U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM N-14
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1933
Pre-Effective Amendment No. ___ Post-Effective Amendment No. ___
(check appropriate box or boxes)
________________
Exact Name of Registrant as Specified in Charter:
FIRST PACIFIC MUTUAL FUND, INC.
Area Code and Telephone Number: (808) 988-8088
Address of Principal Executive Offices: (Number, Street, City, State, Zip Code)
2756 Woodlawn Drive, #6-201, Honolulu, Hawaii 96822
Name and Address of Agent for Service:
Terrence Lee, President; First Pacific Mutual Fund, Inc.;
2756 Woodlawn Drive, #6-201, Honolulu, Hawaii 96822
And a Copy of all communications to:
Audrey C. Talley, Esq.
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
Approximate Date of Proposed Public Offering As soon as practicable after
the effective date of the registration statement.
The Registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Section 24(f) of the Investment Company Act
of 1940 (File No. 33-23452); accordingly, no fee is payable herewith.
Pursuant to Rule 429 under the Securities Act of 1933, this Registration
Statement (the Prospectus and Proxy Statement included herein) relates to
the aforementioned registration of shares on Form N-1A (File No. 33-23452).
It is proposed that this filing will become effective thirty days after
filing pursuant to Rule 488 under the Securities Act of 1933.
Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to Section 8(a), may determine.<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(a) UNDER THE SECURITIES ACT OF 1933)
Part A Location in Prospectus/Proxy Statement
Item 1.
Beginning of Registration Statement Cross Reference Sheet; Cover Page
and Outside Front Cover Page of Prospectus
Item 2.
Beginning and Outside Back Cover Table of Contents
Page of Prospectus
Item 3.
Synopsis and Risk Factors Synopsis Comparison of Fees and Expenses;
Synopsis; Comparison of Investment
Objectives and Policies; Risks
Item 4.
Information about the Transaction Synopsis; Reasons for the
Reorganization; Comparative
Information on Shareholders' Rights;
Exhibit A (Agreement and Plan of
Reorganization)
Item 5.
Information about the Registrant Cover Page; Synopsis; Risks;
Comparison of Investment Objectives
and Policies; Comparative Information
on Shareholders' Rights; Additional
Information
Item 6.
Information about the Company Being Cover Page: Synopsis; Risks;
Acquired Comparison of Investment Objectives
and Policies; Comparative Information
on Shareholders' Rights; Additional
Information
Item 7.
Voting Information Cover Page; Synopsis; Voting
Information Concerning the Meeting
Item 8.
Interest of Certain Persons and Experts Financial Statements and Experts;
Legal Matters
Item 9.
Additional Information Required for Not Applicable
Reoffering by Persons Deemed to be
Underwriters
Part B Location in Statement of Additional
Information
Item 10.
Cover Page Cover Page
Item 11.
Table of Contents Cover Page
Item 12.
Additional Information about the Statement of Additional Information of
Registrant First Hawaii Municipal Bond Fund
dated February 1, 1997
Item 13.
Additional Information about the Statement of Additional Information of
Company Being Acquired Leahi Tax-Free Income Trust dated
February 1, 1997
Item 14.
Financial Statements Incorporated by Reference
Part C
Item 15.
Indemnification Incorporated by Reference to Part A
Caption, "Comparative Information on
Shareholders' Rights-Liability and
Indemnification of Trustees and
Directors"
Item 16.Exhibits Item 16. Exhibits
Item 17.Undertakings Item 17. Undertakings
LEAHI TAX-FREE INCOME TRUST
To our Shareholders:
Please don't be intimidated by the mass of information accompanying
this letter. It contains details of a planned reorganization that would
combine Leahi Tax-Free Income Trust with First Hawaii Municipal Bond Fund.
Our own Board of Trustees has carefully considered all aspects of the plan
and approved it as being in the best interest of Leahi's shareholders.
We are asking you to approve this tax-free reorganization in which
shareholders of Leahi would become shareholders of First Hawaii and receive
the number of shares of First Hawaii which have the same value as their
shares of Leahi. As you will see, the two funds have always been quite
similar in goals, policies, and investment restrictions, so it is little
suprise that our investment results have also been comparable. The
combined fund will have combined assets of over one hundred million
dollars. This will make it the second largest tax-free fund in Hawaii.
It will remain no-load.
This action was occasioned by the proposed sale of the assets of Leahi
Management Company, Inc. to First Pacific Managment Corporation of Honolulu.
It is important that your shares be represented. Please act promptly
to sign and return the card to vote in favor of the Plan. This is
important whether or not you plan to attend the meeting, and does not
prevent you from reconsidering your vote when you are there. For now
though, please do sign and return the card.
Very truly yours,
\s\ Ron Kent
Ron Kent, Chairman of the Board
Dated June 20, 1997
PRELIMINARY COPY
LEAHI INVESTMENT TRUST
Leahi Tax-Free Income Trust
Ward Plaza
210 Ward Avenue, Suite 129
Honolulu, Hawaii 96814
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 24, 1997
To our Shareholders:
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of Leahi Tax-Free Income Trust (the "Leahi Fund") a series of
Leahi Investment Trust (the "Trust") will be held at 9:00 a.m., local
time, on July 24, 1997, at the offices of Leahi Fund, Ward Plaza,
210 Ward Avenue, Suite 129, Honolulu, Hawaii 96814, for the following purposes:
1. To approve an Agreement and Plan of Reorganization (the "Plan"),
providing for the acquisition of all of the assets of Leahi Fund by the
First Hawaii Municipal Bond Fund series ("First Hawaii") of First Pacific
Mutual Fund, Inc. (the "Corporation") in exchange for shares of First Hawaii.
The Plan also provides for distribution of such shares of First Hawaii to
shareholders of Leahi Fund in liquidation and subsequent termination of
Leahi Fund and the Trust. A vote in favor of the Plan is a vote in favor
of the liquidation and termination of Leahi Fund and the Trust.
2. To consider and act upon any other business as may properly come
before the Meeting or any adjournment thereof.
The Trustees of the Trust have fixed the close of business on June 20,
1997 as the record date for the determination of shareholders of Leahi
Fund entitled to notice of and to vote at the Meeting or any adjournment
thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS
WHO DO NOT EXPECT TO ATTEND IN PERSON ARE URGED TO SIGN AND RETURN
THE ENCLOSED PROXY WITHOUT DELAY IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE, SO THAT YOUR SHARES MAY BE REPRESENTED AT THE
MEETING. YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL HELP TO
AVOID THE EXPENSE OF FURTHER SOLICITATION.
June 20, 1997 By Order of the Board of Trustees
\s\ Ronalad E. Kent
Ronald E. Kent
Chairman of the Board
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED JUNE 20, 1997
Acquisition of Assets of
LEAHI TAX-FREE INCOME TRUST
a series of
LEAHI INVESTMENT TRUST
Ward Plaza
210 Ward Avenue, Suite 129
Honolulu, Hawaii 96814
(808) 522-7777
By and in Exchange for Shares of
FIRST HAWAII MUNICIPAL BOND FUND
a series of
FIRST PACIFIC MUTUAL FUND, INC.
2756 Woodlawn Drive, Suite 6-201
Honolulu, Hawaii 96822
(808) 988-8088
Leahi Investment Trust (the "Trust") is an open-end, management
investment company which currently offers one series of shares, the Leahi
Tax-Free Income Trust (the "Leahi Fund"). The Leahi Fund is a
non-diversified series, the objective of which is to provide investors with
the maximum level of income exempt from federal and Hawaii income taxes,
consistent with preservation of capital. The Fund seeks to achieve its
objective of investing primarily in municipal securities which pay interest
exempt from federal and Hawaii income taxes.
First Pacific Mutual Fund, Inc. (the "Corporation") is an open-end,
management investment company which currently offers three series of shares,
one of which is the First Hawaii Municipal Bond Fund ("First Hawaii").
First Hawaii is a non-diversified series, the objective of which is to provide
a high level of current income exempt from federal and Hawaii state income
taxes, consistent with preservation of capital. First Hawaii attempts to
achieve its objective by investing primarily in a varied portfolio of
investment grade municipal securities which pay interest exempt from federal
and Hawaii income taxes.
This Prospectus/Proxy Statement is being furnished to shareholders of
Leahi Fund in connection with a proposed Agreement and Plan of
Reorganization (the "Plan") to be submitted to shareholders of Leahi
Fund for consideration at a Special Meeting of Shareholders to be held on July
24, 1997 at 9:00 a.m. at the offices of Leahi Fund, Ward Plaza, 210 Ward
Avenue, Suite 129, Honolulu, Hawaii 96814, and any adjournments thereof
(the "Meeting"). The Plan provides for all of the assets of Leahi Fund
to be acquired by First Hawaii in exchange for shares of First Hawaii
(hereinafter referred to as the "Reorganization"). Following the
Reorganization, shares of First Hawaii will be distributed to shareholders
of Leahi Fund in liquidation of Leahi Fund and Leahi Fund
and the Trust will be terminated. As a result of the proposed
Reorganization, shareholders of the Leahi Fund will receive that number of
full and fractional shares of First Hawaii having an aggregate net asset
value equal to the aggregate net asset value of such shareholder's shares of
Leahi Fund.
The Prospectus/Proxy Statement sets forth concisely information about
First Hawaii that shareholders of Leahi Fund should know before voting
on the Reorganization. This Prospectus/Proxy Statement is accompanied by
the Prospectus of First Hawaii dated February 1, 1997, which Prospectus is
incorporated by reference herein. The Annual and Semi-Annual Reports of
First Hawaii for the fiscal year ended September 30, 1996 and the semi-annual
period ended March 31, 1997, respectively are incorporated herein by
reference in their entirety. The Prospectus of Leahi Fund dated
February 1, 1997, the Annual Report to Shareholders of Leahi Fund for
the fiscal year ended September 30, 1996 and the Semi-Annual Report to
Shareholders of Leahi Fund for the six-month period ended March 31, 1997
and the Statement of Additional Information of First Hawaii, dated
February 1, 1997 have been filed with the Securities and Exchange Commission
(SEC), are incorporated herein by reference and are available without charge
upon written request to Leahi Management, Inc., Ward Plaza, 210 Ward Avenue,
Suite 129, Honolulu, Hawaii 96814 or by calling toll free 1-800-354-9641
(inter-island). The Statement of Additional Information of Leahi Fund
dated February 1, 1997 is also available upon request and without charge
by writing Leahi Management, Inc. at the aforementioned address and/or by
calling the aforementioned telephone number.
A Statement of Additional Information dated June 20, 1997, relating to
this Prospectus/Proxy Statement and the Reorganization, which includes the
financial statements of First Hawaii dated September 30, 1996 and March 31,
1997 and the financial statements of Leahi Fund dated September 30, 1996
and March 31, 1997 has been filed with the SEC and is incorporated by
reference in its entirety into this Prospectus/Proxy Statement. A copy of
such Statement of Additional Information is available upon request and
without charge by writing First Pacific Management Corporation, 2756 Woodlawn
Drive, Suite 6-201, Honolulu, Hawaii 96822 or by calling toll free
1-800-354-9654 (inter-island).
Included as Exhibit A of this Prospectus/Proxy Statement is a copy
of the Plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
COMPARISON OF FEES AND EXPENSES. . . . . . . . . . . . . . . . . .
SYNOPSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proposed Plan of Reorganization . . . . . . . . . . . . . . . . .
Tax Consequences. . . . . . . . . . . . . . . . . . . . . . . . .
Investment Objectives and Policies. . . . . . . . . . . . . . . .
Comparative Performance Information of Each Fund. . . . . . . . .
Management of the Funds . . . . . . . . . . . . . . . . . . . . .
Investment Advisers . . . . . . . . . . . . . . . . . . . . . . .
Portfolio Management. . . . . . . . . . . . . . . . . . . . . . .
Distribution of Shares. . . . . . . . . . . . . . . . . . . . . .
Purchase and Redemption Procedures. . . . . . . . . . . . . . . .
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . .
RISKS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
REASONS FOR THE REORGANIZATION . . . . . . . . . . . . . . . . . . . .
COMPARISON OF INVESTMENT OBJECTIVE AND POLICIES. . . . . . . . . . . .
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS. . . . . . . . . . . .
Form of Organization. . . . . . . . . . . . . . . . . . . . . . .
Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder Liability . . . . . . . . . . . . . . . . . . . . . .
Shareholder Meetings and Voting Rights. . . . . . . . . . . . . .
Liquidation or Dissolution. . . . . . . . . . . . . . . . . . . .
Liability and Indemnification of Trustees and Directors . . . . .
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . .
VOTING INFORMATION CONCERNING THE MEETING. . . . . . . . . . . . . . .
FINANCIAL STATEMENTS AND EXPERTS . . . . . . . . . . . . . . . . . . .
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AGREEMENT AND PLAN OF REORGANIZATION . . . . . . . . . . . . . . . . . A-1
PERFORMANCE OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . B-1
<PAGE>
COMPARISON OF FEES AND EXPENSES
The amounts for First Hawaii and Leahi Fund set forth in the following
tables and examples are based on the expenses for the fiscal year ended
September 30, 1996. All amounts are adjusted for voluntary expense waivers.
The amounts for First Hawaii pro forma are based on what the combined
expenses would have been for the twelve months ending March 31, 1997.
The following tables show for First Hawaii and Leahi Fund the shareholder
transaction expenses and annual fund expenses associated with an investment
in the shares of each fund.
<TABLE>
<S> <C> <C>
Shareholder Transaction Expenses First Hawaii Leahi
Sales Load Imposed on Purchases None None
Sales Load Imposed on Reinvested Dividends None None
Contingent Deferred Sales Load None None
Redemption Fees None None
Exchange Fees None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Expenses 0.50% 0.50%
Shareholder Servicing Costs 0.10% 0.07%
12b-1 Fees After Waiver 0.11% 1 0.06% 3
Other Expenses 0.27% 0.22%
Total Operating Costs After Waiver 0.98% 2 0.85% 4
</TABLE>
1 The Hawaii Fund's 12b-1 Plan provides that the Hawaii Fund may incur costs
not to exceed .25% per annum of the Hawaii Fund's average net assets for the
distribution of Fund shares. The Distributor has waived a portion of the
Hawaii Fund's fees during the year ended 09/30/96. Such waivers may cease
at any time.
2 Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian arrangement were .95%.
3 12b-1 fees were paid by Leahi Fund during this period for $10,791
reimbursing expenses incurred in fiscal year 1993 and $17,617 reimbursing
expenses incurred in fiscal year 1994. The maximum amount which could have
been paid by Leahi Fund was 0.25% of average net assets.
4 Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian arrangement were .84%.
<TABLE>
<S> <C>
Shareholder Transaction Expenses First Hawaii Pro Forma
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Contingent Deferred Sales Load None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Expenses 0.50%
Shareholder Servicing Costs 0.10%
12b-1 Fees After Waiver 0.09% 5
Other Expenses 0.18% 6
Total Operating Costs After Waiver 0.87% 6
</TABLE>
5 Assumes waiver of distribution fees. The Hawaii Fund's 12b-1 Plan provides
that the Hawaii Fund may incur costs not to exceed .25% per annum of the Hawaii
Fund's average net assets for the distribution of Fund shares.
6 Ratio of expenses to average net assets after the reduction in custodian
fees by earning credits for univested cash balances remaining with the
custodian would be .85%. There can be no assurances that this arrangement
will remain effective. In such case, Other Expenses would be increased by
the value of the custody credits, however, First Hawaii has agreed to limit
its expenses to .85% for the two years following Closing of the Reorganization.
EXAMPLES
The following tables show for each fund, and for First Hawaii, pro forma
assuming consummation of the Reorganization, examples of the cumulative
effect of shareholder transaction expenses and annual fund operating
expenses indicated above on a $1,000 investment in the fund for the
periods specified, assuming (i) a 5% annual return, and (ii) redemption
at the end of each period.
<TABLE>
<S> <C> <C> <C> <C>
One Three Five Ten
Year Years Years Years
First Hawaii $10 $31 $54 $120
Leahi Fund $9 $27 $47 $104
First Hawaii Pro Forma $9 $28 $48 $107
</TABLE>
The purpose of the foregoing examples is to assist Leahi Fund shareholders
in understanding the various costs and expenses that an investor in First
Hawaii, as a result of the Reorganization, would bear directly and
indirectly, as compared with the various direct and indirect expenses
currently borne by a shareholder in Leahi Fund. These examples should not
be considered a representation of past or further expenses or annual returns.
Actual expenses may be greater or less than those shown. Moreover, while
the example assumes a 5% annual return, a fund's actual performance will
vary and may result in actual returns greater or less than 5%.
<PAGE>
SYNOPSIS
THIS SYNOPSIS IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
PROSPECTUS/PROXY STATEMENT AND THE PLAN AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE ADDITIONAL INFORMATION CONTAINED
ELSEWHERE IN THE PROSPECTUS/PROXY STATEMENT, THE PROSPECTUS OF
FIRST HAWAII MUNICIPAL BOND FUND DATED FEBRUARY 1, 1997 AND THE
PROSPECTUS OF LEAHI TAX-FREE INCOME TRUST DATED FEBRUARY 1, 1997
(WHICH ARE INCORPORATED HEREIN BY REFERENCE) AND THE PLAN, A FORM
OF WHICH IS ATTACHED TO THIS PROSPECTUS/PROXY STATEMENT AS EXHIBIT A.
SHAREHOLDERS SHOULD READ THE ENTIRE PROSPECTUS/PROXY STATEMENT
CAREFULLY.
GENERAL
This Prospectus/Proxy Statement is furnished by the Trustees of the Leahi
Investment Trust (the "Trust") in connection with the solicitation of proxies
for use at a Special Meeting of Shareholders (the "meeting") of Leahi
Tax-Free Income Trust ("Leahi Fund") to be held at 9:00 a.m. on July 24, 1997
at Ward Plaza, 210 Ward Avenue, Suite 129, Honolulu, Hawaii 96814. The
purpose of the Meeting is to approve the Plan whereby all of the assets of
Leahi Fund will be acquired by First Hawaii, in exchange solely for shares
of common stock of First Hawaii, and such other business as may properly
come before the Meeting or any adjournment thereof.
Approval of the Plan requires the affirmative vote of a majority of shares
of Leahi Fund outstanding and entitled to vote. Approval of the Plan by the
shareholders of First Hawaii is not required and the Plan is not being
submitted for their approval.
PROPOSED PLAN OF REORGANIZATION
The Plan provides for the transfer of all of the assets of Leahi Fund in
exchange for shares of First Hawaii. (The Leahi Fund and First Hawaii each
may also be referred to in this Prospectus/Proxy Statement as a "Fund" and
together, as the "Funds"). The Plan also calls for the distribution of
shares of First Hawaii to Leahi Fund shareholders in liquidation of Leahi
Fund as part of the Reorganization. As a result of the Reorganization, the
shareholders of Leahi Fund will become the owners of that number of
full and fractional shares of First Hawaii having an aggregate net asset
value equal to the aggregate net asset value of the shareholder's shares of
Leahi Fund as of the close of business on the date that Leahi Fund's assets
are exchanged for shares of First Hawaii.
The Trustees of the Trust, including the Trustees who are not "interested
persons," as such term is defined in the 1940 Act (the "Independent
Trustees"), have concluded that the Reorganization would be in the best
interests of shareholders of Leahi Fund and that the interests of the
shareholders of Leahi Fund will not be diluted as a result of the
transactions contemplated by the Reorganization. Accordingly, the Trustees
have submitted the Plan for the approval of Leahi Fund's shareholders.
THE BOARD OF TRUSTEES OF THE TRUST RECOMMENDS APPROVAL BY
SHAREHOLDERS OF THE LEAHI FUND OF THE PLAN EFFECTING THE
REORGANIZATION.
The Board of Directors of the Corporation has also approved the Plan and
Reorganization.
TAX CONSEQUENCES
Prior to or at the completion of the Reorganization, Leahi Fund will have
received an opinion of counsel that the Reorganization has been structured
so that no gain or loss will be recognized by Leahi Fund or its shareholders
for federal income tax purposes as a result of the receipt of shares of First
Hawaii in the Reorganization. The holding period and aggregate tax basis of
the First Hawaii shares that are received by Leahi Fund shareholders will be
the same as the holding period and aggregate tax basis of shares of Leahi
Fund previously held by such shareholders. In addition, the holding period
and tax basis of the assets of Leahi Fund in the hands of First Hawaii as a
result of the Reorganization will be the same as in the hands of Leahi Fund
immediately prior to the Reorganization and no gain or loss will be
recognized by First Hawaii upon the receipt of the assets of Leahi Fund in
exchange for shares of First Hawaii.
INVESTMENT OBJECTIVES AND POLICIES OF FIRST HAWAII AND LEAHI FUND
The investment objective of First Hawaii is to provide a high level of
current income exempt from federal and Hawaii 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 Hawaii income taxes.
The Fund invests 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 Hawaii 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 Hawaii 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 investment objective of Leahi Fund is to provide investors with the
maximum level of income exempt from federal and Hawaii income taxes,
consistent with preservation of capital. The Fund seeks to achieve its
objective by investing primarily in municipal securities which pay interest
exempt from federal and Hawaii income taxes. The Fund seeks to achieve its
objective by investing primarily in municipal securities which pay interest
that is exempt from federal and Hawaii income taxes ("Hawaii Municipal
Securities"). Hawaii Municipal Securities include general obligation and
revenue bonds and notes of issuers located in Hawaii, as well as obligations
issued by or under the authority of Guam, Puerto Rico, and the Virgin
Islands. The Fund expects that at least a majority of its assets will be
invested in municipal securities of issuers located in Hawaii.
COMPARATIVE PERFORMANCE INFORMATION OF EACH FUND
The current yield and total return quotations set forth below are based
on standardized methods of computing performance established by the
Securities and Exchange Commission. 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. The yields for the Funds for
the 30-day periods ending September 30, 1996 and March 31, 1997 are set
forth below:
<TABLE>
<S> <C> <C>
Month Ended Month Ended
9/30/96 03/31/97
First Hawaii 4.64% 4.49%
Leahi Fund 4.50% 4.47%
</TABLE>
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.
<TABLE>
<S> <C> <C> <C> <C>
One Year Five Years Since Inception Inception
Ended 9/30/96 Ended 9/30/96 to 9/30/96 Date
First Hawaii 5.62% 6.52% 7.20% 11/23/88
Leahi Fund 5.05% 6.82% 7.47% 10/26/87
</TABLE>
For a discussion of First Hawaii's performance during the fiscal year
ended September 30, 1996, see the First Hawaii Annual Report. For a
discussion of Leahi Fund's performance during the fiscal year ended September
30, 1996, see "Discussion of Fund Performance" in Leahi Fund's Prospectus.
MANAGEMENT OF THE FUNDS
The overall management and supervision of First Hawaii is the
responsibility of the Corporation's Board of Directors. Similarly, the
overall management and supervision of Leahi Fund is the responsibility of
the Trust's Board of Trustees. For a discussion of the responsibilities
of the Corporation's Board of Directors, see "Officers and Directors" in
First Hawaii's Prospectus. For a discussion of the responsibilities of the
Trust's Board of Trustees, see "Management of the Fund" in Leahi Fund's
Prospectus.
INVESTMENT ADVISERS
First Pacific Management Corporation ("FPMC") is First Hawaii's Investment
Manager. The Investment Manager was organized in 1988. The annual
management fee for the Fund is .50% of average daily net assets. The
Manager also provides the Fund with certain shareholder services for an
annual fee of .10% of average daily net assets. Louis D'Avanzo is the
portfolio manager for the Fund.
Leahi Management Company, Inc. ("LMCI") is Leahi Fund's Investment
Manager. The Investment Manager was organized in 1987. The annual
management fee for the Fund is .50% of average daily net assets. Dianne
J. Qualtrough is the portfolio manager for the Fund. For a discussion of the
investment managers and portfolio managers for each Fund, see "Investment
Manager" in First Hawaii Prospectus and "Management of the Fund" in
Leahi Fund Prospectus.
DISTRIBUTION OF SHARES
First Pacific Securities is the distributor of First Hawaii shares. The
Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 of the Investment Company Act of 1940 which provides that the Fund may
spend up to .25% of its average daily net assets in connection with the Fund's
activities as a distributor of its shares.
The principal distributor for shares of Leahi Fund is Linsco/Private
Ledger Corp. The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940
Act whereby it may reimburse the Investment Manager, LMCI, each month up to a
maximum of 0.25% per annum of the Fund's average daily net assets for actual
expenses incurred in the promotion and marketing of the Fund's shares,
including expenses of the Distributor which are paid by the Investment
Manager. For a discussion of First Hawaii's distributor see "Purchasing
Shares of the Fund" and "The Distribution Plan" in First Hawaii
Prospectus. For a discussion of Leahi Fund's distributor see "How to Invest
in the Fund" and "General Information" in Leahi Fund Prospectus.
PURCHASE AND REDEMPTION PROCEDURES
The minimum initial investment for Hawaii Fund is $1,000 with a $100
minimum for subsequent investments; less in certain circumstances. Shares
are sold at net asset value. Shares may be redeemed at net asset value next
determined. The Fund may require involuntary redemption of shares if the
value of an account is less than $500.
The minimum initial investment in Leahi Fund is $1,000. Subsequent
investments must be at least $50. Shares are sold at net asset value. The
redemption price is the net asset value next determined after the shares are
tendered for redemption. Leahi Fund may require involuntary redemption of
shares if the value of an account is less than $750.
For a discussion of how the shares of First Hawaii may be purchased and
redeemed and how the offering price of the shares is determined, see
"Purchasing Shares of the Fund", "Redemption of Shares," and "Net Asset
Value" in First Hawaii's Prospectus. For a discussion of how the shares of
Leahi Fund may be purchased and redeemed and how the offering price of the
shares is determined, see "How to Invest in the Fund", "How to Sell or
Redeem an Investment in the Fund" and "How the Fund's Per Share Value is
Determined" in Leahi Fund's Prospectus.
DIVIDEND POLICY
Distributions from net investment income are declared daily and paid
monthly for First Hawaii and Leahi Fund, respectively. Capital gains, if
any, are distributed annually for each Fund. Each Fund reinvests
distributions in additional shares of the respective Fund, unless a
shareholder elects otherwise.
After the Reorganization, shareholders of Leahi Fund that have elected to
have their distributions reinvested will have distributions from First Hawaii
invested in shares of First Hawaii.
Each Fund has elected to be treated as a regulated investment company
under Subchapter M of the Internal Revenue Code and has qualified for such
treatment for its fiscal year ended September 30, 1996. As such, the Funds
will not pay any income or excise taxes on income and capital gains
distributed to shareholders.
For a discussion of First Hawaii's policy with respect to dividends and
distributions and tax consequences of an investment in shares of the Fund,
see "Distributions from the Fund" and "Tax Status" in First Hawaii's
Prospectus. For a discussion of Leahi Fund's policy with respect to dividends
and distribution and tax consequences of an investment in shares of the Fund,
see "Distributions and Tax Information" in Leahi Fund's Prospectus.
RISKS
Since the investment objectives and policies of each fund are
substantially similar, the risks involved in investing in each Fund's
shares are similar. Subject to certain limitations, First Hawaii may
lend its portfolio securities. These investments entail certain risks.
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 a fund has decreased,
the Fund could experience a loss. Tax-exempt securities may be adversely
affected by local political and economic conditions and developments within
the State which adversely affect issuers of such tax-exempt securities.
Adverse conditions in the State of Hawaii's significant industries could
have a correspondingly adverse effect on specific issuers within the State
or on anticipated revenue of the State.
Leahi Fund invests solely 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") or Standard & Poor's Corporation ("S&P") or, if
unrated, are judged by its investment manager to be of comparable quality.
First Hawaii may invest up to 10% of its assets in bonds rated BB by S&P or
Ba by Moody's. Lower grade municipal securities are generally regarded as
having predominantly speculative capacity to pay interest and repay principal
in accordance with their terms.
REASONS FOR THE REORGANIZATION
At a meeting of the Board of Trustees of Leahi Fund held on May 8, 1997,
the Board considered and approved the Reorganization as in the best interests
of the Fund and its shareholders in light of the transactions contemplated
by the Asset Purchase Agreement and determined that the interests of
existing shareholders of Leahi Fund will not be diluted as a result of the
transactions contemplated by the Reorganization.
Under the terms of an agreement between LMCI and FPMC (the "Asset Purchase
Agreement"), FPMC will acquire substantially all of the assets and operations
of LMCI related to Leahi Fund. FPMC is a privately held company, of which
Terrence Lee, president of First Hawaii, is the majority shareholder. The
approval of the shareholders of Leahi Fund of the Reorganization is a condition
to the consummation of the transaction between FPMC and LMCI. Mr. Kent, as the
principal shareholder of LMCI, will receive a majority of the purchase price
for LMCI upon consummation of the sale of its assets, and Ms. Qualtrough, as
the owner of an interest in LMCI, will also receive compensation in the
transaction. The transactions contemplated by the Asset Purchase Agreement
have been structured to comply with Section 15 (f) under the Investment
Company Act of 1940 which provides that an investment adviser (such as LMCI)
of a registered investment company (such as Leahi Portfolio) may receive
any amount or benefit in connection with a sale of securities of or any
other interest in the investment adviser which results in an assignment
of an investment advisory contract or the change in control of or identity
of the investment adviser so long as for (1) a period of three years
thereafter at least 75% of the Trustees are independent with respect to
the new adviser and the previous adviser and (2) there is not imposed
any "unfair burden" on the investment company as a result of such
transaction or any express or implied terms, conditions or understandings
applicable therto.
In approving the Plan, the Trustees reviewed various factors about the
Funds and the proposed Reorganization. There are substantial similarities
between Leahi Fund and First Hawaii. Specifically, Leahi Fund and First
Hawaii have substantially similar investment objectives and policies and
comparable risk profiles. The Board also evaluated potential economies of
scale associated with larger mutual funds and concluded that operational
efficiencies may be achieved in the future following a reorganization with
First Hawaii. There can be no assurance that any economies of scale or other
benefits will be realized. Additionally, the Board considered the
composition of the staff of the investment manager and concluded that the
administrative operations of First Hawaii's management staff complemented
the needs of Leahi Fund for growth and operational efficiency. Both investment
managers to First Hawaii and Leahi Fund believe that the proposed
Reorganization would be in the best interests of each Fund and its
shareholders.
The Board of Trustees considered a variety of factors related to the
Reorganization, including but not limited to (1) the terms and conditions of
the Plan of Reorganization and the anticipated effect of the Reorganization
on per-share expenses and costs of Leahi Portfolio; (2) whether the proposed
Reorganization would achieve economies of scale for Leahi Portfolio and
benefit its shareholders by promoting more efficient operations and enabling
greater diversification of investments; (3) whether the interests of the
shareholders of Leahi Portfolio would be diluted as a result of the
transactions contemplated by the proposed Reorganization, especially the
expenses of the Reorganization; (4) whether the investment objectives,
policies and restrictions of Leahi Portfolio and First Hawaii are
compatible; (5) the relative, comparative past growth in assets,investment
performance and expenses of Leahi Portfolio and First Hawaii; (6) the
investment advisory and other services to be provided by FPMC and
information regarding its personnel and financial condition; (7) the
governance and management of First Pacific; (8) the distributor, custodian,
transfer agent, accountants and counsel for First Hawaii; (9) the future
prospects of Leahi Portfolio if the proposed Reorganization were not
effected; (10) whether the proposed Reorganization would result in the
recognition of any gain or loss for federal income tax purposes either
to Leahi Portfolio or First Hawaii or their shareholders; and
(11) alternatives to the proposed Reorganization, including liquidation
and other possible merger candidates.
The Trustees also considered that there are alternatives available to
shareholders of Leahi Fund, including the ability to redeem their shares, as
well as the option to vote against the Reorganization. If the Plan is not
approved by shareholders of Leahi Fund, the Trustees may consider other
appropriate action that is in the best interests of Leahi Fund and its
shareholders.
THE TRUSTEES OF LEAHI FUND RECOMMEND THAT THE SHAREHOLDERS OF
THE LEAHI FUND APPROVE THE PROPOSED REORGANIZATION.
AGREEMENT AND PLAN OF REORGANIZATION
The following summary is qualified in its entirety by reference to the
Plan (Exhibit A hereto).
The Plan provides that First Hawaii will acquire all of the assets of
Leahi Fund in exchange for shares of First Hawaii. The number of full and
fractional shares of First Hawaii to be received by the shareholders of
Leahi Fund will be determined by dividing the value of the assets of Leahi Fund
to be acquired, by the per share value of First Hawaii and Leahi Fund, computed
as of the close of regular trading on the NYSE on the Closing Date. The net
asset value per share of each Fund will be determined by dividing assets,
ess liabilities, by the total number of outstanding shares.
Bank Boston, N.A. the custodian for Leahi Fund and Union Bank of
California, N.A. the custodian for First Hawaii, will compute the value of
the Funds' respective portfolio securities. The method of valuation employed
will be consistent with the procedures set forth in the Prospectus and
Statement of Additional Information of the respective fund, Rule 22c-1 under
the 1940 Act, and with the interpretations of such rule by the SEC's Division
of Investment Management.
At or prior to the Closing Date, Leahi Fund shall have declared a
dividend or dividends and distribution or distributions which, together with
all previous dividends and distributions, shall have the effect of
distributing to Leahi Fund's shareholders (in shares of Leahi Fund, or in
cash, as the shareholder has previously elected) all of Leahi Fund's
investment company taxable income for the taxable year ending on or prior to
the Closing Date (computed without regard to any deduction for dividends
paid) and all of its net capital gains realized in all taxable years ending on
or prior to the Closing Date (after reductions for any capital loss carry
forward).
As soon after the Closing Date as conveniently practicable, Leahi Fund
will liquidate and distribute pro rata to shareholders of record as of the
close of business on the Closing Date the full and fractional shares of
First Hawaii received by Leahi Fund. Such liquidation and distribution
will be accomplished by the establishment of accounts in the names of
Leahi Fund's shareholders on the share records of First Hawaii's transfer
agent. Each account will represent the respective pro rata number
of full and fractional Leahi shares of First Hawaii due to Leahi Fund's
shareholders. All issued and outstanding shares of Leahi Fund,
including those represented by certificates, will be canceled. First
Hawaii does not issue share certificates to shareholders. The shares of
First Hawaii to be issued will have no preemptive or conversion rights.
After such distribution and the winding up of its affairs, Leahi
Fund and the Trust will be terminated, and expect to file with the SEC an
application for deregistration as a regulated investment company.
Every shareholder of Leahi Fund will own First Hawaii shares immediately
after the reorganization that, except for rounding, will be equal to the value
of that shareholder's shares of Leahi Fund immediately prior to the
reorganization. Moreover, because shares of First Hawaii will be issued at
net asset value in exchange for net assets of Leahi Fund that, except for
rounding, will equal the aggregate value of those shares, the net asset value
per share of First Hawaii will be unchanged. Thus, the reorganization will
not result in a dilution of the value of any shareholder account. The
reorganization may substantially reduce the percentage of ownership of a
Leahi Fund's shareholder below such shareholder's current percentage of
ownership in Leahi Fund because, while such shareholder will have the same
dollar amount invested initially in First Hawaii that he or she had invested in
Leahi Fund, his or her investment will represent a smaller percentage of the
combined net assets of First Hawaii and Leahi Fund.
The reasons that the Reorganization was proposed are described above under
"Reasons for the Reorganization."
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by Leahi Fund's shareholders,
the election of two individuals who currently serve as Trustees of the
Trust, or other persons satisfactory to the Trust and the Corporation,
to the Board of the Corporation, accuracy of various representations and
warranties and receipt of opinions of counsel, including opinions with
respect to those matters referred to in "Federal Income Tax Consequences"
below. Notwithstanding approval of Leahi Fund's shareholders, the
Plan may be terminated (a) by the mutual agreement of Leahi Fund
and First Hawaii; or (b) at or prior to the Closing Date by either party
(i) because of a material breach by the other party of any representation,
warranty, or agreement contained therein to be performed at or prior to the
Closing Date, or (ii) because a condition to the obligation of the
terminating party has not been met and it reasonably appears that it
will not or cannot be met.
The expenses of Leahi Fund in connection with the Reorganization
(including the cost of any proxy soliciting agents) will be borne by Leahi
Investment Management and the expenses of First Hawaii will be borne by
First Pacific Management Corporation whether or not the Reorganization is
consummated.
FEDERAL INCOME TAX CONSEQUENCES
The Reorganization is intended to qualify for federal income tax purposes
as a tax-free reorganization under section 368(a) of the Code. As a
condition to the closing of the Reorganization, Leahi Fund will receive
an opinion of counsel to the effect that, on the basis of the existing
provisions of the Code, U.S. Treasury regulations issued thereunder, current
administrative rules, pronouncements and court decisions, for federal income
tax purposes, upon consummation of the Reorganization:
(1) The transfer of all of the assets of Leahi Fund solely in
exchange for shares of First Hawaii and the distribution of First Hawaii's
shares by Leahi Fund in dissolution and liquidation of shares by
Leahi Fund, will constitute a "reorganization" within the meaning of section
368(a)(1)(C) of the Code;
(2) No gain or loss will be recognized by Leahi Fund or its
shareholders on the transfer of all of its assets to First Hawaii solely
in exchange for First Hawaii shares or upon distribution of
First Hawaii shares to Leahi Fund's shareholders in exchange for their
shares of the Fund;
(3) The tax basis of the assets transferred will be the same to First
Hawaii as the tax basis of such assets to Leahi Fund immediately prior
to the Reorganization, and the holding period of such assets in the hands of
First Hawaii will include the period during which the assets were held by
Leahi Fund;
(4) No gain or loss will be recognized by First Hawaii upon the receipt
of the assets from Leahi Fund solely in exchange for the shares of First
Hawaii.
(5) No gain or loss will be recognized by Leahi Fund's shareholders
upon the issuance of the shares of First Hawaii to them, provided they
receive solely such shares (including fractional shares) in exchange for
their shares of Leahi Fund; and
(6) The aggregate tax basis of the shares of First Hawaii including any
fractional shares, received by each of the shareholders of Leahi Fund
pursuant to the Reorganization will be the same as the aggregate tax basis
of the shares of Leahi Fund held by such shareholder immediately prior to
the Reorganization, and the holding period of the shares of First Hawaii,
including fractional shares, received by each such shareholder will include
the period during which the shares of Leahi Fund exchanged therefor
were held by such shareholder.
Opinions of counsel are not binding upon the Internal Revenue Service or
the courts. If the Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, each Leahi Fund shareholder would
recognize a taxable gain or loss equal to the difference between his or her
tax basis in his or her Leahi Fund shares and the fair market value of
First Hawaii shares he or she received. Shareholders of Leahi Fund
should consult their tax advisers regarding the effect, if any, of
the proposed Reorganization in light of their individual circumstances.
Since the foregoing discussion relates only to the federal income tax
consequences of the Reorganization, shareholders of Leahi Fund should
also consult their tax advisers as to state and local tax consequences, if
any, of the Reorganization.
It is not anticipated that it will be necessary that the securities
of the combined portfolio be sold in significant amounts in order to comply
with the policies and investment practices of First Hawaii.
PRO-FORMA CAPITALIZATION AND RATIOS
The following table sets forth the capitalization of First Hawaii and
Leahi Fund as of March 31, 1997 and on a pro-forma combined capitalization
basis as of that date, as if the Reorganization had occurred on that date.
<TABLE>
<S> <C> <C> <C>
Pro Forma
First Hawaii Leahi Fund Combined
Net Assets $54,886,135 $48,390,483 $103,276,618
Net Asset Value per Share $10.82 $13.59 $10.82
Shares Outstanding 5,070,859 3,559,886 9,541,607
</TABLE>
The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets of First Hawaii for
the six month period ended March 31, 1997 and of Leahi Fund for the six month
period ended March 31, 1997. The ratios are annualized and are also shown on
a pro forma combined basis.
Pro Forma
First Hawaii Leahi Fund Combined
Ratio of expenses to 0.97% 0.83% 0.87%
average net assets
Ratio of net investment 4.94% 5.08% 5.06%
income to average net assets
INFORMATION ABOUT FIRST HAWAII
FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
For additional condensed financial information about First Hawaii, see
Exhibit B to this Prospectus/Proxy Statement and "Financial Highlights" in
First Hawaii Prospectus, which accompanies this Prospectus/Proxy Statement.
The following financial highlights contain selected data for a share
outstanding, total return, ratios to average net assets and other supplemental
data for the period presented.
<TABLE>
<S> <C> <C>
Six Months
Year Ended Ended
9/30/96 03/31/97
Net asset value
Beginning of period $10.84 $10.89
Income from investment operations
Net investment income .55 .27
Net gain (loss) on securities (unrealized) .05 (.07)
Total from investment operations .60 .20
Less distributions
Dividends from net investment income (.55) (.27)
End of period $10.89 $10.82
Total Return 5.62% 3.66% (b)
Ratios/Supplemental Data
Net assets, end of period (in 000's) $54,165 $54,866
Ratio of expenses to average net assets
Before expense reimbursements .98% (a) .97% (b)
After expense reimbursements .98% (a) .97% (a) (b)
Ratio of net investment income to average net assets
Before expense reimbursements 5.03% 4.94% (b)
After expense reimbursements 5.03% 4.94% (b)
Portfolio turnover 15.16% 1.64%
</TABLE>
(a) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian arrangement were .95% in 1996 and 1997.
(b) Annualized.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in its entirety by
the descriptions of the respective investment objectives, policies and
restrictions set forth in the respective Prospectuses and Statements of
Additional Information of the Funds. For a discussion of First Hawaii's
investment objective and policies and risk factors associated with an
investment in First Hawaii, see "Prospectus Summary," "Investment Objective
and Policies," "Municipal Securities" and "Investment Practices" in
First Hawaii Prospectus. First Hawaii's Prospectus also offers an
additional Fund advised by FPMC. The additional Fund is not involved in the
Reorganization, its investment objective, policies and restrictions are not
discussed in this Prospectus/Proxy Statement and its shares are not offered
hereby.
First Hawaii's investment objective is to provide a high level of current
income exempt from federal and Hawaii state income taxes, consistent with
preservation of capital. There can be no assurance that the Fund will
achieve its investment objective.
First Hawaii 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 Hawaii 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 Hawaii 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.
First Hawaii may invest up to 10% of its assets in bonds rated BB or Ba
grade municipal securities. The lowest quality municipals in which First
Hawaii 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.
When FPMC determines during periods of adverse market conditions, including
when Hawaiian 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 of which may be subject to federal,
state or local income tax.
For a discussion of Leahi Fund's investment objective and policies and
risk factors associated with an investment in Leahi Fund, see "Objectives
and Investment Approach of the Fund" in Leahi Fund Prospectus.
The investment objective of Leahi Fund is to provide investors with the
maximum level of income exempt from federal and Hawaii income taxes,
consistent with preservation of capital. Leahi Fund seeks to achieve its
objective by investing primarily in municipal securities which pay interest
that is exempt from federal and Hawaii income taxes ("Hawaii Municipal
Securities"). Hawaii Municipal Securities include general obligation and
revenue bonds and notes of issuers located in Hawaii, as well as
obligations issued by or under the authority of Guam, Puerto Rico, and the
Virgin Islands. The Fund expects that at least a majority of its assets will
be invested in municipal securities of issuers located in Hawaii. There are
no limitations on the maturities of the securities which the Fund may purchase.
There is no assurance that Leahi Fund's objective will be achieved.
Leahi Fund invests solely in securities which, at the time of purchase are
either rated within the four highest grades assigned by Moody's or S&P or, if
unrated, are judged by LMCI, the Fund's investment manager, to be of comparable
quality to such rated securities. Municipal obligations rated in the fourth
highest grade are considered by such rating agencies to have some speculative
characteristics and thus may present investment risks not present in more
highly rated obligations.
For temporary defense purposes only, Leahi Fund may invest up to 100% of
its assets in (i) obligations issued or guaranteed by the full faith and
credit of the U.S. Government, its agencies, instrumentalities or
authorities, highest rated commercial paper, certificates of deposit of
domestic banks with assets of $1 billion or more, and repurchase agreements
(subject to the limitations described below), the interest on which is
subject to federal, and may be subject to Hawaii, income taxes; and
(ii) securities the interest on which is exempt from regular federal income
taxes but not Hawaii's income taxes, such as municipal securities issued by
other states and their agencies and instrumentalities.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
FORM OF ORGANIZATION
For a discussion of the organization of First Hawaii see "General
Information and History" in First Hawaii Prospectus. The Corporation
is an open-end management investment company registered with the SEC under
the 1940 Act, which offers multiple series of shares. First Hawaii is a non-
diversified series of the Corporation, which was organized as a Maryland
corporation. For a discussion of the organization of Leahi Fund see
"General Information" in Leahi Fund Prospectus. The Trust is an
open-end management investment company registered with the SEC under the
1940 Act. Leahi Fund is a non-diversified series of the Trust, which was
organized as a Massachusetts business trust.
CAPITALIZATION
For a discussion of the capitalization and voting rights of shareholders
of First Hawaii see "General Information and History" in First Hawaii
Prospectus. The Corporation 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 First Hawaii. 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
respective series and (2) equal distribution and redemption rights with
respect to matters which affect the respective series and (3) equal dividend,
distribution and redemption rights to assets of the respective series.
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 pre-emptive 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. For a discussion of the capitalization and voting rights of
shareholders of Leahi Fund see "General Information" in Leahi Fund
Prospectus. The Trust may issue an unlimited number of full and fractional
shares of beneficial interest with a par value of $.01, which may
be issued in any number of series. Leahi Fund is the first, and currently
only, series being offered to the public, although the Board of Trustees
may authorize and issue other series, the assets and liability of
which would be separate and distinct from any other series. Shares issued
by the Fund have no preemptive, conversion, or subscription rights.
Shareholders have equal and exclusive rights as to dividends and
distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in any election of Trustees
can, if they so choose, elect all of the Trustees.
SHAREHOLDER LIABILITY
Under Massachusetts Law, shareholders of a business trust could, under
certain circumstances, be held personally liable for the obligations of the
business trust. However, the Declaration of Trust of the Trust under which
Leahi Fund was established disclaims shareholder liability for acts or
obligations of the series and require that notice of such disclaimer be
given in each agreement, obligation or instrument entered into or executed
by Leahi Fund or the Trustees. The Declaration of Trust provides for
indemnification out of the series' property for all losses and expenses of
any shareholder held personally liable for the obligations of the series.
Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is considered remote since it is limited to
circumstances in which a disclaimer is inoperative and the series or the
trust itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS AND VOTING RIGHTS
For a discussion of shareholder meetings and voting rights of
shareholders of First Hawaii see "General Information and History" in
First Hawaii Prospectus. For a discussion of shareholder meetings and
voting rights of shareholders of Leahi Fund see "General Information" in
Leahi Fund Prospectus.
Neither Leahi Fund nor First Hawaii is required to hold annual
meetings of shareholders. However, a meeting of shareholders for the purpose
of voting upon the question of removal of a Trustee of the Trust must be
called when requested in writing by the holders of 10% of the outstanding
shares of the Trust. Similarly, 10% of the shareholders of the Corporation
have the right to call a meeting to consider the removal of one or more of
the Directors.
The Trust and the Corporation currently do not intend to hold regular
shareholder meetings. Neither permits cumulative voting. A majority of the
Corporation's shares outstanding and 40% of the Trust's shares outstanding
and entitled to vote on a matter generally constitutes a quorum for
consideration of such matter. In either case, a majority of the shares
voting is sufficient to act on a matter (unless otherwise specifically
required by the applicable governing documents or other law, including
the 1940 Act).
LIQUIDATION OR DISSOLUTION
In the event of the liquidation of First Hawaii or Leahi Fund,
respectively, the shareholders are entitled to receive, when, and as
declared by the Directors or Trustees, respectively, the excess of the
assets belonging to such Fund or attributable to the series over the
liabilities belonging to the Fund or attributable to the series.
In either case, the assets so distributable to shareholders of the Fund
will be distributed among the shareholders in proportion to the number of
shares of the Fund held by them and recorded on the books of the Fund.
LIABILITY AND INDEMNIFICATION OF TRUSTEES AND DIRECTORS
The Declaration of Trust of the Trust provides that a Trustee shall be
liable solely for his own bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties. The By-laws of the Trust provide that
present and former Trustees are generally entitled to indemnification against
liabilities and expenses with respect to claims related to their position with
the Trust unless, it shall have determined that such Trustee is liable by
reason of his or her willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
The Articles of Incorporation of the Corporation provide that a Director
of the Corporation shall have no liability to the Corporation or its
stockholders for money damages and the Corporation shall indemnify current
and former directors to the extent permitted by governing law. These
provisions do not protect a director against any liability to the
Corporation or its shareholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
ADDITIONAL INFORMATION
First Hawaii. Information concerning the operation and management of First
Hawaii is incorporated herein by reference from the Prospectus dated February
1, 1997, a copy of which is enclosed, and the Statement of Additional
Information dated February 1, 1997. A copy of such Statement of Additional
Information is available upon request and without charge by writing First
Hawaii at the address listed on the cover page of this Prospectus/Proxy
Statement or by calling toll free 1-800-354-9654 (inter-island).
Leahi Fund. Information about Leahi Fund is included in its current
Prospectus dated February 1, 1997, and in the Statement of Additional
Information of the same date that have been filed with the SEC, all of
which are incorporated herein by reference. Copies of the Prospectus,
Statement of Additional Information, and the Fund's Semi-Annual Report dated
March 31, 1997 are available upon request and without charge by writing to
the address listed on the cover of this Prospectus/Proxy Statement or by
calling toll free 1-800-354-9654 (inter-island).
Reports and other information filed by Leahi Fund and First Hawaii can
be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's regional offices in Los Angeles (5670
Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648, New York
(7 World Trade Center, Suite 1300, New York, New York 10048) and Chicago
(Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511). Copies of such material can also be obtained at prescribed rates
from the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Board of Trustees of the Trust to be used at
the Special Meeting of Shareholders to be held at 9:00 a.m. local time, July
24, 1997, at the offices of the Leahi Fund, Ward Plaza, 210 Ward Avenue, Suite
129, Honolulu, Hawaii 96814, and at any adjournments thereof. This
Prospectus/Proxy Statement, along with a Notice of the Meeting and a proxy
card, is first being mailed to shareholders on or about June 20, 1997.
Only shareholders of record as of the close of business on the Record Date,
June 20, 1997 will be entitled to notice of, and to vote at, the Meeting or
any adjournment thereof. The holders of a majority of the shares outstanding
at the close of business on the Record Date present in person or represented by
proxy will constitute a quorum for the Meeting. If the enclosed form of proxy
is properly executed and returned in time to be voted at the Meeting, the
proxies named therein will vote the shares represented by the proxy in
accordance with the instructions marked thereon. Unmarked proxies will be
voted FOR the proposed Reorganization and FOR any other matters deemed
appropriate. Proxies that reflect abstentions and "broker non-votes"
(i.e., shares held by brokers or nominees as to which (i) instructions
have not been received from the beneficial owners or the persons entitled
to vote or (ii) the broker or nominee does not have discretionary voting
power on a particular matter) will be counted as shares that are present
and entitled to vote for purposes of determining the presence of a quorum,
but will have no effect on the outcome of the vote to approve the Plan.
A proxy may be revoked at any time on or before the Meeting by written
notice to the Secretary of Leahi Fund, Ward Plaza, 210 Ward Avenue, Suite
129, Honolulu, Hawaii 96814. Unless revoked, all valid proxies will be voted
in accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Plan and the Reorganization contemplated
thereby.
Approval of the Plan will require the affirmative vote of a majority of
the outstanding shares. Each full share outstanding is entitled to one vote
and each fractional share outstanding is entitled to a proportionate share
of one vote.
Proxy solicitations will be made primarily by mail, but proxy solicitations
may also be made by telephone, telegraph or personal solicitations conducted
by officers and employees of LMCI or Leahi Fund, their affiliates or other
representatives of Leahi Fund (who will not be paid by Leahi Fund for
their solicitation activities).
Any proxy given, whether in writing or by telephone, is revocable.
In the event that sufficient votes to approve the Reorganization are not
received by July 24, 1997, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies. In
determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of
negative votes actually cast, the nature of any further solicitation and
the information to be provided to shareholders with respect to the
reasons for the solicitation. Any such adjournment will require an
affirmative vote by the holders of the majority of the outstanding
shares present in person or by proxy and entitled to vote at the Meeting.
The persons named as proxies will vote upon such adjournment after
consideration of all circumstances which may bear upon a decision to
adjourn the Meeting.
A shareholder who objects to the proposed Reorganization will not be
entitled under either Massachusetts law or the Declaration of Trust of the
Trust to demand payment for, or an appraisal of, his or her shares. However,
shareholders should be aware that the Reorganization as proposed is not
expected to result in recognition of gain or loss to shareholders for
federal income tax purposes and that, if the Reorganization is consummated,
shareholders will be free to redeem the shares of First Hawaii
which they receive in the transaction at their then-current net asset value.
Shares of Leahi Fund may be redeemed at any time prior to the
consummation of the Reorganization. Leahi Fund shareholders may
wish to consult their tax advisers as to any differing consequences of
redeeming Leahi Fund shares prior to the Reorganization or exchanging such
shares in the Reorganization.
Leahi Fund does not hold annual shareholder meetings. If the
Reorganization is not approved, shareholders wishing to submit proposals for
consideration for inclusion in a proxy statement for a subsequent shareholder
meeting should send their written proposals to the Secretary of Leahi Fund at
the Address set forth on the cover of this Prospectus/Proxy Statement such that
they will be received by Leahi Fund in a reasonable period of time prior to
any such meeting.
The mere submission of a proposal by a shareholder does not guarantee
that such proposal will be included in the proxy statement because certain
rules under the federal securities laws must be complied with before
inclusion of the proposal is required. In the event that the Plan is approved
at this Meeting with respect to Leahi Fund, it is not expected that there will
be any future shareholder meetings of Leahi Fund.
It is the present intent of the Board of Directors of the Corporation and
First Hawaii not to hold annual meetings of shareholders unless the election
of Directors is required under the 1940 Act nor to hold special meetings of
shareholders unless required by the 1940 Act or state law.
The votes of the shareholders of First Hawaii are not being solicited by
this Prospectus/Proxy Statement and are not required to carry out the
Reorganization.
As of the close of business on June 20, 1997, Leahi Fund had ___________
shares of beneficial interest outstanding and entitled to vote. As of June 20,
1997 there were no beneficial owners of more than 5% of the outstanding shares
of beneficial interest of Leahi Fund. As of June 20, 1997, the trustees
and officers of Leahi Fund, as a group, owned less than 1% of the outstanding
shares of Leahi Fund.
FINANCIAL STATEMENTS AND EXPERTS
The annual and semi-annual reports of Leahi Fund as of September 30,
1996 (audited) and March 31, 1997 (unaudited) have been incorporated by
reference into this Prospectus/Proxy Statement. The financial statements as
of September 30, 1996 have been incorporated by reference into this
Prospectus/Proxy Statement in reliance upon the report of Tait, Weller
& Baker, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of First Hawaii as of September 30, 1996
(audited) and March 31, 1997 (unaudited) have been incorporated by
reference into this Prospectus/Proxy Statement. The financial
statements as of September 30, 1996 have been incorporated by
reference into this Prospectus/Proxy Statement in reliance upon the
report of Tait, Weller & Baker, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
LEGAL MATTERS
Certain legal matter concerning the issuance of shares of First Hawaii
will be passed upon by Stradley, Ronon, Stevens & Young LLP, Philadelphia,
Pennsylvania.
OTHER BUSINESS
The Trustees of the Trust do not intend to present any other business at
the Meeting. If, however, any other matters are properly brought before the
Meeting, the persons named in the accompanying form of proxy will vote thereon
in accordance with their judgment.
THE BOARD OF TRUSTEES OF LEAHI FUND, INCLUDING THE INDEPENDENT
TRUSTEES, RECOMMENDS APPROVAL OF THE PLAN. ANY UNMARKED PROXIES
WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF
APPROVAL OF THE PLAN.
June 20, 1997<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
as of this 8th day of May, 1997, by and between Leahi Investment Trust, a
Massachusetts Business Trust (the "Trust"), on behalf of Leahi
Tax-Free Income Trust, a separate series of Leahi Investment Trust (the
"Acquired Fund"), and First Pacific Mutual Fund, Inc., a Maryland
corporation ("First Pacific"), on behalf of First Hawaii Municipal
Bond Fund, a separate series of First Pacific (the "Acquiring Fund").
(The Acquiring Fund and the Acquired Fund are sometimes referred to
collectively as the "Funds" and individually as a "Fund".)
This Agreement is intended to be and is adopted as a plan of
reorganization within the meaning of Section 368(a)(1) of the Internal
Revenue Code of 1986, as amended (the "Code"). The reorganization
("Reorganization") will consist of the transfer of substantially all of
the property, assets, and goodwill of the Acquired Fund to the Acquiring
Fund in exchange solely for shares of the voting common stock of the
Acquiring Fund ("Acquiring Fund Shares"), followed by the distribution
by the Acquired Fund, on or promptly after the Closing Date, as defined
herein, of the Acquiring Fund Shares to the shareholders of
the Acquired Fund, the cancellation of all of the outstanding shares of the
Acquired Fund ("Acquired Fund Shares"), and the liquidation of the Acquired
Fund, and the termination of the Acquired Fund as a subtrust of the Trust,
as provided herein, all upon the terms and conditions hereinafter set forth
in this Agreement.
In consideration of the premises and of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR
ACQUIRING FUND SHARES AND LIQUIDATION OF THE ACQUIRED FUND
1.1 On the Closing Date for the Reorganization (the "Closing Date"), the
Acquired Fund shall transfer substantially all of its property and assets
(consisting, without limitation, of portfolio securities and instruments,
dividends and interest receivables, claims, cash, cash equivalents, deferred or
prepaid expenses shown as assets on the Acquired Fund's books, goodwill and
intangible property, books and records, and other assets), as set forth in
the statement of assets and liabilities referred to in Section 8.2 hereof
(the "Statement of Assets and Liabilities"), to the Acquiring Fund free and
clear of all liens, encumbrances, and claims, except for cash or bank
deposits in an amount necessary: (a) to pay its costs and expenses of
carrying out this Agreement (including but not limited to fees of counsel and
independent accountants, any income dividends and any capital gains
distributions payable prior to the Closing Date as required by Section 8.15
hereof, and expenses of its liquidation contemplated hereunder); (b) to
discharge all of the unpaid liabilities reflected on its books and records at
the Closing Date; and (c) to pay such contingent liabilities, if any, as the
Board of Trustees of the Trust shall reasonably deem to exist against
the Acquired Fund at the Closing Date, for which contingent and other
appropriate liability reserves shall be established on the Acquired Fund's
books. Any unspent portion of such cash or bank deposits retained shall be
delivered by the Trust to the Acquiring Fund upon the satisfaction of all
of the foregoing liabilities, costs, and expenses of the Acquired Fund in
exchange for shares of the Acquiring Fund. (The property and assets to be
transferred to the Acquiring Fund under this Agreement are referred to herein
as the "Acquired Fund Net Assets"). In exchange for the transfer of the
Acquired Fund Net Assets, the Acquiring Fund shall deliver to the Acquired
Fund, for distribution on or promptly after the Closing Date pro rata by
the Acquired Fund to its shareholders as of the close of business on the
Closing Date, a number of the Acquiring Fund Shares having an aggregate
net asset value equal to the value of the Acquired Fund Net Assets, all
determined as provided in Section 2 of this Agreement and as of the date
and time specified therein. Such transactions shall take place on the
Closing Date at the time of the closing provided for in Section 3.1 of
this Agreement (the "Closing Time"). At and after the Closing Date, the
Trust shall not be responsible for the liabilities of the Acquired Fund,
and recourse for such liabilities shall be limited to the Acquiring Fund,
except as provided in this Section 1.1.
1.2 The Acquired Fund reserves the right to purchase or sell any of its
portfolio securities, except to the extent such purchases or sales may be
limited by the representations made in connection with issuance of the tax
opinion described in Section 8.9 hereof.
1.3 On or promptly after the Closing Date, the Acquired Fund shall
liquidate and distribute pro rata to its shareholders of record at the
Closing Time on the Closing Date (the "Acquired Fund Shareholders") the
Acquiring Fund Shares received by the Acquired Fund pursuant to
Section 1.1 hereof. (The date of such liquidation and distribution is
referred to as the "Liquidation Date.") In addition, each Acquired Fund
Shareholder shall have the right to receive any dividends or other
distributions that were declared prior to the Closing Date, but unpaid at
that time, with respect to the Acquired Fund Shares that are held by such
Acquired Fund Shareholders on the Closing Date. Such liquidation and
distribution shall be accomplished by First Pacific Recordkeeping, Inc., in
its capacity as transfer agent for the Acquiring Fund, by opening accounts
on the share records of the Acquiring Fund in the names of the Acquired Fund
Shareholders and transferring to each such Acquired Fund Shareholder account
the pro rata number of the Acquiring Fund Shares due each such Acquired Fund
Shareholder from the Acquiring Fund Shares then credited to the account of
the Acquired Fund on the Acquiring Fund's books and records. The Acquiring
Fund shall not issue certificates representing Acquiring Fund Shares in
connection with such exchange, except in accordance with the procedures set
forth in the Acquiring Fund's then-current Prospectus and Statement of
Additional Information or as provided in Section 1.4 hereof.
1.4 The Acquired Fund Shareholders holding certificates representing
their ownership of Acquired Fund Shares may be requested to surrender such
certificates or deliver an affidavit with respect to lost certificates, in
such form and accompanied by such surety bonds as the Acquired Fund may
require (collectively, an "Affidavit"), to the Acquired Fund prior to the
Closing Date. On the Closing Date, any Acquired Fund Share certificates
that remain outstanding shall be deemed to be canceled. The Trust's
transfer books with respect to the Acquired Fund's shares shall be closed
permanently as of the close of business on the day immediately prior to the
Closing Date. All unsurrendered Acquired Fund Share certificates shall no
longer evidence ownership of common stock of the Acquired Fund and shall
be deemed for all corporate purposes to evidence ownership of the number of
Acquiring Fund Shares into which the Acquired Fund Shares were effectively
converted. Unless and until any such certificate shall be so surrendered or
an Affidavit relating thereto shall be delivered to the Acquiring Fund,
dividends and other distributions payable by the Acquiring Fund subsequent
to the Liquidation Date with respect to such Acquiring Fund Shares shall be
paid to the holder of such certificate(s), but such Shareholders may not
redeem or transfer Acquiring Fund Shares received in the Reorganization with
respect to unsurrendered Acquired Fund Share certificates.
1.5 Any transfer taxes payable upon issuance of Acquiring Fund Shares
in a name other than the registered holder of the Acquiring Fund Shares on
the books of the Acquired Fund as of that time shall, as a condition of such
issuance and transfer, be paid by the person to whom such Acquiring Fund
Shares are to be issued and transferred.
1.6 As soon as practicable following the Liquidation Date, the Trust
shall take all steps necessary to end the existence of the Acquired Fund,
including (a) the payment or other satisfaction of the Acquired Fund's
remaining outstanding costs, expenses, and other liabilities from the cash
and bank deposits retained for that purpose pursuant to Section 1.1 hereof,
and (b) the termination of the Acquired Fund as a sub-trust of the Trust in
accordance with the Trust's Agreement and Declaration of Trust, as
heretofore amended (the "Declaration of Trust").
2. VALUATION
2.1 The net asset value of the Acquiring Fund Shares and the value of
the Acquired Fund Net Assets shall in each case be determined as of the close
of regular trading on the New York Stock Exchange ("NYSE") on the Closing
Date, provided that on such date (a) the NYSE is open for unrestricted
trading; and (b) no extraordinary financial event or change in market
conditions occurs, so that accurate appraisal of the net asset value of the
Acquiring Fund and the Acquired Fund Net Assets is possible. The net asset
value per share of Acquiring Fund Shares shall be computed in accordance with
the policies and procedures set forth in the then-current Prospectus and
Statement of Additional Information of the Acquiring Fund, and shall be
computed to not fewer than two (2) decimal places. The value of the Acquired
Fund Net Assets shall be computed in accordance with the policies and
procedures set forth in the then-current Prospectus and Statement of
Additional Information of the Acquired Fund.
2.2 In the event that on the proposed Closing Date trading or the
reporting of trading on the NYSE or elsewhere shall be disrupted (including
as noted in Section 2.1 concerning restricted trading on
the NYSE, extraordinary financial events or extraordinary changes in market
conditions) so that accurate appraisal of the net asset value of the
Acquiring Fund or the value of the Acquired Fund Net Assets is impracticable,
the Closing Date shall be postponed until the first business day when regular
trading on the NYSE shall have been fully resumed and reporting shall have
been restored and other trading markets are otherwise stable.
2.3 The number of Acquiring Fund Shares to be issued (including
fractional shares, if any) in exchange for the Acquired Fund Net Assets
shall be determined by dividing the value of the Acquired Fund Net Assets
by the Acquiring Fund's net asset value per share, both as determined in
accordance with Section 2.1 hereof.
2.4 All computations of value regarding the Acquiring Fund shall be made
by First Pacific Management Corporation, the investment adviser to the
Acquiring Fund ("FP Adviser"), in cooperation with Tait, Weller & Baker,
independent auditors of the Acquiring Fund, and all computations of value
regarding the Acquired Fund shall be made by Leahi Management Company, Inc.,
the investment adviser to the Acquired Fund ("Leahi") in cooperation with Tait,
Weller & Baker, independent auditors of the Acquired Fund.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be July 31, 1997 or such earlier or
later date as the parties may agree. The Closing Time shall be at 4:00 pm,
Eastern Time. The Closing shall be held at the offices of
Stradley, Ronon, Stevens & Young, LLP, located at 2600 One Commerce Square,
Philadelphia, PA 19103-7098, or at such other time and/or place as the parties
may agree.
3.2 Portfolio securities that are not held in book-entry form shall be
transferred by Bank Boston, N.A. (the "Custodian") or its agents or
nominees from the Acquired Fund's account with the Custodian to the
account of the Acquiring Fund at its custodian bank, Union Bank of
California, N.A. on the Closing Date, duly endorsed in proper form for
transfer, in such condition as to constitute good delivery thereof in
accordance with the custom of brokers, and shall be accompanied by all
necessary federal and state stock transfer stamps or a check for the
appropriate purchase price thereof. Portfolio securities held of record
by the Custodian or its agents or nominees in book-entry form on behalf
of the Acquired Fund shall be transferred to the Acquiring Fund by the
Custodian. Any cash of the Acquired Fund delivered on the Closing Date
shall be in the form of currency or shall be delivered on the Closing Date
by the Custodian by wiring to the Acquiring Fund's account maintained with
its custodian, Union Bank of California, N.A.
3.3 If any of the Acquired Fund Net Assets, for any reason, are not
transferred on the Closing Date, the Acquired Fund shall cause such assets
to be transferred to the Acquiring Fund in accordance with this Agreement
at the earliest practicable date thereafter.
3.4 Fund/Plan Services, Inc., in its capacity as transfer agent for the
Acquired Fund, shall deliver to the Acquiring Fund at the Closing Time a list
of the names, addresses, federal taxpayer identification numbers, and backup
withholding and nonresident alien withholding status of Acquired Fund
Shareholders and the number and aggregate net asset value of outstanding shares
of the Acquired Fund owned by each such Acquired Fund Shareholder, all as of
the close of regular trading on the NYSE on the Closing Date, certified by
an appropriate officer of Fund/Plan Services, Inc., as the case may be
(the "Shareholder List"). First Pacific Recordkeeping, Inc., in its
capacity as transfer agent for the Acquiring Fund, shall issue and deliver
to the Acquired Fund a confirmation evidencing the Acquiring Fund Shares to
be credited to each Acquired Fund Shareholder on the Liquidation Date, or
provide evidence satisfactory to the Acquired Fund that such Acquiring Fund
Shares have been credited to each Acquired Fund Shareholder's account on the
books of the Acquiring Fund. At the Closing, each Fund shall deliver to the
other Fund such bills of sale, checks, assignments, certificates, receipts,
or other documents as the other Fund or its counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES OF THE TRUST AND THE ACQUIRED
FUND
The Trust, on behalf of the Acquired Fund, represents and warrants to
First Pacific, on behalf of the Acquiring Fund, as follows:
4.1 The Trust is a business trust duly organized, validly existing, and
in "good standing" under the laws of the Commonwealth of Massachusetts
(meaning it has filed its most recent annual report and has not filed a
certificate of termination) and has the power to own all of its properties
and assets and, subject to approval of the Acquired Fund Shareholders, to
perform its obligations under this Agreement and to consummate the
transactions contemplated herein. The Trust is not required to qualify
to do business in any jurisdiction (i) in which it is not so qualified or
(ii) where failure to qualify would not subject it to any material liability
or disability. The Trust has all necessary federal, state, and local
authorizations, consents, and approvals required, to own all of its
properties and assets and to carry on its business as now being conducted
to consummate the transactions contemplated herein.
4.2 The Trust is a registered investment company classified as a
management company of the open-end type and its registration with the SEC as
an investment company under the Investment Company Act of 1940, as amended,
(the "1940 Act") is in full force and effect.
4.3 The execution, delivery, and performance of this Agreement have been
duly authorized by all necessary action on the part of the Trust's Board of
Trustees on behalf of the Acquired Fund, and this Agreement constitutes a
valid and binding obligation of the Trust, subject to the approval of the
Acquired Fund Shareholders, enforceable in accordance with its terms,
subject as to enforcement to bankruptcy, insolvency, reorganization,
arrangement, moratorium, and other similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
4.4 The Trust is not, and the execution, delivery, and performance of
this Agreement by the Trust will not result, in violation of any provision
of the Declaration of Trust or By-Laws of the Trust or of any agreement,
indenture, instrument, contract, lease, or other arrangement or undertaking
to which the Trust or the Acquired Fund is a party or by which it is bound.
4.5 The Acquired Fund has elected to be treated as a regulated investment
company ("RIC") for federal income tax purposes under Part I of Subchapter M of
the Internal Revenue Code ("Code"), has qualified as a RIC for each taxable
year of its operations, and will continue to qualify as a RIC as of the
Closing Date and with respect to its final taxable year ending upon its
liquidation.
4.6 The financial statements of the Acquired Fund for the period from
October 1, 1993 to September 30, 1996 (which were audited by its independent
accountants) and for the six months ended March 31, 1997 (which are not
audited) (copies of both of which have been furnished to the Acquiring
Fund), present fairly the financial position of the Acquired Fund as of
the dates indicated and the results of its operations and changes in net
assets for the respective stated periods (in accordance with generally
accepted accounting principles consistently applied).
4.7 The Prospectus of the Acquired Fund, dated February 1, 1997, and
the corresponding Statement of Additional Information, dated February 1,
1997, do not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and any amended, revised, or new Prospectus or Statement of
Additional Information of the Acquired Fund or any supplement thereto, that
is hereafter filed with the SEC (copies of which documents shall be
provided to the Acquiring Fund promptly after such filing), shall not
contain any untrue statement of a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.8 No material legal or administrative proceeding or investigation of
or before any court or governmental body is currently pending or, to its
knowledge, threatened as to the Trust or the Acquired Fund or any of their
properties or assets. The Trust and the Acquired Fund know of no facts which
might form the basis for the institution of such proceedings. The Trust and
the Acquired Fund are not parties to or subject to the provisions of any
order, decree, or judgment of any court or governmental body which
materially and adversely affects its business or its ability to consummate
the transactions herein contemplated.
4.9 The Trust has furnished First Pacific with copies or descriptions of
all material agreements or other arrangements to which the Acquired Fund is a
party. The Acquired Fund has no material contracts or other commitments
(other than this Agreement or agreements for the purchase of securities
entered into in the ordinary course of business and consistent with its
obligations under this Agreement) which will not be terminated by the
Acquired Fund in accordance with its terms at or prior to the Closing Date.
4.10 The Acquired Fund does not have any known liabilities of a material
amount, contingent or otherwise, other than those reflected in the financial
statements referred to in Section 4.6 hereof and those incurred in the
ordinary course of business as an investment company since the dates of those
financial statements. On the Closing Date, the Trust shall advise First
Pacific in writing of all of the Acquired Fund's known liabilities,
contingent or otherwise, whether or not incurred in the ordinary course of
business, existing or accrued at such time.
4.11 Since September 30, 1996, there has not been any material adverse
change in the Acquired Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of its business.
4.12 At the date hereof and by the Closing Date, all federal, state, and
other tax returns and reports, including information returns and payee
statements, of the Acquired Fund required by law to have been filed or
furnished by such dates shall have been filed or furnished, or extensions
concerning such tax returns and reports shall have been obtained, and all
federal, state, and other taxes, interest, and penalties shall have been
paid so far as due, or adequate provision shall have been made on the
Acquired Fund's books for the payment thereof, and to the best of the
Acquired Fund's knowledge no such tax return is currently under audit
and no tax deficiency or liability has been asserted with respect to
such tax returns or reports by the Internal Revenue Service or any state
or local tax authority.
4.13 At the Closing Date, the Trust will have good and marketable title
to the Acquired Fund Net Assets, and subject to approval by the Acquired
Fund Shareholders, full right, power and authority to sell, assign, transfer,
and deliver such assets hereunder, and upon delivery and in payment for such
assets, the Acquiring Fund will acquire good and marketable title thereto
subject to no liens or encumbrances of any nature whatsoever or restrictions
on the ownership or transfer thereof, except (a) such imperfections of title
or encumbrances as do not materially detract from the value or use of the
assets subject thereto, or materially affect title thereto; or (b) such
restrictions as might arise under federal or state securities laws or the
rules and regulations thereunder.
4.14 No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Trust of
the transactions contemplated by this Agreement, except such as may be
required under the federal or state securities laws or the rules and
regulations thereunder.
4.15 Any Prospectus or Statement of Additional Information of the
Acquired Fund contained or incorporated by reference in the Form N-14
Registration Statement referred to in Section 6.7 hereof, and any
supplement or amendment to such documents (other than written information
furnished by First Pacific for inclusion therein, as covered by First
Pacific's warranty in Section 5.18 hereof), on the effective and
clearance dates of the Form N-14 Registration Statement, on the date
of the Special Meeting of Acquired Fund Shareholders, and on the Closing
Date: (a) shall comply in all material respects with the provisions of the
Securities Exchange Act of 1934 (the "1934 Act"), the 1940 Act, the rules
and regulations thereunder, and all applicable state securities laws and
rules and regulations thereunder; and (b) shall not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein in light
of the circumstances under which such statements were made, not misleading.
4.16 All of the issued and outstanding shares of the Acquired Fund are,
and at the Closing Date will be, duly and validly issued and outstanding,
fully paid and nonassessable. All of the issued and outstanding shares of
the Acquired Fund will, at the time of Closing, be held by the persons and in
the amounts set forth in the Shareholder List.
4.17 All of the issued and outstanding shares of the Acquired Fund
have been offered for sale and sold in conformity, in all material
respects, with all applicable federal and state securities laws,
including the registration or exemption from registration of such shares,
except as may have been previously disclosed in writing to First Pacific as
of the date hereof.
4.18 The Trust and the Acquired Fund are not under the jurisdiction of
a Court in a Title 11 or similar case within the meaning of Section
368(a)(3)(A) of the Code.
4.19 The information to be furnished by the Trust for use in preparing
any application for orders, the Form N-14 Registration Statement referred to
in Section 6.7 hereof, and the Combined Proxy Statement/Prospectus of the
Funds (the "Proxy Statement/Prospectus") to be included in the Form N-14
Registration Statement, proxy materials, and other documents which may be
necessary in connection with the transactions contemplated hereby shall be
accurate and complete and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto.
4.20 There is no intercorporate indebtedness existing between the Acquired
Fund and the Acquiring Fund that was issued, acquired, or will be settled at a
discount.
4.21 The Acquired Fund does not have any unamortized or unpaid
organizational fees or expenses.
5. REPRESENTATIONS AND WARRANTIES OF FIRST PACIFIC AND THE
ACQUIRING FUND
First Pacific, on behalf of the Acquiring Fund, represents and warrants to
the Trust as follows:
5.1 First Pacific is a corporation duly organized, validly existing,
and in "good standing" under the laws of the State of Maryland (meaning it
has filed its most recent annual report and has not filed articles of
dissolution) and has the power to own all of its properties and assets and
to perform its obligations under this Agreement and to consummate the
transactions contemplated herein. First Pacific is not required to qualify
to do business in any jurisdiction (i) in which it is not so qualified or
(ii) where failure to qualify would not subject it to any material liability
or disability. First Pacific has all necessary federal, state, and local
authorizations, consents, and approvals required to own all of its properties
and assets and to carry on its business as now being conducted and to
consummate the transactions contemplated herein.
5.2 First Pacific is a registered investment company classified as a
management company of the open-end type and its registration with the SEC
as an investment company under the 1940 Act is in full force and effect.
5.3 The execution, delivery, and performance of this Agreement have been
duly authorized by all necessary action on the part of First Pacific's Board
of Directors on behalf of the Acquiring Fund, and this Agreement constitutes
a valid and binding obligation of First Pacific enforceable in accordance
with its terms, subject as to enforcement to bankruptcy, insolvency,
reorganization, arrangement, moratorium, and other similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles.
5.4 First Pacific is not, and the execution, delivery, and performance
of this Agreement by First Pacific will not result, in violation of any
provisions of First Pacific's Articles of Incorporation, as amended from time
to time (the "Articles of Incorporation") or By-Laws or of any agreement,
indenture, instrument, contract, lease, or other arrangement or undertaking
to which First Pacific or the Acquiring Fund is a party or by which it is
bound.
5.5 Except as previously disclosed in writing as of the date hereof,
the Acquiring Fund has elected to be treated as a RIC for federal income tax
purposes under Part I of Subchapter M of the Code, has qualified as a RIC for
each taxable year since its inception, and will qualify as a RIC as of the
Closing Date.
5.6 Any financial statements of the Acquiring Fund which will be
furnished to the Trust in connection with the transactions contemplated
by this Agreement will present fairly the financial position of the
Acquiring Fund as of the dates indicated and the results of its operations
and changes in net assets for the respective stated periods (in accordance
with generally accepted accounting principles consistently applied).
5.7 The Prospectus of the Acquiring Fund, dated February 1, 1997, and
its Statement of Additional Information, dated February 1, 1997, do not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and any amended, revised, or new Prospectus or Statement of
Additional Information of the Acquiring Fund or any supplement thereto, that
is hereafter filed with the SEC (copies of which documents shall be provided
to the Trust promptly after such filing), shall not contain any untrue
statement of a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
5.8 No material legal or administrative proceeding, or investigation of
or before any court or governmental body is currently pending or, to its
knowledge, threatened as to First Pacific or the Acquiring Fund or any of
their properties or assets. First Pacific and the Acquiring Fund know of no
facts which might form the basis for the institution of such proceedings.
First Pacific and the Acquiring Fund are not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental
body which materially and adversely affects the Acquiring Fund's business or
its ability to consummate the transactions herein contemplated.
5.9 First Pacific does not have any known liabilities of a material
amount, contingent or otherwise, other than those incurred in the ordinary
course of business as an investment company since the date of the Acquiring
Fund's inception on November 23, 1988. On the Closing Date, First Pacific
shall advise the Acquired Fund in writing of all of the Acquiring Fund's
known liabilities, contingent or otherwise, whether or not incurred in the
ordinary course of business, existing or accrued at such time.
5.10 Since September 30, 1993, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities, or
business other than changes occurring in the ordinary course of its business.
5.11 At the date hereof and by the Closing Date, all federal, state, and
other tax returns and reports, including information returns and payee
statements, of the Acquiring Fund required by law to have been filed or
furnished by such dates shall have been filed or furnished or extensions
concerning such tax returns and reports shall have been obtained, and all
federal, state, and other taxes, interest, and penalties shall have been
paid so far as due, or adequate provision shall have been made on the
Acquiring Fund's books for the payment thereof, and to the best of the
Acquiring Fund's knowledge no such tax return is currently under audit and
no tax deficiency or liability has been asserted with respect to such tax
returns or reports by the Internal Revenue Service or any state or local tax
authority.
5.12 No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by First Pacific
of the transactions contemplated by the Agreement, except for the
registration of the Acquiring Fund Shares under the Securities Act of 1933
(the "1933 Act"), the 1940 Act, or as may otherwise be required under the
federal and state securities laws or the rules and regulations thereunder.
5.13 The Form N-14 Registration Statement and the Proxy
Statement/Prospectus referred to in Section 6.7 hereof (other than written
information furnished by the Trust for inclusion therein as covered by the
Trust's warranty in Section 4.19 hereof) and any Prospectus or Statement of
Additional Information of the Acquiring Fund contained or incorporated
therein by reference, and any supplement or amendment to the Form N-14
Registration Statement or any such Prospectus or Statement of Additional
Information, on the effective and clearance dates of the Form N-14
Registration Statement, on the date of the Special Meeting of Acquired
Fund Shareholders, and on the Closing Date: (a) shall comply in all material
respects with the provisions of the 1934 Act, the 1940 Act, the rules and
regulations thereunder, and all applicable state securities laws and the
rules and regulations thereunder; and (b) shall not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which the statements were made, not misleading.
5.14 All of the issued and outstanding shares of common stock of the
Acquiring Fund are, and at the Closing Date will be, duly and validly issued
and outstanding, fully paid and nonassessable.
5.15 All of the issued and outstanding shares of common stock of the
Acquiring Fund have been offered for sale and sold in conformity, in all
material respects, with all applicable federal and state securities laws,
including the registration or exemption from registration of such shares,
except as has been previously disclosed in writing to the Trust as of the
date hereof.
5.16 The Acquiring Fund Shares to be issued and delivered to the Trust
pursuant to the terms of this Agreement, when so issued and delivered, will
be duly and validly issued shares of common stock of the Acquiring Fund,
will be fully paid and nonassessable by First Pacific, and will be duly
registered in conformity with all applicable federal securities laws, and
no shareholder of the Acquiring Fund shall have any option, warrant, or
preemptive right of subscription or purchase with respect thereto.
5.17 First Pacific and the Acquiring Fund are not under the jurisdiction
of a Court in a Title 11 or similar case within the meaning of Section
368(a)(3)(A) of the Code.
5.18 All information to be furnished by First Pacific to the Trust for
use in preparing any prospectus, proxy materials, and other documents which
may be necessary in connection with the transactions contemplated hereby
shall be accurate and complete and shall comply in all material respects
with federal securities and other laws and regulations applicable thereto.
5.19 There is no intercorporate indebtedness existing between the
Acquired Fund and the Acquiring Fund that was issued, acquired, or will
be settled at a discount.
5.20 The Acquiring Fund does not own, directly or indirectly, nor has
it owned during the past five (5) years, directly or indirectly, any stock
of the Acquired Fund.
6. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
6.1 Except as expressly contemplated herein to the contrary, each Fund
shall operate its business in the ordinary course between the date hereof
and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions and any other
distribution necessary or desirable to avoid federal income or excise taxes.
6.2 After the effective date of the Form N-14 Registration Statement
referred to in Section 6.7 hereof, and before the Closing Date and as a
condition thereto, the Trust shall hold a Special Meeting of the Acquired
Fund Shareholders to consider and vote upon this Agreement and the
transactions contemplated hereby (including the termination of the Acquired
Fund as a sub-trust of the Trust) and the Trust shall take all other actions
reasonably necessary to obtain approval of the transactions contemplated
herein.
6.3 The Trust and the Acquired Fund covenant that they shall not sell
or otherwise dispose of any of the Acquiring Fund Shares to be received in
the transactions contemplated herein, except in distribution to the Acquired
Fund Shareholders as contemplated herein.
6.4 The Trust shall provide such information within its possession or
reasonably obtainable as First Pacific may reasonably request concerning the
beneficial ownership of the Acquired Fund Shares.
6.5 Subject to the provisions of this Agreement, First Pacific and the
Trust each shall take, or cause to be taken, all action, and do or cause to
be done, all things reasonably necessary, proper, or advisable to consummate
the transactions contemplated by this Agreement.
6.6 The Trust shall furnish to First Pacific on the Closing Date the
Statement of the Assets and Liabilities of the Acquired Fund as of the
Closing Date, which statement shall be prepared in accordance with generally
accepted accounting principles consistently applied, reviewed by Tait, Weller
& Baker, and shall be certified by the Trust's Treasurer or Assistant
Treasurer. As promptly as practicable, but in any case within sixty (60)
days after the Closing Date, the Trust shall issue to First Pacific, in such
form as is reasonably satisfactory to First Pacific, a statement of the
earnings and profits of the Acquired Fund for federal income tax purposes,
and of any capital loss carryovers and other items that will be carried over
to the Acquiring Fund as a result of Section 381 of the Code, which statement
shall be certified by the Trust's Treasurer or Assistant Treasurer. The
Trust covenants that the Acquired Fund has no earnings and profits that were
accumulated by it or any acquired entity during a taxable year when it or
such entity did not qualify as a RIC under the Code or, if it has such
earnings and profits, shall distribute them to its shareholders prior to the
Closing Date.
6.7 First Pacific, with the cooperation of the Trust and counsel, shall
prepare and file with the SEC a Registration Statement on Form N-14 (the "Form
N-14 Registration Statement") and the included Proxy Statement/Prospectus, as
promptly as practicable in connection with the issuance of the Acquiring Fund
Shares and the holding of the Special Meeting of the Acquired Fund Shareholders
and to consider approval of this Agreement as contemplated herein and related
transactions. First Pacific shall prepare any pro forma financial statement
that may be required under applicable law to be included in the Form N-14
Registration Statement. The Trust shall provide First Pacific with all
information about the Acquired Fund that is necessary to prepare the pro
forma financial statements. First Pacific and the Trust shall cooperate
with each other and shall furnish each other with any information relating
to itself that is required by the 1933 Act, the 1934 Act, and the 1940 Act,
the rules and regulations thereunder, and applicable state securities laws,
to be included in the Form N-14 Registration Statement and the Proxy
Statement/Prospectus.
6.8 The Trust shall deliver to First Pacific at the Closing Date
confirmation or other adequate evidence as to the tax costs and holding
periods of the assets of the Acquired Fund delivered to the Acquiring Fund
in accordance with the terms of this Agreement.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST AND THE
ACQUIRED FUND
The obligations of the Trust and the Acquired Fund hereunder shall be
subject to the following conditions precedent:
7.1 This Agreement and the transactions contemplated by this Agreement
shall have been approved by the Board of Directors of First Pacific in the
manner required by First Pacific's Articles of Incorporation and applicable
laws, and this Agreement, the transactions contemplated by this Agreement,
and the termination of the Acquired Fund as a sub-trust of the Trust shall
have been approved by the Acquired Fund Shareholders in the manner required
by the Acquired Fund's Declaration of Trust and By-Laws and applicable laws.
7.2 As of the Closing Date, there shall have been no material adverse
change in the financial position, assets, or liabilities of the Acquiring
Fund since the dates of the most recent financial statements furnished to
the Trust in accordance with Section 5.6 hereof. For purposes of this
Section 7.2, a decline in the net asset value per share of the Acquiring
Fund due to the effect of normal market conditions on liquid securities
shall not constitute a material adverse change.
7.3 All representations and warranties of First Pacific and the Acquiring
Fund made in this Agreement, except as they may be affected by the transactions
contemplated by this Agreement, shall be true and correct in all material
respects as if made at and as of the Closing Date.
7.4 First Pacific shall have performed and complied in all material
respects with its obligations, agreements, and covenants required by this
Agreement to be performed or complied with by it prior to or at the Closing
Date.
7.5 First Pacific shall have furnished the Trust at the Closing Date
with a certificate or certificates of its President and/or Treasurer as of
the Closing Date to the effect that the conditions precedent set forth in
the Sections 7.1 (as to First Pacific), 7.2, 7.3, 7.4, 7.10, 7.11, 7.15
and 7.17 hereof have been fulfilled.
7.6 The Trust shall have received an opinion or opinions of counsel to
First Pacific, in form reasonably satisfactory to the Trust, and dated as of
the Closing Date, to the effect that: (a) First Pacific is a corporation
duly organized and validly existing under the laws of the State of Maryland;
(b) the shares of the Acquiring Fund issued and outstanding at the Closing
Date are duly authorized, validly issued, fully paid, and non-assessable by
First Pacific, and the Acquiring Fund Shares to be delivered to the Trust,
as provided for by this Agreement, are duly authorized and upon delivery
pursuant to the terms of this Agreement will be validly issued, fully paid
and non-assessable by First Pacific, and to such counsel's knowledge, no
shareholder of the Acquiring Fund has any option, warrant, or preemptive
right to subscription or purchase in respect thereof; (c) this Agreement has
been duly authorized, executed, and delivered by First Pacific and represents
a valid and binding contract of First Pacific, enforceable in accordance with
its terms, subject to the effect of bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance, and similar laws relating to or affecting
creditors' rights generally and court decisions with respect thereto and to
the exercise of judicial discretion in accordance with general principles of
equity, whether in a proceeding at law or in equity; provided, however, that
no opinion need be expressed with respect to provisions of this Agreement
relating to indemnification nor with respect to provisions of this Agreement
intended to limit liability for particular matters to the Acquiring Fund and
its assets; (d) the execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated by this Agreement will not,
violate the Articles of Incorporation or By-Laws of First Pacific or any
material agreement known to such counsel to which First Pacific or the
Acquiring Fund is a party or by which it is bound; (e) to the knowledge of
such counsel, no consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by First Pacific of
the transactions contemplated by this Agreement, except such as have been
obtained under the 1933 Act, the 1934 Act, the 1940 Act, the rules and
regulations under those statutes, and such as may be required by state
securities laws, rules and regulations; and (f) First Pacific is registered
as an investment company under the 1940 Act and such registration with the
SEC as an investment company under the 1940 Act is in full force and effect.
Such opinion: (a) shall state that while such counsel have not verified, and
are not passing upon and do not assume responsibility for, the accuracy,
completeness, or fairness of any portion of the Form N-14 Registration
Statement or any amendment thereof or supplement thereto, they have generally
reviewed and discussed certain information included therein with respect to
First Pacific and the Acquiring Fund with certain of its officers and that
in the course of such review and discussion no facts came to the attention
of such counsel which caused them to believe that, on the respective
effective or clearance dates of the Form N-14 Registration Statement and any
amendment thereof or supplement thereto and only insofar as they relate to
information with respect to First Pacific and the Acquiring Fund, the Form
N-14 Registration Statement or any amendment thereof or supplement thereto
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; (b) shall state that such counsel does
not express any opinion or belief as to the financial statements, other
financial data, statistical data, or information relating to First Pacific or
the Acquiring Fund contained or incorporated by reference in the Form N-14
Registration Statement; (c) may rely on the opinion of other counsel to the
extent set forth in such opinion, provided such other counsel is reasonably
acceptable to the Trust; and (d) shall state that such opinion is solely for
the benefit of the Trust.
7.7 The Trust shall have received an opinion of counsel to First Pacific
addressed to the Funds in form reasonably satisfactory to them and dated as of
the Closing Date, with respect to the matters specified in Section 8.9 hereof.
7.8 The Form N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending the effectiveness shall
have been instituted, or to the knowledge of the Funds, contemplated by
the SEC.
7.9 The parties shall have received a memorandum, in form reasonably
satisfactory to each of them, prepared by counsel to First Pacific or
another person approved by the parties, containing assurance reasonably
satisfactory to them that all permits and other authorizations necessary
under state securities laws to consummate the transactions contemplated
herein have been obtained.
7.10 No action, suit, or other proceeding shall be threatened or pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated herein.
7.11 The SEC shall not have issued any unfavorable advisory report under
Section 25(b) of the 1940 Act nor instituted any proceedings seeking to enjoin
consummation of the transactions contemplated by this Agreement under Section
25(c) of the 1940 Act.
7.12 The Trust shall have received from First Pacific all such documents,
including but not limited to, checks, share certificates, if any, and receipts,
which the Trust or its counsel may reasonably request.
7.13 First Pacific shall have furnished the Trust at the Closing Date
with a certificate or certificates of its President and/or Treasurer dated
as of said date to the effect that: (a) the Acquiring Fund has no plan or
intention to reacquire any of the Acquiring Fund Shares to be issued in the
Reorganization, except in the ordinary course of business; (b) the Acquiring
Fund has no plan or intention to sell or otherwise dispose of any of the
assets of the Acquired Fund acquired in the Reorganization, except for
dispositions made in the ordinary course of business or transfers described
in Section 368(a)(2)(C) of the Code; and (c) following the Closing, the
Acquiring Fund will continue the historic business of the Acquired Fund or
use a significant portion of the Acquired Fund's assets in a business.
7.14 First Pacific Recordkeeping, in its capacity as transfer agent for
the Acquiring Fund, shall issue and deliver to the President of the Trust a
confirmation statement evidencing the Acquiring Fund Shares to be credited
at the Closing Date or provide evidence satisfactory to the Trust that the
Acquiring Fund Shares have been credited to the accounts of each of the
Acquired Fund Shareholders on the books of the Acquiring Fund, in each case
certified by the President of the Acquiring Fund.
7.15 At the Closing Date, the registration of First Pacific with the SEC
as an investment company under the 1940 Act will be in full force and effect.
7.16 The Trust shall have received from First Pacific an undertaking
to limit the expenses of the Acquiring Fund to eighty-five basis points
(.85%) annually for each of the two years following the Closing Date.
7.17 Two Individuals, either Trustees of the Trust as of the date of
this Agreement, or other persons acceptable to the Trust and to First
Pacific, shall have been elected to the Board of Directors of First Pacific.
7.18 First Pacific shall have provided for the continuation of the
directors and officers professional liability insurance for the Trustees
and officers of the Trust as of the date of this Agreement for each of the
three years following the Closing Date.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF FIRST PACIFIC AND THE
ACQUIRING FUND
The obligations of First Pacific and the Acquiring Fund hereunder shall be
subject to the following conditions precedent:
8.1 This Agreement, the transactions contemplated by this Agreement, and
the termination of the Acquired Fund as a sub-trust of the Trust described in
Section 6.2 hereof shall have been approved by the Board of Trustees of the
Trust and the Acquired Fund Shareholders in the manner required by the
Trust's Declaration of Trust and By-Laws and applicable law.
8.2 The Trust shall have furnished First Pacific with the Statement of
Assets and Liabilities of the Acquired Fund, with values determined as
provided in Section 2 hereof, with their respective dates of acquisition and
tax costs, all as of the Closing Date, reviewed by Tait, Weller & Baker and
certified on the Trust's behalf by its Treasurer or Assistant Treasurer.
8.3 As of the Closing Date, there shall have been no material adverse
change in the financial position, assets, or liabilities of the Acquired Fund
since the dates of the financial statements referred to in Section 4.6
hereof. For purposes of this Section 8.3, a decline in the value of the
Acquired Fund Net Assets due to the effect of normal market conditions on
liquid securities shall not constitute a material adverse change.
8.4 All representations and warranties of the Trust and the Acquired Fund
made in this Agreement, except as they may be affected by the transactions
contemplated by this Agreement, shall be true and correct in all material
respects as if made at and as of the Closing Date.
8.5 The Trust shall have performed and complied in all material respects
with each of its obligations, agreements, and covenants required by this
Agreement to be performed or complied with by it prior to or at the Closing
Date.
8.6 The Trust shall have furnished First Pacific at the Closing Date with
a certificate or certificates of its President and/or Treasurer, dated as of
the Closing Date, to the effect that the conditions precedent set forth in
Sections 8.1, 8.3, 8.4, 8.5, 8.13, 8.15 hereof have been fulfilled.
8.7 The Trust shall have duly executed and delivered to First Pacific
(a) bills of sale, assignments, certificates and other instruments of
transfer ("Transfer Documents") as First Pacific may deem necessary or
desirable to transfer all of the Acquired Fund's right, title, and interest
in and to the Acquired Fund Net Assets; and (b) all such other documents,
including but not limited to, checks, share certificates, if any, and
receipts, which First Pacific may reasonably request. Such assets of the
Acquired Fund shall be accompanied by all necessary state stock transfer
stamps or cash for the appropriate purchase price therefor.
8.8 First Pacific shall have received an opinion or opinions of counsel
to the Trust, in form reasonably satisfactory to First Pacific, and dated as
of the Closing Date, to the effect that: (a) the Trust is a business trust
duly organized and validly existing under the laws of the Commonwealth of
Massachusetts; (b) the shares of the Acquired Fund issued and outstanding
at the Closing Date are duly authorized, validly issued, fully paid and
non-assessable by the Trust; (c) this Agreement and the Transfer Documents
have been duly authorized, executed, and delivered by the Trust and
represent valid and binding contracts of the Trust, enforceable in
accordance with their terms, subject to the effect of bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, and similar
laws relating to or affecting creditors' rights generally and court decisions
with respect thereto and to the exercise of judicial discretion in accordance
with general principles of equity, whether in a proceeding at law or in
equity; provided, however, that no opinion need be expressed with respect to
provisions of this Agreement relating to indemnification nor with respect to
provisions of this Agreement intended to limit liability for particular
matters to the Acquired Fund and its assets; (d) the execution and delivery
of this Agreement did not, and the consummation of the transactions
contemplated by this Agreement will not, violate the Declaration of Trust
or By-laws of the Trust or any material agreement known to such counsel
to which the Trust or the Acquired Fund is a party or by which it is bound;
(e) to the knowledge of such counsel, no consent, approval, authorization,
or order of any court or governmental authority is required for the
consummation by the Trust of the transactions contemplated by this Agreement,
except such as have been obtained under the 1933 Act, the 1934 Act, the 1940
Act, the rules and regulations under those statutes, and such as may be
required under state securities laws, rules, and regulations; and (f) the
Trust is registered as an investment company under the 1940 Act and such
registration with the SEC as an investment company under the 1940 Act is in
full force and effect. Such opinion: (a) shall state that while such
counsel have not verified, and are not passing upon and do not assume
responsibility for, the accuracy, completeness, or fairness of any portion
of the Form N-14 Registration Statement or any amendment thereof or
supplement thereto, they have generally reviewed and discussed certain
information included therein with respect to the Trust and the Acquired
Fund with certain officers of the Trust and that in the course of such
review and discussion no facts came to the attention of such counsel
which caused them to believe that, on the respective effective or
clearance dates of the Form N-14 Registration Statement, and any
amendment thereof or supplement thereto and only insofar as they relate
to information with respect to the Trust and the Acquired Fund, the Form N-14
Registration Statement or any amendment thereof or supplement thereto
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading; (b) shall state that such counsel does not express any
opinion or belief as to the financial statements, other financial data,
statistical data, or any information relating to the Trust or the Acquired
Fund contained or incorporated by reference in the Form N-14 Registration
Statement; (c) may rely upon the opinion of other counsel to the extent set
forth in the opinion, provided such other counsel is reasonably acceptable to
First Pacific; and (d) shall state that such opinion is solely for the benefit
of First Pacific.
8.9 First Pacific shall have received an opinion of counsel to First
Pacific, addressed to the Funds and in form reasonably satisfactory to them,
and dated as of the Closing Date, to the effect that for federal income tax
purposes: (a) the transfer of all of the assets of the Acquired Fund to the
Acquiring Fund in exchange for Acquiring Fund Shares, and the distribution of
said Acquiring Fund Shares to the shareholders of the Acquired Fund, as
provided in this Agreement, will constitute a reorganization within the
meaning of Section 368(a)(1)(C) of the Code; (b) in accordance with Section
361(a), Section 361(c)(1), and Section 357(a) of the Code, no gain or loss
will be recognized by the Acquired Fund or its shareholders as a result of
such transactions; (c) in accordance with Section 1032(a) of the Code, no
gain or loss will be recognized by the Acquiring Fund or its shareholders
as a result of such transactions; (d) in accordance with Section 354(a)(1)
of the Code, no gain or loss will be recognized by the Acquired Fund
Shareholders on the distribution to them by the Acquired Fund of Acquiring
Fund Shares in exchange for their shares of the Acquired Fund; (e) in
accordance with Section 358(a)(1) of the Code, the basis of the Acquiring
Fund Shares received by each Acquired Fund Shareholder will be the same as
the basis of the Acquired Fund Shareholder's shares immediately prior to the
transaction; (f) in accordance with Section 362(b) of the Code, the basis
to the Acquiring Fund of the assets of the Acquired Fund will be the same as
the basis of such assets in the hands of the Acquired Fund immediately prior
to the transaction; (g) in accordance with Section 1223(l) of the Code, a
shareholder's holding period for Acquiring Fund Shares will be determined by
including the period for which the shareholder held Acquired Fund Shares
exchanged therefor, provided that the Acquired Fund Shareholder held such
Acquired Fund Shares as a capital asset; (h) in accordance with Section
1223(2) of the Code, the holding period of the Acquiring Fund with respect
to the assets transferred by the Acquired Fund will include the period for
which such assets were held by the Acquired Fund; (i) subject to the
conditions and limitations specified in Section 381, 382, 383, and 384 of
the Code, the Acquiring Fund will succeed to and take into account the items
of the Acquired Fund described in Section 381(c) of the Code. No opinion
will be provided, however, as to whether any accrued market discount will
be required to be recognized as ordinary income by the Acquired Fund in
accordance with Section 1276 of the Code.
8.10 The property and assets to be transferred to the Acquiring Fund under
this Agreement shall include no assets which the Acquiring Fund may not
properly acquire.
8.11 The Form N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of the Funds, contemplated by the
SEC.
8.12 The parties shall have received a memorandum, in form reasonably
satisfactory to each of them, prepared by counsel to First Pacific or
another person approved by the parties, containing assurance reasonably
satisfactory to them that all permits and other authorizations necessary
under state securities laws to consummate the transactions contemplated by
this Agreement have been obtained.
8.13 No action, suit, or other proceedings shall be threatened or pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated herein.
8.14 The SEC shall not have issued any unfavorable advisory report under
Section 25(b) of the 1940 Act nor instituted any proceeding seeking to enjoin
consummation of the transactions contemplated by this Agreement under Section
25(c) of the 1940 Act.
8.15 Prior to the Closing Date, the Acquired Fund shall have declared a
dividend or dividends, which, together with all previous dividends, shall
have the effect of distributing to its shareholders all of its net investment
company income (which term shall be deemed to include its net tax exempt
income), if any, for each taxable period or year ending prior to the Closing
Date and for the periods from the end of each such taxable period or year to
and including the Closing Date (computed without regard to any deduction for
dividends paid), and all of its net capital gain, if any, realized in each
taxable period or year ending prior to the Closing Date and in the periods
from the end of each such taxable period or year to and including the Closing
Date.
8.16 The Trust shall have furnished First Pacific at the Closing Date with
a certificate or certificates of its President and/or Treasurer dated as of
said date to the effect that: (a) The fair market value of the Acquiring
Fund Shares received by each Acquired Fund shareholder will approximately
equal the fair market value of the Acquired Fund Shares surrendered in the
exchange; (b) to the best of the knowledge of the officers and trustees of
the Trust, after reasonable inquiry, there is no plan or intention by the
stockholders who own 5% or more of Acquired Fund, and to the best of the
knowledge and belief of the officers and trustees of the Trust, there is
no plan or intention on the part of the remaining stockholders of Acquired
Fund to sell or dispose any of the Acquiring Fund Shares to be received by
them in the transaction that would reduce Acquired Fund shareholders'
ownership of Acquiring Fund Shares to a number of shares having a value,
as of the date of the transaction, of less than 50 percent of the value of
all of the formerly outstanding Acquired Fund Shares as of the same date.
For purposes of this representation, Acquired Fund Shares exchanged for cash
or other property, surrendered by dissenters, if any, or exchanged for cash
in lieu of fractional shares of Acquiring Fund will be treated as
outstanding Acquired Fund Shares on the date of the transaction.
Moreover, Acquired Fund Shares and Acquiring Fund Shares held by Acquired
Fund shareholders and otherwise sold, redeemed, or disposed of prior or
subsequent to the transaction will be considered in making this
representation (except for shares which are redeemed at the demand of
the shareholders in the ordinary course of business as required by
Section 22(e) of the 1940 Act); (b) Acquiring Fund will acquire at
least 90 percent of the fair market value of the net assets and at
least 70 percent of the fair market value of the gross assets held by
Acquired Fund immediately before the transaction. For purposes of this
representation, amounts used by Acquired Fund to pay its reorganization
expenses, amounts paid by Acquired Fund to shareholders who receive cash
or other property, and all redemptions and distributions (except for
redemptions pursuant to a demand of a shareholder in the ordinary course of
Acquired Fund's business as required by Section 22(e) of the 1940 Act, and
regular, normal dividends of net investment income and net capital gains)
made by Acquired Fund immediately preceding the transfer will be included
as assets of Acquired Fund held immediately prior to the transaction; (c)
Acquired Fund will distribute to its shareholders the Acquiring Fund Shares
it receives pursuant to the transaction; (d) the liabilities of Acquired
Fund assumed by Acquiring Fund, if any, and any liabilities to which the
transferred assets are subject were incurred by Acquired Fund in the
ordinary course of its business as a regulated investment company; (e)
prior to the Reorganization, Acquiring Fund has not disposed of and/or
acquired assets in order to satisfy the investment objectives of Acquiring
Fund or for any other reason or otherwise change its historic investment
policies except for acquisitions and dispositions made in the ordinary course
of business as a regulated investment company; (f) FP Advisers and Leahi
will share the expenses incurred in connection with the transaction by the
Acquiring Fund and the Acquired Fund, and the shareholders of Acquired Fund
will pay their respective expenses, if any, incurred in connection with the
transaction; (g) there is no intercorporate indebtedness existing between
Acquiring Fund and Acquired Fund that was issued, acquired, or will be
settled at a discount; (h) Acquiring Fund satisfies the requirements
applicable to regulated investment companies under section 851 of the Code,
and, therefore, satisfies the requirements of section 368(a)(2)(F)(i) and
(ii); (i) the fair market value of the assets of Acquired Fund transferred
to Acquiring Fund will equal or exceed the sum of the liabilities assumed by
Acquiring Fund, plus the amount of liabilities, if any, to which the
transferred assets are subject; (j) Acquired Fund is not under the
jurisdiction of a court in a Title 11 or similar case within the meaning
of section 368(a)(3)(A); (k) Acquiring Fund has elected to be taxed as RICs
under section 851 and, for all their taxable periods, (including the last
short taxable period ending on the date of the transaction for Acquired Fund)
has qualified for the special tax treatment afforded RICs under the Code;
(l) Acquired Fund has no earnings and profits accumulated in any taxable
year to which the provisions of subchapter M of the Code (or the
corresponding provisions of prior law) did not apply; (m) Acquired Fund
has satisfied all federal, state and local tax liabilities for all tax
periods, including federal income and excise taxes, and has not filed a
federal Section 6662 (formerly Section 6661) Disclosure Statement with
respect to any return.
8.17 Fund/Plan Services, Inc., in its capacity as transfer agent for the
Acquired Fund, shall have furnished to First Pacific immediately prior to the
Closing Date a list of the names and addresses of the Acquired Fund
Shareholders and the number and percentage ownership of outstanding Acquired
Fund Shares owned by each such shareholder as of the close of regular trading
on the NYSE on the Closing Date, certified on behalf of the Acquired Fund by
the Trust's President.
8.18 At the Closing Date, the registration of the Trust with the SEC as
an investment company under the 1940 Act shall be in full force and effect.
9. FINDER'S FEES AND OTHER EXPENSES
9.1 Each Fund represents and warrants to the other that there is no
person or entity entitled to receive any finder's fees or other similar fees
or commission payments in connection with the transactions provided for herein.
9.2 FP Advisers and Leahi shall be liable for all expenses incurred
by the Funds in connection with entering into and carrying out the
transactions contemplated by this Agreement, whether or not the transactions
contemplated hereby are consummated.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Funds agree that neither Fund has made any representation,
warranty, or covenant not provided in this Agreement and that this Agreement
constitutes the entire agreement between the parties and supersedes any and
all prior agreements, arrangements, and undertakings relating to the matters
provided for herein.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder for a period of three (3) years following the Closing Date. In
the event of a breach by the Trust or the Acquired Fund of any such
representation, warranty, or covenant, the Acquired Fund, until the time of
its liquidation and termination, shall be liable to First Pacific and the
Acquiring Fund for any such breach.
11. TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Funds. In addition, either Fund may at its option terminate this Agreement
at or prior to the Closing Date because of:
11.1(a) a material breach by the other Fund of any representation,
warranty, or agreement contained herein to be performed at or prior to the
Closing Date; or
11.1(b) a condition precedent to the obligations of either Fund
has not been met and which reasonably appears will not or cannot be met.
11.2 In the event of any such termination, there shall be no liability for
damages on the part of either Fund, the Trust, or First Pacific, or their
respective Boards of Directors/Trustees or officers, but all expenses
incidental to the preparation and carrying out of this Agreement shall be
paid as provided in Section 9.2 hereof.
12. INDEMNIFICATION
12.1 The Acquiring Fund shall indemnify, defend, and hold harmless the
Acquired Fund, the Trust, its Board of Trustees, officers, employees,
accountants, counsel, independent contractors, and agents (collectively
"Acquired Fund Indemnified Parties") against all losses, claims, demands,
liabilities, and expenses, including reasonable legal and other expenses
incurred in defending third party claims, actions, suits, or proceedings,
whether or not resulting in any liability to such Acquired Fund
Indemnified Parties and including amounts paid by any one or more of the
Acquired Fund Indemnified Parties in a compromise or settlement of any such
claim, action, suit, or proceeding, or threatened third party claim, suit,
action, or proceeding, made with the consent of the Acquiring Fund, arising
from any untrue statement or alleged untrue statement of a material fact
contained in the Form N-14 Registration Statement, as filed and in effect
with the SEC, or any application prepared by the Acquiring Fund with any
state regulatory agency in connection with the transactions contemplated
by this Agreement under the securities laws thereof ("Application"); or
which arises out of or is based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, that the
Acquiring Fund shall only be liable in such case to the extent that any
such loss, claim, demand, liability, or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or
alleged omission about the Acquiring Fund or the transactions contemplated
by this Agreement made in the Form N-14 Registration Statement or any
Application.
12.2 The Acquired Fund, shall indemnify, defend, and hold harmless the
Acquiring Fund, First Pacific, its Board of Directors, officers, employees,
accountants, counsel, independent contractors, and agents (collectively
"Acquiring Fund Indemnified Parties") against all losses, claims, demands,
liabilities, and expenses, including reasonable legal and other expenses
incurred in defending third party claims, actions, suits, or proceedings,
whether or not resulting in any liability to such Acquiring Fund
Indemnified Parties and including amounts paid by any one or more of the
Acquiring Fund Indemnified Parties in a compromise or settlement of any such
claim, suit, action, or proceeding, made with the consent of the Acquired
Fund (if it still exists) or the Trust, arising from any untrue statement or
alleged untrue statement of a material fact contained in the Form N-14
Registration Statement, as filed and in effect with the SEC or any
Application; or which arises out of or is based upon any omission or alleged
omission to state therein a material fact required to be stated therein and
necessary to make the statements therein not misleading; provided, however,
that the Acquired Fund shall only be liable in such case to the
extent that any such loss, claim, demand, liability, or expense arises out
of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission about the Acquired Fund or about the
transactions contemplated by this Agreement made in the Form N-14
Registration Statement or any Application.
12.3 A party seeking indemnification hereunder is hereinafter called the
"indemnified party" and the party from whom the indemnified party is seeking
indemnification hereunder is hereinafter called the "indemnifying party."
Each indemnified party shall notify the indemnifying party in writing within
ten (10) days of the receipt by one or more of the indemnified parties of
any notice of legal process of any suit brought against or claim made
against such indemnified party as to any matters covered by this Section 12,
but the failure to notify the indemnifying party shall not relieve the
indemnifying party from any liability which it may have to any indemnified
party otherwise than under this Section 12. The indemnifying party shall be
entitled to participate at its own expense in the defense of any claim,
action, suit, or proceeding covered by this Section 12, or, if it so elects,
to assume at its own expense the defense thereof with counsel satisfactory to
the indemnified parties; provided, however, if the defendants in any such
action include both the indemnifying party and any indemnified party and
the indemnified party shall have reasonably concluded that there may be
legal defenses available to it which are different from or additional to
those available to the indemnifying party, the indemnified party shall have
the right to select separate counsel to assume such legal defense and to
otherwise participate in the defense of such action on behalf of such
indemnified party.
Upon receipt of notice from the indemnifying party to the indemnified
parties of the election by the indemnifying party to assume the defense of
such action, the indemnifying party shall not be liable to such indemnified
parties under this Section 12 for any legal or other expenses subsequently
incurred by such indemnified parties in connection with the defense thereof
unless (i) the indemnified parties shall have employed such counsel in
connection with the assumption of legal defenses in accordance with the
provision of the immediately preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses
of more than one separate counsel); (ii) the indemnifying party does not
employ counsel reasonably satisfactory to the indemnified parties to
represent the indemnified parties within a reasonable time after notice of
commencement of the action; or (iii) the indemnifying party has authorized
the employment of counsel for the indemnified parties at its expense.
12.4 This Section 12 shall survive the termination of this Agreement and
for a period of three (3) years following the Closing Date.
13. LIABILITY OF FIRST PACIFIC AND THE TRUST
13.1 Each party acknowledges and agrees that all obligations of First
Pacific under this Agreement are binding only with respect to the Acquiring
Fund; that any liability of First Pacific under this Agreement with respect
to the Acquiring Fund, or in connection with the transactions contemplated
herein with respect to the Acquiring Fund, shall be discharged only out of
the assets of the Acquiring Fund; and that no other portfolio or series of
First Pacific shall be liable with respect to this Agreement or in connection
with the transactions contemplated herein.
13.2 Each party acknowledges and agrees that all obligations of the Trust
under this Agreement are binding only with respect to the Acquired Fund; that
any liability of the Trust under this Agreement with respect to the Acquired
Fund, or in connection with the transactions contemplated herein with respect
to the Acquired Fund, shall be discharged only out of the assets of the
Acquired Fund; and that no other portfolio or series of the Trust shall be
liable with respect to this Agreement or in connection with the transactions
contemplated herein.
14. AMENDMENTS
This Agreement may be amended, modified, or supplemented in such manner
as may be mutually agreed upon in writing by the authorized officers of First
Pacific and the Trust; provided, however, that following the Special Meeting
of Acquired Fund Shareholders called by the Board of Trustees of the Trust
pursuant to Section 6.2 hereof, no such amendment may have the effect of
changing the provisions for determining the number of Acquiring Fund Shares
to be issued to Acquired Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
15. NOTICES
Any notice, report, statement, or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be deemed to be
properly given when delivered personally or by telecopier to the party
entitled to receive the notice or when sent by certified or registered mail,
postage prepaid, or delivered to a recognized overnight courier service, in
each case properly addressed to the party entitled to receive such notice or
communication at the following address or such other address as may hereafter
be furnished in writing by notice similarly given by one party to the other.
If to the Acquired Fund:
Leahi Investment Trust
c/o Leahi Management Company, Inc.
210 Ward Avenue
Suite 129
Honolulu, Hawaii 96814
Attention: Ronald E. Kent
with copies to:
W. Lee H. Dunham, Esq.
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
If to the Acquiring Fund:
First Pacific Mutual Fund, Inc.
2756 Woodlawn Drive
#6-201
Honolulu, Hawaii 96822
Attention: Terrence Lee
with copies to:
Audrey C. Talley, Esq.
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103
16. FAILURE TO ENFORCE
The failure of any party hereto to enforce at any time any of the
provisions of this Agreement shall in no way be construed to be a waiver
of any such provision, nor in any way to affect the validity of this
Agreement or any part hereof as the right of any party thereafter to
enforce each and every such provision. No waiver of any breach of this
Agreement shall be held to be a waiver of any other or subsequent breach.
17. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
17.1 The article and Section headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
17.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
17.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Maryland.
17.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by
any party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or
give any person, firm, or corporation, other than the parties hereto and
their respective successors and assigns, any rights or remedies under or
by reason of this Agreement.
17.5 It is expressly understood and agreed that the obligations of
the Trust and First Pacific under this Agreement, including but not limited
to any liability as a result of the breach of any of their respective
representations and warranties, are not binding on their respective Board of
Directors/Trustees, shareholders, nominees, officers, agents, or employees
individually, but bind only the respective assets of the Acquiring Fund and
the Acquired Fund.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed by its President and its seal to be affixed thereto and attested
by its Secretary.
Attest: FIRST PACIFIC MUTUAL FUND, INC., on behalf of
First Hawaii Municipal Bond Fund, a separate
series of First Pacific Mutual Fund, Inc.
By:
Attest: LEAHI INVESTMENT TRUST, on behalf of Leahi
Tax-Free Income Trust, a separate series of
Leahi Investment Trust
By:
<PAGE>
PERFORMANCE OVERVIEW EXHIBIT B
First Hawaii Municipal Bond Fund vs.
Lehman Muni Bond Index
Comparison of Change in Value of $10,000 Investment
The following table including average annual total return information was
presented as a graph.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
9/1989 9/1990 9/1991 9/1992 9/1993 9/1994 9/1995 9/1996
First Hawaii 10,815 11,233 12,593 13,873 15,415 15,079 16,349 17,628
Municipal Bond Fund
Lehman Muni 10,717 11,426 12,848 14,015 15,707 15,442 16,999 18,303
Bond Index
</TABLE>
Average Annual Total Return
1 Year 5.62%
5 Years 6.52%
Inception 7.20%
The graph above compares the increase in value of a $10,000 investment in the
First Hawaii Municipal Bond Fund with the performance of the Lehman Muni Bond
Index. The objective of the graph is to permit you to compare the
performance of the Fund with the current market and to give perspective to
market conditions and investment strategies and techniques pursued by the
investment manager that materially affected the performance of the Fund.
The Lehman Muni Bond Index reflects reinvestment of dividends but not the
expenses of the Fund. Past performance is not indicative of future results.
<PAGE>
First Hawaii Municipal Bond Fund
FINANCIAL HIGHLIGHTS
The financial highlights and ratios for the five years ended September 30, 1996
have been selected from the Fund's financial statements, which have been
audited by Tait, Weller & Baker, independent certified public accountants,
whose unqualified report thereon appears in the Fund's Annual Report to
Shareholders for the year ended September 30, 1996. Such financial
statement and report are incorporated by reference in this Prospectus/Proxy
Statement.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
November 23,
1988(a) to
Years ended September 30, September 30
1996 1995 1994 1993 1992 1991 1990 1989
Net asset value
Beginning of year $10.84 $10.62 $11.48 $10.90 $10.47 $9.92 $10.25 $10.00
Income from investment operations
Net investment income .55 .55 .55 .58 .60 .62 .63 .53
Net gain (loss) on securities
(both realized and unrealized) .05 .31 (.80) .60 .43 .55 (.24) .25
Total from investment operations .60 .86 (.25) 1.18 1.03 1.17 .39 .78
Less distributions
Dividends from net investment
income (.55) (.55) (.55) (.58) (.60) (.62) (.63) (.53)
Distributions from capital gains - (.09) (.06) (.02) - - - -
Distributions from paid-in capital - - - - - - (.09) -
Total distributions (.55) (.64) (.61) (.60) (.60) (.62) (.72) (.53)
End of year $10.89 $10.84 $10.62 $11.48 $10.90 $10.47 $9.92 $10.25
Total Return 5.62% 8.42% (2.18)% 11.11% 10.16% 12.11% 3.87% 8.15%
Ratios/Supplemental Data
Net assets, end of year
(in 000's) $54,165 $51,131 $52,230 $57,396 $39,291 $25,688 $14,792 $6,619
Ratio of expenses to average net assets
Before expenses reimbursements .98% 1.00% .97% 95% .95% 1.01% 1.64% 2.22%(b)(c)
After expense reimbursements .98%(A) .97%(A) .95% .95% .95% .91% .83% .54%(b)(c)
Ratio of net investment income to average net assets
Before expense reimbursements 5.03% 5.19% 4.99% 5.21% 5.67% 5.95% 5.35% 4.72(b)(c)
After expense reimbursements 5.03% 5.22% 5.01% 5.21% 5.67% 6.05% 6.16% 6.40%(b)(c)
Portfolio turnover 15.16% 17.08% 40.22% 27.77% 18.44% 7.28% 46.57% 21.91%
</TABLE>
(A) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian arrangement were .95% in 1996 and 1995. Prior
to 1995, such reductions were reflected in the expense ratios.
(a) Effective date of Fund's initial registration under the Securities Act
of 1933 as amended.
(b) Annualized.
(c) Excludes taxes and tax reimbursements of 1.15% of average net assets on
an annualized basis.
<PAGE>
FIRST PACIFIC MUTUAL FUND, INC. Prospectus dated
2756 Woodlawn Drive, #6-201 February 1, 1997
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 Fund's net asset value will fluctuate.
First Hawaii Municipal Bond Fund ("Bond Fund"). The objective of Bond
Fund is to provide a high level of current income exempt from federal and
Hawaii state income taxes, consistent with preservation of capital. The
bond 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 Hawaii income taxes.
First Hawaii Intermediate Municipal Fund ("Intermediate Fund"). The
objective of Intermediate Fund is to provide a high level of current income
exempt from federal and Hawaii state income taxes, consistent with
preservation of capital. The Intermediate Fund attempts to achieve its
objective by investing primarily in a varied portfolio of investment grade
municipal securities, with a dollar weighted average portfolio maturity of
more than three years but not more than ten years which pay interest exempt
from federal and Hawaii income taxes.
First Pacific Management Corporation (the "Manager") manages each
Fund's portfolio of investments.
There is no sales load imposed at the time of purchase of a Fund's
shares. (See "PURCHASING SHARES OF THE FUNDS.") Each Fund has adopted a
distribution plan which provides that the Fund may spend up to .25% of its
average daily net assets in connection with the distribution of Fund shares.
This Prospectus sets forth the information about the Funds that a
prospective investor should know before investing in a Fund. Please read
and retain this Prospectus for future reference.
_____________________
A Statement of Additional Information, dated February 1, 1997,
containing additional information about the Funds 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
FINANCIAL HIGHLIGHTS................................................ 5
PROSPECTUS SUMMARY.................................................. 7
INVESTMENT OBJECTIVES AND POLICIES.................................. 9
MUNICIPAL SECURITIES................................................ 9
INVESTMENT PRACTICES................................................ 11
PURCHASING SHARES OF THE FUNDS...................................... 12
DISTRIBUTIONS FROM THE FUNDS........................................ 13
REDEMPTION OF SHARES................................................ 13
NET ASSET VALUE..................................................... 15
TAX STATUS.......................................................... 15
OFFICERS AND DIRECTORS.............................................. 17
INVESTMENT MANAGER.................................................. 17
CUSTODIAN ......................................................... 18
THE DISTRIBUTION PLAN............................................... 18
ALLOCATION OF BROKERAGE TRANSACTIONS................................ 19
SHAREHOLDER SERVICES AND REPORTS.................................... 19
GENERAL INFORMATION AND HISTORY..................................... 20
FIRST HAWAII MUNICIPAL BOND FUND EXPENSES
The following table illustrates all expenses and fees that a
shareholder of the Bond Fund will incur. Additional transaction fees may
be charged if a broker-dealer or other financial intermediary deals with the
Fund on your behalf.
Shareholder Transaction Expenses
Sales Load Imposed on Purchases..................................... NONE
Sales Load Imposed on Reinvested Dividends.......................... NONE
Contingent Deferred Sales Load...................................... NONE
Redemption Fees..................................................... NONE
Exchange Fees....................................................... NONE
<TABLE>
<S> <C>
Annual Operating Expenses
(as a percentage of average net assets)
Management Expenses................................................. .50%
Shareholder Servicing Costs........................................ .10
12b-1 Fees After Waiver............................................ .11 <F1>
Other Expenses..................................................... .27
Total Operating Costs After Waiver........................... .98% <F2>
<FN>
<F1>
The Fund's 12b-1 Plan provides that the Fund may incur costs not to exceed
.25% per annum of the Fund's average net assets for the distribution of
Fund shares. The Distributor has waived a portion of the Bond Fund's fees
during the year ended 09/30/96. Such waivers may cease at anytime.
<F2>
Includes .03% custodian fees reduced through custodian arrangements.
</FN>
</TABLE>
The purpose of this table is to assist the investor in understanding
the various expenses that an investor in the Bond Fund will bear directly
or indirectly. Absent the fee waiver, 12b-1 fees could have been up to
.25% per annum and total operating costs after waiver could have been up to
1.12% per annum of the Bond Fund's average net assets. The expenses set
forth above are based on actual amounts for the most recent fiscal year.
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 Bond Fund charges no redemption fees of any kind.
1 year 3 years 5 years 10 years
$10 $31 $54 $120
This example should not be considered a representation of past or future
expenses or performance. Actual expenses may be greater or less than those
shown.
FIRST HAWAII INTERMEDIATE MUNICIPAL FUND EXPENSES
The following table illustrates all expenses and fees that a
shareholder of the Intermediate Fund will incur. Additional transaction
fees may be charged if a broker-dealer or other financial intermediary deals
with the Fund on your behalf.
Shareholder Transaction Expenses
Sales Load Imposed on Purchases.................................... NONE
Sales Load Imposed on Reinvested Dividends......................... NONE
Contingent Deferred Sales Load..................................... NONE
Redemption Fees.................................................... NONE
Exchange Fees....................................................... NONE
<TABLE>
<S> <C>
Annual Operating Expenses
(as a percentage of average net assets)
Management Expenses.............................................. .50%
Shareholder Servicing Costs ..................................... .10
12b-1 Fees After Waiver.......................................... .08 <F3>
Other Expenses................................................... .16
Total Operating Costs After Waiver............................ .84%
<FN>
<F3>
The Fund's 12b-1 Plan provides that the Fund may incur costs not to exceed
.25% per annum of the Fund's average net assets for the distribution of
Fund shares. The Distributor has waived a portion of the Intermediate Fund's
fees during the period ending 09/30/96. Such waivers may cease at any time.
</FN>
</TABLE>
The purpose of this table is to assist the investor in understanding
the various expenses that an investor in the Intermediate Fund will bear
directly or indirectly. Absent the fee waiver, 12b-1 fees could have been
up to .25% per annum and total operating costs could have been up to 1.01%
per annum of the Intermediate Fund's average net assets. The expenses set
forth above are based on actual amounts for the most recent fiscal year.
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 Intermediate Fund charges no redemption fees of any
kind.
1 year 3 years 5 years 10 years
$9 $27 $47 $104
This example should not be considered a representation of past or future
expenses or performance. Actual expenses may be greater or less than
those shown.
First Hawaii Municipal Bond Fund
FINANCIAL HIGHLIGHTS
The financial highlights and ratios for the periods presented have been
selected from the Fund's financial statements, which have been examined
by Tait, Weller & Baker, independent certified public accountants, whose
unqualified report thereon appears on the Fund's Annual Report to
Shareholders for the year ended September 30, 1996. Such Financial
statement and report are incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
Years ended September 30,
1996 1995 1994 1993
<S> <C> <C> <C> <C>
Net asset value
Beginning of year $10.84 $10.62 $11.48 $10.90
Income from investment operations
Net investment income .55 .55 .55 .58
Net gain (loss) on securities
(both realized and unrealized) .05 .31 (.80) . 60
Total from investment operations .60 .86 (.25) 1.18
Less distributions
Dividend from net investment income (.55) (.55) (.55) (.58)
Distributions from capital gains - (.09) (.06) (.02)
Distributions from paid-in capital - - - -
Total distributions (.55) (.64) (.61) (.60)
End of year $10.89 $10.84 $10.62 $11.48
Total return 5.62% 8.42% (2.18)% 11.11%
Ratios/Supplemental Data
Net assets, end of year (in 000's) $54,165 $51,131 $52,230 $57,396
Ratio of expenses to average net assets
Before expense reimbursements .98%(A) 1.00% .97% .95%
After expense reimbursements .98%(A) .97% .95% .95%
Ratio of net investment income
to average net assets
Before expense reimbursements 5.03% 5.19% 4.99% 5.21%
After expense reimbursements 5.03% 5.22% 5.01% 5.21%
Portfolio turnover 15.16% 17.08% 40.22% 27.77%
</TABLE>
<TABLE>
November 23,
1988 (a) to
Years ended September 30, September 30,
1992 1991 1990 1989
<S> <C> <C> <C> <C>
Net Asset Value
Beginning of year $10.47 $ 9.92 $10.25 $10.00
Income from investment operations
Net investment income .60 .62 .63 .53
Net gain (loss) on securities
(both realized and unrealized) .43 .55 (.24 .25
Total from investment operations 1.03 1.17 .39 .78
Less Distributions
Dividend from net investment income (.60) (.62) (.63) (.53)
Distributions from capital gains - - - -
Distributions from paid-in capital - - (.09) -
Total Distributions (.60) (.62) (.72) (.53)
End of year $10.90 $10.47 $9.92 $10.25
Total Return 10.16% 12.11% 3.87% 8.15%
Ratios/Supplemental Data
Net assets, end of year (in 000's) $39,291 $25,688 $14,792 $6,619
Ratio of expenses to average net assets
Before expense reimbursements .95% 1.01% 1.64% 2.22%(b)(c)
After expense reimbursements .95% .91% .83% .54%(b)(c)
Ratio of net investment income to average net assets
Before expense reimbursements 5.67% 5.95% 5.35% 4.72%(b)(c)
After expense reimbursements 5.67% 6.05% 6.16% 6.40%(b)(c)
Portfolio turnover 18.44% 7.28% 46.57% 21.91%
<FN>
(A) Ratio of expenses to average net assets after the reduction of
custodian fees under a custodian arrangement were .95% in 1996 and
1995. Prior to 1995, such reductions were reflected in the
expense ratios.
(a) Effective date of the Fund's initial registration under the
Securities Act of 1933 as amended.
(b) Annualized.
(c) Excludes taxes and tax reimbursements of 1.15% of average net
assets on an annualized basis.
</FN>
</TABLE>
First Hawaii Intermediate Municipal Fund
FINANCIAL HIGHLIGHTS
The financial highlights and ratios for the period presented have been
selected from the Fund's financial statements, which have been examined
by Tait, Weller & Baker, independent certified public accountants, whose
unqualified report thereon appears in the Fund's Annual Report to
Shareholders for the year ended September 30, 1996. Such Financial
statement and report are incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
Period
July 5, 1994*
to
Years ended September 30, September 30,
1996 1995 1994
<S> <C> <C> <C>
Net asset value
Beginning of year $5.14 $4.99 $5.00
Income from investment operations
Net investment income .22 .23 .05
Net gain (loss) on securities (.02) .15 (.01)
(unrealized)
Total from investment operations .20 .38 .04
Less distributions
Dividends from net investment income (.22) (.23) (.05)
End of period $5.12 $5.14 $4.99
Total return 3.95% 7.86% .72%
Ratios/Supplemental Data
Net assets, end of year $6,624 $4,760 $2,447
(in 000's)
Ratio of expenses to average net assets
Before expense reimbursements 1.50% 1.90% 4.98%(a)
After expense reimbursements .84%(b) .66%(b) 0%(a)
Ratio of net investment income to average net assets
Before expense reimbursements 3.66% 3.39% .12%(a)
After expense reimbursements 4.32% 4.63% 4.60%(a)
Portfolio turnover 17.76% 10.04% 0%
<FN>
*Commencement of operations
(a) Annualized.
(b) Ratios of expenses to average net assets after the reduction of
custodian fees under a custodian arrangement were .75% and .64%
for 1996 and 1995 respectively. Prior to 1995, such reductions
were reflected in the expense ratios.
</FN>
</TABLE>
PERFORMANCE
From time to time each Fund may advertise its total return and
yield. The "total return" of a Fund refers to the average annual
compounded rates of return over 1, 5 and 10 year periods or for the life
of a 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 each
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 each Fund during the relevant period. The
"yield" of each 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 a 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. Further information about
the performance of a Fund is contained in each Fund's annual report to
shareholders, which may be obtained without charge.
PROSPECTUS SUMMARY
Offering Price, Charge
and Minimum Purchase The minimum initial investment is $1,000
with a $100 minimum for subsequent
investments; less in certain circumstances.
Shares are sold at net asset value. See
"PURCHASING SHARES OF THE FUNDS."
Investment Objective
and Policies Each Fund seeks to provide a high level of
current income exempt from federal and
Hawaii state income taxes, consistent with
preservation of capital. There is no
assurance that this objective will be
achieved. Each Fund will invest primarily
in a varied portfolio of investment grade
Hawaii municipal securities. The
Intermediate Fund will attempt to achieve
its objective by investing primarily in a
varied portfolio of investment grade
obligations with an average portfolio
maturity of more than three years but not
more than ten years. Each Fund will
primarily invest in municipal securities
issued by or on behalf of the State of
Hawaii 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. Each Fund will not invest
more than 10% in lower rated municipal
securities. See "INVESTMENT OBJECTIVES AND
POLICIES."
Risks and Subject to certain limitations, each Fund may
Investment Practices 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 which adversely
affect issuers of such tax-exempt securities.
Adverse conditions in the State of Hawaii'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 a 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 a Fund's fixed payment
obligation. See "MUNICIPAL SECURITIES" and
"INVESTMENT PRACTICES."
Investment Manager First Pacific Management Corporation is
each Fund's Investment Manager. The
Investment Manager was organized in 1988.
The annual management fee for each Fund is
.50% of average daily net assets. The
Manager also provides each Fund with
certain shareholder services for an annual
fee of .10% of average daily net assets.
Distributions from Distributions from net investment income
the Fund are declared daily and paid monthly.
Capital gains, if any, are distributed
annually. See "DISTRIBUTIONS FROM THE
FUNDS."
Redemption Shares may be redeemed at net asset value next
determined. Each Fund may require involuntary
redemption of shares if the value of an account
is less than $500. See "REDEMPTION OF SHARES."
Distribution Plan Each Fund and its shareholders have adopted
a distribution plan pursuant to Rule 12b-1
of the Investment Company Act of 1940 which
provides that the Fund may spend up to .25%
of its average daily net assets in
connection with the Fund's activities as a
distributor of its shares. See "THE
DISTRIBUTION PLAN."
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 OBJECTIVES AND POLICIES
Each Fund's investment objective is to provide a high level of
current income exempt from federal and Hawaii state income taxes,
consistent with preservation of capital. There can be no assurance that
a Fund will achieve its investment objective, which may be changed only
with shareholder approval. The Intermediate Fund invests primarily in a
portfolio of investment grade obligations with a dollar weighted average
portfolio maturity of more than three years but not more than ten years.
Generally speaking, intermediate bonds have less market fluctuation than
long term bonds. However, intermediate bonds may have lower yields due
to their shorter maturity. There is, of course, no assurance that the
Fund's objective will be achieved.
Each 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 Hawaii 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 Hawaii state income
taxes. In normal circumstances up to 100%, but not less than 80%, of a
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. Each 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-Investment Grade Municipal Securities and Lower Grade
Municipal Securities" below.)
When the Investment Manager determines during periods of adverse
market conditions including when Hawaiian tax exempt securities are
unavailable, each Fund may invest up to 20% of the value of its net
assets for temporary defensive purposes in money market instruments the
interest of 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. 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 each 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.
Investment Grade Municipal Securities
Each 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 each Fund will invest primarily in
investment grade municipal securities, from time to time each 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 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 Hawaii Securities
The ability of each 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 each Fund invests primarily in
obligations of issuers located in Hawaii, the marketability, and market
value of these obligations may be affected by certain Hawaiian
constitutional provisions, legislative measures, executive orders,
administrative regulations, and vote initiatives.
The Hawaiian economy is concentrated in tourism, agriculture,
construction and military operations. Tourism is Hawaii's largest
economic sector. 1996 marked the stabilization of the Hawaii visitor
industry following the 1991-1993 slump. With visitor arrivals on a
record-setting pace, statewide occupancies reaching pre-slump levels and
average daily room rates continuing to make up for ground lost during the
slump, the Hawaii tourism industry appears well on the way to recovery.
Agriculture, dominated by the Hawaiian pineapple and sugar trade, has
faced increased foreign competition. Agricultural production has become
somewhat more diversified and includes cattle, poultry, vegetables,
coffee, flowers and other nursery products.
Governmental activities, including activities usually administered
on a municipal or county level such as public education, are the
responsibility of the state. This concentration aggravates an otherwise
high level of state debt obligations. The state General Fund has
operated either within planned deficits or with ending fund balances
since December 1962. Revenue is derived primarily from general excise
taxes and individual and corporate income tax.
Hawaii's county governments may issue government obligation bonds.
The counties have preferred to finance capital investment with cash of
federal grants. As a result, relatively minimal amounts are charged to
the county general obligation debt limit, which restricts local
government indebtedness to not more than 15% of net assessed value of
real property. In Hawaii, no city or other governmental units may issue
bonds.
INVESTMENT PRACTICES
"When Issued" and "Delayed Delivery" Transactions
Each 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 Bond Fund may invest in municipal bonds with a maturity range
as long as 40 years. The Bond 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.
Each 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 a Fund will invest more than 25% of its assets
in a particular segment (bonds financing similar projects such as
utilities, hospitals or housing finance agencies) of the municipal bond
market. Developments affecting a particular segment could have a
significant effect on a Fund's performance. (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. Each Fund may be subject to greater risk as compared
to a fund that does not follow this practice.
Each 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. Each 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, each 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 FUNDS
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 each Fund may be
purchased from the Distributor or from members of the National
Association of Securities Dealers who have sales agreements with the
Distributor. Direct purchase orders may be made by submitting a check or
wiring funds and in the case of a new account, a completed application 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., New York City time,
are confirmed at that day's public offering price. Direct purchase
orders received by the Transfer Agent after 4:00 p.m. are confirmed at
the public offering price 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 of the Funds may be purchased by customers of brokers-
dealers or other financial intermediaries ("Service Agents") which have
established a shareholder servicing relationship with their customers.
Service Agents may impose additional or different conditions on purchases
or redemptions of Fund shares and may charge transaction or other account
fees. Each Service Agent is responsible for transmitting to its
customers a schedule of any such fees and information regarding
additional or different purchase or redemption conditions. Shareholders
who are customers of Service Agents should consult their Service Agent
for information regarding these fees and conditions. Amounts paid to
Service Agents may include transaction fees and/or service fees, which
would not be imposed if shares of the Portfolio were purchased directly
from the Distributor. Service Agents may provide shareholder services to
their customers that are not available to a shareholder dealing directly
with the Fund's Distributor.
Service Agents may enter confirmed purchase orders on behalf of
their customers. If shares of a Portfolio are purchased in this manner,
the Service Agent must receive your investment order before 4:00 pm EST,
and transmit it to the Fund's Transfer Agent prior to 5:00 pm EST to
receive that day's share price. Proper payment for the order must be
received by the Transfer Agent no later than the time when the Fund is
priced on the following business day. Service Agents are responsible to
their customers and the Fund for timely transmission of all subscription
and redemption requests, investment information, documentation and money.
The issuance of shares is recorded on the books of each Fund in
full and fractional shares carried to the third decimal place. To avoid
additional operating costs, and for investor convenience, share
certificates will no longer be issued. Each Fund's shares are offered at
the net asset value next computed 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 no sales load imposed on
purchases of Fund shares at the time of purchase.
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.
In-Kind Purchases
Under certain circumstances, an investor may purchase a Fund's
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 a Fund with a purchase order,
investors must contact the Manager ((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 net asset value next determined 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 FUNDS
Each Fund will declare distributions on a daily basis and will pay
such distributions on a monthly basis. Each 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 a Fund, less the Fund's expenses. Capital
gains distributions consist of a 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.
Each 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 and clearing agency. The Manager may
waive this requirement under certain circumstances. 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 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
guaranteed by an acceptable financial institution such as a bank, savings
and loan association, trust company, credit union, broker, dealer,
registered securities association and 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. Investors cannot redeem shares by
telephone if stock certificates are held for those shares. 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. Each 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. A 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 Funds 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 guaranteed.
This service may be amended or terminated at any time by the Transfer
Agent or the Fund.
General
Whether shares are redeemed by a 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
and stock certificates (if any) are received in proper form as set forth
above. Wire transfers from a 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 Funds 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 a 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.
Each Fund reserves the right to redeem an investor's account where
the account is worth less than $500. Each 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 Funds 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 each 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 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 a Fund's portfolio
securities such that the Fund's net asset value per share might be
materially affected. Each 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
Each Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986 (the "Code"). In
each year a 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 a 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 a Fund is not deductible to
the extent of the exempt interest dividends received from a Fund.
Distributions of a Fund's taxable income and net short-term capital
gains, if any, are taxable to shareholders at ordinary income rates.
Distributions of a 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. Each Fund will inform
shareholders of the source and tax status of such distributions promptly
after the close of each calendar year. Interest on certain "private
activity" obligations issued after August 7, 1986 will give rise to an
item of tax preference which may cause a shareholder to be subject to (or
result in an increased liability under) the alternative minimum tax.
Distributions from the Funds 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 Funds 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 a 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," each
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 a 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.
Each 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,
each Fund is required, in certain circumstances, to withhold up to 30% of
dividends paid to nonresident aliens.
Hawaii Tax Status
Shareholders of each Fund who are subject to Hawaii income taxes
will not be subject to Hawaii 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 Hawaii or any of its political
subdivisions 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 a 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 Hawaii income tax.
Interest on Hawaiian Obligations, tax-exempt obligations of states
other than Hawaii and their political subdivisions, and obligations of
the United States or its possessions is not exempt from the Hawaii
Franchise Tax. This tax applies to banks, building and loan
associations, industrial loan companies, financial corporations, and
small business investment companies.
Persons or entities who are not Hawaii residents should not be
subject to Hawaii income taxation on dividends and distributions made by
the Fund but may be subject to other state and local taxes.
Each Fund will notify its shareholders within 45 days after the
close of the year as to the interest derived from Hawaii obligations and
exempt from Hawaii 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 Funds, 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 1988, and acts as its manager. The Manager manages the
investment of the assets of each 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 each 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 each 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, each 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 reimburse expenses such that it will
waive a portion of its fees or reimburse a Fund for its other expenses 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 Funds. 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.
Since 1995, a moderately expanding economy, modest demands for debt
and the expectations of consistent price and unit labor costs have
contributed to stable long term interest rates. Given these conditions
and expectations, the primary investment strategy of the Bond Fund's
investment manager was to purchase high quality twenty year Hawaii
municipal bonds. The stability of interest rates, coupled with the
strategy of purchasing high quality municipal bonds was the primary
factor producing the past year's performance results.
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 each Fund's investment activities. The Manager implements
the investment program of the Funds and the composition of its portfolio
on a day-to-day basis.
The current Management Agreement between the Bond Fund and First
Pacific Management Corporation was approved on May 14, 1991 and the
Management Agreement between the Intermediate Fund and the Manager was
approved on July 7, 1994. Each 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
Union Bank of California, N.A. of San Francisco, California is the
custodian of the assets of each Fund.
THE DISTRIBUTION PLAN
Each 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 .25% 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 each Distribution
Plan is in the best interests of the shareholders. Pursuant to the
Distribution Plan, each Fund has entered into a Distribution Agreement
with First Pacific Securities (the "Distributor"), to serve as the
distributor of each Fund's shares. Under the Distribution Plan, each
Fund will pay the Distributor for expenditures which are primarily
intended to result in the sale of the respective 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 Funds are 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 Fund understands that the staff
of the Securities and Exchange Commission is continuing its consideration
of payments under Rule 12b-1.
Each 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.
Each 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
purposes of voting on the Distribution Plan. The Distribution Plan for
Bond fund was approved by the Fund's shareholders and the Distribution
Plan for Intermediate Fund will be submitted to the Fund's initial
shareholder(s) for approval. The Distribution Plans 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 respective Fund, and all material amendments of a
Distribution Plan must be approved by the Directors and also by the
disinterested Directors. Each 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 respective Fund.
While a 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 each 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 Funds may take into account
whether the firm has sold or is selling shares of the Funds.
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 each 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 Funds 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
funds 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. As compensation
for its clerical, bookkeeping and shareholder services, the Transfer
Agent receives a fee, computed daily and payable monthly, at an
annualized rate of .10% of the Fund's average daily net assets.
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.
First Pacific Recordkeeping, Inc. also provides fund accounting
services for the Intermediate Fund pursuant to a Fund Accounting
Agreement.
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 each 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 respective
Fund, and (2) equal dividend, distribution and redemption rights to
assets of the respective 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 pre-emptive 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.
The Fund may use "First Pacific" in its name so long as First
Pacific Management Corporation or an affiliate thereof, acts as its
investment manager.
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, 2756 Woodlawn Drive #6-201, Honolulu, Hawaii 96822.
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
Union Bank of California, N.A.
475 Sonsome Street, 15th Floor
San Francisco, California 94111
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, HI 96822
LEGAL COUNSEL TO INVESTMENT MANAGER
Goodsill Anderson Quinn & Stifel
1099 Alakea Street, Suite 1800
Alii Place
Honolulu, Hawaii 96813
FOR INCORPORATION BY REFERENCE PURPOSES ONLY
Ward Plaza
210 Ward Avenue
Suite 129
Honolulu, Hawaii 96814
(808) 522-7777
PROSPECTUS
FEBRUARY 1, 1997
LEAHI TAX-FREE INCOME TRUST (the "Fund") is a mutual fund whose
investment objective is to provide investors with the maximum level of
income exempt from federal and Hawaii income taxes, consistent with
preservation of capital. The Fund seeks to achieve its objective by
investing primarily in municipal securities which pay interest exempt
from federal and Hawaii income taxes.
This prospectus sets forth basic information about the Fund that
prospective investors should know before investing. It should be read and
retained for future reference. A Statement of Additional Information dated
February 1, 1997, as may be amended from time to time, has been filed with
the Securities and Exchange Commission and is incorporated herein by
reference. The Statement of Additional Information is available without
charge upon written request to the Fund at the address given above.
Page
Expense Table. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . 3
Discussion of Fund Performance . . . . . . . . . . . . . . . . . . . 4
Leahi Tax-free Income Trust. . . . . . . . . . . . . . . . . . . . . 5
Objective And Investment Approach of the Fund . . . . . . . . . . . 5
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . .13
How to Invest in the Fund. . . . . . . . . . . . . . . . . . . . . .15
How to Sell or Redeem an Investment in the Fund. . . . . . . . . . .16
How the Fund's Per Share Value Is Determined. . . . . . . . . . . .18
Distributions And Tax Information . . . . . . . . . . . . . . . . .18
General Information. . . . . . . . . . . . . . . . . . . . . . . . .20
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
EXPENSE TABLE
The following table of fees and expenses is provided to assist
investors in understanding the various costs and expenses which may be borne
directly by an investor in the Fund. The percentages shown below are based
on actual expenses incurred by the Fund for the fiscal year ended September
30, 1996. Actual expenses in future years may be more or less than those
shown below. For a complete discussion of the fees connected with an
investment in the Fund and the services provided to the Fund, see "How to
Invest in the Fund" and "Management of the Fund".
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases. . . . . . . . NONE
Maximum Sales Charge Imposed on Reinvested Dividends . . NONE
Deferred Sales Charge. . . . . . . . . . . . . . . . . . NONE
Redemption Fees. . . . . . . . . . . . . . . . . . . . . NONE
Exchange Fee . . . . . . . . . . . . . . . . . . . . . . NONE
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees (after waiver and reimbursement) . 0.50%
12b-1 Fees . . . . . . . . . . . . . . . . . . . . 0.06%*
Other Expenses . . . . . . . . . . . . . . . . . . 0.29%
Total Fund Operating Expenses. . . . . . . . . . . 0.85%
Example
The following example illustrates the total transaction and operating
expenses that an investor in the Fund will have paid over various time periods
on a hypothetical investment of $1,000 in the Fund, 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 sales charges or redemption fees of
any kind:
1 year 3 years 5 years 10 years
-------- --------- --------- ----------
$9 $27 $47 $104
<PAGE>
This example is based on the annual operating expenses shown above
and should not be considered a representation of future expenses or
performance. The operating expenses are borne by the Fund, and only
indirectly by shareholders as a result of their investment in the Fund.
Actual expenses may be greater or lesser than those shown, and the annual
rate of return may be more or less than 5%.
- ----------
*12b-1 fees were paid by the Fund during this period for $10,791 reimbursing
expenses incurred in fiscal year 1993 and $17,617 reimbursing expenses
incurred in fiscal year 1994. The maximum amount which could have been paid
by the Fund was 0.25% of average net assets.
<PAGE>
FINANCIAL HIGHLIGHTS
Financial highlights and ratios for the five years ended
September 30, 1996 have been selected from the Fund's financial
statements, which have been audited by Tait, Weller & Baker, independent
certified public accountants, whose unqualified report thereon appears in
the Fund's Annual Report to Shareholders for the year ended September 30,
1996, and is incorporated by reference into this Prospectus.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
10/26/87%*
Fiscal Year Ended September 30, to
1996 1995 1994 1993 1992 1991 1990 1989 1988**
Net asset value,
beginning of period $ 13.74 $ 13.24 $ 14.42 $ 13.43 $ 12.97 $12.27 $ 12.40 $12.34 $ 12.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.70 0.71 0.69 0.71 0.74 0.74 0.79 0.66 0.49
Net gain loss) on securities (both
realized and unrealized) (0.02) 0.50 (1.08) 1.03 0.50 0.70 (0.13) 0.06 0.34
Total from investment
operations 0.68 1.21 (0.39) 1.74 1.24 1.44 0.66 0.72 0.83
LESS DISTRIBUTIONS
Dividends from net
investment income (0.70) (0.71) (0.69) (0.71) (0.74) (0.74) (0.79) (0.66) (0.49)
Distributions from
capital gains --- --- (0.10) (0.04) (0.04) --- --- --- ---
Total distributions (0.70) (0.71) (0.79) (0.75) (0.78) (0.74) (0.79) (0.66) (0.49)
Net asset value,
end of period $ 13.72 $ 13.74 $ 13.24 $ 14.42 $ 13.43 $ 12.97 $ 12.27 $12.40 $ 12.34
Total Return 5.05% 9.40% (2.76%) 13.34% 9.83% 12.12% 5.40% 6.74% 9.07%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(in 000's) $47,465 $45,537 $43,928 $44,628 $30,950 $20,173 $12,576 $7,104 $ 5,200
Ratio of expenses to average net
assets 0.85%(b) 0.83%(b) 0.85% 0.98% 1.06% 1.09%(a) 0.89% 1.19% 1.07%
Ratio of net investment income to
average net assets 5.09% 5.30% 5.04% 5.13% 5.60% 5.86%(a) 6.35%(a) 6.06% 6.23%
Portfolio turnover 17.42% 20.16% 22.05% 12.56% 8.04% 36.78% 31.12% 11.49% 28.16%
</TABLE>
(a) Prior to reimbursement from manager, ratio of expenses to average net
assets was 1.39% and 1.90% for 1991 and 1990, respectively, and ratio
of net investment income to average net assets was 5.56% and 5.34% for
1991 and 1990.
(b) Ratio of Expenses to average net assets after the reduction of custodian
agreement were 0.83% and 0.82% for 1996 and 1995, respectively. Prior to
1995, such reductions were reflected in the expense ratios.
* Commencement of operations.
** Figures for Total Return, Ratios and Portfolio turnover are annualized.
<PAGE>
DISCUSSION OF FUND PERFORMANCE
Below are line graphs comparing the Fund and the broad based national
(state taxable) Lehman Muni Bond Index through the Fund's fiscal year end
September 30, 1996. The objective of the graph is to permit you to compare
the performance of the Fund with the current market, and to give perspective
to market conditions and investment strategies and techniques pursued by the
Investment Manager that materially affected the performance of the Funds.
While remaining a high quality portfolio, the Fund, under the direction of
the Investment Manager, has been converting from shorter duration,
pre-refunded issues to mid to long-term holdings for more flexibility in a
volatile interest rate environment . Such rebalancing, in the opinion of the
Investment Manager, will help protect the Fund from movements in interest
rates such as reduced the Fund's total return for the last year from that
of the previous year. Also, below are Leahi's average annual total returns
for the one-year, five-year and inception through September 30, 1996 periods.
The graph below compares the increase in value of a $10,000 investment
in Leahi Tax-Free Income Trust with the performance of the Lehman Muni Bond
Index. The values are as of September 30th for each of the last nine years
and include reinvested dividends. The Lehman Brothers Index reflects
investment of "dividends," but not the expenses of the Fund.
The following table including average annual total return information was
presented as a graph.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 1989 1990 1991 1992 1993 1994 1995 1996
Leahi 10,848 11,579 12,204 13,684 15,029 17,033 16,562 18,120 19,036
Tax-Free Income Trust
Lehman 11,237 12,182 12,988 14,604 15,930 17,855 17,553 19,323 20,609
Muni Bond Index
</TABLE>
Average annual total return
1 year 5.05%
5 year 6.82%
Inception 7.47%
LEAHI TAX-FREE INCOME TRUST
The LEAHI TAX-FREE INCOME TRUST (the "Fund") is a series of the Leahi
Investment Trust (the "Trust"), a Massachusetts business trust organized as an
open-end, non-diversified management investment company offering redeemable
shares of beneficial interest. Shares of the Fund may be purchased at their
current net asset value with no sales charge by mailing a completed Account
Application, together with a check payable to Leahi Tax-Free Income Trust,
as indicated in the Account Application. The minimum initial investment is
$1,000, with subsequent investments of $50 or more. See "How to Invest in
the Fund".
OBJECTIVE AND INVESTMENT APPROACH OF THE FUND
The investment objective of the Fund is to provide investors with the
maximum level of income exempt from federal and Hawaii income taxes, consistent
with preservation of capital. The Fund seeks to achieve its objective by
investing primarily in municipal securities which pay interest that is exempt
from federal and Hawaii income taxes ("Hawaii Municipal Securities"). Hawaii
Municipal securities include general obligation and revenue bonds and notes
of issuers located in Hawaii, as well as obligations issued by or under the
authority of Guam, Puerto Rico, and the Virgin Islands. The Fund expects
that at least a majority of its assets will be invested in municipal
securities of issuers located in Hawaii. There are no limitations on the
maturities of the securities which the Fund may purchase.
There is, of course, no assurance that the Fund's objective will be
achieved, and the Fund's net asset value per share will fluctuate with changes
in the market value of its investment portfolio.
Investment Grade Securities. The Fund will invest solely 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) or
Standard & Poor's Corporation ("S&P") or, if unrated, are judged by Leahi
Management Company, Inc., the Fund's investment manager ("Investment
Manager"), to be of comparable quality to such rated securities. Municipal
obligations rated in the fourth highest grade are considered by such
rating agencies to have some speculative characteristics and thus may
present investment risks not present in more highly rated obligations.
An Appendix to the Statement of Additional Information contains a complete
description of the municipal securities ratings of Moody's and S&P.
Characteristics of Municipal Securities. Municipal securities
include debt obligations issued to obtain funds for various public purposes,
including construction of a wide range of public facilities such as bridges,
highways, housing, hospitals, mass transportation, schools, streets, and
water and sewer works. other public purposes for which municipal securities
or bonds may be issued include the refunding of outstanding obligations, the
obtaining of funds for general operating expenses and the obtaining of funds
to loan to other public institutions and facilities. In addition, certain
types of industrial development bonds are or have been issued by or on
behalf of public authorities to obtain funds to be provided to privately
operated housing facilities, sports facilities, convention or trade show
facilities, airport, mass transit, port or parking facilities, air or water
pollution control facilities and certain local facilities for water supply,
gas, electricity or sewage or solid waste disposal. Bonds issued after the
effective date of the Tax Reform Act of 1986 for some of these purposes,
such as sports, convention or trade show, and parking facilities, do not
pay interest that is excludable from gross income for federal income tax
purposes. The Fund will limit its purchase of industrial development bonds,
however, to those the interest on which is exempt from regular federal
income tax, although the interest on certain of such bonds may be subject
to the alternative minimum tax. See "Distributions and Tax Information."
The two principal classifications of municipal securities are
"general obligation" and "revenue" bonds. General obligation bonds are
secured by the pledge of the credit and taxing power of the issuing
municipality for the payment of principal and interest. Revenue 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 excise or
specific revenue source. Industrial development bonds are a form of revenue
bond and do not generally constitute the pledge of the credit of the issuer
of such bonds.
Other types of municipal securities include tax anticipation notes,
revenue anticipation notes, bond anticipation notes, and variable rate demand
notes. Specific information concerning these and other forms of municipal
securities is described in the Statement of Additional Information section
entitled, "Investment Objective and Policies Municipal Securities."
It is possible that the Fund from time to time will invest more than
25% of its assets in a particular segment of the municipal securities market,
such as hospital revenue bonds, housing agency bonds, industrial development
bonds or airport bonds, or in securities the interest on which is paid from
revenues of a similar type of project. In such circumstances, economic,
business, political or other changes affecting one bond (such as proposed
legislation affecting the financing of a project, shortages or price
increases of materials, or declining markets or needs for the project)
might also affect other bonds, thereby potentially increasing market risk.
The Fund may purchase floating rate and variable rate obligations.
These obligations bear interest at rates that are not fixed, but that vary
with changes in specified market rates or indices on a predetermined
schedule. These obligations generally carry a demand feature that permits
the Fund to tender them back to the issuer or a third party at par value
prior to maturity plus accrued interest, which amount may be more or less
than the amount the Fund paid for them. The Fund will limit its purchase of
municipal securities that are floating rate and variable rate obligations to
those meeting the quality standards set forth above. Frequently such
obligations are secured by letters of credit or by other credit enhancement
arrangements provided by banks. The quality of the underlying creditor or
of the bank, as the case may be, must be equivalent to the quality standards
set forth above as determined by the Fund's investment manager under the
supervision of the Trust's Board of Trustees. In addition, the Investment
Manager monitors the earning power, cash flow and other liquidity ratios of
the issuers of such obligations, as well as the credit worthiness of the
institution responsible for paying the principal amount of the obligation
under the demand feature.
The Fund may also invest more than 25% of its assets in participation
interests purchased from banks in floating or variable rate municipal
securities (such as industrial development bonds) owned by banks.
Participation interests carry a demand feature permitting the Fund to
tender them back to the bank.
Each participation generally is backed by an irrevocable letter of credit or
guarantee of a bank which the Investment Manager, acting under the supervision
of the Trust's Board of Trustees, has determined meets the prescribed quality
standards for the Fund. The Fund will only invest in such participation
interests to the extent that an opinion of counsel supports the
characterization of interest of such securities as tax-exempt. Only
participation interests issued by Federal Deposit Insurance Corporation
("FDIC") insured banks or savings institutions having at least $1 billion
in assets may be purchased by the Fund. See the Statement of Additional
Information section entitled "Investment Objectives and Policies Other
Municipal Securities" for more information.
For the purpose of providing greater liquidity in its portfolio, the
Fund may purchase municipal securities from banks, brokers or dealers, and
other financial institutions (such as insurance or other investment companies),
together with puts to sell the municipal security within a specified period
of time and at a specified exercise price. Because of the put feature on
such municipal securities, the prices of the securities may be higher and
the yields lower than they otherwise would be. With respect to 75% of the
total value of the Fund's assets, no more than 5% of such value may be in
securities underlying puts issued by the same institution, except that the
Fund may invest up to 10% of its asset value in unconditional puts
(exercisable even in the event of a default in the payment of principal or
interest on the underlying security) and other securities issued by the same
institution.
General Policies. The Fund, under normal market conditions, will
attempt to invest 100% and, as a matter of fundamental policy, will invest at
least 80% of the value of its net assets in securities the interest on which
is exempt from regular federal and Hawaii income taxes and is not subject to
the federal alternative minimum tax. Thus, it is possible that under normal
market conditionS up to 20% of the Fund's net assets could be invested in
municipal securities from other states (which would generate income not
exempt from Hawaii income taxes), Hawaiian or other municipal securities
the interest on which is a tax preference item under the federal alternative
tax, U.S. Treasury obligations, high quality commercial paper, obligations of
U.S. banks (including commercial banks and savings institutions insured by
the FDIC) with assets of $1 billion or more, and repurchase agreements
secured by U.S. Government securities. (Some of the foregoing investments
generate income that would be subject to both federal and Hawaii income
taxes when distributed to the Fund's shareholders).
For temporary defensive purposes only, the Fund may invest up
to 100% of its assets in (i) obligations issued or guaranteed by the full
faith and credit of the U.S. Government, its agencies, instrumentalities or
authorities, highest rated commercial paper, certificates of deposit of
domestic banks with assets of $1 billion or more, and repurchase agreements
(subject to the limitations described below) the interest on which is subject
to federal and may be subject to Hawaii income taxes; and (ii) securities
the interest on which is exempt from regular federal income taxes but not
Hawaii's income taxes, such as municipal securities issued by other states
and their agencies and instrumentalities.
Repurchase Agreements. The Fund may enter into repurchase agreements
in order to earn additional income on available cash or as a temporary
defensive investment. Under such agreements, the Fund invests in eligible
U.S. Government securities and the seller agrees to repurchase them at a
mutually agreed time and price. Income from repurchase agreements is
taxable. It is anticipated that the Fund will invest less than 5% of its
net assets at any given time in repurchase agreements.
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when- issued or delayed delivery basis, for payment and
delivery at a later date. The price and yield are generally fixed on the
date of commitment to purchase, and the value of the security is thereafter
reflected in the Fund's net asset value. During the period between purchase
and settlement, the market value of the security may be more or less than the
purchase price. The Fund may forego other investment opportunities pending
consummation of such transactions and such transactions are subject to the
risk of the other party failing to consummate the transaction. When the
Fund purchases securities on a when issued or delayed delivery basis, it
maintains a segregated account with its custodian bank in an amount equal
to the purchase price as long as the obligation to purchase continues.
Portfolio Turnover. The annual rate of portfolio turnover is
generally anticipated to be less than 100%. See the Statement of Additional
Information section entitled "Execution of Portfolio Transactions" for more
information.
The Fund has adopted certain investment restrictions, which are
described fully in the Statement of Additional Information. one of these
restrictions states that the Fund may borrow money from banks only for
extraordinary or emergency purposes in amounts not to exceed 25% of the
Fund's assets, and that additional investments may not be made while any
such borrowings are in excess of 5% of the Fund's assets. Like the Fund's
investment objective, this restriction is fundamental and may be changed
only by a majority vote of the Fund's outstanding shares.
Special Considerations. An investment in shares of the Fund may
not be considered appropriate for all investors and should not be considered
a complete investment program. Each prospective investor should take into
account his or her own investment objectives as well as the investor's other
investments when considering the purchase of shares of the Fund.
While the Fund is a non-diversified investment company under the
Investment Company Act of 1940 (the "1940 Act"), the Fund intends to comply
with the diversification standards applicable to regulated investment
companies under the Internal Revenue Code of 1986, as amended (the "Code").
As of the last day of each fiscal quarter, the Fund intends that its
investments in the securities of any one issuer (other than the U.S.
Government) will be limited to 25% of its total assets, and, with respect
to at least 50% of its total assets, the Fund may not have more than 5% of
its assets invested in the securities of any one issuer or hold more than
10% of the outstanding voting securities of any one issuer. To the extent
the Fund is not diversified for purposes of the 1940 Act, it may be more
susceptible to adverse developments affecting a single issuer. Each
political subdivision, agency, or instrumentality and each multi-state
agency of which Hawaii (or a territory) is a member, and each public
authority which issues industrial development bonds on behalf of a
private entity, will be regarded as a separate issuer for determining
the diversification of the Fund's portfolio.
The Fund is subject to the risk of price fluctuation of the municipal
securities held in its portfolio which is generally a function of the
underlying credit rating of an issuer, the maturity length of the
securities, the securities' yield, and general economic and interest rate
conditions. Yields on municipal securities vary depending on a variety
of factors, including the general condition of the financial markets and
of the municipal securities market, the size of a particular offering,
the maturity of the obligation and the credit rating of the issue.
Generally, municipal securities of longer maturities produce higher current
yields but are subject to greater price fluctuation due to changes in
interest rates, tax laws, and other general market factors than are
municipal securities with shorter maturities. Similarly, lower rated
municipal securities generally produce a higher yield with shorter
maturities than better rated municipal securities due to the perception
of a greater degree of risk as to the ability of the issuer to pay principal
and interest obligations.
The values of outstanding municipal securities will change in
response to changes in the interest rates payable on new issues of municipal
securities. should such interest rates rise, the value of the outstanding
securities, including those held in the Fund's portfolio, will likely
decline and would sell at a discount from face amount, and if such
interest rates fall, the value of outstanding securities will likely
increase and would sell at a premium to face amount. Changes in the
value of municipal securities held in the Fund's portfolio arising from
these or other factors will cause changes in the net asset value per share
of the Fund.
Certain restrictions exist on the use of tax-exempt bond financing
for various nongovernmental activities. These restrictions may limit the
supply of tax-exempt obligations available for investment.
State of Hawaii. The ability of the Fund to meet its objective is
affected by the ability of the issuers of the Fund's portfolio securities to
meet their payment obligations. There are additional risks associated with
an investment which concentrates in issues of one state. Since the Fund
invests primarily in obligations of issuers located in Hawaii, the
marketability and market value of these obligations may be affected by
certain Hawaiian constitutional provisions, legislative measures, executive
orders, administrative regulations, voter initiatives, and other political
and economic developments. If any such problems arise, they could adversely
affect the ability of various Hawaiian issuers to meet their financial
obligation.
The Hawaiian economy is concentrated in tourism, agriculture and
food processing, construction and military operations. The Hawaiian economy
has been undergoing a slow recovery. This economic recovery continued in the
second quarter of 1996. The State of Hawaii Department of Business, Economic
Development and Tourism ("OBEDT") recently forecasted a continued recovery.
While OBEDT has projected growth of jobs and personal income of 0.0% and
2.7%, respectively, for 1996, the outlook for 1997 and beyond is more
optimistic. As the slow economic expansion continues, the State economy
is currently expected to grow 2.6% in 1997, slightly better than the
forecast for the U.S as a whole.
Tourism is Hawaii's largest economic sector. In 1992 and 1993,
due largely to the recession in the U.S., total visitor arrivals to the
State fell. Signs of recovery in this key economic sector appeared in 1994,
however, with four solid quarters of growth in visitor arrivals. While
growth in visitor arrivals slowed some in the first part of 1995, total
arrivals increased approximately 3% for calendar 1995. This growth
continued during the first half of calendar 1996, with total visitor
arrivals increasing 6.3% from the previous year. Supply constraints
presented by the airline industry continues to pose a risk for the
tourism-based economy. Reflecting the increase in visitor arrivals,
transient accommodation tax ("TAT") revenues and the general excise tax
base for hotel services increased 18.7% and 11.4%, respectively, for the
first half of the year.
Agriculture is dominated by pineapple and sugar production, and has
experienced increased domestic and foreign competition resulting in downsizing
of the industries. Agricultural production has become somewhat more
diversified and now includes cattle, poultry, vegetables, coffee, flowers
and other nursery products, but the agriculture sector continues to decline.
other economic diversification projects are underway, including expansion of
containerized port facilities and aquaculture (both experimental and with
limited commercial production).
The agriculture and food processing industries have shown
improvement. The general excise tax for producing increased 14.7% in
the second quarter of 1996, relative to the year-earlier figure. This
was the largest annual growth in the quarterly figure since the third
quarter of 1993. For the first half of 1996, agricultural wage and
salary jobs were 4.3% higher than in the first half of 1995.
The general excise tax base for contracting grew by 6.7% in the
second quarter over the year earlier quarter and by 6.5% from the first
half of 1995 to the first half of 1996. These were the highest annual
rates of growth for either a quarter or a half year since 1991. On the
other hand, the number of wage and salary jobs in the industry continued
to fall from 26,200 in the second quarter of 1995 to 24,200 in 1996, a 7.6%
drop. For the first half of 1996, construction jobs were 7% lower than in
the year earlier.
Despite growth in key sectors of the economy, the number of
nonagricultural wages and salary jobs declined 1.0% in the first half of
1996, a loss of more than 5,300 jobs. Most of the loss in jobs was due to
the restructuring of the State government and the decline in construction
jobs. In contrast, the number of jobs in agriculture rose from an average
of 7,000 jobs in the first half of 1995 to 7,300 jobs in the first half of
1996. The hotel industry also added 1,000 jobs, from an average of 37,800
jobs in the first half of 1995 to 38,800 jobs in the first half of 1996,
or an increase of 2.6%. The unemployment rate at the end of the second
quarter of 1996 was 6.2%, slightly higher than the rate at the
same time in the prior year.
Governmental activities, including activities usually administered
on a municipal or county level such as public education, libraries, hospitals
and public welfare are the responsibility of the State. This concentration
aggravates an otherwise high level of state debt obligations. Revenue is
derived primarily from excise taxes and individual and corporate income tax.
The constitution limits tax supported debt service to 18.5% of average
General Fund revenues in the three fiscal years preceding any issuance.
The State's historically strong financial position weakened in 1992
as the recession reduced growth in sales and income taxes. Continued
sluggish tax receipts led to a continued decline in the state's unreserved
general fund position. General fund revenues fell approximately 1.1% for
the fiscal year ended June 30, 1995. Real gross state product increased by
2.5% in 1994 and 2.4% in 1995. During the period of September 1994 through
December 1995, General Fund revenue forecasts were reduced by a total of
$619 million for the 21/2 year period from December 1994 through June 1997.
The General Fund balance for FY 1995 fell below 5% of General Fund revenues
for the first time in many years, therefore the State legislature did not
provide for any tax refund or credit for the 1996 tax year.
The important of the revised revenue estimated on the budget prompted
the administration to pursue additional measures to reduce expenditures and
enhance revenues. Executive departments were required to cut $139 million
in FY 1996. A permanent reduction in the size of the State government was
undertaken in FY 1996. For the General Fund, approximately 550 filled and
620 vacant permanent and temporary positions were eliminated. Additional
savings and revenues may be realized from the early retirement program
instituted by the State in FY 1995, transfers of excess funds from special
and revolving funds and the resolution of protested insurance premium taxes.
By the end of FY 1996, the State's financial condition improved slightly.
Revenue collections totaled $3.194 billion and exceeded expenditures by
$70 million. The fund balance rose to $161 million, or 5% of revenues.
For the 1997 fiscal year, the administration proposed that executive
departments carry their 1996 cuts over to 1997. These cuts, together with
other reductions to the FY 1997 budget, resulted in the 1997 General Fund
budget being reduced by $172 million from $3.247 billion to $3.075 billion.
Hawaii's general obligation bonds are rated Aa by Moody's and AA by
S&P. Fitch does not currently rate the State's general obligations.
The State is currently involved in litigation in connection with
the lands transferred to the U.S. by the Republic of Hawaii at Hawaii's
annexation to the U.S. in 1898 ("Ceded Lands"). Ceded Lands are currently
held by the State as a public trust for certain defined purposes. The
litigation concerns amounts of proceeds and income from such Ceded Lands
that were to be paid to the office of Hawaiian Affairs to be used for the
betterment of native Hawaiians. The State is also involved in certain
other litigation.
Commonwealth of Puerto Rico. Subject to the Fund's investment
policies, the Fund may invest in the obligations of the government of Puerto
Rico. Accordingly, the Fund may be adversely affected by local political
and economic conditions and developments within Puerto Rico affecting the
issuers of such obligations.
Puerto Rico has a diversified economy dominated by the manufacturing
and service sectors. Puerto Rico's gross domestic product ("GDP") increased by
3.4% in fiscal year 1996 compared to growth of 3.4% during the previous fiscal
year. Growth is expected to fall to about 2.2% in the 1992 fiscal year .
Manufacturing is currently the largest sector in terms of gross domestic
product and is more diversified than during earlier phases of Puerto Rico's
industrial development. The three largest sectors of the economy (as a
percentage of employment) are services, government and manufacturing. The
North American Free Trade Agreement (NAFTA), which became effective January
1, 1994, could lead to the loss of Puerto Rico's lower salaried or labor
intensive jobs to Mexico. Puerto Rico's unemployment rate of approximately
15.6% in December 1996, is almost triple the national average.
The Commonwealth of Puerto Rico exercises virtually the same control
over its internal affairs as do the fifty states; however, it differs from the
states in its relationship with the federal government. Most federal taxes,
except those such as social security taxes that are imposed by mutual
consent, have not been levied in Puerto Rico. However in August 1996,
Congress eliminated Section 936 of the Code . Section 936 provided tax-free
income to U.S. companies operating in Puerto Rico. Current beneficiaries of
Section 936 will not be effected immediately as the benefits, already limited
by Congress in 1993, are to be phased out over ten years. No benefits at
all will accrue for new investments. The elimination and phaseout of
benefits will likely cause a shift in the economy away from manufacturing
and toward services such as tourism and high-technology industries and will
probably slow economic growth. Damage and losses caused by hurricane
Hortense will aggravate the slowdown. There can be no assurance that
the abolition of Section 936 benefits will not lead to a weakened
economy, a lower rating on Puerto Rico's debt or lower prices for
Puerto Rican bonds that may be held by the Fund.
Puerto Rico's financial reporting was first conformed to generally
accepted accounting principles in fiscal 1990. Nonrecurring revenues have been
used frequently to balance recent years' budgets. In November 1993 Puerto
Ricans voted on whether they wished to retain their Commonwealth status,
become a state or establish an independent nation. The measure was defeated,
with 48.5% voting to remain a Commonwealth, 46% voting for statehood and 4%
voting for independence. Retaining Commonwealth status leaves intact the
current relationship with the federal government. There can be no assurance
that the statehood issue will not be brought to a vote in the future. A
successful statehood vote in Puerto Rico would then require the U.S.
Congress to ratify the election.
Puerto Rico's general obligation bonds are rated A by S&P and Baal
(negative outlook) by Moody's. The elimination of Section 936 discussed
above will not have an immediate effect on Puerto Rico's credit ratings.
Fitch does not currently rate Puerto Rico obligations.
MANAGEMENT OF THE FUND
The Trust has a Board of Trustees which establishes the Fund's
policies and supervises and reviews the management of the Fund. The
day-to-day operations of the Fund are administered by officers elected
by the Board of Trustees. The Board of Trustees consists of the following
individuals:
Ronald E. Kent Chairman of the Board of Leahi Management Company,
Inc. and the Trust, and Registered Representative
of Linsco/Private Ledger Corp.
Ernest W. Albrecht Retired; formerly Director of Traffic and Special
Projects for Pan American World Airways; former
Personal Representative and official Greeter for
the City of Honolulu.
Gail A. Chew Vice President for Visitor Services/community
Relations, Hawaii Visitors Bureau. Formerly with
Estate of James Campbell.
Karen T. Nakamura President, Wallpaper Hawaii, Ltd. and its subsidiary
Remodeling Specialists.
Dianne J. Qualtrough Vice President of Leahi Management Company, Inc. and
President of the Trust, and Branch Manager and
Registered Principal of Linsco/Private Ledger Corp.
Kim F. Scoggins Executive Vice President, Sales, The Prudential
Locations. Formerly, Leasing Agent, Monroe
& Friedlander, Inc. Formerly, Vice President
and Chief Operating Officer, Ralston Enterprises, Inc.
David M. Walker Retired; former Vice President, Fireman's Fund
Insurance Companies, Honolulu, Hawaii.
Investment Manager. Leahi Management Company, Inc., 210 Ward Avenue,
Suite 129, Honolulu, Hawaii 96814, serves as the Fund's Investment Manager
(the "Investment Manager"). Under the Management Agreement with the Fund,
the Investment Manager has the overall responsibility for making
determinations as to the investment of the assets of the Fund and
implementing the same, including determining which brokers or dealers to
use in the execution of portfolio transactions, and for administering all
operations of the Fund. Dianne J. Qualtrough, President and a Trustee of
the Trust, is the portfolio manager for the Fund and is primarily
responsible for all investment decisions on behalf of the Fund. The
Investment Manager's responsibilities include, but are not limited to,
providing office facilities, executive, administrative and clerical
services to the Fund, as well as coordinating with various entities
which deal with the Trust, such as the accountants, attorneys, custodian,
transfer agent and distributor. The Investment Manager is also responsible
for monitoring legal and regulatory compliance, including preparation of
reports and filings with securities administrators and informing the
Trustees of all information necessary for their periodic review as
required by securities laws and otherwise.
Ronald E. Kent, the principal shareholder and President of the
Investment Manager, is the Chairman of the Board and a Trustee of the Trust.
The Investment Manager was organized on August 20, 1987, in order to provide
management services to the Fund. The principals of the Investment Manager
have been in the general securities business for over 25 years; however, the
Fund is the only mutual fund for which the Investment Manager or its
principals currently provide management or administrative services.
The Fund has agreed to pay the Investment Manager a monthly fee at the
annual rate of 1/2 of 1% of the value of the average net assets of the Fund.
For the fiscal year ended September 30, 1996, the Investment Manager received
fees of $233,778.
Since most of the portfolio transactions of the Fund will be on a
principal or net basis, the Fund will incur few if any brokerage commissions.
The Investment Manager considers a number of factors in determining which
brokers or dealers to use for the Fund's portfolio transactions, with the
goal of obtaining prompt execution at the most favorable net price. While
these are more fully discussed in the Statement of Additional Information,
the factors include, but are not limited to, the reasonableness of
commissions and spreads on net trades, the quality of services and
execution, and the availability of research which the Investment Manager
may lawfully and appropriately use in its investment advisory capacities.
Provided the Fund receives prompt execution at competitive prices, the
Investment Manager may also consider the sale of Fund shares as a factor
in selecting broker-dealers for the Fund's portfolio transactions. The
Fund may, from time to time, effect portfolio transactions with, and pay
commissions to, Linsco/Private Ledger Corp., a broker-dealer which is
affiliated with the Investment Manager.
The Fund has adopted a Code of Ethics incorporating policies on
personal securities trading as recommended by the Investment Company
Institute.
Expenses. All expenses incurred in the operation of the Fund
are borne by the Fund, except to the extent specifically assumed by the
Investment Manager and the Distributor. Expenses borne by the Fund include
fees of the Investment Manager; accounting, legal, transfer agent, custodian
and disbursing agent fees; investor servicing costs; taxes, if any;
brokerage fees and commissions; fees and expenses of Trustees who are not
interested persons of or affiliated with the Investment Manager or
Distributor; salaries of certain personnel; costs and expenses of
calculating its daily net asset value; accounting, bookkeeping and
recordkeeping required under the 1940 Act; insurance premiums; trade
association dues; fees and expenses of registering and maintaining
registration of its shares for sale under federal and applicable state
securities laws; payments under the Promotion and Marketing Plan (discussed
below); printing and other expenses relating to the Fund's operations;
amortization of its organization expenses; and any extraordinary and
nonrecurring expenses which are not expressly assumed by the Investment
Manager or the Distributor.
Expense Limitation. The Investment Manager has agreed with the
Fund that if, in any fiscal year, the operating expenses of the Fund exceed
1% of its average annual net assets, the following reduction in fees will
occur. Initially, the Investment Manager will reduce its fees to the extent
necessary to meet the expense limitation, if possible. This obligation is
limited to the extent of the management fees owed by the Fund and therefore
net Fund expenses may exceed 1% per annum.
HOW TO INVEST IN THE FUND
The principal distributor for the shares of the Fund is
Linsco/Private Ledger Corp., 210 Ward Avenue, Suite 129, Honolulu, Hawaii
96814, (808) 522-7000 (the "Distributor"). Shares may be purchased directly
from the Fund or through securities firms that have dealer agreements with
the Distributor. The Distributor does not participate in the management
of the Fund.
The minimum initial investment is $1,000. Subsequent investments
must be at least $50. The Fund may, at its discretion, waive the minimum
investment requirements for purchases in conjunction with certain group or
periodic plans.
All shares are purchased at the current net asset value with no sales
charge.
To purchase shares of the Fund, investors should follow these
instructions:
Initial Investment
- Complete the Fund's Account Application found at the back of
this Prospectus.
- Make your check payable to "Leahi Tax-Free Income Trust".
- Mail or deliver the completed Account Application and your
check to the Fund at the address shown on the Account
Application.
Subsequent Investments
- Detach and complete the reinvestment form attached to your
monthly account statement or order confirmation.
- Make your check payable to "Leahi Tax-Free Income Trust".
- Write your shareholder account number on the check.
- Mail or deliver the check and reinvestment form to the Fund
at the address indicated on such form.
All investments must be made in U.S. dollars and, to avoid fees and
delays, checks should be drawn only on U.S. banks. Investments should not be
made by third party check. A charge may be imposed if any check used for
investment does not clear. The Fund reserves the right to reject any
purchase order in whole or in part.
If an order, together with payment in proper form, is received by the
Fund by the close of trading on the New York Stock Exchange ("NYSE"), Fund
shares will be purchased at the net asset value determined as of the close
of trading on the NYSE on that day. Orders received after the close of
trading on the NYSE will be purchased at the net asset value determined
as of the close of trading on the next business day. It is the
responsibility of any securities firm to transmit orders so that they will
be received by the Distributor on a timely basis.
Automatic Investment Program. Through an automatic investment
program you can invest a fixed dollar amount each month in the Fund. This
results in more shares being purchased when the Fund's net asset value is
relatively low and fewer shares being purchased when the fund's net asset
value is relatively high and may result in a lower average cost per share
than a less systematic investment approach.
Prior to participating in the program, you must establish an account
with the Fund and complete the Authorization Agreement for the program. You
should designate on the Authorization Agreement the dollar amount of each
monthly investment (minimum $50) you wish to make. Thereafter, on the
designated day of each month, an amount equal to the specified monthly
investment will automatically be withdrawn from your bank account and
invested in shares of the Fund.
General. Federal tax regulations require that nonexempt investors
provide a certified Taxpayer Identification Number and certain other required
certifications upon opening or reopening an account in order to avoid
withholding of taxes on taxable distributions and proceeds of redemptions.
The Fund may also be required to withhold tax upon such distributions and
proceeds if it is notified by the Internal Revenue Service or a broker that
the number furnished by the shareholder is incorrect or that the shareholder
is subject to withholding due to a failure to report all interest and dividend
income. See the Fund's Account Application for further information
concerning this requirement.
Share certificates are issued only upon written request. No
certificates are issued for fractional shares.
HOW TO SELL OR REDEEM AN INVESTMENT IN THE FUND
A shareholder has the right to have the Fund redeem all or any
portion of his or her outstanding shares at such shares' current net asset
value on each day the NYSE is open for trading. The redemption price is the
net asset value next determined after the shares are validly tendered for
redemption.
Direct Redemption. A written request for redemption, together with
an endorsed share certificate where one has been issued, must be received by
the Fund's Transfer Agent in order to constitute a valid tender for
redemption. The Transfer Agent requires that the signatures) on the
written request or endorsed certificate be guaranteed by a commercial
bank or trust company or a member firm of a domestic stock exchange or
the National Association of Securities Dealers, Inc.
Telephone Redemption. Shareholders who complete the Telephone
Redemption Authorization portion of the Account Application may redeem
shares on any business day the NYSE is open by calling the Fund at (808)
522-7777 before the close of trading on the NYSE. Redemption proceeds will
be mailed or wired at the shareholder's direction the next business day to
the predesignated account. The minimum amount that may be wired is $1,000
(wire charges, if any, may be deducted from redemption proceeds). During
periods of drastic economic or market changes, the telephone redemption
privilege may be difficult to implement. In this event, shareholders
should follow the other redemption procedures discussed above.
By establishing the telephone redemption service, a shareholder
authorizes the Fund and its Transfer Agent to act upon the instructions of
any person by telephone to redeem from the account for which such service
has been authorized and transfer the proceeds to the bank account designated
in the Authorization. The Fund will employ procedures designed to provide
reasonable assurance that telephone instructions are genuine and, if it does
not do so, it may be liable for any losses due to unauthorized or fraudulent
instructions. The procedures employed by the Fund include requiring
personal identification by account number and social security or tax
identification number, and providing written confirmation of transactions.
The shareholder agrees that neither the Fund nor the Transfer Agent will be
liable for any loss, expense, or cost arising out of any telephone redemption
request by a person reasonably believed to be a shareholder, including any
fraudulent or unauthorized requests.
The Fund may change, modify, or terminate this service at any time.
shareholders may request telephone redemption privileges after an account is
opened; however, the Authorization form will require a separate signature
guarantee.
Systematic Withdrawal. As another convenience, the Fund offers a
Systematic Withdrawal Program whereby a shareholder may request that a check
drawn in a predetermined amount be sent to that shareholder each month or
calendar quarter. A shareholder's account must have Fund shares with a
value of at least $10,000 in order to start a Systematic Withdrawal Program,
and the minimum amount that may be withdrawn periodically under the
Systematic Withdrawal Program is $100. This Program may be terminated or
modified by a shareholder or the Fund at any time without charge or penalty.
Withdrawals made concurrently with purchases of additional shares
may be inadvisable because of tax consequences, and accordingly no additional
purchases may be made while this Program is in effect unless they exceed the
lesser of $5,000 or three times the annual withdrawals. In addition, if
the amount withdrawn exceeds the dividends credited to the shareholder's
account, the account ultimately may be depleted.
General. No charge is made by the Fund on sales or redemptions,
but shares tendered through investment brokers or dealers (other than the
Distributor) may be subject to a service charge by such dealers. Payment of
the redemption proceeds will be made promptly, but not later than seven days
after the receipt of all documents in proper form, including any share
certificates) or a written redemption order with appropriate signature
guarantee. Redemption checks will be drawn on the Bank of Hawaii. The
Fund may suspend the right of redemption under certain extraordinary
circumstances in accordance with the rules of the Securities and Exchange
Commission ("SEC"). The Fund will not mail redemption proceeds until checks
used for the purchase of shares have cleared, which may take up to 15
days. Redemptions are taxable transactions upon which shareholders may
recognize a gain or a loss for federal and state tax purposes.
Due to the relatively high cost of maintaining smaller accounts,
the Fund reserves the right to redeem shares in any account if at any time,
due to redemptions by the shareholder, the total value of a shareholder
account is less than $750. Such redemptions are involuntary on the part of the
shareholder; however, a shareholder will be notified that the value of his or
her account is less than $750 and be allowed 30 days to make additional
investments to bring the value of his account to at least $750.
HOW THE FUND'S PER SHARE VALUE IS DETERMINED
The net asset value of a Fund share is determined at least daily as
of the close of trading on the NYSE on each day the NYSE is open for trading
and is calculated by dividing the value of the Fund's total net assets by the
number of Fund shares outstanding. Portfolio securities for which current
market prices are readily available are valued using the mean between the
bid and the asked prices. Securities for which current market quotations
are not readily available are valued at fair value as determined in good
faith by or under the supervision of the Trust's officers in accordance with
policies which are specifically authorized by the Board of Trustees of the
Trust. Generally, fixed income securities are valued by an independent
pricing service 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 Board of Trustees. Short
term obligations with maturities of sixty days or less are generally valued
at amortized cost as reflecting fair value.
Dividends and Distributions. Dividends from net investment income
are declared daily and paid monthly to shareholders of record on the last
business day of each month. Dividends are declared as to any shares
outstanding beginning at the close of business on the day on which federal
funds for the purchase of the shares have been received by the Fund. The
Fund will distribute any net long-term or short-term capital gains to the
shareholders of the Fund on an annual basis. Dividends and capital gains
distributions are reinvested in additional shares of the Fund at the net
asset value per share on the reinvestment date unless the shareholder has
previously requested in writing to the Transfer Agent that payment be made
in cash.
That part of the net investment income of the Fund which is
attributable to interest from municipal securities which are described in
Section 103(a) of the Code and which is distributed to shareholders, less
certain deductions, will be designated by the Fund as an "exempt-interest
dividend" under the Code. The percentage of income designated as tax-exempt
will be applied uniformly to all distributions made by the Fund during each
fiscal year (ending on September 30) and may differ from the actual
tax-exempt percentage for any particular month. Exempt-interest dividends
to shareholders may be excluded from the shareholder's gross income for
regular federal income tax purposes. Any portion of distributions of net
investment income not designated as tax-exempt should be treated by
shareholders as ordinary income subject to federal income tax.
Federal Taxation. The Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code and has qualified for such
treatment for its fiscal year ended September 30, 1996. It intends to
continue to so qualify. As such, the Fund will not pay any income or excise
taxes on income and capital gains distributed to its shareholders in
accordance with the timing requirements of the Code.
Interest on bonds issued to finance essential state and local
government operations is fully tax exempt for individual shareholders.
However, interest on certain private activity bonds (including loans for
housing and student loans) issued after August 7, 1986, while still
excludable from gross income for regular federal income tax purposes,
will constitute a preference item for taxpayers in determining their
alternative minimum tax. The Fund may acquire such bonds where such
bonds are consistent with the Fund's objective and, in the opinion of the
Investment Manager, such bonds represent the most attractive investment
opportunity then available to the Fund. No more than 20% of the Fund's
net assets will be invested in Hawaii Municipal Securities whose interest
income is treated as a tax preference item under the federal individual
alternative minimum tax. Tax-exempt income also results in a tax preference
item for corporations, which may subject a corporate investor to liability
(or increased liability) under the corporate alternative minimum tax.
Distributions of long-term capital gains, whether in shares or cash,
are taxable as long-term capital gains for federal income tax purposes
regardless of how long a shareholder has held shares of the Fund.
Distributions of short-term capital gains are taxable to shareholders as
ordinary income for federal income tax purposes. The maximum individual
tax rate applicable to ordinary income is currently 39.6%, and the maximum
individual tax rate applicable to net long-term capital gains is currently
28%. Any loss realized upon the redemption of shares within six months from
the date of their purchase will be disallowed to the extent of tax-exempt
dividends received during such period or will be treated as a long-term
capital loss to the extent of any amounts treated as long-term capital gain
distributions during such six-month period. Distributions declared in
October, November or December as of a record date in such a month will be
treated as received by shareholders in December if paid during January of
the following year.
Shareholders will be informed annually of the amount and nature of
the Fund's income and distributions and are required to disclose their
receipt of tax-exempt income, including tax-exempt distributions from the
Fund, on their federal tax returns.
Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of the Fund is not deductible to the extent
attributable to exempt-interest dividends. In addition, persons who are
"substantial users" as defined in the Code (or persons related to
substantial users) of facilities financed by private activity bonds held by
the Fund should consult their tax advisers with respect to whether the Fund's
exempt-interest dividends retain their exclusion under the Code for such
persons. Recipients of Social Security and railroad retirement benefits may
be taxable on a portion of their benefits if their gross incomes exceed
specified threshold amounts; exempt interest dividends may be added to
taxable income solely for the purpose of determining whether the threshold
amount has been exceeded.
Additional information about taxes is set forth in the Statement of
Additional Information section entitled "Distribution and Tax Information".
Shareholders should consult their own advisers concerning federal, state and
local taxation of distributions from the Fund.
State Taxation. The Fund has received an opinion letter from the
Hawaii Department of Taxation regarding the status of the Fund and its
anticipated dividends and distributions. Pursuant to that letter,
individuals, estates, trusts and corporations subject to Hawaii Income
Taxation will not be required to include dividends from the Fund in their
personal or corporate taxable income for Hawaii income tax purposes to the
extent the dividends are derived from interest on obligations of the State
of Hawaii, including any political subdivision, agency or instrumentality
thereof, or of the United States and its territories or possessions, to the
extent such interest is exempt from state income taxes under federal law.
Shares issued by the Fund have no preemptive, conversion, or
subscription rights. Shareholders have equal and exclusive rights as to
dividends and distributions as declared by the Fund and to the net assets
of the Fund upon liquidation or dissolution. Voting rights are not
cumulative, so that the holders of more than 50% of the shares voting in
any election of Trustees can, if they so choose, elect all of the Trustees.
While the Trust is not required to, nor does it intend to, hold annual
meetings of shareholders, such meetings may be called by the Trustees in
their discretion, or upon demand by the holders of 10% or more of the
outstanding shares of the Fund for the purpose of electing or removing
Trustees.
Promotion and Marketing Plan. The Fund has adopted a plan (the
"Plan") pursuant to Rule 12b-1 under the 1940 Act whereby it may reimburse
the Investment Manager each month up to a maximum of 0.25% per annum of the
Fund's average daily net assets for actual expenses incurred in the
promotion and marketing of the Fund's shares, including expenses of the
Distributor which are paid by the Investment Manager. Reimbursable expenses
include the printing of prospectuses and reports used for sales purposes,
advertisements, expenses of preparation and printing of sales literature,
and other expenses related to the promotion and marketing of the Fund's
shares (including any service fees paid to dealers or others who assist in
the promotion and marketing of the Fund's shares). The Plan also provides
that the Investment Manager may include as a promotion and marketing expense
a portion of the Investment Manager's overhead expenses attributable to the
promotion and marketing of the Fund's shares, including personnel and
out-of-pocket costs. The Plan permits the Investment Manager to carry
forward for a maximum of three years (without carrying charge) any promotion
and marketing expenses covered by the Plan.
Reimbursement for expenses under the Plan are made on a "first-in,
first-out" basis. To the extent the amount permitted to be paid to the
Investment Manager in any one year (up to 0.25% of average net assets)
exceeds the Investment Manager's actual promotion and marketing expenses in
that year plus unpaid expenses incurred in the prior three years, the maximum
permissible payment will be reduced for that year accordingly so as not to
exceed the level of the Investment Manager's actual expenses. Under this
type of arrangement, the Investment Manager may not make a profit under the
Plan. From inception of the Plan through the fiscal year ended September 30,
1990, no reimbursement was made by the Fund. The Investment Manager incurred
$20,289 , $15,800 and $9,296 respectively, in expenses during the last three
fiscal years which were reimbursable under the Plan. During the fiscal
year ended September 30, 1996, $10,791 and $17,617 was paid by the Fund
reimbursing promotional expenses incurred in fiscal years 1993 and 1994.
Unreimbursed expenses are not treated as expenses or fixed
liabilities of the Fund until they are actually submitted for reimbursement
by the Investment Manager and the requested reimbursement is approved by the
Board of Trustees in accordance with the Plan. once approved, such expenses
will beliabilities of the Fund even if the Plan is not renewed or is
terminated. Prior to the submission and approval of such Unreimbursed
expenses, the Fund has no liability for the payment of such expenses, even
if the Plan is terminated or not renewed, and such expenses are not
reflected as liabilities in the financial statements of the Fund.
In addition to providing for the expenses discussed above, the Plan
also recognizes that the Investment Manager and Distributor may use their fees
or other resources to pay expenses associated with activities primarily
intended to result in the promotion and marketing of the Fund's shares and
that some of the Fund's normal operating expenses, such as the investment
management and distribution fees, and other payments made in the ordinary
course of their business, are appropriately used in this manner. The
Statement of Additional Information has more details on the Plan.
Custodian, Transfer and Accounting Services Agent. The First
National Bank of Boston is the Fund's Custodian. The Bank of Hawaii, acting
as agent for the Custodian, is the Fund's depository and disbursing agent for
redemptions. Fund/Plan Services, Inc. is the Fund's Transfer and Accounting
Services Agent.
Shareholder Inquiries. Shareholder inquiries should be directed to
Leahi Management Company, Inc. at 210 Ward Avenue, Suite 129, Honolulu, Hawaii
96814, (808) 522-7777.
This Prospectus is not an offering of the securities herein described
in any state in which the offering is unauthorized. No salesman, dealer or
other person is authorized to give information or make any representation
other than those contained in this Prospectus or in the Statement of
Additional Information.
<PAGE>
LEAHI TAX-FREE INCOME TRUST
ACCOUNT APPLICATION
210 Ward Avenue, Suite 129, Honolulu, Hawaii 96814 - (808) 522-7777
ACCOUNT REGISTRATION o Individual o Joint Tenants
o Uniform Transfer to Minors Act o Trust o Other
ACCOUNT NAME(S)
SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER ACCOUNT ADDRESS
PHONE NUMBER BUSINESS PHONE
INITIAL INVESTMENT $ (minimum initial purchase: $1,000.00)
DISTRIBUTION OPTION If no option is indicated, Option A will be assigned.
A. Dividends and capital gains
o distributions reinvested in additional shares.
B. Dividends in cash; capital
o gains distributions in additional shares.
C. Dividends and capital
o gains distributions cash.
TELEPHONE REDEMPTION AUTHORIZATION (Optional)
o Check this box and attach a deposit slip for your bank account
if you wish to make telephone redemptions of $1,000 or more and
have the proceeds wired to the indicated account. (The account
names must match exactly.) Any person you supply with the
required account information can make telephone redemptions
on your behalf. Proceeds from any telephone redemption will be
sent only to the address shown on this account application. As
indicated in the Prospectus neither the trust nor the transfer
agent will be liable for any loss, expense, or cost arising
out of any telephone redemption request by a person reasonably
believed to be a shareholder.
Upon penalties of perjury, the undersigned certifies (1) that the number shown
on this form is my (our) correct taxpayer identification number; (2) that I
(we) am not subject to backup withholding because (a) I (we) have not been
notified that I (we) am subject to backup withholding, or (b) the Internal
Revenue Service has notified me (us) that I (we) am no longer subject to
backup withholding, or (c) I (we) am an exempt recipient, (3) that I (we)
am of legal age and capacity to purchase shares for my (our) own account
or for the account of the organization above; (4) that I (we) have read the
Prospectus and agree to its terms; (5) that the above information is
correct; and (6) if indicated, that the Transfer Agent is authorized to act
upon telephone redemption requests and that I (we) will not hold the Fund or
Transfer Agent liable for any loss, liability, cost or expense for acting
upon telephone instructions.
Signature X Date
Additional Signature (if any) X<PAGE>
LEAHI TAX-FREE INCOME TRUST
ACCOUNT APPLICATION
(continued)
210 Ward Avenue, Suite 129, Honolulu, Hawaii 96814 - (808) 522-7777
SYSTEMATIC WITHDRAWAL PLAN (Optional)
o Check this box if you wish to participate in the Systematic Withdrawal
Program. To qualify for this program investors must establish an
account of at least $10,000.00.
Withdrawal amount: $
($100 minimum)
Withdrawal schedule: o monthly o quarterly
Mail or deliver your application to:
LEAHI TAX-FREE INCOME TRUST
210 Ward Avenue
Suite 129
Honolulu, Hawaii 96814
(808) 522-7777
<PAGE>
LEAHI TAX-FREE INCOME TRUST
AUTHORIZATION AGREEMENT FOR AUTOMATIC INVESTMENT PROGRAM
(ACH DEBITS)
210 Ward Avenue, Suite 129, Honolulu, Hawaii 96814
(808) 522-7777
Leahi Account No. _____________
I (we) hereby authorize Leahi Tax-Free Income Trust, hereinafter called LEAHI,
to initiate debit entry, on or about the [ ]5th or [ ]20th (check one) day of
each month for a monthly investment in my LEAHI account in the amount of
$_____________ (minimum $50) to my(our) [ ]Checking or [ ]Savings (check
one) account at the BANK named below to debit the same to such account.
BANK NAME BRANCH
CITY STATE ZIP
ARA NUMBER (9 digits) ACCOUNT NO.
This authorization is to remain in full force and effect until LEAHI has
received written notification from me (or either of us) of its termination
in such time and in such manner as to afford LEAHI and BANK a reasonable
opportunity to act on it. (PLEASE ATTACH A VOIDED CHECK OR DEPOSIT SLIP FOR
VERIFICATION).
NAME(S)
SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER
SIGNATURE DATE
SIGNATURE(joint) DATE
- -------------------------------------------------------------------------------
INDEMNIFICATION AGREEMENT
TO: The bank named above:
So that you may comply with your Depositor's request and authorization, LEAHI
agrees as follows:
1. To indemnify and hold you harmless from any loss you may suffer arising
from or in connection with the payment of a debit drawn by LEAHI to the order
of the fund, designated on the account of your depositor's executing the
authorization, including any costs or expenses reasonably incurred in
connection with such loss. LEAHI will not, however, indemnify you against
any loss due to your payment of any debit generated against insufficient
funds.
2. To refund to you any amount erroneously paid by you to LEAHI on any such
debit upon a claim for the amount of any such debit on which erroneous payment
was made.
<PAGE>
LEAHI TAX-FREE INCOME TRUST
AUTHORIZATION AGREEMENT FOR AUTOMATIC INVESTMENT PROGRAM
(ACH DEBITS)
MAIL TO:
210 Ward Avenue, Suite 129
Honolulu, HI 96814
(808) 522-7777
INSTRUCTIONS
HOW DOES IT WORK?
1. Leahi Tax-Free Income Trust, through our bank, Bank of Hawaii, draws an
automatic clearing house (ACH) debit against your personal checking/savings
account each month.
2. Choose any amount (at least the minimum subsequent investment amount) that
you would like to invest regularly and your debit will be processed by Leahi
Tax-Free Income Trust.
3. Shares will be purchased and a confirmation sent to you.
HOW DO I SET IT UP?
1. Complete the form (and a fund application if you are establishing a new
account).
2. Attach a voided check to the Automatic Investment Program application.
3. Mail the form to Leahi Tax-Free Income Trust at the above address.
4. As soon as your bank accepts your authorization, debits will be generated
and your Automatic Investment Program started. In order for you to have
Automatic Clearing House (ACH) debits from your account, your bank must be
able to accept ACH transactions and/or be a member of an ACH association.
We cannot guarantee acceptance by your bank.
5. Please allow three to four weeks processing time before the first debit
occurs.
6. Returned items will result in a $20.00 fee being deducted from your
account.
<PAGE>
TRUSTEES OF LEAHI INVESTMENT TRUST
ERNEST W. ALBRECHT, Honolulu, Hawaii
GAIL ANN CHEW, Honolulu, Hawaii
RONALD E. KENT, Honolulu, Hawaii
KAREN T. NAKAMURA, Honolulu, Hawaii
DIANNE J. QUALTROUGH, Honolulu, Hawaii
KIM F. SCOGGINS, Honolulu, Hawaii
DAVID M. WALKER , Honolulu, Hawaii
INVESTMENT MANAGER
LEAHI MANAGEMENT COMPANY, INC.
210 Ward Avenue, Suite 129, Honolulu, Hawaii 96814
DISTRIBUTOR
LINSCO/PRIVATE LEDGER, CORP.
210 Ward Avenue, Suite 129, Honolulu, Hawaii 96814
DEPOSITORY AND DISBURSING AGENT
BANK OF HAWAII
Ward Plaza Branch, Honolulu, Hawaii 96814
CUSTODIAN
THE FIRST NATIONAL BANK OF BOSTON 150
Royall Street, Canton, Massachusetts 02021
TRANSFER AGENT
FUND/PLAN SERVICES, INC.
P.O. Box 874, #2 Elm Street, Conshohocken,
Pennsylvania 19428
AUDITORS
TAIT, WELLER & BAKER
Two Penn Center, Suite 700, Philadelphia
Pennsylvania 19102
LEGAL COUNSEL TO TRUST
SULLIVAN & WORCESTER LLP One Post Office Square
Boston, Massachusetts 02109
LEAHI
TAX-FREE INCOME TRUST
Hawaii's own
double tax-free
mutual fund.
PROSPECTUS
FEBRUARY 1, 1997
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
LEAHI TAX-FREE INCOME TRUST
a series of
LEAHI INVESTMENT TRUST
Ward Plaza
210 Ward Avenue, Suite 129
Honolulu, Hawaii 96814
(808) 522-7777
By and in Exchange for Shares of
FIRST HAWAII MUNICIPAL BOND FUND
a series of
FIRST PACIFIC MUTUAL FUND, INC.
2756 Woodlawn Drive, Suite 6-201
Honolulu, Hawaii 96822
(808) 988-8088
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets of Leahi Tax-Free Income Trust ("Leahi
Fund"), a series of Leahi Investment Trust, to First Hawaii Municipal
Bond Fund ("First Hawaii"), a series of First Pacific Mutual Fund, Inc.,
in exchange for shares of common stock, $.01 par value of First Hawaii,
consists of this cover page and the following described documents, each
of which is attached hereto and incorporated by reference herein:
(1) The Statement of Additional Information of First Hawaii dated
February 1, 1997;
(2) The Statement of Additional Information of Leahi Fund dated
February 1, 1997;
(3) Annual Report of First Hawaii for the year ended September 30, 1996;
(4) Semi-annual Financial Statements (unaudited) of First Hawaii for the
six-month period ended March 31, 1997;
(5) Annual Report of Leahi Fund for the year ended September 30, 1996;
(6) Semi-annual Financial Statements (unaudited) of Leahi Fund for the
six-month period ended March 31, 1997; and
(7) Pro-Forma Combining Financial Statements (unaudited) dated March 31,
1997.
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of First Hawaii and Leahi Funds dated June 20, 1997. A copy of
the Prospectus/Proxy Statement may be obtained without charge by calling or
writing to First Hawaii or Leahi Fund at the telephone numbers or addresses
set forth above.
The date of this Statement of Additional Information is June 20, 1997.<PAGE>
FIRST PACIFIC MUTUAL FUND, INC.
FIRST HAWAII MUNICIPAL BOND FUND SERIES AND
FIRST HAWAII INTERMEDIATE MUNICIPAL 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 Hawaii Municipal Bond Fund
(the "Bond Fund") is the first series of the corporation. First Hawaii
Intermediate Municipal Fund (the "Intermediate Fund") is the second series
of the corporation. Each 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 Hawaii personal
income taxes as is consistent with prudent investment management
and the preservation of shareholders' capital. The Intermediate Fund will
attempt to achieve its objective by investing primarily in a varied portfolio
of investment grade obligations with a dollar weighted average portfolio
maturity of more than three years but not more than ten years. 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 February 1, 1997, (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, 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 Policies and Restrictions . . . . . . . . . . . . . . . . . . . . 2
Additional Investment Considerations . . . . . . . . . . . . . . . . . . . . 3
Descriptions of Municipal Securities Ratings . . . . . . . . . . . . . . . .10
Officers and Directors . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Custodian. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Fund Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Investment Management Agreement. . . . . . . . . . . . . . . . . . . . . . .15
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . .16
The Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
This Statement of Additional Information is dated February 1, 1997.
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of each Fund is to provide investors with as high
a level of income exempt from federal income taxes and Hawaii personal income
taxes as is consistent with prudent investment management and the preservation
of shareholders' capital. The Intermediate Fund will attempt to achieve its
objective by investing primarily in a varied portfolio of investment grade
obligations with a dollar weighted average portfolio maturity of more than
three years but not more than ten years. Each Fund will primarily invest
its assets in obligations issued by or on behalf of the State of Hawaii and
its political subdivisions, agencies and certain territories of the United
States, the interest on which is exempt from federal and Hawaii state income
taxes in the opinion of counsel.
Fundamental investment restrictions limiting the investments of each Fund
provide that each 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 in 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 Hawaii 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 Funds may not change any of these investment restrictions without the
approval of the lesser of (i) more than 50% of the respective Fund's
outstanding shares or (ii) 67% of the respective 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,
a 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. Each Fund anticipates that
the annual portfolio turnover rate of the Fund will be less than 100%. Each
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 respective Fund; honor
redemption orders, meet anticipated redemption requirements and negate gains
from discount purchases; reinvest earnings from portfolio securities in like
securities; or defray nominal 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, and therefore the
Intermediate Fund generally expects to invest in obligations with a dollar
weighted average portfolio maturity of more than three years but not more
than ten years. The two principal 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-printed 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.
Each 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
cur-rent yield than is 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 accordingly
the Intermediate Fund will invest in obligations with a dollar weighted
average portfolio maturity of more than three years but not more than ten
years. 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 each 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. Each Fund will purchase
only those unrated securities which the Investment Manager believes are
comparable to rated securities that qualify for purchase by the respective
Fund.
Hawaii Bonds. Four types of Hawaii bonds have been authorized for issuance
(bonds, notes and other instruments of indebtedness). They are:
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 undertaking,
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.
The constitutional limitation on issuance of State general obligation bonds
is the amount of bonds outstanding that would cause the debt service (principal
and interest payable on such bonds, (either the higher or the current projected
debt service )) to exceed 18 1/2% of the average net general fund revenues of
Hawaii in the three fiscal years just preceding such issuance (general fund
revenue excludes grants from the federal government and receipts excluded in
computing the total State debt). This limitation on the power of the State
to incur indebtedness, applies only to the issuance of general obligation
bonds, is computed at the time of issuance and includes only issued general
obligation bonds.
Because each Fund will ordinarily invest 80% or more of its net assets in
Hawaii obligations, it is more susceptible to factors affecting Hawaii issuers
than is a comparable municipal bond fund not concentrated in the obligations
of issuers located in a single state.
The Hawaiian economy is concentrated in tourism, agriculture, construction
and military operations. Tourism is Hawaii's largest economic sector. 1996
marked the stabilization of the Hawaii visitor industry following the 1991-1993
slump. With visitor arrivals on a record setting pace, statewide occupancies
reaching pre-slump levels and average daily room rates continuing to make up
for ground lost during the slump, the Hawaii tourism industry appears well on
the way to recovery.
Sugar, the State's prime traditional crop, gives clear evidence of
contracting to a fraction of its long-held size and perhaps disappearing
altogether in the not so distant future. Pineapple production and exports
have declined with the end of plantation operations on Lanai and a cannery
closing on Oahu. The shift to a more even mix of plantation and non-
plantation crops means that the decrease in a portion of Hawaii's merchandise
exports will be partly offset by an increase in import-substituting local
production.
Hawaii's construction industry settled into a cyclical trough in 1995 from
which it is expected to rebound in 1997-98 only if private construction grows
enough to offset the stabilization of public construction at levels dictated
by county, state and federal government fiscal austerity. From a current-
dollar value of $4.5 billion in the 12 months ending in July 1991, the peak
year for taxable contracting receipts in the previous construction cycle,
construction fell to a cyclical low of $3.15 billion in 1995, a level
expected to persist through 1996.
The federal government maintains 26 military installations in the State,
encompassing approximately 5% of the land area of the State. To reduce the
number of military installations in the United States, and to ensure the
impartiality of the decision-making process, the Defense Base Closure and
Realignment Commission was established pursuant to the Defense Base Closure
and Realignment Act of 1993. On July 1, 1995, the Commission reported to
President Clinton its final determinations as to the timely closure and
realignment of domestic military installations. Barber Point Naval Air
Station will be closed in 1999. Air squadrons will be redeployed to Seattle,
Washington and to the Kaneohe Marine Corps. Base, Hawaii.
As of the date of this SAI, general obligation bonds issued by the State
of Hawaii are rated Aa by Moody's and AA by S&P. There can be no assurance
that the economic conditions on which these ratings are based will continue
or that particular bond issues may not be adversely affected by changes in
economic, political or other conditions.
The State's overall debt levels are high with debt service equaling about
13% of current expenditures. This is due, in part, to the State's assumption
of many local government functions, including local education. Revenue is
derived primarily from general excise taxes and individual and corporate
income tax. The State General Fund has operated either within planned
deficits or with ending fund balances since 1962. The State's historically
strong financial position is under pressure as the sluggish economy reduces
growth in sales and income taxes. Total revenues for fiscal 1995 declined
5.7 percent.
The State's real gross state product has been slow to build momentum.
Estimates published by the Research and Economic Analysis Division, Hawaii
Department of Business and Economic Development, show the State's growth
rate to have been only 0.3 percent annually from 1992 to 1994, following a
slight decline in 1991. DBED's preliminary estimate of growth for 1995 is
0.8 percent, pointing to a slight gain as Hawaii's economic adjustments of
the early 1990's come to an end.
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 Each 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 canceling
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 Funds 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
actions, 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 Securities and Exchange
Commission ("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 S&P) follows:
An S&P corporate or municipal debt rating is a cur-rent 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 Debt rated "BB", "B", "CCC", or "CC" is regarded, on balance, as
B predominantly speculative with respect to capacity to pay interest and
CCC repay principal in accordance with the terms of the obligation. "BB"
CC indicates the lowest degree of speculation and "CC" the highest degree
of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
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 five 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 payments 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 Aa 1,
A 1, Baa 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.
Name, Age
and Address
Position & Office With the Fund
Principal Occupation During the Past Five Years
*Terrence K.H. Lee (39)
1441 Victoria St #901
Honolulu, HI 96822
Director, President
President, First Pacific Management Corp.;
President, First Pacific Securities
Samuel L. Chesser (41)
180 Miller Ave., #6
Mill Valley, CA 94941
Director
Market Maker and Member Pacific Stock
Exchange: Formerly President, First Pacific
Securities; Vice President, First Pacific
Management Corporation
Clayton W.H. Chow (44)
896 Puuikena Dr.
Honolulu, HI 96821
Director
Sr. Account Executive, Federal Express
Lynden Keala (41)
47-532 Hui Iwa St.
Kaneohe, HI 96744
Director
Market Analyst, Vanier Graphics, Inc.
Stuart S. Marlowe (55)
274 Poipu Drive
Honolulu, HI 96825
Director
President, Record Service, Inc.
*Jean M. Chun (40)
920 Ward Ave., #12G
Honolulu, HI 96814
Secretary
Corporate Secretary, First Pacific
Management Corporation; Corporate
Secretary, First Pacific Securities
*Charlotte A. Meyer (43)
PO Box 2834
Kamuela, HI 96743
Treasurer
Corporate Treasurer, First Pacific
Management Corporation; Corporate
Treasurer, First Pacific Securities
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
Union Bank of California, N.A., of San Francisco, California, is the
custodian of each 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 each Fund.
FUND ACCOUNTING
First Pacific Recordkeeping, Inc., a wholly-owned subsidiary of First
Pacific Management Corporation provides fund accounting for the Fund. The
accounting fee schedule for the Fund is as follows:
$21,500 Minimum to $ 20 Million of Average Net Assets
.0000325 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 and to supply investment research including the selection of securities
for the Fund to purchase, hold or sell and the selection of 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.
Fees paid by Bond Fund for the three most recent fiscal years:
<TABLE>
<S> <C> <C> <C> <C>
Investment Management Management Shareholder Services Service
Agreement Fees Waived Agreement Fees Waived
1996 $265,680 $0 $53,136 $0
1995 $245,192 $13,597 $49,050 $0
1994 $275,965 $11,858 $55,193 $0
</TABLE>
Fees paid by Intermediate Fund for the three most recent fiscal years:
<TABLE>
<S> <C> <C> <C> <C>
Investment Management Management Shareholder Services Service
Agreement Fees Waived Agreement Fees Waived
1996 $29,311 $11,697 $5,862 $5,862
1995 $20,231 $10,437 $4,046 $4,046
1994 $ 1,427 $ 1,427 $ 285 $ 285
</TABLE>
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 brokers 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 Securities and Exchange Commission 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 to furnish reports to the Directors and to maintain
records in connection with such reviews.
Commissions, fees or other remuneration paid to the Distributor for
portfolio transactions for the Bond Fund and Intermediate Fund for the three
most recent fiscal years: 1996-none, 1995-none; 1994-none.
THE DISTRIBUTOR
Shares of the Fund are offered on a continuous basis through First Pacific
Securities, Inc. 2756 Woodlawn Drive, #6-201, Honolulu, Hawaii 96822 (the
"Distributor"), a wholly-owned subsidiary of the Manager. Pursuant to a
distribution agreement, First Pacific Securities 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.
Under the Distribution Agreement between the Fund and the Distributor, the
Distributor pays the expenses of 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 Securities
and Exchange Commission 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, each Fund will pay the distributor for
expenditures which are primarily intended to result in the sale of the
respective 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 from engaging in the business of underwriting, selling or
distributing securities. Accordingly, each 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.
Distribution Plan payments by the Bond Fund, by category, for the most
recent fiscal year are as follows: Advertising $9,475; Seminars and
Meetings $3,905; Printing $2,680; Rent $16,635; Utilities $3,790; Telephone
$3,202; Salaries and Wages $41,370; Employee Benefits $1,198; Miscellaneous
$3,791; Total $86,046.
Distribution Plan payments by the Intermediate Fund, by category, for the
most recent fiscal year are as follows: Advertising $1,376; Seminars and
Meetings $214; Printing $1,243; Salaries and Wages $1,000;
Miscellaneous $657; Total $4,490.
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 for redemptions 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 March 15, 1994. 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 purchases and redemptions 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 and total return quotations used by the Fund are based on
standardized methods of computing performance mandated by Securities and
Exchange Commission rules. An explanation of those and other methods used
by the Portfolios 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 Securities and Exchange
Commission 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.
The yields for the Funds for the 30-day periods ending September 30, 1996 and
December 31, 1996 are set forth below:
Month Ended Month Ended
09/30/96 12/31/96
First Hawaii Municipal Bond Fund 4.64% 4.45%
First Hawaii Intermediate Municipal Fund 4.16% 4.02%
Tax equivalent yield is calculated by dividing that portion of the current
yield (calculated as described above) which is tax exempt by I 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 Securities and Exchange Commission
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 at the end of 1, 5 or 10 year periods of
a hypothetical $1,000 payment made at the beginning of the 1, 5
or 10 year periods.
The average annual total return for the Funds for the periods indicated and
ended September 30, 1996 are set forth below:
<TABLE>
<S> <C> <C> <C>
One Year Five Year Since
Inception
First Hawaii Municipal Bond Fund
(Inception November 23, 1988) 5.62% 6.52% 7.20%
First Hawaii Intermediate Municipal Fund
(Inception July 5, 1994) 3.95% ----- 5.58%
</TABLE>
The average annual total return for the Funds for the periods indicated
and ended December 31, 1996 are set forth below:
<TABLE>
<S> <C> <C> <C>
One Year Five Year Since
Inception
First Hawaii Municipal Bond Fund
(Inception November 23, 1988) 4.17% 6.34% 7.25%
First Hawaii Intermediate Municipal Fund
(Inception July 5, 1994) 3.77% ----- 5.63%
</TABLE>
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 or total return for the Fund as reported by various financial
publications and/or compare yield or total return to yield or total return
as reported by other investments, indices, and averages.
The Lehman 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 each Fund will be audited at least annually
by Tait Weller & Baker, Independent Auditors. The 1996 Annual Report to
Shareholders is incorporated by reference to this Statement of Additional
Information.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1997
LEAHI TAX-FREE INCOME TRUST
210 Ward Avenue, Suite 129
Honolulu, Hawaii 96814
(808) 522-7777
Leahi Tax-Free Income Trust (the "Fund") is a mutual fund whose
investment objective is providing investors with the maximum level of
income exempt from federal and Hawaii income taxes, consistent with
preservation of capital. The Fund seeks to achieve its objective by
investing primarily in obligations which pay interest exempt from federal
and Hawaii income taxes. The Fund is a series of Leahi Investment Trust, a
Massachusetts business trust.
A prospectus for the Fund, dated February 1, 1997, provides the basic
information you should know before purchasing shares of the Fund and may be
obtained without charge from the Fund at the address stated above. This
Statement of Additional Information is not a prospectus. It contains
information in addition to and more detailed than the information set forth
in the Fund's Prospectus. It is intended to provide you with additional
information regarding the activities and operations of the Fund, and should
be read in conjunction with the Prospectus.
TABLE OF CONTENTS
The Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B2
Investment objective and Policies. . . . . . . . . . . . . . . . . . . . B2
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . B6
Distributions and Tax Information. . . . . . . . . . . . . . . . . . . . B8
Trustees and officers. . . . . . . . . . . . . . . . . . . . . . . . . .B12
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . .B13
Execution of Portfolio Transactions. . . . . . . . . . . . . . . . . . .B14
Additional Purchase and Redemption Information . . . . . . . . . . . . .B14
Determination of Share Price . . . . . . . . . . . . . . . . . . . . . .B15
Promotion and Marketing of Fund Shares . . . . . . . . . . . . . . . . .B15
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . .B18
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . .B19
Appendix Description of Municipal Securities Ratings . . . . . . . . . .B20
<PAGE>
THE TRUST
The Leahi Investment Trust (the "Trust") is an open-end, non-diversified
management investment company organized on July 23, 1987 as a Massachusetts
business trust. The Trust currently issues shares of beneficial interest,
$ .01 par value per share, in one series, the Leahi Tax-Free Income Trust.
INVESTMENT OBJECTIVE AND POLICIES
The following discussion supplements the discussion of the Fund's
investment objective and policies as set forth in the Prospectus. There can
be no assurance, however, that the objective of the Fund will be attained.
MUNICIPAL SECURITIES
The Prospectus describes the general categories and characteristics of
municipal securities. Discussed below are the major attributes of the various
municipal and other securities in which the Fund may invest.
Municipal Notes:
Tax anticipation notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax
revenues, to be payable from these specific future taxes. They are usually
general obligations of the issuer, secured by the taxing power of the issuer
for the payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other
kinds of revenue, such as federal revenues available under the Federal Revenue
Sharing Program. They also are usually general obligations of the issuer.
Bond anticipation notes normally are issued to provide interim financing
until long-term financing can be arranged. The long-term bonds then provide
the money for the repayment of the notes.
Construction loan notes are sold to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the Federal Housing Administration under
the Federal National Mortgage Association or the Government National Mortgage
Association.
Short-term discount notes (tax-exempt commercial paper) are short-term
(365 days or less) promissory notes issued by municipalities to supplement
their cash flow.
Municipal Bonds:
Municipal bonds, which meet longer term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds.
General obligation bonds are issued by states, counties, cities, towns,
and regional districts. The proceeds of these obligations are used to fund a
wide range of public projects, including construction or improvement of
schools, highways and roads, and water and sewer systems. The basic
security behind general obligation bonds is the issuer's pledge of its
full faith, credit and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service
may be limited or unlimited as to the rate or amount of special assessments.
Revenue bonds are not secured by the full faith, credit and taxing power
of their issuer. Rather, the principal security for revenue bonds is generally
the net revenue derived from a particular facility, group of facilities, or, in
some cases, the proceeds of a special excise or other specific revenue source.
Revenue bonds are issued to finance a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges, universities and hospitals.
Although the principal security behind these bonds may vary, many provide
additional security in the form of a debt service reserve fund whose money
may be used to make principal and interest payments on the issuer's
obligations. Housing finance authorities have a wide range of security,
including partially or fully insured mortgages, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other
public projects. Some authorities are provided further security in
the form of a state's assurance (although without obligation) to make up
deficiencies in the debt service reserve fund.
Industrial development bonds are in most cases revenue bonds and are
issued by or on behalf of public authorities to raise money to finance
various privately-operated facilities for business, manufacturing, housing,
sports, and pollution control. These bonds are also used to finance public
facilities such as airports, mass transit systems, ports, and parking. The
payment of the principal and interest on such bonds depends solely on the
ability of the facility's user to meet its financial obligations and the
pledge, if any, of the real and personal property so financed as security
for such payment. The Fund will not purchase industrial development bonds
to the extent that the interest paid by particular bonds is not excluded
from gross income for federal income tax purposes pursuant to the Tax Reform
Act of 1986.
There may, of course, be other types of municipal securities that
become available which are similar to the foregoing described municipal
securities in which the Fund may invest.
Other Municipal Securities:
Variable or floating rate demand notes ("VRDN's") are tax-exempt
obligations which contain a floating or variable interest rate adjustment
formula and an unconditional right of demand to receive payment of the
unpaid principal balance plus accrued interest upon a short notice period
prior to specified dates, either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument. The interest rates are adjustable, at intervals ranging from
daily to up to six months, to some prevailing market rate for similar
investments, such adjustment formula being calculated to maintain the
market value of the VRDN at approximately the par value of the VRDN
upon the adjustment date. The adjustments are typically based upon the
prime rate of a bank or some other appropriate interest rate adjustment
index.
The Fund will decide which variable or floating rate demand instruments
it will purchase in accordance with procedures prescribed by the Trust's Board
of Trustees to minimize credit risks. Any VRDN must be of high quality as
determined by the Board of Trustees, with respect to both its long-term
and short-term aspects, except that where credit support for the instrument
is provided even in the event of default on the underlying security, the
Fund may rely only on the high quality character of the short-term aspect of
the demand instrument, i.e., the demand feature. A VRDN which is unrated must
have high quality characteristics similar to those rated in accordance with
policies and guidelines determined by the Trust's Board of Trustees. If the
quality of any VRDN falls below the high quality level required by the Board
of Trustees, the Fund must dispose of the instrument within a reasonable
period of time by exercising the demand feature or by selling the VRDN in
the secondary market, whichever is believed by the Investment Manager to be
in the best interests of the Fund and its shareholders.
The Fund may also invest in VRDN's in the form of participation
interests ("Participating VRDN's") in variable or floating rate tax-exempt
obligations held by a financial institution, typically a commercial bank
("institution"). Participating VRDN's provide the Fund with a specified
undivided interest (up to 100%) of the underlying obligation and the right to
demand payment of the unpaid principal balance plus accrued interest on the
Participating VRDN's from the institution upon a specified number of days'
notice. In addition, the Participating VRDN is backed by an irrevocable
letter of credit or guarantee of the institution. The Fund has an undivided
interest in the underlying obligation and thus participates on the same basis
as the institution which typically retains fees out of the interest paid on
the obligation for servicing the obligation, providing the letter of credit
and issuing the repurchase commitment.
The Fund may purchase from banks, brokers or dealers, or other financial
institutions, specified municipal securities with puts. A "put" is a right to
sell a defined underlying security within a specified period of time and at a
specified exercise price, which may be sold only with the underlying security.
A "standby commitment" is a put that entitles the holder to achieve same-day
settlement and to receive an exercise price equal to the amortized cost of the
underlying security plus accrued interest, if any, at the time of exercise.
There are diversification requirements with respect to puts which may be
acquired by the Fund, to insure that the Fund's liquidity will not be impaired
by relying too heavily upon the same institution or a group of institutions.
For purposes of the diversification requirements, a put will be considered to
be from the institution to which the Fund must look for payment of the
exercise price. In the case of a standby commitment, the put would be from
the institution that has agreed to repurchase the underlying security, while
in the case of a demand feature, the put would be from the party that has
provided a letter of credit or other credit facility to insure payment of
the exercise price. The diversification limitations discussed in the
Prospectus are applied to the securities subject to puts from the same
institution and not to the puts themselves.
A standby commitment may not be used to affect the Fund's valuation
of the municipal security underlying the commitment. Any consideration paid
by the Fund for the standby commitment, whether paid in cash or by paying
a premium for the underlying security, which increases the cost of the
security and reduces the yield otherwise available from the same security,
will be accounted for by the Fund as unrealized depreciation until the
standby commitment is exercised or expires.
Management understands that the Internal Revenue Service (the "Service")
has issued a revenue ruling to the effect that, under specified circumstances,
a registered investment company will be the owner of tax-exempt municipal
obligations acquired subject to a put option. The Service has also issued
private letter rulings to certain taxpayers (which do not serve as precedent
for other taxpayers) to the effect that tax-exempt interest received by a
regulated investment company with respect to such obligations will be
tax-exempt in the hands of the company and may be distributed to its
shareholders as exempt-interest dividends. The Service has subsequently
announced that it will not ordinarily issue advance ruling letters as to
the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right
to cause the security, or the participation interest therein, to be purchased
by either the seller or a third party. The Fund intends to take the position
that it is the owner of any municipal obligations acquired subject to a
standby commitment or other put and that tax-exempt interest earned with
respect to such municipal obligations will be tax-exempt in its hands.
There is no assurance that standby commitments will be available to the
Fund nor has the Fund assumed that such commitments would continue to be
available under all market conditions.
The Fund may also purchase escrow secured bonds, which are created
when an issuer refunds in advance of maturity (or pre-refunds) an outstanding
bond issue which is not immediately callable and it becomes necessary or
desirable to set aside funds for redemption of the bonds at a future date.
In an advance refunding the issuer will use the proceeds of a new bond issue
to purchase high grade interest-bearing debt securities which are then
deposited in an irrevocable escrow account held by a trustee bank to secure
all future payments of principal and interest of the advance refunded bond.
Escrow secured bonds will often receive a triple A rating from the major
rating services.
U.S. Government obligations which may be owned by the Fund are issued by
the U.S. Treasury and include bills, certificates of indebtedness, notes and
bonds, or are issued by agencies and instrumentalities of the U.S. Government
and backed by the full faith and credit of the U.S. Government.
Certificates of deposit are short-term obligations of commercial banks.
Commercial paper are promissory notes issued by municipalities or corporations
in order to finance their short-term credit needs.
REPURCHASE AGREEMENTS
The Fund may invest its assets in eligible U.S. Government securities
and concurrently enter into repurchase agreements with respect to such
securities. Under such agreements, the seller of the securities agrees to
repurchase such securities at a mutually agreed upon time and price. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same,
with interest at a stated rate due to the Fund together with the repurchase
price upon repurchase. In either case, the income to the Fund is unrelated
to the interest rate on the U.S. Government securities. such repurchase
agreements will be made only with member banks of the federal reserve system
and primary government securities dealers whose creditworthiness has been
evaluated as satisfactory by the Investment Manager in accordance with
guidelines adopted by the Trust's Board of Trustees. The Fund will not
generally enter into repurchase agreements with more than seven days to
maturity if, as a result, more than 5% of the value of the Fund's total
assets would be invested in such repurchase agreements.
For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Fund to the seller of the
U.S. Government securities subject to the repurchase agreement. It is not
clear whether a court would consider the U.S. Government securities
acquired by the Fund subject to a repurchase agreement as being owned by the
Fund or as being collateral for a loan by the Fund to the seller. In the
event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the U.S. Government securities before its
repurchase under a repurchase agreement, the Fund may encounter delays and
incur costs before being able to sell the securities. Delays may involve
loss of interest or a decline in price of the U.S. Government securities.
If a court characterizes the transaction as a loan and the Fund has not
perfected a security interest in the U.S. Government securities, the Fund
may be required to return the securities to the seller's estate and be
treated as an unsecured creditor of the seller. As an unsecured creditor,
the Fund would be at the risk of losing some or all of the principal and
income involved in the transaction. As with any unsecured debt instrument
purchased for the Fund, the Investment Manager seeks to minimize the risk of
loss through repurchase agreements by analyzing the creditworthiness of the
obligor, in this case the seller of the U.S. Government securities.
Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the securities.
However, the Fund will always receive as collateral for any repurchase
agreement securities, the market value of which is equal to at least 100%
of the amount invested by the Fund plus accrued interest, and the Fund will
make payment against such securities only upon account of its Custodian. If
the market value of the U.S. Government securities subject to the repurchase
agreement becomes less than the repurchase price (including interest), the
Fund will direct the seller of the U.S. Government securities to deliver
additional securities so that the market value of all securities subject to
the repurchase agreement will equal or exceed the repurchase price plus
accrued interest. It is possible that the Fund will be unsuccessful in
seeking to impose on the seller a contractual obligation to deliver
additional securities.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted
by the Fund and (unless otherwise noted) are fundamental and cannot be
changed without the affirmative vote of a majority of the Fund's
outstanding voting securities as defined in the 1940 Act. The Fund may not:
1. As of the last day of each fiscal quarter, have more than 25% of its total
assets invested in the securities of any one issuer (other than the U.S.
Government and its agencies and instrumentalities), or, with respect to at
least 50% of the Fund's total assets, (a) have more than 5% of the total
assets of the Fund invested in any one such issuer or (b) own more than
10% of the outstanding voting securities or any one issuer.
2. Make loans to others, except (a) through the purchase of debt securities
in accordance with its investment objective and policies, and (b) to the
extent the entry into a repurchase agreement is deemed to be a loan.
3. (a) Borrow money, except temporarily for extraordinary or emergency
purposes from a bank and then not in excess of 25% of its total net assets
(at the lower of cost or fair market value). Any such borrowing will be
made only if immediately thereafter there is an asset coverage of at least
300% of all borrowings, and no additional investments may be made while any
such borrowings are in excess of 5% of total assets.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with any such borrowings.
4. Purchase securities on margin, sell securities short, participate on a
joint or joint and several basis in any securities trading account, or
underwrite securities except insofar as the Fund may be technically deemed
an underwriter under the federal securities laws in connection with the
disposition of portfolio securities. (This restriction does not preclude
the Fund from obtaining such short-term credit as may be necessary for the
clearance of purchases and sales of its portfolio securities.)
5. Buy or sell interests in oil, gas or mineral exploration or development
programs, or real estate, provided that this limitation shall not prohibit
the purchase of municipal and other debt securities secured by real estate
or interests therein.
6. Purchase or hold securities of any issuer, if, at the time of purchase or
thereafter, any of the Trustees or officers of the Trust or the Fund's
Investment Manager owns beneficially more than 1/2 of 1%, and all such
Trustees or officers holding more than 1/2 of 1% together own beneficially
more than 5%, of the issuer's securities.
7. Purchase or sell common stocks, preferred stocks, warrants or other equity
securities, commodities or commodity contracts, or futures contracts, or
invest in put, call, straddle or spread options, except that the Fund may
purchase, hold and dispose of "obligations with puts attached" in accordance
with its investment policies.
8. Invest in securities of other investment companies (except as they
may be acquired as part of a merger, consolidation or acquisition of
assets) which would result in the Fund (i) owning more than 3% of the
total outstanding voting stock of another registered investment company;
(ii) investing more than 5% of its total assets in the securities of a
single registered investment company; or (iii) investing more than 10% of
its total assets in the securities (other than treasury stock) of registered
investment companies. (This is an operating policy which may be changed upon
notice to shareholders.)
9. Invest, in the aggregate, more than 10% of its assets in securities with
legal or contractual restrictions on resale, securities which are not readily
marketable, and repurchase agreements with more than seven days to maturity.
10. Invest in any issuer for the purposes of exercising control or management.
11. Issue senior securities, as identified in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into repurchase
transactions.
If a percentage restriction is adhered to at the time of investment,
a subsequent increase or decrease in the percentage resulting from a change
in values or assets will not constitute a violation of that restriction.
DISTRIBUTIONS AND TAX INFORMATION
DISTRIBUTIONS:
The Fund declares dividends from net investment income daily and pays
such dividends on a monthly basis as stated in its Prospectus. The Fund's
policy is to declare as dividends 100% of its net investment income during
each calendar year. The Fund will also declare a distribution of net
realized long-term and undistributed short-term capital gains, if any,
shortly after the Fund's fiscal year-end, although an additional
distribution may be made in December if necessary to avoid federal excise
tax.
TAX INFORMATION:
Federal Taxation
The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code") and qualified as such for its fiscal year ended September 30, 1996.
It intends to continue to so qualify, which requires compliance with
certain requirements regarding the source of its income, diversification
of its assets, and timing of its distributions. The Fund's policy is to
distribute to its shareholders all of its investment company taxable income,
its net tax-exempt income, and any net realized capital gains for each fiscal
year in a manner which complies with the distribution requirements of the
Code, so that the Fund will not be subject to any Federal income or excise
taxes.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90% of its
tax-exempt net investment income and at least 90% of its taxable net
investment income (including net short-term capital gains), if any, and is
not subject to federal income tax to the extent that it distributes annual
taxable net investment income and net realized capital gains in the manner
required under the Code.
The Fund will be subject to a 4% nondeductible annual excise tax on
amounts required to be but not distributed under a prescribed formula. The
formula requires payment to shareholders during a calendar year of
distributions representing at least 98% of the Fund's ordinary income for
the calendar year (including investment company income and net capital
gains, and excluding gains and losses from the sale or exchange of capital
assets and the dividends-paid deductions) and at least 98% of the excess of
its capital gains over capital losses realized during the one-year period
ending October 31 during such year.
Subchapter M of the Code permits the character of tax-exempt
dividends distributed by a regulated investment company to flow through
as tax-exempt interest to its shareholders, provided that at least 50% of
the value of its assets at the end of each quarter of its taxable year is
invested in state, municipal and other obligations, the interest on which
is exempt under Section 103(a) of the Code. The Fund intends to satisfy
this 50% requirement in order to permit its distributions of tax-exempt
interest to be treated as such for federal income tax purposes in the hands
of the shareholders. Distributions to shareholders of tax-exempt interest
earned by the Fund for the taxable year are therefore not subject to
federal income tax, although they may be subject to the individual or
corporate alternative minimum taxes described below. A portion of
original issue discount relating to stripped municipal bonds and
their coupons may be treated as taxable income under certain circumstances.
Distributions of net investment company income, including the excess of
net short-term capital gains over net long-term capital losses, are taxable to
shareholders as ordinary income. Distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares of the
Fund have been held by such shareholders. Such distributions are not
eligible for the dividends received deduction. Any loss realized upon the
redemption of shares within six months from the date of their purchase will
be disallowed to the extent of tax-exempt dividends received during such
period or will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gain during such
six-month period.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment,
requiring federal income taxes to be paid thereon by the Fund, the Fund
will elect to treat such capital gains as having been distributed to
shareholders. As a result, shareholders will report such capital gains as
long-term capital gains, and will be able to claim their share of federal
income taxes paid by the Fund on such gains as a credit against their own
federal income tax liability, and will be entitled to increase the adjusted
tax basis of their Fund shares by the difference between their pro rata
share of such gains and their tax credit.
Distributions of any net investment company taxable income and net
realized capital gains will be taxable as described above, whether received
in shares or in cash. Shareholders electing to receive distributions in the
form of additional shares will have a cost basis for federal income tax
purpose in each share so received equal to the net asset value of a share
on the reinvestment date.
All distributions of taxable and tax-exempt income and net realized
capital gain, whether received in shares or in cash, must be reported by
shareholders on their federal income tax returns.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of the Fund will not be deductible for federal income tax purposes.
Under rules used by the Internal Revenue Service to determine when borrowed
funds are used for the purpose of purchasing or carrying particular assets,
the purchase of shares may be considered to have been made with borrowed
funds even though the borrowed funds are not directly traceable to the
purchase of shares.
Under the federal income tax law, the Fund will be required to report to
the Internal Revenue Service all distributions of taxable income and capital
gains as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of exempt shareholders, which include most
corporations. Pursuant to the backup withholding provisions of Section 3406
of the Code, distributions of any taxable income and capital gains and
proceeds from the redemption of Fund shares may be subject to withholding of
federal income tax at the rate of 31% in the case of nonexempt shareholders
who fail to furnish the Fund with their taxpayer identification numbers and
with required certifications regarding their status under the federal income
tax law or if the Fund is notified by the Internal Revenue Service or a
broker that the number furnished by the shareholder is incorrect or that the
shareholder is subject to withholding due to a failure to report all interest
and dividend income. Under a special exception, distributions made by the
Fund will not be subject to backup withholding if the Fund reasonably
estimates that at least 95% of all such distributions will consist of
tax-exempt dividends. If the withholding provisions are applicable, any
such distributions and proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Corporate shareholders should certify their exempt status in order to avoid
possible erroneous application of backup withholding.
Up to 85% of an individual's social security or tier I railroad
retirement benefits may be included in federal taxable income for benefit
recipients whose adjusted gross income (including income from tax-exempt
sources such as tax-exempt bonds and the Fund) plus 50% of their benefits
exceeds certain base amounts. Income from the Fund is still tax-exempt to
the extent described in the Prospectus; it is only included in the
calculation of whether a recipient's income exceeds certain established
amounts.
Section 147(a) of the Code prohibits exemption from taxation of
interest on certain governmental obligations to persons who are "substantial
users" (or persons related thereto) of facilities financed by such
obligations. The Fund has not undertaken any investigation as the users of
the facilities financed by tax-exempt bonds in its portfolio.
Federal tax legislation enacted in 1986 included several provisions that
may affect the supply of, and the demand for, tax-exempt bonds, as well as the
tax-exempt nature of interest paid thereon. For example:
(i) Interest on certain private activity bonds issued after August 15,
1986 (or, in certain cases, on or after September 1, 1986) is generally not
exempt from regular tax, although it might have been exempt under prior law.
These include bonds the proceeds of which are used to finance sports
facilities, convention facilities, industrial parks, and nuclear waste
disposal facilities;
(ii) Interest on all private activity bonds issued on or after August 8,
1986 (or, in certain cases, September 1, 1986) other than qualified Section
501(c)(3) bonds or refundings of bonds originally issued before such dates
is subject to the individual or corporate alternative minimum tax;
(iii) Interest on all tax-exempt bonds, regardless of when issued,
constitutes a tax preference item subject to the corporate alternative
minimum tax because 50% of the difference between pre-tax adjusted book
income and alternative minimum taxable income or 75% of the difference
between adjusted current earnings and alternative minimum taxable income
is subject to the corporate alternative minimum tax; and
(iv) Due to the substantial number and range of requirements to be
satisfied by tax-exempt bonds in the future, the risk of retroactive
revocation of the tax-exempt status of bonds due to acts or omissions
on the part of issuers or conduit borrowers after the date of issuance
will in general be greater than under prior law but will vary for different
types of bonds.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. domestic corporations, partnerships, trusts and estates.
Each shareholder who is not a U.S. person should consider the U.S. and
foreign tax consequences of ownership of shares of the Fund, including the
possibility that such a shareholder may be subject to a U.S. withholding
tax at a rate of 30% (or at a lower rate under an applicable income tax
treaty) on amounts constituting ordinary income received by such persons.
State Taxation
The Hawaii Department of Taxation, in an opinion letter issued to
the Fund, has indicated that income received by the Fund, as a regulated
investment company under the Code, and distributed to shareholders who are
subject to Hawaii income taxation in compliance with the Code, will
be treated for Hawaii income tax purposes in the same manner as though it
were received by the shareholders directly from the issuer. The Hawaii
income tax treatment of dividends and distributions of the Fund will,
therefore, depend on the source of such dividends.
Hawaii income tax law provides that interest paid with respect to
obligations issued by the State of Hawaii, including any political
subdivision, agency or instrumentality thereof, shall be treated by
Hawaiian recipients thereof as items of interest excludable from income for
Hawaii income tax purposes. Hawaii also does not tax interest where
prohibited by federal law, as is the case with interest derived from
obligations of U.S. possessions, including Puerto Rico, Guam, and the
Virgin Islands.
Therefore, investment income of the Fund derived from Hawaii
obligations and obligations of the U.S. Government and certain of its
possessions, when distributed to individuals, estates, trusts and
corporations subject to Hawaii income taxation, will not be required to
be included in the personal or corporate Hawaii income tax of such
shareholders. Dividends derived from other sources and capital gains
distributions will be taxable to Hawaii shareholders under the Hawaii
income tax law.
General
Each distribution by the Fund is accompanied by a brief explanation
of the form and character of the distribution. In January of each year the
Fund will issue to each shareholder a statement of the federal income tax
status of all distributions, including a statement of the percentage of the
prior calendar year's distributions which the Fund has designated as tax
exempt, and the percentage of such tax-exempt distributions treated as a
tax-preference item for purposes of the alternative minimum tax.
Shareholders should consult their tax advisers about the application
of the provisions of tax law described in this Statement of Additional
Information in light of their particular tax situations.
TRUSTEES AND OFFICERS
The Trustees of the Trust serve for an indefinite term. The Trustees
are responsible for the overall management of the Fund, including general
supervision and review of its investment activities. The Trustees, in turn,
elect the officers of the Trust, who are responsible for administering the
day-to-day operations of the Trust and the Fund. The addresses of the
current Trustees and executive officers are set forth below.
Ernest W. Albrecht - 1010 Wilder Avenue #802, Honolulu, Hawaii 96822.
Gail A. Chew - 50 Bates Street #G, Honolulu, Hawaii 96817.
Ronald E. Kent* - 210 Ward Avenue, Suite 129, Honolulu, Hawaii 96814.
Karen T. Nakamura - 3160 Waialae Avenue, Honolulu, Hawaii 96816.
Dianne J. Qualtrough* - 210 Ward Avenue, Suite 129, Honolulu, Hawaii 96814.
Kim F. Scoggins - 220 South King Street, Suite 1806, Honolulu, Hawaii 96813
David Walker - 4611 Kilauea Avenue, Honolulu, Hawaii 96816.
__________
* Mr. Kent and Ms. Qualtrough are "interested persons" of the Trust.
The Trustees of the Fund who are not affiliated with the Fund's Investment
Manager receive $100.00 for each meeting attended. The officers of the Fund
receive no compensation directly from the Fund for performing the duties of
their offices.
As of November 30, 1996, the Trustees and officers of the Trust as a
group owned less than 1% of the outstanding shares of the Fund.
<PAGE>
MANAGEMENT OF THE FUND
The following information supplements, and should be read in con unction
with, the section in the Fund's prospectus entitled "Management of the Fund".
Investment Manager
The Investment Manager serves as the Fund's Investment Manager pursuant
to an Investment Management Agreement with the Fund which was first approved
by the Board of Trustees, including those Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust or the Investment Manager
(the "Independent Trustees"), on October 29, 1992, and by a majority of the
Fund's outstanding shares at a special meeting of shareholders held on
January 7, 1993. The Investment Management Agreement continues in effect
if approved annually by (i) the Board of Trustees of the Trust, or (ii) the
vote of a majority of the Fund's outstanding voting securities (as defined
in the 1940 Act), provided that in either event the continuance also is
approved by a majority of the Independent Trustees, cast in person at a
meeting called for the purpose of voting on such approval. The Investment
Management Agreement was last approved by the Board of Trustees of the Trust,
including a majority of the Independent Trustees, on October 31, 1996. The
Investment Management Agreement is terminable without penalty on 60 days'
written notice, by the Board of Trustees of the Trust, by vote of the
holders of a majority of the Fund's shares, or by the Investment Manager.
The Investment Management Agreement will terminate automatically in the
event of its assignment (as defined in the 1940 Act).
The Investment Management Agreement provides that the Investment
Manager will not be liable to the Trust or any shareholder for any act or
omission in connection with its services to the Trust, in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of
its obligations or duties under the Agreement.
The Investment Manager, Leahi Management Company, Inc., is a Hawaii
corporation. Ronald E. Kent is the principal shareholder and President of
the Investment Manager. Dianne J. Qualtrough is the Vice President of the
Investment Manager and Portfolio Manager of the Fund.
The use of the name "Leahi" by the Trust and the Fund is pursuant to a
license granted by the Investment Manager, and in the event the Investment
Management Agreement with the Fund is terminated, the Investment Manager
has reserved the right to require the Trust to amend its Declaration
of Trust to remove the reference to the name "Leahi" and to cease using
such name in the name of the Fund.
For the fiscal year ended September 30, 1994, the Investment Manager was
paid $219,675, no part of which was waived. Total expenses paid by the Fund
for the fiscal year ended September 30, 1994, amounted to 0.85% of average
net assets. For the fiscal year ended September 30, 1995, the Investment
Manager was paid $214,800, no part of which was waived. Total expenses
paid by the Fund for the fiscal year ended September 30, 1995, amounted
to .83% of average net assets. For the fiscal year ended September 30,
1996, the Investment Manager was paid $233,778, no part of which was waived.
Total expenses paid by the Fund for the fiscal year ended September 30, 1996,
amounted to .85% of average net assets.
EXECUTION OF PORTFOLIO TRANSACTIONS
Under the Investment Management Agreement, the selection of brokers and
dealers to execute transactions is made by the Investment Manager in
accordance with criteria set forth in the Investment Management Agreement
and any directions which the Trustees may give. Since most purchases made
by the Fund are principal transactions at net prices, the Fund incurs little
or no brokerage commissions. The Fund will not purchase securities on a
principal basis from any broker-dealer which is affiliated with the Fund or
the Investment Manager.
The Fund deals directly with the selling or purchasing principal or market
maker without incurring charges for the services of a broker on its behalf
unless it is determined that a better price or execution may be obtained by
utilizing the services of a broker. Purchases from dealers include a spread
between the bid and asked price and purchases of portfolio securities from
underwriters include a commission or concession paid by the issuer to the
underwriter. The Fund seeks to obtain prompt execution of orders at the
most favorable net price. Transactions may be directed to dealers for
services rendered by such dealers in the execution of orders or in return
for the Investment Manager's receipt of special research and statistical
information which the Investment Manager may lawfully and appropriately
use in its investment advisory capacities. It is not possible to place a
dollar value on the special executions or on the research services received
by the Investment Manager from dealers effecting transactions in portfolio
securities. The allocation of transactions in order to obtain additional
research services permits the Investment Manager to supplement its own
research and analysis activities and to obtain the views and information of
individuals and research staffs of other securities firms. Provided
that the best execution is obtained, sales of Fund shares may also be
considered as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions. For the fiscal years ended 1994, 1995 and
1996 the Fund paid no brokerage commissions.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by the Investment Manager (or any
of its affiliates) are considered at or about the same time, transactions in
such securities will be allocated among the several investment companies and
clients in a manner deemed equitable to all by the Investment Manager, taking
into account the respective sizes of the entities and the amount of
securities to be purchased or sold. It is possible that in some cases this
procedure could have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases, however, it is
possible that the ability to participate in volume transactions and to
negotiate lower commissions will be beneficial to the Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion (i) to suspend the
continued offering of the Fund's shares, (ii) to reject purchase orders in
whole or in part when, in the judgment of the Investment Manager, such
rejection is in the best interest of the Fund, and (iii) to reduce or waive
the minimum for initial and subsequent investments for certain fiduciary
accounts or under circumstances where certain economics can be achieved in
sales of the Fund's shares.
Payments to shareholders for shares of the Fund redeemed directly from
the Fund will be made as Promptly as possible but no later than seven days
after receipt by the Fund's Transfer Agent of the written request in proper
form, with the appropriate documentation as stated in the Prospectus, except
that the Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange
is restricted as determined by the securities and Exchange Commission
("SEC") or such Exchange is closed for other than weekends and holidays;
(b) an emergency exists as determined by the SEC making disposal of portfolio
securities or valuation of net assets of the Fund not reasonably practicable;
or (c) for such other period as the SEC may permit for the protection of the
Fund's shareholders. At various times, the Fund may be requested to redeem
its shares for which it has not yet received good payment. In this
circumstance, the Fund may delay the mailing of redemption checks until the
payment has been collected for the purchase of such shares.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed, but
under abnormal conditions which make payment in cash unwise, the Fund may
make payment wholly or partly in securities with a current market value
equal to the redemption price. In such case an investor may incur brokerage
costs in converting such securities to cash. The Fund has elected to be
governed by the provisions of Rule 18f-1 under the 1940 Act, which contains
a formula for determining the redemption amounts that must be paid in cash.
The value of shares on redemption may be more or less than the investor's
cost, depending upon the market value of the Fund's portfolio securities at
the time of redemption.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of
shares of the Fund will be determined once daily as of the close of trading
on the New York Stock Exchange, on each day such Exchange is open for
trading. It is expected that the Exchange will be closed on Saturdays and
Sundays and on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day . The Fund
does not expect to determine the net asset value of its shares on any day
when the Exchange is not open for trading even if there is sufficient
trading in its portfolio securities on such days to materially affect the
net asset value per share.
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total
assets (as described in the Prospectus); the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
calculation and the result (adjusted to the nearest cent) is the net asset
value per share.
PROMOTION AND MARKETING OF FUND SHARES
The Fund has adopted a plan (the "Plan"), pursuant to Rule 12b-1 under
the 1940 Act, whereby it may reimburse the Investment Manager each month up
to a maximum of 0.25% per annum of its average daily net assets for actual
expenses incurred in the promotion and marketing of the Fund's shares. The
basic terms of the Plan are set forth in the Prospectus.
The Board of Trustees has determined that a continuous cash flow resulting
from the sale of new shares is necessary and appropriate to enable the Fund to
meet redemptions and to take advantage of buying opportunities without having
to make unwarranted liquidations of portfolio securities. Because the Fund
imposes no sales charge, the Board of Trustees determined that it would
benefit the Fund to have additional monies available for the promotion and
marketing activities undertaken on behalf of the Fund by the Investment
Manager in connection with the continuous sale of the Fund's shares. The
Board of Trustees, including the Trustees who are not interested persons as
defined in the 1940 Act, concluded that in the exercise of their reasonable
business judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its shareholders.
The Plan covers not only reimbursements for expenses incurred in the
promotion and marketing activities with respect to the Fund's shares, but
also payments pursuant to the Investment Management Agreement and
Distribution Agreement and any other payments made by the Fund in the
ordinary course of its business to the extent such payments, although
primarily intended to cover operational and not promotion-related activities,
may be deemed primarily intended to result in the sale of the Fund's shares,
within the context of Rule 12b-1 under the 1940 Act. The costs and
activities, the payment of which is intended to be within the scope of the
Plan if deemed to be primarily intended to result in the sale of the
Fund's shares may include, but are not limited to, the costs of preparation
and mailing of all required reports and notices to shareholders, prospectuses
and proxy materials; all fees and expenses relating to the qualification
of the Fund and/or its shares under the Securities Act of 1933 and the
1940 Act; all costs in preparation and mailing of confirmations of shares
sold or redeemed, reports of share balances, and responding to telephone
or mail inquiries of investors or prospective investors; and payments to
financial institutions, advisers, or other firms.
As stated in the Prospectus, the Plan permits the Investment Manager
to receive reimbursement each month for actual expenses incurred in
connection with the promotion and marketing of the Fund shares and permits
the Investment Manager to include as part of such expenses for which is
received reimbursement under the Plan a pro rata portion of its overhead
expenses attributable to such activities. These overhead expenses include
leases, communications, salaries, training, supplies, photocopying and
any other category of the Investment Manager's expenses attributable to the
promotion and marketing activities undertaken by the Investment Manager with
respect to the Fund's shares.
To the extent promotion and marketing expenses of the Investment Manager
covered by the Plan in any one year are not fully reimbursed because they
exceed 0.25% per annum of the Fund's average daily net assets, the Plan
permits the Investment Manager to carry forward such expenses (without
carrying charge) for a maximum of three years. Reimbursement for expenses
under the Plan will be made on a "first -in, first-out" basis. To the
extent the amount permitted to be paid under the Plan exceeds the Investment
Manager's reimbursable expenses (including those carried forward from prior
years), the amount receivable by the Investment Manager under the Plan will
be reduced for that year so as not to exceed the level of Investment
Manager's actual expenses.
The Plan was last renewed for the an additional year on October 31, 1996,
and must be renewed annually by the Board of Trustees, including a majority of
the Independent Trustees, cast in person at a meeting called for that purpose.
It is also required that the selection and nomination of such Trustees who are
not interested persons (should any election be necessary) be made by the
current Trustees who are not interested persons. The Plan and any marketing
or service agreement entered into pursuant to the Plan may be terminated at
any time, without any penalty, on 60 days' written notice, by such Trustees,
by the Investment Manager, or by vote of a majority of the Fund's outstanding
shares (as defined in the 1940 Act). Any dealer or other firm which enters
into a marketing or service agreement pursuant to the Plan may also terminate
such marketing or services agreement at any time upon written notice to the
other party. The Plan will terminate automatically upon termination of the
Investment Management Agreement.
The Plan and any related marketing or service agreement may not be amended
to increase materially the amount spent for promotion and marketing without
approval by a majority of the Fund's outstanding shares, and all such
material amendments to the Plan or any related marketing or service agreement
also must be approved by the Trustees who are not interested persons, cast
in person at a meeting called for the purpose of voting on any such amendment.
The Investment Manager is required to report in writing to the Trustees at
least quarterly on the amounts and purpose of any payment made under the Plan
and any related marketing or service agreement, as well as to furnish the
Trustees with such other information as may reasonably be requested
in order to enable the Trustees to make an informed determination of whether
the Plan should be continued.
For the fiscal year ended September 30, 1996, the expenses incurred by the
Investment Manager which were reimbursable by the Fund pursuant to the Plan
were:
<TABLE>
<S> <C>
Advertising $ 2,250
Distribution 6,070
Printing 416
Promotion and Marketing 560
Total $ 9,296
</TABLE>
Reimbursements of $10,791 and $17,617 were made by the Fund to the
Investment Manager for 1993 and 1994 carry forwards stated under the Plan.
The Investment Manager carried forward $15,800 from the 1995 fiscal year, as
permitted under the Plan.
Distribution Agreement
The Fund has entered into a Distribution Agreement with Linsco/
Private Ledger Corp. (the "Distributor") which provides that the Distributor
is the principal distributor of the shares of the Fund. The Agreement is
renewable annually by the Trust's Board of Trustees or by vote of a majority
of the Fund's outstanding shares, and in either event by vote of a majority
of the Trustees who are not interested persons of the Distributor or the
Trust. The Agreement may be terminated on 60 days' notice by either party,
and is automatically terminated upon assignment.
The Distributor is responsible for certain of the expenses of
distribution of the Fund's shares, including advertising expenses, costs
of printing sales material and prospectuses used to offer shares to the
public, and expenses of preparing and printing amendments to the Trust's
registration statement necessitated solely by the activities of the
Distributor. These expenses may be paid or reimbursed by the Investment
Manager, and are included in the expenses eligible for reimbursement by
the Fund under the Plan.
The branch office of the Distributor located in Honolulu, Hawaii
will be the office primarily responsible for the sale of Fund shares.
The Distribution Agreement contains provisions with respect to
renewal and termination similar to those in the Investment Management
Agreement. Pursuant to the Distribution Agreement, the Trust has agreed
to indemnify the Distributor to the extent permitted by applicable law
against certain liabilities under the Securities Act of 1933.
GENERAL INFORMATION
Investors in the Fund will be informed of the Fund's progress through
periodic reports. Financial statements certified by independent public
accountants will be submitted to shareholders at least annually.
The First National Bank of Boston, 150 Royall Street, Canton,
Massachusetts 02021, acts as Custodian of the securities and other assets of
the Fund. The Custodian does not participate in decisions relating to the
purchase and sale of securities by the Fund.
Tait, Weller & Baker, Two Penn Center, Suite 700, Philadelphia,
Pennsylvania 19102, are independent auditors for the Trust.
Sullivan & Worcester LLP, One Post Office Square, Boston,
Massachusetts 02109, are legal counsel to the Trust and the Fund.
The shareholders of a Massachusetts business trust could, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Trust's Agreement and Declaration of Trust
("Declaration of Trust") contains an express disclaimer of shareholder
liability for acts or obligations of the Trust. The Declaration of Trust
also provides for indemnification and reimbursement of expenses out of the
Fund's assets for any shareholder held personally liable for obligations of
the Fund or Trust. The Declaration of Trust provides that the Trust shall,
upon written request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund or Trust and satisfy any
judgment thereon. All such rights are limited to the assets of the Fund.
The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
trustees, officers, employees and agents to cover possible tort and other
liabilities. Furthermore, the activities of the Trust as an
investment company as distinguished from an operating company would not
likely give rise to liabilities in excess of the Fund's total assets. Thus,
the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both
inadequate insurance exists and the Fund itself is unable to meet its
obligations.
The Declaration of Trust and Bylaws of the Trust further provide that
no officer or Trustee of the Trust will be personally liable for any
obligations of the Trust, nor will any officer or Trustee be personally
liable to the Trust or its shareholders except by reason of his own bad
faith, willful misfeasance, gross negligence in the performance of his
duties or reckless disregard of his obligations and duties. With these
exceptions, the Declaration of Trust provides that an officer or Trustee
of the Trust is entitled to be indemnified against all liabilities and
expenses incurred by the officer or Trustee in connection with the
defense or disposition of any proceeding in which he may be involved
or with which he may be threatened by reason of his being or having
been an officer or Trustee.
The Trust is registered with the SEC as a management investment
company. Such registration does not involve supervision of the management
or policies of the Fund. The Prospectus of the Fund and this Statement of
Additional Information omit certain of the information contained in the
Registration Statement filed with the SEC. Copies of such information
may be obtained from the SEC upon payment of the prescribed fee.
As of December 30, 1996, no shareholder of record directly or
beneficially owned 5% or more of the outstanding shares of the Fund.
FINANCIAL STATEMENTS
The audited financial statements of the Fund set forth in its Annual
Report to Shareholders for the year ended September 30, 1996, filed with the
Securities and Exchange Commission, are incorporated herein by reference.
Any person not receiving a copy of the Annual Report with this Statement of
Additional Information may call or write to the Trust and obtain a free
copy. Investment Manager carried forward $15,800 from the 1995 fiscal
year, as permitted under the Plan.
<PAGE>
APPENDIX DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
The following paragraphs summarize the descriptions for the rating
symbols of municipal securities.
Municipal Bonds
Moody's Investors Services:
Aaa: Municipal 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 to 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 anticipated are most
unlikely to impair the fundamentally strong position of such
issues.
Aa: Municipal 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
Aaa bonds because margins of protection may not be as large 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.
A: Municipal 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.
Bbb: Bonds which are rated Bbb 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.
Conditional Rating: 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 operations 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 of elimination of basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Standard & Pool's Corporation:
AAA: Municipal bonds rated AAA are highest grade obligations. They possess the
ultimate degree of protection as to principal and interest. The market
they move with interest rates, and hence provide the maximum safety on
all counts.
AA: Municipal bonds rated AA also qualify as high grade obligations, and in
the majority of instances differ from AAA issues only in small degree.
Here, too, prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from adverse
effects of changes in economic and trade conditions. Interest and
principal are regarded as safe. They predominantly reflect money rates
in their market behaviors, but also to some extent, economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest
Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
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 bonds 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 his own judgment with respect to such likelihood
and risk.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within the major rating categories.
Moody's:
Moody's ratings for state and municipal and other short-term
obligations will be designated Moody's Investment Grade ("MIG"). This
distinction is in recognition of the differences between short-term credit
risk and long-term risk. Factors affecting the liquidity of the borrower
are uppermost in importance in short-term borrowing, while various factors
of the first importance in long-term borrowing risk are of lesser importance
in the short run. Symbols used will be as follows:
MIG1: Notes are of the best quality enjoying strong protection from
established cash flows of funds for their servicing of from established
and broad-based access to the market for refinancing, or both.
MIG2: Notes are of high quality, with margins of protections ample, although
not so large as in the preceding group.
MIG3: Notes are of favorable quality, with all security elements accounted
for, but lacking the undeniable strength of the preceding grades. Market
access for refinancing, in particular, is likely to be less well established.
MIG4: Notes are of adequate quality, carrying specific risk but having
protection and not being distinctly or predominantly speculative.
Standard & Poor's:
For municipal note issues due in three years or less the ratings
below usually will be assigned. Notes maturing beyond three years will most
likely receive a bond rating of the type recited above.
SP1: Issues carrying this designation have a very strong or strong capacity
to pay principal and interest. Issues determined to possess overwhelming
safety characteristics will be given a "plus" (+) designation.
SP2: Issues carrying this designation have a satisfactory capacity to
pay principal and interest.
Commercial Paper
Moody's:
Moody's Commercial Paper ratings, which are also applicable to
municipal paper investments permitted to be made by the Trust, are opinions
of the ability of issuers to repay punctually their promissory obligations
not having an original maturity in excess of nine months. Moody's employs
the following designations, all judged to be investment grade, to indicate
the relative repayment capacity of rated issuers:
P1 (Prime-1): Superior capacity for repayment.
P2 (Prime-2): Strong capacity for repayment.
P2 (Prime-3): Acceptable capacity for repayment.
Standard & Poor's:
S & P ratings are 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. Issues within the "A" category
are delineated with the numbers 1, 2, and 3 to indicate the relative degree
of safety, as follows:
A1: This designation indicates the degree of safety regarding timely
payment is very strong A "plus" (+) designation indicates an even
stronger likelihood of timely payment
A2: 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.
A3: 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.
The Commercial Paper Rating is not a recommendation to purchase or
sell a security The ratings are based on current information furnished to
Standard & Poor's by the issuer and obtained by Standard & Poor's from other
sources it considers reliable The ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of, such information.
<PAGE>
November 26, 1996
FIRST HAWAII
Municipal Bond Fund
Intermediate Municipal Fund
Dear Shareholders,
1996 has been an exciting year for the First Hawaii family of funds. A
slowly growing economy, coupled with low inflaction and reduced government
spending led to a rewarding year for municipal bond investors. Additionally,
the First Hawaii Municipal Bond Fund received national recognition after
being awarded Morningstar's highest rating of 5 stars.
For the year ended September 30, 1996:
The First Hawaii Municipal Bond Fund had a distribution rate of 5.03%
(free from Federal and State of Hawaii taxes). This is a taxable
equivalent yield of 8.10% for shareholders in the 31% Federal tax
bracket. Net assets grew 5.93% to $54,164,927.
The First Hawaii Intermediate Municipal Fund had a distribution rate
of 4.32% (free from Federal and State of Hawaii taxes). This is a
taxable equivalent yield of 6.96% for shareholders in the 31% Federal
tax bracket. Net assets grew 39.16% to $6,624,234.
On the following pages you will find our Funds' 1996 Annual report. If you
have any questions or would like us to provide information about the Funds
to your family or friends, please call us at 988-8088.
We would like to thank you for your business as well as the referrals we've
received. It has been our pleasure serving you. As we begin our ninth year,
we look forward to providing you with the same high levels of performance
and service which you have come to expect.
On behalf of the staff and management of the Funds, I would like to extend
to you and your family our very best wishes for a safe and happy holiday
season.
Sincerely,
\s\
Terrence KH Lee
President
Ratings as of September 30, 1996. Morningstar proprietary ratings are
subject to change every month. Past performance is no guarantee of future
results. Morningstar ratings are calculated from the fund's three-, five-,
and ten-year average annual returns in excess of 90-day Treasury bill returns
with appropriate fee adjustments, and a risk factor that reflects fund
performance below 90-day T-bill returns. Morningstar fund returns are
adjusted for fees but not sales loads. Ten percent of the funds in an
investment category receive five stars, 22.5% receive four stars, 35%
receive three stars, 22.5% receive two stars, and 10% receive one star.
There were 1745 funds in the Municipal Bond Fund category for 1 year, 1013
funds in this category for 3 years, and 561 funds in this category for 5
years. The Fund had a ranking of 5 stars and 5 stars for the 3 and 5 year
periods ending 9/30/96. Some income may be subject to the Federal
alternative minimum tax for certain investors. Some of the fund's fees
were waived during this period. If such expenses had been paid by the
fund, returns would have been lower.
<PAGE>
Tait, Weller & Baker
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
First Pacific Mutual Fund, Inc.
Honolulu, Hawaii
We have audited the accompanying statements of assets and liabilities of
First Hawaii Municipal Bond Fund and First Hawaii Intermediate Municipal
Fund (each a series of shares of First Pacific Mutual Fund, Inc.), including
the schedules of investments, as of September 30, 1996, and the related
statements of operations for the year then ended, the statements of changes
in net assets and the financial highlights for the periods indicated thereon.
These financial statements and financial highlights are the responsibility
of the Funds' management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 1996, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial
position of First Hawaii Municipal Bond Fund and First Hawaii Intermediate
Municipal Fund as of September 30, 1996, the results of their operations for
the year then ended, the changes in their net assets and the financial
highlights for the periods referred to above, in conformity with generally
accepted accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
November 6, 1996
<PAGE>
The following two tables, including average annual total return information,
were presented as graphs in the annual report to shareholders dated
September 30, 1996:
FIRST HAWAII MUNICIPAL BOND FUND AS COMPARED TO THE LEHMAN MUNI
BOND INDEX
(Comparison of Change in Value of $10,000 Investment)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
9/1989 9/1990 9/1991 9/1992 9/1993 9/1994 9/1995 9/1996
First Hawaii 10,815 11,233 12,593 13,873 15,415 15,079 16,349 17,268
Municipal Bond Fund
Lehman Muni Bond Index 10,717 11,426 12,848 14,015 15,707 15,442 16,999 18,303
</TABLE>
Average Annual Total Return
1 Year 5.62%
5 Years 6.52%
Inception 7.20%
The graph above compares the increase in value of a $10,000 investment in
the First Hawaii Muncipal Bond Fund with the performance of the Lehman Muni
Bond Index. The objective of the graph is to permit you to compare the
performance of the Fund with the current market and to give perspective to
market conditions and investments strategies and techniques pursued by the
investment manager that materially affected the performance of the Fund.
The Lehman Muni Bond Index reflects reinvestment of dividends but not the
expenses of the Fund. Past performance is not indicative of future results.
<PAGE>
FIRST HAWAII INTERMEDIATE MUNICIPAL FUND AS COMPARED TO
THE LEHMAN MUNI BOND INDEX
(Comparison of Change in Value of $10,000 Investment)
9/1993 9/1994 9/1995 9/1996
First Hawaii 10,000 10,072 10,864 11,293
Intermediate Municipal Fund
Lehman Muni Bond Index 10,000 10,070 11,197 11,943
Average Annual Total Return
1 Year 3.95%
Inception 5.58%
The graph above compares the increase in value of a $10,000 investment in the
First Hawaii Intermediate Muncipal Fund with the performance of the Lehman Muni
Bond Index. The objective of the graph is to permit you to compare the
performance of the Fund with the current market and to give perspective to
market conditions and investments strategies and techniques pursued by the
investment manager that materially affected the performance of the Fund. The
Lehman Muni Bond Index reflects reinvestment of dividends but not the expenses
of the Fund. Past performance is not indicative of future results.
<PAGE>
FIRST HAWAII MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS
September 30, 1996
Value
Par Value (Note 1)
HAWAII MUNICIPAL BONDS - 92.08%
Hawaii County
General Obligation Bonds - 3.66%
$1,150,000 7.050%, 6/01/01 $1,259,250
100,000 6.800%, 12/01/01 104,000
565,000 7.200%, 6/01/06 621,500
1,984,750
Hawaii State
General Obligation Bonds - .94%
135,000 6.000%, 10/01/08 142,763
330,000 7.125%, 9/01/09 364,237
507,000
Airport Systems Revenue Bonds - 5.25%
400,000 5.125%, 7/01/00 405,500
345,000 6.300%, 7/01/01 366,131
560,000 7.000%, 7/01/20 611,800
1,325,000 7.500%, 7/01/20 1,460,813
2,844,244
Department of Budget & Finance Special
Purpose Revenue Bonds
Citizens Utilities Company - .94%
400,000 7.375%, 11/01/15 408,876
100,000 7.375%, 9/01/18 102,122
510,998
Hawaiian Electric Company, Inc. - 4.30%
1,655,000 7.625%, 12/01/18 1,789,469
310,000 7.600%, 7/01/20 334,025
200,000 7.600%, 5/01/26 205,500
2,328,994
Kapiolani Hospital - 3.86%
1,550,000 6.400%, 7/01/13 1,594,562
430,000 7.650%, 7/01/19 493,425
2,087,987
Kaiser Permanente Center - 4.08%
2,150,000 6.250%, 3/01/21 2,211,812
Queen's Medical Center Program - 6.69%
200,000 6.800%, 7/01/00 211,500
300,000 5.200%, 7/01/04 303,375
540,000 6.900%, 7/01/04 575,775
250,000 6.125%, 7/01/11 272,188
600,000 6.200%, 7/01/22 655,500
1,635,000 5.750%, 7/01/26 1,604,343
3,622,681
St. Francis Medical Center - 3.47%
1,765,000 6.500%, 7/01/22 1,879,725
Wahiawa General Hospital - 6.26%
230,000 7.125%, 7/01/98 236,900
2,985,000 7.500%, 7/01/12 3,152,906
3,389,806
<PAGE>
Department of Transportation
Special Facilities Revenue Bonds - 4.08%
2,250,000 5.750%, 3/01/13 2,210,625
Harbor Capital Improvements Revenue Bonds, Series 1989 - 3.74%
300,000 5.650%, 7/01/02 311,250
100,000 6.200%, 7/01/03 106,750
280,000 6.300%, 7/01/04 301,350
125,000 7.250%, 7/01/10 136,563
260,000 7.250%, 7/01/13 270,182
540,000 7.000%, 7/01/17 584,550
300,000 6.500%, 7/01/19 316,875
2,027,520
Highway Revenue Bonds, Series 1993 - 2.45%
200,000 5.000%, 7/01/09 192,250
150,000 5.000%, 7/01/11 142,125
1,000,000 5.600%, 7/01/14 995,000
1,329,375
Housing Authority
Single Family Mortgage Purpose Revenue Bonds - 15.18%
145,000 6.300%, 7/01/99 149,350
525,000 8.000%, 7/01/08 544,688
390,000 8.000%, 7/01/10 409,012
405,000 7.000%, 7/01/11 425,250
100,000 5.700%, 7/01/13 98,125
590,000 6.900%, 7/01/16 616,550
305,000 7.375%, 7/01/16 313,006
1,505,000 8.125%, 7/01/17 1,582,131
530,000 9.250%, 7/01/17 538,613
495,000 8.125%, 7/01/19 520,369
455,000 6.750%, 7/01/20 468,081
540,000 7.100%, 7/01/24 564,300
1,865,000 5.900%, 7/01/27 1,851,519
135,000 7.800%, 7/01/29 141,581
8,222,575
Multi-Family Mortgage Purpose Revenue Bonds - 6.50%
70,000 4.000%, 7/01/97 69,783
180,000 4.500%, 1/01/99 178,875
200,000 4.800%, 1/01/01 197,750
205,000 4.800%, 7/01/01 203,975
210,000 4.900%, 1/01/02 207,375
215,000 4.900%, 7/01/02 213,656
1,000,000 5.700%, 7/01/18 961,250
1,500,000 6.100%, 7/01/30 1,488,750
3,521,414
Public Housing Authority Bonds - .35%
185,000 5.750%, 8/01/00 189,520
University Faculty Housing - 4.18%
90,000 4.350%, 10/01/00 89,550
330,000 4.450%, 10/01/01 327,938
345,000 4.550%, 10/01/02 342,412
1,500,000 5.700%, 10/01/25 1,505,625
2,265,525
<PAGE>
Honolulu City & County
Board of Water Supply - 1.58%
100,000 5.000%, 7/01/04 100,750
750,000 5.800%, 7/01/21 754,688
855,438
General Obligation Bonds - 2.84%
100,000 7.300%, 7/01/03 114,250
200,000 7.350%, 7/01/06 234,250
100,000 7.250%, 2/01/08 107,875
1,000,000 7.300%, 2/01/09 1,080,000
1,536,375
Halawa Business Park - 1.81%
170,000 6.300%, 10/15/00 179,350
370,000 6.500%, 10/15/02 398,675
365,000 6.600%, 10/15/03 399,675
977,700
Housing Authority
Multi-Family Mortgage Purpose Revenue Bonds - 1.93%
1,000,000 6.900%, 6/20/35 1,046,250
Kauai County
General Obligation Bonds - 5.02%
595,000 6.700%, 8/01/97 609,869
255,000 6.100%, 2/01/99 257,076
300,000 5.100%, 2/01/01 304,875
410,000 5.850%, 8/01/07 428,450
780,000 5.850%, 8/01/07 815,100
295,000 5.900%, 2/01/12 300,531
2,715,901
Maui County
General Obligation Bonds - 1.54%
740,000 8.000%, 1/01/01 834,350
Water System Revenue - 1.43%
315,000 5.850%, 12/01/00 332,325
400,000 6.600%, 12/01/07 440,500
772,825
Total Hawaii Municipal Bonds 49,873,390
<PAGE>
PUERTO RICO MUNICIPAL BONDS - 5.00%
Puerto Rico Commonwealth
Electric Power Authority Revenue Bonds - .73%
100,000 7.125%, 7/01/14 108,750
100,000 7.125%, 7/01/14 108,750
110,000 7.125%, 7/01/14 117,837
55,000 7.125%, 7/01/14 58,919
394,256
General Obligation Bonds - .14%
70,000 7.750%, 7/01/13 75,688
Housing Finance Corp.
Multi-Family Mortgage Revenue Bonds - 1.17%
455,000 7.500%, 4/01/22 477,181
150,000 7.650%, 10/15/22 157,875
635,056
Industrial, Medical & Environmental Pollution Control
Abbott Laboratories - .55%
295,000 6.500%, 7/01/09 296,516
Baxter Travenol Laboratories - .60%
300,000 8.000%, 9/01/12 326,250
Upjohn Co. Project - 1.66%
825,000 7.500%, 12/01/23 898,219
Public Building Authority
Health Facilities & Services - .15%
75,000 7.250%, 7/01/17 80,156
Total Puerto Rico Municipal Bonds 2,706,141
VIRGIN ISLANDS MUNICIPAL BONDS - .86%
Virgin Islands
Port Authority Airport Revenue Bonds - .64%
325,000 8.100%, 10/01/05 346,531
Public Finance Authority, Series A - .22%
100,000 7.300%, 10/01/18 121,375
Total Virgin Islands Municipal Bonds 467,906
Total Investments (Cost $51,274,306) (a) 97.94% 53,047,437
Other Assets Less Liabilities 2.06 1,117,490
Net Assets 100.00% $ 54,164,927
(a) Aggregate cost for federal income tax purposes is $51,278,944.
At September 30, 1996, unrealized appreciation (depreciation)
of securities for federal income tax purposes is as follows:
Gross unrealized appreciation $ 1,875,398
Gross unrealized depreciation (106,905)
Net unrealized appreciation $ 1,768,493
See accompanying notes to financial statements
<PAGE>
First Hawaii Intermediate Municipal Fund
Schedule of Investments
September 30, 1996
Par Value Value
(Note 1)
HAWAII MUNICIPAL BONDS - 96.10%
Hawaii County
General Obligation Bonds - 4.06%
$ 65,000 6.350%, 5/15/01 $65,093
100,000 6.800%, 12/01/01 104,000
100,000 6.500%, 5/15/06 100,160
269,253
Hawaii State
General Obligation Bonds - 1.56%
100,000 5.500%, 7/01/01 103,625
Airport Systems Revenue Bonds - 14.75%
500,000 5.125%, 7/01/00 608,250
105,000 6.400%, 7/01/02 113,006
250,000 5.700%, 7/01/07 255,625
976,881
Department of Budget & Finance Special Purpose Revenue Bonds
Citizens Utilities Company - 4.62%
300,000 7.375%, 9/01/18 306,366
Kapiolani Hospital - 8.08%
200,000 5.500%, 7/01/05 202,500
290,000 7.650%, 7/01/19 332,775
535,275
Queen's Medical Center Program - 6.25%
200,000 6.800%, 7/01/00 211,500
200,000 5.200%, 7/01/04 202,250
413,750
St. Francis Medical Center - 4.12%
270,000 5.250%, 7/01/97 272,730
Wahiawa General Hospital - 4.51%
290,000 7.125%, 7/01/98 298,700
Harbor Capital Improvements Revenue Bonds, Series 1989 - 4.73%
200,000 5.650%, 7/01/02 207,500
100,000 5.850%, 7/01/02 105,500
313,000
Highway Revenue Bonds, Series 1993 - 3.02%
200,000 4.800%, 7/01/03 200,000
Housing Authority
Single Family Mortgage Purpose Revenue Bonds - 5.14%
200,000 6.300%, 7/01/99 206,000
130,000 6.800%, 7/01/99 134,225
340,225
Multi-Family Mortgage Purpose Revenue Bonds - 3.99%
165,000 4.000%, 1/01/97 164,705
100,000 4.000%, 7/01/97 99,690
264,395
Public Housing Authority Bonds - 3.09%
200,000 5.750%, 8/01/00 204,886
<PAGE>
University Faculty Housing - 3.45%
230,000 4.350%, 10/01/00 228,850
University of Hawaii - 4.32%
University Revenue Bonds
280,000 5.450%, 10/01/06 286,300
Honolulu City & County
Board of Water Supply - 4.56%
300,000 5.000%, 7/01/04 302,250
General Obligation Bonds - 1.53%
100,000 5.000%, 10/01/02 101,125
Halawa Business Park - 3.19%
200,000 6.300%, 10/15/00 211,000
Kauai County
General Obligation Bonds - 4.57%
300,000 6.100%, 2/01/99 302,442
Maui County
General Obligation Bonds - 3.23%
190,000 8.000%, 1/01/01 214,225
Water System Revenue - 3.33%
100,000 6.600%, 12/01/07 110,125
100,000 6.700%, 12/01/11 110,625
220,750
Total Hawaii Municipal Bonds 6,366,028
PUERTO RICO MUNICIPAL BONDS - 4.01%
Puerto Rico Commonwealth
Electric Power Authority Revenue Bonds - 1.48%
90,000 7.125%, 7/01/14 97,875
General Obligation Bonds - 1.50%
90,000 7.750%, 7/01/17 99,225
Housing Finance Corp.
Single Family Mortgage Revenue Bonds - 1.03%
65,000 6.150%, 8/01/03 68,087
Total Puerto Rico Municipal Bonds 265,187
Total Investments (Cost $6,527,604) (a) 100.11% 6,631,215
Liabilities in Excess of Other Assets (.11) (6,976)
Net Assets 100.00% $6,624,239
(a) Aggregate cost for federal income tax purposes is $6,527,604.
At September 30, 1996, unrealized appreciation (depreciation)
of securities for federal income tax purposes is as follows:
Gross unrealized appreciation $ 104,933
Gross unrealized depreciation (1,322)
Net unrealized appreciation $ 103,611
See accompanying note to financial statements
<PAGE>
First Hawaii Municipal Bond Fund
First Hawaii Intermediate Municipal Fund
Statement of Assets and Liabilities
September 30, 1996
<TABLE>
<S> <C> <C>
ASSETS
Investments at market value
(Identified cost $51,274,306
and $6,527,604, respectively) (Note 1(A)) $53,047,437 $6,631,215
Cash 1,337,019 95,685
Interest receivable 866,616 103,680
Receivable for fund shares sold - 916
Total assets 55,251,072 6,831,496
LIABILITIES
Payable for investments purchased 1,001,350 200,618
Accrued expenses 26,174 3,904
Distributions payable 58,621 2,735
Total liabilities 1,086,145 207,257
NET ASSETS
(applicable to 4,972,944 and 1,294,198
shares outstanding, $.01 par value,
20,000,000 shares authorized) $54,164,927 $6,624,239
NET ASSET VALUE, OFFERING AND REPURCHASE PRICE PER SHARE
($54,164,927 / 4,972,944 shares) $10.89
($6,624,239 / 1,294,198 shares) $5.12
NET ASSETS
At September 30, 1996, net assets consisted of:
Paid-in capital $52,621,279 $6,505,223
Accumulated net realized gain (loss) on investments (229,483) 15,405
Net unrealized appreciation 1,773,131 103,611
$54,164,927 $6,624,239
</TABLE>
See accompanying notes to financial statements
<PAGE>
First Hawaii Municipal Bond Fund
First Hawaii Intermediate Municipal Fund
Statement of Operations
September 30, 1996
<TABLE>
<S> <C> <C>
Municipal Intermediate
Bond Municipal
Fund Fund
INVESTMENT INCOME
Interest income $3,173,398 $297,127
Expenses
Management fee (Note 2) 265,680 29,311
Distribution costs (Note 2) 57,119 4,491
Transfer agent fees (Note 2) 47,215 14,400
Shareholder services (Note 2) 53,136 5,862
Accounting fees (Note 2) 39,222 23,865
Legal and audit fees 24,927 4,263
Printing 14,920 1,379
Custodian fees 10,311 3,000
Insurance 7,519 767
Registration fees 1,599 528
Directors fees 800 -
Total expenses 522,448 87,866
Fee reductions (Note 4) (17,405) (5,365)
Expenses reimbursed or waived (Note 2) - (38,462)
Net expenses 505,043 44,039
Net investment income 2,668,355 253,088
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain from security transactions 21,217 17,216
Increase (decrease) in unrealized appreciation
of investments 202,015 (35,876)
Net gain (loss) on investments 223,232 (18,660)
Net increase in net assets resulting
from operations $2,891,587 $234,428
</TABLE>
See accompanying notes to financial statements
First Hawaii Municipal Bond Fund
Statement of Changes in Net Assets
Years ended September 30, 1996 and 1995
<TABLE>
<S> <C> <C>
1996 1995
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income $2,668,355 $2,559,984
Net realized gain (loss) on investments 21,217 (264,520)
Increase in unrealized appreciation of investments 202,015 1,552,334
Net increase in net assets resulting from operations 2,891,587 3,847,798
Distributions to shareholders from
Net investment income
($.55 and $.55 per share, respectively) (2,668,355) (2,559,984)
Realized capital gains
($.06 per share) - (393,211)
Capital share transactions (a)
Increase (decrease) in net assets resulting
from capital share transactions 2,810,813 (1,993,708)
Total increase (decrease) in net assets 3,034,045 (1,099,105)
NET ASSETS
Beginning of year 51,130,882 52,229,987
End of year $54,164,927 $51,130,882
</TABLE>
(a) Summary of capital share activity follows:
<TABLE>
<S> <C> <C>
1996 1995
Shares Value Shares Value
Shares sold 982,410 $10,706,770 857,509 $9,080,787
Shares issued on reinvestment
of distributions 173,650 1,892,040 200,904 2,110,188
1,156,060 12,598,810 1,058,413 11,190,975
Shares redeemed (900,255) (9,787,997) (1,261,140) (13,184,683)
Net increase (decrease) 255,805 $2,810,813 (202,727) $(1,993,708)
</TABLE>
See accompanying notes to financial statements
<PAGE>
First Hawaii Intermediate Municipal Fund
Statement of Changes in net assets
Years ended September 30, 1996 and 1995
<TABLE>
<S> <C> <C>
1996 1995
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income $253,088 $187,328
Net realized gain (loss) on investments 17,216 (1,811)
Increase in unrealized appreciation
of investments (35,876) 150,634
Net increase in net assets resulting
from operations 234,428 336,151
Distributions to shareholders from
Net investment income ($.22 and $.23
per share, respectively) (253,088) (187,328)
Capital share transactions (a)
Increase in net assets resulting from
capital share transactions 1,882,838 2,164,414
Total increase in net assets 1,864,178 2,313,237
NET ASSETS
Beginning of year 4,760,061 2,446,824
End of year $6,624,239 $4,760,061
</TABLE>
(a) Summary of capital share activity follows:
<TABLE>
<S> <C> <C>
1996 1995
Shares Value Shares Value
Shares sold 688,964 $3,522,684 730,169 $3,638,418
Shares issued on reinvestment
of distributions 43,852 224,869 34,948 176,499
732,816 3,747,553 765,117 3,814,917
Shares redeemed (364,169) (1,864,715) (329,433) (1,650,503)
Net increase 368,647 $1,882,838 435,684 $2,164,414
</TABLE>
See accompanying notes to financial statements
<PAGE>
First Hawaii Municipal Bond Fund
Financial Highlights
(For a share outstanding throughout the period)
Years ended September 30,
<TABLE>
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Net asset value
Beginning of year $10.84 $10.62 $11.48 $10.90 $10.47
Income from investment operations
Net investment income .55 .55 .55 .58 .60
Net gain (loss) on securities
(both realized and unrealized) .05 .31 (.80) .60 .43
Total from investment operations .60 .86 (.25) 1.18 1.03
Less distributions
Dividends from net investment income (.55) (.55) (.55) (.58) (.60)
Distributions from capital gains - (.09) (.06) (.02) -
Total distributions (.55) (.64) (.61) (.60) (.60)
End of year $10.89 $10.84 $10.62 $11.48 $10.90
Total return 5.62% 8.42% (2.18)% 11.11% 10.16%
Ratios/Supplemental Data
Net assets, end of period (in 000's) $54,165 $51,131 $52,230 $57,396 $39,291
Ratio of expenses to average net assets
Before expense reimbursements .98% 1.00% .97% .95% .95%
After expense reimbursements .98% (a) .97% (a) .95% .95% .95%
Ratio of net investment income to average net assets
Before expense reimbursements 5.03% 5.19% 4.99% 5.21% 5.67%
After expense reimbursements 5.03% 5.22% 5.01% 5.21% 5.67%
Portfolio turnover 15.16% 17.08% 40.22% 27.77% 18.44%
</TABLE>
(a) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement were .95% in 1996 and 1995. Prior to 1995,
such reductions were reflected in the expense ratios.
See accompanying notes to financial statements
<PAGE>
First Hawaii Intermediate Municipal Fund
Financial Highlights
(For a share outstanding throughout the period)
<TABLE>
<S> <C> <C> <C>
Period
July 5, 1994*
to
Years ended September 30, September 30,
1996 1995 1994
Net asset value
Beginning of period $5.14 $4.99 $5.00
Income from investment operations
Net investment income .22 .23 .05
Net gain (loss) on securities (unrealized) (.02) .15 (.01)
Total from investment operations .20 .38 .04
Less distributions
Dividends from net investment income (.22) (.23) (.05)
End of year $5.12 $5.14 $4.99
Total return 3.95% 7.86% .72%
Ratios/Supplemental Data
Net assets, end of period (in 000's) $6,624 $4,760 $2,447
Ratio of expenses to average net assets
Before expense reimbursements 1.50% 1.90% 4.48% (a)
After expense reimbursements .84% (b) .66% (b) 0% (a)
Ratio of net investment income to average net assets
Before expense reimbursements 3.66% 3.39% .12% (a)
After expense reimbursements 4.32% 4.63% 4.60% (a)
Portfolio turnover 17.76% 10.04% 0%
</TABLE>
* Commencement of operations
(a) Annualized
(a) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement were .75% and .64% for 1996 and 1995,
respectively. Prior to 1995, such reductions were reflected in the expense
ratios.
See accompanying notes to financial statements
<PAGE>
First Hawaii Municipal Bond Fund
First Hawaii Intermediate Municipal Fund
Notes to Financial Statements
September 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Hawaii Municipal Bond Fund and First Hawaii Intermediate Municipal Fund
("Funds") are each a series of shares of First Pacific Mutual Fund, Inc.
which is registered under the Investment Company Act of 1940, as a
non-diversified open-end management company.
The investment objective of the Funds is to provide investors with the
maximum level of income exempt from federal and Hawaii income taxes
consistent with the preservation of capital. The Funds seek to achieve
their objective by investing primarily in municipal securities which pay
interest that is exempt from federal and Hawaii income taxes.
The Funds are subject to the risk of price fluctuation of the municipal
securities held in its portfolio which is generally a function of the
underlying credit rating of an issuer, the maturity length of the
securities, the securities' yield, and general economic and interest rate
conditions.
Since the Funds invest primarily in obligations of issuers located in Hawaii,
the marketability and market value of these obligations may be affected by
certain Hawaiian constitutional provisions, legislative measures, executive
orders, administrative regulations, voter initiatives, and other political
and economic developments. If any such problems arise, they could adversely
affect the ability of various Hawaiian issuers to meet their financial
obligation.
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of income and
expenses during the reported period. Actual results could differ from
those estimates.
(A) SECURITY VALUATION
Portfolio securities, which are fixed income securities, are valued by
an independent pricing service 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 Board
of Directors. Securities with remaining maturities of 60 days or less
are valued on the amortized cost basis as reflecting fair value. All
other securities are valued at their fair value as determined in good
faith by the Board of Directors.
(B) FEDERAL INCOME TAXES
It is the Funds' policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute their taxable income, if any, to their shareholders.
Therefore, no federal income tax provision is required.
(C) SECURITY TRANSACTIONS, INVESTMENT INCOME AND DISTRIBUTIONS TO
SHAREHOLDERS
Security transactions are recorded on the trade date. Interest income
is recorded on the accrual basis. Bond discounts and premiums are
amortized as required by the Internal Revenue Code. Distributions to
shareholders are declared daily and reinvested or paid in cash monthly.
Premiums and discounts are amortized in accordance with income tax
regulations.
(2) INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS WITH
AFFILIATES
First Pacific Management Corporation ("FPMC") provides the Funds with
management and administrative services pursuant to a management agreement.
In accordance with the terms of the management agreement, FPMC receives
compensation at the annual rate of .50% of each Fund's average daily net
assets.
FPMC also provides the Funds with certain clerical, bookkeeping and
shareholder services pursuant to a service agreement approved by the
Funds' directors. As compensation for these services FPMC receives a fee,
computed daily and payable monthly, at an annualized rate of .10% of each
Fund's average daily net assets.
The Funds' distributor, First Pacific Securities ("FPS"), a wholly-owned
subsidiary of FPMC, received $57,119 for costs incurred in connection with
the sale of First Hawaii Municipal Bond Fund's shares. FPS also received
$4,491 for costs incurred with the sale of First Hawaii Intermediate
Municipal Fund's shares (See Note 3).
First Pacific Recordkeeping, ("FPR"), a wholly-owned subsidiary of FPMC,
serves as the transfer agent and accounting agent for the Funds.
<PAGE>
For the year ended September 30, 1996, FPMC and FPR voluntarily waived
certain management, transfer agent, shareholder services, and accounting
fees in the amount of $38,462 for First Hawaii Intermediate Municipal Fund.
Certain officers and directors of the Funds are also officers of FPMC,
FPS and FPR.
(3) DISTRIBUTION COSTS
The Funds' Board of Directors, including a majority of the Directors who
are not "interested persons" of the Funds, as defined in the Investment
Company Act of 1940, adopted a distribution plan pursuant to Rule 12b-1
of the Act. The Plan regulates the manner in which a regulated investment
company may assume costs of distributing and promoting the sales of its
shares.
The Plan provides that the Funds may incur certain costs, which may not
exceed .25% per annum of the Funds' average daily net assets, for payment
to the distributor for items such as advertising expenses, selling
expenses, commissions or travel reasonably intended to result in sales of
shares of the Funds.
(4) PURCHASES AND SALES/CUSTODY OF SECURITIES
Purchases and sales of securities aggregated $10,867,149 and $7,895,674,
respectively for the First Hawaii Municipal Bond Fund. Purchases and
sales of securities for First Hawaii Intermediate Municipal Fund
aggregated $5,639,020 and $3,203,068, respectively. Under an agreement
with the Custodian Bank, custodian fees are reduced by credits for cash
balances. During the year ended September 30, 1996, such reductions
amounted to $17,405 and $5,365 for the First Hawaii Municipal Bond Fund
and the First Hawaii Intermediate Municipal Bond Fund, respectively.
<PAGE>
INVESTMENT MANAGER
First Pacific Management Corporation
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822
DISTRIBUTOR
First Pacific Management Corporation
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822
CUSTODIAN
Bank of California
San Francisco, California
LEGAL COUNSEL TO FUND
Stradley, Ronon, Stevens & Young
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
Goodsill Anderson Quinn & Stifel
1099 Alakea Street, Suite 1800
Alii Place
Honolulu, Hawaii 96813
<PAGE>
<PAGE>
FIRST HAWAII MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS
March 31, 1997 (Unaudited)
Value
Par Value (Note 1)
HAWAII MUNICIPAL BONDS (91.33%)
Hawaii County
General Obligation Bonds - 3.57%
$1,150,000 7.050%, 6/01/01 $ 1,242,000
100,000 6.800%, 12/01/01 102,689
565,000 7.200%, 6/01/06 613,025
1,957,714
Hawaii State
General Obligation Bonds - .92%
135,000 6.000%, 10/01/08 143,775
330,000 7.125%, 9/01/09 358,875
502,650
Airport Systems Revenue Bonds - 5.14%
400,000 5.125%, 7/01/00 404,500
345,000 6.300%, 7/01/01 364,406
560,000 7.000%, 7/01/20 605,500
1,330,000 7.500%, 7/01/20 1,448,037
2,822,443
Hawaiian Electric Company, Inc. - 4.91%
1,660,000 7.625%, 12/01/18 1,776,200
310,000 7.600%, 7/01/20 331,700
200,000 7.600%, 5/01/26 201,750
400,000 5.875%, 12/01/26 386,000
2,695,650
Kapiolani Hospital - 3.78%
1,550,000 6.400%, 7/01/13 1,581,000
430,000 7.650%, 7/01/19 485,900
10,000 6.875%, 4/01/12 10,273
2,077,173
Kaiser Permanente Center - 4.02%,
2,150,000 6.250%, 3/01/21 2,206,438
Queen's Medical Center Program - 6.54%
200,000 6.800%, 7/01/00 209,000
300,000 5.200%, 7/01/04 302,625
540,000 6.900%, 7/01/04 569,025
250,000 6.125%, 7/01/11 269,375
600,000 6.200%, 7/01/22 648,750
1,635,000 5.750%, 7/01/26 1,592,081
3,590,856
St. Francis Medical Center - 3.38%
1,765,000 6.500%, 7/01/22 1,855,456
Wahiawa General Hospital - 6.15%
230,000 7.125%, 7/01/98 234,887
2,985,000 7.500%, 7/01/12 3,141,713
3,376,600
Department of Transportation Special
Facilities Revenue Bonds - 4.02%
2,250,000 5.750%, 3/01/13 2,205,000
Harbor Capital Improvements Revenue Bonds, Series 1989 - 4.41%
300,000 5.650%, 7/01/02 308,625
100,000 6.200%, 7/01/03 105,750
280,000 6.300%, 7/01/04 298,900
125,000 7.250%, 7/01/10 135,312
305,000 7.250%, 7/01/13 312,921
540,000 7.000%, 7/01/17 578,475
300,000 6.500%, 7/01/19 312,750
400,000 5.500%, 7/01/27 366,500
2,419,233
Highway Revenue Bonds, Series 1993 - 2.39%
200,000 5.000%, 7/01/09 191,500
150,000 5.000%, 7/01/11 140,063
1,000,000 5.600%, 7/01/14 978,750
1,310,313
Housing Authority
Single Family Mortgage Purpose Revenue Bonds - 15.05%
145,000 6.300%, 7/01/99 148,625
525,000 8.000%, 7/01/08 542,063
390,000 8.000%, 7/01/10 406,088
405,000 7.000%, 7/01/11 424,238
100,000 5.700%, 7/01/13 100,000
590,000 6.900%, 7/01/16 615,075
305,000 7.375%, 7/01/16 311,884
1,505,000 8.125%, 7/01/17 1,568,962
530,000 9.250%, 7/01/17 539,148
495,000 8.125%, 7/01/19 516,037
400,000 6.750%, 7/01/20 411,000
540,000 7.100%, 7/01/24 562,950
2,015,000 5.900%, 7/01/27 1,992,350
115,000 7.800%, 7/01/29 120,175
8,258,595
Multi-Family Mortgage Purpose Revenue Bonds - 6.44%
70,000 4.000%, 7/01/97 69,922
180,000 4.500%, 1/01/99 179,100
200,000 4.800%, 1/01/01 198,250
205,000 4.800%, 7/01/01 204,231
210,000 4.900%, 1/01/02 207,638
215,000 4.900%, 7/01/02 213,925
1,000,000 5.700%, 7/01/18 972,500
1,500,000 6.100%, 7/01/30 1,490,625
3,536,191
Public Housing Authority Bonds - .81%
185,000 5.750%, 8/01/00 189,458
250,000 5.750%, 8/01/04 255,690
445,148
University Faculty Housing - 4.06%
90,000 4.350%, 10/01/00 89,100
330,000 4.450%, 10/01/01 325,875
345,000 4.550%, 10/01/02 340,256
1,500,000 5.700%, 10/01/25 1,475,625
2,230,856
<PAGE>
Honolulu City & County
Board of Water Supply - 1.53%
100,000 5.000%, 7/01/04 100,125
750,000 5.800%, 7/01/21 740,625
840,750
General Obligation Bonds - 3.20%
100,000 7.300%, 7/01/03 112,375
200,000 7.350%, 7/01/06 231,750
100,000 7.250%, 2/01/08 107,250
1,000,000 7.300%, 2/01/09 1,073,750
240,000 5.500%, 9/01/16 232,200
1,757,325
Halawa Business Park - 1.73%
170,000 6.300%, 10/15/00 175,950
370,000 6.500%, 10/15/02 388,962
365,000 6.600%, 10/15/03 387,356
952,268
Housing Authority
Multi-Family Mortgage Purpose Revenue Bonds - 1.90%
1,000,000 6.900%, 6/20/35 1,045,000
Kauai County
General Obligation Bonds - 4.48%
595,000 6.700%, 8/01/97 600,635
300,000 5.100%, 2/01/01 303,750
410,000 5.850%, 8/01/07 429,988
780,000 5.850%, 8/01/07 818,025
295,000 5.900%, 2/01/12 301,637
2,454,035
Maui County
General Obligation Bonds - 1.50%
740,000 8.000%, 1/01/01 823,250
Water System Revenue - 1.40%
315,000 5.850%, 12/01/00 329,175
400,000 6.600%, 12/01/07 435,000
764,175
Total Hawaii Municipal Bonds 50,127,119
<PAGE>
PUERTO RICO MUNICIPAL BONDS - 4.82%
Puerto Rico Commonwealth
Electric Power Authority Revenue Bonds - .71%
100,000 7.125%, 7/01/14 107,250
100,000 7.125%, 7/01/14 107,250
110,000 7.125%, 7/01/14 116,600
55,000 7.125%, 7/01/14 58,438
389,538
General Obligation Bonds - .14%
70,000 7.750%, 7/01/13 74,550
Housing Finance Corp.
Multi-Family Mortgage Revenue Bonds - 1.13%
450,000 7.500%, 4/01/22 472,500
140,000 7.650%, 10/15/22 146,825
619,325
Industrial, Medical & Environmental Pollution Control
Abbott Laboratories - .49%
270,000 6.500%, 7/01/09 271,374
Baxter Travenol Laboratories - .59%
300,000 8.000%, 9/01/12 321,750
Upjohn Co. Project - 1.62%
825,000 7.500%, 12/01/23 887,906
Public Building Authority
Health Facilities & Services - .14%
75,000 7.250%, 7/01/17 79,032
Total Puerto Rico Municipal Bonds 2,643,475
VIRGIN ISLANDS MUNICIPAL BONDS - .84%
Virgin Islands
Port Authority Airport Revenue Bonds - .62%
325,000 8.100%, 10/01/05 342,469
Public Finance Authority, Series A - .22%
100,000 7.3005, 10/01/18 119,625
Total Virgin Islands Municipal Bonds 462,094
Total Investments (Cost $51,827,726) (a) 96.99% 53,232,688
Other Assets Less Liabilities 3.01 1,653,447
Net Assets 100.00% $54,886,135
(a) Aggregate cost for federal income tax purposes is $51,827,726.
At March 31, 1997, unrealized appreciation (depreciation)
of securities for federal income tax purposes is as follows:
Gross unrealized appreciation $1,563,218
Gross unrealized depreciation (158,256)
Net unrealized appreciation $1,404,962
See accompanying notes to financial statements
<PAGE>
FIRST HAWAII INTERMEDIATE MUNICIPAL FUND
SCHEDULE OF INVESTMENTS
March 31, 1997 (Unaudited)
Value
Par Value (Note 1)
HAWAII MUNICIPAL BONDS - 89.33%
Hawaii County
General Obligation Bonds - 4.23%
$ 65,000 6.350%, 5/15/01 $ 65,087
100,000 6.800%, 12/01/01 102,689
100,000 6.500%, 5/15/06 100,163
267,939
Hawaii State
General Obligation Bonds - 1.63%
100,000 5.500%, 7/01/01 102,875
Airport Systems Revenue Bonds - 15.35%
600,000 5.125%, 7/01/00 606,750
150,000 6.400%, 7/01/02 111,694
250,000 5.700%, 7/01/07 253,437
971,881
Kapiolani Hospital - 9.99%
100,000 6.650%, 7/01/98 102,750
200,000 5.500%, 7/01/05 201,750
290,000 7.650%, 7/01/19 327,700
632,200
Queen's Medical Center Program - 6.49%
200,000 6.800%, 7/01/00 209,000
200,000 5.200%, 7/01/04 201,750
410,750
St. Francis Medical Center - 4.28%
270,000 5.250%, 7/01/97 270,848
Wahiawa General Hospital - 4.68%
290,000 7.125%, 7/01/98 296,163
Harbor Capital Improvements Revenue Bonds, Series 1989 - 4.90%
200,000 5.650%, 7/01/02 205,750
100,000 5.850%, 7/01/02 104,375
310,125
Highway Revenue Bonds, Series 1993 - 3.14%
200,000 4.800%, 7/01/03 199,000
Housing Authority
Single Family Mortgage Purpose Revenue Bonds - 5.34%
200,000 6.300%, 7/01/99 205,000
130,000 6.800%, 7/01/99 132,939
337,939
Multi-Family Mortgage Purpose Revenue Bonds - 1.58%
100,000 4.000%, 7/01/97 99,889
Public Housing Authority Bonds - 3.24%
200,000 5.750%, 8/01/00 204,820
University Faculty Housing - 3.60%
230,000 4.350%, 10/01/00 227,700
University of Hawaii - 4.49%
University Revenue Bonds
280,000 5.450%, 10/01/06 284,200
<PAGE>
Honolulu City & County
Board of Water Supply - 4.75%
300,000 5.000%, 7/01/04 300,375
General Obligation Bonds - 1.59%
100,000 5.000%, 10/01/02 100,625
Halawa Business park - 3.27%
200,000 6.300%, 10/15/00 207,000
Maui County
General Obligation Bonds - 3.34%
190,000 8.000%, 1/01/01 211,375
Water System Revenue - 3.44%
100,000 6.600%, 12/01/07 108,750
100,000 6.700%, 12/01/11 109,125
217,875
Total Hawaii Municipal Bonds 5,653,579
PUERTO RICO MUNICIPAL BONDS - 3.98%
Puerto Rico Commonwealth
Electric Power Authority Revenue Bonds - 1.53%
90,000 7.125%, 7/01/14 96,525
General Obligation Bonds - 1.54%
90,000 7.750%, 7/01/17 97,762
Housing Finance Corp.
Single Family Mortgage Revenue Bonds - .91%
55,000 6.150%, 8/01/03 57,544
Total Puerto Rico Municipal Bonds 251,831
Total Investments (Cost $5,825,082) (a) 93.31% 5,905,410
Other Assets Less Liabilities 6.69 423,263
Net Assets 100.00% $6,328,673
(a) Aggregate cost for federal income tax purposes is $5,825,082.
At March 31, 1997, unrealized appreciation (depreciation)
of securities for federal income tax purposes is as follows:
Gross unrealized appreciation $121,376
Gross unrealized depreciation (41,048)
Net unrealized appreciation $ 80,328
See accompanying notes to financial statements
<PAGE>
First Hawaii Municipal Bond Fund
First Hawaii Intermediate Municipal Fund
Statement of Assets and Liabilities
March 31, 1997 (Unaudited)
<TABLE>
<S> <C> <C>
Municipal Intermediate
Bond Municipal
Fund Fund
ASSETS
Investments at market value
(Identified cost $51,827,726
and $5,825,082, respectively) (Note 1 (A)) $53,232,688 $5,905,410
Cash 1,395,881 341,725
Interest receivable 886,059 99,969
Prepaid expenses - 3,827
Total assets 55,514,628 6,350,931
LIABILITIES
Payable for investments purchased 370,750 -
Accrued expenses 24,533 -
Distributions payable 233,210 22,258
Total liabilities 628,493 22,258
NET ASSETS
(Applicable to 5,070,859 and 1,246,836
shares outstanding, $.01 par value,
20,000,000 shares authorized) $54,886,135 $6,328,673
NET ASSET VALUE OFFERING AND REPURCHASE PRICE PER SHARE
($54,886,135 / 5,070,859 shares) $10.82
($6,328,673 / 1,246,836 shares) $5.08
NET ASSETS
At March 31, 1997, net assets consisted of:
Paid-in capital $53,701,099 $6,253,391
Accumulated net realized loss on investments (219,926) (5,046)
Net unrealized appreciation 1,404,962 80,328
$54,886,135 $6,328,673
</TABLE>
See accompanying notes to financial statements
<PAGE>
First Hawaii Municipal Bond Fund
First Hawaii Intermediate Municipal Fund
Statement of Operations
Six months ended March 31, 1997 (Unaudited)
<TABLE>
<S> <C> <C>
Municipal Intermediate
Bond Municipal
Fund Fund
INVESTMENT INCOME
Interest income $1,623,209 $160,715
Expenses
Management fee (Note 2) 137,649 16,046
Distribution costs (Note 2) 27,662 -
Transfer agent fees (Note 2) 18,068 5,083
Shareholder services (Note 2) 27,530 3,209
Accounting fees (Note 2) 19,264 5,871
Legal and audit fees 14,068 1,904
Printing 7,500 952
Custodian fees 5,300 648
Insurance 6,558 635
Registration fees 2,313 -
Directors fees 800 -
Total expenses 266,712 34,348
Fee reductions (Note 4) (5,300) (648)
Expenses reimbursed or waived (Note 2) - (9,622)
Net expenses 261,412 24,078
Net investment income 1,361,797 136,637
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) from security transactions 9,557 (5,046)
Decrease in unrealized appreciation of investments (368,169) (23,283)
Net loss on investments (358,612) (28,329)
Net increase in net assets resulting
from operations $1,003,185 $108,308
</TABLE>
See accompanying notes to financial statements
<PAGE>
First Hawaii Municipal Bond Fund
Statement of Changes in Net Assets
Six months ended March 31, 1997 (Unaudited)
Year ended September 30, 1996
<TABLE>
<S> <C> <C>
1997 1996
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income $1,361,797 $2,668,355
Net realized gain on investments 9,557 21,217
Increase in (decrease) in unrealized
appreciation of investments (368,169) 202,015
Net increase in net assets
resulting from operations 1,003,185 2,891,587
Distributions to shareholders from
Net investment income
($.27 and $.55 per share, respectively) (1,361,797) (2,668,355)
Capital share transactions (a)
Increase in net assets resulting
from capital share transactions 1,079,820 2,810,813
Total increase in net assets 721,208 3,034,045
NET ASSETS
Beginning of period 54,164,927 51,130,882
End of period $54,886,135 $54,164,927
</TABLE>
(a) Summary of capital share activity follows:
<TABLE>
<S> <C> <C>
1997 1996
Shares Value Shares Value
Shares sold 474,503 $5,199,455 982,410 $10,706,770
Shares issued on reinvestment
of distributions 73,374 804,682 173,650 1,892,040
547,877 6,004,137 1,156,060 12,598,810
Shares redeemed (449,962) (4,924,317) (900,255) (9,787,997)
Net increase 97,915 $1,079,820 255,805 $2,810,813
</TABLE>
See accompanying notes to financial statements
<PAGE>
First Hawaii Intermediate Municipal Fund
Statement of Changes in Net Assets
Six months ended March 31, 1997 (Unaudited)
Year ended September 30, 1996
<TABLE>
<S> <C> <C>
1997 1996
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income $136,637 $253,088
Net realized gain (loss) on investments (5,046) 17,216
Decrease in unrealized appreciation of investments (23,283) (35,876)
Net increase in net assets resulting from operations 108,308 234,428
Distributions to shareholders from
Net investment income
($.11 and $.22 per share, respectively) (136,637) (253,088)
Capital gains ($.01 per share) (15,405) -
Capital share transactions (a)
Increase (decrease) in net assets
resulting from capital share transactions (251,832) 1,882,838
Total increase (decrease) in net assets (295,566) 1,864,178
NET ASSETS
Beginning of period 6,624,239 4,760,061
End of period $6,328,673 $6,624,239
</TABLE>
(a) Summary of capital share activity follows:
<TABLE>
<S> <C> <C>
1997 1996
Shares Value Shares Value
Shares sold 175,054 $889,978 688,964 $3,522,684
Shares issued on reinvestment
of distributions 21,519 110,598 43,852 224,869
196,573 1,000,576 732,816 3,747,553
Shares redeemed (243,935) (1,252,408) (364,169) (1,864,715)
Net increase (decrease) (47,362) $(251,832) 368,647 $1,882,838
</TABLE>
See accompanying notes to financial statements
<PAGE>
First Hawaii Muncipal Bond Fund
Financial Highlights
(For a share outstanding throughout the period)
Years ended September 30,
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1997(b) 1996 1995 1994 1993 1992
Net asset value
Beginning of year $10.89 $10.84 $10.62 $11.48 $10.90 $10.47
Income from investment operations
Net investment income .27 .55 .55 .55 .58 .60
Net gain (loss) on securities
(both realized and unrealized) (.07) .05 .31 (.80) .60 .43
Total from investment operations .20 .60 .86 (.25) 1.18 1.03
Less distributions
Dividends from net investment income (.27) (.55) (.55) (.55) (.58) (.60)
Distributions from capital gains - - (.09) (.06) (.02) -
Total distributions (.27) (.55) (.64) (.61) (.60) (.60)
End of year $10.82 $10.89 $10.84 $10.62 $11.48 $10.90
Total return 3.66% (c) 5.62% 8.42% (2.18)% 11.11% 10.16%
Ratios/Supplemental Data
Net assets, end of period (in 000's) $54,866 $54,165 $51,131 $52,230 $57,396 $39,291
Ratio of expenses to average net assets
Before expense reimbursements .97% (c) .98% 1.00% .97% .95% .95%
After expense reimbursements .97%(a)(c) .98%(a) .97%(a) .95% .95% .95%
Ratio of net investment income to average net assets
Before expense reimbursements 4.94%(c) 5.03% 5.19% 4.99% 5.21% 5.67%
After expense reimbursements 4.94%(c) 5.03% 5.22% 5.01% 5.21% 5.67%
Portfolio turnover 1.64% 15.16% 17.08% 40.22% 27.77% 18.44%
</TABLE>
(a) Ratio of expenses to average net assets after the reduction of
custodian fees under a custodian agreement were .95% in 1997, 1996
and 1995. Prior to 1995, such reductions were reflected in the
expense ratios.
(b) Six months ended March 31, 1997 (unaudited).
(c) Annualized.
See accompanying notes to financial statements
<PAGE>
First Hawaii Intermediate Municipal Fund
Financial Highlights
(For a share outstanding throughout the period)
<TABLE>
<S> <C> <C> <C> <C>
Six Months Period
Ended July 5, 1994*
March 31 Year ended to
1997 September 30, September 30,
(Unaudited) 1996 1995 1994
Net asset value
Beginning of period $5.12 $5.14 $4.99 $5.00
Income from investment operations
Net investment income .11 .22 .23 .05
Net gain (loss) on securities (unrealized) (.03) (.02) .15 (.01)
Total from investment operations .08 .20 .38 .04
Less distributions
Dividends from net investment income (.11) (.22) (.23) (.05)
Distribution from capital gains (.01) - - -
Total distributions (.12) (.22) (.23) (.05)
End of period $5.08 $5.12 $5.14 $4.99
Total return 3.07%(a) 3.95% 7.86% .72%
Ratios/Supplemental Data
Net assets, end of period (in 000's) $6,329 $6,624 $4,760 $2,447
Ratio of expenses to average net assets
Before expense reimbursements 1.07%(a) 1.50% 1.90% 4.48%(a)
After expense reimbursements .77%(a)(b).84%(b) .66%(b) 0%(a)
Ratio of net investment income to average net assets
Before expense reimbursements 3.94%(a) 3.66% 3.39% .12%(a)
After expense reimbursements 4.26%(a) 4.32% 4.63% 4.60%(a)
Portfolio turnover 1.64% 17.76% 10.04% 0%
</TABLE>
* Commencement of operations
(a) Annualized
(b) Ratio of expenses to average net assets after the reduction of
custodian fees under a custodian agreement were .75% for 1997 and
1996 and .64% for 1995. Prior to 1995, such reductions were reflected
in the expense ratios.
See accompanying notes to financial statements
<PAGE>
First Hawaii Municipal Bond Fund
First Hawaii Intermediate Municipal Fund
Notes to Financial Statements
March 31, 1997 (Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Hawaii Municipal Bond Fund and First Hawaii Intermediate Municipal
Fund ("Funds") are each a series of shares of First Pacific Mutual Fund,
Inc. which is registered under the Investment Company Act of 1940, as a
non-diversified open-end management company.
The investment objective of the Funds is to provide investors with the
maximum level of income exempt from federal and Hawaii income taxes
consistent with the preservation of capital. The Funds seek to achieve
their objective by investing primarily in municipal securities which pay
interest that is exempt from federal and Hawaii income taxes.
The Funds are subject to the risk of price fluctuation of the municipal
securities held in its portfolio which is generally a function of the
underlying credit rating of an issuer, the maturity length of the
securities, the securities' yield, and general economic and interest
rate conditions.
Since the Funds invest primarily in obligations of issuers located in
Hawaii, the marketability and market value of these obligations may be
affected by certain Hawaiian constitutional provisions, legislative
measures, executive orders, administrative regulations, voter initiatives,
and other political and economic developments. If any such problems
arise, they could adversely affect the ability of various Hawaiian
issuers to meet their financial obligation.
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of income and
expenses during the reported period. Actual results could differ from
those estimates.
(A) SECURITY VALUATION
Portfolio securities, which are fixed income securities, are valued
by an independent pricing service 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 Board of Directors. Securities with remaining
maturities of 60 days or less are valued on the amortized cost
basis as reflecting fair value. All other securities are valued
at their fair value as determined in good faith by the Board of
Directors.
(B) FEDERAL INCOME TAXES
It is the Funds' policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment
companies and to distribute their taxable income, if any, to
their shareholders. Therefore, no federal income tax provision
is required.
(C) SECURITY TRANSACTIONS, INVESTMENT INCOME AND DISTRIBUTIONS TO
SHAREHOLDERS
Security transactions are recorded on the trade date. Interest
income is recorded on the accrual basis. Bond discounts and
premiums are amortized as required by the Internal Revenue Code.
Distributions to shareholders are declared daily and reinvested or
paid in cash monthly. Premiums and discounts are amortized in
accordance with income tax regulations.
(2) INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS WITH
AFFILIATES
First Pacific Management Corporation ("FPMC") provides the Funds with
management and administrative services pursuant to a management agreement.
In accordance with the terms of the management agreement, FPMC receives
compensation at the annual rate of .50% of each Fund's average daily net
assets.
The Funds' distributor, First Pacific Securities ("FPS"), a wholly-owned
subsidiary of FPMC, received $27,662 for costs incurred in connection
with the sale of First Hawaii Municipal Bond Fund's shares (See Note 3).
First Pacific Recordkeeping, ("FPR"), a wholly-owned subsidiary of FPMC,
serves as the transfer agent and accounting agent for the Funds. FPR
also provides the Funds with certain clerical, bookkeeping and shareholder
services pursuant to a service agreement approved by the Funds' directors.
As compensation for these services FPR receives a fee, computed daily and
payable monthly, at an annualized rate of .10% of each Fund's average daily
net assets.
<PAGE>
For the six months ended March 31, 1997, FPMC and FPR voluntarily waived
certain management, transfer agent, shareholder services, and accounting
fees in the amount of $9,622 for First Hawaii Intermediate Municipal Fund.
Certain officers and directors of the Funds are also officers of FPMC,
FPS and FPR.
(3) DISTRIBUTION COSTS
The Funds' Board of Directors, including a majority of the Directors who
are not "interested persons" of the Funds, as defined in the Investment
Company Act of 1940, adopted a distribution plan pursuant to Rule 12b-1
of the Act. The Plan regulates the manner in which a regulated
investment company may assume costs of distributing and promoting the
sales of its shares.
The Plan provides that the Funds may incur certain costs, which may not
exceed .25% per annum of the Funds' average daily net assets, for payment
to the distributor for items such as advertising expenses, selling
expenses, commissions or travel reasonably intended to result in sales of
shares of the Funds.
(4) PURCHASES AND SALES/CUSTODY OF SECURITIES
Purchases and sales of securities aggregated $1,476,633 and $879,338,
respectively for the First Hawaii Municipal Bond Fund. Purchases and
sales of securities for First Hawaii Intermediate Municipal Fund
aggregated $103,701 and $778,225, respectively. Under an agreement
with the Custodian Bank, custodian fees are reduced by credits for
cash balances. During the six months ended March 31, 1997, such
reductions amounted to $5,300 and $648 for the First Hawaii Municipal
Bond Fund and the First Hawaii Intermediate Municipal Bond Fund,
respectively.
<PAGE>
Ward Plaza
210 Ward Avenue
Suite 129
Honolulu, Hawaii 96814
808/522-7777<PAGE>
October 17, 1996
Dear Shareholder:
The last twelve months have seen a frenzy of stockmarket trading. Time after
time the popular averages have made new records, and even experienced
investors find it difficult not to be tempted. Unfortunately, market gyrations
often divert public attention from traditional fundamentals and intrinsic
value, and make it difficult to appreciate quiet (realistic) investment
success.
Leahi's primary objective is the same as it has been since our inception:
maximum income exemption from federal and Hawaii income taxes consistent
with prevention of capital. Our $0.70 dividend in the latest twelve months
is just one cent lower than payout over the same period last year, while net
asset value of $13.72 is down two cents from the value of the previous year.
Total return for the period was slightly over 5%, composed predominantly of the
tax-exempt income component. We have also maintained the high quality of
Leahi's investment portfolio. More than 95% of our holdings are in the top
three grades of municipal bonds. We will continue to emphasize this quality
as we continue to pursue all of the objectives that are important to you.
Does this letter look vaguely familiar? It will might, since it is only
slightly modified from our semi-annual report. I hope you will share my
satisfaction in a year that was moderately successful and comfortingly
uneventful.
Warmest aloha,
\s\
Ronald E. Kent
Chairman, Board of Trustees
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees
of Leahi Investment Trust:
We have audited the accompanying statement of assets and liabilities of the
Leahi Tax-Free Income Trust (the "Trust"), a series of the Leahi Investment
Trust, including the schedule of investments as of September 30, 1996,
and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights
are the responsibility of the Trust's management. Our responsibility is
to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation on
securities owned as of September 30, 1996, by correspondence with the
custodian. Our audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of Leahi Tax-Free Income Trust as of September 30, 1996, the results of its
operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended in conformity with generally
accepted accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
October 17, 1996
<PAGE>
LEAHI TAX-FREE INCOME TRUST
Schedule of Investments
September 30, 1996
Face S&P Value
Amount Investments Rating Percent (Note 1)
Municipal Bonds - Hawaii
Hawaii Country Hawaii General Obligation Bonds AAA 3.2%
$ 465,000 7.200%, 06/01/06, FGIC Pre-refunded $ 511,500
200,000 7.200%, 06/01/05, FGIC Pre-refunded 220,000
300,000 5.600%, 05/01/11, FGIC 303,375
500,000 5.550%, 05/01/09, FGIC 507,500
Hawaii State General Obligation Bonds AA 4.4%
100,000 7.200%, 09/01/06, Pre-refunded 110,625
100,000 7.125%, 09/01/10, Pre-refunded 110,375
125,000 7.000%, 06/01/10, Pre-refunded 135,625
150,000 7.000%, 06/01/07, Pre-refunded 162,750
300,000 6.250%, 01/01/14 314,625
500,000 6.250%, 01/01/13 521,250
200,000 6.000%, 11/01/10 211,000
500,000 5.700%, 10/01/04 525,000
Hawaii State Airport System Revenue Bonds - AMT AAA 6.8%
1,095,000 7.500%, 07/01/20, FGIC 1,207,237
545,000 7.000%, 07/01/20, FGIC 595,413
175,000 7.000%, 07/01/10, FGIC 192,281
1,025,000 6.750%, 07/01/21, MBIA 1,091,625
150,000 5.800%, 07/01/01, MBIA 157,313
Hawaii State Airport System Revenue Bonds - AMT A- 2.5%
500,000 7.000%, 07/01/18 540,000
200,000 7.000%, 07/01/07 218,750
385,000 6.900%, 07/01/12 429,275
Hawaii State Dept. Budget & Finance AA+ 0.3%
Citizens Utilities Project 85
125,000 7.375%, 11/01/15 127,718
<PAGE>
Hawaii State Dept. Budget & Finance AAA 1.2%
Hawaiian Electric Bonds - AMT
$ 275,000 6.550%, 12/01/22, MBIA $ 291,844
250,000 6.200%, 05/01/26, MBIA 256,875
Hawaii State Dept. Budget & Finance BBB+ 4.1%
Hawaiian Electric Bonds - AMT
1,060,000 7.625%, 12/01/18 1,146,125
250,000 7.600%, 07/01/20 269,375
500,000 6.875%, 04/01/12 513,705
Hawaii State Dept. Budget & Finance
Maui Electric BBB+ 0.2%
100,000 6.875%, 04/04/12 102,741
Hawaii State Dept. Budget & Finance AA 2.3%
Kaiser Permanente Medical Refunding Bonds
850,000 6.500%, 03/01/11 889,313
175,000 6.250%, 03/01/21 180,031
Hawaii State Dept. Budget & Finance A 7.1%
Kapiolani Healthcare System
100,000 6.400%, 07/01/13 102,875
1,285,000 6.300%, 07/01/08 1,339,613
340,000 6.250%, 07/01/21 345,100
600,000 6.200%, 07/01/16 609,000
985,000 6.000%, 07/01/19 980,075
Hawaii State Dept. Budget & Finance AAA 7.5%
Kapiolani Hospital Pali Momi Project 9
3,120,000 7.600%, 07/01/10, Pre-refunded 3,572,400
<PAGE>
Hawaii State Dept. Budget & Finance-Queens Hospital AAA 1.2%
$ 565,000 6.500%, 07/01/12, FGIC Pre-refunded $ 588,306
Hawaii State Dept. Budget & Finance-Queens Hospital AA 2.6%
750,000 6.000%, 07/01/20 758,437
500,000 5.750%, 07/01/26 490,625
Hawaii State Dept. Budget & Finance AAA 2.3%
St. Francis Medical Center
1,000,000 6.500%, 07/01/22, FGIC 1,065,000
Hawaii State Dept. of Transportation Revenue Bonds A+ 1.0%
500,000 5.750%, 03/01/13 491,250
Hawaii State Harbor Capital Improvement Revenue Bonds A+ 0.5%
200,000 6.200%, 07/01/08 210,250
Hawaii State Harbor Capital Improvement AAA 3.6%
Revenue Bonds - AMT
390,000 7.250%, 07/01/13, AMBAC 405,272
100,000 7.250%, 07/01/10, MBIA 109,250
270,000 7.000%, 07/01/17, MBIA 292,275
500,000 6.500%, 07/01/19, FGIC 528,125
250,000 6.250%, 07/01/15, FGIC 258,125
105,000 6.200%, 07/01/03, FGIC 112,088
Hawaii State Housing Authority Revenue Bonds AAA 2.6%
1,250,000 5.900%, 07/01/27 1,245,312
Hawaii State Housing Authority Revenue Bonds A 3.4%
225,000 6.900%, 07/01/16 235,125
1,370,000 5.900%, 07/01/27 1,354,587
<PAGE>
Housing Finance & Development Corp. Revenue Bonds N/R 2.1%
Affordable Rental Housing Program
$1,000,000 6.100%, 07/01/30 $ 992,500
Honolulu City & County General Obligation Bonds AA 0.6%
Resource Recovery Improvement - AMT
250,000 7.300%, 02/01/10 270,000
Honolulu City & County General Obligation Water Bonds AA 2.1%
250,000 7.150%, 06/01/11, Pre-refunded 274,375
200,000 7.100%, 06/01/07, Pre-refunded 219,000
230,000 6.000%, 12/01/09 242,075
250,000 5.800%, 07/01/16 252,500
Honolulu City & County General Obligation Bond-AMT AA 0.3%
150,000 7.250%, 02/01/07 162,000
Honolulu City & County General Obligation Bonds AA 12.9%
880,000 7.100%, 10/01/09, Pre-refunded 942,700
380,000 7.100%, 10/01/08, Pre-refunded 407,075
300,000 6.900%, 12/01/06, Pre-refunded 330,000
725,000 6.700%, 08/01/11, Pre-refunded 797,500
525,000 6.700%, 08/01/10, Pre-refunded 577,500
985,000 6.700%, 08/01/09, Pre-refunded 1,083,500
820,000 6.700%, 08/01/08, Pre-refunded 902,000
375,000 6.700%, 08/01/05, Pre-refunded 412,500
460,000 6.100%, 06/01/12 478,975
200,000 6.000%, 06/01/10 207,500
Honolulu City & County General Obligation Mortgage
Revenue Bonds AAA 0.7%
325,000 6.800%, 07/01/28, MBIA 348,969
<PAGE>
Honolulu City & County Housing Bond AAA 0.4%
Waipahu Tower - AMT
$ 200,000 6.900%, 06/20/35, GNMA $ 209,250
Kauai County General Obligation Bonds AAA 2.4%
100,000 7.350%, 08/01/05, MBIA Pre-refunded 105,750
250,000 5.900%, 02/01/10, MBIA 256,563
250,000 5.900%, 02/01/11, MBIA 255,625
500,000 5.850%, 08/01/07, AMBAC 522,500
Maui County General Obligation Bonds AAA 3.9%
125,000 7.300%, 03/01/03, Pre-refunded 132,344
175,000 6.800%, 12/01/08, AMBAC Pre-refunded 191,844
250,000 6.800%, 12/01/05, AMBAC Pre-refunded 274,063
735,000 5.750%, 01/01/12, FGIC 745,106
235,000 5.750%, 06/01/13, MBIA 238,231
250,000 5.700%, 01/01/09, FGIC 253,437
Maui County Board of Water Supply AAA 0.7%
General Obligation
300,000 6.500%, 12/01/06, FGIC Pre-refunded 328,875
University of Hawaii Board of Regents AAA 1.7%
Revenue Bonds - AMBAC
500,000 5.700%, 10/01/17 501,875
300,000 5.650%, 10/01/16 __________ 301,125
TOTAL HAWAII 84.6% 40,153,593
<PAGE>
Municipal Bonds - Puerto Rico
Puerto Rico Electric Power Authority Revenue Bonds AAA 0.7%
$ 300,000 6.250%, 07/01/17, FSA $ 313,500
Puerto Rico Commonwealth Electric Power Bonds A- 0.3%
120,000 7.000%, 07/01/07 127,950
Puerto Rico Commonwealth General Obligation Bonds AAA 1.9%
100,000 7.300%, 07/01/20, Pre-refunded 111,625
100,000 6.250%, 07/01/10, MBIA 105,750
405,000 6.000%, 07/01/14, MBIA 416,137
45,000 7.125%, 07/01/02, FGIC - Pre-refunded 47,045
230,000 7.125%, 07/01/02, FGIC 239,041
Puerto Rico Commonwealth General Obligation Bonds A 2.9%
300,00 6.500%, 07/01/23 320,250
750,000 6.450%, 07/01/17 798,750
250,000 6.250%, 07/01/10 260,000
Puerto Rico Commonwealth Highway Authority Bonds AAA 0.7%
100,000 8.000%, 07/01/03, Pre-refunded 108,500
200,000 7.750%, 07/01/10, Pre-refunded 226,250
Puerto Rico Commonwealth Highway Authority Bonds A 1.6%
225,000 6.750%, 07/01/05 246,094
530,000 6.000%, 07/01/20 531,987
<PAGE>
Puerto Rico Commonwealth Housing Bonds AAA 0.6%
Single Family Mortgage Portfolio - AMT
$ 300,000 6.250%, 04/01/29, GNMA $ 303,750
Puerto Rico Commonwealth Housing Bonds AA 0.4%
Single Family Mortgage Portfolio
175,000 7.500%, 10/01/15 183,969
Puerto Rico Commonwealth Public Building AAA 0.6%
Improvement Bonds
250,000 7.250%, 07/01/10, Pre-refunded 278,125
Puerto Rico Commonwealth Public Building AAA 1.2%
Authority - Public Education & Health Facilities
225,000 7.875%, 07/01/16, Series G, Pre-refunded 236,450
200,000 7.875%, 07/01/16, Series H, Pre-refunded 210,178
105,000 7.875%, 07/01/07, Pre-refunded 110,343
Puerto Rico Medical & Environmental Center Bonds AAA 1.0%
440,000 6.250%, 07/01/24, MBIA 459,250
<PAGE>
Puerto Rico University Revenue Bonds A 1.8%
$ 840,000 6.500%, 06/01/13 _________ $ 873,600
TOTAL PUERTO RICO 13.7% 6,508,544
TOTAL MUNICIPAL BONDS (Cost: $44,645,481)(a) 98.3% 46,662,137
Other Assets Less Liabilities 1.7% 802,417
TOTAL NET ASSETS 100.0% $47,464,554
(a) Aggregate cost for federal income tax purposes is $44,645,481.
At September 30, 1996, unrealized appreciation(depreciation) of securities
for federal income tax purposes is as follows:
Gross unrealized appreciation $2,127,599
Gross unrealized depreciation (110,943)
Total net unrealized appreciation $2,016,656
The accompanying notes are an integral part of these financial statements
<PAGE>
Leahi Tax-Free Income Trust
Statement of Assets and Liabilities
September 30, 1996
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (cost $44,645,481) $ 46,662,137
Cash 90,409
Receivables:
Interest 800,329
Funds shares sold 2,250
Other assets 1,270
TOTAL ASSETS 47,556,395
LIABILITIES:
Payables:
Accrued expenses 28,141
Dividend distributions 63,700
TOTAL LIABILITIES 91,841
NET ASSETS:
(Applicable to 3,460,706 shares outstanding, $.01 par
value, unlimited shares authorized.) $ 47,464,554
NET ASSET VALUE:
Offering and redemption price
per share ($47,464,554/3,460,706) $13.72
NET ASSETS:
At September 30, 1996, net assets consisted of:
Paid-in capital $ 45,466,811
Accumulated net realized loss on investments (18,913)
Net unrealized appreciation $ 47,464,554
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Leahi Tax-Free Income Trust
Statement of Operations
September 30, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 2,766,773
EXPENSES:
Investment manager fee (Note 3) 233,778
Custodian fees 12,100
Transfer agent fees 34,892
Fund accounting & pricing fees 49,606
Legal fees 5,339
Insurance 11,684
Auditing fees 14,750
Trustees fees 1,400
Printing 3,277
Distribution fees (Note 4) 28,408
Total expenses 395,234
Fee reductions (Note 6) (5,607)
Net expenses 389,627
Net investment income 2,377,146
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from security transactions 53,839
Decrease in unrealized appreciation on investments (147,240)
Net realized and unrealized loss on investments (93,401)
Net increase in net assets resulting from operations $ 2,283,745
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Leahi Tax-Free Income Trust
Statement of Changes in Net Assets
Year Ended September 30,
<TABLE>
<S> <C> <C>
1996 1995
INCREASE IN NET ASSETS
Operations:
Net investment income $ 2,377,146 2,275,664
Realized gain (loss) from security transactions 53,839 (59,064)
Increase (decrease) in unrealized
appreciation on investments (147,240) 1,586,371
Net increase in net assets resulting from operations 2,283,745 3,802,971
Distribution to Shareholders:
Distribution from net investment income
($0.70 and $0.71 per share, respectively) (2,377,146) (2,275,664)
</TABLE>
(93,401) 1,527,307
Trust Share Transactions:
SHARES
Year Ended September 30,
<TABLE>
<S> <C> <C> <C> <C>
1996 1995
Purchased by investors 435,555 423,298 6,240,969 5,693,362
Issued through reinvestment
of distributions 113,340 114,602 1,560,495 1,527,950
Repurchased by Trust (420,514) (541,062) (5,780,506) (7,139,863)
Increase (decrease) in shares and net assets derived from Trust
share transactions 146,381 (3,162) 2,020,958 81,449
1,927,557 1,608,756
NET ASSETS
Beginning of period 45,536,997 43,928,241
End of period $47,464,554 $45,536,997
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Leahi Tax-Free Income Trust
Financial Highlights
(For a share outstanding throughout the period)
Years ended September 30,
<TABLE>
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Net asset value, beginning of period $13.74 $13.24 $14.42 $13.43 $12.97
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.70 0.71 0.69 0.71 0.74
Net gain (loss) on securities (both
realized and unrealized) (0.02) 0.50 (1.08) 1.03 0.50
Total from investment operations 0.68 1.21 (0.39) 1.74 1.24
LESS DISTRIBUTIONS
Dividends from net investment income (0.70) (0.71) (0.69) (0.71) (0.74)
Distributions from capital gains --- --- (0.10) (0.04) (0.04)
Total distributions (0.70) (0.71) (0.79) (0.75) (0.78)
Net asset value, end of period $13.72 $13.74 $13.24 $14.42 $13.43
Total Return 5.05% 9.40% (2.76%) 13.34% 9.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $47,465 $45,537 $43,928 $44,628 $30,950
Ratio of expenses to average net
assets 0.85%(a) 0.83%(a) 0.85% 0.98% 1.06%
Ratio of net investment income to
average net assets 5.09% 5.30% 5.04% 5.13% 5.60%
Portfolio turnover 17.42% 20.16% 22.05% 12.56% 8.04%
</TABLE>
(a) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement were 0.83% and 0.82% for 1996 and 1995,
respectively. Prior to 1995, such reductions were reflected in the
expense ratios.
The accompanying notes are an integral part of these financial statements
<PAGE>
LEAHI TAX-FREE INCOME TRUST
Notes to Financial Statements
September 30, 1996
1. Significant Accounting Policies
Leahi Tax-Free Income Trust (the "Trust") is a series of Leahi Investment
Trust which was organized as a Massachusetts business trust on July 23, 1987.
The Trust is an open-end, nondiversified management investment company
registered under the Investment Company Act of 1940, as amended. On
October 26, 1987, the Trust's registration statement under the Securities
Act of 1933 became effective. The Trust commenced operations on November 2,
1987.
The investment object of the Fund is to provide investors with the maximum
level of income exempt from federal and Hawaii income taxes consistent with the
preservation of capital. The Fund seeks to achieve its objective by investing
primarily in municipal securities which pay interest that is exempt from
federal and Hawaii income taxes.
The Fund is subject to the risk of price fluctuation of the municipal
securities held in its portfolio which is generally a function of the
underlying credit rating of an issuer, the maturity length of the securities,
the securities' yield, and general economic and interest rate conditions.
Since the Fund invests primarily in obligations of issuers located in
Hawaii, the marketability and market value of these obligations may be
affected by certain Hawaiian constitutional provisions, legislative measures,
executive orders, administrative regulations, voter initiatives, and other
political and economic developments. If any such problems arise, they could
adversely affect the ability of various Hawaiian issuers to meet their
financial obligation. The Fund also has a concentration of securities
from issuers located in Puerto Rico. Those issues could be affected by
similar development within Puerto Rico
a. Security Valuations:
Portfolio securities, which are fixed income securities, are valued by an
independent pricing service 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 Board of Trustees. Securities
with remaining maturities of sixty days or less are valued on the amortized
cost basis as reflecting fair value.
b. Federal Income Taxes:
It is the Trust's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and
to distribute its taxable income, if any, to its shareholders. Therefore,
no federal income tax provision is required. At September 30, 1996, the
Trust had an unused capital loss carryforward of approximately $18,900 of
which $17,300 expires in 2003 and $1,600 expires in 2004.
<PAGE>
c. Other:
As is common in the industry, security transactions are accounted for
on the date the securities are purchased or sold (trade date). Realized
gains and losses on security transactions are determined on the basis
of specific identification for both financial statement and federal
income tax purposes. Distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.
Premiums and discounts are amortized in accordance with income tax
regulations.
2. Dividend Distributions
The Trust accrues dividends daily and pays dividends either monthly
in cash, or reinvests dividends at the then current net asset value.
3. Investment Manager Fees
Leahi Management Company, Inc. serves as the Trust's Investment Manager,
and provides portfolio management services, office facilities, executive,
administrative, clerical services, and monitors legal regulatory compliance
for the Trust. For the services provided under the terms of the Investment
Management Agreement, the Investment Manager receives a monthly fee at the
annual rate of 1/2 of 1% of the value of the average daily net assets of
the Trust.
All expenses incurred in the operation of the Trust are home by the Trust,
however, the Investment Manager has agreed with the Trust that if in any fiscal
year, the operating expenses of the Trust exceed 1% of the average annual net
assets, the Investment Manager will reduce its fees to the extent necessary
to limit the Trust's expense to the maximum allowed.
Certain officers and trustees of the Trust are also officers and/or
directors of Leahi Management Company.
4. Distribution Fees
The Trust's Board of Trustees, including a majority of the Trustees
who are not "interested persons" of the Trust, as defined in the Investment
Company Act of 1940 (the "Act), have adopted a promotion and marketing
plan (the "Plan") pursuant to Rule 12b-1 of the Act. The Plan regulates
the manner in which regulated investment companies may assume costs of
distributing and promoting the sales of its shares.
The Plan provides that the Trust incur certain costs which may not
exceed 1/4 of 1% of the value of the annual average daily net assets of
the Trust for such items as advertisements, sales literature, commissions
and other expenses related to the promotion and marketing of the Trust's
shares.
The Plan permits the Investment Manager to carryforward for a maximum of
three years (without carrying charge) any unreimbursed promotion and
marketing expenses covered by the Plan. Unreimbursed costs as of
September 30, 1996 amounted to $25,096.
<PAGE>
5. Purchases and Sales of Securities
During the year ended September 30, 1996, purchases and sales of
securities, other than short-term securities, aggregated $10,191,278 and
$7,991,258, respectively.
6. Custody Fees
Under an agreement with the custodian bank, custody fees are reduced
by credits for cash balances. Such reductions amounted to $5,607 during
the year ended September 30, 1996.
<PAGE>
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<PAGE>
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<PAGE>
TRUSTEES OF LEAHI INVESTMENT TRUST
ERNEST W. ALBRECHT, Honolulu, Hawaii
GAIL ANN CHEW, Honolulu, Hawaii
RONALD E. KENT, Honolulu, Hawaii
KAREN T. NAKAMURA, Honolulu, Hawaii
DIANNE J. QUALTROUGH, Honolulu, Hawaii
KIM F. SCOGGINS, Honolulu, Hawaii
DAVID M. WALKER, Honolulu, Hawaii
INVESTMENT MANAGER
LEAHI MANAGEMENT COMPANY, INC.
210 Ward Avenue, Suite 129, Honolulu, Hawaii 96814
DISTRIBUTOR
LINSCO/PRIVATE LEDGER, CORP.
210 Ward Avenue, Suite 129, Honolulu, Hawaii 96814
DEPOSITORY AND DISBURSING AGENT
BANK OF HAWAII
Ward Plaza Branch, Honolulu, Hawaii 96814
CUSTODIAN
THE FIRST NATIONAL BANK OF BOSTON
150 Royall Street, Canton, Massachusetts 02021
TRANSFER AGENT
FPS SERVICES, INC.
3200 Horizon Drive, P.O. Box 61503,
King of Prussia, Pennsylvania 19406
AUDITORS
TAIT, WELLER & BAKER
Two Penn Center, Suite 700, Philadelphia
Pennsylvania 19102
LEGAL COUNSEL TO TRUST
SULLIVAN & WORCESTER LLP
One Post Office Square
Boston, Massachusetts 02109
This material may be used as sales literature, if
preceded or accompanied by a current prospectus
which gives details about charges, investment
objectives and operating policies of the Trust.<PAGE>
<PAGE>
LEAHI TAX-FREE INCOME TRUST
Schedule of Investments
March 31, 1997
(Unaudited)
Face S&P Value
Amount Investments Rating Percent (Note 1)
Municipal Bonds - Hawaii
Hawaii Country Hawaii General Obligation Bonds AAA 2.1%
$ 465,000 7.200%, 06/01/06, FGIC Pre-refunded $ 504,525
200,000 7.200%, 06/01/05, FGIC Pre-refunded 217,000
300,000 5.600%, 05/01/11, FGIC 303,375
Hawaii State General Obligation Bonds A+ 3.2%
100,000 7.200%, 09/01/06, Pre-refunded 109,000
100,000 7.125%, 09/01/10, Pre-refunded 108,750
125,000 7.000%, 06/01/10, Pre-refunded 133,750
150,000 7.000%, 06/01/07, Pre-refunded 160,500
300,000 6.250%, 01/01/14 310,875
500,000 6.250%, 01/01/13 517,500
200,000 6.000%, 11/01/10 210,750
Hawaii State Airport System Revenue Bonds - AMT AAA 6.7%
1,095,000 7.500%, 07/01/20, FGIC - AMT 1,219,400
545,000 7.000%, 07/01/20, FGIC - AMT 589,281
175,000 7.000%, 07/01/10, FGIC - AMT 190,750
1,025,000 6.750%, 07/01/21, MBIA - AMT 1,082,656
150,000 5.800%, 07/01/01, MBIA 156,187
Hawaii State Airport System Revenue Bonds - AMT A- 2.4%
500,000 7.000%, 07/01/18 - AMT 533,750
200,000 7.000%, 07/01/07 - AMT 215,750
385,000 6.900%, 07/01/12 - AMT 428,793
<PAGE>
Hawaii State Dept. Budget & Finance AAA 1.5%
Hawaiian Electric Bonds - AMT
$ 275,000 6.550%, 12/01/22, MBIA $ 284,969
250,000 6.200%, 05/01/26, MBIA 252,187
200,000 5.875%, 12/01/26 193,000
Hawaii State Dept. Budget & Finance BBB+ 2.9%
Hawaiian Electric Bonds - AMT
250,000 7.600%, 07/01/20 267,500
1,060,000 7.625%, 12/01/18 1,134,200
Hawaii State Dept. Budget & Finance
Maui Electric BBB+ 0.2%
100,000 6.875%, 04/01/12 102,731
Hawaii State Dept. Budget & Finance AA 2.2%
Kaiser Permanente Medical Refunding Bonds
850,000 6.500%, 03/01/11 885,063
175,000 6.250%, 03/01/21 179,593
Hawaii State Dept. Budget & Finance A 6.9%
Kapiolani Healthcare System
100,000 6.400%, 07/01/13 102,000
1,285,000 6.300%, 07/01/08 1,334,793
340,000 6.250%, 07/01/21 341,700
600,000 6.200%, 07/01/16 603,000
985,000 6.000%, 07/01/19 966,531
<PAGE>
Hawaii State Dept. Budget & Finance AAA 7.3%
Kapiolani Hospital Pali Momi Project 9
$3,120,000 7.600%, 07/01/10, Pre-refunded $ 3,517,800
Hawaii State Dept. Budget & Finance-Queens Hospital AA 4.2%
945,000 6.000%, 07/01/20 953,269
1,100,000 5.750%, 07/01/26 1,071,125
Hawaii State Dept. Budget & Finance AAA 2.1%
St. Francis Medical Center
1,000,000 6.500%, 07/01/22, FGIC 1,051,250
Hawaii State Dept. of Transportation Revenue Bonds A- 1.0%
500,000 5.750%, 03/01/13 490,000
Hawaii State Harbor Capital Improvement Revenue Bonds A+ 0.4%
200,000 6.200%, 07/01/08 208,000
Hawaii State Harbor Capital Improvement AAA 3.5%
Revenue Bonds - AMT
390,000 7.250%, 07/01/13, AMBAC 400,128
100,000 7.250%, 07/01/10, MBIA 108,250
270,000 7.000%, 07/01/17, MBIA 289,238
500,000 6.500%, 07/01/19, FGIC 521,250
250,000 6.250%, 07/01/15, FGIC 256,250
105,000 6.200%, 07/01/03, FGIC 111,037
<PAGE>
Hawaii State Housing Authority Revenue Bonds AAA 2.6%
$1,250,000 5.900%, 07/01/27, MBIA $ 1,234,375
Hawaii State Housing Authority Revenue Bonds A 3.0%
225,000 6.900%, 07/01/16 234,563
1,220,000 5.900%, 07/01/27 1,207,800
Housing Finance & Development Corp. Revenue Bonds N/R 2.1%
Affordable Rental Housing Program
1,000,000 6.100%, 07/01/30 $ 993,750
Honolulu City & County General Obligation Bonds AA 0.6%
Resource Recovery Improvement - AMT
250,000 7.300%, 02/01/10 267,813
Honolulu City & County General Obligation Water Bonds AA 2.0%
250,000 7.150%, 06/01/11, Pre-refunded 270,625
200,000 7.100%, 06/01/07, Pre-refunded 216,000
230,000 6.000%, 12/01/09 243,225
250,000 5.800%, 07/01/16 248,438
Honolulu City & County General Obligation Bond-AMT AA 0.3%
150,000 7.250%, 02/01/07 161,063
Honolulu City & County General Obligation Mortgage
Revenue Bonds AAA 0.7%
325,000 6.800%, 07/01/28, MBIA 348,563
<PAGE>
Honolulu City & County General Obligation Bonds AA 12.5%
$ 880,000 7.100%, 10/01/09, Pre-refunded $ 930,600
380,000 7.100%, 10/01/08, Pre-refunded 401,850
300,000 6.900%, 12/01/06, Pre-refunded 325,875
725,000 6.700%, 08/01/11, Pre-refunded 787,531
525,000 6.700%, 08/01/10, Pre-refunded 570,281
985,000 6.700%, 08/01/09, Pre-refunded 1,069,956
820,000 6.700%, 08/01/08, Pre-refunded 890,725
375,000 6.700%, 08/01/05, Pre-refunded 407,344
460,000 6.100%, 06/01/12 477,250
200,000 6.000%, 06/01/10 207,500
Honolulu City & County Housing Bond AAA 0.4%
Waipahu Tower - AMT
200,000 6.900%, 06/20/35, GNMA 209,000
Kauai County General Obligation Bonds AAA 2.4%
100,000 7.350%, 08/01/05, MBIA Pre-refunded 104,250
250,000 5.900%, 02/01/10, MBIA 256,250
250,000 5.900%, 02/01/11, MBIA 255,625
500,000 5.850%, 08/01/07, AMBAC 524,375
Maui County Board of Water Supply AAA 0.7%
General Obligation
300,000 6.500%, 12/01/06, FGIC Pre-refunded 325,125
<PAGE>
Maui County General Obligation Bonds AAA 3.8%
$ 125,000 7.300%, 03/01/03, Pre-refunded $ 130,653
175,000 6.800%, 12/01/08, AMBAC Pre-refunded 189,438
250,000 6.800%, 12/01/05, AMBAC Pre-refunded 270,625
735,000 5.750%, 01/01/12, FGIC 744,188
235,000 5.750%, 06/01/13, MBIA 237,350
250,000 5.700%, 01/01/09, FGIC 253,750
University of Hawaii Board of Regents AAA 2.6%
Revenue Bonds - AMBAC
500,000 5.700%, 10/01/17 493,125
800,000 5.650%, 10/01/16 __________ 789,000
TOTAL HAWAII 81.4% 39,408,992
<PAGE>
Municipal Bonds - Puerto Rico
Puerto Rico Electric Power Authority Revenue Bonds AAA 0.6%
$ 300,000 6.250%, 07/01/17, FSA $ 310,875
Puerto Rico Commonwealth Electric Power Bonds BBB+ 0.2%
120,000 7.000%, 07/01/07 126,750
Puerto Rico Commonwealth General Obligation Bonds AAA 1.4%
100,000 7.300%, 07/01/20, Pre-refunded 110,000
50,000 7.125%, 07/01/02, Pre-refunded 51,400
180,000 7.125%, 07/01/02, FGIC 184,716
100,000 6.250%, 07/01/10, FGIC 106,000
250,000 5.750%, 07/01/14, MBIA 248,750
Puerto Rico Commonwealth General Obligation Bonds A 2.8%
300,000 6.500%, 07/01/23 321,375
750,000 6.450%, 07/01/17 795,937
250,000 6.250%, 07/01/10 259,687
Puerto Rico Commonwealth Highway Authority Bonds AAA 0.7%
100,000 8.000%, 07/01/03, Pre-refunded 106,750
200,000 7.750%, 07/01/10, Pre-refunded 222,750
Puerto Rico Commonwealth Highway Authority Bonds A 1.6%
225,000 6.750%, 07/01/05 246,094
630,000 6.000%, 07/01/20 629,213
530,000 5.750%, 07/01/18 514,763
<PAGE>
Puerto Rico Commonwealth Housing Bonds AAA 0.8%
Single Family Mortgage Portfolio - AMT
$ 360,000 6.250%, 04/01/29, GNMA $ 364,500
Puerto Rico Commonwealth Housing Bonds AA 0.4%
Multi-Family Mortgage Portfolio
175,000 7.500%, 10/01/15 183,312
Puerto Rico Commonwealth Public Building AAA 0.6%
Improvement Bonds
250,000 7.250%, 07/01/10, Pre-refunded 274,063
Puerto Rico Commonwealth Public Building AAA 2.0
Authority - Public Education & Health Facilities
225,000 7.875%, 07/01/16, Series G, Pre-refunded 236,450
200,000 7.875%, 07/01/16, Series H, Pre-refunded 210,178
550,000 5.500%, 07/01/25, Series A 524,562
Puerto Rico Commonwealth Public Building A 0.3%
Authority - Public Education & Health Facilities
150,000 5.570%, 07/01/15 147,000
Puerto Rico Medical & Environmental Center Bonds AAA 1.9%
440,000 6.250%, 07/01/24, MBIA 456,500
455,000 6.250%, 08/01/32, FHA 463,531
<PAGE>
Puerto Rico University Revenue Bonds A 1.1%
$ 500,000 6.500%, 06/01/13 _________$ 514,375
TOTAL PUERTO RICO 15.7% 7,598,318
TOTAL MUNICIPAL BONDS (Cost: $45,466,743)(a) 97.1% 47,007,310
Other Assets Less Liabilities 2.9% 1,383,173
TOTAL NET ASSETS 100.0% $48,390,483
(a) Aggregate cost for federal income tax purposes is $45,466,743.
At March 31, 1997, unrealized appreciation (depreciation) of securities
for federal income tax purposes is as follows:
Gross unrealized appreciation $1,749,659
Gross unrealized depreciation (209,092)
Total net unrealized appreciation $1,540,567
The accompanying notes are an integral part of these financial statements
<PAGE>
Leahi Tax-Free Income Trust
Statement of Assets and Liabilities
March 31, 1997 (Unaudited)
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (cost $45,466,743) $ 47,007,310
Cash 835,094
Receivables:
Interest 783,552
Funds shares sold 11,409
Other assets 6,324
TOTAL ASSETS 48,634,689
LIABILITIES:
Payables:
Accrued expenses 32,915
Dividend distributions 69,131
Redemptions 151,161
TOTAL LIABILITIES 253,206
NET ASSETS:
(Applicable to 3,559,886 shares outstanding,
$.01 par value, unlimited shares authorized.) $ 48,390,483
NET ASSET VALUE:
Offering and redemption price per share
($48,390,483/3,559,886) $13.59
NET ASSETS:
At March 31, 1997, net assets consisted of:
Paid-in capital $ 46,831,010
Accumulated net realized loss on investments 18,906
Net unrealized appreciation 1,540,567
$ 48,390,483
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Leahi Tax-Free Income Trust
Statement of Operations
Quarter Ended March 31, 1997 (Unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 1,418,910
EXPENSES:
Investment manager fee 119,659
Custodian fees 2,111
Transfer agent fees 13,454
Fund accounting & pricing fees 24,155
Legal fees 5,468
Insurance 15,500
Trustees fees 1,000
Printing 2,871
Miscellaneous 15,963
Total expenses 200,181
Fee reductions (Note 6) (1,547)
Net expenses 198,634
Net investment income 1,220,276
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized gain from security transactions 37,819
Decrease in unrealized appreciation on investments (476,089)
Net realized and unrealized loss on investments (438,270)
Net increase in net assets resulting from operations $ 782,006
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Leahi Tax-Free Income Trust
Statement of Changes in Net Assets
Six-Months
Ended Year Ended
3/31/97 9/30/96
INCREASE IN NET ASSETS
Operations:
Net investment income $ 1,220,276 $ 2,377,146
Realized gain (loss) from
security transactions 37,819 53,839
Increase (decrease) in unrealized
appreciation on investments (476,089) (147,240)
Net increase in net assets resulting from operations 782,006 2,283,745
Distribution to Shareholders:
Distribution from net investment income
($0.70 and $0.71 per share, respectively) (1,220,276) (2,377,146)
(438,270) (93,401)
Trust Share Transactions:
SHARES
Six-Months
Ended Year Ended
3/31/97 9/30/96
Purchased by investors 219,350 435,555 3,015,775 6,240,969
Issued through reinvestment
of distributions 59,985 113,340 825,754 1,560,495
Repurchased by Trust (180,155) (420,514)(2,477,330) (5,780,506)
Increase (decrease) in shares and net assets derived from
Trust share transactions 99,180 146,381 1,364,199 2,020,958
925,929 1,927,557
NET ASSETS
Beginning of period 47,464,554 45,536,997
End of period $48,390,483 $47,464,554
The accompanying notes are an integral part of these financial statements
<PAGE>
Leahi Tax-Free Income Trust
Financial Highlights
(For a share outstanding throughout the period)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Six-Months
Ended
3/31/97 Years ended September 30,
(Unaudited) 1996 1995 1994 1993 1992
Net asset value, beginning of period $13.72 $13.74 $13.24 $14.42 $13.43 $12.97
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.35 0.70 0.71 0.69 0.71 0.74
Net gain (loss) on securities (both
realized and unrealized) (0.13) (0.02) 0.50 (1.08) 1.03 0.50
Total from investment operations 0.22 0.68 1.21 (0.39) 1.74 1.24
LESS DISTRIBUTIONS
Dividends from net investment income (0.35) (0.70) (0.71) (0.69) (0.71) (0.74)
Distributions from capital gains --- --- --- (0.10) (0.04) (0.04)
Total distributions (0.35) (0.70) (0.71) (0.79) (0.75) (0.78)
Net asset value, end of period $13.59 $13.72 $13.74 $13.24 $14.42 $13.43
Total Return 3.20% 5.05% 9.40%(b) (2.76%) 13.34% 9.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $48,391 $47,465 $45,537 $43,928 $44,628 $30,950
Ratio of expenses to average net
assets 0.83% 0.85% 0.83%(c) 0.85% 0.98% 1.06%
Ratio of net investment income to
average net assets 5.08% 5.09% 5.30%(c) 5.04% 5.13% 5.60%
Portfolio turnover 6.83% 17.42% 20.16% 22.05% 12.56% 8.04%
</TABLE>
(a) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement were 0.83% and 0.82% for 1996 and 1995,
respectively. Prior to 1995, such reductions were reflected in the
expense ratios.
The accompanying notes are an integral part of these financial statements
<PAGE>
LEAHI TAX-FREE INCOME TRUST
Notes to Financial Statements
March 31, 1997
(Unaudited)
1. Significant Accounting Policies
Leahi Tax-Free Income Trust (the "Trust") is a series of Leahi Investment
Trust which was organized as a Massachusetts business trust on July 23, 1987.
The Trust is an open-end, nondiversified management investment company
registered under the Investment Company Act of 1940, as amended.
On October 26, 1987, the Trust's registration statement under the
Securities Act of 1933 became effective. The Trust commenced operations
on November 2, 1987.
The investment object of the Fund is to provide investors with the maximum
level of income exempt from federal and Hawaii income taxes consistent with the
preservation of capital. The Fund seeks to achieve its objective by investing
primarily in municipal securities which pay interest that is exempt from
federal and Hawaii income taxes.
The Fund is subject to the risk of price fluctuation of the municipal
securities held in its portfolio which is generally a function of the
underlying credit rating of an issuer, the maturity length of the
securities, the securities' yield, and general economic and interest
rate conditions.
Since the Fund invests primarily in obligations of issuers located in
Hawaii, the marketability and market value of these obligations may be
affected by certain Hawaiian constitutional provisions, legislative
measures, executive orders, administrative regulations, voter initiatives,
and other political and economic developments. If any such problems arise,
they could adversely affect the ability of various Hawaiian issuers
to meet their financial obligation. The Fund also has a concentration
of securities from issuers located in Puerto Rico. Those issues could
be affected by similar development within Puerto Rico
a. Security Valuations:
Portfolio securities, which are fixed income securities, are valued
by an independent pricing service 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 Board of
Trustees. Securities with remaining maturities of sixty days or less
are valued on the amortized cost basis as reflecting fair value.
b. Federal Income Taxes:
It is the Trust's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and
to distribute its taxable income, if any, to its shareholders. Therefore,
no federal income tax provision is required. At September 30, 1996,
the Trust had an unused capital loss carryforward of approximately
$18,900 of which $17,300 expires in 2003 and $1,600 expires in 2004.
<PAGE>
c. Other:
As is common in the industry, security transactions are accounted for
on the date the securities are purchased or sold (trade date). Realized
gains and losses on security transactions are determined on the basis of
specific identification for both financial statement and federal income
tax purposes. Distributions to shareholders are recorded on the ex-dividend
date. Interest income and estimated expenses are accrued daily. Premiums
and discounts are amortized in accordance with income tax regulations.
2. Dividend Distributions
The Trust accrues dividends daily and pays dividends either monthly
in cash, or reinvests dividends at the then current net asset value.
3. Investment Manager Fees
Leahi Management Company, Inc. serves as the Trust's Investment
Manager, and provides portfolio management services, office facilities,
executive, administrative, clerical services, and monitors legal regulatory
compliance for the Trust. For the services provided under the terms of the
Investment Management Agreement, the Investment Manager receives a monthly
fee at the annual rate of 1/2 of 1% of the value of the average daily net
assets of the Trust.
All expenses incurred in the operation of the Trust are home by
the Trust, however, the Investment Manager has agreed with the Trust that
if in any fiscal year, the operating expenses of the Trust exceed 1% of
the average annual net assets, the Investment Manager will reduce its
fees to the extent necessary to limit the Trust's expense to the maximum
allowed.
Certain officers and trustees of the Trust are also officers
and/or directors of Leahi Management Company.
4. Distribution Fees
The Trust's Board of Trustees, including a majority of the Trustees
who are not "interested persons" of the Trust, as defined in the Investment
Company Act of 1940 (the "Act), have adopted a promotion and marketing plan
(the "Plan") pursuant to Rule 12b-1 of the Act. The Plan regulates the
manner in which regulated investment companies may assume costs of
distributing and promoting the sales of its shares.
The Plan provides that the Trust incur certain costs which may not
exceed 1/4 of 1% of the value of the annual average daily net assets of the
Trust for such items as advertisements, sales literature, commissions
and other expenses related to the promotion and marketing of the Trust's
shares.
<PAGE>
The plan permits the Investment Manager to carry forward for a
maximum of three years (without carrying charge) any unreimbursed
promotion and marketing expenses covered by the plan. Unreimbursed
costs as of March 31, 1997 amounted to $29,186.
5. Purchases and Sales of Securities
During the year ended March 31, 1997, purchases and sales of
securities, other than short-term securities, aggregated $4,049,634
and $3,223,137, respectively.
6. Custody Fees
Under an agreement with the custodian bank, custody fees are
reduced by credits for cash balances. Such reductions amounted to
$1,547 during the six months ended March 31, 1997.
<PAGE>
FIRST HAWAII MUNICIPAL BOND FUND
PRO FORMA STATEMENT OF NET ASSETS
March 31, 1997 (Unaudited)
First Pro
Leahi First Hawaii Leahi Hawaii Forma * Pro Forma
Par Value Par Value Value Value Adjust- Balance
ments
HAWAII MUNICIPAL BONDS
Hawaii County
General Obligation Bonds
$ - $1,150,000 7.050%,6/01/01 $ - $ 1,242,000 $ - $ 1,242,000
- 100,000 6.800%,12/01/01 - 102,689 - 102,689
465,000 565,000 7.200%,6/01/06 504,925 613,025 - 1,117,950
200,000 - 7.200%,6/01/05 217,000 - - 217,000
300,000 - 5.600%,5/01/11 303,375 - - 303,375
1,025,300 1,957,714 - 2,983,014
Hawaii State
General Obligation Bonds
- 135,000 6.000%,10/01/08 - 143,775 - 143,775
- 330,000 7.125%,9/01/09 - 358,875 - 358,875
100,000 - 7.200%,9/01/06 109,000 - - 109,000
150,000 - 7.000%,6/01/07 160,500 - - 160,500
125,000 - 7.000%,6/01/10 133,750 - - 133,750
100,000 - 7.125%,9/01/10 108,750 - - 108,750
200,000 - 6.000%,11/01/10 210,750 - - 210,750
500,000 - 6.250%,1/01/13 517,500 - - 517,500
300,000 - 6.250%,1/01/14 310,875 - - 310,875
1,551,125 502,650 - 2,053,775
Airport Systems Revenue Bonds
- 400,000 5.125%,7/01/00 - 404,500 - 404,500
- 345,000 6.300%,7/01/01 - 364,406 - 364,406
545,000 560,000 7.000%,7/01/20 589,281 605,500 - 1,194,781
1,120,000 1,330,000 7.500%,7/01/20 1,219,400 1,448,037 - 2,667,437
150,000 - 5.800%,7/01/01 156,188 - - 156,188
200,000 - 7.000%,7/01/07 215,750 - - 215,750
175,000 - 7.000%,7/01/10 190,750 - - 190,750
385,000 - 6.900%,7/01/12 428,794 - - 428,794
500,000 - 7.000%,7/01/18 533,750 - - 533,750
1,025,000 - 6.750%,7/01/21 1,082,656 - - 1,082,656
4,416,569 2,822,443 - 7,239,012
<PAGE>
FIRST HAWAII MUNICIPAL BOND FUND
PRO FORMA STATEMENT OF NET ASSETS - (Continued)
March 31, 1997 (Unaudited)
First Pro
Leahi First Hawaii Leahi Hawaii Forma * Pro Forma
Par Value Par Value Value Value Adjust- Balance
ments
Hawaiian Electric Company, Inc.
1,060,000 1,660,000 7.625%,12/01/18 1,134,200 1,776,200 - 2,910,400
250,000 310,000 7.600%,7/01/20 267,500 331,700 - 599,200
250,000 200,000 6.200%,5/01/26 252,188 201,750 - 453,938
200,000 400,000 5.875%,12/01/26 193,000 386,000 - 579,000
500,000 - 6.875%,4/01/12 513,655 - - 513,655
275,000 - 6.555%,12/01/22 284,969 - - 284,969
2,645,512 2,695,650 - 5,341,162
Kapiolani Hospital
100,000 1,550,000 6.400%,7/01/13 102,000 1,581,000 - 1,683,000
- 430,000 7.650%,7/01/19 - 485,900 - 485,900
- 10,000 6.875%,4/01/12 - 10,273 - 10,273
1,285,000 - 6.300%,7/01/08 1,334,794 - - 1,334,794
3,120,000 - 7.600%,7/01/10 3,517,800 - - 3,517,800
600,000 - 6.200%,7/01/16 603,000 - - 603,000
985,000 - 6.000%,7/01/19 966,531 - - 966,531
340,000 - 6.250%,7/01/21 341,700 - - 341,700
6,865,825 2,077,173 - 8,942,998
Kaiser Permanente Center
175,000 2,150,000 6.250%,3/01/21 179,594 2,206,438 - 2,386,032
850,000 - 6.500%,3/01/11 885,063 - - 885,063
1,064,657 2,206,438 - 3,271,095
Queen's Medical Center Program
- 200,000 6.800%,7/01/00 - 209,000 - 209,000
- 300,000 5.200%,7/01/04 - 302,625 - 302,625
- 540,000 6.900%,7/01/04 - 569,025 - 569,025
- 250,000 6.125%,7/01/11 - 269,375 - 269,375
- 600,000 6.200%,7/01/22 - 648,750 - 648,750
1,100,000 1,635,000 5.750%,7/01/26 1,071,125 1,592,081 - 2,663,206
945,000 - 6.000%,7/01/20 953,269 - - 953,269
2,024,394 3,590,856 - 5,615,250
St. Francis Medical Center
1,000,000 1,765,000 6.500%,7/01/22 1,051,250 1,855,456 - 2,906,706
FIRST HAWAII MUNICIPAL BOND FUND
PRO FORMA STATEMENT OF NET ASSETS - (Continued)
March 31, 1997 (Unaudited)
First
Leahi First Hawaii Leahi Hawaii Pro Forma * Pro Forma
Par Value Par Value Value Value Adjustments Balance
Wahiawa General Hospital
- 230,000 7.125%,7/01/98 - 234,887 - 234,887
- 2,985,000 7.500%,7/01/12 - 3,141,713 - 3,141,713
- 3,376,600 - 3,376,600
Maui Electric
100,000 - 6.875%,4/01/12 102,731 - - 102,731
Department of Transportation
Special Facilities Revenue Bonds
500,000 2,250,000 5.750%,3/01/13 490,000 2,205,000 - 2,695,000
Harbor Capital Improvements Revenue Bonds, Series 1989
- 300,000 5.650%,7/01/02 - 308,625 - 308,625
105,000 100,000 6.200%,7/01/03 111,037 105,750 - 216,787
- 280,000 6.300%,7/01/04 - 298,900 - 298,900
100,000 125,000 7.250%,7/01/10 108,250 135,312 - 243,562
390,000 305,000 7.250%,7/01/13 400,128 312,921 - 713,049
270,000 540,000 7.000%,7/01/17 289,238 578,475 - 867,713
500,000 300,000 6.500%,7/01/19 521,250 312,750 - 834,000
- 400,000 5.500%,7/01/27 - 366,500 - 366,500
200,000 - 6.200%,7/01/08 208,000 - - 208,000
250,000 - 6.250%,7/01/15 256,250 - - 256,250
1,894,153 2,419,233 - 4,313,386
Highway Revenue Bonds, Series 1993
- 200,000 5.000%,7/01/09 - 191,500 - 191,500
- 150,000 5.000%,7/01/11 - 140,063 - 140,063
- 1,000,000 5.600%,7/01/14 - 978,750 - 978,750
- 1,310,313 - 1,310,313
FIRST HAWAII MUNICIPAL BOND FUND
PRO FORMA STATEMENT OF NET ASSETS - (Continued)
March 31, 1997 (Unaudited)
First
Leahi First Hawaii Leahi Hawaii Pro Forma * Pro Forma
Par Value Par Value Value Value Adjustments Balance
Housing Authority Single Family Mortgage Purpose Revenue Bonds
- 145,000 6.300%,7/01/99 - 148,625 - 148,625
- 525,000 8.000%,7/01/08 - 542,063 - 542,063
- 390,000 8.000%,7/01/10 - 406,088 - 406,088
- 405,000 7.000%,7/01/11 - 424,238 - 424,238
- 100,000 5.700%,7/01/13 - 100,000 - 100,000
- 590,000 6.900%,7/01/16 - 615,075 - 615,075
- 305,000 7.375%,7/01/16 - 311,884 - 311,884
- 1,505,000 8.125%,7/01/17 - 1,568,962 - 1,568,962
- 530,000 9.250%,7/01/17 - 539,148 - 539,148
- 495,000 8.125%,7/01/19 - 516,037 - 516,037
- 400,000 6.750%,7/01/20 - 411,000 - 411,000
- 540,000 7.100%,7/01/24 - 562,950 - 562,950
2,470,000 2,015,000 5.900%,7/01/27 2,442,175 1,992,350 - 4,434,525
- 115,000 7.800%,7/01/29 - 120,175 - 120,175
225,000 - 6.900%,7/01/16 234,562 - - 234,562
2,676,737 8,258,595 - 10,935,332
Multi-Family Mortgage Purpose Revenue Bonds
- 70,000 4.000%,7/01/97 - 69,922 - 69,922
- 180,000 4.500%,1/01/99 - 179,100 - 179,100
- 200,000 4.800%,1/01/01 - 198,250 - 198,250
- 205,000 4.800%,7/01/01 - 204,231 - 204,231
- 210,000 4.900%,1/01/02 - 207,638 - 207,638
- 215,000 4.900%,7/01/02 - 213,925 - 213,925
- 1,000,000 5.700%,7/01/18 - 972,500 - 972,500
1,000,000 1,500,000 6.100%,7/01/30 993,750 1,490,625 - 2,484,375
993,750 3,536,191 - 4,529,941
Public Housing Authority Bonds
- 185,000 5.750%,8/01/00 - 189,458 - 189,458
- 250,000 5.750%,8/01/04 - 255,690 - 255,690
- 445,148 - 445,148
FIRST HAWAII MUNICIPAL BOND FUND
PRO FORMA STATEMENT OF NET ASSETS - (Continued)
March 31, 1997 (Unaudited)
First
Leahi First Hawaii Leahi Hawaii Pro Forma * Pro Forma
Par Value Par Value Value Value Adjustments Balance
University Faculty Housing
- 90,000 4.350%,10/01/00 - 89,100 - 89,100
- 330,000 4.450%,10/01/01 - 325,875 - 325,875
- 345,000 4.550%,10/01/02 - 340,256 - 340,256
- 1,500,000 5.700%,10/01/25 - 1,475,625 - 1,475,625
- 2,230,856 - 2,230,856
University of Hawaii - Revenue Bonds
800,000 - 5.650%,10/01/16 789,000 - - 789,000
500,000 - 5.700%,10/01/17 493,125 - - 493,125
1,282,125 - - 1,282,125
Honolulu City & County
Board of Water Supply
- 100,000 5.000%,7/01/04 - 100,125 - 100,125
- 750,000 5.800%,7/01/21 - 740,625 - 740,625
200,000 - 7.100%,6/01/07 216,000 - - 216,000
230,000 - 6.000%,12/01/09 243,225 - - 243,225
250,000 - 7.150%,6/01/11 270,625 - - 270,625
250,000 - 5.800%,7/01/16 248,437 - - 248,437
325,000 - 6.800%,7/01/28 348,563 - - 348,563
1,326,850 840,750 - 2,167,600
<PAGE>
FIRST HAWAII MUNICIPAL BOND FUND
PRO FORMA STATEMENT OF NET ASSETS - (Continued)
March 31, 1997 (Unaudited)
First
Leahi First Hawaii Leahi Hawaii Pro Forma * Pro Forma
Par Value Par Value Value Value Adjustments Balance
General Obligation Bonds
- 100,000 7.300%,7/01/03 - 112,375 - 112,375
- 200,000 7.350%,7/01/06 - 231,750 - 231,750
- 100,000 7.250%,2/01/08 - 107,250 - 107,250
- 1,000,000 7.300%,2/01/09 - 1,073,750 - 1,073,750
- 240,000 5.500%,9/01/16 - 232,200 - 232,200
375,000 - 6.700%,8/01/05 407,344 - - 407,344
300,000 - 6.900%,12/01/06 325,875 - - 325,875
820,000 - 6.700%,8/01/08 890,725 - - 890,725
380,000 - 7.100%,10/01/08 401,850 - - 401,850
985,000 - 6.700%,8/01/09 1,069,956 - - 1,069,956
880,000 - 7.100%,10/01/09 930,600 - - 930,600
200,000 - 6.000%,6/01/10 207,500 - - 207,500
525,000 - 6.700%,8/01/10 570,281 - - 570,281
725,000 - 6.700%,8/01/11 787,531 - - 787,531
460,000 - 6.100%,6/01/12 477,250 - - 477,250
150,000 - 7.250%,2/01/07 161,062 - - 161,062
200,000 - 6.900%,6/20/35 209,000 - - 209,000
250,000 - 7.300%,2/01/10 267,813 - - 267,813
6,706,787 1,757,325 - 8,464,112
Halawa Business Park
- 170,000 6.300%,10/15/00 - 175,950 - 175,950
- 370,000 6.500%,10/15/02 - 388,962 - 388,962
- 365,000 6.600%,10/15/03 - 387,356 - 387,356
- 952,268 - 952,268
Housing Authority Multi-Family Mortgage Purpose Revenue Bonds
- 1,000,000 6.900%,6/20/35 - 1,045,000 - 1,045,000
FIRST HAWAII MUNICIPAL BOND FUND
PRO FORMA STATEMENT OF NET ASSETS - (Continued)
March 31, 1997 (Unaudited)
First Pro
Leahi First Hawaii Leahi Hawaii Forma * Pro Forma
Par Value Par Value Value Value Adjustments Balance
Kauai County
General Obligation Bonds
- 595,000 6.700%,8/01/97 - 600,635 - 600,635
- 300,000 5.100%,2/01/01 - 303,750 - 303,750
- 410,000 5.850%,8/01/07 - 429,988 - 429,988
500,000 780,000 5.850%,8/01/07 524,375 818,025 - 1,342,400
- 295,000 5.900%,2/01/12 - 301,637 - 301,637
100,000 - 7.350%,8/01/05 104,250 - - 104,250
250,000 - 5.900%,2/01/10 256,250 - - 256,250
250,000 - 5.900%,2/01/11 255,625 - - 255,625
1,140,500 2,454,035 - 3,594,535
Maui County
General Obligation Bonds
- 740,000 8.000%,1/01/01 - 823,250 - 823,250
125,000 - 7.300%,3/01/03 130,653 - - 130,653
250,000 - 6.800%,12/01/05 270,625 - - 270,625
175,000 - 6.800%,12/01/08 189,437 - - 189,437
250,000 - 5.700%,1/01/09 253,750 - - 253,750
735,000 - 5.750%,1/01/12 744,187 - - 744,187
235,000 - 5.750%,6/01/13 237,350 - - 237,350
1,826,002 823,250 - 2,649,252
Water System Revenue
- 315,000 5.850%,12/01/00 - 329,175 - 329,175
- 400,000 6.600%,12/01/07 - 435,000 - 435,000
300,000 - 6.500%,12/01/06 325,125 - - 325,125
325,125 764,175 - 1,089,300
Total Hawaii Municipal Bonds 39,409,392 50,127,119 - 89,536,511
FIRST HAWAII MUNICIPAL BOND FUND
PRO FORMA STATEMENT OF NET ASSETS - (Continued)
March 31, 1997 (Unaudited)
First Pro
Leahi First Hawaii Leahi Hawaii Forma * Pro Forma
Par Value Par Value Value Value Adjustments Balance
PUERTO RICO MUNICIPAL BONDS
Puerto Rico Commonwealth
Electric Power Authority Revenue Bonds
- 100,000 7.125%,7/01/14 - 107,250 - 107,250
- 100,000 7.125%,7/01/14 - 107,250 - 107,250
- 110,000 7.125%,7/01/14 - 116,600 - 116,600
- 55,000 7.125%,7/01/14 - 58,438 - 58,438
120,000 - 7.000%,7/01/07 126,750 - - 126,750
300,000 - 6.250%,7/01/17 310,875 - - 310,875
437,625 389,538 - 827,163
General Obligation Bonds
- 70,000 7.750%,7/01/13 - 74,550 - 74,550
50,000 - 7.125%,7/01/02 51,000 - - 51,000
180,000 - 7.125%,7/01/02 184,716 - - 184,716
250,000 - 6.250%,7/01/10 259,687 - - 259,687
100,000 - 6.250%,7/01/10 106,000 - - 106,000
750,000 - 6.450%,7/01/17 795,938 - - 795,938
100,000 - 7.300%,7/01/20 110,000 - - 110,000
300,000 - 6.500%,7/01/23 321,375 - - 321,375
250,000 - 5.750%,7/01/24 248,750 - - 248,750
2,077,466 74,550 - 2,152,016
Highway Authority
100,000 - 8.000%,7/01/03 106,750 - - 106,750
225,000 - 6.750%,7/01/05 243,844 - - 243,844
200,000 - 7.750%,7/01/10 222,750 - - 222,750
530,000 - 5.750%,7/01/18 514,762 - - 514,762
630,000 - 6.000%,7/01/20 629,213 - - 629,213
1,717,319 - - 1,717,319
Housing Finance Corp. Multi-Family Mortgage Revenue Bonds
- 450,000 7.500%,4/01/22 - 472,500 - 472,500
- 140,000 7.650%,10/15/22 - 146,825 - 146,825
- 619,325 - 619,325
FIRST HAWAII MUNICIPAL BOND FUND
PRO FORMA STATEMENT OF NET ASSETS - (Continued)
March 31, 1997 (Unaudited)
First Pro
Leahi First Hawaii Leahi Hawaii Forma * Pro Forma
Par Value Par Value Value Value Adjustments Balance
Single Family Mortgage Revenue Bonds
175,000 - 7.500%,10/01/15 183,312 - - 183,312
360,000 - 6.250%,4/01/29 364,500 - - 364,500
547,812 - - 547,812
Industrial, Medical & Environmental Pollution Control
Abbott Laboratories
- 270,000 6.500%,7/01/09 - 271,374 - 271,374
Baxter Travenol Laboratories
- 300,000 8.000%,9/01/12 - 321,750 - 321,750
Upjohn Co. Project
- 825,000 7.500%,12/01/23 - 887,906 - 887,906
Medical and Environmental Center
440,000 - 6.250%,7/01/24 456,500 - - 456,500
455,000 - 6.250%,8/01/32 463,531 - - 463,531
920,031 - - 920,031
Public Building Authority Health Facilities & Services
- 75,000 7.250%,7/01/17 - 79,032 - 79,032
150,000 - 5.750%,7/01/15 147,000 - - 147,000
200,000 - 7.875%,7/01/16 205,960 - - 205,960
225,000 - 7.875%,7/01/16 231,705 - - 231,705
550,000 - 5.500%,7/01/25 524,562 - - 524,562
1,109,227 79,032 - 1,188,259
Public Building Improvements
250,000 - 7.250%,7/01/10 274,063 - - 274,063
University of Puerto Rico
500,000 - 6.500%,6/01/13 514,375 - - 514,375
Total Puerto Rico Municipal Bonds 7,597,918 2,643,475 - 10,241,393
FIRST HAWAII MUNICIPAL BOND FUND
PRO FORMA STATEMENT OF NET ASSETS - (Continued)
March 31, 1997 (Unaudited)
First Pro
Leahi First Hawaii Leahi Hawaii Forma * Pro Forma
Par Value Par Value Value Value Adjustments Balance
VIRGIN ISLANDS MUNICIPAL BONDS
Virgin Islands
Port Authority Airport Revenue Bonds
- 325,000 8.100%,10/01/05 - 342,469 - 342,469
Public Finance Authority, Series A
- 100,000 7.300%,10/01/18 - 119,625 - 119,625
Total Virgin Islands Municipal Bonds - 462,094 - 462,094
Total Investments
(Cost $97,294,469) (a) 97.06% 47,007,310 53,232,688 - 100,239,998
Cash 2.16 835,094 1,395,881 - 2,230,975
Other Assets Less Liabilities .78 548,079 257,566 - 805,645
Net Assets 100.00% $48,390,483 $54,886,135 $- $103,276,618
Shares outstanding 3,559,886 5,070,859 9,541,607
Net asset value and
redemption price per share $13.59 $10.82 $10.82
(a) Aggregate cost for federal income tax purposes is $97,294,469.
At March 31, 1997, unrealized appreciation (depreciation)
of securities for federal income tax purposes is as follows:
Gross unrealized appreciation $3,312,877
Gross unrealized depreciation (367,348)
Net unrealized appreciation $2,945,529
* See Note 2 for pro forma adjustments
See accompanying notes to pro forma financial statements
<PAGE>
FIRST HAWAII MUNICIPAL BOND FUND
PRO FORMA STATEMENT OF OPERATIONS
Six months ended March 31, 1997 (Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Leahi First Hawaii
Tax-Free Municipal Pro Forma* Pro Forma
Income Trust Bond Fund Adjustments Balance
INVESTMENT INCOME
Interest income $1,418,910 $1,623,209 $ - $3,042,119
Expenses
Management fees 119,659 137,649 - 257,308
Distribution costs 10,886 27,662 7,767 46,315
Transfer agent fees 13,454 18,068 (8,772) 22,750
Shareholder services - 27,530 23,932 51,462
Accounting fees 24,155 19,264 (23,219) 20,200
Legal and audit fees 10,045 14,068 (8,613) 15,500
Printing 2,871 7,500 3,629 14,000
Custodian fees 2,111 5,300 564 7,975
Insurance 15,500 6,558 (13,461) 8,597
Registration fees 500 2,313 - 2,813
Directors fees 1,000 800 (1,000) 800
Total expenses 200,181 266,712 (19,173) 447,720
Fee reductions (1,547) (5,300) (2,128) (8,975)
Net expenses 198,634 261,412 (21,301) 438,745
Net investment income 1,220,276 1,361,797 21,301 2,603,374
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain
from security transactions 37,819 9,557 - 47,376
Decrease in unrealized appreciation
of investments (476,089) (368,169) - (844,258)
Net loss on investments (438,270) (358,612) - (796,882)
Net increase in net assets resulting
from operations $782,006 $1,003,185 $21,301 $1,806,492
</TABLE>
* See Notes 2 for Pro Forma Adjustments
See accompanying notes to pro forma financial statements
<PAGE>
FIRST HAWAII MUNICIPAL BOND FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
March 31, 1997 (Unaudited)
(1) PROPOSED REORGANIZATION
Under the proposed Agreement and Plan of Reorganization, the First Hawaii
Municipal Bond Fund ("First Hawaii"), a separate series of First Pacific
Mutual Fund, Inc., will acquire all or substantially all of the assets of
Leahi Tax-Free Income Trust ("Leahi") in exchange for shares of First Hawaii.
The reorganization will be accomplished on a tax-free basis and the exchange
ratio will be computed by dividing Leahi's net asset value per share by
First Hawaii's net asset value per share on the reorganization date.
(2) PRO FORMA ADJUSTMENTS
The pro forma adjustments in the statement of net assets and statement
of operations reflect the following:
A) Recognition of anticipated expense savings and expense
increases resulting from economies of scale and contractual agreements.
B) No pro forma adjustments were necessary in the statement of net assets.
<PAGE>
FIRST HAWAII MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Six Months November 23,
Ended 1988 (c) to
March 31, Years Ended September 30,
September 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989
Net asset value
Beginning of year $10.89 $10.84 $10.62 $11.48 $10.90 $10.47 $ 9.92 $10.25 $10.00
Income from investment operations
Net investment income .27 .55 .55 .55 .58 .60 .62 .63 .53
Net gain (loss) on securities
(both realized and unrealized) (.07) .05 .31 (.80) .60 .43 .55 (.24) .25
Total from investment operations .20 .60 .86 (.25) 1.18 1.03 1.17 .39 .78
Less distributions
Dividends from net investment income (.27) (.55) (.55) (.55) (.58) (.60) (.62) (.63) (.53)
Distributions from capital gains - - (.09) (.06) (.02) - - - -
Distributions from paid-in capital - - - - - - - (.09) -
Total distributions (.27) (.55) (.64) (.61) (.60) (.60) (.62) (.72) (.53)
End of year $10.82 $10.89 10.84 $10.62 $11.48 $10.90 $10.47 $9.92 $10.25
Total return 3.66%(b) 5.62% 8.42% (2.18)% 11.11% 10.16% 12.11% 3.87% 8.15%
Rations/Supplemental Data
Net assets, end of period (in 000's) $54,866 $54,165 $51,131 $52,230 $57,396 $39,291 $25,688 $14,792 $6,619
Ratio of expenses to average net assets
Before expense reimbursements .97%(b) .98% 1.00% .97% .95% .95% 1.01% 1.64% 2.22% (b
After expense reimbursements .97%(b) .98%(a) .97%(a) .95% .95% .95% .91% .83% .54% (b)
Ratio of net investment income to average net assets
Before expense reimbursements 4.94%(b) 5.03% 5.19% 4.99% 5.21% 5.67% 5.95% 5.35% 4.72% (b)
After expense reimbursements 4.94%(b) 5.03% 5.22% 5.01% 5.21% 5.67% 6.05% 6.16% 6.40% (b)
Portfolio turnover 1.64% 15.16% 17.08% 40.22% 27.77% 18.44% 7.28% 46.57% 21.91%
</TABLE>
(a) Ratio of expenses to average net assets after the reduction of
custodian fees under a custodian arrangement were .95% in 1997, 1996 and 1995.
Prior to 1995, such reductions were reflected in the expense ratios.
(b) Annualized
(c) Commencement of Operations
<PAGE>
LEAHI TAX-FREE INCOME TRUST
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Six Months November23,
Ended 1988(a) to
March 31, Years Ended September 30, September 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988**
Net asset value
Beginning of year $13.72 $13.74 $13.24 $14.42 $13.43 $12.97 $12.27 $12.40 $12.34 $12.00
Income from investment operations
Net investment income .35 .70 .71 .69 .71 .74 .74 .79 .66 .49
Net gain (loss) on securities
(both realized and unrealized) (.13) (.02) .50 (1.08) 1.03 .50 .70 (.13) .06 .34
Total from investment operations .22 .68 1.21 (.39) 1.74 1.24 1.44 .66 .72 .83
Less distributions
Dividends from net investment income (.35) (.70) (.71) (.69) (.71) (.74) (.74) (.79) (.66) (.49)
Distributions from capital gains - - - (.10) (.04) (.04) - - - -
Total distributions (.35) (.70) (.71) (.79) (.75) (.78) (.74) (.79) (.66) (.49)
End of year $13.59 $13.72 $13.74 $13.24 $14.42 $13.43 $12.97 $12.27 $12.40 $12.34
Total return 3.20%(b) 5.05% 9.40% (2.76)% 13.34% 9.83% 12.12% 5.40% 6.74% 9.07%
Rations/Supplemental Data
Net assets, end of period (in 000's) $48,391 $47,465 $45,537 43,928 $44,628 $30,950 $20,173 $12,576 $7,104 $5,200
Ratio of expenses to average net assets .83%(b) .85% .83% .85% .98% 1.06% 1.09% .89% 1.19% 1.07%
Ratio of net investment income to
average net assets 5.08%(b) 5.09% 5.30% 5.04% 5.13% 5.60% 5.86% 6.35% 6.06% 6.23%
Portfolio turnover 6.83% 17.42% 20.16% 22.05% 12.56% 8.04% 36.78% 31.12% 11.49% 28.16%
</TABLE>
(a) Commencement of Operations
(b) Annualized
First Hawaii Municipal Bond Fund
Estimated Annual Post-Acquisition Expenses
Assumption: Average net assets (ANA) during the first year after the
acquisition is $100,000,000
Expense Account
Management Fees 500,000 0.50% Contractual-50 basis points
management fee on ANA up to
$500,000,000
Shareholder Services Costs 100,000 0.10% Contractual-10 basis points
on ANA paid to First Pacific
Recordkeeping for clerical,
bookeeping and shareholder
services
Fund Accounting 44,000 0.04% Flat rate @ $3,700 per month
Transfer Agency Fees 49,500 0.05% 3,000 accounts @ $16.50 per
year maintenance fee
Distribution Costs 90,000 0.09% Percentage of ANA consisten
with Pre-acquistion rate
(subject to increase based
on distributor's costs)
Custody Fees 17,500 0.02% Bank of CA fee schedule
(0.2% of ANA up to $50MM;
0.15% thereafter)
Audit 25,000 0.03% Slight increase over
pre-acquisition rate due
to increased assets
Legal 8,000 0.01% Average of two prior years
fees; not expected to increase
significantly
Registration Fees 4,000 0.00% Not significant
Printing Costs 30,000 0.03% Double pre-acquisition costs
due to increased number of
shareholders
Directors Fees 1,600 0.00% Not significant
Total Expenses 870,000 0.87%
Custody Fee Credits** (17,500) -0.02%
Net Expenses 852,500 0.85%
** In past years the Fund has been able to eliminate custody fees by
earning credits for uninvested cash balances remaining with the custodian.
There can be no assurances that this arrangement will remain effective.
In such case the Net Expenses would be increased by the value of the
custody credits.
<PAGE>
FIRST PACIFIC MUTUAL FUND, INC.
PART C
OTHER INFORMATION
Item 15. Indemnification
The Articles of Incorporation of the Registrant provide that a Director
of the Registrant shall have no liability to the Registrant or its
stockholders for money damages and the Registrant shall indemnify
current and former directors to the extent permitted by governing law.
These provisions do not protect a director against any liability to the
Registrant or its shareholders to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Item 16. Exhibits
Number Description
1 Charter of the Registrant1/
2 Bylaws2/
3 Not Applicable
4 Agreement and Plan of Reorganization (included as Exhibit A to
the Prospectus contained in Part A to this registration statement)
5 Charter, Articles Fifth and Seventh; Bylaws, Articles Second and
Third; Articles Supplementary1/2/
6 Investment Advisory Contracts1/
7 Distribution Agreement1/
8 Not Applicable
9 Custodian Agreement3/
10 Rule 12b-1 Distribution Plan3/
11 Opinion and Consent of Counsel as to the legality of the
shares being issued.
12 Form of Tax Opinion and Consent of Counsel
13 Not Applicable
14 Consent of Tait, Weller & Baker
15 Not Applicable
16 Not Applicable
17 (a) Form of Proxy Card
(b) Registrant's Rule 24f-2 Declaration
_________________
1/ Incorporated by reference to Registrant's Registration Statement
(File Nos. 33-23452 and 811-5631) (the "Registration Statement")
and post-effective amendments no. 8 and 11 to the Registration
Statement.
2/ Incorporated by reference to the Registration Statement.
3/ Incorporated by reference to post-effective amendment no. 11.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of
a prospectus that is a part of this registration statement
by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) of the Securities Act,
the reoffering prospectus will contain the information
called for by the applicable registration form for
reofferings by persons who may be deemed underwriters,
in addition to the information called for by the other
items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that
is filed under paragraph (1) above will be filed as a part of
an amendment to the registration statement and will not be
used until the amendment is effective, and that, in
determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and
the offering of the securities at that time shall be deemed to
be the initial bona fide offering of them.<PAGE>
(3) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Comission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person
of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy
as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
As required by the Securities Act of 1933, this Registration
Statement has been signed on behalf of the Registrant, in the City of
Honolulu, and State of Hawaii, on the 16th day of May, 1997.
FIRST PACIFIC MUTUAL FUND, INC.
By: \s\ Terrence K.H. Lee
Terrence K.H. Lee
President
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
\s\ Terrence K.H. Lee President, Principal Executive and May 16, 1997
Terrence K.H. Lee Financial Officer and Director
\s\ Samuel L. Chesser Director May 16, 1997
Samuel L. Chesser
\s\ Clayton W.H. Chow Director May 16, 1997
Clayton W.H. Chow
\s\ Lynden Keala Director May 16, 1997
Lynden Keala
\s\ Stuart Marlowe Director May 16, 1997
Stuart Marlowe
<PAGE>
EXHIBIT INDEX
Item 16
Exhibit Number Page
11 Opinion of Counsel
12 Tax Opinion
14 Consent of Tait, Weller & Baker
17(a) Form of Proxy Card
17(b) Registrant's Rule 24f-2 Declaration
EXHIBIT 11
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial:
(215) 564-8101 May 16, 1997
FIRST PACIFIC MUTUAL FUND, INC.
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822
Gentlemen:
We have been requested by First Pacific Mutual Fund, Inc., a Maryland
corporation with a present authorized capitalization of 100,000,000 shares
of $.01 par value common stock and currently consisting of three series, of
which 20,000,000 shares have been allocated to each series (the
"Corporation") established by Articles of Incorporation dated
July 8, 1988 as amended (the "Charter"), for our opinion with respect
to certain matters relating to the First Hawaii Municipal Bond Fund (the
"Acquiring Fund"), a series of the Corporation. We understand that the
Corporation is about to file a Registration Statement on Form N-14 for
the purpose of registering shares of the Corporation under the
Securities Act of 1933, as amended (the "1933 Act"), in connection with
the proposed acquisition by the Acquiring Fund of all of the assets of
the Leahi Tax-Free Income Series of the Leahi Investment Trust (the
"Acquired Fund"), a Massachusetts business trust with transferable
shares, in exchange solely for shares of the Acquiring Fund pursuant
to an Agreement and Plan of Reorganization the form of which is
included in the Form N-14 Registration Statement (the "Plan").
We have, as counsel, participated in various business and other
proceedings relating to the Corporation. We have examined copies,
either certified or otherwise proved to be genuine to our satisfaction,
of the Corporation's Charter, as amended by Articles Supplementary, and
By-Laws, and other documents relating to its organization, operation,
and proposed operation, including the proposed Plan and we have made
such other investigations as, in our judgment, are necessary or
appropriate to enable us to render the opinion expressed below.
Based upon the foregoing, and assuming the approval by shareholders
of the Acquired Fund of certain matters scheduled for their consideration
at a meeting presently anticipated to be held on July 24, 1997, it is our
opinion that the shares of the Acquiring Fund currently being registered,
when issued in accordance with the Plan and the Corporation's Charter, as
amended, and By-Laws, will be legally issued, fully paid and non-assessable
by the Corporation, subject to compliance with the 1933 Act, the
Investment Company Act of 1940, as amended and applicable state laws
regulating the offer and sale of securities.
We hereby consent to the filing of this opinion with and as part of
the Registration Statement on Form N-14 and to the reference to our firm
under the caption "Legal Matters" in the Prospectus/Proxy Statement filed
as part of the Registration Statement.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
By: /s/ Audrey C. Talley
Audrey C. Talley, a Partner
<PAGE>
EXHIBIT 12
FORM OF TAX OPINION TO BE DELIVERED AT CLOSING
May 2, 1997
Board of Trustees
Leahi Investment Trust
Board of Directors
First Pacific Mutual Fund, Inc.
Re: Agreement and Plan of Reorganization, Dated as of the
th Day of , 1997, By and Between Leahi Investment
Trust (the "Trust") on behalf of Leahi Tax-Free Income
Trust ("Acquired Fund") and First Pacific Mutual Fund, Inc.
("First Pacific") on behalf of First Hawaii Municipal Bond
Fund ("Acquiring Fund")
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the reorganization of Acquired Fund whereby, Acquired Fund
will transfer substantially all of its property, assets, and goodwill to
Acquiring Fund in exchange solely for shares of voting common stock of
Acquiring Fund ("Acquiring Fund Shares"), followed by the distribution
by Acquired Fund of the Acquiring Fund Shares to the shareholders of
Acquired Fund, the cancellation of all of the outstanding shares of
Acquired Fund ("Acquired Fund Shares") and the liquidation of Acquired
Fund (the "Reorganization").
In rendering our opinion, we have reviewed and relied upon
(a) the Amended and Restated Agreement, dated as of the th day of
, 1997, by and between First Pacific and the Trust ("Agreement"),
(b) the proxy materials provided to stockholders of Acquired Fund in
connection with the Special Meeting of Stockholders of Acquired Fund
held , 1997, (c) certain representations concerning the
Reorganization made to us by First Pacific and the Trust in a letter
dated , 1997 (the "Representation Letter"), (d) all
other documents, financial and other reports and corporate minutes
which we deemed relevant or appropriate, and (e) such statutes,
regulations, rulings and decisions as we deemed material to the
rendition of this opinion. All terms used herein, unless otherwise
defined, are used as defined in the Agreement.
For purposes of this opinion, we have assumed that Acquired Fund
on the effective date of the Reorganization satisfies, and following the
Reorganization, Acquiring Fund will continue to satisfy, the requirements
of subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company.
Under regulations to be prescribed by the Secretary of Treasury
under Section 1276(d) of the Code, certain transfers of market discount
bonds will be excepted from the requirement that accrued market discount
be recognized on disposition of a market discount bond under Section 1276(a)
of the Code. Such regulations are to provide, in part, that accrued market
discount will not be included in income if no gain is recognized under
Section 361(a) of the Code where a bond is transferred in an exchange
qualifying as a tax-free reorganization. As of the date hereof,
the Secretary has not issued any regulations under Section 1276 of the Code.
Based on the foregoing and provided the Reorganization is carried
out in accordance with the applicable laws of the State of Maryland and the
Commonwealth of Massachusetts, the Agreement and the Representation Letter,
it is our opinion that:
1. The Reorganization will constitute a tax-free reorganization
within the meaning of Section 368(a)(1) of the Code and Acquired Fund and
Acquiring Fund will each be a party to the reorganization within the meaning
of Section 368(b) of the Code.
2. No gain or loss will be recognized by Acquired Fund upon the
transfer of all of its assets to Acquiring Fund in exchange solely for
Acquiring Fund Shares pursuant to Section 361(a) and Section 357(a) of the
Code. We express no opinion as to whether any accrued market discount will
be required to be recognized as ordinary income pursuant to Section 1276 of
the Code.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt by it of all of the assets of Acquired Fund in exchange solely for
Acquiring Fund Shares pursuant to Section 1032(a) of the Code.
4. The basis of the assets of Acquired Fund received by Acquiring
Fund will be the same as the basis of such assets to Acquired Fund immediately
prior to the exchange pursuant to Section 362(b) of the Code.
5. The holding period of the assets of Acquired Fund received by
Acquiring Fund will include the period during which such assets were held by
Acquired Fund pursuant to Section 1223(2) of the Code.
6. No gain or loss will be recognized by the stockholders of
Acquired Fund upon the exchange of their Acquired Fund Shares for Acquiring
Fund Shares (including fractional shares to which they may be entitled),
pursuant to Section 354(a) of the Code.
7. The basis of the Acquiring Fund Shares received by the
stockholders of Acquired Fund (including fractional shares to which they
may be entitled) will be the same as the basis of the Acquired Fund Shares
exchanged therefor pursuant to Section 358(a)(1) of the Code.
8. The holding period of the Acquiring Fund Shares received
by the stockholders of Acquired Fund (including fractional shares to which
they may be entitled) will include the holding period of the Acquired Fund
Shares surrendered in exchange therefor, provided that the Acquired Fund
Shares were held as a capital asset on the effective date of the
Reorganization, pursuant to Section 1223(1) of the Code.
9. Acquiring Fund will succeed to and take into account as of
the date of the proposed transfer (as defined in Section 1.381(b)-1(b) of
the Income Tax Regulations) the items of Acquired Fund described in Section
381(c) of the Code, subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code.
Our opinion is based upon the Code, the applicable Treasury
Regulations promulgated thereunder, the present position of the Internal
Revenue Service as set forth in published revenue rulings and revenue
procedures, present administrative positions of the Internal Revenue
Service, and existing judicial decisions, all of which are subject to
change either prospectively or retroactively.
Our opinion is conditioned upon the performance by Acquiring Fund
and Acquired Fund of their undertakings in the Representation Letter.
This opinion is being rendered to Acquiring Fund and Acquired Fund
and may be relied upon only by such funds and the stockholders of each.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
By: \s\ William S. Pilling, III
William S.Pilling, III, a Partner
<PAGE>
EXHIBIT 14
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the references to our firm in the Pre-Effective Amendment
to the Registration Statement on Form N-14 of the First Pacific Mutual Fund,
Inc. and to the use of our report dated November 6, 1996 on the financial
statements and financial highlights of First Hawaii Municipal Bond Fund, a
series of shares of the First Pacific Mutual Fund, Inc. We also consent to
the use of our report dated October 17, 1996 on the financial statements
and financial highlights of Leahi Tax-Free Income Trust, a series of
shares of Leahi Investment Trust. Each set of financial statements and
financial highlights appear in their respective 1996 Annual Report to
Shareholders which accompanies the Statement of Additional Information.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
May 19, 1997
<PAGE>
EXHIBIT 17(a)
LEAHI TAX-FREE INCOME SERIES
of
LEAHI INVESTMENT TRUST
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 24, 1997
The undersigned, revoking all Proxies heretofore given, hereby appoints
Ronald Kent or____________________________ or either of them as Proxies of
the undersigned, with full power of substitution, to vote on behalf of the
undersigned all shares of the Leahi Tax-Free Income Series ("Leahi Fund")
of the Leahi Investment Trust ("the Trust") that the undersigned is entitled
to vote at the special meeting of shareholders of the Leahi Fund to be held
at 9:00 a.m., local time, on Thursday, July 24, 1997 at the offices of Leahi
Management Company, Inc., Ward Plaza, 210 Ward Avenue, Suite 129, Honolulu,
Hawaii 96814 and at any adjournments thereof, as fully as the undersigned
would be entitled to vote if personally present, as follows:
To approve an Agreement and Plan of Reorganization whereby the First
Hawaii Municipal Bond Fund series of First Pacific Mutual Fund, Inc. ("First
Hawaii") will acquire all of the assets of Leahi Fund in exchange for Shares
of First Hawaii, followed by the liquidation and termination of Leahi Fund
and the Trust, as substantially described in the accompanying
Prospectus/Proxy Statement.
_________ FOR _________ AGAINST _________ ABSTAIN
THE BOARD OF TRUSTEES OF THE TRUST RECOMMENDS A VOTE FOR THE
PROPOSAL.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED OR FOR THE
PROPOSAL IF NO CHOICE IS INDICATED.
THE PROXIES ARE AUTHORIZED IN THEIR DISCRETION TO VOTE UPON SUCH
OTHER MATTERS AS MAY COME BEFORE THE MEETING OR ANY ADJOURNMENTS
THEREOF.
NOTE: PLEASE SIGN EXACTLY AS YOUR
NAME(S) APPEARS ON THIS CARD.
Date:__________________________________________________________
Signature(s):__________________________________________________
Signature (of joint owner,
if any):________________________________________________________
NOTE: When signing as attorney, executor, administrator, trustee, guardian,
or as custodian for a minor, please sign your name and give your full title
as such. If signing on behalf of a corporation, please sign full corporate
name and your name and indicate your title. If you are a partner signing for
a partnership, please sign the partnership name and your name. Joint owners
should each sign this proxy. Please sign, date and return.
<PAGE>
EXHIBIT 17(b)
[TEXT OF ORIGINAL AS FILED WITH
REGISTRANT'S REGISTRATION STATEMENT ON FORM N-1A]
STRADLEY, RONON, STEVENS & YOUNG
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial:
(215) 564-8101 April 4, 1988
Filing Desk
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: First Pacific Mutual Fund, Inc.
Form N-8A Notification of Registration under the 1940 Act
Form N-1A Registration under the 1933 and 1940 Acts
Gentlemen:
Enclosed is the Form N-8A Notification of Registration of First Pacific
Mutual Fund, Inc. as an investment company under Section 8(a) of the
Investment Company Act of 1940. Also enclosed are thirteen copies of the
Form N-1A Registration Statement filed under the Securities Act of 1933 and
under Section 8(b) of the Investment Company Act of 1940, including exhibits
and a manually signed and sequentially numbered copy of the Registration
Statement.
First Pacific Mutual Fund, Inc. has elected to register an indefinite
number of its shares pursuant to Rule 24f-2 under the 1940 Act and enclosed
herewith is a certified check in the amount of $500 for the registration fee.
Also enclosed is a certified check in the amount of $1,000 as payment of the
registration fee imposed by Rule 8b-6 under the 1940 Act.
First Pacific Mutual Fund, Inc. is an open-end management series
investment company incorporated under the laws of the State of Maryland.
The first series of the Fund is the First Hawaii Municipal Bond Fund. The
investment manager of the Fund is First Pacific Management Corporation.
Van Kampen Merritt Investment Advisory Group, Inc. serves as investment
advisor to the Fund.
Questions related to this filing should be directed to me at the number
above. Please sign and date the attached copy of this letter to acknowledge
receipt of this filing and return it to me in the enclosed self-addressed,
stamped envelope.
Very truly yours
\s\ Audrey C. Talley
Audrey C. Talley,
ACT:jas
Encs.
cc: Mr. Terrence Lee (w/enc.)
Steven M. Felsenstein, Esquire (w/enc.)
bc: Mr. Gene Strandberg (w/enc.)
Mr. Ray Ishioka (w/enc.)
