AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 2002
FILE NO. 2-87607
INVESTMENT COMPANY ACT FILE NO. 811-3896
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. 20 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 20 /X/
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FPA PERENNIAL FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
11400 WEST OLYMPIC BOULEVARD, SUITE 1200
LOS ANGELES, CALIFORNIA 90064
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(310)473-0225
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
J. RICHARD ATWOOD, TREASURER COPY TO:
FPA PERENNIAL FUND, 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
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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)
/ / 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(1)
/X/ ON MAY 1, 2002 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
FPA PERENNIAL FUND, INC.
CROSS REFERENCE SHEET
FORM N-1A PROSPECTUS CAPTION
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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 Objective, Principal
Investment Strategies, and
Principal 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
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STATEMENT OF ADDITIONAL
PART B INFORMATION CAPTION
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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 Objective,
Strategies 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
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FPA Perennial Fund, Inc.
PROSPECTUS
FPA Perennial
Fund, Inc. is a mutual
fund designed for
individual, partnership
and corporate retirement
plans. The Fund's primary
investment objective is
long-term growth of
capital. Current income is
a secondary consideration.
The Fund usually invests
principally in common
stocks considered by the
Fund's investment adviser,
First Pacific
Advisors, Inc., on the
basis of fundamental
analysis, to provide
attractive value relative
to their market prices.
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.
MAY 1, 2002
[FPA LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200 Los Angeles, CA 90064
FPA PERENNIAL FUND, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
(310) 473-0225
TABLE OF CONTENTS
PAGE
Risk/Return Summary......................................... 3
Investment Results.......................................... 4
Fees and Expenses of the Fund............................... 5
Investment Objective, Principal Investment Strategies, and
Principal Risks........................................... 6
Management and Organization................................. 7
Purchase, Pricing and Sale of Shares........................ 7
Exchange of Shares and Shareholder Services................. 11
Dividends, Distributions and Taxes.......................... 14
Financial Highlights........................................ 15
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RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE. The Fund's primary investment objective is long-term growth of capital. Current income is a secondary consideration.
WHO MAY WANT TO INVEST IN THE FUND?
- Investors seeking long-term growth of capital
- Investors willing to own shares over the course of a market cycle or longer
- Retirement plans and other tax-exempt entities
PRINCIPAL INVESTMENT STRATEGIES. The Fund's investment adviser, First Pacific Advisors, Inc., purchases common stocks using a value discipline and evaluating each company on its own merits. The Adviser's measures of value include price/earnings ratios, book value, and replacement cost of assets. The Adviser looks for the following attributes in companies selected for investment:
- Industry segment leaders
- Consistently high returns on capital
- Substantial portion of earnings reinvested in business
- Capable management team
- Undervalued in relation to the stock market
- Temporarily out-of-favor or not closely followed by other investors
PRINCIPAL INVESTMENTS. The Fund invests primarily in the common stocks of U.S. companies in a variety of industries and market segments. The Fund can also invest in debt securities, preferred stocks and convertible securities. The Fund generally holds some assets in high quality short-term debt securities to provide liquidity. The Fund generally invests in medium and smaller capitalization issuers although it may purchase securities of larger companies. No more than 25% of the Fund's total assets will be invested in the securities of foreign issuers.
PRINCIPAL INVESTMENT RISKS.
- The U.S. or foreign market goes down.
- The market favors growth stocks over value stocks or favors companies at a different capitalization level.
- The Fund's value-oriented investment approach could result in an emphasis on medium and smaller sized companies. Investing in smaller companies generally involves greater risk than investing in larger companies. Also, the portfolio might not reflect all facets of the national economy and could differ significantly from broad market indicies.
- An adverse event, such as an unfavorable earnings report, depresses the value of a particular stock.
- Prices of the Fund's foreign securities go down because of unfavorable changes in foreign currency exchange rates, foreign government actions, political instability or other factors that can adversely affect investments in foreign countries.
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency, entity or person.
INVESTMENT RESULTS
The bar chart and table below provide an indication of the risks 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 Fund's past performance is not necessarily an indication of how the Fund 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
1992 13.07 1993 4.64 1994 (0.03) 1995 17.27 1996 20.39 1997 24.30 1998 4.80 1999 25.31 2000 10.16 2001 22.73 |
The Fund's highest/lowest QUARTERLY results during this time period were:
HIGHEST 29.16% (Quarter ended 6/30/99) LOWEST (20.28)% (Quarter ended 9/30/98) |
The table below shows how the Fund's average annual returns after deduction of the maximum sales charge for 1, 5 and 10 calendar years compared with those of the Russell 2500 Index and the Lipper Small-Cap Core Fund Average.
For the periods ended December 31, 2001:
ONE YEAR FIVE YEARS TEN YEARS
-------- ---------- ---------
FUND WITH MAXIMUM SALES CHARGE OF 5.25% DEDUCTED
Before Taxes................................................ 16.29% 15.90% 13.32%
After Taxes on Distributions................................ 00.00% 00.00% 00.00%
After Taxes on Distributions and Sale of Fund Shares........ 00.00% 00.00% 00.00%
Russell 2500*............................................... 1.22% 10.34% 13.13%
Lipper Small-Cap Core Fund Average*......................... 7.65% 10.95% 12.75%
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* The Russell 2500 Index consists of the 2,500 smallest companies in the Russell 3000 total capitalization universe. This index is considered a measure of small to mid capitalization stock performance and is included as a broad-based comparison to the capitalization characteristics of the Fund's portfolio. The Lipper Small-Cap Core Fund Average provides an additional comparison of how the Fund performed in relation to other mutual funds with similar objectives.
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.
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price)...................................... 5.25%
Maximum Deferred Sales Load (as a percentage of original
sales price or redemption proceeds, as applicable)...... 2.00%*
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........................................... 0.75%
Distribution (12b-1) Fees................................. None
Other Expenses (including financial services)............. 0.49%
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Total Fund Operating Expenses............................. 1.24%
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* No deferred sales charge applies to a redemption if the sales charge was paid at the time of initial purchase. A deferred sales charge of 2% applies to redemptions within 90 days of purchase for certain purchases made by persons eligible to purchase shares without an initial sales charge. In addition, an account management fee may be charged by unaffiliated investment advisers or broker-dealers to certain accounts entitled to purchase shares without sales charge. A deferred sales charge of 1% applies to redemptions within one year of purchase for certain purchases of $1,000,000 or more made without a sales load at the time of purchase on which FPA Fund Distributors, Inc. pays a dealer concession of 0.50% of the purchase price.
** 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:
One Year.................................................... $ 645 Three Years................................................. $ 898 Five Years.................................................. $ 1,170 Ten Years................................................... $ 1,946 |
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES, AND PRINCIPAL RISKS
INVESTMENT OBJECTIVE. The Fund's primary investment objective is long-term growth of capital. Providing you current income is a secondary consideration.
PRINCIPAL INVESTMENT STRATEGIES. The Fund's Adviser favors investments in common stocks it believes undervalued when considering various valuation criteria. The Adviser purchases common stocks using a value discipline and evaluating each company on its own merits. The Adviser's measures of value include price/earnings ratios, book value, and replacement cost of assets. The Adviser also believes that current as well as expected future levels of profitability and free cash flow are important in its stock selection process. The Adviser attempts to lessen price risk by not overpaying for earnings of even the best companies. The Adviser believes that better values and less price risk can often be found among companies with successful records that are currently out-of-favor as evidenced by factors such as relatively low price-earnings ratios. The Fund generally holds some assets in high quality short-term debt securities to provide liquidity. The Fund may also invest in fixed-income and convertible securities.
For temporary defensive purposes, the Fund may take larger than usual positions in cash or high-quality short term debt securities (U.S. government or government agency securities, obligations of domestic banks, prime commercial paper notes and repurchase agreements). These positions could detract from the achievement of the Fund's objective.
The Fund relies on the professional judgment of its Adviser to make decisions about the Fund's portfolio securities. The Adviser's basic investment philosophy is to purchase securities on the basis of fundamental value and earnings expectations rather than short-term stock market expectations.
PRINCIPAL RISKS. Your investment in the Fund is subject to a number of principal risks related to its principal investment strategies, including the following:
- The Adviser's emphasis on a value-oriented investment approach generally results in the Fund's portfolio being invested primarily in medium or smaller sized companies. Smaller companies typically are subject to a greater degree of change in earnings and business prospects than larger, more established companies. In addition, securities of smaller companies are traded in lower volumes than those issued by larger companies and may be more volatile than those of larger companies. In light of these characteristics of smaller companies and their securities, the Fund may be subjected to greater risk than that assumed when investing in the equity securities of larger companies;
- Fund shares could decline in value in response to certain events, such as changes in markets or economies;
- The prices of equity securities held by the Fund can be affected by events specifically involving the issuers of these securities;
- The price of debt securities held by the Fund can be affected by changing interest rates (as interest rates rise, the price of debt securities fall), effective maturities and credit ratings; and
- Investing outside the U.S. can also involve additional risks, such as currency fluctuations, foreign government actions 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 the Fund's inception in 1983. The Adviser manages assets of approximately $3.5 billion for six investment companies, including one closed-end investment company, and 20 institutional accounts. First Pacific Advisors, Inc. is headquartered at 11400 West Olympic Boulevard, Suite 1200, Los Angeles, California 90064. The Adviser selects investments for the Fund, provides administrative services and manages the Fund's business. The total management fee paid by the Fund, as a percentage of average net assets, for the previous fiscal year was 0.75%.
PORTFOLIO MANAGERS
Eric S. Ende, President and Director of the Fund and Senior Vice President of the Adviser, and Steven R. Geist, Executive Vice President of the Fund and Vice President of the Adviser, are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Ende had been the sole Portfolio Manager of the Fund since 1995, and Mr. Geist was named as an additional Portfolio Manager of the Fund on August 3, 1999.
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 must use the account information form for initial purchases. The minimum initial investment is $1,500, and each subsequent investment must be at least $100. Minimum investment requirements can be changed by the Fund or waived by FPA Fund Distributors, Inc. All purchases made by check should be in U.S. dollars and made payable to the FPA Funds or State Street Bank and Trust Company. Third party checks will not be accepted. A charge may be imposed if a check does not clear.
SHARE PRICE. The Fund calculates its share price, also called net asset value, as of 4:00 p.m. New York time, which is the normal close of trading on the New York Stock Exchange ("NYSE"), every day the NYSE is open. The NYSE is closed most national holidays and Good Friday. The share price is rounded to the nearest cent per share and equals the market value of all portfolio securities plus other assets, less all liabilities, divided by the number of Fund shares outstanding. Orders received by dealers before the NYSE closes on any business day are priced based on the share price for that day if Boston Financial Data Services, Inc. receives the order prior to its close of business at 4:00 p.m. Eastern time. Orders received by Boston Financial Data Services, Inc. after such time generally are priced based on the share price for the next business day. However, orders received by certain retirement plans and certain other financial intermediaries before the NYSE closes and communicated to Boston Financial Data Services, Inc. by 9:30 a.m., Eastern time, on the following business day are priced at the share price for the prior business day. The share price 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 investments to reduce your sales charge: grandparents, parents, siblings, children or grandchildren; or by the individual, his or her spouse and a trustee or other fiduciary purchasing securities for related trusts, estates or fiduciary accounts, including employee benefit plans.
SALES SALES REALLOWED
SIZE OF INVESTMENT CHARGE(1) CHARGE(2) TO DEALERS(2)
------------------ --------- --------- -------------
Less than $50,000.......................................... 5.54% 5.25% 5.00%
$50,000 but less than $100,000............................. 4.71% 4.50% 4.25%
$100,000 but less than $250,000............................ 3.90% 3.75% 3.50%
$250,000 but less than $500,000............................ 2.56% 2.50% 2.25%
$500,000 but less than $1,000,000.......................... 1.52% 1.50% 1.50%
$1,000,000 and over........................................ 0.00%(3) 0.00%(3) 0.00%(4)
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(1) As a percentage of net amount invested.
(2) As a percentage of public offering price.
(3) No sales charge is payable on investments of $1 million or more. However, a contingent deferred sales charge of 1% on the lesser of the purchase or redemption price is imposed if, within one year of purchase for investments of $1 million or more made without a sales load and on which FPA Fund Distributors, Inc. paid a dealer concession of 0.50%, a redemption (except by exchange) reduces the account to less than the original investment. Such contingent deferred sales charge is withheld from the redemption proceeds and paid to FPA Fund Distributors, Inc.
(4) FPA Fund Distributors, Inc. will pay a dealer concession for orders of $1 million or more equal to 0.50% of the purchase 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.
- FPA New Income, Inc.
- FPA Paramount Fund, Inc.
- FPA Perennial Fund, Inc. (this Fund)
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 13-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 SUBJECT TO A 2% DEFERRED SALES CHARGE. You and your spouse (and your immediate relatives) can purchase shares without a sales charge at the time of purchase, if you fall into one of the following categories and you represent that the shares you purchase are for investment and will not be resold except through redemption or repurchase by the Fund. Immediate relatives include grandparents, parents, siblings, children and grandchildren of a qualified investor, and the spouse of any immediate relative.
(a) current and former directors, officers and employees of the Adviser, Old Mutual (US) Holdings Inc. (formerly known as United Asset Management Corporation) (the Adviser and FPA Fund Distributors, Inc. are indirect wholly owned subsidiaries of Old Mutual (US) Holdings Inc.) and its affiliates;
(b) current and former directors, officers and employees of Angeles Corporation (the former parent of the Adviser) and its affiliates;
(c) current and former directors of, and partners and employees of legal counsel to, the investment companies advised by the Adviser;
(d) investment advisory clients of the Adviser and consultants to such clients and their directors, officers and employees;
(e) employees (including registered representatives) of a dealer that has a selling group agreement with FPA Fund Distributors, Inc. and consents to the purchases;
(f) any employee benefit plan maintained for the benefit of such qualified investors;
(g) directors, officers and employees of a company whose employee benefit plan holds shares of one or more of the FPA Funds; and
(h) directors, officers and employees of the Fund's custodian or transfer agent.
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 also purchase without a sales charge at the time of purchase:
(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 to purchase shares without a sales charge at the time of purchase, 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. Purchases made under this section are subject to a 2% contingent deferred sales charge if shares are redeemed within 90 days of purchase (except by exchange). The 2% is applied to the lesser of the purchase or redemption price if the redemption reduces the account to less than the original investment. The contingent deferred sales charge is withheld from the redemption proceeds and paid to FPA Fund Distributors, Inc.
SELLING (REDEEMING) YOUR SHARES
You can sell (redeem) for cash without charge (except a contingent deferred sales charge, if applicable, as described above) any or all of your Fund shares at any time by sending a written request to Boston Financial Data Services, Inc. Faxes are not acceptable. You can also place redemption requests through dealers, but they may charge a fee. If you are selling Fund shares from a retirement plan, you should consult the plan documentation concerning federal tax consequences and consult your plan custodian about procedures.
In the case of an exchange of shares subject to a 2% contingent deferred sales charge within 90 days of purchase, the shares acquired by exchange are subject to a 2% contingent deferred sales charge if redeemed (except by exchange) within 90 days of the exchange. In the case of an exchange of shares subject to a 1% contingent deferred sales charge within one year of purchase, the shares acquired by exchange are subject to a 1% contingent deferred sales charge if redeemed (except by exchange) within one year of the initial purchase.
A check will be mailed to you within seven days after Boston Financial Data Services, Inc. receives a properly completed request (as described below under "Written Requests"). If Fund shares sold were recently purchased by check, payment of the redemption proceeds will be delayed until confirmation that the purchase check has cleared, which may take up to 15 days from the date of purchase.
WRITTEN REQUESTS. Requests must be signed by the registered shareholder(s). If you hold a stock certificate, it must be included with your written request. A signature guarantee is required if the redemption is:
- Over $10,000;
- Made payable to someone other than the registered shareholder or to somewhere other than the registered address; or
- If the shareholder is a corporation, partnership, trust or fiduciary.
A signature guarantee can be obtained from a bank or trust company; a broker or dealer; a credit union; a national securities exchange, registered securities association or clearing agency; or a savings and loan association. Additional documents are required for sales by corporations, partnerships, trusts, fiduciaries, executors or administrators.
TELEPHONE TRANSACTIONS. You must elect the option on the account information form to have the right to sell your shares by telephone. If you wish to make an election to have the right to sell your shares via telephone or to change such an election after opening an account, you will need to complete a request with a signature guarantee. Sales via telephone are not available for shares held in a Fund-sponsored retirement account or in certificate form.
When you obtain the right to sell your Fund shares by telephone, you may direct that a check for the proceeds payable to the shareholder of record be mailed to the address of record or you may designate a bank account to which the proceeds of such redemptions are sent. Telephone redemptions over $5,000 that are sent to your bank are wired unless the designated bank cannot receive Federal Reserve wires, in which case the redemptions are mailed. Telephone redemptions under $5,000 that are sent to the designated bank are mailed unless you request otherwise. There is a $3.50 charge per wire. No telephone redemptions to the address of record will be processed within 30 days of a change in the address of record.
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.
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 the other FPA Funds, namely FPA Capital Fund, Inc., FPA New Income, Inc. and FPA Paramount Fund, Inc.
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.
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. The $5.00 exchange fee is paid by FPA Fund Distributors, Inc. 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.
If your shares are held in a Fund-sponsored individual retirement account, you cannot exchange them into shares of the money market fund.
The money market fund is not an FPA Fund and is separately managed. The fact that you have the ability to exchange your shares for shares of the money market fund is not a Fund recommendation of the money market fund.
HOW TO EXCHANGE YOUR SHARES. You can exercise your exchange privileges either by written instructions or telephone (telephone exchange privileges are available unless you specifically decline them on the account information form). Exchanges are subject to the following restrictions:
- You are limited to four exchanges in one account during any calendar year; if we give you notice you have exceeded this limit, any further exchanges will be null and void;
- Shares must be owned 15 days before exchanging, and cannot be in certificate form unless you deliver the certificate when you request the exchange;
- An exchange requires the purchase of shares with a value of at least $1,000; and
- Exchanges are subject to the same signature and signature guarantee requirements applicable to the redemption of shares.
Exchanges and purchases are at the share price next determined after receipt of a proper request (as described above under "Written Requests") by Boston Financial Data Services, Inc. In the case of exchanges into the money market fund, dividends generally start on the following business day.
For federal and state income tax purposes, an exchange is treated as a sale and could result in a capital gain or loss. If the shares exchanged have been held less than 91 days, the sales charge paid on them is not included in the tax basis of the exchanged shares, but is carried over and included in the tax basis of the shares acquired. See the Statement of Additional Information for further information.
DISCONTINUATION OF THE EXCHANGE PROGRAMS. The Fund and FPA Fund Distributors, Inc. can change or discontinue the rights to exchange Fund shares into other FPA Funds or the money market fund upon 60 days' notice. If you have exchanged your shares into shares of the money market fund, you will have at least 60 days after being given notice of the end of the exchange program to reacquire Fund shares without a sales charge.
FOR MORE INFORMATION OR FOR PROSPECTUSES FOR OTHER FPA FUNDS AND/OR THE MONEY MARKET FUND, PLEASE CONTACT A DEALER OR FPA FUND DISTRIBUTORS, INC. YOU SHOULD READ THE PROSPECTUSES OF THESE OTHER FUNDS AND CONSIDER DIFFERENCES IN OBJECTIVES AND POLICIES BEFORE MAKING ANY EXCHANGE.
OTHER SHAREHOLDER SERVICES
INVESTMENT ACCOUNT. Each shareholder has an investment account in which Boston Financial Data Services, Inc. holds Fund shares. You will receive a statement showing account activity after each transaction. Unless you make a written request, stock certificates will not be issued. Stock certificates are only issued for full shares.
PRE-AUTHORIZED INVESTMENT PLAN. You may establish an account with a $100 minimum initial investment and the establishment of automatic monthly investments of at least $100. To make automatic monthly investments, you must complete the account information form available from dealers or FPA Fund Distributors, Inc. Boston Financial Data Services, Inc. will withdraw funds from your bank account monthly for $100 or more as specified through the Automated Clearing House.
RETIREMENT PLANS. If you are eligible, you can establish an IRA (individual retirement account) and/or other retirement plan with a $100 minimum initial investment and an expressed intention to increase the investment to $1,500 within 12 months. Each subsequent investment must be at least $100. Neither the Fund nor FPA Fund Distributors, Inc. imposes additional fees for these plans, but the plan custodian does.
You should consult your tax adviser about the implications of establishing a retirement plan with Fund shares. Persons with earned income ineligible for deductible contributions generally may make non-deductible contributions into an IRA. The earnings on shares held in an IRA are generally tax-deferred. In addition, the Taxpayer Relief Act of 1997 expanded opportunities for certain investors to make deductible contributions to IRAs and also created two new tax-favored accounts, the Roth IRA and the Education IRA, in which earnings (subject to certain restrictions) are not taxed even on withdrawal. Retirement-related tax matters are complicated; you should consult your tax adviser. FPA Fund Distributors, Inc. and dealers have applicable forms and information regarding plan administration, custodial fees and other plan provisions.
SYSTEMATIC WITHDRAWAL PLAN. If you have an account with a value of $10,000 or more, you can make monthly, quarterly, semi-annual or annual withdrawals of $50 or more by electing this option on the account information form. Under this arrangement, sufficient Fund shares will be sold to cover the withdrawals and the proceeds will be forwarded to you as directed on the account information form. Dividends and capital gains distributions are automatically reinvested in the Fund at net asset value. If withdrawals continuously exceed reinvestments, your account will be reduced and ultimately exhausted. PLEASE NOTE THAT CONCURRENT WITHDRAWALS AND PURCHASES ARE ORDINARILY NOT IN YOUR BEST INTEREST BECAUSE OF ADDITIONAL SALES CHARGES, AND YOU WILL RECOGNIZE ANY TAXABLE GAINS OR LOSSES ON THE AUTOMATIC WITHDRAWALS.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund's investment income consists principally of dividends and interest earned on its portfolio securities. This income, after payment of expenses, will be distributed to you semi-annually. Net capital gains realized from the sale of securities are distributed annually. Dividends and capital gain distributions are automatically reinvested in the Fund at the share price determined at the close of business the day after the record date, unless before the record date for receipt of the dividend or capital gain distribution you request cash payment of dividends and capital gains distributions. You can use the account information form to request a cash payment.
TAX CONSEQUENCES
Dividends and capital gains are generally taxable whether they are reinvested or received in cash unless you are exempt from taxation or entitled to tax deferral. Dividends and distributions are taxed at ordinary rates, while capital gains distributions 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 30.5% for the calendar year ended December 31, 2001 and 30% for the calendar years ended December 31, 2002 and 2003, of your taxable distributions and redemptions. Federal law also requires the Fund to withhold 30% or the applicable tax treaty rate from dividends paid to certain nonresident aliens, non-U.S. partnership and non-U.S. corporation shareholder accounts.
Please see the Statement of Additional Information and consult with your tax adviser.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's financial performance for the past five 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.
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Per share operating performance:
Net asset value at beginning of year.............. $20.59 $20.45 $20.15 $24.00 $22.58
------ ------ ------ ------ ------
Income from investment operations:
Net investment income (loss).................... $(0.02) -- $(0.03) $ 0.07 $ 0.05
Net realized and unrealized gain on investment
securities.................................... 4.65 $ 1.95 4.89 0.82 4.61
------ ------ ------ ------ ------
Total from investment operations.................. $ 4.63 $ 1.95 $ 4.86 $ 0.89 $ 4.66
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income............ -- -- $(0.11) $(0.05)
Distributions from net realized capital gains... (2.07) (1.81) (4.56) (4.63) (3.19)
------ ------ ------ ------ ------
Total distributions............................... $(2.07) $(1.81) $(4.56) $(4.74) $(3.24)
------ ------ ------ ------ ------
Net asset value at end of year.................... $23.15 $20.59 $20.45 $20.15 $24.00
====== ====== ====== ====== ======
Total investment return*.......................... 22.73% 10.16% 25.31% 4.80% 24.30%
Ratios/supplemental data:
Net assets at end of year (in $000's)............. 51,975 40,170 43,116 49,813 50,201
Ratio of expenses to average net assets........... 1.24% 1.24% 1.30% 1.16% 1.16%
Ratio of net investment income (loss) to average
net assets....................................... (0.11)% 0.02% (0.15)% 0.32% 0.21%
Portfolio turnover rate........................... 25% 16% 16% 34% 19%
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* Return is based on net asset value per share, adjusted for reinvestment of distributions, and does not reflect deduction of the sales charge.
FOR SHAREHOLDER SERVICES CONTACT FOR RETIREMENT PLAN SERVICES FOR DEALER SERVICES CONTACT BOSTON FINANCIAL DATA CALL YOUR EMPLOYER OR PLAN FPA FUND DISTRIBUTORS, INC. SERVICES, INC. ADMINISTRATOR 11400 West Olympic Boulevard P.O. Box 8115 Suite 1200 Boston, MA 02266-8115 FOR 24-HOUR INFORMATION GO TO Los Angeles, CA 90064 (617) 483-5000 or FUNDMASTER MARKETING GROUP (310) 473-0225 or (800) 638-3060 except Alaska INTERNET WEB SITE (800) 982-4372 except Hawaii, Massachusetts and http://www.fundmaster.com Alaska, Hawaii and Puerto Rico Puerto Rico |
Telephone conversations may be recorded or monitored for verification, record keeping and quality assurance purposes.
INVESTMENT ADVISER CUSTODIAN AND TRANSFER AGENT FIRST PACIFIC ADVISORS, INC. STATE STREET BANK AND 11400 West Olympic Boulevard TRUST COMPANY Suite 1200 225 Franklin Street Los Angeles, CA 90064 Boston, MA 02110 |
Inquiries concerning transfer of registration, distributions, redemptions and shareholder service should be directed to Boston Financial Data Services, Inc. Inquiries concerning sales should be directed to FPA Fund Distributors, Inc.
MULTIPLE TRANSLATIONS
This Prospectus may be translated into other languages. If there are any inconsistencies or ambiguities, the English text will prevail.
OTHER FUND INFORMATION
ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS
Additional information about the Fund's investments is available in the Fund's annual and semi-annual reports to shareholders. In the Fund's annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information on all aspects of the Fund, including the Fund's financial statements.
A current SAI has been filed with the Securities and Exchange Commission ("SEC") and is incorporated by reference into this Prospectus. The SAI and other related materials about the Fund are available for review or to be copied at the SEC's Public Reference Room in Washington, D.C. (1-202-942-8090) or from the EDGAR database on the SEC's Internet Web Site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at publicinfo@sec.gov or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102.
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, OR
(800) 982-4372, EXCEPT FROM ALASKA, HAWAII AND PUERTO RICO (WHERE YOU
MAY CALL COLLECT (310) 473-0225).
Investment Company Act No. 811-3896
PA75PROSP02
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2002
FPA PERENNIAL FUND, INC.
This Statement of Additional Information supplements the current Prospectus of FPA Perennial Fund, Inc. ("Fund") dated May 1, 2002. This Statement does not present a complete picture of the various topics discussed and should be read in conjunction with the Fund's Prospectus. Although this Statement of Additional Information is not itself a Prospectus, it is, in its entirety, incorporated by reference into the Prospectus. The Fund's Prospectus can be obtained by contacting your securities dealer or the Fund's principal underwriter, FPA Fund Distributors, Inc. ("Distributor"), at 11400 West Olympic Boulevard, Suite 1200, Los Angeles, California 90064; telephone (310) 473-0225 or (800) 982-4372, except from Alaska, Hawaii and Puerto Rico.
TABLE OF CONTENTS
Page
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Investment Objective, Strategies and Policies 1
Description of Certain Securities and Investment Techniques 1
Equity Securities 1
Fixed-Income Securities 1
Lower Rated Debt Securities 2
Risk Factors Relating to Lower Rated Securities 3
Securities of Foreign Issuers 3
Foreign Currency Transactions 4
Covered Call Options 5
Short Sales Against the Box 5
Repurchase Agreements 5
Leverage 5
Investment Restrictions 6
Additional Restrictions 7
Fund Organization 8
Directors and Officers of the Fund 8
Fund Shares Owned by Directors as of March 31, 2002 11
Director Compensation Paid During the Fiscal Year
Ended December 31, 2001 11
Committees of the Board of Directors 12
Five Percent Shareholders 13
Management 13
Investment Adviser 13
Investment Advisory and Service Agreement 14
Principal Underwriter 15
Portfolio Transactions and Brokerage 15
Portfolio Turnover 16
Capital Stock 17
Common Stock 17
Voting Rights 17
Purchase and Redemption of Shares 17
Net Asset Value 17
Sales Charges 17
Authorized Financial Intermediaries 17
Sales at Net Asset Value 18
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Letter of Intent 18
FPA Exchange Privilege 18
Redemption of Shares 19
Telephone Redemption 19
Contingent Deferred Sales Charges 20
Tax Sheltered Retirement Plans 20
Dividends, Distributions and Taxes 21
Distributor 22
Prior Performance Information 22
Financial Statements 23
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INVESTMENT OBJECTIVE, STRATEGIES AND POLICIES
The following limitations and guidelines are considered at the time of purchase, under normal market conditions, and are based on a percentage of FPA Perennial Fund, Inc.'s (the "Fund") total assets unless otherwise noted. This summary is not intended to reflect all of the Fund's investment limitations.
INVESTMENT OBJECTIVE AND STRATEGIES
- The Fund's primary investment objective is long-term growth of capital. Providing you current income is a secondary consideration. The Fund's investment adviser, First Pacific Advisors, Inc., purchases common stocks using a value discipline and evaluating each company on its own merits. The Adviser's measures of value include price/earnings ratios, book value, and replacement cost of assets. The Fund invests primarily in the common stocks of U.S. companies in a variety of industries and market segments. The Fund can also invest in debt securities, preferred stocks and convertible securities. No more than 25% of the Fund's total assets will be invested in the securities of foreign issuers.
- Investments in the Fund are not limited by a specific industry, and substantially all common stocks purchased by the Fund will be listed on a national securities exchange or the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System or National List.
FIXED-INCOME SECURITIES
- Up to 15% of the Fund's total assets can be invested in fixed-income securities, including convertible securities, that are rated BB or lower, by Standard & Poor's Corporation or Ba or lower by Moody's Investor Services, Inc.
NON-U.S. SECURITIES
- The Fund can invest up to 25% of its total assets in securities of foreign issuers provided no more than 10% be invested in such securities not represented by American Depositary Receipts ("ADRs") listed on the New York Stock Exchange ("NYSE") or American Stock Exchange.
DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
EQUITY SECURITIES -- The Fund will invest primarily in equity securities. Equity securities represent an ownership position in a company. The prices of equity securities fluctuate based on changes in the financial conditions of their issuers and on market and economic conditions. These fluctuations can be severe and can generate large losses.
FIXED-INCOME SECURITIES -- The Fund can invest in fixed-income securities. Bonds and other fixed-income securities are used by issuers to borrow money. Issuers pay investors interest and generally must repay the amount borrowed at maturity. Some fixed-income securities, such as zero coupon bonds, do not pay current interest but are purchased at a discount from their face value. The market price of fixed-income securities held by the Fund can be expected to vary inversely to changes in prevailing interest rates and can also be affected by the financial conditions of the issuers. Investments in fixed-income securities with longer maturities generally produce higher yields but are subject to greater market fluctuation.
LOWER RATED DEBT SECURITIES -- The Fund can invest up to 15% of its total assets in fixed-income securities, including convertible securities, which are rated BB or lower, by Standard & Poor's Corporation ("S&P") or Ba or lower by Moody's Investor Services, Inc. ("Moody's"), which ratings are considered by the rating agencies to be speculative, and unrated securities considered by the Adviser to be of comparable quality. Debt securities with a rating of BB/Ba or lower are commonly referred to as "junk bonds."
To the extent the Fund acquires convertible securities or other debt securities that are rated lower than investment grade or are not rated, there is a greater risk that payment of principal and interest will not be made on a timely basis or at all. Because investment in lower rated or unrated 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. 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. 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 could be rated C, C1 or D by S&P or C by Moody's or may be unrated. Debt obligations of such companies are usually available at a deep discount from the face value of the instrument. The Fund 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 debt-holders, 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.
As of December 31, 2001, less than 1% of the Fund's total assets were invested in convertible securities and 9.9% of the Fund's total assets were invested in high-grade, short-term securities.
RISK FACTORS RELATING TO LOWER RATED SECURITIES
1. SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest rates affect high yield securities differently from other securities. The prices of high yield bonds have been found to be less sensitive to interest rate changes than higher rated investments, but more sensitive to adverse economic changes or individual issuer developments. During an economic downturn or substantial period of rising interest rates, highly leveraged issuers are likely to experience financial stress which would adversely affect their ability to service their principal and interest payment obligations, to meet projected business goals, and to obtain additional financing. If the issuer of a bond owned by the Fund defaults, the Fund may incur additional expenses to seek recovery. In addition, periods of economic uncertainty and changes can be expected to result in increased volatility of market prices of high yield bonds and the Fund's asset value. Furthermore, the market prices of high yield bonds structured as zero coupon or pay-in-kind securities are affected to a greater extent by interest rate changes and thereby tend to be more volatile than securities that pay interest periodically and in cash.
2. LIQUIDITY AND VALUATION. To the extent that there is no established retail secondary market, there may be thin trading of high yield bonds, and there could be a negative impact on the Fund's Board of Directors' ability to accurately value high yield bonds and the Fund's assets and on the Fund's ability to dispose of the bonds. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the values and liquidity of high yield bonds, especially in a thinly traded market. To the extent the Fund owns or may acquire illiquid high yield bonds, these securities may involve special liquidity and valuation difficulties.
3. LEGISLATION. New laws and proposed new laws could have a negative impact on the market for high yield bonds. For example, several years ago legislation required federally-insured savings and loan associations to divest their investments in high yield bonds.
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 25% of its total assets in securities of foreign issuers, provided no more than 10% be invested in such securities not represented by ADRs listed on the NYSE or American Stock Exchange. Investments in securities of foreign issuers can be affected favorably
or unfavorably by changes in currency rates and exchange control regulations. Compared to U.S. companies, there might be less publicly available information about foreign companies, which generally are subject to less stringent and uniform accounting, auditing and financial reporting standards and requirements. Securities of some foreign companies might be less liquid or more volatile than those of U.S. companies. Foreign brokerage commissions and custodial fees are generally higher than in the United States. Settlement of transactions in some foreign markets can be delayed or can be less frequent than in the U.S., which could affect the liquidity of the Fund's portfolio. Investments in foreign securities can be affected by local political or economic instability, expropriation or nationalization of assets and imposition of withholding taxes on dividend or interest payments, the difficulty of predicting international trade patterns, and the possibility of imposition of exchange controls. 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 similar governmental action affecting foreign investments. In the event of a default on any foreign debt obligation, it could be more difficult for the Fund to obtain or enforce a judgment against the issuer.
The Fund can purchase foreign securities in the form of ADRs or other securities representing underlying shares of foreign companies. ADRs are receipts typically issued by an American bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. ADRs are publicly traded on exchanges or over-the-counter in the United States and are issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some or all of the depositary's transaction fees, whereas under an unsponsored arrangement, the foreign issuer assumes no obligations and the depositary's transaction fees are paid by the ADR holders. In addition, less information is available in the United States about an unsponsored ADR than about a sponsored ADR. The Fund can invest in ADRs through both sponsored and unsponsored arrangements.
FOREIGN CURRENCY TRANSACTIONS -- The value of any of the Fund's portfolio securities that are traded in foreign markets can be affected by changes in currency exchange rates and exchange control regulations. In addition, the Fund, in purchasing or selling securities in foreign markets, will incur costs in connection with conversions between various currencies. The Fund's foreign currency exchange transactions generally are conducted on a spot basis (that is, cash basis) at the spot rate for purchasing or selling currency prevailing in the foreign currency exchange market. The Fund purchases and sells foreign currency on a spot basis in connection with the settlement of transactions in securities traded in such foreign currency. The cost of currency exchange transactions is generally the difference between the bid and offer spot rate of the currency being purchased or sold. The Fund does not purchase and sell foreign currencies as an investment.
COVERED CALL OPTIONS -- In an effort to increase potential income, the Fund is authorized to write (i.e. sell) covered call options listed on a national securities exchange. When the Fund writes a listed call option, the purchaser has the right to buy a security from the Fund at a fixed exercise price any time before the option contract expires, regardless of changes in the market price of the underlying security. The Fund writes options only on securities it owns (covered options) and must retain ownership of the underlying security while the option is outstanding. Until the option expires, the Fund cannot profit from a rise in the market price of the underlying security over the exercise price, except insofar as the premium which the Fund receives, net of commissions, represents a profit. The premium paid to the Fund is the consideration for undertaking this obligation.
The Fund may not write any option which, at the time, would cause its outstanding options to cover securities comprising more than 10% of its total assets. Writing option contracts is a highly specialized activity and could limit investment flexibility at certain times. The maximum term for listed options exceeds two years, but the Fund expects that most options it writes will not exceed six months.
SHORT SALES AGAINST THE BOX -- The Fund can make short sales of securities or maintain a short position if the Fund contemporaneously owns or has the right to obtain at no added cost identical securities to those sold short (short sales "against the box") or if the securities sold are "when issued" or "when distributed" securities that the Fund expects to receive in a recapitalization, reorganization, or other exchange for securities the Fund contemporaneously owns or has the right to obtain at no added cost. The principal purpose of short sales is to enable the Fund to obtain the current market price of a security that the Fund desires to sell but which cannot be currently delivered for settlement. The Fund will not make short sales or maintain a short position if to do so would cause more than 25% of its total assets (exclusive of proceeds from short sales) to be allocated to a segregated account in connection with short sales.
The Fund did not effect any short sales in the last fiscal year.
REPURCHASE AGREEMENTS -- The Fund can invest in repurchase agreements with domestic banks or dealers to earn interest on temporarily available cash. A repurchase agreement is a short-term investment in which the purchaser (i.e., the Fund) acquires a debt security that the seller agrees to repurchase at a future time and set price, thereby determining the yield during the holding period. Repurchase agreements are collateralized by the underlying debt securities and may be considered loans under the Investment Company Act of 1940 ("1940 Act"). In the event of bankruptcy or other default by the seller, the Fund could experience delays and expenses liquidating the underlying security, loss from decline in value of such security, and lack of access to income on such security. The Fund will not invest more than 10% of its net assets in repurchase agreements that mature in more than seven days and/or other securities which are not readily marketable.
LEVERAGE -- The Fund can borrow from banks to raise additional funds for investment. Such borrowings may be made periodically when it is expected that the potential return, including capital appreciation and/or income, from the investment of these funds will exceed the cost. Any return from investment of the borrowed funds in excess of the interest cost will cause the net asset value of Fund shares to rise faster than would otherwise be the case. Conversely, if the return on the investment of the borrowed funds fails to cover the interest cost, the net asset value will decrease faster than normal. This speculative factor is known as leverage. This policy permitting bank borrowing cannot be changed without the approval of the holders of a majority (as defined under "Investment Restrictions") of the Fund's outstanding voting securities. The Fund may collateralize any bank borrowing by depositing portfolio securities with, or segregating such securities for, the account of the lending bank. See "Investment Restrictions."
Under the 1940 Act, the Fund must have an asset coverage of at least 300% of the amount borrowed, immediately after the borrowing. Asset coverage means the ratio of total assets (including the proceeds of borrowings) less liabilities other than borrowings, to borrowings. If the Fund's asset coverage falls below this requirement because of market fluctuations, redemptions or other reasons, the Fund must reduce its bank debt as necessary within three days (including Sundays or holidays). To do this, the Fund may have to sell a portion of its investments at a disadvantageous time. The amount of any borrowing is also limited by the applicable Federal Reserve Board's margin limitations.
The Fund has not borrowed since its inception and has no present intention to do so during the coming year.
INVESTMENT RESTRICTIONS
The Fund has adopted the investment restrictions stated below. They apply at the time securities are purchased or other relevant action is taken. These restrictions and the Fund's investment objective cannot be changed without approval of the holders of a majority of outstanding Fund shares. The 1940 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 shall not:
1. Purchase any securities which would cause more than 5% of the Fund's total assets at the time of such purchase to be invested in the securities of any one issuer, excepting securities issued or guaranteed by the U.S. Government, or purchase more than 10% of any class of securities of any one issuer.
2. Concentrate its investment in particular industries by investing more than 25% of the value of its total assets in the securities of companies primarily engaged in any one industry.
3. Purchase securities of other registered investment companies if immediately after such purchase the Fund will own (a) more than 3% of the total outstanding voting stock of any such companies, (b) securities issued by any of such companies having an aggregate value in excess of 5% of the value of the total assets of the Fund or (c) securities issued by investment companies having an aggregate value in excess of 10% of the value of the total assets of the Fund.
4. Purchase or sell real property, including limited partnership interests, but excluding readily marketable interests in real estate investment trusts or readily marketable securities of companies which invest in real estate.
5. Engage in short sales, margin purchases, puts, calls, straddles or spreads, except that the Fund may write covered call options and effect closing transactions to the extent described in "Covered Call Options" and 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.
6. Make loans, except that the Fund may invest in repurchase agreements. The Fund will not invest in repurchase agreements maturing in more than seven days if any such investment, together with any illiquid securities held by the Fund, exceeds 10% of the value of its net assets. See "Repurchase Agreements." The purchase of publicly distributed debt securities will not constitute the making of loans.
7. Participate on a joint or a joint and several basis in any trading account in securities.
8. Purchase securities for the purpose of exercising control or management. However, once investments have been acquired, the Fund may exercise its vote as a shareholder in its best interests even though such vote may affect management or control of a company.
9. Underwrite the sale of securities of others, except when the Fund might be deemed to be a statutory underwriter because of its disposing of restricted securities. The Fund will not purchase restricted securities.
10. Purchase or sell commodities or commodity contracts.
11. Purchase from, or sell to, any officers, directors or employees of the Fund or its investment adviser or underwriter, or any of their officers or directors, any securities other than the shares of the Fund's capital stock. Such persons or firms, however, may act as brokers for the Fund for customary commissions.
12. Issue any senior securities except that the Fund may borrow from banks to the extent permitted by the 1940 Act (see "Leverage" above).
ADDITIONAL RESTRICTIONS. The Fund is also subject to the following policies which its Board of Directors can amend and which apply at the time of purchase of securities. The Fund will not:
1. Invest more than 5% of its total assets in warrants valued at the lower of cost or market, nor more than 2% of its total assets in warrants (valued on such basis) which are not listed on the NYSE or the American Stock Exchange. Warrants acquired in units or attached to other securities are not subject to the foregoing limitations.
2. Purchase interests in oil, gas or other mineral leases, except that it may acquire securities of public companies which are engaged in such activities, or invest in arbitrage transactions.
3. Purchase securities of other investment companies except through purchase in the open market in a transaction involving no commission or profit to a sponsor or dealer (other than the customary broker's commission) or except as part of a merger, consolidation or other acquisition.
4. Purchase or retain securities of any issuer if those officers and directors of the Fund or its investment adviser who own individually more than 0.5% of the securities of such issuer together own more than 5% of the securities of such issuer.
5. Invest more than 5% of its total assets in securities of unseasoned issuers which have been in operation directly or through predecessors for less than three years, or in equity securities for which market quotations are not readily available.
6. Pledge, mortgage or hypothecate portfolio securities or other assets to the extent that the percentage of such encumbered assets plus the sales charge exceed 15% of the offering price of Fund shares.
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 1983. 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 Old Mutual (US) Holdings Inc. (formerly known as United Asset Management Corporation). These investment companies are FPA Capital Fund, Inc., FPA New Income, Inc., FPA Paramount Fund, Inc. and Source Capital, Inc. (collectively, the "FPA Funds").
Directors serve until the next meeting of shareholders or until their successors are duly elected. Since shareholder meetings are not held each year, the Directors term is indefinite in length. It a Director dies or resigns, a successor generally can be elected by the remaining Directors. Officers of the Fund are elected annually by the Board of Directors. Information regarding Directors and officers of the Fund are set forth in the following tables. All officers of the Fund are also officers of the Adviser.
FUND DIRECTORS AND OFFICERS
DIRECTORS
NUMBER OF
YEAR FIRST FPA FUND OTHER
POSITION ELECTED AS BOARDS ON DIRECTORSHIPS
WITH DIRECTOR OF PRINCIPAL OCCUPATION(S) WHICH DIRECTOR HELD BY
NAME, ADDRESS* AND AGE FUND THE FUND DURING PAST 5 YEARS SERVES DIRECTOR
-------------------------- ---------- ----------- -------------------------------------- --------------- --------------
"NON-INTERESTED" DIRECTORS
Willard H. Altman, Jr., 66 Director 1998 Former Partner of Ernst & 5 1
Young LLP, Independent Auditors
for the Fund. Director of
Source Capital, Inc. (since May
1998), of FPA Capital Fund,
Inc. (since July 1998), of FPA
New Income, Inc. (since JULY
1998) and of FPA Paramount Fund,
Inc. (since January 2002).
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.
John P. Endicott, 84 Director 1983 Independent Management Consultant; 1 -0-
Associate, Case and Company,
Inc. (Management Consultants)
from April 1981 to January 1983;
and President and Director,
Sierracin Corporation
(manufacturer of high technology
products) from 1969 to March
1979. Director of FPA Paramount
Fund, Inc. from September 1979
to December 2001.
Leonard Mautner, 84 Director 1983 President, Leonard Mautner 2 -0-
Associates (management
consultants); General Partner,
Goodman & Mautner LTD. (venture
capital partnership); and
President, Goodman & Mautner,
Inc. (investment manager) from
1969 to 1979. Director of FPA
Paramount Fund, Inc. for more
than the past five years.
|
NUMBER OF
YEAR FIRST FPA FUND OTHER
POSITION ELECTED AS BOARDS ON DIRECTORSHIPS
WITH DIRECTOR OF PRINCIPAL OCCUPATION(S) WHICH DIRECTOR HELD BY
NAME, ADDRESS* AND AGE FUND THE FUND DURING PAST 5 YEARS SERVES DIRECTOR
-------------------------- ---------- ----------- -------------------------------------- --------------- --------------
"INTERESTED" DIRECTORS**
ERIC S. ENDE, 57 Director, 2000 Senior Vice President of First 3 -0-
President & Pacific Advisors, Inc. for more
Portfolio than the past five years; Director
Manager (since March 2000), President
(since March 2000) and Portfolio
Manager (since march 2000) of
FPA Paramount Fund, Inc.;
Director (since March 2000),
President (since March 2000) and
Chief Investment Officer since
May 1997 of Source Capital,
Inc.; and Vice President of FPA
Capital Fund, Inc. and of FPA
New Income, Inc. for more than
the past five years. Vice
President from June 1985 to
March 2000 of FPA Paramount
Fund, Inc.; Chief Investment
Officer from September 1995 to
August 1999 of FPA Perennial
Fund, Inc.; and Senior Vice
President from August 1995 to
March 2000 of Source Capital,
Inc.
Lawrence J. Sheehan, 69 Director 1991 Of counsel to, and partner (1969 to 4 -0-
1994) of, the law firm of
O'Melveny & Myers LLP, Legal
Counsel to the Fund. Director of
Source Capital, Inc., of FPA New
Income, Inc. and of FPA Capital
Fund, Inc. for more than the
past five years.
|
* The address for each Director is 11400 West Olympic Boulevard, Suite 1200, Los Angeles, California 90064.
** "Interested person" within the meaning of the 1940 Act by virtue of an affiliation with the Fund's Adviser in the case of Mr. Ende and by virtue of an affiliation with legal counsel to the Fund in the case of Mr. Sheehan.
FUND SHARES OWNED BY DIRECTORS AS OF MARCH 31, 2002
AGGREGATE DOLLAR RANGES OF
DOLLAR RANGE OF FUND SHARES OWNED IN ALL FPA
NAME SHARES OWNED FUNDS OVERSEEN BY DIRECTOR
-------------------------------------- -------------------- -----------------------------------------
"NON-INTERESTED" DIRECTORS
Willard H. Altman, Jr.
John P. Endicott
Leonard Mautner
"INTERESTED" DIRECTORS
Eric S. Ende
Lawrence J. Sheehan
|
As of March 31, 2002 the officers and Directors of the Fund and their families, as a group, owned beneficially or of record less than 0.0% of the outstanding shares of the Fund.
DIRECTOR COMPENSATION PAID DURING THE FISCAL YEAR ENDED DECEMBER 31, 2001
No compensation is paid by the Fund to any officer or Director who is a director, officer or employee of the Adviser or its affiliates. The Fund pays annual fees of $3,000 to Directors who are not affiliated with the Adviser, plus $500 for Board of Directors or Committee meetings attended. During the last fiscal year, the Directors then in office received as a group $20,000 in Directors' fees.
No pension or retirement benefits are accrued as part of Fund expenses. The Fund reimburses certain expenses of the Directors who are not affiliated with the Adviser.
AGGREGATE COMPENSATION TOTAL COMPENSATION
NAME FROM THE FUND FROM ALL FPA FUNDS
-------------------------------------- ---------------------- -----------------------------------------
"NON-INTERESTED" DIRECTORS
Willard H. Altman, Jr. $5,000 $43,000
John P. Endicott $5,000 $14,500
Leonard Mautner $5,000 $14,500
"INTERESTED" DIRECTORS
Eric S. Ende $-0- $-0-
Lawrence J. Sheehan $5,000 $43,000
|
OFFICERS
YEAR FIRST
ELECTED AN
POSITION WITH OFFICER OF
NAME, ADDRESS* AND AGE FUND THE FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
--------------------------- ----------------- ----------- --------------------------------------------------------------
Steven R. Geist, 48 Executive Vice 1996 Vice President of First Pacific Advisors, Inc. for more
President than the past five years; Senior Vice President and Fixed-
& Portfolio Income Manager of Source Capital, Inc. since November
Manager 1999; Executive Vice President and Portfolio Manager of
FPA Paramount Fund, Inc. since March 2000. Vice
President from August 1996 to November 1999 of Source
Capital, Inc.
J. Richard Atwood, 41 Treasurer 1997 Director, Principal and Chief Operating Officer since May
2000 of First Pacific Advisors, Inc.; and Director (since
May 2000), President (since May 2000), Chief Executive
Officer (since May 2000), Chief Financial Officer (since
March 1998) and Treasurer for more than the past five
years of each FPA Fund. Senior Vice President from
January 1997 to May 2000 of First Pacific Advisors, Inc.
and of FPA Fund Distributors, Inc.
Sherry Sasaki, 47 Secretary 1983 Assistant Vice President and Secretary for more than the
past five years of First Pacific Advisors, Inc.; and
Secretary of each FPA Fund and of FPA Fund
Distributors, Inc. for more than the past five years.
Christopher H. Thomas, 44 Assistant 1995 Vice President and Controller of First Pacific Advisors,
Treasurer Inc. for more than the past five years; Director (since May
2000), Vice President and Controller for more than the past five
years of FPA Fund Distributors, Inc.; and Assistant Treasurer of
each FPA Fund for more than the past five years.
|
* The address of each officer is 11400 West Olympic Boulevard, Suite 1200, Los Angeles, California 90064.
COMMITTEES OF THE BOARD OF DIRECTORS. The Fund has as Audit Committee comprised of Willard H. Altman, Jr., John P. Endicott and Leonard Mautner, none of whom is considered an "interested person" of the Fund within the meaning of the 1940 Act. The Committee makes recommendations to the Board of Directors concerning the selection of the Fund's independent auditors and reviews with such auditors the results of the annual audit, including the scope of auditing procedures, the adequacy of internal controls, and compliance by the Fund with the accounting, recording and financial reporting requirements of the 1940 Act. The Audit Committee met four times during the last fiscal year.
The Fund has a Nominating Committee consisting of Willard H. Altman, Jr., John P. Endicott and Leonard Mautner, none of whom is considered an "interested person" of the Fund within the meaning of the 1940 Act. The Committee recommends to the full Board of Directors nominees for election as directors of the Fund to fill the vacancies on the Board, when and as they occur. The Committee periodically reviews such
issues as the Board's composition and compensation and other relevant issues, and recommends any appropriate changes to the full Board of Directors. While the Committee normally is able to identify from its own resources an ample number of qualified candidates, it will consider shareholders' suggestions of persons to be considered as nominees to fill future vacancies on the Board. Such suggestions must be sent in writing to the Nominating Committee of the Fund, in care of the Fund's Secretary, and must be accompanied by complete biographical and occupational data on the prospective nominee along with a written consent of the prospective nominee for consideration of his or her name by the Committee. The determination of nominees recommended by the Committee is within the full discretion of the Committee, and a final selection of nominees is within the sole discretion of the Board. Therefore, no assurance can be given that any persons recommended by shareholders will be nominated as directors. The Nominating Committee met once during the last fiscal year.
The Fund has a Valuation Committee consisting of Willard H. Altman, Jr., John P. Endicott and Leonard Mautner, none of whom is considered an "interested person" of the Fund within the meaning of the 1940 Act. The Committee reviews the status, history and prospects for Fund investments with particular reference to investment policies and guidelines and recommends any appropriate changes to the full Board of Directors. The Valuation Committee met did not meet during the last fiscal year.
FIVE PERCENT SHAREHOLDERS
As of March 31, 2002, no person was known by the Fund to own of record or beneficially 5% or more of the outstanding Fund shares, except Merrill Lynch, Pierce, Fenner & Smith, Inc., for the sole benefit of its customers, Attention: Fund Administration 97103, 4800 Deer Lake Drive, East Floor 2, Jacksonville, Florida 32246-6484, which held approximately 00,000 shares (0.00%). Such broker-dealer advises that the shares are held for the benefit of its customers.
MANAGEMENT
INVESTMENT ADVISER. First Pacific Advisors, Inc., together with its predecessors, has been in the investment advisory business since 1954, serving as investment adviser to the Fund since its inception. Presently, the investment adviser manages assets of approximately $3.5 billion for six investment companies, including one closed-end investment company, and 20 institutional accounts. Currently, the personnel of First Pacific Advisors, Inc. consists of seven persons engaged full time in portfolio management or investment research in addition to 22 persons engaged full time in trading, administrative, financial or clerical activities. The Fund, the Adviser and the Distributor have adopted Codes of Ethics designed to prevent officers and employees who may have access to nonpublic information about the trading activities of the Fund (access persons) from profiting from that information. The Codes permit access persons to invest in securities for their own accounts, including securities that may be held by the Fund, but place substantive and procedural restrictions on their trading activities. For example, the Codes require that access persons receive advance approval for every securities trade to ensure that there is no conflict with the trading activities of the Fund.
First Pacific Advisors, Inc. is an indirect subsidiary of Old Mutual (US) Holdings Inc. (formerly known as United Asset Management Corporation) ("OMH"). OMH is a holding company principally engaged, through affiliated firms, in providing institutional investment management. In September, 2000, OMH was acquired by, and subsequently became a wholly owned subsidiary of Old Mutual plc, a United Kingdom- based financial services group with substantial asset management, insurance and banking businesses. On October 23, 2000, shareholders of the Fund approved a new investment advisory agreement between the
Adviser and the Fund, identical to the prior agreement in all respects except for its effective and termination dates. Old Mutual plc is listed on the London Stock Exchange. No person is known by Old Mutual plc to own or hold with power to vote 25% or more of its outstanding shares of common stock.
INVESTMENT ADVISORY AND SERVICE AGREEMENT. The Fund has entered into an Investment Advisory Agreement dated October 23, 2000 ("Advisory Agreement"), with the Adviser pursuant to which the Adviser provides continuing supervision of the Fund's investment portfolio. The Adviser is authorized, subject to the control of the Fund's Board of Directors, to determine which securities are to be bought or sold and in what amounts. In addition to providing investment advisory and management services, the Adviser furnishes office space, facilities and equipment, and maintains the Fund's books and records. It also compensates all officers and other personnel of the Fund, all of whom are employed by the Adviser, subject to reimbursement from the Fund for personnel involved in providing financial services as indicated below.
Other than the expenses the Adviser specifically assumes under the Advisory Agreement, the Fund bears all costs of its operation. These costs include brokerage commissions and other costs of portfolio transactions; fees and expenses of directors not affiliated with the Adviser; taxes; transfer agent, dividend disbursement, reinvestment and custodian fees; legal and audit fees; printing and mailing of reports to shareholders and proxy materials; shareholders' and directors' meetings; registration of Fund shares under federal and state laws; printing and engraving stock certificates; trade association membership fees; premiums for the fidelity bond and errors and omissions insurance maintained by the Fund; litigation; interest on indebtedness; and reimbursement of the Adviser's expenses in providing financial services to the Fund as described below.
For services rendered, the Adviser is paid a monthly fee computed at the annual rate of 0.75% of the first $50 million, and 0.65% of the excess over $50 million, of the Fund's average net assets. The average net assets are determined by taking the average of all the daily determinations of net assets made, in the manner provided in the Fund's Articles of Incorporation, during a calendar month.
In addition to the advisory fee, the Fund reimburses the Adviser monthly for costs incurred in providing financial services to the Fund. Such financial services include (a) maintaining the accounts, books and other documents forming the basis for the Fund's financial statements, (b) preparing such financial statements and other Fund documents and reports of a financial nature required by federal and state laws, (c) calculating daily net assets and (d) participating in the production of the Fund's registration statements, prospectuses, proxy materials and reports to shareholders (including compensation of the Treasurer or other principal financial officer of the Fund, compensation of personnel working under such person's direction and expenses of office space, facilities and equipment such persons use to perform their financial services duties). However, for any fiscal year, the cost of such financial services paid by the Fund cannot exceed 0.10% of the average daily net assets of the Fund.
The advisory fee and cost of financial services is reduced in the amount by which certain defined operating expenses of the Fund (including the advisory fee and cost of financial services) for any fiscal year exceed 1.50% of the first $30 million of average net assets, plus 1% of the remaining average net assets. Such values are calculated at the close of business on the last business day of each calendar month. Any required reduction or refund is computed and paid monthly. Operating expenses (as defined in the Advisory Agreement) exclude (a) interest, (b) taxes, (c) brokerage commissions and (d) any extraordinary expenses, such as litigation, merger, reorganization or recapitalization, to the extent such extraordinary expenses can be excluded under the rules or policies of the states in which Fund shares are registered for sale. All expenditures, including costs connected with the purchase, retention or sale of portfolio
securities, which are capitalized in accordance with generally accepted accounting principles applicable to investment companies, are accounted for as capital items and not as expenses. This expense limitation provision does not require any payment by the Adviser beyond the return of the advisory fee and cost of financial services paid to it by the Fund for a fiscal year.
The Advisory Agreement provides that the Adviser does not have any liability to the Fund or any of its shareholders for any error of judgment, any mistake of law or any loss the Fund suffers in connection with matters related to the Advisory Agreement, except for liability resulting from willful misfeasance, bad faith or negligence on the part of the Adviser or the reckless disregard of its duties under the Advisory Agreement.
The Advisory Agreement is renewable annually if specifically approved each year (a) by the Fund's Board of Directors or by the vote of a majority (as defined in the 1940 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 1940 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 April 30, 2003, 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 1940 Act). The Advisory Agreement may be terminated without penalty by the Fund's Board of Directors or the vote of a majority (as defined in the 1940 Act) of the Fund's outstanding voting securities on 60 days' written notice to the other party. The Advisory Agreement automatically terminates in the event of its assignment (as defined in the 1940 Act).
In determining whether to renew the Advisory Agreement, those Fund Directors who were not affiliated with the Adviser met separately to evaluate information provided by the Adviser in accordance with the 1940 Act and to determine their recommendation to the full Board of Directors. The Directors considered a variety of factors, including the quality of advisory, management and accounting services provided to the Fund, the fees and expenses borne by the Fund, the profitability of the Adviser and the investment performance of the Fund as well as the performance of a peer group of mutual funds. The Fund's advisory fee and expense ratio was also considered in light of the advisory fees and expense ratios of a peer group of mutual funds. Particular attention was given to the Fund's superior long-term investment performance. The Directors also took into consideration the benefits derived by the Adviser from arrangements under which it receives research services from brokers to whom the Fund's brokerage transactions are allocated as described under "Portfolio Transactions and Brokerage." Based upon its consideration of these and other relevant factors, the Directors concluded that the advisory fees paid by the Fund are fair and reasonable.
For the fiscal years ended December 31, 1999, 2000 and 2001, the Adviser received gross advisory fees of $304,286, $310,817, and $324,046, respectively, plus $40,571, $41,442, and $43,214, respectively for costs incurred in providing financial services to the Fund.
PRINCIPAL UNDERWRITER. FPA Fund Distributors, Inc. (the "Distributor"), located at 11400 West Olympic Boulevard, Suite 1200, Los Angeles, California 90064, acts as principal underwriter of Fund shares pursuant to a Distribution Agreement dated September 25, 2000 (the "Distribution Agreement"). The Distributor is a wholly owned subsidiary of the Adviser. Please see "Distributor" for more information.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser makes decisions to buy and sell securities for the Fund, selects broker-dealers and negotiates commission rates or net prices. In over-the-counter transactions, orders are placed directly with a principal
market maker unless the Adviser believes better prices and executions are available elsewhere. Portfolio transactions are effected with broker-dealers selected for their abilities to give prompt execution at prices favorable to the Fund. In selecting broker-dealers and in negotiating commissions, the Adviser considers each firm's reliability, the quality of its execution services on a continuing basis and its financial condition. When more than one firm is believed to meet these criteria, preference can be given to broker-dealers providing research services to the Fund or the Adviser. Subject to seeking best execution, the Adviser can also consider sales of Fund shares as a factor in selecting broker-dealers to execute portfolio transactions for the Fund. Any solicitation fees the Adviser receives in connection with acceptance of an exchange or tender offer of the Fund's portfolio securities are applied to reduce the advisory fees.
The Advisory Agreement authorizes the Adviser to pay commissions on security transactions to broker- dealers furnishing research services in an amount higher than the lowest available rate. The Adviser must determine in good faith that such amount is reasonable in relation to the brokerage and research services provided (as required by Section 28(e) of the Securities Exchange Act of 1934) viewed in terms of the particular transaction or the Adviser's overall responsibilities with respect to accounts for which it exercises investment discretion. The term brokerage and research services is defined to include (a) providing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (b) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and performance of accounts; and (c) effecting securities transactions and performing related incidental functions, such as clearance, settlement and custody. The advisory fee is not reduced as a result of the Adviser's receipt of such research.
Research services furnished by broker-dealers effecting securities transactions for the Fund can be used by the Adviser for all advisory accounts. However, the Adviser might not use all such research services in managing the Fund's portfolio. In the Adviser's opinion, it is not possible to measure separately the benefits from research services to each advisory account. Because the volume and nature of the trading activities of advisory accounts are not uniform, the amount of commissions in excess of the lowest available rate paid by each advisory account for brokerage and research services will vary. However, the Adviser believes the total commissions the Fund pays are not disproportionate to the benefits it receives on a continuing basis.
The Adviser attempts to allocate portfolio transactions equitably whenever concurrent decisions are made to purchase or sell securities for the Fund and other advisory accounts. In some cases, this procedure could have an adverse effect on the price or amount of securities available to the Fund. The main factors considered in such allocations are the respective investment objectives, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment, the size of investment commitments generally held, and the opinion of the persons responsible for recommending the investments.
Brokerage commissions paid by the Fund on portfolio transactions for the fiscal years ended December 31, 1999, 2000 and 2001, totaled $28,633, $30,330, and $14,195, respectively. During the last fiscal year, $13,611 of commissions were paid on transactions having a total value of $6,968,794 to brokers selected because of research services provided to the Adviser.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of purchases or sales of portfolio securities for a fiscal year by the average monthly value of portfolio securities during such fiscal year. Securities maturing in one year or less at the time of acquisition are not included in this computation. The turnover
rate for prior periods is shown in the Prospectus under the caption "Financial Highlights." This rate may vary greatly from year to year as well as within a year.
CAPITAL STOCK
COMMON STOCK. Each share of the Fund participates equally in dividend and liquidation rights. Fund shares are transferable, fully paid and non-assessable, and do not have any preemptive or conversion rights. The Fund has authorized 25 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 1940 Act, which is likely to occur infrequently. In addition, a special meeting of the shareholders will be called, if requested by the holders of 10% of the Fund's outstanding shares, for the purposes, and to act upon the matters, specified in the request (which may include election or removal of directors). When matters are submitted for a shareholder vote, each shareholder is entitled to one vote for each share owned. Shares of the Fund do not have cumulative voting rights, which means holders of more than 50% of Fund shares voting for the election of directors can elect 100% of the directors if they so choose. In such event, holders of the remaining Fund shares are not able to elect any person or persons to the Fund's Board of Directors.
PURCHASE AND REDEMPTION OF SHARES
NET ASSET VALUE. Net asset value is computed as of the close of the NYSE on each business day during which the NYSE is open. Net asset value, rounded to the nearest cent per share, is the total market value of all of the Fund's portfolio securities plus other assets (including any accrued reimbursement of expenses), less all liabilities, divided by the total number of Fund shares outstanding. The NYSE is closed not only on weekends but also on customary holidays, which currently are New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Such computation is made by (a) valuing securities listed or traded on a national securities exchange or on the NASDAQ National Market System at the last sale price or, if there has been no sale that day, at the last bid price, (b) valuing unlisted securities for which quotations are readily available at the last representative bid price as supplied by the National Association of Securities Dealers Automated Quotations (NASDAQ) or by dealers and (c) appraising all other portfolio securities and assets at fair value as determined in good faith by the Fund's Board of Directors.
SALES CHARGES. The maximum sales charge is 5.25% of the offering price, but lower sales charges apply for larger purchases. A portion of the sales charge is allocated to dealers selling Fund shares in amounts ranging from 95% to 100%, depending on the size of the investment. During special promotions, the Distributor may reallow up to 100% of the sales charge to dealers. At such times dealers could be deemed to be underwriters for purposes of the Securities Act of 1933. Discounts are alike to all dealers.
AUTHORIZED FINANCIAL INTERMEDIARIES. The Fund has authorized certain financial intermediaries including one or more brokers to accept on its behalf purchase and redemption orders. These brokers are authorized to designate other intermediaries to accept purchase and redemption orders on the Fund's behalf. The Fund is deemed to have received a purchase or redemption order when an authorized financial intermediary including an authorized broker or if applicable a broker's authorized designee accepts the order. Customer orders are priced at the Fund's net asset value next computed after they are accepted by an authorized financial intermediary, including an authorized broker or the broker's authorized designee.
SALES AT NET ASSET VALUE. Full-time employees of the Adviser can purchase Fund shares at net asset value via payroll deduction, provided the minimum initial investment is $250. Each subsequent investment must be at least $50.
LETTER OF INTENT. To be eligible for reduced sales charges, the investor must sign at the time of initial purchase, or within 30 days, a Letter of Intent ("LOI") covering investments to be made within a period of 13 months ("Period") from the initial purchase. The investor then becomes eligible for a reduced sales charge based on the total amount of the specified intended investment ("LOI Goal"), provided the amount is not less than $10,000. A minimum initial purchase of $1,500 and minimum subsequent purchases of $100 each are required. Fund shares can also be purchased to fulfill a letter of intent entered into with respect to shares of the other FPA Funds. The account information form, which should be used to establish an LOI, is available from dealers or the Distributor.
All transactions under an LOI must be indicated as such and must be placed by the dealer (in the case of an initial purchase) or the shareholder (in the case of any subsequent purchase) directly through Boston Financial Data Services, Inc. ("Shareholder Service Agent"). Shareholders should review for accuracy all confirmations of transactions, especially purchases made pursuant to an LOI.
If the LOI Goal is completed before the end of the Period, any subsequent purchases within the Period receive the applicable reduced sales charge. In addition, during the Period, the shareholder can increase his or her LOI Goal, and all subsequent purchases are treated as a new LOI (including escrow of additional Fund shares) except as to the Period, which does not change.
Signing an LOI does not bind the shareholder to complete his or her LOI Goal, but the LOI Goal must be completed to obtain the reduced sales charge. The LOI is binding on the Fund and the Distributor. However, the Distributor may withdraw a shareholder's LOI privileges for future purchases upon receiving information that the shareholder has resold or transferred his or her Fund shares within the Period.
The LOI requires the Shareholder Service Agent, as escrow agent, to hold 5% of the LOI Goal in escrow until completion of the LOI Goal within the Period. The escrowed Fund shares are taken from the first purchase and, if necessary, from each successive purchase. If the LOI Goal is completed within the Period, the escrowed Fund shares are promptly delivered to, or as directed by, the shareholder.
If the LOI Goal is not completed within the Period, the shareholder must pay the Distributor an amount equal to the sales charge applicable to a single purchase in the total amount of the purchases made under the LOI minus the sales charges actually paid. If the Distributor does not receive such unpaid sales charge within 20 days after requesting payment in writing, the Distributor instructs the Shareholder Service Agent to redeem escrowed Fund shares sufficient to cover the unpaid sales charge. Under the LOI, the shareholder irrevocably appoints the Shareholder Service Agent as his or her attorney with full power of substitution to surrender for redemption any or all escrowed Fund shares. If the redemption proceeds are inadequate, the shareholder is liable to the Distributor for the difference. The Shareholder Service Agent delivers to, or as directed by, the shareholder all Fund shares remaining after such redemption, together with any excess cash proceeds.
Any income dividends and capital gains distributions on the escrowed Fund shares are paid or reinvested as directed by, the shareholder.
FPA EXCHANGE PRIVILEGE. The procedures for exchanging shares between FPA Funds are described under "Exchanging Your Fund Shares" in the Fund's Prospectus. If the account registration information for the
two FPA Fund accounts involved in the exchange are different in any respect, the exchange instructions must be in writing and must contain a signature guarantee as described under "Selling (Redeeming) Your Shares" in the Fund's Prospectus.
By use of the exchange privilege, the investor authorizes the Shareholder Service Agent to act on telephonic, telegraphic or written exchange instructions from any person representing himself to be the investor or the agent of the investor and believed by the Shareholder Service Agent to be genuine. The Shareholder Service Agent uses procedures it considers reasonable to confirm exchange instructions via telephone, including requiring account registration verification from the caller and recording telephone instructions. Neither the Shareholder Service Agent nor the Fund is liable for losses due to unauthorized or fraudulent instructions if there is a reasonable belief in the authenticity of received instructions and reasonable procedures are employed; otherwise, they may be liable. The Shareholder Service Agent's records of such instructions are binding.
For purposes of determining the sales charge rate previously paid, all sales charges paid on the exchanged security and on any security previously exchanged for such security or for any of its predecessors will be included. If the exchanged security was acquired through reinvestment, that security may be exchanged without a sales charge. If a shareholder exchanges less than all of his securities, the security requiring no or the lowest incremental sales charge is deemed exchanged first.
Exchange requests received on a business day before shares of the Funds involved in the request are priced, are processed on the date of receipt by the Shareholder Service Agent. "Processing " a request means that shares in the Fund from which the shareholder is withdrawing an investment will be redeemed at the net asset value per share next determined after receipt. Shares of the new Fund into which the shareholder is investing will also normally be purchased at the net asset value per share, plus any applicable sales charge, next determined after receipt by the Shareholder Service Agent. Exchange requests received on a business day after the time shares of the Funds involved in the request are priced, are processed on the next business day as described above.
REDEMPTION OF SHARES. Redemptions are not made on days when the NYSE is
closed, including those holidays listed under "Purchase and Redemption of
Shares - Net Asset Value." The right of redemption can be suspended and the
payment therefore may be postponed for more than seven days during any period
when (a) the NYSE is closed for other than customary weekends or holidays;
(b) trading on the NYSE is restricted; (c) an emergency exists as a result of
which disposal by the Fund of securities it owns is not reasonably
practicable or it is not reasonably practicable for the Fund to fairly
determine the value of its net assets; or (d) the Securities and Exchange
Commission, by order, so permits.
TELEPHONE REDEMPTION. Redemptions can be made by telephone once the shareholder has properly completed and returned to the Shareholder Service Agent the account information form. The shareholder may direct that a check for the proceeds payable to the shareholder of record be mailed to the address of record or they may designate a bank account ("Designated Bank") to which the proceeds of such redemptions are sent. New investors who wish to establish the telephone redemption privilege must complete the appropriate section on the account information form. Existing shareholders who wish to establish the telephone redemption privilege or change the Designated Bank should either enter the new information on an account information form, marking it for "change of information" purposes, or send a letter identifying the Fund account and specifying the exact information to be changed. The letter must be signed exactly as the shareholder's name(s) appear on the account. All signatures require a guarantee as described under "Selling (Redeeming) Your Shares" in the Fund's Prospectus. The account information form is available from authorized 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 Shareholder Service Agent is responsible for any unauthorized
telephone redemptions. If the Fund shares to be redeemed by telephone
(technically a repurchase by agreement between the Fund and the shareholder)
were recently purchased by check, the Shareholder Service Agent can delay
transmitting the proceeds until the purchasing check has cleared but no more
than 15 days from purchase.
The Shareholder Service Agent uses procedures it considers reasonable to confirm redemption instructions via telephone, including requiring account registration verification from the caller and recording telephone instructions. Neither the Shareholder Service Agent nor the Fund is liable for losses due to unauthorized or fraudulent instructions if there is a reasonable belief in the authenticity of received instructions and reasonable procedures are employed; otherwise, they may be liable.
CONTINGENT DEFERRED SALES CHARGES. No deferred sales charge applies to a redemption if a sales charge was paid at the time of initial purchase. A contingent deferred sales charge of 2% is imposed on redemptions and exchanges made within 90 days by persons eligible to purchase shares without a sales charge. In determining how long shares of the Fund have been held, the Fund assumes that shares held by the investor the longest period of time will be sold first. The contingent deferred sales charge is imposed in order to discourage market timing by the shareholders initiating redemptions to take advantage of short-term market movements.
TAX SHELTERED RETIREMENT PLANS
Through the Distributor, prototype retirement plans are available for purchase of Fund shares. These include plans for self-employed individuals and plans for individuals buying shares under an Individual Retirement Account. A penalty tax applies, in general, to distributions made before age 59-1/2, excess contributions and failure to start distribution of the account at age 70-1/2. Borrowing from or against the account could also result in plan disqualification. Distributions from these retirement plans generally are taxable as ordinary income when received.
State Street Bank and Trust Company ("Bank") presently acts as custodian for these retirement plans and imposes fees for administering them. Purchases of Fund shares for a retirement plan must be made by direct remittance to the Bank. When contributions for any tax-qualified plan are invested in Fund shares, all dividends and capital gains distributions paid on those Fund shares are retained in such plan and automatically reinvested in additional Fund shares at net asset value. All earnings accumulate tax-deferred until distribution.
The investor should consult his or her own tax adviser concerning the tax ramifications of establishing, and receiving distributions from, a retirement plan.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund qualified during the last fiscal year for the tax treatment applicable to regulated investment companies under the Internal Revenue Code ("Code") and intends to so qualify in the future. Such qualification requires distributing at least 90% of its investment company taxable income to shareholders and meeting asset diversification and other requirements of the Code. As long as the Fund so qualifies, it does not pay federal income tax on its net investment income or on any net realized capital gains provided such income and capital gains are distributed to shareholders. If for any taxable year the Fund does not so qualify, all of its taxable income, including any net realized capital gains, will be taxed at regular corporate rates (without any deduction for distributions to shareholders).
The Fund is subject to a 4% excise tax to the extent it does not make certain distributions to its shareholders. Such distributions must total (1) at least 98% of ordinary income (investment company taxable income subject to certain adjustments) for any calendar year and (2) 98% of capital gains net income for the year. The Fund intends to distribute sufficient amounts to avoid liability for this excise tax.
If shares of the Fund are sold or exchanged within 90 days of acquisition, and shares of the same or a related mutual fund are acquired, to the extent the sales charge is reduced or waived on the subsequent acquisition, the sales charge may not be used to determine the basis in the disposed shares for purposes of determining gain or loss. To the extent the sales charge is not allowed in determining gain or loss on the initial shares, it is capitalized in the basis of the subsequent shares.
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 withholding on reportable dividends, capital gains distributions and redemption payments ("backup withholding"), at 30.5% for the calendar year ended December 31, 2001, and 30% for the calendar years ended December 31, 2002 and 2003. Generally, shareholders subject to backup withholding are those for whom a taxpayer identification number is not on file with the Fund or who, to the Fund's knowledge, furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that he or she is not subject to backup withholding.
Under existing provisions of the Code, dividends paid to shareholders who are nonresident aliens may be subject to a 30% federal withholding tax applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Nonresident shareholders are urged to consult their own tax advisers concerning the applicability of the federal withholding tax.
The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury Regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and Treasury Regulations. The Code and these Treasury Regulations are subject to change by legislative or administrative action either prospectively or retroactively.
Each investor should consult his or her own tax adviser as to federal tax laws and the effect of state and local tax laws which may differ from federal tax laws.
DISTRIBUTOR
The Distributor acts as principal underwriter of Fund shares pursuant to the Distribution Agreement. The Distributor receives commissions from the sale of Fund shares and has the exclusive right to distribute Fund shares through dealers. From the commissions received, the Distributor pays sales commissions to dealers; its own overhead and general administrative expenses; the cost of printing and distributing Fund prospectuses; and the cost of preparing, printing and distributing sales literature and advertising relating to the Fund. The Fund pays expenses attributable to registering Fund shares under federal and state laws (including registration and filing fees), the cost of preparing the prospectus (including typesetting and printing copies required for regulatory filings by the Fund) and related legal and audit expenses.
The Distribution Agreement is renewable annually if specifically approved each year (a) by the Fund's Board of Directors or by a vote of a majority (as defined in the 1940 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 1940 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 25, 2002 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 1940 Act). The Distribution Agreement terminates if assigned (as defined in the 1940 Act) and may be terminated, without penalty, by either party on 60 days' written notice.
The Distributor's obligation under the Distribution Agreement is an agency or best efforts arrangement pursuant to which the Distributor is required to take and pay for only those Fund shares sold to the public. The Distributor is not obligated to sell any stated number of Fund shares. The Distributor is a subsidiary of the Adviser.
During the fiscal years ended December 31, 1999, 2000 and 2001, total underwriting commissions on the sale of Fund shares were $17,301, $27,592, and $127,211, respectively. Of such totals, the amount retained each year by the Distributor, after reallowance to other dealers, was $1,368, $2,093, and $6,785, respectively.
PRIOR PERFORMANCE INFORMATION
For the purposes of quoting and comparing the Fund's performance to that of other mutual funds and to other relevant market indices in advertisements, performance may be stated in terms of total return. Under
regulations adopted by the Securities and Exchange Commission ("SEC"), funds that intend to advertise performance must include total return quotations calculated according to the following formula:
P(1 + T)TO THE POWER OF n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment, made at the beginning of the 1, 5 or
10 year period, at the end of such period (or
fractional portion thereof).
|
Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication, and cover 1, 5 and 10-year periods of a fund's existence or such shorter period dating from the effectiveness of a fund's registration statement. In calculating the ending redeemable value, the maximum sales load is deducted from the initial $1,000 payment, and all dividends and distributions by a fund are assumed to have been reinvested at net asset value as described in the Prospectus on the reinvestment dates during the period. Total return, or "T" in the formula above, is computed by finding the average annual compounded rates of return over the 1, 5 and 10-year periods (or fractional portion thereof) that would equate the initial amount invested to the ending redeemable value.
The Fund may also from time to time include in such advertising a total return figure that is not calculated according to the formula set forth above in order to compare the performance of the Fund with other measures of investment return. For example, in comparing the Fund's total return with a stock index such as the Russell 2500 Index, the Fund calculates its aggregate total return for the specified periods of time by assuming the investment of $10,000 in Fund shares and assuming the reinvestment of each dividend or other distribution at net asset value on the reinvestment date. Percentage increases are determined by subtracting the initial value of the investment from the ending value and by dividing the remainder by the beginning value. The Fund does not, for these purposes, deduct from the initial value invested any amount representing sales charges. The Fund, however, discloses the maximum sales charge and also discloses that inclusion of sales charges would reduce the performance quoted. Such alternative total return information will be given no greater prominence in such advertising than the information prescribed under SEC regulations.
The Fund's average annual total return (calculated in accordance with the SEC regulations described above) for the 1, 5 and 10-year periods ended December 31, 2001, was 16.29%, 15.90% and 13.32%, respectively. The Fund's average annual total return (determined pursuant to the alternative computation which does not include the maximum initial sales charge of 5.25% of the offering price) for the same periods was 22.73%, 17.15% and 13.93%, 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 associated with the Fund's investment practices. Future results will be affected by the future composition of the Fund's portfolio, as well as by changes in the general price level of equity securities, and general economic and other market conditions. The past 1, 5 and 10-year periods have been ones of generally rising common stock prices subject to short-term fluctuations.
PORTFOLIO OF INVESTMENTS
December 31, 2001
COMMON STOCKS SHARES VALUE
-------------------------------------------------------------------------------- -------------- --------------
PRODUCER DURABLE GOODS - 21.3%
Cognex Corporation* 25,000 $ 640,250
Crane Co 42,000 1,076,880
Denison International plc (ADR)* 75,000 1,242,000
Donaldson Company, Inc 18,000 699,120
Graco Inc 65,300 2,549,965
IDEX Corporation 48,800 1,683,600
Manitowoc Company, Inc., The 48,300 1,502,130
Zebra Technologies Corporation (Class A)* 30,100 1,670,851
--------------
$ 11,064,796
--------------
BUSINESS SERVICES & SUPPLIES - 11.6%
Black Box Corporation* 27,000 $ 1,427,760
HON INDUSTRIES Inc 59,000 1,631,350
Manpower Inc 33,000 1,112,430
Office Depot, Inc.* 100,000 1,854,000
--------------
$ 6,025,540
--------------
TECHNOLOGY - 11.3%
Advanced Fibre Communications, Inc.* 34,000 $ 600,780
Belden Inc 49,000 1,153,950
KEMET Corporation* 50,200 891,050
Plantronics, Inc.* 12,000 307,680
SanDisk Corporation* 110,000 1,584,000
Stratos Lightwave, Inc.* 45,339 278,835
TriQuint Semiconductor, Inc.* 84,691 1,038,312
--------------
$ 5,854,607
--------------
HEALTH CARE - 9.8%
DENTSPLY International Inc. 11,000 $ 552,200
Landauer, Inc 55,000 1,861,750
Lincare Holdings Inc.* 30,000 859,500
Ocular Sciences, Inc.* 77,100 1,796,430
--------------
$ 5,069,880
--------------
ENERGY - 9.0%
Cal Dive International, Inc.* 55,000 $ 1,357,400
Noble Drilling Corporation* 52,400 1,783,696
Tidewater Inc 45,000 1,525,500
--------------
$ 4,666,596
--------------
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PORTFOLIO OF INVESTMENTS
December 31, 2001
SHARES OR
PRINCIPAL
COMMON STOCKS-CONTINUED AMOUNT VALUE
-------------------------------------------------------------------------------- -------------- --------------
RETAILING - 7.6%
Circuit City Stores, Inc 50,000 $ 1,297,500
O'Reilly Automotive, Inc.* 72,500 2,644,075
--------------
$ 3,941,575
--------------
MATERIALS - 5.3%
Martin Marietta Materials, Inc 20,900 $ 973,940
OM Group, Inc 27,000 1,787,130
--------------
$ 2,761,070
--------------
DISTRIBUTION - 4.4%
Arrow Electronics, Inc.* 41,000 $ 1,225,900
ScanSource, Inc.* 23,000 1,094,800
--------------
$ 2,320,700
--------------
CONSUMER DURABLE GOODS - 4.1%
Clayton Homes, Inc 125,000 $ 2,137,500
--------------
BANKING - 2.4%
National Commerce Financial Corporation 50,000 $ 1,265,000
--------------
INSURANCE - 2.0%
Brown & Brown, Inc 38,600 $ 1,053,780
--------------
TOTAL COMMON STOCKS - 88.8% (Cost $29,961,078) $ 46,161,044
-------------
CONVERTIBLE DEBENTURE - 0.7% (Cost $705,250)
Reptron Electronics, Inc. - 6.75% 2004 $ 775,000 $ 348,750
-------------
TOTAL INVESTMENT SECURITIES - 89.5% (Cost $30,666,328) $ 46,509,794
-------------
SHORT-TERM INVESTMENTS - 9.9% (Cost $5,146,640) Short-Term Corporate Notes:
Gannett Co., Inc. - 1.9% 1/3/02 $2,300,000 $ 2,299,757
Coca-Cola Company, The - 1.8% 1/18/02 2,500,000 2,497,875
State Street Bank Repurchase Agreement - 0.85% 1/2/02
(Collateralized by U.S. Treasury Note - 5.5% 5/15/09
market value $357,761) 349,000 349,008
-------------
TOTAL SHORT-TERM INVESTMENTS $ 5,146,640
-------------
TOTAL INVESTMENTS - 99.4% (Cost $35,812,968) $ 51,656,434
Other assets and liabilities, net - 0.6% 318,860
-------------
TOTAL NET ASSETS - 100% $ 51,975,294
-------------
-------------
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*Non-income producing security
See notes to financial statements.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2001
ASSETS
Investments at value:
Investment securities - at market value
(identified cost $30,666,328) $46,509,794
Short-term investments - at cost plus interest earned
(maturities 60 days or less) 5,146,640 $ 51,656,434
----------
Cash 198
Receivable for:
Capital stock sold $ 279,802
Investment securities sold 75,749
Dividends and accrued interest 42,650 398,201
----------- --------------
$ 52,054,833
LIABILITIES
Payable for:
Advisory fees and financial services $ 35,861
Capital stock repurchased 25,028
Accrued expenses 18,650 79,539
----------- --------------
NET ASSETS $ 51,975,294
--------------
--------------
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock - par value $0.01 per share; authorized
25,000,000 shares; outstanding 2,245,424 shares $ 22,454
Additional Paid-in Capital 35,131,173
Undistributed net realized gain on investments 978,201
Unrealized appreciation of investments 15,843,466
-------------
Net assets at December 31, 2001 $ 51,975,294
--------------
--------------
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) $ 23.15
--------------
--------------
Maximum offering price per share
(100/94.75 of per share net asset value) $ 24.43
--------------
--------------
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See notes to financial statements.
STATEMENT OF OPERATIONS
For the Year Ended December 31, 2001
INVESTMENT INCOME
Interest $ 156,092
Dividends 336,791
------------
$ 492,883
EXPENSES - Note 3:
Advisory fees $ 324,046
Transfer agent fees and expenses 56,536
Financial services 43,214
Audit fees 25,100
Registration fees 24,795
Custodian fees 22,232
Directors' fees and expenses 20,315
Reports to shareholders 15,240
Legal fees 6,385
Other expenses 2,986 540,849
------------- ------------
Net investment loss $ (47,966)
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on
investments:
Proceeds from sales of investment securities (excluding
short-term investments with maturities 60 days or less) $ 9,935,443
Cost of investment securities sold 5,738,123
-------------
Net realized gain on investments $ 4,197,320
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year $ 10,764,630
Unrealized appreciation at end of year 15,843,466
-------------
Increase in unrealized appreciation of investments 5,078,836
------------
Net realized and unrealized gain on investments $ 9,276,156
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 9,228,190
------------
------------
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See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2001 2000
---------------------------- ----------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ (47,966) $ 6,404
Net realized gain on investments 4,197,320 3,098,036
Increase in unrealized
appreciation of investments 5,078,836 700,427
----------- ------------
Increase in net assets resulting
from operations $ 9,228,190 $ 3,804,867
Distributions to shareholders from:
Net investment income -- $ (6,404)
Net realized capital gains $ (4,255,231) (4,255,231) (3,476,383) (3,482,787)
----------- ------------
Capital Stock transactions:
Proceeds from Capital Stock sold $ 8,475,058 $ 6,367,443
Proceeds from shares issued to
shareholders upon reinvestment
of dividends and distributions 3,697,945 3,074,319
Cost of Capital Stock repurchased (5,340,334) 6,832,669 (12,709,893) (3,268,131)
----------- ------------ ------------ ------------
Total increase (decrease) in net assets $ 11,805,628 $ (2,946,051)
NET ASSETS
Beginning of year 40,169,666 43,115,717
------------ ------------
End of year $ 51,975,294 $ 40,169,666
------------ ------------
------------ ------------
CHANGE IN CAPITAL STOCK
OUTSTANDING
Shares of Capital Stock sold 379,363 313,398
Shares issued to shareholders
upon reinvestment of dividends
and distributions 160,775 156,350
Shares of Capital Stock repurchased (245,875) (627,051)
------------ ------------
Increase (decrease) in Capital Stock outstanding 294,263 (157,303)
------------ ------------
------------ ------------
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See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001
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 primary investment objective is long-term growth of capital. Current income is a secondary consideration. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements.
A. Security Valuation
Securities listed or traded on a national securities exchange or on the NASDAQ National Market System are valued at the last sale price on the last business day of the year, or if there was not a sale that day, at the last bid price. Securities which are unlisted are valued at the most recent bid price. Short-term investments with maturities 60 days or less are valued at cost plus interest earned which approximates market value.
B. Federal Income Tax
No provision for federal income tax is required because the Fund has elected to be taxed as a "regulated investment company" under the Internal Revenue Code and intends to maintain this qualification and to distribute each year to its shareholders, in accordance with the minimum distribution requirements of the Code, all of its taxable net investment income and taxable net realized gains on investments.
C. Securities Transactions and Related
Investment Income
Securities transactions are accounted for on the date the securities are purchased or sold. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Interest income and expenses are recorded on an accrual basis.
D. Use of Estimates
The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported. Actual results could differ from those estimates.
E. Reclassification of Capital Accounts
The Fund accounts for and reports distributions to shareholders in accordance with the American Institute of Certified Public Accountant's Statement of Position 93-2: Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies. Distributions of net investment income and realized gains are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are due to differing treatments for items such as wash sales, net operating losses, capital loss carry forwards and net realized loss on foreign currency transactions. For the year ended December 31, 2001, the net loss of $47,966 was reclassified to undistributed net realized gain on investments.
NOTE 2 -- PURCHASES, SALES AND TAX DIFFERENCES
The cost of purchases of investment securities (excluding short-term investments with maturities of 60 days or less) aggregated $10,068,703 for the year ended December 31, 2001. Realized gains or losses are based on the specific-certificate identification method.
All of the amounts reported in the financial statements at December 31, 2001 were the same for federal income tax and financial reporting purposes. Gross unrealized appreciation and depreciation for all investments at December 31, 2001 for federal income tax and financial reporting purposes was $16,918,078 and $1,074,612, respectively.
NOTE 3 -- ADVISORY FEES AND OTHER AFFILIATED TRANSACTIONS
Pursuant to an Investment Advisory Agreement, advisory fees were paid by the Fund to First Pacific Advisors, Inc. (the "Adviser"). Under the terms of this Agreement, the Fund pays the Adviser a monthly fee calculated at the annual rate of 0.75% of the first $50 million of the
Fund's average daily net assets and 0.65% of the average daily net assets in excess of $50 million. In addition, the Fund pays the Adviser an amount equal to 0.10% of the average daily net assets for each fiscal year in reimbursement for the provision of financial services to 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 $30 million and 1% of the remaining average net assets of the Fund for the year.
For the year ended December 31, 2001, the Fund paid aggregate fees of $20,000 to all Directors who are not affiliated persons of the Adviser. Legal fees were for services rendered by O'Melveny & Myers 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 December 31, 2001, FPA Fund Distributors, Inc. ("Distributor"), a wholly owned subsidiary of the Adviser, received $6,785 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.
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF FPA PERENNIAL FUND, INC.
We have audited the accompanying statement of assets and liabilities of FPA Perennial Fund, Inc. (the "Fund"), including the portfolio of investments, as of December 31, 2001, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights on page 15 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2001, 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 Perennial Fund, Inc. at December 31, 2001, 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 15 of the Prospectus, for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
February 1, 2002
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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, December 31, 2001
Statement of Assets and Liabilities, December 31, 2001
Statement of Operations
Year ended December 31, 2001
Statement of Changes in Net Assets
Year ended December 31, 2001
Year ended December 31, 2000
All other financial statements and schedules are inapplicable.
(b) Exhibits
(a)(1) The Articles of Incorporation were filed as Exhibit 1 to Post-Effective Amendment No. 17 of Registrant's Registration Statement on Form N-1A and are incorporated herein by reference.
(a)(2) Certificate of Amendment, dated November 29, 1983, to Articles of Incorporation was filed as Exhibit 1.1 to Post-Effective Amendment No. 17 of Registrant's Registration Statement on Form N-1A and is incorporated herein by reference.
(b) Amended and Restated By-Laws were filed as Exhibit 2 to Post-Effective Amendment No. 17 of Registrant's Registration Statement on Form N-1A and are incorporated herein by reference.
(c) Specimen Common Stock Certificate was filed as Exhibit 4 to Post-Effective Amendment No. 16 of Registrant's Registration Statement on Form N-1A and is incorporated herein by reference.
(d) Investment Advisory Agreement between Registrant and First Pacific Advisors, Inc. was filed as Exhibit (d) to Post-Effective Amendment No. 19 of Registrant's Registration Statement on Form N-1A and is incorporated herein by reference.
(e)(1) Distribution Agreement between Registrant and FPA Fund Distributors, Inc. was filed as Exhibit (e)(1) to Post-Effective Amendment No. 19 of Registrant's Registration Statement on Form N-1A and is incorporated herein by reference.
(e)(2) Specimen Selling Group Agreement was filed as Exhibit 5.1 to Post-Effective Amendment No. 17 of Registrant's Registration Statement on Form N-1A and is incorporated herein by reference.
(e)(3) Smith Barney Inc. Mutual Fund Dealer Agreement was filed as Exhibit 6.2 to Post-Effective Amendment No. 14 of Registrant's Registration
Statement on Form N-1A and is incorporated herein by reference.
(g)(1) Custodian Agreement between Registrant and State Street Bank and Trust Company was filed as Exhibit 7 Post-Effective Amendment No. 17 of Registrant's Registration Statement on Form N-1A and is incorporated herein by reference.
(g)(2) Amendment to the Custodian Contract, dated November 1, 1988, was filed as Exhibit 7.1 to Post-Effective Amendment No. 17 of Registrant's Registration Statement on Form N-1A and is incorporated herein by reference.
(g)(3) Custodian Fee Schedule Addendum for GNMA Securities Traded through Participants Trust Company was filed as Exhibit 7.2 to Post-Effective Amendment No. 17 of Registrant's Registration Statement on Form N-1A and is incorporated herein by reference.
(g)(4) Amendment to the Custodian Contract was filed as Exhibit 8.4 to Post-Effective Amendment No. 13 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. 15 of Registrant's Registration Statement on Form N-1A and is incorporated herein by reference.
(g)(6) Amendment to the Custodian Contract.
(h) State Street Bank and Trust Company Universal Individual Retirement Account Information Kit was filed as Exhibit 14.1 to Post-Effective Amendment No. 15 of Registrant's Registration Statement on Form N-1A and is incorporated herein by reference.
(i) Opinion and Consent of Counsel was filed as Exhibit (i) to Post-Effective Amendment No. 18 of Registrant's Registration Statement on Form N-1A and is incorporated herein by reference.
(j) Consent of Independent Auditors (filed as page C-8).
(n)(1) Code of Ethics of Registrant was filed as Exhibit (n)(1) to Post-Effective Amendment No. 19 of Registrant's Registration Statement on Form N-1A and is incorporated herein by reference.
(n)(2) Code of Ethics of First Pacific Advisors, Inc. and of FPA Fund Distributors, Inc. was filed as Exhibit (n)(2) to Post-Effective Amendment No. 19 of Registrant's Registration Statement on Form N-1A and is incorporated herein by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 25. INDEMNIFICATION.
Article VI, Section 2, of Registrant's By-Laws, filed as Exhibit (b) hereto, provides for the indemnification of Registrant's directors and officers to the full extent permissible under the general laws of the State of Maryland, the Securities Act of 1933 ("Securities Act") and the Investment Company Act of 1940; provided, however, that such indemnity shall not protect any such person against any liability to Registrant or any of its shareholders 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 or her office. It is expected that Registrant will obtain from a major insurance carrier a directors' and officers' liability policy covering certain types of errors and omissions.
Insofar as indemnification of liability under the Securities Act may be permitted for directors, officers and controlling persons of Registrant pursuant to the foregoing provisions, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification for such liabilities (other than the payment by Registrant of expenses incurred or paid by a director, officer or controlling person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
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 New Income, Inc. ("New Income"), FPA Paramount Fund, Inc. ("Paramount") 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 and as set forth below.
NAME AND POSITION
WITH ADVISER OTHER AFFILIATIONS (1)
------------------ ------------------
Robert L. Rodriguez, Director and officer of Capital
Director, Principal, and New Income.
Chief Executive Officer
& Chief Investment Officer
C-3
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J. Richard Atwood, (2) Director, Principal, Chief Operating Officer, Chief Financial Officer & Treasurer Eric S. Ende, (2) Senior Vice President Steven T. Romick, --- 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, (2) Vice President Stephen W. O'Neil, --- Vice President & Head Trader Sherry Sasaki, (2) Assistant Vice President & Secretary Christopher J. Motte, --- Assistant Vice President & Senior Trader Marie McAvenia, --- Assistant Vice President |
(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, New Income and Paramount 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.
NAME AND PRINCIPAL POSITIONS & OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH PRINCIPAL UNDERWRITER WITH REGISTRANT
------------------------ --------------------------- -----------------------
J. Richard Atwood (1) President, Chief Executive Treasurer
Officer, Chief Financial
Officer, Treasurer
& Director
Robert L. Rodriguez (1) Director ---
Christopher H. Thomas (1) Vice President, Assistant Treasurer
Controller & Director
Sherry Sasaki (1) Secretary Secretary
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(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.
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:
SUBPARAGRAPH OF PHYSICAL POSSESSION
RULE 31a-1 OF REQUIRED RECORDS
--------------- ---------------------
(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*
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* 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.
ITEMS 32. 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 26th day of February, 2002.
FPA PERENNIAL FUND, INC.
By: /s/ ERIC S. ENDE
--------------------------------
Eric S. Ende, President
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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:
SIGNATURE TITLE DATE
--------- ----- ----
/S/ ERIC S. ENDE
------------------------------ President February 26, 2002
Eric S. Ende (Principal Executive
Officer)
/S/ J. RICHARD ATWOOD
------------------------------ Treasurer February 26, 2002
J. Richard Atwood (Principal Financial
Officer and Principal
Accounting Officer)
/S/ WILLARD H. ALTMAN, JR.
------------------------------ Director February 26, 2002
Willard H. Altman, Jr.
/S/ ERIC S. ENDE
------------------------------ Director February 26, 2002
Eric S. Ende
JOHN P. ENDICOTT*
------------------------------ Director February 26, 2002
John P. Endicott
LEONARD MAUTNER*
------------------------------ Director February 26, 2002
Leonard Mautner
LAWRENCE J. SHEEHAN*
------------------------------ Director February 26, 2002
Lawrence J. Sheehan
*By: /S/ ERIC S. ENDE
--------------------------
Eric S. Ende
Attorney-in-Fact pursuant to Power-of- Attorney
included as page C-7 on
Registrant's Post-Effective Amendment
No. 14 to the Registration Statement
which was filed May 1, 1997.
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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 February 1, 2002, in Post-Effective Amendment No. 20 under the Securities Act of 1933 and Amendment No. 20 under the Investment Company Act of 1940 to the Registration Statement (Form N-1A, No. 2-87607) and related Prospectus and Statement of Additional Information of FPA Perennial Fund, Inc.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
February 26, 2002
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EXHIBIT INDEX
EXHIBIT
--------
99.(g)(6) Amendment to the Custodian Contract.
(j) Consent of Independent Auditors (filed as page C-8).
All other applicable exhibits are incorporated herein by
reference.
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AMENDMENT TO CUSTODIAN CONTRACT
This Amendment to the Custodian Contract is made as of June 22, 2001, by and between FPA PERENNIAL FUND, INC., (the "Fund") and State Street Bank and Trust Company (the "Custodian"). Capitalized terms used in this Amendment without definition shall have the respective meanings given to such terms in the Custodian Contract referred to below.
WHEREAS, the Fund and the Custodian entered into a Custodian Contract dated as of June 11, 1989 (as amended and in effect from time to time, the "Agreement"); and
WHEREAS, the Fund and the Custodian desire to amend certain provisions of the Agreement to reflect revisions to Rule 17f-5 ("Rule 17f-5") and the adoption of Rule 17f-7 ("Rule 17f-7") promulgated under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund and the Custodian desire to amend and restate certain other provisions of the Agreement relating to the custody of assets of the Fund held outside of the United States.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter contained, the parties hereby agree to amend the Agreement, pursuant to the terms thereof, as follows:
I. The amendment to the Agreement, dated February 17, 1998, relating to the 1997 revision of Rule 17f-5 of the Investment Company Act of 1940, as amended, is hereby deleted, and the parties hereto agree that it shall be and is replaced in its entirety by the provisions of new Articles 3 and 4 set forth below.
3. PROVISIONS RELATING TO RULES 17f-5 AND 17f-7
3.1 DEFINITIONS. Capitalized terms in this Amendment shall have the following meanings:
"Country Risk" means all factors reasonably related to the systemic risk of holding Foreign Assets in a particular country including, but not limited to, such country's political environment, economic and financial infrastructure (including any Eligible Securities Depository operating in the country), prevailing or developing custody and settlement practices, and laws and regulations applicable to the safekeeping and recovery of Foreign Assets held in custody in that country.
"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule 17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as defined in Rule 17f-5), a bank holding company meeting the requirements of an Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the requirements of a custodian under Section 17(f) of the 1940 Act; the term does not include any Eligible Securities Depository.
"Eligible Securities Depository" has the meaning set forth in section (b)(1) of Rule 17f-7.
"Foreign Assets" means any of the Fund's investments (including foreign currencies) for which the primary market is outside the United States and such cash and cash equivalents as are reasonably necessary to effect the Fund's transactions in such investments.
"Foreign Custody Manager" has the meaning set forth in section (a)(3) of Rule 17f-5.
3.2 THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
3.2.1 DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. The Fund, by resolution adopted by its Board of Directors (the "Board"), hereby delegates to the Custodian, subject to Section (b) of Rule 17f-5, the responsibilities set forth in this Section 3.2 with respect to Foreign Assets held outside the United States, and the Custodian hereby accepts such delegation as Foreign Custody Manager of the Fund.
3.2.2 COUNTRIES COVERED. The Foreign Custody Manager shall be responsible for performing the delegated responsibilities defined below only with respect to the countries and custody arrangements for each such country listed on Schedule A to this Agreement, which list of countries may be amended from time to time by the Fund with the agreement of the Foreign Custody Manager. The Foreign Custody Manager shall list on Schedule A the Eligible Foreign Custodians selected by the Foreign Custody Manager to maintain the Fund's assets, which list of Eligible Foreign Custodians may be amended from time to time in the sole discretion of the Foreign Custody Manager. The Foreign Custody Manager will provide amended versions of Schedule A in accordance with Section 3.2.5 hereof.
Upon receipt by the Foreign Custody Manager of Proper Instructions to open an account or to place or maintain Foreign Assets in a country listed on Schedule A, and the fulfillment by the Fund of the applicable account opening requirements for such country, the Foreign Custody Manager shall be deemed to have been delegated by the Board responsibility as Foreign Custody Manager with respect to that country and to have accepted such delegation. Execution of this Amendment by the Fund shall be deemed to be a Proper Instruction to open an account, or to place or maintain Foreign Assets, in each country listed on Schedule A in which the Custodian has previously placed or currently maintains Foreign Assets pursuant to the terms of the Agreement. Following the receipt of Proper Instructions directing the Foreign Custody Manager to close the account of the Fund with the Eligible Foreign Custodian selected by the Foreign Custody Manager in a designated country, the delegation by the Board to the Custodian as Foreign Custody Manager for that country shall be deemed to have been withdrawn and the Custodian shall immediately cease to be the Foreign Custody Manager of the Fund with respect to that country.
The Foreign Custody Manager may withdraw its acceptance of delegated responsibilities with respect to a designated country upon written notice to the Fund. Thirty days (or such longer period to which the parties agree in writing) after receipt of any such notice by the Fund, the Custodian shall
have no further responsibility in its capacity as Foreign Custody Manager to the Fund with respect to the country as to which the Custodian's acceptance of delegation is withdrawn.
3.2.3 SCOPE OF DELEGATED RESPONSIBILITIES:
(a) SELECTION OF ELIGIBLE FOREIGN CUSTODIANS. Subject to the provisions of this Section 3.2, the Foreign Custody Manager may place and maintain the Foreign Assets in the care of the Eligible Foreign Custodian selected by the Foreign Custody Manager in each country listed on Schedule A, as amended from time to time. In performing its delegated responsibilities as Foreign Custody Manager to place or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign Custody Manager shall determine that the Foreign Assets will be subject to reasonable care, based on the standards applicable to custodians in the country in which the Foreign Assets will be held by that Eligible Foreign Custodian, after considering all factors relevant to the safekeeping of such assets, including, without limitation the factors specified in Rule 17f-5(c)(1).
(b) CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS. The Foreign Custody Manager shall determine that the contract governing the foreign custody arrangements with each Eligible Foreign Custodian selected by the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
(c) MONITORING. In each case in which the Foreign Custody Manager maintains Foreign Assets with an Eligible Foreign Custodian selected by the Foreign Custody Manager, the Foreign Custody Manager shall establish a system to monitor (i) the appropriateness of maintaining the Foreign Assets with such Eligible Foreign Custodian and (ii) the contract governing the custody arrangements established by the Foreign Custody Manager with the Eligible Foreign Custodian. In the event the Foreign Custody Manager determines that the custody arrangements with an Eligible Foreign Custodian it has selected are no longer appropriate, the Foreign Custody Manager shall notify the Board in accordance with Section 3.2.5 hereunder.
3.2.4 GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY. For purposes of this Section 3.2, the Board shall be deemed to have considered and determined to accept such Country Risk as is incurred by placing and maintaining the Foreign Assets in each country for which the Custodian is serving as Foreign Custody Manager of the Fund.
3.2.5 REPORTING REQUIREMENTS. The Foreign Custody Manager shall report the withdrawal of the Foreign Assets from an Eligible Foreign Custodian and the placement of such Foreign Assets with another Eligible Foreign Custodian by providing to the Board an amended Schedule A at the end of the calendar quarter in which an amendment to such Schedule has occurred. The Foreign Custody Manager shall make written reports notifying the Board of any other material change in the foreign custody arrangements of the Fund described in this Section 3.2 after the occurrence of the material change.
3.2.6 STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF THE FUND. In performing the responsibilities delegated to it, the Foreign Custody Manager agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of assets of management investment companies registered under the 1940 Act would exercise.
3.2.7 REPRESENTATIONS WITH RESPECT TO RULE 17F-5. The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as defined in section (a)(7) of Rule 17f-5. The Fund represents to the Custodian that the Board has determined that it is reasonable for the Board to rely on the Custodian to perform the responsibilities delegated pursuant to this Agreement to the Custodian as the Foreign Custody Manager of the Fund.
3.2.8 EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as defined in section (a)(7) of Rule 17f-5. The Fund represents to the Custodian that the Board has determined that it is reasonable for the Board to rely on the Custodian to perform the responsibilities delegated pursuant to this Agreement to the Custodian as the Foreign Custody Manager of the Fund.
3.3 ELIGIBLE SECURITIES DEPOSITORIES.
3.3.1 ANALYSIS AND MONITORING. The Custodian shall (a) provide the Fund (or its duly- authorized investment manager or investment adviser) with an analysis of the custody risks associated with maintaining assets with the Eligible Securities Depositories set forth on Schedule B hereto in accordance with section (a)(1)(i)(A) of Rule 17f-7, and (b) monitor such risks on a continuing basis, and promptly notify the Fund (or its duly-authorized investment manager or investment adviser) of any material change in such risks, in accordance with section (a)(1)(i)(B) of Rule 17f-7.
3.3.2 STANDARD OF CARE. The Custodian agrees to exercise reasonable care, prudence and diligence in performing the duties set forth in Section 3.3.1.
4. DUTIES OF THE CUSTODIAN WITH RESPECT TO FUND PROPERTY HELD OUTSIDE THE UNITED STATES.
4.1 DEFINITIONS. Capitalized terms in this Article 4 shall have the following meanings:
"Foreign Securities System" means an Eligible Securities Depository listed on Schedule B hereto.
"Foreign Sub-Custodian" means a foreign banking institution serving as an Eligible Foreign Custodian.
4.2 HOLDING SECURITIES. The Custodian shall identify on its books as belonging to the Fund the foreign securities held by each Foreign Sub-Custodian or Foreign Securities System. The Custodian may hold foreign securities for all of its customers, including the Fund, with any Foreign Sub- Custodian in an account that is identified as belonging to the Custodian for the benefit of its
customers, provided however, that (i) the records of the Custodian with respect to foreign securities of the Fund which are maintained in such account shall identify those securities as belonging to the Fund and (ii), to the extent permitted and customary in the market in which the account is maintained, the Custodian shall require that securities so held by the Foreign Sub-Custodian be held separately from any assets of such Foreign Sub-Custodian or of other customers of such Foreign Sub-Custodian.
4.3 FOREIGN SECURITIES SYSTEMS. Foreign securities shall be maintained in a Foreign Securities System in a designated country through arrangements implemented by the Custodian or a Foreign Sub-Custodian, as applicable, in such country.
4.4 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
4.4.1 DELIVERY OF FOREIGN SECURITIES. The Custodian or a Foreign Sub-Custodian shall release and deliver foreign securities of the Fund held by the Custodian or such Foreign Sub- Custodian, or in a Foreign Securities System account, only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases:
(i) upon the sale of such foreign securities for the Fund in accordance with commercially reasonable market practice in the country where such foreign securities are held or traded, including, without limitation: (A) delivery against expectation of receiving later payment; or (B) in the case of a sale effected through a Foreign Securities System, in accordance with the rules governing the operation of the Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign securities;
(iii) to the depository agent in connection with tender or other similar offers for foreign securities of the Fund;
(iv) to the issuer thereof or its agent when such foreign securities are called, redeemed, retired or otherwise become payable;
(v) to the issuer thereof, or its agent, for transfer into the name of the Custodian (or the name of the respective Foreign Sub-Custodian or of any nominee of the Custodian or such Foreign Sub-Custodian) or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units;
(vi) to brokers, clearing banks or other clearing agents for examination or trade execution in accordance with market custom; provided that in any such case the Foreign Sub- 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 Foreign Sub-Custodian's own negligence or willful misconduct;
(vii) 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;
(viii) in the case of warrants, rights or similar foreign securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities;
(ix) for delivery as security in connection with any borrowing by the Fund requiring a pledge of assets by the Fund;
(x) in connection with trading in options and futures contracts, including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other purpose, but only upon receipt of Proper Instructions specifying the foreign securities to be delivered and naming the persons or persons to whom delivery of such securities shall be made.
4.4.2 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, or direct the respective Foreign Sub-Custodian or the respective Foreign Securities System to pay out, monies of the Fund in the following cases only:
(i) upon the purchase of foreign securities for the Fund, unless otherwise directed by Proper Instructions, by (A) delivering money to the seller thereof or to a dealer therefor (or an agent for such seller or dealer) against expectation of receiving later delivery of such foreign securities; or (B) in the case of a purchase effected through a Foreign Securities System, in accordance with the rules governing the operation of such Foreign Securities System;
(ii) in connection with the conversion, exchange or surrender of foreign securities of the Fund;
(iii) for the payment of any expense or liability of the Fund, including but not limited to the following payments: interest, taxes, investment advisory fees, transfer agency fees, fees under this Agreement, legal fees, accounting fees, and other operating expenses;
(iv) for the purchase or sale of foreign exchange or foreign exchange contracts for the Fund, including transactions executed with or through the Custodian or its Foreign Sub-Custodians;
(v) in connection with trading in options and futures contracts, including delivery as original margin and variation margin;
(vi) for payment of part or all of the dividends received in respect of securities sold short;
(vii) in connection with the borrowing or lending of foreign securities; and
(viii) for any other purpose, but only upon receipt of Proper Instructions specifying the amount of such payment and naming the person or persons to whom such payment is to be made.
4.4.3 MARKET CONDITIONS. Notwithstanding any provision of this Agreement to the contrary, settlement and payment for Foreign Assets received for the account of the Fund and delivery of Foreign Assets maintained for the account of the Fund may be effected in accordance with the customary established securities trading or processing practices and procedures in the country or market in which the transaction occurs, including, without limitation, delivering Foreign Assets to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) with the expectation of receiving later payment for such Foreign Assets from such purchaser or dealer.
The Custodian shall provide to the Board the information with respect to custody and settlement practices in countries in which the Custodian employs a Foreign Sub-Custodian described on Schedule C hereto at the time or times set forth on such Schedule. The Custodian may revise Schedule C from time to time, provided that no such revision shall result in the Board being provided with substantively less information than had been previously provided hereunder.
4.5 REGISTRATION OF FOREIGN SECURITIES. The foreign securities maintained in the custody of a Foreign Sub-Custodian (other than bearer securities) shall be registered in the name of the Fund or in the name of the Custodian or in the name of any Foreign Sub-Custodian or in the name of any nominee of the foregoing, and the Fund agrees to hold any such nominee harmless from any liability as a holder of record of such foreign securities. The Custodian or a Foreign Sub-Custodian shall not be obligated to accept securities on behalf of the Fund under the terms of this Agreement unless the form of such securities and the manner in which they are delivered are in accordance with reasonable market practice.
4.6 BANK ACCOUNTS. The Custodian shall identify on its books as belonging to the Fund cash (including cash denominated in foreign currencies) deposited with the Custodian. Where the Custodian is unable to maintain, or market practice does not facilitate the maintenance of, cash on the books of the Custodian, a bank account or bank accounts shall be opened and maintained outside the United States on behalf of the Fund with a Foreign Sub-Custodian. All accounts referred to in
this Section shall be subject only to draft or order by the Custodian (or, if applicable, such Foreign Sub-Custodian) acting pursuant to the terms of this Agreement to hold cash received by or from or for the branches, subsidiaries and affiliates), regardless of currency denomination, is maintained in bank accounts established under, and subject to the laws of, The Commonwealth of Massachusetts.
4.7 COLLECTION OF INCOME. The Custodian shall use reasonable commercial efforts to collect all income and other payments with respect to the Foreign Assets held hereunder to which the Fund shall be entitled and shall credit such income, as collected, to the Fund. In the event that extraordinary measures are required to collect such income, the Fund and the Custodian shall consult as to such measures and as to the compensation and expenses of the Custodian relating to such measures.
4.8 SHAREHOLDER RIGHTS. With respect to the foreign securities held pursuant to this Article 4, the Custodian will use reasonable commercial efforts to facilitate the exercise of voting and other shareholder rights, subject always to the laws, regulations and practical constraints that may exist in the country where such securities are issued. The Fund acknowledges that local conditions, including lack of regulation, onerous procedural obligations, lack of notice and other factors may have the effect of severely limiting the ability of the Fund to exercise shareholder rights.
4.9 COMMUNICATIONS RELATING TO FOREIGN SECURITIES. The Custodian shall transmit promptly to the Fund written information with respect to materials received by the Custodian via the Foreign Sub-Custodians from issuers of the foreign securities being held for the account of the Fund (including, without limitation, pendency of calls and maturities of foreign securities and expirations of rights in connection therewith). With respect to tender or exchange offers, the Custodian shall transmit promptly to the Fund written information with respect to materials so received by the Custodian from issuers of the foreign securities whose tender or exchange is sought or from the party (or its agents) making the tender or exchange offer. The Custodian shall not be liable for any untimely exercise of any tender, exchange or other right or power in connection with foreign securities or other property of the Fund at any time held by it unless (i) the Custodian or the respective Foreign Sub-Custodian is in actual possession of such foreign securities or property and (ii) the Custodian receives Proper Instructions with regard to the exercise of any such right or power, and both (i) and (ii) occur at least three business days prior to the date on which the Custodian is to take action to exercise such right or power.
4.10 LIABILITY OF FOREIGN SUB-CUSTODIANS. Each agreement pursuant to which
the Custodian employs a Foreign Sub-Custodian shall, to the extent
possible, require the Foreign Sub- Custodian to exercise reasonable
care in the performance of its duties, and to indemnify, and hold
harmless, the custodian from and against any loss, damage, cost,
expense, liability or claim arising out of or in connection with the
Foreign Sub-Custodian's performance of such obligations. At the
election of the Fund, the Fund shall be entitled to be subrogated to
the rights of the Custodian with respect to any claims against a
Foreign Sub-Custodian as a consequence of any such loss, damage, cost,
expense, liability or claim if and to the extent that the Fund has not
been made whole for any such loss, damage, cost, expense, liability or
8
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claim.
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4.11 TAX LAW. The Custodian shall have no responsibility or liability for any obligations now or hereafter imposed on the Fund, or the Custodian as custodian of the Fund, by the tax law of the United States or of any state or political subdivision thereof. It shall be the responsibility of the Fund to notify the Custodian of the obligations imposed on the Fund, or the Custodian as custodian of the Fund, by the tax law of countries other than the United States, including responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting. The sole responsibility of the Custodian with regard to such tax law shall be to use reasonable efforts to assist the Fund with respect to any claim for exemption or refund under the tax law of countries for which the Fund has provided such information.
4.12 LIABILITY OF CUSTODIAN. Except as may arise from the Custodian's own negligence or willful misconduct, or the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be without liability to the Fund for any loss, liability, claim or expense resulting from or caused by anything which is part of Country Risk. The Custodian shall be liable for the acts or omissions of a Foreign Sub-Custodian to the same extent as set forth with respect to sub-custodians generally in the Agreement and, regardless of whether assets are maintained in the custody of a Foreign Sub- Custodian or a Foreign Securities System, the Custodian shall not be liable for any loss, damage, cost, expense, liability or claim resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism, or any other loss where the Foreign Sub-Custodian has otherwise acted with reasonable care.
II. Except as specifically superseded or modified herein, the terms and provisions of the Agreement shall continue to apply with full force and effect. In the event of any conflict between the terms of the Agreement prior to this Amendment and this Amendment, the terms of this Amendment shall prevail. If the Custodian is delegated the responsibilities of Foreign Custody Manager pursuant to the terms of Article 3 hereof, in the event of any conflict between the provisions of Articles 3 and 4 hereof, the provisions of Article 3 shall prevail.
[Remainder of page left intentionally blank]
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be executed in its name and behalf by its duly authorized representative as of the date first above written.
WITNESSED BY: STATE STREET BANK AND TRUST COMPANY /S/ JEAN S. CARR By: /S/ JOSEPH L. HOOLEY --------------------------------- --------------------------------- Jean S. Carr Joseph L. Hooley Asst. Vice President Executive Vice President & Associate Counsel WITNESSED BY: FPA PERENNIAL FUND, INC. /S/ SHERRY SASAKI By: /S/ J. RICHARD ATWOOD --------------------------------- --------------------------------- Sherry Sasaki J. Richard Atwood Secretary Treasurer |
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS
COUNTRY SUBCUSTODIAN
------- ------------
Argentina Citibank, N.A.
Australia Westpac Banking Corporation
Austria Erste Bank der Osterreichischen
Sparkasen AG
Bahrain HSBC Bank Middle East
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank
Belgium Fortis Bank nv-sa
Bermuda The Bank of Bermuda Limited
Bolivia Citibank, N.A.
Botswana Barclays Bank of Botswana Limited
Brazil Citibank, N.A.
Bulgaria ING Bank N.V.
Canada State Street Trust Company Canada
Chile BankBoston, N.A.
People's Republic The Hongkong and Shanghai
of China Banking Corporation Limited,
Shanghai and Shenzhen branches
Colombia Cititrust Colombia S.A. Societe Fiduciaria
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SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS
COUNTRY SUBCUSTODIAN
------- ------------
Costa Rica Banco BCT S.A.
Croatia Privredna Banka Zagreb d.d
Cyprus The Cyprus Popular Bank
Czech Republic Ceskoslovenska Obchodni
Banka, A.S.
Denmark Danske Bank A/S
Ecuador Citibank, N.A.
Egypt Egyptian British Bank S.A.E.
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Estonia Hansabank
Finland Merita Bank Plc.
France BNP Paribas, S.A.
Germany Dresdner Bank AG
Ghana Barclays Bank of Ghana Limited
Greece National Bank of Greece S.A.
Hong Kong Standard Chartered Bank
Hungary Citibank Rt.
Iceland Icebank Ltd.
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SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS
COUNTRY SUBCUSTODIAN
------- ------------
India Deutsche Bank AG
The Hongkong and Shanghai
Banking Corporation Limited
Indonesia Standard Chartered Bank
Ireland Bank of Ireland
Israel Bank Hapoalim B.M.
Italy BNP Paribas, Italian Branch
Ivory Coast Societe Generale de Banquers
en Cote d'Ivoire
Jamaica Scotiabank Jamaica Trust and Merchant
Bank Ltd.
Japan The Fuji Bank, Limited
The Sumitomo Bank, Limited
Jordan HSBC Bank Middle East
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Kazakhstan HSBC Bank Kasakhstan
Kenya Barclays Bank of Kenya Limited
Republic of Korea The Hongkong and Shanghai Banking
Corporation Limited
Latvia A/s Hansabanka
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SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS
COUNTRY SUBCUSTODIAN
------- ------------
Lebanon HSBC Bank Middle East
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Lithuania Vilniaus Bankas AB
Malaysia Standard Chartered Bank Malaysia Berhad
Mauritius The Hongkong and Shanghai
Banking Corporation Limited
Mexico Citibank Mexico, S.A.
Morocco Banque Commerciale du Maroc
Namibia Standard Bank Namibia Limited
Netherlands Fortis Bank (Nederland) N.V.
New Zealand ANZ Banking Group (New Zealand) Limited
Nigeria Stanbic Merchant Bank Nigeria Limited
Norway Christiania Bank og Kreditkasse ASA
Oman HSBC Bank Middle East
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Pakistan Deutsche Bank AG
Palestine HSBC Bank Middle East
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
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SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS
COUNTRY SUBCUSTODIAN
------- ------------
Panama BankBoston, N.A.
Peru Citibank, N.A.
Phillippines Standard Chartered Bank
Poland Bank Handlowy w Warszawie S.A.
Portugal Banco Comercial Portugues
Qatar HSBC Bank Middle East
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Romania ING Bank, N.V.
Russia Credit Suisse First Boston AO - Moscow
(as delegate of Credit Suisse
First Boston - Zurich)
Singapore The Development Bank of Singapore Limited
Slovak Republic Ceskoslovenska Obchodni Banka, A.S.
Slovenia Banka Austria Creditanstalt d.d. - Ljubljana
South Africa Standard Bank of South Africa Limited
Spain Banco Santander Central Hispano S.A.
Sri Lanka The Hongkong and Shanghai
Banking Corporation Limited
Swaziland Standard Bank Swaziland Limited
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SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS
COUNTRY SUBCUSTODIAN
------- ------------
Sweden Skandinaviska Enskilda Banken
Switzerland UBS AG
Taiwan - R.O.C. Central Trust of China
Thailand Standard Chartered Bank
Trinidad & Tobago Republic Bank Limited
Tunisia Banque Internationale Arabe de Tunisie
Turkey Citibank, N.A.
Ukraine ING Bank Ukraine
United Kingdom State Street Bank and Trust Company,
London Branch
Uruguay BankBoston, N.A.
Venezuela Citibank, N.A.
Vietnam The Hongkong and Shanghai
Banking Corporation Limited
Zambia Barclays Bank of Zambia Limited
Zimbabwe Barclays Bank of Zimbabwe Limited
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SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
DEPOSITORIES OPERATING IN NETWORK MARKETS
COUNTRY DEPOSITORIES
------- ------------
Argentina Caja de Valores S.A.
Australia Austraclear Limited
Reserve Bank Information and
Transfer System
Austria Oesterreichische Kontrolbank AG
(Wertpapiersammelbank Division)
Belgium Caisse Interprofessionnelle de Depots et
de Virements de Titres, S.A.
Banque Nationale de Belgique
Brazil Companhia Brasileira de Liquidacao e Custodia
Sistema Especial de Liquidacao e de Custodia (SELIC)
Central de Custodia e de Liquidacao Financeira de
Titulos Privados (CETIP)
Bulgaria Central Depository AD
Bulgarian National Bank
Canada Canadian Depository for Securities Limited
Chile Deposito Central de Valores S.A.
People's Republic Shanghai Securities Central Clearing &
of China Registration Corporation
Shenzhen Securities Central Clearing Co., Ltd.
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SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
DEPOSITORIES OPERATING IN NETWORK MARKETS
COUNTRY DEPOSITORIES
------- ------------
Colombia Deposito Centralizado de Valores
Costa Rica Central de Valores S.A.
Croatia Ministry of Finance
National Bank of Croatia
Sredisnja Depozitarna Agencija d.d
Czech Republic Stredisko cennych papiru
Czech National Bank
Denmark Vaerdipapircentralen (Danish Securities Center)
Egypt Misr for Clearing, Settlement, and Depository
Estonia Eesti Vaartpaberite Keskdepositoorium
Finland Finnish Central Securities Depository
France Euroclear France
Germany Clearstream Banking AG, Frankfurt
Greece Bank of Greece,
System for Monitoring Transactions in
Securities in Book-Entry Form
Hong Kong Central Clearing and Settlement System
Central Moneymarkets Unit
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SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
DEPOSITORIES OPERATING IN NETWORK MARKETS
COUNTRY DEPOSITORIES
------- ------------
Hungary Kozponti Elszamolohaz es Ertektar
(Budapest) Rt. (KELER)
India National Securities Depository Limited
Central Depository Services India Limited
Reserve Bank of India
Indonesia Bank of Indonesia
PT Kustodian Sentral Efek Indonesia
Israel Tel Aviv Stock Exchange Clearing
House Ltd. (TASE Clearinghouse)
Italy Monte Titoli S.p.A.
Ivory Coast Depositaire Central - Banque de Reglement
Jamaica Jamaica Central Securities Depository
Japan Japan Securities Depository Center (JASDEC)
Bank of Japan Net Systems
Kazakhstan Central Depository of Securities
Kenya Central Bank of Kenya
Republic of Korea Korea Securities Depository
Latvia Latvian Central Depository
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SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
DEPOSITORIES OPERATING IN NETWORK MARKETS
COUNTRY DEPOSITORIES
------- -------------
Lebanon Custodian and Clearing Center of
Financial Instruments for Lebanon
and the Middle East (Midclear) S.A.L.
Banque du Liban
Lithuania Central Securities Depository of Lithuania
Malaysia Malaysian Central Depository Sdn. Bhd.
Bank Negara Malaysia,
Scripless Securities Trading and Safekeeping
System
Mauritius Central Depository & Settlement Co. Ltd.
Bank of Mauritius
Mexico S.D. INDEVAL
(Instituto para el Deposito de Valores)
Morocco Maroclear
Netherlands Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)
New Zealand New Zealand Central Securities
Depository Limited
Nigeria Central Securities Clearing System Limited
Norway Verdipapirsentralen (Norwegian Central
Securities Depository)
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SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
DEPOSITORIES OPERATING IN NETWORK MARKETS
COUNTRY DEPOSITORIES
------- ------------
Oman Muscat Depository & Securities
Registration Company, SAOC
Pakistan Central Depository Company of Pakistan Limited
State Bank of Pakistan
Palestine Clearing Depository and Settlement, a department
of the Palestine Stock Exchange
Peru Caja de Valores y Liquidaciones, Institucion de
Compensacion y Liquidacion de Valores S.A
Phillippines Phillippine Central Depository Inc.
Registry of Scripless Securities
(ROSS) of the Bureau of Treasury
Poland National Depository of Securities
(Krajowy Depozyt Papierow Wartosciowych SA)
Central Treasury Bills Registrar
Portugal Central de Valores Mobilarios
Qatar Central Clearing and Registration (CCR), a
department of the Doha Securities Market
Romania National Securities Clearing, Settlement and
Depository Company
Bucharest Stock Exchange Registry Division
National Bank of Romania
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SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
DEPOSITORIES OPERATING IN NETWORK MARKETS
COUNTRY DEPOSITORIES
------- ------------
Singapore Central Depository (Pte) Limited
Monetary Authority of Singapore
Slovak Republic Stredisko cennych papierov
National Bank of Slovakia
Slovenia Klirinsko Depotna Druzba d.d
South Africa Central Depository Limited
Share Transactions Totally Electronic
(STRATE) Ltd.
Spain Servicio de Compensacion y
Liquidacion de Valores, S.A.
Banco de Espana, Central de Anotaciones en Cuenta
Sri Lanka Central Depository System (Pvt) Limited
Sweden Vardepapperscentralen VPC AB
(Swedish Central Securities Depository)
Switzerland SegaIntersettle AG (SIS)
Taiwan - R.O.C. Taiwan Securities Central Depository Co., Ltd.
Thailand Thailand Securities Depository Company Limited
Tunisia Societe Tunisienne Interprofessionelle pour la
Compensation et de Depots des Valeurs Mobilieres
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SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
DEPOSITORIES OPERATING IN NETWORK MARKETS
COUNTRY DEPOSITORIES
------- ------------
Turkey Takas ve Saklama Bankasi A.S. (TAKASBANK)
Central Bank of Turkey
Ukraine National Bank of Ukraine
United Kingdom Central Gilts Office and
Central Moneymarkets Office
Venezuela Banco Central de Venezuela
Zambia LuSE Central Shares Depository Limited
Bank of Zambia
TRANSNATIONAL
Euroclear
Clearstream Banking AG
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SCHEDULE C
MARKET INFORMATION
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION
------------------------------- -----------------
(SCHEDULED FREQUENCY)
THE GUIDE TO CUSTODY IN WORLD MARKETS An overview of settlement and
(hardcopy annually and regular safekeeping procedures, custody
website updates) practices and foreign investor
considerations for the markets in which
State Street offers custodial services.
GLOBAL CUSTODY NETWORK REVIEW Information relating to Foreign
(annually) Sub-Custodians in State Street's Global
Custody Network. The Review stands as an
integral part of the materials that
State Street provides to its U.S. mutual
fund clients to assist them in complying
with SEC Rule 17f-5. The Review also
gives insight into State Street's market
expansion and Foreign Sub-Custodian
selection processes, as well as the
procedures and controls used to monitor
the financial condition and performance
of our Foreign Sub-Custodian banks.
SECURITIES DEPOSITORY REVIEW Custody risk analyses of the Foreign
(annually) Securities Depositories presently
operating in Network markets. This
publication is an integral part of the
materials that State Street provides to
its U.S. mutual fund clients to meet
informational obligations created by SEC
Rule 17f-7.
GLOBAL LEGAL SURVEY With respect to each market in which
(annually) State Street offers custodial services,
opinions relating to whether local law
restricts (i) access of a fund's
independent public accountants to books
and records of a Foreign Sub-Custodian
or Foreign Securities System, (ii) a
fund's ability to recover in the event
of bankruptcy or insolvency of a Foreign
Sub-Custodian or Foreign Securities
System, (iii) a fund's ability to
recover in the event of a loss by a
Foreign Sub-Custodian or Foreign
Securities System, and (iv) the ability
of a foreign investor to convert cash
and cash equivalents to U.S. dollars.
SUBCUSTODIAN AGREEMENTS Copies of the contracts that State
(annually) Street has entered into with each
Foreign Sub-Custodian that maintains
U.S. mutual fund assets in the markets
in which State Street offers custodial
services.
GLOBAL MARKET BULLETIN Information on changing settlement and
(daily or as necessary) custody conditions in markets where
State Street offers custodial services.
Includes changes in market and tax
regulations, depository developments,
dematerialization information, as well
as other market changes that may impact
State Street's clients.
Foreign Custody Advisories For those markets where State Street
(as necessary) offers custodial services that exhibit
special risks or infrastructures
impacting custody, State Street issues
market advisories to highlight those
unique market factors which might impact
our ability to offer recognized custody
service levels.
Material Change Notices Informational letters and accompanying
(presently on a quarterly materials confirming State Street's
basis or as otherwise necessary) foreign custody arrangements, including
a summary of material changes with
Foreign Sub-Custodians that have
occurred during the previous quarter.
The notices also identify any material
changes in the custodial risks
associated with maintaining assets with
Foreign Securities Depositories.
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