<R/R>
FIRST PACIFIC MUTUAL FUND, INC. Prospectus dated
2756 Woodlawn Drive, #6-201 May 29, 1996
Honolulu, Hawaii 96822
FIRST PACIFIC MUTUAL FUND, INC.
First Pacific Mutual Fund, Inc. (the "Corporation") is a mutual fund,
organized as a non-diversified open-end management investment company. In
this Prospectus all references to any series of the Corporation will be
called the "Fund" unless expressly noted otherwise. The Corporation offers
three series of shares each of which has different investment objectives and
investment policies. Each Fund's net asset value will fluctuate.
First Idaho Tax-Free Fund (the "Fund"). The objective of this Fund
is to provide a high level of current income exempt from federal and Idaho
state income taxes, consistent with preservation of capital. The Fund
attempts to achieve its objective by investing primarily in a varied
portfolio of investment grade municipal securities which pay interest exempt
from federal and Idaho income taxes. There can be no assurance that the
Fund will meet its stated objective.
First Pacific Management Corporation (the "Manager") manages the
Fund's portfolio of investments.
This Prospectus sets forth the information about the Fund that a
prospective investor should know before investing in the Fund. Please read
and retain this Prospectus for future reference.
_____________________
A Statement of Additional Information, dated May 29, 1996,
containing additional information about the Fund has been filed with the
Securities and Exchange Commission and is hereby incorporated by reference
into this Prospectus. A copy of the Statement of Additional Information may
be obtained without charge by calling (808) 988-8088.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
FUND EXPENSE TABLE.................................................. 3
PROSPECTUS SUMMARY.................................................. 4
INVESTMENT OBJECTIVE AND POLICIES................................... 5
MUNICIPAL SECURITIES................................................ 6
INVESTMENT PRACTICES................................................ 7
PURCHASING SHARES OF THE FUND....................................... 8
DISTRIBUTIONS FROM THE FUND......................................... 11
REDEMPTION OF SHARES................................................ 11
NET ASSET VALUE..................................................... 12
TAX STATUS.......................................................... 13
OFFICERS AND DIRECTORS.............................................. 14
INVESTMENT MANAGER.................................................. 14
CUSTODIAN........................................................... 15
THE DISTRIBUTION PLAN............................................... 16
ALLOCATION OF BROKERAGE TRANSACTIONS................................ 16
SHAREHOLDER SERVICES AND REPORTS.................................... 16
GENERAL INFORMATION AND HISTORY..................................... 17
FIRST IDAHO TAX-FREE FUND EXPENSES
The following table illustrates all expenses and fees that a
shareholder of the Fund will incur.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases............................. 2.75%
Sales Charge Imposed on Reinvested Dividends........................... None
Contingent Deferred Sales Charge....................................... None
Redemption Fees........................................................ None
Annual Operating Expenses
(as a percentage of average net assets)
Management Expenses.................................................. .50%
12b-1 Fees........................................................... .50 1
Other Expenses (Estimated).......................................... .15
Total Operating Expenses............................................ 1.15%
The purpose of this table is to assist the investor in understanding
the various expenses that an investor in the Fund will bear directly or
indirectly. The expenses set forth above are based on estimated amounts for
the fiscal year ending September 30, 1996. Long-term shareholders may pay
more than the economic equivalent of the maximum front-end sales charges
permitted by the National Association of Securities Dealers.
The following example illustrates the expenses that you would pay on
$1,000 investment over various time periods assuming (1) a 5% annual rate
of return and (2) redemption at the end of each time period. As noted in
the table above, the Fund charges no redemption fees of any kind.
1 year 3 years
$39 $63
This example should not be considered a representation of past or future
expenses or actual performance. Actual expenses may be greater or less than
those shown.
_________________________
1 The Manager and the Distributor have indicated they will waive a
portion of the Fund's Management Expenses and 12b-1 fees during the period
ending September 30, 1996. Such waivers may cease at any time.
PERFORMANCE
From time to time, the Fund may advertise its total return, yield and
tax equivalent yield. The "total return" of the Fund refers to the average
annual compounded rate of return over 1, 5 and 10 year periods or for the
life of the Fund (which periods will be stated in the advertisement) that
would equate an initial amount invested at the beginning of a stated period
to the ending redeemable value of the investment. The calculation assumes
the reinvestment of all dividends and distributions, includes all recurring
fees that are charged to all shareholder accounts and a deduction of all
nonrecurring charges deducted at the end of each period. Aggregate total
return may also be presented for various periods; such return represents the
cumulative change in value of an investment in the Fund for the specific
period (reflecting changes in Fund share prices and assuming reinvestment
of dividends and distributions). Total return may be quoted with or without
giving effect to any voluntary expense limitations in effect for the Fund
during the relevant period. The "yield" of the Fund is computed by dividing
the net investment income per share earned during the period stated in the
advertisement (using the average number of shares entitled to receive
dividends) by the maximum offering price per share on the last day of the
period. The calculation includes among expenses of the Fund, for the
purpose of determining net investment income, all recurring fees that are
charged to all shareholder accounts and any nonrecurring charges for the
period stated. The yield formula provides for semi-annual compounding which
assumes that net investment income is earned and reinvested at a constant
rate and annualized at the end of a six-month period. The "tax equivalent"
yield of the Fund is calculated by determining the pre-tax yield which,
after being taxed at a stated rate, would be equivalent to the stated
current yield calculated as described above. The Fund's Annual Report will
contain additional performance information. It will be available following
the completion of the Fund's fiscal year, without charge upon request to the
Fund by writing to the address or calling the phone number on the cover of
this Prospectus.
PROSPECTUS SUMMARY
Offering Price,
and Minimum The minimum initial investment is $1,000 with $100
Purchase minimum subsequent investment; less in certain
circumstances. Shares are sold at net asset value
plus any applicable sales charge. See
"PURCHASING SHARES OF THE FUND".
Investment
Objective and Policies The Fund seeks to provide a high level of current
income exempt from federal and Idaho state income
taxes, consistent with preservation of capital.
There is no assurance that this objective will be
achieved. The Fund will invest primarily in a
varied portfolio of investment grade Idaho
municipal securities. The Fund will primarily
invest in municipal securities issued by or on
behalf of the State of Idaho and its political
subdivisions, agencies and instrumentalities,
certain interstate agencies and certain territories
of the United States. Municipal securities include
municipal bonds, as well as shorter term municipal
notes, municipal leases, zero coupon bonds, pre-
refunded bonds, and tax exempt commercial paper.
Individual bonds could range in maturity from three
months to forty years. The net asset value per
share may increase or decrease depending on changes
in interest rates and other factors affecting the
municipal credit markets. The Fund will not invest
more than 10% in lower rated municipal securities.
See"INVESTMENT OBJECTIVES AND POLICIES".
Risks and
Investment Practices Subject to certain limitations, the Fund may lend
its portfolio securities, and enter into
when-issued or delayed delivery transactions.
These investments entail certain risks. Tax-exempt
securities may be adversely affected by local
political and economic conditions and developments
within the State and the United States of America
which adversely affect issuers of such tax-exempt
securities. Adverse conditions in the State of
Idaho's significant industries could have a
correspondingly adverse effect on specific issuers
within the State or on anticipated revenue of the
State. In the event of the bankruptcy of a
borrower of Fund portfolio securities, the Fund
could experience delays in recovering either the
securities loaned or its cash. To the extent that
the value of the securities loaned has increased or
the value of the collateral held by the Fund has
decreased, the Fund could experience a loss. When
the time comes to receive and pay for a when-issued
security, the security may have a value greater or
less than the Fund's fixed payment obligation. See
"MUNICIPAL SECURITIES" and "INVESTMENT PRACTICES."
Investment Manager First Pacific Management Corporation is the Fund's
Investment Manager. The Investment Manager was
organized in 1988. The annual management fee is
.50% of average daily net assets.
Distributions from Distributions from net investment income are
Fund declared daily and paid monthly. Capital gains,
if any, are distributed annually. See
"DISTRIBUTIONS FROM THE FUND."
Redemption Shares may be redeemed at the next determined net
asset value. The Fund may require involuntary
redemption of shares if the value of an account is
less than $500. See "REDEMPTION OF SHARES."
Transfer Agent First Pacific Recordkeeping, Inc. See "SHAREHOLDER
SERVICES AND REPORTS."
The above is qualified in its entirety by
reference to the more detailed information
included elsewhere in this Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide a high level of current
income exempt from federal and Idaho state income taxes, consistent with
preservation of capital. There can be no assurance that the Fund will
achieve its investment objective, which may be changed only with shareholder
approval.
The Fund will generally invest its assets in a varied portfolio of
investment grade municipal securities which are general obligation and
revenue bonds and notes issued by or on behalf of the State of Idaho and its
political subdivisions, agencies and instrumentalities, certain interstate
agencies and certain territories of the United States, the interest on
which, in the opinion of bond counsel or other counsel to the issuer of such
securities, is exempt from federal and Idaho state income taxes. In normal
circumstances up to 100%, but not less than 80%, of the Fund's net assets
will be invested in the foregoing types of municipal securities. The
foregoing is a fundamental policy and cannot be changed without shareholder
approval. In certain instances the interest on municipal securities may be
an item of tax preference includable in alternative minimum taxable income
depending upon the shareholder's tax status. The Fund may invest up to 20%
of its total assets in securities which generate interest which is treated
as an item of tax preference and subject to federal and state alternative
minimum tax. (See "TAX STATUS".) The Fund may invest up to 10% of its
assets in bonds rated BB or Ba grade municipal securities. The lowest
quality municipals in which each Fund will invest are those rated BB by S&P,
Ba by Moody's or which are unrated, but judged by the Investment Manager to
be of equivalent quality. (See "Municipal Securities-Medium and Lower Grade
Municipal Securities" below.)
When the Investment Manager determines during periods of adverse
market conditions, including when Idaho tax exempt securities are
unavailable, the Fund may invest up to 20% of the value of its net assets
for temporary defensive purposes in money market instruments the interest
on which may be subject to federal, state or local income tax.
MUNICIPAL SECURITIES
General
Municipal securities are debt obligations issued by or on behalf of
the government of states, territories or possessions of the United States,
the District of Columbia and their political subdivisions, agencies and
instrumentalities, the interest on which is generally exempt from the
regular Federal income tax.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. "General obligation" bonds are secured by
the issuer's pledge of its faith, credit and taxing power for the payment
of principal and interest. "Revenue" bonds are usually payable only from
the revenue derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source. Industrial development bonds are usually revenue bonds, the
credit quality of which is normally directly related to the credit standing
of the industrial user involved.
There are, in addition, a variety of hybrid and special types of
municipal securities, including variable rate securities, municipal notes
and municipal leases. Variable rate securities bear rates of interest that
are adjusted periodically according to formulae intended to minimize
fluctuations in values of the instruments. Municipal notes include tax,
revenue and bond anticipation notes of short maturity, generally less than
three years, which are issued to obtain temporary funds for various public
purposes. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities such as fire, sanitation or police vehicles or telecommunications
equipment, buildings or other capital assets. The Fund may invest in
municipal leases without limit. Some municipal securities may not be backed
by the faith, credit and taxing power of the issuer. Zero coupon bonds are
debt obligations which do not require the periodic payment of interest and
are issued at a significant discount from face value. Pre-refunded bonds
are municipal bonds for which the issuer has previously provided money
and/or securities to pay the principal, any premium and interest on the
bonds to their maturity date or to a specific call date. A more detailed
description of the types of municipal securities in which the Fund may
invest is included in the Statement of Additional Information.
From time to time, proposals have been introduced before Congress that
would have the effect of reducing or eliminating the federal tax exemption
on income derived from municipal securities. If such a proposal were
enacted, the ability of the Fund to pay tax exempt interest dividends might
be adversely affected. The Tax Reform Act of 1986 also limits the types and
amounts of securities eligible to pay tax exempt interest, which may
restrict the range of tax exempt securities available for investment by the
Fund.
Investors should be aware that the net asset value of the Fund may
change as general levels of interest rates fluctuate. When interest rates
increase, the value of the Fund's portfolio securities can be expected to
decline. Conversely, when interest rates decline, the value of the Fund's
portfolio securities can be expected to increase.
Investment Grade Municipal Securities
The Fund will invest its assets primarily (up to 100% but not less
than 90%), in securities which, at the time of purchase, are either rated
within the four highest grades assigned by Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa, A and Baa) or Standard & Poor's Corporation ("S&P")
(AAA, AA, A and BBB); or if unrated, are judged by the Investment Manager
to be of comparable quality to such rated securities. Bonds which are rated
Baa or BBB are considered as medium grade obligations, i.e. they are neither
highly protected nor poorly secured. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Although the Fund will invest primarily in investment grade municipal
securities, from time to time the Fund may also invest in medium grade
municipal securities and in lower grade municipal securities. The
Investment Manager attributes to medium and lower quality obligations the
same general characteristics as do rating services such as Standard & Poor's
and Moody's.
Lower Grade Municipal Securities
Municipal securities which are in lower grade categories generally
offer a higher current yield than is offered by municipal securities which
are in the higher grade categories, but they also generally involve greater
price volatility and greater credit and market risk. Lower grade municipal
securities, including those rated BB and Ba, are generally regarded as
having predominantly speculative capacity to pay interest and repay
principal in accordance with their terms. A more detailed description of
the risks of investing in such municipal securities is set forth in the
Statement of Additional Information.
Certain Considerations Regarding Idaho Securities
The ability of the Fund to meet its objective is affected by the
ability of municipal issuers to meet their payment obligations. There are
additional risks associated with an investment which invests primarily in
issues of one state. Since the Fund invests primarily in obligations of
issuers located in Idaho, the marketability and market value of these
obligations may be affected by certain Idaho constitutional provisions,
legislative measures, executive orders, administrative regulations, and
voter initiatives.
The Idaho economy is concentrated in construction, manufacturing,
agriculture, tourism, food products, lumber and mining. Agriculture related
business ranks as the state's number one industry with cash receipts of
close to $3 billion. Over 18,000 Idahoans are employed in food processing
operations and more than 32,000 work on farms and ranches. The service
producing sector accounts for nearly eight out of every ten nonfarm jobs in
Idaho. Tourism is growing rapidly and is Idaho's third largest industry.
Idaho's hi-tech industry has continued to grow at a rapid pace and may
become the state's largest employer.
INVESTMENT PRACTICES
"When-Issued" and "Delayed Delivery" Transactions
The Fund may purchase and sell municipal securities on a "when-issued"
and "delayed delivery" basis. No income accrues to the Fund on municipal
securities in connection with such transactions prior to the date the Fund
actually takes delivery of and makes payment for such securities. These
transactions are subject to market fluctuation; the value of the municipal
securities at delivery may be more or less than their purchase price, and
yields generally available on municipal securities when delivery occurs may
be higher or lower than yields on the municipal securities obtained pursuant
to such transactions. Because the Fund relies on the buyer or seller, as
the case may be, to consummate the transaction, failure by the other party
to complete the transaction may result in the Fund missing the opportunity
of obtaining a price or yield considered to be advantageous. When the Fund
is the buyer in such a transaction, however, it will maintain, in a
segregated account with its custodian, cash or high-grade municipal
portfolio securities having an aggregate value equal to the amount of such
purchase commitments until payment is made. The Fund will make commitments
to purchase municipal securities on such basis only with the intention of
actually acquiring these securities, but the Fund may sell such securities
prior to the settlement date if such sale is considered advisable. To the
extent the Fund engages in "when-issued" and "delayed delivery"
transactions, it will do so for the purpose of acquiring securities for the
Fund's portfolio consistent with the Fund's investment objective and
policies and not for the purpose of investment leverage.
Other Practices
The Fund may invest in municipal bonds with a maturity range as long
as 40 years. The Fund will seek to invest in municipal bonds of such
maturities that, in the judgment of the Fund and the Investment Manager,
will provide a high level of current income consistent with liquidity
requirements and market conditions.
The Fund may borrow amounts up to 5% of its net assets (including
reverse repurchase agreements) in order to pay for redemptions when
liquidation of portfolio securities is considered disadvantageous or
inconvenient and may pledge up to 10% of its net assets to secure such
borrowing.
It is possible that the Fund will invest more than 25% of its assets
in a particular segment (bonds financing similar projects such as utilities
or hospitals) of the municipal bond market. (An investment of more than 25%
of assets in a particular segment of the municipal bond market differs from
an investment (i.e., concentration) of more than 25% of assets in a single
industry.) In such circumstances, economic, business, political or other
changes affecting one bond might also affect other bonds in the same
segment, thereby potentially increasing market risk with respect to the
bonds in such segment. Such changes could include, but are not limited to,
proposed or suggested legislation involving the financing of projects within
such segments, declining markets or needs for such projects and shortages
or price increases of materials needed for such projects.
The Fund intends to invest its assets in a varied portfolio in order
to reduce the impact on the Fund of any loss on a particular portfolio
security. However, in order to attain economies of scale at relatively low
asset size, the Fund may invest more than 5% of its assets in at least five
issuers and may invest as much as 50% of its assets in as few as two
issuers. With respect to the remaining 50% of its assets, it may invest no
more than 5% in the securities of one issuer. Thus, the Fund's investments
may be diversified among fewer issuers than if it were a diversified fund
and, if so, the Fund's net asset value may increase or decrease more rapidly
than a diversified fund if these securities change in value.
PURCHASING SHARES OF THE FUND
The Funds' shares are continuously offered through First Pacific
Securities (the "Distributor"), 2756 Woodlawn Drive, #6-201, Honolulu,
Hawaii 96822. The Distributor is a wholly-owned subsidiary of the Fund's
Investment Manager.
The minimum initial investment to open an account is $1,000, and the
minimum subsequent investment is $100. Shares in the Fund may be purchased
from the Distributor or from members of the National Association of
Securities Dealers who have sales agreements with the Distributor. If an
order is placed with a broker-dealer, the broker-dealer is responsible for
promptly transmitting the order to the Fund. Direct purchase orders may be
made by submitting a check or wiring funds and in the case of a new account,
a completed application sent to the Fund's transfer agent, First Pacific
Recordkeeping, Inc. ("Transfer Agent") at the following address: First
Pacific Recordkeeping, Inc., 2756 Woodlawn Drive, #6-201, Honolulu, Hawaii,
96822. For subsequent investments, the stub from the bottom of the
shareholder confirmation should be sent along with the check.
All orders for the purchase of shares are subject to acceptance or
rejection by the Corporation or by the Distributor. Direct purchase orders
received by the Transfer Agent by 4:00 p.m., Eastern Standard Time, are
confirmed at that day's net asset value plus any applicable sales charge,
which will vary with the amount purchased. Direct purchase orders received
by the Transfer Agent after 4:00 p.m. Eastern Standard Time are confirmed
at the next determined net asset value plus any applicable sales charge,
next determined on the following business day. Should an order to purchase
shares be canceled because an investor's check does not clear, the investor
will be responsible for any resulting losses or fees incurred in that
transaction.
Shares are offered at net asset value plus any applicable sales charge as
follows:
<TABLE>
<CAPTION>
Concession to
As a % of Dealers as a
Amount of As a % of Net Amount % of Amount
Investment Offering Price Invested Invested
______________________________________________________________
<S> <C> <C> <C>
Less than $50,000 2.75% 2.83% 2.25%
$50,000 but less
than $100,000 2.25% 2.30% 1.75%
$100,000 but less
than $250,000 1.75% 1.78% 1.25%
$250,000 but less
than $500,000 1.25% 1.27% 0.95%
$500,000 but less
than $1,000,000 1.00% 1.01% 0.80%
$1,000,000 and over 0.00% 0.00% 0.25%*
<FN>
* The Distributor may pay a concession to dealers, out of its own
assets, a fee of up to .25% of the offering price of sales of $1,000,000 or
more. However, the Distributor reserves the right to recoup any portion of
the amount paid to the dealer if the investor redeems some or all of the
shares from the Fund within thirteen months of the time of purchase.
</FN>
</TABLE>
The issuance of shares is recorded on the books of the Fund in full
and fractional shares carried to the third decimal place. To avoid
additional operating costs, and for investor convenience, share certificates
will not be issued. The Fund's shares are offered at the net asset value
next computed, plus any applicable sales charge, after the Transfer Agent
receives a check and order to purchase from an investor's securities dealer
or broker or directly from the investor. There is a sales load of up to
2.75% imposed on purchases of Fund shares at the time of purchase.
Investors may make systematic investments in fixed amounts
automatically on a monthly basis through the Fund's Automatic Investment
Plan. Information is available by contacting the Fund or your broker-
dealer.
Fund shares may be purchased at reduced sales charges through a Letter
of Intention (LOI). Through an LOI, you may pay a lower sales charge if the
dollar amount of shares currently being purchased plus the dollar amount of
any purchases you intend to make during the next thirteen months of shares
of the Fund equals $50,000 or more. Shares acquired up to 90 days before
the LOI is filed will be counted toward completion of the LOI, and will be
entitled to a retroactive downward adjustment of the initial sales charge.
You or your dealer must inform us each time that a purchase is made under
a LOI. Automatic Investment Plans are not allowed for LOI purchases. Your
first purchase must be at least 5% of the LOI amount. If the transfer
agent does not receive a completed LOI within 20 business days after
settlement of the first LOI purchase or if the total purchases indicated on
the LOI are not made within the thirteen month period, your account will be
charged with the difference between the reduced LOI sales charge and the
sales charge applicable to the purchase actually made. Out of your initial
purchase, 5% of the dollar amount specified will be held in escrow during
the thirteen month period (registered in your name) to assure such necessary
payment. If you redeem your account during this period, the applicable Fund
will withhold from the escrow amount sufficient shares to pay any unpaid
sales charge.
Fund shares may be purchased without a sales charge by employees,
directors and officers of the Fund, investment executives and other
employees of dealers that have selling agreements with the Distributor, and
the spouses and children under 21 years of age of any of the foregoing
persons.
Investors will be entitled to begin receiving dividends on such shares
on the next business day after the Fund receives good funds for such order.
It is the responsibility of an investor, or an investor's broker or dealer,
to promptly forward payment to the Corporation for shares being purchased.
The Distributor from time to time pays certain additional cash
incentives of up to $100 and/or non-cash incentives such as vacations or
other prizes to broker-dealers and financial institutions in consideration
of their sales of Fund shares. In some instances, other incentives may be
made available only to selected broker-dealers and financial institutions,
based on objective standards developed by the Distributor, to the exclusion
of other broker-dealers and financial institutions. The Distributor in its
discretion may from time to time, pursuant to objective criteria established
by it, pay fees to qualifying brokers, dealers or financial intermediaries
for certain services or activities which are primarily intended to result
in sales of shares of the Fund.
In-Kind Purchases
Under certain circumstances, an investor may purchase Fund shares by
delivering to the Fund securities eligible for the Fund's portfolio. All
in-kind purchases are subject to prior approval by the Manager. Prior to
sending securities to the Fund with a purchase order, investors must contact
the Manager at (808) 988-8088 for verbal approval of the in-kind purchase.
Acceptance of such securities will be at the discretion of the Manager based
on its judgment as to whether, in each case, acceptance of the securities
will allow the Fund to acquire the securities at no more than the cost of
acquiring them through normal channels. Fund shares purchased in exchange
for securities are issued at the next determined net asset value plus any
applicable sales charge, after receipt of securities and the purchase order.
Securities accepted for in-kind purchases will be valued in the same manner
as portfolio securities, described below under "NET ASSET VALUE", at the
value next determined after receipt of the purchase order. Approval by the
Manager of in-kind purchases will not delay valuation of the securities
accepted for in-kind purchases or fund shares issued in exchange for such
securities. The in-kind exchange, for tax purposes, constitutes the sale
of one security and the purchase of another. The sale may involve either
a capital gain or loss to the shareholder for federal income tax purposes.
DISTRIBUTIONS FROM THE FUND
The Fund will declare distributions on a daily basis and will pay such
distributions on a monthly basis. The Fund will also make distributions to
investors of its net realized capital gains, if any, annually. The monthly
distribution is composed of all or a portion of investment income earned by
the Fund, less the Fund's expenses. Capital gain distributions consist of
the Fund's realized gain on transactions in securities and in futures and
options hedging transactions, net of any realized capital losses, less any
carryover capital losses from previous years.
The Fund will automatically credit monthly distributions and any
annual net long-term capital gain distributions to an investor's account in
additional shares of the Fund valued at net asset value, unless an investor
elects otherwise to the Fund's transfer agent. This election must be made
by writing to the Transfer Agent. If an investor elects to change the
method of distribution, such change will be effective only with regard to
distributions for which the payment date is seven or more business days
after the Transfer Agent has received the request.
REDEMPTION OF SHARES
Written Redemption Request
Investors may redeem shares at any time by mailing a written
redemption request in proper form to the Transfer Agent. This request
should be sent to First Pacific Recordkeeping, Inc., 2756 Woodlawn Drive,
#6-201, Honolulu, HI 96822. The request should indicate the amount to be
redeemed, identify the account number and be signed exactly as the shares
are registered. If the amount being redeemed is in excess of $50,000, or
if proceeds are to be sent to anyone other than the registered shareholder
or address of record, signature(s) must be guaranteed by an acceptable
financial institution such as a bank, savings and loan association, trust
company, credit union, broker dealer, registered securities association or
clearing agency. From time to time, the Transfer Agent, in its discretion,
may waive any or certain of the foregoing requirements in particular cases.
Investors will receive the net asset value per share next computed after the
Transfer Agent receives the redemption request in proper form.
Telephone Redemptions
Investors who have previously established the telephone redemption
privilege may sell shares by calling the Transfer Agent at (808) 988-8088
before 4:00 p.m. Eastern Standard Time to request a redemption. Prior to
redeeming shares by telephone the "Redemption Instructions" section of
either the Account Application or Expedited Telephone Redemption and
Exchange Request Form (the "Authorization") must be completed and on file
with the Transfer Agent. The signature(s) on the Authorization must be
medallion guaranteed by an acceptable financial institution such as a bank,
savings and loan association, trust company, credit union, broker dealer,
registered securities association or clearing agency unless the
Authorization is completed at the time an account is originally established.
A redemption requested by telephone will be processed at the net asset value
next determined after receipt of the request. The proceeds would then be
made payable to the registered shareowner(s) and mailed to the address
registered on the account or wired to a bank, as requested on the
Authorization. If the amount being redeemed is $50,000 or more, see
"Written Redemption Request". In addition, this service is not available
with respect to shares purchased by check until 15 days after purchase.
By utilizing the telephone redemption service, an investor authorizes
the Transfer Agent or its agent to act upon the instructions of any person
by telephone to redeem shares for any account for which such service has
been authorized to the address of record of such account. The Fund and the
Transfer Agent will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These procedures
include requiring the investor to provide certain personal identification
at the time an account is opened and prior to effecting each transaction
request by telephone. In addition, investors may be required to provide
additional telecopied written instructions of such transaction requests.
The Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent telephone instructions if the Fund or the
Transfer Agent does not employ these procedures. Neither the Fund nor the
Transfer Agent will be responsible for any loss, liability, cost or expense
for following instructions received by telephone that it reasonably believes
to be genuine. To change the name of the commercial bank or the account
designated to receive redemption proceeds, a written request must be sent
to the Fund at the Corporation's address. Requests to change the bank or
account must be signed by each shareholder and each signature must be
medallion guaranteed. This service may be amended or terminated at any time
by the Transfer Agent or the Fund.
Redemptions Through Certain Broker Dealers
Certain broker-dealers who have sales agreements with the Distributor
may allow their customers to redeem shares of the Fund purchased through
that broker-dealer by notifying the broker-dealer directly. The broker-
dealer is then responsible for promptly placing the redemption request with
the Fund on the customer's behalf. Payment will be made to the shareholder
by check or wire sent to the broker-dealer. Broker-dealers offering this
service may impose a fee or additional requirements for such redemptions.
General
Whether shares are redeemed by the Fund or sold through a securities
dealer, a check for the proceeds (net of any required tax withholding)
ordinarily will be mailed to investors or their dealer as the case may be
within five business days after a redemption request or repurchase order are
received in proper form as set forth above or such shorter period as may be
required by applicable law. Wire transfers from the Fund of redemption
proceeds, in the manner described above, ordinarily will be transmitted to
the investor within two business days. If any shares are redeemed or
repurchased shortly after purchase, the Fund will not mail the proceeds
until checks received for the purchase of shares have cleared, which may
take 10 days or more. The proceeds, of course, may be more or less than the
cost of the shares.
The right of redemption by the Fund may be suspended or the date of
payment postponed for more than seven days during any period when the New
York Stock Exchange is closed (other than customary weekend and holiday
closings), when an emergency exists as defined by rules and regulations of
the Securities and Exchange Commission, or during any period when the
Securities and Exchange Commission has by order permitted such suspension
or postponement.
The Fund reserves the right to redeem an investor's account where the
account is worth less than $500. The Fund will advise the shareholder of
such intention in writing at least sixty (60) days prior to effecting such
redemption, during which time the shareholder may purchase additional shares
in an amount necessary to bring the account back to $500. The Fund will not
redeem an investor's account which is worth less than $500 solely on account
of a market decline.
NET ASSET VALUE
The net asset value per share for the Fund is determined by
calculating the total value of the Fund's assets, deducting its total
liabilities, and dividing the result by the number of shares outstanding.
The net asset value is computed once daily as of 4:00 p.m. Eastern Standard
Time, Monday through Friday, except on customary business holidays, or
except on any day on which no purchase or redemption orders are received,
or there is not a sufficient degree of trading in the Fund's portfolio
securities such that the Fund's net asset value per share might be
materially affected. The Fund reserves the right to calculate the net asset
value and to adjust the public offering price based thereon more frequently
than once a day if deemed desirable.
Fixed income securities are valued by using market quotations, prices
provided by market makers or estimates of market values obtained from yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established in good faith by the Directors of the
Fund. Short-term securities with remaining maturities of less than 60 days
are valued at amortized cost when it is determined by First Pacific's Board
of Directors that amortized cost is the fair value of such securities.
Other assets are valued at fair value as determined in good faith by the
Directors.
TAX STATUS
Federal Taxes
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986 (the "Code"). In each
year the Fund so qualifies and distributes to its shareholders substantially
all of its net investment income and net capital gains, if any, in the
manner required by the Code, it will not be required to pay federal income
taxes, except to the extent that its taxable income is not distributed.
If, at the close of each quarter of the Fund's taxable year, at least
50% of the value of the Fund's total assets consists of obligations exempt
from federal income tax ("tax-exempt obligations"), the Fund will be
qualified to pay exempt interest dividends to its shareholders to the extent
of its tax-exempt interest income (less expenses applicable thereto).
Exempt interest dividends may be treated by shareholders as interest
excludable from their gross income for federal income tax purposes, but may
be taxable distributions for state and local tax purposes. Exempt interest
dividends are included, however, in determining what portion, if any, of a
person's social security benefits will be includable in gross income subject
to federal income tax. Interest with respect to indebtedness incurred or
continued by a shareholder to purchase or carry shares of the Fund is not
deductible to the extent of the exempt interest dividends received from the
Fund.
Exempt-interest dividends attributable to interest income on certain
tax exempt obligations issued after August 7, 1986 to finance private
activities are treated as an item of tax preference for purposes of
computing the alternative minimum tax for individuals, estates and trusts
which may cause a shareholder to be subject to (or result in an increased
liability under) the alternative minimum tax. The Fund may invest up to 20%
of its total assets in securities which generate interest which is treated
as an item of tax preference and subject to federal and state alternative
minimum tax.
Distributions of the Fund's taxable income and net short-term capital
gains, if any, are taxable to shareholders at ordinary income rates.
Distributions of the Fund's net long-term capital gains ("capital gains
dividends"), if any, are taxable to shareholders at the rates applicable to
long-term capital gains regardless of the length of time shares of the Fund
have been held by such shareholders. The Fund will inform shareholders of
the source and tax status of such distributions promptly after the close of
each calendar year. Distributions from the Fund will not be eligible for
the 70% dividends received deduction for corporations because none of the
Funds' net income will arise from dividends on common or preferred stock.
Redemption or resale of shares of the Fund will be a taxable
transaction for federal income tax purposes, and shareholders will recognize
gain or loss in an amount equal to the difference between their basis in
their shares of the Fund and the amount received. Assuming that such shares
are held as a capital asset, the gain or loss will be a capital gain or loss
and will generally be long-term if such shareholders have held their shares
for more than one year. Any loss on shares held for six months or less will
be disallowed to the extent of any exempt interest dividends received with
respect to such shares. If such loss is not entirely disallowed, it will
be treated as a long-term capital loss to the extent of any capital gains
dividends received (or deemed to have been received) with respect to such
shares.
Distributions of the Fund's taxable income and net capital gains, if
any, will be taxable as described above, whether received in shares of the
Fund or in cash. Shareholders who receive distributions in the form of
additional shares will have a basis for federal income tax purposes in each
such share equal to the value thereof on the reinvestment date.
In order to avoid a 4% excise tax on "spillover dividends," the Fund
will be required to distribute by December 31 of each year at least 98% of
its net investment income for such year and at least 98% of its capital gain
net income (computed on the basis of the one-year period ending on October
31 of such year), plus any required distribution amounts that were not
distributed in previous tax years. Dividends that are declared by the Fund
in December of any year and that are actually paid before the following
February to shareholders of record on a specified date in December will be
treated for tax purposes as having been distributed to, and received by,
shareholders in December.
The Fund is required, in certain circumstances, to withhold 31% of
taxable dividends and certain other payments, including redemptions, paid
to shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security
number) or who are otherwise subject to backup withholding. In addition,
the Fund is required, in certain circumstances, to withhold up to 30% of
dividends paid to nonresident aliens.
Idaho Tax Status
Shareholders of the Fund who are subject to Idaho income taxes will
not be subject to Idaho income taxes on the Fund's dividends to the extent
that such dividends qualify as either (1) exempt-interest dividends of a
regulated investment company under Section 852(b)(5) of the Internal Revenue
Code of 1986, which are derived from interest on tax-exempt obligations of
the State of Idaho or any of its political subdivisions (including bonds
issued by certain authorities of the State of Idaho) or on obligations of
the possessions or territories of the United States (such as Puerto Rico,
Virgin Islands or Guam) that are exempt from federal income tax or (2)
dividends derived from interest or dividends on obligations of the United
States and its possessions or on obligations or securities of any authority,
commission or instrumentality of the United States included in federal
adjusted gross income but exempt from state income taxes under the laws of
the United States. To the extent that the Fund's distributions are
attributable to sources not described in the preceding sentences, such as
long or short term capital gains, such distributions will not be exempt from
Idaho income tax.
Persons or entities who are not Idaho residents may be subject to
Idaho income taxation on dividends and distributions made by the Fund to the
extent those dividends and distributions are not tax exempt as explained in
the preceding paragraph.
<R/R>
The Fund will notify its shareholders within 45 days after the close
of the year as to the interest derived from Idaho obligations and exempt
from Idaho income tax.
The tax discussion set forth above is for general information only.
Prospective investors should consult their tax advisors regarding the
federal, state, local, foreign and other tax consequences to them of any
investment in the Fund, including the effects of any changes, including
proposed changes, in the tax laws.
OFFICERS AND DIRECTORS
The officers of the Fund manage its day-to-day operations. The Fund's
manager and its officers are subject to the supervision and control of the
Board of Directors under the laws of Maryland. A list of the directors and
officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years is set forth in the
"Statement of Additional Information."
INVESTMENT MANAGER
First Pacific Management Corporation (the "Manager"), 2756 Woodlawn
Drive, #6-201, Honolulu, Hawaii 96822, was founded in 1988, organized the
Fund in 1996, and acts as its manager. The Manager manages the investment
of the assets of the Fund, provides the Fund with investment research and
administers the Fund's daily business affairs. The Manager engages in a
continuous review and analysis of state and local economic conditions and
trends and governmental activities related to the issuance of state and
local debt obligations. The Manager provides portfolio research and
services. The Manager is responsible for evaluating the portfolio and
overseeing its performance. First Pacific Management Corporation provides
or pays the cost of certain management, supervisory and administrative
services required in the normal operation of the Corporation. This includes
investment management and supervision; remuneration of directors, officers
and other personnel; rent; and such other items that arise in daily
corporate administration. Daily corporate administration includes the
coordination and monitoring of any third parties furnishing services to the
Fund, providing the necessary office space, equipment and personnel for such
Fund business and assisting in the maintenance of the Fund's federal
registration statement and other documents required to comply with federal
and state law. Not considered normal operating expenses, and therefore
payable by the Fund, are organizational expenses, custodian fees,
shareholder services and transfer agency fees, taxes, interest, governmental
charges and fees, including registration of the Fund and its shares with the
Securities and Exchange Commission and the Securities Departments of the
various States, brokerage costs, dues, and all extraordinary costs and
expenses including but not limited to legal and accounting fees incurred in
anticipation of or arising out of litigation or administrative proceedings
to which the Fund, its directors or officers may be subject or a party
thereto. As compensation for the services provided by First Pacific
Management Corporation, the Fund pays the Manager a fee at the annual rate
of .50 of one percent (.50%) of its average daily net assets.
The Manager may voluntarily assume expenses such that it will waive
a portion of its fees to the extent required to meet any applicable state
expense limitation or to maintain a certain voluntary maximum annual expense
ratio for the Fund. Any such expense limitation would reduce the Fund's
expenses and increase its yield.
Certain officers and directors of the Fund are also officers or
directors, or both, of First Pacific Management Corporation. Terrence K.H.
Lee, President of the Fund and the Manager, owns 68% of the stock of the
Manager. The stock of the Manager owned by Mr. Lee and by other
stockholders who are not controlling persons is subject to certain
agreements providing for rights of first refusal as to such stock.
Louis F. D'Avanzo is primarily responsible for the day to day
management of the Fund. Mr. D'Avanzo has been portfolio manager of the
First Hawaii Municipal Bond Fund since August of 1991. Mr. D'Avanzo has
been portfolio manager of the First Hawaii Intermediate Municipal Fund since
its inception in July of 1994. Mr. D'Avanzo has been employed with First
Pacific Management Corporation since July of 1989.
Management Agreement
Subject to the authority of the Board of Directors of the Corporation,
the Manager and the Corporation's officers will supervise and implement the
Fund's investment activities. The Manager implements the investment program
of the Fund and the composition of its portfolio on a day-to-day basis.
The Management Agreement between the Fund and First Pacific
Management Corporation will be submitted to the Fund's initial
shareholder(s) for approval. The Agreement continues in effect for an
initial two-year period and thereafter for successive annual periods, so
long as such continuance is specifically approved at least annually by the
Board of Directors of the Corporation or by a vote of the majority of the
outstanding voting securities of the Fund, and, provided also that such
continuance is approved by a vote of the majority of the directors who are
not parties to the Agreements or interested persons of any such party at a
meeting held in person and called specifically for the purpose of evaluating
and voting on such approval. The Agreement provides that either party may
terminate by giving the other not more than sixty days nor less than thirty
days written notice. The Agreement will terminate automatically if assigned
by either party.
CUSTODIAN
Bank of California of San Francisco, California is the custodian of
the assets of the Fund.
THE DISTRIBUTION PLAN
The Fund has adopted a distribution plan (the "Distribution Plan")
pursuant to Rule 12b-1 under the Investment Company Act of 1940 which
provides that the Fund may spend up to .50% per year of its average daily
net assets in connection with the Fund's activities as a distributor of its
shares. The Board of Directors determined that the Distribution Plan is in
the best interests of the shareholders. Pursuant to the Distribution Plan,
the Fund has entered into a Distribution Agreement with First Pacific
Securities, Inc. (the "Distributor"), to serve as the distributor of the
Fund's shares. Under the Distribution Plan, the Fund will pay the
Distributor for expenditures which are primarily intended to result in the
sale of the Fund's shares such as advertising, marketing and distributing
the Fund's shares and servicing Fund investors, including payments for
reimbursement of and/or compensation to brokers and dealers.
During the initial term of the Distribution Agreement the amounts
payable to the Distributor under the Distribution Plan may not fully
reimburse the Distributor for its actual distribution related expenses. The
Distributor expects to recover such excess amounts through its normal fees
under the Distribution Plan in later years. The Fund is not legally
obligated to repay such excess amounts or any interest thereon, or to
continue the Distribution Plan for such purpose. Distribution Plan payments
are subject to limits under the rules of the National Association of
Securities Dealers.
The Plan provides that the Distributor must submit quarterly reports
to the Board of Directors of the Corporation setting forth all amounts paid
under the Distribution Plan and the purposes for which such expenditures
were made, together with such other information as from time to time is
reasonably requested by the Directors.
The Distribution Plan provides that it will continue in full force and
effect if ratified at the first meeting of Fund shareholders, and thereafter
from year to year so long as such continuance is specifically approved by
a vote of the Directors, and also by a vote of the disinterested Directors,
cast in person at a meeting called for the purpose of voting on the
Distribution Plan. The Distribution Plan for the Fund will be submitted to
the Fund's initial shareholder(s) for approval. The Distribution Plan may
not be amended to increase materially the amount to be spent for the
services described therein without approval by a vote of a majority of the
outstanding voting shares of the Fund, and all material amendments of the
Distribution Plan must be approved by the Directors and also by the
disinterested Directors. The Distribution Plan may be terminated at any time
by a vote of a majority of the disinterested Directors or by a vote of a
majority of the outstanding voting shares of the Fund. While the
Distribution Plan is in effect, selection of the nominees for disinterested
directors is committed to the discretion of the disinterested directors.
ALLOCATION OF BROKERAGE TRANSACTIONS
In effecting purchases and sales of the Fund's portfolio securities,
the Manager and the Fund may place orders with and pay brokerage commissions
to brokers, including brokers which may be affiliated with the Fund, the
Manager, the Distributor or dealers participating in the offering of the
Fund's shares. In addition, in selecting among firms to handle a particular
transaction, subject to best price and execution, the Manager and the Fund
may take into account whether the firm has sold or is selling shares of the
Fund.
SHAREHOLDER SERVICES AND REPORTS
First Pacific Recordkeeping, Inc., transfer agent for the Fund,
performs bookkeeping, data processing and administrative services related
to the maintenance of shareholder accounts. The Transfer Agent also
provides personal services to shareholders of the Fund pursuant to the
Shareholder Services Agreement. Services provided pursuant to this
Agreement include telephone and written communications with shareholders
pertaining to changing dividend payment options, account designations and
addresses, transfers, purchase and redemption transactions and general
maintenance of shareholder relations. The Shareholder Service Agreement
does not duplicate services provided under the Transfer Agent Agreement,
such as maintenance of shareholder accounts and records, or effectuating
redemptions, transfers or opening shareholder accounts. Clerical services
provided by the Transfer Agent on behalf of the Fund under the Shareholder
Services Agreement include personnel as needed, equipment and supplies, to
respond to and process the shareholder inquiries. Bookkeeping services
provided by the Transfer Agent on behalf of the Fund pursuant to this
Agreement, are generally limited to records of transactions and expenditures
originating with the Transfer Agent in connection with providing
supplemental shareholder services and maintaining shareholder relations and
communications.
When an initial investment is made in the Fund, an account will be
opened for each investor on the Fund's books and investors will receive a
confirmation of the opening of the account. Investors will receive monthly
statements giving details of all activity in their account during the month
and will also receive a statement whenever an investment or withdrawal is
made in or from their account. Information for federal income tax purposes
will be provided at the end of the year.
GENERAL INFORMATION AND HISTORY
First Pacific Mutual Fund, Inc. was incorporated in Maryland on July
8, 1988 and has a present authorized capitalization of 100,000,000 shares
of $.01 par value common stock, of which, 20,000,000 shares have been
allocated to the Fund. All shares have like rights and privileges. Each
full and fractional share, when issued and outstanding, has (1) equal voting
rights with respect to matters which affect the Fund, and (2) equal
dividend, distribution and redemption rights to assets of the Fund. Shares
when issued are fully paid and nonassessable. The Corporation may create
other series of stock but will not issue any senior securities.
Shareholders do not have preemptive or conversion rights. These shares have
noncumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors, if they choose to do so, and in such event, the holders of the
remaining less than 50% of the shares voting will not be able to elect any
Directors. The Corporation is not required to hold a meeting of
shareholders each year. The Fund intends to hold annual meetings when it
is required to do so by the Maryland General Corporate Law or the Investment
Company Act of 1940. Shareholders have the right to call a meeting to
consider the removal of one or more of the Directors and will be assisted
in Shareholder communication in such matter.
This prospectus omits certain of the information contained in
the registration statement filed with the Securities and Exchange
Commission, Washington, D.C. These items may be inspected at the offices
of the Commission or obtained from the Commission upon payment of the fee
prescribed.
Shareholder inquiries should be directed to: First Pacific
Securities, Inc., 2756 Woodlawn Drive #6-201, Honolulu, Hawaii 96822.<PAGE>
INVESTMENT MANAGER
First Pacific Management Corporation
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822
DISTRIBUTOR
First Pacific Securities, Inc.
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822
CUSTODIAN
Bank of California
400 California Street
San Francisco, California 94104
LEGAL COUNSEL TO FUND
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
INDEPENDENT AUDITORS
Tait, Weller & Baker
Two Penn Center Plaza, Suite 700
Philadelphia, Pennsylvania 19102
TRANSFER AGENT
First Pacific Recordkeeping, Inc.
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822
LEGAL COUNSEL TO INVESTMENT MANAGER
Hawley Troxell Ennis & Hawley
First Interstate Center
877 West Main, Suite 1000
Boise, Idaho 83701
<R/R>
FIRST PACIFIC MUTUAL FUND, INC.
FIRST IDAHO TAX-FREE FUND SERIES
STATEMENT OF ADDITIONAL INFORMATION
First Pacific Mutual Fund, Inc. (the "Corporation") is a series
investment company organized as a Maryland corporation. In this Statement
of Additional Information all references to any series of the Corporation
will be called the "Fund" unless expressly noted otherwise. First Idaho
Tax-Free Fund is the third series of the corporation. The Fund is a non-
diversified, open-end management investment company whose investment goal
is to provide investors with as high a level of income exempt from federal
income taxes and Idaho personal income taxes as is consistent with prudent
investment management and the preservation of shareholders' capital. The
Fund's portfolio is managed by First Pacific Management Corporation (the
"Manager").
This Statement of Additional Information is not a prospectus but
should be read in conjunction with the Fund's Prospectus dated May 29, 1996,
(the "Prospectus"). A copy of the Prospectus may be obtained without charge
by calling (808) 988-8088.
The Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission ("SEC"), Washington, D.C. This omitted
information may be obtained from the Commission upon payment of the fee
prescribed, or inspected at the Commission's office at no charge.
TABLE OF CONTENTS
Investment Polices and Restrictions........................................2
Additional Investment Considerations ......................................4
Description of Municipal Securities Ratings...............................11
Officers and Directors ...................................................15
Custodian ................................................................16
Fund Accounting ..........................................................17
Independent Auditors .....................................................17
Investment Management Agreement...........................................17
Portfolio Transactions ...................................................17
The Distributor ..........................................................18
Transfer Agent ...........................................................20
Performance ..............................................................21
This Statement of Additional Information is dated May 29, 1996.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is to provide investors with as
high a level of income exempt from federal income taxes and Idaho personal
income taxes as is consistent with prudent investment management and the
preservation of shareholders' capital. The Fund will primarily invest its
assets in obligations issued by or on behalf of the State of Idaho and its
political subdivisions, agencies and certain territories of the United
States, the interest on which is exempt from federal and Idaho state income
taxes in the opinion of counsel.
Fundamental investment restrictions limiting the investments of the
Fund provide that the Fund may not:
1. Purchase any securities (other than obligations issued or
guaranteed by the United States Government or by its agencies or
instrumentalities), if as a result more than 5% of the Fund's total assets
(taken at current value) would then be invested in securities of a single
issuer or if as a result the Fund would hold more than 10% of the
outstanding voting securities of any single issuer, except that with respect
to 50% of the Fund's total assets up to 25% may be invested in one issuer.
2. Invest more than 25% of its assets in a single industry. (As
described in the Prospectus, the Fund may from time to time invest more than
25% of its assets in a particular segment of the municipal bond market;
however, the Fund will not invest more than 25% of its assets in industrial
development bonds in a single industry.)
3. Borrow money, except for temporary purposes from banks or in
reverse repurchase transactions as described in the Statement of Additional
Information and then in amounts not in excess of 5% of the total asset value
of the Fund, or mortgage, pledge or hypothecate any assets except in
connection with a borrowing and in amounts not in excess of 10% of the total
asset value of the Fund. Borrowing (including bank borrowing and reverse
repurchase transactions) may not be made for investment leverage, but only
to enable the Fund to satisfy redemption requests where liquidation of
portfolio securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the Fund.
Notwithstanding this investment restriction, the Fund may enter into "when-
issued" and "delayed delivery" transactions as described in the Prospectus.
4. Make loans, except to the extent obligations in which the Fund may
invest are considered to be loans.
5. Buy any securities "on margin." The deposit of initial or
maintenance margin in connection with municipal bond index and interest rate
futures contracts or related options transactions is not considered the
purchase of a security on margin.
6. Sell any securities "short", write, purchase or sell puts, calls
or combinations thereof, or purchase or sell interest rate or other
financial futures or index contracts or related options, except as
described, from time to time, under the heading "Investment Practices" in
the Prospectus.
7. Act as an underwriter of securities, except to the extent the Fund
may be deemed to be an underwriter in connection with the sale of securities
held in its portfolio.
8. Purchase any illiquid assets, including any security which is
restricted as to disposition under federal securities laws or by contract
("restricted securities" or which is not readily marketable), if as a result
of such purchase more than 15% of the Fund's total assets would be so
invested.
9. Make investments for the purpose of exercising control or
participation in management.
10. Invest in securities of other investment companies, except as part
of a merger, consolidation or other acquisition and except that the Fund may
temporarily invest up to 10% of the value of its assets in Idaho tax exempt
money market funds for temporary defensive purposes, including when
acceptable investments are unavailable. Such tax exempt fund investments
will be limited in accordance with Section 12(d) of the 1940 Act.
11. Invest in equity, interests in oil, gas or other mineral
exploration or development programs.
12. Purchase or sell real estate, commodities or commodity contracts,
except to the extent the municipal securities the Fund may invest in are
considered to be interests in real estate, and except to the extent the
options and futures and index contracts the Fund may invest in are
considered to be commodities or commodities contracts.
The Fund may not change any of these investment restrictions without the
approval of the lesser of (i) more than 50% of the Fund's outstanding shares
or (ii) 67% of the Fund's shares present at a meeting at which the holders
of more than 50% of the outstanding shares are present in person or by
proxy. As long as the percentage restrictions described above are satisfied
at the time of the investment or borrowing, the Fund will be considered to
have abided by those restrictions even if, at a later time, a change in
values or net assets causes an increase or decrease in percentage beyond
that allowed.
Frequent portfolio turnover is not anticipated. The Fund anticipates
that the annual portfolio turnover rate of the Fund will be less than 100%.
The Fund will not seek capital gain or appreciation but may sell securities
held in its portfolio and, as a result, realize capital gain or loss. Sales
of portfolio securities will be made for the following purposes: in order
to eliminate unsafe investments and investments not consistent with the
preservation of the capital or tax status of the Fund; honor redemption
orders, meet anticipated redemption requirements and negate gains from
discount purchases; reinvest the earnings from portfolio securities in like
securities; or defray normal administrative expenses.
ADDITIONAL INVESTMENT CONSIDERATIONS
Municipal Securities. Municipal securities include long-term
obligations, which are often called municipal bonds, as well as shorter term
municipal notes, municipal leases, and tax exempt commercial papers. Under
normal market conditions, longer term municipal securities have greater
price fluctuation than shorter term municipal securities. The two principle
classifications of municipal bonds are "general obligation" and "revenue"
or "special obligation" bonds, which include "industrial revenue bonds."
General obligation bonds are secured by the issuer's pledge of its faith,
credit, and taxing power for the payment of principal and interest. Revenue
or special obligation bonds are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special tax or other specific revenue source such as from the
user of the facility being financed. Municipal leases are obligations
issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may take the form of a lease,
an installment purchase contract, a conditional sales contract, or a
participation certificate in any of the above. Some municipal leases and
participation certificates may not be considered readily marketable. The
"issuer" of municipal securities is generally deemed to be the governmental
agency, authority, instrumentality or other political subdivision, or the
nongovernmental user of a facility, the assets and revenues of which will
be used to meet the payment obligations, or the guarantee of such payment
obligations, of the municipal securities. Zero coupon bonds are debt
obligations which do not require the periodic payment of interest and are
issued at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the
period until maturity at a rate of interest reflecting the market rate of
the security at the time of issuance. Inverse floaters are types of
derivative municipal securities whose interest rates bear an inverse
relationship to the interest rate on another security or the value of an
index. These securities usually permit the investor to convert the floating
rate to a fixed rate (normally adjusted downward), and this optional
conversion feature may provide a partial hedge against rising interest rates
if exercised at an opportune time. Pre-refunded bonds are municipal bonds
for which the issuer has previously provided money and/or securities to pay
the principal, any premium, and the interest on the bonds to their maturity
date or to a specific call date. The bonds are payable from principal and
interest on an escrow account invested in U.S. government obligations,
rather than from the usual tax base or revenue stream. As a result, the
bonds are rated AAA by the rating agencies.
The Fund may purchase floating and variable rate demand notes, which
are municipal securities normally having a stated maturity payment in excess
of one year, but which permit the holder to demand payment of principal at
any time, or at specified intervals. The issuer of such notes normally has
a corresponding right, after a given period, to prepay at its discretion,
upon notice to the note holders, the outstanding principal amount of the
notes plus accrued interest. The interest rate on a floating rate demand
note is based on a known lending rate, such as a bank's prime rate, and is
adjusted automatically each time such rate is adjusted. The interest rate
on a variable rate demand note is adjusted automatically at specified
intervals. There generally is no secondary market for these notes, although
they are redeemable at face value. Each note purchased by the Fund will
meet the criteria established for the purchase of municipal securities.
Medium and Lower Grade Municipal Securities. Municipal securities
which are in the medium and lower grade categories generally offer a higher
current yield than that offered by municipal securities which are in the
high grade categories, but they also generally involve greater price
volatility and greater credit and market risk. Credit risk relates to the
issuer's ability to make timely payment of principal and interest when due.
Market risk relates to the changes in market value that occur as a result
of variation in the level of prevailing interest rates and yield
relationships in the municipal securities market. Generally, prices for
longer maturity issues tend to fluctuate more than for shorter maturity
issues. Additionally, the Fund will seek to reduce risk through portfolio
diversification, credit analysis, and attention to current developments and
trends in the economy and financial and credit markets.
Many issuers of medium and lower grade municipal securities choose not
to have a rating assigned to their obligations by one of the rating
agencies; hence the Fund's portfolio may at times contain unrated
securities. Unrated securities may carry a greater risk and a higher yield
than rated securities. Although unrated securities are not necessarily
lower quality, the market for them may not be so broad as for rated
securities. The Fund will purchase only those unrated securities which the
Investment Manager believes are comparable to rated securities that qualify
for purchase by the Fund.
Idaho Bonds. Idaho issues several types of municipal securities.
These include:
1. General Obligation bonds (all bonds for the payment of the
principal and interest of which the full faith and credit of the State or
a political subdivision are pledged and, unless otherwise indicated,
including reimbursable general obligation bonds);
2. Bonds issued under special improvements statutes;
3. Revenue bonds or bond anticipation notes (all bonds payable from
revenues, or user taxes, or any combination of both, of a public
ndertaking, improvement, system or loan program); and
4. Special purpose revenue bonds (all bonds payable from rental or
other payments made or any issuer by a person pursuant to contract and
security) including anti-pollution revenue bonds. Such bonds shall only be
authorized or issued to finance manufacturing, processing or industrial
enterprise facilities, utilities serving general public, health care
facilities provided to the general public by not-for-profit corporations or
low and moderate income governmental housing programs.
All bonds other than special purpose revenue bonds may be authorized
by a majority vote of the members of each House of the State Legislature.
Special purpose revenue bonds may be authorized by two-thirds vote of the
members of each House of the State Legislature.
There is a constitutional limitation of $2 million on the issuance of
State of Idaho general obligation bonds. Idaho may exceed this limitation
only through voter referendum and approval by members of each House of the
State Legislature. This limitation on the power of the State to incur
indebtedness, applies only to the issuance of State general obligation
bonds.
Because the Portfolio will ordinarily invest 80% or more of its net
assets in Idaho obligations, it is more susceptible to factors affecting
Idaho issuers than is a comparable municipal bond fund not concentrated in
the obligations of issuers located in a single state.
The Idaho economy is concentrated in construction, manufacturing,
agriculture, tourism, food products, lumber and mining.
Agriculture related business ranks as the state's number one industry
with cash receipts of close to $3 billion. Over 18,000 Idahoans are
employed in food processing operations and more than 32,000 work on farms
and ranches.
The service producing sector, another one of the fastest growing
sectors of Idaho's economy, accounts for nearly eight out of every ten
nonfarm jobs in Idaho. Categories in this sector include finance,
insurance, real estate, transportation, communications, public utilities,
trade, services and government. With the expected economic growth and
influx of population from outside of the state, these categories are
forecast to continue advancement. Idaho's economy is slowly shifting its
reliance on agricultural and consumptive natural resource-based industries,
to those businesses which include jobs in the categories listed above.
Tourism is growing rapidly and is Idaho's third largest industry.
Between 1989 and 1994, annual travel expenditures have increased from $730
million to over $1.8 billion and employment in travel related businesses has
grown by almost 50% since 1982.
Idaho's hi-tech industry has continued to grow at a rapid pace during
the last two years. The electrical and nonelectrical machinery sector may
become the state's largest manufacturing employer early next year.
According to DRI/McGraw Hill, real spending on office and computing
equipment will increase by at least 14.0% annually through 1997.
With only 3% of the nation's forests, Idaho ranks among the seventh
largest producers of softwood lumber in the U.S., producing 5% of the
nation's softwood lumber. 1994's wild fires left large tracts of forest
land ripe for salvage logging which may help mitigate the efforts the U.S.
Forest Service has made in recent years to reduce the number of board feet
cut from Idaho forests. The burned timber must be cut within a very short
time to reduce the risk of decay thereby rendering it useless for commercial
lumber purposes. The salvage sales may help alleviate an otherwise tight
lumber supply and employment market. In spite of this, the Idaho Division
of Financial Management (DFM) is forecasting an employment decline of 4.3%
in 1995.
Idaho ranks in the top ten domestic producers of gold and has remained
one of the nation's largest producers of silver for nearly a century. Idaho
also ranks among the nation's leading producers of lead, zinc, antimony,
phosphate and molybdenum. The phosphate and molybdenum deposits in
southeastern Idaho are the largest in the U.S.
With the growth in world trade and the reduction of tariffs and other
trade barriers, Idaho's economy is becoming increasingly tied to the
international marketplace. Between 1987 and 1994, Idaho's total exports
have grown from $750 million to $2.3 billion. The growth in merchandise or
non-agricultural products has increased from $332 million in 1987 to $1.32
billion in 1994. Based on U. S. Department of Commerce calculations,
exports directly account for nearly 44,000 Idaho jobs.
U.S. Census Bureau data shows total Idaho housing starts rose 54.1%
during the first quarter of 1994. Construction employment is
correspondingly strong during the same time period. However, the severe
housing shortage, while not alleviated, is abating somewhat and longer sales
times, rising vacancy rates and moderating rent and sale prices suggest that
Idaho's housing supply is finally catching up with the demand.
The U.S. Department of Commerce Bureau of Economic Analysis reports
Idaho nonfarm personal income grew at a healthy 8.4% in the first quarter
of 1994. On an annual basis, Idaho nonfarm employment is expected to grow
5.5% in 1994, non-farm personal income is forecast to increase 8.7%, and
housing starts are expected to rise 11.4%.
U.S. Government Securities. Government Securities include (1) U.S.
Treasury obligations, which differ only in their interest rates, maturities
and times of issuance: U.S. Treasury bills (maturity of one year or less),
U.S. Treasury notes (maturities of one to 10 years), and U.S. Treasury bonds
(generally maturities of greater than 10 years), and separated or divided
U.S. Treasury securities (stripped by the U.S. Treasury) whose payments of
principal and interest are all backed by the full faith and credit of the
United States; and (2) obligations issued or guaranteed by U.S. Government
agencies or instrumentalities, some of which are backed by the full faith
and credit of the U.S. Treasury, e.g., direct pass-through certificates of
the Government National Mortgage Association (generally referred to as
"GNMA"); some of which are supported by the right of the issuer to borrow
from the U.S. Government, e.g., obligations of Federal Home Loan Banks; and
some of which are backed only by the credit of the issuer itself, e.g.,
obligations of the Student Loan Marketing Association.
Investments in taxable securities will be substantially in securities
issued or guaranteed by the United States Government (such as bills, notes
and bonds), its agencies, instrumentalities or authorities, highly-rated
corporate debt securities (rated AA, or better, by S&P or Aa3, or better,
by Moody's); prime commercial paper (rated A-1 + or A-2 by S&P or P-1 or P-2
by Moody's) and certificates of deposit of the 100 largest domestic banks
in terms of assets which are subject to regulatory supervision by the U.S.
Government or state governments and the 50 largest foreign banks in terms
of assets with branches or agencies in the United States. Investments in
certificates of deposit of foreign banks and foreign branches of U.S. banks
may involve certain risks, including different regulation, use of different
accounting procedures, political or other economic developments, exchange
controls, withholding income taxes at the source, or possible seizure or
nationalization of foreign deposits. When the Fund takes a temporary
defensive position, the Fund will not be pursuing policies designed to
achieve its investment objective.
Investment Practices of the Fund.
Hedging. Hedging is a means of offsetting, or neutralizing, the price
movement of an investment by making another investment, the price of which
should tend to move in the opposite direction from that of the original
investment. If the Investment Manager deems it appropriate to hedge
partially or fully the Fund's portfolio against market value changes, the
Fund may buy or sell financial futures contracts and options thereon, such
as municipal bond index future contracts and the related put or call options
contracts on such index futures.
Both parties entering into a financial futures contract are required
by the contract marketplace to post a good faith deposit, known as "initial
margin." Thereafter, the parties must make additional deposits equal to any
net losses due to unfavorable price movements of the contract, and are
credited with an amount equal to any net gains due to favorable price
movements. These additional deposits or credits are calculated and required
daily and are known as "maintenance margin." In situations in which the
Fund is required to deposit additional maintenance margin, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet such
maintenance margin requirements at a time when it may be disadvantageous to
do so. When the Fund engages in the purchase or sale of futures contracts
or the sale of options thereon, it will deposit the initial margin required
for such contracts in a segregated account maintained with the Fund's
custodian, in the name of the futures commission merchant with whom the Fund
maintains the related account. Thereafter, if the Fund is required to make
maintenance margin payments with respect to the futures contracts, or mark-
to-market payments with respect to such option sale positions, the Fund will
make such payments directly to such futures commission merchant. The SEC
currently requires mutual funds to demand promptly the return of any excess
maintenance margin or mark-to-market credits in its account with futures
commission merchants. The fund will comply with SEC requirements concerning
such excess margin.
The Fund may also purchase and sell put and call options on financial
futures, including option on municipal bond index futures. An option on a
financial future gives the holder the right to receive, upon exercise of the
option, a position in the underlying futures contract. When the Fund
purchases an option on a financial futures contract, it receives in exchange
for the payment of a cash premium the right, but not the obligation, to
enter into the underlying futures contract at a price (the "strike price")
determined at the time the option was purchased, regardless of the
comparative market value of such futures position at the time the option is
exercised. The holder of a call option has the right to receive a long (or
buyer's) position in the underlying futures and the holder of a put option
has the right to receive a short (or seller's) position in the underlying
futures.
When the Fund sells an option on a financial futures contract, it
receives a cash premium which can be used in whatever way is deemed most
advantageous to the Fund. In exchange for such premium, the Fund grants to
the option purchaser the right to receive from the Fund, at the strike
price, a long position in the underlying futures contract, in the case of
a call option, or a short position in such futures contract, in the case of
a put option, even though the strike price upon exercise of the option is
less (in the case of a call option) or greater (in the case of a put option)
than the value of the futures position received by such holder. If the
value of the underlying futures position is not such that exercise of the
option would be profitable to the option holder, the option will generally
expire without being exercised. The Fund has no obligation to return
premiums paid to it whether or not the option is exercised. It will
generally be the policy of the Fund, in order to avoid the exercise of an
option sold by it, to cancel its obligation under the option by entering
into a closing purchase transaction, if available, unless it is determined
to be in the Fund's interest to deliver the underlying futures position.
A closing purchase transaction consists of the purchase by the Fund of an
option having the same term as the option sold by the Fund, and has the
effect of cancelling the Fund's position as a seller. The premium which the
Fund will pay in executing a closing purchase transaction may be higher than
the premium received when the option was sold, depending in large part upon
the relative price of the underlying futures position at the time of each
transaction. The Securities and Exchange Commission requires that the
obligations of mutual funds, such as the Fund, under option sale positions
must be "covered."
The Fund does not intend to engage in transactions in futures
contracts or related options for speculative purposes but only as a hedge
against changes in the values of securities in their portfolios resulting
from market conditions, such as fluctuations in interest rates. In
addition, the Fund will not enter into futures contracts or related options
(except in closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin deposits and premiums paid for its open futures
and options positions, less the amount by which any such options are "in-
the-money", would exceed 5% of the Fund's total assets (taken at current
value).
Investments in financial futures and related options entail certain
risks. Among these are the possibility that the cost of hedging could have
an adverse effect on the performance of the Fund if the Investment Manager
predictions as to interest rate trends are incorrect or due to the imperfect
correlation between movement in the price of the futures contracts and the
price of the Fund's actual portfolio of municipal securities. Although the
contemplated use of these contracts should tend to minimize the risk of loss
due to a decline in the value of the securities in the Fund's portfolio, at
the same time hedging transactions tend to limit any potential gains which
might result in an increase in the value of such securities. In addition,
futures and options markets may not be liquid in all circumstances due,
among other things, to daily price movement limits which may be imposed
under the rules of the contract marketplace, which could limit the Fund's
ability to enter into positions or close out existing positions, at a
favorable price. If the Fund is unable to close out a futures position in
connection with adverse market movements, the Fund would be required to make
daily payments on maintenance margin until such position is closed out.
Also, the daily maintenance margin requirement in futures and option sales
transactions creates greater potential financial exposure than do option
purchase transactions, where the Fund's exposure is limited to the initial
cost of the option.
Income earned or deemed to be earned, if any, by the Fund from its
hedging activities will be distributed to its shareholders in taxable
distributions.
The Fund's hedging activities are subject to special provisions of the
Internal Revenue Code. These provisions may, among other things, limit the
use of losses of the Fund and affect the holding period of the securities
held by the Fund and the nature of the income realized by the Fund. These
provisions may also require the Fund to mark-to-market some of the positions
in its portfolio (i.e., treat them as if they were closed out), which may
cause the Fund to recognize income without the cash to distribute such
income and to incur tax at the Fund level. The Fund and its shareholders
may recognize taxable income as a result of the Fund's hedging activities.
The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification
of the Fund as a regulated investment company.
If the Manager deems it appropriate to seek to hedge the Fund's
portfolio against market value changes, the Fund may buy or sell financial
futures contracts and related options, such as municipal bond index futures
contracts and the related put or call options contracts on such index
futures. A tax exempt bond index fluctuates with changes in the market
values of the tax exempt bonds included in the index. An index future is
an agreement pursuant to which two parties agree to receive or deliver at
settlement an amount of cash equal to a specified dollar amount multiplied
by the difference between the value of the index at the close of the last
trading day of the contract and the price at which the future was originally
written. A financial future is an agreement between two parties to buy and
sell a security for a set price on a future date. An index future has
similar characteristics to a financial future except that settlement is made
through delivery of cash rather than the underlying securities. An example
is the Long-Term Municipal Bond futures contract traded on the Chicago Board
of Trade. It is based on the Bond Buyer's Municipal Bond Index, which
represents an adjusted average price of the forty most recent long-term
municipal issues of $50 million or more ($75 million in the instance of
housing issues) rated A or better by either Moody's Investor Service, Inc.
or Standard & Poor's Corporation, maturing in no less than nineteen years,
having a first call in no less than seven nor more than sixteen years, and
callable at par.
"When-issued" and "delayed delivery" transactions. The Fund may
engage in "when-issued" and "delayed delivery" transactions and utilize
futures contracts and options thereon for hedging purposes. The SEC
generally requires that when mutual funds, such as the Fund, effect
transactions of the foregoing nature, such funds must either segregate cash
or readily marketable portfolio securities with its custodian in an amount
of its obligations under the foregoing transactions, or cover such
obligations by maintaining positions in portfolio securities, futures
contracts or options that would serve to satisfy or offset the risk of such
obligations. When effecting transactions of the foregoing nature, the Fund
will comply with such segregation or cover requirements.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements with selected commercial banks or broker-dealers,
under which the Fund sells securities and agrees to repurchase them at an
agreed upon time and at an agreed upon price. The difference between the
amount the Fund receives for the securities and the amount it pays on
repurchase is deemed to be a payment of interest by the Fund. The Fund will
maintain in a segregated account having an aggregate value with its
custodian, cash, treasury bills, or other U.S. Government securities having
an aggregate value equal to the amount of such commitment to repurchase,
including accrued interest, until payment is made. Reverse repurchase
agreements are treated as a borrowing by the Fund and will be used by it as
a source of funds on a short-term basis, in an amount not exceeding 5% of
the net assets of the Fund (which 5% includes bank borrowings) at the time
of entering into any such agreement. The Fund will enter into reverse
repurchase agreements only with commercial banks whose deposits are insured
by the Federal Deposit Insurance Corporation and whose assets exceed $500
million or broker-dealers who are registered with the SEC. In determining
whether to enter into a reverse repurchase agreement with a bank or broker-
dealer, the Fund will take into account the credit worthiness of such party
and will monitor such credit worthiness on an ongoing basis.
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
Standard & Poor's Corporation - A brief description of the applicable
Standard & Poor's Corporation ("S&P") rating symbols and their meanings (as
published by Standard & Poor's Corporation) follows:
An S&P corporate or municipal debt rating is a current assessment of
the credit worthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on audited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal
in accordance with the terms of the obligation;
2. Nature of and provision of the obligation;
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
1. Municipal bonds.
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issued only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB
B
CCC
CC
Debt rated "BB", "B", "CCC", or "CC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "CC" the highest
degree of speculation. While such debt will likely have some quality
and protective characteristics, those are outweighed by large
quantities or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating
is provisional. A provisional rating assumes the successful
completion of the project being financed by the debt being
rated and indicates that payment of debt service requirements
is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should
exercise judgment with respect to such likelihood and risk.
L: The letter "L" indicates that the rating pertains to the
principal amount of those bonds where the underlying deposit
collateral is fully insured by the Federal Savings & Loan
Insurance Corp. or the Federal Deposit Insurance Corp.
+ Continuance of the rating is contingent upon S&P's receipt of
closing documentation confirming investments and cash flow.
* Continuance of the rating is contingent upon S&P's receipt
of an executed copy of the escrow agreement.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
2. Short-term tax exempt notes
S&P's tax exempt note ratings are generally given to such notes
that mature in three years or less. The three rating categories are as
follows:
SP-1 Very strong or strong capacity to pay principal and interest.
These issues determined to possess overwhelming safety
characteristics will be given plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
3. Tax-exempt Commercial Paper
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A"
for the highest quality obligations to "D" for the lowest. The two
categories the Fund will invest in are as follows:
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category
are further refined with the designation 1, 2 and 3 to indicate
the relative degree of safety. These issues determined to
possess overwhelming safety characteristics are denoted with a
plus (+) sign designation.
A-1 This designation indicates that the degree of safety regarding
timely payment is very strong.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only an adequate
capacity for timely payment. However, such capacity may be
damaged by changing conditions or short-term adversities.
Moody's Investors Service, Inc. - A brief description of the
applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and
their meanings (as published by Moody's) follows:
1. Municipal bonds
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred as "gilt edge". Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long period
of time may be small.
Con.(...) Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating
experience, (c) rentals which begin when facilities are completed, or
(d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A 1, Baa 1, Ba 1, and B 1.
2. Short-term tax exempt notes
Short-term Notes. The four ratings of Moody's for short-term notes
are MIG 1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying
strong protection from established cash flows"; MIG 2 denotes "high quality"
with "ample margins of protection"; MIG 3 notes are of "favorable
quality....but lacking the undeniable strength of the preceding grades"; MIG
4 notes are of "adequate quality, carrying specific risk but having
protection...and not distinctly or predominantly speculative."
3. Tax exempt commercial paper
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory
obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory
obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
OFFICERS AND DIRECTORS
The officers and directors of First Pacific Mutual Fund, Inc., their
principal occupations for the last five years and their affiliation, if any,
with the Manager, or the Fund's Distributor, are shown below. Interested
persons of the Fund as defined in the Investment Company Act of 1940 are
indicated by an asterisk in the table below.
<TABLE>
<CAPTION>
Position & Principal
Name, Age Office With Occupation During
and Address the Fund the Past Five Years
___________________________________________________________________
<S> <C> <C>
*Terrence K.H. Lee (39) Director, President, First Pacific Management Corp.;
1441 Victoria St #901 President President, First Pacific Securities, Inc.
Honolulu, HI 96822
Samuel L. Chesser (41) Director Market Maker and Member Pacific Stock
21 Seacape Drive Exchange: Formerly President, First
Muir Beach, CA 94965 Pacific Securities, Inc.; Vice President,
First Pacific Management Corporation.
Clayton W.H. Chow (44) Director Sr. Account Executive, Federal Express
896 Puuikena Dr.
Honolulu, HI 96821
Lynden Keala (41) Director Market Analyst, Vanier Graphics, Inc.
47-532 Hui Iwa St.
Kaneohe, HI 96744
Stuart S. Marlowe (55) Director President, Record Service, Inc.
274 Poipu Drive
Honolulu, HI 96825
*Jean M. Chun (40) Secretary Corporate Secretary, First Pacific
217 Prospect St. B-14 Management Corporation; Corporate
Honolulu, HI 96813 Secretary, First Pacific Securities, Inc.
*Charlotte A. Meyer (41) Treasurer Corporate Treasurer, First Pacific
PO Box 2834 Management Corporation; Corporate
Kamuela, HI 96743 Treasurer, First Pacific Securities, Inc.
</TABLE>
The compensation of the officers who are interested persons (as
defined in the Investment Company Act of 1940) of the Manager is paid by the
Manager. The Fund pays the compensation of all other officers of the Fund
who are not interested persons for services or reimbursed for expenses
incurred in connection with attending meetings of the Board of Directors.
The directors of the Fund are not compensated for services or reimbursed for
expenses incurred in connection with attending meetings of the Board of
Directors. The directors and officers as a group own less than 1% of the
Fund's shares.
CUSTODIAN
Bank of California, of San Francisco, California, is the custodian of
the Fund and has custody of all securities and cash. The custodian, among
other things, attends to the collection of principal and income, and payment
for the collection of proceeds of securities bought and sold by the Fund.
FUND ACCOUNTING
First Pacific Recordkeeping, Inc., a wholly-owned subsidiary of First
Pacific Management Corporation provides fund accounting for the Fund. The
annual accounting fee schedule for the Fund is as follows:
$21,500 Minimum to $20 Million of Average Net Assets
.000325 On Next $30 Million of Average Net Assets
.00026 On Next $50 Million of Average Net Assets
.000195 On Next $100 Million of Average Net Assets
.0001625 Over $200 Million of Average Net Assets
INDEPENDENT AUDITORS
The independent auditors for the Fund are Tait, Weller & Baker,
Philadelphia, Pennsylvania.
INVESTMENT MANAGEMENT AGREEMENT
The investment management agreement between the Manager and the Fund
provides that the Manager will provide portfolio management services to the
Fund including the selection of securities for the Fund to purchase, hold
or sell, supply investment research to the Fund and select brokers through
whom the Fund's portfolio transactions are executed. The Manager also
administers the business affairs of the Fund, furnishes offices, necessary
facilities and equipment, provides administrative services, and permits its
officers and employees to serve without compensation as directors and
officers of the Fund if duly elected to such positions.
The agreement provides that the Manager shall not be liable for any
error of judgment or of law, or for any loss suffered by the Fund in
connection with the matters to which the agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the
part of the Manager in the performance of its obligations and duties, or by
reason of its reckless disregard of its obligations and duties under the
agreement.
The Manager's activities are subject to the review and supervision of
the Fund's Board of Directors, to whom the Manager renders periodic reports
of the Fund's investment activities.
PORTFOLIO TRANSACTIONS
The Manager will place orders for portfolio transactions for the Fund
with broker-dealer firms giving consideration to the quality, quantity and
nature of each firm's professional services. These services include
execution, clearance procedures, wire service quotations and statistical and
other research information provided to the Fund and the Manager, including
quotations necessary to determine the value of the Fund's net assets. Any
research benefits derived are available for all clients of the Manager.
Since statistical and other research information is only supplementary to
the research efforts of the Manager and still must be analyzed and reviewed
by its staff, the receipt of research information is not expected to
materially reduce its expenses. In selecting among the firms believed to
meet the criteria for handling a particular transaction, the Fund or the
Manager may (subject always to best price and execution) take into
consideration that certain firms have sold or are selling shares of the
Fund, and/or that certain firms provide market, statistical or other
research information to the Fund. Securities may be acquired through firms
that are affiliated with the Fund, its Manager, or its Distributor and other
principal underwriters acting as agent, and not as principal. Transactions
will only be placed with affiliated brokers if the price to be paid by the
Fund is at least as good as the price the Fund would pay to acquire the
security from other unaffiliated parties.
If it is believed to be in the best interests of the Fund the Manager
may place portfolio transactions with unaffiliated brokers or dealers who
provide the types of service (other than sales) described above, even if it
means the Fund will have to pay a higher commission (or, if the dealer's
profit is part of the cost of the security, will have to pay a higher price
for the security) than would be the case if no weight were given to the
broker's or dealer's furnishing of those services. This will be done,
however, only if, in the opinion of the Manager, the amount of additional
commission or increased cost is reasonable in relation to the value of the
services.
If purchases or sales of securities of the Fund and of one or more
other clients advised by the Manager are considered at or about the same
time, transactions in such securities will be allocated among the several
clients in a manner deemed equitable to all by the Manager, taking into
account the respective sizes of the funds and the amount of securities to
be purchased or sold. Although it is possible that in some cases this
procedure could have a detrimental effect on the price or volume of the
security as far as the Fund is concerned, it is also possible that the
ability to participate in volume transactions and to negotiate lower
brokerage commissions generally will be beneficial to the Fund.
The Directors have adopted certain policies incorporating the
standards of Rule 17e-1 issued by the SEC under the Investment Company Act
of 1940 which requires that the commission paid to the Distributor and other
affiliates of the Fund must be reasonable and fair compared to the
commissions, fees or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar
securities during a comparable period of time. The rule and procedures also
contain review requirements and require First Pacific Securities, Inc. to
furnish reports to the Directors and to maintain records in connection with
such reviews.
THE DISTRIBUTOR
Shares of the Fund are offered on a continuous basis through First
Pacific Securities, Inc. (the "Distributor"), a wholly-owned subsidiary of
the Manager. Pursuant to a distribution agreement, First Pacific
Securities, Inc. will purchase shares of the Fund for resale to the public,
either directly or through securities dealers and brokers, and is obligated
to purchase only those shares for which it has received purchase orders.
A discussion of how to purchase and redeem the Fund's shares and how the
Fund's shares are priced is contained in the Prospectus.
Determining Offering Price
Shares are offered at net asset value plus any applicable sales charge as
follows:
<TABLE>
<CAPTION>
Concession to
As a % of Dealers as a
Amount of As a % of Net Amount % of Amount
Investment Offering Price Invested Invested
______________________________________________________________
<S> <C> <C> <C>
Less than $50,000 2.75% 2.83% 2.25%
$50,000 but less
than $100,000 2.25% 2.30% 1.75%
$100,000 but less
than $250,000 1.75% 1.78% 1.25%
$250,000 but less
than $500,000 1.25% 1.27% 0.95%
$500,000 but less
than $1,000,000 1.00% 1.01% 0.80%
$1,000,000 and over0.00% 0.00% 0.25%*
<FN>
* The Distributor may pay a concession to dealers, out of its own
assets, a fee of up to .25% of the offering price of sales of $1,000,000 or
more. However, the Distributor reserves the right to recoup any portion
of the amount paid to the dealer if the investor redeems some or all of the
shares from the Fund within thirteen months of the time of purchase.
</FN>
</TABLE>
Under the Distribution Agreement between the Fund and the Distributor,
the Distributor pays the expenses for distribution of Fund shares, including
preparation and distribution of literature relating to the Fund and its
investment performance and advertising and public relations material. The
Fund bears the expenses of registration of its shares with the SEC and of
sending prospectuses to existing shareholders. The Distributor pays the
cost of qualifying and maintaining qualification of the shares for sale
under the securities laws of the various states and permits its officers and
employees to serve without compensation as directors and officers of the
Fund if duly elected to such positions.
Under the Distribution Plan, the Fund will pay the distributor for
expenditures which are primarily intended to result in the sale of the
Fund's shares such as advertising, marketing and distributing the Fund's
shares and servicing Fund investors, including payments for reimbursement
of and/or compensation to brokers, dealers, certain financial institutions,
(which may include banks) and other intermediaries for administrative and
accounting services for Fund investors who are also their clients. Such
third party institutions will receive fees based on the average daily value
of the Fund's shares owned by investors for whom the institution performs
administrative and accounting services. The Glass-Steagall Act and other
applicable laws, among other things, generally prohibit federally chartered
or supervised banks from engaging in the business of underwriting, selling
or distributing securities. Accordingly, the Fund will engage banks only
to perform administrative and investor servicing functions. The Funds'
management believes that such laws should not preclude a bank from
performing these services. However, if a bank were prohibited by law from
so acting, its investor clients would be permitted to remain Fund investors
and alternative means for continuing the servicing of such investors would
be sought.
The Distribution Agreement continues in effect from year to year if
specifically approved at least annually by the shareholders or directors of
the Fund and by the Fund's disinterested directors in compliance with the
Investment Company Act of 1940. The agreement may be terminated without
penalty upon thirty days written notice by either party and will
automatically terminate if it is assigned.
TRANSFER AGENT
First Pacific Recordkeeping, Inc., Honolulu, Hawaii, a wholly-owned
subsidiary of First Pacific Management Corporation, serves as transfer
agent, dividend disbursing agent and redemption agent pursuant to a Transfer
and Dividend Disbursing Agency Agreement approved by the Board of Directors
of First Pacific Mutual Fund, Inc. at a meeting held for such purpose on
January 29, 1996. The agreement is subject to annual renewal by the Board
of Directors, including the directors who are not interested persons of the
Fund or of the Transfer Agent. Pursuant to the agreement, the Transfer
Agent will receive a fee calculated at an annual rate of $16.50 per
shareholder account and will be reimbursed out-of-pocket expenses incurred
on the Fund's behalf.
The Transfer Agent acts as paying agent for all Fund expenses and
provides all the necessary facilities, equipment and personnel to perform
the usual or ordinary services of Transfer and Dividend Paying Agent,
including: receiving and processing orders and payments for purchases of
shares, opening stockholder accounts, preparing annual stockholder meeting
lists, mailing proxy material, receiving and tabulating proxies, mailing
stockholder reports and prospectuses, withholding certain taxes on
nonresident alien accounts, disbursing income dividends and capital
distributions, preparing and filing U.S. Treasury Department Form 1099 (or
equivalent) for all stockholders, preparing and mailing confirmation forms
to stockholders for all purposes and redemption of the Fund's shares and all
other confirmable transactions in stockholders' accounts, recording
reinvestment of dividends and distributions of the Fund's shares and causing
redemption of shares for and disbursements of proceeds to withdrawal plan
stockholders.
PERFORMANCE
Current yield, tax equivalent yield and total return quotations used
by the Fund are based on standardized methods of computing performance
mandated by SEC rules. An explanation of those and other methods used by
the Portfolio to compute or express performance follows:
As indicated below, current yield is determined by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders
during the 30-day base period. According to the new SEC formula:
Yield = 2 [(a-b + 1)6-1]
-----------------
cd
where
a= dividends and interest earned during the period.
b= expenses accrued for the period (net of reimbursements).
c= the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d= the maximum offering price per share on the last day of the period.
Tax equivalent yield is calculated by dividing that portion of the
current yield (calculated as described above) which is tax exempt by 1 minus
a stated tax rate and adding the quotient to that portion of the yield of
the Fund that is not tax exempt.
As the following formula indicates, the average annual total return
is determined by multiplying a hypothetical initial purchase order of $1,000
by the average annual compound rate of return (including capital
appreciation/depreciation and dividends and distributions paid and
reinvested) for the stated period less any fees charged to all shareholder
accounts and annualizing the result. The calculation assumes that all
dividends and distributions are reinvested at the public offering price on
the reinvestment dates during the period. The quotation assumes the account
was completely redeemed at the end of each period and the deduction of all
applicable charges and fees.
According to the new SEC formula:
P(1 + T)n = ERV
where
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods at the end
of the 1, 5 or 10 year periods (or fractional portion thereof).
Comparisons and Advertisements
To help investors better evaluate how an investment in the Fund might
satisfy their investment objective, advertisements regarding the Fund may
discuss yield, tax equivalent yield or total return for the Fund as reported
by various financial publications and/or compare yield, tax equivalent yield
or total return to yield, tax equivalent yield or total return as reported
by other investments, indices, and averages.
The Shearson Lehman Hutton Municipal Bond Index measures yield, price,
and total return for the municipal bond market. The Bond Buyer 20 Bond
Index is an index of municipal bond yields based on yields of 20 general
obligation bonds maturing in 20 years. The Bond Buyer 40 Bond Index is an
index of municipal bond yields of 40 general obligation bonds maturing in
40 years.
Financial Statements
The Financial Statements of the Fund will be audited at least annually
by Tait Weller & Baker, Independent Auditors.
