<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1997
SECURITIES ACT FILE NO. 2-10766
INVESTMENT COMPANY ACT FILE NO. 811-123
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 69
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 68
THE COMPOSITE FUNDS
(FORMERLY COMPOSITE BOND & STOCK FUND, INC.)*
--------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
601 WEST MAIN AVENUE, SUITE 300
SPOKANE, WA 99201
----------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (509) 353-3486
JOHN T. WEST
THE COMPOSITE FUNDS
601 WEST MAIN AVENUE, SUITE 801
SPOKANE, WA 99201
---------------------------------------
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
JOSEPH B. KITTREDGE, JR. LAWRENCE R. SMALL
ROPES & GRAY PAINE, HAMBLEN, COFFIN
ONE INTERNATIONAL PLACE BROOKE & MILLER
BOSTON, MASSACHUSETTS 02110 717 WEST SPRAGUE AVENUE, SUITE 1200
SPOKANE, WA 99201-3505
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b), or
[ ] on [date] pursuant to paragraph (b), or
[ ] 60 days after filing pursuant to paragraph (a)(1), or
[X] 75 days after filing pursuant to paragraph (a)(2), or
[ ] on [date] pursuant to paragraph (a) of Rule 485.
================================================================================
*Effective on or before December 31, 1997 (the "Effective Time"), Composite U.S.
Government Securities Fund, Composite Income Fund, Composite Growth & Income
Fund, Composite Cash Management Company Money Market Fund, Composite Cash
Management Company Tax-Exempt Money Market Fund, Composite Tax-Exempt Bond
Fund, Composite Northwest Fund and Composite Bond & Stock Fund, the eight
initial series of shares of The Composite Funds, a Massachusetts business trust
(the "Trust") will succeed to all of the assets, rights, obligations and
liabilities of Composite U.S. Government Securities, Inc., Composite Income
Fund, Inc., Composite Equity Series, Inc., Composite Cash Management Company
Money Market Portfolio, Composite Cash Management Company Tax-Exempt Portfolio,
Composite Tax-Exempt Bond Fund, Inc., Composite Northwest Fund, Inc., and
Composite Bond & Stock Fund, Inc., respectively. The Trust has expressly adopted
the Registration Statement of Composite Bond & Stock Fund, Inc., as its own,
effective as of the Effective Time, for all purposes of the Investment Company
Act of 1940.
================================================================================
This Post-Effective Amendment relates only to the Composite High Yield Fund
series of The Composite Funds (the "Trust"). Information contained in the
Registration Statement relating to the other series of the Trust is neither
amended nor superseded hereby.
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
PART A
------
N-1A ITEM NO.
LOCATION
<S> <C> <C>
Item 1. Cover Page.............................................. Cover Page
Item 2. Synopsis................................................ Fee Table
Item 3. Condensed Financial Information......................... Not Applicable
Item 4. General Description of the Registrant................... The Fund's Investment
and Risk Considerations
Investment Restrictions
Item 5. Management of the Fund.................................. Who We Are
The Cost of Good
Management
Item 6. Capital Stock and Other Securities...................... Who We Are
Distribution of
Income and Capital
Gains
Income Taxes on Dividends and
Capital Gains
We're Here to Help You
Item 7. Purchase of Securities Being Offered.................... The Cost of Good
Management
The Value of a Single
Share
How to Buy Shares
Item 8. Redemption or Repurchase................................ How to Sell Shares
Item 9. Pending Legal Proceedings............................... Not applicable
PART B
------
Item 10. Cover Page.............................................. Cover Page
Item 11. Table of Contents....................................... Table of Contents
Item 12. General Information and History......................... Organization and Authorized Capital
Who We Are
Item 13. Investment Objectives & Policies........................ See Prospectus Page [ ]
Investment Practices
Investment Restrictions
Brokerage Allocations and Portfolio Transactions
Item 14. Management of the Fund.................................. The Fund and Its Management
Item 15. Control Persons and Principal Holders of Securities..... Trustees and Officers of the Fund
Item 16. Investment Advisory and Other Services.................. The Investment Adviser
Investment Management Services
Distribution Services
Custodian
Item 17. Brokerage Allocation & Other Practices.................. Brokerage
Allocations and Portfolio Transactions
Item 18. Capital Stock and Other Securities...................... Organization and Authorized Capital
Who We Are
Voting Privileges
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered........................................... How Shares are Valued
How Shares Can Be Purchased
Redemption of Shares (Part A)
Exchange Privilege
Services Provided by the Fund
Specimen Price
Make-Up Sheet
Item 20. Tax Status.............................................. Dividends, Capital Gain Distributions and Taxes
Item 21. Underwriters............................................ Distribution Services
Item 22. Performance Information................................. Performance Information
Item 23. Financial Statements.................................... Financial Statements and Reports
</TABLE>
<PAGE>
THE COMPOSITE FUNDS
601 WEST MAIN AVENUE, SUITE 300
SPOKANE, WASHINGTON 99201-0613
TELEPHONE (509) 353-3550 TOLL FREE (800) 543-8072
This prospectus describes Class A, Class B, Class I and Class S shares of the
Composite High Yield Fund (the "Fund"), one of nine series of The Composite
Funds (the "Trust") and provides information on how you may invest in such
shares. The Class A and Class B shares offer investors alternative ways of
paying sales charges and distribution costs. Class I shares are not offered or
sold to individual investors and Class S shares are sold exclusively to
investors who open Composite Asset Management Accounts. See "Class I shares" and
"Class S shares." Please read this prospectus before investing, and keep it for
future reference. It contains useful information that can help you decide
whether the investment goals of the Fund are right for you.
A Statement of Additional Information ("SAI") about the Fund, dated March 1,
1998, has been filed with the Securities and Exchange Commission (the "SEC"),
and is incorporated herein by reference (considered legally a part of this
prospectus). The SAI is available free upon request by calling the Trust at 800-
543-8072.
THE FUND MAY INVEST WITHOUT LIMIT IN LOWER-RATED BONDS, COMMONLY REFERRED TO
AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED TO BE SPECULATIVE WITH REGARD
TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL. PURCHASERS SHOULD CAREFULLY
ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THIS FUND. SEE "INVESTMENT
PRACTICES -- LOWER-RATED SECURITIES."
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL RESERVE BOARD OR
ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CROSS REFERENCE SHEET.................................................................................... 2
SUMMARY OF FUND EXPENSES................................................................................. 5
SUMMARY OF SIERRA TRUST FUNDS' EXPENSES.................................................................. 7
THE FUND'S INVESTMENT AND RISK CONSIDERATIONS............................................................ 8
Investment Practices................................................................................ 8
PERFORMANCE INFORMATION.................................................................................. 14
Yield............................................................................................... 14
Total Return........................................................................................ 14
Total returns and yields are based on past results and are not a prediction of future performance... 14
Obtaining Performance Information................................................................... 15
YOUR ACCOUNT............................................................................................. 16
Ways to Set Up Your Account......................................................................... 16
Individual or Joint Account......................................................................... 16
Retirement16
Gifts or Transfers to a Minor Child ("UGMA," "UTMA")................................................ 16
Trust............................................................................................... 16
Corporation or Other Organization................................................................... 17
How to Invest in the Fund........................................................................... 17
Buying Class A shares............................................................................... 19
Buying Class B or Class S shares.................................................................... 20
You must notify the Fund whenever you are entitled to a waiver of reimbursement of CDSC............. 21
Buying Class I shares............................................................................... 22
Distribution of income and capital gains............................................................ 22
How to Sell Shares.................................................................................. 22
IRAs and other tax-sheltered retirement plans....................................................... 23
Exchange Privilege and Restrictions................................................................. 24
Dividends, Capital Gains and Taxes.................................................................. 24
The Fund in Detail.................................................................................. 25
Organization........................................................................................ 25
Composite, Its Affiliates and Service Providers..................................................... 25
Adviser............................................................................................. 25
Administrator, Transfer Agent and Custodian......................................................... 25
Distributor......................................................................................... 25
Management Fee...................................................................................... 27
DESCRIPTION OF SECURITY RATINGS.......................................................................... 28
</TABLE>
i
<PAGE>
SUMMARY OF FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B AND CLASS S CLASS I
----------- -------------------- -------
<S> <C> <C> <C>
Maximum Sales Charge Imposed
on Purchases
(as a percentage of offering price) 4.50%(1) None None
----- ---- ----
Maximum Sales Charge Imposed
on Reinvested Dividends
(as a percentage of offering price) None None None
----- ---- ----
Deferred Sales Charge None(2) 5.00% None
----- ---- ----
Redemption Fees(3) None None None
----- ---- ----
Exchange Fees(4) None None None
----- ---- ----
</TABLE>
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B AND CLASS S CLASS I
----------- -------------------- -------
<S> <C> <C> <C>
Management Fees
(after voluntary waiver/
reimbursement)(5) --% --% --%
----- ---- ----
12b-1 Fees(6) 0.25% 1.00% --%
----- ---- ----
Other Expenses(7)
(after reimbursement) --% --% --%
----- ---- ----
Total Fund Operating Expenses
(after voluntary waiver/
reimbursement)(8) --% --% --%
----- ---- ----
</TABLE>
- ---------
(1) The initial sales charge is reduced for purchases of $50,000 and over,
decreasing to zero for purchases of $1,000,000 and over for the Fund.
(2) Certain investors who purchase Class A Shares at net asset value
(sometimes referred to herein as "NAV") based on a purchase amount of $1
million or more may be subject to a 1.0% contingent deferred sales charge
("CDSC") on redemptions within one year of purchase or a 0.5% CDSC on
redemptions after 1 year but within 2 years of purchase. Class A Shares
purchased through a qualified 401(k) or 403(b) plan may, in certain
circumstances, be subject to a CDSC of 1.0% if the shares are redeemed
within two years of their initial purchase.
(3) A $10.00 fee may be charged for each wire transfer if shares are redeemed
by wire transfer to a shareholder's pre-authorized designated bank account.
1
<PAGE>
(4) Upon written notice to shareholders, the exchange privilege may be modified
or terminated and/or the Trust may begin imposing a charge of up to $5.00
for each exchange. See "Your Account -- Exchange Privileges and
Restrictions."
(5) Reflects voluntary waivers of management fees by Composite. In the absence
of such voluntary waivers, estimated management fees would have been __%
for the High Yield Fund.
(6) Of the 12b-1 fees for the Class B and Class S Shares, 0.75% represents an
asset-based sales charge and 0.25% is a service charge. Due to the
continuous nature of the 12b-1 fee, long-term shareholders of the Fund may
pay more than the economic equivalent of the maximum front-end sales charge
otherwise permitted by the Conduct Rules of the National Association of
Securities Dealers, Inc. ("NASD").
(7) Estimated "other expenses" for the High Yield Fund, without reimbursements,
would have been ___%.
(8) The total fund operating expenses set forth in the foregoing table reflect
management fees and other expenses after voluntary waiver/reimbursement.
Absent such fee waiver/reimbursement estimated total fund operating
expenses would have been ___%.
2
<PAGE>
EXAMPLE:
You would have paid the following expenses on a $1,000 investment at the end of
each time period, assuming (1) 5% annual return and (2) reinvestment of all
dividends and distributions.
CLASS A(1)
1 YEAR $__
3 YEARS __
5 YEARS __
10 YEARS
CLASS B AND CLASS S
(assuming a complete redemption
at the end of period)(2)
1 YEAR $__
3 YEARS __
5 YEARS __
10 YEARS(3)
CLASS B AND CLASS S
(assuming no redemption)(4)
1 YEAR $__
3 YEARS __
5 YEARS __
10 YEARS(3)
CLASS I
1 YEAR $__
3 YEARS __
5 YEARS __
10 YEARS __
- ---------
(1) Assumes deduction at the time of purchase of maximum initial sales charge
for the Fund.
(2) Assumes deduction of maximum applicable contingent deferred sales charge.
(3) Assumes that conversion to Class A shares occurs after the eighth year.
THESE EXAMPLES ARE NOT MEANT TO STATE ACTUAL OR EXPECTED EXPENSES OR RATES
OF RETURN, WHICH MAY BE GREATER OR LESS THAN AS SHOWN. Absent the waiver of
fees or expense reimbursements by Composite as described above, the amounts
in the Example above would be greater. The purpose of this table is to
assist the investor in understanding the various costs and estimated
expenses that may be directly or indirectly borne by investors in the Fund.
3
<PAGE>
THE FUND'S INVESTMENT AND RISK CONSIDERATIONS
The following section describes the investment objective and policies of the
Fund and some of the risk considerations of investing in the Fund. The
"Investment Practices" section that follows provides more detailed information
about the investment practices of the Fund. Except as otherwise noted, the
investment guidelines set forth in this Prospectus and the SAI are not
fundamental and may be changed at any time without shareholder consent by vote
of the Board of Trustees of the Fund. A complete list of investment restrictions
that cannot be changed without the approval of a majority of the Fund's
outstanding shares is contained in the SAI.
The Fund invests, under normal market conditions, at least 65% of its assets in
a diversified portfolio of fixed income securities (including debt securities,
convertible securities and preferred stocks) rated lower than BBB by Standard &
Poor's ("S&P") or Baa by Moody's Investors Service or of equivalent quality as
determined by Composite Research & Management Co. ("Composite"). The remainder
of the Fund's assets may be invested in any other securities Composite believes
are consistent with the Fund's objective, including higher-rated fixed income
securities, common stocks and other equity securities. The Fund may invest in
securities of foreign issuers. The Fund may also engage in hedging strategies
involving equity options.
Securities rated below investment-grade (Baa by Moody's or BBB by S&P), as
well as comparable unrated securities, are commonly known as "junk bonds,"
usually entail greater risk (including the possibility of default or bankruptcy
of the issuers), generally involve greater price volatility and risk of
principal and income, and may be less liquid than higher rated securities. Both
price volatility and illiquidity may make it difficult for the Fund to value or
to sell certain of these securities under certain market conditions. Prices of
non-investment-grade debt securities may be affected by legislative and
regulatory developments. For further information, see the SAI.
Non-investment-grade debt securities are often considered to be speculative and
involve greater risk of default or price changes due to changes in the issuer's
creditworthiness. The market prices of these securities may decline
significantly in periods of general economic difficulty, which may follow
periods of rising interest rates.
Gary J. Pokrzywinski, CFA, Vice President and Senior Portfolio Manager of
Composite, has had primary responsibility for the day-to-day management of the
Fund's portfolio since its inception and has been employed by Composite since
1992.
INVESTMENT PRACTICES
The following pages contain more detailed information about types of securities
in which the Fund may invest, strategies Composite may employ in pursuit of the
Fund's investment objective, and a summary of risks and restrictions associated
with these securities and investment practices. The Fund's NAV will fluctuate
as the values of the securities it owns change. There are many factors that
influence fluctuations in the market value of securities owned by the Fund. An
individual security's price can be affected by such factors as poor earnings
reports by its issuer, litigation, loss of major customers, or changes
particular to its industry. For more information see the SAI. All policies and
limitations are considered at the time of purchase; the sale of securities is
not required in the event of a subsequent change in circumstances.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS. The Fund may
invest in securities of foreign issuers directly or in the form of American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") or other similar securities representing securities
of foreign issuers. These securities may not necessarily be denominated in the
same currency as the securities they represent. These securities involve the
risks described under "Foreign Investments" below.
BORROWING. The Fund may borrow money from banks solely for temporary or
emergency purposes in an amount up to [30]% of its net assets. If the Fund
borrows money, its share price may be subject to greater fluctuation until
4
<PAGE>
the borrowing is paid off. If the Fund makes additional investments while
borrowings are outstanding, this may be construed as a form of leverage.
Leveraging, which is speculative, will magnify declines as well as increases in
the value of the Fund's shares and increases the yield on the Fund's
investments.
In order to seek a high level of current income, the Fund may enter into dollar
rolls, in which the Fund sells securities for delivery in the current month and
simultaneously contracts to repurchase, typically in 30 or 60 days,
substantially similar (same type, coupon and maturity) securities on a specified
future date, which, under the Investment Company Act, as amended ("Investment
Company Act"), may be considered borrowings from the counterparty. The proceeds
of the initial sale of securities in the dollar roll transactions may be used to
purchase long- term securities which will be held during the roll period. To the
extent that the proceeds of the initial sale of securities are invested in long-
term bonds, the proceeds are subject to the higher volatility in price of such
long-term bonds in comparison to short-term bonds. See "Fixed-Income Obligations
and Securities" below.
The Fund may engage in reverse repurchase agreements, which under the Investment
Company Act may be considered borrowings by the seller. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the repurchase price of the securities and, if the
proceeds from the reverse purchase agreement are invested in securities, that
the market value of the securities bought may decline below the repurchase price
of the securities sold.
DEBT SECURITIES ISSUED OR GUARANTEED BY SUPRANATIONAL ORGANIZATIONS. The Fund
may invest assets in debt securities issued or guaranteed by supranational
organizations, such as obligations issued or guaranteed by the Asian Development
Bank, Inter-American Development Bank, International Bank for Reconstruction and
Development (World Bank), African Development Bank, European Coal and Steel
Community, European Economic Community, European Investment Bank and the Nordic
Investment Bank.
EXCHANGE RATE-RELATED SECURITIES. The Fund may invest in securities which are
indexed to certain specific foreign currency exchange rates. These securities
involve the possibility of significant changes in rates of exchange between the
U.S. dollar and any foreign currency to which an exchange rate-related security
is linked. In addition, there is no assurance that sufficient trading interest
to create a liquid secondary market will exist for a particular exchange rate-
related security due to conditions in the debt and foreign currency markets.
Illiquidity in the forward foreign exchange market and the high volatility of
the foreign exchange market may from time to time combine to make it difficult
to sell an exchange rate-related security prior to maturity without incurring a
significant price loss.
FIXED-INCOME SECURITIES. The market value of fixed-income securities held by the
Fund and, consequently, the value of the Fund's shares can be expected to vary
inversely to changes in prevailing interest rates. Investors should also
recognize that, in periods of declining interest rates, the yield of the Fund
will tend to be somewhat higher than prevailing market rates and, in periods of
rising interest rates, the Fund's yield will tend to be somewhat lower. Also,
when interest rates are falling, any net inflow of money to the Fund will likely
be invested in instruments producing lower yields than the balance of its
assets, thereby reducing current yield. In periods of rising interest rates, the
opposite can be expected to occur. The prices of longer maturity securities are
also subject to greater market fluctuations as a result of changes in interest
rates. In addition, obligations purchased by the Fund may be subject to the risk
of default.
FLOATING RATE, INVERSE FLOATING RATE AND VARIABLE RATE OBLIGATIONS. The Fund may
purchase floating rate, inverse floating rate and variable rate obligations,
including participation interests therein.
The Fund may purchase mortgage-backed securities that are floating rate, inverse
floating rate and variable rate obligations. Securities purchased by the Fund
may include floating rate, inverse floating rate and variable rate obligations,
including variable rate demand notes issued by industrial development
authorities and other governmental entities, as well as participation interests
therein. Although variable rate demand notes are frequently not rated by credit
rating agencies, the Fund may purchase unrated notes that are determined by
Composite to be of comparable quality at the time of purchase to rated
instruments that may be purchased by the Fund. The absence of an active
secondary market could make it difficult for the Fund to dispose of these
securities in the event the
5
<PAGE>
issuer of the note were to default on its payment obligations, and the Fund
could, for this or other reasons, suffer a loss as a result of the default.
An inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a multiple of the change in the index rate, which may
lead to greater volatility in their market values.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Fund may engage in foreign currency
exchange transactions. The Fund authorized to buy and sell securities
denominated in currencies other than the U.S. dollar, and receive interest,
dividends and sale proceeds in currencies other than the U.S. dollar, may enter
into foreign currency exchange transactions to convert to and from different
foreign currencies and to convert foreign currencies to and from the U.S.
dollar. The Fund either enters into these transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
uses forward contracts to purchase or sell foreign currencies.
The Fund may enter into foreign currency hedging transactions in an attempt to
protect against changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated portfolio position. These transactions tend to limit any potential
gain that might be realized should the value of the hedged currency increase.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
these securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of a hedging
strategy is highly uncertain. In addition, when Composite believes that the
currency of a specific country may deteriorate against another currency, it may
enter into a forward contract to sell the less attractive currency and buy the
more attractive one. The amount in question could be less than or equal to the
value of the Fund's securities denominated in the less attractive currency. The
Fund may also enter into a forward contract to sell a currency which is linked
to a currency or currencies in which some or all of the Fund's portfolio
securities are or could be denominated, and to buy U.S. dollars. These practices
are referred to as "cross hedging" and "proxy hedging."
Forward currency exchange contracts are agreements to exchange one currency for
another - for example, to exchange a certain amount of U.S. dollars for a
certain amount of Japanese Yen - at a future date and specified price. Because
there is a risk of loss to the Fund if the other party does not complete the
transaction, Composite will enter into foreign currency exchange contracts only
with parties approved by the Board of Trustees.
The Fund may maintain "short" positions in forward currency exchange
transactions, which would involve the Fund's agreeing to exchange currency that
it currently does not own for another currency - for example, to exchange an
amount of Japanese Yen that it does not own for a certain amount of U.S. dollars
- - at a future date and specified price in anticipation of a decline in the value
of the currency sold short relative to the currency that the Fund has contracted
to receive in the exchange.
Use of currency hedging techniques may be limited by the need to protect the
status of the Fund as a regulated investment company under the Code.
FOREIGN INVESTMENTS. The Fund may invest in securities of foreign issuers.
There are certain risks involved in investing in foreign securities, including
those resulting from (i) fluctuations in currency exchange rates, (ii)
devaluation of currencies, (iii) future political or economic developments and
the possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions, (iv) reduced availability of public
information concerning issuers, and (v) the fact that foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic companies. Moreover, securities of many foreign companies
may be less liquid and their prices more volatile than those of securities of
comparable domestic companies. In addition, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds
6
<PAGE>
or other assets of the Fund, including the withholding of dividends. The risks
associated with foreign securities may be greater for securities of issuers in
developing countries, commonly known as "emerging markets."
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the New York Stock Exchange ("NYSE"). Accordingly, the Fund's
foreign investments may be less liquid and their prices may be more volatile
than comparable investments in securities of U.S. companies. Moreover, the
settlement periods for foreign securities, which are often longer than those for
securities of U.S. issuers, may affect portfolio liquidity. In buying and
selling securities on foreign exchanges, the Fund normally pays fixed
commissions that are generally higher than the negotiated commissions charged in
the United States. In addition, there is generally less governmental supervision
and regulation of securities exchanges, brokers and issuers in foreign countries
than in the United States. In addition, foreign securities generally are
denominated and pay dividends or interest in foreign currencies, and the value
of the Fund's net assets as measured in U.S. dollars will be affected favorably
or unfavorably by changes in exchange rates.
GOVERNMENT STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may invest in
government stripped mortgage-backed securities issued or guaranteed by the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). These
securities represent beneficial ownership interests in either periodic principal
distributions (principal-only or "PO strips") or interest distributions
(interest-only or "IO strips") on mortgage-backed certificates issued by GNMA,
FNMA or FHLMC, as the case may be. Investing in government stripped mortgage-
backed securities involves the risks normally associated with investing in
mortgage-backed securities issued by government or government-related entities.
See "Mortgage-Backed Securities" below. In addition, the yields on PO and IO
strips are extremely sensitive to prepayments on the underlying PO and IO strips
mortgage loans. If a decline in the level of prevailing interest rates results
in a higher than anticipated rate of principal, distributions of principal will
be accelerated, thereby reducing the yield to maturity on IO strips and
increasing the yield to maturity on PO strips. Conversely, if an increase in the
level of prevailing interest rates results in a rate of principal prepayments
lower than anticipated, distributions of principal will be deferred, thereby
increasing the yield to maturity on IO strips and decreasing the yield to
maturity on PO strips. Sufficiently high prepayment rates could result in the
Fund's not fully recovering its initial investment in an IO strip. There can be
no assurance that the Fund will be able to effect a trade of a government
stripped mortgage-backed security at a time when it wishes to do so. The Fund
will acquire government stripped mortgage-backed securities only if a liquid
secondary market for the securities exists at the time of acquisition.
HOLDINGS IN OTHER INVESTMENT COMPANIES. When Composite believes that it would be
beneficial to the Fund and appropriate under the circumstances, the Fund may
invest its assets in securities of mutual funds that are not affiliated with
Composite. As a shareholder in any such mutual fund, the Fund will bear its
ratable share of the mutual fund's expenses, including management fees, and will
remain subject to the Fund's advisory and administration fees with respect to
the assets so invested. [In addition, the Fund may invest Fund assets in money
market funds affiliated with Janus Capital Corporation ("Janus"), provided that
Janus remits to the Fund the amount of any investment advisory and
administrative services fees paid to Janus as the investment manager of the
money market fund.]
ILLIQUID SECURITIES. Up to 15% of the net assets of the Fund may be invested in
securities that are not readily marketable. Such illiquid securities may include
(1) repurchase agreements with maturities greater than seven calendar days; (2)
time deposits maturing in more than seven calendar days; (3) to the extent a
liquid secondary market does not exist for the instruments, futures contracts
and options thereon; (4) certain over-the-counter options, as described in the
SAI; (5) certain variable rate demand notes having a demand period of more than
seven days; and (6) securities the disposition of which is restricted under
federal securities laws (excluding Rule 144A Securities, described below). The
Fund will not include for purposes of the restrictions on illiquid investments
securities sold pursuant to Rule 144A under the Securities Act of 1933, as
amended, so long as such securities meet liquidity guidelines established by the
Board of Trustees.
7
<PAGE>
LENDING OF SECURITIES. The Fund has the ability to lend portfolio securities up
to 20 % of total assets to brokers and other financial organizations. These
transactions involve a risk of loss to the Fund if the counterparty should fail
to return such securities to the Fund upon demand.
LOAN PARTICIPATIONS. The Fund may invest in participations and assignments of
fixed and floating rate loans made by financial institutions to governmental or
corporate borrowers. Participations and assignments involve the additional risk
that the institution's insolvency could delay or prevent the flow of payments on
the underlying loan to the Fund. The Fund may have limited rights to enforce the
terms of the underlying loan, and the liquidity of loan participations and
assignments may be limited. See the SAI.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Fund may invest in mortgage-
backed U.S. Government securities that represent interests in a pool of mortgage
loans. In addition, the Fund may invest in commercial mortgage-backed
securities, which are similar to the above Mortgage-Backed Securities, except
they are issued by non-governmental entities. Commercial mortgage-backed
securities include collateralized mortgage obligations and real estate mortgage
investment conduits ("REMICs"). While commercial mortgage-backed securities are
generally structured with one or more types of credit enhancement, they
typically lack a guarantee by an entity having the credit status of a
governmental agency or instrumentality.
To the extent that the Fund purchases mortgage-related or mortgage-backed
securities at a premium, mortgage foreclosures and prepayments of principal
(which may be made at any time without penalty) may result in a loss of the
Fund's principal investment. The yield of the Fund may be affected by
reinvestment of prepayments at higher or lower rates than the original
investment. In addition, like other debt securities, the value of mortgage-
related securities, including government and government-related mortgage pools,
will generally fluctuate in response to market interest rates.
The Fund may also purchase asset-backed securities. Asset-backed securities are
structured like mortgage-backed securities, but instead of mortgage loans or
interests in mortgage loans, the underlying assets may include such items as
motor vehicle installment sales or installment loan contracts, leases of various
types of real and personal property, and receivables from credit card
agreements. The ability of an issuer of asset-backed securities to enforce its
security interest in the underlying assets may be limited.
REITS. Real estate investment trusts, known as "REITs," involve certain unique
risks in addition to those risks associated with investing in the real estate
industry in general (such as possible declines in the value of real estate, lack
of availability of mortgage funds or extended vacancies of property). Equity
REITs may be affected by changes in the value of the underlying property owned
by the REITs, while mortgage REITs may be effected by the quality of any credit
extended. REITs are dependent upon management skills, are not diversified, are
subject to heavy cash flow dependency, default by borrowers, and self-
liquidation. REITs are also subject to the possibilities of failing to qualify
for tax free pass-through of income under the Code, and failing to maintain
their exemptions from registration under the 1940 Act.
Investment in REITs involves risks similar to those associated with investing in
small capitalization companies. REITs may have limited financial resources, may
trade less frequently and in a limited volume and may be subject to more abrupt
or erratic price movements.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements, which are
agreements to purchase underlying debt obligations from financial institutions,
such as banks and broker-dealers, subject to the seller's agreement to
repurchase the obligations at an established time and price. Default by the
seller would expose the Fund to possible loss because of adverse market action
or delay in connection with the disposition of the underlying obligations. In
addition, if bankruptcy proceedings are commenced with respect to the seller of
the obligations, the Fund may be delayed or limited in its ability to sell the
collateral.
STRATEGIC TRANSACTIONS. Subject to the investment limitations and restrictions
for the Fund as stated elsewhere in the prospectus and SAI, the Fund, may, but
is not required to, utilize various other investment strategies as described
below to hedge various market risks, to manage the effective maturity or
duration of fixed-income securities, or to seek potentially higher returns.
Utilizing these investment strategies, the Fund may purchase and sell, to the
extent not otherwise limited or restricted for the Fund, exchange-listed and
over-the-counter put and call options on securities, equity and fixed-income
indices and other financial instruments, purchase and sell financial futures
contracts and options thereon, enter into various interest rate transactions
such as swaps, caps, floors or collars, and enter into various currency
transactions such as currency forward contracts, currency futures contracts,
currency swaps or options on currencies or currency futures (collectively, all
the above are called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Some Strategic Transactions may
also be used to seek potentially higher returns. Any or all of these investment
techniques may be used at any time, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The use of Strategic
Transactions involves special considerations and risks, for example (1) the
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the ability of Composite to predict pertinent market movements; and
(2) there might be imperfect correlation, or even no correlation, between price
movements of Strategic Transactions and price movements of the related portfolio
8
<PAGE>
positions. Strategic Transactions can reduce risk of loss by wholly or partially
offsetting the negative effect of unfavorable price movements or of unfavorable
currency fluctuations in the related portfolio or currency positions, but can
also reduce opportunity for gain by offsetting the positive effect of favorable
price movements in positions. The Fund will comply with applicable regulatory
requirements when utilizing Strategic Transactions. Strategic Transactions
involving financial futures and options thereon will be purchased, sold or
entered into only for bona fide hedging, risk management or portfolio management
purposes. For more information, see the SAI.
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. Government Securities,
which include direct obligations of the U.S. Treasury (such as U.S. Treasury
bills, notes and bonds) and obligations directly issued or guaranteed by U.S.
Government agencies or instrumentalities. Some obligations issued or guaranteed
by agencies or instrumentalities of the U.S. Government are backed by the full
faith and credit of the U.S. Government (such as GNMA Bonds), others are backed
only by the right of the issuer to borrow from the U.S. Treasury (such as
securities of Federal Home Loan Banks) and still others are backed only by the
credit of the instrumentality (such as FNMA and FHLMC Bonds).
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or sell
securities on a when-issued or a delayed-delivery basis. The Fund will enter
into a when-issued transaction for the purpose of acquiring portfolio securities
and not for the purpose of leverage. Due to fluctuations in the value of
securities purchased on a when-issued or a delayed-delivery basis, the yields
obtained on such securities may be higher or lower than the yields available in
the market on the dates when the investments are actually delivered to the
buyers. Similarly, the sale of securities for delayed-delivery can involve the
risk that the prices available in the market when delivery is made may actually
be higher than those obtained in the transaction itself.
The use of when-issued transactions and forward commitments enables the Fund to
hedge against anticipated changes in interest rates and prices. However, if
Composite were to forecast incorrectly the direction of interest rate movements,
the Fund might be required to complete such when-issued or forward transactions
at prices inferior to then-current market values.
When-issued securities may include bonds purchased on a "when, as and if issued"
basis, under which the issuance of the securities depends on the occurrence of a
subsequent event. Any significant commitment of the Fund's assets to the
purchase of securities on a "when, as and if issued" basis may increase the
volatility of the Fund's NAV.
PERFORMANCE INFORMATION
YIELD
From time to time, the Fund may advertise 30-day yield. The 30-day yield of the
Fund refers to the income generated by an investment in the Fund over the 30-day
period identified in the advertisement, and is computed by dividing the net
investment income per share earned by the Fund during the period by the maximum
public offering price per share on the last day of the 30-day period. This
income is "annualized" by assuming that the amount of income is generated each
month over a one-year period and is compounded semiannually. The annualized
income is then shown as a percentage of the maximum public offering price. In
addition, the Fund may advertise a similar 30-day yield computed in the same
manner except that the NAV per share is used in place of the public offering
price per share.
TOTAL RETURN
From time to time, the Fund may advertise its average annual total return over
various period. Such total return figures show the average percentage change in
value of an investment in the Fund from the beginning date of the measuring
period. These figures reflect changes in the price of the Fund's shares and
assume that any income dividends and/or capital gains distributions made by the
Fund during the period were reinvested. Figures will be given for recent one-,
five- and ten-year periods (or from commencement of the Fund's operations) and
may be given for other periods.
9
<PAGE>
ADDITIONAL PERFORMANCE QUOTATIONS. Advertisements of total return may also show
total return without giving effect to sales charge. Similarly, the Fund may
provide yield quotations in investor communications based on the Fund's NAV
(rather than its public offering price) on the last day of the period covered by
the yield computation. Because these additional quotations will not reflect the
maximum sales charge payable, such performance quotations will be higher than
the performance quotations that include the maximum sales charge.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT A PREDICTION OF
FUTURE PERFORMANCE.
Performance information is computed separately for each class of shares. Because
Class B and Class S shares bear the expense of the higher distribution and
service fees, it is expected that performance for such shares will be lower than
that for the Fund's Class A or Class I shares. Because Class I shares do not
bear any distribution or service fees, performance for Class I shares will be
higher than that for the Fund's other classes of shares.
OBTAINING PERFORMANCE INFORMATION
The Fund's strategies, performance, and holdings are detailed twice a year in
fund reports, which are sent to all shareholders. The SAI describes the methods
used to determine the Fund's performance. Shareholders may call 800-543-8072 for
performance information. [Shareholders may make inquiries regarding the Fund,
including current total return figures, to any authorized dealer, or by calling
Composite Funds Distributor, Inc. at 800-543-8972.]
10
<PAGE>
YOUR ACCOUNT
WAYS TO SET UP YOUR ACCOUNT
INDIVIDUAL OR JOINT ACCOUNT
Individual accounts are owned by one person. Two types of joint accounts (having
two or more owners) can be opened:
(1) in a "joint tenancy" account, the surviving owner(s) automatically
receive(s) the shares of any owner(s) who die(s); and
(2) in a "tenants in common" account, the heir(s) of any deceased owner
receive(s) such owner's shares, rather than the surviving owners of the joint
account.
RETIREMENT
Retirement plans generally protect investment income and capital gains from
current taxes. Contributions to these accounts may be tax deductible. Retirement
accounts require special applications and typically have lower minimums.
.INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS") allow persons of legal age and under 70
1/2 years old with Adjusted Gross Income ("AGI") of less than $40,000 (or
$60,000 if married and filing jointly) to protect up to $2,000 (subject to
certain limitations for single persons with AGI equal to or greater than
$30,000 and married persons who file jointly with AGI equal to or greater than
$50,000) per tax year from certain tax effects. If your spouse does not work,
you can protect an additional $2,000 per year in your spouse's name.
.ROTH IRAS allow persons of legal age with AGI not exceeding $110,000 (or
$160,000 if married and filing jointly) to protect up to $2,000 (subject to
certain limitations for single persons with AGI equal to or greater than
$95,000 and married persons who file jointly with AGI equal to or greater than
$150,000) per tax year from certain tax effects.
.ROLLOVER IRAS permit persons to retain special tax advantages for certain
transfers from employer-sponsored retirement plans (often occurring when a
person changes employers).
.SIMPLIFIED EMPLOYEE PENSION PLANS ("SEP-IRAS") provide small business owners or
those with self-employed income (and their eligible employees) with many of the
same advantages as a Keogh, but with fewer administrative requirements.
GIFTS OR TRANSFERS TO A MINOR CHILD ("UGMA," "UTMA")
These gifts or transfers provide a way to give money to a child and obtain tax
benefits. A parent or grandparent can give up to $10,000 a year to each child
without paying federal gift tax. Depending on state laws, you can set up a
custodial account under the Uniform Gifts to Minors Act (UGMA) or the Uniform
Transfers to Minors Act (UTMA).
TRUST
Trusts can be used for many purposes, including charitable contributions and
providing a regular income for a child until a certain age. The trust must be
established before an account can be opened.
11
<PAGE>
CORPORATION OR OTHER ORGANIZATION
Corporations, associations, partnerships, institutions, or other groups may
invest for many purposes.
HOW TO INVEST IN THE FUND
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT: MINIMUM $250 TO ADD TO AN ACCOUNT: MINIMUM $100
--------------------------------------------- ---------------------------------------
<S> <C> <C>
BY PHONE . Exchange from another Fund, . Exchange from another Fund,
800-543-8072 SPIF or SAM Portfolios account with same SPIF or SAM Portfolios account
registration, including name, address, with the same registration,
and taxpayer ID number (social security including name, address, and
number for an individual). taxpayer ID number.
. Call Shareholder Services at 800-543- . Call Shareholder Services at
8072. (6:00 a.m. to 6:00 p.m., Pacific 800-543-8072
Time/9:00 a.m. to 9:00 p.m., Eastern
Time, Monday through Friday and 6:00
a.m. to 3:00 p.m., Pacific Time/9:00
a.m. to 6:00 p.m., Eastern Time, on
Saturdays)
BY MAIL . Complete and sign the application. Make . Make your check payable to the
your check or negotiable bank draft Fund in which you wish to invest.
payable to the Fund in which you wish to Indicate your Fund account number
invest. on your check.
Third-party checks are not accepted. Include the "next investment" stub
from your previous account
Mail the completed application form and statement. Mail the check and stub
check to: to the address printed on your
The Composite Funds account statement.
[c/o First Data Investor Services Group
P.O. Box 5118] . Exchange by mail: call 800-543-8072
Westboro, MA 01581-5118 for instructions.
BY WIRE 1. Telephone Shareholder Services and give . Instruct your bank/financial
the (a) name of the account as you wish institution to wire Federal Funds as
it to be registered; (b) address of the described at left under paragraph 2.
account; (c) taxpayer ID number (social
security number for an individual); and
(d) Fund name and class of shares.
2. Instruct your bank to wire Federal Funds
exactly as follows:
[Boston Safe Deposit Trust
Boston, MA
ABA# 011-001234
For credit to: The Composite Funds
Account #132012]
(Fund Name and Class of Shares)
(Customer's Name)
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(Customer's Social Security Number)
3. Mail the completed application form to:
The Composite Funds
[c/o First Data Investor Services Group
P.O. Box 5118
Westboro, MA 01581-5118]
AUTOMATICALLY 1. Obtain and complete an application form. . Pre-authorized periodic investments
are now processed automatically.
(MINIMUM NEW ACCOUNT 2. Attach a voided check or deposit slip (Minimum Amount $25)
AMOUNT $100) from the bank account you would like the
investments transferred from and indicate
either the day of the week or day(s) of
the month when the purchase would occur.
3. Mail the application to the address
listed above.
</TABLE>
INVESTMENT IN FUNDS THROUGH A [SAM] ACCOUNT. In addition to the diversification
among individual securities you receive by investing in the Fund, you may be
able to further diversify risk by spreading your assets among several different
Composite Funds that each have different risk and return characteristics. [SAM]
is an active investment management service offered by [Sierra Investment
Services Corporation ("Sierra Services")], the [SAM] investment adviser, that
allocates your investments across a combination of either Class A or Class S
shares of certain of the Composite Funds selected to meet long-term investment
objectives as well as, in certain circumstances, current income objectives.
[Sierra Services] has developed investment strategies for [SAM] accounts to meet
the diverse financial needs of different investors. You can open a [SAM]
account by meeting with one of the investment professionals of an authorized
dealer who will review your situation and help you identify your long-term
investment objectives. After using [SAM] criteria to determine your long-term
objectives, you can choose one of several investment strategies. Based on your
chosen strategy, your initial investment will be allocated among a number of the
Composite Funds and the Class A or Class S shares of such Composite Funds.
Depending on market conditions, [Sierra Services] from time to time (normally
quarterly) reallocates the combination of Composite Funds or the amounts
invested in the respective Class A or Class S shares of each to implement your
[SAM] investment strategy. In addition, your [SAM] account will be periodically
rebalanced to maintain your [SAM] strategy's current asset allocation mix, if
and when the Composite Funds' performance unbalances the strategy's mix. You
will pay [Sierra Services] a fee for the [SAM] account service that is in
addition to and separate from the fees and expenses you will pay directly or
indirectly as an investor in the Composite Funds.
From time to time, one or more of the Composite Funds used for investment by the
[SAM] accounts may experience relatively large investments or redemptions due to
[SAM] account allocations or rebalancings recommended by [Sierra Services].
These transactions will affect the Fund, because of the Fund experiences
redemptions as a result of reallocations or rebalancings, it may have to sell
portfolio securities, and if it receives additional cash, it will have to invest
the cash. While it is impossible to predict the overall impact of these
transactions over time, there could be adverse effects on portfolio management
to the extent that the Fund may be required to sell securities or invest cash at
times when it would not otherwise do so. These transactions could also have tax
consequences if sales of securities resulted in gains and could also increase
transaction costs. Composite, representing the interests of the Fund, is
committed to minimizing the impact of [SAM] account transactions on the Fund;
[Sierra Services], representing the interest of the [SAM] accounts, is also
committed to minimizing such impact on the Fund to the extent it is consistent
with pursuing the investment objective of the [SAM] accounts. Composite and
[Sierra Services] will nevertheless face conflicts in fulfilling their
respective responsibilities because they are affiliates and employ some of the
same professionals. Composite will monitor the impact of [SAM] account
transactions on the Fund.
BUYING CLASS A SHARES
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<PAGE>
The offering price for Class A shares is the NAV next calculated after receipt
of a properly completed purchase order, plus an initial sales charge as shown in
the table below. Sales charges may be reduced or waived as discussed following
the table. The final column in the table indicates what dealers receive for
selling Class A shares.
<TABLE>
<CAPTION>
Reallowed
Sales charge to dealers
-------------------- ----------
% of % of net % of
Purchase of offering amount offering
Class A shares price invested price
- ---------------------- -------- --------- ---------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.00%
$50,000 to $100,000 4.00 4.17 3.50
$100,000 to $250,000 3.50 3.63 3.00
$250,000 to $500,000 3.00 3.09 2.50
$500,000 to $1,000,000 2.00 2.04 1.75
$1,000,000 and above None* None* None*
</TABLE>
* See net asset value purchases.
Example: An investor considers putting $1,000 into the Fund's Class A shares.
Based on the first column in the above table, ___% of the $1,000 would pay for a
sales charge. The charge would be $45.00, which is ___% of the net investment of
$____, as the next column shows. The dealer selling the shares would be paid $__
of the $45.00, which is ___% of $1,000, as the last column shows.
The following is a summary of information on reduced sales charges for which an
investor may be qualified. This summary refers to the data in the above tables
that cover purchases of $50,000 or more.
CUMULATIVE DISCOUNT. This allows current purchases to qualify for the foregoing
discounts by including the value of shares of Composite Funds that were
purchased subject to an initial or contingent deferred sales charge. The
discount will be based on the amount of the new purchase plus the current
offering price of shares owned at the time of the purchase. Those eligible for a
cumulative discount include individuals, immediate family members or trustees
purchasing for single fiduciary accounts.
LETTER OF INTENT. This discount is for purchases made over an extended period.
It provides for a cumulative discount on the same basis as explained in the
previous paragraph if the following conditions are met: Purchases of Class A
shares must be made within a 13-month period that begins no earlier than 90 days
before the submission of a letter of intent from the investor to the Fund. For
more information about this discount, please contact Composite Funds Distributor
(the "Distributor") or an investment representative.
REINVESTMENT. Redemption proceeds of Class A shares that were subject to a sales
charge when first purchased may be reinvested in Class A shares within 120 days
without incurring another initial sales charge.
NET ASSET VALUE PURCHASES. There is no initial sales charge on Class A
purchases of $1 million or more but such shares may be subject to a contingent
deferred sales charge of 1.00% or .50%, if redeemed during the first or second
year after purchase, respectively.
Qualified employee benefit plans (including SEPs and SIMPLEs) that have more
than 10 participants or that have more than $25,000 invested in those Composite
Funds may purchase shares without an initial sales charge. However, a
contingent deferred sales charge of 1% may be imposed on the amount that was
invested through such a plan in Class A shares and that is redeemed (i) if,
within the first two years after the plan's initial investment in the Composite
Funds, the named fiduciary of the plan withdraws the plan from investing in the
Composite Funds in a manner that causes all shares held by the plan's
participants to be redeemed; or (ii) by a plan participant within two years of
the plan participant's purchase of such Class A shares. The contingent deferred
sales charge will be waived on redemptions in connection with certain
involuntary
14
<PAGE>
distributions, including distributions arising out of the death or post purchase
disability of a shareholder (including one who owns the shares as joint tenant).
Class A shares may be purchased at net asset value, and in any amount, by
officers, directors and employees of Composite or its affiliates, or companies
which have entered into selling agreements with the Distributor, and to certain
family members of such individuals. The purchase must be for investment purposes
only and may not be resold other than through redemption by the Fund. The Fund
may also offer their shares at net asset value [to investors who use the
redemption proceeds from mutual funds outside the Composite Funds (excluding
money market funds);] to certain retirement plans; and to brokers, dealers or
registered investment advisers who have entered into arrangements with the
Distributor providing specifically for the shares to be used in particular
investment products made available to their clients for which they may charge a
separate fee. The Distributor will pay authorized dealers commissions on certain
net asset value purchases as described in the Statement of Additional
Information.
CONSULT AN INVESTMENT REPRESENTATIVE OR SEE THE STATEMENT OF ADDITIONAL
INFORMATION IF YOU THINK YOU MAY QUALIFY FOR ANY OF THESE PURCHASE PLANS. YOU
MUST NOTIFY THE FUND AT THE TIME OF PURCHASE WHENEVER A REDUCED SALES CHARGE OR
NET ASSET VALUE PURCHASE APPLIES.
BUYING CLASS B OR CLASS S SHARES
Class B and Class S shares are offered at the NAV next calculated after receipt
of a properly completed purchase order without an initial sales charge. The
entire amount of the purchase is invested in the Fund. However, Class B and
Class S shares have higher distribution and service fees than Class A shares for
eight years. Also, if Class B or Class S shares are redeemed within six years of
purchase (four years in the case of Class B shares of the Short Term High
Quality Bond Fund), a contingent deferred sales charge generally must be paid.
Those charges and fees help make it possible for the Fund to sell Class B or
Class S shares without sales charges at the time of purchase.
The proceeds from any contingent deferred sales charges are paid to the
Distributor to defray expenses for providing distribution services for Class B
or Class S shares. Examples of such expenses include compensation to sales
people and selected dealers. The Distributor currently pays authorized dealers
commissions of 4.00% of the price of shares sold by them.
CONTINGENT DEFERRED SALES CHARGE. Class B and Class S shares redeemed within six
years of purchase are subject to a contingent deferred sales charge according to
the following schedule. Class B and Class S shares purchased by exchange will
be subject to a contingent deferred sales charge using the schedule of the
Composite Fund into or from which the shares were exchanged that would result in
the greatest contingent deferred sales charge applicable to such shares. Shares
purchased through reinvestment of dividends or capital gain distributions are
not subject to a contingent deferred sales charge.
Year of Contingent
Redemption Deferred
After Purchase Sales Charge
First......................... 5.00%
Second........................ 4.00%
Third......................... 3.00%
Fourth........................ 3.00%
Fifth......................... 2.00%
Sixth......................... 1.00%
Seventh and
following..................... 0%
The contingent deferred sales charge is calculated by applying the above
percentages to whichever of the lesser of the NAV of the redeemed shares at the
time they were purchased or the NAV of the redeemed shares at the time of
redemption.
15
<PAGE>
This means that no contingent deferred sales charge will be charged on any NAV
increases above the initial purchase price. Shares are redeemed in the order
that results in the lowest possible rate being charged. Accordingly, they will
be redeemed first from: shares purchased through reinvested dividends or capital
gain distributions and then in the order of purchase.
Here is an example:
An investor purchases 100 Class B shares at $10 per share -- for a total cost of
$1,000. In the second year after the purchase, the NAV has risen to $12 per
share, and the investor has acquired 10 more shares through dividend
reinvestment.
At that time, the investor decides to make the first redemption. The transaction
includes 50 shares at $12 per share -- for a total of $600.
The first 10 shares to be redeemed will not be subject to any charge because of
the 10 shares received from dividend reinvestment. See item 1) just above this
example.
As for the other 40 shares, the charge will be applied only to the original cost
of $10 per share. The NAV increase of $2 per share will not be considered. As a
result, $400 of the redemption proceeds (40 x $10) will be charged a rate of 4%,
which is the second-year rate shown in the table above. The resulting sales
charge will be 4% x $400, which will be $16.
The contingent deferred sales charge may be waived for redemptions of Class B
shares under these circumstances:
1) Following the death or post purchase disability of a shareholder, as
defined in Section 72(m)(7) of the Internal Revenue Code
2) In connection with certain distributions from an IRA or other retirement
plan, as described in the SAI
3) According to the Fund's systematic withdrawal plan -- but limited to 12%
annually of the value of the Fund account at the time the plan is
established; and
4) In connection with the liquidation by the Fund of a shareholder's account
as described under "How to sell shares."
REINVESTMENT. You may reinvest in Class B shares within 120 days of redemption
and receive reimbursement credited to your account for any contingent deferred
sales charge you previously paid. The holding period of such shares for purposes
of determining any contingent deferred sales charges ("CDSC") conversion to
Class A shares shall be the date from the initial purchase of such shares as
described in the following section.
YOU MUST NOTIFY THE FUND WHENEVER YOU ARE ENTITLED TO A WAIVER OF REIMBURSEMENT
OF CDSC.
CONVERSION FEATURE. Class B and Class S shares that remain outstanding for eight
years will convert to Class A shares of the same Fund. The basis for this will
be the relative NAVs at the time of conversion.
Some investors buy shares at several different times and reinvest dividends and
capital gains over an extended period. Each time a conversion takes place, a
pro-rata portion of shares of the same class acquired through the reinvestment
of dividends and capital gain distributions also will convert to Class A shares.
The conversion of Class B and Class S shares to Class A shares is subject to a
favorable ruling from the Internal Revenue Service or the continuing
availability of an opinion of legal counsel that such conversion will not be
subject to federal income taxes. There cannot be any assurance that a ruling or
opinion will be available. If they should not be available, the conversion of
Class B shares to Class A shares would not occur and those shares would continue
to be subject to higher expenses than Class A shares for an indefinite period.
[Class B shares of the Fund, other than Class B shares purchased by exchange of
Class B shares that, when originally purchased, were subject to a lower
contingent deferred sales charge than that applicable to Class B shares of the
Fund, may be exchanged for Class S shares of a Composite Fund if the investor
has an existing [SAM] account or opens a [SAM] account and meets the investment
minimum for such [SAM] account.]
BUYING CLASS I SHARES
16
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Class I shares are sold exclusively to the various investment portfolios of
[Sierra] Asset Management Portfolios. Class I shares are sold at the net asset
value next determined after receipt of a properly completed purchase order. For
more information about [Sierra] Asset Management Portfolios, consult your
investment representative or call the Distributor.
DISTRIBUTION OF INCOME AND CAPITAL GAINS
The Fund distributes dividends from net investment income (which is essentially
interest and dividends from securities held), minus expenses. It also makes
capital gain distributions if realized gains from the sale of securities exceed
realized losses. The amount of dividends of net investment income and
distributions of net realized long- and short-term capital gains payable to
shareholders will be determined for the Fund. The Fund distributes capital
gains, if any, at least annually, normally in December. Dividends from the net
investment income of the Fund will normally be declared [daily and paid
monthly].
You have four choices regarding what you do with dividends and capital gain
distributions. You can make your choice at the time of your initial purchase or
by contacting the Fund's offices or your investment representative. The options
include:
AUTOMATIC REINVESTMENT. This procedure is automatically effective unless you
choose another option. All dividends and capital gain distributions are
reinvested into additional shares of the Fund.
REINVEST DIVIDENDS IN ANOTHER COMPOSITE FUND. Income dividends may be
automatically invested in the same class of shares of another Fund provided that
Fund is available for sale in your state of residence.
CASH PAYMENT OF INCOME AND REINVESTMENT OF ANY CAPITAL GAINS. With this option,
income dividends are deposited to your pre-authorized bank account or paid by
check. Any capital gain distributions are reinvested in additional shares of the
Fund.
CASH PAYMENT OF ALL DISTRIBUTIONS. All dividends and capital gain distributions
are deposited to your pre-authorized bank account or paid by check.
Reinvestments of income dividends and capital gain distributions are made at the
closing NAV on the day dividends or distributions are deducted from the Fund's
assets.
If you've chosen to receive dividends or capital gain distributions in cash and
your check is returned as undeliverable, the Fund reserves the right to reinvest
your check at the then-current NAV and to automatically reinvest subsequent
dividends and capital gain distributions in your account. The Fund may also
automatically reinvest dividends or distributions of $10 or less.
HOW TO SELL SHARES
You may redeem shares at any time. The price paid per share will be the next NAV
that is calculated (less any applicable CDSC).
TELEPHONE. You may authorize telephone transactions on your Fund account
application. Provided you have pre-authorized these transactions, you may redeem
or exchange shares by telephoning 1-800-543-8072. You may also request these
transactions through your investment representative. Proceeds may be directed to
a pre-authorized bank or broker account or to the address of record for the
account. Exchanges also may be made by telephone. (See the previous section for
more information.)
It may be difficult to reach the Trust offices by telephone during periods of
unusual economic or market activity. Please be persistent if this occurs. Calls
requesting telephone redemption or exchanges during periods of unusual market
activity that are received after business hours will be recorded and returned in
the order they were received.
For your protection, all telephone instructions are verified by requesting
personal shareholder information, providing written confirmations of each
telephone transaction, and recording telephone instructions. The Transfer Agent
may require a Letter of Authorization, other documents, or authorization from
your broker to initiate telephone redemptions of $25,000 or more that are not
directed to your pre-authorized bank or broker account. If these or other
reasonable procedures are used, neither the Transfer Agent nor the Fund will be
liable for following telephone instructions which they reasonably believe to be
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genuine. Shareholders assume the risk of any losses in such cases. However, the
Transfer Agent or the Fund may be liable for any losses because of unauthorized
or fraudulent telephone instructions if they fail to follow reasonable
procedures.
WRITTEN REQUEST. Redemptions also may be requested by writing the Trust offices.
Written requests may require a signature guarantee, as discussed below, and the
return of any outstanding share certificates. Changes in pre-authorized
redemption instructions or your account registration also require signature
guarantees. For your protection, the signature(s) must be guaranteed by an
officer of a U.S. bank belonging to the Federal Reserve System, a member of the
Stock Transfer Association Medallion Program, or a member of the National
Association of Securities Dealers, Inc.
PROMPT PAYMENT. Payment normally will be made on the next business day after
redemption, but no later than seven days after the transaction, unless you
recently purchased Fund shares by check. In that case, redemption proceeds may
be delayed for up to 15 days, until the Transfer Agent verifies collection of
the check. Redemption proceeds will be sent by check or Automated Clearing House
transfer to your bank account without charge. Wire redemption proceeds may be
subject to a $10 fee. The receiving bank also may charge a fee.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders may choose to receive specific cash
withdrawals on a periodic basis. A $5,000 minimum balance is required to
establish a systematic withdrawal plan in the Fund account. Shares of the Fund
will be redeemed to provide the requested payment. Naturally, withdrawals that
continually exceed dividend income and capital gains will eventually exhaust the
account. Class B and Class S shareholders may use a systematic withdrawal plan
to redeem up to 12% of the beginning balance annually without incurring a
contingent deferred sales charge. The beginning balance is the Fund account
balance at the time the plan is established.
OTHER CONSIDERATIONS. It is costly to maintain small accounts. Accordingly, an
account may be closed after 90 days, written notice if the total account value
falls below a minimum (currently $700 or, in the case of an IRA account, $500)
when any transfer or redemption is made. Shares will be redeemed at the next
calculated NAV on the day the account is closed. To prevent an account closure,
investors may purchase shares to bring their account balance above the minimum
during the 90-day grace period.
IRAS AND OTHER TAX-SHELTERED RETIREMENT PLANS
Shares in the Fund may be appropriate for many retirement plans, including IRAs.
Retirement plan contributions are tax deductible in some cases, and earnings
compound on a tax-deferred basis until withdrawn.
From time to time, Composite Funds Distributor, Inc. (the "Distributor") or its
affiliates may offer "IRA bonuses" on IRA rollovers and transfers to IRA
accounts maintained by them. The Fund does not pay any portion of these bonuses.
The products purchased through these rollovers and transfers may include the
Fund. This payment may be considered a reduction in the Distributor's sales
charge.
Information about IRAs and other qualified retirement plans is available from
the Fund offices or your investment representative.
EXCHANGE PRIVILEGE AND RESTRICTIONS
You may exchange shares of the Fund for shares of the same class of any other
Composite Fund. In addition, it is expected that you will be able to exchange
shares of any Composite Fund for shares of the same class of any other Composite
Fund beginning in the 2nd quarter of 1998.
Exchanges are made at the relative NAVs of the shares being exchanged. No
additional sales charge will be incurred when exchanging shares from a Fund
which imposes an initial or contingent deferred sales charge. Any contingent
deferred sales charge on the subsequent sale of shares acquired by exchange will
be based on the contingent deferred sales charge schedule of the Fund into or
from which the shares were exchanged that would result in the greatest
contingent deferred sales charge applicable to such shares. Shares exchanged
from a Money Market fund will be subject to the acquired Fund's sales charge
unless the shares given in exchange were previously exchanged from a fund that
imposes an initial or contingent deferred sales charge. Shares of the Fund may
also be exchanged for ______________. [Sierra Prime Income] Fund is subject to
the availability of shares of [Sierra Prime Income] Fund for exchange purposes
as stated in the prospectus and statement of additional information of [Sierra
Prime Income] Fund. Also, although shares of [Sierra Prime Income] Fund may be
exchanged for shares of the Fund, such exchanges are
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permitted approximately once each calendar quarter so long as [Sierra Prime
Income] Fund makes a repurchase offer for its shares in such quarter and so long
as the [Sierra Prime Income] Fund repurchase offer is sufficiently large to
include [Sierra Prime Income] Fund shares tendered for exchange. For more
information about [Sierra Prime Income] Fund, please consult your investment
representatives or call the Distributor.
All exchanges are subject to the minimum investment requirements of the Fund
being acquired and to its availability for sale in your state of residence. You
may arrange for automatic monthly exchanges. The Fund reserves the right to
refuse any order for the purchase of shares, including those by exchange. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the Fund and, consequently, may be disallowed.
Exchanges of shares are sales and may result in a gain or loss for federal and
state income tax purposes.
DIVIDENDS, CAPITAL GAINS AND TAXES
You are responsible for federal income tax (and state and local income taxes, if
applicable) on dividends and capital gain distributions. This is true whether
such dividends or distributions are paid in cash or reinvested in additional
shares. You will be advised annually as to the amount and tax status of these
dividends and distributions.
Generally, dividends paid by the Fund from interest, dividends or net short-term
capital gains will be taxed as ordinary income. Distributions designated by the
Fund as deriving from net gains on securities held for more than one year but
less than 18 months, and from net gains on securities held for more than 18
months are taxable as such, regardless of how long you have held your shares. If
your shares are in an IRA or another qualified retirement plan, you will not
have to pay tax on the reinvested amount until funds are withdrawn.
The Fund intends to comply with provisions of the Internal Revenue Code
applicable to regulated investment companies and will distribute its ordinary
income and capital gain net income accordingly. Because of this, the Fund does
not anticipate being subject to federal income or excise taxes on earnings it
distributes to shareholders.
Because of tax law requirements, you must provide the Fund an accurate and
certified Social Security number or taxpayer identification number to avoid the
31% "back-up" withholding tax.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT A COMPLETE DESCRIPTION OF
THE FEDERAL, STATE OR LOCAL TAX CONSEQUENCES OF INVESTING IN THE FUND. YOU
SHOULD CONSULT YOUR TAX ADVISER BEFORE INVESTING IN THE FUND.
HOW NAV IS DETERMINED. Portfolio securities and other assets are valued
primarily on the basis of market quotations or, if quotations are not readily
available, by a method that the Board of Trustees believes accurately reflects
fair value. Foreign securities are valued on the basis of quotations from the
primary market in which they are traded, and are translated from the local
currency into U.S. dollars using current exchange rates. The NAVs are determined
at the end of each business day of the New York Stock Exchange or at 1:00 p.m.
Pacific time, whichever is earlier.
The Fund reserves the right to suspend the offering of shares of any class at
any time. The Fund also reserves the right to reject any specific purchase
order, including certain purchases by exchange. Purchase orders may be refused
if, in the opinion of the Distributor they are of a size that would disrupt
management of the Fund.
SHAREHOLDER SERVICES MAY CHARGE A FEE FOR SPECIAL SERVICES, such as providing
historical account documents, that are beyond the normal scope of its services.
THE FUND IN DETAIL
ORGANIZATION
The Fund is a series of The Composite Funds, a Massachusetts business trust
organized on ___________, 1997 (the "Trust").
THE FUND MAY HOLD SPECIAL MEETINGS AND MAIL PROXY MATERIALS. As a series
Massachusetts business trust, the Fund is not required to hold annual
shareholder meetings. On occasion, however, special meetings may be called to
elect or remove trustees, change fundamental policies, approve a management
contract, or for other purposes. Shareholders not attending
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these meetings are encouraged to vote by proxy. When matters are submitted for
shareholder vote, shareholders of each class will have one vote for each full
share owned and proportionate, fractional votes for fractional shares held and
will have exclusive voting rights with respect to matters pertaining solely to
such class, respectively.
COMPOSITE, ITS AFFILIATES AND SERVICE PROVIDERS
ADVISER
The Fund is managed by Composite Research & Management Co., which is referred to
as Composite in this Prospectus.
In connection with its service as investment adviser to the Fund, Composite may
engage one or more sub-adviser to provide investment advisory services and may
change or eliminate any such sub-adviser if it deems such action to be in the
best interests of the Fund and its shareholders.
Composite is an indirect wholly- owned subsidiary of Washington Mutual, Inc.
("Washington Mutual"). Washington Mutual is a publicly owned financial services
company. As of June 30, 1997, Composite and its affiliates had total assets
under management of approximately $___ billion.
ADMINISTRATOR, TRANSFER AGENT AND CUSTODIAN
Murphey Favre Securities Services, Inc. provides shareholder service and other
administrative services. Sierra Administration is under common control with
Composite and Sierra Services. Sierra Administration is located at 9301 Corbin
Avenue, Northridge, California 91324.
DISTRIBUTOR
Composite Funds Distributor, Inc. is the distributor of the Class A, Class B,
Class I and Class S shares of the Fund. The Distributor, located at 1201 Third
Avenue, Suite 780, Seattle, WA 98101, is an indirect wholly owned subsidiary of
Washington Mutual.
The Fund has three distribution plans, pursuant to Rule 12b-1 under the 1940
Act, applicable to Class A, Class B and Class S shares of the Fund (each, a
"Rule 12b-1 Plan"), respectively. Under the applicable Rule 12b-1 Plans, the
Distributor receives a service fee at an annual rate of .25% of the average
daily net assets of each class. In addition, the Distributor is paid an annual
fee as compensation in connection with the offering and sale of Class B and
Class S shares of the Fund at an annual rate of .75% of the average daily net
assets of such shares. These fees may be used to cover the expenses of the
Distributor primarily intended to result in the sale of such shares of the Fund,
including payments to the Distributor's representatives or others for selling
shares. Because the Distributor may retain any amount of its fee that is not so
expended, these Rule 12b-1 Plans are characterized by the SEC as "compensation"
plans.
In addition to providing for the expenses discussed above, each Rule 12b-1 Plan
also recognizes that Composite may use its investment advisory fees or other
resources to pay expenses associated with activities primarily intended to
result in the promotion and distribution of the Fund's shares. The Distributor
may, from time to time, pay to other dealers, in connection with retail sales or
the distribution of shares of the Fund, material compensation in the form of
merchandise or trips. Salespersons and any other person entitled to receive any
compensation for selling or servicing the Fund's shares may receive different
compensation with respect to one particular class of shares over another.
PORTFOLIO TRANSACTIONS AND TURNOVER. All orders for the purchase or sale of
securities on behalf of the Fund are placed by Composite with broker-dealers
that it selects. Broker-dealers are selected on the basis of their ability to
obtain best price and execution for the Fund's transactions and recognizing
brokerage, research and other services provided to the Fund and to Composite.
The Fund may, at the discretion of Composite, utilize authorized dealers or
brokers affiliated with Composite in connection with a purchase or sale of
securities in accordance with rules adopted or exemptive orders issued by the
SEC.
The Fund will not consider portfolio turnover rate a limiting factor in making
investment decisions consistent with their investment objectives and policies.
The Fund estimates that its portfolio turnover rate for its first fiscal year
will not exceed ___%.
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MANAGEMENT FEE
The management fee is calculated and paid to Composite every month. The
management fee for the Fund is based upon a percentage of the average net assets
of the Fund. Absent fee waivers, the total management fee for the Fund as
provided in the investment advisory agreement of the Fund is as follows:
<TABLE>
<CAPTION>
Amount of
Assets After 50; After 75; After 100; After 125; After 150; After 200; After 300; After 400; Over
($ Mil.) First 50 next 25 next 25 next 25 next 25 next 50 next 100 next 100 next 100 500
- ------------ -------- --------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield
- ------------ -------- --------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----
- ------------ -------- --------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----
- ------------ -------- --------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----
- ------------ -------- --------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----
- ------------ -------- --------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----
- ------------ -------- --------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE TRUST'S
OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFERING OF THE TRUST'S SHARES,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER
MAY NOT LAWFULLY BE MADE.
================================================================================
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DESCRIPTION OF SECURITY RATINGS
Moody's Investors Service, Inc. (Moody's)
Corporate and Municipal Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack out- standing investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Standard & Poor's (S&P)
Corporate and Municipal Ratings
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only to a small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC, and C is regarded, on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest.
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While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, or economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy has been filed but debt service payments
are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition of debt service payments are jeopardized.
Commercial Paper
A1 and Prime 1 commercial paper ratings issued by Moody's Investors Services,
Inc. (Moody's) and Standard & Poor's (S&P) are the highest ratings these
corporations issue.
Among factors considered by Moody's in assigning ratings are the following: (1)
evaluation of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
maybe inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships which exist with
the issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparation to
meet such obligations.
Commercial paper rated A1 by S&P has the following characteristics: Liquidity
ratios are adequate to meet cash requirements. Long-term senior debt is rated A
or better. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determine whether the issuer's commercial paper is rated A1, A2 or
A3.
ABSENCE OF RATING:
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Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to quality of the issue. Should no
rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published.
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STATEMENT OF
ADDITIONAL
INFORMATION
March 1, 1998
COMPOSITE HIGH YIELD FUND (the "Fund"),
a series of
The Composite Funds (the "Trust")
601 W. Main Avenue, Suite 801
Spokane, WA 99201-0613
Telephone: 509-353-3550
Toll free: 800-543-8072
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS (THE "PROSPECTUS") OF THE FUND DATED MARCH 1,
1998, WHICH CAN BE OBTAINED WITHOUT CHARGE BY CONTACTING THE FUND AT THE ABOVE
ADDRESS.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE FUND AND ITS MANAGEMENT........................ 2
DISTRIBUTION SERVICES.............................. 7
HOW SHARES ARE VALUED.............................. 8
HOW SHARES CAN BE PURCHASED........................ 8
REDEMPTION OF SHARES............................... 10
EXCHANGE PRIVILEGE................................. 11
SERVICES PROVIDED BY THE FUND...................... 11
TAX-SHELTERED RETIREMENT PLANS..................... 11
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES.... 12
INVESTMENT PRACTICES............................... 13
INVESTMENT RESTRICTIONS............................ 14
PERFORMANCE INFORMATION............................ 15
BROKERAGE ALLOCATIONS AND PORTFOLIO TRANSACTIONS... 16
GENERAL INFORMATION................................ 17
</TABLE>
THE FUND AND ITS MANAGEMENT
The Investment Adviser
The Fund is managed and investment decisions are made under the supervision of
Composite Research & Management Co. ("Composite"). Decisions to buy, sell, or
hold a particular security are made by an investment team of Composite, approved
by an investment committee of Composite, subject to the control and final
direction of the Board of Trustees.
Investment Management Services
Advisory fees and services performed by Composite are discussed in the
Prospectus. The Investment Management Agreement (the "Agreement") between the
Fund and Composite require Composite to furnish suitable office space, research,
statistical and investment management services to the Fund. They will be
approved by shareholders and will continue in effect provided each is approved
at least annually by the Board of Trustees (including a majority of the Trustees
who are not parties to, or "interested persons," as defined in the Investment
Company Act of 1940, of parties to, the Agreement) by votes cast in person at a
meeting called for the purpose of voting on such approval;
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<PAGE>
or by vote of a majority of the outstanding shares of the Fund. The Agreement
can be terminated by either party on sixty (60) days' notice, without penalty,
and each provides for automatic termination upon its assignment.
Under the provisions of the Investment Company Act of 1940 and as used elsewhere
in the Prospectus and this statement of additional information, the phrase "vote
of the majority of the outstanding shares of the Fund" means the vote at any
meeting of shareholders of (a) 67% or more of the shares present at such
meeting, if the shareholders of more than 50% of the outstanding shares are
present or represented by proxy; or (b) more than 50% of the outstanding shares,
whichever is less.
[Composite has agreed that should the expenses of the Fund (excluding taxes,
interest and any portfolio brokerage and the .75% Class B and Class S
distribution fees) exceed in any fiscal year ___% of the average net assets of
the Fund, it will reimburse the Fund for such excess.]
The Agreement provides that the advisory fee paid to Composite by the Fund will
be based solely on the individual assets of the Fund. Under the terms of the
Agreement, the Fund is required to pay fees of Trustees not employed by
Composite or its affiliates, custodial expenses, brokerage fees, taxes, auditing
and legal expenses, costs of issue, transfer, registration or redemption of
shares for sale, costs relating to disbursement of dividends, shareholder
meetings, shareholder reports, and the maintenance of the Fund's legal
existence.
Investment decisions for the Fund are made independently of those for other
funds managed by Composite ("Composite Funds"). However, Composite may
determine that the same security is suitable for more than one of the Composite
Funds. If more than one of the funds is simultaneously engaged in the purchase
or sale of the same security, the transactions are allocated as to price and
amount in accordance with a formula considered to be equitable to each. It is
recognized that in some cases this system could have a detrimental effect on the
price or volume of the security as far as the Fund is concerned. In other cases,
however, it is believed that the ability to participate in volume transactions
may provide better executions for the Fund. It is the opinion of the Board of
Trustees that these advantages, when combined with the personnel and facilities
of Composite's organization, outweigh possible disadvantages which may exist
from participation in simultaneous transactions.
The Trust have adopted a code of ethics that is intended to prevent access
persons from conducting personal securities transactions that interfere with
Fund portfolio transactions or otherwise take unfair advantage of their
relationship to the Fund. In general, the personal securities transactions of
individuals with access to information regarding Fund portfolio transactions
must be pre-cleared by Composite's compliance officer and must not occur when
similar transactions are contemplated by the Fund.
Glass-Steagall
The Glass-Steagall Act, among other things, generally prohibits member banks of
the Federal Reserve System from engaging to any extent in the business of
issuing, underwriting, selling or distributing securities and generally
prohibits management interlocks and affiliations between member banks and
companies engaged in certain activities. In a Statement of Policy dated
September 1, 1982, the Federal Deposit Insurance Corporation concluded that the
investment restrictions of the Glass-Steagall Act do not apply to banks or their
affiliates if the banks are not members of the Federal Reserve System. [Neither]
Washington Mutual Bank [, Great Western nor American Savings Bank] is [not] a
member bank. Composite has advised the Fund that, in its view, the Glass-
Steagall Act does not prohibit the activities of Composite and that it may
perform the services for the Fund contemplated by the Investment Management
Agreement without violation of the Glass-Steagall Act or other applicable
banking laws or regulations.
Trustees and Officers of the Fund
The Board of Trustees is elected by the shareholders of the Trust, including the
Fund. Interim vacancies may be filled by the current Trustees so long as at
least two-thirds were previously elected by shareholders. The Board has
3
<PAGE>
responsibility for the overall management of the Fund, including general
supervision and review of its investment activities. The Trustees, in turn,
elect the officers of the Trust who are responsible for administering the Fund's
day-to-day operations. Trustees and officers of the Trust and their business
experience for the past five years are set forth below. Unless otherwise noted,
the address of each officer is 601 W. Main Avenue, Suite 300, Spokane,
Washington 99201-0613.
WAYNE L. ATTWOOD, MD
Trustee
2931 S. Howard
Spokane, Washington 99203
Dr. Attwood is a retired doctor of internal medicine and gastroenterology in
Spokane, Washington.
KRISTIANNE BLAKE
Trustee
705 W. 7th, Suite D
Spokane, Washington 99204
Mrs. Blake is president of Kristianne Gates Blake, PS, an accounting services
firm specializing in personal financial planning and tax planning.
*ANNE V. FARRELL
Trustee
425 Pike Street, Suite 510
Seattle, Washington 98101
Mrs. Farrell is president and CEO of The Seattle Foundation (a charitable
foundation). In addition, she serves as a director of Washington Mutual, Inc.
*MICHAEL K. MURPHY
Trustee
PO Box 3366
Spokane, Washington 99220-3366
Mr. Murphy is Chairman and CEO of CPM Development Corporation (a holding company
which includes Central Pre-Mix Concrete Company). In addition, he serves as a
director of Washington Mutual, Inc.
*WILLIAM G. PAPESH
President and Trustee
Mr. Papesh is president and a director of Composite and [_______________] (the
"Transfer Agent"), and an executive vice president and a director of Composite
Funds Distributor, Inc. (the "Distributor").
DANIEL L. PAVELICH
Trustee
Two Prudential Plaza
180 North Stetson Avenue, Suite 4300
Chicago, Illinois 60601
Mr. Pavelich is Chairman and CEO of BDO Seidman, a leading national accounting
and consulting firm.
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JAY ROCKEY
Trustee
2121 - Fifth Avenue
Seattle, Washington 98121
Mr. Rockey is Chairman and CEO of The Rockey Company (a regional public
relations firm).
RICHARD C. YANCEY
Trustee
535 Madison Avenue
New York, New York 10022
Mr. Yancey is senior advisor to Dillon, Read & Co., Inc. (a registered broker-
dealer and investment banking firm), New York, New York.
[ARTHUR H. BERNSTEIN, ESQ. (6/8/25)
Trustee
11661 San Vincente Blvd., #405
Los Angeles, California 90049
Mr. Bernstein is President of Bancorp Capital Group, Inc. and President of
Bancorp Venture Capital, Inc. since 1988. He has been a Trustee of Sierra Trust
Funds since 1989.]
[DAVID E. ANDERSON (11/17/26)
Trustee
17960 Seabreeze Drive
Pacific Palisades, California 90272
Retired, Former President & CEO GTE California, Inc. Currently involved in
the following charitable organizations as a director on the following boards:
Board Chairman, Children's Bureau Foundation; Board member, Upward Bound House
of Santa Monica; Past Campaign Chairman of United Way; Past Chairman, Los
Angeles Area Chamber of Commerce. Holds BSEE degree from Iowa State.]
[EDMOND R. DAVIS, ESQ. (9/24/28)
Trustee
550 South Hope Street, 21st Floor
Los Angeles, California 90071-2604
Partner, Brobeck, Phleger & Harrison. Joined the firm as a Partner in 1987 and
is responsible for estate planning, and trusts and estate matters in the Los
Angeles office. ]
[JOHN W. ENGLISH (3/27/33)
Trustee
50 H New England Ave.
P.O. Box 640
Summit, New Jersey 07902-0640
Retired Vice President and Chief Investment Officer, the Ford Foundation (a non-
profit charitable organization). Chairman of the Board and Director, The China
Fund, Inc. (a closed-end mutual fund). Director, Paribas Trust for Institutions
(an open-end mutual fund).]
[ALFRED E. OSBORNE, JR. PH.D. (12/7/44)
Trustee
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110 Westwood Plaza, Suite C305
Los Angeles, California 90095-1481
University professor, researcher and administrator at UCLA since 1972.
Director, Times Mirror Company, ReadiCare, Inc., United States Filter
Corporation, Nordstrom, Inc., Seda Specialty Packing Corporation and Greyhound
Lines, Inc. Independent general partner, Technology Funding Venture Partners V.
Governor of the National Association of Securities Dealers, Inc.]
*These Trustees are "interested persons" of the Fund as that term is defined
in the Investment Company Act of 1940 because they are affiliated persons of the
Fund, Composite, or the Distributor.
GENE G. BRANSON
Vice President
601 West Main Avenue
Spokane, Washington 99201
Mr. Branson is a senior vice president and director of the Distributor and
[Murphey Favre Securities Services, Inc. (the "Transfer Agent")] and a vice
president and director of Composite.
MONTE D. CALVIN, CPA
Vice President and Treasurer
Mr. Calvin is an executive vice president of the Transfer Agent and serves as
the chief financial officer of the Fund.
JEFFREY L. LUNZER, CPA
Assistant Treasurer
Mr. Lunzer is a vice president of the Transfer Agent.
JOHN T. WEST, CPA
Clerk
Mr. West is a vice president of the Transfer Agent.
The Fund is not expected to pay any remuneration to any of its officers,
including Mr. Papesh, during the year ending December 31, 1998. The fund will
pay Trustees' fees for the year ending December 31, 1998.
As of March 1, 1998, officers, Trustees and their immediate families as a
group owned of record and beneficially less than 1% of the outstanding shares of
the Fund.
Kristianne Blake, *Anne V. Farrell, *Michael K. Murphy, and Daniel L. Pavelich
serve as members of the Board's audit committee. The committee meets
periodically with the Fund's independent accountants and officers to review
accounting principles used by the Fund and the adequacy of the Fund's internal
controls.
The investment committee performs interim functions for the Board of Trustees
including dividend declaration and portfolio pricing matters. Members are *Anne
V. Farrell, *Michael K. Murphy, and Richard C. Yancey.
The valuation committee is comprised of any two trustees or officers of the
Trust and one or more portfolio managers, as designated by the Trusts' chairman,
president, or vice president/treasurer . The committee is called upon to value
any security held by the Fund whenever the security cannot otherwise be valued
under the Trusts' guidelines for valuation.
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Responsibilities of the Board's nominating committee include preparing for and
recommending replacements for any vacancies in the Board and initial review of
policy issues regarding the size, composition and compensation of the Boards.
Members of the nominating committee are Wayne L. Attwood, MD, Daniel L.
Pavelich, and Jay Rockey.
The Board's distribution committee is responsible for reviewing distribution
activities and 12b-1 expenditures to determine that there is a reasonable
likelihood the 12b-1 plan will benefit the Fund and its shareholders. The
committee meets at least annually and is responsible for making recommendations
to the Boards regarding renewal or changes to the distribution plans. Committee
members are Wayne L. Attwood, MD, Kristianne Blake, Jay Rockey and Richard C.
Yancey.
*These trustees are considered "interested persons" of the Trust as that term
is defined in the Investment Company Act of 1940, because they are either
affiliated persons of the Trust, Composite or the Distributor.
DISTRIBUTION SERVICES
12b-1 Plan
As discussed in the Prospectus, the Trustees of the Trust have approved plans
for Class A, Class B and Class S shares of the Fund (the "Plans") pursuant to
Rule 12b-1 under the Investment Company Act of 1940, which provide that
investment companies may pay distribution expenses, directly or indirectly,
according to a plan adopted by the Board of Trustees.
Under the Plans, the Fund compensates the Distributor with a service fee at an
annual rate of .25% of the average daily net assets of the Fund attributable to
Class A, Class B and Class S shares, and a distribution fee at an annual rate of
.75% of the Fund's average daily net assets attributable to Class B and Class S
shares.
Because the distribution fees under the Plans are not tied directly to its
expenses, the amount of compensation may be more or less than the Distributor's
actual expenses. For this reason, the Plans may be characterized by the staff of
the Securities and Exchange Commission as being "compensation" plans. The Fund
is not liable for any expenses incurred by the Distributor in excess of the
amount of compensation it receives.
The Distributor pays dealers an amount equal to an annual rate of .25% of
total net assets of all Class A, Class B and Class S share accounts serviced by
their representatives.
Under the Plans, the Distributor will report at least quarterly to the Board
of Trustees the amounts and purposes of all distribution expense payments.
During the continuance of the Plans, as required by Rule 12b-1, the selection
and nomination of the Trustees who are not "interested persons," as defined in
the Investment Company Act of 1940, of the Trust will be at the discretion of
such disinterested Trustees then in office.
The Plans have been approved unanimously by the Trustees including a majority
of the disinterested Trustees who have no direct or indirect interest in the
Plans ("Qualified Trustees"). The Plans will remain in effect for one year, may
be terminated at any time by a vote of a majority of the disinterested Trustees
or by a vote of a majority of the outstanding voting securities of the
applicable class of the applicable Fund and may be renewed from year to year
thereafter only if approved by a vote of Qualified Trustees.
Distributor
The Distributor purchases shares of the Fund in a continuous offering to fill
orders placed with it by investors and investment dealers. It purchases shares
at net asset value and resells shares at the offering price in accordance with
terms of the Distribution Contract with the Trust. The offering price may
include a sales charge as discussed in the Prospectus under "How to buy shares."
The Fund receives the entire net asset value of all of its shares sold.
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The Distributor or designated dealer retains their appropriate portion of any
initial sales charge. The Distributor pays sales commissions to dealers from its
own resources for Class B and Class S sales and retains contingent deferred
sales charge payments. The Distributor acts in a similar capacity for all other
Composite Funds.
The Distributor may compensate its sales people or selected dealers for shares
sold without a sales charge according to various Class A "Net Asset Value
Purchase" provisions. The compensation is based on a percentage of the net asset
value of the shares sold.
The Distributor may act as a broker on portfolio purchases and sales should it
become a member of a securities exchange.
The Fund bears the cost of registering its shares with federal and state
securities commissions and printing prospectuses and statements of additional
information sent to its existing shareholders. The Distributor pays for
information intended for potential shareholders.
Transfer Agent
The Transfer Agent furnishes necessary personnel and other transfer agent
services required by the Fund. At the date of this Statement of Additional
Information, the monthly shareholder servicing fee is [$____] per Class A
account and [$____] per Class B account and [$____] for each Class S account in
the Fund. All requests for transfer of shares should be directed to the Trust or
to the Transfer Agent.
HOW SHARES ARE VALUED
Investment securities are valued on the basis of valuations provided by an
independent pricing service, approved by the Board of Trustees, which uses
information with respect to valuations based upon transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities in determining value. Investment
securities not currently quoted as described above will be priced at fair market
value as determined in good faith in a manner prescribed by the Board of
Trustees. For more information, see the Prospectus.
HOW SHARES CAN BE PURCHASED
Information concerning the purchase of shares is discussed under "How to Buy
Shares" in the Prospectus. Shares of each class of the Fund are sold in a
continuous offering and may be purchased from the Distributor or a designated
dealer at the public offering price, which is the net asset value per share next
determined after receipt of a properly completed purchase order, plus, in the
case of Class A shares, an initial sales charge which is a percentage of the
public offering price and varies as shown in the Prospectus. The Distributor or
designated dealer retains their appropriate portion of the initial sales charge.
Class B shares are sold without an initial sales charge but are subject to
higher ongoing distribution and service fees and may be subject to a contingent
deferred sales charge if redeemed within six years of purchase. The current
contingent deferred sales charge schedule is shown in the Prospectus.
Class I shares are sold exclusively to the various investment portfolios of
[Sierra] Asset Management Portfolios.
Class S shares are sold exclusively to investors who open [SAM] accounts.
Class S shares are sold without an initial sales charge but are subject to
higher ongoing distribution and service fees and may be subject to a contingent
sales charge if redeemed within six years of purchase. The current contingent
deferred sales charge is shown in the Prospectus.
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The minimum initial investment for the Fund is currently $1,000 ($500 in IRA
accounts), and additional investments should be at least $50 (unless the
transaction is via a systematic investment program where the initial and
additional monthly investments must be at least $50). Investments made by an
agent or fiduciary (such as a bank trust department, investment adviser, broker,
or employee benefit or retirement plan), pursuant to a periodic investment plan,
may have the minimum purchase requirements on initial and subsequent investments
waived.
Shareholders who have redeemed Class A shares initially subject to a sales
charge may reinvest their redemption proceeds in Class A shares of any Composite
Fund at net asset value provided that reinvestment is effected within 120 days
of the redemption. Contingent deferred sales charges assessed on any redemption
may be reimbursed if such proceeds are reinvested in shares of the same class
within 120 days. The shareholder is responsible for notifying the Transfer Agent
of such reinvestments. If a loss is realized on the redemption of Fund shares,
the reinvestment may be subject to the "wash sale" rule, resulting in a
disallowance of such loss for federal income tax purposes.
Class A shares may be sold at net asset value and in any amount to current and
retired directors, officers and employees of Washington Mutual, Inc., its
affiliates (including Composite, the Distributor, and the Transfer Agent), and
their children, step-children, grandchildren, step-grandchildren and parents, as
well as to any trust, pension, profit-sharing or other benefit plan for such
persons. The foregoing privilege is also extended to directors, officers, and
employees of other companies which enter into selling arrangements with the
Distributor. Such shares are sold for investment purposes and on the condition
that they will not be resold except through redemption by the Fund.
The Fund may also issue Class A shares at net asset value in connection with
the acquisition of assets, merger or consolidation with, another investment
company, or to shareholders in connection with reinvestment of income dividends
and capital gain distributions. Qualified employee benefit plans (including SEPs
and SIMPLEs) that have more than 10 participants or that have more than $25,000
invested in those Composite Funds offered with an initial or contingent deferred
sales charge are also entitled to buy Class A shares without a sales charge.
Individual retirement accounts that are not part of an employee benefit plan are
ineligible for this privilege. [In addition, shareholders of mutual funds (other
than money market funds), may redeem those shares and use their sale proceeds to
purchase Class A shares of a Composite Fund at net asset value provided the
proceeds are reinvested within 90 days of such sale and proof of the sale is
provided.]
The Distributor may enter into arrangements with brokers, dealers or
registered investment advisers to sell Class A shares at net asset value for use
in particular investment products made available to their clients. The other
parties may charge their clients a fee for these products.
Purchase Plans
Cumulative Discounts: The initial sales charges on Class A shares are
applicable to purchases made at one time by a "purchaser" who may be one of the
following: an individual, and/or the individual's spouse, and/or children
(including step-children) under age 21; a trustee or other fiduciary of a single
trust estate or single fiduciary account; an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Internal Revenue Code; a
pension, profit-sharing or other employee benefit plan qualified or non-
qualified under Section 401 of the Internal Revenue Code; or any other organized
group of persons whether incorporated or not, provided the organization has been
in existence for at least six months and has some purpose other than the
purchase of redeemable securities of a registered investment company at a
discount. In order to qualify for a lower sales charge, all orders from an
organized group will have to be identified as originating from a qualifying
"purchaser." Upon such notification, the investor will receive the lowest
applicable sales charge. Discounts may be modified or terminated at any time.
The Fund's Class A shares may also be purchased at the reduced sales charge
based on Composite Fund shares currently owned by the investor (excluding [Class
A] shares of Composite Money Market Fund, Composite Tax-Exempt Money Market Fund
and California Money Fund (a series of the Sierra Trust Funds), unless exchanged
from another Composite Fund). The sales charge reduction is determined by adding
the value of all Composite Fund
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Class A shares (at maximum offering price) and Class B shares (at net asset
value) to the amount of the Fund's shares being purchased.
Letter of Intent: This Letter provides for a price adjustment depending upon
the actual amount purchased within a 13-month period. If total investments under
the Letter exceed the intended amount and thereby qualify for a lower initial
sales charge, a retroactive price adjustment is made and the difference is used
to purchase additional shares. A shareholder may include the value of all of
Class A shares (at maximum offering price) and Class B shares (at net asset
value) held by such shareholder in Composite Funds (excluding Composite Money
Market Fund, Composite Tax-Exempt Money Market Fund and California Money Fund (a
series of the Sierra Trust Funds), unless exchanged from another Composite Fund)
that were held on the effective date of the Letter of Intent as an "accumulation
credit" toward completion of the Letter.
The Letter of Intent, which imposes no obligation to purchase or sell
additional shares, provides that 5% of the amount of the intended purchase will
be held in escrow (in the form of shares) pending completion of the Letter.
Certificates
Ordinarily certificates for shares purchased will not be issued unless
requested by the investor. There is no charge for such issuance.
REDEMPTION OF SHARES
When the Fund or Transfer Agent receives: 1) a written request in proper form,
for redemption of shares, and 2) the return of any issued certificates for
shares being redeemed, a check for payment of shares will normally be sent the
next business day, and no later than seven business days, except as indicated
below. If the account is pre-authorized for telephone transfer, payment may be
made to a designated bank account or broker, providing such accounts are
identically registered. Telephone redemptions may also be directed to the
shareholder's address of record. No wire fee will be charged for transfers to
Washington Mutual Bank [, Great Western] or Seafirst Bank. There is a $10.00
transmittal wire fee (which is subject to change) to wire to all other banks.
This fee will be subtracted from the account balance prior to making the
transfer. You should be aware that certain banks also charge a receiving wire
fee which is beyond the control of the Transfer Agent.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority must be submitted before the request will be
accepted.
Shares tendered for redemption will be redeemed at the net asset value next
determined less any applicable contingent deferred sales charge as described in
the Prospectus under "How to Buy Shares." The amount received may be more or
less than the cost of the shares, depending on fluctuations in the market value
of securities owned by the Fund. If the shares have been purchased recently,
this redemption payment may be delayed until the Transfer Agent is reasonably
satisfied that the instrument used in the purchase (e.g., a check) has been
collected, which may take up to 14 days.
As discussed in the prospectus, the [Class A,] Class B [and Class S]
contingent deferred sales charge may be waived under certain circumstances. In
addition to the specific cases outlined in the Prospectus, the charge may be
waived for any total or partial redemption in connection with a lump-sum or
other distribution from an Individual Retirement Account ("IRA"), a custodial
account maintained pursuant to Section 403(b)(7) of the Internal Revenue Code of
1986, as amended ("IRC") or a qualified pension or profit sharing plan
("Retirement Plans") following retirement or, in the case of an IRA or Keogh
Plan or custodial account pursuant to IRC section 403(b)(7), after attaining age
59 1/2. The charge also may be waived on any redemption which results from a
tax-free return of an excess contribution pursuant to section 408(d)(4) or (5)
of the IRC, the return of excess deferral amounts pursuant to IRC section
401(k)(8) or 402(g)(2), or from the death or disability of the employee. In
summary, the CDSC may
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be waived on redemptions of shares which constitute Retirement Plan
distributions which are permitted to be made without penalty pursuant to the
IRC, other than tax-free rollovers or transfers of assets.
EXCHANGE PRIVILEGE
Shareholders may exchange shares of the Fund for the same class of shares in
any other Composite Fund. In addition Class B shares may be exchanged for Class
S shares, and Class S shares may be exchanged for Class B shares of [Sierra]
Asset Management Portfolios. A brief discussion of such privileges is in the
Prospectus under "Exchanges for other Composite Funds." Exchanges will be made
at the respective net asset values in effect on the date of such exchange.
Shares previously subject to an initial sales charge may be exchanged without
incurring any additional initial or contingent deferred sales charge. Any gains
or losses realized on an exchange should be recognized for federal income tax
purposes, as required. This privilege is not an option or right to purchase
securities but is a revocable privilege permitted under the present policy of
the Fund. This privilege is not available in any state or other jurisdiction
where the shares of the Composite Fund into which the transfer is to be made are
not available for sale, or when the value of the shares presented for exchange
is less than the minimum dollar purchase required by the appropriate prospectus.
The Fund reserves the right to terminate or end the privilege of any shareholder
who attempts to use the privilege to take advantage of short-term swings in the
market. An investor may exchange some or all of his shares in the Fund for the
same class of any other Composite Fund.
SERVICES PROVIDED BY THE FUND
Systematic Withdrawal Plan
As described in the Prospectus, the Fund offers a Systematic Withdrawal Plan.
All dividends and distributions on shares owned by shareholders participating in
this plan are reinvested in additional shares. Since withdrawal payments
represent the proceeds from sales of shares, any gain or loss on such
redemptions must be reported for tax purposes. In each case, shares will be
redeemed at the close of business on or about the 25th day of each month
preceding payment, and payments will be mailed within three business days
thereafter.
The Systematic Withdrawal Plan may involve the use of principal and is not a
guaranteed annuity. Payments under such a plan do not represent income or a
return on investment but instead are made from the redemption of Fund shares.
Naturally, withdrawals that continually exceed reinvested dividend income and
capital gains will eventually exhaust the account.
Class B [or Class S] shareholders who establish a Systematic Withdrawal Plan
may make annual redemptions of up to 12% of the value of the account, measured
at the time the plan is established, without paying a contingent deferred sales
charge.
A Systematic Withdrawal Plan may be terminated at any time by directing a
written request to the Trust or the Transfer Agent. Upon termination, all future
dividends and capital gain distributions will continue to be reinvested in
additional shares unless a shareholder requests otherwise.
TAX-SHELTERED RETIREMENT PLANS
As described in the Prospectus, shares of the Fund may be purchased as an
investment medium for various tax-sheltered retirement plans. The amounts of
contributions to such plans are generally limited by the Internal Revenue Code.
Each of these plans involves a long-term commitment of assets, and participants
may be subject to possible regulatory penalties for excess contributions,
premature distributions, or for insufficient distributions after age 70 1/2.
Qualified Retirement Plans
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Self-employed individuals (as sole proprietors or partnerships) or
corporations may wish to purchase Fund shares in a retirement plan. Investors
may obtain information regarding these plans by contacting an investment
representative or the Trust.
Individual Retirement Accounts (IRAs)
IRA contributions are invested when received. However, individuals
establishing a new IRA plan may rescind their plan within seven days. In the
event of such termination, their entire purchase price will be refunded by the
Distributor provided they notify the Distributor of their desire to rescind the
purchase. Termination during the seven-day period through regular redemption
rather than through rescission will result in adverse tax consequences.
Internal Revenue Service regulations prohibit revocation of rollover
contributions. Any losses derived through rescission will be absorbed by the
Distributor.
Persons who request information regarding IRA plans will be provided with
application forms and information regarding eligibility and permissible
contributions.
IRA Custody Agreement and Service Charges
The IRA plan provides that the Distributor will furnish custodial services
either as agent for Washington Mutual Bank or as the named custodian. There are
set annual fees for IRA plans per participant unless made under an employer-
sponsored plan, in which case the custodial fee is negotiable. If custodial fees
are not paid annually by separate check, shares will automatically be liquidated
to cover such fees.
Unless participants elect otherwise, any capital gain distributions and income
dividends are reinvested on the ex-dividend date in full and fractional shares
of the Fund at net asset value.
IRA Bonuses
"IRA Bonuses" may periodically be credited to IRA accounts for contributions,
transfers and/or rollovers. Payments will be made at a uniform rate determined
by the Distributor or its affiliates and will be based on the value of the
rollovers and/or transfers. IRA Bonuses are not paid by the Fund.
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES
The Fund intends to continue to conduct its business and maintain the
necessary diversification of assets and source of income requirements to qualify
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). Under Subchapter M of the Code, the Fund is accorded
conduit or "pass through" treatment for federal income tax purposes during each
year in which it (i) derives at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, and gains from the
sale of stock, securities and foreign currencies, or other income (including but
not limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies;
(ii) distributes at least 90% of the sum of its taxable net investment income,
its net tax-exempt income, and the excess, if any of net short-term capital
gains over net long-term capital losses for such year; and (iii) diversifies its
holdings so that, at the end of each fiscal quarter, at least 50% of the market
value of the Fund's assets is represented by cash and cash items, U.S.
government securities, securities of other regulated investment companies, and
other securities limited in respect of any one issuer to a value not greater
than 5% of the value of the Fund's total assets and to not more than 10% of the
outstanding voting securities of such issuer, and not more than 25% of the value
of its assets is invested in the securities (other than those of the U.S.
government or other regulated investment companies) of any one issuer or of two
or more issuers which the Fund controls and which are engaged in the same,
similar or related trades or businesses. Furthermore, if the Fund distributes
98% of its ordinary income for the calendar year and 98% of its capital gain net
income for the one-year period ending October 31 (or later, if the fund is
permitted so to elect and
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so elects), plus any retained amount from the prior year, it will not be subject
to excise tax on undistributed amounts. A dividend paid to shareholders by the
Fund in January of a year generally is deemed to have been paid by the Fund on
December 31 of the preceding year, if the dividend was declared and payable to
shareholders of record on a date in October, November or December of that
preceding year. The Fund intends to distribute such amounts as necessary to
avoid federal income and excise taxes.
Net realized capital gains represent the total profit from sales of securities
minus total losses from sales of securities, including losses carried forward
from prior years. Pursuant to the Taxpayer Relief Act of 1997, two different tax
rates apply to net capital gains (that is, the excess of net gains from capital
assets held for more than one year over net losses from capital assets held for
not more than one year) distributed to shareholders. One rate (generally 28%)
applies to gains on capital assets held for more than one year but not more than
18 months ("27% rate gains") and a second, preferred rate (generally 20%)
applies to the balance of such gains ("adjusted net capital gains").
Distributions of 28% rate gains and adjusted net capital gains will be taxable
to a shareholder as such, whether received in cash or shares of the Fund and
regardless of how long a shareholder has held shares in the Fund. Because long-
term capital gain distributions reduce the value of the shares, losses may occur
upon subsequent sale. Special holding period requirements may make losses long-
term rather than short-term under the Code.
Advice as to the tax status of each year's dividends and distributions will be
mailed annually to each shareholder. Shareholders are urged to consult their own
tax advisors regarding specific questions about federal, state and local taxes.
Shareholders not subject to tax on their income will not be required to pay tax
on amounts distributed to them.
The sale, exchange or redemption of Fund shares may give rise to a gain or
loss. In general, any gain realized upon a taxable disposition of shares will
be treated as 28% rate gain if the shares have been held for more than 12 months
but not more than 18 months, and as adjusted net capital gains if the shares
have been held for more than 18 months. Otherwise the gain on the sale,
exchange or redemption of Fund shares will be treated as short-term capital
gain. In general, any loss realized upon a taxable disposition of shares will
be treated as long-term loss if the shares have been held for more than 12
months, and otherwise as short-term capital loss. However, any loss realized
upon a taxable disposition of shares held for six months or less will be treated
as long-term, rather than short-term, to the extent of any long-term capital
gain distributions received by the shareholder with respect to the shares. All
or a portion of any loss realized upon a taxable disposition of Fund shares will
be disallowed if other shares of the same Fund are purchased within 30 days
before or after the disposition. In such a case, the basis of the newly
purchased shares will be adjusted to reflect the disallowed loss.
Income dividends and capital gain distributions recorded and made shortly
after a purchase of shares by an investor will have the effect of reducing the
net asset value per share by the per share amount of the distribution. Such
distributions are, nevertheless subject to income taxes, despite the fact that
this is, in effect, a return of capital.
INVESTMENT PRACTICES
High yield securities may be regarded as predominately speculative with
respect to the issuer's continuing ability to meet principal and interest
payments. Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher quality debt securities, and the
ability of the Fund to achieve its investment objective may, to the extent of
its investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Fund were investing in
higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities are generally more sensitive to adverse economic
or individual developments than more highly rated investments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of high yield
securities defaults, the Fund may incur additional expenses to seek
13
<PAGE>
recovery. In the case of high yield securities structured as zero coupon or
payment-in-kind securities, the market prices of such securities are affected to
a greater extent by interest rate changes, and therefore tend to be more
volatile than securities which pay interest periodically and in cash.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations in
the daily net asset value of the Fund's shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly traded
market.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit
ratings in a timely fashion to reflect events since the security was last rated.
If a credit rating agency changes the rating of a portfolio security held by the
Fund, the Fund may retain the portfolio security if Composite believes doing so
would help further the Fund's objective.
INVESTMENT RESTRICTIONS
While many decisions of Composite depend on flexibility, there are several
principles so fundamental to the Fund's philosophy that neither they, nor the
investment objective, may be changed without a vote of a majority of the
outstanding shares of the Fund.
The Fund may not:
. invest more than 5%* of its total assets in any single issuer other than
U.S. government securities, except that up to 25% of the Fund's assets may
be invested without regard to this 5% limitation;
. acquire more than 10%* of the voting securities of any one company;
. invest in real estate or commodities;
. invest in oil, gas or other mineral leases;
. invest more than 25%* of its assets in any single industry;**
. buy securities on margin, mortgage or pledge its securities;
. act as underwriter of securities issued by others;
. borrow money for investment purposes (it may borrow up to 5% of its total
assets for emergency, non-investment purposes);
. lend money (except for the execution of repurchase agreements);
. issue senior securities.
*Percentage at the time the investment is made.
In addition, as a matter of non-fundamental policy the Fund may not invest
more than 15%* of its net assets in illiquid securities.
14
<PAGE>
PERFORMANCE INFORMATION
Yield
The Fund's current yield used in advertising is calculated by dividing net
investment income per share (annualized) for a stated 30-day period by the
Fund's maximum offering price (including, in the case of Class A shares, the
4.5% maximum sales charge) at the end of the period. Yields will generally be
lower for Class B shares than Class A shares because of the higher distribution
expenses incurred by Class B shares. Yields will be quoted for each class of
shares in any advertisement presenting the yield of either class.
Interest income for yield purposes is calculated by computing interest income
based on standardized methods applicable to mutual funds. In general, interest
income is reduced on a daily basis with respect to bonds trading at a premium
over par value by a portion of that premium, or increased similarly with respect
to bonds trading at a discount.
Because yield accounting methods differ from the methods used for other
accounting purposes, the Fund's yield may not equal the income paid to your
account or the income reported in the financial statements.
Distribution Rate
The Fund may quote a distribution rate in sales literature. The distribution
rate is calculated by dividing the actual ordinary income dividends per share
(annualized) over a one-month or twelve-month period by the maximum offering
price at the end of the period.
Total Returns
Except as otherwise noted, total returns quoted in advertising include the
effect of applicable sales charges, reinvesting dividends and capital gain
distributions (at net asset value), and any change in net asset value per share
over the period.
Average annual total returns are calculated by determining the change in value
of a hypothetical investment over a stated period of time and then calculating
the annual compounded rate of return that would have produced the same result
had the rate of growth or decline in value been constant over the entire period.
Cumulative total return is the simple change in value of a hypothetical
investment over a stated period of time. The cumulative total return may be
quoted as a percentage or a dollar amount and may be presented numerically or in
a table, graph, or similar illustration.
The total returns are to be calculated as follows:
Average annual total return: ERV = P(1+A)/n/
Cumulative total return (as a percentage): T = (ERV-P)/P
Where:
P = a hypothetical initial investment of $1,000
A = average annual total return
T = total return
n = number of years
ERV = ending redeemable value of a $1,000 hypothetical investment
15
<PAGE>
Comparative Performance Data
Fund literature may occasionally refer to information about the Fund which is
published by mutual funds rating services. Comparisons to fund performance may
be made to various market, economic or other indices. Industry publications may
also be referred to from time to time.
BROKERAGE ALLOCATIONS AND PORTFOLIO TRANSACTIONS
Under terms of the Investment Management Agreement, Composite acts as agent
for the Fund in entering orders with broker-dealers to execute portfolio
transactions and in negotiating commission rates where applicable. Decisions as
to eligible broker-dealers are approved by the president of the Trust.
In executing portfolio transactions and selecting broker-dealers, Composite
shall use its best efforts to seek, on behalf of the Fund, the best overall
terms available. In assessing the best overall terms available for any
transaction, Composite may consider all factors it deems relevant, including the
breadth of the market in the security, the price of the security, the size of
the transaction, the timing of the transaction, the reputation, financial
condition, experience and execution capability of a broker-dealer, and the
amount of the commission and the value of any brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934, as amended) provided by a broker-dealer.
Composite is authorized to pay to a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Fund. This commission may be in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction if Composite determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of that particular
transaction or in terms of the overall responsibilities of Composite to the Fund
and/or other accounts over which Composite exercises investment discretion.
Composite may commit to pay commission dollars to brokers or financial
institutions for specific research materials or products that it considers
useful in advising the Fund and/or its other clients. Research services
furnished to Composite include, for example, written and electronic reports
analyzing economic and financial characteristics, telephone conversations
between brokerage securities analysts and members of Composite's staff, and
personal visits by such analysts, brokerage strategists and economists to
Composite's office.
Some of these services are of value to Composite in advising clients, although
not all of these services are necessarily useful and of value in managing the
Fund. The management fee paid to Composite is not reduced because it receives
those services, even though it might otherwise be required to purchase these
services for cash.
The staff of the Securities and Exchange Commission has expressed the view
that the best price and execution of over-the-counter transactions in portfolio
securities may be secured by dealing directly with principal market makers,
thereby avoiding the payment of compensation to another broker. In certain
situations, Composite believes that the facilities, expert personnel and
technological systems of a broker often enable the Fund to secure a net price by
dealing with a broker that is as good as or better than the price the Fund could
have received from a principal market maker, even after payment of the
compensation to the broker. Composite places its over-the-counter transactions
with principal market makers, but may also deal on a brokerage basis when
utilizing electronic trading networks or as circumstances warrant.
None of the brokers with whom the Fund deal have any interest in Composite or
the Distributor. The Distributor did not execute any portfolio orders for the
Fund during the fiscal year, nor did the Distributor or Composite receive any
direct or indirect compensation as a result of portfolio transactions of the
Fund. Shares may be sold by brokers who execute portfolio transactions for the
Trust; however, no brokerage fees will be allocated for such sales.
16
<PAGE>
The Fund intends to actively manage the portfolio to take advantage of
anticipated movements in the general level of interest rates and temporary
disparities in the normal yield relationship between two securities.
GENERAL INFORMATION
Voting Privileges
Although the Trust is not required to hold annual meetings of shareholders,
shareholders holding at least 10% of the outstanding shares entitled to vote
have the right to call a meeting to elect or remove Trustees, or to take other
actions as provided in the Agreement and Declaration of Trust.
Custodian
The securities and cash owned by the Fund are held in safekeeping by Investors
Fiduciary Trust Company ("IFTC"), 127 West 10th, Kansas City, MO 64105. IFTC is
a wholly owned subsidiary of State Street Bank. The custodian's responsibilities
include collecting dividends, interest and principal payments on the Fund's
investments.
Independent Public Accountants
The firm of LeMaster & Daniels PLLC, Certified Public Accountants, has been
selected as the independent public accountants of the Fund. LeMaster & Daniels
performs audit services for the Fund including the examinations of the financial
statements included in annual reports to shareholders, which are incorporated by
reference into this statement of additional information.
Portfolio Manager Commentary
In communications with the public, portfolio managers may discuss the economic
outlook for the Fund, which might include a discussion of specific securities in
which the Fund may invest, and/or specific characteristics of each investment
portfolio.
17
<PAGE>
PART C
------
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
THE COMPOSITE FUNDS
FORM N-1A
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Index to Financial Statements and Supporting Schedules:
(1) Financial Statements:
Not Applicable.
(2) Supporting Schedules:
Not Applicable.
<PAGE>
Exhibits.
(1) Form of Amended and Restated Agreement and Declaration of Trust
dated as of September 19, 1997, originally filed as an exhibit
to Post-Effective Amendment No. 67 on September 30, 1997, is
incorporated by reference herein.
(2) By-Laws of The Composite Funds, originally filed as an exhibit
to Post-Effective Amendment No. 67 on September 30, 1997, are
incorporated by reference herein.
(3) None
(4) (a) (See Exhibit (1)) Article III (Shares), Article IV
(Shareholders' Voting Powers and Meetings) and Article VI (Net
Income, Distributions, and Redemptions and Repurchases) of the
Amended and Restated Agreement and Declaration of Trust.
(b) (See Exhibit (2)) Article 10 (Provisions Relating to the
Conduct of the Trust's Business ) and Article 11 (Shareholders'
Voting Powers and Meetings) of the By-Laws.
(5) Form of Investment Management Agreement between the Trust and
Composite Research & Management Co. with respect to the High
Yield Fund, filed herewith.
(6) (a)(i) Form of Distribution Contract and Distribution Plan with
Composite Funds Distributor, Inc. (assuming shareholder approval
of proposed charges) originally filed as an exhibit to Post-
Effective Amendment No. 67 on September 30, 1997, is
incorporated by reference herein.
(a)(ii) Form of Distribution Contract and Distribution Plan with
Composite Funds Distributor, Inc. (assuming no shareholder
approval of proposed charges), originally filed as an exhibit to
Post-Effective Amendment No. 67 on September 30, 1997, is
incorporated by reference herein.
(b) Form of Selected Dealer Agreement, originally filed as an
exhibit to Post-Effective Amendment No. 67 on September 30,
1997, is incorporated by reference herein.
(7) None
-2-
<PAGE>
(8) Form of Custody Agreement with Investors Fiduciary Trust
Company, originally filed as an exhibit to Post-Effective
Amendment No. 67 on September 30, 1997, is incorporated by
reference herein.
(9) Transfer Agency Agreement, dated as of __________, 1998 between
the Trust and [____________________], to be filed by amendment.
(10) Opinion and consent of counsel as to legality of securities
being issued, originally filed as an exhibit to Post-Effective
Amendment No. 67 on September 30, 1997, is incorporated by
reference herein.
(11) Not applicable.
(12) None.
(13) None.
(14) None.
(15) See Exhibit 6.
(16) Not applicable.
(17) Not applicable.
(18) Multi-Class Plan adopted pursuant to Rule 18f-3, originally
filed as an exhibit to Post-Effective Amendment No. 67 on
September 30, 1997, originally filed as an exhibit to Post-
Effective Amendment No. 67 on September 30, 1997, is
incorporated by reference herein.
Item 25. Persons Controlled by or Under Common Control with Registrant.
The Registrant is operated under the supervision of Composite Research &
Management Co. ("Composite Research"). Composite Research is affiliated with
Murphey Favre Securities Services, Inc., which serves as transfer agent for the
Registrant. An affiliate of Composite Research, Composite Funds Distributor,
Inc. serves as the principal underwriter and distributor for the Registrant.
-3-
<PAGE>
Composite Research, Murphey Favre Securities Services, Inc. and Composite
Funds Distributor, Inc. serve in their same capacities for the four other
registered investment companies (constituting [36] portfolios).
Composite Research, Murphey Favre Securities Services, Inc. and Composite
Funds Distributor, Inc. are all wholly-owned subsidiaries of Washington Mutual,
Inc. and are all incorporated under the laws of the State of Washington.
Item 26. Number of Holders of Securities
- --------------------------------------------------------------------------------
NUMBER OF RECORD HOLDERS
TITLE OF SERIES (AS OF DECEMBER 31, 1997)
--------------- ------------------------
- --------------------------------------------------------------------------------
CLASS A CLASS B CLASS S CLASS I
SHARES SHARES SHARES SHARES
- --------------------------------------------------------------------------------
Composite High Yield Fund
- --------------------------------------------------------------------------------
Item 27. Indemnification.
Reference is made to Article VIII, Section 1 of the Amended and Restated
Agreement and Declaration of Trust (the "Agreement and Declaration of Trust") of
the Registrant.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant by the Registrant pursuant to the Agreement and
Declaration of Trust, its By-Laws or otherwise, the Registrant is aware that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and, therefore, is unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by directors,
officers or controlling persons of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted by such
directors, officers or controlling persons in connection with shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issues.
Item 28. Business and Other Connections of Investment Advisor.
Registrant's Investment Advisor is Composite Research & Management Co. (the
"Advisor"), a wholly-owned subsidiary of Washington Mutual, Inc., a Washington
corporation. The Advisor serves in that capacity for the four other registered
investment companies (constituting [36] portfolios).
-4-
<PAGE>
Item 29. Principal Underwriters.
The principal underwriter for the Registrant is Composite Funds
Distributor, Inc. which also serves in the same capacity for the four other
registered investment companies (constituting [36] portfolios).
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules thereunder
will be maintained at the offices of the Registrant at 601 West Main Avenue,
Suite 300, Spokane, Washington 99201. The Registrant's custodian activities are
performed at Investors Fiduciary Trust Company ("IFTC"), 127 West 10th, Kansas
City, Missouri 64105.
Item 31. Management Services.
Registrant is not a party to any management related contract, other than as
set forth in the Prospectus.
Item 32. Undertakings.
(a) The Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
-5-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Seattle in the State of
Washington on the 2nd day of December, 1997.
The Composite Funds
WILLIAM G. PAPESH*
---------------------------------
William G. Papesh, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.
SIGNATURE TITLE DATE
WILLIAM G. PAPESH* President and December 2, 1997
- ----------------------- Trustee
William G. Papesh
MONTE D. CALVIN Vice President and
- ----------------------- Treasurer December 2, 1997
Monte D. Calvin
WAYNE L. ATTWOOD, M.D.* Trustee December 2, 1997
- -----------------------
Wayne L. Attwood, M.D.
KRISTIANNE BLAKE* Trustee December 2, 1997
- -----------------------
Kristianne Blake
ANNE V. FARRELL* Trustee December 2, 1997
- -----------------------
Anne V. Farrell
MICHAEL K. MURPHY* Trustee December 2, 1997
- -----------------------
Michael K. Murphy
DANIEL PAVELICH* Trustee December 2, 1997
- -----------------------
Daniel Pavelich
-6-
<PAGE>
JAY ROCKEY* Trustee December 2, 1997
- -----------------------
Jay Rockey
RICHARD C. YANCEY* Trustee December 2, 1997
- -----------------------
Richard C. Yancey
*By: MONTE D. CALVIN
---------------------------------
Monte D. Calvin
Attorney-in-Fact
Pursuant to Power of Attorney
-7-
<PAGE>
Exhibit Index
EXHIBIT NO.
5 Form of Investment Management Agreement between the Trust and
Composite Research & Management Co. with respect to the High
Yield Fund.
-8-
<PAGE>
INVESTMENT MANAGEMENT AGREEMENT
-------------------------------
INVESTMENT MANAGEMENT AGREEMENT (this "Agreement"), dated __________, 1997,
between The Composite Funds, a Massachusetts business trust, (the "Trust"), on
behalf of each of its series which are listed on the signature page of this
Agreement (each referred to herein as a "Fund") and Composite Research &
Management Co., a Washington corporation (the "Manager").
W I T N E S S E T H
-------------------
WHEREAS, the Trust is an open-end series management investment company,
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, each Fund, as a separate series of the Trust, desires to retain
the Manager to render investment management services to the Fund, and the
Manager is willing to render such services;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto agree as follows:
1. Appointment. The Fund hereby appoints the Manager to act as investment
-----------
manager to the Fund for the period and on the terms set forth in this Agreement.
The Manager accepts such appointment and agrees to render the services herein
described, for the compensation herein provided.
2. Management. Subject to the supervision of the Board of Trustees of the
----------
Trust, the Manager shall manage the investment operations of the Fund and the
composition of the Fund's portfolio, including the purchase, retention and
disposition of securities therefor, in accordance with the Fund's investment
objectives, policies and restrictions as stated in the Prospectus and Statement
of Additional Information (as such terms are hereinafter defined) and
resolutions of the Trust's Board of Trustees and subject to the following
understandings:
(a) The Manager shall provide supervision of the Fund's investments,
furnish a continuous investment program for the Fund's portfolio and
determine from time to time what securities will be purchased, retained, or
sold by the Fund, and what portion of the assets will be invested or held
as cash.
(b) The Manager, in the performance of its duties and obligations under
this Agreement, shall act in conformity with the Declaration of Trust (as
hereinafter defined) of the Trust and the investment policies of the Fund
as determined by the Board of Trustees of the Trust.
(c) The Manager shall determine the securities to be purchased or sold by
the Fund and shall place orders for the purchase and sale of portfolio
securities pursuant to its determinations with brokers or dealers selected
by the Manager. In executing portfolio
1
<PAGE>
transactions and selecting brokers or dealers, the Manager shall use its
best efforts to seek on behalf of the Fund the best overall terms
available. In assessing the best overall terms available for any
transaction, the Manager may consider all factors it deems relevant,
including the breadth of the market in the security, the price of the
security, the size of the transaction, the timing of the transaction, the
reputation, financial condition, experience, and execution capability of a
broker or dealer, the amount of commission, and the value of any brokerage
and research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934, as amended) provided by a broker or
dealer. The Manager is authorized to pay to a broker or dealer who
provides such brokerage and research services a commission for executing a
portfolio transaction for the Fund which is in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction if the Manager determines in good faith that such commission
was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of that
particular transaction or in terms of the overall responsibilities of the
Manager to the Fund and/or other accounts over which the Manager exercises
investment discretion.
(d) On occasions when the Manager deems the purchase or sale of a security
to be in the best interest of the Fund as well as other fiduciary accounts
for which it has investment responsibility, the Manager, to the extent
permitted by applicable laws and regulations, may aggregate the securities
to be so sold or purchased in order to obtain the best execution, most
favorable net price or lower brokerage commissions.
(e) Subject to the provisions of the Agreement and Declaration of Trust of
the Trust and the Investment Company Act of 1940, as amended (the "1940)
Act"), the Manager, at its expense, may select and contract with one or
more investment advisers (the "Subadviser") for the Fund to perform some or
all of the services for which it is responsible pursuant to this Section 2.
The Manager shall be solely responsible for the compensation of any
Subadviser of the Fund for its services to the Fund. The Manager may
terminate the services of any Subadviser at any time in its sole
discretion, and shall at such time assume the responsibilities of such
Subadviser unless and until a successor Subadviser is selected. To the
extent that more than one Subadviser is selected, the Manager shall, in its
sole discretion, determine the amount of the Fund's assets allocated to
each such Subadviser.
3. Services Not Exclusive. The investment management services rendered by the
----------------------
Manager hereunder to the Fund are not to be deemed exclusive, and the Manager
shall have the right to render similar services to others, including, without
limitation, other investment companies.
4. Expenses. During the term of this Agreement, the Manager shall pay all
--------
expenses incurred by it in connection with its activities under this Agreement
including the salaries and expenses of any of the officers or employees of the
Manager who act as officers, Trustees or employees of the Trust but excluding
the cost of securities purchased for the Fund and the amount of any brokerage
fees and commissions incurred in executing portfolio transactions for the Fund,
and shall provide the Fund with suitable office space. Other expenses to be
incurred in the operation of the Fund (other than those borne by any third
party), including without limitation, taxes, interest, brokerage fees and
commissions, fees of Trustees who are not
2
<PAGE>
officers, directors, or employees of the Manager, federal registration fees and
state Blue Sky qualification fees, administration fees, bookkeeping, charges of
custodians, transfer and dividend disbursing agents' fees, certain insurance
premiums, industry association fees, outside auditing and legal expenses, costs
of maintaining the Fund's or the Trust's existence, costs of independent pricing
services, costs attributable to investor services (including, without
limitation, telephone and personnel expenses), costs of preparing, printing and
distributing prospectuses to existing shareholders, costs of stockholders'
reports and meetings of shareholders and Trustees of the Fund or the Trust, as
applicable, and any extraordinary expenses will be borne by the Fund.
5. Compensation. For the services provided pursuant to this Agreement, each
------------
Fund shall pay to the Manager as full compensation therefor a monthly fee
computed on the average daily net assets of the Fund as stated in Schedule A
attached hereto. The Fund acknowledges that the Manager, as agent for the Fund,
will allocate a portion of the fee equal to the sub-advisory fee payable to the
sub-advisor, if any, under its sub-advisory agreement to the sub-advisor for
sub-advisory services. The Fund acknowledges that the Manager, as agent for the
Fund, will allocate a portion of the fee to Murphey Favre Securities Services,
Inc. for administrative services, portfolio accounting and regulatory compliance
systems. The Manager also from time to time and in such amounts as it shall
determine in its sole discretion may allocate a portion of the fee to Composite
Funds Distributor, Inc. for facilitating distribution of the Fund. This payment
would be made from revenue which otherwise would be considered profit to the
Manager for its services. This disclosure is being made to the Fund solely for
the purpose of conforming with requirements of the Washington Department of
Revenue for exclusion of revenue from the Washington Business and Occupation
Tax.
6. Limitation of Liability. The Manager shall not be liable for any error of
-----------------------
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement.
7. Delivery of Documents. The Trust has heretofore delivered to the Manager
---------------------
true and complete copies of each of the following documents and shall promptly
deliver to it all future amendments and supplements thereto, if any:
(a) Agreement and Declaration of Trust (such Agreement and Declaration as
presently in effect and as amended from time to time, the "Declaration of
Trust");
(b) Bylaws of the Trust;
(c) Registration Statement under the Securities Act of 1933 and under the
1940 Act of the Trust on Form N-1A, and all amendments thereto, as filed
with the Securities and Exchange Commission (the "Registration Statement")
relating to the Fund and the shares of the Fund;
(d) Notification of Registration of the Trust under the 1940 Act on Form
N-8A;
3
<PAGE>
(e) Prospectuses of the Fund (such prospectuses as presently in effect
and/or as amended or supplemented from time to time, the "Prospectus"); and
(f) Statement of Additional Information of the Fund (such statement as
presently in effect and/or as amended or supplemented from time to time,
the "Statement of Additional Information").
8. Duration and Termination. This Agreement shall become effective as of the
------------------------
date first above-written for an initial period of two years and shall continue
thereafter so long as such continuance is specifically approved at least
annually (a) by the vote of the Board of Trustees including a majority of those
members of the Trust's Board of Trustees who are not parties to this Agreement
or "interested persons" of any such party, cast in person at a meeting called
for that purpose, or by vote of a majority of the outstanding voting securities
of the Fund. Notwithstanding the foregoing, (a) this Agreement may be
terminated at any time, without the payment of any penalty, by either the Fund
(by vote of the Trust's Board of Trustees or by vote of a majority of the
outstanding voting securities of the Fund) or the Manager, on sixty (60) days
prior written notice to the other and (b) shall automatically terminate in the
event of its assignment. As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested persons" and "assignment" shall have
the meanings assigned to such terms in the 1940 Act.
9. Amendments. No provision of this Agreement may be amended, modified,
----------
waived or supplemented except by a written instrument signed by the party
against which enforcement is sought. No amendment of this Agreement shall be
effective until approved in accordance with any applicable provisions of the
1940 Act.
10. Use of Name and Logo. The Fund agrees that it shall furnish to the
--------------------
Manager, prior to any use or distribution thereof, copies of all prospectuses,
statements of additional information, proxy statements, reports to stockholders,
sales literature, advertisements, and other material prepared for distribution
to stockholders of the Fund or to the public, which in any way refer to or
describe the Manager or which include any trade names, trademarks or logos of
the Manager or of any affiliate of the Manager. The Fund further agrees that it
shall not use or distribute any such material if the Manager reasonably objects
in writing to such use or distribution within five (5) business days after the
date such material is furnished to the Manager.
The Manager and/or its affiliates own the names "Sierra", "Composite" and
any other names which may be listed from time to time on a Schedule B to be
attached hereto that they may develop for use in connection with the Fund, which
names may be used by the Fund or the Trust only with the consent of the Manager
and/or its affiliates. The Manager, on behalf of itself and/or its affiliates,
consents to the use by the Trust and by the Fund of such names or any other
names embodying such names, but only on condition and so long as (i) this
Agreement shall remain in full force, (ii) the Fund and the Trust shall fully
perform, fulfill and comply with all provisions of this Agreement expressed
herein to be performed, fulfilled or complied with by it, and (iii) the Manager
is the manager of the Fund and the Trust. No such name shall be used by the
Fund or the Trust at any time or in any place or for any purposes or under any
conditions except as provided in this section. The foregoing authorization by
the Manager, on
4
<PAGE>
behalf of itself and/or its affiliates, to the Fund and the Trust to use such
names as part of a business or name is not exclusive of the right of the Manager
and/or its affiliates themselves to use, or to authorize others to use, the
same; the Fund and the Trust acknowledge and agree that as between the Manager
and/or its affiliates and the Fund or the Trust, the Manager and/or its
affiliates have the exclusive right so to use, or authorize others to use, such
names, and the Fund and the Trust agree to take such action as may reasonably be
requested by the Manager, on behalf of itself and/or its affiliates, to give
full effect to the provisions of this section (including, without limitation,
consenting to such use of such names). Without limiting the generality of the
foregoing, the Fund and the Trust agree that, upon (i) any violation of the
provisions of this Agreement by the Fund or the Trust or (ii) any termination of
this Agreement, by either party or otherwise, the Fund and the Trust will, at
the request of the Manager, on behalf of itself and/or its affiliates, made
within six months after such violation or termination, use its best efforts to
change the name of the Fund and the Trust so as to eliminate all reference, if
any, to such names and will not thereafter transact any business in a name
containing such names in any form or combination whatsoever, or designate itself
as the same entity as or successor to an entity of such names, or otherwise use
such names or any other reference to the Manager and/or its affiliates, except
as may be required by law. Such covenants on the part of the Fund and the Trust
shall be binding upon it, its Trustees, officers, shareholders, creditors and
all other persons claiming under or through it.
The provisions of this section shall survive termination of this Agreement.
11. Notices. Any notice or other communication required to be given pursuant
-------
to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, if to the Fund: 601 W. Main Ave., Suite 300,
Spokane, Washington 99201; or if to the Manager: 1201 Third Avenue, Suite
1220, Seattle, Washington 98101; or to either party at such other address as
such party shall designate to the other by a notice given in accordance with the
provisions of this section.
12. Miscellaneous.
-------------
(a) Except as otherwise expressly provided herein or authorized by the
Board of Trustees of the Trust from time to time, the Manager for all
purposes herein shall be deemed to be an independent contractor and shall
have no authority to act for or represent the Fund in any way or otherwise
be deemed an agent of the Fund.
(b) The Trust shall furnish or otherwise make available to the Manager
such information relating to the business affairs of the Fund as the
Manager at any time or from time to time reasonably requests in order to
discharge its obligations hereunder.
(c) This Agreement shall be governed by and construed in accordance with
the laws of The Commonwealth of Massachusetts and shall inure to the
benefit of the parties hereto and their respective successors.
(d) If any provision of this Agreement shall be held or made invalid or by
any court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
5
<PAGE>
13. Declaration of Trust and Limitation of Liability. A copy of the
------------------------------------------------
Declaration of Trust of the Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts, and notice is hereby given that this Agreement is
executed by an officer of the Trust on behalf of the Trustees of the Trust, as
trustees and not individually, on further behalf of the Fund, and that the
obligations of this Agreement shall be binding upon the assets and properties of
the Fund only and shall not be binding upon the assets and properties of any
other series of the Trust or upon any of the Trustees, officers, employees,
agents or shareholders of the Fund or the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the date first above-written.
THE COMPOSITE FUNDS, on behalf of its series COMPOSITE
BOND & STOCK FUND,
COMPOSITE GROWTH & INCOME FUND,
COMPOSITE U.S. GOVERNMENT SECURITIES FUND,
COMPOSITE TAX-EXEMPT BOND FUND,
COMPOSITE CASH MANAGEMENT COMPANY
MONEY MARKET FUND,
COMPOSITE CASH MANAGEMENT COMPANY
TAX-EXEMPT MONEY MARKET FUND,
COMPOSITE NORTHWEST FUND
COMPOSITE HIGH YIELD FUND
By:
--------------------------------
Name:
Title:
Attest:
By:
--------------------------------
Name:
Title:
COMPOSITE RESEARCH &
MANAGEMENT CO.
By:
--------------------------------
William G. Papesh
President
Attest:
By:
--------------------------------
Sharon L. Howells
Secretary
6
<PAGE>
SCHEDULE A
INVESTMENT MANAGEMENT FEES
<TABLE>
<CAPTION>
FUND FEE
- ---- ---
<S> <C>
Composite Bond & Stock Fund Monthly fee equal to .625% per
Composite Growth & Income Fund annum computed on the average
Composite Income Fund daily net assets of the Fund; on
Composite U.S. Government Securities assets in excess of $250
Fund million, the fee decreases to
Composite High Yield Fund .50% per annum.
Monthly fee equal to .50% per
Composite Tax-Exempt Bond Fund annum computed on the average
daily net assets of the Fund; on
assets in excess of $250
million, the fee decreases to
.40% per annum.
Composite Cash Management Company Monthly fee computed on the
Money Market Fund average daily net assets of the
Composite Cash Management Company Fund equal to .45% per annum up
Tax-Exempt Money Market Fund to the first $1 billion of
assets; .40% per annum on assets
of $1 billion and above.
Monthly fee computed on the
Composite Northwest Fund average daily net assets of the
Fund equal to .625% per annum up
to the first $500 million of
assets; .50% per annum on assets
of $500 million to $1 billion;
.375% per annum on assets of $1
billion and above.
</TABLE>
