SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 12
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940
Amendment No. 13
FIRST PACIFIC MUTUAL FUND, INC.
(Exact Name of Registrant as Specified in Charter)
2756 Woodlawn Drive, #6-201, Honolulu, Hawaii 96822
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, Including Area Code (808) 988-8088
Terrence Lee, President; First Pacific Mutual Fund, Inc.;
2756 Woodlawn Drive, #6-201, Honolulu, Hawaii 96822
(Name and address of Agent for Service)
Please send copies of all communications to: Audrey C. Talley, Esquire
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103-7098
Approximate Date of Proposed Public Offering: Upon effectiveness of this
amendment.
It is proposed that this filing will become effective
(check appropriate box)
__x__ immediately upon filing pursuant to paragraph (b)
_____ on _________ pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ on _________ pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on_________ pursuant to paragraph (a)(2)of Rule 485
The Registrant has registered an indefinite number of securities under this
Registration Statement pursuant to Rule 24f-2 under the Investment Company
Act of 1940. Registrant has filed a Rule 24f-2 Notice for its most recent
fiscal year on or about November 30, 1996.
TABLE OF CONTENTS
TO FORM N-1A
The Facing Page
1- Cross-Reference Sheet
2- Part A - Prospectus
3- Part B - Statement of Additional Information
4- Part C - Other Information
5- Signature Page
Exhibits
CROSS REFERENCE SHEET
N-1A
Item No. Caption or Location in Prospectus
Part A
1 Cover
2 Fund Expenses, Prospectus Summary
3 N/A
4 Prospectus Cover, Investment Objective and Policies,
Municipal Securities, Investment Practices
5 Officers and Directors, Manager, The Distribution Plan,
Transfer Agent, Custodian, Shareholder Services and
Reports and General Information and History
6 General Information and History, Shareholder Services and
Reports, Distributions from the Fund, Tax Status
7 Purchasing Shares of the Fund, Net Asset Value, The
Distribution Plan
8 Redemption of Shares
9 N/A
Part B
10 Cover
11 Table of Contents
12 N/A
13 Cover, Investment Policies and Restrictions, Additional
Investment considerations, Description of Municipal
Securities Ratings
14 Officers and Directors
15 N/A
16 Investment Management Agreement
17 Portfolio Transactions
18 N/A
19 The Distributor
20 N/A
21 The Distributor
22 N/A
23 N/A
Part C
Items 24 through 32 have been answered in order in Part C.
FIRST PACIFIC MUTUAL FUND, INC. Prospectus dated
2756 Woodlawn Drive, #6-201 February 1, 1997
Honolulu, Hawaii 96822
FIRST PACIFIC MUTUAL FUND, INC.
First Pacific Mutual Fund, Inc. (the "Corporation") is a mutual fund,
organized as a non-diversified open-end management investment company. In
this Prospectus all references to any series of the Corporation will be
called the "Fund" unless expressly noted otherwise. The Corporation offers
three series of shares. Each Fund's net asset value will fluctuate.
First Hawaii Municipal Bond Fund ("Bond Fund"). The objective of Bond
Fund is to provide a high level of current income exempt from federal and
Hawaii state income taxes, consistent with preservation of capital. The
bond fund attempts to achieve its objective by investing primarily in a
varied portfolio of investment grade municipal securities which pay interest
exempt from federal and Hawaii income taxes.
First Hawaii Intermediate Municipal Fund ("Intermediate Fund"). The
objective of Intermediate Fund is to provide a high level of current income
exempt from federal and Hawaii state income taxes, consistent with
preservation of capital. The Intermediate Fund attempts to achieve its
objective by investing primarily in a varied portfolio of investment grade
municipal securities, with a dollar weighted average portfolio maturity of
more than three years but not more than ten years which pay interest exempt
from federal and Hawaii income taxes.
First Pacific Management Corporation (the "Manager") manages each
Fund's portfolio of investments.
There is no sales load imposed at the time of purchase of a Fund's
shares. (See "PURCHASING SHARES OF THE FUNDS.") Each Fund has adopted a
distribution plan which provides that the Fund may spend up to .25% of its
average daily net assets in connection with the distribution of Fund shares.
This Prospectus sets forth the information about the Funds that a
prospective investor should know before investing in a Fund. Please read
and retain this Prospectus for future reference.
_____________________
A Statement of Additional Information, dated February 1, 1997,
containing additional information about the Funds has been filed with the
Securities and Exchange Commission and is hereby incorporated by reference
into this Prospectus. A copy of the Statement of Additional Information may
be obtained without charge by calling (808) 988-8088.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
FUND EXPENSE TABLE.................................................. 3
FINANCIAL HIGHLIGHTS................................................ 5
PROSPECTUS SUMMARY.................................................. 7
INVESTMENT OBJECTIVES AND POLICIES.................................. 9
MUNICIPAL SECURITIES................................................ 9
INVESTMENT PRACTICES................................................ 11
PURCHASING SHARES OF THE FUNDS...................................... 12
DISTRIBUTIONS FROM THE FUNDS........................................ 13
REDEMPTION OF SHARES................................................ 13
NET ASSET VALUE..................................................... 15
TAX STATUS.......................................................... 15
OFFICERS AND DIRECTORS.............................................. 17
INVESTMENT MANAGER.................................................. 17
CUSTODIAN ......................................................... 18
THE DISTRIBUTION PLAN............................................... 18
ALLOCATION OF BROKERAGE TRANSACTIONS................................ 19
SHAREHOLDER SERVICES AND REPORTS.................................... 19
GENERAL INFORMATION AND HISTORY..................................... 20
FIRST HAWAII MUNICIPAL BOND FUND EXPENSES
The following table illustrates all expenses and fees that a
shareholder of the Bond Fund will incur. Additional transaction fees may
be charged if a broker-dealer or other financial intermediary deals with the
Fund on your behalf.
Shareholder Transaction Expenses
Sales Load Imposed on Purchases..................................... NONE
Sales Load Imposed on Reinvested Dividends.......................... NONE
Contingent Deferred Sales Load...................................... NONE
Redemption Fees..................................................... NONE
Exchange Fees....................................................... NONE
<TABLE>
<S> <C>
Annual Operating Expenses
(as a percentage of average net assets)
Management Expenses................................................. .50%
Shareholder Servicing Costs........................................ .10
12b-1 Fees After Waiver............................................ .11 <F1>
Other Expenses..................................................... .27
Total Operating Costs After Waiver........................... .98% <F2>
<FN>
<F1>
The Fund's 12b-1 Plan provides that the Fund may incur costs not to exceed
.25% per annum of the Fund's average net assets for the distribution of
Fund shares. The Distributor has waived a portion of the Bond Fund's fees
during the year ended 09/30/96. Such waivers may cease at anytime.
<F2>
Includes .03% custodian fees reduced through custodian arrangements.
</FN>
</TABLE>
The purpose of this table is to assist the investor in understanding
the various expenses that an investor in the Bond Fund will bear directly
or indirectly. Absent the fee waiver, 12b-1 fees could have been up to
.25% per annum and total operating costs after waiver could have been up to
1.12% per annum of the Bond Fund's average net assets. The expenses set
forth above are based on actual amounts for the most recent fiscal year.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the National Association of
Securities Dealers.
The following example illustrates the expenses that you would pay on
$1,000 investment over various time periods assuming (1) a 5% annual rate
of return and (2) redemption at the end of each time period. As noted in
the table above, the Bond Fund charges no redemption fees of any kind.
1 year 3 years 5 years 10 years
$10 $31 $54 $120
This example should not be considered a representation of past or future
expenses or performance. Actual expenses may be greater or less than those
shown.
FIRST HAWAII INTERMEDIATE MUNICIPAL FUND EXPENSES
The following table illustrates all expenses and fees that a
shareholder of the Intermediate Fund will incur. Additional transaction
fees may be charged if a broker-dealer or other financial intermediary deals
with the Fund on your behalf.
Shareholder Transaction Expenses
Sales Load Imposed on Purchases.................................... NONE
Sales Load Imposed on Reinvested Dividends......................... NONE
Contingent Deferred Sales Load..................................... NONE
Redemption Fees.................................................... NONE
Exchange Fees....................................................... NONE
<TABLE>
<S> <C>
Annual Operating Expenses
(as a percentage of average net assets)
Management Expenses.............................................. .50%
Shareholder Servicing Costs ..................................... .10
12b-1 Fees After Waiver.......................................... .08 <F3>
Other Expenses................................................... .16
Total Operating Costs After Waiver............................ .84%
<FN>
<F3>
The Fund's 12b-1 Plan provides that the Fund may incur costs not to exceed
.25% per annum of the Fund's average net assets for the distribution of
Fund shares. The Distributor has waived a portion of the Intermediate Fund's
fees during the period ending 09/30/96. Such waivers may cease at any time.
</FN>
</TABLE>
The purpose of this table is to assist the investor in understanding
the various expenses that an investor in the Intermediate Fund will bear
directly or indirectly. Absent the fee waiver, 12b-1 fees could have been
up to .25% per annum and total operating costs could have been up to 1.01%
per annum of the Intermediate Fund's average net assets. The expenses set
forth above are based on actual amounts for the most recent fiscal year.
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the National Association of
Securities Dealers.
The following example illustrates the expenses that you would pay on
$1,000 investment over various time periods assuming (1) a 5% annual rate
of return and (2) redemption at the end of each time period. As noted in
the table above, the Intermediate Fund charges no redemption fees of any
kind.
1 year 3 years 5 years 10 years
$9 $27 $47 $104
This example should not be considered a representation of past or future
expenses or performance. Actual expenses may be greater or less than
those shown.
First Hawaii Municipal Bond Fund
FINANCIAL HIGHLIGHTS
The financial highlights and ratios for the periods presented have been
selected from the Fund's financial statements, which have been examined
by Tait, Weller & Baker, independent certified public accountants, whose
unqualified report thereon appears on the Fund's Annual Report to
Shareholders for the year ended September 30, 1996. Such Financial
statement and report are incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
Years ended September 30,
1996 1995 1994 1993
<S> <C> <C> <C> <C>
Net asset value
Beginning of year $10.84 $10.62 $11.48 $10.90
Income from investment operations
Net investment income .55 .55 .55 .58
Net gain (loss) on securities
(both realized and unrealized) .05 .31 (.80) . 60
Total from investment operations .60 .86 (.25) 1.18
Less distributions
Dividend from net investment income (.55) (.55) (.55) (.58)
Distributions from capital gains - (.09) (.06) (.02)
Distributions from paid-in capital - - - -
Total distributions (.55) (.64) (.61) (.60)
End of year $10.89 $10.84 $10.62 $11.48
Total return 5.62% 8.42% (2.18)% 11.11%
Ratios/Supplemental Data
Net assets, end of year (in 000's) $54,165 $51,131 $52,230 $57,396
Ratio of expenses to average net assets
Before expense reimbursements .98%(A) 1.00% .97% .95%
After expense reimbursements .98%(A) .97% .95% .95%
Ratio of net investment income
to average net assets
Before expense reimbursements 5.03% 5.19% 4.99% 5.21%
After expense reimbursements 5.03% 5.22% 5.01% 5.21%
Portfolio turnover 15.16% 17.08% 40.22% 27.77%
</TABLE>
<TABLE>
November 23,
1988 (a) to
Years ended September 30, September 30,
1992 1991 1990 1989
<S> <C> <C> <C> <C>
Net Asset Value
Beginning of year $10.47 $ 9.92 $10.25 $10.00
Income from investment operations
Net investment income .60 .62 .63 .53
Net gain (loss) on securities
(both realized and unrealized) .43 .55 (.24 .25
Total from investment operations 1.03 1.17 .39 .78
Less Distributions
Dividend from net investment income (.60) (.62) (.63) (.53)
Distributions from capital gains - - - -
Distributions from paid-in capital - - (.09) -
Total Distributions (.60) (.62) (.72) (.53)
End of year $10.90 $10.47 $9.92 $10.25
Total Return 10.16% 12.11% 3.87% 8.15%
Ratios/Supplemental Data
Net assets, end of year (in 000's) $39,291 $25,688 $14,792 $6,619
Ratio of expenses to average net assets
Before expense reimbursements .95% 1.01% 1.64% 2.22%(b)(c)
After expense reimbursements .95% .91% .83% .54%(b)(c)
Ratio of net investment income to average net assets
Before expense reimbursements 5.67% 5.95% 5.35% 4.72%(b)(c)
After expense reimbursements 5.67% 6.05% 6.16% 6.40%(b)(c)
Portfolio turnover 18.44% 7.28% 46.57% 21.91%
<FN>
(A) Ratio of expenses to average net assets after the reduction of
custodian fees under a custodian arrangement were .95% in 1996 and
1995. Prior to 1995, such reductions were reflected in the
expense ratios.
(a) Effective date of the Fund's initial registration under the
Securities Act of 1933 as amended.
(b) Annualized.
(c) Excludes taxes and tax reimbursements of 1.15% of average net
assets on an annualized basis.
</FN>
</TABLE>
First Hawaii Intermediate Municipal Fund
FINANCIAL HIGHLIGHTS
The financial highlights and ratios for the period presented have been
selected from the Fund's financial statements, which have been examined
by Tait, Weller & Baker, independent certified public accountants, whose
unqualified report thereon appears in the Fund's Annual Report to
Shareholders for the year ended September 30, 1996. Such Financial
statement and report are incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
Period
July 5, 1994*
to
Years ended September 30, September 30,
1996 1995 1994
<S> <C> <C> <C>
Net asset value
Beginning of year $5.14 $4.99 $5.00
Income from investment operations
Net investment income .22 .23 .05
Net gain (loss) on securities (.02) .15 (.01)
(unrealized)
Total from investment operations .20 .38 .04
Less distributions
Dividends from net investment income (.22) (.23) (.05)
End of period $5.12 $5.14 $4.99
Total return 3.95% 7.86% .72%
Ratios/Supplemental Data
Net assets, end of year $6,624 $4,760 $2,447
(in 000's)
Ratio of expenses to average net assets
Before expense reimbursements 1.50% 1.90% 4.98%(a)
After expense reimbursements .84%(b) .66%(b) 0%(a)
Ratio of net investment income to average net assets
Before expense reimbursements 3.66% 3.39% .12%(a)
After expense reimbursements 4.32% 4.63% 4.60%(a)
Portfolio turnover 17.76% 10.04% 0%
<FN>
*Commencement of operations
(a) Annualized.
(b) Ratios of expenses to average net assets after the reduction of
custodian fees under a custodian arrangement were .75% and .64%
for 1996 and 1995 respectively. Prior to 1995, such reductions
were reflected in the expense ratios.
</FN>
</TABLE>
PERFORMANCE
From time to time each Fund may advertise its total return and
yield. The "total return" of a Fund refers to the average annual
compounded rates of return over 1, 5 and 10 year periods or for the life
of a Fund (which periods will be stated in the advertisement) that would
equate an initial amount invested at the beginning of a stated period to
the ending redeemable value of the investment. The calculation assumes
the reinvestment of all dividends and distributions, includes all
recurring fees that are charged to all shareholder accounts and a
deduction of all nonrecurring charges deducted at the end of each period.
Aggregate total return may also be presented for various periods; such
return represents the cumulative change in value of an investment in each
Fund for the specific period (reflecting changes in Fund share prices and
assuming reinvestment of dividends and distributions). Total return may
be quoted with or without giving effect to any voluntary expense
limitations in effect for each Fund during the relevant period. The
"yield" of each Fund is computed by dividing the net investment income
per share earned during the period stated in the advertisement (using the
average number of shares entitled to receive dividends) by the maximum
offering price per share on the last day of the period. The calculation
includes among expenses of a Fund, for the purpose of determining net
investment income, all recurring fees that are charged to all shareholder
accounts and any nonrecurring charges for the period stated. The yield
formula provides for semi-annual compounding which assumes that net
investment income is earned and reinvested at a constant rate and
annualized at the end of a six-month period. Further information about
the performance of a Fund is contained in each Fund's annual report to
shareholders, which may be obtained without charge.
PROSPECTUS SUMMARY
Offering Price, Charge
and Minimum Purchase The minimum initial investment is $1,000
with a $100 minimum for subsequent
investments; less in certain circumstances.
Shares are sold at net asset value. See
"PURCHASING SHARES OF THE FUNDS."
Investment Objective
and Policies Each Fund seeks to provide a high level of
current income exempt from federal and
Hawaii state income taxes, consistent with
preservation of capital. There is no
assurance that this objective will be
achieved. Each Fund will invest primarily
in a varied portfolio of investment grade
Hawaii municipal securities. The
Intermediate Fund will attempt to achieve
its objective by investing primarily in a
varied portfolio of investment grade
obligations with an average portfolio
maturity of more than three years but not
more than ten years. Each Fund will
primarily invest in municipal securities
issued by or on behalf of the State of
Hawaii and its political subdivisions,
agencies and instrumentalities, certain
interstate agencies and certain territories
of the United States. Municipal securities
include municipal bonds, as well as shorter
term municipal notes, municipal leases,
zero coupon bonds, pre-refunded bonds, and
tax exempt commercial paper. Individual
bonds could range in maturity from three
months to forty years. The net asset value
per share may increase or decrease
depending on changes in interest rates and
other factors affecting the municipal
credit markets. Each Fund will not invest
more than 10% in lower rated municipal
securities. See "INVESTMENT OBJECTIVES AND
POLICIES."
Risks and Subject to certain limitations, each Fund may
Investment Practices lend its portfolio securities, and enter into
when-issued or delayed delivery transactions.
These investments entail certain risks. Tax-exempt
securities may be adversely affected by
local political and economic conditions and
developments within the State which adversely
affect issuers of such tax-exempt securities.
Adverse conditions in the State of Hawaii's
significant industries could have a
correspondingly adverse effect on specific
issuers within the State or on anticipated
revenue of the State. In the event of the
bankruptcy of a borrower of Fund portfolio
securities, the Fund could experience
delays in recovering either the securities
loaned or its cash. To the extent that the
value of the securities loaned has
increased or the value of the collateral
held by a Fund has decreased, the Fund
could experience a loss. When the time
comes to receive and pay for a when-issued
security, the security may have a value
greater or less than a Fund's fixed payment
obligation. See "MUNICIPAL SECURITIES" and
"INVESTMENT PRACTICES."
Investment Manager First Pacific Management Corporation is
each Fund's Investment Manager. The
Investment Manager was organized in 1988.
The annual management fee for each Fund is
.50% of average daily net assets. The
Manager also provides each Fund with
certain shareholder services for an annual
fee of .10% of average daily net assets.
Distributions from Distributions from net investment income
the Fund are declared daily and paid monthly.
Capital gains, if any, are distributed
annually. See "DISTRIBUTIONS FROM THE
FUNDS."
Redemption Shares may be redeemed at net asset value next
determined. Each Fund may require involuntary
redemption of shares if the value of an account
is less than $500. See "REDEMPTION OF SHARES."
Distribution Plan Each Fund and its shareholders have adopted
a distribution plan pursuant to Rule 12b-1
of the Investment Company Act of 1940 which
provides that the Fund may spend up to .25%
of its average daily net assets in
connection with the Fund's activities as a
distributor of its shares. See "THE
DISTRIBUTION PLAN."
Transfer Agent First Pacific Recordkeeping, Inc. See
"SHAREHOLDER SERVICES AND REPORTS."
The above is qualified in its entirety by
reference to the more detailed information
included elsewhere in this Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective is to provide a high level of
current income exempt from federal and Hawaii state income taxes,
consistent with preservation of capital. There can be no assurance that
a Fund will achieve its investment objective, which may be changed only
with shareholder approval. The Intermediate Fund invests primarily in a
portfolio of investment grade obligations with a dollar weighted average
portfolio maturity of more than three years but not more than ten years.
Generally speaking, intermediate bonds have less market fluctuation than
long term bonds. However, intermediate bonds may have lower yields due
to their shorter maturity. There is, of course, no assurance that the
Fund's objective will be achieved.
Each Fund will generally invest its assets in a varied portfolio of
investment grade municipal securities which are general obligation and
revenue bonds and notes issued by or on behalf of the State of Hawaii and
its political subdivisions, agencies and instrumentalities, certain
interstate agencies and certain territories of the United States, the
interest on which, in the opinion of bond counsel or other counsel to the
issuer of such securities, is exempt from federal and Hawaii state income
taxes. In normal circumstances up to 100%, but not less than 80%, of a
Fund's net assets will be invested in the foregoing types of municipal
securities. The foregoing is a fundamental policy and cannot be changed
without shareholder approval. Each Fund may invest up to 10% of its
assets in bonds rated BB or Ba grade municipal securities. The lowest
quality municipals in which each Fund will invest are those rated BB by
S&P, Ba by Moody's or which are unrated, but judged by the Investment
Manager to be of equivalent quality. (See "MUNICIPAL
SECURITIES-Investment Grade Municipal Securities and Lower Grade
Municipal Securities" below.)
When the Investment Manager determines during periods of adverse
market conditions including when Hawaiian tax exempt securities are
unavailable, each Fund may invest up to 20% of the value of its net
assets for temporary defensive purposes in money market instruments the
interest of which may be subject to federal, state or local income tax.
MUNICIPAL SECURITIES
General
Municipal securities are debt obligations issued by or on behalf of
the government of states, territories or possessions of the United
States, the District of Columbia and their political subdivisions,
agencies and instrumentalities, the interest on which is generally exempt
from the regular Federal income tax.
The two principal classifications of municipal securities are
"general obligation" and "revenue" bonds. "General obligation" bonds are
secured by the issuer's pledge of its faith, credit and taxing power for
the payment of principal and interest. "Revenue" bonds are usually
payable only from the revenue derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source. Industrial development bonds are
usually revenue bonds, the credit quality of which is normally directly
related to the credit standing of the industrial user involved.
There are, in addition, a variety of hybrid and special types of
municipal securities, including variable rate securities, municipal notes
and municipal leases. Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to minimize
fluctuations in values of the instruments. Municipal notes include tax,
revenue and bond anticipation notes of short maturity, generally less
than three years, which are issued to obtain temporary funds for various
public purposes. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment
and facilities. Some municipal securities may not be backed by the
faith, credit and taxing power of the issuer. Zero coupon bonds are debt
obligations which do not require the periodic payment of interest and are
issued at a significant discount from face value. Pre-refunded bonds are
municipal bonds for which the issuer has previously provided money and/or
securities to pay the principal, any premium and interest on the bonds to
their maturity date or to a specific call date. A more detailed
description of the types of municipal securities in which each Fund may
invest is included in the Statement of Additional Information.
From time to time, proposals have been introduced before Congress
that would have the effect of reducing or eliminating the federal tax
exemption on income derived from municipal securities. If such a
proposal were enacted, the ability of the Fund to pay tax exempt interest
dividends might be adversely affected. The Tax Reform Act of 1986 also
limits the types and amounts of securities eligible to pay tax exempt
interest, which may restrict the range of tax exempt securities available
for investment by the Fund.
Investment Grade Municipal Securities
Each Fund will invest its assets primarily (up to 100% but not less
than 90%), in securities which, at the time of purchase, are either rated
within the four highest grades assigned by Moody's Investors Service,
Inc. ("Moody's") (Aaa, Aa, A and Baa) or Standard & Poor's Corporation
("S&P") (AAA, AA, A and BBB); or if unrated, are judged by the Investment
Manager to be of comparable quality to such rated securities. Bonds
which are rated Baa or BBB are considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well. Although each Fund will invest primarily in
investment grade municipal securities, from time to time each Fund may
also invest in medium grade municipal securities and in lower grade
municipal securities. The Investment Manager attributes to medium and
lower quality obligations the same general characteristics as do rating
services such as Standard & Poor's and Moody's.
Lower Grade Municipal Securities
Municipal securities which are in lower grade categories generally
offer a higher current yield than is offered by municipal securities
which are in the higher grade categories, but they also generally involve
greater price volatility and greater credit and market risk. Lower grade
municipal securities, including BB and Ba, are generally regarded as
having predominantly speculative capacity to pay interest and repay
principal in accordance with their terms. A more detailed description of
the risks of investing in such municipal securities is set forth in the
Statement of Additional Information.
Certain Considerations Regarding Hawaii Securities
The ability of each Fund to meet its objective is affected by the
ability of municipal issuers to meet their payment obligations. There
are additional risks associated with an investment which invests
primarily in issues of one state. Since each Fund invests primarily in
obligations of issuers located in Hawaii, the marketability, and market
value of these obligations may be affected by certain Hawaiian
constitutional provisions, legislative measures, executive orders,
administrative regulations, and vote initiatives.
The Hawaiian economy is concentrated in tourism, agriculture,
construction and military operations. Tourism is Hawaii's largest
economic sector. 1996 marked the stabilization of the Hawaii visitor
industry following the 1991-1993 slump. With visitor arrivals on a
record-setting pace, statewide occupancies reaching pre-slump levels and
average daily room rates continuing to make up for ground lost during the
slump, the Hawaii tourism industry appears well on the way to recovery.
Agriculture, dominated by the Hawaiian pineapple and sugar trade, has
faced increased foreign competition. Agricultural production has become
somewhat more diversified and includes cattle, poultry, vegetables,
coffee, flowers and other nursery products.
Governmental activities, including activities usually administered
on a municipal or county level such as public education, are the
responsibility of the state. This concentration aggravates an otherwise
high level of state debt obligations. The state General Fund has
operated either within planned deficits or with ending fund balances
since December 1962. Revenue is derived primarily from general excise
taxes and individual and corporate income tax.
Hawaii's county governments may issue government obligation bonds.
The counties have preferred to finance capital investment with cash of
federal grants. As a result, relatively minimal amounts are charged to
the county general obligation debt limit, which restricts local
government indebtedness to not more than 15% of net assessed value of
real property. In Hawaii, no city or other governmental units may issue
bonds.
INVESTMENT PRACTICES
"When Issued" and "Delayed Delivery" Transactions
Each Fund may purchase and sell municipal securities on a "when
issued" and "delayed delivery" basis. No income accrues to the Fund on
municipal securities in connection with such transactions prior to the
date the Fund actually takes delivery of and makes payment for such
securities. These transactions are subject to market fluctuation; the
value of the municipal securities at delivery may be more or less than
their purchase price, and yields generally available on municipal
securities when delivery occurs may be higher or lower than yields on the
municipal securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may
result in the Fund missing the opportunity of obtaining a price or yield
considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or high-grade municipal portfolio securities having an
aggregate value equal to the amount of such purchase commitments until
payment is made. The Fund will make commitments to purchase municipal
securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the
settlement date if such sale is considered advisable. To the extent the
Fund engages in "when issued" and "delayed delivery" transactions, it
will do so for the purpose of acquiring securities for the Fund's
portfolio consistent with the Fund's investment objective and policies
and not for the purpose of investment leverage.
Other Practices
The Bond Fund may invest in municipal bonds with a maturity range
as long as 40 years. The Bond Fund will seek to invest in municipal
bonds of such maturities that, in the judgment of the Fund and the
Investment Manager, will provide a high level of current income
consistent with liquidity requirements and market conditions.
Each Fund may borrow amounts up to 5% of its net assets (including
reverse repurchase agreements) in order to pay for redemptions when
liquidation of portfolio securities is considered disadvantageous or
inconvenient and may pledge up to 10% of its net assets to secure such
borrowing.
It is possible that a Fund will invest more than 25% of its assets
in a particular segment (bonds financing similar projects such as
utilities, hospitals or housing finance agencies) of the municipal bond
market. Developments affecting a particular segment could have a
significant effect on a Fund's performance. (An investment of more than
25% of assets in a particular segment of the municipal bond market
differs from an investment (i.e., concentration) of more than 25% of
assets in a single industry.) In such circumstances, economic, business,
political or other changes affecting one bond might also affect other
bonds in the same segment, thereby potentially increasing market risk
with respect to the bonds in such segment. Such changes could include,
but are not limited to, proposed or suggested legislation involving the
financing of projects within such segments, declining markets or needs
for such projects and shortages or price increases of materials needed
for such projects. Each Fund may be subject to greater risk as compared
to a fund that does not follow this practice.
Each Fund intends to invest its assets in a varied portfolio in
order to reduce the impact on the Fund of any loss on a particular
portfolio security. However, in order to attain economies of scale at
relatively low asset size. Each Fund may invest more than 5% of its
assets in at least five issuers and may invest as much as 50% of its
assets in as few as two issuers. With respect to the remaining 50% of
its assets, it may invest no more than 5% in the securities of one
issuer. Thus, each Fund's investments may be diversified among fewer
issuers than if it were a diversified fund and, if so, the Fund's net
asset value may increase or decrease more rapidly than a diversified fund
if these securities change in value.
PURCHASING SHARES OF THE FUNDS
The Funds' shares are continuously offered through First Pacific
Securities (the "Distributor"), 2756 Woodlawn Drive, #6-201, Honolulu,
Hawaii 96822. The Distributor is a wholly owned subsidiary of the Fund's
Investment Manager.
The minimum initial investment to open an account is $1,000, and
the minimum subsequent investment is $100. Shares in each Fund may be
purchased from the Distributor or from members of the National
Association of Securities Dealers who have sales agreements with the
Distributor. Direct purchase orders may be made by submitting a check or
wiring funds and in the case of a new account, a completed application to
the Fund's transfer agent, First Pacific Recordkeeping, Inc. ("Transfer
Agent") at the following address: First Pacific Recordkeeping, Inc.,
2756 Woodlawn Drive, #6-201, Honolulu, Hawaii, 96822. For subsequent
investments, the stub from the bottom of the shareholder confirmation
should be sent along with the check.
All orders for the purchase of shares are subject to acceptance or
rejection by the Corporation or by the Distributor. Direct purchase
orders received by the Transfer Agent by 4:00 p.m., New York City time,
are confirmed at that day's public offering price. Direct purchase
orders received by the Transfer Agent after 4:00 p.m. are confirmed at
the public offering price next determined on the following business day.
Should an order to purchase shares be canceled because an investor's
check does not clear, the investor will be responsible for any resulting
losses or fees incurred in that transaction.
Shares of the Funds may be purchased by customers of brokers-
dealers or other financial intermediaries ("Service Agents") which have
established a shareholder servicing relationship with their customers.
Service Agents may impose additional or different conditions on purchases
or redemptions of Fund shares and may charge transaction or other account
fees. Each Service Agent is responsible for transmitting to its
customers a schedule of any such fees and information regarding
additional or different purchase or redemption conditions. Shareholders
who are customers of Service Agents should consult their Service Agent
for information regarding these fees and conditions. Amounts paid to
Service Agents may include transaction fees and/or service fees, which
would not be imposed if shares of the Portfolio were purchased directly
from the Distributor. Service Agents may provide shareholder services to
their customers that are not available to a shareholder dealing directly
with the Fund's Distributor.
Service Agents may enter confirmed purchase orders on behalf of
their customers. If shares of a Portfolio are purchased in this manner,
the Service Agent must receive your investment order before 4:00 pm EST,
and transmit it to the Fund's Transfer Agent prior to 5:00 pm EST to
receive that day's share price. Proper payment for the order must be
received by the Transfer Agent no later than the time when the Fund is
priced on the following business day. Service Agents are responsible to
their customers and the Fund for timely transmission of all subscription
and redemption requests, investment information, documentation and money.
The issuance of shares is recorded on the books of each Fund in
full and fractional shares carried to the third decimal place. To avoid
additional operating costs, and for investor convenience, share
certificates will no longer be issued. Each Fund's shares are offered at
the net asset value next computed after the Transfer Agent receives a
check and order to purchase from an investor's securities dealer or
broker or directly from the investor. There is no sales load imposed on
purchases of Fund shares at the time of purchase.
Investors will be entitled to begin receiving dividends on such
shares on the next business day after the Fund receives good funds for
such order. It is the responsibility of an investor, or an investor's
broker or dealer, to promptly forward payment to the Corporation for
shares being purchased.
In-Kind Purchases
Under certain circumstances, an investor may purchase a Fund's
shares by delivering to the Fund securities eligible for the Fund's
portfolio. All in-kind purchases are subject to prior approval by the
Manager. Prior to sending securities to a Fund with a purchase order,
investors must contact the Manager ((808)988-8088) for verbal approval of
the in-kind purchase. Acceptance of such securities will be at the
discretion of the Manager based on its judgment as to whether, in each
case, acceptance of the securities will allow the Fund to acquire the
securities at no more than the cost of acquiring them through normal
channels. Fund shares purchased in exchange for securities are issued at
the net asset value next determined after receipt of securities and the
purchase order. Securities accepted for in-kind purchases will be valued
in the same manner as portfolio securities, described below under "Net
Asset Value," at the value next determined after receipt of the purchase
order. Approval by the Manager of in-kind purchases will not delay
valuation of the securities accepted for in-kind purchases or fund shares
issued in exchange for such securities. The in-kind exchange, for tax
purposes, constitutes the sale of one security and the purchase of
another. The sale may involve either a capital gain or loss to the
shareholder for federal income tax purposes.
DISTRIBUTIONS FROM THE FUNDS
Each Fund will declare distributions on a daily basis and will pay
such distributions on a monthly basis. Each Fund will also make
distributions to investors of its net realized capital gains, if any,
annually. The monthly distribution is composed of all or a portion of
investment income earned by a Fund, less the Fund's expenses. Capital
gains distributions consist of a Fund's realized gain on transactions in
securities and in futures and options hedging transactions, net of any
realized capital losses, less any carryover capital losses from previous
years.
Each Fund will automatically credit monthly distributions and any
annual net long-term capital gain distributions to an investor's account
in additional shares of the Fund valued at net asset value, unless an
investor elects otherwise to the Fund's transfer agent. This election
must be made by writing to the Transfer Agent. If an investor elects to
change the method of distribution, such change will be effective only
with regard to distributions for which the payment date is seven or more
business days after the Transfer Agent has received the request.
REDEMPTION OF SHARES
Written Redemption Request
Investors may redeem shares at any time by mailing a written
redemption request in proper form to the Transfer Agent. This request
should be sent to First Pacific Recordkeeping, Inc., 2756 Woodlawn Drive,
#6-201, Honolulu, HI 96822. The request should indicate the amount to
be redeemed, identify the account number and be signed exactly as the
shares are registered. If the amount being redeemed is in excess of
$50,000, or if proceeds are to be sent to anyone other than the
registered shareholder or address of record, signature(s) must be
guaranteed by an acceptable financial institution such as a bank, savings
and loan association, trust company credit union, broker, dealer,
registered securities association and clearing agency. The Manager may
waive this requirement under certain circumstances. Investors will
receive the net asset value per share next computed after the Transfer
Agent receives the redemption request in proper form.
Telephone Redemptions
Investors who have previously established the telephone redemption
privilege may sell shares by calling the Transfer Agent at (808) 988-8088
before 4:00 p.m. Eastern time to request a redemption. Prior to
redeeming shares by telephone the "Redemption Instructions" section of
either the Account Application or Expedited Telephone Redemption and
Exchange Request Form (the "Authorization") must be completed and on file
with the Transfer Agent. The signature(s) on the Authorization must be
guaranteed by an acceptable financial institution such as a bank, savings
and loan association, trust company, credit union, broker, dealer,
registered securities association and clearing agency unless the
Authorization is completed at the time an account is originally
established. A redemption requested by telephone will be processed at
the net asset value next determined after receipt of the request. The
proceeds would then be made payable to the registered shareowner(s) and
mailed to the address registered on the account or wired to a bank, as
requested on the Authorization. Investors cannot redeem shares by
telephone if stock certificates are held for those shares. In addition,
this service is not available with respect to shares purchased by check
until 15 days after purchase.
By utilizing the telephone redemption service, an investor
authorizes the Transfer Agent or its agent to act upon the instructions
of any person by telephone to redeem shares for any account for which
such service has been authorized to the address of record of such
account. Each Fund and the Transfer Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are
genuine. These procedures include requiring the investor to provide
certain personal identification at the time an account is opened and
prior to effecting each transaction request by telephone. In addition,
investors may be required to provide additional telecopied written
instructions of such transaction requests. A Fund or the Transfer Agent
may be liable for any losses due to unauthorized or fraudulent telephone
instructions if the Fund or the Transfer Agent does not employ these
procedures. Neither the Funds nor the Transfer Agent will be responsible
for any loss, liability, cost or expense for following instructions
received by telephone that it reasonably believes to be genuine. To
change the name of the commercial bank or the account designated to
receive redemption proceeds, a written request must be sent to the Fund
at the Corporation's address. Requests to change the bank or account
must be signed by each shareholder and each signature must be guaranteed.
This service may be amended or terminated at any time by the Transfer
Agent or the Fund.
General
Whether shares are redeemed by a Fund or sold through a securities
dealer, a check for the proceeds (net of any required tax withholding)
ordinarily will be mailed to investors or their dealer as the case may be
within five business days after a redemption request or repurchase order
and stock certificates (if any) are received in proper form as set forth
above. Wire transfers from a Fund of redemption proceeds, in the manner
described above, ordinarily will be transmitted to the investor within
two business days. If any shares are redeemed or repurchased shortly
after purchase, the Funds will not mail the proceeds until checks
received for the purchase of shares have cleared, which may take 10 days
or more. The proceeds, of course, may be more or less than the cost of
the shares.
The right of redemption by a Fund may be suspended or the date of
payment postponed for more than seven days during any period when the New
York Stock Exchange is closed (other than customary weekend and holiday
closings), when an emergency exists as defined by rules and regulations
of the Securities and Exchange Commission, or during any period when the
Securities and Exchange Commission has by order permitted such suspension
or postponement.
Each Fund reserves the right to redeem an investor's account where
the account is worth less than $500. Each Fund will advise the
shareholder of such intention in writing at least sixty (60) days prior
to effecting such redemption, during which time the shareholder may
purchase additional shares in an amount necessary to bring the account
back to $500. The Funds will not redeem an investor's account which is
worth less than $500 solely on account of a market decline.
NET ASSET VALUE
The net asset value per share for each Fund is determined by
calculating the total value of the Fund's assets, deducting its total
liabilities, and dividing the result by the number of shares outstanding.
The net asset value is computed once daily as of 4:00 p.m. Eastern time,
Monday through Friday, except on customary business holidays, or except
on any day on which no purchase or redemption orders are received, or
there is not a sufficient degree of trading in a Fund's portfolio
securities such that the Fund's net asset value per share might be
materially affected. Each Fund reserves the right to calculate the net
asset value and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable.
Fixed income securities are valued by using market quotations,
prices provided by market makers or estimates of market values obtained
from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith
by the Directors of the Fund. Short-term securities with remaining
maturities of less than 60 days are valued at amortized cost when it is
determined by First Pacific's Board of Directors that amortized cost is
the fair value of such securities. Other assets are valued at fair value
as determined in good faith by the Directors.
TAX STATUS
Federal Taxes
Each Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986 (the "Code"). In
each year a Fund so qualifies and distributes to its shareholders
substantially all of its net investment income and net capital gains, if
any, in the manner required by the Code, it will not be required to pay
federal income taxes, except to the extent that its taxable income is not
distributed.
If, at the close of each quarter of a Fund's taxable year, at least
50% of the value of the Fund's total assets consists of obligations
exempt from federal income tax ("tax-exempt obligations"), the Fund will
be qualified to pay exempt interest dividends to its shareholders to the
extent of its tax-exempt interest income (less expenses applicable
thereto). Exempt interest dividends may be treated by shareholders as
interest excludable from their gross income for federal income tax
purposes, but may be taxable distributions for state and local tax
purposes. Exempt interest dividends are included, however, in
determining what portion, if any, of a person's social security benefits
will be includable in gross income subject to federal income tax.
Interest with respect to indebtedness incurred or continued by a
shareholder to purchase or carry shares of a Fund is not deductible to
the extent of the exempt interest dividends received from a Fund.
Distributions of a Fund's taxable income and net short-term capital
gains, if any, are taxable to shareholders at ordinary income rates.
Distributions of a Fund's net long-term capital gains ("capital gains
dividends"), if any, are taxable to shareholders at the rates applicable
to long-term capital gains regardless of the length of time shares of the
Fund have been held by such shareholders. Each Fund will inform
shareholders of the source and tax status of such distributions promptly
after the close of each calendar year. Interest on certain "private
activity" obligations issued after August 7, 1986 will give rise to an
item of tax preference which may cause a shareholder to be subject to (or
result in an increased liability under) the alternative minimum tax.
Distributions from the Funds will not be eligible for the 70% dividends
received deduction for corporations because none of the Funds' net income
will arise from dividends on common or preferred stock.
Redemption or resale of shares of the Funds will be a taxable
transaction for federal income tax purposes, and shareholders will
recognize gain or loss in an amount equal to the difference between their
basis in their shares of the Fund and the amount received. Assuming that
such shares are held as a capital asset, the gain or loss will be a
capital gain or loss and will generally be long-term if such shareholders
have held their shares for more than one year. Any loss on shares held
for six months or less will be disallowed to the extent of any exempt
interest dividends received with respect to such shares. If such loss is
not entirely disallowed, it will be treated as a long-term capital loss
to the extent of any capital gains dividends received (or deemed to have
been received) with respect to such shares.
Distributions of a Fund's taxable income and net capital gains, if
any, will be taxable as described above, whether received in shares of
the Fund or in cash. Shareholders who receive distributions in the form
of additional shares will have a basis for federal income tax purposes in
each such share equal to the value thereof on the reinvestment date.
In order to avoid a 4% excise tax on "spillover dividends," each
Fund will be required to distribute by December 31 of each year at least
98% of its net investment income for such year and at least 98% of its
capital gain net income (computed on the basis of the one-year period
ending on October 31 of such year), plus any required distribution
amounts that were not distributed in previous tax years. Dividends that
are declared by a Fund in December of any year and that are actually paid
before the following February to shareholders of record on a specified
date in December will be treated for tax purposes as having been
distributed to, and received by, shareholders in December.
Each Fund is required, in certain circumstances, to withhold 31% of
taxable dividends and certain other payments, including redemptions, paid
to shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security
number) or who are otherwise subject to backup withholding. In addition,
each Fund is required, in certain circumstances, to withhold up to 30% of
dividends paid to nonresident aliens.
Hawaii Tax Status
Shareholders of each Fund who are subject to Hawaii income taxes
will not be subject to Hawaii income taxes on the Fund's dividends to the
extent that such dividends qualify as either (1) exempt-interest
dividends of a regulated investment company under Section 852(b)(5) of
the Internal Revenue Code of 1986, which are derived from interest on
tax-exempt obligations of the State of Hawaii or any of its political
subdivisions or on obligations of the possessions or territories of the
United States (such as Puerto Rico, Virgin Islands or Guam) that are
exempt from federal income tax or (2) dividends derived from interest or
dividends on obligations of the United States and its possessions or on
obligations or securities of any authority, commission or instrumentality
of the United States included in federal adjusted gross income but exempt
from state income taxes under the laws of the United States. To the
extent that a Fund's distributions are attributable to sources not
described in the preceding sentences, such as long or short term capital
gains, such distributions will not be exempt from Hawaii income tax.
Interest on Hawaiian Obligations, tax-exempt obligations of states
other than Hawaii and their political subdivisions, and obligations of
the United States or its possessions is not exempt from the Hawaii
Franchise Tax. This tax applies to banks, building and loan
associations, industrial loan companies, financial corporations, and
small business investment companies.
Persons or entities who are not Hawaii residents should not be
subject to Hawaii income taxation on dividends and distributions made by
the Fund but may be subject to other state and local taxes.
Each Fund will notify its shareholders within 45 days after the
close of the year as to the interest derived from Hawaii obligations and
exempt from Hawaii income tax.
The tax discussion set forth above is for general information only.
Prospective investors should consult their tax advisors regarding the
federal, state, local, foreign and other tax consequences to them of any
investment in the Funds, including the effects of any changes, including
proposed changes, in the tax laws.
OFFICERS AND DIRECTORS
The officers of the Fund manage its day-to-day operations. The
Fund's manager and its officers are subject to the supervision and
control of the Board of Directors under the laws of Maryland. A list of
the directors and officers of the Fund and a brief statement of their
present positions and principal occupations during the past five years is
set forth in the "Statement of Additional Information."
INVESTMENT MANAGER
First Pacific Management Corporation (the "Manager"), 2756 Woodlawn
Drive, #6-201, Honolulu, Hawaii 96822, was founded in 1988, organized the
Fund in 1988, and acts as its manager. The Manager manages the
investment of the assets of each Fund, provides the Fund with investment
research and administers the Fund's daily business affairs. The Manager
engages in a continuous review and analysis of state and local economic
conditions and trends and governmental activities related to the issuance
of state and local debt obligations. The Manager provides portfolio
research and services. The Manager is responsible for evaluating the
portfolio and overseeing its performance. First Pacific Management
Corporation provides or pays the cost of certain management, supervisory
and administrative services required in the normal operation of the
Corporation. This includes investment management and supervision;
remuneration of directors, officers and other personnel; rent; and such
other items that arise in daily corporate administration. Daily
corporate administration includes the coordination and monitoring of any
third parties furnishing services to each Fund, providing the necessary
office space, equipment and personnel for such Fund business and
assisting in the maintenance of the Fund's federal registration statement
and other documents required to comply with federal and state law. Not
considered normal operating expenses, and therefore payable by each Fund,
are organizational expenses, custodian fees, shareholder services and
transfer agency fees, taxes, interest, governmental charges and fees,
including registration of the Fund and its shares with the Securities and
Exchange Commission and the Securities Departments of the various States,
brokerage costs, dues, and all extraordinary costs and expenses including
but not limited to legal and accounting fees incurred in anticipation of
or arising out of litigation or administrative proceedings to which the
Fund, its directors or officers may be subject or a party thereto. As
compensation for the services provided by First Pacific Management
Corporation, each Fund pays the Manager a fee at the annual rate of .50
of one percent (.50%) of its average daily net assets.
The Manager may voluntarily reimburse expenses such that it will
waive a portion of its fees or reimburse a Fund for its other expenses to
the extent required to meet any applicable state expense limitation or to
maintain a certain voluntary maximum annual expense ratio for the Fund.
Any such expense limitation would reduce the Fund's expenses and increase
its yield.
Certain officers and directors of the Fund are also officers or
directors, or both, of First Pacific Management Corporation. Terrence
K.H. Lee, President of the Fund and the Manager, owns 68% of the stock of
the Manager. The stock of the Manager owned by Mr. Lee and by other
stockholders who are not controlling persons is subject to certain
agreements providing for rights of first refusal as to such stock.
Louis F. D'Avanzo is primarily responsible for the day to day
management of the Funds. Mr. D'Avanzo has been portfolio manager of the
First Hawaii Municipal Bond Fund since August of 1991. Mr. D'Avanzo has
been portfolio manager of the First Hawaii Intermediate Municipal Fund
since its inception in July of 1994. Mr. D'Avanzo has been employed with
First Pacific Management Corporation since July of 1989.
Since 1995, a moderately expanding economy, modest demands for debt
and the expectations of consistent price and unit labor costs have
contributed to stable long term interest rates. Given these conditions
and expectations, the primary investment strategy of the Bond Fund's
investment manager was to purchase high quality twenty year Hawaii
municipal bonds. The stability of interest rates, coupled with the
strategy of purchasing high quality municipal bonds was the primary
factor producing the past year's performance results.
Management Agreement
Subject to the authority of the Board of Directors of the
Corporation, the Manager and the Corporation's officers will supervise
and implement each Fund's investment activities. The Manager implements
the investment program of the Funds and the composition of its portfolio
on a day-to-day basis.
The current Management Agreement between the Bond Fund and First
Pacific Management Corporation was approved on May 14, 1991 and the
Management Agreement between the Intermediate Fund and the Manager was
approved on July 7, 1994. Each Agreement continues in effect for an
initial two-year period and thereafter for successive annual periods, so
long as such continuance is specifically approved at least annually by
the Board of Directors of the Corporation or by a vote of the majority of
the outstanding voting securities of the Fund, and, provided also that
such continuance is approved by a vote of the majority of the directors
who are not parties to the Agreements or interested persons of any such
party at a meeting held in person and called specifically for the purpose
of evaluating and voting on such approval. The Agreement provides that
either party may terminate by giving the other not more than sixty days
nor less than thirty days written notice. The Agreement will terminate
automatically if assigned by either party.
CUSTODIAN
Union Bank of California, N.A. of San Francisco, California is the
custodian of the assets of each Fund.
THE DISTRIBUTION PLAN
Each Fund has adopted a distribution plan (the "Distribution Plan")
pursuant to Rule 12b-1 under the Investment Company Act of 1940 which
provides that the Fund may spend up to .25% per year of its average daily
net assets in connection with the Fund's activities as a distributor of
its shares. The Board of Directors determined that each Distribution
Plan is in the best interests of the shareholders. Pursuant to the
Distribution Plan, each Fund has entered into a Distribution Agreement
with First Pacific Securities (the "Distributor"), to serve as the
distributor of each Fund's shares. Under the Distribution Plan, each
Fund will pay the Distributor for expenditures which are primarily
intended to result in the sale of the respective Fund's shares such as
advertising, marketing and distributing the Fund's shares and servicing
Fund investors, including payments for reimbursement of and/or
compensation to brokers and dealers.
During the initial term of the Distribution Agreement the amounts
payable to the Distributor under the Distribution Plan may not fully
reimburse the Distributor for its actual distribution related expenses.
The Distributor expects to recover such excess amounts through its normal
fees under the Distribution Plan in later years. The Funds are not
legally obligated to repay such excess amounts or any interest thereon,
or to continue the Distribution Plan for such purpose. Distribution Plan
payments are subject to limits under the rules of the National
Association of Securities Dealers. The Fund understands that the staff
of the Securities and Exchange Commission is continuing its consideration
of payments under Rule 12b-1.
Each Plan provides that the Distributor must submit quarterly
reports to the Board of Directors of the Corporation setting forth all
amounts paid under the Distribution Plan and the purposes for which such
expenditures were made, together with such other information as from time
to time is reasonably requested by the Directors.
Each Distribution Plan provides that it will continue in full force
and effect if ratified at the first meeting of Fund shareholders, and
thereafter from year to year so long as such continuance is specifically
approved by a vote of the Directors, and also by a vote of the
disinterested Directors, cast in person at a meeting called for the
purposes of voting on the Distribution Plan. The Distribution Plan for
Bond fund was approved by the Fund's shareholders and the Distribution
Plan for Intermediate Fund will be submitted to the Fund's initial
shareholder(s) for approval. The Distribution Plans may not be amended
to increase materially the amount to be spent for the services described
therein without approval by a vote of a majority of the outstanding
voting shares of the respective Fund, and all material amendments of a
Distribution Plan must be approved by the Directors and also by the
disinterested Directors. Each Distribution Plan may be terminated at any
time by a vote of a majority of the disinterested Directors or by a vote
of a majority of the outstanding voting shares of the respective Fund.
While a Distribution Plan is in effect, selection of the nominees for
disinterested directors is committed to the discretion of the
disinterested directors.
ALLOCATION OF BROKERAGE TRANSACTIONS
In effecting purchases and sales of each Fund's portfolio
securities, the Manager and the Fund may place orders with and pay
brokerage commissions to brokers, including brokers which may be
affiliated with the Fund, the Manager, the Distributor or dealers
participating in the offering of the Fund's shares. In addition, in
selecting among firms to handle a particular transaction, subject to best
price and execution, the Manager and the Funds may take into account
whether the firm has sold or is selling shares of the Funds.
SHAREHOLDER SERVICES AND REPORTS
First Pacific Recordkeeping, Inc., transfer agent for the Fund,
performs bookkeeping, data processing and administrative services related
to the maintenance of shareholder accounts. The Transfer Agent also
provides personal services to shareholders of each Fund pursuant to the
Shareholder Services Agreement. Services provided pursuant to this
Agreement include telephone and written communications with shareholders
pertaining to changing dividend payment options, account designations and
addresses, transfers, purchase and redemption transactions and general
maintenance of shareholder relations. The Shareholder Service Agreement
does not duplicate services provided under the Transfer Agent Agreement,
such as maintenance of shareholder accounts and records, or effectuating
redemptions, transfers or opening shareholder accounts. Clerical
services provided by the Transfer Agent on behalf of the Funds under the
Shareholder Services Agreement include personnel as needed, equipment and
supplies, to respond to and process the shareholder inquiries.
Bookkeeping services provided by the Transfer Agent on behalf of the
funds pursuant to this Agreement, are generally limited to records of
transactions and expenditures originating with the Transfer Agent in
connection with providing supplemental shareholder services and
maintaining shareholder relations and communications. As compensation
for its clerical, bookkeeping and shareholder services, the Transfer
Agent receives a fee, computed daily and payable monthly, at an
annualized rate of .10% of the Fund's average daily net assets.
When an initial investment is made in the Fund, an account will be
opened for each investor on the Fund's books and investors will receive a
confirmation of the opening of the account. Investors will receive
monthly statements giving details of all activity in their account during
the month and will also receive a statement whenever an investment or
withdrawal is made in or from their account. Information for federal
income tax purposes will be provided at the end of the year.
First Pacific Recordkeeping, Inc. also provides fund accounting
services for the Intermediate Fund pursuant to a Fund Accounting
Agreement.
GENERAL INFORMATION AND HISTORY
First Pacific Mutual Fund, Inc. was incorporated in Maryland on
July 8, 1988 and has a present authorized capitalization of 100,000,000
shares of $.01 par value common stock, of which, 20,000,000 shares have
been allocated to each Fund. All shares have like rights and privileges.
Each full and fractional share, when issued and outstanding, has (1)
equal voting rights with respect to matters which affect the respective
Fund, and (2) equal dividend, distribution and redemption rights to
assets of the respective Fund. Shares when issued are fully paid and
nonassessable. The Corporation may create other series of stock but will
not issue any senior securities. Shareholders do not have pre-emptive or
conversion rights. These shares have noncumulative voting rights, which
means that the holders of more than 50% of the shares voting for the
election of Directors can elect 100% of the Directors, if they choose to
do so, and in such event, the holders of the remaining less than 50% of
the shares voting will not be able to elect any Directors. The
Corporation is not required to hold a meeting of shareholders each year.
The Fund intends to hold annual meetings when it is required to do so by
the Maryland General Corporate Law or the Investment Company Act of 1940.
Shareholders have the right to call a meeting to consider the removal of
one or more of the Directors and will be assisted in Shareholder
communication in such matter.
The Fund may use "First Pacific" in its name so long as First
Pacific Management Corporation or an affiliate thereof, acts as its
investment manager.
This prospectus omits certain of the information contained in the
registration statement filed with the Securities and Exchange Commission,
Washington, D.C. These items may be inspected at the offices of the
Commission or obtained from the Commission upon payment of the fee
prescribed.
Shareholder inquiries should be directed to: First Pacific
Securities, 2756 Woodlawn Drive #6-201, Honolulu, Hawaii 96822.
INVESTMENT MANAGER
First Pacific Management Corporation
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822
DISTRIBUTOR
First Pacific Securities, Inc.
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822
CUSTODIAN
Union Bank of California, N.A.
475 Sonsome Street, 15th Floor
San Francisco, California 94111
LEGAL COUNSEL TO FUND
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
INDEPENDENT AUDITORS
Tait, Weller & Baker
Two Penn Center Plaza, Suite 700
Philadelphia, Pennsylvania 19102
TRANSFER AGENT
First Pacific Recordkeeping, Inc.
2756 Woodlawn Drive, #6-201
Honolulu, HI 96822
LEGAL COUNSEL TO INVESTMENT MANAGER
Goodsill Anderson Quinn & Stifel
1099 Alakea Street, Suite 1800
Alii Place
Honolulu, Hawaii 96813
FIRST PACIFIC MUTUAL FUND, INC. Prospectus dated
2756 Woodlawn Drive, #6-201 February 1, 1997
Honolulu, Hawaii 96822
FIRST PACIFIC MUTUAL FUND, INC.
First Pacific Mutual Fund, Inc. (the "Corporation") is a mutual
fund, organized as a non-diversified open-end management investment
company. In this Prospectus all references to any series of the
Corporation will be called the "Fund" unless expressly noted otherwise.
The Corporation offers three series of shares each of which has different
investment objectives and investment policies. Each Fund's net asset
value will fluctuate.
First Idaho Tax-Free Fund (the "Fund"). The objective of this
Fund is to provide a high level of current income exempt from federal and
Idaho state income taxes, consistent with preservation of capital. The
Fund attempts to achieve its objective by investing primarily in a varied
portfolio of investment grade municipal securities which pay interest
exempt from federal and Idaho income taxes. There can be no assurance
that the Fund will meet its stated objective.
First Pacific Management Corporation (the "Manager") manages the
Fund's portfolio of investments.
A maximum sales charge of 2.75% of the purchase price, with reduced
sales charges beginning at $50,000, is imposed at the time of purchase of
the Fund's shares (See "PURCHASING SHARES OF THE FUND".) The Fund has
adopted a distribution plan which provides that the Fund may spend up to
.50% of its average daily net assets in connection with the distribution
of Fund shares.
This Prospectus sets forth the information about the Fund that a
prospective investor should know before investing in the Fund. Please
read and retain this Prospectus for future reference.
_____________________
A Statement of Additional Information, dated February 1, 1997,
containing additional information about the Fund has been filed with the
Securities and Exchange Commission and is hereby incorporated by
reference into this Prospectus. A copy of the Statement of Additional
Information may be obtained without charge by calling (808) 988-8088.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
FUND EXPENSE TABLE.................................................. 3
COMPARATIVE PERFORMANCE.............................................. 4
FINANCIAL HIGHLIGHTS................................................. 5
PROSPECTUS SUMMARY................................................... 6
INVESTMENT OBJECTIVE AND POLICIES.................................... 7
MUNICIPAL SECURITIES................................................. 8
INVESTMENT PRACTICES................................................. 9
PURCHASING SHARES OF THE FUND........................................ 10
DISTRIBUTIONS FROM THE FUND.......................................... 13
REDEMPTION OF SHARES................................................ 13
NET ASSET ..VALUE................................................... 15
TAX STATUS.......................................................... 15
OFFICERS AND DIRECTORS.............................................. 17
INVESTMENT MANAGER.................................................. 17
CUSTODIAN........................................................... 18
THE DISTRIBUTION PLAN............................................... 18
ALLOCATION OF BROKERAGE TRANSACTIONS................................ 19
SHAREHOLDER SERVICES AND REPORTS.................................... 19
GENERAL INFORMATION AND HISTORY...................................... 19
FIRST IDAHO TAX-FREE FUND EXPENSES
The following table illustrates all expenses and fees that a
shareholder of the Fund will incur. Additional transaction fees may be
charged if a broker-dealer or other financial intermediary deals with the
Fund on your behalf.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases............................ 2.75%
Sales Charge Imposed on Reinvested Dividends......................... None
Contingent Deferred Sales Charge..................................... None
Redemption Fees.......................................................None
<TABLE>
<S> <C>
Annual Operating Expenses
(as a percentage of average net assets)
Management Expenses................................................. .50%
12b-1 Fees.......................................................... .50 <F1>
Other Expenses (Estimated)... ..................................... .15
Total Operating Expenses........................................... 1.15%
<FN>
<F1>
The Manager and the Distributor have waived a portion of the Fund's Management
Expenses and 12b-1 fees during the period ending September 30, 1996. Such
waivers may cease at any time.
</FN>
</TABLE>
The purpose of this table is to assist the investor in
understanding the various expenses that an investor in the Fund will bear
directly or indirectly. Expenses for the fiscal year ending September
30, 1996 after waiver of management and 12b-1 fees were .02% of average
net assets. The expenses set forth above are based on actual contractual
amount, without any fee waivers, for the most recent fiscal year ending
September 30, 1996. Long-term shareholders may pay more than the
economic equivalent of the maximum front-end sales charges permitted by
the National Association of Securities Dealers.
The following example illustrates the expenses that you would pay
on $1,000 investment over various time periods assuming (1) a 5% annual
rate of return and (2) redemption at the end of each time period. As
noted in the table above, the Fund charges no redemption fees of any
kind.
1 year 3 years
$39 $63
This example should not be considered a representation of past or future
expenses or actual performance. Actual expenses may be greater or less
than those shown.
THE FOLLOWING TABLE DATED SEPTEMBER 30, 1996, INCLUDING AVERAGE ANNUAL TOTAL
RETURN INFORMATION , WAS PRESENTED AS A GRAPH IN THE PROSPECTUS .
_________________________________________________________________________
____
FIRST IDAHO TAX-FREE FUND AS COMPARED TO THE LEHMAN MUNI BOND INDEX
(Comparison of Change in Value of $10,000 Investment)
9/1996
--------
First Idaho Tax-Free Fund 9,925
Lehman Muni Bond Index 10,141
AVERAGE ANNUAL TOTAL RETURN
Inception (.75%)
First Idaho Tax-Free Fund
FINANCIAL HIGHLIGHTS
The financial highlights and ratios for the period presented have been
selected from the Fund's financial statements, which have been examined by
Tait, Weller & Baker, independent certified public accountants, whose
unqualified report thereon appears in the Fund's Annual Report to
Shareholders for the year ended September 30, 1996. Such financial
statement and report are incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
Period
July 3, 1996*
to
September 30,
1996
<S> <C>
Net Asset Value
Beginning of period $10.00
Income from investment operations
Net investment income .05
Net unrealized gain on securities .15
Total from investment operations .20
Less distributions
Dividends from net investment income (.05)
End of period $10.15
Total return 2.05%
Ratios/Supplemental Data
Net assets, end year (000's) $111
Ratio of expenses to average net assets .02% (a)
Ratio of net investment income to average
net assets 3.03% (a)
Portfolio turnover 0%
*Commencement of operations
(a) Annualized
</TABLE>
PERFORMANCE
From time to time, the Fund may advertise its total return, yield and
tax equivalent yield. The "total return" of the Fund refers to the average
annual compounded rate of return over 1, 5 and 10 year periods or for the
life of the Fund (which periods will be stated in the advertisement) that
would equate an initial amount invested at the beginning of a stated period
to the ending redeemable value of the investment. The calculation assumes
the reinvestment of all dividends and distributions, includes all recurring
fees that are charged to all shareholder accounts and a deduction of all
nonrecurring charges deducted at the end of each period. Aggregate total
return may also be presented for various periods; such return represents the
cumulative change in value of an investment in the Fund for the specific
period (reflecting changes in Fund share prices and assuming reinvestment
of dividends and distributions). Total return may be quoted with or without
giving effect to any voluntary expense limitations in effect for the Fund
during the relevant period. The "yield" of the Fund is computed by dividing
the net investment income per share earned during the period stated in the
advertisement (using the average number of shares entitled to receive
dividends) by the maximum offering price per share on the last day of the
period. The calculation includes among expenses of the Fund, for the
purpose of determining net investment income, all recurring fees that are
charged to all shareholder accounts and any nonrecurring charges for the
period stated. The yield formula provides for semi-annual compounding which
assumes that net investment income is earned and reinvested at a constant
rate and annualized at the end of a six-month period. The "tax equivalent"
yield of the Fund is calculated by determining the pre-tax yield which,
after being taxed at a stated rate, would be equivalent to the stated
current yield calculated as described above. The Fund's Annual Report will
contain additional performance information. It will be available following
the completion of the Fund's fiscal year, without charge upon request to the
Fund by writing to the address or calling the phone number on the cover of
this Prospectus.
PROSPECTUS SUMMARY
Offering Price, and
Minimum Purchase The minimum initial investment is $1,000 with a $100
minimum for subsequent investments; less in certain
circumstances. Shares are sold at net asset value
plus any applicable sales charge. See
"PURCHASING SHARES OF THE FUND".
Investment The Fund seeks to provide a high level of current income
Objective exempt from federal and Idaho state income taxes,
and Policies consistent with preservation of capital. There is
no assurance that this objective will be achieved.
The Fund will invest primarily in a varied portfolio of
investment grade Idaho municipal securities. The Fund
will primarily invest in municipal securities issued
by or on behalf of the State of Idaho and its political
subdivisions, agencies and instrumentalities, certain
interstate agencies and certain territories of the
United States. Municipal securities include municipal
bonds, as well as shorter term municipal notes,
municipal leases, zero coupon bonds, pre-refunded
bonds, and tax exempt commercial paper. Individual
bonds could range in maturity from three months to
forty years. The net asset value per share
may increase or decrease depending on changes in
interest rates and other factors affecting the
municipal credit markets. The Fund will not
invest more than 10% in lower rated municipal
securities. See "INVESTMENT OBJECTIVES AND POLICIES".
Risks and Subject to certain limitations, the Fund
Investment Practices may lend its portfolio securities, and enter into
when-issued or delayed delivery transactions.
These investments entail certain risks.
Tax-exempt securities may be adversely affected
by local political and economic conditions and
developments within the State and the United
States of America which adversely affect issuers
of such tax-exempt securities. Adverse
conditions in the State of Idaho's significant
industries could have a correspondingly adverse
effect on specific issuers within the State or on
anticipated revenue of the State. In the event
of the bankruptcy of a borrower of Fund portfolio
securities, the Fund could experience delays in
recovering either the securities loaned or its
cash. To the extent that the value of the
securities loaned has increased or the value of
the collateral held by the Fund has decreased,
the Fund could experience a loss. When the time
comes to receive and pay for a when-issued
security, the security may have a value greater
or less than the Fund's fixed payment obligation.
See "MUNICIPAL SECURITIES" and "INVESTMENT
PRACTICES."
Investment Manager First Pacific Management Corporation is the
Fund's Investment Manager. The Investment
Manager was organized in 1988. The annual
management fee is .50% of average daily net
assets.
Distributions from Distributions from net investment income
Fund are declared daily and paid monthly. Capital gains, if
any, are distributed annually. See "DISTRIBUTIONS FROM
THE FUND."
Redemption Shares may be redeemed at the next determined net
asset value. The Fund may require involuntary
redemption of shares if the value of an account is less
than $500. See "REDEMPTION OF SHARES."
Transfer Agent First Pacific Recordkeeping, Inc. See
"SHAREHOLDER SERVICES AND REPORTS."
The above is qualified in its entirety by
reference to the more detailed information
included elsewhere in this Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide a high level of
current income exempt from federal and Idaho state income taxes,
consistent with preservation of capital. There can be no assurance that
the Fund will achieve its investment objective, which may be changed only
with shareholder approval.
The Fund will generally invest its assets in a varied portfolio of
investment grade municipal securities which are general obligation and
revenue bonds and notes issued by or on behalf of the State of Idaho and
its political subdivisions, agencies and instrumentalities, certain
interstate agencies and certain territories of the United States, the
interest on which, in the opinion of bond counsel or other counsel to the
issuer of such securities, is exempt from federal and Idaho state income
taxes. In normal circumstances up to 100%, but not less than 80%, of the
Fund's net assets will be invested in the foregoing types of municipal
securities. The foregoing is a fundamental policy and cannot be changed
without shareholder approval. In certain instances the interest on
municipal securities may be an item of tax preference includable in
alternative minimum taxable income depending upon the shareholder's tax
status. The Fund may invest up to 20% of its total assets in securities
which generate interest which is treated as an item of tax preference and
subject to federal and state alternative minimum tax. (See "TAX
STATUS".) The Fund may invest up to 10% of its assets in bonds rated BB
or Ba grade municipal securities. The lowest quality municipals in which
each Fund will invest are those rated BB by S&P, Ba by Moody's or which
are unrated, but judged by the Investment Manager to be of equivalent
quality. (See "MUNICIPAL SECURITIES-Investment Grade Municipal
Securities and Lower Grade Municipal Securities" below.)
When the Investment Manager determines during periods of adverse
market conditions, including when Idaho tax exempt securities are
unavailable, the Fund may invest up to 20% of the value of its net assets
for temporary defensive purposes in money market instruments the interest
on which may be subject to federal, state or local income tax.
MUNICIPAL SECURITIES
General
Municipal securities are debt obligations issued by or on behalf of
the government of states, territories or possessions of the United
States, the District of Columbia and their political subdivisions,
agencies and instrumentalities, the interest on which is generally exempt
from the regular Federal income tax.
The two principal classifications of municipal securities are
"general obligation" and "revenue" bonds. "General obligation" bonds are
secured by the issuer's pledge of its faith, credit and taxing power for
the payment of principal and interest. "Revenue" bonds are usually
payable only from the revenue derived from a particular facility or class
of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source. Industrial development bonds are
usually revenue bonds, the credit quality of which is normally directly
related to the credit standing of the industrial user involved.
There are, in addition, a variety of hybrid and special types of
municipal securities, including variable rate securities, municipal notes
and municipal leases. Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to minimize
fluctuations in values of the instruments. Municipal notes include tax,
revenue and bond anticipation notes of short maturity, generally less
than three years, which are issued to obtain temporary funds for various
public purposes. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment
and facilities such as fire, sanitation or police vehicles or
telecommunications equipment, buildings or other capital assets. The
Fund may invest in municipal leases without limit. Some municipal
securities may not be backed by the faith, credit and taxing power of the
issuer. Zero coupon bonds are debt obligations which do not require the
periodic payment of interest and are issued at a significant discount
from face value. Pre-refunded bonds are municipal bonds for which the
issuer has previously provided money and/or securities to pay the
principal, any premium and interest on the bonds to their maturity date
or to a specific call date. A more detailed description of the types of
municipal securities in which the Fund may invest is included in the
Statement of Additional Information.
From time to time, proposals have been introduced before Congress
that would have the effect of reducing or eliminating the federal tax
exemption on income derived from municipal securities. If such a
proposal were enacted, the ability of the Fund to pay tax exempt interest
dividends might be adversely affected. The Tax Reform Act of 1986 also
limits the types and amounts of securities eligible to pay tax exempt
interest, which may restrict the range of tax exempt securities available
for investment by the Fund.
Investors should be aware that the net asset value of the Fund may
change as general levels of interest rates fluctuate. When interest
rates increase, the value of the Fund's portfolio securities can be
expected to decline. Conversely, when interest rates decline, the value
of the Fund's portfolio securities can be expected to increase.
Investment Grade Municipal Securities
The Fund will invest its assets primarily (up to 100% but not less
than 90%), in securities which, at the time of purchase, are either rated
within the four highest grades assigned by Moody's Investors Service,
Inc. ("Moody's") (Aaa, Aa, A and Baa) or Standard & Poor's Corporation
("S&P") (AAA, AA, A and BBB); or if unrated, are judged by the Investment
Manager to be of comparable quality to such rated securities. Bonds
which are rated Baa or BBB are considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well. Although the Fund will invest primarily in
investment grade municipal securities, from time to time the Fund may
also invest in medium grade municipal securities and in lower grade
municipal securities. The Investment Manager attributes to medium and
lower quality obligations the same general characteristics as do rating
services such as Standard & Poor's and Moody's.
Lower Grade Municipal Securities
Municipal securities which are in lower grade categories generally
offer a higher current yield than is offered by municipal securities
which are in the higher grade categories, but they also generally involve
greater price volatility and greater credit and market risk. Lower grade
municipal securities, including those rated BB and Ba, are generally
regarded as having predominantly speculative capacity to pay interest and
repay principal in accordance with their terms. A more detailed
description of the risks of investing in such municipal securities is set
forth in the Statement of Additional Information.
Certain Considerations Regarding Idaho Securities
The ability of the Fund to meet its objective is affected by the
ability of municipal issuers to meet their payment obligations. There
are additional risks associated with an investment which invests
primarily in issues of one state. Since the Fund invests primarily in
obligations of issuers located in Idaho, the marketability and market
value of these obligations may be affected by certain Idaho
constitutional provisions, legislative measures, executive orders,
administrative regulations, and voter initiatives.
The Idaho economy is concentrated in construction, manufacturing,
agriculture, tourism, food products, lumber and mining. Agriculture
related business ranks as the state's number one industry with cash
receipts of close to $3 billion. Over 18,000 Idahoans are employed in
food processing operations and more than 32,000 work on farms and
ranches. The service producing sector accounts for nearly eight out of
every ten nonfarm jobs in Idaho. Tourism is growing rapidly and is
Idaho's third largest industry. Idaho's hi-tech industry has continued
to grow at a rapid pace and may become the state's largest employer.
INVESTMENT PRACTICES
"When-Issued" and "Delayed Delivery" Transactions
The Fund may purchase and sell municipal securities on a "when-
issued" and "delayed delivery" basis. No income accrues to the Fund on
municipal securities in connection with such transactions prior to the
date the Fund actually takes delivery of and makes payment for such
securities. These transactions are subject to market fluctuation; the
value of the municipal securities at delivery may be more or less than
their purchase price, and yields generally available on municipal
securities when delivery occurs may be higher or lower than yields on the
municipal securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may
result in the Fund missing the opportunity of obtaining a price or yield
considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or high-grade municipal portfolio securities having an
aggregate value equal to the amount of such purchase commitments until
payment is made. The Fund will make commitments to purchase municipal
securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the
settlement date if such sale is considered advisable. To the extent the
Fund engages in "when-issued" and "delayed delivery" transactions, it
will do so for the purpose of acquiring securities for the Fund's
portfolio consistent with the Fund's investment objective and policies
and not for the purpose of investment leverage.
Other Practices
The Fund may invest in municipal bonds with a maturity range as
long as 40 years. The Fund will seek to invest in municipal bonds of
such maturities that, in the judgment of the Fund and the Investment
Manager, will provide a high level of current income consistent with
liquidity requirements and market conditions.
The Fund may borrow amounts up to 5% of its net assets (including
reverse repurchase agreements) in order to pay for redemptions when
liquidation of portfolio securities is considered disadvantageous or
inconvenient and may pledge up to 10% of its net assets to secure such
borrowing.
It is possible that the Fund will invest more than 25% of its
assets in a particular segment (bonds financing similar projects such as
utilities or hospitals) of the municipal bond market. Developments
affecting a particular segment could have a significant effect on Fund
performance. (An investment of more than 25% of assets in a particular
segment of the municipal bond market differs from an investment (i.e.,
concentration) of more than 25% of assets in a single industry.) In such
circumstances, economic, business, political or other changes affecting
one bond might also affect other bonds in the same segment, thereby
potentially increasing market risk with respect to the bonds in such
segment. Such changes could include, but are not limited to, proposed or
suggested legislation involving the financing of projects within such
segments, declining markets or needs for such projects and shortages or
price increases of materials needed for such projects. The Fund may be
subject to greater risk as compared to a fund that does not follow this
practice.
The Fund intends to invest its assets in a varied portfolio in
order to reduce the impact on the Fund of any loss on a particular
portfolio security. However, in order to attain economies of scale at
relatively low asset size, the Fund may invest more than 5% of its assets
in at least five issuers and may invest as much as 50% of its assets in
as few as two issuers. With respect to the remaining 50% of its assets,
it may invest no more than 5% in the securities of one issuer. Thus, the
Fund's investments may be diversified among fewer issuers than if it were
a diversified fund and, if so, the Fund's net asset value may increase or
decrease more rapidly than a diversified fund if these securities change
in value.
PURCHASING SHARES OF THE FUND
The Fund's shares are continuously offered through First Pacific
Securities (the "Distributor"), 2756 Woodlawn Drive, #6-201, Honolulu,
Hawaii 96822. The Distributor is a wholly-owned subsidiary of the Fund's
Investment Manager.
The minimum initial investment to open an account is $1,000, and
the minimum subsequent investment is $100. Shares in the Fund may be
purchased from the Distributor or from members of the National
Association of Securities Dealers who have sales agreements with the
Distributor. If an order is placed with a broker-dealer, the broker-
dealer is responsible for promptly transmitting the order to the Fund.
Direct purchase orders may be made by submitting a check or wiring funds
and in the case of a new account, a completed application sent to the
Fund's transfer agent, First Pacific Recordkeeping, Inc. ("Transfer
Agent") at the following address: First Pacific Recordkeeping, Inc.,
2756 Woodlawn Drive, #6-201, Honolulu, Hawaii, 96822. For subsequent
investments, the stub from the bottom of the shareholder confirmation
should be sent along with the check.
All orders for the purchase of shares are subject to acceptance or
rejection by the Corporation or by the Distributor. Direct purchase
orders received by the Transfer Agent by 4:00 p.m., Eastern Standard
Time, are confirmed at that day's net asset value plus any applicable
sales charge, which will vary with the amount purchased. Direct purchase
orders received by the Transfer Agent after 4:00 p.m. Eastern Standard
Time are confirmed at the next determined net asset value plus any
applicable sales charge, next determined on the following business day.
Should an order to purchase shares be canceled because an investor's
check does not clear, the investor will be responsible for any resulting
losses or fees incurred in that transaction.
Shares of the Fund may be purchased by customers of broker-dealers
or other financial intermediaries ("Service Agents) which have
established a shareholder servicing relationship with their customers.
Service Agents may impose additional or different conditions on purchases
or redemptions of Fund shares and may charge transaction or other account
fees. Each Service Agent is responsible for transmitting to its
customers a schedule of any such fees and information regarding
additional or different purchase or redemption conditions. Shareholders
who are customers of Service Agents should consult their Service Agent
for information regarding these fees and conditions. Amounts paid to
Service Agents may include transaction fees and/or service fees, which
would not be imposed if shares of the Portfolio were purchased directly
from the Distributor. Service Agents may provide shareholder services to
their customers that are not available to a shareholder dealing directly
with the Fund's Distributor.
Service Agents may enter confirmed purchase orders on behalf of
their customers. If shares of a Portfolio are purchased in this manner,
the Service Agent must receive your investment order before 4:00 pm EST,
and transmit it to the Fund's Transfer Agent prior to 5:00 pm EST to
receive that day's share price. Proper payment for the order must be
received by the Transfer Agent no later than the time when the Fund is
priced on the following business day. Service Agents are responsible to
their customers and the Fund for timely transmission of all subscription
and redemption requests, investment information, documentation and money.
Shares are offered at net asset value plus any applicable sales charge as
follows:
<TABLE>
<CAPTION>
Concession to
As a % of Net Dealers as a
Amount of As a % of Amount % of Amount
Investment Offering Price Invested Invested
______________________________________________________________
<S> <C> <C> <C>
Less than $50,000 2.75% 2.83% 2.25%
$50,000 but less
than $100,000 2.25% 2.30% 1.75%
$100,000 but less
than $250,000 1.75% 1.78% 1.25%
$250,000 but less
than $500,000 1.25% 1.27% 0.95%
$500,000 but less
than $1,000,000 1.00% 1.01% 0.80%
$1,000,000 and over 0.00% 0.00% 0.25%*
<FN>
* The Distributor may pay a concession to dealers, out of its own
assets, a fee of up to .25% of the offering price of sales of $1,000,000
or more. However, the Distributor reserves the right to recoup any
portion of the amount paid to the dealer if the investor redeems some or
all of the shares from the Fund within thirteen months of the time of
purchase.
</FN>
</TABLE>
The issuance of shares is recorded on the books of the Fund in full
and fractional shares carried to the third decimal place. To avoid
additional operating costs, and for investor convenience, share
certificates will not be issued. The Fund's shares are offered at the
net asset value next computed, plus any applicable sales charge, after
the Transfer Agent receives a check and order to purchase from an
investor's securities dealer or broker or directly from the investor.
There is a sales load of up to 2.75% imposed on purchases of Fund shares
at the time of purchase.
Investors may make systematic investments in fixed amounts
automatically on a monthly basis through the Fund's Automatic Investment
Plan. Information is available by contacting the Fund or your broker-
dealer.
Fund shares may be purchased at reduced sales charges through a
Letter of Intention (LOI). Through an LOI, you may pay a lower sales
charge if the dollar amount of shares currently being purchased plus the
dollar amount of any purchases you intend to make during the next
thirteen months of shares of the Fund equals $50,000 or more. Shares
acquired up to 90 days before the LOI is filed will be counted toward
completion of the LOI, and will be entitled to a retroactive downward
adjustment of the initial sales charge. You or your dealer must inform us
each time that a purchase is made under a LOI. Automatic Investment
Plans are not allowed for LOI purchases. Your first purchase must be at
least 5% of the LOI amount. If the transfer agent does not receive a
completed LOI within 20 business days after settlement of the first LOI
purchase or if the total purchases indicated on the LOI are not made
within the thirteen month period, your account will be charged with the
difference between the reduced LOI sales charge and the sales charge
applicable to the purchase actually made. Out of your initial purchase,
5% of the dollar amount specified will be held in escrow during the
thirteen month period (registered in your name) to assure such necessary
payment. If you redeem your account during this period, the applicable
Fund will withhold from the escrow amount sufficient shares to pay any
unpaid sales charge.
Fund shares may be purchased at net asst value, without a sales
charge, by institutions or other investors who qualify as: officers and
directors of the Fund; officers, directors and full time employees of
First Pacific Management Corporation, or any of its subsidiaries;
selected dealers and brokers and their officers and employees; spouses
and children under 21 years of age of any of the foregoing persons;
partners and full-time employees of the Funds' counsel; trust companies
and bank trust departments for funds held in a fiduciary, agency,
advisory, custodial or similar capacity; any state or political
subdivision thereof of any instrumentality, department, authority or
agency of any state or political subdivision thereof; managed account
clients of registered investment advisors; wrap accounts for the benefit
of clients of financial planners adhering to certain standards
established by First Pacific Management Corporation.
Shares can also be purchased at net asset value, without a sales
charge, if the purchase of such shares is funded by the proceeds from the
redemption of shares of any unrelated open-end investment company that
charges a front-end sales charge, and in certain circumstances, a
contingent deferred sales charge. In order to utilize this privilege,
the purchase order must be received by the Fund within 60 days after the
redemption of shares of the unrelated investment company.
Investors will be entitled to begin receiving dividends on such
shares on the next business day after the Fund receives good funds for
such order. It is the responsibility of an investor, or an investor's
broker or dealer, to promptly forward payment to the Corporation for
shares being purchased.
The Distributor from time to time pays certain additional cash
incentives of up to $100 and/or non-cash incentives such as vacations or
other prizes to broker-dealers and financial institutions in
consideration of their sales of Fund shares. In some instances, other
incentives may be made available only to selected broker-dealers and
financial institutions, based on objective standards developed by the
Distributor, to the exclusion of other broker-dealers and financial
institutions. The Distributor in its discretion may from time to time,
pursuant to objective criteria established by it, pay fees to qualifying
brokers, dealers or financial intermediaries for certain services or
activities which are primarily intended to result in sales of shares of
the Fund.
In-Kind Purchases
Under certain circumstances, an investor may purchase Fund shares
by delivering to the Fund securities eligible for the Fund's portfolio.
All in-kind purchases are subject to prior approval by the Manager.
Prior to sending securities to the Fund with a purchase order, investors
must contact the Manager at (808) 988-8088 for verbal approval of the
in-kind purchase. Acceptance of such securities will be at the discretion
of the Manager based on its judgment as to whether, in each case,
acceptance of the securities will allow the Fund to acquire the
securities at no more than the cost of acquiring them through normal
channels. Fund shares purchased in exchange for securities are issued at
the next determined net asset value plus any applicable sales charge,
after receipt of securities and the purchase order. Securities accepted
for in-kind purchases will be valued in the same manner as portfolio
securities, described below under "NET ASSET VALUE", at the value next
determined after receipt of the purchase order. Approval by the Manager
of in-kind purchases will not delay valuation of the securities accepted
for in-kind purchases or fund shares issued in exchange for such
securities. The in-kind exchange, for tax purposes, constitutes the sale
of one security and the purchase of another. The sale may involve either
a capital gain or loss to the shareholder for federal income tax
purposes.
DISTRIBUTIONS FROM THE FUND
The Fund will declare distributions on a daily basis and will pay
such distributions on a monthly basis. The Fund will also make
distributions to investors of its net realized capital gains, if any,
annually. The monthly distribution is composed of all or a portion of
investment income earned by the Fund, less the Fund's expenses. Capital
gain distributions consist of the Fund's realized gain on transactions in
securities and in futures and options hedging transactions, net of any
realized capital losses, less any carryover capital losses from previous
years.
The Fund will automatically credit monthly distributions and any
annual net long-term capital gain distributions to an investor's account
in additional shares of the Fund valued at net asset value, unless an
investor elects otherwise to the Fund's transfer agent. This election
must be made by writing to the Transfer Agent. If an investor elects to
change the method of distribution, such change will be effective only
with regard to distributions for which the payment date is seven or more
business days after the Transfer Agent has received the request.
REDEMPTION OF SHARES
Written Redemption Request
Investors may redeem shares at any time by mailing a written
redemption request in proper form to the Transfer Agent. This request
should be sent to First Pacific Recordkeeping, Inc., 2756 Woodlawn Drive,
#6-201, Honolulu, HI 96822. The request should indicate the amount to
be redeemed, identify the account number and be signed exactly as the
shares are registered. If the amount being redeemed is in excess of
$50,000, or if proceeds are to be sent to anyone other than the
registered shareholder or address of record, signature(s) must be
guaranteed by an acceptable financial institution such as a bank, savings
and loan association, trust company, credit union, broker dealer,
registered securities association or clearing agency. From time to time,
the Transfer Agent, in its discretion, may waive any or certain of the
foregoing requirements in particular cases. Investors will receive the
net asset value per share next computed after the Transfer Agent receives
the redemption request in proper form.
Telephone Redemptions
Investors who have previously established the telephone redemption
privilege may sell shares by calling the Transfer Agent at (808) 988-8088
before 4:00 p.m. Eastern Standard Time to request a redemption. Prior to
redeeming shares by telephone the "Redemption Instructions" section of
either the Account Application or Expedited Telephone Redemption and
Exchange Request Form (the "Authorization") must be completed and on file
with the Transfer Agent. The signature(s) on the Authorization must be
medallion guaranteed by an acceptable financial institution such as a
bank, savings and loan association, trust company, credit union, broker
dealer, registered securities association or clearing agency unless the
Authorization is completed at the time an account is originally
established. A redemption requested by telephone will be processed at
the net asset value next determined after receipt of the request. The
proceeds would then be made payable to the registered shareowner(s) and
mailed to the address registered on the account or wired to a bank, as
requested on the Authorization. If the amount being redeemed is $50,000
or more, see "Written Redemption Request". In addition, this service is
not available with respect to shares purchased by check until 15 days
after purchase.
By utilizing the telephone redemption service, an investor
authorizes the Transfer Agent or its agent to act upon the instructions
of any person by telephone to redeem shares for any account for which
such service has been authorized to the address of record of such
account. The Fund and the Transfer Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are
genuine. These procedures include requiring the investor to provide
certain personal identification at the time an account is opened and
prior to effecting each transaction request by telephone. In addition,
investors may be required to provide additional telecopied written
instructions of such transaction requests. The Fund or the Transfer
Agent may be liable for any losses due to unauthorized or fraudulent
telephone instructions if the Fund or the Transfer Agent does not employ
these procedures. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for following
instructions received by telephone that it reasonably believes to be
genuine. To change the name of the commercial bank or the account
designated to receive redemption proceeds, a written request must be sent
to the Fund at the Corporation's address. Requests to change the bank or
account must be signed by each shareholder and each signature must be
medallion guaranteed. This service may be amended or terminated at any
time by the Transfer Agent or the Fund.
Redemptions Through Certain Broker Dealers
Certain broker-dealers who have sales agreements with the
Distributor may allow their customers to redeem shares of the Fund
purchased through that broker-dealer by notifying the broker-dealer
directly. The broker-dealer is then responsible for promptly placing the
redemption request with the Fund on the customer's behalf. Payment will
be made to the shareholder by check or wire sent to the broker-dealer.
Broker-dealers offering this service may impose a fee or additional
requirements for such redemptions.
General
Whether shares are redeemed by the Fund or sold through a
securities dealer, a check for the proceeds (net of any required tax
withholding) ordinarily will be mailed to investors or their dealer as
the case may be within five business days after a redemption request or
repurchase order are received in proper form as set forth above or such
shorter period as may be required by applicable law. Wire transfers from
the Fund of redemption proceeds, in the manner described above,
ordinarily will be transmitted to the investor within two business days.
If any shares are redeemed or repurchased shortly after purchase, the
Fund will not mail the proceeds until checks received for the purchase of
shares have cleared, which may take 10 days or more. The proceeds, of
course, may be more or less than the cost of the shares.
The right of redemption by the Fund may be suspended or the date of
payment postponed for more than seven days during any period when the New
York Stock Exchange is closed (other than customary weekend and holiday
closings), when an emergency exists as defined by rules and regulations
of the Securities and Exchange Commission, or during any period when the
Securities and Exchange Commission has by order permitted such suspension
or postponement.
The Fund reserves the right to redeem an investor's account where
the account is worth less than $500. The Fund will advise the
shareholder of such intention in writing at least sixty (60) days prior
to effecting such redemption, during which time the shareholder may
purchase additional shares in an amount necessary to bring the account
back to $500. The Fund will not redeem an investor's account which is
worth less than $500 solely on account of a market decline.
NET ASSET VALUE
The net asset value per share for the Fund is determined by
calculating the total value of the Fund's assets, deducting its total
liabilities, and dividing the result by the number of shares outstanding.
The net asset value is computed once daily as of 4:00 p.m. Eastern
Standard Time, Monday through Friday, except on customary business
holidays, or except on any day on which no purchase or redemption orders
are received, or there is not a sufficient degree of trading in the
Fund's portfolio securities such that the Fund's net asset value per
share might be materially affected. The Fund reserves the right to
calculate the net asset value and to adjust the public offering price
based thereon more frequently than once a day if deemed desirable.
Fixed income securities are valued by using market quotations,
prices provided by market makers or estimates of market values obtained
from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith
by the Directors of the Fund. Short-term securities with remaining
maturities of less than 60 days are valued at amortized cost when it is
determined by First Pacific's Board of Directors that amortized cost is
the fair value of such securities. Other assets are valued at fair value
as determined in good faith by the Directors.
TAX STATUS
Federal Taxes
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986 (the "Code"). In each
year the Fund so qualifies and distributes to its shareholders
substantially all of its net investment income and net capital gains, if
any, in the manner required by the Code, it will not be required to pay
federal income taxes, except to the extent that its taxable income is not
distributed.
If, at the close of each quarter of the Fund's taxable year, at
least 50% of the value of the Fund's total assets consists of obligations
exempt from federal income tax ("tax-exempt obligations"), the Fund will
be qualified to pay exempt interest dividends to its shareholders to the
extent of its tax-exempt interest income (less expenses applicable
thereto). Exempt interest dividends may be treated by shareholders as
interest excludable from their gross income for federal income tax
purposes, but may be taxable distributions for state and local tax
purposes. Exempt interest dividends are included, however, in
determining what portion, if any, of a person's social security benefits
will be includable in gross income subject to federal income tax.
Interest with respect to indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Fund is not deductible to
the extent of the exempt interest dividends received from the Fund.
Exempt-interest dividends attributable to interest income on
certain tax exempt obligations issued after August 7, 1986 to finance
private activities are treated as an item of tax preference for purposes
of computing the alternative minimum tax for individuals, estates and
trusts which may cause a shareholder to be subject to (or result in an
increased liability under) the alternative minimum tax. The Fund may
invest up to 20% of its total assets in securities which generate
interest which is treated as an item of tax preference and subject to
federal and state alternative minimum tax.
Distributions of the Fund's taxable income and net short-term
capital gains, if any, are taxable to shareholders at ordinary income
rates. Distributions of the Fund's net long-term capital gains ("capital
gains dividends"), if any, are taxable to shareholders at the rates
applicable to long-term capital gains regardless of the length of time
shares of the Fund have been held by such shareholders. The Fund will
inform shareholders of the source and tax status of such distributions
promptly after the close of each calendar year. Distributions from the
Fund will not be eligible for the 70% dividends received deduction for
corporations because none of the Funds' net income will arise from
dividends on common or preferred stock.
Redemption or resale of shares of the Fund will be a taxable
transaction for federal income tax purposes, and shareholders will
recognize gain or loss in an amount equal to the difference between their
basis in their shares of the Fund and the amount received. Assuming that
such shares are held as a capital asset, the gain or loss will be a
capital gain or loss and will generally be long-term if such shareholders
have held their shares for more than one year. Any loss on shares held
for six months or less will be disallowed to the extent of any exempt
interest dividends received with respect to such shares. If such loss is
not entirely disallowed, it will be treated as a long-term capital loss
to the extent of any capital gains dividends received (or deemed to have
been received) with respect to such shares.
Distributions of the Fund's taxable income and net capital gains,
if any, will be taxable as described above, whether received in shares of
the Fund or in cash. Shareholders who receive distributions in the form
of additional shares will have a basis for federal income tax purposes in
each such share equal to the value thereof on the reinvestment date.
In order to avoid a 4% excise tax on "spillover dividends," the
Fund will be required to distribute by December 31 of each year at least
98% of its net investment income for such year and at least 98% of its
capital gain net income (computed on the basis of the one-year period
ending on October 31 of such year), plus any required distribution
amounts that were not distributed in previous tax years. Dividends that
are declared by the Fund in December of any year and that are actually
paid before the following February to shareholders of record on a
specified date in December will be treated for tax purposes as having
been distributed to, and received by, shareholders in December.
The Fund is required, in certain circumstances, to withhold 31% of
taxable dividends and certain other payments, including redemptions, paid
to shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security
number) or who are otherwise subject to backup withholding. In addition,
the Fund is required, in certain circumstances, to withhold up to 30% of
dividends paid to nonresident aliens.
Idaho Tax Status
Shareholders of the Fund who are subject to Idaho income taxes will
not be subject to Idaho income taxes on the Fund's dividends to the
extent that such dividends qualify as either (1) exempt-interest
dividends of a regulated investment company under Section 852(b)(5) of
the Internal Revenue Code of 1986, which are derived from interest on
tax-exempt obligations of the State of Idaho or any of its political
subdivisions (including bonds issued by certain authorities of the State
of Idaho) or on obligations of the possessions or territories of the
United States (such as Puerto Rico, Virgin Islands or Guam) that are
exempt from federal income tax or (2) dividends derived from interest or
dividends on obligations of the United States and its possessions or on
obligations or securities of any authority, commission or instrumentality
of the United States included in federal adjusted gross income but exempt
from state income taxes under the laws of the United States. To the
extent that the Fund's distributions are attributable to sources not
described in the preceding sentences, such as long or short term capital
gains, such distributions will not be exempt from Idaho income tax.
Persons or entities who are not Idaho residents may be subject to
Idaho income taxation on dividends and distributions made by the Fund to
the extent those dividends and distributions are not tax exempt as
explained in the preceding paragraph.
The Fund will notify its shareholders within 45 days after the
close of the year as to the interest derived from Idaho obligations and
exempt from Idaho income tax.
The tax discussion set forth above is for general information only.
Prospective investors should consult their tax advisors regarding the
federal, state, local, foreign and other tax consequences to them of any
investment in the Fund, including the effects of any changes, including
proposed changes, in the tax laws.
OFFICERS AND DIRECTORS
The officers of the Fund manage its day-to-day operations. The
Fund's manager and its officers are subject to the supervision and
control of the Board of Directors under the laws of Maryland. A list of
the directors and officers of the Fund and a brief statement of their
present positions and principal occupations during the past five years is
set forth in the "Statement of Additional Information."
INVESTMENT MANAGER
First Pacific Management Corporation (the "Manager"), 2756 Woodlawn
Drive, #6-201, Honolulu, Hawaii 96822, was founded in 1988, organized the
Fund in 1996, and acts as its manager. The Manager manages the
investment of the assets of the Fund, provides the Fund with investment
research and administers the Fund's daily business affairs. The Manager
engages in a continuous review and analysis of state and local economic
conditions and trends and governmental activities related to the issuance
of state and local debt obligations. The Manager provides portfolio
research and services. The Manager is responsible for evaluating the
portfolio and overseeing its performance. First Pacific Management
Corporation provides or pays the cost of certain management, supervisory
and administrative services required in the normal operation of the
Corporation. This includes investment management and supervision;
remuneration of directors, officers and other personnel; rent; and such
other items that arise in daily corporate administration. Daily
corporate administration includes the coordination and monitoring of any
third parties furnishing services to the Fund, providing the necessary
office space, equipment and personnel for such Fund business and
assisting in the maintenance of the Fund's federal registration statement
and other documents required to comply with federal and state law. Not
considered normal operating expenses, and therefore payable by the Fund,
are organizational expenses, custodian fees, shareholder services and
transfer agency fees, taxes, interest, governmental charges and fees,
including registration of the Fund and its shares with the Securities and
Exchange Commission and the Securities Departments of the various States,
brokerage costs, dues, and all extraordinary costs and expenses including
but not limited to legal and accounting fees incurred in anticipation of
or arising out of litigation or administrative proceedings to which the
Fund, its directors or officers may be subject or a party thereto. As
compensation for the services provided by First Pacific Management
Corporation, the Fund pays the Manager a fee at the annual rate of .50 of
one percent (.50%) of its average daily net assets.
The Manager may voluntarily assume expenses such that it will
waive a portion of its fees to the extent required to meet any applicable
state expense limitation or to maintain a certain voluntary maximum
annual expense ratio for the Fund. Any such expense limitation would
reduce the Fund's expenses and increase its yield.
Certain officers and directors of the Fund are also officers or
directors, or both, of First Pacific Management Corporation. Terrence
K.H. Lee, President of the Fund and the Manager, owns 68% of the stock of
the Manager. The stock of the Manager owned by Mr. Lee and by other
stockholders who are not controlling persons is subject to certain
agreements providing for rights of first refusal as to such stock.
Louis F. D'Avanzo is primarily responsible for the day to day
management of the Fund. Mr. D'Avanzo has been portfolio manager of the
First Hawaii Municipal Bond Fund since August of 1991. Mr. D'Avanzo has
been portfolio manager of the First Hawaii Intermediate Municipal Fund
since its inception in July of 1994. Mr. D'Avanzo has been employed with
First Pacific Management Corporation since July of 1989.
Management Agreement
Subject to the authority of the Board of Directors of the
Corporation, the Manager and the Corporation's officers will supervise
and implement the Fund's investment activities. The Manager implements
the investment program of the Fund and the composition of its portfolio
on a day-to-day basis.
The Management Agreement between the Fund and First Pacific
Management Corporation was approved on July 1, 1996. The Agreement
continues in effect for an initial two-year period and thereafter for
successive annual periods, so long as such continuance is specifically
approved at least annually by the Board of Directors of the Corporation
or by a vote of the majority of the outstanding voting securities of the
Fund, and, provided also that such continuance is approved by a vote of
the majority of the directors who are not parties to the Agreements or
interested persons of any such party at a meeting held in person and
called specifically for the purpose of evaluating and voting on such
approval. The Agreement provides that either party may terminate by
giving the other not more than sixty days nor less than thirty days
written notice. The Agreement will terminate automatically if assigned
by either party.
CUSTODIAN
Union Bank of California, N.A. of San Francisco, California is the
custodian of the assets of the Fund.
THE DISTRIBUTION PLAN
The Fund has adopted a distribution plan (the "Distribution Plan")
pursuant to Rule 12b-1 under the Investment Company Act of 1940 which
provides that the Fund may spend up to .50% per year of its average daily
net assets in connection with the Fund's activities as a distributor of
its shares. The Board of Directors determined that the Distribution Plan
is in the best interests of the shareholders. Pursuant to the
Distribution Plan, the Fund has entered into a Distribution Agreement
with First Pacific Securities, Inc. (the "Distributor"), to serve as the
distributor of the Fund's shares. Under the Distribution Plan, the Fund
will pay the Distributor for expenditures which are primarily intended to
result in the sale of the Fund's shares such as advertising, marketing
and distributing the Fund's shares and servicing Fund investors,
including payments for reimbursement of and/or compensation to brokers
and dealers.
During the initial term of the Distribution Agreement the amounts
payable to the Distributor under the Distribution Plan may not fully
reimburse the Distributor for its actual distribution related expenses.
The Distributor expects to recover such excess amounts through its normal
fees under the Distribution Plan in later years. The Fund is not legally
obligated to repay such excess amounts or any interest thereon, or to
continue the Distribution Plan for such purpose. Distribution Plan
payments are subject to limits under the rules of the National
Association of Securities Dealers.
The Plan provides that the Distributor must submit quarterly
reports to the Board of Directors of the Corporation setting forth all
amounts paid under the Distribution Plan and the purposes for which such
expenditures were made, together with such other information as from time
to time is reasonably requested by the Directors.
The Distribution Plan provides that it will continue in full force
and effect if ratified at the first meeting of Fund shareholders, and
thereafter from year to year so long as such continuance is specifically
approved by a vote of the Directors, and also by a vote of the
disinterested Directors, cast in person at a meeting called for the
purpose of voting on the Distribution Plan. The Distribution Plan for
the Fund will be submitted to the Fund's initial shareholder(s) for
approval. The Distribution Plan may not be amended to increase
materially the amount to be spent for the services described therein
without approval by a vote of a majority of the outstanding voting shares
of the Fund, and all material amendments of the Distribution Plan must be
approved by the Directors and also by the disinterested Directors. The
Distribution Plan may be terminated at any time by a vote of a majority
of the disinterested Directors or by a vote of a majority of the
outstanding voting shares of the Fund. While the Distribution Plan is in
effect, selection of the nominees for disinterested directors is
committed to the discretion of the disinterested directors.
ALLOCATION OF BROKERAGE TRANSACTIONS
In effecting purchases and sales of the Fund's portfolio
securities, the Manager and the Fund may place orders with and pay
brokerage commissions to brokers, including brokers which may be
affiliated with the Fund, the Manager, the Distributor or dealers
participating in the offering of the Fund's shares. In addition, in
selecting among firms to handle a particular transaction, subject to best
price and execution, the Manager and the Fund may take into account
whether the firm has sold or is selling shares of the Fund.
SHAREHOLDER SERVICES AND REPORTS
First Pacific Recordkeeping, Inc., transfer agent for the Fund,
performs bookkeeping, data processing and administrative services related
to the maintenance of shareholder accounts. The Transfer Agent also
provides personal services to shareholders of the Fund pursuant to the
Shareholder Services Agreement. Services provided pursuant to this
Agreement include telephone and written communications with shareholders
pertaining to changing dividend payment options, account designations and
addresses, transfers, purchase and redemption transactions and general
maintenance of shareholder relations. The Shareholder Service Agreement
does not duplicate services provided under the Transfer Agent Agreement,
such as maintenance of shareholder accounts and records, or effectuating
redemptions, transfers or opening shareholder accounts. Clerical
services provided by the Transfer Agent on behalf of the Fund under the
Shareholder Services Agreement include personnel as needed, equipment and
supplies, to respond to and process the shareholder inquiries.
Bookkeeping services provided by the Transfer Agent on behalf of the Fund
pursuant to this Agreement, are generally limited to records of
transactions and expenditures originating with the Transfer Agent in
connection with providing supplemental shareholder services and
maintaining shareholder relations and communications.
When an initial investment is made in the Fund, an account will be
opened for each investor on the Fund's books and investors will receive a
confirmation of the opening of the account. Investors will receive
monthly statements giving details of all activity in their account during
the month and will also receive a statement whenever an investment or
withdrawal is made in or from their account. Information for federal
income tax purposes will be provided at the end of the year.
GENERAL INFORMATION AND HISTORY
First Pacific Mutual Fund, Inc. was incorporated in Maryland on
July 8, 1988 and has a present authorized capitalization of 100,000,000
shares of $.01 par value common stock, of which, 20,000,000 shares have
been allocated to the Fund. All shares have like rights and privileges.
Each full and fractional share, when issued and outstanding, has (1)
equal voting rights with respect to matters which affect the Fund, and
(2) equal dividend, distribution and redemption rights to assets of the
Fund. Shares when issued are fully paid and nonassessable. The
Corporation may create other series of stock but will not issue any
senior securities. Shareholders do not have preemptive or conversion
rights. These shares have noncumulative voting rights, which means that
the holders of more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors, if they choose to do so, and
in such event, the holders of the remaining less than 50% of the shares
voting will not be able to elect any Directors. The Corporation is not
required to hold a meeting of shareholders each year. The Fund intends
to hold annual meetings when it is required to do so by the Maryland
General Corporate Law or the Investment Company Act of 1940.
Shareholders have the right to call a meeting to consider the removal of
one or more of the Directors and will be assisted in Shareholder
communication in such matter.
This prospectus omits certain of the information contained in
the registration statement filed with the Securities and Exchange
Commission, Washington, D.C. These items may be inspected at the offices
of the Commission or obtained from the Commission upon payment of the fee
prescribed.
Shareholder inquiries should be directed to: First Pacific
Securities, Inc., 2756 Woodlawn Drive #6-201, Honolulu, Hawaii 96822.
INVESTMENT MANAGER
First Pacific Management Corporation
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822
DISTRIBUTOR
First Pacific Securities, Inc.
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822
CUSTODIAN
Union Bank of California, N.A.
475 Sonsome Street, 15th Floor
San Francisco, California 94111
LEGAL COUNSEL TO FUND
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
INDEPENDENT AUDITORS
Tait, Weller & Baker
Two Penn Center Plaza, Suite 700
Philadelphia, Pennsylvania 19102
TRANSFER AGENT
First Pacific Recordkeeping, Inc.
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822
LEGAL COUNSEL TO INVESTMENT MANAGER
Hawley Troxell Ennis & Hawley
First Interstate Center
877 West Main, Suite 1000
Boise, Idaho 83701
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
Description 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 the earnings from portfolio securities in like securities; or
defray normal administrative expenses.
ADDITIONAL INVESTMENT CONSIDERATIONS
Municipal Securities. Municipal securities include long-term
obligations, which are often called municipal bonds, as well as shorter
term municipal notes, municipal leases, and tax-exempt commercial papers.
Under normal market conditions, longer term municipal securities have
greater price fluctuation than shorter term municipal securities, 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-refunded bonds are
municipal bonds for which the issuer has previously provided money and/or
securities to pay the principal, any premium, and the interest on the
bonds to their maturity date or to a specific call date. The bonds are
payable from principal and interest on an escrow account invested in U.S.
government obligations, rather than from the usual tax base or revenue
stream. As a result, the bonds are rated AAA by the rating agencies.
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 current 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 )-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 cancelling the Fund's position as a seller. The
premium which the Fund will pay in executing a closing purchase
transaction may be higher than the premium received when the option was
sold, depending in large part upon the relative price of the underlying
futures position at the time of each transaction. The Securities and
Exchange Commission requires that the obligations of mutual funds, such
as the Fund, under option sale positions must be "covered."
The Fund does not intend to engage in transactions in futures
contracts or related options for speculative purposes but only as a hedge
against changes in the values of securities in their portfolios resulting
from market conditions, such as fluctuations in interest rates. In
addition, the Fund will not enter into futures contracts or related
options (except in closing transactions) if, immediately thereafter, the
sum of the amount of its initial margin deposits and premiums paid for
its open futures and options positions, less the amount by which any such
options are "in-the-money", would exceed 5% of the Fund's total assets
(taken at current value).
Investments in financial futures and related options entail certain
risks. Among these are the possibility that the cost of hedging could
have an adverse effect on the performance of the Fund if the Investment
Manager predictions as to interest rate trends are incorrect or due to
the imperfect correlation between movement in the price of the futures
contracts and the price of the Fund's actual portfolio of municipal
securities. Although the contemplated use of these contracts should tend
to minimize the risk of loss due to a decline in the value of the
securities in the Fund's portfolio, at the same time hedging transactions
tend to limit any potential gains which might result in an increase in
the value of such securities. In addition, futures and options markets
may not be liquid in all circumstances due, among other things, to daily
price movement limits which may be imposed under the rules of the
contract marketplace, which could limit the Fund's ability to enter into
positions or close out existing positions, at a favorable price. If the
Fund is unable to close out a futures position in connection with adverse
market movements, the Fund would be required to make daily payments on
maintenance margin until such position is closed out. Also, the daily
maintenance margin requirement in futures and option sales transactions
creates greater potential financial exposure than do option purchase
transactions, where the Fund's exposure is limited to the initial cost of
the option.
Income earned or deemed to be earned, if any, by the Fund from its
hedging activities will be distributed to its shareholders in taxable
distributions.
The Fund's hedging activities are subject to special provisions of
the Internal Revenue Code. These provisions may, among other things,
limit the use of losses of the Fund and affect the holding period of the
securities held by the Fund and the nature of the income realized by the
Fund. These provisions may also require the Fund to mark-to-market some
of the positions in its portfolio (i.e., treat them as if they were
closed out), which may cause the Fund to recognize income without the
cash to distribute such income and to incur tax at the Fund level. The
Fund and its shareholders may recognize taxable income as a result of the
Fund's hedging activities. The Fund will monitor its transactions and
may make certain tax elections in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a regulated investment
company.
If the Manager deems it appropriate to seek to hedge the Fund's
portfolio against market value changes, the Fund may buy or sell
financial futures contracts and related options, such as municipal bond
index futures contracts and the related put or call options contracts on
such index futures. A tax exempt bond index fluctuates with changes in
the market values of the tax exempt bonds included in the index. An
index future is an agreement pursuant to which two parties agree to
receive or deliver at settlement an amount of cash equal to a specified
dollar amount multiplied by the difference between the value of the index
at the close of the last trading day of the contract and the price at
which the future was originally written. A financial future is an
agreement between two parties to buy and sell a security for a set price
on a future date. An index future has similar characteristics to a
financial future except that settlement is made through delivery of cash
rather than the underlying securities. An example is the Long-Term
Municipal Bond futures contract traded on the Chicago Board of Trade. It
is based on the Bond Buyer's Municipal Bond Index, which represents an
adjusted average price of the forty most recent long-term municipal
issues of $50 million or more ($75 million in the instance of housing
issues) rated A or better by either Moody's Investor Service, Inc. or
Standard & Poor's Corporation, maturing in no less than nineteen years,
having a first call in no less than seven nor more than sixteen years,
and callable at par.
"When-issued" and "delayed delivery" transactions. The Fund may
engage in "when issued" and "delayed delivery" transactions and utilize
futures contracts and options thereon for hedging purposes. The
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 current assessment
of the credit worthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold
a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable. S&P
does not perform an audit in connection with any rating and may, on
occasion, rely on audited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provision of the obligation;
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other
arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
1. Municipal bonds.
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issued only in
small degree.
A Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher rated categories.
BB Debt rated "BB", "B", "CCC", or "CC" is regarded, on balance, as
B predominantly speculative with respect to capacity to pay interest
CCC and repay principal in accordance with the terms of the obligation.
CC "BB" indicates the lowest degree of speculation and "CC" the highest
degree of speculation. While such debt will likely have some
quality and protective characteristics, 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 three years or less. The three rating categories
are as follows:
SP-1 Very strong or strong capacity to pay principal and
interest. These issues determined to possess
overwhelming safety characteristics will be given plus
(+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
3. Tax-exempt Commercial Paper
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into four categories, ranging
from "A" for the highest quality obligations to "D" for the lowest. The
two categories the Fund will invest in are as follows:
A Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this
category are further refined with the designation 1, 2 and 3
to indicate the relative degree of safety. These issues
determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
A-1 This designation indicates that the degree of safety
regarding timely payment is very strong.
A-2 Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only an adequate
capacity for timely payment. However, such capacity may be
damaged by changing conditions or short-term adversities.
Moody's Investors Service, Inc. - A brief description of the
applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and
their meanings (as published by Moody's) follows:
1. Municipal bonds
Aaa-Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred as "gilt edge". Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa-Bonds which are rated Baa are considered as medium grade
obligations, i.e. they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B-Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Con.(...)-Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction,
(b) earnings of projects unseasoned in operating experience, (c) rentals
which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by
the symbols 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.
<TABLE>
<CAPTION>
Name, Age Position & Office Principal occupation during
and Address With the Fund the past five years
<S> <C> <C>
*Terrence K.H. Lee (39) Director, President, First Pacific Management Corp.;
1441 Victoria St #901 President President, First Pacific Securities
Honolulu, HI 96822
Samuel L. Chesser (41) Director Market Maker and Member Pacific Stock
180 Miller Ave., #6 Exchange: Formerly President, First
Mill Valley, CA 94941 Pacific Securities; Vice President,
First Pacific Management Corporation.
Clayton W.H. Chow (44) Director Sr. Account Executive, Federal Express
896 Puuikena Dr.
Honolulu, HI 96821
Lynden Keala (41) Director Market Analyst, Vanier Graphics, Inc.
47-532 Hui Iwa St.
Kaneohe, HI 96744
Stuart S. Marlowe (55) Director President, Record Service, Inc.
274 Poipu Drive
Honolulu, HI 96825
*Jean M. Chun (40) Secretary Corporate Secretary, First Pacific
920 Ward Ave., #12G Management Corporation; Corporate
Honolulu, HI 96814 Secretary, First Pacific Securities
*Charlotte A. Meyer (43) Treasurer Corporate Treasurer, First Pacific
PO Box 2834 Management Corporation; Corporate
Kamuela, HI 96743 Treasurer, First Pacific Securities
</TABLE>
The compensation of the officers who are interested persons (as
defined in the Investment Company Act of 1940) of the Manager is paid by
the Manager. The Fund pays the compensation of all other officers of the
Fund who are not interested persons for services or reimbursed for
expenses incurred in connection with attending meetings of the Board of
Directors. The directors of the Fund are not compensated for services or
reimbursed for expenses incurred in connection with attending meetings of
the Board of Directors. The directors and officers as a group own less
than 1% of the Fund's shares.
CUSTODIAN
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
.000325 On Next $ 30 Million of Average Net Assets
.00026 On Next $ 50 Million of Average Net Assets
.000195 On Next $100 Million of Average Net Assets
.0001625 Over $200 Million of Average Net Assets
INDEPENDENT AUDITORS
The independent auditors for the Fund are Tait, Weller & Baker,
Philadelphia, Pennsylvania.
INVESTMENT MANAGEMENT AGREEMENT
The investment management agreement between the Manager and the
Fund provides that the Manager will provide portfolio management services
to the Fund 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>
<CAPTION>
Investment Management Management Shareholder Services Service
Agreement Fees Waived Agreement Fees Waived
<S> <C> <C> <C> <C>
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>
<CAPTION>
Investment Management Management Shareholder Services Service
Agreement Fees Waived Agreement Fees Waived
<S> <C> <C> <C> <C>
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 broker's or dealer's furnishing of those
services. This will be done, however, only if, in the opinion of the
Manager, the amount of additional commission or increased cost is
reasonable in relation to the value of the services.
If purchases or sales of securities of the Fund and of one or more other
clients advised by the Manager are considered at or about the same time,
transactions in such securities will be allocated among the several
clients in a manner deemed equitable to all by the Manager, taking into
account the respective sizes of the funds and the amount of securities to
be purchased or sold. Although it is possible that in some cases this
procedure could have a detrimental effect on the price or volume of the
security as far as the Fund is concerned, it is also possible that the
ability to participate in volume transactions and to negotiate lower
brokerage commissions generally will be beneficial to the Fund.
The Directors have adopted certain policies incorporating the
standards of Rule 17e-1 issued by the 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 and other applicable laws,
among other things, generally prohibit federally chartered or supervised
banks from engaging in the business of underwriting, selling or
distributing securities. Accordingly, 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 1
minus a stated tax rate and adding the quotient to that portion of the
yield of the Fund that is not tax exempt.
As the following formula indicates, the average annual total return
is determined by multiplying a hypothetical initial purchase order of
$1,000 by the average annual compound rate of return (including capital
appreciation/depreciation and dividends and distributions paid and
reinvested) for the stated period less any fees charged to all
shareholder accounts and annualizing the result. The calculation assumes
that all dividends and distributions are reinvested at the public
offering price on the reinvestment dates during the period. The
quotation assumes the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. According
to the new 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>
<CAPTION>
Since
One Year Five Year Inception
<S> <C> <C> <C>
First Hawaii
Municipal Bond Fund 5.62% 6.52% 7.20%
(Inception November 23, 1988)
First Hawaii
Intermediate Municipal Fund 3.95% ----- 5.58%
(Inception July 5, 1994)
</TABLE>
The average annual total return for the Funds for the periods indicated
and ended December 31, 1996 are set forth below:
<TABLE>
<CAPTION>
Since
One Year Five Year Inception
<S> <C> <C> <C>
First Hawaii
Municipal Bond Fund 4.17% 6.34% 7.25%
(Inception November 23, 1988)
First Hawaii
Intermediate Municipal Fund 3.77% ----- 5.63%
(Inception July 5, 1994)
</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.
FIRST PACIFIC MUTUAL FUND, INC.
FIRST IDAHO TAX-FREE FUND SERIES
STATEMENT OF ADDITIONAL INFORMATION
First Pacific Mutual Fund, Inc. (the "Corporation") is a series
investment company organized as a Maryland corporation. In this
Statement of Additional Information all references to any series of the
Corporation will be called the "Fund" unless expressly noted otherwise.
First Idaho Tax-Free Fund is the third series of the corporation. The
Fund is a non-diversified, open-end management investment company whose
investment goal is to provide investors with as high a level of income
exempt from federal income taxes and Idaho personal income taxes as is
consistent with prudent investment management and the preservation of
shareholders' capital. The Fund's portfolio is managed by First Pacific
Management Corporation (the "Manager").
This Statement of Additional Information is not a prospectus but
should be read in conjunction with the Fund's Prospectus dated 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 ("SEC"), Washington, D.C. This
omitted information may be obtained from the Commission upon payment of
the fee prescribed, or inspected at the Commission's office at no charge.
TABLE OF CONTENTS
Investment Polices and Restrictions.....................................2
Additional Investment Considerations....................................4
Description of Municipal Securities Ratings............................11
Officers and Directors.................................................15
Custodian..............................................................16
Fund Accounting........................................................17
Independent Auditors...................................................17
Investment Management Agreement........................................17
Portfolio Transactions.................................................18
The Distributor........................................................19
Transfer Agent.........................................................20
Performance............................................................21
This Statement of Additional Information is dated February 1, 1997.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is to provide investors with
as high a level of income exempt from federal income taxes and Idaho
personal income taxes as is consistent with prudent investment management
and the preservation of shareholders' capital. The Fund will primarily
invest its assets in obligations issued by or on behalf of the State of
Idaho and its political subdivisions, agencies and certain territories of
the United States, the interest on which is exempt from federal and Idaho
state income taxes in the opinion of counsel.
Fundamental investment restrictions limiting the investments of the
Fund provide that the Fund may not:
1. Purchase any securities (other than obligations issued or
guaranteed by the United States Government or by its agencies or
instrumentalities), if as a result more than 5% of the Fund's total
assets (taken at current value) would then be invested in securities of a
single issuer or if as a result the Fund would hold more than 10% of the
outstanding voting securities of any single issuer, except that with
respect to 50% of the Fund's total assets up to 25% may be invested in
one issuer.
2. Invest more than 25% of its assets in a single industry. (As
described in the Prospectus, the Fund may from time to time invest more
than 25% of its assets in a particular segment of the municipal bond
market; however, the Fund will not invest more than 25% of its assets in
industrial development bonds in a single industry.)
3. Borrow money, except for temporary purposes from banks or in
reverse repurchase transactions as described in the Statement of
Additional Information and then in amounts not in excess of 5% of the
total asset value of the Fund, or mortgage, pledge or hypothecate any
assets except in connection with a borrowing and in amounts not in excess
of 10% of the total asset value of the Fund. Borrowing (including bank
borrowing and reverse repurchase transactions) may not be made for
investment leverage, but only to enable the Fund to satisfy redemption
requests where liquidation of portfolio securities is considered
disadvantageous or inconvenient. In this connection, the Fund will not
purchase portfolio securities during any period that such borrowings
exceed 5% of the total asset value of the Fund. Notwithstanding this
investment restriction, the Fund may enter into "when-issued" and
"delayed delivery" transactions as described in the Prospectus.
4. Make loans, except to the extent obligations in which the
Fund may invest are considered to be loans.
5. Buy any securities "on margin." The deposit of initial or
maintenance margin in connection with municipal bond index and interest
rate futures contracts or related options transactions is not considered
the purchase of a security on margin.
6. Sell any securities "short", write, purchase or sell puts,
calls or combinations thereof, or purchase or sell interest rate or other
financial futures or index contracts or related options, except as
described, from time to time, under the heading "Investment Practices" in
the Prospectus.
7. Act as an underwriter of securities, except to the extent the
Fund may be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
8. Purchase any illiquid assets, including any security which is
restricted as to disposition under federal securities laws or by contract
("restricted securities" or which is not readily marketable), if as a
result of such purchase more than 15% of the Fund's total assets would be
so invested.
9. Make investments for the purpose of exercising control or
participation in management.
10. Invest in securities of other investment companies, except as
part of a merger, consolidation or other acquisition and except that the
Fund may temporarily invest up to 10% of the value of its assets in Idaho
tax exempt money market funds for temporary defensive purposes, including
when acceptable investments are unavailable. Such tax exempt fund
investments will be limited in accordance with Section 12(d) of the 1940
Act.
11. Invest in equity, interests in oil, gas or other mineral
exploration or development programs.
12. Purchase or sell real estate, commodities or commodity
contracts, except to the extent the municipal securities the Fund may
invest in are considered to be interests in real estate, and except to
the extent the options and futures and index contracts the Fund may
invest in are considered to be commodities or commodities contracts.
The Fund may not change any of these investment restrictions
without the approval of the lesser of (i) more than 50% of the Fund's
outstanding shares or (ii) 67% of the Fund's shares present at a meeting
at which the holders of more than 50% of the outstanding shares are
present in person or by proxy. As long as the percentage restrictions
described above are satisfied at the time of the investment or borrowing,
the Fund will be considered to have abided by those restrictions even if,
at a later time, a change in values or net assets causes an increase or
decrease in percentage beyond that allowed.
Frequent portfolio turnover is not anticipated. The Fund
anticipates that the annual portfolio turnover rate of the Fund will be
less than 100%. The Fund will not seek capital gain or appreciation but
may sell securities held in its portfolio and, as a result, realize
capital gain or loss. Sales of portfolio securities will be made for the
following purposes: in order to eliminate unsafe investments and
investments not consistent with the preservation of the capital or tax
status of the Fund; honor redemption orders, meet anticipated redemption
requirements and negate gains from discount purchases; reinvest the
earnings from portfolio securities in like securities; or defray normal
administrative expenses.
ADDITIONAL INVESTMENT CONSIDERATIONS
Municipal Securities. Municipal securities include long-term
obligations, which are often called municipal bonds, as well as shorter
term municipal notes, municipal leases, and tax exempt commercial papers.
Under normal market conditions, longer term municipal securities have
greater price fluctuation than shorter term municipal securities. The two
principle classifications of municipal bonds are "general obligation" and
"revenue" or "special obligation" bonds, which include "industrial
revenue bonds." General obligation bonds are secured by the issuer's
pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue or special obligation bonds are payable
only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special tax or other
specific revenue source such as from the user of the facility being
financed. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. They may take the form of a lease, an installment purchase
contract, a conditional sales contract, or a participation certificate in
any of the above. Some municipal leases and participation certificates
may not be considered readily marketable. The "issuer" of municipal
securities is generally deemed to be the governmental agency, authority,
instrumentality or other political subdivision, or the nongovernmental
user of a facility, the assets and revenues of which will be used to meet
the payment obligations, or the guarantee of such payment obligations, of
the municipal securities. Zero coupon bonds are debt obligations which
do not require the periodic payment of interest and are issued at a
significant discount from face value. The discount approximates the
total amount of interest the bonds will accrue and compound over the
period until maturity at a rate of interest reflecting the market rate of
the security at the time of issuance. Inverse floaters are types of
derivative municipal securities whose interest rates bear an inverse
relationship to the interest rate on another security or the value of an
index. These securities usually permit the investor to convert the
floating rate to a fixed rate (normally adjusted downward), and this
optional conversion feature may provide a partial hedge against rising
interest rates if exercised at an opportune time. Pre-refunded bonds are
municipal bonds for which the issuer has previously provided money and/or
securities to pay the principal, any premium, and the interest on the
bonds to their maturity date or to a specific call date. The bonds are
payable from principal and interest on an escrow account invested in U.S.
government obligations, rather than from the usual tax base or revenue
stream. As a result, the bonds are rated AAA by the rating agencies.
The Fund may purchase floating and variable rate demand notes,
which are municipal securities normally having a stated maturity payment
in excess of one year, but which permit the holder to demand payment of
principal at any time, or at specified intervals. The issuer of such
notes normally has a corresponding right, after a given period, to prepay
at its discretion, upon notice to the note holders, the outstanding
principal amount of the notes plus accrued interest. The interest rate
on a floating rate demand note is based on a known lending rate, such as
a bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals. There generally is no secondary
market for these notes, although they are redeemable at face value. Each
note purchased by the Fund will meet the criteria established for the
purchase of municipal securities.
Medium and Lower Grade Municipal Securities. Municipal securities
which are in the medium and lower grade categories generally offer a
higher current yield than that offered by municipal securities which are
in the high grade categories, but they also generally involve greater
price volatility and greater credit and market risk. Credit risk relates
to the issuer's ability to make timely payment of principal and interest
when due. Market risk relates to the changes in market value that occur
as a result of variation in the level of prevailing interest rates and
yield relationships in the municipal securities market. Generally,
prices for longer maturity issues tend to fluctuate more than for shorter
maturity issues. Additionally, the Fund will seek to reduce risk through
portfolio diversification, credit analysis, and attention to current
developments and trends in the economy and financial and credit markets.
Many issuers of medium and lower grade municipal securities choose
not to have a rating assigned to their obligations by one of the rating
agencies; hence the Fund's portfolio may at times contain unrated
securities. Unrated securities may carry a greater risk and a higher
yield than rated securities. Although unrated securities are not
necessarily lower quality, the market for them may not be so broad as for
rated securities. The Fund will purchase only those unrated securities
which the Investment Manager believes are comparable to rated securities
that qualify for purchase by the Fund.
Idaho Bonds. Idaho issues several types of municipal securities.
These include:
1. General Obligation bonds (all bonds for the payment of the
principal and interest of which the full faith and credit of the State or
a political subdivision are pledged and, unless otherwise indicated,
including reimbursable general obligation bonds);
2. Bonds issued under special improvements statutes;
3. Revenue bonds or bond anticipation notes (all bonds payable
from revenues, or user taxes, or any combination of both, of a public
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.
There is a constitutional limitation of $2 million on the issuance
of State of Idaho general obligation bonds. Idaho may exceed this
limitation only through voter referendum and approval by members of each
House of the State Legislature. This limitation on the power of the
State to incur indebtedness, applies only to the issuance of State
general obligation bonds.
Because the Fund will ordinarily invest 80% or more of its net
assets in Idaho obligations, it is more susceptible to factors affecting
Idaho issuers than is a comparable municipal bond fund not concentrated
in the obligations of issuers located in a single state.
The Idaho economy is concentrated in construction, manufacturing,
agriculture, tourism, food products, lumber and mining.
Agriculture related business ranks as the state's number one
industry with cash receipts of close to $3 billion. Over 18,000 Idahoans
are employed in food processing operations and more than 32,000 work on
farms and ranches.
The service producing sector, another one of the fastest growing
sectors of Idaho's economy, accounts for nearly eight out of every ten
nonfarm jobs in Idaho. Categories in this sector include finance,
insurance, real estate, transportation, communications, public utilities,
trade, services and government. With the expected economic growth and
influx of population from outside of the state, these categories are
forecast to continue advancement. Idaho's economy is slowly shifting its
reliance on agricultural and consumptive natural resource-based
industries, to those businesses which include jobs in the categories
listed above.
Tourism is growing rapidly and is Idaho's third largest industry.
Between 1989 and 1994, annual travel expenditures have increased from
$730 million to over $1.8 billion and employment in travel related
businesses has grown by almost 50% since 1982.
Idaho's hi-tech industry has continued to grow at a rapid pace
during the last two years. The electrical and nonelectrical machinery
sector may become the state's largest manufacturing employer early next
year. According to DRI/McGraw Hill, real spending on office and
computing equipment will increase by at least 14.0% annually through
1997.
With only 3% of the nation's forests, Idaho ranks among the seventh
largest producers of softwood lumber in the U.S., producing 5% of the
nation's softwood lumber. 1994's wild fires left large tracts of forest
land ripe for salvage logging which may help mitigate the efforts the
U.S. Forest Service has made in recent years to reduce the number of
board feet cut from Idaho forests. The burned timber must be cut within
a very short time to reduce the risk of decay thereby rendering it
useless for commercial lumber purposes. The salvage sales may help
alleviate an otherwise tight lumber supply and employment market. In
spite of this, the Idaho Division of Financial Management (DFM) is
forecasting an employment decline of 4.3% in 1995.
Idaho ranks in the top ten domestic producers of gold and has
remained one of the nation's largest producers of silver for nearly a
century. Idaho also ranks among the nation's leading producers of lead,
zinc, antimony, phosphate and molybdenum. The phosphate and molybdenum
deposits in southeastern Idaho are the largest in the U.S.
With the growth in world trade and the reduction of tariffs and
other trade barriers, Idaho's economy is becoming increasingly tied to
the international marketplace. Between 1987 and 1994, Idaho's total
exports have grown from $750 million to $2.3 billion. The growth in
merchandise or non-agricultural products has increased from $332 million
in 1987 to $1.32 billion in 1994. Based on U. S. Department of Commerce
calculations, exports directly account for nearly 44,000 Idaho jobs.
U.S. Census Bureau data shows total Idaho housing starts rose 54.1%
during the first quarter of 1994. Construction employment is
correspondingly strong during the same time period. However, the severe
housing shortage, while not alleviated, is abating somewhat and longer
sales times, rising vacancy rates and moderating rent and sale prices
suggest that Idaho's housing supply is finally catching up with the
demand.
The U.S. Department of Commerce Bureau of Economic Analysis reports
Idaho nonfarm personal income grew at a healthy 8.4% in the first quarter
of 1994. On an annual basis, Idaho nonfarm employment is expected to
grow 5.5% in 1994, non-farm personal income is forecast to increase 8.7%,
and housing starts are expected to rise 11.4%.
U.S. Government Securities. Government Securities include (1) U.S.
Treasury obligations, which differ only in their interest rates,
maturities and times of issuance: U.S. Treasury bills (maturity of one
year or less), U.S. Treasury notes (maturities of one to 10 years), and
U.S. Treasury bonds (generally maturities of greater than 10 years), and
separated or divided U.S. Treasury securities (stripped by the U.S.
Treasury) whose payments of principal and interest are all backed by the
full faith and credit of the United States; and (2) obligations issued or
guaranteed by U.S. Government agencies or instrumentalities, some of
which are backed by the full faith and credit of the U.S. Treasury, e.g.,
direct pass-through certificates of the Government National Mortgage
Association (generally referred to as "GNMA"); some of which are
supported by the right of the issuer to borrow from the U.S. Government,
e.g., obligations of Federal Home Loan Banks; and some of which are
backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association.
Investments in taxable securities will be substantially in
securities issued or guaranteed by the United States Government (such as
bills, notes and bonds), its agencies, instrumentalities or authorities,
highly-rated corporate debt securities (rated AA, or better, by S&P or
Aa3, or better, by
Moody's); prime commercial paper (rated A-1 + or A-2 by S&P or P-1 or P-2
by Moody's) and certificates of deposit of the 100 largest domestic banks
in terms of assets which are subject to regulatory supervision by the
U.S. Government or state governments and the 50 largest foreign banks in
terms of assets with branches or agencies in the United States.
Investments in certificates of deposit of foreign banks and foreign
branches of U.S. banks may involve certain risks, including different
regulation, use of different accounting procedures, political or other
economic developments, exchange controls, withholding income taxes at the
source, or possible seizure or nationalization of foreign deposits. When
the Fund takes a temporary defensive position, the Fund will not be
pursuing policies designed to achieve its investment objective.
Investment Practices of the Fund.
Hedging. Hedging is a means of offsetting, or neutralizing, the
price movement of an investment by making another investment, the price
of which should tend to move in the opposite direction from that of the
original investment. If the Investment Manager deems it appropriate to
hedge partially or fully the Fund's portfolio against market value
changes, the Fund may buy or sell financial futures contracts and options
thereon, such as municipal bond index future contracts and the related
put or call options contracts on such index futures.
Both parties entering into a financial futures contract are
required by the contract marketplace to post a good faith deposit, known
as "initial margin." Thereafter, the parties must make additional
deposits equal to any net losses due to unfavorable price movements of
the contract, and are credited with an amount equal to any net gains due
to favorable price movements. These additional deposits or credits are
calculated and required daily and are known as "maintenance margin." In
situations in which the Fund is required to deposit additional
maintenance margin, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet such maintenance margin requirements at
a time when it may be disadvantageous to do so. When the Fund engages in
the purchase or sale of futures contracts or the sale of options thereon,
it will deposit the initial margin required for such contracts in a
segregated account maintained with the Fund's custodian, in the name of
the futures commission merchant with whom the Fund maintains the related
account. Thereafter, if the Fund is required to make maintenance margin
payments with respect to the futures contracts, or mark-to-market
payments with respect to such option sale positions, the Fund will make
such payments directly to such futures commission merchant. The SEC
currently requires mutual funds to demand promptly the return of any
excess maintenance margin or mark-to-market credits in its account with
futures commission merchants. The fund will comply with SEC requirements
concerning such excess margin.
The Fund may also purchase and sell put and call options on
financial futures, including option on municipal bond index futures. An
option on a financial future gives the holder the right to receive, upon
exercise of the option, a position in the underlying futures contract.
When the Fund purchases an option on a financial futures contract, it
receives in exchange for the payment of a cash premium the right, but not
the obligation, to enter into the underlying futures contract at a price
(the "strike price") determined at the time the option was purchased,
regardless of the comparative market value of such futures position at
the time the option is exercised. The holder of a call option has the
right to receive a long (or buyer's) position in the underlying futures
and the holder of a put option has the right to receive a short (or
seller's) position in the underlying futures.
When the Fund sells an option on a financial futures contract, it
receives a cash premium which can be used in whatever way is deemed most
advantageous to the Fund. In exchange for such premium, the Fund grants
to the option purchaser the right to receive from the Fund, at the strike
price, a long position in the underlying futures contract, in the case of
a call option, or a short position in such futures contract, in the case
of a put option, even though the strike price upon exercise of the option
is less (in the case of a call option) or greater (in the case of a put
option) than the value of the futures position received by such holder.
If the value of the underlying futures position is not such that exercise
of the option would be profitable to the option holder, the option will
generally expire without being exercised. The Fund has no obligation to
return premiums paid to it whether or not the option is exercised. It
will generally be the policy of the Fund, in order to avoid the exercise
of an option sold by it, to cancel its obligation under the option by
entering into a closing purchase transaction, if available, unless it is
determined to be in the Fund's interest to deliver the underlying futures
position. A closing purchase transaction consists of the purchase by the
Fund of an option having the same term as the option sold by the Fund,
and has the effect of cancelling the Fund's position as a seller. The
premium which the Fund will pay in executing a closing purchase
transaction may be higher than the premium received when the option was
sold, depending in large part upon the relative price of the underlying
futures position at the time of each transaction. The Securities and
Exchange Commission requires that the obligations of mutual funds, such
as the Fund, under option sale positions must be "covered."
The Fund does not intend to engage in transactions in futures
contracts or related options for speculative purposes but only as a hedge
against changes in the values of securities in their portfolios resulting
from market conditions, such as fluctuations in interest rates. In
addition, the Fund will not enter into futures contracts or related
options (except in closing transactions) if, immediately thereafter, the
sum of the amount of its initial margin deposits and premiums paid for
its open futures and options positions, less the amount by which any such
options are "in-the-money", would exceed 5% of the Fund's total assets
(taken at current value).
Investments in financial futures and related options entail certain
risks. Among these are the possibility that the cost of hedging could
have an adverse effect on the performance of the Fund if the Investment
Manager predictions as to interest rate trends are incorrect or due to
the imperfect correlation between movement in the price of the futures
contracts and the price of the Fund's actual portfolio of municipal
securities. Although the contemplated use of these contracts should tend
to minimize the risk of loss due to a decline in the value of the
securities in the Fund's portfolio, at the same time hedging transactions
tend to limit any potential gains which might result in an increase in
the value of such securities. In addition, futures and options markets
may not be liquid in all circumstances due, among other things, to daily
price movement limits which may be imposed under the rules of the
contract marketplace, which could limit the Fund's ability to enter into
positions or close out existing positions, at a favorable price. If the
Fund is unable to close out a futures position in connection with adverse
market movements, the Fund would be required to make daily payments on
maintenance margin until such position is closed out. Also, the daily
maintenance margin requirement in futures and option sales transactions
creates greater potential financial exposure than do option purchase
transactions, where the Fund's exposure is limited to the initial cost of
the option.
Income earned or deemed to be earned, if any, by the Fund from its
hedging activities will be distributed to its shareholders in taxable
distributions.
The Fund's hedging activities are subject to special provisions of
the Internal Revenue Code. These provisions may, among other things,
limit the use of losses of the Fund and affect the holding period of the
securities held by the Fund and the nature of the income realized by the
Fund. These provisions may also require the Fund to mark-to-market some
of the positions in its portfolio (i.e., treat them as if they were
closed out), which may cause the Fund to recognize income without the
cash to distribute such income and to incur tax at the Fund level. The
Fund and its shareholders may recognize taxable income as a result of the
Fund's hedging activities. The Fund will monitor its transactions and
may make certain tax elections in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a regulated investment
company.
If the Manager deems it appropriate to seek to hedge the Fund's
portfolio against market value changes, the Fund may buy or sell
financial futures contracts and related options, such as municipal bond
index futures contracts and the related put or call options contracts on
such index futures. A tax exempt bond index fluctuates with changes in
the market values of the tax exempt bonds included in the index. An
index future is an agreement pursuant to which two parties agree to
receive or deliver at settlement an amount of cash equal to a specified
dollar amount multiplied by the difference between the value of the index
at the close of the last trading day of the contract and the price at
which the future was originally written. A financial future is an
agreement between two parties to buy and sell a security for a set price
on a future date. An index future has similar characteristics to a
financial future except that settlement is made through delivery of cash
rather than the underlying securities. An example is the Long-Term
Municipal Bond futures contract traded on the Chicago Board of Trade. It
is based on the Bond Buyer's Municipal Bond Index, which represents an
adjusted average price of the forty most recent long-term municipal
issues of $50 million or more ($75 million in the instance of housing
issues) rated A or better by either Moody's Investor Service, Inc. or
Standard & Poor's Corporation, maturing in no less than nineteen years,
having a first call in no less than seven nor more than sixteen years,
and callable at par.
"When-issued" and "delayed delivery" transactions. The Fund may
engage in "when-issued" and "delayed delivery" transactions and utilize
futures contracts and options thereon for hedging purposes. The SEC
generally requires that when mutual funds, such as the Fund, effect
transactions of the foregoing nature, such funds must either segregate
cash or readily marketable portfolio securities with its custodian in an
amount of its obligations under the foregoing transactions, or cover such
obligations by maintaining positions in portfolio securities, futures
contracts or options that would serve to satisfy or offset the risk of
such obligations. When effecting transactions of the foregoing nature,
the Fund will comply with such segregation or cover requirements.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements with selected commercial banks or broker-dealers,
under which the Fund sells securities and agrees to repurchase them at an
agreed upon time and at an agreed upon price. The difference between the
amount the Fund receives for the securities and the amount it pays on
repurchase is deemed to be a payment of interest by the Fund. The Fund
will maintain in a segregated account having an aggregate value with its
custodian, cash, treasury bills, or other U.S. Government securities
having an aggregate value equal to the amount of such commitment to
repurchase, including accrued interest, until payment is made. Reverse
repurchase agreements are treated as a borrowing by the Fund and will be
used by it as a source of funds on a short-term basis, in an amount not
exceeding 5% of the net assets of the Fund (which 5% includes bank
borrowings) at the time of entering into any such agreement. The Fund
will enter into reverse repurchase agreements only with commercial banks
whose deposits are insured by the Federal Deposit Insurance Corporation
and whose assets exceed $500 million or broker-dealers who are registered
with the SEC. In determining whether to enter into a reverse repurchase
agreement with a bank or broker-dealer, the Fund will take into account
the credit worthiness of such party and will monitor such credit
worthiness on an ongoing basis.
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
Standard & Poor's Corporation - A brief description of the
applicable Standard & Poor's Corporation ("S&P") rating symbols and their
meanings (as published by Standard & Poor's Corporation) follows:
An S&P corporate or municipal debt rating is a current assessment
of the credit worthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold
a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable. S&P
does not perform an audit in connection with any rating and may, on
occasion, rely on audited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal
in accordance with the terms of the obligation;
2. Nature of and provision of the obligation;
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other
arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
1. Municipal bonds.
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issued only in
small degree.
A Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB Debt rated "BB", "B", "CCC", or "CC" is regarded, on balance, as
B predominantly speculative with respect to capacity to pay interest
CCC and repay principal in accordance with the terms of the obligation.
CC "BB" indicates the lowest degree of speculation and "CC" the highest
degree of speculation. While such debt will likely have some
quality and protective characteristics, those are outweighed by
large quantities or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating
is provisional. A provisional rating assumes the successful
completion of the project being financed by the debt being
rated and indicates that payment of debt service requirements
is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion of
the project, makes no comment on the likelihood of, or the
risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such
likelihood and risk.
L: The letter "L" indicates that the rating pertains to the
principal amount of those bonds where the underlying deposit
collateral is fully insured by the Federal Savings & Loan Insurance
Corp. or the Federal Deposit Insurance Corp.
+ Continuance of the rating is contingent upon S&P's receipt
of closing documentation confirming investments and cash
flow.
* Continuance of the rating is contingent upon S&P's
receipt of an executed copy of the escrow agreement.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
2. Short-term tax exempt notes
S&P's tax exempt note ratings are generally given to such
notes that mature in three years or less. The three rating categories
are as follows:
SP-1 Very strong or strong capacity to pay principal and interest.
These issues determined to possess overwhelming safety
characteristics will be given plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
3. Tax-exempt Commercial Paper
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into four categories, ranging
from "A" for the highest quality obligations to "D" for the lowest. The
two categories the Fund will invest in are as follows:
A Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this
category are further refined with the designation 1, 2 and 3
to indicate the relative degree of safety. These issues
determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
A-1 This designation indicates that the degree of safety
regarding timely payment is very strong.
A-2 Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only an adequate
capacity for timely payment. However, such capacity may be
damaged by changing conditions or short-term adversities.
Moody's Investors Service, Inc. - A brief description of the
applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and
their meanings (as published by Moody's) follows:
1. Municipal bonds
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred as "gilt edge". Interest payments are protected
by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than
in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e. they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds in
this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any
long period of time may be small.
Con.(...) Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are
rated conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned in
operating experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by
the symbols Aa 1, A 1, Baa 1, Ba 1, and B 1.
2. Short-term tax exempt notes
Short-term Notes. The four ratings of Moody's for short-term notes
are MIG 1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying
strong protection from established cash flows"; MIG 2 denotes "high
quality" with "ample margins of protection"; MIG 3 notes are of
"favorable quality....but lacking the undeniable strength of the
preceding grades"; MIG 4 notes are of "adequate quality, carrying
specific risk but having protection...and not distinctly or predominantly
speculative."
3. Tax exempt commercial paper
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions)
have a superior capacity for repayment of short-term promissory
obligations.
Issuers rated Prime-2 (or related supporting institutions)
have a strong capacity for repayment of short-term promissory
obligations.
Issuers rated Prime-3 (or related supporting institutions)
have an acceptable capacity for repayment of short-term promissory
obligations.
Issuers rated Not Prime do not fall within any of the Prime
rating categories.
OFFICERS AND DIRECTORS
The officers and directors of First Pacific Mutual Fund, Inc.,
their principal occupations for the last five years and their
affiliation, if any, with the Manager, or the Fund's Distributor, are
shown below. Interested persons of the Fund as defined in the Investment
Company Act of 1940 are indicated by an asterisk in the table below.
<TABLE>
<CAPTION>
Name, Age Position & Office Principal Occupation During
and Address With the Fund the Past Five Years
___________________________________________________________________________
<S> <C> <C>
*Terrence K.H. Lee (39) Director, President, First Pacific Management Corp.;
1441 Victoria St #901 President President, First Pacific Securities, Inc.
Honolulu, HI 96822
Samuel L. Chesser (41) Director Market Maker and Member Pacific Stock
180 Miller Ave., #6 Exchange: Formerly President, First
Mill Valley, CA 94941 Pacific Securities, Inc.; Vice President,
First Pacific Management Corporation.
Clayton W.H. Chow (44) Director Sr. Account Executive, Federal Express
896 Puuikena Dr.
Honolulu, HI 96821
Lynden Keala (41) Director Market Analyst, Vanier Graphics, Inc.
47-532 Hui Iwa St.
Kaneohe, HI 96744
Stuart S. Marlowe (55) Director President, Record Service, Inc.
274 Poipu Drive
Honolulu, HI 96825
*Jean M. Chun (40) Secretary Corporate Secretary, First Pacific
920 Ward Ave., #12G Management Corporation; Corporate
Honolulu, HI 96814 Secretary, First Pacific Securities, Inc.
*Charlotte A. Meyer (43) Treasurer Corporate Treasurer, First Pacific
PO Box 2834 Management Corporation; Corporate
Kamuela, HI 96743 Treasurer, First Pacific Securities, Inc.
</TABLE>
The compensation of the officers who are interested persons (as defined
in the Investment Company Act of 1940) of the Manager is paid by the Manager.
The Fund pays the compensation of all other officers of the Fund who are not
interested persons for services or reimbursed for expenses incurred in
connection with attending meetings of the Board of Directors. The directors
of the Fund are not compensated for services or reimbursed for expenses
incurred in connection with attending meetings of the Board of Directors.
The directors and officers as a group own less than 1% of the Fund's shares.
CUSTODIAN
Union Bank of California, N.A. of San Francisco, California, is the
custodian of the Fund and has custody of all securities and cash. The
custodian, among other things, attends to the collection of principal and
income, and payment for the collection of proceeds of securities bought
and sold by the Fund.
FUND ACCOUNTING
First Pacific Recordkeeping, Inc., a wholly-owned subsidiary of First
Pacific Management Corporation provides fund accounting for the Fund. The
annual accounting fee schedule for the Fund is as follows:
$21,500 Minimum to $ 20 Million of Average Net Assets
.000325 On Next $ 30 Million of Average Net Assets
.00026 On Next $ 50 Million of Average Net Assets
.000195 On Next $100 Million of Average Net Assets
.0001625 Over $200 Million of Average Net Assets
INDEPENDENT AUDITORS
The independent auditors for the Fund are Tait, Weller & Baker,
Philadelphia, Pennsylvania.
INVESTMENT MANAGEMENT AGREEMENT
The investment management agreement between the Manager and the Fund
provides that the Manager will provide portfolio management services to the
Fund including the selection of securities for the Fund to purchase, hold
or sell, supply investment research to the Fund and select brokers through
whom the Fund's portfolio transactions are executed. The Manager also
administers the business affairs of the Fund, furnishes offices, necessary
facilities and equipment, provides administrative services, and permits
its officers and employees to serve without compensation as directors and
officers of the Fund if duly elected to such positions.
The agreement provides that the Manager shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in connection with
the matters to which the agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Manager
in the performance of its obligations and duties, or by reason of its
reckless disregard of its obligations and duties under the agreement.
The Manager's activities are subject to the review and supervision of the
Fund's Board of Directors, to whom the Manager renders periodic reports of
the Fund's investment activities.
Fees paid by the Fund for the most recent fiscal year:
Investment Management Agreement Amount Waived
1996 $20 $20
PORTFOLIO TRANSACTIONS
The Manager will place orders for portfolio transactions for the Fund
with broker-dealer firms giving consideration to the quality, quantity and
nature of each firm's professional services. These services include
execution, clearance procedures, wire service quotations and statistical
and other research information provided to the Fund and the Manager,
including quotations necessary to determine the value of the Fund's net
assets. Any research benefits derived are available for all clients of
the Manager. Since statistical and other research information is only
supplementary to the research efforts of the Manager and still must be
analyzed and reviewed by its staff, the receipt of research information is
not expected to materially reduce its expenses. In selecting among the
firms believed to meet the criteria for handling a particular transaction,
the Fund or the Manager may (subject always to best price and execution)
take into consideration that certain firms have sold or are selling shares
of the Fund, and/or that certain firms provide market, statistical or
other research information to the Fund. Securities may be acquired
through firms that are affiliated with the Fund, its Manager, or its
Distributor and other principal underwriters acting as agent, and not
as principal. Transactions will only be placed with affiliated
brokers if the price to be paid by the Fund is at least as good as the
price the Fund would pay to acquire the security from other unaffiliated
parties.
If it is believed to be in the best interests of the Fund the Manager may
place portfolio transactions with unaffiliated brokers or dealers who provide
the types of service (other than sales) described above, even if it means the
Fund will have to pay a higher commission (or, if the dealer's profit is part
of the cost of the security, will have to pay a higher price for the
security) than would be the case if no weight were given to the broker's
or dealer's furnishing of those services. This will be done, however, only
if, in the opinion of the Manager, the amount of additional commission or
increased cost is reasonable in relation to the value of the services.
If purchases or sales of securities of the Fund and of one or more other
clients advised by the Manager are considered at or about the same time,
transactions in such securities will be allocated among the several clients
in a manner deemed equitable to all by the Manager, taking into account the
respective sizes of the funds and the amount of securities to be purchased
or sold. Although it is possible that in some cases this procedure
could have a detrimental effect on the price or volume of the security as
far as the Fund is concerned, it is also possible that the ability to
participate in volume transactions and to negotiate lower brokerage
commissions generally will be beneficial to the Fund.
The Directors have adopted certain policies incorporating the standards of
Rule 17e-1 issued by the SEC under the Investment Company Act of 1940 which
requires that the commission paid to the Distributor and other affiliates of
the Fund must be reasonable and fair compared to the commissions, fees or
other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time. The rule and procedures also contain review requirements and
require First Pacific Securities, Inc. to furnish reports to the Directors and
to maintain records in connection with such reviews.
Commissions, fees or other remuneration paid to the Distributor for
portfolio transactions for the Fund for the most recent fiscal year: 1996-none.
THE DISTRIBUTOR
Shares of the Fund are offered on a continuous basis through First Pacific
Securities, Inc. (the "Distributor"), a wholly-owned subsidiary of the
Manager. Pursuant to a distribution agreement, First Pacific Securities, Inc.
will purchase shares of the Fund for resale to the public, either directly
or through securities dealers and brokers, and is obligated to purchase only
those shares for which it has received purchase orders. A discussion of how
to purchase and redeem the Fund's shares and how the Fund's shares are
priced is contained in the Prospectus.
Determining Offering Price
Shares are offered at net asset value plus any applicable sales charge as
follows:
<TABLE>
<CAPTION>
Concession to
As a % of Net Dealers as a
Amount of As a % of Amount % of Amount
Investment Offering Price Invested Invested
_________________________________________________________________________
<S> <C> <C> <C>
Less than $50,000 2.75% 2.83% 2.25%
$50,000 but less
than $100,000 2.25% 2.30% 1.75%
$100,000 but less
than $250,000 1.75% 1.78% 1.25%
$250,000 but
than $500,000 1.25% 1.27% 0.95%
$500,000 but less
than $1,000,000 1.00% 1.01% 0.80%
$1,000,000 and over 0.00% 0.00% 0.25%*
<FN>
* The Distributor may pay a concession to dealers, out of its own assets,
a fee of up to .25% of the offering price of sales of $1,000,000 or more.
However, the Distributor reserves the right to recoup any portion of the
amount paid to the dealer if the investor redeems some or all of the shares
from the Fund within thirteen months of the time of purchase.
</FN>
</TABLE>
Under the Distribution Agreement between the Fund and the Distributor, the
Distributor pays the expenses for distribution of Fund shares, including
preparation and distribution of literature relating to the Fund and its
investment performance and advertising and public relations material. The
Fund bears the expenses of registration of its shares with the SEC and of
sending prospectuses to existing shareholders. The Distributor pays the
cost of qualifying and maintaining qualification of the shares for sale
under the securities laws of the various states and permits its officers
and employees to serve without compensation as directors and officers of
the Fund if duly elected to such positions.
Under the Distribution Plan, the Fund will pay the distributor for
expenditures which are primarily intended to result in the sale of the
Fund's shares such as advertising, marketing and distributing the Fund's
shares and servicing Fund investors, including payments for reimbursement
of and/or compensation to brokers, dealers, certain financial institutions,
(which may include banks) and other intermediaries for administrative and
accounting services for Fund investors who are also their clients. Such
third party institutions will receive fees based on the average daily value
of the Fund's shares owned by investors for whom the institution performs
administrative and accounting services. The Glass-Steagall Act and other
applicable laws, among other things, generally prohibit federally chartered
or supervised banks from engaging in the business of underwriting,
selling or distributing securities. Accordingly, the Fund will engage
banks only to perform administrative and investor servicing functions.
The Funds' management believes that such laws should not preclude a bank
from performing these services. However, if a bank were prohibited by
law from so acting, its investor clients would be permitted to remain
Fund investors and alternative means for continuing the servicing of
such investors would be sought.
The Distribution Agreement continues in effect from year to year if
specifically approved at least annually by the shareholders or directors
of the Fund and by the Fund's disinterested directors in compliance with
the Investment Company Act of 1940. The agreement may be terminated
without penalty upon thirty days written notice by either party and will
automatically terminate if it is assigned.
Distribution Plan payments by the Fund for the most recent fiscal year
are as follows: none.
TRANSFER AGENT
First Pacific Recordkeeping, Inc., Honolulu, Hawaii, a wholly-owned
subsidiary of First Pacific Management Corporation, serves as transfer agent,
dividend disbursing agent and redemption agent pursuant to a Transfer and
Dividend Disbursing Agency Agreement approved by the Board of Directors of
First Pacific Mutual Fund, Inc. at a meeting held for such purpose on
January 29, 1996. The agreement is subject to annual renewal by the
Board of Directors, including the directors who are not interested persons
of the Fund or of the Transfer Agent. Pursuant to the agreement, the
Transfer Agent will receive a fee calculated at an annual rate of $16.50
per shareholder account and will be reimbursed out-of-pocket expenses
incurred on the Fund's behalf.
The Transfer Agent acts as paying agent for all Fund expenses and
provides all the necessary facilities, equipment and personnel to perform
the usual or ordinary services of Transfer and Dividend Paying Agent,
including: receiving and processing orders and payments for purchases of
shares, opening stockholder accounts, preparing annual stockholder meeting
lists, mailing proxy material, receiving and tabulating proxies, mailing
stockholder reports and prospectuses, withholding certain taxes on
nonresident alien accounts, disbursing income dividends and capital
distributions, preparing and filing U.S. Treasury Department Form 1099
(or equivalent) for all stockholders, preparing and mailing confirmation
forms to stockholders for all purposes and redemption of the Fund's shares
and all other confirmable transactions in stockholders' accounts, recording
reinvestment of dividends and distributions of the Fund's shares and causing
redemption of shares for and disbursements of proceeds to withdrawal plan
stockholders.
PERFORMANCE
Current yield, tax equivalent yield and total return quotations used by
the Fund are based on standardized methods of computing performance mandated
by SEC rules. An explanation of those and other methods used by the Portfolio
to compute or express performance follows:
As indicated below, current yield is determined by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders
during the 30-day base period. According to the new SEC formula:
Yield = 2 [(a-b + 1)6-1]
cd
where
a= dividends and interest earned during the period.
b= expenses accrued for the period (net of reimbursements).
c= the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d= the maximum offering price per share on the last day of the period.
The yield for the Fund 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 Idaho Tax-Free Fund 2.94% 4.48%
Tax equivalent yield is calculated by dividing that portion of the current
yield (calculated as described above) which is tax exempt by 1 minus a stated
tax rate and adding the quotient to that portion of the yield of the Fund that
is not tax exempt.
As the following formula indicates, the average annual total return is
determined by multiplying a hypothetical initial purchase order of $1,000
by the average annual compound rate of return (including capital
appreciation/depreciation and dividends and distributions paid and
reinvested) for the stated period less any fees charged to all shareholder
accounts and annualizing the result. The calculation assumes that all
dividends and distributions are reinvested at the public offering price on
the reinvestment dates during the period. The quotation assumes the account
was completely redeemed at the end of each period and the deduction of all
applicable charges and fees. According to the new SEC formula:
P(1 + T)n = ERV
where
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value 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 Fund for the periods indicated and
ended September 30, 1996 are set forth below:
Since
One Year Five Year Inception
First Idaho Tax-Free Fund ----- ----- (.75%)
(Inception July 3, 1996)
The average annual total return for the Funds for the periods indicated and
ended December 31, 1996 are set forth below:
Since
One Year Five Year Inception
First Idaho Tax-Free Fund ----- ----- .88%
(Inception July 3, 1996)
Comparisons and Advertisements
To help investors better evaluate how an investment in the Fund might
satisfy their investment objective, advertisements regarding the Fund may
discuss yield, tax equivalent yield or total return for the Fund as reported
by various financial publications and/or compare yield, tax equivalent yield
or total return to yield, tax equivalent yield or total return as reported
by other investments, indices, and averages.
The 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 the 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.
FIRST HAWAII
Municipal Bond Fund
Intermediate Municipal Fund
November 26, 1996
Dear Shareholders,
1996 has been an exciting year for the First Hawaii family of funds. A slowly
growing economy, coupled with low inflation 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% 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
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
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.
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
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
- -------------------------------------------------------------------------------
VALUE
PAR 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 notes 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>
Municipal Intermediate
Bond Municipal
Fund Fund
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
Year ended 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 (decrease) 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 arrangement 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>
Period
July 5, 1994*
to
Years ended September 30, September 30,
1996 1995 1994
---- ---- -----------
</TABLE>
<TABLE>
<S> <C> <C> <C>
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 period $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
(b) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian arrangement were .75% and .64% for 1996 and 1995,
respectively. Prior to 1995, such reductions were reflected in the
expense ratios.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
FIRST HAWAII MUNICIPAL BOND FUND
FIRST HAWAII INTERMEDIATE MUNICIPAL FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
September 30, 1996
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
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 Municipal
Bond Fund 10,815 11,233 12,593 13,873 15,415 15,079 16,349 17,268
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%
_________________________________________________________________________
______
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 Intermediate
Municipal Fund 10,000 10,072 10,864 11,293
Lehman Muni Bond Index 10,000 10,070 11,197 11,943
AVERAGE ANNUAL TOTAL RETURN
1 Year 3.95%
Inception 5.58%
_________________________________________________________________________
______
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
First Pacific Mutual Fund, Inc.
Honolulu, Hawaii
We have audited the accompanying statement of assets and liabilities of First
Idaho Tax-Free Fund (a series of shares of First Pacific Mutual Fund, Inc.),
including the schedule of investments, as of September 30, 1996, and the related
statement of operations, the statement of changes in net assets and the
financial highlights for the period July 3, 1996 (commencement of operations)
the September 30, 1996. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit 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 of securities owned as of September 30, 1996,
by correspondence with the custodian. 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
audit provides 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
Idaho Tax-Free Fund as of September 30, 1996, the results of its operations, the
changes in its net assets, and the financial highlights for the period July 3,
1996 to September 30, 1996, in conformity with generally accepted accounting
principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
November 6, 1996
FIRST IDAHO TAX-FREE FUND
SCHEDULE OF INVESTMENTS
September 30, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
PAR VALUE
VALUE (NOTE 1)
IDAHO MUNICIPAL BONDS (21.98%)
Cassia & Twin Falls County
General Obligation Bonds (21.98%)
$25,000 5.375%, 8/01/13 $ 24,375
---------
PUERTO RICO MUNICIPAL BONDS (38.09%)
Puerto Rico Commonwealth
Housing Finance Corp.
Multi-Family Mortgage Revenue Bonds (4.73%)
5,000 7.500%, 4/01/22 5,244
-----------
Single Family Mortgage Revenue Bonds (4.73%)
5,000 6.150%, 8/01/03 5,238
-----------
Industrial, Medical & Environmental Pollution Control
Abbott Laboratories (4.53%)
5,000 6.500%, 7/01/09 5,025
-----------
Public Building Authority
Health Facilities & Services (24.10%)
25,000 7.250%, 7/01/17 26,719
----------
TOTAL PUERTO RICO MUNICIPAL BONDS 42,226
----------
TOTAL INVESTMENTS (COST $66,459) (A) 60.07% 66,601
OTHER ASSETS LESS LIABILITIES 39.93 44,279
------- ----------
Net Assets 100.00% $110,880
======= ==========
(a) Aggregate cost for federal income tax purposes is $66,400.
At September 30, 1996, unrealized appreciation (depreciation) of
securities for federal income tax purposes is as follows:
Gross unrealized appreciation $168
Gross unrealized depreciation (27)
--------
Net unrealized appreciation $141
========
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to financial statements
FIRST IDAHO TAX-FREE FUND
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996
- -------------------------------------------------------------------------------
ASSETS
Investments at market value
(Identified cost $66,460) (Note 1(A)) $ 66,601
Cash 43,301
Interest receivable 996
------------
Total assets 110,898
LIABILITIES
Accrued expenses 1
Distributions payable 17
------------
Total liabilities 18
------------
NET ASSETS
(Applicable to 10,924 shares outstanding,
$.01 par value, 20,000,000 shares authorized) $110,880
============
NET ASSET VALUE, OFFERING AND REPURCHASE PRICE PER SHARE
Net asset value and repurchase price per share
($110,880 / 10,924 shares) $10.15
======
Offering price per share
(100 / 97.25 of $10.15) * $10.44
======
NET ASSETS
At September 30, 1996, net assets consisted of:
Paid-in capital $110,739
Net unrealized appreciation of investments 141
-----------
$110,880
===========
* On investments of $50,000 or more the offering price is reduced.
- -------------------------------------------------------------------------------
See accompanying notes to financial statements
FIRST IDAHO TAX-FREE FUND
STATEMENT OF OPERATIONS
Period July 3, 1996 (Commencement of Operations) to September 30, 1996
- -------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income $ 123
--------
Expenses
Management fee (Note 2) 20
Distribution costs (Note 2) 1
Accounting fees (Note 2) 5,287
Transfer agent fees (Note 2) 3,487
--------
TOTAL EXPENSES 8,795
Expenses waived (Note 2) (8,794)
--------
NET EXPENSES 1
-----------
NET INVESTMENT INCOME 122
UNREALIZED GAIN ON INVESTMENTS
Increase in unrealized appreciation of investments 141
---------
Net increase in net assets resulting from operations $ 263
========
- -------------------------------------------------------------------------------
See accompanying notes to financial statements
FIRST IDAHO TAX-FREE FUND
STATEMENT OF CHANGES IN NET ASSETS
Period July 3, 1996 (Commencement of Operations) to September 30, 1996
- -------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investments income $ 122
Increase in unrealized appreciation of investments 141
------------
Net increase in net assets resulting from operations 263
Distributions to shareholders from
Net investment income ($.05 per share) (122)
Capital share transactions (a)
Increase in net assets resulting from capital
share transactions 110,739
------------
Total increase in net assets 110,880
NET ASSETS
Beginning of period -
------------
End of period $110,880
============
(a) Summary of capital share activity follows:
Shares Value
------ -----
Shares sold 10,914 $110,635
Shares issued on reinvestment of distributions 10 104
--------- ------------
Net increase 10,924 $110,739
========= ============
- -------------------------------------------------------------------------------
See accompanying notes to financial statements
FIRST IDAHO TAX-FREE FUND
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
- -------------------------------------------------------------------------------
Period
July 3, 1996*
to
September 30,
1996
-------------
Net asset value
Beginning of period $10.00
Income from investment operations
Net investment income .05
Net unrealized gain on securities .15
-------
Total from investment operations .20
Less distributions
Dividends from net investment income (.05)
-------
End of period $10.15
=======
Total return 2.05%
Ratios/Supplemental Data
Net assets, end of year (in 000's) $111
Ratio of expenses to average net assets .02% (a)
Ratio of net investment income to average net assets 3.03% (a)
Portfolio turnover 0%
* Commencement of operations
(a) Annualized
- -------------------------------------------------------------------------------
See accompanying notes to financial statements
FIRST IDAHO TAX-FREE FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Idaho Tax-Free Fund is 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 Fund is to provide investors with the
maximum level of income exempt from federal and Idaho 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 Idaho 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
Idaho, the marketability and market value of these obligations may be
affected by certain Idahoan 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 Idahoan issuers to meet
their financial obligation. The Fund also has a concentration of
securities from issuers located in Puerto Rico. Those issuers could be
affected by similar developments within Puerto Rico.
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 Fund'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.
(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 Fund 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 the Fund's average daily net
assets.
FPMC also provides the Fund with certain clerical, bookkeeping and
shareholder services pursuant to a service agreement approved by the
Fund's directors.
The Funds' distributor, First Pacific Securities ("FPS"), a wholly-owned
subsidiary of FPMC, received $1 for costs incurred in connection with the
sale of the 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 Fund.
For the period ended September 30, 1996, FPMC and FPR voluntarily waived
certain management, transfer agent, and accounting fees in the amount of
$8,794 for the Fund.
Certain officers and directors of the Funds are also officers of FPMC, FPS
and FPR.
(3) DISTRIBUTION COSTS
The Fund's Board of Directors, including a majority of the Directors who
are not "interested persons" of the Fund, 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 Fund may incur certain costs, which may not
exceed .50% per annum of the Fund's 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 Fund.
(4) PURCHASES AND SALES/CUSTODY OF SECURITIES
Purchases of securities aggregated $66,741.
- ------------------------------------------------------------------------------
PART C
OTHER INFORMATION
Item 24. STATEMENTS AND EXHIBITS.
The following are the financial statements and exhibits filed as a part
of this registration statement:
(a) Financial Statements:
(Included in Part B to this Post-effective Amendment #12 to
Form N-1A.)
(b) Exhibits:
(1) Registrant's Articles of Incorporation.*
(Filed with Form N-1A registration.)
(2) Registrant's By-Laws.*
(Filed with Form N-1A registration.)
(3) Not applicable, because there is no voting trust
agreement.
(4) Specimen copy of each security to be issued by the
registrant.*
(Filed with Form N-1A registration.)
(5) (a) Form of Management Agreement between First
Pacific Management Corporation and the Registrant.*
(Filed with Form N-1A registration.)
(6) Form of principal Underwriting Agreement between
First Pacific Securities and the Registrant.*
(Filed with Form N-1A registration.)
(7) Not applicable, because there are no pension, bonus
or other agreements for the benefit of directors and
officers.
(8) Form of Custodian Agreement between Registrant and
Union Bank of California, N.A.
(Filed with Form N-1A registration.)
(9) There are no other material contracts not made in the
ordinary course of business between the Registrant
and others.
(10) Opinion and consent of counsel as to the legality of the
registrant's securities being registered. (To be
supplied annually pursuant to Rule 24f-2 of the
Investment Company Act of 1940.)
(11) The consent of Tait, Weller & Baker Independent
Public Accountants.
(12) Not applicable.
(13) Letter from contributors of initial capital to the
Registrant that purchase was made for investment
purposes without any present intention of redeeming or
selling.*
(Filed with Pre-effective Amendment #1 to Form N-1A).
(14) Not applicable.
(15) (a) Rule 12b-1 Plan of Distribution.*
(Filed with Form N-1A registration.)
(b) Service Agreement.*
(Filed with Form N-1A registration.)
(c) Selling Dealer Agreement.*
(Filed with Form N-1A registration.)
First Idaho Tax-Free Fund Selling Dealer
Agreement as Amended
(d) First Pacific Mutual Fund Inc. Transfer Agent
Agreement.*
(Filed with Form N-1A registration.)
(e) Accounting Services Agreement.*
(Filed with Form N-1A registration.)
(f) Shareholder Services Agreement*
(Filed with Form N-1A registration.)
(16) Schedule of Computation of Performance Quotations.
(27) Financial Data Schedules
*Previously filed and incorporated by reference herein.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL OF THE REGISTRANT.
NONE
Item 26. NUMBER OF HOLDERS OF SECURITIES.
The number of record holders of each class of securities of the
Registrant as of December 31, 1996, are as follows:
(1) (2)
Title of Class Number of Record Holders
Common stock $.01 par value:
First Hawaii Municipal Bond Fund 1,944
First Hawaii Intermediate Municipal Fund 207
First Idaho Tax-Free Fund 12
Item 27. INDEMNIFICATION.
Under the terms of the Maryland General Corporation Law and the
company's Articles of Incorporation, the company shall indemnify any person who
was or is a director, officer or employee of the company to the maximum extent
permitted by the Maryland General Corporation Law; provided however, that any
such indemnification (unless ordered by a court) shall be made by the company
only as authorized in the specific case upon a determination that
indemnification of such persons is proper in the circumstances. Such
determination shall be made:
(i) by the Board of Directors by a majority vote of a quorum which
consists of the directors who are neither "interested persons" of the company as
defined in Section 2(a)(19) of the 1940 Act, nor parties to the proceedings, or,
(ii) if the required quorum is not obtainable or if a quorum of such
directors so directs, by independent legal counsel in a written opinion.
No indemnification will be provided by the company to any director or officer
of the company for any liability to the company or shareholders to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of duty.
As permitted by Article ELEVENTH of the company's Articles of
Incorporation and subject to the restrictions under D2-418(F)(1) of the Maryland
General Corporation Law, reasonable expenses incurred by a director who is a
party to a proceeding may be paid by the company in advance of the final
disposition of the action, after a determination that the facts then known
would not preclude indemnification, upon receipt by the company of a written
affirmation by the director of the director's good faith belief that the
standard of conduct necessary for indemnification by the company has been
met and a written undertaking by or on behalf of the director to repay the
amount if it is ultimately determined that the standard of conduct has not
been met.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The principal business of First Pacific Management Corporation is to provide
investment counsel and advice to individuals and institutional investors.
Item 29. PRINCIPAL UNDERWRITERS.
(a) First Pacific Securities, the only principal underwriter of the
Registrant, does not act as principal underwriter, depositor or investment
advisor to any other investment company.
(b) Herewith is the information required by the following table with
respect to each director, officer or partner of the only underwriter named in
answer to Item 21 of Part B:
<TABLE>
<CAPTION>
Position and Position and
Name and Principal Offices with Offices with
Business Address Underwriter Registrant
<S> <C> <C>
Terrence K.H. Lee President Director and
2756 Woodlawn Drive, #6-201 President
Honolulu, HI 96822
Jean M. Chun Secretary/ Secretary/
2756 Woodlawn Drive, #6-201 Vice President Vice President
Honolulu, HI 96822
Charlotte A. Meyer Treasurer/ Treasurer/
2756 Woodlawn Drive, #6-201 Vice President Vice President
Honolulu, HI 96822
Louis F. D'Avanzo Vice President Vice President
2756 Woodlawn Drive, #6-201
Honolulu, HI 96822
Nora B. Simpson Vice President Vice President
702 W. Idaho Street, #321
Boise, ID 83702
</TABLE>
(c) Not applicable.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
Each account, book or other document required to be maintained by
Section 31(a) of the 1940 Act and the Rules (17 CFR 270.31a-1 to 31a-3)
promulgated thereunder is in the physical possession of:
First Pacific Management Corporation
2756 Woodlawn Drive, #6-201
Honolulu, HI 96822;
First Pacific Recordkeeping, Inc.
2756 Woodlawn Drive, #6-201
Honolulu, HI 96822
Item 31. MANAGEMENT SERVICES.
All management services are covered in the management
agreement between the Registrant and First Pacific Management Corporation, as
discussed in Parts A and B.
Item 32. UNDERTAKINGS.
Not applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto authorized,
in the City of Honolulu and State of Hawaii on the 20th day of January, 1997.
FIRST PACIFIC MUTUAL FUND, INC.
(Registrant)
By: \s\ Terrence K.H. Lee
Terrence K.H. Lee, President
Pursuant to the requirement of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
\s\ Terrence K.H. Lee President, Principal January 20, 1997
Terrence K.H. Lee Executive and Financial
Officer, and Director
\s\ Samuel L. Chesser Director January 20, 1997
Samuel L. Chesser
\s\ Clayton W.H. Chow Director January 20, 1997
Clayton W.H. Chow
\s\ Lynden Keala Director January 20, 1997
Lynden Keala
\s\ Stuart S. Marlowe Director January 20, 1997
Stuart S. Marlowe
EXHIBIT INDEX
Item 24.
(b) (11) Accountant's Consent
(b) (15) (c) Selling Dealer Agreement
(b) (16) Computation of Performance Quotations
(b) (27) Financial Data Schedules
Exhibit (b) (11)
Accountant's Consent
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the references to our firm in the Pose-Effective Amendment
to the Registration Statement on Form N-1A of First Pacific Mutual Fund, Inc.
and to the use of our report dated November 6, 1996 on the financial
statements and financial highlights of First Hawaii Municipal Bond Fund,
First Hawaii Intermediate Municipal Fund, and First Idaho Tax-Free Fund,
each a series of shares of First Pacific Mutual Fund, Inc. Such financial
statements and financial highlights appear in the 1996 Annual Report to
Shareholders which are incorporated by reference in the Registration
Statement and Prospectus.
/s/ Tait Weller & Baker
Tait, Weller & Baker
Philadelphia, Pennsylvania
January 21, 1997
Exhibit (b) (15) (c)
FIRST PACIFIC SECURITIES, INC.
2756 Woodlawn Drive, Suite #6- 201
Honolulu, Hawaii 96822
(808) 988-8088
SELLING DEALER AGREEMENT
First Pacific Securities, Inc., principal underwriter of the capital stock
of the First Idaho Tax-Free Fund series of First Pacific Mutual Fund, Inc.
(hereinafter referred to as the "Fund"), cordially invites you to become a
member of the Selling Group which distributes the Fund's shares. We base
our offer of membership to you on our understanding that you are a member
of the National Association of Securities Dealers, Inc. and also on the
understanding that you agree to act in accordance with the following terms:
1. You and we agree to abide by Rule 26 of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., and all other rules
and regulations that are now or may become applicable to transactions
hereunder.
2. Orders for shares received from you and accepted by us will be
executed at the public offering price applicable to each order as established
by the prospectus of the Fund, including any applicable sales load waivers.
The procedure relating to the handling of orders shall be subject to
instructions which we shall forward from time to time to all members of
the Selling Group. All orders are subject to acceptance by us and we
reserve the right in our sole discretion to reject any order.
3. (a) At the time of sale, checks shall be made out to the Fund and
the principal underwriter of the Fund will rebate to you a concession equal
to the amount set forth in the then current prospectus of the Fund.
(b) We agree to pay you a quarterly amount in arrears equal to .40%
of the net asset value of Fund accounts attributable to your sales efforts
until the earlier of the date on which the net assets subject to this
Agreement are redeemed out of the Fund by the shareholder or the date of
termination or material amendment of the Fund's Rule 12b-1 Distribution Plan.
4. As a member of the Selling Group, you agree to purchase shares only
from us as agent for the Fund or from your customers. Purchases from us
shall be made only for the purpose of covering purchase orders already
received from your customers (who may be any persons other than a securities
dealer or broker) or for your own bona fide investment. Purchases from your
customers shall be at a price not less than the net asset value next
calculated after receipt by us of a proper order.
5. You agree that you will not withhold placing customers' orders
so as to profit yourself as a result of such withholding.
6. You agree to sell shares only (a) to your customers at the public
offering price then applicable in accordance with the terms of the
prospectus of the Fund, or (b) to us as agent for the Fund or the Fund itself.
7. Settlements shall be made promptly, but in no case later than three
business days after our acceptance of the order. If payment is not so
received or made, the right is reserved forthwith to cancel the sale or, at
our option, to resell the shares purchased at the then prevailing net asset
value, in which latter case you will agree to be responsible for any loss
resulting to us from your failure to make payment as aforesaid.
8. If any shares sold to you under the terms of this agreement are
repurchased by the Fund or by us as agent for the Fund, you agree to pay
forthwith to us the full amount of the concession allowed to you on the
original sale. We shall notify you of such repurchase within ten
days of the date of said liquidation.
9. All sales will be subject to receipt of shares by us from the Fund.
The Fund and/or we reserve the right in our discretion without notice to you
to suspend sales or withdraw the offering of shares entirely, to change the
offering price as provided in the prospectus or to modify or cancel
this agreement, which shall be construed in accordance with the laws of the
State of Idaho.
10. No person is authorized to make any representations concerning
the Fund or their shares except those contained in the prospectus of the
Fund and any such information as may be released by the Fund as information
supplemental to the prospectus. In purchasing shares from us you shall
rely solely on the representations contained in the prospectus and
supplemental information above mentioned.
11. Additional copies of the prospectus and of any printed information
issued as supplemental literature to said documents will be supplied by us to
members of the Selling Group in reasonable quantities upon request.
12. In no transaction shall you have authority whatsoever to act as agent
of the Fund or of us or of any other member of the Selling Group, and nothing
in this agreement shall constitute you or the Fund, the agent of the other.
In all transactions in these shares between you and us, you are acting as
principal, or as agent for an undisclosed principal, and we as agent for the
Fund.
13. All communications to us shall be sent to: First Pacific Securities,
Inc. at the address set forth on page one of this Agreement. Any notice to
you shall be duly given if mailed or telegraphed to you at your address as
registered from time to time with The National Association of Securities
Dealers, Inc.
FIRST IDAHO TAX-FREE FUND FIRST PACIFIC SECURITIES, INC.
By:__________________________________________
Date:________________________________________
The undersigned accepts your invitation to become a member of the Selling Group
and agrees to abide by the foregoing terms and conditions. The undersigned
acknowledges receipt of First Pacific Securities, Inc. prospectuses for use
in connection with this offering.
Dealer Name_______________________________________________________________
Address___________________________________________________________________
___________________________________________________________________
Employer Identification Number_________________________________________
By:_____________________________________________________________________
(Authorized Signature)
Print Name and Title_____________________________________________________
Phone Number_____________________________________________________________
Date_____________________________________________________________________
Exhibit (b) (16)
FIRST PACIFIC MUTUAL FUND, INC.
First Hawaii Municipal Bond Fund Series
Schedule for Computation of Performance Quotations
1. Average Annual Total Return:
P(1 + T)n = ERV
Inception to December 31, 1996: 7.25%
P = 1,000
T = .0725
n = 8.0833
ERV = $1,760.70
1,000(1+.0725)8.0833=$1,760.70
Inception to September 30, 1996: 7.20%
P = 1,000
T = .0720
n = 7.8548
ERV = $1,726.66
1,000(1+.0720)7.8548=$1,726.66
December 31, 1991 to December 31, 1996: 6.34%
P = 1,028.31
T = .0634
n = 5
ERV = $1,398.21
1,028.31(1+.0634)5=$1,398.21
September 30, 1991 to December 31, 1996: 6.52%
P = 1,000
T = .0652
n = 5
ERV = $1,371.19
1,000(1+.0652)5=$1,371.19
January 1, 1996 to December 31, 1996: 4.17%
P = 1,000
T = .0417
n = 1
ERV = $ 1,041.70
1,000(1+.0417)1=$1,041.70
September 30, 1995 to September 30, 1996: 5.62%
P = 1,000
T = .0562
n = 1
ERV = $1,056.23
1,000(1+.0562)1=$1,056.23
FIRST PACIFIC MUTUAL FUND, INC.
First Hawaii Intermediate Municipal Fund Series
Schedule for Computation of Performance Quotations
1. Average Annual Total Return:
P(1 + T)n = ERV
Inception to December 31, 1996: 5.63%
P = 1,000
T = .0563
n = 2.4904
ERV = $1,146.26
1,000(1+.0563)2.4904=$1,146.26
Inception to September 30, 1996: 5.58%
P = 1,000
T = .0558
n = 2.2384
ERV = $1,129.30
1,000(1+.0558)2.2384=$1,129.30
December 31, 1995 to December 31, 1996: 3.77%
P = 1,000
T = .0377
n = 1
ERV = $ 1,037.70
1,000(1+.0377)1=$1,037.70
September 30, 1995 to September 30, 1996: 3.95%
P = 1,000
T = .0395
n = 1
ERV = $1,039.49
1,000(1+.0395)1=$1,039.49
FIRST PACIFIC MUTUAL FUND, INC.
First Idaho Tax-Free Fund Series
Schedule for Computation of Performance Quotations
1. Average Annual Total Return:
P(1 + T)n = ERV
Inception to December 31, 1996: .88%
P = 1,000
T = .0088
n = .4973
ERV = $1,008.77
1,000(1+.0088).4973=$1,008.77
Inception to September 30, 1996: (.75%)
P = 1,000
T = .0205
n = .2459
ERV = $992.54
1,000(1-.0075).2459=$992.54
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000837351
<NAME> First Pacific Mutual Fund
<SERIES>
<NUMBER> 001
<NAME> First Hawaii Municipal Bond Fund
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1.000
<INVESTMENTS-AT-COST> 51,274,306
<INVESTMENTS-AT-VALUE> 53,047,437
<RECEIVABLES> 866,616
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1,337,019
<TOTAL-ASSETS> 55,251,072
<PAYABLE-FOR-SECURITIES> 1,001,350
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 84,795
<TOTAL-LIABILITIES> 1,086,145
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 52,621,279
<SHARES-COMMON-STOCK> 4,972,944
<SHARES-COMMON-PRIOR> 4,717,139
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (229,483)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,773,131
<NET-ASSETS> 54,164,927
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,173,398
<OTHER-INCOME> 0
<EXPENSES-NET> 505,043
<NET-INVESTMENT-INCOME> 2,668,355
<REALIZED-GAINS-CURRENT> 21,217
<APPREC-INCREASE-CURRENT> 202,015
<NET-CHANGE-FROM-OPS> 2,891,587
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,668,355
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 982,410
<NUMBER-OF-SHARES-REDEEMED> 900,255
<SHARES-REINVESTED> 173,650
<NET-CHANGE-IN-ASSETS> 3,034,045
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (250,700)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 265,680
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 522,448
<AVERAGE-NET-ASSETS> 53,007,448
<PER-SHARE-NAV-BEGIN> 10.84
<PER-SHARE-NII> .55
<PER-SHARE-GAIN-APPREC> .05
<PER-SHARE-DIVIDEND> .55
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.89
<EXPENSE-RATIO> .95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000837351
<NAME> First Pacific Mutual Fund
<SERIES>
<NUMBER> 002
<NAME> First Hawaii Intermediate Municipal Fund
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1.000
<INVESTMENTS-AT-COST> 6,527,604
<INVESTMENTS-AT-VALUE> 6,631,215
<RECEIVABLES> 104,596
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 95,685
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<TABLE> <S> <C>
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<NAME> First Pacific Mutual Fund
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<NAME> First Idaho Tax-Free Fund
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