UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number | 811-852 |
|
FPA PARAMOUNT FUND, INC. |
(Exact name of registrant as specified in charter) |
|
11400 WEST OLYMPIC BLVD., SUITE 1200, LOS ANGELES, CALIFORNIA | | 90064 |
(Address of principal executive offices) | | (Zip code) |
|
J. RICHARD ATWOOD,
11400 WEST OLYMPIC BLVD., SUITE 1200, LOS ANGELES, CALIFORNIA 90064 |
(Name and address of agent for service) |
|
Registrant’s telephone number, including area code: | 310-473-0225 | |
|
Date of fiscal year end: | SEPTEMBER 30 | |
|
Date of reporting period: | MARCH 31, 2009 | |
| | | | | | | | |
Item 1. Report to Stockholders.
FPA Paramount Fund, Inc.
Semi-Annual Report
March 31, 2009
Distributor:
FPA FUND DISTRIBUTORS, INC.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
51751
LETTER TO SHAREHOLDERS
Following the market's more than 20% fourth quarter decline, not to mention the 35-40% loss for the year, the drop continued into the first quarter, reaching an S&P Index close of 677 on March 9, a further 25% decline from the end of December.
From that date into mid April we saw a powerful market advance which may represent the end of the bear market, or just a temporary bear market rally, like the many we experienced during the 1930s. Time will tell.
Meanwhile, the world economy is in a parlous state. Things are bad and getting worse. Structural defects in the financial system are far from fixed. About the best that can be said is that the economy seems to be deteriorating at a decreasing rate. This may be driven by excessively large inventory corrections earlier in the year which would have caused production to be weaker than final demand.
On the negative side, the unemployment rate, 7.2% at year-end, is up to 8.5% and could reach 10% by December. Combined with the dramatic increase in the consumer savings rate, from nil to 5% and likely to increase further, this suggests that a consumer-led economic recovery is unlikely. As a further confirmation, more than 10% of U.S. home mortgages are delinquent, the worst in decades.
Amidst the gloomy statistics there are some encouraging signs. Prices for copper, scrap steel, and oil are all up. Though typically an indication of an improving economy, they may be no more than a temporary blip, driven by inventory depletion or speculative activities.
Paramount's performance in the first quarter (a 2% decline) was dramatically better than the fourth quarter of 2008, and relative to the market indexes (Russell 2500 and S&P both down 11%) was one of the best in memory.
To a considerable extent, the portfolio's best first-quarter performers reflected a recovery from especially weak performance in the fourth quarter. This included oil service companies FMC (+32%) and Noble (+9%), companies supporting life sciences research Life Technologies (+39%) and Charles River Labs (+4%), and retailers Car Max (+58%) and Signet (+32%).
On the negative side, the only readily identifiable theme was weakness among many industrial companies. Holdings Actuant, Graco, Brady, Clarcor, Wabco and Franklin Electric declined an average of about 25%. We added to positions in several of these companies as the price declines made valuations even more attractive.
The table below shows performance for both FPA Paramount and the benchmark Russell 2500, as well as leading large-cap indexes. Results for the longer 9-year period (since we assumed management of the Fund) have been remarkably good, with an advantage over the market (S&P 500) of 8.5 points annually. Performance for shorter periods has been generally competitive.
| | | Periods Ended March 31, 2009 | |
| | | First
Quarter | | One
Year | | Three
Years* | | Five
Years* | | Nine
Years* | |
| FPA Paramount† | | | (2.4 | )% | | | (33.7 | )% | | | (14.0 | )% | | | (3.4 | )% | | | 3.5 | % | |
| Russell 2500 | | | (11.4 | )% | | | (38.2 | )% | | | (16.0 | )% | | | (4.5 | )% | | | (0.4 | )% | |
| S&P 500 | | | (11.0 | )% | | | (38.1 | )% | | | (13.1 | )% | | | (4.8 | )% | | | (5.1 | )% | |
| Nasdaq | | | (2.8 | )% | | | (32.2 | )% | | | (12.5 | )% | | | (4.4 | )% | | | (11.3 | )% | |
* Annualized Returns
† Does not reflect deduction of the sales charge which, if deducted, would reduce the performance shown.
One of the few silver linings in an otherwise gloomy bear market is that several companies whose past high valuations meant that we could only admire them from afar have now declined in price enough to make them viable purchase candidates. The circumstances which have led to this new situation are a combination of much lower overall market prices and some company-specific business concerns. The result is that these valuations have declined from well above 20x to only 12x trailing earnings. This for companies with historic EPS growth rates in the mid-teens and returns on equity of close to 30%.
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The two companies we are describing are Varian Medical and VCA Antech. Both share most, if not all, of the attributes we are always seeking:
• High returns on capital
• Good balance sheets
• Leading market shares
• Attractive reinvestment opportunities
• Barriers to entry
Varian Medical, which we added to the portfolio in February, is the worldwide leader in manufacturing equipment for therapeutic radiation, generally for cancer treatment. With a market share of about 50%, Varian is well ahead of competitors Siemens, Elekta, and Tomo Therapy.
With cancer mostly a disease of the old — 75% of cancers are diagnosed in those over 55 — demographics are clearly a powerful source of increased demand. In addition, improving worldwide standards of care represent another tailwind for Varian.
The industry has also benefitted from a number of important technology changes, permitting the radiation beam to be more precisely targeted on the tumor as well as treatment plans that minimize damage to healthy tissue. These and other improvements have induced hospitals and other treatment centers to upgrade or completely replace older equipment.
With the largest base of installed equipment in the industry, Varian has a considerable competitive advantage. Customers are loath to change their current equipment supplier, whether for new equipment purchases or for major upgrades. With Varian doing a good job of service and technology development, they have been quite successful in maintaining this customer base intact.
We noted earlier that each of these firms had some company-specific business issues. In the case of Varian the problem is economic pressure on hospitals and their inability to fund otherwise desirable capital expenditures. Although healthcare is often regarded as recession resistant, the fact is that most hospitals are under severe economic pressure from a decline in elective surgeries and an increase in bad debt, the latter driven by the unemployed losing insurance coverage, and patients having difficulty meeting their copayments, whether from Medicare or from private insurance. In addition, non-profit hospitals are also stressed by shrunken endowments and lower charitable contributions.
The consequence of these economic pressures is that big-ticket capital expenditures, and a new Varian linear accelerator at $2-3 million certainly qualifies, have become very hard to finance. Fortunately for Varian, there are several partial offsets. First, radiation treatment is generally a profitable activity for hospitals, so investing in up-to-date radiation equipment earns an attractive return on investment. Second, most healthcare markets are competitive. A hospital with outdated equipment will lose share and profits to other hospitals and to free-standing radiation centers, run by groups of radiation oncologists. Finally, and perhaps most important, new equipment yields better clinical outcomes.
At this point, new orders from U.S. hospitals are still positive year over year, but are likely to start declining in a quarter or two. Foreign orders are showing greater strength. With considerable backlog on the books, and lead-times of perhaps 9-12 months, revenues should hold up longer than orders, but will also eventually flatten or decline.
We view this likely slowdown as cyclical and not secular. With our long investment time horizon, we believe that Varian's temporary challenges and its resulting stock price decline from $65 into the high $20s has given us a very attractive buying opportunity, one likely to reap rewards over future years.
Our second recent purchase, VCA Antech (ticker symbol WOOF), was added to the portfolio in third quarter 2008. It is the leading operator of veterinary hospitals and the U.S. leader in veterinary diagnostic labs.
VCA's vet hospital business is very much acquisition driven, and they have been at it for well over two decades. They pay a relatively modest price (about 5x EBITDA), remove a lot of administrative burdens from the vets, and realize economies in
2
purchasing and other areas. The business has no reimbursement or bad debt risk, and has benefitted over the years from a trend toward better pet care and increased use of diagnostic testing. It provides VCA with extensive reinvestment opportunities and earns operating margins in the mid- to high-teens.
VCA's other business, operating vet central labs, is even more attractive, with operating margins over 30%. VCA along with competitor Idexx dominate the business, with a combined market share of 60-70%. There are significant economies of scale and the successful entry of a new competitor is highly unlikely.
As in the case of Varian, the market does have some worries about VCA's business, also driven by the economic cycle. Though many had hoped that pet care would be immune to recession, the reality has been that although many pet owners would never skimp on their cats and dogs, there are others who are willing to delay check-ups or pay for a more limited panel of tests than in the past. The result has been a flattening in hospital revenues, though the labs have held up better.
VCA has met the challenge with cost reductions and as a result the damage to earnings has been minimized. Nevertheless the market is concerned and has driven VCA's stock price from over $45 to the teens. As was the case with Varian, we have taken a much longer-term view, and viewed the price decline as an opportunity to establish a position in a company that for many years was out of our valuation range.
Respectfully submitted,
Eric S. Ende
President & Portfolio Manager
April 16, 2009
The discussion of Fund investments represents the views of the Fund's managers at the time of this report and are subject to change without notice. References to individual securities are for informational purposes only and should not be construed as recommendations to purchase or sell individual securities. While the Fund's managers believe that the Fund's holdings are value stocks, there can be no assurance that others will consider them as such. Further, investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
3
FORWARD LOOKING STATEMENT DISCLOSURE
As mutual fund managers, one of our responsibilities is to communicate with shareholders in an open and direct manner. Insofar as some of our opinions and comments in our letters to shareholders are based on current management expectations, they are considered "forward-looking statements" that may or may not be accurate over the long term. While we believe we have a reasonable basis for our comments and we have confidence in our opinions, actual results may differ materially from those we anticipate. You can identify forward-looking statements by words such as "believe," "expect," "may," "anticipate," and other similar expressions when discussing prospects for particular portfolio holdings and/or the markets, generally. We cannot, however, assure future results and disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. Further, information provided in th is report should not be construed as a recommendation to purchase or sell any particular security.
HISTORICAL PERFORMANCE
| | | Average Annual Total Return
Periods Ended March 31, 2009 | |
| | | 1 Year | | 3 Years | | 5 Years | | 10 Years | |
FPA Paramount Fund, Inc.
(NAV) | | | (33.67 | )% | | | (13.99 | )% | | | (3.39 | )% | | | 2.90 | % | |
FPA Paramount Fund, Inc.
(Net of Sales Charge) | | | (37.15 | )% | | | (15.52 | )% | | | (4.43 | )% | | | 2.35 | % | |
| Lipper Mid-Cap Core Average | | | (38.09 | )% | | | (14.51 | )% | | | (4.15 | )% | | | 2.85 | % | |
| Russell 2500 Index | | | (38.23 | )% | | | (15.98 | )% | | | (4.45 | )% | | | 3.33 | % | |
The table presented above shows the average annual total return, which includes reinvestment of all distributions, for several different periods ended March 31, 2009 for the Fund and comparative indices of securities prices. The Russell 2500 Index consists of the 2,500 smallest companies in the Russell 3000 total capitalization universe. This index is a measure of small to medium capitalization stock performance. The Lipper Mid-Cap Core Average provides an additional comparison of how your Fund performed in relation to other mutual funds with similar objectives. The data quoted represents past performance, and an investment in the Fund may fluctuate so that an investor's shares when redeemed may be worth more or less than their original cost. Since investors purchase shares of the Fund with varying sales charges depending primarily on volume purchased, the returns for the Fund are presented at net asset value (NAV) and also net of the curren t maximum sales charge of 5.25% of the offering price.
4
PORTFOLIO SUMMARY
March 31, 2009
| Common Stocks | | | | | | | 93.3 | % | |
| Business Services & Supplies | | | 27.6 | % | | | | | |
| Producer Durable Goods | | | 16.4 | % | | | | | |
| Retailing | | | 13.3 | % | | | | | |
| Transportation | | | 9.9 | % | | | | | |
| Health Care | | | 8.6 | % | | | | | |
| Energy | | | 7.9 | % | | | | | |
| Technology | | | 5.2 | % | | | | | |
| Financial | | | 3.5 | % | | | | | |
| Entertainment | | | 0.9 | % | | | | | |
| Short-Term Investments | | | | | | | 6.8 | % | |
| Other Assets and Liabilities, net | | | | | | | -0.1 | % | |
| Total Net Assets | | | | | | | 100.0 | % | |
MAJOR PORTFOLIO CHANGES
Six Months Ended March 31, 2009
| | | Shares | |
| NET PURCHASES | |
| Common Stocks | |
| Actuant Corporation (Class A) (1) | | | 242,500 | | |
| FMC Technologies, Inc. (1) | | | 126,700 | | |
| VCA Antech, Inc. | | | 99,900 | | |
| Varian Medical Systems, Inc. (1) | | | 25,000 | | |
| WABCO Holdings Inc. | | | 230,000 | | |
| NET SALES | |
| Common Stocks | |
| AmSurg Corporation (2) | | | 222,200 | | |
| Brady Corporation (Class A) | | | 83,200 | | |
| Brown & Brown, Inc. | | | 117,900 | | |
| CarMax, Inc. | | | 90,300 | | |
| Carnival Corporation (Class A) | | | 112,900 | | |
| CLARCOR Inc. | | | 66,800 | | |
| Cognex Corporation (2) | | | 483,700 | | |
| Heartland Express, Inc. | | | 115,100 | | |
| Helix Energy Solutions Group, Inc. | | | 56,300 | | |
| IDEX Corporation | | | 110,400 | | |
| Knight Transportation, Inc. | | | 108,300 | | |
| Lincare Holdings Inc. | | | 81,000 | | |
| Microchip Technology Incorporated | | | 42,800 | | |
| O'Reilly Automotive, Inc. | | | 156,700 | | |
| Plantronics, Inc. (2) | | | 486,300 | | |
| ScanSource, Inc. | | | 77,800 | | |
| Signet Jewelers Ltd. | | | 67,600 | | |
| Zebra Technologies Corporation (Class A) | | | 41,600 | | |
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
5
PORTFOLIO OF INVESTMENTS
March 31, 2009
| COMMON STOCKS | | Shares | | Value | |
| BUSINESS SERVICES & SUPPLIES — 27.6% | |
| Brady Corporation (Class A) | | | 258,600 | | | $ | 4,559,118 | | |
| Charles River Laboratories International, Inc.* | | | 279,100 | | | | 7,594,311 | | |
| CLARCOR Inc. | | | 176,400 | | | | 4,443,516 | | |
| Copart, Inc.* | | | 186,900 | | | | 5,543,454 | | |
| Landauer, Inc. | | | 3,800 | | | | 192,584 | | |
| Life Technologies Corporation* | | | 311,600 | | | | 10,120,768 | | |
| Manpower Inc. | | | 153,800 | | | | 4,849,314 | | |
| ScanSource, Inc.* | | | 488,300 | | | | 9,072,614 | | |
| | | $ | 46,375,679 | | |
| PRODUCER DURABLES — 16.4% | |
| Actuant Corporation (Class A) | | | 242,500 | | | $ | 2,505,025 | | |
| Franklin Electric Co., Inc. | | | 160,100 | | | | 3,543,013 | | |
| Graco Inc. | | | 208,000 | | | | 3,550,560 | | |
| HNI Corporation | | | 379,500 | | | | 3,946,800 | | |
| IDEX Corporation | | | 191,850 | | | | 4,195,760 | | |
| WABCO Holdings Inc. | | | 380,000 | | | | 4,677,800 | | |
| Zebra Technologies Corporation (Class A)* | | | 274,900 | | | | 5,228,598 | | |
| | | $ | 27,647,556 | | |
| RETAILING — 13.3% | |
| CarMax, Inc.* | | | 546,000 | | | $ | 6,792,240 | | |
| O'Reilly Automotive, Inc.* | | | 288,600 | | | | 10,103,886 | | |
| Signet Jewelers Ltd. | | | 472,400 | | | | 5,408,980 | | |
| | | $ | 22,305,106 | | |
| TRANSPORTATION — 9.9% | |
| Heartland Express, Inc. | | | 577,000 | | | $ | 8,545,370 | | |
| Knight Transporation, Inc. | | | 530,600 | | | | 8,043,896 | | |
| | | $ | 16,589,266 | | |
| HEALTH CARE — 8.6% | |
| Bio-Rad Laboratories, Inc. (Class A)* | | | 81,200 | | | $ | 5,351,080 | | |
| Lincare Holdings Inc.* | | | 243,700 | | | | 5,312,660 | | |
| VCA Antech, Inc.* | | | 131,000 | | | | 2,954,050 | | |
| Varian Medical Systems, Inc.* | | | 25,000 | | | | 761,000 | | |
| | | $ | 14,378,790 | | |
6
PORTFOLIO OF INVESTMENTS
March 31, 2009
| COMMON STOCKS — Continued | | Shares or
Principal
Amount | | Value | |
| ENERGY — 7.9% | |
| FMC Technologies, Inc.* | | | 126,700 | | | $ | 3,974,579 | | |
| Helix Energy Solutions Group, Inc.* | | | 385,800 | | | | 1,983,012 | | |
| Noble Corporation | | | 307,200 | | | | 7,400,448 | | |
| | | $ | 13,358,039 | | |
| TECHNOLOGY — 5.2% | |
| Maxim Integrated Products, Inc. | | | 235,400 | | | $ | 3,109,634 | | |
| Microchip Technology Incorporated | | | 266,000 | | | | 5,636,540 | | |
| | | $ | 8,746,174 | | |
| FINANCIAL — 3.5% | |
| Brown & Brown, Inc. | | | 311,200 | | | $ | 5,884,792 | | |
| ENTERTAINMENT — 0.9% | |
| Carnival Corporation (Class A)* | | | 67,300 | | | $ | 1,453,680 | | |
| TOTAL COMMON STOCKS — 93.3% (Cost $254,039,825) | | | | | | $ | 156,739,082 | | |
| SHORT-TERM INVESTMENTS — 6.8% | |
| General Electric Capital Services, Inc. — 0.15% 04/01/09 | | $ | 6,000,000 | | | $ | 6,000,000 | | |
| Toyota Motor Credit Corporation — 0.18% 04/07/09 | | | 5,465,000 | | | | 5,464,836 | | |
| TOTAL SHORT-TERM INVESTMENTS (Cost $11,464,836) | | | | | | $ | 11,464,836 | | |
| TOTAL INVESTMENTS — 100.1% (Cost $265,504,661) | | | | | | $ | 168,203,918 | | |
| Other assets and liabilities, net — (0.1)% | | | | | | | (153,905 | ) | |
| TOTAL NET ASSETS — 100% | | | | | | $ | 168,050,013 | | |
* Non-income producing security
See notes to financial statements.
7
STATEMENT OF ASSETS AND LIABILITIES
March 31, 2009
| ASSETS | |
| Investments at value: | |
Investment securities — at market value
(identified cost $254,039,825) | | $ | 156,739,082 | | | | | | |
Short-term investments — at amortized cost
(maturities 60 days or less) | | | 11,464,836 | | | $ | 168,203,918 | | |
| Cash | | | | | | | 539 | | |
| Receivable for: | |
| Capital stock sold | | $ | 122,884 | | | | | | |
| Dividends | | | 13,623 | | | | 136,507 | | |
| | | | | | | $ | 168,340,964 | | |
| LIABILITIES | |
| Payable for: | |
| Capital stock repurchased | | $ | 153,440 | | | | | | |
| Advisory fees and financial services | | | 103,011 | | | | | | |
| Accrued expenses | | | 34,500 | | | | 290,951 | | |
| NET ASSETS | | | | | | $ | 168,050,013 | | |
| SUMMARY OF SHAREHOLDERS' EQUITY | |
Capital Stock — par value $0.25 per share: authorized
100,000,000 shares; outstanding 16,285,874 shares | | | | | | $ | 4,071,468 | | |
| Additional Paid-in Capital | | | | | | | 326,312,267 | | |
| Accumulated net realized loss on investments | | | | | | | (65,000,595 | ) | |
| Distributions in excess of net investment income | | | | | | | (32,384 | ) | |
| Unrealized depreciation of investments | | | | | | | (97,300,743 | ) | |
| NET ASSETS | | | | | | $ | 168,050,013 | | |
NET ASSET VALUE, REDEMPTION PRICE AND
MAXIMUM OFFERING PRICE PER SHARE | |
Net asset value and redemption price per share
(net assets divided by shares outstanding) | | | | | | $ | 10.32 | | |
Maximum offering price per share
(100/94.75 of per share net asset value) | | | | | | $ | 10.89 | | |
See notes to financial statements.
8
STATEMENT OF OPERATIONS
March 31, 2009
| INVESTMENT INCOME | |
| Dividends | | | | | | $ | 1,146,778 | | |
| Interest | | | | | | | 28,053 | | |
| | | | | | | $ | 1,174,831 | | |
| EXPENSES: — NOTE | |
| Advisory fees | | $ | 623,016 | | | | | | |
| Financial services | | | 92,002 | | | | | | |
| Transfer agent fees and expenses | | | 91,948 | | | | | | |
| Registration fees | | | 33,956 | | | | | | |
| Custodian fees and expenses | | | 33,417 | | | | | | |
| Audit and tax fees | | | 32,450 | | | | | | |
| Legal fees | | | 32,117 | | | | | | |
| Reports to shareholders | | | 23,842 | | | | | | |
| Directors fees and expenses | | | 13,500 | | | | | | |
| Other fees and expenses | | | 8,206 | | | | 984,454 | | |
| Net investment income | | | | | | $ | 190,377 | | |
| NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS | |
| Net realized loss on investments: | |
| Proceeds from sales of investment securities | | $ | 54,392,309 | | | | | | |
| Cost of investment securities sold | | | 76,468,434 | | | | | | |
| Net realized loss on investments | | | | | | $ | (22,076,125 | ) | |
| Change in unrealized depreciation of investments: | |
| Unrealized depreciation at beginning of period | | $ | (28,183,435 | ) | | | | | |
| Unrealized depreciation at end of period | | | (97,300,743 | ) | | | | | |
| Change in unrealized depreciation of investments | | | | | | | (69,117,308 | ) | |
| Net realized and unrealized loss on investments | | | | | | $ | (91,193,433 | ) | |
| CHANGE IN NET ASSETS RESULTING FROM OPERATIONS | | | | | | $ | (91,003,056 | ) | |
See notes to financial statements.
9
STATEMENT OF CHANGES IN NET ASSETS
| | | For the Six Months Ended
March 31, 2009 | | For the Year Ended
September 30, 2008 | |
| CHANGES IN NET ASSETS | |
| Operations: | |
| Net investment income | | $ | 190,377 | | | | | | | $ | 1,032,107 | | | | | | |
| Net realized gain (loss) on investments | | | (22,076,125 | ) | | | | | | | 21,387,837 | | | | | | |
Change in unrealized depreciation
of investments | | | (69,117,308 | ) | | | | | | | (66,185,926 | ) | | | | | |
Change in net assets resulting
from operations | | | | | | $ | (91,003,056 | ) | | | | | | $ | (43,765,982 | ) | |
Distributions to shareholders from net
investment income | | | | | | | (1,162,068 | ) | | | | | | | (227,343 | ) | |
| Capital Stock transactions: | |
| Proceeds from Capital Stock sold | | $ | 7,960,412 | | | | | | | $ | 22,185,401 | | | | | | |
Proceeds from shares issued to shareholders upon
reinvestment of dividends and distributions | | | 964,591 | | | | | | | | 170,618 | | | | | | |
| Cost of Capital Stock repurchased* | | | (45,355,798 | ) | | | (36,430,795 | ) | | | (79,091,169 | ) | | | (56,735,150 | ) | |
| Total change in net assets | | | | | | $ | (128,595,919 | ) | | | | | | $ | (100,728,475 | ) | |
| NET ASSETS | |
| Beginning of period | | | | | | | 296,645,932 | | | | | | | | 397,374,407 | | |
| End of period | | | | | | $ | 168,050,013 | | | | | | | $ | 296,645,932 | | |
CHANGE IN CAPITAL STOCK
OUTSTANDING | |
| Shares of Capital Stock sold | | | | | | | 769,972 | | | | | | | | 1,350,012 | | |
Shares issued to shareholders upon
reinvestment of dividends and distributions | | | | | | | 97,829 | | | | | | | | 10,131 | | |
| Shares of Capital Stock repurchased | | | | | | | (4,349,611 | ) | | | | | | | (4,881,955 | ) | |
| Change in Capital Stock outstanding | | | | | | | (3,481,810 | ) | | | | | | | (3,521,812 | ) | |
* Net of redemption fees of $10,916 and $25,653 for the periods ended March 31, 2009, and September 30, 2008, respectively.
See notes to financial statements.
10
FINANCIAL HIGHLIGHTS
Selected Data for Each Share of Capital Stock Outstanding Throughout Each Period
| | | Six
Months
Ended | | Year Ended September 30, | |
| | | March 31, | | | |
| | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | 2004 | |
| Per share operating performance: | |
| Net asset value at beginning of period | | $ | 15.01 | | | $ | 17.06 | | | $ | 15.62 | | | $ | 15.02 | | | $ | 13.01 | | | $ | 10.79 | | |
| Income from investment operations: | |
| Net investment income (loss) | | $ | 0.02 | | | | 0.05 | | | $ | 0.14 | | | $ | 0.12 | | | $ | 0.04 | | | $ | (0.01 | ) | |
Net realized and unrealized gain (loss) on
investment securities | | | (4.64 | ) | | | (2.09 | ) | | | 1.47 | | | | 0.60 | | | | 1.97 | | | | 2.23 | | |
| Total from investment operations | | $ | (4.62 | ) | | | (2.04 | ) | | $ | 1.61 | | | $ | 0.72 | | | $ | 2.01 | | | $ | 2.22 | | |
| Less dividends from net investment income | | $ | (0.07 | ) | | $ | (0.01 | ) | | $ | (0.17 | ) | | $ | (0.12 | ) | | | — | | | | — | | |
| Redemption fees | | | — | * | | | — | * | | | — | * | | | — | * | | | — | * | | | — | * | |
| Net asset value at end of period | | $ | 10.32 | | | $ | 15.01 | | | $ | 17.06 | | | $ | 15.62 | | | $ | 15.02 | | | $ | 13.01 | | |
| Total investment return** | | | (30.79 | )% | | | (11.96 | )% | | | 10.30 | % | | | 4.79 | % | | | 15.45 | % | | | 20.57 | % | |
| Ratios/supplemental data: | |
| Net assets at end of period (in 000's) | | $ | 168,050 | | | $ | 296,646 | | | $ | 397,374 | | | $ | 595,825 | | | $ | 345,027 | | | $ | 207,907 | | |
| Ratio of expenses to average net assets | | | 1.09 | %† | | | 0.89 | % | | | 0.90 | % | | | 0.85 | % | | | 0.89 | % | | | 0.99 | % | |
Ratio of net investment income (loss) to
average net assets | | | 0.21 | %† | | | 0.29 | % | | | 0.74 | % | | | 0.89 | % | | | 0.30 | % | | | (0.16 | )% | |
| Portfolio turnover rate | | | 22 | %† | | | 12 | % | | | 17 | % | | | 15 | % | | | 13 | % | | | 16 | % | |
* Rounds to less than $0.01 per share.
** Return is based on net asset value per share, adjusted for reinvestment of distributions, and does not reflect deduction of the sales charge. The return for the period ended March 31, 2009 is not annualized.
† Annualized.
See notes to financial statements.
11
NOTES TO FINANCIAL STATEMENTS
March 31, 2009
NOTE 1 — Significant Accounting Policies
The Fund is registered under the Investment Company Act of 1940, as a diversified, open-end management investment company. The Fund's objective is a high total investment return, including capital appreciation and income, from a diversified portfolio of securities. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements.
A. Security Valuation
Securities listed or traded on a national securities exchange are valued at the last sale price. If there was not a sale that day, these securities are valued at the last bid price. Securities traded in the NASDAQ National Market System are valued at the NASDAQ Official Closing Price on the last business day of the period, or if there was not a sale that day, at the last bid price. Unlisted securities are valued at the most recent bid price. Short-term investments with maturities of 60 days or less are valued at amortized cost, 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, 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.
NOTE 2 — Purchases of Investment Securities
Cost of purchases of investment securities (excluding short-term investments with maturities of 60 days or less) aggregated $20,319,581 for the six months ended March 31, 2009. Realized gains or losses are based on the specific identification method. The cost of investment securities (excluding short-term investments with maturities of 60 days or less at the time of purchase) held at March 31, 2009 for federal income tax purposes was $254,060,935. Gross unrealized appreciation and depreciation for all securities at March 31, 2009 for federal income tax purposes was $2,684,588 and $100,006,441, respectively resulting in net unrealized depreciation of $97,321,853. For federal income tax purposes, the Fund currently has accumulated net realized losses from prior years in the amount of $42,903,150. The ability to carry these losses forward expires in 2009. The Fund has realized an additional $22,076,125 of losses in the current period. The amoun t of losses carried forward into future years, if any, will be based on the Fund's operations for the entire year. The Fund adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes, on October 1, 2007. The implementation of FIN 48 resulted in no liability for unrecognized tax benefits and no change to the beginning net asset value of the Fund. As of and during the period ended March 31, 2009, the Fund did not have any liability for unrecognized tax benefits. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the period, the Fund did not incur any interest or penalties. The Fund is not subject to examination by U.S. federal tax authorities for years ended before September 30, 2004 o r by state tax authorities for years ended before September 30, 2003.
12
NOTES TO FINANCIAL STATEMENTS
Continued
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, LLC (the "Adviser"). Under the terms of this Agreement, the Fund pays the Adviser a monthly fee calculated at the annual rate of 0.75% of the first $50 million of the Fund's average daily net assets and 0.65% of the average daily net assets in excess of $50 million. In addition, the Fund reimburses the Adviser monthly for the costs incurred by the Adviser in providing financial services to the Fund, providing, however, that this reimbursement shall not exceed 0.1% of the average daily net assets for any fiscal year. The Agreement 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 11/2% of the first $30 million and 1% of t he remaining average net assets of the Fund for the year.
For the six months ended March 31, 2009, the Fund paid aggregate fees, excluding expenses, of $13,500 to all Directors who are not affiliated persons of the Adviser. Certain officers of the Fund are also officers of the Adviser and FPA Fund Distributors, Inc.
NOTE 4 — Redemption Fees
A redemption fee 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. For the six months ended March 31, 2009, the Fund collected $10,916 in redemption fees, which amounted to less than $0.01 per share.
NOTE 5 — Distributor
For the six months ended March 31, 2009, FPA Fund Distributors, Inc. ("Distributors"), a wholly owned subsidiary of the Adviser, received $853 in net Fund share sales commissions after reallowance to other dealers. The Distributor pays its own overhead and general administrative expenses, the cost of supplemental sales literature, promotion and advertising.
NOTE 6 — Disclosure of Fair Value Measurements
The Fund adopted Statement of Financial Accounting Standards No. 157 ("FAS 157"), Fair Value Measurements, on October 1, 2007. FAS 157 requires the Fund to classify its assets based on valuation method, using three levels. Level 1 investment securities are valued based on quoted market prices in active markets for identical assets. Level 2 investment securities are valued based on significant observable market inputs, such as quoted prices for similar assets and quoted prices in inactive markets or other market observable inputs. Level 3 investment securities are valued using significant unobservable inputs that reflect the Fund's determination of assumptions that market participants might reasonably use in valuing the assets. The valuation levels are not necessarily an indication of the risk associated with investing in those securities. The following table presents the valuation levels of the Fund's investments as of March 31, 2009:
| Level 1 — Quoted Prices | | $ | 156,739,082 | | |
Level 2 — Other significant
observable inputs | | | 11,464,836 | * | |
Level 3 — Significant unobservable
inputs | | | — | | |
| Total investments | | $ | 168,203,918 | | |
* Comprised solely of short-term investments with maturities of 60 days or less that are valued at amortized cost.
NOTE 7 — Line of Credit
On February 27, 2009, the Fund, along with FPA Perennial Fund, Inc., collectively entered into an agreement that enables them to participate in a $50 million unsecured line of credit with State Street Bank and Trust. Borrowings will be made solely to temporarily finance the repurchase of Capital Stock. Interest is charged to each Fund based on its borrowings at a rate per annum equal to the higher of the Federal Funds Rate or the Overnight LIBOR Rate plus 0.625%. In addition, the Fund and FPA Perennial Fund, Inc. pay a commitment fee of 0.125% per annum on any unused portion of the line of credit. During the period ended March 31, 2009, the Fund had no borrowings under the agreement.
13
SHAREHOLDER EXPENSE EXAMPLE
March 31, 2009
Fund Expenses
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including advisory and administrative fees; shareholder service fees; and other Fund expenses. The Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the year and held for the entire year.
Actual Expenses
The information in the table under the heading "Actual Performance" provides information about actual account values and actual expenses. You may use the information in this column, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000= 8.6), then multiply the result by the number in the first column in the row entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The information in the table under the heading "Hypothetical Performance (5% return before expenses)" provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the information under the heading "Hypothetical Performance (5% return before expenses)" is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| | | Actual
Performance | | Hypothetical
Performance
(5% return
before
expenses) | |
Beginning Account Value
September 30, 2008 | | $ | 1,000.00 | | | $ | 1,000.00 | | |
Ending Account Value
March 31, 2009 | | $ | 692.10 | | | $ | 1,019.50 | | |
Expenses Paid During
Period* | | $ | 4.60 | | | $ | 5.50 | | |
* Expenses are equal to the Fund's annualized expense ratio of 1.09%, multiplied by the average account value over the period and prorated for the six-months ended March 31, 2009 (182/365 days).
14
DIRECTOR AND OFFICER INFORMATION
| Name, Age & Address | | Positions(s)
With Fund/
Years Served | | Principal Occupation(s)
During the Past 5 Years | | Portfolios in
Fund Complex
Overseen | | Other
Directorships | |
| Willard H. Altman, Jr. – (73)† | | Director & Chairman*
Years Served: 7 | | Retired, Formerly, until 1995, Partner of Ernst & Young LLP, a public accounting firm. | | | 6 | | | | |
|
| Thomas P. Merrick – (71)† | | Director*
Years Served: 1 | | Private consultant. President of Strategic Planning Consultants for more than the past five years. Former Executive Committee member and Vice President of Fluor Corporation, responsible for strategic planning, from 1984 to 1998. | | | 3 | | | | |
|
| Lawrence J. Sheehan – (76)† | | Director*
Years Served: 3 | | Retired. Formerly Partner (1969 to 1994) and of counsel employee (1994 to 2002) of the law firm of O'Melveny & Myers LLP. | | | 6 | | | | |
|
| Eric S. Ende – (64) | | Director*
President & Portfolio Manager
Years Served: 9 | | Partner of the Adviser since 2006. Formerly Senior Vice President of First Pacific Advisers, Inc. from 1984 to 2006. | | | 3 | | | | |
|
| Steven R. Geist (55) | | Executive Vice President & Portfolio Manager
Year Served: 9 | | Partner of the Adviser since 2006. Formerly Vice President of First Pacific Advisers, Inc. from 1992 to 2006. | | | | | | | |
|
| J. Richard Atwood – (48) | | Treasurer
Years Served: 12 | | Chief Operating Officer of the Adviser. President and Chief Executive Officer of FPA Fund Distributors, Inc. | | | | | | FPA Fund Distributors, Inc. | |
|
| Christopher H. Thomas – (52) | | Chief Compliance Officer
Years Served: 14 | | Vice President and Chief Compliance Officer of the Adviser and Vice President of FPA Fund Distributors, Inc. | | | | | | FPA Fund
Distributors, Inc. | |
|
| Sherry Sasaki – (54) | | Secretary
Years Served: 26 | | Assistant Vice President and Secretary of the Adviser and of FPA Fund Distributors, Inc. | | | | | | | |
|
| E. Lake Setzler – (42) | | Assistant Treasurer
Years Served: 3 | | Vice President and Controller of the Adviser since 2005. Formerly Chief Operating Officer of Inflective Asset Management, LLC (2004-2005) and Vice President of Transamerica Investment Management, LLC (2000-2004). | | | | | | | |
|
* Directors serve until their resignation, removal or retirement.
† Audit Committee member
Additional information on the Directors is available in the Statement of Additional Information. Each of the above individuals can be contacted at 11400 W. Olympic Blvd,. Suite 1200, Los Angeles, CA 90064.
15
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FPA PARAMOUNT FUND, INC.
INVESTMENT ADVISER
First Pacific Advisors, LLC
11400 West Olympic Boulevard, Suite 1200
Los Angeles, CA 90064
DISTRIBUTOR
FPA Fund Distributors, Inc.
11400 West Olympic Boulevard, Suite 1200
Los Angeles, California 90064
COUNSEL
O'Melveny & Myers LLP
Los Angeles, California
TICKER SYMBOL: FPRAX
CUSIP: 302546106
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Los Angeles, California
CUSTODIAN & TRANSFER AGENT
State Street Bank and Trust Company
Boston, Massachusetts
SHAREHOLDER SERVICE AGENT
Boston Financial Data Services, Inc.
P.O. Box 8115
Boston, Massachusetts 02266-8500
30 Dan Road
Canton, Massachusetts 02021-2809
(800) 638-3060
(617) 483-5000
This report has been prepared for the information of shareholders of FPA Paramount, Inc., and is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus.
The Fund's complete proxy voting record for the 12 months ended June 30, 2008 is available without charge, upon request by calling (800) 982-4372 and on the SEC's website at www.sec.gov.
The Fund's schedule of portfolio holdings, filed the second and fourth quarter of Form N-Q with the SEC, is available on the SEC's website at www.sec.gov. Form N-Q is available at the SEC's Public Reference Room in Washington, D.C., and information on the operations of the Public Reference Room may be obtained by calling 1-202-942-8090. To obtain information on Form N-Q from the Fund, shareholders can call 1-800-982-4372.
Additional information about the Fund is available online at www.fpafunds.com. This information includes, among other things, holdings, top sectors, and performance, and is updated on or about the 15th business day after the end of the quarter.
Item 2. | | Code of Ethics. Not Applicable to this semi-annual report. |
| | |
Item 3. | | Audit Committee Financial Expert. Not Applicable to this semi-annual report. |
| | |
Item 4. | | Principal Accountant Fees and Services. Not Applicable to this semi-annual report. |
| | |
Item 5. | | Audit Committee of Listed Registrants. Not Applicable. |
| | |
Item 6. | | Schedule of Investments. The schedule of investments is included as part of the report to stockholders filed under Item 1 of this Form. |
| | |
Item 7. | | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not Applicable. |
| | |
Item 8. | | Portfolio Managers of Closed-End Management Investment Companies. Not Applicable. |
| | |
Item 9. | | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not Applicable. |
| | |
Item 10. | | Submission of Matters to a Vote of Security Holders. There has been no material change to the procedures by which shareholders may recommend nominees to the registrant’s board of directors. |
| | |
Item 11. | | Controls and Procedures. |
| | |
| | (a) The principal executive officer and principal financial officer of the registrant have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) are effective based on their evaluation of the disclosure controls and procedures as of a date within 90 days of the filing date of this report. |
| | |
| | (b) There have been no significant changes in the registrant’s internal controls over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting. |
Item 12. | | Exhibits. | | | | |
| | | | | | | | |
| | (a)(1) | | Code of ethics as applies to the registrant’s principal executive and financial officers, as required to be disclosed under Item 2 of Form N-CSR. Not Applicable to this semi-annual report. |
| | | | | | | | |
| | (a)(2) | | Separate certification for the registrant’s principal executive officer and principal financial officer, as required by Rule 30a-2(a) under the Investment Company Act of 1940. Attached hereto. |
| | | | | | | | |
| | (a)(3) | | Not Applicable |
| | | | | | | | |
| | (b) | | Separate certification for the registrant’s principal executive officer and principal financial officer, as required by Rule 30a-2(b) under the Investment Company Act of 1940. Attached hereto. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FPA PARAMOUNT FUND, INC.
By: | /s/ ERIC S. ENDE | |
| Eric S. Ende, President |
| (Principal Executive Officer) |
| |
Date: | May 29, 2009 |
| | | | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
FPA PARAMOUNT FUND, INC.
By: | /s/ ERIC S. ENDE | |
| Eric S. Ende, President |
| (Principal Executive Officer) |
| |
Date: | May 29, 2009 |
| | | | |
By: | /s/ J. RICHARD ATWOOD | |
| J. Richard Atwood, Treasurer |
| (Principal Financial Officer) |
| |
Date: | May 29, 2009 |
| | | | |
