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
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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)
Roy W. Adams, Jr.
370 Park Street
Suite 2
Moraga, CA 94556
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(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: September 30, 2012
Item 1. Reports to Stockholders.
First Pacific Low Volatility Fund
ANNUAL REPORT
September 30, 2012
November 4, 2012
Dear fellow shareholder,
On June 10, 2011 the First Pacific Low Volatility Fund ("Fund") commenced
operations as a new series of First Pacific Mutual Fund, Inc. The investment
objective of the Fund is to achieve long-term capital appreciation and
preservation of capital while lowering volatility.
Despite the many headwinds faced by a global economic recovery, equity
markets finished the twelve-months ending September 30, 2012 with strong gains.
The European sovereign debt crisis was aided by debt purchase programs from the
European Central Bank, and statement from President Draghi committing to
maintaining the Eurozone. In the U.S., the Federal Reserve announced its third
major round of bond purchases and focused efforts on the mortgage-backed sector.
The central bank also extended its commitment to maintain interest rate levels
low until the middle of 2015. The efforts have been successful in maintaining
the equity market rally. However, investors are displaying concerns over the
fiscal-cliff of U.S. automatic spending cuts and increased tax rates and its
effects on consumers' income and company profitability.
Despite a rally in higher-beta and cyclical sectors of the market, the
portfolio managers of the Fund maintained a preference for dividend-paying
companies with a historically lower market sensitivity profile. The Fund's cash
levels detracted from relative performance as the broad equity markets rose
versus a very-low yielding cash environment. At September 30, 2012 the Fund had
a cash allocation of 9.82% of its net assets.
The portfolio managers weighted a higher percentage of the portfolio
within defensive sectors throughout the most recent twelve months. As of
September 30, 2012, the top five categories as a percentage of net assets were
Health Care (12.98%), Structured Notes (12.39%), Information Technology
(12.14%), Consumer Staples (10.04%) and Cash (9.82%). The sector focus also
detracted from relative performance as the higher-beta sectors and cyclical
sectors of the market outperformed during the time period.
CATEGORY ALLOCATION (% of Net Assets)
September 30, 2012
[The following table was depicted as a pie chart in the printed material.]
Consumer Discretionary 7.76%
Consumer Staples 10.04%
Energy 6.38%
Financials 8.97%
Health Care 12.98%
Industrials 2.23%
Information Technology 12.14%
Telecommunication Services 6.55%
Utilities 7.25%
Exchange Traded Funds 6.86%
Structured Notes 12.39%
Money Market Fund 9.82%
Options -0.43%
Other Liabilities -2.94%
There was no capital gain distribution to shareholders for the 2011
calendar year. There will be a capital gain distribution for the Fund for the
2012 calendar year.
On the following pages you will find our September 30, 2012 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 (808) 988-8088 or (800) 354-9654.
Thank you for your business. On behalf of the staff and management of the
Fund, I would like to extend to you and your family best wishes for a safe and
happy holiday season.
Warmest Aloha,
/s/ Terrence K.H. Lee
Terrence K.H. Lee
President and CEO
Before investing, read the prospectus carefully. Please carefully consider the
Fund's investment objective, risks, and charges and expenses before investing.
The prospectus contains this and other information about the Fund. This Annual
Report must be accompanied or preceded by a prospectus.
The Fund's yield, share price and investment return fluctuate so that you may
receive more or less than your original investment upon redemption. Low
volatility investing does not guarantee a profit or protect against a loss in a
generally declining market. Past performance is no guarantee of future results.
The Fund is a series of First Pacific Mutual Fund, Inc.
Mutual fund investing involves risks. Principal loss is possible. The First
Pacific Low Volatility Fund's investments in structured notes may subject the
Fund to greater interest rate, credit and counterparty risks and costs than
traditional equity funds. The price of structured notes may be volatile and
they may have a limited trading market, making it difficult to value or sell
them. Structured notes are also subject to risks of debt instruments, including
interest rate and call risks, but may have a greater risk of loss than a typical
debt security of the same maturity and credit quality. In exchange for the
issuer's guarantee of full or partial payment of principal on maturity, the
upside return the Fund could achieve on its investment may be capped or limited
and the issuer's guarantee is generally available only if the Fund holds the
structured note to maturity. The Fund may also invest in foreign securities
which, especially in emerging markets, involve greater volatility and political,
economic, regulatory and currency risks and differences in accounting methods.
The Fund may invest in small, mid or large companies. Investment in smaller
companies involves additional risks such as limited liquidity and greater
volatility than larger companies. The Fund's investments in other investment
companies, including exchange traded funds, subjects the Fund to those risks
affecting that investment company, including a possible decrease in the value of
the underlying securities. The Fund will also incur brokerage costs when it
purchases exchange traded funds and will incur its pro rata share of the
underlying investment company's expenses. This is not a complete list of risks
that may affect the Fund. For additional information concerning the risks
applicable to the Fund, please see the Fund's prospectus.
Lee Financial Securities, Inc./Distributor
November 29, 2012
This Annual Report may contain certain forward-looking statements about factors
that may affect the performance of the Fund in the future. These statements are
based on the predictions and expectations of Lee Financial Group Inc., the
Fund's investment manager (the "Investment Manager") concerning certain future
events, such as performance of the economy, changes in interest rates and other
factors that may impact the performance of the Fund. The Investment Manager
believes that these forward looking statements are reasonable, although they are
inherently uncertain and difficult to predict. Actual events may cause
adjustments in portfolio management strategies from those currently expected to
be employed.
FIRST PACIFIC LOW VOLATILITY FUND
$10,000 Investment in Fund Compared to Dow Jones Moderately Aggressive Portfolio
Index, S&P 500 Index and Barclays Capital U.S. Aggregate Index
[The following table was depicted as a line chart in the printed material.]
First Pacific Low Volatility Dow Jones Moderately S&P 500 Barclays Capital
Fund Investor Class Aggressive Index Index U.S. Aggregate Index
06/10/2011 $10,000 $10,000 $10,000 $10,000
09/30/2011 $ 9,170 $ 8,900 $ 8,960 $10,323
09/30/2012 $10,420 $10,647 $11,666 $10,856
Average Annual Total Return
First Pacific Low Volatility Dow Jones Moderately S&P 500 Barclays Capital
Fund Investor Class Aggressive Index Index U.S. Aggregate Index
1 year 13.63% 19.63% 30.20% 5.16%
Since Inception 3.21% 4.92% 12.51% 6.49%
The Dow Jones Moderately Aggressive Portfolio Index is made up of composite
indexes representing the three major asset classes: stocks, bonds and cash.
These component asset class indexes are weighted differently within each
relative risk index to achieve the targeted risk level; generally 80% stocks and
20% bonds and cash. The weightings are rebalanced monthly to maintain these
levels.
The S&P 500 Index is an unmanaged market capitalization weighted index comprised
of 500 widely held common stocks. The S&P 500 Index is generally considered
representative of the stock market as a whole. It is not possible to invest
directly in an unmanaged index.
The Barclays Capital U.S. Aggregate Index represents securities that are SEC-
registered, taxable, and dollar denominated. The index covers the U.S.
investment grade fixed rate bond market, with index components for government
and corporate securities, mortgage pass-through securities, and asset-backed
securities. These major categories are subdivided into more specific
indices that are calculated and reported on a regular basis. It is not possible
to invest directly in an unmanaged index. This index is rebalanced by market
capitalization each month.
The benchmark index was changed to the Dow Jones Moderately Aggressive Index
because the Investment Manager believes it is more reflective of the management
style of the Fund portfolio.
The graph above compares the increase in value of a $10,000 investment in the
Fund with the performance of the Dow Jones Moderately Aggressive Portfolio
Index, the S&P 500 Index and the Barclays Capital U.S. Aggregate Index. The
objective of the graph is to permit you to compare the performance of the Fund
with the current market and to give perspective to market conditions and
investment strategies and techniques pursued by the investment manager that
materially affected the performance of the Fund. The Dow Jones Moderately
Aggressive Portfolio Index, the S&P 500 Index and Barclays Capital U.S.
Aggregate Index reflect reinvestment of dividends but not the expenses of the
Fund. It is not possible to invest directly in an index. The return and
principal value of an investment in the Fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. Past performance is not indicative of future results. Current
performance may be higher or lower than the total return shown. Please call the
Fund at (808) 988-8088 or (800) 354-9654 to obtain the most recent month-end
returns. The total returns are before taxes on distributions or redemptions
of Fund shares. The Fund's annual operating expense ratio, as stated in the
current prospectus dated February 1, 2012, is 2.33%. This rate can fluctuate
and may differ from the expense ratio for the most recently completed period
disclosed in the "Financial Highlights" portion of this Annual Report.
YOUR FUND'S EXPENSES
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 period 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 04/01/12 Value 09/30/12 04/01/12-09/30/12
First Pacific Low Volatility Fund Investor Class
Actual $1,000.00 $1,010.60 $7.64
Hypothetical $1,000.00 $1,017.40 $7.67
*Expenses are equal to the annualized expense ratio (1.52%), multiplied by the
average account value over the period, multiplied by 183/366 to reflect the one-
half year period.
TAIT, WELLER & BAKER LLP
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of First Pacific Mutual Fund, Inc.
We have audited the accompanying statement of assets and liabilities of First
Pacific Low Volatility Fund, a series of First Pacific Mutual Fund, Inc.,
including the schedule of investments, as of September 30, 2012, the related
statement of operations for the year then ended, the statements of changes in
net assets and financial highlights for the year then ended and for the period
June 10, 2011 (commencement of operations) through September 30, 2011. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. The Fund is not required to have, nor were we engaged to perform,
an audit of the Fund's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Fund's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of September 30, 2012, by correspondence
with the custodian and brokers or by other appropriate auditing procedures where
replies from brokers were not received. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Pacific Low Volatility Fund as of September 30, 2012, the results of its
operations for the year then ended, the changes in its net assets, and the
financial highlights for the year then ended and for the period June 10, 2011
through September 30, 2011, in conformity with accounting principles generally
accepted in the United States of America.
/s/ TAIT, WELLER & BAKER LLP
Tait, Weller & Baker LLP
Philadelphia, Pennsylvania
November 28, 2012
FIRST PACIFIC LOW VOLATILITY FUND
SCHEDULE OF INVESTMENTS
September 30, 2012
----------------------------------------------------------------------------
COMMON STOCK - 74.30%
Shares Value
------ -----
CONSUMER DISCRETIONARY - 7.76%
The Walt Disney Company 21,000 1,097,880
McDonald's Corporation 14,000 1,284,500
-----------
2,382,380
-----------
CONSUMER STAPLES - 10.04%
Church & Dwight Co., Inc. 12,000 647,880
The Coca-Cola Company 26,200 993,766
Kimberly-Clark Corporation 10,000 857,800
Lorillard, Inc. 5,000 582,250
-----------
3,081,696
-----------
ENERGY - 6.38%
Devon Energy Corporation 5,600 338,800
Exxon Mobil Corporation 8,000 731,600
Marathon Oil Corp. 30,000 887,100
-----------
1,957,500
-----------
FINANCIALS - 8.97%
American Express Company 13,200 750,552
The PNC Financial Services Group, Inc. 12,000 757,200
Ventas, Inc. (REIT) 20,000 1,245,000
-----------
2,752,752
-----------
HEALTH CARE - 12.98%
Aetna Inc. 6,700 265,320
Bristol-Myers Squibb Company 40,000 1,350,000
Intuitive Surgical, Inc. (b) 1,600 793,008
Johnson & Johnson 10,000 689,100
UnitedHealth Group, Inc. 16,000 886,560
-----------
3,983,988
-----------
<FN>
See accompanying notes to financial statements.
</FN>
FIRST PACIFIC LOW VOLATILITY FUND
SCHEDULE OF INVESTMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
Shares Value
------ -----
INDUSTRIALS - 2.23%
3M Company 7,400 683,908
-----------
683,908
-----------
INFORMATION TECHNOLOGY - 12.14%
Apple Inc. 2,500 1,668,150
International Business Machines Corporation 6,000 1,244,700
Qualcomm Inc. 13,000 812,370
-----------
3,725,220
-----------
TELECOMMUNICATION SERVICES - 6.55%
AT&T Inc. 18,300 689,910
Verizon Communications Inc. 29,000 1,321,530
-----------
2,011,440
-----------
UTILITIES - 7.25%
Oneok, Inc. 28,000 1,352,680
PPL Corporation 30,000 871,500
-----------
2,224,180
-----------
Total Common Stocks (Cost $21,468,612) 22,803,064
-----------
EXCHANGE-TRADED FUNDS (ETF's) - 6.86%
IShares Barclays 20+ Year 14,000 1,739,220
Materials Select Sector SPDR 10,000 367,700
-----------
Total ETF's (Cost $2,182,340) 2,106,920
-----------
<FN>
See accompanying notes to financial statements.
</FN>
FIRST PACIFIC LOW VOLATILITY FUND
SCHEDULE OF INVESTMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
Shares Value
------ -----
STRUCTURED NOTES - 12.39%
Deutsche Bank Capped Buffered Underlying Securities
Linked to the S&P 500 Index Due 05/20/2013 (b) 1,000,000 1,086,410
The Goldman Sachs Group, Inc. Medium-Term
Notes, Series D Leveraged Buffered Index-Linked
Notes due 04/15/2013 Linked to the S&P 500 Index (b) 1,000,000 1,206,700
JP Morgan Chase & Co., Buffered Return
Enhanced Notes Linked to the S&P 500 Index
Due 01/10/2013 (b) 500,000 544,350
Royal Bank of Canada Buffered Bullish
Enhanced Return Notes Linked to the iShares
MSCI EAFE Index Fund Due 12/28/2012 (b) 1,000,000 966,600
-----------
Total Structured Notes (Cost $3,500,000) 3,804,060
-----------
MONEY MARKET FUND - 9.82%
Federated Government Obligation-I 3,014,938 3,014,938
-----------
Money Market Fund (Cost $3,014,938) 3,014,938
-----------
Total Investments (Cost $30,165,890) (a) 103.37% 31,728,982
Other Assets Less Liabilities (3.37%) (1,034,370)
------- -----------
Net Assets 100.00% $30,694,612
======= ==========
(a) Aggregate cost for federal income tax purposes is $30,165,890.
(b) Non-Income producing security.
At September 30, 2012, unrealized appreciation (depreciation) of securities for
federal income tax purposes is as follows:
Gross unrealized appreciation $ 1,928,466
Gross unrealized depreciation (365,374)
----------
Net unrealized appreciation $ 1,563,092
==========
<FN>
See accompanying notes to financial statements.
</FN>
FIRST PACIFIC LOW VOLATILITY FUND
SCHEDULE OF OPEN OPTIONS WRITTEN
September 30, 2012
----------------------------------------------------------------------------
Written Call Options (b) Contracts Value
--------- -----
International Business Machines Corporation
expires 10/2012 at $185.00 (exercise price) 60 (133,200)
-----------
Total Written Call Options (Premiums Received $69,478) (133,200)
-----------
(b) Non-Income producing security.
<FN>
See accompanying notes to financial statements.
</FN>
FIRST PACIFIC LOW VOLATILITY FUND
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2012
----------------------------------------------------------------------------
Low Volatility
Fund
--------------
ASSETS
Investments at market value
(Identified cost $30,165,890) (Note 1 (A)) $31,728,982
Income receivable 40,056
Other assets 17,968
----------
Total assets 31,787,006
----------
LIABILITIES
Payable for investment securities purchased 904,000
Redemptions payable 500
Management fee payable 16,350
Administration fee payable 503
Distribution plan payable 3,820
Shareholder servicing fee payable 2,515
Transfer agent fee payable 1,509
Chief Compliance Officer fee payable 1,358
Accrued expenses 28,639
Written options at value (premium $69,478) 133,200
----------
Total liabilities 1,092,394
----------
NET ASSETS $30,694,612
(Applicable to 2,945,119 shares outstanding, ==========
$.01 par value, 20,000,000 shares authorized)
NET ASSET VALUE, OFFERING AND REPURCHASE
PRICE PER SHARE, INVESTOR CLASS SHARES $10.42
=====
NET ASSETS
At September 30, 2012, net assets consisted of:
Paid-in capital $28,922,692
Accumulated net realized gain on investments 272,550
Unrealized depreciation on written options (63,722)
Net unrealized appreciation 1,563,092
----------
$30,694,612
==========
<FN>
See accompanying notes to financial statements.
</FN>
FIRST PACIFIC LOW VOLATILITY FUND
STATEMENT OF OPERATIONS
For the year ended September 30, 2012
----------------------------------------------------------------------------
Low Volatility
Fund
--------------
INVESTMENT INCOME
Dividend Income $ 415,403
Interest income 427
---------
Total investment income 415,830
---------
Expenses
Management fee (Note 2) 255,408
Distribution costs (Notes 2 and 3) 38,312
Transfer agent fee (Note 2) 15,324
Shareholder services fee (Note 2) 25,540
Administration fee (Note 2) 5,108
Accounting fee 41,398
Legal and audit fees 40,566
Printing 3,030
Custodian fee 8,709
Registration fee 33,426
Chief Compliance Officer fee (Note 2) 15,453
Directors fee 1,793
Insurance fee 1,231
Miscellaneous fee 7,145
---------
Total expenses 492,443
Management fees waived (41,278)
---------
Net Expenses 451,165
---------
Net investment income loss (35,335)
---------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on transactions from:
Investments 252,319
Options 233,207
Net change in unrealized appreciation (depreciation) on transactions from:
Investments 2,720,115
Options (63,722)
---------
Net realized and unrealized gain on investments 3,141,919
---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $3,106,584
=========
<FN>
See accompanying notes to financial statements.
</FN>
FIRST PACIFIC LOW VOLATILITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------------------------------------------------
For The Year Ended For The Period June 10, 2011
September 30, 2012 through September 30, 2011*
------------------ ----------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income loss $ (35,335) $ (66,495)
Net realized gain (loss) on investments 485,526 (177,641)
Increase (decrease) in unrealized appreciation
(depreciation) of investments 2,656,393 (1,157,023)
------------ -----------
Net increase (decrease) in net assets
resulting from operations 3,106,584 (1,401,159)
----------- ----------
Capital share transactions (a)
Increase in net assets resulting from
capital share transactions 6,677,627 22,311,560
----------- ----------
Total increase in net assets 9,784,211 20,910,401
NET ASSETS
Beginning of year and period 20,910,401 -
----------- ----------
End of year and period $ 30,694,612 $ 20,910,401
========== ==========
(a) Summary of capital share activity follows:
Investor Class Investor Class
For The Year Ended For The Period June 10, 2011
September 30, 2012 through September 30, 2011
------------------ ----------------------------
Shares Value Shares Value
------ ----- ------ -----
Shares sold 923,462 $ 9,255,485 2,368,269 $23,156,495
Shares redeemed (258,845) (2,577,858) (87,768) (844,935)
-------- ---------- --------- ----------
Net increase 664,617 $ 6,677,627 2,280,501 $22,311,560
======== ========= ========= ==========
*Commenced operations June 10, 2011.
<FN>
See accompanying notes to financial statements.
</FN>
FIRST PACIFIC LOW VOLATILITY FUND
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year and period)
----------------------------------------------------------------------------
INVESTOR CLASS
---------------------------------------
Year and Period Ended September 30,
---------------------------------------
2012 2011*
---- ----
Net asset value
Beginning of period $ 9.17 $10.00
----- -----
Income from investment operations
Net investment income (.01) (.03)
Net gain (loss) on securities
(both realized and unrealized) 1.26 (.80)
----- -----
Total from investment operations 1.25 (.83)
----- -----
End of Period $10.42 $ 9.17
===== =====
Total return 13.63% -8.30%
Ratios/Supplemental Data
Net assets, end of period (in 000's) $30,695 $20,910
Ratio of expenses to average
net assets before fee waivers (a) 1.93% 2.28%**
Ratio of expenses to average
net assets after fee waivers (a) 1.77% 2.28%**
Ratio of net investment income
to average net assets before fee waivers -0.30% -1.58%**
Ratio of net investment income
to average net assets after fee waivers -0.14% -1.58%**
Portfolio turnover 81.84% 18.42%
*Commenced operations June 10, 2011.
**Annualized
(a) Does not include expenses of the investment companies in which the Fund
invests.
<FN>
See accompanying notes to financial statements.
</FN>
FIRST PACIFIC LOW VOLATILITY FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 2012
----------------------------------------------------------------------------
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Pacific Low Volatility Fund ("Fund") is a series of First Pacific Mutual
Fund, Inc. which is registered under the Investment Company Act of 1940 as a
non-diversified open-end management investment company. First Pacific Mutual
Fund, Inc. currently has two investment portfolios, including the Fund which is
currently offering one Class of Shares: Investor Shares.
The investment objective of the Fund is to achieve long-term capital
appreciation and preservation of capital while lowering volatility. The Fund
seeks to achieve its objective by normally investing primarily in equity
securities of U.S. companies and allocating a portion of total assets to
structured notes. The Fund also may invest in exchange traded funds that invest
in domestic or foreign securities, foreign securities, real estate investment
trusts, fixed income securities, short-term debt instruments, cash and cash
equivalents, and convertible bonds and convertible preferred stock. It
also may write and purchase covered call and put options.
Structured notes are specially designed debt instruments whose principal and
interest payments are linked to, and whose values rise or fall in response to,
the value of an index, basket of securities, interest rate benchmark or other
financial asset. Structured notes are subject to interest rate risk.
They are also subject to credit risk with respect both to the issuer and, if
applicable, to the underlying security. The price of structured notes may be
volatile and they may have a limited trading market, making it difficult to
value them or sell them at an acceptable price. In exchange for the issuer's
guarantee of full or partial payment of principal on maturity, the upside return
the Fund could achieve on its investment may be capped or limited and the
issuer's guarantee is generally available only if the Fund holds the structured
note to maturity. There may be higher fees and costs associated with structured
notes than other types of investments. In some cases, the Fund may enter into
agreements with an issuer of structured notes to purchase a minimum amount of
those notes over time. Structured notes are also subject to counterparty risk,
which is the risk that the other party to the transaction will not fulfill its
contractual obligations. The Fund may write (sell) covered call options on
securities. If the option is exercised by the purchaser prior to the
expiration, the Fund is required to deliver the underlying security against
payment of the exercise price. Writing call options is a highly specialized
activity and entails greater than ordinary investment risks. The successful use
of options depends in part on the future price fluctuations and the degree of
correlation between the options and the securities markets. The value
of the Fund's positions in options will fluctuate in response to changes in the
value of the underlying security or index, as applicable. Portfolio assets
covering written options cannot be sold while the option is outstanding, unless
replaced with similar assets. As a result there is a possibility that
segregation of a large percentage of the Fund's assets could affect its
portfolio management as well as the ability of the Fund to meet redemption
requests or other current obligations. Unusual market conditions or the lack of
a ready market for any particular option at a specific time may reduce the
effectiveness of the Fund's option strategies. Over-the-counter options may be
considered illiquid and are also subject to counterparty risk, which is the risk
that the other party to the contract will not fulfill its contractual obligation
to complete the transaction with the Fund.
FIRST PACIFIC LOW VOLATILITY FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
Disclosures about Derivative Instruments and Hedging Activities: The Fund
follows FASB ASC 815 "Disclosures about Derivative Instruments and Hedging
Activities" ("ASC 815"), effective May 1, 2009. ASC 815 requires enhanced
disclosures about the Fund's use of, and accounting for, derivative instruments
and the effect on the results of the Fund's operations and financial position.
At September 30, 2012 and during the period then ended, the Fund had the
following derivatives and transactions in derivatives:
Transactions in written option contracts for the period ended September 30, 2012
are as follows:
Number of Premiums
Contracts Received
--------- --------
Options outstanding at September 30, 2011 0 $ 0
Options written (3,823) (778,026)
Options closed 1,680 114,468
Options exercised 1,342 440,590
Options expired 741 153,490
------ --------
Options outstanding at September 30, 2012 (60) $ (69,478)
The locations on the Statement of Assets and Liabilities of the Fund's
derivative positions by type of exposure, all of which are not accounted for as
hedging instruments under ASC 815 are as follows:
Values of Derivative Instruments as of September 30, 2012 on the Statement of
Assets and Liabilities:
Liabilities Location Value
----------- -------- -----
Equity Contracts - Options Written options at value $133,200
The effect of Derivative Instruments on the Statement of Operations for the
period ended September 30, 2012:
Amount of Realized Gain or (Loss) on Derivatives Recognized in Income
Written Options Total
--------------- -----
Equity Contracts $233,207 $233,207
Change in Unrealized Appreciation or (Depreciation) on Derivatives Recognized
in Income
Written Options Total
--------------- -----
Equity Contracts $(63,722) $(63,722)
The Fund's investments in other investment companies subjects it to those risks
affecting the investment company, including the possibility that the value of
the underlying securities held by the investment company could decrease. The
Fund will incur its pro rata share of the underlying investment company's
expenses. The Fund may purchase ETFs which may trade at a discount to its
net asset value. Investors in the Fund will indirectly bear fees and expenses
charged by the underlying ETFs in which the Fund invests in addition to the
Fund's direct fees and expenses. The Fund will also incur brokerage costs when
it purchases shares of ETFs. In addition, the Fund will be affected by losses of
the underlying ETF and the level of risk arising from the investment practices
of the underlying ETF.
FIRST PACIFIC LOW VOLATILITY FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
The Fund may purchase fixed income securities which will change in value in
response to interest rate changes and other factors, such as the perception of
the issuer's creditworthiness. For example, the value of fixed income securities
will generally decrease when interest rates rise, which may cause the value of
the Fund to decrease. In addition, an underlying fund's investment in fixed
income securities with longer maturities will fluctuate more in response to
interest rate changes.
(A) SECURITY VALUATION
Portfolio securities that are fixed income (debt) securities are valued by
an independent pricing agent using methodologies that it believes are
appropriate, including actual market transactions, broker-dealer supplied
valuations, matrix pricing, or other electronic data processing techniques
designed to identify market values for such securities, in accordance with
procedures established in good faith by the Board of Directors.
Structured notes are valued at the closing price or evaluated bid as
provided daily by independent pricing agents. Equity securities listed on
a securities exchange or an automated quotation system for which
quotations are readily available will be valued at the last quoted sale
price on the principal exchange on which they are traded on the valuation
date (or at approximately 4:00 p.m. Eastern Time if a security's
principal exchange is normally open at that time), or, if there is no such
reported sale on the valuation date, at the closing bid price. Securities
traded over-the-counter will be valued at the last reported sale price on
the Nasdaq Trade Reporting Facility, Alternative Display Facility or other
facility that reports trades of over-the-counter securities. If there is
no such reported sale on the valuation date, over-the-counter securities
will be valued at the most recently quoted bid price. Nasdaq listed
securities are valued at the Nasdaq Official Closing Price. Options
listed for trading on a securities exchange or board of trade will be
valued at the last quoted sale price or, in the absence of a sale, at the
mean of the closing bid and ask prices. In the absence of a last quoted
sales price or mean price, options are valued at the closing ask price
(for short positions). Futures contracts and options thereon, which are
traded on commodities exchanges, are valued at their daily settlement
value as of the close of such commodities exchanges. Redeemable
securities issued by open-end investment companies are valued at the
investment company's applicable net asset value. Exchange-traded open-end
investment companies and closed-end investment companies are priced as
equity securities. Foreign securities are often principally traded on
markets that close at different hours than U.S. markets. Such securities
will be valued at their most recent closing prices on the relevant
principal exchange even if the close of that exchange is earlier than the
time of the Fund's net asset value ("NAV") calculation. However,
securities traded in foreign markets which remain open as of the time of
the NAV calculation will be valued at the most recent sales price as of
the time of the NAV calculation. In addition, prices for certain foreign
securities may be obtained from the Fund's approved independent pricing
agents. Securities with remaining maturities of 60 days or less are
valued on the amortized cost basis as reflecting fair value.
Securities for which market quotations are not readily available or for
which available prices are believed to be suspect will be valued at "fair
value" using methods determined in good faith by or at the direction of
the Board of Directors. For these purposes, "fair value" means the price
that the Investment Manager reasonably expects 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.
FIRST PACIFIC LOW VOLATILITY FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
The Fund utilizes various methods to measure the fair value of most of its
investments on a recurring basis. U.S. 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.
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 arketplace, 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/out changing an
investment's assigned level within the hierarchy.
The following is a description of the valuation techniques applied to the
Fund's major categories of financial instruments measured at fair value on
a recurring basis:
Common Stocks and Exchange-Traded Funds, to the extent these securities
are actively traded and valuation adjustments are not applied, are
categorized in Level 1 of the fair value hierarchy. Preferred stock and
other equities traded on inactive markets or valued by reference to
similar instruments are categorized in Level 2 of the fair value
hierarchy.
Structured Notes are categorized in Level 2 of the fair value hierarchy.
Investment in registered open-end investment management companies will be
categorized as Level 1 of the fair value hierarchy.
Options listed for trading on a securities exchange or board of trade, and
which are actively traded, are categorized in Level 1 of the fair value
hierarchy.
FIRST PACIFIC LOW VOLATILITY FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
The following is a summary of the inputs used in valuing the Fund's
investments, as of September 30, 2012. 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
Assets
------
Common Stocks $22,803,064 $ -0- $-0- $22,803,064
Exchange Traded Funds $ 2,106,920 $ -0- $-0- $ 2,106,920
Structured Notes $ -0- $3,804,060 $-0- $ 3,804,060
Money Market Fund $ 3,014,938 $ -0- $-0- $ 3,014,938
---------- --------- --- ----------
Total Investments $27,924,922 $3,804,060 $-0- $31,728,982
========== ========= === ==========
Liabilities
-----------
Written covered call options $ 133,200 $ -0- $-0- $ 133,200
--------- ---------- ---- ----------
There were no 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.
(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.
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, 2012, open Federal tax years
include the tax year ended September 30, 2011 and 2012. 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.
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.
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. At September 30, 2012, the
First Pacific Low Volatility Fund utilized $177,641 in short-term capital
loss carryforwards to offset current year gains.
FIRST PACIFIC LOW VOLATILITY FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
The Fund had net capital losses of $3,067 incurred after October 31, 2011.
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.
(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. Net realized gains and losses from
investment transactions are reported on an identified cost basis.
Interest income is recognized using the accrual method and includes
accretion of original issue and market discount and amortization of
premium. Dividend income is recognized on the ex-dividend date, except
that certain dividends from foreign securities are
recorded as soon as the information becomes available after the ex-
dividend date. The Fund intends to pay income dividends at least
annually.
(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.
(E) SHARE VALUATION
The net asset value per share for the Fund is determined by calculating
the total value of the Fund's assets, deducting its total liabilities and
dividing the result by the number of shares outstanding.
(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, respectively. In accordance with the terms of the
management agreement and of the administrative services agreement, LFG receives
compensation at the annual rate of 1.00% and up to .05% of the Fund's
average daily net assets, respectively. For the period ended September 30,
2012, the Fund was allocated, and paid LFG, $15,453 for the Chief Compliance
Officer fee.
The Fund's distributor, Lee Financial Securities, Inc. ("LFS"), a wholly-owned
subsidiary of LFG, received $38,312 for costs incurred in connection with the
sale of the 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 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.
FIRST PACIFIC LOW VOLATILITY FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
September 30, 2011
----------------------------------------------------------------------------
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. Rule 12b-1
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 First Pacific Low Volatility 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
Purchases and sales of securities aggregated $32,128,485 and $18,025,260,
respectively, for the Fund during the period October 1, 2011 and September 30,
2012.
(5) TAX COMPONENTS OF CAPITAL AND DISTRIBUTIONS TO SHAREHOLDERS
For the period ending September 30, 2012 the Fund had no distributions.
The tax character of distributable earnings at September 30, 2012 were as
follows:
Undistributed Post Unrealized Total
Net Investment Undistributed Capital Loss October Gain/ Distributable
Income Capital Gains Carryforwards Losses (Loss) Earnings
------ ------------- ------------- ------ ------ --------
First Pacific Low
Volatility Fund
$ 275,617 $ - $ - $(3,067) $1,499,370 $1,771,920
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.
(6) NEW ACCOUNTING PRONOUNCEMENTS
In December 2011, FASB issued ASU No. 2011-11 related to disclosures about
offsetting assets and liabilities. The amendments in this ASU require an entity
to disclose information about offsetting and related arrangements to enable
users of its financial statements to understand the effect of those
arrangements on its financial position. The ASU is effective for annual
reporting periods beginning on or after January 1, 2013, and interim periods
within those annual periods. The guidance requires retrospective application
for all comparative periods presented. The Fund is currently evaluating the
impact ASU 2011-11 will have on the financial statement disclosures.
FIRST PACIFIC LOW VOLATILITY FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
(7) SUBSEQUENT EVENTS DISCLOSURE
In preparing the Fund's financial statements as of September 30, 2012, the
Fund's management considered the impact of subsequent events for potential
recognition or disclosure in these financial statements.
FIRST PACIFIC MUTUAL FUND, INC.
----------------------------------------------------------------------------
BOARD OF DIRECTORS AND OFFICERS (Unaudited)
Overall responsibility for management of First Pacific Mutual Fund, Inc., (the
"Company") rests with the Board of Directors. Each Director serves during the
lifetime of the Company and until its termination, or until the Director's
death, resignation, retirement or removal. The Directors, in turn, elect the
officers of the Company to actively supervise its day-to-day operations. The
officers have been elected for an annual term. The following table provides
information regarding each Director and officer of the Company.
Number of
Portfolios
Position Term of in Company Other
& Office and Complex Director
Office With Length of Principal Occupation Overseen -Ships
Name Age the Time During the Past by Held by
and Address Company Served Five Years Director* Director
--------------------------------------------------------------------------------
DISINTERESTED DIRECTORS
-----------------------
Clayton W.H. Chow (60) Director Unlimited Term Since April 2010, Sales 2 None
24 years Consultant, Henry Schein
Dental; prior to April 2010,
Office Technology Specialist,
Xerox Corporation and Account
Executive, Roadway Express
Lynden M. Keala (58) Director Unlimited Term Account Executive, 2 None
23 years Workflow One (formerly The
Relizon Company)
Stuart S. Marlowe (72) Director Unlimited Term Owner, Surfside Sales and 2 None
24 years Marketing (Sales and marketing of
music for the State of Hawaii)
Karen T. Nakamura (68) Director Unlimited Term Executive Vice President 2 None
15 years & CEO, Building Industry
Association of Hawaii;
Vice President, Wallpaper
Hawaii, Ltd.
Kim F. Scoggins (65) Director Unlimited Term Commercial Real Estate, 2 None
15 years Colliers Monroe Friedlander, Inc.
Real Estate, 1250 Oceanside
Partners
INTERESTED DIRECTORS
--------------------
Terrence K.H. Lee(55) Director, Unlimited Term Director, President and 2 None
Chairman, 24 years CEO, Lee Financial Group Inc.,
President Lee Financial Securities, Inc.,
and CEO and Lee Financial Recordkeeping,
Inc.
OFFICERS
--------
Nora B. Simpson (52) Treasurer (Since October Vice President, CCO, CFO, and
2004), Chief Compliance Treasurer, Lee Financial Group
Officer, Assistant Inc., Lee Financial Securities,
Secretary (Since July Inc., and Lee Financial
2002) Recordkeeping, Inc.
Charlotte A. Meyer (59) Assistant Treasurer Director, Assistant Treasurer and
(Since October 2004) Vice President, Lee Financial
Group Inc., Lee Financial
Securities, Inc., and Lee
Financial Recordkeeping, Inc.
Lugene Endo Lee (56) Secretary Director, Secretary and Vice
(Since July 1991) President, Lee Financial Group
Inc., Lee Financial Securities,
Inc., and Lee Financial
Recordkeeping, Inc.
Terrence K.H. Lee and Lugene Endo Lee are husband and wife.
Terrence K.H. Lee is an interested person of the Company by virtue of his
relationship as a director, officer and shareholder of the Fund's investment
manager, as a director and officer of the Fund's principal underwriter and
transfer agent and because he has had a material and professional
relationship with the Company for the last two completed calendar years.
*Each Company director oversees two portfolios of the Company that are currently
offered for sale.
Additional information about members of the Board of Directors and executive
officers is available in the Fund's Statement of Additional Information ("SAI").
To obtain a free copy of the SAI, please call (808) 988-8088.
FIRST PACIFIC LOW VOLATILITY FUND (Unaudited)
Shareholder Information
Household Delivery of Shareholder Documents: Only one Prospectus, Annual and
Semi-Annual Report will be sent to shareholders with the same last name and
address on their Fund account, unless you request multiple copies. If you would
like to receive separate copies, please call us at (808) 988-8088. We will begin
sending you additional copies within 30 days. If your shares are held through a
service provider, please contact them directly.
Business Continuity Plan Summary Disclosure Statement: First Pacific Mutual
Fund, Inc., Lee Financial Group Inc., Lee Financial Securities, Inc. and Lee
Financial Recordkeeping, Inc. have developed Business Continuity Plans on how we
will respond to events that significantly disrupt our business. Since the timing
and impact of disasters and disruptions is unpredictable, we will have to be
flexible in responding to actual events as they occur. Contacting Us - If after
a significant business disruption you cannot contact us as you usually do at
(808) 988-8088, you should go to our website at www.leehawaii.com. Please visit
our website at www.leehawaii.com for the Business Continuity Plan Disclosure
Statement.
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, 2011 and ending June 30, 2012.
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.
Disclosure Regarding Approval of the Management Agreement (Unaudited)
First Pacific Low Volatility Fund
At a meeting held on July 25, 2012, the Board of Directors of First Pacific
Mutual Fund, Inc. ("Fund") considered and approved the continuance of the
Investment Management Agreement between the Fund and Lee Financial Group Inc.
("LFG") with respect to the First Pacific Low Volatility Fund (the
"Portfolio"), a series of First Pacific Mutual Fund, Inc., for an additional
one-year period ending September 30, 2013.
Prior to the meeting, the Directors had received detailed information from LFG.
This information together with other information provided by LFG and the
information provided to the Directors throughout the course of year 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. During the course of the year, the Directors received a
wide variety of materials relating to the services provided by LFG, including
reports on the Portfolio's investment results; portfolio composition; portfolio
trading practices; and other information relating to the nature, extent
and quality of services provided by LFG to the Fund and Portfolio. In addition,
the Board reviewed and considered supplementary information and presentations by
LFG that included materials regarding the Portfolio's investment results;
management fee; performance; expense comparisons; financial and profitability
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 providing 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 renewal of the agreement with LFG representatives. In deciding to
recommend the renewal 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 its senior management, portfolio managers 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 the Fund and Portfolio and the Board is satisfied with the
quality of services provided by LFG in advising the Portfolio.
Other Services. The Board considered, in connection with the performance of
LFG's investment management services to the Fund and the Portfolio, the
following: LFG's policies, procedures and systems for 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 provided by LFG to the Fund and
Portfolio under the Administrative Agreement.
3. Investment Performance
The Board considered the Portfolio's unique pursuit of its investment objective
and the investment results of the Portfolio in light of its objective. The
Directors reviewed the performance of the Portfolio since inception on June 10,
2011, on an absolute basis and in comparison to its benchmark indexes and
other comparable mutual funds. The Directors also reviewed the rankings for the
Portfolio by an independent rating and ranking organization, noting that at June
30, 2012, the Portfolio outperformed the Dow Jones Moderately Aggressive
Portfolio Index. The Board concluded that the performance of the Portfolio is
generally competitive with its benchmark index and other comparable mutual
funds.
4. Management Fees and Total Operating Expenses
The Board reviewed the management fees and total operating expenses of the
Portfolio and compared such amounts with the 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 management fees (including LFG's waiver of 0.35% of that
fee until January 31, 2014) for the Portfolio are generally competitive with
fees paid by comparable funds and LFG's other similarly managed clients; and the
expense ratio of the Portfolio is generally competitive with the expenses paid
by comparable funds.
5. Adviser Costs, Level of Profits, Economies of Scale and Ancillary Benefits
The Board reviewed information regarding LFG's costs of providing services to
the Fund and 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 profit to LFG for
investment management services seems reasonable based on the services 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 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 management fee for the Portfolio was reasonable in relation to the
benefits derived by LFG and its affiliates from these relationships.
6. Conclusions
No single factor was determinative of the Board's decision to re-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 all of the Fund's Independent Directors, concluded that the
Investment Management Agreement, and the compensation is determined to be fair
and reasonable in light of such services provided and expenses 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
Roy W. Adams, Jr.
370 Park Street
Suite 2
Moraga, CA 94556
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
1818 Market Street, Suite #2400
Philadelphia, Pennsylvania 19103-2108
TRANSFER AGENT
Lee Financial Recordkeeping, Inc.
2756 Woodlawn Drive, Suite #6-201
Honolulu, Hawaii 96822-1856
Hawaii Municipal Fund
ANNUAL REPORT
September 30, 2012
November 4, 2012
Dear fellow shareholder,
As we begin our 25th year of operations, we are pleased to provide you
with our Fund's 2012 Annual Report.
It has been and continues to be daunting times for investors. We have
seen unprecedented downturns in the equity markets followed by sharp rises in
major indices. The economy which was in a recession is now showing signs of a
sluggish recovery. Amidst this continued turmoil, municipal bonds have
generally experienced less volatility than many of their equity counterparts.
As shareholders of the Hawaii Municipal 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. Over the course of the fiscal year, the treasury yield curve was
virtually unchanged with short-term rates remaining near 0% and long-
term interest rates falling by just 11 basis points to 2.42%. The long-end of
the municipal yield curve, however experienced a greater drop in rates.
Municipal rates fell due to increasing concerns of higher future State of
Hawaii and federal income taxes. This accounts for the Hawaii Municipal Fund's
fiscal year price increase of $0.48 per share. The Hawaii Municipal Fund
Investor Class had a net asset value ("NAV") of $10.83 on October 1, 2011 and a
NAV of $11.31 on September 30, 2012. The primary investment strategy of the
Hawaii Municipal Fund is to purchase primarily investment grade long-term Hawaii
municipal bonds. The past year's performance of the Fund, which is presented in
this Annual Report, was primarily a result of the implementation of this
strategy.
During the fiscal year ended September 30, 2012, the Federal Reserve Bank
kept the Federal Funds Rate between 0 and 0.25%. During this period the 20 year
treasury bond's yield fell by 11 basis points to 2.42%. In our opinion, the
continuation of low interest rates in the long end of the yield curve can be
interpreted as an indication that bond investors believe inflation will not
greatly increase over the long-term. Still, there continues to be risks to
inflation and the bond market, among which are U.S. fiscal policy, international
conflicts/terrorism and global economic factors.
On the following pages are line graphs comparing the Fund's performance
to the Barclays Capital Municipal Bond Index for the 10 years ended September
30, 2012. The graph assumes a hypothetical $10,000 investment in the Fund. The
object of the graph is to permit a comparison of the Fund with a benchmark and
to provide perspective on market conditions and investment strategies and
techniques that materially affected the performance of the Fund. For the fiscal
year ended September 30, 2012, the Hawaii Municipal Fund's concentration in
Hawaii municipal bonds caused the portfolio to lag the Index. For the 5 and 10
year periods ended September 30, 2012, the Hawaii Municipal Fund's portfolio had
a shorter effective maturity than the Barclays Capital Municipal Bond Index,
therefore, the Hawaii Municipal Fund lagged the Index due to the declining
interest rate environments.
MOODY'S MUNICIPAL BOND RATINGS
Hawaii Municipal Fund
September 30, 2012
[The following table was depicted as a pie chart in the printed material.]
Aaa 3.45%
Aa1 1.36%
Aa2 26.81%
Aa3 16.48%
A1 2.74%
A2 8.58%
A3 6.76%
Baa1 3.12%
Baa2 3.05%
Ba1 0.34%
NA^ 27.31%
^Primarily all of the investments in the Hawaii Municipal Fund portfolio
are investment grade securities. Only 1.18% of the municipal bonds purchased
for the portfolio are deemed to be below investment grade by the
Investment Manager.
We are proud to report that as a Hawaii resident, 100% of the income
dividends earned in 2012 were both state and federal tax-free*. There was no
capital gain distribution to shareholders for the 2011 calendar year.
There will not be a capital gain distribution for the Hawaii Municipal Fund for
the 2012 calendar year.
If you have any questions about this Annual Report or would like us to
provide information about the Fund to your family or friends, please call us at
988-8088.
Thank you for your business as well as the many referrals. On behalf of
the staff and management of the Fund, I would like to extend to you and your
family best wishes for a safe and happy holiday season.
Warmest Aloha,
/s/ Terrence K.H. Lee
Terrence K.H. Lee
President and CEO
*Some income may be subject to the federal alternative minimum tax for certain
investors. Income may also be subject to capital gains taxes.
Before investing, read the prospectus carefully. Please carefully consider the
Fund's investment objective, risks, and charges and expenses before investing.
The prospectus contains this and other information about the Fund. This Annual
Report must be accompanied or preceded by a prospectus.
The 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. The Fund is a series of
First Pacific Mutual Fund, Inc.
Mutual fund investing includes risks. Principal loss is possible. The Fund's
investments in municipal bonds subjects the Fund to interest rate, credit, call
and geographic concentration risk.
Lee Financial Securities, Inc./Distributor
November 29, 2012
This Annual Report may contain certain forward-looking statements about factors
that may affect the performance of the Fund in the future. These statements are
based on the predictions and expectations of Lee Financial Group Inc., the
Fund's investment manager (the "Investment Manager"), concerning certain future
events, such as performance of the economy, changes in interest rates and other
factors that may impact the performance of the Fund. The Investment Manager
believes that these forward looking statements are reasonable, although they are
inherently uncertain and difficult to predict. Actual events may cause
adjustments in portfolio management strategies from those currently expected to
be employed.
HAWAII MUNICIPAL FUND INVESTOR CLASS
$10,000 Investment in Fund Compared to Barclays Capital Municipal Bond Index
[The following table was depicted as a line chart in the printed material.]
Hawaii Municipal Fund Barclays Capital
Investor Class Municipal Bond Index
09/30/02 $10,000 $10,000
09/30/03 $10,398 $10,389
09/30/04 $10,817 $10,867
09/30/05 $11,124 $11,307
09/30/06 $11,516 $11,811
09/30/07 $11,762 $12,176
09/30/08 $11,559 $11,949
09/30/09 $12,597 $13,723
09/30/10 $13,242 $14,520
09/30/11 $13,566 $15,084
09/30/12 $14,604 $16,338
Average Annual Total Return
Hawaii Municipal Fund Barclays Capital Municipal Bond Index
1 Year 7.65% 5.16%
5 Year 4.42% 6.06%
10 Year 3.86% 5.03%
The Barclays Capital Municipal Bond Index consists of a broad selection of
investment grade general obligation and revenue bonds of maturities ranging from
one year to 30 years. It is an unmanaged index representative of the tax-exempt
bond market. This index is made up of all investment grade municipal bonds
issued after December 31, 1990 having a remaining maturity of at least one year.
It is not possible to invest directly in an unmanaged index.
The graph above compares the increase in value of a $10,000 investment in the
Fund with the performance of the Barclays Capital Municipal Bond Index. The
objective of the graph is to permit you to compare the performance of the Fund
with the current market and to give perspective to market conditions and
investment strategies and techniques pursued by the investment manager that
materially affected the performance of the Fund. The Barclays Capital
Municipal Bond Index reflects reinvestment of dividends but not the expenses of
the Fund. It is not possible to invest directly in an index. The return and
principal value of an investment in the Fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. Past performance is not indicative of future results. Current
performance may be higher or lower than the total return shown. Please call the
Fund at (808) 988-8088 or (800) 354-9654 to obtain the most recent month-end
returns. The total returns are before taxes on distributions or redemptions of
Fund shares. The Fund's annual operating expense ratio, as stated in the
current prospectus dated February 1, 2012, is 1.03%. This rate can fluctuate
and may differ from the expense ratio for the most recently completed fiscal
year disclosed in the "Financial Highlights" portion of this Annual Report.
YOUR FUND'S EXPENSES
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 04/01/12 Value 09/30/12 04/01/12-09/30/12
Hawaii Municipal Fund Investor Class
Actual $1,000.00 $1,041.30 $5.31
Hypothetical $1,000.00 $1,019.80 $5.25
*Expenses are equal to the annualized expense ratio (1.04%), multiplied by the
average account value over the period, multiplied by 183/366 to reflect the one-
half year period.
TAIT, WELLER & BAKER LLP
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of First Pacific Mutual Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Hawaii
Municipal Fund, a series of First Pacific Mutual Fund, Inc., including the
schedule of investments, as of September 30, 2012, the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. The Fund is not required to have, nor were we engaged to
perform, an audit of the Fund's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Fund's internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of September 30, 2012, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Hawaii
Municipal Fund as of September 30, 2012, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ TAIT, WELLER & BAKER LLP
Tait, Weller & Baker LLP
Philadelphia, Pennsylvania
November 28, 2012
HAWAII MUNICIPAL FUND
SCHEDULE OF INVESTMENTS
September 30, 2012
----------------------------------------------------------------------------
Value
Par Value (Note 1 (A))
--------- ------------
HAWAII MUNICIPAL BONDS - 95.39%
----------------------
Hawaii County
General Obligation Bonds - 3.72%
$ 1,755,000 5.000%, 07/15/21 $ 2,056,843
1,000,000 5.000%, 07/15/22 1,035,130
370,000 5.000%, 07/15/24 396,429
1,210,000 5.000%, 03/01/25 1,434,140
1,265,000 5.000%, 03/01/26 1,492,700
-----------
6,415,242
-----------
Hawaii State
General Obligation Bonds - 4.82%
4,000,000 5.000%, 06/01/25 4,904,160
2,880,000 5.000%, 05/01/27 3,424,176
-----------
8,328,336
-----------
Airport Systems Revenue Bonds - 8.20%
665,000 5.250%, 07/01/26 795,593
11,280,000 5.250%, 07/01/27 13,364,093
-----------
14,159,686
-----------
Certificates of Participation-State Office Buildings - 4.44%
1,500,000 5.000%, 05/01/15 1,652,700
4,200,000 5.000%, 05/01/17 4,882,332
500,000 4.000%, 05/01/19 563,970
500,000 4.000%, 05/01/20 562,870
-----------
7,661,872
-----------
Department of Budget & Finance Special Purpose Revenue Bonds
Hawaiian Electric Company, Inc. - 5.75%
4,725,000 5.650%, 10/01/27 4,778,109
5,000,000 4.650%, 03/01/37 5,148,400
-----------
9,926,509
-----------
Chaminade University - 3.01%
2,750,000 5.000%, 01/01/26 2,872,760
1,270,000 4.700%, 01/01/31 1,303,731
1,000,000 4.750%, 01/01/36 1,027,460
-----------
5,203,951
-----------
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
SCHEDULE OF INVESTMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
Value
Par Value (Note 1 (A))
--------- ------------
Hawaii Pacific Health - 5.16%
$ 775,000 4.625%, 07/01/21 $ 869,387
1,140,000 5.600%, 07/01/33 1,154,843
6,000,000 5.500%, 07/01/40 6,665,640
200,000 5.750%, 07/01/40 224,088
-----------
8,913,958
-----------
Hawaii Mid-Pacific Institute - 2.20%
2,085,000 5.000%, 01/01/26 2,156,078
1,635,000 4.625%, 01/01/36 1,639,529
-----------
3,795,607
-----------
Kapiolani Health Care System - 0.34%
575,000 6.400%, 07/01/13 583,648
-----------
Kuakini Hawaii Health System - 0.33%
570,000 6.300%, 07/01/22 570,923
-----------
Kahala Nui - 8.58%
300,000 3.350%, 11/15/19 306,015
300,000 3.600%, 11/15/20 306,099
250,000 3.800%, 11/15/21 255,057
500,000 5.000%, 11/15/21 567,700
1,065,000 4.625%, 11/15/27 1,086,747
1,200,000 5.000%, 11/15/27 1,297,944
1,000,000 5.125%, 11/15/32 1,070,450
8,200,000 8.000%, 11/15/33 9,063,788
815,000 5.250%, 11/15/37 866,924
-----------
14,820,724
-----------
Wilcox Hospital - 0.96%
245,000 5.250%, 07/01/13 245,845
1,250,000 5.350%, 07/01/18 1,252,950
160,000 5.500%, 07/01/28 160,240
-----------
1,659,035
-----------
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
SCHEDULE OF INVESTMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
Value
Par Value (Note 1 (A))
--------- ------------
Department of Hawaiian Homelands - 2.62%
$ 1,000,000 5.875%, 04/01/34 $ 1,132,560
3,000,000 6.000%, 04/01/39 3,385,890
-----------
4,518,450
-----------
Hawaiian Homelands - COP Kapolei - 3.94%
210,000 3.750%, 11/01/16 229,144
950,000 4.125%, 11/01/23 1,008,719
5,100,000 5.000%, 11/01/31 5,570,577
-----------
6,808,440
-----------
Harbor Capital Improvements Revenue Bonds - 3.82%
1,580,000 5.250%, 01/01/16 1,673,441
1,665,000 5.375%, 01/01/17 1,763,169
500,000 5.500%, 07/01/19 501,130
2,005,000 5.250%, 01/01/21 2,143,385
520,000 5.750%, 07/01/29 521,404
-----------
6,602,529
-----------
Hawaii Health Systems - 0.85%
94,000 3.800%, 02/15/13 95,040
1,370,000 4.700%, 02/15/19 1,381,069
-----------
1,476,109
-----------
Highway Revenue - 1.16%
1,640,000 5.000%, 01/01/26 2,000,702
-----------
Housing Authority
Single Family Mortgage
Special Purpose Revenue Bonds - 3.24%
325,000 4.800%, 07/01/13 325,478
90,000 5.250%, 07/01/13 90,102
2,770,000 5.400%, 07/01/29 2,771,108
30,000 5.750%, 07/01/30 30,000
1,870,000 5.375%, 07/01/33 1,871,533
485,000 5.000%, 07/01/36 509,003
-----------
5,597,224
-----------
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
SCHEDULE OF INVESTMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
Value
Par Value (Note 1 (A))
--------- ------------
HCDC Rental Housing System Revenue Bonds - 3.83%
$ 100,000 3.700%, 01/01/13 $ 100,587
810,000 4.750%, 07/01/22 854,372
600,000 4.750%, 07/01/23 638,376
895,000 5.000%, 07/01/24 960,523
100,000 5.000%, 07/01/25 107,444
990,000 6.000%, 07/01/26 1,104,721
1,055,000 6.000%, 07/01/27 1,168,718
785,000 6.000%, 07/01/28 863,312
750,000 6.000%, 07/01/29 821,602
-----------
6,619,655
-----------
HFDC Multi-Family-Kuhio Park- 3.42%
2,430,000 4.750%, 10/01/27 2,634,800
3,000,000 4.950%, 04/01/29 3,265,950
-----------
5,900,750
-----------
Multi-Family-Iwilei Apartments- 2.45%
165,000 3.300%, 01/01/26 166,919
4,000,000 3.750%, 01/01/31 4,055,680
-----------
4,222,599
-----------
Multi-Family-Kooloaula Apartments- 2.19%
220,000 3.125%, 09/01/22 226,428
3,435,000 4.000%, 09/01/33 3,552,099
-----------
3,778,527
-----------
University of Hawaii - Revenue Bonds - 6.20%
100,000 4.000%, 07/15/16 111,742
1,000,000 5.000%, 10/01/18 1,212,710
1,000,000 5.000%, 10/01/19 1,223,400
1,500,000 5.000%, 10/01/23 1,679,895
3,355,000 4.500%, 07/15/26 3,699,022
2,500,000 5.000%, 07/15/29 2,769,975
-----------
10,696,744
-----------
Honolulu City & County
Multi-Family - Waipahu - 1.12%
1,925,000 6.900%, 06/20/35 1,927,618
----------
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
SCHEDULE OF INVESTMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
Value
Par Value (Note 1 (A))
--------- ------------
Water System Revenue Bonds
Board of Water Supply - 4.95%
$ 3,550,000 4.500%, 07/01/23 $ 3,899,533
1,470,000 5.000%, 07/01/26 1,654,338
2,500,000 5.000%, 07/01/32 2,984,950
-----------
8,538,821
-----------
Waste System Revenue - 1.63%
2,380,000 5.250%, 07/01/36 2,815,207
-----------
Kauai County
General Obligation Bonds - 3.16%
400,000 3.125%, 08/01/23 406,952
770,000 5.000%, 08/01/24 945,575
880,000 3.625%, 08/01/25 963,811
2,780,000 5.000%, 08/01/27 3,139,204
-----------
5,455,542
-----------
Kukuiula Development - 2.00%
1,090,000 5.625%, 05/15/33 1,125,469
2,250,000 5.750%, 05/15/42 2,321,955
-----------
3,447,424
-----------
Maui County
General Obligation Bonds - 1.30%
1,000,000 5.000%, 07/01/23 1,122,290
1,000,000 5.000%, 07/01/24 1,119,200
-----------
2,241,490
-----------
Total Hawaii Municipal Bonds (Cost $154,644,801) 164,687,322
-----------
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
SCHEDULE OF INVESTMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
Value
Par Value (Note 1 (A))
--------- ------------
VIRGIN ISLANDS MUNICIPAL BONDS - 0.20%
------------------------------
Virgin Islands
Public Finance Authority, Series A - 0.05%
$ 80,000 7.300%, 10/01/18 $ 96,440
-----------
Public Finance Authority, Series A - 0.15%
250,000 5.000%, 07/01/14 255,038
-----------
Total Virgin Islands Municipal Bonds (Cost $332,068) 351,478
-----------
Total Investments (Cost $154,976,869) (a) 95.59% 165,038,800
Other Assets Less Liabilities 4.41% 7,622,563
------ -----------
Net Assets 100.00% $172,661,363
====== ===========
(a) Aggregate cost for federal income tax purposes is $154,879,918.
At September 30, 2012, unrealized appreciation (depreciation) of
securities for federal income tax purposes is as follows:
Gross unrealized appreciation $10,158,882
Gross unrealized (depreciation) -
-----------
Net unrealized appreciation $10,158,882
===========
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2012
----------------------------------------------------------------------------
Municipal
Fund
---------
ASSETS
Investments at market value
(Identified cost $154,976,869) (Note 1 (A)) $165,038,800
Cash 5,648,447
Interest receivable 2,310,326
Subscriptions receivable 5,000
Other assets 7,652
-----------
Total assets 173,010,225
LIABILITIES
Distributions payable 135,506
Redemptions payable 32,809
Management fee payable 70,286
Administration fee payable 2,811
Distribution plan payable 21,361
Shareholder servicing fee payable 14,057
Transfer agent fee payable 8,434
Chief Compliance Officer fee payable 4,944
Accrued expenses 58,654
-----------
Total liabilities 348,862
-----------
NET ASSETS $172,661,363
(Applicable to 15,269,766 shares outstanding, ===========
$.01 par value, 40,000,000 shares authorized)
NET ASSET VALUE, OFFERING AND REPURCHASE
PRICE PER SHARE, INVESTOR CLASS SHARES $11.31
=====
NET ASSETS
At September 30, 2012, net assets consisted of:
Paid-in capital $164,205,465
Undistributed net investment income 96,951
Accumulated net realized loss on investments (1,702,984)
Net unrealized appreciation 10,061,931
-----------
$172,661,363
===========
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
STATEMENT OF OPERATIONS
For the year ended September 30, 2012
----------------------------------------------------------------------------
Municipal
Fund
---------
INVESTMENT INCOME
Interest income $ 6,779,472
---------
Expenses
Management fee (Note 2) 824,496
Distribution costs (Notes 2 and 3) 247,351
Transfer agent fee (Note 2) 98,937
Shareholder services fee (Note 2) 164,897
Administration fee (Note 2) 32,977
Accounting fee 69,353
Legal and audit fees 118,884
Printing 8,950
Custodian fee 27,235
Insurance 11,458
Registration fee 10,713
Directors fee 10,901
Chief Compliance Officer fee (Note 2) 58,000
Miscellaneous 37,528
---------
Total expenses 1,721,680
Fee reductions (Note 5) (12,937)
---------
Net expenses 1,708,743
---------
Net investment income 5,070,729
---------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized loss from security transactions (124,346)
Change in unrealized appreciation (depreciation)
of investments 7,133,434
---------
Net gain on investments 7,009,088
---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $12,079,817
==========
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------------------------------------------------
For The Year Ended For The Year Ended
September 30, 2012 September 30, 2011
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income $ 5,070,729 $ 6,190,429
Net realized gain (loss) on investments (124,346) (469,436)
Increase (decrease) in unrealized appreciation
(depreciation) of investments 7,133,434 (2,350,769)
----------- -----------
Net increase (decrease) in net assets
resulting from operations 12,079,817 3,370,224
----------- -----------
Distributions to shareholders from:
Net investment income
Investor Class
($.34 and $.39 per share, respectively) (5,039,690) (6,118,746)
Capital gains
Investor Class
($.00 and $.00 per share, respectively) - -
---------- ----------
Total distributions to shareholders (5,039,690) (6,118,746)
----------- -----------
Capital share transactions (a)
Increase (decrease) in net assets resulting
from capital share transactions 7,355,597 (16,918,397)
----------- -----------
Total increase (decrease) in net assets 14,395,724 (19,666,919)
NET ASSETS
Beginning of year 158,265,639 177,932,558
----------- -----------
End of year
(including undistributed net investment income
of $96,951 and $85,213, respectively) $172,661,363 $158,265,639
=========== ===========
(a) Summary of capital share activity follows:
Investor Class Investor Class
------------------- ------------------
For The Year Ended For The Year Ended
September 30, 2012 September 30, 2011
------------------- -------------------
Shares Value Shares Value
Shares sold 1,140,860 $12,614,641 873,093 $ 9,315,095
Shares issued on reinvestment
of distributions 324,338 3,595,451 421,482 4,475,287
--------- ---------- --------- ----------
1,465,198 16,210,092 1,294,575 13,790,382
Shares redeemed (802,855) (8,854,495) (2,903,690) (30,708,779)
--------- ---------- --------- ----------
Net increase (decrease) 662,343 $7,355,597 (1,609,115) $(16,918,397)
========= ========= ========= ==========
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)
----------------------------------------------------------------------------
INVESTOR CLASS
-----------------------------------------
Years Ended September 30,
-----------------------------------------
2012 2011 2010 2009 2008
---- ---- ---- ---- ----
Net asset value
Beginning of year $10.83 $10.97 $10.80 $10.31 $10.88
----- ----- ----- ----- -----
Income from investment operations
Net investment income .34 .39 .37 .38 .39
Net gain (loss) on securities
(both realized and unrealized) .48 (.14) .17 .51 (.57)
----- ----- ----- ----- -----
Total from investment operations .82 .25 .54 .89 (.18)
----- ----- ----- ----- -----
Less distributions
Dividends from net investment income (.34) (.39) (.37) (.38) (.39)
Distributions from capital gains - - - (.02) -
----- ----- ----- ----- -----
Total distributions (.34) (.39) (.37) (.40) (.39)
----- ----- ----- ----- -----
End of year $11.31 $10.83 $10.97 $10.80 $10.31
===== ===== ===== ===== =====
Total return 7.65% 2.45% 5.12% 8.98% -1.73%
Ratios/Supplemental Data
Net assets, end of year (in 000's) $172,661 $158,266 $177,933 $165,893 $150,059
Ratio of expenses to average
net assets (a) 1.04% 1.03% 1.03% 1.05% 1.08%
Ratio of net investment income
to average net assets 3.06% 3.74% 3.49% 3.77% 3.54%
Portfolio turnover 22.52% 13.68% 19.60% 25.90% 13.47%
(a) Ratios of expenses to average net assets after the reduction of custodian
fees and other expenses under a custodian arrangement were 1.03%, 1.02%, 1.03%,
1.02%, and 1.02%, for the years ended September 30, 2012, 2011, 2010, 2009,
and 2008, respectively.
<FN>
See accompanying notes to financial statements.
</FN>
HAWAII MUNICIPAL FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 2012
----------------------------------------------------------------------------
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hawaii Municipal Fund ("Fund") is a series of First Pacific Mutual Fund, Inc.
which is registered under the Investment Company Act of 1940, as a non-
diversified open-end management investment company. First Pacific Mutual Fund,
Inc. currently has two investment portfolios, including the Hawaii Municipal
Fund which 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 a portfolio of investment grade
municipal securities issued by or on behalf of the State of Hawaii, or any of
its political subdivisions, 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, that are fixed income securities, are valued by an
independent pricing service using methodologies that it believes are
appropriate including actual market transactions, broker-dealer supplied
valuations, matrix pricing, or other electronic data processing techniques
designed to identify market values for such securities, in accordance with
procedures established in good faith by the Board of Directors.
Securities with remaining maturities of 60 days or less are valued on the
amortized cost basis as reflecting fair value. Securities for which
market quotations are not readily available or for which available prices
are suspect will be valued at "fair value" using methods determined in
good faith by or at the direction of the Board of Directors. For these
purposes, "fair value" means the price that the Investment Manager
reasonably expects 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. U.S. 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)
September 30, 2012
----------------------------------------------------------------------------
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/out changing an
investment's assigned level within the hierarchy.
The following is a description of the valuation techniques applied to the
Fund's major categories of financial instruments measured at fair value on
a recurring basis:
Municipal bonds are categorized in Level 2 of the fair value hierarchy.
The following is a summary of the inputs used in valuing the Fund's
investments, as of September 30, 2012. 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- $165,038,800 $-0- $165,038,800
There were no 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)
September 30, 2012
----------------------------------------------------------------------------
(B) FEDERAL INCOME TAXES
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute its taxable income, if any, to its shareholders. Therefore,
no federal income tax provision is required.
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, 2012, open Federal tax
years include the tax years ended September 30, 2009 - September 30, 2012.
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.
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.
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. At September 30, 2012, the Hawaii
Municipal Fund had a capital loss carryforward of $1,599,310 of which
$547,947 expires in 2017, $120,704 expires in 2018, and $282,754 short-
term capital loss and $647,905 long-term capital loss which do not expire.
The Fund had net capital losses of $103,674 incurred after October 31,
2011. 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.
(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
HAWAII MUNICIPAL FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(E) SHARE VALUATION
The net asset value per share for the Fund is determined by calculating
the total value of the Fund's assets, deducting its total liabilities and
dividing the result by the number of shares outstanding.
(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, respectively. In accordance with the terms of the
management agreement and of 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. For the period ended September 30,
2012, the Fund was allocated, and paid LFG, $58,000 of the Chief Compliance
Officer fee.
The Fund's distributor, Lee Financial Securities, Inc. ("LFS"), a wholly-owned
subsidiary of LFG, received $247,351 for costs incurred in connection with the
sale of the 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 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. Rule 12b-1
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.
HAWAII MUNICIPAL FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
(4) PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities aggregated $40,239,286 and $34,160,000,
respectively, for the Fund during the period October 1, 2011 and September 30,
2012.
(5) CUSTODY CREDITS
Under an agreement with the Fund's custodian bank, a portion of the 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
year ended September 30, 2012, such reductions amounted to $12,937 for the
Hawaii Municipal Fund. Credits used to offset expenses were as follows:
Custody fees, $12,937.
(6) TAX COMPONENTS OF CAPITAL AND DISTRIBUTIONS TO SHAREHOLDERS
The tax character of distributions paid during the years ended September
30, 2012 and 2011 were as follows:
Exempt- Long-Term
Interest Ordinary Capital Total
Dividends Income Gains Distributions
--------- -------- --------- -------------
Hawaii Municipal Fund
2012 $5,039,690 $ - $ - $5,039,690
2011 $6,118,746 $ - $ - $6,118,746
The tax character of distributable earnings at September 30, 2012 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 $ - $ - $(1,599,310) $(103,674) $10,158,882 $8,455,898
* 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, 2012, the Hawaii Municipal
Fund's undistributed investment income was decreased by $19,301, and accumulated
net realized loss on investments was decreased by $19,301.
(7) NEW ACCOUNTING PRONOUNCEMENTS
In December 2011, FASB issued ASU No. 2011-11 related to disclosures about
offsetting assets and liabilities. The amendments in this ASU require an entity
to disclose information about offsetting and related arrangements to enable
users of its financial statements to understand the effect of those
arrangements on its financial position. The ASU is effective for annual
reporting periods beginning
HAWAII MUNICIPAL FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
September 30, 2012
----------------------------------------------------------------------------
on or after January 1, 2013, and interim periods within those annual periods.
The guidance requires retrospective application for all comparative periods
presented. The Fund is currently evaluating theimpact ASU 2011-11 will have on
the financial statement disclosures.
(8) SUBSEQUENT EVENTS DISCLOSURE
In preparing the Fund's financial statements as of September 30, 2012, the
Fund's management considered the impact of subsequent events for potential
recognition or disclosure in these financial statements.
FIRST PACIFIC MUTUAL FUND, INC.
----------------------------------------------------------------------------
BOARD OF DIRECTORS AND OFFICERS (Unaudited)
Overall responsibility for management of First Pacific Mutual Fund, Inc., (the
"Company") rests with the Board of Directors. Each Director serves during the
lifetime of the Company and until its termination, or until the Director's
death, resignation, retirement or removal. The Directors, in turn, elect the
officers of the Company to actively supervise its day-to-day operations. The
officers have been elected for an annual term. The following table provides
information regarding each Director and officer of the Company.
Number of
Portfolios
Position Term of in Company Other
& Office and Complex Director
Office With Length of Principal Occupation Overseen -Ships
Name Age the Time During the Past by Held by
and Address Company Served Five Years Director* Director
--------------------------------------------------------------------------------
DISINTERESTED DIRECTORS
-----------------------
Clayton W.H. Chow (60) Director Unlimited Term Since April 2010, Sales 2 None
24 years Consultant, Henry Schein
Dental; prior to April 2010,
Office Technology Specialist,
Xerox Corporation and Account
Executive, Roadway Express
Lynden M. Keala (58) Director Unlimited Term Account Executive, 2 None
23 years Workflow One (formerly The
Relizon Company)
Stuart S. Marlowe (72) Director Unlimited Term Owner, Surfside Sales and 2 None
24 years Marketing (Sales and marketing of
music for the State of Hawaii)
Karen T. Nakamura (68) Director Unlimited Term Executive Vice President 2 None
15 years & CEO, Building Industry
Association of Hawaii;
Vice President, Wallpaper
Hawaii, Ltd.
Kim F. Scoggins (65) Director Unlimited Term Commercial Real Estate, 2 None
15 years Colliers Monroe Friedlander, Inc.
Real Estate, 1250 Oceanside
Partners
INTERESTED DIRECTORS
--------------------
Terrence K.H. Lee(55) Director, Unlimited Term Director, President and 2 None
Chairman, 24 years CEO, Lee Financial Group Inc.,
President Lee Financial Securities, Inc.,
and CEO and Lee Financial Recordkeeping,
Inc.
OFFICERS
--------
Nora B. Simpson (52) Treasurer (Since October Vice President, CCO, CFO, and
2004), Chief Compliance Treasurer, Lee Financial Group
Officer, Assistant Inc., Lee Financial Securities,
Secretary (Since July Inc., and Lee Financial
2002) Recordkeeping, Inc.
Charlotte A. Meyer (59) Assistant Treasurer Director, Assistant Treasurer and
(Since October 2004) Vice President, Lee Financial
Group Inc., Lee Financial
Securities, Inc., and Lee
Financial Recordkeeping, Inc.
Lugene Endo Lee (56) Secretary Director, Secretary and Vice
(Since July 1991) President, Lee Financial Group
Inc., Lee Financial Securities,
Inc., and Lee Financial
Recordkeeping, Inc.
Terrence K.H. Lee and Lugene Endo Lee are husband and wife.
Terrence K.H. Lee is an interested person of the Company by virtue of his
relationship as a director, officer and shareholder of the Fund's investment
manager, as a director and officer of the Fund's principal underwriter and
transfer agent and because he has had a material and professional
relationship with the Company for the last two completed calendar years.
*Each Company director oversees two portfolios of the Company that are currently
offered for sale.
Additional information about members of the Board of Directors and executive
officers is available in the Fund's Statement of Additional Information ("SAI").
To obtain a free copy of the SAI, please call (808) 988-8088.
HAWAII MUNICIPAL FUND INVESTOR CLASS (Unaudited)
Shareholder Information
Household Delivery of Shareholder Documents: Only one Prospectus, Annual and
Semi-Annual Report will be sent to shareholders with the same last name and
address on their Fund account, unless you request multiple copies. If you would
like to receive separate copies, please call us at (808) 988-8088. We will begin
sending you additional copies within 30 days. If your shares are held through a
service provider, please contact them directly.
Business Continuity Plan Summary Disclosure Statement: First Pacific Mutual
Fund, Inc., Lee Financial Group Inc., Lee Financial Securities, Inc. and Lee
Financial Recordkeeping, Inc. have developed Business Continuity Plans on how we
will respond to events that significantly disrupt our business. Since the timing
and impact of disasters and disruptions is unpredictable, we will have to be
flexible in responding to actual events as they occur. Contacting Us - If after
a significant business disruption you cannot contact us as you usually do at
(808) 988-8088, you should go to our website at www.leehawaii.com. Please visit
our website at www.leehawaii.com for the Business Continuity Plan Disclosure
Statement.
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, 2011 and ending June 30, 2012.
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.
Disclosure Regarding Approval of the Management Agreement
Hawaii Municipal Fund (Unaudited)
At a meeting held on July 25, 2012, the Board of Directors of First Pacific
Mutual Fund, Inc. ("Fund") considered and approved the continuance of the
Investment Management Agreement between the Fund and Lee Financial Group Inc.
("LFG") with respect to the Hawaii Municipal Fund (the "Portfolio"), a
series of First Pacific Mutual Fund, Inc., for an additional one-year period
ending September 30, 2013.
Prior to the meeting, the Directors had received detailed information from LFG.
This information together with other information provided by LFG and the
information provided to the Directors throughout the course of year 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. During the course of the year, the Directors received a
wide variety of materials relating to the services provided by LFG, including
reports on the Portfolio's investment results; portfolio composition; portfolio
trading practices; and other information relating to the nature, extent
and quality of services provided by LFG to the Fund and Portfolio. In addition,
the Board reviewed and considered supplementary information and presentations by
LFG that included materials regarding the Portfolio's investment results;
management fee; performance; expense comparisons; financial and profitability
information regarding LFG, descriptions of various functions such as compliance
monitoring and portfolio trading, and information about the experience and
qualifications of the personnel providing 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 renewal of the agreement with LFG representatives. In deciding to
recommend the renewal 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 its senior management, portfolio manager 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 the Fund and Portfolio and the Board is satisfied with the
quality of services provided by LFG in advising the Portfolio.
Other Services. The Board considered, in connection with the performance of
LFG's investment management services to the Fund and the Portfolio, the
following: LFG's policies, procedures and systems for 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 provided by LFG to the
Fund and Portfolio under the Administrative Agreement.
3. Investment Performance
The Board considered the Portfolio's unique, balanced pursuit of its investment
objective and the investment results of the Portfolio in light of its objective.
The Directors reviewed the short-term and long-term performance of the Portfolio
on an absolute basis and in comparison to its benchmark index and other
comparable Hawaii and single-state mutual funds. The Directors also reviewed the
rankings for the Portfolio by an independent rating and ranking organization.
The Directors took into consideration LFG's explanation that because the
Portfolio has a shorter effective maturity than the Barclays Capital Municipal
Bond Index, the Portfolio tends to lag the Index in declining interest rate
environments. LFG also reported that at June 30, 2012, an independent rating and
ranking organization had rated the Portfolio as having a low risk and a below
average return as compared to other single state municipal bond funds. The
Board concluded that the performance of the Portfolio is generally
competitive (in some cases performance for certain periods was higher than the
comparative performance information, and in other cases it was lower) with its
benchmark index and other comparable mutual funds.
4. Management Fees and Total Operating Expenses
The Board reviewed the management fees and total operating expenses of the
Portfolio and compared such amounts with the average fees and expense levels of
other comparable funds. The Board considered that LFG did not provide advisory
fee information on its other clients, because those clients are not managed
similarly to the Portfolio. The Board concluded that: the management fees for
the Portfolio are generally competitive with fees paid by comparable funds; and
the expense ratio of the Portfolio is generally competitive with the expenses
paid by comparable funds.
5. Adviser Costs, Level of Profits, Economies of Scale and Ancillary Benefits
The Board reviewed information regarding LFG's costs of providing services to
the Fund and the Portfolio, as well as the resulting level of profits to LFG.
The Board further concluded that the profit to LFG for investment management
services seems reasonable based on the services 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 noted that there are no soft dollar arrangements. 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 management fee for
the Portfolio was reasonable in relation to the benefits derived by LFG and its
affiliates from these relationships.
6. Conclusions
No single factor was determinative of the Board's decision to re-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 all of the Fund's Independent Directors, concluded that the
Investment Management Agreement, and the compensation is determined to be fair
and reasonable in light of such services provided and expenses 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
Roy W. Adams, Jr.
370 Park Street
Suite 2
Moraga, CA 94556
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
1818 Market Street, Suite #2400
Philadelphia, Pennsylvania 19103-2108
TRANSFER AGENT
Lee Financial Recordkeeping, Inc.
2756 Woodlawn Drive, Suite #6-201
Honolulu, Hawaii 96822-1856
Item 2. Code of Ethics.
(a) The registrant has adopted a code of ethics that applies to its principal
executive and senior financial executives.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f)(1) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a
copy of its code of ethics that applies to its principal executive and senior
financial executives.
(f)(2) Copies of the Code of Ethics may be obtained free of charge by accessing
the website www.leehawaii.com, 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.
Item 3. Audit Committee Financial Expert
(a)(1) The registrant's board of directors has determined that the registrant
does not have an audit committee financial expert serving on its audit
committee.
(a)(2) Not applicable.
(a)(3) The board of directors concluded that based on the required attributes,
no independent member of the Board qualified as a financial expert. Based on
the size of the registrant, the Board further concluded that a financial expert
was not required.
Item 4. Principal Accountant Fee and Services.
(a) Audit Fees.
The aggregate fees billed for each of the last two fiscal years for professional
services rendered by the principal accountant for the audit of the registrant's
annual financial statements or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
were $46,500.00 for the fiscal year ended September 30, 2012 and $45,500.00 for
the fiscal year ended September 30, 2011.
(b) Audit-Related Fees.
The aggregate fees billed in each of the last two fiscal years for assurance and
related services by the principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item were none for the fiscal year
ended September 30, 2012 and none for the fiscal year ended September 30, 2011.
(c) Tax Fees.
The aggregate fees billed in each of the last two fiscal years for professional
services rendered by the principal accountant for tax compliance, tax advice,
and tax planning were $7,000.00 for the fiscal year ended September 30, 2012 and
$6,700.00 for the fiscal year ended September 30, 2011.
(d) All Other Fees.
The aggregate fees billed in each of the last two fiscal years for products and
services provided by the principal accountant, other than the services reported
in paragraphs (a) through (c) of this Item were $8,250.00 for the fiscal year
ended September 30, 2012, and $8,000.00 for the fiscal year ended September 30,
2011. These fees are for services related to the internal control audit of the
transfer agent.
(e)(1) Audit Committee's Pre-Approval Policies and Procedures
1. (a) The Committee shall review and approve proposals for the
independent accountants to render permissible non-audit services. The Committee
may adopt pre-approval policies and procedures, including both general pre-
approvals and terms for specific case-by-case approvals, and may delegate the
authority to grant such pre-approvals to one or more members of the Committee.
(b) The pre-approval requirement may be waived with respect to the
provision of non-audit services for the registrant if: (i) the aggregate amount
of all such non-audit services provided to the registrant constitutes no more
than 5% of the total amount of revenues paid by the registrant to its
independent accountants during the fiscal year in which the non-audit services
are provided; (ii) such services were not recognized at the time of the
engagement to be non-audit services; and (iii) such services are promptly
brought to the attention of the Committee and approved prior to the completion
of the audit.
2. Review and approve in advance with the independent accountants each
non-audit engagement involving the registrant's independent accountants and the
registrant's investment adviser and any entity controlling, controlled by or
under common control with the adviser ("control affiliates") where: (i) the
investment adviser or its control affiliate provides ongoing services to the
registrant; and (ii) the engagement relates directly to the operations and
financial reporting of the registrant.
(a) The pre-approval requirement may be waived if: (i) the
aggregate amount of all services provided constitutes not more than 5% of the
total amount of revenues paid to the registrant's independent accountants by the
registrant's investment adviser and its control affiliates that provide
ongoing services to the registrant during the fiscal year in which the services
are provided that would have to be pre-approved by the registrant's Committee;
(ii) such services were not recognized by the registrant's adviser or its
control affiliates (that provide ongoing services to the Fund) at the time of
the engagement to be non-audit services; and (iii) such services are promptly
brought to the attention of the Committee and approved prior to the completion
of the audit.
(e)(2) None of the services provided to the registrant described in paragraphs
(b) - (d) of Item 4 were pre-approved by the audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable.
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant were $15,250 for the fiscal
year ended September 30, 2012 and $14,700 for the fiscal year ended September
30, 2011.
(h) Not applicable.
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 reports 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") (17CFR 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
(17CFR 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 that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over
financial reporting.
Item 12. Exhibits.
(a)(1) Code of Ethics is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940
Act (17 CFR270.30a-2(a)) and Section 302 of the Sarbanes Oxley Act
of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) 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 November 28, 2012
-----------------
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 November 28, 2012
-----------------
*Print the name and title of each signing officer under his or her signature.