FIRST PACIFIC MUTUAL FUND, INC.
HAWAII INTERMEDIATE FUND
HAWAII MUNICIPAL FUND
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822-1856
September 23, 2007
Dear Shareholder:
On behalf of the Board of Directors of First Pacific Mutual Fund, Inc.
(the "Company"), we are pleased to invite you to a special meeting of
shareholders of the Hawaii Intermediate Fund (the "Intermediate Fund") and
Hawaii Municipal Fund (the "Municipal Fund") to be held at 11:00 a.m. (Hawaii
time) on November 8, 2007 at the offices of Lee Financial Group Inc., 2756
Woodlawn Drive, #6-201, Honolulu, Hawaii 96822 (the "Special Meeting"). At the
Special Meeting, shareholders of the Intermediate Fund will be asked to approve
a Plan of Reorganization, dated as of June 12, 2007 (the "Plan of
Reorganization"), which contemplates the reorganization of the Intermediate Fund
into the Investor Class of the Municipal Fund. The Intermediate Fund and the
Municipal Fund are each separate investment portfolios of the Company and are
sometimes referred to as the "Funds." Shareholders of both Funds will be
asked to approve an amendment to the Company's charter that is necessary so that
the reorganization can be completed.
The Board of Directors of the Company unanimously recommends that you vote
to approve the proposed reorganization and the related charter amendment.
The proposed reorganization will enable Intermediate Fund shareholders to
invest in a larger fund with the same investment objective and a similar
investment strategy. The total operating expenses of the Municipal Fund
Investor Class are expected to be lower than the current operating expenses of
the Intermediate Fund. In addition, while past performance is no assurance of
future results, the recent and long-term past performance of the Municipal Fund
Investor Class has historically been higher than that of the Intermediate Fund.
By combining the assets of the two Funds, a single fund will be created with a
considerably larger asset base than the assets of the Intermediate Fund alone.
This greater asset size should allow shareholders to take advantage of the
possible benefits of future economies of scale and spreading fixed costs
across a larger asset base. Further, the reorganization is intended to be tax-
free and will not dilute your investment.
The Board of Directors recommends that Intermediate Fund shareholders vote
in favor of the proposed reorganization and that all shareholders vote in favor
of the related charter amendment. For more information about the reorganization
and the charter amendment, please carefully review the enclosed materials. The
formal Notice of Special Meeting, a Combined Proxy Statement/Prospectus, a Proxy
Card and a Fund prospectus, as supplemented, are enclosed.
We urge you to vote as soon as possible. Please return your Proxy Card as
soon as possible so that your vote will be counted.
Your vote is important to us regardless of the number of shares that you
own. Please vote by returning your Proxy Card today in the enclosed postage-
paid envelope.
If you have any questions about the reorganization, please do not hesitate
to contact the Company collect at 1-808-988-8088, or toll free at 1-800-354-9654
(inter-island).
We look forward to your attendance at the Special Meeting or receiving
your proxy card so that your shares may be voted at the Special Meeting.
Sincerely,
/s/ Terrence K.H. Lee
Terrence K.H. Lee
President
FIRST PACIFIC MUTUAL FUND, INC.
Questions & Answers
The following questions and answers provide an overview of the proposal to
reorganize the Intermediate Fund into the Municipal Fund and the proposal to
amend the Company's charter. We also encourage you to read the full text of the
combined proxy statement/prospectus (the "Proxy/Prospectus") that follows.
Q: What are shareholders being asked to vote upon?
A: Shareholders of the Intermediate Fund are being asked in the attached
Proxy/Prospectus to consider and approve a proposal to reorganize the
Intermediate Fund into the Investor Class of the Municipal Fund.
Q. Why has the reorganization of the Intermediate Fund into the Municipal
Fund been recommended?
A: The Directors of the Company (the "Directors"), including those Directors
who are not "interested persons" as defined in the Investment Company Act of
1940, as amended (the "1940 Act"), have determined that the reorganization of
the Intermediate Fund into the Municipal Fund is in the best interests of the
shareholders of each of the Intermediate Fund and the Municipal Fund and that
interests of the existing shareholders of the Intermediate Fund and the
Municipal Fund will not be diluted as a result of the reorganization. The
Intermediate Fund has a very small asset base (less than $9 million as of July
31, 2007) and the Fund's investment adviser, Lee Financial Group Inc., has
informed the Directors that it is likely that its assets will not increase
significantly to make the Fund economically viable. The proposed reorganization
would enable the shareholders of the Intermediate Fund to continue their
individual investment programs in a larger fund with the same investment
objective and similar investment strategy. Shareholders of both the Intermediate
Fund and Municipal Fund should benefit from the greater efficiencies that
are expected to result from the reorganization. In addition, the total
operating expenses of the Municipal Fund Investor Class after the reorganization
are expected to be lower than the current total operating expenses of the
Intermediate Fund, and the recent and long-term performance of the Municipal
Fund Investor Class has historically been higher than the Intermediate Fund.
The Directors reviewed and considered a number of factors relating to the
reorganization. The Directors also considered that neither the Intermediate
Fund nor the Municipal Fund will bear any direct fees or expenses in connection
with the reorganization. Under the Plan of Reorganization, all of the fees and
expenses in connection with entering into and carrying out the transactions
contemplated by the Plan of Reorganization, whether or not such transactions are
concluded, will be paid by Lee Financial Group Inc.
Q: What is the anticipated timing of the reorganization?
A: The Special Meeting of shareholders to consider the proposal is scheduled
to occur on November 8, 2007. If all necessary approvals are obtained, the
proposed reorganization will likely take place on or about November 19, 2007, or
another date selected by the Company.
Q: Who will receive the Proxy/Prospectus material?
A: The Proxy/Prospectus has been mailed to all persons and entities that held
shares of record in the Intermediate Fund and Municipal Fund on September 7,
2007. Please note that in some cases record ownership of and/or voting
authority over Fund shares may reside with a fiduciary or other agent. In these
cases, the fiduciary or other agent may receive the combined Proxy/Prospectus.
Q: How is the Intermediate Fund proposed to be reorganized?
A: If the reorganization is approved by shareholders, the Plan of
Reorganization provides that the Intermediate Fund will transfer all of its
assets and liabilities to the Municipal Fund and all Intermediate Fund shares
will be redeemed in exchange for Municipal Fund Investor Class shares. As a
result, each shareholder of the Intermediate Fund will become a shareholder of
the Municipal Fund. If the reorganization is approved by shareholders,
Intermediate Fund shareholders who do not wish to have their Intermediate Fund
shares exchanged for shares of the Municipal Fund Investor Class as part of the
reorganization should redeem their shares prior to the consummation of the
reorganization. If you redeem your shares, you may recognize a taxable gain or
loss based on the difference between your tax basis in the shares and the amount
you receive for them.
Q: What are the costs and federal tax implications to shareholders in
connection with the proposed reorganization?
A: The Company will not bear any direct fees or expenses in connection with
the reorganization. Under the Plan of Reorganization, Lee Financial Group Inc.
has agreed to pay all of the fees and expenses in connection with entering into
and carrying out the transactions contemplated by the Plan of Reorganization,
whether or not the transactions contemplated are concluded.
The exchange of Intermediate Fund shares for Municipal Fund Investor Class
shares is intended to be tax-free under federal income tax laws, and is
conditioned on receipt of a tax opinion to that effect. Nonetheless, the sale
of securities by the Intermediate Fund prior to the reorganization, whether in
the ordinary course of business or in anticipation of the reorganization, may
increase the amount of the final distribution made by the Intermediate Fund
prior to the reorganization. Immediately prior to the reorganization, the
Intermediate Fund will declare and pay a final distribution to shareholders of
all of the Intermediate Fund's remaining undistributed investment company
taxable income and net capital gain, if any, recognized in taxable years ending
on or before the day of the reorganization, including the short taxable year
that will end on the day of the reorganization.
Q: Why are shareholders of both Funds being asked to approve the charter
amendment?
A: Under Maryland law, which governs the Company, the Company needs to have
certain provisions in its charter to effect the proposed reorganization of the
Intermediate Fund into the Municipal Fund. The Company's charter currently does
not have these provisions. Amending the charter to permit the reorganization is
an action that requires approval of a majority of all the Company's
shareholders, not only shareholders of the Intermediate Fund. If the charter
amendment is not approved, the reorganization cannot be completed and the
Directors will consider other options for the Intermediate Fund.
First Pacific Mutual Fund, Inc.
Hawaii Intermediate Fund
Hawaii Municipal Fund
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822-1856
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On November 8, 2007
To Shareholders of the Hawaii Intermediate Fund and Hawaii Municipal Fund:
NOTICE IS GIVEN THAT a special meeting (the "Special Meeting") of the
shareholders of the Hawaii Intermediate Fund (the "Intermediate Fund") and
Hawaii Municipal Fund (the "Municipal Fund") of First Pacific Mutual Fund, Inc.
(the "Company"), will be held at 11:00 a.m. (Hawaii time), on November 8, 2007
at the offices of Lee Financial Group Inc., 2756 Woodlawn Drive, #6-201,
Honolulu, Hawaii 96822-1856 ("Lee Financial") for the purpose of considering and
voting upon:
ITEM 1. A proposal to amend the Company's charter to permit the Company
to effect the reorganization described in Item 2 below;
ITEM 2. A proposal to approve a Plan of Reorganization and the
transactions contemplated thereby, including the transfer of all the
assets and liabilities of the Intermediate Fund to the Municipal Fund in
exchange for shares of the Municipal Fund. The Municipal Fund shares
received by the Intermediate Fund will be distributed to shareholders of
the Intermediate Fund and the Intermediate Fund will be terminated as
soon as practicable thereafter; and
ITEM 3. The transaction of such other business as may properly come
before the Special Meeting or any adjournment(s) thereof.
The charter amendment, proposed reorganization and related matters are
described in the attached Combined Proxy Statement/Prospectus. The Directors of
the Company (the "Directors") unanimously recommend that you vote in favor of
each proposal.
Shareholders of record as of the close of business on September 7, 2007
are entitled to notice of, and to vote at, the Special Meeting or any
adjournment(s) thereof.
You are requested to mark, date, sign and return promptly in the enclosed
envelope the accompanying proxy card that is being solicited by the Directors.
This is important to ensure a quorum at the Special Meeting. Proxies may be
revoked at any time before they are exercised by submitting to the Company a
written notice of revocation or a subsequently executed proxy or by attending
the Special Meeting and voting in person.
By Order of the Board of Directors,
/s/ Jean Chun Lee
Jean Chun Lee
Secretary
We need your proxy vote immediately. You may think that your vote is not
important, but it is. By law, the Special Meeting will have to be adjourned
without conducting any business if shares representing a majority interest in
the Funds entitled to vote in person or by proxy at the meeting are not
represented at the meeting. In that event, the Company would continue to
solicit votes for a certain period of time in an attempt to achieve a quorum.
Your vote could be critical in allowing the Company to hold the Special
Meeting as scheduled, so please return your proxy card immediately.
COMBINED PROXY STATEMENT/PROSPECTUS
September 23, 2007
FIRST PACIFIC MUTUAL FUND, INC.
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822-1856
(808) 988-8088
This combined proxy statement/prospectus ("Proxy/Prospectus") is being
sent to shareholders of the Hawaii Intermediate Fund (the "Intermediate Fund")
and Hawaii Municipal Fund (the "Municipal Fund" and, together with the
Intermediate Fund, the "Funds"), each a series of First Pacific Mutual Fund,
Inc., a Maryland Corporation (the "Company"). The Company's Board of Directors
(the "Directors") has called a Special Meeting of Shareholders (the "Special
Meeting") at the offices of Lee Financial Group Inc. ("Lee Financial" or the
"Adviser") on November 8, 2007 at 11:00 a.m. Hawaii time.
The following table summarizes the proposals to be voted on at the Special
Meeting and indicates those shareholders that are being solicited with respect
to each proposal.
Proposal Shareholders Solicited
(1) To amend the Company's charter to permit All shareholders of both
the Company to effect the reorganization Funds of the Company will
described in Proposal (2) below. Vote together and not
separately by Fund.
(2) To approve a Plan of Reorganization and the Shareholders of the
transactions contemplated thereby, including Intermediate Fund.
the transfer of all the assets and
liabilities of the Intermediate Fund to the
Municipal Fund in exchange for shares of the
Municipal Fund. The Municipal Fund shares
received by the Intermediate Fund will be
distributed to shareholders of the
Intermediate Fund and the Intermediate Fund
will be terminated as soon as practicable
thereafter.
At the Special Meeting, shareholders of the Intermediate Fund will be
asked to approve a proposed Plan of Reorganization dated as of June 12, 2007
(the "Plan of Reorganization") and the transactions contemplated thereby (the
"Reorganization"). Shareholders of both Funds will be asked to approve an
amendment to the Company's charter that will permit the Company to effect the
Reorganization. The Company is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Intermediate Fund and Municipal Fund are separate investment
portfolios of the Company. As of the date of this Proxy/Prospectus, each Fund
has shares outstanding in a single share class, the Investor Class.
Plan of Reorganization. The Plan of Reorganization, which is attached as
Appendix A, provides for and contemplates: (1) the transfer of all of the
assets and liabilities of the Intermediate Fund to the Municipal Fund in
exchange for Investor Class shares of the Municipal Fund; (2) the amendment of
the Company's Charter that will permit the Company to redeem shares of the
Intermediate Fund for the purpose of effecting the Reorganization (the "Charter
Amendment"); (3) and the issuance of Investor Class shares of the Municipal Fund
received by the Intermediate Fund in the Reorganization to the shareholders of
the Intermediate Fund, such that each shareholder of the Intermediate Fund will
hold, immediately after the effective time of the Reorganization, full and
fractional Investor Class shares of the Municipal Fund with the same
aggregate dollar value as the shareholder held in the Intermediate Fund
immediately before the transaction. As a result of the Reorganization,
shareholders of the Intermediate Fund will become shareholders of the Municipal
Fund.
This Proxy/Prospectus sets forth concisely the information that an
Intermediate Fund shareholder should know before voting on the Reorganization
and investing in the Municipal Fund and that shareholders of both Funds should
consider before voting on the Charter Amendment, and should be retained for
future reference. It is both a proxy statement for the Special Meeting and a
prospectus for the Municipal Fund shares that are to be issued in connection
with the Reorganization.
Additional information is set forth in the Statement of Additional
Information dated September 23, 2007 relating to this Proxy/Prospectus and in
the prospectus, as supplemented, dated February 1, 2007 for the Company which is
incorporated herein by reference. These documents are on file with the SEC, and
are available without charge by calling the Company at (808) 988-8088 (collect)
or (800) 354-9654 (toll-free inter-island), on the Company's website at
www.leehawaii.com or by writing the Company at the address stated above. In
addition, a current prospectus, as supplemented, accompanies this
Proxy/Prospectus.
The Annual Report for the Funds for the fiscal year ended September 30,
2006 and the Semi-Annual Report for the Funds for the period ended March 31,
2007 can be obtained without charge by calling or writing the Company at the
telephone numbers, website or street address stated above. Each of these
documents together with other information about the Funds is also
available on the SEC's website at www.sec.gov. You may review and copy
documents at the SEC Public Reference Room in Washington, D.C. (for information
on the operation of the Public Reference Room call (202) 942-8090). You may
request documents by mail from the SEC, upon payment of a duplication fee, by
writing to: Securities and Exchange Commission, Public Reference Branch, Office
of Consumer Affairs and Information Services, Washington, D.C. 20549-0102, or by
electronic request by e-mailing the SEC at publicinfo@sec.gov.
This Proxy/Prospectus is expected to be first sent to shareholders on or
about September 23, 2007. The solicitation of proxies will be primarily by
mail, but may include personal telephone, electronic or oral communication by
officers and service providers of the Funds, who will not be paid for these
services. All costs associated with the preparation, filing and
distribution of the proxy materials and the Special Meeting will be borne by Lee
Financial.
The SEC has not approved or disapproved these securities or passed upon
the accuracy or adequacy of this Proxy/Prospectus. Any representation to the
contrary is a criminal offense.
Shares of the Funds are not deposits or obligations of or guaranteed or
endorsed by any bank. Such shares are not insured by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
government agency. Mutual fund shares involve certain investment risks,
including the possible loss of principal.
PROXY STATEMENT/PROSPECTUS
Table of Contents
PROPOSAL 1: APPROVAL OF CHARTER AMENDMENT 1
PROPOSAL 2: APPROVAL OF THE PLAN OF REORGANIZATION 2
SUMMARY 2
Board's Consideration of the Reorganization 2
The Reorganization 2
Federal Income Tax Consequences of the Reorganization 3
Comparative Fees and Expenses 4
Overview of the Intermediate Fund and Municipal Fund 6
Voting Information 7
PRINCIPAL RISK FACTORS 7
Risks of Investing in the Intermediate Fund and the Municipal Fund 7
INFORMATION ABOUT THE REORGANIZATION 9
Directors' Considerations 9
The Plan of Reorganization 11
Description of the Plan of Reorganization 11
Description of the Securities to be Issued 13
Federal Income Tax Consequences 13
Capitalization 14
COMPARISON OF INTERMEDIATE AND MUNICIPAL FUNDS 15
Investment Objectives and Principal Investment Strategies 15
Investment Adviser and Advisory Fee Information 17
Other Service Providers 17
Dividends and Other Distributions 17
ADDITIONAL INFORMATION ABOUT THE INTERMEDIATE FUND AND
MUNICIPAL FUND 18
Financial Highlights 18
Materials Incorporated By Reference 21
INFORMATION APPLICABLE TO PROPOSALS 1 & 2 21
VOTING INFORMATION 21
General Information 21
Shareholder and Board Approvals 21
Quorum and Adjournment 22
Principal Shareholders 22
OTHER INFORMATION 23
Shareholder Proposals 23
Other Business 23
Available Information 23
Financial Statements 24
SHAREHOLDER INQUIRIES 24
APPENDIX A A-1
PROPOSAL 1: APPROVAL OF THE CHARTER AMENDMENT
At a meeting held on July 25, 2007, the Company's Board of Directors
considered and approved, and recommends that the Funds' shareholders approve, a
proposed new section 4 of Article SEVENTH of the Company's Articles of
Incorporation, which reads as follows:
"4. Subject to the requirements of the Investment Company Act of 1940, as
amended, the Board of Directors may, without the vote or consent of the
stockholders, cause the corporation to redeem at net asset value all or
any proportion of the outstanding shares of any series or class from any
holder or holders upon such conditions as may be established by the Board
of Directors in its sole discretion, for any purpose, including, without
limitation, a reorganization or liquidation of one or more series or
classes."
As a Maryland corporation, the Company is subject to the Maryland General
Corporation Law (the "MGCL"). The MGCL does not contain provisions that would
permit a reorganization involving one series of an investment company into
another series of the same investment company absent certain provisions in the
company's charter. The Reorganization is dependent upon the Company's ability
to redeem all the Intermediate Fund's shares. Accordingly, without the Charter
Amendment, the Reorganization could not be effected even if approved by the
Intermediate Fund shareholders.
The Charter Amendment would permit the Board of Directors in the Board's
discretion to redeem any or all of a shareholder's shares upon conditions
established by the Board and without shareholder approval. Such redemption
could be made for any purpose, including a reorganization or liquidation of one
or more series or classes of shares. The powers of the Board would remain
subject to the requirements of the 1940 Act, Maryland law, other applicable law,
and the Directors' fiduciary duties. In addition to permitting the Company to
effect the Reorganization, under certain circumstances it may be in
shareholders' interest to liquidate a series or class without the need to obtain
shareholder approval. For example, a fund may have insufficient assets to
invest effectively or excessively high expense levels due to operational
needs. Under such circumstance, the Directors may determine that liquidating
the fund is in the shareholders' interest and the only appropriate course of
action. The process of obtaining shareholder approval of the fund's liquidation
may, however, make it more difficult to complete the fund's liquidation and, in
general, will increase the costs associated with the liquidation. In such a
case, it may be in the shareholders' interest to permit the fund liquidation
without incurring the costs and delays of a stockholder meeting.
The affirmative vote of a majority of the shares of the Intermediate Fund
and Municipal Fund entitled to vote at the Special Meeting in person or by
proxy, in the aggregate, is required to approve the Charter Amendment.
The Directors unanimously recommend that shareholders of the Intermediate
Fund and Municipal Fund vote FOR the Charter Amendment.
PROPOSAL 2: APPROVAL OF THE PLAN OF REORGANIZATION
SUMMARY
The following is a summary of certain information regarding the
Reorganization contained in this Proxy/Prospectus and the Plan of
Reorganization. The Plan of Reorganization governs the terms of the
Reorganization and is attached as Appendix A.
Board's Consideration of the Reorganization
At a meeting held on June 12, 2007, the Company's Directors considered the
Plan of Reorganization and the Reorganization of the Intermediate Fund into the
Municipal Fund. Based upon their evaluation of the information presented to
them, and in light of their fiduciary duties under federal and state law, the
Directors, including all of the non-interested Directors (as defined in the 1940
Act) determined that participation in the Reorganization, as contemplated by the
Plan of Reorganization, was in the best interests of the shareholders of each
Fund and that the interests of the existing shareholders of each Fund will not
be diluted as a result of the Reorganization. For additional information, see
"Information About the Reorganization - Directors' Considerations."
The Directors unanimously recommend that shareholders of the Intermediate
Fund vote FOR approval of the Plan of Reorganization.
The Reorganization
As set forth in the Plan of Reorganization, the Reorganization between the
Intermediate Fund and the Municipal Fund would involve:
* The acquisition of all of the assets of the Intermediate Fund by the
Municipal Fund and the assumption by the Municipal Fund of all of the
liabilities of the Intermediate Fund in exchange for shares of the
Municipal Fund;
* The issuance of the Municipal Fund's Investor Class shares to each holder
of the Intermediate Fund's shares as of the effective time of the
Reorganization.
Completion of the Reorganization is contingent upon approval of the Charter
Amendment and filing of Articles of Amendment with the State of Maryland.
As a result of the Reorganization, each Intermediate Fund shareholder will
become a shareholder of the Municipal Fund and will hold, immediately after the
Reorganization, Municipal Fund Investor Class shares having a total dollar value
equal to the total dollar value of the shares such shareholder held in the
Intermediate Fund immediately prior to the effectiveness of the Reorganization.
The exchange of shares in the Reorganization is intended to be tax-free
under federal income tax laws.
If approved, the Reorganization will occur as of the opening of business
on or about November 19, 2007, or another date selected by the Company.
Approval of the Plan of Reorganization and the transactions contemplated therein
requires the approval of a majority of the Intermediate Fund shares entitled to
vote at the Special Meeting in person or by proxy. See "Information about the
Reorganization" and "Voting Information" below.
In June 2007, Lee Financial presented to the Directors for their
consideration a proposal to reorganize the Intermediate Fund into the Municipal
Fund. Lee Financial had discontinued the voluntary waiver of a portion of its
management fee and the Intermediate Fund had commenced paying the Distributor
and Shareholder Servicing Agent fees for distribution, marketing and shareholder
servicing related activities. Representatives of Lee Financial explained that
efforts to significantly increase the assets of the Intermediate Fund had not
been successful. As a result, the Intermediate Fund was not expected to reach
the necessary scale needed in order to make the Fund economically viable and
reduce expenses for the Fund's shareholders. After review and evaluation of the
possible alternatives, Lee Financial recommended that the Directors consider the
Reorganization.
At that meeting, the Directors reviewed and considered, a number of
factors relating to the Company, the Funds and Lee Financial. For the reasons
cited above and the additional reasons set forth below under "Information About
the Reorganization -Directors' Considerations," the Directors unanimously
recommend the approval of the proposed Reorganization by Intermediate Fund
shareholders.
Federal Income Tax Consequences of the Reorganization
It is intended that the Reorganization will not result in the recognition,
for federal income tax purposes, of gain or loss by the Intermediate Fund, the
Municipal Fund or their respective shareholders. Nonetheless, any sale of
securities by the Intermediate Fund prior to the Reorganization, whether in the
ordinary course of business or in anticipation of the Reorganization, may
increase the amount of the final distribution made by the Intermediate Fund
prior to the Reorganization. Immediately prior to the Reorganization, the
Intermediate Fund will declare and pay a distribution to shareholders of all of
the Intermediate Fund's remaining undistributed investment company taxable
income and net capital gain, if any, recognized in taxable years ending on or
before the day of the Reorganization.
As a condition to the closing of the Reorganization, the Company will
receive an opinion from its counsel, Drinker Biddle & Reath LLP, (based on
certain facts, qualifications, assumptions and representations) to the effect
that the Reorganization, for federal income tax purposes, will qualify as a tax-
free reorganization within the meaning of section 368(a) of the Internal Revenue
Code (the "Code"). See "Information About the Reorganization - Federal Income
Tax Consequences" below.
Comparative Fees and Expenses
Intermediate Fund and Municipal Fund Expenses
Expense Ratio Tables. Expenses of mutual funds are often measured by
their expense ratios (i.e., the ratio of their total expenses for a year divided
by their average daily net asset value over the same year). The total expenses
of the Intermediate Fund and Municipal Fund differ on a gross and net basis.
The following table: (1) compares the fees and expenses for the
Intermediate Fund and the Municipal Fund and (2) shows the estimated fees and
expenses for the Municipal Fund on a Combined Fund pro forma basis after giving
effect to the Reorganization. The purpose of these tables is to assist
shareholders in understanding the various costs and expenses that investors in
these portfolios will bear as shareholders. The tables enable you to compare
and contrast the recent expense levels for the Intermediate Fund and the
Municipal Fund and obtain a general idea of what the expense levels would be if
the Reorganization occurs. The tables do not reflect any charges that may be
imposed by institutions directly on their customer accounts in connection with
investments in the portfolios. Combined Fund pro forma expense levels shown
should not be considered an actual representation of future expenses or
performance. Such Combined Fund pro forma expense levels project levels but
actual expenses may be greater or less than those shown.
The annual operating expenses of the Municipal Fund are based on actual
expenses for the twelve months ended March 31, 2007. The annual operating
expenses of the Intermediate Fund have been restated to reflect the elimination
of the voluntary management fee waiver and the payment of distribution and
shareholder servicing fees as if those fees had been incurred for the twelve
months ended March 31, 2007. The Combined Fund pro forma expense ratios are
constructed by assuming that the Reorganization occurred on March 31, 2007.
For financial statement purposes the Municipal Fund will be the accounting
survivor of the Reorganization. As the accounting survivor, the Municipal
Fund's operating history will be used for financial reporting purposes.
Example Table. Following the expense ratio table are expense examples
intended to help you compare and contrast the cost of investing in: (1) the
Intermediate Fund as it currently exists, (2) the Municipal Fund as it currently
exists, and (3) the Municipal Fund if it acquires the Intermediate Fund (i.e.,
the "Combined Fund pro forma" figure).
The examples depict the dollar amount of expenses on a hypothetical
investment in each of the Funds for the periods shown. In the "Combined Fund
pro forma" line, the dollar figures shown are computed based on the total
operating expense figures from the corresponding expense ratio table (and not
the net operating expense figure). In other words, the examples do not reflect
any expense waivers or reimbursements.
Shareholder Fees (paid directly from your investment)
Municipal Fund
Intermediate Fund Municipal Fund Investor Class
Investor Class Investor Class Shares (Combined
Shares Shares Fund Pro Forma)
Maximum Sales Charge (load) Imposed on
Purchases (as a percentage of offering price)
None None None
Redemption Fee (as a percentage of amount
redeemed, if applicable)
None None None
Annual Fund Operating Expenses (deducted from Fund assets)
Municipal Fund
Intermediate Fund Municipal Fund Investor Class
Investor Class Investor Class Shares (Combined
Shares Shares Fund Pro Forma)
Investment Advisory Fees 0.50% 0.50% 0.50%
Distribution (12b-1) Fees1 0.15% 0.15% 0.15%
Other Expenses2 0.55% 0.39% 0.39%
Total Annual Fund
Operating Expenses 1.20%3 1.04% 1.04%
<FN>
1 Each Funds' Distribution Plan allows the Investor Class to spend up to
0.25% per year of its average daily net assets in connection with the
activity to distribute its shares. For the 12 months ended March 31, 2007
the Intermediate Fund and the Municipal Fund expensed 0.15% of their
respective average daily net assets.
2 Other Expenses include shareholder servicing fees which are currently
0.10% of total assets.
3 Distribution (12b-1) Fees, Other Expenses and Total Annual Fund Operating
Expenses have been restated to reflect fees paid to the Fund's Distributor
and Shareholder Servicing Agent for marketing, distribution and
shareholder servicing related activities.
Each Fund also has arrangements with the Company's custodian bank to
reduce fees through custodian arrangements. Such credit may cease at any
time. Custody credits reduced the Intermediate Fund's and the Municipal
Fund's Operating Expense by 0.32% and 0.14%, respectively. As a result of
the custody credits Total Annual Fund Operating Expenses for the
Intermediate Fund and the Municipal Fund would be 0.88% and 0.90%,
respectively.
</FN>
Examples
The following Examples are intended to help you compare the cost of
investing in: (1) the Intermediate Fund as it currently exists; (2) the
Municipal Fund as it currently exists; and (3) the Municipal Fund if it acquires
the Intermediate Fund (i.e., the Combined Fund Pro Forma) with the cost of
investing in other mutual funds. The Examples assume that you invest $10,000 in
the Intermediate Fund, Municipal Fund or Combined Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Intermediate Fund's, Municipal Fund's or Combined Fund's operating expenses
remain the same. The Examples do not reflect any waivers and expense
limitations. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 year 3 years 5 years 10 years
Intermediate Fund - Investor Class $122 $381 $660 $1,455
Municipal Fund - Investor Class $106 $331 $574 $1,271
Combined Fund Pro Forma $106 $331 $574 $1,271
The purpose of the foregoing tables is to assist an investor in
understanding the various costs and expenses that an investor will bear directly
or indirectly. The examples should not be considered a representation of future
expenses which may be more or less than those shown. The assumed 5% annual
return is hypothetical and should not be considered a representation of past or
future annual return. Actual return may be greater or less than the assumed
amount. The examples assume that all dividends and other distributions are
reinvested.
Overview of the Intermediate Fund and Municipal Fund
Comparison of Investment Objectives and Principal Investment Strategies
Investment Objective: Both Funds have the same investment objective: To
provide a high level of current income exempt from federal and Hawaii state
income taxes, consistent with preservation of capital and prudent investment
management.
Principal Investment Strategy: 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 bond counsel to the issuer. Each Fund will invest, under normal
circumstances, at least 80% of its net assets in these municipal securities.
The investment strategy of the Intermediate Fund and the Municipal Fund
differs in the average maturity range of the obligations in which each Fund
invests: the Municipal Fund will attempt to achieve its objective by investing
primarily in municipal bonds with maturities of up to 40 years and the Fund has
an average expected maturity of 10-25 years. The Intermediate Fund will attempt
to achieve its objective by investing primarily in municipal bonds with a dollar
weighted average portfolio maturity of 3-10 years.
For additional information regarding the investment objective, policies
and restrictions of the Intermediate and Municipal Funds, see "Comparison of the
Intermediate Fund and Municipal Fund - Investment Objectives and Principal
Strategies - Other Investment Practices and Investment Securities of the
Intermediate Fund and Municipal Fund."
Service Providers
Lee Financial Group Inc. ("Lee Financial") serves as investment adviser to
the Funds.
For a detailed description of the management of the Funds, including Lee
Financial and other service providers to the Funds, see "Comparison of
Intermediate and Municipal Fund - Investment Adviser and Advisory Fee
Information," "Comparison of Intermediate and Municipal Fund - Other
Service Providers," and the Funds' prospectus which accompanies this
Proxy/Prospectus.
Share Class Characteristics and Shareholder Transactions and Services
Investor Class. The Investor Class Shares of the Funds are offered at net
asset value with no front-end or contingent deferred sales charges.
The purchase, redemption, exchange, dividend and other policies and
procedures of the Intermediate Fund and Municipal Fund are identical. See the
Funds' prospectus for more information.
Voting Information
The Company's Directors are furnishing this Proxy/Prospectus in
connection with the solicitation of proxies. Only shareholders of record at the
close of business on September 7, 2007, will be entitled to vote at the Special
Meeting. Shares represented by a properly executed proxy will be voted in
accordance with the instructions thereon. If no instruction is made, the named
proxies will vote in favor of the proposals set forth in the Notice of Meeting.
Proxies may be revoked at any time before they are exercised by submitting to
the Company a written notice of revocation or a subsequently executed proxy or
by attending the Special Meeting and voting in person. For additional
information, see "Voting Information" below.
PRINCIPAL RISK FACTORS
Risks of Investing in the Intermediate Fund and the Municipal Fund
An investment in the Intermediate Fund or the Municipal Fund is subject to
specific risks arising from the types of securities in which the Intermediate
Fund or the Municipal Fund invests and general risks arising from investing in
any mutual fund. There is no assurance that the Intermediate Fund or the
Municipal Fund will meet its investment objective, and investors could lose
money by investing in the Intermediate Fund or the Municipal Fund. As with all
mutual funds, an investment in the Intermediate Fund or the Municipal Fund is
not insured or guaranteed by the U.S. Government, Federal Deposit Insurance
Corporation, Federal Reserve Board or any other government agency.
The principal risks applicable to the Intermediate Fund and the Municipal
Fund are described in the table that follows below. More information about
certain types of portfolio securities and investment techniques, and their
associated risks, is provided in the statement of additional information (the
"SAI") of the Funds. You should consider the investment risks discussed in SAI
of the Funds which are important to your investment choice.
Principal Risk Funds Subject to Risk
Interest Rate Risk Both Funds
The net asset value of the Funds may change as
interest rates fluctuate. When interest rates increase,
the net asset value could decline. When interest rates
decline, the net asset value could increase. When
interest rates change, intermediate term bonds generally
have less market fluctuation than long-term bonds.
Credit Risk Both Funds
Credit risk is the ability of municipal issuers
to meet their payment obligations.
Hawaii Securities Both Funds
The Funds primarily invest in obligations of issuers
located in Hawaii. The marketability and market value of
these obligations may be affected by certain changes in
Hawaiian constitutional provisions, legislative measures,
executive orders, administrative regulations and voter
initiatives.
All Hawaiian governmental activities are the
responsibility of the state. This concentration adds to the
state's high level of debt. However, the State General Fund
has operated within planned deficits or with ending fund
balances since December 1962.
Concentration Risk Both Funds
The Funds are subject to the additional risk that they
concentrate their investments in instruments issued by or on
behalf of the State of Hawaii. Due to the level of investment
in municipal obligations issued by the State of Hawaii and its
political subdivisions, the performance of the Funds will be
closely tied to the economic and political conditions in the
State of Hawaii. Therefore, an investment in the Funds may
be riskier than an investment in other types of municipal bond
funds.
Non-Diversified, Open End Management Investment Both Funds
Company
The Funds are non-diversified and their assets may be
invested in fewer issuers than a diversified fund. If the value
of portfolio securities changes, the Funds' net asset value may
increase or decrease more rapidly than diversified funds.
Tax Laws Both Funds
The Kentucky Supreme Court has held that state tax
laws cannot discriminate against other states' municipal
securities, and the U.S. Supreme Court has granted a petition
to review that decision. If the U.S. Supreme Court affirms the
Kentucky court's holding, such a decision could adversely
affect state tax exemptions for municipal bond interest and the
market for single-state municipal bond funds, such as the
Funds.
INFORMATION ABOUT THE REORGANIZATION
Significant features of the Reorganization are summarized below. This
summary is qualified in its entirety by reference to the Plan of Reorganization
which is attached as Appendix A.
Directors' Considerations
At a meeting held on June 12, 2007, the Directors approved the Plan of
Reorganization. The Board of Directors is proposing the Reorganization
primarily to create a larger, more efficient Fund. The Directors considered
that the Funds have identical investment objectives, similar strategies and the
same portfolio manager. The Directors also considered potential effects of the
Reorganization on expense ratios over time. The total operating expenses of the
Municipal Fund Investor Class are expected to be lower than the current
operating expenses of the Intermediate Fund, and the recent and long-term past
performance of the Municipal Fund Investor Class has historically been higher
than the Intermediate Fund. It is expected that the larger combined fund may
realize economies of scale that may, in the long run, result in lower expense
ratios. Therefore, given the strong performance of the Municipal Fund
Investor Class, and the compatibility between the investment objectives and
principal strategies of both Funds, the Board of Directors determined that the
Reorganization would enable the shareholders of the Intermediate Fund to
continue their individual investment programs without substantial disruption. In
addition, the shareholders of the Intermediate Fund will have the same
shareholder rights since both Funds are series of the Company and are governed
by the same Articles of Incorporation and Bylaws. The Board of Directors
considered various factors in reviewing the proposed Reorganization. Such
factors include, but are not limited to the following:
* improved operating efficiencies of the Funds after the Reorganization due
to the combination of similar Funds;
* the Intermediate Fund asset base is very small and it is likely that its
assets will not increase significant to make the Fund economically viable;
* the recent and long-term past investment performance of the Municipal Fund
Investor Class has historically been stronger than that of the
Intermediate Fund;
* Lee Financial had discontinued the voluntary waiver of a portion of its
management fee and the Intermediate Fund had commenced paying the
Distributor and Shareholder Servicing Agent fees for distribution,
marketing and shareholder servicing related activities, causing the
operating expenses of the Intermediate Fund to increase;
* the total operating expenses of the Municipal Fund Investor Class after
the reorganization are expected to be lower than the current total
operating expenses of the Intermediate Fund;
* the expected realization of economies of scale in the long run that should
over time reduce the operating expense ratios for the combined Fund as a
result of Lee Financial managing one fund instead of two funds with the
same investment objective and similar investment strategies;
* the investment objectives of the Intermediate Fund and Municipal Fund are
identical;
* similarities between the investment policies and strategies of the
Intermediate Fund and those of the Municipal Fund;
* the Funds share the same portfolio manager;
* the expectation of no reduction of the services provided to the
Intermediate Fund shareholders after the Reorganization;
* neither the Intermediate Fund nor the Municipal Fund will bear any direct
fees or expenses in connection with the Reorganization;
* the Reorganization is to be structured as a tax-free transaction;
* the proposed Reorganization is in the best interests of both Funds and
their shareholders and will not dilute the interests of either Fund's
shareholders; and
* the Intermediate Fund shareholders will have the opportunity to vote on
the Reorganization.
In addition, the Directors considered the capital loss tax carryforwards
of the Intermediate Fund, which were approximately $2,052 as of the end of the
Fund's last tax year ended September 30, 2006. The Directors were informed that
while those capital loss tax carryforwards will be transferred to the Municipal
Fund in the Reorganization, most of the carryforwards will not be usable, due to
annual limitations resulting from the Reorganization. Therefore, one
consequence of the Reorganization will be to increase the likelihood that
shareholders of the Intermediate Fund who become shareholders of the Municipal
Fund will receive capital gains distributions after the Reorganization that are
taxable to them. The Directors considered the loss of the potential benefits of
the capital loss tax carryforwards to the Intermediate Fund and its shareholders
in light of a number of factors including: (i) the potential benefits of the
Reorganization; and (ii) the possibility that, in light of the Intermediate
Fund's declining asset base, the potential benefits of a substantial portion of
that fund's capital loss carryforwards would remain unused by the time they
expired in 2010 and 2013.
Based on their evaluation of the relevant information presented to them,
and in light of their fiduciary duties under federal and state law, the
Company's Directors, including all of the Directors who are not interested
persons as defined in the 1940 Act, unanimously determined that the proposed
Reorganization will not result in the recognition of any gain or loss for
federal income tax purposes by the Intermediate Fund, the Municipal Fund or
their respective shareholders.
The Directors unanimously recommend that shareholders of the Intermediate
Fund vote FOR approval of the Plan of Reorganization.
The Plan of Reorganization
The terms and conditions of the Reorganization are set forth in the Plan
of Reorganization. Significant provisions of the Plan of Reorganization are
summarized below; however, this summary is qualified in its entirety by
reference to the Plan of Reorganization, a copy of which is attached as
Appendix A to this Proxy/ Prospectus.
Description of the Plan of Reorganization.
The Plan of Reorganization provides that prior to the time the
Reorganization becomes effective (the "Effective Time"), the Company will
execute and file with the Maryland State Department of Assessments and Taxation
Articles of Amendment to the Company's Charter (the form of which is
attached hereto as part of Appendix A). The Charter Amendment is described
above under "Proposal 1: Approval of the Charter Amendment."
At the Effective Time, all of the assets and liabilities of the
Intermediate Fund will be transferred to the Municipal Fund, such that at and
after the Effective Time, the assets and liabilities of the Intermediate Fund
will become the assets and liabilities of the Municipal Fund. In exchange for
the transfer of assets and liabilities, the Municipal Fund will issue to the
Intermediate Fund Investor Class shares of the Municipal Fund having an
aggregate net asset value equal to the aggregate net asset value of the
Intermediate Fund shares that are outstanding immediately prior to the Effective
Time. The Company will then distribute the Municipal Fund shares to
shareholders of the Intermediate Fund (in redemption of their Intermediate Fund
shares) in proportion to the value of their shares held in the Intermediate
Fund. The effect of these transactions is that Intermediate Fund shareholders,
immediately after completion of the Reorganization, will hold Investor Class
shares of the Municipal Fund equal in value to the Intermediate Fund shares held
immediately before the Reorganization. At and after the Effective Time, all
debts, liabilities and obligations of the Intermediate Fund will attach to the
Intermediate Fund and may thereafter be enforced against the Municipal Fund to
the same extent as if they had been incurred by it.
The Plan of Reorganization provides that the Board of Directors of the
Company will declare a dividend or dividends with respect to the Intermediate
Fund prior to the Effective Time. This dividend, together with all previous
dividends, will have the effect of distributing to the shareholders of the
Intermediate Fund all undistributed ordinary income earned and net capital gains
recognized up to and including the Effective Time. The shareholders of the
Intermediate Fund will recognize ordinary income with respect to this
distribution.
The stock transfer books of the Company for the Intermediate Fund will be
permanently closed as of the close of business on the day immediately preceding
the Effective Time. Redemption requests received thereafter by the Company with
respect to the Intermediate Fund will be deemed to be redemption requests for
the Municipal Fund. If any Intermediate Fund shares held by an Intermediate
Fund shareholder are represented by a share certificate, the certificate must be
surrendered to the Company's transfer agent for cancellation before the
Municipal Fund Investor Class shares issued to the shareholder in the
Reorganization will be redeemed.
The Reorganization is subject to a number of conditions. These conditions
include:
(1) The approval of the Charter Amendment as described above under
Proposal 1 by the shareholders of the Municipal Fund and
Intermediate Fund;
(2) The approval of the Plan of Reorganization and the transactions
contemplated therein by the shareholders of the Intermediate Fund;
and
(3) The receipt of certain legal opinions described in the Plan of
Reorganization including legal opinions of Drinker Biddle & Reath
LLP that the Municipal Fund Investor Class shares issued to
shareholders of the Intermediate Fund in accordance with the terms
of the Plan of Reorganization will be validly issued, fully paid
and non-assessable and relating to tax matters as discussed below
under "Federal Income Tax Consequences."
The Company, by consent of its Board of Directors, may waive any condition
to the obligations of the Intermediate Fund or Municipal Fund under the Plan of
Reorganization if, in its judgment, the waiver will not have a material adverse
affect on the interests of the shareholders of the Intermediate Fund or the
Municipal Fund.
Under the plan of Reorganization, the Company will not bear any fees or
expenses in connection with the transactions contemplated by the reorganization.
All fees and expenses incurred in connection with the Reorganization will be
paid by Lee Financial.
Subject to the satisfaction of the conditions in the Plan of
Reorganization, the Effective Time will be as of the start of business on or
about November 19, 2007, or such other date as is scheduled by the
Company.
The Plan of Reorganization may be terminated and the Reorganization may be
abandoned at any time for any reason prior to the Effective Time by the vote of
a majority of the Board of Directors of the Company, including a majority of the
Directors who are not "interested persons" of the Company as defined in the 1940
Act. The Plan of Reorganization provides further that at any time prior to or
(to the fullest extent permitted by law) after approval of the Plan of
Reorganization by the shareholders of the Intermediate Fund, the Company may,
upon authorization by the Board of Directors of the Company, and with or without
the approval of the shareholders, amend any of the provisions of the Plan of
Reorganization.
Approval of the Reorganization requires the approval of the holders of a
majority (more than 50%) of all votes of the Intermediate Fund entitled to be
cast at the Special Meeting. See the section of this Proxy/Prospectus entitled
"Voting Information" for more information.
If the Reorganization is approved, Intermediate Fund shareholders who do
not wish to become shareholders of the Municipal Fund as part of the
Reorganization should redeem their shares prior to the consummation of the
Reorganization. If you redeem your shares, you will recognize a gain or loss
for federal income tax purposes, based on the difference between your tax
basis in the shares and the amount you receive for them.
Description of the Securities to be Issued
Shareholders of the Intermediate Fund as of the Effective Time of the
Reorganization will receive full and/or fractional Municipal Fund Investor Class
shares in accordance with the procedures provided for in the Plan of
Reorganization, as described above. The Municipal Fund Investor Class shares to
be issued in connection with each Reorganization will be fully paid and non-
assessable when issued, and will have no pre-emptive or conversion rights.
Federal Income Tax Consequences
The consummation of the transactions contemplated pursuant to the Plan of
Reorganization is intended to qualify for federal income tax purposes as a tax-
free reorganization under section 368(a) of the Code. As a condition to the
closing of the Reorganization, the Company will receive the opinion of
Drinker Biddle & Reath LLP, counsel to the Company, to the effect that on the
basis of the existing provisions of the Code, U.S. Treasury Department
regulations under the Code, current administrative rulings and pronouncements
and court decisions, and certain facts, qualifications, assumptions and
representations with respect to the Reorganization, for federal income tax
purposes:
(1) the acquisition of the assets of the Intermediate Fund by the
Municipal Fund in exchange for Municipal Fund Investor Class shares
and the assumption by the Municipal Fund of the liabilities of the
Intermediate Fund, followed by the distribution of those shares to
the Intermediate Fund shareholders will constitute a
"reorganization" within the meaning of section 368(a)(1)(C) or (D)
of the Code, and each such Fund will be "a party to the
reorganization" within the meaning of section 368(b) of the Code;
(2) the Intermediate Fund will recognize no gain or loss upon the
transfer of its assets and liabilities to the Municipal Fund;
(3) the Municipal Fund will recognize no gain or loss upon the receipt
of the assets of the Intermediate Fund in exchange for Municipal
Fund Investor Class shares and the assumption of the liabilities of
the Intermediate Fund;
(4) no shareholder of the Intermediate Fund will recognize gain or loss
upon the receipt of Municipal Fund Investor Class shares in
exchange for Intermediate Fund shares;
(5) each shareholder of the Intermediate Fund will obtain an aggregate
tax basis in the Municipal Fund Investor Class shares received in
the exchange equal to the shareholder's aggregate tax basis in the
Intermediate Fund shares exchanged;
(6) the tax basis of the assets of the Intermediate Fund in the hands
of the Municipal Fund will be the same as the tax basis of those
assets in the hands of the Intermediate Fund immediately before
the transfer;
(7) the holding period of Municipal Fund Investor Class shares received
by each shareholder of the Intermediate Fund will include the
holding period of the corresponding Intermediate Fund shares
exchanged by that shareholder, provided that at the time of the
exchange the Intermediate Fund shares were held by that shareholder
as capital assets; and
(8) the holding period of the Municipal Fund for the assets of the
Intermediate Fund transferred to it will include the period during
which those assets were held by the Intermediate Fund.
Shares held for the purpose of investment are generally considered to be
capital assets.
The Company has not sought, and will not seek, a tax ruling from the
Internal Revenue Service ("IRS") on the tax treatment of the Reorganization.
The opinion of counsel will not be binding on the IRS, nor will it preclude the
IRS (or a court) from adopting a contrary position.
Immediately before the Reorganization, the Intermediate Fund will pay a
dividend or dividends that, together with all previous dividends, will have the
effect of distributing to its shareholders all of the Intermediate Fund's
remaining undistributed investment company taxable income and net capital gain,
if any, recognized in taxable years ending on or before the day of the
Reorganization, including the short taxable year that will end on the day of the
Reorganization. Any such dividends will generally be included in the taxable
income of the Intermediate Fund's shareholders (other than shareholders that are
tax-exempt entities).
As a result of the Reorganization, the Municipal Fund will succeed to the
tax attributes of the Intermediate Fund, except that the amount of capital loss
carryforwards of the Intermediate Fund that the Municipal Fund may use to offset
capital gains recognized after the Reorganization will be subject to an annual
limitation under sections 382 and 383 of the Code. In general, the limitation
for each taxable year will equal the sum of (1) the product of the net asset
value of the Intermediate Fund as of the Effective Time of the Reorganization
multiplied by that month's "long-term tax-exempt rate" (which is a market-
based rate published by the IRS each month, which is designed to approximate the
average yield on tax-exempt bonds) plus (2) the amount of any unrealized built-
in gains of the Intermediate Fund as of the Effective Time of the Reorganization
that the Municipal Fund recognizes within the first five taxable years ending
after the Effective Time of the Reorganization (as long as the amount of
unrealized built-in gains is greater than the lesser of (i) 15% of the net asset
value of the Intermediate Fund or (ii) $10,000,000 as of the Effective Time).
(The annual limitation will be proportionately reduced for the portion of the
Municipal Fund's current taxable year after the Effective Time of the
Reorganization and for any subsequent short taxable year.) The effect of the
annual limitation resulting from the Reorganization will be to preclude the use
of a significant portion of the Intermediate Fund's capital loss
carryforwards altogether because the carryforwards in excess of the annual
limitation will expire unused in 2009 and 2012.
Shareholders should consult their own tax advisers concerning the potential tax
consequences of the Reorganization to them, including foreign,
state and local tax consequences.
Capitalization
The following tables show the capitalization of the Intermediate Fund and
the Municipal Fund Investor Class as of July 31, 2007, and the capitalization of
the Municipal Fund Investor Class on a pro-forma basis as of that date after
giving effect to the Reorganization. The following are examples of the number
of shares of the Municipal Fund Investor Class that would be exchanged for the
shares of the Intermediate Fund if the Reorganization shown had been consummated
on July 31, 2007 and do not reflect the number of such shares or the value of
such shares that would actually be received if the Reorganization depicted
occurs. Amounts in the tables are in thousands, except for net asset value per
share.
Intermediate Fund and Municipal Fund*
Intermediate Combined Fund
Fund Municipal Fund* Pro Forma
Net Assets: $ 8,719,351 $ 150,002,541 $ 158,721,892
Net Asset Value
Per Share: $5.12 $10.88 $10.88
Shares
Outstanding: 1,702,998 13,786,998
* The Municipal Fund will be the accounting survivor for financial statement
purposes.
COMPARISON OF INTERMEDIATE AND MUNICIPAL FUNDS
Investment Objectives and Principal Investment Strategies
This section briefly compares and contrasts the investment objectives and
principal investment strategies of the Intermediate Fund with those of the
Municipal Fund. More complete information may be found in the prospectus for
the Intermediate Fund and the Municipal Fund which accompanies this
Proxy/Prospectus.
Investment Objective: Both Funds have the same investment objective: To
provide a high level of current income exempt from federal and Hawaii state
income taxes, consistent with preservation of capital and prudent investment
management. This investment objective cannot be changed without shareholder
approval.
Principal Investment Strategies: 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 bond counsel to the issuer. Each Fund will invest, under normal
circumstances, at least 80% of its net assets in these municipal securities.
The investment strategy of the Intermediate Fund and the Municipal Fund
differs in the average maturity range of the obligations in which each Fund
invests: the Municipal Fund will attempt to achieve its objective by investing
primarily in municipal bonds with maturities of up to 40 years and the Fund has
an average expected maturity of 10-25 years. The Intermediate Fund will attempt
to achieve its objective by investing primarily in municipal bonds with a dollar
weighted average portfolio maturity of 3-10 years.
Each Fund pursues these investment strategies as follows:
* Credit Quality
At least 90% of each Fund's assets will be invested in municipal
securities within the four highest credit quality ratings assigned by Standard &
Poor's Ratings Services (AAA, AA, A, BBB) or Moody's Investors Service (Aaa, Aa,
A, Baa), or in unrated municipal securities judged by the investment manager
to be of comparable quality.
* Concentration
More than 25% of each Fund's assets may be invested in a particular
segment of the municipal bond market. Developments affecting a particular
segment could have a significant effect on Fund performance.
* Risk Management
Each Fund will consist of different types of municipal issuers in order to
reduce the impact of any loss on a particular security.
* Downgrade Policy
Downgraded bonds will be subject to review. Based upon the review, a Fund
will elect to hold or sell the downgraded bond.
Other Investment Practices and Investment Securities of the Intermediate
Fund and the Municipal Fund. Each Fund may also:
* Hedge its portfolio partially or fully against market value changes by
buying or selling 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.
* Engage in "when-issued" or "delayed delivery" transactions. Yields
generally available on municipal securities when delivery occurs may be higher
or lower than yields on securities obtained in the transactions.
* Enter into reverse repurchase agreements, under which a Fund sells
securities and agrees to repurchase them at an agreed upon time and at an agreed
upon price. These transactions are treated as a borrowing by the Fund.
* Purchase bonds whose interest is treated as an item of tax preference
for purposes of determining federal alternative minimum tax liability.
During periods of adverse market conditions each Fund may not achieve its
investment objective. For temporary defensive purposes, including when Hawaiian
tax-exempt securities are unavailable, each Fund may invest in money market
instruments. The interest on these instruments may be subject to federal or
state income taxes.
Each of the Intermediate Fund and Municipal Fund may also buy other types
of securities or employ other portfolio management techniques. Both of the
Funds may engage in the same investment practices to the extent consistent with
their respective principal investment strategies. Please refer to the
Statement of Additional Information for the Funds, which is on file with the SEC
and is available without charge by calling the Company at (808)-988-8088
(collect) or (800)-354-9654, inter-island, on the Company's web-site at
www.leehawaii.com or by writing to the Company, 2756 Woodlawn Drive, #6-
201, Honolulu, Hawaii 96822-1856 for more information on the Funds' investment
techniques.
Fundamental Investment Restrictions. Both the Intermediate Fund and
Municipal Fund have adopted identical fundamental investment restrictions.
These fundamental restrictions cannot be changed with respect to a Fund without
the consent of the holders of a majority of that Fund's outstanding shares.
The term "majority of the outstanding shares" means the vote of (i) 67% or more
of a Fund's shares present at a meeting, if more than 50% of the outstanding
shares of a Fund are present or represented by proxy, or (ii) more than 50% of a
Fund's outstanding shares, whichever is less.
Performance. The average annual total returns for the periods ended March
31, 2007 for Investor Class shares of the Intermediate Fund and the Municipal
Fund were as follows:
One Year Five Year Ten Years
Intermediate Fund 3.41% 3.17% 3.74%
Municipal Fund 4.33% 4.62% 4.67%
Investment Adviser and Advisory Fee Information
The Funds are managed on a day-to-day basis by Lee Financial. As of June
30, 2007, Lee Financial had assets under management of approximately $380
million. As described in the Funds' prospectus, both Funds are contractually
obligated to pay Lee Financial 0.50% of its average daily net assets. Lee
Financial also serves as the Company's Administrator, for which it receives a
fee calculated at an annual rate of up to .05% of each Fund's average daily net
assets.
Other Service Providers
The Intermediate Fund and Municipal Fund have the same service providers.
The names of these service providers are set forth below:
Distributor Lee Financial Securities, Inc.
Administrator Lee Financial Group Inc.
Transfer Agent and Lee Financial Recordkeeping, Inc.
Dividend Disbursing Agent
Custodian Union Bank of California, N.A.
Accounting Services Agent Ultimus Fund Solutions, LLC
Independent Registered Public Tait Weller & Baker LLP
Accounting Firm
Dividends and Other Distributions
Dividends from investment company income, if any, are declared and paid
monthly and distributions from net capital gains, if any, are generally declared
and paid annually by each Fund.
ADDITIONAL INFORMATION ABOUT THE INTERMEDIATE FUND
AND MUNICIPAL FUND
Financial Highlights
The tables that follow present performance information about the Investor
Class shares of the Funds. This information is intended to help you understand
each Fund's financial performance for the past five years. The total returns in
the table represent the rate that you would have earned (or lost) on an
investment in a Fund, assuming you reinvested all of your dividends and
distributions. The financial highlights for the fiscal years ended September
30, 2006, 2005, 2004, 2003 and 2002 have been audited by Tait, Weller & Baker
LLP, Independent Registered Public Accounting Firm, whose report, along with
each Fund's financial statements, appears in the annual report that accompanies
our SAI. The financial highlights for the six month period ended March 31, 2007
are unaudited. You can obtain the Funds' annual report, which contains more
performance information, at no charge by calling 1 (808) 988-8088 (collect) or
(800) 354-9654 inter-island, by visiting the Company's website at
www.leehawaii.com or by writing to the Company at the address listed on this
Proxy/Prospectus.
Selected data for a share outstanding throughout each period
HAWAII MUNICIPAL FUND
For The Six
Months Ended Years Ended September 30,
March 31, 2007 2006 2005 2004 2003 2002(b)
(Unaudited)
Net asset value
Beginning of period $11.04 $11.10 $11.21 $11.22 $11.25 $10.89
Income from investment operations
Net investment income .20 .40 .41 .47 .47 .48
Net gain (loss) on securities
(both realized and unrealized) (.04) (.02) (.09) - (.03) .36
Total from investment operations .16 .38 .32 .47 .44 .84
Less distributions
Dividends from net investment income (.20) (.40) (.41) (.47) (.47) (.48)
Distributions from capital gains -** (.04) (.02) (.01) -** -
Total distributions (.20) (.44) (.43) (.48) (.47) (.48)
End of period $11.00 $11.04 $11.10 $11.21 $11.22 $11.25
Total return 1.43% 3.52% 2.84% 4.03% 3.98% 7.98%
Ratios/Supplemental Data
Net assets,
end of period (in 000's)$150,352 $151,582 $150,505 $142,680 $141,838 $134,980
Ratio of expenses to
average net assets (a) 1.03%* 1.04% .98% 1.00% 1.01% 1.02%
Ratio of net investment income to
average net assets 3.31%* 3.64% 3.55% 3.98% 4.22% 4.42%
Portfolio turnover 7.21% 22.17% 26.82% 10.53% 16.40% 13.06%
* Annualized
** Less than $.01 per share
(a) Ratios of expenses to average net assets after the reduction of custodian
fees and other expenses under a custodian arrangement for the Investor Class
were .93%, .90%, .94%, .98%, .99%, and .96% for the six months ended March 31,
2007 and for the years ended September 30, 2006, 2005, 2004, 2003, and 2002,
respectively.
(b) As required, effective October 1, 2001, the Fund has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment Companies and
began amortizing market discount on debt securities. Had the Fund not
amortized market discount as an adjustment to interest income, the net
investment income to average net assets would have been 4.38%.
Selected data for a share outstanding throughout each period
HAWAII INTERMEDIATE FUND
For The Six
Months Ended Years Ended September 30,
March 31, 2007 2006 2005 2004 2003 2002
(Unaudited)
Net asset value
Beginning of period $5.15 $5.18 $5.22 $5.26 $5.27 $5.17
Income from investment operations
Net investment income .07 .16 .15 .15 .15 .16
Net gain (loss) on securities
(both realized and unrealized) (.01) (.03) (.04) (.04) (.01) .10
Total from investment operations .06 .13 .11 .11 .14 .26
Less distributions
Dividends from net investment income (.07) (.16) (.15) (.15) (.15) (.16)
Total distributions (.07) (.16) (.15) (.15) (.15) (.16)
End of period $5.14 $5.15 $5.18 $5.22 $5.26 $5.27
Total return 1.09% 2.49% 2.15% 2.21% 2.72% 5.26%
Ratios/Supplemental Data
Net assets, end of period (in 000's)$9,180 $9,030 $10,154 $8,973 $7,647 $6,345
Ratio of expenses to average net assets
Before expense reimbursements 1.20%* .86% .83% .82% .96% .84%
After expense reimbursements 1.20*(a).76%(a).73%(a).72%(a).73%(a).74%(a)
Ratio of net investment income to average net assets
Before expense reimbursements 2.24%* 2.81% 2.74% 2.84% 2.61% 3.15%
After expense reimbursements 2.24%* 2.91% 2.90% 2.94% 2.86% 3.15%
Portfolio turnover 4.29% 1.13% 15.72% 13.96% 20.02% 18.29%
* Annualized
(a) Ratios of expenses to average net assets after the reduction of custodian
fees and other expenses under a custodian arrangement were .88%, .63%, .68%,
..70%, .71%, and .69%, for the six months ended March 31, 2007 and for the years
ended September 30, 2006, 2005, 2004, 2003, and 2002, respectively.
Materials Incorporated By Reference
Information about the Funds is included in the prospectus (as
supplemented) dated February 1, 2007, a copy of which accompanies this
Proxy/Prospectus and is incorporated herein by reference.
INFORMATION APPLICABLE TO PROPOSALS 1 & 2
VOTING INFORMATION
General Information
The Directors are furnishing this Proxy/Prospectus in connection with the
solicitation of proxies for the Special Meeting. It is expected that the
solicitation of proxies will be primarily by mail. Officers and service
contractors of the Company may also solicit proxies by telephone or otherwise.
Shareholders may vote by mail, by marking, signing, dating and returning the
enclosed proxy card in the enclosed postage-paid envelope. Any shareholder
giving a proxy may revoke it at any time before it is exercised by submitting to
the Company a written notice of revocation or a subsequently executed proxy or
by attending the Special Meeting and voting in person.
Only shareholders of record at the close of business on September 7, 2007
will be entitled to vote at the Special Meeting. As of that date, the
Intermediate Fund had ______________ shares of common stock issued and
outstanding and the Municipal Fund had ______________ shares of common stock
issued and outstanding. Each whole share held entitles the shareholder
to one vote and each fractional share is entitled to a proportionate fractional
vote.
If an accompanying proxy is signed and returned in time for the Special
Meeting, the shares covered thereby will be voted in accordance with the proxy
on all matters that may properly come before the Special Meeting. If a proxy is
signed and returned but does not give voting direction, it will be voted for the
approval of the proposals described in this Proxy/Prospectus.
Shareholder and Board Approvals
The Charter Amendment is being submitted for approval by the Company's
shareholders at the Special Meeting pursuant to the Company's Articles of
Incorporation and By-Laws, and was unanimously approved by the Directors at a
meeting held on July 25, 2007. A majority of the outstanding shares of the
Intermediate Fund and Municipal Fund entitled to vote constitutes a quorum at
the Special Meeting. Approval of the Charter Amendment requires the approval of
a majority (more than 50%) of the shares, in the aggregate, of the Intermediate
Fund and Municipal Fund entitled to cast votes at the Special Meeting in person
or by proxy. Completion of the Reorganization is contingent upon approval of
the Charter Amendment.
The Plan of Reorganization is being submitted for approval by the
Intermediate Fund's shareholders at the Special Meeting pursuant to the
Company's Articles of Incorporation and By-Laws, and was unanimously approved by
the Directors at a meeting held on June 12, 2007. A majority of the outstanding
shares of the Intermediate Fund entitled to vote constitutes a quorum at the
Special Meeting. Approval of the Reorganization requires the approval of a
majority (more than 50%) of the shares of the Intermediate Fund entitled to cast
votes at the Special Meeting in person or by proxy. A vote for the Plan of
Reorganization includes a vote for the Reorganization; conversely, a vote
against the Plan of Reorganization is a vote against the Reorganization. If
shareholders of the Intermediate Fund do not approve the Plan of Reorganization,
the Company will not effect the Reorganization and the Board of Directors will
consider possible alternatives, including the liquidation of the Intermediate
Fund.
Quorum and Adjournment
In the event that at the time any session of the Special Meeting is called
to order a quorum with respect to any proposal is not present in person or by
proxy, the persons named as proxies may vote those proxies which have been
received to adjourn the Special Meeting to a later date. In the event that a
quorum is present but sufficient votes in favor of a proposal have not been
received, the persons named as proxies may propose one or more adjournments of
the Special Meeting to permit further solicitation of proxies with respect to
such proposal. Any such adjournment will require the affirmative vote of a
majority of the shares entitled to vote on the proposal present in person or by
proxy and voting at the session of the Special Meeting to be adjourned. The
persons named as proxies will vote those proxies which they are entitled to vote
in favor of any such proposal in favor of such an adjournment, and will vote
those proxies required to be voted against any such proposal against any such
adjournment. Subject to the foregoing, the Special Meeting may be adjourned and
readjourned without further notice to shareholders.
A quorum is constituted with respect to a proposal by the presence in
person or by proxy of the holders of a majority of the outstanding shares
entitled to vote on such proposal at the Special Meeting. For purposes of
determining the presence of a quorum for transacting business at the Special
Meeting, abstentions and broker "non-votes" (that is, proxies from brokers or
nominees indicating that such persons have not received instructions from the
beneficial owners or other persons entitled to vote shares on a particular
matter with respect to which the brokers or nominees do not have discretionary
power) will be treated as shares that are present at the Special Meeting, but
which have not been voted. Abstentions and broker "non-votes" will have
the effect of a "no" vote for purposes of obtaining the requisite approvals of
the Charter Amendment and the Reorganization.
Principal Shareholders
As of September 7, 2007, the officers and Directors of the Company as a
group owned or controlled less than 1% of the outstanding shares of each the
Intermediate Fund and Municipal Fund. To the Company's knowledge, as of
September 7, 2007, the following shareholders of record owned 5% or more of the
outstanding Investor Class shares of the Funds:
Fund Name and Amount of Percentage of
Name Address Shares Owned Fund Owned
The percentage of the Municipal Fund that would be owned by the above
named shareholders upon consummation of the Reorganization is expected to
decline. For purposes of the 1940 Act, any person who owns directly or through
one or more controlled companies more than 25% of the voting securities of a
company is presumed to "control" such company. Accordingly, to the extent that
a shareholder identified in the foregoing table is identified as the beneficial
holder of more than 25% of a class, or is identified as the holder of record of
more than 25% of a class and has voting and/or investment power, it may be
presumed to control such class.
OTHER INFORMATION
Shareholder Proposals
As a general matter, the Company does not hold annual meetings of
shareholders unless otherwise required by the 1940 Act. By observing this
policy, the Company seeks to avoid the expenses customarily incurred in the
preparation of proxy material and the holding of shareholder meetings. The next
meeting of the shareholders of the Company will be held at such time as the
Board of Directors may determine or at such time as may be legally required.
Shareholders wishing to submit proposals for inclusion in a proxy statement for
a subsequent shareholder's meeting should send their written proposals to the
Company at its address stated on the first page of this Proxy/Prospectus.
Timely submission of a proposal does not necessarily mean that such proposal
will be included.
Other Business
The Company and Lee Financial know of no business to be presented to the
Special Meeting other than the matters set forth in this Proxy/Prospectus. If
any other matter properly came before the Special Meeting, and on all matters
incidental to the conduct of the Special Meeting, the persons named as proxies
intend to vote the proxies in accordance with their best judgment.
Available Information
The Company is subject to the information requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith, files reports
and other information with the SEC. Reports, proxy statements, registration
statements and other information filed by the Company may be inspected without
charge and copied at the public reference facilities maintained by the SEC at
100 F Street, NE, Washington, DC 20549, and at certain of the following regional
offices of the SEC listed below: New York Regional Office, 3 World Financial
Center, Suite 400, New York, New York 10281-1022; Boston Regional Office, 33
Arch Street, 23rd Floor, Boston, Massachusetts 02110-1424; Philadelphia Regional
Office, The Mellon Independence Center, 701 Market Street, Philadelphia,
Pennsylvania 19106-1532; Miami Regional Office, 801 Brickell Avenue, Suite 1800,
Miami, Florida 33131; Atlanta Regional Office, 3475 Lenox Road, N.E., Suite
1000, Atlanta, Georgia 30326-1232; Chicago Regional Office, 175 West Jackson
Boulevard, Suite 900, Chicago, Illinois 60604; Denver Regional Office, 1801
California Street, Suite 1500, Denver, Colorado 80202-2656; Fort Worth Regional
Office, Burnett Plaza, Suite 1900, 801 Cherry Street, Unit 18, Fort Worth, Texas
76102; Salt Lake Regional Office, 15 W. South Temple Street, Suite 1800, Salt
Lake City, Utah 84101; Los Angeles Regional Office, 5670 Wilshire Boulevard,
11th Floor, Los Angeles, California 90036-3648; and San Francisco Regional
Office, 44 Montgomery Street, Suite 2600, San Francisco, California 94104.
Copies of such materials may also be obtained from the Public Reference
Branch, Office of Consumer Affairs and Information Services, Securities and
Exchange Commission, Washington, DC 20549 at prescribed rates. Information
included in the Proxy/Prospectus concerning the Company was provided by the
Company.
Financial Statements
The audited financial statements and related reports audited by Tait,
Weller & Baker LLP independent registered public accounting firm, are contained
in the 2006 Annual Report of the Funds and are incorporated by reference into
the Statement of Additional Information relating to this Proxy/Prospectus. The
financial statements in each Fund's Annual Report have been incorporated by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Company in writing at the
address, or by phone at the phone number, on the cover page of this
Proxy/Prospectus.
* * *
Shareholders who do not expect to be present at the Special Meeting are
requested to mark, sign and date the enclosed proxy and return it in the
enclosed envelope. No postage is required if mailed in the United States.
The Company will furnish, without charge, copies of its 2006 Annual Report
and March 31, 2007 Semi-Annual Report to any shareholder upon request by writing
the Company at First Pacific Mutual Fund, Inc., 2756 Woodlawn Drive, #6-201,
Honolulu, Hawaii 96822-1856; by telephone at (808) 988-8088 (collect) or (800)
354-9654 (toll-free inter-island); or on the Company's website at
www.leehawaii.com.
APPENDIX A
PLAN OF REORGANIZATION
This PLAN OF REORGANIZATION (the "Plan") is dated the 12th day of June
2007, and has been adopted by the Board of Directors of First Pacific Mutual
Fund, Inc. (the "Company"), a Maryland corporation, to provide for the
reorganization of its Hawaii Intermediate Fund - Investor Class (the "Transferor
Fund") into its Hawaii Municipal Fund (the "Surviving Fund"). The Transferor
Fund and the Surviving Fund (each a "Fund" and together, the "Funds") are each
separate investment portfolios of the Company.
A. Background
The Company is an open-end management investment company registered with
the Securities and Exchange Commission (the "SEC") under the Investment Company
Act of 1940 (the "1940 Act"). The Board of Directors of the Company has
determined that it is in the best interests of the Transferor Fund and its
respective shareholders to be reorganized through the transfer of all of its
assets and liabilities to the Surviving Fund upon the terms set forth in this
Plan (the "Reorganization").
This Plan is intended to be and is adopted as a plan of reorganization and
liquidation within the meaning of Section 368(a) of the United States Internal
Revenue Code of 1986, as amended (the "Code"), and any successor provision.
B. The Reorganization
1. Prior to the Effective Time of the Reorganization (as defined below
in Section 5 of this Article B), the Company will execute and file Articles of
Amendment to the Company's Charter with the Maryland State Department of
Assessments and Taxation in substantially the form attached hereto as Annex I,
which Articles of Amendment will, among other things, permit the Board of
Directors of the Company to redeem Investor Class shares of the Transferor Fund
for the purpose of effecting the Reorganization.
2. At the Effective Time of the Reorganization (as defined below in
Section 5 of this Article B), substantially all property of every description,
and substantially all interests, rights, privileges and powers of the Transferor
Fund, subject to substantially all liabilities of the Transferor Fund, whether
accrued, absolute, contingent or otherwise (such assets subject to such
liabilities are herein referred to as the "Assets") will be transferred and
conveyed by the Transferor Fund to the Surviving Fund and will be assumed by the
Surviving Fund, such that at and after the Effective Time of the Reorganization
the Assets of the Transferor Fund will become and be the Assets of the Surviving
Fund. In exchange for the transfer of the Assets of the Transferor Fund, the
Surviving Fund will contemporaneously issue to the Transferor Fund full and
fractional Investor Class shares of the Surviving Fund, and the Transferor Fund
will distribute such Investor Class shares of the Surviving Fund to the
shareholders of the Transferor Fund in proportion to their respective interests
in the Transferor Fund at the Effective Time of the Reorganization, and the
outstanding shares of the Transferor Fund will be redeemed by the Company. The
number of Investor Class shares of the Surviving Fund so issued will have an
aggregate net asset value equal to the value of the Assets of the Transferor
Fund. The net asset value of the Transferor Fund and of the Surviving Fund
shall be determined as of 4:00 p.m., Eastern time, on the business day preceding
the Effective Time of the Reorganization, or at such other time as may be
determined by the Board of Directors or an authorized officer of the
Company. The net asset value of the Transferor Fund and Surviving Fund shall be
computed in the manner set forth in the Funds' then current prospectus under the
Securities Act of 1933, as amended. At and after the Effective Time of the
Reorganization, all debts, liabilities, obligations and duties of the Transferor
Fund will attach to the Surviving Fund as aforesaid and may thenceforth be
enforced against the Surviving Fund to the same extent as if the same had been
incurred by it.
3. Prior to the Effective Time of the Reorganization, the Transferor
Fund shall have declared a dividend or dividends, with a record date and ex-
dividend date prior to the Effective Time of the Reorganization, which, together
with all previous dividends, shall have the effect of distributing to its
shareholders all of its net investment income, if any, for the taxable periods
or years ended on or before September 30, 2006 and for the period from said date
to and including the Effective Time of the Reorganization (computed without
regard to any deduction for dividends paid) and all of its net capital gain, if
any, realized in taxable years or periods ended on or before September 30, 2006
and in the period from said date to and including the Effective Time of the
Reorganization.
4. At the Effective Time of the Reorganization, the Company will
liquidate the Transferor Fund by making a liquidating distribution to the
Transferor Fund shareholders of Investor Class shares of the Surviving Fund,
such that the shares so distributed will have an aggregate net asset value equal
to the aggregate net asset value of the shares of the Transferor Fund held by
such shareholder immediately prior to the Effective Time of the Reorganization.
In addition, each shareholder of the Transferor Fund will have the right to
receive any unpaid dividends or other distributions that were declared before
the Effective Time of the Reorganization with respect to the shares of the
Transferor Fund held by the shareholder immediately prior to the Effective Time
of the Reorganization.
5. The stock transfer books of the Company with respect to the
Transferor Fund will be permanently closed as of the close of business on the
day immediately preceding the Effective Time of the Reorganization. Redemption
requests received thereafter by the Company with respect to the Transferor Fund
will be deemed to be redemption requests for Investor Class shares of the
Surviving Fund issued in the Reorganization. If any shares of the Transferor
Fund are represented by a share certificate, the certificate must be surrendered
to the Company's transfer agent for cancellation before the Surviving Fund
shares issuable to the shareholder pursuant to this Plan will be redeemed.
6. The "Effective Time of the Reorganization" for purposes of this Plan
shall be the opening of business on November 19, 2007, or at such other time as
may be determined by the Board of Directors or an officer of the Company.
C. Actions by Shareholders of the Transferor Fund
Prior to the Effective Time of the Reorganization and as a condition
thereto, the Board of Directors of the Company will call, and the Company will
hold, a meeting of the shareholders of the Transferor Fund to consider and vote
upon:
1. Approval of the Charter Amendment that is the subject of the
Articles of Amendment described in Section 1 of Article B.
2. Approval of this Plan and the transactions contemplated hereby.
3. Such other matters as may be determined by the Board of Directors of
the Company.
D. Conditions to the Reorganization
Consummation of this Plan and the Effective Time of the Reorganization
will be subject to:
1. the approval of the matters referred to in Article C of this Plan by
the shareholders of the Transferor Fund in the manner required by law and
otherwise deemed necessary or advisable by the Board of Directors of the
Company; and
2. the following additional conditions:
a. The Company will have received an opinion of Drinker Biddle &
Reath LLP, based on reasonable representations and assumptions, to the effect
that:
(i) the Investor Class shares of the Surviving Fund to be
issued pursuant to this Plan will, when issued in accordance with the provisions
hereof, be validly issued, fully paid and non-assessable; and
(ii) for federal income tax purposes: (A) the acquisition of
the assets of the Transferor Fund by the Surviving Fund in return for Investor
Class shares of the Surviving Fund and the assumption by the Surviving Fund of
the liabilities of the Transferor Fund, followed by the distribution of those
shares to the Transferor Fund shareholders will constitute a "reorganization"
within the meaning of section 368(a)(1)(C) or (D) of the Code, and each such
Fund will be "a party to the reorganization" within the meaning of section
368(b) of the Code; (B) the Transferor Fund will recognize no gain or loss upon
the transfer of its assets and liabilities to the Surviving Fund; (C) the
Surviving Fund will recognize no gain or loss upon the receipt of the assets of
the Transferor Fund in exchange for Investor Class shares of the Surviving Fund
and the assumption of the liabilities of the Transferor Fund; (D) no shareholder
of the Transferor Fund will recognize gain or loss upon the receipt of Investor
Class shares of the Surviving Fund in exchange for Transferor Fund shares; (E)
each shareholder of the Transferor Fund will obtain an aggregate tax basis in
the Investor Class shares of the Surviving Fund received in the exchange equal
to the shareholder's aggregate tax basis in the Transferor Fund shares
exchanged; (F) the tax basis of the assets of the Transferor Fund in the hands
of the Surviving Fund will be the same as the tax basis of those assets in the
hands of the Transferor Fund immediately before the transfer; (G) the holding
period of Investor Class shares of the Surviving Fund received by each
shareholder of the Transferor Fund will include the holding period of the
corresponding Transferor Fund shares exchanged by that shareholder, provided
that at the time of the exchange the Transferor Fund shares were held by that
shareholder as capital assets; and (H) the holding period of the Surviving Fund
for the assets of the Transferor Fund transferred to it will include the period
during which those assets were held by the Transferor Fund.
b. All necessary approvals, registrations and exemptions required
under federal and state laws will have been obtained.
E. Miscellaneous
1. This Plan and the transactions contemplated hereby will be governed
and construed in accordance with the laws of the State of Maryland.
2. This Plan and the Reorganization contemplated hereby may be
abandoned at any time for any reason prior to the Effective Time of the
Reorganization upon the vote of a majority of the Board of Directors of the
Company.
3. At any time prior to or (to the fullest extent permitted by law)
after approval of this Plan by the shareholders of the Transferor Fund, the
Company may, upon authorization by the Board of Directors and with or without
the approval of shareholders of the Transferor Fund, amend any of the provisions
of this Plan.
4. The transaction expenses incurred in connection with the
Reorganization will be borne by Lee Financial Group Inc.
5. No Fund shall be liable for any claims against any other Fund. The
Company and Lee Financial Group Inc. specifically acknowledge and agree that any
liability of the Company under this Plan with respect to a particular Fund, or
in connection with the transactions contemplated herein with respect to a
particular Fund, shall be discharged only out of the assets of the particular
Fund and that no other portfolio of the Company shall be liable with respect
thereto.
6. The Company, by consent of its Board of Directors, or an officer
authorized by such Board of Directors, may waive any condition to the
obligations of the Transferor Fund or Surviving Fund hereunder if, in its or
such officer's judgment, such waiver will not have a material adverse effect on
the interests of the shareholders of the Transferor Fund or the Surviving Fund.
[Signatures Omitted]
PART B
FIRST PACIFIC MUTUAL FUND, INC.
HAWAII MUNICIPAL FUND - INVESTOR CLASS
______________________________________________________________________________
Statement of Additional Information
September 23, 2007
______________________________________________________________________________
Acquisition of all of the assets and liabilities of: By and in exchange for
shares of:
Hawaii Intermediate Fund - Investor Class Hawaii Municipal Fund -
Investor Class
(the "Intermediate Fund") (the "Municipal Fund")
(each, a series of First Pacific Municipal Fund, Inc. (the "Company"))
2756 Woodlawn Drive, #6-201
Honolulu, Hawaii 96822-1856
This Statement of Additional Information ("SAI"), which is not a
prospectus, supplements and should be read in conjunction with the Proxy
Statement/Prospectus dated September 23, 2007 (the "Proxy
Statement/Prospectus") relating specifically to the Special Meeting of
Shareholders of the Company which is scheduled to be held on November 8, 2007.
A copy of the Proxy Statement/Prospectus may be obtained upon request and
without charge by calling (808) 988-8088 (collect) or toll free (800) 354-9654
inter-island or visiting the Company's website at www.leehawaii.com. Unless
otherwise indicated, capitalized terms used herein and not otherwise defined
have the same meanings as are given to them in the Proxy Statement/Prospectus.
The Reorganization is expected to occur in accordance with the terms of
the Plan of Reorganization.
General Information:
This SAI and the Proxy Statement/Prospectus are related to a proposal to
approve a Plan of Reorganization dated June 12, 2007, and the transactions
contemplated thereby. The Plan of Reorganization contemplates the transfer of
all of the assets and liabilities of the Intermediate Fund to the Municipal Fund
in exchange for Investor Class shares of the Municipal Fund, and the
distribution of such shares to shareholders of the Intermediate Fund, such that
each holder of shares in the Intermediate Fund at the Effective Time of the
Reorganization will receive the same aggregate dollar value of full and
fractional Investor Class shares of the Municipal Fund.
Incorporation of Documents By Reference into the Statement of Additional
Information
This Statement of Additional Information incorporates by reference the following
documents:
(1) Statement of Additional Information of the Company dated February 1, 2007
(previously filed on EDGAR, Accession No. 0000837351-07-000004).
(2) The audited financial statements and related report of the independent
registered public accounting firm included in the Company's Annual Report
to Shareholders for the fiscal year ended September 30, 2006 (previously
filed on EDGAR, Accession No. 0000837351-067-000027). No other parts of
the Annual Report are incorporated herein by reference.
(3) The unaudited financial statements included in the Company's Semi-Annual
Report to Shareholders for the period ended March 31, 2007 (previously
filed on EDGAR, Accession No. 0000837351-07-000022). No other parts of
the Semi-Annual Report are incorporated herein by reference.
No pro forma information has been prepared for the reorganization of the
Intermediate Fund into the Municipal Fund Investor Class because as of June 30,
2007, the net asset value of the Intermediate Fund did not exceed 10% of the net
asset value of the Municipal Fund Investor Class and, therefore pro forma
financial information is not required.
FIRST PACIFIC MUTUAL FUND
FORM N-14
PART C: - OTHER INFORMATION
Item 15. 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.
Provisions for indemnification of the Company's investment manager are
contained in Section 10 of the Investment Management Agreement between the
Company and Lee Financial Group Inc.
Provisions for indemnification of the Company's distributor are contained
in Section 14 of the Distribution Agreement between the Company and Lee
Financial Securities, Inc.
Provisions for indemnification of the Company's transfer agent and
dividend disbursing agent are contained in Section 24 of the Transfer Agent and
Dividend Disbursing Agent Agreement between the Company and Lee Financial
Recordkeeping, Inc.
Item 16. EXHIBITS.
The following are the exhibits filed as a part of this registration
statement:
(1) Articles of Incorporation
(a) Articles of Incorporation filed with Post-Effective
Amendment #11 to Form N-1A registration.*
(b) Articles Supplementary to Articles of Incorporation
filed with Post-Effective Amendment #18 to Form N-1A
registration.*
(c) Articles of Amendment to Articles of Incorporation
filed with Post-Effective Amendment #18 to Form N-1A
registration.*
(d) Form of Articles of Amendment is filed herewith.
(2) By-Laws.
(a) Fund By-Laws filed with Post-Effective Amendment #11
to Form N-1A registration.*
(b) Amendment No. 1 to By-Laws is filed herewith.
(3) Voting Trust Agreement.
Not applicable.
(4) Plan of Reorganization dated June 12, 2007 is attached as Appendix A
of the Combined Proxy Statement/Prospectus
(5) Instruments Defining Rights of Security Holders.
Not applicable.
(6) Investment Management Contracts.
(a) Investment Management Contract filed with Post-Effective
Amendment #16 to Form N-1A registration.*
(b) Amendment to Investment Management Agreement dated July 24,
2001, filed with Post-Effective Amendment #17 to Form N-1A
registration.*
(c) Amendment to Investment Management Agreement dated
October 17, 2001 filed with Post-Effective Amendment
#17 to Form N-1A registration.*
(d) Amendment to Investment Management Agreement dated July 24,
2002 filed with Post-Effective Amendment #18 to Form N-1A
registration.*
(e) Amendment to Investment Management Agreement dated April 21,
2004 filed with Post-Effective Amendment #22 to Form N-1A
registration.*
(7) Underwriting Contracts.
(a) Distribution Contract filed with Post-Effective
Amendment #15 to Form N-1A registration.*
(b) Amendment to Distribution Contract dated July 24, 2001
filed with Post-Effective Amendment #17 to Form N-1A
registration.*
(c) Amendment to Distribution Contract dated July 24, 2002
filed with Post-Effective Amendment #18 to Form N-1A
registration.*
(8) Bonus or Profit Sharing Contracts.
Not applicable because there are no pension, bonus or other
agreements for the benefit of Directors and Officers.
(9) Custodian Agreements.
(a) Custodian Agreement filed with Post-Effective
Amendment #14 to Form N-1A registration.*
(b) Amendment to Custodian Agreement dated December 31, 2001
filed with Post-Effective Amendment #17 to Form N-1A
registration.*
(c) Amendment to Custodian Agreement dated December 31, 2001
filed with Post-Effective Amendment #17 to Form N-1A
registration.*
(10) Rule 12b-1 Plan and Rule 18f-3 Plan.
(a) Rule 12b-1 Plan filed with Post-Effective Amendment #15 to
Form N-1A registration.*
(b) Amendment to 12b-1 Distribution Plan dated July 24, 2001
filed with Post-Effective Amendment #17 to Form N-1A
registration.*
(c) Rule 18f-3 Plan filed with Post-Effective Amendment #18 to
Form N-1A registration.*
(11) Legal Opinion as to legality of Securities being registered.
The Opinion and Consent of Drinker Biddle & Reath LLP that shares
will be validly issued, fully paid and non-assessable is filed
herewith.
(12) Legal Opinion as to Tax Matters.
The Opinion of Drinker Biddle & Reath LLP, with respect to
certain tax consequences, is filed herewith.
(13) Other Material Contracts.
(a) Administration Agreement filed with Post-Effective Amendment
#15 to Form N-1A registration.*
(i) Amendment to Administrative Agreement dated July 24,
2001 filed with Post-Effective Amendment #17 to Form
N-1A registration.*
(ii) Amendment to Administrative Agreement dated
October 17, 2001 filed with Post-Effective Amendment
#17 to Form N-1A registration.*
(iii) Amendment to Administrative Agreement dated July 24,
2002 filed with Post-Effective Amendment #18 to Form
N-1A registration.*
(iv) Amendment to Administrative Agreement dated
April 21, 2004 filed with Post-Effective Amendment #22
to Form N-1A registration.*
(b) Selling Dealer Agreement filed with Pre-Effective Amendment
#1 to Form N-1A registration.*
(i) Amended Selling Dealer Agreement dated July 23, 2003
filed with Post-Effective Amendment #21 to Form N-1A
registration.*
(c) Transfer Agent Agreement filed with Post-Effective Amendment
#14 to Form N-1A registration.*
(i) Amendment to Transfer Agent Agreement dated July 24,
2001 filed with Post-Effective Amendment #17 to Form
N-1A registration.*
(ii) Amendment to Transfer Agent Agreement dated July 24,
2002 filed with Post-Effective Amendment #18 to Form
N-1A registration.*
(d) Fund Accounting Agreement filed with Post-Effective
Amendment #17 to Form N-1A registration.*
(i) Amendment to Fund Accounting Agreement dated
August 5, 2002 filed with Post-Effective
Amendment #18 to Form N-1A registration.*
(e) Shareholder Services Agreement filed with Post-Effective
Amendment #14 to Form N-1A registration.*
(i) Amendment to Shareholder Services Agreement dated
July 24, 2001 filed with Post-Effective Amendment
#17 to Form N-1A registration.*
(14) Consent of Independent Registered Public Accounting Firm.
The consent of Tait, Weller & Baker LLP Independent Registered
Public Accounting Firm, is filed herewith.
(15) Omitted Financial Statements.
Not applicable.
(16) Powers of Attorney
Not Applicable.
(17) Additional Exhibits.
(a) Forms of Proxy are filed herewith.
(b) Prospectus dated February 1, 2007 with respect to the Hawaii
Municipal Fund Investor Class and Hawaii Intermediate Fund
Investor Class is filed herewith.
(c) Prospectus Supplement dated April 30, 2007 is filed
herewith.
(d) Prospectus Supplement dated May 23, 2007 is filed herewith.
(e) Prospectus Supplement dated July 13, 2007 is filed herewith.
(f) Prospectus Supplement dated August 16, 2007 is filed
herewith.
(g) Statement of Additional Information dated February 1, 2007
is filed herewith.
(h) Supplement dated April 30, 2007 to the Statement of
Additional Information is filed herewith.
(i) First Pacific Mutual Fund, Inc. Annual Report to
Shareholders for the fiscal year ended September 30, 2006
is filed herewith.
(j) First Pacific Mutual Fund, Inc. Semi-Annual Report to
Shareholders for the semi-annual period ended March 31, 2007
is filed herewith.
* Previously filed and incorporated by reference herein.
Item 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public reoffering of
the securities registered through the use of a prospectus which is a part
of this registration statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of
1933, as amended (the "1933 Act"), the reoffering prospectus will contain
the information called for by the applicable registration form for
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is
effective, and that, in determining any liability under the 1933 Act, each
post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide
offering of them.
SIGNATURES
As required by the Securities Act of 1933, this registration
statement has been signed on behalf of the registrant, in the City of Honolulu,
and State of Hawaii, on the 17th day of August, 2007.
FIRST PACIFIC MUTUAL FUND, INC.
By: _/s/ Terrence K.H. Lee________
Terrence K.H. Lee, President and CEO
As required by the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
/s/ Terrence K.H. Lee______________ Director, President August 17, 2007
Terrence K.H. Lee and CEO
/s/ Clayton W.H. Chow_____________ Director August 17, 2007
Clayton W.H. Chow
/s/ Lynden M. Keala_______________ Director August 17, 2007
Lynden M. Keala
/s/ Stuart S. Marlowe______________ Director August 17, 2007
Stuart S. Marlowe
/s/ Nora B. Simpson_______________ Treasurer August 17, 2007
Nora B. Simpson (Chief Financial Officer)
/s/ Karen T. Nakamura_____________ Director August 17, 2007
Karen T. Nakamura
/s/ Kim F. Scoggins_______________ Director August 17, 2007
Kim F. Scoggins
EXHIBIT INDEX
(1)(d) Form of Articles of Amendment.
(2)(b) Amendment No. 1 to By-Laws.
(11) Opinion and consent of Drinker Biddle & Reath LLP that shares will
be validly issued, fully paid and non-assessable.
(12) Opinion of Drinker Biddle & Reath LLP with respect to certain tax
consequences.
(14) Consent of Tait, Weller & Baker LLP
(17)(a) Forms of Proxy Card.
(17)(b) Prospectus dated February 1, 2007 with respect to the Hawaii
Municipal Fund Investor Class and Hawaii Intermediate Fund
Investor Class.
(17)(c) Prospectus Supplement dated April 30, 2007.
(17)(d) Prospectus Supplement dated May 23, 2007.
(17)(e) Prospectus Supplement dated July 13, 2007.
(17)(f) Prospectus Supplement dated August 16, 2007.
(17)(g) Statement of Additional Information dated February 1, 2007.
(17)(h) Supplement dated April 30, 2007 to the Statement of Additional
Information
(17)(i) First Pacific Mutual Fund, Inc. Annual Report to Shareholders for
the fiscal year ended September 30, 2006.
(17)(j) First Pacific Mutual Fund, Inc. Semi-Annual Report to Shareholders
for the semi-annual period ended March 31, 2007.