<PAGE>
[LOGO OF FIRST MUTUAL FUNDS APPEARS HERE]
July 30, 1996
Dear Fellow Shareholder:
As we complete another fiscal year, I am pleased to provide you with the
Trust's audited annual report. This has been a remarkable year for First
Mutual Funds, and we take great pride in the value we have created for our
shareholders. On both an absolute and relative basis the Trust's performance
during the fiscal year was exceptional. We outperformed our benchmarks, the
S&P 500 and the Russell 2000 index for the 12 month period ended 6/30/96 as
shown below. The Trust has also provided long-term consistent returns to its
shareholders. Total returns of the Trust and its benchmark indexes for the
period ended June 30th for the 1, 3, 5, 10 year and "since inception" periods
were:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
------ ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
First Mutual Funds.................... 49.12% 21.46% 14.75% 11.04% 15.20%
S&P 500............................... 27.21% 17.26% 15.60% 13.72% 15.56%
Russell 2000.......................... 30.46% 14.10% 15.61% 8.41% 10.02%
</TABLE>
We believe the performance of the Trust over the last year is directly
correlated to our strict adherence to our investment strategy and process.
While we have always believed that wealth is created through the long-term
ownership of growth businesses, we have spent a considerable amount of time
refining the implementation of this process and enhancing our valuation
discipline. We continue to invest in companies that are characterized by
exceptional fundamentals, attractive valuations and reasonable expectations.
We focus on the determinants of value as they relate to the economic model of
the business. In other words, we allocate capital to value creators.
Specifically, we try to understand the mechanics of value creation and
determine intrinsic value. We measure and quantify expectations so that we can
determine the rationality of expectations and capture value at entry price. In
addition, this valuation discipline allows us to contain risk by selling
stocks which have appreciated significantly above their intrinsic value. In
summary, we evaluate the management, market position, return on invested
capital, cash flow and growth, in order to answer the question "do you want to
own the business and at what price?"
The past twelve months have been very kind to the equity markets, and we do
not predict the performance of either the market or the Trust. As such, we
would not be surprised to see the Trust or the market move up, down, or
sideways over the next six months. However, over a more meaningful measure of
time, if we successfully implement our strategy, we would expect value to be
realized.
As always we will continue to run the Trust in a prudent manner and focus on
creating value for our shareholders.
Sincerely yours,
/s/ David E. Beard /s/ David P. Como /s/ Charles Honey
David E. Beard David P. Como Charles Honey
<PAGE>
SCHEDULE OF INVESTMENTS JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
------- -----------
<C> <S> <C>
COMMON STOCKS - 93.43%
CHEMICALS - 4.15%
60,000 First Mississippi Corp. ................................. $ 1,335,000
-----------
COMPUTER SOFTWARE - 4.93%
12,000 Sterling Software, Inc.*................................. 924,000
35,000 Wang Laboratories, Inc.*................................. 660,625
-----------
1,584,625
-----------
DIVERSIFIED OPERATIONS - 5.62%
10,000 AlliedSignal, Inc. ...................................... 571,250
10,000 American Brands, Inc. ................................... 453,750
18,750 Thermo Electron Corp.*................................... 780,469
-----------
1,805,469
-----------
ELECTRICAL-CIRCUIT BOARDS - 1.17%
32,000 Continental Circuits Corp.*.............................. 376,000
-----------
FINANCIAL INSTITUTIONS - 11.23%
10,000 Bank of Boston Corp. .................................... 495,000
5,000 Citicorp................................................. 413,125
15,000 First USA, Inc. ......................................... 825,000
58,000 Insignia Financial Group, Inc., Cl. A*................... 1,580,500
20,000 ISB Financial Corp. ..................................... 295,000
-----------
3,608,625
-----------
FOOD PRODUCTS - 1.59%
16,800 Heinz (H.J.) Co. ........................................ 510,300
-----------
LEISURE-HOTELS/MOTELS - 5.44%
25,000 HFS, Inc.*............................................... 1,750,000
-----------
MACHINERY-DIVERSIFIED - 3.57%
20,000 Blount International, Inc., Cl. A........................ 630,000
10,000 York International Corp. ................................ 517,500
-----------
1,147,500
-----------
MACHINERY-VISION - 7.36%
60,000 Medar, Inc.*............................................. 622,500
47,800 Perceptron, Inc.*........................................ 1,744,700
-----------
2,367,200
-----------
</TABLE>
<PAGE>
SCHEDULE OF INVESTMENTS JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
------- -----------
<C> <S> <C>
MEDIA-RADIO/TV - 13.96%
30,000 American Radio Systems Corp.*............................ $ 1,290,000
34,900 Heftel Broadcasting Corp., Cl. A*........................ 1,033,912
35,500 Sinclair Broadcast Group, Cl. A*......................... 1,544,250
33,000 Westinghouse Electric Corp. ............................. 618,750
-----------
4,486,912
-----------
MEDICAL-PRODUCTS/SUPPLY - 7.43%
20,000 Angeion Corp.*........................................... 155,000
20,000 ATS Medical, Inc.*....................................... 202,500
10,000 ATS Medical, Inc. Warrants*.............................. 7,500
10,000 Guidant Corp. ........................................... 492,500
10,000 Johnson & Johnson........................................ 495,000
73,785 Lasersight, Inc.*........................................ 802,412
15,000 Sano Corp.*.............................................. 232,500
-----------
2,387,412
-----------
OIL & GAS-EXPLORATION & PRODUCTS - 6.26%
100,000 Abacan Resource Corp.*................................... 417,180
50,000 Belden & Blake Corp.*.................................... 1,037,500
25,000 Cairn Energy USA, Inc.*.................................. 359,375
50,000 Queen Sand Resources, Inc.* (Note 4)..................... 200,000
-----------
2,014,055
-----------
OIL & GAS-FIELD SERVICES - 2.86%
35,000 Pride Petroleum Services, Inc.*.......................... 498,750
5,000 Schlumberger, Ltd. ...................................... 421,250
-----------
920,000
-----------
PUBLISHING-NEWS - 4.87%
25,000 Harte-Hanks Communications............................... 693,750
12,000 Tribune Co. ............................................. 871,500
-----------
1,565,250
-----------
RETAIL - 6.44%
25,000 CUC International, Inc.*................................. 887,500
12,000 Federated Department Stores, Inc.*....................... 409,500
30,000 Warnaco Group, Cl. A..................................... 772,500
-----------
2,069,500
-----------
</TABLE>
<PAGE>
SCHEDULE OF INVESTMENTS JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
--------- -----------
<C> <S> <C>
TELECOMMUNICATIONS - 6.55%
20,000 Glenayre Technologies, Inc.*.......................... $ 1,000,000
20,000 WorldCom, Inc.*....................................... 1,107,500
-----------
2,107,500
-----------
TOTAL COMMON STOCKS (COST $21,708,555) - 93.43%....... 30,035,348
-----------
<CAPTION>
PRINCIPAL
AMOUNT
---------
<C> <S> <C>
CONVERTIBLE BONDS- 1.99%
$500,000 American Body Armor & Equipment,
5.00%, 04/30/01 (Cost $500,000)....................... 640,000
-----------
TOTAL INVESTMENTS (COST $22,208,555**) - 95.42%....... 30,675,348
OTHER ASSETS LESS OTHER LIABILITIES - 4.58%........... 1,471,788
-----------
NET ASSETS - 100.00%.................................. $32,147,136
===========
*Non-income producing security
**Cost for Federal income tax purposes is $22,208,555 and net unrealized
appreciation consists of:
Gross unrealized appreciation......................... $ 8,742,811
Gross unrealized depreciation......................... (276,018)
-----------
Net unrealized appreciation........................... $ 8,466,793
===========
</TABLE>
The notes to the financial statements are an integral part of these statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities at market value
(identified cost $22,208,555) (Notes 1 and 4)..................... $30,675,348
Cash............................................................... 707,222
Receivables:
Dividends and interest............................................ 22,137
Investment securities sold........................................ 757,725
Capital stock sold................................................ 10,550
Other assets....................................................... 8,244
-----------
TOTAL ASSETS...................................................... 32,181,226
-----------
LIABILITIES
Accrued expenses................................................... 34,090
-----------
TOTAL LIABILITIES................................................. 34,090
-----------
NET ASSETS
(applicable to outstanding shares of 2,327,103; unlimited shares of
$0.001 par value authorized)...................................... $32,147,136
===========
Net asset value, offering and redemption price per share
($32,147,136/2,327,103)........................................... $ 13.81
===========
SOURCE OF NET ASSETS
Paid-in capital.................................................... $19,391,533
Accumulated net realized gain on investments....................... 4,288,810
Net unrealized appreciation of investments......................... 8,466,793
-----------
NET ASSETS........................................................ $32,147,136
===========
</TABLE>
The notes to financial statements are an integral part of these statements.
<PAGE>
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends......................................................... $ 220,569
Interest.......................................................... 14,981
-----------
TOTAL INCOME..................................................... 235,550
-----------
EXPENSES
Advisory fees (Note 3)............................................ 191,340
Distribution expense (Note 3)..................................... 63,780
Administrator expense............................................. 45,248
Transfer agent fees............................................... 32,079
Bookkeeping and pricing........................................... 24,000
Insurance expense................................................. 17,016
Custodian fees.................................................... 17,339
Legal expense..................................................... 8,807
Registration expense.............................................. 18,529
Independent accountants........................................... 11,000
Other............................................................. 8,303
Trustees' fees and expenses....................................... 3,000
Reports to shareholders........................................... 3,972
-----------
TOTAL EXPENSES................................................... 444,413
-----------
NET INVESTMENT LOSS.............................................. (208,863)
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from security transactions...................... 5,869,876
Net change in unrealized appreciation of investments.............. 4,618,568
-----------
Net realized and unrealized gain on investments................... 10,488,444
-----------
Net increase in net assets resulting from operations.............. $10,279,581
===========
</TABLE>
The notes to financial statements are an integral part of these statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
OPERATIONS
Net investment loss................................. $ (208,863) $ (144,069)
Net realized gain on investments.................... 5,869,876 555,050
Net change in unrealized appreciation of invest-
ments.............................................. 4,618,568 3,822,245
----------- -----------
Net increase in net assets resulting from operations
................................................... 10,279,581 4,233,226
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from realized gains on investments
($0.9235 and $0.1877 per share, respectively)...... (1,927,263) (406,887)
----------- -----------
(1,927,263) (406,887)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Receipt from shares sold............................ 3,039,765 2,464,698
Receipt from shares issued on reinvestment of dis-
tributions......................................... 1,720,464 369,927
Shares redeemed..................................... (1,246,789) (7,825,757)
----------- -----------
Net increase (decrease) in net assets resulting from
capital shares transactions (a).................... 3,513,440 (4,991,132)
----------- -----------
Total Increase (Decrease) in Net Assets............ 11,865,758 (1,164,793)
NET ASSETS
Beginning of year................................... 20,281,378 21,446,171
----------- -----------
End of year......................................... $32,147,136 $20,281,378
=========== ===========
(a)Transactions in capital stock were:
Shares sold........................................ 259,258 279,383
Shares issued on reinvestment of distributions..... 154,718 46,299
Shares redeemed.................................... (109,829) (914,197)
----------- -----------
Net increase (decrease)............................ 304,147 (588,515)
Beginning balance.................................. 2,022,956 2,611,471
----------- -----------
Ending balance..................................... 2,327,103 2,022,956
=========== ===========
</TABLE>
The notes to financial statements are an integral part of these statements.
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The table below sets forth financial data for a share of capital stock
outstanding throughout each year presented.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR............................. $10.03 $8.21 $9.29 $8.49 $9.24
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
---------------------------------
Net investment income (loss)..... (0.09) (0.09) (0.09) (0.06) 0.01
Net gains (losses) on securities
(both realized and unrealized).. 4.79 2.10 (0.13) 1.09 (0.09)
------- ------- ------- ------- -------
Total from investment
operations..................... 4.70 2.01 (0.22) 1.03 (0.08)
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
------------------
Dividends (from net investment
income)......................... 0.00 0.00 0.00 0.00 (0.02)
Distributions (from capital
gains).......................... (0.92) (0.19) (0.86) (0.23) (0.65)
------- ------- ------- ------- -------
Total distributions............. (0.92) (0.19) (0.86) (0.23) (0.67)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR...... $13.81 $10.03 $8.21 $9.29 $8.49
======= ======= ======= ======= =======
TOTAL RETURN...................... 49.12% 25.04% (3.91%) 12.17% (1.01%)
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net assets, end of period (in
000's).......................... $32,147 $20,281 $21,446 $19,093 $18,143
Ratio of expenses to average net
assets**........................ 1.74% 2.16% 1.97% 1.99% 1.87%
Ratio of net investment income
(loss) to average net assets**.. (0.82%) (0.77%) (0.97%) (0.61%) 0.08%
Portfolio turnover rate.......... 107% 198% 178% 172% 175%
Average commission rate paid..... $0.0683 N/A N/A N/A N/A
</TABLE>
- ---------------------------------
** Average net assets have been computed on the basis of the value of the net
assets at the end of the month.
The notes to financial statements are an integral part of these financial
statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996
- -------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The Trust is registered under the Investment Company Act of 1940, as amended,
as an open-ended, diversified management company. The Trust's primary
investment objective is to seek capital appreciation principally through
investments in common stock. The Trust may also invest in securities
convertible into common stock such as convertible bonds or preferred stock.
Its secondary investment objective is to seek income from dividends and
interest. Because of the risks inherent in any investment program, the Trust
cannot ensure that its investment objectives will be realized. The following
is a summary of significant accounting policies consistently followed by the
Trust in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles for investment
companies.
A. SECURITY VALUATION. Investments in securities traded on a national
securities exchange are valued at the last reported sales price on the last
business day of the period. Unlisted securities, or listed securities in which
there were no sales, are valued at the mean of the closing bid and ask prices.
Short-term obligations with remaining maturities of 60 days or less are valued
at cost plus accrued interest which approximates market value.
B. OTHER. As is common in the industry, security transactions are accounted
for on the date the securities are purchased or sold (trade date). Cost is
determined and gains and losses are based on the identified cost basis for
both financial statement and federal income tax purposes. Dividend income and
distributions to shareholders are reported on the ex-dividend date. Interest
income and estimated expenses are accrued daily. Distributions are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. Those differences are primarily due to
different treatments for net operating losses.
C. NET ASSET VALUE PER SHARE. Net asset value per share of the capital stock
of the Trust is determined daily as of the close of trading on the New York
Stock Exchange by dividing the value of its net assets by the number of Trust
shares outstanding. The offering price and redemption price per share is the
same as the net asset value per share.
D. FEDERAL INCOME TAXES. It is the policy of the Trust to comply with
requirements of the Internal Revenue Code applicable to regulated investment
companies, if such qualification is in the best interest of its stockholders,
and to make distributions of net investment income and capital gains (after
reduction for any amounts available for federal income tax purposes as capital
loss carryovers) sufficient to relieve it from all, or substantially all,
federal income taxes.
<PAGE>
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996
- -------------------------------------------------------------------------------
E. USE OF ESTIMATES IN FINANCIAL STATEMENTS. In preparing financial statements
in conformity with generally accepted accounting principles, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, as well as the reported
amounts of income and expenses during the reporting period. Actual results may
differ from these estimates.
NOTE 2 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, other than short-term investments,
aggregated $27,044,280 and $26,693,537, respectively, for the year ended June
30, 1996.
NOTE 3 - INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Trainer, Wortham & Co., Inc. (the "Advisor") is the investment advisor for the
Trust pursuant to an investment advisory agreement (the "Agreement") effective
October 31, 1991. Under the terms of the Agreement, the Advisor receives an
annual fee, accrued daily and paid quarterly, of 0.75% on the first
$40,000,000 of the average daily net assets of the Trust and 0.50% on average
daily net assets over $40,000,000.
For the year ended June 30, 1996, the Trust paid the Advisor $191,340 in
advisory fees. The Trust has adopted a Distribution Plan (the "Plan"),
effective October 31, 1991, pursuant to Rule 12b-1 under the Investment
Company Act of 1940, which permits the Trust to pay certain expenses
associated with the distribution of its shares. The Plan provides that the
Trust will reimburse Fund/Plan Broker Services, Inc. (the "Distributor"), the
Trust's sole Underwriter and Distributor, for actual distribution and
shareholder servicing expenses incurred by the Distributor not exceeding, on
an annual basis, 0.25% of the Trust's average daily net assets. For the year
ended June 30, 1996, the Trust reimbursed the Distributor $63,780 for
distribution costs incurred.
NOTE 4 - RESTRICTED SECURITIES
The investment in 50,000 shares of Queen Sand Resources, Inc. common stock,
the sale of which is restricted, has been valued by the Board of Trustees
after considering certain pertinent factors, including the results of
operations of Queen Sands Resources, Inc. since the date of purchase in 1995
and the sales price of recent private placements in its common stock. There is
no quoted market value for Queen Sands Resources, Inc. shares.
<PAGE>
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996
- -------------------------------------------------------------------------------
Certain officers and trustees of the Trust are affiliated persons of the
Advisor.
FIRST MUTUAL FUNDS
845 Third Avenue, 6th Floor
New York, NY 10022
OFFICERS INVESTMENT ADVISOR
David P. Como, President Trainer, Wortham & Co., Inc.
H. Williamson Ghriskey, Jr. 845 Third Avenue, 6th Floor
Vice President/Treasurer New York, NY 10022
Charles H.G. Honey
Vice President
Debra L. Clark, Secretary
LEGAL COUNSEL AUDITORS
Stradley, Ronon, Stevens, & Young Tait, Weller & Baker
2600 One Commerce Square Two Penn Center Plaza, Suite 700
Philadelphia, PA 19103 Philadelphia, PA 19102
CUSTODIAN FUND ADMINISTRATION
United Missouri Bank KC, NA Fund/Plan Services, Inc.
P.O. Box 412797 P.O. Box 874
Kansas City, MO 64141-2797 Conshohocken, PA 19428
This report is submitted for the general information of the shareholders of
the Trust. It is not authorized for distribution to prospective investors in
the Trust unless preceded or accompanied by an effective Prospectus which
includes details regarding the Trust's objectives, policies, expenses and
other information.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
First Mutual Funds
New York, New York
We have audited the statement of assets and liabilities of First Mutual
Funds, including the schedule of investments, as of June 30, 1996, 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 for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 June 30, 1996, 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
First Mutual Funds, as of June 30, 1996, and 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 for each of the five
years in the period then ended are in conformity with generally accepted
accounting principles.
TAIT, WELLER & BAKER
Philadelphia, PA
July 11, 1996
<PAGE>
DIVIDEND NOTICES
- -------------------------------------------------------------------------------
Note the following information is required by section 854(b)(2) of the
Internal Revenue Code and is based on the Trust's tax year July 1, 1995 to
June 30, 1996:
<TABLE>
<CAPTION>
ORDINARY INCOME
DISTRIBUTIONS PER SHARE PERCENTAGE
------------------------------ QUALIFYING
FROM FROM 70% DIVIDENDS LONG TERM
INVESTMENT SHORT TERM RECEIVED DEDUCTION CAPITAL GAINS
DATE PAID INCOME CAPITAL GAINS FOR CORPORATIONS PER SHARE
- --------- ---------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
12/29/95 .000 .658 6% .266
</TABLE>
Form 1099-DIV will be mailed to you in late January 1997, providing you with
the nature and dollar amounts of all distributions paid in calendar 1996 and
should be used to complete your 1996 tax return.
<PAGE>
ILLUSTRATION OF $10,000 INVESTMENT
- --------------------------------------------------------------------------------
The graph below compares the increase in value of a $10,000 investment in First
Mutual Funds with the performance of the Standard & Poors 500 Index. The values
are as of June 30th for each of the last ten years. The values and returns for
First Mutual Funds includes reinvested dividends.
[Graph comparing the increase in value of a $10,000 investment in First Mutual
Funds with the performance of the Standard & Poors 500 Index appears here]
<PAGE>
(This page intentionally left blank)
<PAGE>
TRUSTEES:
Robert H. Breslin, Jr.
David P. Como
Raymond Eisenberg
David Elias
Robert S. Lazar
Martin S. Levine
Therese C. Thibadeau
James F. Twaddell
FOR ADDITIONAL
INFORMATION
OR A PROSPECTUS
PLEASE CALL
[LOGO OF FIRST MUTUAL FUNDS APPEARS HERE]
845 THIRD AVENUE
NEW YORK, NY 10022
ANNUAL REPORT
JUNE 30, 1996
[LOGO OF FIRST MUTUAL FUNDS APPEARS HERE]
FIRST
MUTUAL
FUNDS
