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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)
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: September 30, 2004
Item 1. Report to Stockholders.
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FPA PARAMOUNT FUND, INC.
ANNUAL REPORT
[FPA PARAMOUNT FUND, INC. LOGO]
DISTRIBUTOR:
FPA FUND DISTRIBUTORS, INC.
11400 WEST OLYMPIC BOULEVARD, SUITE 1200
LOS ANGELES, CALIFORNIA 90064
42074
SEPTEMBER 30, 2004
<Page>
LETTER TO SHAREHOLDERS
I am pleased to report that FPA Paramount Fund, after several years of only
modest changes in total assets, has now exceeded $200 million for the first time
in many years. This represents an almost doubling in size in the past year, and
close to tripling since the low point of the first quarter of 2003.
The stock market has been relatively flat so far this year with a 4%
advance in the small-cap Russell 2000, but only a 2% gain in the S&P and a 5%
decline in the Nasdaq. Paramount's performance has been solid with a gain of
8.2% year-to-date. For the longer 3-year period, Paramount's annual return of
17.6% is about 3 1/2 points ahead of the benchmark Russell 2500 and far above
the S&P and Nasdaq.
<Table>
<Caption>
PERIODS ENDED SEPTEMBER 30, 2004
-----------------------------------
THREE FIVE
QUARTER YTD YEARS* YEARS*
------- ----- ------ -------
Paramount (0.4)% 8.2% 17.6% 7.2%**
Russell 2500 (2.5)% 3.6% 14.1% 9.4%
S & P 500 (1.9)% 1.5% 4.1% (1.3)%
Nasdaq (7.4)% (5.3)% 8.2% (7.1)%
</Table>
* Annualized Returns
** Includes 6 months (October '99 to March '00) under prior portfolio manager.
Paramount has for several years owned shares in two companies. LINCARE and
RENAL CARE, which in addition to having similar names, operate businesses which
are alike in two crucial aspects -- both provide life-saving services to very
ill and mostly elderly patients, and both receive a large portion of their
revenue from Medicare.
Having Medicare as your principal payer has both positive and negative
aspects. In the plus column, Medicare pays their bills promptly and is free of
credit risk. As a negative, however, Medicare reimbursement rates are subject to
change at the whim of Congress or the CMS (Center for Medicare Services) -- and
more likely down than up. In addition, there have been, from time to time,
Federal investigations into possible fraudulent activities by companies
providing services payable by Medicare. Such investigations have involved
Lincare and Renal Care, as well as their industry competitors, though with no
adverse outcomes -- so far.
Within the past year, these negative features of doing business with
Medicare have come to the fore for both Lincare and Renal Care. First, a
reduction in the rates paid to oxygen providers like Lincare, and more recently
a Federal investigation into several aspects of dialysis providers' operations,
with subpoenas issued to Renal Care and other industry participants.
Lincare, a company we first purchased in June 2000, provides oxygen to
patients in their home. These patients have compromised heart and lung
functions, generally associated with either emphysema (from smoking), or
congestive heart failure. Supplemental oxygen improves their quality of life and
lets them stay in their own homes. Lincare, along with Apria Healthcare are the
leading companies and each have about 20% of a highly fragmented market.
As an investment, we are attracted by Lincare's industry leading operating
margins of 35% as well as its 30% plus return on equity and solid balance sheet.
It has also demonstrated the ability to grow rapidly by opening new offices and
acquiring smaller competitors.
The Medicare Modernization Act, signed in December 2003, contained some
provisions which threatened to significantly reduce the revenues of oxygen
providers like Lincare. This would involve both asthma and other drugs provided
by the oxygen companies as well as the basic rate for oxygen equipment.
In response to the impending changes, Lincare's stock price declined from
over $40 to about $30, or almost 30%. Our response to the price decline was to
significantly add to Paramount's position. We did this for two reasons. First,
we believed that the worst case reimbursement changes directed by Congress would
result in the exit from the business of many smaller operators, with severe
negative effects on the mostly elderly oxygen-using population. Since the CMS,
the federal agency overseeing Medicare, has
1
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considerable discretion in making the changes, we did not expect the worst case
to be implemented. Second, Lincare has demonstrated in the past that it can take
advantage of adverse environments. In the late 1990s, for example, Medicare
rates were reduced by 30% over a two-year period. Lincare responded by cutting
costs and taking market share from weakened competitors, with the result that
its earnings actually went up. While we certainly did not expect an earnings
increase, we expected Lincare to greatly outperform its competitors in the
coming challenging period.
Recently, Lincare shareholders received some good news. The CMS concluded,
after extensive analysis, that the planned reduction of drug reimbursement to
cost plus 6% was too severe and that an additional dispensing fee of about $60
per month was required. In response to this, Lincare's stock price jumped about
20% to $36 per share.
The issue of how large a reduction there will be in the charge for oxygen
equipment is yet to be resolved, but a cut of 10 - 15% is likely. Though severe,
we are confident that with a combination of cost reductions and rapid market
share growth, Lincare will offset the worst impact of the cuts.
Renal Care, added to Paramount's portfolio in July 2002, operates dialysis
centers. Its patients suffer from end-stage renal disease (ESRD) and must
receive dialysis three times a week in order to survive. There are about 300,000
ESRD patients in the United States. The disease is often the result of years of
high blood pressure or diabetes. Our ability to control hypertension has
improved over the past decade or two, making it a declining, but nevertheless
still large problem. In contrast, the incidence of diabetes is increasing
rapidly and advances in treatment have not been dramatic.
Like Lincare, Renal Care has industry leading margins and has grown
steadily through both internal expansion and acquisition of small competitors.
In late October of this year, both Renal Care and the other leading
dialysis chains received Department of Justice subpoenas which appear to be
focused on the related issues of PTH (Parathyroid Hormone) testing and
administration of Vitamin D. Both PTH and Vitamin D are involved in the
regulation of levels of calcium and phosphorus in the body, which is crucial to
health and quite difficult to control in ESRD patients.
Industry analysts are generally mystified by the government's motivation in
this subpoena. Not only is PTH testing and Vitamin D therapy a relatively small
6% of dialysis companies' revenues, but the medical challenges involved in this
area make it very likely that changes in test frequency or Vitamin D drug
selection are driven entirely by the decisions of individual physicians.
Renal Care's stock declined about 10% on the news of the investigation and
we took the opportunity to add to our position.
Respectfully submitted,
/s/ Eric S. Ende
Eric S. Ende
President & Portfolio Manager
November 1, 2004
2
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HISTORICAL PERFORMANCE
CHANGE IN VALUE OF A $10,000 INVESTMENT IN FPA PARAMOUNT FUND, INC. VS. RUSSELL
2500 INDEX AND LIPPER MID-CAP CORE FUND AVERAGE FROM OCTOBER 1, 1994 TO
SEPTEMBER 30, 2004
[CHART]
<Table>
<Caption>
FPA PARAMOUNT FUND, INC. FPA PARAMOUNT FUND, INC. (NAV) RUSSELL 2500 INDEX LIPPER MID-CAP CORE FUND AVERAGE
1994 $ 9,350 $ 10,000 $ 10,000 $ 10,000
1995 $ 10,389 $ 11,111 $ 12,547 $ 12,100
1996 $ 12,510 $ 13,380 $ 14,534 $ 14,399
1997 $ 14,724 $ 15,748 $ 19,521 $ 18,575
1998 $ 11,079 $ 11,849 $ 16,316 $ 17,089
1999 $ 10,326 $ 11,044 $ 19,869 $ 20,250
2000 $ 8,083 $ 8,644 $ 25,737 $ 27,915
2001 $ 8,980 $ 9,605 $ 20,906 $ 21,941
2002 $ 9,127 $ 9,761 $ 19,349 $ 20,353
2003 $ 12,128 $ 12,971 $ 26,235 $ 26,092
2004 $ 14,624 $ 15,641 $ 31,086 $ 30,422
<Caption>
AVERAGE ANNUAL TOTAL RETURN
YEARS ENDED SEPTEMBER 30, 2004
------------------------------
FPA PARAMOUNT FUND, INC. 1 YEAR 5 YEARS 10 YEARS
- ------------------------ -------- ------- ---------
At Net Asset Value 20.57% 7.21% 4.57%
With Maximum 5.25% Sales Charge 14.24% 6.06% 4.01%
</Table>
Past performance is not indicative of future performance. 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 medium
capitalization stock performance. This index does not reflect any commissions or
fees which would be incurred by an investor purchasing the stocks it represents.
The Lipper Mid-Cap Core Fund Average provides an additional comparison of how
your Fund performed in relation to other mutual funds with similar objectives.
The Lipper data does not include sales charges. The performance shown for FPA
Paramount Fund, Inc., with an ending value of $14,624 reflects deduction of the
current maximum sales charge of 5.25% of the offering price. In addition, since
investors purchase shares of the Fund with varying sales charges depending
primarily on volume purchased, the Fund's performance at net asset value (NAV)
is also shown, as reflected by the ending value of $15,641. The performance of
the Fund and of the Averages is computed on a total return basis which includes
reinvestment of all distributions. The current portfolio managers, Eric S. Ende
and Steven R. Geist, have been primarily responsible for the management of the
portfolio since April 1, 2000.
3
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PORTFOLIO SUMMARY
September 30, 2004
<Table>
COMMON STOCKS 74.2%
Producer Durable Goods 13.1%
Health Care 12.2%
Energy 9.4%
Technology 8.5%
Business Services & Supplies 6.8%
Retailing 6.0%
Distribution 4.6%
Banking 3.6%
Entertainment 3.6%
Insurance 3.1%
Materials 2.6%
Transportation 0.7%
SHORT-TERM CORPORATE NOTES 25.7%
OTHER ASSETS AND LIABILITIES, NET 0.1%
-----
TOTAL NET ASSETS 100.0%
=====
</Table>
MAJOR PORTFOLIO CHANGES
Six Months Ended September 30, 2004
(Unaudited)
<Table>
<Caption>
SHARES
--------
NET PURCHASES
COMMON STOCKS
Arthur J. Gallagher & Co. (1) 119,800
Bio-Rad Laboratories, Inc. 72,500
CarMax, Inc. 167,500
Cognex Corporation 112,500
Crane Co. 65,000
Engelhard Corporation 67,500
Health Management Associates, Inc. 123,800
Inveresk Research Group, Inc. (1) 40,500
Invitrogen Corporation (1) 45,000
Lincare Holdings, Inc. 65,000
Noble Corporation 45,000
North Fork Bancorporation 65,000
O'Reilly Automotive, Inc. 49,400
Oshkosh Truck Corporation (1) 60,000
SanDisk Corporation 100,000
NET SALES
COMMON STOCKS
National Commerce Financial Corporation (2) 145,000
Ocular Sciences, Inc. 58,000
</Table>
(1) Indicates new commitment to portfolio
(2) Indicates elimination from portfolio
4
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PORTFOLIO OF INVESTMENTS
September 30, 2004
<Table>
<Caption>
SHARES VALUE
------------ -------------
COMMON STOCKS
PRODUCER DURABLE GOODS -- 13.1%
Cognex Corporation 245,000 $ 6,419,000
Crane Co. 175,000 5,061,000
Graco Inc. 121,500 4,070,250
IDEX Corporation 105,750 3,591,270
Oshkosh Truck Corporation 60,000 3,423,600
Zebra Technologies Corporation (Class A)* 78,000 4,758,780
-------------
$ 27,323,900
-------------
HEALTH CARE -- 12.2%
Bio-Rad Laboratories, Inc.* 82,500 $ 4,215,750
Health Management Associates, Inc. 205,000 4,188,150
Invitrogen Corporation* 45,000 2,474,550
Landauer, Inc. 4,500 211,185
Lincare Holdings, Inc.* 185,000 5,496,350
Ocular Sciences, Inc.* 65,000 3,118,050
Renal Care Group, Inc. 172,500 5,559,675
-------------
$ 25,263,710
-------------
ENERGY -- 9.4%
Cal Dive International, Inc.* 210,000 $ 7,480,200
Noble Drilling Corporation* 165,000 7,416,750
Tidewater Inc. 142,500 4,638,375
-------------
$ 19,535,325
-------------
TECHNOLOGY -- 8.5%
Advanced Fibre Communications, Inc.* 225,000 $ 3,577,500
KEMET Corporation* 52,500 424,725
Plantronics, Inc. 117,700 5,089,348
SanDisk Corporation* 260,000 7,571,200
TriQuint Semiconductor, Inc.* 248,746 970,109
-------------
$ 17,632,882
-------------
BUSINESS SERVICES & SUPPLIES -- 6.8%
Charles River Laboratories International, Inc. 51,100 $ 2,340,380
HNI Corporation 86,200 3,411,796
Inveresk Research Group, Inc.* 40,500 1,494,045
Manpower Inc. 72,500 3,225,525
Office Depot, Inc.* 240,000 3,607,200
-------------
$ 14,078,946
-------------
RETAILING -- 6.0%
CarMax, Inc.* 277,496 $ 5,980,039
O'Reilly Automotive, Inc.* 170,000 6,509,300
-------------
$ 12,489,339
-------------
DISTRIBUTION -- 4.6%
Black Box Corporation 60,000 $ 2,217,000
ScanSource Inc.* 115,000 7,337,000
-------------
$ 9,554,000
-------------
</Table>
5
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<Table>
<Caption>
SHARES OR
PRINCIPAL
AMOUNT VALUE
------------ -------------
COMMON STOCKS -- Continued
BANKING -- 3.6%
North Fork Bancorporation 170,000 $ 7,556,500
-------------
ENTERTAINMENT -- 3.6%
CEC Entertainment, Inc.* 85,000 $ 3,123,750
Carnival Corporation 90,000 4,256,100
-------------
$ 7,379,850
-------------
INSURANCE -- 3.1%
Brown & Brown, Inc. 55,000 $ 2,513,500
Gallagher & Co., Arthur J. 119,800 3,968,974
-------------
$ 6,482,474
-------------
MATERIALS -- 2.6%
Engelhard Corporation 192,500 $ 5,457,375
-------------
TRANSPORTATION -- 0.7%
Heartland Express, Inc. 62,000 $ 1,153,125
Knight Transportation, Inc.* 15,750 337,365
-------------
$ 1,490,490
-------------
TOTAL COMMON STOCKS -- 74.2% (Cost $116,528,958) $ 154,244,791
-------------
SHORT-TERM INVESTMENTS -- 25.7%
Short-term Corporate Notes:
American General Finance Corporation -- 1.84% 10/1/04 $ 4,295,000 $ 4,295,000
Toyota Motor Credit Corporation -- 1.71% 10/8/04 8,183,000 8,180,279
General Electric Capital Services, Inc. -- 1.66% 10/12/04 9,000,000 8,995,435
Citigroup Inc. -- 1.60% 10/13/04 8,300,000 8,295,573
Federal Home Loan Bank Discount Note -- 1.70% 10/15/04 6,397,000 6,392,771
Dupont (E.I.) De Nemours & Co. -- 1.67% 10/18/04 4,321,000 4,317,592
AIG Funding, Inc. -- 1.75% 10/25/04 9,000,000 8,989,500
General Electric Company -- 1.76% 10/27/04 4,000,000 3,994,916
-------------
TOTAL SHORT-TERM INVESTMENTS (Cost $53,461,066) $ 53,461,066
-------------
TOTAL INVESTMENTS -- 99.9% (Cost $169,990,024) $ 207,705,857
Other assets and liabilities, net -- 0.1% 200,947
-------------
TOTAL NET ASSETS -- 100% $ 207,906,804
=============
</Table>
* Non-income producing security
See notes to financial statements.
6
<Page>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2004
<Table>
ASSETS
Investments at value:
Investment securities -- at market value
(identified cost $116,528,958) $ 154,244,791
Short-term investments -- at amortized cost
(maturities 60 day or less) 53,461,066 $ 207,705,857
--------------
Cash 141
Receivable for:
Investment securities sold $ 835,673
Capital stock sold 436,280
Dividends and accrued interest 35,400 1,307,353
-------------- ---------------
$ 209,013,351
LIABILITIES
Payable for:
Investment securities purchased $ 732,742
Capital stock repurchased 212,670
Advisory fees and financial services 126,235
Accrued expenses 34,900 1,106,547
-------------- ---------------
NET ASSETS $ 207,906,804
===============
SUMMARY OF SHAREHOLDERS' EQUITY
Capital Stock -- par value $0.25 per share: authorized
100,000,000 shares; outstanding 15,976,218 shares $ 3,994,055
Additional Paid-in Capital 328,756,176
Accumulated net realized loss on investments (162,559,260)
Unrealized appreciation of investments 37,715,833
---------------
NET ASSETS $ 207,906,804
===============
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) $ 13.01
===============
Maximum offering price per share
(100/94.75 of per share net asset value) $ 13.73
===============
</Table>
See notes to financial statements.
7
<Page>
STATEMENT OF OPERATIONS
For the Year Ended September 30, 2004
<Table>
INVESTMENT INCOME
Interest $ 285,826
Dividends 905,749
---------------
$ 1,191,575
EXPENSES -- Note 3:
Advisory fees $ 955,928
Transfer agent fees and expenses 149,580
Financial services 139,373
Directors' fees and expenses 38,579
Reports to shareholders 34,081
Custodian fees and expenses 31,346
Registration fees 27,808
Audit fees 24,000
Insurance 8,899
Legal fees 6,495
Other expenses 1,886 1,417,975
-------------- ---------------
Net investment loss $ (226,400)
---------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments:
Proceeds from sales of investment securities (excluding
short-term investments with maturities of 60 days or less) $ 18,151,931
Cost of investment securities sold 11,164,541
--------------
Net realized gain on investments $ 6,987,390
Unrealized appreciation of investments:
Unrealized appreciation at beginning of year $ 19,202,320
Unrealized appreciation at end of year 37,715,833
--------------
Increase in unrealized appreciation of investments 18,513,513
---------------
Net realized and unrealized gain on investments $ 25,500,903
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 25,274,503
===============
</Table>
See notes to financial statements.
8
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------
2004 2003
------------------------------- --------------------------------
INCREASE IN NET ASSETS
Operations:
Net investment loss $ (226,400) $ (413,654)
Net realized gain on investments 6,987,390 7,183,045
Net unrealized appreciation of investments 18,513,513 18,458,804
-------------- --------------
Increase in net assets resulting from operations $ 25,274,503 $ 25,228,195
Capital Stock transactions:
Proceeds from Capital Stock sold $ 90,278,196 $ 31,201,909
Cost of Capital Stock repurchased (17,284,393) 72,993,803 (20,983,669) 10,218,240
-------------- -------------- -------------- ---------------
Total increase in net assets $ 98,268,306 $ 35,446,435
NET ASSETS
Beginning of year 109,638,498 74,192,063
-------------- ---------------
End of year $ 207,906,804 $ 109,638,498
============== ===============
CHANGE IN CAPITAL STOCK OUTSTANDING
Shares of Capital Stock sold 7,240,277 3,301,409
Shares of Capital Stock repurchased (1,422,239) (2,278,134)
-------------- ---------------
Increase in Capital Stock outstanding 5,818,038 1,023,275
============== ===============
</Table>
See notes to financial statements.
9
<Page>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Per share operating performance:
Net asset value at beginning of year $ 10.79 $ 8.12 $ 8.00 $ 7.33 $ 9.46
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income (loss) $ (0.01) $ (0.04) $ (0.03) $ 0.08 $ 0.13
Net realized and unrealized gain (loss) on
investment securities 2.23 2.71 0.16 0.72 (2.17)
---------- ---------- ---------- ---------- ----------
Total from investment operations $ 2.22 $ 2.67 $ 0.13 $ 0.80 $ (2.04)
---------- ---------- ---------- ---------- ----------
Less dividends from net investment income -- -- $ (0.01) $ (0.13) $ (0.09)
---------- ---------- ---------- ---------- ----------
Net asset value at end of year $ 13.01 $ 10.79 $ 8.12 $ 8.00 $ 7.33
========== ========== ========== ========== ==========
Total investment return* 20.57% 32.88% 1.63% 11.11% (21.73)%
Ratios/supplemental data:
Net assets at end of year (in 000's) $ 207,907 $ 109,638 $ 74,192 $ 67,078 $ 73,235
Ratio of expenses to average net assets:
Before reimbursement from Investment Adviser 0.99% 1.15% 1.18% 1.28% 1.22%
After reimbursement from Investment Adviser 0.99% 1.15% 1.17% 1.20% 1.17%
Ratio of net investment income (loss) to average net assets:
Before reimbursement from Investment Adviser (0.16)% (0.47)% (0.34)% 0.84% 1.18%
After reimbursement from Investment Adviser (0.16)% (0.47)% (0.34)% 0.92% 1.22%
Portfolio turnover rate 16% 17% 14% 16% 76%
</Table>
* Return is based on net asset value per share, adjusted for reinvestment of
distributions, and does not reflect deduction of the sales charge.
See notes to financial statements.
10
<Page>
NOTES TO FINANCIAL STATEMENTS
September 30, 2004
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 on the last business day of the year, or if
there was not a sale that day, 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 year, or if there was not a sale that
day, at the last bid price. Unlisted securities are valued at the most
recent bid price. Short-term investments with maturities of 60 days or less
are valued at 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, 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.
NOTE 2 -- PURCHASES OF INVESTMENT SECURITIES
Cost of purchases of investment securities (excluding short-term
investments with maturities of 60 days or less) aggregated $55,682,146 for the
year ended September 30, 2004. Realized gains or losses are based on the
specific identification method. There were no material differences between the
amounts reported in the financial statements at September 30, 2004 for federal
income tax and financial reporting purposes. Gross unrealized appreciation and
depreciation for all securities at September 30, 2004 for federal income tax
purposes was $42,535,775 and $4,819,942, respectively. For federal income tax
purposes, the Fund currently has accumulated net realized losses in the amount
of $162,553,291 which can be carried forward to offset future gains. The ability
to carry these losses forward expires as follows: $90,097,712 in 2007;
$1,128,157 in 2008; and $71,327,422 in 2009. During the year ended September 30,
2004, the Fund reclassified $226,400 from accumulated net loss to additional
paid in capital to align financial reporting with tax reporting.
NOTE 3 -- ADVISORY FEES AND OTHER AFFILIATED TRANSACTIONS
Pursuant to an Investment Advisory Agreement, advisory fees were paid by
the Fund to First Pacific Advisors, Inc. (the "Adviser"). Under the terms of
this Agreement, the Fund pays the Adviser a monthly fee calculated at the annual
rate of 0.75% of the first $50 million of the Fund's average daily net assets
and 0.65% of the average daily net assets in excess of $50 million. In addition,
the Fund reimburses the Adviser monthly for the costs incurred by the Adviser in
providing financial services to the Fund, providing, however, that this
reimbursement shall not exceed 0.1% of the average daily net assets for any
fiscal year. The Agreement 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
11
<Page>
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 September 30, 2004, the Fund paid aggregate fees,
excluding expenses, of $36,000 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 year ended September 30, 2004, the Fund collected
$97,375 in redemption fees.
NOTE 5 -- DISTRIBUTOR
For the year ended September 30, 2004, FPA Fund Distributors, Inc.
("Distributors"), a wholly owned subsidiary of the Adviser, received $12,684 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 REGISTERED
PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND
BOARD OF DIRECTORS OF FPA PARAMOUNT FUND, INC.
We have audited the accompanying statement of assets and liabilities of FPA
Paramount Fund, Inc., (the "Fund"), including the portfolio of investments, as
of September 30, 2004, and the related statement of operations for the year then
ended, and the statements of changes in net assets and financial highlights for
each of the two 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. The financial highlights of FPA
Paramount Fund, Inc., for each of the three years in the period ended September
30, 2002 were audited by other auditors whose report, dated November 12, 2002,
expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (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 September 30, 2004, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. 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 provides a
reasonable basis for our opinion.
In our opinion, the 2003 and 2004 financial statements and financial
highlights referred to above present fairly, in all material respects, the
financial position of FPA Paramount Fund, Inc. as of September 30, 2004, the
results of its operations for the year then ended, and the changes in net assets
and financial highlights for each of the two years in the period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
Los Angeles, California
November 8, 2004
12
<Page>
SHAREHOLDER EXPENSE EXAMPLE
September 30, 2004
(unaudited)
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.
<Table>
<Caption>
HYPOTHETICAL
PERFORMANCE
(5% RETURN
ACTUAL BEFORE
PERFORMANCE EXPENSES)
----------- ------------
Beginning Account Value
March 31, 2004 $ 1,000.00 $ 1,000.00
Ending Account Value
September 30, 2004 $ 1,035.00 $ 1,020.23
Expenses Paid During
Period* $ 4.80 $ 4.77
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 0.94%, multiplied
by the average account value over the period and prorated for the six-months
ended September 30, 2004 (183/365 days).
13
<Page>
DIRECTOR AND OFFICER INFORMATION
<Table>
<Caption>
POSITIONS(S) PORTFOLIOS IN
WITH FUND/ PRINCIPAL OCCUPATION(S) FUND COMPLEX
NAME, AGE & ADDRESS YEARS SERVED DURING THE PAST 5 YEARS OVERSEEN OTHER DIRECTORSHIPS
- ------------------------------ ----------------- ------------------------------------ ------------- ---------------------------
Williard H. Altman, Jr. - (69) Director* Retired, Formerly, until 1995, 6
11400 W. Olympic Blvd., #1200 Years Served: 2 Partner of Ernst & Young LLP, a
Los Angeles, CA 90064 public accounting firm.
Leonard Mautner - (87) Director* President, Leonard Mautner 2
11400 W. Olympic Blvd., #1200 Years Served: 23 Associates; and General Partner,
Los Angeles, CA 90064 Goodman & Mautner Ltd.
John H. Rubel - (84) Director* President, John H. Rubel and 1
11400 W. Olympic Blvd., #1200 Years Served: 26 Associates, Inc.
Los Angeles, CA 90064
John P. Shelton (84) Director* Professor Emeritus at UCLA Graduate 1 Genisco Systems, Inc.
11400 W. Olympic Blvd., #1200 Years Served: 27 School of Management.
Los Angeles, CA 90064
Eric S. Ende - (60) Director* Senior Vice President of the 3
11400 W. Olympic Blvd., #1200 President & Adviser.
Los Angeles, CA 90064 Portfolio Manager
Years Served: 4
Steven R. Geist (50) Executive Vice Vice President of the Adviser.
11400 W. Olympic Blvd., #1200 President &
Los Angeles, CA 90064 Portfolio Manager
Year Served: 4
J. Richard Arwood - (44) Treasurer Principal and Chief Operating First Pacific Advisors Inc.
11400 W. Olympic Blvd., #1200 Years Served: 7 Officer of the Adviser. President and FPA Fund
Los Angeles, CA 90064 and Chief Executive Officer of FPA Distributors, Inc.
Fund Distributors, Inc.
Sherry Sasaki - (49) Secretary Assistant Vice President and
11400 W. Olympic Blvd., #1200 Years Served: 22 Secretary of the Adviser and of FPA
Los Angeles, CA 90064 Fund Distributors, Inc.
Christopher H. Thomas - (47) Assistant Vice President and Controller of the FPA Fund
11400 W. Olympic Blvd., #1200 Treasurer Adviser and of FPA Fund Distributors, Inc.
Los Angeles, CA 90064 Years Served: 9 Distributors, Inc.
</Table>
* Directors serve until their resignation, removal or retirement.
14
<Page>
FPA PARAMOUNT FUND, INC.
INVESTMENT ADVISER
First Pacific Advisors, Inc.
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
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
(800) 638-3060
(617) 483-5000
TICKER SYMBOL: FPRAX
CUSIP: 302546106
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, 2004 is
available without charge, upon request by calling (800) 982-4372 and on the
SEC's website at www.sec.gov.
<Page>
Item 2. Code of Ethics.
(a) The registrant has adopted a code of ethics that applies to
the registrant's senior executive and financial officers.
Upon request, any person may obtain a copy of this code of
ethics, without charge, by calling (800) 982-4372. A copy of
the code of ethics is filed as an exhibit to this Form N-CSR.
(b) During the period covered by this report, there were not any
amendments to the provisions of the code of ethics adopted in
2(a) above.
(c) During the period covered by this report, there were not any
implicit or explicit waivers to the provisions of the code of
ethics adopted in 2(a).
Item 3. The registrant's board of directors has determined that
Willard H. Altman, Jr., a member of the registrant's audit committee
and board of directors, is an "audit committee financial expert" and
is "independent," as those terms are defined in this Item. This
designation will not increase the designee's duties, obligations or
liability as compared to his duties, obligations and liability as a
member of the audit committee and of the board of directors.
Item 4. Principal Accountant Fees and Services.
<Table>
<Caption>
2003 2004
(a) Audit Fees $ 22,000 $ 23,000
(b) Audit Related Fees -0- -0-
(c) Tax Fees $ 5,000 $ 5,250
(d) All Other Fees -0- -0-
</Table>
(e)(1) Disclose the audit committee's pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of
Regulation S-X. The audit committee shall pre-approve all
audit and permissible non-audit services that the committee
considers compatible with maintaining the independent
auditors' independence. The pre-approval requirement will
extend to all non-audit services provided to the registrant,
the adviser, and any entity controlling, controlled by, or
under common control with the adviser that provides ongoing
services to the registrant, if the engagement relates
directly to the operations and financial reporting of the
registrant; provided, however, that an engagement of the
registrant's independent auditors to perform attest services
for the registrant, the adviser or its affiliates required by
generally accepted auditing standards to complete the
examination of the registrant's financial statements (such as
an examination conducted in accordance with Statement on
Auditing Standards Number 70 issued by the American Institute
of Certified Public Accountants), will be deem pre-approved
if: (i) the registrant's independent auditors inform the
audit committee of the engagement, (ii) the
<Page>
registrant's independent auditors advise the audit committee
at least annually that the performance of this engagement
will not impair the independent auditor's independence with
respect to the registrant, and (iii) the audit committee
receives a copy of the independent auditor's report prepared
in connection with such services. The committee may delegate
to one or more committee members the authority to review and
pre-approve audit and permissible non-audit services. Actions
taken under any such delegation will be reported to the full
committee at its next meeting.
(e)(2) Disclose the percentage of services described in each of
paragraphs (b) - (d) of this Item that were approved by the
audit committee pursuant to paragraph (c)(7)(i)(C) of Rule
2-01 of Regulation S-X. 100% of the services provided to the
registrant described in paragraphs (b) - (d) of this Item
were pre-approved by the audit committee pursuant to
paragraphs (e)(1) of this Item. There were no services
provided to the investment adviser or any entity controlling,
controlled by or under common control with the adviser
described in paragraphs (b) - (d) of this Item that were
required to be pre-approved by the audit committee.
(f) If greater than 50%, disclose the percentage of hours
expended on the principal accountant's engagement to audit
the registrant's financial statements for the most recent
fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent
employees. All services performed on the engagement to audit
the registrant's financial statements for the most recent
fiscal year end were performed by the principal accountant's
full-time, permanent employees.
(g) Disclose the aggregate non-audit fees billed by the
registrant's accountant for services rendered to the
registrant, and rendered to the registrant's investment
adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant for
each of the last two fiscal years of the registrant. None.
(h) Disclose whether the registrant's audit committee of the
board of director has considered whether the provision of
non-audit services that were rendered to the registrant's
investment adviser (not including any sub-adviser whose role
is primarily portfolio management and is subcontracted with
or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X is
<Page>
compatible with maintaining the principal accountant's
independence. Not Applicable.
Item 5. Audit Committee of Listed Registrants. Not Applicable.
Item 6. Schedule of Investments. Not Applicable. 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. Purchases of Equity Securities by Closed-End Management Investment
Companies. Not Applicable.
Item 9. 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 10. 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 registrant's last fiscal half-year (the
registrant's second fiscal half- year in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
controls over financial reporting.
Item 11. Exhibits.
(a)(1) Code of ethics as applies to the registrant's officers and
directors, as required to be disclosed under Item 2 of Form
N-CSR. Attached hereto as Ex.99.CODE.ETH.
(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
<Page>
(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 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
Date: December 7, 2004
Pursuant to 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/ J. RICHARD ATWOOD
-----------------------------
J. Richard Atwood, Treasurer
Date: December 7, 2004