stocks,
the Fund's portfolio may include common stocks acquired upon conversion of
convertible securities. Such securities are sold when the sale does not
adversely affect the Fund's assets.
DEBT SECURITY RATINGS - Moody's Investor Services, Inc. ("Moody's") and Standard
& Poor's Corporation ("S&P") employ the designations set forth below to rate
debt securities.
MOODY'S
Aaa - Bonds judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as gilt-edge. Interest payments
are protected by a large or an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds judged to be of high quality by all standards. Together with the Aaa
group they comprise what are generally known as high-grade bonds. They are rated
lower than the best bonds because margins of protection may not be as large as
in Aaa securities, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present which make the long-term risks
appear somewhat larger.
A - Bonds which possess many favorable investment attributes and are to be
considered as upper medium- grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa - Bonds considered as medium-grade obligations (i.e., they are neither
highly protected nor poorly secured). Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba - Bonds judged to have speculative elements. Their future cannot be
considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B - Bonds which generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
Ca - Bonds which represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
C - The lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Nonrated - Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
14
<PAGE>
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons. Note: Those bonds in the Aa, A,
Baa, Ba and B groups which Moody's believe possess the strongest investment
attributes are designated by the symbols Aa 1, A 1, Baa 1, Ba 1 and B 1.
S&P
AAA - Capacity to pay interest and repay principal is extremely strong.
AA - Capacity to pay interest and repay principal is very strong and these bonds
differ from AAA issues only in small degree.
A - Capacity to pay interest and repay principal is strong although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than bonds in higher rated categories.
BBB - Capacity to pay interest and repay principal is adequate. Whereas these
bonds normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal than for bonds in higher rated
categories. BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on
balance as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CI - reserved for income bonds on which no interest is being paid.
D - in default, and payment of interest and/or repayment of principal is in
arrears.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
COMMERCIAL PAPER RATINGS. Moody's and S&P employ the designations set forth
below to rate commercial
15
<PAGE>
paper.
Moody's designations, all judged to be investment grade, indicate the relative
repayment capacity of rated issuers. Issuers rated Prime-1 have a superior
capacity for repayment of short-term promissory obligations. Issuers rated
Prime-2 have a strong capacity for repayment of short-term promissory
obligations. Issuers rated Prime-3 have an acceptable capacity for repayment of
short-term promissory obligations.
S&P ratings are an assessment of the likelihood of timely payment of debt having
an original maturity of no more than 365 days. Issuers assigned the highest
rating by S&P ("A") are regarded as having the greatest capacity for timely
payment. Issuers in this category are further refined with the designations 1, 2
and 3 to indicate the relative degree of safety. A-1 indicates that the degree
of safety regarding timely payment is either overwhelming (denoted with a plus
sign) or very strong. A-2 indicates that capacity for timely payment is strong;
however, the relative degree of safety is not as high as for issuers designated
A-1. A-3 indicates a satisfactory capacity for timely payment. They are,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
INVESTMENT RESTRICTIONS
The Fund has adopted investment restrictions stated below. They apply at the
time securities are purchased or other relevant action is taken. These
restrictions and the Fund's investment 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 money, except from a bank as a temporary measure for extraordinary
or emergency purposes (including meeting redemptions without immediately
selling securities), but not for leverage or investment, in an amount not
to exceed 10% of the value of net assets at the time the borrowing is
made; provided, however, that so long as such borrowings exceed 5% of the
value of net assets the Fund will not make any new investments;
2. Mortgage, pledge or hypothecate assets, except to an extent not greater
than 10% of total assets to secure borrowings made in accordance with
restriction 1 above;
3. Invest more than 5% of its total assets (excluding cash and cash items) in
the securities of any one issuer, except the United States Government, its
agencies and instrumentalities. Investments in one or more domestic
commercial banks are excluded from this 5% limitation with respect to 25%
of the Fund's total assets;
4. Invest more than 25% of the Fund's total assets in the securities of
issuers (other than domestic banks and the U.S. Government, its agencies
and instrumentalities) in the same industry. Electric, natural gas
distribution, natural gas pipeline, combined electric and natural gas and
telephone utilities are considered separate industries for purposes of
this restriction and finance companies as a group shall not be considered
within a single industry;
5. Make time deposits (excluding negotiable certificates of deposit) of more
than seven days. Time
16
<PAGE>
deposits with maturity occurring on the Fund's next business day or within
up to seven calendar days may not exceed 10% of the Fund's total assets;
6. Make loans to others, except through the purchase of various kinds of
publicly distributed debt obligations, investments in variable amount
master demand notes and repurchase agreement transactions in which the
Fund is permitted to invest;
7. Purchase or sell real estate; however, the Fund may purchase marketable
securities issued by companies which invest in real estate or interests
therein;
8. Purchase securities on margin or sell short, 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;
9. Purchase or sell commodities or commodity futures contracts, or interests
in oil, gas or mineral exploration or development programs;
10. Underwrite securities of other issuers;
11. Acquire more than 10% of any class of securities of an issuer. For this
purpose, all outstanding bonds and other evidences of indebtedness shall
be deemed within a single class regardless of maturities, priorities,
coupon rates, series, designations, conversion rights, security or other
differences;
12. Purchase securities (other than under repurchase agreements of not more
than one week's duration - considering only the remaining days to maturity
of each existing repurchase agreement) for which there exists no readily
available market or for which there are legal or contractual restrictions
on resale (except securities which are subject to such resale restrictions
but which, in the judgment of the Fund's investment adviser, are readily
redeemable on demand), if, as a result of any such purchase, more than 10%
of the Fund's net assets would be invested in such securities;
13. Purchase warrants or write, purchase or sell puts, calls, straddles,
spreads or combinations thereof;
14. Purchase securities of other investment companies except in connection
with a merger, consolidation, acquisition or reorganization;
15. Purchase securities of any issuer for the purpose of exercising control of
management;
16. Invest more than 5% of total assets in securities of any issuer which,
together with predecessors, has been in continuous operation less than
three years; and
17. Purchase or retain the securities of an issuer if those officers or
directors of the Fund or the Fund's investment adviser who are also
officers or directors of the issuer and who each own beneficially more
than 0.5% of the securities of that issuer, together own more than 5% of
the securities of such issuer.
17
<PAGE>
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 five directors is responsible for overseeing the Fund's affairs.
DIRECTORS AND OFFICERS OF THE FUND
All directors and officers of the Fund are also directors and/or officers of one
or more of four other investment companies advised by the Adviser, which is an
indirect wholly owned subsidiary of United Asset Management Corporation ("UAM").
These investment companies are FPA Capital Fund, Inc., FPA 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.
18
<PAGE>
FUND DIRECTORS AND OFFICERS
DIRECTORS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
POSITION HELD WITH
NAME/AGE FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Willard H. Altman, 64 Director Former Partner of Ernst & Young LLP,
independent auditors for the Fund. Director of
Source Capital, Inc., of FPA Capital Fund, 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 (Until 5/99)
- ------------------------------------------------------------------------------------------------------------
DeWayne W. Moore, 85 Director Former Director, Senior Vice President and Chief
Financial Officer of Guy F. Atkinson Company of
California (construction). Director of FPA
Capital Fund, Inc.
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
AGGREGATE
AGGREGATE COMPENSATION (1)
COMPENSATION (1) FROM THE FPA TOTAL NUMBER OF
FROM THE FUND FUND COMPLEX BOARDS OF FUNDS
DURING THE FISCAL DURING THE FISCAL MANAGED BY THE
YEAR ENDED YEAR ENDED ADVISER ON WHICH
NAME/AGE 9/30/99 9/30/99 DIRECTOR SERVED
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Willard H. Altman, 64 $10,000 $41,500 4
- ------------------------------------------------------------------------------------------------------------
Donald E. Cantlay, 77 $ 5,584 $11,168 2
- ------------------------------------------------------------------------------------------------------------
DeWayne W. Moore, 85 $10,000 $20,000 2
- ------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
POSITION HELD WITH
NAME/AGE FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Julio J. de Puzo, Jr., 45* Director (Elected Director (since October 1995), Principal and
12/20/99) Chief Executive Officer (since March 1996) of
& Executive Vice First Pacific Advisors, Inc.; Director and
President 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.;
Director (since December 1999) and Executive
Vice President (since August 1996) of FPA
Capital Fund, 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 Capital Fund, 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.
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
AGGREGATE
AGGREGATE COMPENSATION (1)
COMPENSATION FROM THE FPA TOTAL NUMBER OF
(1) FROM THE FUND COMPLEX BOARDS OF FUNDS
FUND DURING DURING THE FISCAL MANAGED BY THE
THE FISCAL YEAR YEAR ENDED ADVISER ON WHICH
NAME/AGE ENDED 9/30/99 9/30/99 DIRECTOR SERVED
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Julio J. de Puzo, Jr., 45* $ -0- $ -0- 5
- ------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
POSITION HELD WITH
NAME/AGE FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Alfred E. Osborne, Jr., 55 Director (Elected Director of the Harold Price Center for
12/20/99) Entrepreneurial Studies and Associate
Professor of Business Economics at The John
E. Anderson Graduate School of Management at
UCLA. Dr. Osborne has been at UCLA since
1972. Director of FPA Capital Fund, Inc., of
the Times Mirror Company, of K2 Inc., of
Nordstrom, Inc., and of E+ Capital
Corporation, a privately held company, which
operates a venture capital fund and owns
Wedbush Morgan Securities, Inc., a
broker-dealer. Independent general partner of
Technology Funding Venture Partners V L.P., a
business development company. Trustee of the
WM Group of Funds and of the World Wide Index
Funds, mutual fund complexes.
- ----------------------------------------------------------------------------------------------------------
Lawrence J. Sheehan, 67* Director Of counsel to, and partner (1969 to 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 Capital Fund, Inc. Director of TCW
Convertible Securities Fund, Inc., a
closed-end investment company. Trustee of the
World Wide Index Funds, a mutual fund
complex.
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
AGGREGATE
AGGREGATE COMPENSATION (1)
COMPENSATION FROM THE FPA TOTAL NUMBER OF
(1) FROM THE FUND COMPLEX BOARDS OF FUNDS
FUND DURING DURING THE FISCAL MANAGED BY THE
THE FISCAL YEAR YEAR ENDED ADVISER ON WHICH
NAME/AGE ENDED 9/30/99 9/30/99 DIRECTOR SERVED
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alfred E. Osborne, Jr., 55 $ -0- $ -0- 2
- ----------------------------------------------------------------------------------------------------------
Lawrence J. Sheehan, 67* $10,000 $42,000 4
- ----------------------------------------------------------------------------------------------------------
</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 First Pacific Advisors,
Inc. in the case of Mr. de Puzo and by virtue of his affiliation with
legal counsel to the Fund in the case of Mr. Sheehan.
21
<PAGE>
OFFICERS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NAME/AGE POSITION HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert L. Rodriguez, 51 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
Capital Fund, Inc. for more than the past five
years; and Director 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.
- --------------------------------------------------------------------------------------------------------------
Eric S. Ende, 55 Vice President Senior Vice President of First Pacific Advisors,
Inc. for more than the past five years; President
(since September 1995) and Portfolio Manager
(since August 1999) of FPA Perennial Fund, Inc.;
Chief Investment Officer since May 1997 and
Senior Vice President for more than the past five
years of Source Capital, Inc.; and Vice President of
FPA Capital Fund, Inc. and of FPA Paramount
Fund, Inc. for more than the past five years. Chief
Investment Officer from September 1995 to August
1999, Executive Vice President from August 1995
to September 1995, and Vice President from May
1985 to August 1995 of FPA Perennial Fund, Inc.
- --------------------------------------------------------------------------------------------------------------
Janet M. Pitman, 56 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 Capital Fund, 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 Capital Fund, Inc. since January
1997. Vice President and Chief Financial Officer
of Transamerica Investment Services, Inc. from
January 1995 to January 1997. Vice President (or
Assistant Vice President) and Controller of First
Pacific Advisors, Inc. from August 1988 to January
1995, and Assistant Treasurer of FPA Fund
Distributors, Inc. from May 1991 to January 1995.
Assistant Treasurer of the Fund, of FPA Capital
FundNew Income, Inc., of FPA Paramount Fund,
Inc., of FPA Perennial Fund, Inc., and of Source
Capital, Inc. from August 1988 to January 1995.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NAME/AGE POSITION HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sherry Sasaki, 44 Secretary Assistant Vice President and Secretary for more
than the past five years of First Pacific Advisors,
Inc.; and Secretary of Source Capital, Inc., of
FPA Capital Fund, Inc., of FPA Paramount Fund,
Inc., of FPA Perennial Fund, Inc., and of FPA
Fund Distributors, Inc. for more than the past five
years.
- --------------------------------------------------------------------------------------------------------------
Christopher H. Thomas, 42 Assistant Treasurer Vice President and Controller of First Pacific
Advisors, Inc. and of FPA Fund Distributors, Inc.
since March 1995, and Assistant Treasurer of FPA
Perennial Fund, Inc., of FPA Capital Fund, 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 received as a group
$35,584 in Directors' fees. Such Directors were also reimbursed for certain
travel expenses by the Fund.
FIVE PERCENT SHAREHOLDERS
As of December 31, 1999, no person was known by the Fund to own of record or
beneficially 5% or more of the outstanding Fund shares, except Charles Schwab &
Co., Inc., for the benefit of customers, 101 Montgomery Street, San Francisco,
California 94104-4122, which held 0,000,000 shares (00.0%), and National
Financial Services Corp., for the exclusive use of its customers, Attention:
Mutual Funds, 5th Floor, 200 Liberty Street - 1 WFC, New York, New York
10281-1003, which held 0,000,000 shares (0.0%). The foregoing broker-dealers
and/or investment advisory firms advise that the shares are held for the benefit
of their 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 six investment
companies, including one closed-end investment company, and 22 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.
23
<PAGE>
INVESTMENT ADVISORY AND SERVICE AGREEMENT. The Fund has entered into an
Investment Advisory Agreement dated December 27, 1994 ("Advisory Agreement"),
with the Adviser pursuant to which the Adviser provides continuing supervision
of the Fund's investment portfolio. The Adviser is authorized, subject to the
control of the Fund's Board of Directors, to determine which securities are to
be bought or sold and in what amounts. In addition to providing investment
advisory and management services, the Adviser furnishes office space, facilities
and equipment, and maintains the Fund's books and records. It also compensates
all officers and other personnel of the Fund, all of whom are employed by the
Adviser.
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 Directors not
affiliated with the Adviser; 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; and postage.
For services rendered, facilities furnished and expenses assumed, the Adviser is
paid an investment management fee. Such fee is payable monthly at the annual
rate of 0.50% of the Fund's average daily net assets.
The Adviser pays the Fund the amount by which certain defined operating expenses
of the Fund for any fiscal year exceed 1.50% of the first $15 million of average
net assets, plus 1% of the remaining average net assets. Such reimbursement is
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.
The Advisory Agreement provides that the Adviser shall not be liable for any
error of judgment, any mistake of law , any loss arising out of any investment,
or any act or omission in the management of the Fund, except willful
misfeasance, bad faith or negligence in the Adviser's performance of its duties
or the reckless disregard of its obligations 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 December 31, 2000, has been approved by the Board of Directors and a majority
of the Fund's directors who are not parties to the Advisory Agreement or
interested persons of any such party (as defined in the Investment Company Act).
The Advisory Agreement may be terminated without penalty 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
24
<PAGE>
of its assignment.
For the fiscal years ended September 30, 1997, 1998 and 1999, the Adviser
received gross advisory fees of $2,124,391, $2,958,785 and $2,846,976,
respectively.
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 December 27, 1994 (the "Distribution Agreement"). Please see "Distributor"
for more information.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the Fund
and for the placement of its portfolio business and the negotiation of any
commissions paid on such transactions. Since most transactions the Fund makes
are principal transactions at net prices, the Fund incurs little or no brokerage
costs. Portfolio securities are normally purchased directly from the issuer or
from an underwriter or market maker for the securities. Purchases of portfolio
securities from underwriters include a commission or concession the issuer pays
to the underwriter. Purchases from dealers serving as market makers include the
spread between the bid and asked price. Sales to dealers are effected at bid
prices.
The Adviser is responsible for placing portfolio transactions and does so in a
manner deemed fair and reasonable to the Fund and not according to any formula.
The primary consideration in all portfolio transactions is prompt execution of
orders in an effective manner at the most favorable price. 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 price to the Fund in any transaction may be less
favorable than that available from another broker-dealer if the difference is
reasonably justified by other aspects of its services. Subject to policies
determined by the Fund's Board of Directors, the Adviser shall not be deemed to
have acted unlawfully or to have breached any duty created by the Advisory
Agreement or otherwise solely because the Fund paid a broker-dealer providing
brokerage and research services commissions for effecting a transaction in
excess of the commission another broker-dealer would have charged for the same
transaction. The Adviser must determine in good faith that such commission was
reasonable relative to the value of the brokerage and research services
provided, considering either that particular transaction or the Adviser's
overall responsibilities to the Fund. The Adviser is further authorized to
allocate orders it places for the Fund to broker-dealers providing products or
services which assist in making investment decisions. The Adviser shall allocate
the amounts and proportions of such costs and shall regularly report on such
allocations to the Fund's Board of Directors.
Brokerage and research services are defined by Section 28(e) of the Securities
Exchange Act of 1934 to include (a) providing advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and performance of accounts; and
(c) effecting securities transactions and performing functions incidental
thereto, such as clearance, settlement and custody.
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 the 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
25
<PAGE>
investment commitments generally held, and the opinions of the persons
responsible for recommending the investments.
Brokerage commissions paid by the Fund on a portfolio transaction(s) for the
fiscal years ended September 30, 1997 and 1998 totaled $330 and $12,
respectively. During the last fiscal year, the Fund did not pay any brokerage
commissions.
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 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 4.5%, 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
26
<PAGE>
in amounts ranging from 80% to 89%, 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.
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
27
<PAGE>
shareholder irrevocably appoints the Shareholder Service Agent as his or her
attorney with full power of substitution to surrender for redemption any or all
escrowed Fund shares. If the redemption proceeds are inadequate, the shareholder
is liable to the Distributor for the difference. The Shareholder Service Agent
delivers to, or as directed by, the shareholder all Fund shares remaining after
such redemption, together with any excess cash proceeds.
Any income dividends and capital gains distributions on the escrowed Fund shares
are paid or reinvested as directed by, the shareholder.
FPA EXCHANGE PRIVILEGE. The procedures for exchanging shares between FPA Funds
are described under "Exchanging Your Fund Shares" in the Fund's Prospectus. If
the account registration information for the two FPA Fund accounts involved in
the exchange are different in any respect, the exchange instructions must be in
writing and must contain a signature guarantee as described under "Selling
(Redeeming) Your Shares" in the Fund's Prospectus.
By use of the exchange privilege, the investor authorizes the Shareholder
Service Agent ("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 there is a reasonable belief
in the authenticity of received instructions and 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
practicable for the Fund to fairly determine the value of its net assets; or (d)
the Securities and Exchange Commission, by order, so permits.
TELEPHONE REDEMPTION. Redemptions can be made by telephone once the shareholder
has properly completed and returned to the Agent the optional shareholder
services form, including the designation of
28
<PAGE>
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 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 there is a reasonable belief
in the authenticity of received instructions and reasonable procedures are
employed; otherwise, they may be liable.
TAX SHELTERED RETIREMENT PLANS
Through the Distributor, prototype retirement plans are available for purchase
of Fund shares. These include plans for self-employed individuals and plans for
individuals buying shares under an Individual Retirement Account. A penalty tax
applies, in general, to distributions made before age 59-1/2, excess
contributions and failure to start distribution of the account at age 70-1/2.
Borrowing from or against the account could also result in plan
disqualification. Distributions from these retirement plans generally are
taxable as ordinary income when received.
State Street Bank and Trust Company ("Bank") presently acts as custodian for
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.
29
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund qualified during the last fiscal year for the tax treatment applicable
to regulated investment companies under the Internal Revenue Code ("Code") and
intends to so qualify in the future. Such qualification requires distributing at
least 90% of its investment company taxable income to shareholders and meeting
asset diversification and other requirements of the Code. As long as the Fund so
qualifies, it does not pay federal income tax on its net investment income or on
any net realized capital gains provided such income and capital gains are
distributed to shareholders. If for any taxable year the Fund does not so
qualify, all of its taxable income, including any net realized capital gains,
will be taxed at regular corporate rates (without any deduction for
distributions to shareholders).
The Fund is subject to a 4% excise tax to the extent it does not make certain
distributions to its shareholders. Such distributions must total (1) at least
98% of ordinary income (investment company taxable income subject to certain
adjustments) for any calendar year and (2) 98% of capital gains net income for
the 12 months ended October 31 of such year. The Fund intends to distribute
sufficient amounts to avoid liability for this excise tax.
If shares of the Fund are sold or exchanged within 90 days of acquisition, and
shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.
Under federal tax law, any loss a shareholder realizes on redemption of Fund
shares held for less than six months is treated as a long-term capital loss to
the extent of any long-term capital gain distribution which was paid on such
Fund shares.
Prior to purchasing Fund shares, the impact of dividends or capital gains
distributions should be carefully considered. Any such payments made to a
shareholder shortly after purchasing Fund shares reduce the net asset value of
such Fund shares to that extent and unnecessarily increase sales charges. All or
a portion of such dividends or distributions, although in effect a return of
capital, is subject to taxes, possibly at ordinary income tax rates.
Dividends and distributions declared payable to shareholders of record after
September 30 of any year and paid before February 1 of the following year are
considered taxable income to shareholders on the record date even though paid in
the next year. To the extent determined each year, a portion of the dividends
paid to shareholders from the Fund's net investment income qualifies for the 70%
dividends received deduction for corporations.
Some shareholders may be subject to 31% withholding on reportable dividends,
capital gains distributions and redemption payments ("backup withholding").
Generally, shareholders subject to backup withholding are those for whom a
taxpayer identification number is not on file with the Fund or who, to the
Fund's knowledge, furnished an incorrect number. When establishing an account,
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.
30
<PAGE>
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 offering of Fund shares is a continuous offering.
The Distributor receives commissions from the sale of Fund shares and has the
exclusive right to distribute Fund shares through dealers. From commissions
received, the Distributor pays its own overhead and general administrative
expenses; the cost of printing and distributing Fund prospectuses used in
connection with this offering, except for those furnished to existing
shareholders; and the cost of advertising and sales literature. The Fund pays
expenses attributable to registering Fund shares under federal and state laws
and the compensation and expenses of the Fund's transfer agent.
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 September 30, 1997, 1998 and 1999, total underwriting
commissions on the sale of Fund shares were $1,121,144, $1,013,895 and $541,675,
respectively, of which $163,881, $129,635 and $70,027, respectively, were
retained by the Distributor after reallowances to other dealers.
PRIOR PERFORMANCE INFORMATION
For the purposes of quoting and comparing the performance of the Fund to that of
other mutual funds and to other relevant market indices in advertisements,
performance may be stated in terms of total return. Under regulations adopted by
the Securities and Exchange Commission ("SEC"), funds that intend to advertise
performance must include total return quotations calculated according to the
following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
31
<PAGE>
ERV = ending redeemable value of a hypothetical
$1,000 payment, made at the beginning of the 1, 5 or
10 year period, at the end of such period (or
fractional portion thereof).
Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication, and cover 1, 5 and
10-year periods of a fund's existence or such shorter period dating from the
effectiveness of a fund's registration statement. In calculating the ending
redeemable value, the maximum sales load is deducted from the initial $1,000
payment and all dividends and distributions by a fund are assumed to have been
reinvested at net asset value as described in the Prospectus on the reinvestment
dates during the period. Total return, or "T" in the formula above, is computed
by finding the average annual compounded rates of return over the 1, 5 and
10-year periods (or fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value.
The Fund may also from time to time include in such advertising a total return
figure that is not calculated according to the formula set forth above in order
to compare the performance of the Fund with other measures of investment return.
For example, in comparing the Fund's total return with a bond index such as the
Lehman Brothers Government/Corporate Bond 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
September 30, 1999 was (0.80)%, 6.53% and 8.33%, respectively. The Fund's
average annual total return (determined pursuant to the alternative computation
which does not include the maximum initial sales charge of 4.5% of the offering
price) for the same periods was 3.87%, 7.52% and 8.83%, 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 level of interest rates,
and general economic and other market conditions.
32
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1999
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES Amount Value
- ------------------------------------------------------------ ------------- -------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCIES
MORTGAGE-BACKED SECURITIES -- 33.3%
Federal Home Loan Mortgage Corporation
--5.85% 2017 ............................................. $ 9,110,870 $ 9,056,774
--6% 2008 ................................................ 26,642,721 25,762,273
--6% 2009 ................................................ 22,316,000 21,318,754
--7% 2008 ................................................ 2,453,541 2,430,539
--7% 2023 ................................................ 5,000,000 4,800,000
--7 1/2% 2021 ............................................ 1,149,739 1,158,721
--8 1/2% 2026 ............................................ 7,929,853 8,237,135
--10.15% 2006 ............................................ 13,456 13,473
Federal Home Loan Mortgage Corporation (IO)
--6 1/2% 2007 ............................................ 8,044,424 685,345
--6 1/2% 2020 ............................................ 1,764,835 113,198
--6 1/2% 2023 ............................................ 4,437,568 503,211
--7% 2020 ................................................ 8,000,000 920,000
Federal Home Loan Mortgage Corporation (Z)
--6 1/2% 2029 ............................................ 5,333,082 4,399,792
--7% 2029 ................................................ 4,915,019 4,483,419
--7 1/2% 2026 ............................................ 7,168,831 7,108,344
Federal National Mortgage Association
--5.16% 2022 ............................................. 18,500,000 17,667,500
--6 1/2% 2008 ............................................ 2,867,198 2,833,149
Federal National Mortgage Association (IO)
--6% 2027 ................................................ 38,536,034 10,933,559
--6% 2028 ................................................ 23,765,747 6,657,760
--6 1/2% 2009 ............................................ 4,159,415 646,985
--6 1/2% 2020 ............................................ 4,976,693 466,371
--7% 2004 ................................................ 862,420 111,306
--7% 2017 ................................................ 2,343,119 59,126
Federal National Mortgage Association (Z)
--7% 2019 ................................................ 13,111,641 12,275,774
--7% 2024 ................................................ 11,529,717 10,448,807
--7 1/2% 2024 ............................................ 1,658,816 1,599,722
</TABLE>
33
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1999
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES--CONTINUED Amount Value
- ------------------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Government National Mortgage Association
--7% 2028 ............................................................ $ 9,825,724 $ 9,610,786
--7 1/2% 2023 ........................................................ 457,560 459,275
Government National Mortgage Association II --8% 2027 ................... 3,875,107 3,950,187
Government National Mortgage Association (MH)
--8 1/4% 2006-7 ...................................................... 348,339 355,306
--8 3/4% 2006 ........................................................ 782,738 810,623
--8 3/4% 2011 ........................................................ 839,414 858,824
--9% 2010 ............................................................ 497,004 512,225
--9% 2011 ............................................................ 1,204,111 1,240,987
--9 1/4% 2010-11 ..................................................... 873,492 905,156
--9 3/4% 2005-6 ...................................................... 1,777,391 1,849,041
--9 3/4% 2012-13 ..................................................... 762,704 793,451
Government National Mortgage Association (PL)
--10 1/4% 2017 ....................................................... 898,441 923,149
--------------
$ 176,960,047
--------------
OTHER U.S. GOVERNMENT & AGENCIES --42.7%
Tennessee Valley Authority --8 3/8% 1999 ................................ $ 3,400,000 $ 3,400,000
U.S. Treasury Inflation-Indexed Notes --3 3/8% 2007 ..................... 214,620,240 204,895,260
U.S. Treasury Notes --8 1/4% 2005 ....................................... 1,800,000 1,829,813
U.S. Treasury Notes Strip --0% 2009 ..................................... 31,000,000 16,691,950
--------------
$ 226,817,023
--------------
TOTAL U.S. GOVERNMENT & AGENCIES --76.0% ................................ $ 403,777,070
--------------
MORTGAGE BONDS
ASSET BACKED --3.4%
Green Tree Financial Corporation
--7 1/4% 2005 ........................................................ $ 9,716,854 $ 9,388,909
--7 3/4% 2029 ........................................................ 1,000,000 805,000
--7.77% 2029 ......................................................... 5,500,000 4,840,000
--8% 2028 ............................................................ 3,048,511 2,876,081
--------------
$ 17,909,990
--------------
</TABLE>
34
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1999
<TABLE>
<CAPTION>
Principal
BONDS & DEBENTURES--CONTINUED Amount Value
- ---------------------------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
MORTGAGE BACKED --1.6%
DLJ Mortgage Acceptance Corp. (Series 1997-E Class B)
--7.5481% 2026* .............................................................. $ 4,959,717 $ 3,655,078
First Financial Mortgage Trust (Series 9 Class A4)
--5.8% 2008 .................................................................. 1,000,000 977,500
Norwest Asset Securities Corp. (Series 1999-13 Class A"Z")
--6 3/4% 2029 ................................................................ 1,316,355 1,115,611
Prudential Home Mortgage Securities Corp. (Series 1993-F Class 1B1)
--6.65995% 2000* ............................................................. 2,942,698 2,932,582
------------
$ 8,680,771
------------
TOTAL MORTGAGE BONDS --5.0% ................................................... $ 26,590,761
------------
CORPORATE BONDS & DEBENTURES --7.3%
Advanta Corporation
--5.6075% 2000 (Floating Rate) ............................................... $ 1,600,000 $ 1,582,000
--6.65% 2000 ................................................................. 2,400,000 2,384,714
--6.658% 1999 ................................................................ 3,400,000 3,396,600
Advantica Restaurant Group, Inc. --11 1/4% 2008 ................................ 10,928,038 10,053,795
Oregon Steel Mills, Inc. --11% 2003 ............................................ 13,350,000 13,817,250
Trump Atlantic City Associates --11 1/4% 2006 .................................. 9,000,000 7,650,000
------------
$ 38,884,359
------------
TOTAL NON-CONVERTIBLE BONDS & DEBENTURES --88.3% ............................... $469,252,190
------------
CONVERTIBLE SECURITIES CONVERTIBLE BONDS & DEBENTURES --10.5%
Centertrust Retail Properties, Inc. ............................................
--7 1/2% 2001 (Class A) ...................................................... $ 4,858,000 $ 4,627,245
--7 1/2% 2001 (Class B) ...................................................... 5,800,000 5,365,000
Charming Shoppes, Inc. --7 1/2% 2006 ........................................... 7,000,000 6,370,000
CKE Restaurants, Inc. --4 1/4% 2004 ............................................ 12,000,000 7,680,000
DRS Technologies, Inc. --9% 2003 ............................................... 2,000,000 2,240,000
HomeBase, Inc. --5 1/4% 2004 ................................................... 8,302,000 5,728,380
Michaels Stores, Inc. --6 3/4% 2003 ............................................ 17,250,000 16,775,625
Offshore Logistics, Inc. --6% 2003 ............................................. 2,000,000 1,675,000
Quantum Health Resources, Inc. --4 3/4% 2000 ................................... 1,000,000 915,000
Read-Rite Corporation --6 1/2% 2004 ............................................ 10,055,000 4,273,375
------------
$ 55,649,625
------------
</TABLE>
35
<PAGE>
PORTFOLIO OF INVESTMENTS
September 30, 1999
<TABLE>
<CAPTION>
Shares or
Principal
CONVERTIBLE SECURITIES--CONTINUED Amount Value
- -------------------------------------------------------------------------- -------------- ------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCK --0.1%
Treev Inc. (Series A) ..................................................... 66,000 $ 449,625
------------
TOTAL CONVERTIBLE SECURITIES --10.6% ...................................... $ 56,099,250
------------
OTHER PREFERRED STOCK --0.6%
Crown American Realty Trust ............................................... 78,500 $ 3,238,125
------------
TOTAL INVESTMENT SECURITIES --99.5% (Cost $542,907,348) ................... $528,589,565
------------
SHORT-TERM INVESTMENT --0.2%
State Street Bank Repurchase Agreement --4 1/4% 10/1/99
(Collateralized by U.S. Treasury Notes --8 1/8% 2021
market value $783,544, Cost $767,091) ................................. $ 767,000 $ 767,091
------------
TOTAL INVESTMENTS --99.7% (Cost $543,674,439) ............................. $529,356,656
Other assets and liabilities, net --0.3% .................................. 1,776,829
------------
TOTAL NET ASSETS --100% ................................................... $531,133,485
------------
------------
</TABLE>
* Restricted securities purchased without registration under the Securities Act
of 1933 pursuant to Rule 144A, which generally may be resold only to certain
institutional investors prior to registration. DLJ Mortgage Acceptance Corp.
was purchased on September 8, 1997 and Prudential Home Mortgage Securities
Corp. was purchased on May 20, 1998. These restricted securities constituted
1.2% of total net assets at September 30, 1999.
See notes to financial statements.
36
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments at value:
Investment securities --at market value
(identified cost $542,907,348) .................................... $ 528,589,565
Short-term investments --at cost plus interest earned
(maturities of 60 days or less) ................................... 767,091 $ 529,356,656
-------------
Cash .................................................................. 503
Receivable for:
Interest ............................................................ $ 5,515,399
Capital Stock sold .................................................. 725,922
Investment securities sold .......................................... 66,311 6,307,632
------------- -------------
$ 535,664,791
LIABILITIES
Payable for:
Capital Stock repurchased ........................................... $ 4,175,174
Advisory fees ....................................................... 225,947
Accrued expenses and other liabilities .............................. 130,185 4,531,306
------------- -------------
NET ASSETS .............................................................. $ 531,133,485
-------------
-------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.01 per share; authorized
100,000,000 shares; outstanding 49,324,340 shares ................... $ 493,243
Additional Paid-in Capital ............................................ 531,442,176
Undistributed net realized gains on investments ....................... 4,252,881
Undistributed net investment income ................................... 9,262,968
Unrealized depreciation of investments ................................ (14,317,783)
-------------
Net assets at September 30, 1999 ...................................... $ 531,133,485
-------------
-------------
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) ........................... $ 10.77
-------------
-------------
Maximum offering price per share
(100/95.5 of per share net asset value) .............................. $ 11.28
-------------
-------------
</TABLE>
See notes to financial statements.
37
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C> <C>
Interest .................................................................. $ 39,220,123
Dividends ................................................................. 479,000
-------------
$ 39,699,123
EXPENSES
Advisory fees ............................................................. $ 2,846,976
Transfer agent fees and expenses .......................................... 253,280
Custodian fees and expenses ............................................... 57,813
Registration fees ......................................................... 50,685
Directors' fees and expenses .............................................. 36,150
Insurance ................................................................. 31,067
Audit fees ................................................................ 24,920
Postage ................................................................... 22,523
Reports to shareholders ................................................... 22,319
Legal fees ................................................................ 3,611
Other expenses ............................................................ 16,979 3,366,323
------------- -------------
Net investment income ............................................. $ 36,332,800
-------------
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) .............. $ 176,943,008
Cost of investment securities sold ........................................ 172,179,484
-------------
Net realized gain on investments ...................................... $ 4,763,524
Unrealized appreciation (depreciation) of investments:
Unrealized appreciation at beginning of year .............................. $ 5,317,224
Unrealized depreciation at end of year .................................... (14,317,783)
-------------
Decrease in unrealized appreciation of investments .................... (19,635,007)
-------------
Net realized and unrealized loss on investments ................... $ (14,871,483)
-------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ............................................................. $ 21,461,317
-------------
-------------
</TABLE>
See notes to financial statements.
38
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended September 30,
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ........................ $ 36,332,800 $ 35,993,477
Net realized gain on investments ............. 4,763,524 2,862,505
Decrease in unrealized
appreciation of investments ................ (19,635,007) (9,176,172)
------------- -------------
Increase in net assets resulting
from operations .............................. $ 21,461,317 $ 29,679,810
Distributions to shareholders from:
Net investment income ........................ $ (37,467,415) $ (33,893,211)
Net realized capital gains ................... (3,215,415) (40,682,830) (1,183,945) (35,077,156)
------------- -------------
Capital Stock transactions:
Proceeds from Capital Stock sold ............. $ 127,033,525 $ 236,277,210
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions ............. 35,025,699 30,352,091
Cost of Capital Stock repurchased ............ (227,450,554) (65,391,330) (175,059,444) 91,569,857
------------- ------------- ------------ -------------
Total increase (decrease) in net assets ........ $ (84,612,843) $ 86,172,511
NET ASSETS
Beginning of year, including
undistributed net investment income
of $10,397,583 and $8,297,317 ................ 615,746,328 529,573,817
------------- -------------
End of year, including
undistributed net investment income
of $9,262,968 and $10,397,583 ................ $ 531,133,485 $ 615,746,328
------------- -------------
------------- -------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold ................... 11,732,265 21,199,452
Shares issued to shareholders
upon reinvestment of dividends
and distributions ............................ 3,253,664 2,740,769
Shares of Capital Stock repurchased ............ (20,998,240) (15,730,014)
------------- -------------
Increase (decrease) in Capital Stock
outstanding .................................. (6,012,311) 8,210,207
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940 as a
diversified, open-end, management investment company. The Fund's investment
objective is to seek current income and long-term total return. The following is
a summary of significant accounting policies consistently followed by the Fund
in the prepara- tion 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 and securities listed on a national securities
exchange for which the over-the-counter market more accurately reflects the
securities' value in the judgment of the Fund's officers, are valued at the most
recent bid price or other ascertainable market value. Short-term investments
with maturities of 60 days or less are valued at cost plus interest earned which
approximates market value. Securities for which market quotations are not
readily available are valued at fair value as determined in good faith by, or
under the direction of, the Board of Directors.
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 financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported. Actual results could differ from
these 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 $173,518,631 for the
year ended September 30, 1999. Realized gains or losses are based on the
specific-certificate identification method. Cost of investment securities owned
at September 30, 1999 was the same for federal income tax and financial
reporting purposes. Gross unrealized appreciation and depreciation for all
securities at September 30, 1999 for federal income tax purposes was $1,978,029
and $16,295,812, 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 0.5% of the average daily net assets of the Fund. The Agreement
obligates the Adviser to reduce its fee to the extent necessary to reimburse the
Fund for any annual expenses (exclusive of interest, taxes, the cost of any
supplemental statistical and research information, and extraordinary expenses
such as litigation) in excess of 1 1/2% of the first $15 million and 1% of the
remaining average net assets of the Fund for the year.
40
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
For the year ended September 30, 1999, the Fund paid aggregate fees of
$35,584 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 September 30, 1999, FPA Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of the Adviser, received $70,027 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 -- DISTRIBUTION TO SHAREHOLDERS
On September 30, 1999, the Board of Directors declared a dividend from net
investment income of $0.17 per share payable October 7, 1999 to shareholders of
record on September 30, 1999. For financial statement purposes, this dividend
and distribution was recorded on the ex-dividend date, October 1, 1999.
41
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF FPA NEW INCOME, INC.
We have audited the accompanying statement of assets and liabilities of FPA New
Income, Inc. (the "Fund"), including the portfolio of investments, as of
September 30, 1999, the related statement of operations for the year then ended,
the statement of changes in net assets for each of the two years in the period
then ended, and the financial highlights on page 20 of the Prospectus for each
of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, including confirmation of securities owned
as of September 30, 1999 by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of FPA
New Income, Inc. at September 30, 1999, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights on page 20 of the Prospectus,
for each of the five years in the period then ended in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
November 12, 1999
42
<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, September 30, 1999
Statement of Assets and Liabilities, September 30, 1999
Statement of Operations
Year ended September 30, 1999
Statement of Changes in Net Assets
Year ended September 30, 1999
Year ended September 30, 1998
All other financial statements and schedules are inapplicable.
(b) Exhibits
(a) Articles of Incorporation.
(b) By-Laws.
(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.39 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) Amendment to the Custodian Contract.
(g)(3) Custodian Fee Schedule Addendum for GNMA Securities Traded
through Participants Trust Company.
(g)(4) Amendment to the Custodian Contract was filed as Exhibit 8.4 to
Post- Effective Amendment No. 38 of Registrant's Registration
Statement on Form N-1A and is incorporated herein by reference.
(g)(5) Amendment to the Custodian Contract was filed as Exhibit 8.5 to
Post- Effective Amendment No. 40 of Registrant's Registration
Statement on Form N-1A and is incorporated herein by reference.
(h)(1) Agreement and Articles of Merger, dated February 14, 1994.
C-1
<PAGE>
(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. 40 of Registrant's Registration
Statement on Form N-1A and is incorporated herein by reference.
(i) Opinion 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 Capital Fund, Inc. ("Capital"), FPA Paramount Fund, Inc. ("Paramount"), FPA
Perennial Fund, Inc. ("Perennial") and FPA Crescent Portfolio, each 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, officer,
employee, partner or trustee, in any other business, profession, vocation or
employment of a substantial nature except as described under the caption
"Directors and Officers of the Fund" in Part B hereof as set forth below.
C-2
<PAGE>
<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, Officer of Capital.
Vice President
Rikard B. Ekstrand, ---
Vice President
Steven R. Geist, Officer of Source and
Vice President of Perennial.
Janet M. Pitman, (2)
Vice President
Mary S. Thomas, ---
Vice President
Sherry Sasaki, (2)
Assistant Vice President
& Secretary
C-3
<PAGE>
Marie McAvenia, ---
Assistant Vice President
</TABLE>
(1) The address of each company named is 11400 West Olympic Boulevard, Suite
1200, Los Angeles, California 90064.
(2) A description of such person's other affiliations is given under the
caption "Directors and Officers of the Fund" in Part B hereof.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) FPA Fund Distributors, Inc., the principal underwriter for Registrant, acts
as a principal underwriter for Capital, 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 & Offices Positions and Offices
Business Address with Principal Underwriter with Registrant
- ---------------- -------------------------- ---------------
<S> <C> <C>
Julio J. de Puzo, Jr. (1) President, Chief Executive Director &
Officer & Director Exec Vice Pres.
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 Assistant Treasurer
& Controller
Sherry Sasaki (1) Secretary Secretary
</TABLE>
(1) 11400 West 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.
C-4
<PAGE>
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
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 West 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 1st day of December, 1999.
FPA NEW INCOME, 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 December 1, 1999
Robert L. Rodriguez Executive Officer)
/s/ J. RICHARD ATWOOD
----------------------- Treasurer (Principal December 1, 1999
J. Richard Atwood Financial Officer and
Principal Accounting
Officer)
/s/ WILLARD H. ALTMAN
----------------------- Director December 1, 1999
Willard H. Altman
DEWAYNE W. MOORE*
----------------------- Director December 1, 1999
DeWayne W. Moore
LAWRENCE J. SHEEHAN*
----------------------- Director December 1, 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. 35 to the Registration Statement which was
filed October 28, 1994.
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 November 12, 1999, in Post-Effective
Amendment No. 41 under the Securities Act of 1933 and Amendment No. 22 under the
Investment Company Act of 1940 to the Registration Statement (Form N-1A
No. 2-30393)and related Prospectus and Statement of Additional Information of
FPA New Income, Inc.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
December 3, 1999
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
(a) Articles of Incorporation.
(b) By-Laws.
(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) Amendment to the Custodian Contract.
(g)(3) Custodian Fee Schedule Addendum for GNMA Securities Traded through
Participants Trust Company.
(h)(1) Agreement and Articles of Merger, dated February 14, 1994.
(i) Opinion of Counsel (to be filed by amendment).
(j) Consent of Independent Auditors (filed as page C-7).
(n) Financial Data Schedule.
</TABLE>
All other applicable exhibits are incorporated herein by reference.
<PAGE>
ARTICLE OF INCORPORATION
OF
FPA NEW INCOME, 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 NEW INCOME, 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.
(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.
<PAGE>
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, conversion 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:
(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 procedures.
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-
<PAGE>
(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 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 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 By-Laws 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.
-3-
<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
whenever the words "share" or "shares" are used in the charter or By-Laws 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 By-Laws 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.
(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
-4-
<PAGE>
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 By-Laws 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 of 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 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 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 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.
(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.
-5-
<PAGE>
ARTICLE IX
The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, the undersigned incorporator of FPA NEW
INCOME, INC. hereby executes the foregoing Articles of Incorporation and
acknowledges the same to be her act.
Dated the 7th day of February, 1994.
/s/ Sherry Sasaki
----------------------------------------
Sherry Sasaki
-6-
<PAGE>
FPA NEW INCOME, 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
shareholders 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.
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
<PAGE>
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 for 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 proxies and ballots shall be received, and all
questions touching the qualification of voters and the validity of
-2-
<PAGE>
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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<PAGE>
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 (3) 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 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 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 members.
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 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 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
-6-
<PAGE>
by designation or ex-officio, except when designated by the Board. Each Vice
President shall 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 of Directors.
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 confirmed upon or assigned to him by the Board of Directors, the
President or 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
person.
IN WITNESS WHEREOF, the undersigned Secretary of FPA New Income, Inc.
hereby certifies that the foregoing By-Laws were duly adopted by the Board of
Directors of the Corporation on February 14, 1994.
/s/ Sherry Sasaki
----------------------------------------
Sherry Sasaki, Secretary
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<PAGE>
<PAGE>
<TABLE>
<S><C>
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------------------------------ ------------------------------
FPA NEW INCOME, INC.
------------------------------ ------------------------------
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF MARYLAND CERTAIN DEFINITIONS
THIS CERTIFIES THAT IS THE OWNER OF
SPECIMEN
CUSIP 302544 10 1
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
- ---------------------------------------------------- ----------------------------------------------------
- ---------------------------------------------------- FPA NEW INCOME, 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
- --------------------------------------------------------------------------------------------------------------------------------
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<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 IHF 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, as sign 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
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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 17Ad-15.
</TABLE>
<PAGE>
INVESTMENT ADVISORY AGREEMENT
AGREEMENT dated December 27, 1994, by and between FPA NEW INCOME,
INC., a Maryland corporation (hereinafter referred to as the "Fund"), and FIRST
PACIFIC ADVISORS, INC., a Massachusetts corporation (hereinafter referred to as
the "Manager").
W I T N E S S E T H :
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 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 Investment Company Act and the
statements relating to the Fund's investment objectives, investment policies and
investment restrictions as the same are set forth
<PAGE>
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 in to
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 of 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, 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.
-2-
<PAGE>
When Fund portfolio securities are tendered by the Manager or an
affiliated 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.
(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 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 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 and 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.
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 one-half (1/2) of one percent
(1%) 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
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<PAGE>
such compensation shall be paid proportionately for any other period ending with
the termination of the Agreement.
(b) 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 on and one-half percent (1 1/2%) of the first Fifteen Million
Dollars ($15,000,000) of the average net asset value of the Fund, plus one
percent (1%) of the average net assets of the Fund in excess of Fifteen Million
Dollars ($15,000,000), 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 or 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 or other aspects of any other business, whether of
similar or dissimilar nature.
ARTICLE VI
DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall continue in effect to December 31, 1995. 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.
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<PAGE>
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 State
Courts or in the absence of any controlling decision of any such court, by
rules, 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 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.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
FPA NEW INCOME, INC.
(seal) By:/s/ Robert L. Rodriguez
-----------------------------------------
Robert L. Rodriguez,
President
FIRST PACIFIC ADVISORS, INC.
(seal) By:/s/ Christopher Linden
------------------------------------------
Christopher Linden,
President
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<PAGE>
DISTRIBUTION AGREEMENT
Agreement dated as of this 27th day of December, 1994, by and between
FPA NEW INCOME, INC., a Maryland corporation (hereinafter called the "Fund"),
and FPA FUND DISTRIBUTORS, INC., a California corporation (hereinafter called
the "Distributor").
W I T N E S S E T H :
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, including
distribution 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 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, 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 requirements of the Distributor. The
Fund further agrees to use its best efforts to prepare, file and keep
<PAGE>
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 own 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 Services 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.
(c) The Distributor shall enter into Selected Dealer 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
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<PAGE>
inconsistent with the provisions of this Agreement. The Distributor shall
continue each such Selected Dealer Agreement in effect, or terminate it, upon
its sole discretion. Such Selected Dealer 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 have
entered into Selected Dealer 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
Selected Dealer 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 Selected Dealer 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 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.
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<PAGE>
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, if any, as set forth in the
current prospectus of the Fund, and (iii) the broker-dealer's mark-up, if
any, described in the Selected Dealer 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
of 1933, 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
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 such 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
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<PAGE>
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) This 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.
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<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 NEW INCOME, 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
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<PAGE>
FPA FUND DISTRIBUTORS, INC.
11400 WEST OLYMPIC BOULEVARDo SUITE 1200o 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 receive
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 for 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 for
your discount and our commission on such sale. If payment for the shares
purchased is not received
<PAGE>
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 (an 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 is 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:
----------------------------
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:
----------------------------
(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>
CUSTODIAN CONTRACT
This Contract between FPA New Income, Inc., a Delaware corporation,
hereinafter called the "Fund," and State Street Bank and Trust Company,
hereinafter called the "Custodian,"
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
I. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT.
The Fund hereby employs the Custodian as the Custodian of its assets. The
Fund agrees to deliver to the Custodian all securities and similar investments
and all cash owned or received by it, including all payments of income or
capital received by it with respect to all securities and similar investments
owned by the Fund from time to time and the cash or other consideration received
by it for such shares of common stock ("Shares") of the Fund as may be issued or
sold from time to time. The Custodian shall not be responsible for any property
of the Fund held or received by the Fund and not delivered to the Custodian.
II. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND
HELD BY THE CUSTODIAN
A. HOLDING SECURITIES. The Custodian shall hold and
physically segregate for the account of the Fund all
non-cash property, including all securities owned by
the fund, other than securities which are maintained
pursuant to Section L of Article II hereof in a
"Securities System" as defined in such section.
B. DELIVERY OF SECURITIES. The Custodian shall release
and deliver securities owned by the Fund held by the
Custodian or in a Securities System account of the
Custodian only upon receipt of "Proper Instructions,"
as defined in Section Q of Article II hereof which may
be continuing instructions when deemed appropriate by
the parties, and only in the following cases:
1. Upon the sale of such securities for the
account of the Fund and receipt of payment
thereof;
2. Upon the receipt of payment in connection
with any repurchase agreement related to such
securities entered into by the Fund;
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3. In the case of a sale effected through a
Securities System, in accordance with the
provisions of Section L of Article II hereof;
4. To the depository agent in connection with
tender or other similar offers for such
securities;
5. To the issuer thereof or its agent when such
securities are called, redeemed, retired or
otherwise become payable; PROVIDED that, in
any such case, the cash or other
consideration is to be delivered to the
Custodian;
6. To the issuer thereof or its agent for
transfer into the name of any nominee or
nominees of the Custodian or into the name or
nominee name of any agent appointed pursuant
to Section K of Article II hereof; or for
exchange for a different number of bonds,
certificates or other evidence representing
the same aggregate face amount or number of
units; or for exchange of interim receipts or
temporary securities for definitive
securities; PROVIDED that in such case, the
new securities are to be delivered to the
Custodian;
7. To the broker selling the same for
examination in accordance with the "street
delivery" custom; PROVIDED that the Custodian
shall adopt such procedures, as the Fund from
time to time shall approve, to ensure their
prompt return to the Custodian by the broker
in the event the broker elects not to accept
them;
8. For exchange or conversion pursuant to any
plan of merger, consolidation,
recapitalization, reorganization or
readjustment of the securities of the issuer
of such securities, or pursuant to provisions
for conversion contained in such securities,
or pursuant to any deposit agreement;
PROVIDED that, in any such case, the new
securities and cash, if any, are to be
delivered to the Custodian;
9. In the case of warrants, rights or similar
securities, the surrender thereof upon the
exercise of such warrants, rights of similar
securities; PROVIDED that, in any such case,
the new securities and cash, if any, are to
be delivered to the Custodian;
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10. For delivery in connection with any loans of
securities made by the Fund, BUT ONLY against
receipt of adequate collateral as specified
from time to time by action of the Directors
of the Fund, which may be in the form of cash
or obligations issued by the United States
government, its agencies or
instrumentalities;
11. For delivery as security in connection with
any borrowings by the Fund requiring a pledge
or hypothecation of assets by the Fund, BUT
ONLY against receipt of amounts borrowed;
12. For delivery in accordance with the
provisions of any agreement among the Fund,
the Custodian and a broker-dealer registered
under the Securities Exchange Act of 1934
(the "Exchange Act") and a member of The
National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation
and of any registered national securities
exchange, or of any similar organization or
organizations, regarding escrow or other
arrangements in connection with transactions
by the Fund;
13. Upon receipt of instructions from the
transfer agent for the Fund, for delivery to
such transfer agent or to holders of Shares
of the Fund in connection with distributions
in kind, as may be described from time to
time in the Fund's currently effective
prospectus, in satisfaction of requests by
holders of Shares of the Fund for repurchase
or redemption; and
14. For any other proper corporate purposes, BUT
ONLY upon receipt of, in addition to Proper
Instructions, a certified copy of a
resolution of the Directors or of the
Executive Committee signed by an officer of
the Fund and certified by the Secretary or an
Assistant Secretary, specifying the
securities to be delivered, setting forth the
purpose for which such delivery is to be
made, declaring such purposes to be proper
corporate purposes, and naming the person or
persons to whom delivery of such securities
shall be made.
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<PAGE>
The Custodian acknowledges that the Fund, as
of the effective date of this Contract, has
not adopted any policies enabling it to loan
securities, engage in options transactions
and to make distributions in kind; and that
paragraphs 10, 12 and 13 will become
applicable until after the Fund has adopted
such a policy or policies.
C. REGISTRATION OF SECURITIES. Securities held by the
Custodian (other than bearer securities) shall be
registered in the name of the Fund or in the name of
any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively
to the Fund, UNLESS the Fund has authorized in writing
the appointment of a nominee to be used in common with
other registered investment companies having the same
investment adviser as the Fund, or in the name or
nominee name of any agent appointed pursuant to
Section K of Article II hereof. All securities
accepted by the Custodian on behalf of the Fund under
the terms of this Contract shall be in "street" or
other good delivery form. The Fund shall from time to
time furnish the Custodian appropriate instruments to
enable the Custodian to register in the name of the
nominee of the Custodian any securities held by the
Custodian hereunder which may be registered in the
name of the Fund.
D. BANK ACCOUNTS. The Custodian shall open and maintain a
separate bank account or accounts in the name of the
Fund, subject only to draft or order by the Custodian
acting pursuant to the terms of this Contract, and
shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for
the account of the Fund, other than cash maintained by
the Fund in a bank account established and used in
accordance with Rule 17f-3 under the Investment
Company Act of 1940. Funds held by the Custodian for
the Fund may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian
or in other banks or trust companies; PROVIDED,
however, that every such bank or trust company shall
be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank
or trust company and the funds to be deposited with
each such bank or trust company shall be approved by
action of the Directors of the Fund. Such funds shall
be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian
only in that capacity. If requested by the Fund, the
Custodian shall furnish the Fund, not later than
twenty days after the last business day of each
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<PAGE>
month, a statement reflecting the current status of
its internal reconciliation of the closing balance as
of that day in all accounts described in this
Paragraph to the balance shown on the daily cash
report for that day rendered to the Fund.
E. PAYMENTS FOR SHARES. The Custodian shall receive from
the distributor of the Fund's Shares or from the
transfer agent of the Fund (the "Transfer Agent") and
deposit into the Fund's account such payments as are
received for Shares of the Fund issued or sold from
time to time by the Fund. The Custodian will provide
timely notification to the Fund and the Transfer Agent
of any receipt by it of payments for Shares of the
Fund.
F. INVESTMENT AND AVAILABILITY OF FEDERAL FUNDS. Upon
mutual agreement between the Fund and the Custodian,
the Custodian shall, upon receipt of Proper
Instruments, which may be continuing instructions when
deemed appropriate by the parties:
1. Invest in such instruments as may be set
forth in such instructions on the same day as
received all federal funds received after a
time agreed upon between the Custodian and
the Fund; and
2. Make federal funds available to the Fund as
of specified times agreed upon from time to
time by the Fund and the Custodian in the
amount of checks received in payment for
Shares of the Fund which are deposited into
the Fund's account.
G. COLLECTIONS. Unless and until the Custodian receives
Proper Instructions to the contrary, the Custodian
shall:
1. Present for payment for the account of the
Fund all securities which are called,
redeemed or retired or otherwise become
payable or which call for payment upon
presentation, and hold the cash received by
it upon such payment for the account of the
Fund; and
2. Collect on a timely basis all income and
other payments with respect to registered
securities held hereunder to which the Fund
shall be entitled either by law or pursuant
to custom in the securities business, and
shall collect on a timely basis all income
and other payments with respect to bearer
securities if, on the date of
5
<PAGE>
payment by the issuer, such securities are
held by the Custodian or agent thereof and
shall deposit such income, as collected, into
the Fund's account. Without limiting the
generality of the foregoing, the Custodian
shall detach and present for payment all
coupons and other income items requiring
presentation as and when they become due,
shall collect interest when due on securities
held hereunder, and shall endorse and
deposit, in the name of the Fund, checks
drafts and other negotiable instruments on
the same day as received. All securities
accepted by the Custodian pursuant to
Subsection 1 of Section H of Article II
hereof shall be accompanied by payment of, or
a "due bill" for, any dividends, interest, or
other distributions of the issuer, due to the
Fund.
H. PAYMENT OF FUND MONIES. Upon receipt of Proper
Instructions, which may be continuing instructions
when deemed appropriate by the parties, the Custodian
shall pay out monies of the Fund in the following
cases only:
1. Upon the purchase of securities for the
account of the Fund BUT ONLY (a) against the
delivery of such securities to the Custodian
(or any bank, banking firm or trust company
doing business in the United States or abroad
which is qualified under the Investment
Company Act of 1940, as amended, to act as a
custodian and has been designated by the
Custodian as its agent for this purpose)
registered in the name of the Fund or in the
name of a nominee of the Custodian referred
to in Section C of Article II hereof or in
proper form for transfer; (b) in the case of
a purchase effected through a Securities
System, in accordance with the conditions set
forth in Section L of Article II hereof; or
(c) in the case of repurchase agreements
entered into between the Fund and the
Custodian, or another bank, or a broker-
dealer which is a member of the NASD, (i)
against delivery of the securities either in
certificate form or through an entry
crediting the Custodian's account at the
Federal Reserve Bank with such securities; or
(ii) against delivery or the receipt
evidencing purchase by the Fund of securities
owned by the Custodian along with written
evidence of the agreement by the Custodian to
repurchase such securities from the Fund
provided that the specific securities
purchased by the
6
<PAGE>
Fund are identified by book-entry in the
records of the Custodian bank;
2. In connection with the conversion, exchange
or surrender of securities owned by the Fund
as set forth in Section B of Article II
hereof;
3. For the redemption or repurchase of Shares of
the Fund as set forth in Section J of Article
II hereof;
4. For the payment of any expense of liability
incurred by the Fund, including but not
limited to the following payments for the
account of the Fund: interest, taxes,
management, accounting, transfer agent and
legal fees and operating expenses of the Fund
whether or not such expenses are to be in
whole or part capitalized or treated as
deferred expenses;
5. For the repayment of any loan made by the
Fund but only (a) against surrender of the
note or notes evidencing the loan and (b)
against redelivery of any securities pledged
or hypothecated to secure such loan;
6. For the payment of any dividends or other
distributions declared pursuant to the
governing documents of the Fund; AND
7. For any other proper purposes, BUT ONLY upon
receipt of, or in addition to Proper
Instructions, a certified copy of a
resolution of the Directors or of the
Executive Committee of the Fund signed by an
officer of the Fund and certified by its
Secretary or an Assistant Secretary,
specifying the amount of such payment,
setting forth the purpose for which such
payment is to be made, declaring such purpose
to be a proper purpose, and naming the person
or persons to whom such payment is to be
made.
I. LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF
SECURITIES PURCHASE. In any and every case where
payment for purchase of securities for the account of
the Fund is made by the Custodian in advance of the
receipt of the securities purchased in the absence of
specific written instructions from the Fund to so pay
in advance, the Custodian shall be absolutely liable
to the Fund for such securities to the same extent as
if the
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<PAGE>
securities had been received by the Custodian, EXCEPT
that in the case of repurchase agreements entered into
by the Fund with a bank which is a member of the
Federal Reserve System, the Custodian may transfer
funds to the account of such bank prior to the receipt
of written evidence that the securities subject to
such repurchase agreement have been transferred by
book-entry into a segregated nonproprietary account of
the Custodian maintained with the Federal Reserve Bank
of Boston or of the Safe-keeping receipt, provided
that such securities have in fact been so transferred
by book-entry.
J. PAYMENTS FOR REPURCHASES OR REDEMPTIONS OF SHARES OF
THE FUND. From such funds as may be available for the
purpose but subject to the limitations of the
governing documents of the Fund and any applicable
action of the Directors of the Fund pursuant thereto,
the Custodian shall, upon receipt of instructions from
the Transfer Agent, make funds available for payment
to holders of Shares of the Fund who have delivered to
the Transfer Agent a request for redemption or
repurchase of Shares of the Fund. In connection with
the redemption or repurchase of shares of the Fund,
the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to
or through a commercial bank designated by the
redeeming shareholders. In connection with the
redemption or repurchase of Shares of the Fund, the
Custodian shall honor checks drawn on the Custodian by
a holder of such Shares, which checks have been
furnished by the Fund to the holder of such Shares,
when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed
upon from time to time between the Fund and the
Custodian. The above provisions regarding payment by
wire and redemption by shareholder check will only be
effective upon adoption by the Fund of policies so
permitting.
K. APPOINTMENT OF AGENTS. The Custodian may at any time
or times in its discretion appoint (and may at any
time remove) any other bank or trust company which is
itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent
to carry out such of the provisions of this Article II
as the Custodian may from time to time direct;
PROVIDED, however, that the appointment of any agent
shall not relieve the Custodian of any of its
responsibilities or liabilities hereunder, and that
the Custodian shall hold the Fund harmless from the
acts and omissions of any agent appointed pursuant to
this paragraph.
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<PAGE>
L. DEPOSIT OF FUND ASSETS IN SECURITIES SYSTEMS. The
Custodian may deposit and/or maintain securities owned
by the Fund in a clearing agency registered with the
Securities and Exchange Commission under Section 17A
of the Exchange Act, which acts as a securities
depository, or in the book-entry system authorized by
the U.S. Department of the Treasury and certain
federal agencies, collectively referred to herein as
"Securities Systems" in accordance with applicable
Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject
to the following provisions:
1. The Custodian may keep securities of the Fund
in a Securities System provided that such
securities are represented in an account
("Account") of the Custodian in the
Securities System which shall not include any
assets of the Custodian other than assets
held as a fiduciary, custodian, or otherwise
for customers;
2. The records of the Custodian with respect to
securities of the Fund which are maintained
in a Securities System shall identify by
book-entry those securities belonging to the
Fund;
3. The Custodian shall pay for securities
purchased for the account of the Fund upon
(i) receipt of the advice from the Securities
System that such securities have been
transferred to the Account, and (ii) the
making of an entry on the records of the
Custodian to reflect such payment and
transfer for the account of the Fund. The
Custodian shall transfer securities sold for
the account of the Fund upon (i) receipt of
advice from the Securities System that
payment for such securities has been
transferred to the Account, and (ii) the
making of an entry on the records of the
Custodian to reflect such transfer and
payment for the account of the Fund. Copies
of all advices from the Securities System of
transfers of securities for the account of
the Fund shall identify the Fund, be
maintained for the Fund by the Custodian and
be provided to the Fund at its request. The
Custodian shall furnish the Fund confirmation
of each transfer to or from the account of
the Fund in the form of a written advice or
notice and shall furnish to the Fund copies
of daily transaction sheets reflecting each
day's transactions in the Securities System
for the account of the Fund on the next
business day;
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<PAGE>
4. The Custodian shall provide the Fund with any
report obtained by the Custodian on the
Securities System's accounting system,
internal accounting control and procedures
for safeguarding securities deposited in the
Securities System;
5. The Custodian shall have received the initial
or annual certificate, as the case may be,
required by Article VIII, hereof; and
6. Anything to the contrary in this Contract
notwithstanding, the Custodian shall be
liable to the Fund for any loss or damage to
the Fund resulting from use of the Securities
System by reason of any negligence,
misfeasance or misconduct of the Custodian or
any of its agents or of any of its or their
employees or from any failure to the
Custodian or any such agents to enforce
effectively such rights as it may have
against the Securities System; at the
election of the Fund, it shall be entitled to
be subrogated to the rights of the Custodian
with respect to any claim against the
Securities System or any other person which
the Custodian may have as a consequence of
any such loss or damage if and to the extent
that the Fund has not been made whole for any
such loss or damage.
M. SEGREGATED ACCOUNT. The Custodian shall upon receipt
of Proper Instructions established and maintain a
segregated account or accounts for and on behalf of
the Fund, into which account or accounts may be
transferred cash and/or securities, including
securities maintained in an account by the Custodian
pursuant to Section B(12) of Article II hereof, (i) in
accordance with the provisions of any agreement among
the Fund, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD,
relating to compliance with the rules of The Options
Clearing Corporation and of any registered national
securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements
in connection with transactions by the Fund, (ii) for
the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release
No. 10666, or any subsequent release or releases of
the Securities and Exchange Commission relating to the
maintenance of segregated accounts by registered
investment companies and (iii) for other proper
corporate purposes, BUT ONLY, in the case
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<PAGE>
of clause (iii), upon receipt of, in addition to
Proper Instructions, a certified copy of a resolution
of the Board of Directors or of the Executive
Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary,
setting forth the purpose or purposes of such
segregated account and declaring such purposes to be
proper corporate purposes.
N. OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian
shall execute ownership and other certificate and
affidavits for all federal and state tax purposes in
connection with receipt of income or other payments
with respect to securities of the Fund held by it and
in connection with transfers of securities.
O. PROXIES. The Custodian shall, with respect to the
securities held hereunder, cause to be promptly
executed by the registered holder of such securities,
if the securities are registered otherwise than in the
name of the Fund, all proxies, without indication of
the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund such proxies, all
proxy soliciting materials and all notice relating to
such securities.
P. COMMUNICATIONS RELATING TO FUND PORTFOLIO SECURITIES.
The Custodian shall transmit promptly to the Fund all
written information (including, without limitation,
pendency of calls and maturities of securities and
expirations of conversion and other rights in
connection therewith and notices of exercise of call
options written by the Fund) received by the Custodian
from issuers of the securities being held for the
Fund. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Fund all
written information received by the Custodian from
issuers of the securities whose tender or exchange is
sought and from the party (or his agents) making the
tender or exchange offer. If the Fund desires to take
action with respect to any tender offer, exchange
offer or any other similar transaction, the Fund shall
notify the Custodian at least three business days
prior to the date on which the Custodian is to take
such action, unless special arrangements to the
contrary have been agreed to by the Fund and the
Custodian.
Q. PROPER INSTRUCTIONS. "Proper Instructions" as used
throughout this Article II means a writing signed by
one or more person or persons as shall have been from
time to time authorized by action of the Directors of
the Fund. Each such writing shall set
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<PAGE>
forth the specific transaction or type of transaction
involved, including a specific statement of the
purpose for which such action is requested. Oral
instructions will be considered Proper Instructions if
the Custodian reasonably believes them to have been
given by a person authorized to give such instructions
with respect to the transaction involved. The Fund
shall cause all oral instructions to be confirmed in
writing by the following business day. The Custodian
shall use reasonable efforts to insure that all such
written confirmations are received in a timely manner
from the Fund. Upon receipt of a certificate of the
Secretary or an Assistant Secretary as to the
authorization by the Directors of the Fund accompanied
by a detailed description of procedures approved by
the Directors, Proper Instructions may include
communications effected directly between
electro-mechanical or electronic devices provided that
the Directors and the Custodian are satisfied that
such procedures afford adequate safeguards for the
Fund's assets.
R. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY. The
Custodian may in its discretion, without express
authority from the Fund:
1. Make payments to itself or others for minor
expenses of handling securities or other
similar items relating to its duties under
this Contract; PROVIDED that all such
payments shall be accounted for to the Fund;
2. Surrender securities in temporary form for
securities in definitive form; and
3. In general, attend to all nondiscretionary
details in connection with the sale,
exchange, substitution, purchase, transfer
and other dealings with the securities and
property of the Fund except as otherwise
directed by action of the Directors of the
Fund.
S. EVIDENCE OF AUTHORITY. The Custodian shall be
protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or
paper believed by it to be genuine and to have been
properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of
action of the Directors of the Fund as conclusive
evidence (a) of the authority of any person to act in
accordance with such vote or (b) of any determination
or of any action by the Directors pursuant to the
governing instruments of the Funds as described in
such vote, and such vote may be
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<PAGE>
considered as in full force and effect until receipt
by the Custodian of written notice to the contrary.
III. RECORDS AND REPORTS.
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder,
applicable federal and state tax laws and any other law or administrative rules
or procedures which may be applicable to the Fund. All such records shall remain
the property of the Fund, shall be subject to the provisions of Article IX
hereof, and shall be open to the inspection and audit at reasonable times by
duly authorized officers, employees or agents of the Fund and employees and
agents of the Securities and Exchange Commission. The Custodian shall, at the
Fund's request, supply the Fund with a tabulation of securities owned by the
Fund and held by the Custodian and shall, render to the Fund a daily report of
all monies received or paid on behalf of the Fund and of the resultant cash
balance, a list of all security transactions that remain unsettled at such time,
and such other reports as the Fund may reasonable request.
IV. OPINION OF FUND'S INDEPENDENT ACCOUNTANT.
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-1 and Form N-1R or other annual
reports to the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
V. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS.
The Custodian shall provide to the Fund, at such times as the Fund may
reasonable require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this Contact;
such reports, which shall be of sufficient scope and in sufficient detail, as
may reasonably be required by the Fund, to provide reasonable assurance that any
material inadequacies would be disclosed, shall state in detail material
inadequacies disclosed by such examination, and, if there are no such
inadequacies, shall so state.
VI. COMPENSATION OF CUSTODIAN.
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund and
the Custodian.
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<PAGE>
VII. RESPONSIBILITY OF CUSTODIAN.
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the titles, validity or genuineness
of any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties. The Custodian shall
be held to the exercise of reasonable care in carrying out the provisions of
this Contract, but shall be kept indemnified by and shall be without liability
to the Fund for any action taken or omitted by it in good faith without
negligence. It shall be entitled to rely on and may act upon advice of counsel
(who may be counsel for the Fund) on all matters, and shall be without liability
for any action reasonably taken or omitted pursuant to such advice.
Notwithstanding the foregoing, the responsibility of the Custodian with respect
to redemptions effected by check shall be in accordance with a separate
Agreement entered into between the Custodian and the Fund; and provided further
that notwithstanding the foregoing, after receipt of securities or other
property of the Fund by the Custodian to be held by the Custodian and until the
delivery or other disposition of such securities or other property pursuant to
instructions of the Fund pursuant hereto, the Custodian assumes liability for
damage thereto or loss thereof or loss of any money or securities received as
dividends or of any split-ups, rights or other distribution or proceeds
therefrom caused as a result of the negligence, willfull misconduct or bad faith
by the Custodian in connection with the Custodian's handling of the securities.
The Custodian's responsibility for damage or loss arising from military power,
war, insurrection, or nuclear fission, fusion, or radioactivity shall be limited
to the use of the Custodian's best efforts to secure from transfer agents and
similar appropriate persons replacement of securities determined to be lost,
missing, or destroyed.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
VIII. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT.
This contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may not be
assigned by the Custodian without consent of the Fund, may be amended as to the
Contract or the fee ONLY by mutual written agreement of the parties hereto and
may be terminated by either party by an instrument in writing delivered or
mailed, postage prepaid to the other party, such termination to take effect not
sooner than sixty (60) days after the date of such delivery or mailing;
PROVIDED, however, that the Custodian shall not act under Section L of Article
II hereof in the absence of receipt of an initial certificate of the Secretary
or an Assistant Secretary that the Directors of the Fund have approved the
initial use of a particular Securities System and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Directors have
reviewed the use by the Fund of such Securities System, as required in each case
by Rule 17f-4 under the Investment Company Act of 1940, as amended; PROVIDED
FURTHER, however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state laws or regulations, or any
provision of the governing documents of the Fund, and FURTHER PROVIDED, that the
Fund may at
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<PAGE>
any time by action of its Directors (i) substitute another bank or trust company
for the Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
IX. SUCCESSOR CUSTODIAN.
If a successor custodian shall be appointed by action of the Directors of
the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian; duly endorsed and in the form for
transfer, all securities then held by it hereunder and all funds and other
properties of the Fund deposited with or held by it hereunder.
If no successor custodian shall be appointed, the Custodian shall, in like
manner, upon receipt of a certified copy of action of the Directors of the Fund,
deliver at the office of the Custodian such securities, funds and other
properties in accordance with such action.
In the event that no written order designating a successor custodian or
certified copy of action of the Directors shall have been delivered to the
Custodian on or before the date when such termination shall become effective,
then the Custodian shall have the right to deliver to a bank or trust company,
which is a "bank," as defined in the Investment Company Act of 1940, of its own
selection, having an aggregate capital, surplus, and undivided profits, as shown
by its last published report, of not less than $25,000,000, all securities,
funds and other properties held by the Custodian and all instruments held by the
Custodian relative thereto and all other property held by it under this Contract
and to transfer to an account of such successor custodian all of the Fund's
securities held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of action referred to above or
of the Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
X. INTERPRETIVE AND ADDITIONAL PROVISIONS.
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, PROVIDED that no such interpretive or additional provisions
shall contravene any applicable federal or state laws or regulations or any
provisions of the governing instruments of the Fund. No interpretive or
additional provisions made as provided n the preceding sentence shall be deemed
to be an amendment of this Contract.
15
<PAGE>
XI. DIRECTORS
All reference to actions of or by Directors herein shall require action by
such Directors acting as a Board of Directors and not individually.
XII. MASSACHUSETTS LAW TO APPLY.
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with the Investment Company Act of 1940, other federal
securities laws where applicable, and the laws of the Commonwealth of
Massachusetts.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its fully authorized representative and its
seal to be hereunder affixed as of the 20th day of August, 1984.
FPA NEW INCOME, INC.
(seal) By: /s/ Julio J. de Puzo, Jr.
-----------------------------------
Julio J. de Puzo, Jr., Treasurer
STATE STREET BANK AND TRUST COMPANY
(seal) By: /s/ E. D. Hawkes, Jr.
-----------------------------------
Vice President
16
<PAGE>
(LOGO)
STATE STREET BANK AND TRUST COMPANY
Custodian Fee Schedule
FPA PARAMOUNT FUND, INC.
FPA PERENNIAL FUND, INC.
* FPA NEW INCOME, 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 cash 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
Custody and
Fund Net Assets Portfolio Acct.
--------------- ----------------
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
* 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).
Fund Net Assets Annual Fees
--------------- -----------
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
<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 loaned 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 BOOKS
Monitoring for calls and processing coupons -- for each
coupon issue held -- monthly charge $ 5.00
VIII. HOLDING CHARGE
For each issue maintained -- monthly charge $ 5.00
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.
<PAGE>
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
officers 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 J. de Puzo, Jr. By /s/ E. D. 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 NEW INCOME, 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
of 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 NEW INCOME, INC.
/s/ Sherry Sasaki By /s/ Julio J. de Puzo, Jr.
- ------------------------ ------------------------------
Secretary Treasurer
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ P. McClure By /s/ E. D. Hawkes, Jr.
- ------------------------ ------------------------------
Assistant Secretary Vice President
<PAGE>
(LOGO)
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.
FPA PARAMOUNT 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.
Description Amount
----------- ------
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
FPA PARAMOUNT FUND, INC.
FPA NEW INCOME FUND
FPA PERENNIAL FUND
SOURCE CAPITAL
FPA CAPITAL FUND, INC. STATE STREET BANK AND TRUST CO.
By: By: E. D. Hawkes, Jr.
--------------------------------- -----------------------------
Title Treasurer Title Vice President
------------------------------- ---------------------------
Signature: /s/ Julio J. De Puzo, Jr. Signature: /s/ E. D. Hawkes, Jr.
-------------------------- ---------------------
Date February 14, 1990 Date January 10, 1990
-------------------------------- ----------------------------
<PAGE>
AGREEMENT AND ARTICLES OF MERGER
AGREEMENT AND ARTICLES OF MERGER, dated this 14th day of February,
1994, by and between FPA New Income, Inc., a Maryland corporation (hereinafter
called the "Maryland Corporation" or the "Surviving Corporation") and FPA New
Income, 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 20,000,000 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.
<PAGE>
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:
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 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 1994 Annual Meeting of
Stockholders of the Delaware Corporation (the "1994 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
2
<PAGE>
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 September 30, 1994,
provided the appointment of Ernst & Young is approved by the stockholders of the
Delaware Corporation at the 1994 Annual Meeting.
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
<PAGE>
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.
3.2 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
4
<PAGE>
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 New Income, 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.
(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.
5
<PAGE>
ARTICLE V
5.1 The obligation 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 a 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 shareholders.
(f) Each Constituent Corporation shall have received an
opinion of counsel, from O'Melveny & Myers, substantially to the effect
that:
6
<PAGE>
(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.
7
<PAGE>
(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;
(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 May 9, 1994, or o 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
May 9, 1994, or on such other date as its Board of Directors shall approve. If
this Agreement is adopted by the affirmative vote of a 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 the Constituent Corporation 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
8
<PAGE>
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
(c) by either of the Constituent Corporations if the merger
shall not have become effective on or before December 31, 1994.
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 will
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
9
<PAGE>
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 representation 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 on instrument.
10
<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 NEW INCOME, INC.
a Delaware corporation
(Corporate Seal)
By /s/ Robert L. Rodriguez
--------------------------------
Robert L. Rodriguez, President
Attest:
By: /s/ Sherry Sasaki
-------------------------------
Sherry Sasaki, Secretary
FPA NEW INCOME, INC.
a Maryland corporation
(Corporate Seal)
By /s/ Robert L. Rodriguez
--------------------------------
Robert L. Rodriguez, President
Attest:
By: /s/ Sherry Sasaki
-------------------------------
Sherry Sasaki, Secretary
11
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<PAGE>
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