UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-05631
---------
First Pacific Mutual Fund, Inc.
--------------------------------
(Exact name of registrant as specified in charter)
2756 Woodlawn Drive, Suite #6-201
Honolulu, HI 96822-1856
------------------------
(Address of principal executive offices) (Zip code)
Audrey C. Talley
Drinker Biddle & Reath LLP
One Logan Square
Suite #2000
Philadelphia, PA 19103-6996
----------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 808-988-8088
Date of fiscal year end: September 30
Date of reporting period: March 31, 2011
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its
regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of
the information collection burden estimate and any suggestions for reducing
the burden to Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of
information under the clearance requirements of 44 U.S.C. 3507.
Item 1. Reports to Stockholders.
May 5, 2011
Dear fellow shareholder,
The April tax season has just passed, and as Hawaii taxpayers, many of
us felt the impact of paying high taxes. In fact, as a Hawaii resident, as
much as $42 of every $100 of our taxable income could go to the government in
income taxes.
According to the Tax Foundation, the average employee in Hawaii works
until April 6th to pay his taxes. In this tough economy, every dollar we
save makes a difference. We believe that investing in tax-free funds such as
the Hawaii Municipal Fund can help reduce our tax burden. As shareholders of
the Fund, you are earning tax-free income* and supporting local projects
designed to enrich our community. The money raised through municipal bonds
is commonly used to build schools, hospitals, roads, airports, harbors, and
water and electrical systems that serve to create jobs and improve the
quality of life here in our islands.
Interest rates are the most important of many factors which can affect
bond prices. For the period October 1, 2010 through March 31, 2011, the
Federal Reserve left the Fed Funds rate unchanged in the range of 0 - .25%.
During this period the yield curve steepened with the 10 year treasury bond
yield rising from 2.54% to 3.47%. At the same time continuing state budget
difficulties kept municipal bond yields high relative to treasury bonds.
This accounts for the Hawaii Municipal Fund's six month price decrease of
$0.48 per share. The investment strategy of the Hawaii Municipal Fund is to
purchase primarily investment grade long-term Hawaii municipal bonds. The
past six months performance for the Fund, which is presented in this Semi-
Annual Report, was primarily a result of the implementation of this
strategy.
We believe that the economy is slowly recovering from a number of
crises - housing, credit and financial. However, spending by people and
businesses remain weak and the economy continues to be plagued with high
unemployment. This would normally be a positive for the bond market, but
because of massive federal stimulus injections, we believe that there
continues to be a higher than normal inflationary risk which may impact the
municipal bond market.
On the following pages you will find our March 31, 2011 Semi-Annual
Report. If you have any questions or would like us to provide information
about the Fund to your family or friends, please call us at 988-8088.
STANDARD & POOR'S
MUNICIPAL BOND RATINGS
Hawaii Municipal Fund
March 31, 2011
[The following table was depicted as a pie chart in the printed material.]
Hawaii Municipal Fund
AAA 4.48%
AA+ 8.64%
AA 8.46%
AA- 7.49%
A+ 5.70%
A- 17.45%
BBB+ 6.79%
BBB 6.54%
BBB- 12.15%
NR^ 22.30%
^ Primarily all of the investments in the Hawaii Municipal Fund
portfolio are investment grade securities. Only 1.31% of the municipal bonds
purchased for the portfolio are deemed to be below investment grade by the
Investment Manager.
Thank you for your business. As always, we look forward to providing
you with the high level of service that you have come to expect.
Warmest Aloha,
/s/ Terrence K.H. Lee
Terrence K.H. Lee
President and CEO Lee Financial Securities, Inc./Distributor
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available without
charge, upon request, by calling (808) 988-8088.
Before investing, read the prospectus carefully. Please carefully consider
the Fund's investment objective, risks, and charges and expenses before
investing. *Some income may be subject to the federal alternative minimum
tax for certain investors. Income may also be subject to capital gains
taxes. The prospectus contains this and other information about the Fund.
This Semi-Annual Report must be accompanied or preceded by a prospectus.
Fund's yield, share price and investment return fluctuate so that you may
receive more or less than your original investment upon redemption. Past
performance is no guarantee of future results. Hawaii Municipal Fund is a
series of First Pacific Mutual Fund, Inc.
YOUR FUND'S EXPENSES (Unaudited)
As a Fund shareholder, you can incur the following costs:
Ongoing Fund costs, including management fees, distribution and
service (12b-1) fees, and other Fund expenses. All mutual funds have
ongoing costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The first line (Actual) for the share class listed in the table below
provides actual account values and expenses. The "Ending Account Value" is
derived from the Fund's actual return, which includes the effect of Fund
expenses.
You can estimate the expenses you paid during the period, by following these
steps. Of course, your account value and expenses will differ from those in
this illustration:
1. Divide your account value by $1,000.
If an account had an $8,600 value, the $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid
During Period."
If expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
Hypothetical example for Comparison with Other Funds
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical
"Ending Account Value" is based on the actual expense ratio for the share
class and an assumed 5% annual rate of return before expenses, which does not
represent the Fund's actual return. The figure under the heading "Expenses
Paid During Period" shows the hypothetical expenses your account would have
incurred under this scenario. You can compare this figure with the 5%
hypothetical examples that appear in shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing
costs. Therefore, the second line is useful in comparing ongoing costs only,
and will not help you compare total costs of owning different funds. Please
refer to the Fund prospectus for additional information on operating
expenses.
Beginning Expenses Paid During
Account Ending Account Period*
Value 10/01/10 Value 03/31/11 10/01/10-03/31/11
Hawaii Municipal Fund Investor Class
Actual $1,000.00 $ 974.20 $4.86
Hypothetical $1,000.00 $1,020.01 $4.98
*Expenses are equal to the annualized expense ratio (.99%), multiplied by the
average account value over the period, multiplied by 182/365 to reflect the
one-half year period.
HAWAII MUNICIPAL FUND
SCHEDULE OF INVESTMENTS
March 31, 2011 (Unaudited)
-------------------------------------------------------------------------
Value
Par Value (Note 1 (A))
--------- ------------
HAWAII MUNICIPAL BONDS - 97.59%
----------------------
Hawaii County
General Obligation Bonds - 3.58%
$ 1,755,000 5.000%, 07/15/21 $ 1,914,512
1,000,000 5.000%, 07/15/22 1,060,010
370,000 5.000%, 07/15/24 392,208
1,210,000 5.000%, 03/01/25 1,297,991
1,265,000 5.000%, 03/01/26 1,344,328
---------
6,009,049
---------
Hawaii State
General Obligation Bonds - 2.81%
530,000 5.000%, 08/01/20 535,459
4,000,000 5.000%, 05/01/27 4,186,440
---------
4,721,899
---------
Airport Systems Revenue Bonds - 17.39%
170,000 6.900%, 07/01/12 176,945
345,000 6.900%, 07/01/12 359,093
3,000,000 5.750%, 07/01/15 3,031,290
2,500,000 5.750%, 07/01/16 2,523,950
3,235,000 5.750%, 07/01/17 3,262,045
6,000,000 5.625%, 07/01/18 6,043,440
855,000 5.250%, 07/01/21 856,616
12,780,000 5.250%, 07/01/27 12,928,120
----------
29,181,499
----------
Certificates of Participation - State Office Buildings - 4.37%
1,500,000 5.000%, 05/01/15 1,659,630
4,200,000 5.000%, 05/01/17 4,660,572
500,000 4.000%, 05/01/19 513,185
500,000 4.000%, 05/01/20 504,160
---------
7,337,547
---------
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
SCHEDULE OF INVESTMENTS - (Continued)
March 31, 2011 (Unaudited)
-------------------------------------------------------------------------
Value
Par Value (Note 1 (A))
--------- ------------
Department of Budget & Finance Special Purpose Revenue Bonds
Hawaiian Electric Company, Inc. - 17.64%
$ 400,000 4.950%, 04/01/12 $ 409,908
5,430,000 5.750%, 12/01/18 5,429,674
125,000 6.150%, 01/01/20 125,077
1,125,000 5.700%, 07/01/20 1,125,990
115,000 5.450%, 11/01/23 112,944
10,225,000 5.650%, 10/01/27 9,957,719
8,085,000 6.200%, 11/01/29 8,084,919
2,400,000 5.100%, 09/01/32 2,063,880
3,000,000 4.650%, 03/01/37 2,293,470
----------
29,603,581
----------
Chaminade University - 2.62%
2,600,000 5.000%, 01/01/26 2,444,624
1,270,000 4.700%, 01/01/31 1,094,892
1,000,000 4.750%, 01/01/36 850,100
---------
4,389,616
---------
Hawaii Pacific Health - 4.37%
1,140,000 5.600%, 07/01/33 1,050,202
7,000,000 5.500%, 07/01/40 6,104,630
200,000 5.750%, 07/01/40 180,938
---------
7,335,770
---------
Hawaii Mid-Pacific Institute - 1.80%
2,085,000 5.000%, 01/01/26 2,002,851
1,230,000 4.625%, 01/01/36 1,025,771
---------
3,028,622
---------
Kapiolani Health Care System - 1.02%
1,610,000 6.400%, 07/01/13 1,711,382
---------
Kuakini Hawaii Health System - 0.34%
570,000 6.300%, 07/01/22 567,213
---------
Kahala Nui - 5.14%
8,200,000 8.000%, 11/15/33 8,626,318
---------
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
SCHEDULE OF INVESTMENTS - (Continued)
March 31, 2011 (Unaudited)
-------------------------------------------------------------------------
Value
Par Value (Note 1 (A))
--------- ------------
Wilcox Hospital - 1.25%
$ 695,000 5.250%, 07/01/13 $ 695,862
1,250,000 5.350%, 07/01/18 1,250,437
160,000 5.500%, 07/01/28 151,957
---------
2,098,256
---------
Harbor Capital Improvements Revenue Bonds - 4.65%
150,000 5.000%, 07/01/12 155,645
1,580,000 5.250%, 01/01/16 1,678,829
1,665,000 5.375%, 01/01/17 1,751,896
500,000 5.500%, 07/01/19 507,550
2,005,000 5.250%, 01/01/21 2,035,817
1,200,000 5.250%, 01/01/27 1,156,332
520,000 5.750%, 07/01/29 522,179
---------
7,808,248
---------
Hawaii Health Systems - 1.05%
377,000 3.800%, 02/15/13 380,170
1,370,000 4.700%, 02/15/19 1,373,384
---------
1,753,554
---------
Housing Authority
Single Family
Mortgage Special Purpose Revenue Bonds - 4.32%
215,000 4.650%, 07/01/12 219,696
370,000 4.800%, 07/01/13 377,707
105,000 5.250%, 07/01/13 105,094
3,435,000 5.400%, 07/01/29 3,434,897
210,000 5.750%, 07/01/30 210,002
2,165,000 5.375%, 07/01/33 2,160,627
740,000 5.000%, 07/01/36 743,567
---------
7,251,590
---------
HCDC Rental Housing System Revenue Bonds - 3.70%
100,000 3.700%, 01/01/13 102,027
810,000 4.750%, 07/01/22 803,682
600,000 4.750%, 07/01/23 593,376
895,000 5.000%, 07/01/24 896,727
100,000 5.000%, 07/01/25 100,059
990,000 6.000%, 07/01/26 1,037,025
1,055,000 6.000%, 07/01/27 1,095,839
785,000 6.000%, 07/01/28 809,076
750,000 6.000%, 07/01/29 768,510
---------
6,206,321
---------
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
SCHEDULE OF INVESTMENTS - (Continued)
March 31, 2011 (Unaudited)
-------------------------------------------------------------------------
Value
Par Value (Note 1 (A))
--------- ------------
Department of Hawaiian Homelands - 2.36%
$ 1,000,000 5.875%, 04/01/34 $ 995,620
3,000,000 6.000%, 04/01/39 2,967,870
---------
3,963,490
---------
Hawaiian Homelands - COP Kapolei - 2.67%
210,000 3.750%, 11/01/16 220,889
950,000 4.125%, 11/01/23 942,153
3,295,000 5.000%, 11/01/31 3,325,149
---------
4,488,191
---------
University of Hawaii - Revenue Bonds - 6.53%
100,000 4.000%, 07/15/16 108,039
1,000,000 4.000%, 10/01/17 1,070,750
1,000,000 5.000%, 10/01/18 1,131,030
1,000,000 5.000%, 10/01/19 1,121,900
1,500,000 5.000%, 10/01/23 1,599,900
3,355,000 4.500%, 07/15/26 3,370,433
2,500,000 5.000%, 07/15/29 2,561,525
----------
10,963,577
----------
Honolulu City & County
General Obligation Bonds - 1.71%
2,000,000 5.000%, 07/01/23 2,083,480
500,000 5.000%, 07/01/26 512,230
275,000 5.000%, 07/01/31 279,694
---------
2,875,404
---------
Waipahu - 1.18%
1,975,000 6.900%, 06/20/35 1,977,153
---------
Water System Revenue Bonds
Board of Water Supply - 3.11%
3,550,000 4.500%, 07/01/23 3,690,828
1,470,000 5.000%, 07/01/26 1,524,699
---------
5,215,527
---------
Waste System Revenue - 0.12%
200,000 5.500%, 07/01/11 202,456
---------
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
SCHEDULE OF INVESTMENTS - (Continued)
March 31, 2011 (Unaudited)
-------------------------------------------------------------------------
Value
Par Value (Note 1 (A))
--------- ------------
Kauai County
General Obligation Bonds - 2.35%
$ 1,065,000 5.000%, 08/01/25 $ 1,070,399
2,780,000 5.000%, 08/01/27 2,873,575
---------
3,943,974
---------
Housing Authority Paanau Project - 0.24%
395,000 7.250%, 04/01/12 395,312
---------
Maui County
General Obligation Bonds - 1.27%
1,000,000 5.000%, 07/01/23 1,064,770
1,000,000 5.000%, 07/01/24 1,059,870
---------
2,124,640
---------
Total Hawaii Municipal Bonds (Cost $167,100,249) 163,780,189
-----------
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
SCHEDULE OF INVESTMENTS - (Continued)
March 31, 2011 (Unaudited)
-------------------------------------------------------------------------
Value
Par Value (Note 1 (A))
--------- ------------
VIRGIN ISLANDS MUNICIPAL BONDS - 0.22%
------------------------------
Virgin Islands
Public Finance Authority, Series A - 0.06%
$ 90,000 7.300%, 10/01/18 $ 105,383
-------
Public Finance Authority, Series A - 0.16%
250,000 5.000%, 07/01/14 261,677
-------
Total Virgin Islands Municipal Bonds (Cost $346,603) 367,060
-------
Total Investments (Cost $167,446,852) (a) 97.81% 164,147,249
Other Assets Less Liabilities 2.19% 3,666,970
------ -----------
Net Assets 100.00% $ 167,814,219
====== ===========
(a) Aggregate cost for federal income tax purposes is $167,265,336.
At March 31, 2011, unrealized appreciation (depreciation) of securities
for federal income tax purposes is as follows:
Gross unrealized appreciation $ 1,500,682
Gross unrealized (depreciation) (4,618,769)
----------
Net unrealized (depreciation) $(3,118,087)
==========
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
STATEMENT OF ASSETS AND LIABILITIES
March 31, 2011 (Unaudited)
-------------------------------------------------------------------------
Municipal
Fund
ASSETS ---------
Investments at market value
(Identified cost $167,446,852) (Note 1 (A)) $164,147,249
Cash 1,313,462
Interest receivable 2,709,814
Subscriptions receivable 15,500
Other assets 16,061
-----------
Total assets 168,202,086
-----------
LIABILITIES
Distributions payable 138,910
Redemptions payable 95,037
Management fee payable 71,214
Administration fee payable 2,848
Distribution Plan payable 21,364
Shareholder Servicing fee payable 14,243
Transfer Agent fee payable 8,546
Chief Compliance Officer fee payable 5,733
Accrued expenses 29,972
-----------
Total liabilities 387,867
-----------
NET ASSETS $167,814,219
============
(Applicable to 16,003,681 shares outstanding,
$.01 par value, 20,000,000 shares authorized)
NET ASSET VALUE, OFFERING AND REPURCHASE
PRICE PER SHARE, INVESTOR CLASS SHARES $10.49
======
NET ASSETS
At March 31, 2011, net assets consisted of:
Paid-in capital $171,605,494
Undistributed net investment income 193,804
Accumulated net realized loss on investments (685,476)
Net unrealized depreciation (3,299,603)
------------
$167,814,219
============
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
STATEMENT OF OPERATIONS
For the six months ended March 31, 2011 (Unaudited)
-------------------------------------------------------------------------
Municipal
Fund
---------
INVESTMENT INCOME
Interest income $4,036,777
----------
Expenses
Management fee (Note 2) 426,215
Distribution costs (Notes 2 and 3) 127,865
Transfer Agent fee (Note 2) 51,145
Shareholder Services fee (Note 2) 85,242
Administration fee (Note 2) 17,047
Accounting fee 34,448
Legal and Audit fees 41,307
Custodian fee 9,401
Insurance 4,186
Registration fee 4,240
Miscellaneous 3,904
Chief Compliance Officer fee (Note 2) 33,657
Directors fee 3,231
----------
Total expenses 841,888
Fee reductions (Note 5) (2,876)
----------
Net expenses 839,012
----------
Net investment income 3,197,765
----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain from security transactions 598,104
Change in unrealized depreciation of investments (8,578,869)
----------
Net (loss) on investments (7,980,765)
----------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(4,783,000)
===========
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
STATEMENT OF CHANGES IN NET ASSETS
-------------------------------------------------------------------------
For The Six Months Ended For The Year Ended
March 31, 2011 (Unaudited) September 30, 2010
-------------------------- ------------------
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income $ 3,197,765 $ 5,984,525
Net realized gain (loss) on investments 598,104 104,147
Increase (Decrease) in unrealized
appreciation (depreciation) of investments (8,578,869) 2,576,463
---------- ---------
Net increase (decrease) in net assets
resulting from operations (4,783,000) 8,665,135
---------- ---------
Distributions to shareholders from:
Net investment income
Investor Class ($.20 and $.37 per
share, respectively) (3,172,568) (5,880,797)
Capital gains
Investor Class ($.00 and $.00 per
share, respectively) - -
---------- ----------
Total distributions to shareholders (3,172,568) (5,880,797)
---------- ----------
Capital share transactions (a)
Increase (Decrease) in net assets resulting
from capital share transactions (2,162,771) 9,255,585
---------- ---------
Total increase (decrease) in net assets (10,118,339) 12,039,923
NET ASSETS
Beginning of period 177,932,558 165,892,635
----------- -----------
End of period (including undistributed net
investment income of $193,804 and $168,607,
respectively) $167,814,219 $177,932,558
============ ============
(a) Summary of capital share activity follows:
Investor Class Investor Class
For The Six Months Ended For The Year Ended
March 31, 2011(Unaudited) September 30, 2010
------------------------- ------------------
Shares Value Shares Value
------ ----- ------ -----
Shares sold 506,253 $ 5,398,212 2,731,560 $29,496,727
Shares issued on reinvestment
of distributions 222,640 2,354,759 403,775 4,368,385
------- --------- --------- ----------
728,893 7,752,971 3,135,335 33,865,112
Shares redeemed (941,750) (9,915,742) (2,274,962) (24,609,527)
-------- ---------- ---------- -----------
Net increase (decrease) (212,857) $(2,162,771) 860,373 $ 9,255,585
======== =========== ========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
-------------------------------------------------------------------------
INVESTOR CLASS
For The Six Months Ended Years Ended September 30,
March 31, 2011 (Unaudited) 2010 2009 2008 2007 2006
-------------------------- ---- ---- ---- ---- ----
Net asset value
Beginning of period $10.97 $10.80 $10.31 $10.88 $11.04 $11.10
------ ------ ------ ------ ------ ------
Income from investment operations
Net investment income .20 .37 .38 .39 .39 .40
Net gain (loss) on securities
(both realized and unrealized) (.48) .17 .51 (.57) (.16) (.02)
----- ----- ----- ----- ----- -----
Total from investment operations(.28) .54 .89 (.18) .23 .38
----- ----- ----- ----- ----- -----
Less distributions
Dividends from
net investment income (.20) (.37) (.38) (.39) (.39) (.40)
Distributions from
capital gains - - (.02) - -** (.04)
----- ----- ----- ----- ----- -----
Total distributions (.20) (.37) (.40) (.39) (.39) (.44)
----- ----- ----- ----- ----- -----
End of period $10.49 $10.97 $10.80 $10.31 $10.88 $11.04
====== ====== ====== ====== ====== ======
Total return -2.58%+ 5.12% 8.98% -1.73% 2.14% 3.52%
Ratios/Supplemental Data
Net assets, end of
period (in 000's) $167,814 $177,933 $165,893 $150,059 $148,893 $151,852
Ratio of expenses to average
net assets (a) .99%* 1.03% 1.05% 1.08% 1.02% 1.04%
Ratio of net investment income to
average net assets 3.75%* 3.49% 3.77% 3.54% 3.55% 3.64%
Portfolio turnover 10.08%+ 19.60% 25.90% 13.47% 15.66% 22.17%
* Annualized
+ Not 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 .98%, 1.03%, 1.02%, 1.02%, .96%, and .90%, for the six months
ended March 31, 2011 and for the years ended September 30, 2010, 2009,
2008, 2007, and 2006, respectively.
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 2011 (Unaudited)
-------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hawaii Municipal Fund ("Fund") is a series of shares of First Pacific
Mutual Fund, Inc. which is registered under the Investment Company Act of
1940, as a non-diversified open-end management company. Hawaii Municipal
Fund is currently authorized to offer one Class of Shares: Investor
Shares.
The investment objective of the Fund is 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. The Fund seeks
to achieve its objective by investing primarily in municipal securities
issued by or on behalf of the State of Hawaii, or any of its political
subdivisions or agencies, which pay interest that is exempt from regular
federal and Hawaii income taxes.
The Fund is subject to the risk of price fluctuation of the municipal
securities held in its portfolio which is generally a function of the
underlying credit rating of an issuer, the maturity length of the
securities, the securities' yield, and general economic and interest rate
conditions.
Since the Fund invests primarily in obligations of issuers located in
Hawaii, the Fund is subject to additional concentration of risk. Due to
the level of investment in Hawaii municipal obligations, the marketability
and market value of these obligations may be affected by certain Hawaiian
constitutional provisions, legislative measures, executive orders,
administrative regulations, voter initiatives, and other political and
economic developments. If any such problems arise, they could adversely
affect the ability of various Hawaiian issuers to meet their financial
obligation. Therefore, an investment in the Fund may be riskier than
investment in other types of municipal bond funds.
(A) SECURITY VALUATION
Portfolio securities, which are fixed income securities, are valued by
an independent pricing service using market quotations, prices
provided by market-makers, or estimates of market values obtained from
yield data relating to instruments or securities with similar
characteristics, in accordance with procedures established in good
faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued on the amortized cost basis
not readily available will be valued at their "fair value" in good
faith. For these purposes, "fair value" means the price that the Fund
Accountant and the Investment Manager reasonably expect the Fund could
receive from an arm's-length buyer upon the current sale of the
securities within seven (7) days, after considering all appropriate
factors and indications of value available to them. Such value will
be cost if the Investment Manager determines such valuation is
appropriate after considering a multitude of factors in accordance
with established procedures.
The Fund utilizes various methods to measure the fair value of most of
its investments on a recurring basis. Generally Accepted Accounting
Principles ("GAAP") establishes a hierarchy that prioritizes inputs to
valuation methods. The three levels of inputs are:
Level 1 - Unadjusted quoted prices in active markets for identical
assets or liabilities that the Fund has the ability to access.
HAWAII MUNICIPAL FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
March 31, 2011 (Unaudited)
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Level 2 - Observable inputs other than quoted prices included in Level
1 that are observable for the asset or liability, either directly or
indirectly. These inputs may include quoted prices for the identical
instrument on an inactive market, prices for similar instruments,
interest rates, prepayment speeds, credit risk, yield curves, default
rates and similar data.
Level 3 -Unobservable inputs for the asset or liability, to the extent
relevant observable inputs are not available, representing the Fund's
own assumptions about the assumptions a market participant would use
in valuing the asset or liability, and would be based on the best
information available.
The availability of observable inputs can vary from security to
security and is affected by a wide variety of factors, including for
example, the type of security, whether the security is new and not yet
established in the marketplace, the liquidity of markets, and other
characteristics particular to the security. To the extent that
valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires
more judgment. Accordingly, the degree of judgment exercised in
determining fair value is greatest for instruments categorized in
Level 3.
The inputs used to measure fair value may fall into different levels
of the fair value hierarchy. In such cases, for disclosure purposes,
the level in the fair value hierarchy within which the fair value
measurement falls in its entirety, is determined based on the lowest
level input that is significant to the fair value measurement in its
entirety.
Changes in valuation techniques may result in transfers in changing an
investment's assigned level within the hierarchy.
The following is a summary of the inputs used in valuing the Fund's
investments, as of March 31, 2011. The inputs or methodology used for
valuing securities are not necessarily an indication of the risks
associated with investing in those securities.
Valuation Inputs at Reporting Date:
Description Level 1 Level 2 Level 3 Total
Municipal Bonds $-0- $164,147,249 $-0- $164,147,249
There were no significant transfers in to and out of Levels 1 and 2
during the current period presented. There were no purchases, sales,
issuances, and settlements on a gross basis relating to Level 3
measurements during the current period presented.
HAWAII MUNICIPAL FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
March 31, 2011 (Unaudited)
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(B) FEDERAL INCOME TAXES
It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and
to distribute their taxable income, if any, to their shareholders.
Therefore, no federal income tax provision is required. At September
30, 2010, the Hawaii Municipal Fund had a capital loss carryforward of
$1,283,580 of which $1,162,876 expires in 2017 and $120,704 expires in
2018.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, the Fund intends to declare each year as
dividends in each calendar year at least 98% of its net investment
income (earned during the calendar year) and 98% of its net realized
capital gains (earned during the twelve months ended October 31) plus
undistributed amounts, if any, from prior years.
Net capital losses incurred after October 31 and within the taxable
year are deemed to arise on the first business day of the Fund's next
taxable year.
The Fund has reviewed all open tax years for all major jurisdictions,
which is the Federal jurisdiction, and concluded that there are no
significant uncertain tax positions that would require recognition in
the financial statements. As of September 30, 2010, open Federal tax
years include the tax years ended September 30, 2007 - September 30,
2010. The Fund has no examination in progress and is also not aware
of any tax positions for which it is reasonably possible that the
total amounts of unrecognized tax benefits will significantly change
in the next twelve months.
On December 22, 2010, the Regulated Investment Company Modernization
Act of 2010 (the "Act") was enacted. The Act modernizes several of
the federal income and excise tax provisions related to regulated
investment companies such as the Fund, and, with certain exceptions,
is effective for taxable years beginning after December 22, 2010.
Among the changes made are changes to the capital loss carryforward
rules allowing for capital losses to be carried forward indefinitely.
Rules in effect as of the report date limit the carryforward period to
eight years. Capital loss carryforwards generated in taxable years
beginning after effective date of the Act must be fully used before
capital loss forwards generated in taxable years prior to effective
date of the Act; therefore, under certain circumstances, capital loss
carryforwards available as of the report date, if any, may expire
unused. Management is currently evaluating the complete impact of the
Act on the Fund's financial statements.
(C) SECURITY TRANSACTIONS, INVESTMENT INCOME AND DISTRIBUTIONS TO
SHAREHOLDERS
Security transactions are recorded on the trade date. Interest
income is recorded on the accrual basis. Bond discounts and premiums
are amortized using the interest method. Distributions to
shareholders are declared daily and reinvested or paid in cash
monthly.
(D) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
HAWAII MUNICIPAL FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
March 31, 2011 (Unaudited)
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(2) INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Lee Financial Group Inc. ("LFG") provides the Fund with management and
administrative services pursuant to a management agreement and
administrative services agreement. In accordance with the terms of the
management agreement and the administrative services agreement, LFG
receives compensation at the annual rate of .50% and up to .05% of the
Fund's average daily net assets, respectively. LFG also receives
compensation for costs incurred by the Chief Compliance Officer.
The Fund's distributor, Lee Financial Securities, Inc. ("LFS"), a wholly-
owned subsidiary of LFG, received $127,865 for costs incurred in
connection with the sale of Hawaii Municipal Fund's shares (See Note 3).
Lee Financial Recordkeeping, Inc. ("LFR"), a wholly-owned subsidiary of
LFG, serves as the transfer agent for the Fund. In accordance with the
terms of the transfer agent agreement, LFR receives compensation at the
annual rate of .06% of the Fund's average daily net assets. LFR also
provides the Hawaii Municipal Fund with certain clerical, bookkeeping and
shareholder services pursuant to a service agreement approved by the
Fund's directors. As compensation for these services LFR receives a fee,
computed daily and payable monthly, at an annualized rate of .10% of the
Fund's average daily net assets.
Certain officers and directors of the Fund are also officers of LFG, LFS
and LFR.
(3) DISTRIBUTION COSTS
The Fund's Board of Directors, including a majority of the Directors who
are not "interested persons" of the Fund, as defined in the Investment
Company Act of 1940, adopted a distribution plan pursuant to Rule 12b-1 of
the Act. The Plan regulates the manner in which a regulated investment
company may assume costs of distributing and promoting the sales of its
shares.
The Plan provides that the Hawaii Municipal Fund Investor Class may incur
certain costs, which may not exceed .25% per annum of the Fund's average
daily net assets, for payment to the distributor for items such as
advertising expenses, selling expenses, commissions or travel, reasonably
intended to result in sales of shares of the Fund.
(4) PURCHASES AND SALES OF SECURITIES
For the six months ended March 31, 2011, purchases and sales of securities
aggregated $16,926,687 and $20,983,453, respectively, for the Hawaii
Municipal Fund.
(5) CUSTODY CREDITS
Under an agreement with the Custodian Bank, custodian fees are paid by
credits for cash balances. Any remaining credits are used to offset
expenses of other vendors and service providers. If not for the offset
agreement, the assets could have been employed to produce income. During
the six months ended March 31, 2011, such reductions amounted to $2,876
for the Hawaii Municipal Fund. Credits used to offset expenses were as
follows: Custody fees, $2,876.
HAWAII MUNICIPAL FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
March 31, 2011 (Unaudited)
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(6) TAX COMPONENTS OF CAPITAL AND DISTRIBUTIONS TO SHAREHOLDERS
The tax character of distributions paid during the years ended September
30, 2010 and 2009 were as follows:
Exempt- Long-Term
Interest Ordinary Capital Total
Dividends Income Gains Distributions
Hawaii Municipal Fund
2010 $5,880,797 $ - $ - $5,880,797
2009 $5,638,587 $ - $305,440* $5,944,027
*The Fund distributed on November 28, 2008, and designated,
$305,440 as a long-term capital gain pursuant to Internal
Revenue Code Section 852(b)(3).
The tax character of distributable earnings at September 30, 2010 were
as follows:
Undistributed Post Unrealized Total
Ordinary Exempt- Undistributed Capital Loss October Gain/ Distributable
Interest Income Capital Gains Carryforwards Losses (Loss)** Earnings
Hawaii
Municipal Fund
$ - $ - $(1,283,580) $ - $5,447,873 $4,164,293
**The difference between book basis and tax basis unrealized
appreciation is attributable to market discount on debt securities.
Accounting principles generally accepted in the United States of America
require that certain components of net assets be reclassified between
financial and tax reporting. These reclassifications have no effect on
net assets or net asset value per share. For the year-ended September 30,
2010, the Hawaii Municipal Fund's undistributed investment income was
decreased by $66,758, and accumulated net realized loss on investments was
decreased by $66,758.
(7) NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued Accounting Standards Update "Improving
Disclosures about Fair Value Measurements" ("ASU"). The ASU requires
enhanced disclosures about a.) transfers into and out of Levels 1 and 2,
and b.) purchases, sales, issuances, and settlements on a gross basis
relating to Level 3 measurements. The first disclosure is effective for
the first reporting period beginning after December 15, 2009, and for
interim periods within those fiscal years.
(8) SUBSEQUENT EVENTS DISCLOSURE
In preparing the Financial Statements as of March 31, 2011, Management
considered the impact of subsequent events for potential recognition or
disclosure in these Financial Statements.
HAWAII MUNICIPAL FUND INVESTOR CLASS
Shareholder Information (Unaudited)
Proxy Voting Policies and Procedures
The Fund has established Proxy Voting Policies and Procedures
("Policies") that the Fund uses to determine how to vote proxies
relating to portfolio securities. Shareholders may request copies of
the Policies free of charge by calling (808) 988-8088 or by sending a
written request to Lee Financial Group Inc., 2756 Woodlawn Drive, Suite
#6-201, Honolulu, HI 96822. Copies of the Fund's proxy voting records
are posted on the Securities and Exchange Commission's website at
www.sec.gov and the Fund's website at www.leehawaii.com and reflect the
12-month period beginning July 1, 2009 and ending June 30, 2010.
Quarterly Statement of Investments
The Fund files a complete statement of investments with the Securities
and Exchange Commission for the first and third quarters for each
fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by
visiting the Commission's website at www.sec.gov or the Fund's website
at www.leehawaii.com. The filed form may also be viewed and copied at
the Commission's Public Reference Room in Washington, DC. Information
regarding the operations of the Public Reference Room may be obtained
by calling 1-800-SEC-0330.
On January 19, 2011, the Board of Directors approved the establishment of the
First Pacific Low Volatility Fund, a series of First Pacific Mutual Fund, Inc.
The First Pacific Low Volatility Fund filed a registration statement with the
Securities and Exchange Commission which was declared effective on May 16, 2011.
A discussion regarding the Board of Directors' basis for approving the
investment management contract of the First Pacific Low Volatility Fund follows.
DISCLOSURE REGARDING APPROVAL OF THE MANAGEMENT AGREEMENT (UNAUDITED)
FIRST PACIFIC LOW VOLATILITY FUND
At a meeting held on January 19, 2011, the Board of Directors of First Pacific
Mutual Fund, Inc. ("Fund") considered and approved an Investment Management
Agreement between the Fund and Lee Financial Group Inc. ("LFG") with respect to
the First Pacific Low Volatility Fund (the "Portfolio"), a new series of First
Pacific Mutual Fund, Inc., for a two year period ending September 30, 2012.
Prior to the meeting, the Directors had received detailed information from LFG.
This information together with other information provided by LFG formed the
primary (but not exclusive) basis for the Board's determinations as summarized
below. The information, material factors and conclusions that formed the basis
for the Board's subsequent approval of the Investment Management Agreement are
described below.
1. Information Received
Materials reviewed. The Directors received a variety of materials relating to
the services to be provided by LFG, including the proposed portfolio
composition; portfolio trading practices; and other information relating to the
nature, extent and quality of services to be provided by LFG to the Portfolio.
In addition, the Board reviewed and considered supplementary information and
presentations by LFG including the Portfolio's proposed investment objective,
strategy and policies; proposed management fee; expense comparisons; financial
information regarding LFG; descriptions of various functions such as compliance
monitoring and portfolio trading, brokerage and soft-dollar commission
practices; and information about the experience and qualifications of the
personnel who would provide investment management and administrative services to
the Portfolio.
Review Process. The Board received assistance regarding legal and industry
standards from independent counsel to the independent Directors. The Board
discussed the approval of the agreement with LFG representatives. In deciding
to recommend the approval of the agreement, the Directors did not identify any
single issue or particular information that, in isolation, was the controlling
factor. This summary describes the most important, but not all, of the factors
considered by the Board.
2. Nature, Extent and Quality of Services
In the Board's review of LFG, its personnel and its resources, it considered the
depth and quality of LFG's investment management process; the experience,
capability and integrity of the proposed portfolio management team and other
personnel; the turnover rates of its personnel; and the overall financial
strength and stability of its organization. Based on this review, the Board
determined that LFG has the capabilities, resources and personnel necessary to
manage and advise the Portfolio.
Other Services. The Board considered, in connection with the performance of its
investment management services to the Fund and the Portfolio, the following:
LFG's policies, procedures and systems to ensure compliance with applicable laws
and regulations and its commitment to these programs; its efforts to keep the
Board informed; and its attention to matters that may involve conflicts of
interest with the Fund. As a point of comparison, the Board also considered the
nature, extent, quality and cost of certain non-investment related
administrative services to be provided by LFG to the Portfolio under the
Administrative Agreement.
3. Management Fees and Total Operating Expenses
The Board reviewed the proposed management fees and estimated total operating
expenses of the Portfolio and compared such amounts with the industry average
fees and expense levels of other comparable funds. The Board considered the
advisory fee information for other LFG clients that are similarly managed to the
Portfolio. The Board concluded that: the proposed management fees for the
Portfolio are generally competitive with fees paid by comparable funds and LFG's
other similarly managed clients; and the estimated expense ratio of the
Portfolio is generally competitive with the expenses paid by comparable funds.
4. Adviser Costs, Level of Profits, Economies of Scale and Ancillary Benefits
The Board considered information regarding LFG's expected costs of providing
services to the Portfolio, including LFG's payment of the legal fees for
organizing and registering the Portfolio, as well as the resulting level of
profits to LFG. The Board further concluded that the estimated profit to LFG
for investment management services seems reasonable based on the services to be
provided. The Board noted that since the management fee does not contain
breakpoints, there would be no economies of scale from reduction of the
management fee as the Portfolio's assets grow. In assessing the benefits to LFG
from its relationships with the Portfolio, the Board considered the proposed
soft dollar arrangements for the Portfolio. The Board also took into account
potential benefits to LFG as the Fund's administrator and the engagement of
affiliates for distribution, shareholder servicing and transfer agency services
and concluded that the proposed management fee for the Portfolio was reasonable
in relation to the benefits to be derived by LFG from these relationships.
5. Conclusions
No single factor was determinative of the Board's decision to approve the
Investment Management Agreement, but rather the Directors based their
determination on the total mix of information available to them. Based on their
review, including their consideration of each of the factors referred to above,
the Board, including a majority of the Independent Directors, concluded that the
Investment Management Agreement, and the compensation is determined to be fair
and reasonable in light of such services to be provided and expenses to be
incurred under the Agreement.
INVESTMENT MANAGER
Lee Financial Group Inc.
2756 Woodlawn Drive, Suite #6-201
Honolulu, Hawaii 96822-1856
DISTRIBUTOR
Lee Financial Securities, Inc.
2756 Woodlawn Drive, Suite #6-201
Honolulu, Hawaii 96822-1856
FUND ACCOUNTANT
Ultimus Fund Solutions, LLC
225 Pictoria Drive, Suite 450
Cincinnati, OH 45246
CUSTODIAN
Union Bank, N.A.
350 California Street, 6th Floor
San Francisco, California 94104
LEGAL COUNSEL
Drinker Biddle & Reath LLP
One Logan Square
Suite 2000
Philadelphia, Pennsylvania 19103-6996
TRANSFER AGENT
Lee Financial Recordkeeping, Inc.
2756 Woodlawn Drive, Suite #6-201
Honolulu, Hawaii 96822-1856
Item 2. Code of Ethics.
The information required by this Item is only required in an annual report on
this Form N-CSR.
Item 3. Audit Committee Financial Expert
The information required by this Item is only required in an annual report on
this Form N-CSR.
Item 4. Principal Accountant Fee and Services.
The information required by this Item is only required in an annual report on
this Form N-CSR.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
(a) Schedule I - Investment in securities of unaffiliated issuers is included as
part of the report to shareholders filed under Item 1 of this Form.
(b) Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
No material changes were made to the procedures by which shareholders recommend
nominees to the board.
Item 11. Controls and Procedures.
(a) The registrant's principal executive and principal financial officers, or
person performing similar functions, has concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-
3(d)) that occurred during the registrant's second fiscal quarter of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
Item 12. Exhibits.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the Act (17 CFR
270.30a-2(a)) are furnished herewith.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(a) under the 1940 Act
and Section 906 of the Sarbanes-Oxley Act of 2002 are attached
hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Pacific Mutual Fund, Inc.
-------------------------------
By (Signature and Title)* /s/ Terrence K.H. Lee
-----------------------
Terrence K.H. Lee, President and CEO
(principal executive officer)
Date May 26, 2011
------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Terrence K.H. Lee
-----------------------
Terrence K.H. Lee, President and CEO
(principal executive officer)
By (Signature and Title)* /s/ Nora B. Simpson
---------------------
Nora B. Simpson, Treasurer
(principal financial officer)
Date May 26, 2011
------------
*Print the name and title of each signing officer under his or her signature.