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 23, 1997.
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.
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.
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
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.
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.
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.
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.
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
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.
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.
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
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
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
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
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
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
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
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
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
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
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
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.
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.
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
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
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
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
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
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
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
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
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
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
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
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
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.
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.
Ward Plaza
210 Ward Avenue
Suite 129
Honolulu, Hawaii 96814
808/522-7777
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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.
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.
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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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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 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.
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
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
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
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
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.
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
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.
