<PAGE>
As filed with the Securities and Exchange Commission on October 1, 1997
Registration No. ____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. __
[ ] Post-Effective Amendment No. __
The Composite Funds
(Exact name of Registrant as Specified in Charter)
601 West Main Avenue, Suite 300
Spokane, Washington 99201
(Address of Principal Executive Offices)
(509) 353-3401
(Area Code and Telephone Number)
____________
William G. Papesh, President
Composite Research & Management Co.
1201 Third Avenue, Suite 1400
Seattle, Washington 98101
(Name and Address of Agent for Service)
Copies to:
Lawrence R. Small, Esq. Joseph B. Kittredge, Esq.
Paine, Hamblen, Coffin, Ropes & Gray
Brooke & Miller One International Place
717 West Sprague Avenue, Suite 1200 Boston, MA 02110
Spokane, WA 99201
____________
Approximate Date of Proposed Public Offering:
As soon as practicable after this Registration Statement becomes effective.
____________
It is proposed that this filing will become effective on October 31, 1997
pursuant to Rule 488.
____________
Composite Bond & Stock Fund, Inc. has registered an indefinite amount of its
securities under the Securities Act of 1933, pursuant to Rule 24f-2 under the
Investment Company Act of 1940. The Registrant filed on September 30, 1997,
pursuant to Rule 414 under the Securities Act of 1933, a post-effective
amendment to the Registration Statement on Form N-1A of Composite Bond & Stock
Fund, Inc. (File Nos. 2-10766 and 811-123) adopting such registration statement
as its own, effective as of the time that the Registrant succeeds to all of the
assets and liabilities of Composite Bond & Stock Fund, Inc., Composite U.S.
Government Securities, Inc., Composite Income Fund, Inc., Composite Equity
Series, Inc., Composite Cash Management Company, Composite Tax-Exempt Bond Fund,
Inc. and Composite Northwest Fund, Inc., which, it is anticipated, will take
place prior to the consummation of the transactions registered on this
Registration Statement on Form N-14. In reliance upon Rule 24f-2, no filing fee
is being paid at this time. A Rule 24f-2 Notice for Composite Bond & Stock
Fund, Inc. for the fiscal year ended October 31, 1996 was filed on December 19,
1996.
<PAGE>
The Composite Funds
Cross-Reference Sheet
as required by Rule 481(a)
Form N-14 Item Caption in Prospectus/Proxy Statement
1 Cross-Reference Sheet; Outside Front Cover of Prospectus
2 Outside Back Cover Page of Prospectus; Table of Contents
3 Overview of Mergers; Risk Factors
4 Approval or Disapproval of Agreement and Plan of
Reorganization
5 Information about the Acquiring Funds
6 Information about the Acquired Funds
7 Voting Information
8,9 Not Applicable
Form N-14 Item Caption in Statement of Additional Information
10 Cover Page
11 Table of Contents
12, 13 Additional Information about the Acquiring and Acquired Funds
14 Financial Statements
Form N-14 Item Caption in Part C
15 Indemnification
16 Exhibits
17 Undertakings
<PAGE>
SIERRA TRUST FUNDS
U.S. GOVERNMENT FUND
CORPORATE INCOME FUND
GROWTH AND INCOME FUND
GLOBAL MONEY FUND
U.S. GOVERNMENT MONEY FUND
NATIONAL MUNICIPAL FUND
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
DECEMBER , 1997
To the Shareholders:
Notice is hereby given that a Special Meeting of Shareholders of the U.S.
Government Fund, the Corporate Income Fund, the Growth and Income Fund, the
Global Money Fund, the U.S. Government Money Fund and the National Municipal
Fund (the "Funds"), each a series of the Sierra Trust Funds (the "Sierra
Trust"), will be held on , December , 1997 at at the offices of
to consider the following:
1. To consider and act upon a proposal to elect the Board of Trustees. (TO BE
VOTED UPON BY THE SHAREHOLDERS OF ALL FUNDS.)
2. To approve or disapprove an Agreement and Plan of Reorganization providing
for the transfer of all of the assets of the Sierra Trust U.S. Government Fund
to the Composite U.S. Government Securities Fund, a series of The Composite
Funds (the "Composite Trust"), in exchange for shares of the Composite U.S.
Government Securities Fund and the assumption by the Composite U.S. Government
Securities Fund of all of the liabilities of the Sierra Trust U.S. Government
Fund, and the distribution of such shares to the shareholders of the Sierra
Trust U.S. Government Fund in complete liquidation of the Sierra Trust U.S.
Government Fund. (TO BE VOTED UPON BY THE SHAREHOLDERS OF THE SIERRA TRUST
U.S. GOVERNMENT FUND ONLY.)
3. To approve or disapprove an Agreement and Plan of Reorganization providing
for the transfer of all of the assets of the Sierra Trust Corporate Income
Fund to the Composite Income Fund, a series of the Composite Trust, in ex-
change for shares of the Composite Income Fund and the assumption by the Com-
posite Income Fund of all of the liabilities of the Sierra Trust Corporate In-
come Fund, and the distribution of such shares to the shareholders of the Si-
erra Trust Corporate Income Fund in complete liquidation of the Sierra Trust
Corporate Income Fund. (TO BE VOTED UPON BY THE SHAREHOLDERS OF THE SIERRA
TRUST CORPORATE INCOME FUND ONLY.)
4. To approve or disapprove an Agreement and Plan of Reorganization providing
for the transfer of all of the assets of the Sierra Trust Growth and Income
Fund to the Composite Growth & Income Fund, a series of the Composite Trust,
in exchange for shares of the Composite Growth & Income Fund and the assump-
tion by the Composite Growth & Income Fund of all of the liabilities of the
Sierra Trust Growth and Income Fund, and the distribution of such shares to
the shareholders of the Sierra Trust Growth and Income Fund in complete liqui-
dation of the Sierra Trust Growth and Income Fund. (TO BE VOTED UPON BY THE
SHAREHOLDERS OF THE SIERRA TRUST GROWTH AND INCOME FUND ONLY.)
1
<PAGE>
5. To approve or disapprove an Agreement and Plan of Reorganization providing
for the transfer of all of the assets of the Sierra Trust Global Money Fund to
the Composite Money Market Fund, a series of the Composite Trust, in exchange
for shares of the Composite Money Market Fund and the assumption by the Com-
posite Money Market Fund of all of the liabilities of the Sierra Trust Global
Money Fund, and the distribution of such shares to the shareholders of the Si-
erra Trust Global Money Fund in complete liquidation of the Sierra Trust
Global Money Fund. (TO BE VOTED UPON BY THE SHAREHOLDERS OF THE SIERRA TRUST
GLOBAL MONEY FUND ONLY.)
6. To approve or disapprove an Agreement and Plan of Reorganization providing
for the transfer of all of the assets of the Sierra Trust U.S. Government
Money Fund to the Composite Money Market Fund, a series of the Composite
Trust, in exchange for shares of the Composite Money Market Fund and the as-
sumption by the Composite Money Market Fund of all of the liabilities of the
Sierra Trust U.S. Government Money Fund, and the distribution of such shares
to the shareholders of the Sierra Trust U.S. Government Money Fund in complete
liquidation of the Sierra Trust U.S. Government Money Fund. (TO BE VOTED UPON
BY THE SHAREHOLDERS OF THE SIERRA TRUST U.S. GOVERNMENT MONEY FUND ONLY.)
7. To approve or disapprove an Agreement and Plan of Reorganization providing
for the transfer of all of the assets of the Sierra Trust National Municipal
Fund to the Composite Tax-Exempt Bond Fund, a series of the Composite Trust,
in exchange for shares of the Composite Tax-Exempt Bond Fund and the assump-
tion by the Composite Tax-Exempt Bond Fund of all of the liabilities of the
Sierra Trust National Municipal Fund, and the distribution of such shares to
the shareholders of the Sierra Trust National Municipal Fund in complete liq-
uidation of the Sierra Trust National Municipal Fund. (TO BE VOTED UPON BY THE
SHAREHOLDERS OF THE SIERRA TRUST NATIONAL MUNICIPAL FUND ONLY.)
8. To transact such other business as may properly come before the meeting.
The Trustees have fixed the close of business on October , 1997 as the rec-
ord date for determination of shareholders entitled to notice of, and to vote
at, the Special Meeting.
By order of the Board of Trustees
Keith B. Pipes, Secretary
October , 1997
WE URGE YOU TO MARK, SIGN, DATE AND MAIL THE ENCLOSED PROXY IN THE
POSTAGE-PAID ENVELOPE PROVIDED SO THAT YOU WILL BE REPRESENTED AT THE
SPECIAL MEETING.
2
<PAGE>
<TABLE>
<CAPTION>
ACQUISITION OF THE ASSETS OF: BY AND IN EXCHANGE FOR SHARES OF:
- ----------------------------- ---------------------------------
<S> <C>
U.S. Government Fund.................. Composite U.S. Government Securities Fund
Corporate Income Fund................. Composite Income Fund
Growth and Income Fund................ Composite Growth & Income Fund
Global Money Fund..................... Composite Money Market Fund
U.S. Government Money Fund............ Composite Money Market Fund
National Municipal Fund............... Composite Tax-Exempt Bond Fund
each a series of each a series of
Sierra Trust Funds The Composite Funds
P.O. Box 5118 601 West Main Avenue
Westboro, Massachusetts 01581 Spokane, Washington 99201
1-800-222-5852 1-800-543-8072
</TABLE>
This Prospectus/Proxy Statement relates to (i) the election of Trustees of
the Sierra Trust Funds (the "Sierra Trust") and (ii) the proposed mergers (the
"Mergers") of the Sierra Trust U.S. Government Fund (the "Sierra Government
Fund"), the Sierra Trust Corporate Income Fund (the "Sierra Income Fund"), the
Sierra Trust Growth and Income Fund (the "Sierra Growth & Income Fund"), the
Sierra Trust Global Money Fund (the "Sierra Global Money Fund"), the Sierra
Trust U.S. Government Money Fund (the "Sierra Government Money Fund") and the
Sierra Trust National Municipal Fund (the "Sierra Municipal Fund") (each an
"Acquired Fund"), each a series of the Sierra Trust, into, respectively, the
Composite U.S. Government Securities Fund, the Composite Income Fund, the Com-
posite Growth & Income Fund, the Composite Money Market Fund, the Composite
Money Market Fund and the Composite Tax-Exempt Bond Fund (each an "Acquiring
Fund"), each a series of The Composite Funds (the "Composite Trust"). The
Mergers are to be effected through the transfer of all of the assets of each
Acquired Fund to the corresponding Acquiring Fund in exchange for shares of
beneficial interest of the Acquiring Fund (the "Merger Shares") and the as-
sumption by the Acquiring Fund of all of the liabilities of the Acquired Fund,
followed by the distribution of the Merger Shares to the shareholders of the
Acquired Fund in liquidation of the Acquired Fund. As a result of each pro-
posed transaction, each shareholder of the Acquired Fund will receive in ex-
change for his or her Acquired Fund shares a number of Acquiring Fund shares
of the same class equal in value at the date of the exchange to the aggregate
value of the shareholder's Acquired Fund shares.
Because shareholders of the Acquired Funds are being asked to approve trans-
actions which will result in their receiving shares of the Acquiring Funds,
this Proxy Statement also serves as a Prospectus for the Merger Shares of each
Acquiring Fund. The investment objective of each Acquiring Fund is as follows:
(1) COMPOSITE U.S. GOVERNMENT SECURITIES FUND (the "Composite Government
Fund"), which has been in existence since 1982, seeks to provide a high level
of current income, consistent with safety and liquidity. It invests in obli-
gations issued or guaranteed by the U.S. Government, and in repurchase agree-
ments and colPROSPECTUS/PROXY STATEMENT
October , 1997
3
<PAGE>
lateralized mortgage obligations that are secured by those types of obliga-
tions. In the future, this Fund may, pending shareholder approval, be permit-
ted to invest in all securities issued by agencies or instrumentalities of
the U.S. Government.
(2) COMPOSITE INCOME FUND (the "Composite Income Fund"), which has been in
existence since 1975, seeks to provide a high level of current income that is
consistent with protection of shareholders' capital. It pursues this objec-
tive through careful investment in a diversified pool of debt securities.
(3) COMPOSITE GROWTH & INCOME FUND (the "Composite Growth & Income Fund"),
which has been in existence since 1949, seeks to provide long-term capital
growth, with current income as a secondary consideration. It pursues this ob-
jective through investment in a diversified pool of common stocks and other
securities.
(4) COMPOSITE MONEY MARKET FUND (the "Composite Money Fund"), which has been
in existence since 1979, seeks to provide maximum current income, while pre-
serving capital and maintaining liquidity. It pursues this objective through
investment in high-quality money market instruments.
(5) COMPOSITE TAX-EXEMPT BOND FUND (the "Composite Tax-Exempt Fund"), which
has been in existence since 1976, seeks to provide a high level of income
that is exempt from federal taxes and to protect investors' capital. It in-
vests in bonds issued by states, counties, cities and other governmental bod-
ies whose bonds generate income exempt from federal tax.
THE COMPOSITE INCOME FUND AND THE COMPOSITE TAX-EXEMPT FUND MAY INVEST UP TO
35% OF THEIR ASSETS IN LOWER-RATED FIXED-INCOME SECURITIES COMMONLY KNOWN AS
"JUNK BONDS," WHICH ARE SUBJECT TO HIGH RISK AND WHICH ARE SPECULATIVE WITH
REGARD TO PAYMENT OF INTEREST AND RETURN OF PRINCIPAL. INVESTORS SHOULD CARE-
FULLY CONSIDER THESE RISKES BEFORE INVESTING IN THESE FUNDS. SEE "RISK FAC-
TORS."
INVESTMENT IN THE COMPOSITE MONEY FUND (OR IN ANY OTHER FUND) IS NEITHER IN-
SURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT
THE COMPOSITE MONEY FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE.
The Composite Trust is a newly organized, open-end series management invest-
ment company, organized as a Massachusetts business trust, that has been
formed to streamline the operations of the mutual funds managed by Composite
Research & Management Co. ("CRM"), which are currently organized as Washington
corporations (or series thereof). Immediately prior to and as a condition to
the Merger (or Mergers) with the corresponding Acquired Fund (or Funds), each
Acquiring Fund identified in the numbered paragraphs above will succeed to all
of the assets and liabilities of, respectively, the following Washington cor-
porations (or series thereof) (the "Reorganizations"): (1) Composite U.S. Gov-
ernment Securities, Inc., a Washington corporation; (2) Composite Income Fund,
Inc., a Washington corporation; (3) Composite Growth & Income Fund, a series
of Composite Equity Series, Inc., a Washington corporation; (4) Composite Cash
Management Company: Money Market Portfolio, a series of Composite Cash Manage-
ment Company, a Washington corporation; and (5) Composite Tax Exempt Bond
Fund, Inc., a Washington corporation.
The Acquired Funds and the Acquiring Funds are referred to in this
Prospectus/Proxy Statement as the "Funds," and the Sierra Trust and the Com-
posite Trust are referred to in this Prospectus/ Proxy Statement as the
"Trusts." The term "Acquiring Funds" refers to such Funds and/or their prede-
cessors (i.e., both before and after the Reorganization as series of the Com-
posite Trust), as the context requires.
4
<PAGE>
This Prospectus/Proxy Statement explains concisely what you should know be-
fore investing in each Acquiring Fund. Please read it and keep it for future
reference.
The following documents have been filed with the Securities and Exchange Com-
mission (the "SEC") and are incorporated into this Prospectus/Proxy Statement
by reference: (i) the current Prospectus, dated April 30, 1997, of the Compos-
ite Bond Funds (including the Composite Government Fund, the Composite Income
Fund and the Composite Tax-Exempt Fund), the current Prospectus, dated Febru-
ary 28, 1997, of the Composite Equity Funds (including the Composite Growth &
Income Fund) and the current Prospectus, dated April 30, 1997, of Composite
Cash Management Company (including the Composite Money Fund), each as amended
or supplemented from time to time (the "Composite Prospectuses"); (ii) the
current Prospectuses of the Sierra Trust, dated October , 1997, as amended or
supplemented from time to time, (the "Sierra Prospectuses"); (iii) the current
Statement of Additional Information of the Sierra Trust, dated October ,
1997, as amended or supplemented from time to time (the "Sierra SAI"); (iv)
the current Statements of Additional Information of the Composite Bond Funds,
dated April 30, 1997, the Composite Equity Funds, dated February 28, 1997, and
Composite Cash Management Company, dated April 30, 1997, each as amended or
supplemented from time to time (the "Composite SAIs"); (v) the Report of Inde-
pendent Accountants and financial statements in respect of each Acquired Fund
included in the Sierra Trust's Annual Report to Shareholders for the year
ended June 30, 1997 (the "Sierra Annual Report"); (vi) the Report of Indepen-
dent Accountants and financial statements (A) in respect of each of the Com-
posite Government Fund, the Composite Income Fund and the Composite Tax-Exempt
Fund included in the Composite Bond Funds Annual Report to Shareholders for
the year ended December 31, 1996, (B) in respect of the Composite Growth & In-
come Fund contained in Composite Equity Funds Annual Report to Shareholders
for the year ended October 31, 1996 and (C) in respect of the Composite Money
Fund contained in the Composite Cash Management Company Annual Report to
Shareholders for the year ended December 31, 1996 (all three such Annual Re-
ports collectively, the "Composite Annual Reports"); (vii) the financial
statements (A) in respect of each of the Composite Government Fund, the Com-
posite Income Fund and the Composite Tax-Exempt Fund contained in the Compos-
ite Bond Funds Semi-Annual Report to Shareholders for the six months ended
June 30, 1997, (B) the financial statements in respect of the Composite Growth
& Income Fund contained in the Composite Equity Funds Semi-Annual Report to
Shareholders for the six months ended April 30, 1997 and (C) the financial
statements in respect of the Composite Money Fund contained in the Composite
Cash Management Company Semi-Annual Report to Shareholders for the six months
ended June 30, 1997 (all three such Semi-Annual Reports collectively, the
"Composite Semi-Annual Reports"); and (viii) a Statement of Additional Infor-
mation dated October , 1997 relating to the transactions described in this
Prospectus/Proxy Statement (the "Merger SAI").
For a free copy of any or all of the Prospectuses, Statements of Additional
Information, Annual Reports or Semi-Annual Reports referred to in the forego-
ing paragraph, please call 1-800-543-8072 or write to the Composite Trust at
the address appearing above.
THE SECURITIES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT HAVE NOT BEEN AP-
PROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
5
<PAGE>
SHARES OF THE ACQUIRING FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARAN-
TEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY,
AND INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- -------------------------------------------------------------------------------
6
<PAGE>
OVERVIEW OF MERGERS
PROPOSED TRANSACTIONS
The transactions described on the first page of this Prospectus/Proxy State-
ment are part of an overall restructuring of the registered investment compa-
nies (the "Composite/Sierra Mutual Funds") advised by CRM and Sierra Invest-
ment Advisors Corporation ("Sierra"). CRM, which has been in the business of
investment management since 1944, is a direct subsidiary of Washington Mutual,
Inc. ("Washington Mutual"), a financial services company, and Sierra is an in-
direct subsidiary of Washington Mutual as a result of the merger, which took
place on July 1, 1997, of Sierra's former indirect parent, Great Western Fi-
nancial Corporation, with and into a wholly-owned subsidiary of Washington Mu-
tual (the "Washington Mutual/Great Western Merger"). The restructuring in-
volves, among other components, several "mergers" between Funds in the
Composite/Sierra Mutual Funds family with similar investment objectives and
policies. The result of the restructuring will be a single, more integrated
mutual fund complex, with broader exchange privileges for shareholders.
As part of the restructuring, the Directors of each Acquiring Fund and the
Trustees of each of the Composite Trust and the Sierra Trust, all of which are
open-end management investment companies, have approved transactions involv-
ing, for each Acquired Fund and the corresponding Acquiring Fund, (i) the Re-
organization of the Acquiring Fund from a stand-alone corporation (or series
thereof, in the case of the Composite Money Fund) to a series of the Composite
Trust, followed immediately by (ii) the Merger of the Acquired Fund into the
Acquiring Fund. Each Merger is proposed to be accomplished pursuant to an
Agreement and Plan of Reorganization providing for the transfer of all of the
assets of the Acquired Fund to the Acquiring Fund in exchange for the assump-
tion by the Acquiring Fund of all of the liabilities of the Acquired Fund and
for shares of the Acquiring Fund, followed by the liquidation of the Acquired
Fund.
Each Merger is conditioned on the Reorganization of the Acquiring Fund having
taken place, which is subject to approval of the Acquiring Fund's sharehold-
ers. A meeting of each Acquiring Fund's shareholders will be held on or about
December , 1997 to consider these and other matters. The Reorganizations will
not result in any changes in the investment objectives, policies and restric-
tions, assets and liabilities or management arrangements for the Acquiring
Funds. However, certain investment policies and restrictions of the Acquiring
Funds have been proposed to be changed, certain expense reimbursements by CRM
are proposed to be eliminated, and the distribution fees paid by the Class A
shares of certain of the Acquiring Funds are proposed to be increased, in each
case at or about the time of the Reorganizations. The Reorganizations and the
Mergers would, if approved by shareholders, take place whether or not the pro-
posed changes in investment policies and restrictions, expense reimbursements
and distribution fees are approved. See Appendix C and the Merger SAI for fur-
ther information.
CRM is the investment adviser to each Acquiring Fund, and Sierra is the in-
vestment adviser to each Acquired Fund. Sierra has delegated responsibility
for managing each Acquired Fund's portfolio to an investment subadviser unaf-
filiated with CRM or Sierra. These subadvisers are BlackRock Financial Manage-
ment, Inc. ("BlackRock") in the case of the Sierra Government Fund, TCW Funds
Management, Inc. ("TCW") in the case of the Sierra Income Fund, J.P. Morgan
Investment Management, Inc. ("J.P. Morgan") in the case of the Sierra Growth &
Income Fund and the Sierra Global Money Fund, Alliance Capital Management,
L.P. ("Alliance") in the case of the Sierra Government Money Fund and Van
Kampen American Capital Management Inc. ("Van Kampen") in the case of the Si-
erra Municipal Fund. The
7
<PAGE>
day-to-day management of each Acquiring Fund is handled by portfolio manage-
ment personnel at CRM and not by the current subadvisers of the Acquired
Funds. Consequently, if shareholders of an Acquired Fund approve its Merger,
that will effectively change the party responsible for managing the assets of
the Acquired Fund. However, as explained further below under "Comparison of
Investment Objectives, Policies and Restrictions," each Acquiring Fund has
investment objectives substantially similar to the corresponding Acquired
Fund.
As a result of each proposed transaction, each Acquired Fund will receive a
number of Class A, Class B, Class I and Class S shares of the relevant Acquir-
ing Fund equal in value to the value of the net assets of the Acquired Fund
being transferred and attributable to the Class A, Class B, Class I and Class
S shares, respectively, of the Acquired Fund. Following the transfer, (i) the
Acquiring Fund will distribute to each of its Class A, Class B, Class I and
Class S shareholders a number of full and fractional Class A, Class B, Class I
and/or Class S Merger Shares of the relevant Acquiring Fund equal in value to
the aggregate value of the shareholder's Class A, Class B, Class I and/or
Class S Acquired Fund shares, as the case may be, and (ii) the Acquired Fund
will be liquidated.
The Class A, Class B, Class I and Class S shares of each Acquiring Fund have
substantially similar characteristics to the corresponding classes of the re-
spective Acquired Fund. Class A shares are generally sold subject to a front-
end sales load and are subject to a servicing fee at an annual rate of 0.25%
of assets attributable to Class A shares. Class A shares are generally not
subject to a contingent deferred sales charge (a "CDSC"), except in the case
of certain purchases of Class A shares without a sales load which are redeemed
within two years after purchase. Class B and Class S shares are sold at net
asset value, without an initial sales charge but subject to a CDSC at declin-
ing rates if redeemed within six years of purchase. Class B and Class S shares
are subject to servicing and distribution fees at an aggregate annual rate of
1.00% of assets attributable to Class B or Class S shares and convert automat-
ically to Class A shares approximately eight years after purchase. Class I
shares are sold at net asset value, without an initial sales charge or CDSC,
are not subject to servicing or distribution fees and do not have a conversion
feature. The Acquiring Funds do not currently offer Class I or Class S shares,
but will begin offering such shares, in addition to Class A and Class B
shares, at or before the time that the Mergers are consummated. No sales
charge will be charged to Acquired Fund shareholders on the issuance of the
Merger Shares, and no CDSC will be charged to Acquired Fund shareholders on
the exchange of their Acquired Fund shares for the Merger Shares. The Merger
Shares will be subject to a CDSC on redemption to the same extent that the Ac-
quired Fund shares exchanged were so subject. For the purposes of computing
the CDSC, if any, payable on redemption of Class A, Class B and Class S Merger
Shares, and determining the conversion date of Class B and Class S Merger
Shares to Class A shares, the Merger Shares will be treated as having been
purchased as of the date that, and for the price at which, the Acquired Fund
shares exchanged for such Merger Shares were purchased.
As described more fully below, the Trustees of the Sierra Trust approved the
Mergers based on a thorough examination of CRM and a careful review of CRM's
investment philosophy and performance. The Trustees of the Sierra Trust unani-
mously recommend that shareholders of each Acquired Fund approve the Merger
for such Fund. In reaching that conclusion, the Trustees considered that each
Merger offers shareholders the opportunity to pursue a substantially similar
investment objective in a larger Fund, which should offer economics of scale
and opportunities for greater diversification of risk; that the Mergers and
the general restructuring of which they are a part will offer broader exchange
privileges; and that CRM has
8
<PAGE>
estimated that the Mergers that should result in Fund operating expenses at
lower levels than have historically been experienced, except for the Sierra
Government Fund, for which estimated operating expenses will not change sig-
nificantly, and the Sierra Global Money Fund, which will experience a slight
increase in expenses. See "Operating Expenses" below and "Background and Rea-
sons for the Proposed Mergers."
OPERATING EXPENSES
As the following tables suggest, based on expense levels experienced by the
Funds in the past, the Mergers should result in shareholders receiving, in
some cases, significant reductions in the level of Fund expenses borne by such
shareholders compared to historical periods. Of course, there can be no assur-
ance that the Mergers will continue to result in expense savings for share-
holders. These tables summarize, for Class A, Class B, Class I and Class S
shares, expenses (i) that each Acquired Fund incurred in its fiscal year ended
June 30, 1997, (ii) that each Acquiring Fund incurred in its fiscal year ended
December 31 or October 31, 1996, as the case may be, restated to reflect fees
and expenses currently in effect (or to be put into effect, if approved by
shareholders, prior to the Mergers) for the Acquiring Funds, and (iii) that
each Acquiring Fund would have incurred in its most recent fiscal year after
giving effect on a pro forma combined basis to the proposed Merger, as if the
Merger had occurred as of the beginning of such fiscal year. The tables are
provided to help you understand an investor's share of the operating expenses
which each Fund incurs. The examples show the estimated cumulative expenses
attributable to a hypothetical $1,000 investment in each Acquired Fund, each
Acquiring Fund on a pro forma basis, over specified periods.
9
<PAGE>
<TABLE>
<CAPTION>
CURRENT EXPENSES CURRENT EXPENSES
SIERRA GOVERNMENT FUND COMPOSITE GOVERNMENT FUND PRO FORMA EXPENSES
(FOR FISCAL YEAR ENDED (FOR FISCAL YEAR ENDED COMPOSITE GOVERNMENT
JUNE 30, 1997) DECEMBER 31, 1996) FUND
---------------------- ------------------------- --------------------
<S> <C> <C> <C>
SHAREHOLDER EXPENSES
- -----------------------------------------------------------------------------------------------
Maximum Sales Charge
Imposed on Purchase (as
a percentage of
offering price at the
time of purchase)
Class A................ 4.50% 4.50% 4.50%
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- -----------------------------------------------------------------------------------------------
Maximum Contingent De-
ferred Sales Charge
Class A................ None* None None
Class B................ 5.00% 5.00% 5.00%
Class I................ None -- None
Class S................ 5.00% -- 5.00%
- -----------------------------------------------------------------------------------------------
Redemption Fees
Class A................ None None None
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- -----------------------------------------------------------------------------------------------
Exchange Fees
Class A................ None None None
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- -----------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
- -----------------------------------------------------------------------------------------------
Management Fees (after
voluntary waivers or
reimbursement)
Class A................ 0.23% 0.63% 0.50%
Class B................ 0.23% 0.63% 0.50%
Class I................ 0.23% -- 0.50%
Class S................ 0.23% -- 0.50%
- -----------------------------------------------------------------------------------------------
12b-1 Fees
Class A................ 0.25% 0.25% 0.25%
Class B................ 1.00% 1.00% 1.00%
Class I................ None -- None
Class S................ 1.00% -- 1.00%
- -----------------------------------------------------------------------------------------------
Other Expenses
Class A................ 0.50% 0.20% 0.22%
Class B................ 0.50% 0.22% 0.24%
Class I................ 0.50% -- 0.22%
Class S................ 0.50% -- 0.24%
- -----------------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES
(after voluntary waivers or reimbursement)
Class A................ 0.98% 1.08% 0.97%
Class B................ 1.73% 1.85% 1.74%
Class I................ 0.73% -- 0.72%
Class S................ 1.73% -- 1.74%
- -----------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
CURRENT EXPENSES CURRENT EXPENSES
SIERRA GOVERNMENT FUND COMPOSITE GOVERNMENT FUND PRO FORMA EXPENSES
(FOR FISCAL YEAR ENDED (FOR FISCAL YEAR ENDED COMPOSITE GOVERNMENT
JUNE 30, 1997) DECEMBER 31, 1996) FUND
---------------------- ------------------------- --------------------
<S> <C> <C> <C>
TOTAL FUND OPERATING EXPENSES (CONTINUED)
(after voluntary waivers or reimbursement)
- -----------------------------------------------------------------------------------------------
Management fees without
expense waivers:
Class A................ 0.55% 0.63% 0.50%
Class B................ 0.55% 0.63% 0.50%
Class I................ 0.55% -- 0.50%
Class S................ 0.55% -- 0.50%
- -----------------------------------------------------------------------------------------------
TOTAL FUND OPERATING
EXPENSES WITHOUT
EXPENSE WAIVERS AND
REIMBURSEMENTS:
Class A................ 1.30% 1.08% 0.97%
Class B................ 2.05% 1.85% 1.74%
Class I................ 1.05% -- 0.72%
Class S................ 2.05% -- 1.74%
- -----------------------------------------------------------------------------------------------
SHAREHOLDER EXPENSES
- -----------------------------------------------------------------------------------------------
Maximum Sales Charge
Imposed on Purchase (as
a percentage of
offering price at the
time of purchase)
Class A................ 4.50% 4.50% 4.50%
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- -----------------------------------------------------------------------------------------------
Maximum Contingent
Deferred Sales Charge
Class A................ None* None None
Class B................ 5.00% 5.00% 5.00%
Class I................ None -- None
Class S................ 5.00% -- 5.00%
- -----------------------------------------------------------------------------------------------
Redemption Fees
Class A................ None None None
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- -----------------------------------------------------------------------------------------------
Exchange Fees
Class A................ None None None
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- -----------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
- -----------------------------------------------------------------------------------------------
Management Fees (after
voluntary
waivers or
reimbursement)
Class A................ 0.44% 0.63% 0.60%
Class B................ 0.44% 0.63% 0.60%
Class I................ 0.44% -- 0.60%
Class S................ 0.44% -- 0.60%
- -----------------------------------------------------------------------------------------------
12b-1 Fees
Class A................ 0.25% 0.25% 0.25%
Class B................ 1.00% 1.00% 1.00%
Class I................ None -- None
Class S................ 1.00% -- 1.00%
- -----------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
CURRENT EXPENSES CURRENT EXPENSES
SIERRA GROWTH & COMPOSITE GROWTH &
INCOME FUND INCOME FUND PRO FORMA EXPENSES
(FOR FISCAL YEAR ENDED (FOR FISCAL YEAR ENDED COMPOSITE GROWTH &
JUNE 30, 1997) OCTOBER 31, 1996) INCOME FUND
---------------------- ---------------------- ------------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES (CONTINUED)
(as a percentage of av-
erage net assets)
- ------------------------------------------------------------------------------------------
Other Expenses
Class A................ 0.49% 0.25% 0.25%
Class B................ 0.49% 0.26% 0.26%
Class I................ 0.49% -- 0.25%
Class S................ 0.49% -- 0.26%
- ------------------------------------------------------------------------------------------
TOTAL FUND OPERATING
EXPENSES
(after voluntary
waivers or
reimbursement)
Class A................ 1.18% 1.13% 1.09%
Class B................ 1.93% 1.89% 1.86%
Class I................ 0.93% -- 0.85%
Class S................ 1.93% -- 1.86%
- ------------------------------------------------------------------------------------------
Management fees without
expense waivers:
Class A................ 0.65% 0.63% 0.60%
Class B................ 0.65% 0.63% 0.60%
Class I................ 0.65% -- 0.60%
Class S................ 0.65% -- 0.60%
- ------------------------------------------------------------------------------------------
TOTAL FUND OPERATING
EXPENSES WITHOUT
EXPENSE WAIVERS AND
REIMBURSEMENTS:
Class A................ 1.39% 1.13% 1.09%
Class B................ 2.14% 1.89% 1.86%
Class I................ 1.14% -- 0.85%
Class S................ 2.14% -- 1.86%
- ------------------------------------------------------------------------------------------
SHAREHOLDER EXPENSES
- ------------------------------------------------------------------------------------------
Maximum Sales Charge
Imposed on Purchase
(as a percentage of
offering price at the
time
of purchase)
Class A................ 5.75% 5.75% 5.75%
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- ------------------------------------------------------------------------------------------
Maximum Contingent
Deferred Sales Charge
Class A................ None* None None
Class B................ 5.00% 5.00% 5.00%
Class I................ None -- None
Class S................ 5.00% -- None
- ------------------------------------------------------------------------------------------
Redemption Fees
Class A................ None None None
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- ------------------------------------------------------------------------------------------
Exchange Fees
Class A................ None None None
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- ------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
CURRENT EXPENSES
CURRENT EXPENSES COMPOSITE MONEY
SIERRA GLOBAL MONEY FUND MARKET FUND PRO FORMA EXPENSES
(FOR FISCAL YEAR ENDED (FOR FISCAL YEAR ENDED COMPOSITE MONEY
JUNE 30, 1997) DECEMBER 31, 1996) MARKET FUND
------------------------ ---------------------- ------------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
- --------------------------------------------------------------------------------------------
Management Fees
Class A................ 0.75% 0.63% 0.60%
Class B................ 0.75% 0.63% 0.60%
Class I................ 0.75% -- 0.60%
Class S................ 0.75% -- 0.60%
- --------------------------------------------------------------------------------------------
12b-1 Fees
Class A................ 0.25% 0.25% 0.25%
Class B................ 1.00% 1.00% 1.00%
Class I................ None -- None
Class S................ 1.00% -- 1.00%
- --------------------------------------------------------------------------------------------
Other Expenses
Class A................ 0.53% 0.23% 0.23%
Class B................ 0.53% 0.31% 0.31%
Class I................ 0.53% -- 0.23%
Class S................ 0.53% -- 0.31%
- --------------------------------------------------------------------------------------------
TOTAL FUND OPERATING
EXPENSES
Class A................ 1.53% 1.11% 1.08%
Class B................ 2.28% 1.94% 1.91%
Class I................ 1.28% -- 0.83%
Class S................ 2.28% -- 1.91%
- --------------------------------------------------------------------------------------------
SHAREHOLDER EXPENSES
- --------------------------------------------------------------------------------------------
Maximum Sales Charge
Imposed on Purchase
(as a percentage of
offering price at the
time
of purchase)
Class A................ None None None
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- --------------------------------------------------------------------------------------------
Maximum Contingent
Deferred Sales Charge
Class A................ None* None None
Class B................ 5.00% 5.00% 5.00%
Class I................ None -- None
Class S................ 5.00% -- 5.00%
- --------------------------------------------------------------------------------------------
Redemption Fees
Class A................ None None None
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- --------------------------------------------------------------------------------------------
Exchange Fees
Class A................ None None None
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- --------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
CURRENT EXPENSES CURRENT EXPENSES
SIERRA GOVERNMENT COMPOSITE MONEY
MONEY FUND FUND PRO FORMA EXPENSES
(FOR FISCAL YEAR ENDED (FOR FISCAL YEAR ENDED COMPOSITE MONEY
JUNE 30, 1997) DECEMBER 31, 1996) MARKET FUND
---------------------- ---------------------- ------------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
- ------------------------------------------------------------------------------------------
Management Fees (after
voluntary waivers or
reimbursement)
Class A................ -- 0.35% 0.35%
Class B................ -- 0.35% 0.35%
Class I................ -- -- 0.35%
Class S................ -- -- 0.35%
- ------------------------------------------------------------------------------------------
12b-1 Fees
Class A................ 0.25% None None
Class B................ 1.00% 1.00% 1.00%
Class I................ None -- None
Class S................ 1.00% -- 1.00%
- ------------------------------------------------------------------------------------------
Other Expenses
Class A................ 0.50% 0.43% 0.44%
Class B................ 0.50% 0.43% 0.44%
Class I................ 0.50% -- 0.44%
Class S................ 0.50% -- 0.44%
- ------------------------------------------------------------------------------------------
TOTAL FUND OPERATING
EXPENSES
(after voluntary
waivers or
reimbursement)
Class A................ 0.75% 0.78% 0.79%
Class B................ 1.50% 1.78% 1.79%
Class I................ 0.50% -- 0.79%
Class S................ 1.50% -- 1.79%
- ------------------------------------------------------------------------------------------
Management fees without
expense waivers:
Class A................ 0.40% 0.45% 0.40%
Class B................ 0.40% 0.45% 0.40%
Class I................ 0.40% -- 0.40%
Class S................ 0.40% -- 0.40%
- ------------------------------------------------------------------------------------------
TOTAL FUND OPERATING
EXPENSES WITHOUT
EXPENSE WAIVERS AND
REIMBURSEMENTS:
Class A................ 1.15% 0.88% 0.84%
Class B................ 1.90% 1.88% 1.84%
Class I................ 0.90% -- 0.84%
Class S................ 1.90% -- 1.84%
- ------------------------------------------------------------------------------------------
SHAREHOLDER EXPENSES
- ------------------------------------------------------------------------------------------
Maximum Sales Charge
Imposed on Purchase
(as a percentage of
offering price at the
time
of purchase)
Class A................ None None None
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- ------------------------------------------------------------------------------------------
Maximum Contingent
Deferred Sales Charge
Class A................ None* None None
Class B................ 5.00% 5.00% 5.00%
Class I................ None -- None
Class S................ 5.00% -- 5.00%
- ------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
CURRENT EXPENSES CURRENT EXPENSES
SIERRA COMPOSITE
MUNICIPAL FUND TAX-EXEMPT FUND PRO FORMA EXPENSES
(FOR FISCAL YEAR ENDED (FOR FISCAL YEAR ENDED COMPOSITE
JUNE 30, 1997) DECEMBER 31, 1996) TAX-EXEMPT FUND
---------------------- ---------------------- ------------------
<S> <C> <C> <C>
SHAREHOLDER EXPENSES
(CONTINUED)
- ------------------------------------------------------------------------------------------
Redemption Fees
Class A................ None None None
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- ------------------------------------------------------------------------------------------
Exchange Fees
Class A................ None None None
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- ------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
- ------------------------------------------------------------------------------------------
Management Fees (after
voluntary waivers
or reimbursement)
Class A................ 0.06% 0.35% 0.35%
Class B................ 0.06% 0.35% 0.35%
Class I................ 0.06% -- 0.35%
Class S................ 0.06% -- 0.35%
- ------------------------------------------------------------------------------------------
12b-1 Fees
Class A................ 0.25% None None
Class B................ 1.00% 1.00% 1.00%
Class I................ None -- None
Class S................ 1.00% -- 1.00%
- ------------------------------------------------------------------------------------------
Other Expenses
Class A................ 0.54% 0.43% 0.39%
Class B................ 0.54% 0.43% 0.39%
Class I................ 0.54% -- 0.39%
Class S................ 0.54% -- 0.39%
- ------------------------------------------------------------------------------------------
TOTAL FUND OPERATING
EXPENSES
(after voluntary
waivers or
reimbursement)
Class A................ 0.85% 0.78% 0.74%
Class B................ 1.60% 1.78% 1.74%
Class I................ 0.60% -- 0.74%
Class S................ 1.60% -- 1.74%
- ------------------------------------------------------------------------------------------
Management fees without
expense waivers:
Class A................ 0.40% 0.45% 0.40%
Class B................ 0.40% 0.45% 0.40%
Class I................ 0.40% -- 0.40%
Class S................ 0.40% -- 0.40%
- ------------------------------------------------------------------------------------------
TOTAL FUND OPERATING
EXPENSES WITHOUT
EXPENSE WAIVERS AND
REIMBURSEMENTS:
Class A................ 1.19% 0.88% 0.79%
Class B................ 1.94% 1.88% 1.79%
Class I................ 0.94% -- 0.79%
Class S................ 1.94% -- 1.79%
- ------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
CURRENT EXPENSES CURRENT EXPENSES
SIERRA COMPOSITE
MUNICIPAL FUND TAX-EXEMPT FUND PRO FORMA EXPENSES
(FOR FISCAL YEAR ENDED (FOR FISCAL YEAR ENDED COMPOSITE
JUNE 30, 1997) DECEMBER 31, 1996) TAX-EXEMPT FUND
---------------------- ---------------------- ------------------
<S> <C> <C> <C>
SHAREHOLDER EXPENSES
- ------------------------------------------------------------------------------------------
Maximum Sales Charge
Imposed on Purchase
(as a percentage of
offering price at the
time
of purchase)
Class A................ 4.50% 4.50% 4.50%
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- ------------------------------------------------------------------------------------------
Maximum Contingent
Deferred Sales Charge
Class A................ None* None None
Class B................ 5.00% 5.00% 5.00%
Class I................ None -- None
Class S................ 5.00% -- 5.00%
- ------------------------------------------------------------------------------------------
Redemption Fees
Class A................ None None None
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- ------------------------------------------------------------------------------------------
Exchange Fees
Class A................ None None None
Class B................ None None None
Class I................ None -- None
Class S................ None -- None
- ------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
- ------------------------------------------------------------------------------------------
Management Fees (after
voluntary waivers or
reimbursement)
Class A................ 0.31% 0.50% 0.50%
Class B................ 0.31% 0.50% 0.50%
Class I................ 0.31% -- 0.50%
Class S................ 0.31% -- 0.50%
- ------------------------------------------------------------------------------------------
12b-1 Fees
Class A................ 0.25% 0.25% 0.25%
Class B................ 1.00% 1.00% 1.00%
Class I................ None -- 0.25%
Class S................ 1.00% -- 1.00%
- ------------------------------------------------------------------------------------------
Other Expenses
Class A................ 0.48% 0.10% 0.10%
Class B................ 0.48% 0.15% 0.15%
Class I................ 0.48% -- 0.10%
Class S................ 0.48% -- 0.15%
- ------------------------------------------------------------------------------------------
TOTAL FUND OPERATING
EXPENSES
(after voluntary
waivers or
reimbursement)
Class A................ 1.04% 0.85% 0.85%
Class B................ 1.79% 1.65% 1.65%
Class I................ 0.79% -- 0.85%
Class S................ 1.79% -- 1.65%
- ------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CURRENT EXPENSES CURRENT EXPENSES
SIERRA COMPOSITE
MUNICIPAL FUND TAX-EXEMPT FUND PRO FORMA EXPENSES
(FOR FISCAL YEAR ENDED (FOR FISCAL YEAR ENDED COMPOSITE
JUNE 30, 1997) DECEMBER 31, 1996) TAX-EXEMPT FUND
---------------------- ---------------------- ------------------
<S> <C> <C> <C>
TOTAL FUND OPERATING
EXPENSES (CONTINUED)
(after voluntary
waivers or
reimbursement)
- ------------------------------------------------------------------------------------------
Management fees without
expense waivers:
Class A................ 0.55% 0.50% 0.50%
Class B................ 0.55% 0.50% 0.50%
Class I................ 0.55% -- 0.50%
Class S................ 0.55% -- 0.50%
- ------------------------------------------------------------------------------------------
TOTAL FUND OPERATING
EXPENSES WITHOUT
EXPENSE WAIVERS AND
REIMBURSEMENTS:
Class A................ 1.28% 0.85% 0.85%
Class B................ 2.03% 1.65% 1.65%
Class I................ 1.03% -- 0.85%
Class S................ 2.03% -- 1.65%
- ------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
EXAMPLES OF FUND EXPENSES:
An investment of $1,000 would incur the following expenses, assuming (1) 5%
annual return and (2) unless otherwise indicated, redemption at the end of each
time period:
<TABLE>
<CAPTION>
CURRENT EXPENSES
CURRENT EXPENSES COMPOSITE
SIERRA GOVERNMENT FUND GOVERNMENT FUND PRO FORMA EXPENSES
(FOR FISCAL YEAR ENDED (FOR FISCAL YEAR ENDED COMPOSITE
JUNE 30, 1997) DECEMBER 31, 1996) GOVERNMENT FUND
---------------------- ---------------------- ------------------
<S> <C> <C> <C>
Class A
1 year................. $ 55 $ 56 $ 54
3 years................ $ 75 $ 78 $ 75
5 years................ $ 97 $102 $ 96
10 years............... $160 $171 $159
- ------------------------------------------------------------------------------------------
Class B (assuming
redemption at end of
period)
1 year................. $ 68 $ 60 $ 58
3 years................ $ 84 $ 91 $ 85
5 years................ $114 $112 $104
10 years............... $184 $197 $185
- ------------------------------------------------------------------------------------------
Class B (assuming no
redemption)
1 year................. $ 18 $ 19 $ 18
3 years................ $ 54 $ 58 $ 55
5 years................ $ 94 $100 $ 94
10 years............... $184 $197 $185
- ------------------------------------------------------------------------------------------
Class I
1 year................. $ 7 $ -- $ 7
3 years................ $ 23 $ -- $ 23
5 years................ $ 41 $ -- $ 40
10 years............... $ 91 $ -- $ 89
- ------------------------------------------------------------------------------------------
Class S (assuming
redemption at end of
period)
1 year................. $ 68 $ -- $ 58
3 years................ $ 84 $ -- $ 85
5 years................ $114 $ -- $104
10 years............... $184 $ -- $185
- ------------------------------------------------------------------------------------------
Class S (assuming no
redemption)
1 year................. $ 18 $ -- $ 18
3 years................ $ 54 $ -- $ 55
5 years................ $ 94 $ -- $ 94
10 years............... $184 $ -- $185
- ------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CURRENT EXPENSES
CURRENT EXPENSES COMPOSITE
SIERRA INCOME FUND INCOME FUND PRO FORMA EXPENSES
(FOR FISCAL YEAR ENDED (FOR FISCAL YEAR ENDED COMPOSITE
JUNE 30, 1997) DECEMBER 31, 1996) INCOME FUND
---------------------- ---------------------- ------------------
<S> <C> <C> <C>
Class A
1 year................. $ 56 $ 56 $ 56
3 years................ $ 81 $ 79 $ 78
5 years................ $107 $104 $103
10 years............... $182 $176 $173
- ------------------------------------------------------------------------------------------
Class B (assuming
redemption at end of
period)
1 year................. $ 70 $ 60 $ 59
3 years................ $ 91 $ 92 $ 88
5 years................ $124 $114 $111
10 years............... $206 $201 $198
- ------------------------------------------------------------------------------------------
Class B (assuming no
redemption)
1 year................. $ 20 $ 19 $ 19
3 years................ $ 61 $ 59 $ 58
5 years................ $104 $102 $101
10 years............... $206 $201 $198
- ------------------------------------------------------------------------------------------
Class I
1 year................. $ 9 $ -- $ 9
3 years................ $ 30 $ -- $ 27
5 years................ $ 51 $ -- $ 47
10 years............... $114 $ -- $105
- ------------------------------------------------------------------------------------------
Class S (assuming
redemption at end of
period)
1 year................. $ 70 $ -- $ 59
3 years................ $ 91 $ -- $ 88
5 years................ $124 $ -- $112
10 years............... $206 $ -- $198
- ------------------------------------------------------------------------------------------
Class S (assuming no
redemption)
1 year................. $ 20 $ -- $ 19
3 years................ $ 61 $ -- $ 58
5 years................ $104 $ -- $101
10 years............... $206 $ -- $198
- ------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
CURRENT EXPENSES
CURRENT EXPENSES SIERRA COMPOSITE
GROWTH & INCOME FUND GROWTH & INCOME FUND PRO FORMA EXPENSES
(FOR FISCAL YEAR ENDED (FOR FISCAL YEAR ENDED COMPOSITE
JUNE 30, 1997) DECEMBER 31, 1996) GROWTH & INCOME FUND
----------------------- ---------------------- --------------------
<S> <C> <C> <C>
Class A
1 year................. $ 72 $ 68 $ 68
3 years................ $103 $ 91 $ 90
5 years................ $136 $115 $114
10 years............... $229 $185 $182
- ---------------------------------------------------------------------------------------------
Class B (assuming
redemption at end of
period)
1 year................. $ 73 $ 61 $ 59
3 years................ $101 $ 94 $ 90
5 years................ $142 $116 $113
10 years............... $243 $205 $202
- ---------------------------------------------------------------------------------------------
Class B (assuming no
redemption)
1 year................. $ 23 $ 20 $ 19
3 years................ $ 71 $ 61 $ 60
5 years................ $122 $105 $103
10 years............... $243 $205 $202
- ---------------------------------------------------------------------------------------------
Class I
1 year................. $ 13 $ -- $ 8
3 years................ $ 41 $ -- $ 26
5 years................ $ 70 $ -- $ 46
10 years............... $156 $ -- $103
- ---------------------------------------------------------------------------------------------
Class S (assuming
redemption at end of
period)
1 year................. $ 73 $ -- $ 59
3 years................ $101 $ -- $ 90
5 years................ $142 $ -- $113
10 years............... $243 $ -- $202
- ---------------------------------------------------------------------------------------------
Class S (assuming no
redemption)
1 year................. $ 23 $ -- $ 19
3 years................ $ 71 $ -- $ 60
5 years................ $122 $ -- $103
10 years............... $243 $ -- $202
- ---------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
CURRENT EXPENSES CURRENT EXPENSES
SIERRA GLOBAL COMPOSITE
MONEY FUND MONEY FUND PRO FORMA EXPENSES
(FOR FISCAL YEAR ENDED (FOR FISCAL YEAR ENDED COMPOSITE
JUNE 30, 1997) DECEMBER 31, 1996) MONEY FUND
---------------------- ---------------------- ------------------
<S> <C> <C> <C>
Class A
1 year................. $ 8 $ 8 $ 8
3 years................ $ 24 $ 25 $ 25
5 years................ $ 42 $ 43 $ 44
10 years............... $ 93 $ 97 $ 98
- ------------------------------------------------------------------------------------------
Class B (assuming
redemption at end of
period)
1 year................. $ 65 $ 59 $ 58
3 years................ $ 77 $ 89 $ 86
5 years................ $102 $108 $107
10 years............... $159 $183 $184
- ------------------------------------------------------------------------------------------
Class B (assuming no
redemption)
1 year................. $ 15 $ 18 $ 18
3 years................ $ 47 $ 56 $ 56
5 years................ $ 82 $ 96 $ 97
10 years............... $170 $183 $184
- ------------------------------------------------------------------------------------------
Class I
1 year................. $ 5 $ -- $ 8
3 years................ $ 16 $ -- $ 25
5 years................ $ 28 $ -- $ 44
10 years............... $ 63 $ -- $ 98
- ------------------------------------------------------------------------------------------
Class S (assuming
redemption at end of
period)
1 year................. $ 65 $ -- $ 58
3 years................ $ 77 $ -- $ 86
5 years................ $102 $ -- $107
10 years............... $159 $ -- $184
- ------------------------------------------------------------------------------------------
Class S (assuming no
redemption)
1 year................. $ 15 $ -- $ 18
3 years................ $ 47 $ -- $ 56
5 years................ $ 82 $ -- $ 97
10 years............... $170 $ -- $184
- ------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
CURRENT EXPENSES CURRENT EXPENSES
SIERRA GOVERNMENT COMPOSITE
MONEY FUND MONEY FUND PRO FORMA EXPENSES
(FOR FISCAL YEAR ENDED (FOR FISCAL YEAR ENDED COMPOSITE
JUNE 30, 1997) DECEMBER 31, 1996) MONEY FUND
---------------------- ---------------------- ------------------
<S> <C> <C> <C>
Class A
1 year................. $ 9 $ 8 $ 8
3 years................ $ 27 $ 25 $ 24
5 years................ $ 47 $ 43 $ 41
10 years............... $105 $ 97 $ 92
- ------------------------------------------------------------------------------------------
Class B (assuming
redemption at end of
period)
1 year................. $ 66 $ 59 $ 58
3 years................ $ 80 $ 89 $ 85
5 years................ $107 $108 $104
10 years............... $170 $183 $179
- ------------------------------------------------------------------------------------------
Class B (assuming no
redemption)
1 year................. $ 16 $ 18 $ 18
3 years................ $ 50 $ 56 $ 55
5 years................ $ 87 $ 96 $ 94
10 years............... $170 $183 $179
- ------------------------------------------------------------------------------------------
Class I
1 year................. $ 6 $ -- $ 8
3 years................ $ 19 $ -- $ 24
5 years................ $ 33 $ -- $ 41
10 years............... $ 75 $ -- $ 92
- ------------------------------------------------------------------------------------------
Class S (assuming
redemption at end of
period)
1 year................. $ 66 $ -- $ 58
3 years................ $ 80 $ -- $ 85
5 years................ $107 $ -- $104
10 years............... $170 $ -- $179
- ------------------------------------------------------------------------------------------
Class S (assuming no
redemption)
1 year................. $ 16 $ -- $ 18
3 years................ $ 50 $ -- $ 55
5 years................ $ 87 $ -- $ 94
10 years............... $170 $ -- $179
- ------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
CURRENT EXPENSES
CURRENT EXPENSES COMPOSITE
SIERRA MUNICIPAL FUND TAX-EXEMPT FUND PRO FORMA EXPENSES
(FOR FISCAL YEAR ENDED (FOR FISCAL YEAR ENDED COMPOSITE
JUNE 30, 1997) DECEMBER 31, 1996) TAX-EXEMPT FUND
---------------------- ---------------------- ------------------
<S> <C> <C> <C>
Class A
1 year................. $ 55 $ 53 $ 53
3 years................ $ 77 $ 71 $ 71
5 years................ $100 $ 90 $ 90
10 years............... $166 $145 $145
- ------------------------------------------------------------------------------------------
Class B (assuming
redemption at end of
period)
1 year................. $ 68 $ 58 $ 57
3 years................ $ 86 $ 85 $ 82
5 years................ $117 $101 $100
10 years............... $191 $174 $174
- ------------------------------------------------------------------------------------------
Class B (assuming no
redemption)
1 year................. $ 18 $ 17 $ 17
3 years................ $ 56 $ 52 $ 52
5 years................ $ 97 $ 90 $ 90
10 years............... $191 $174 $174
- ------------------------------------------------------------------------------------------
Class I
1 year................. $ 8 $ -- $ 9
3 years................ $ 25 $ -- $ 27
5 years................ $ 44 $ -- $ 47
10 years............... $ 98 $ -- $105
- ------------------------------------------------------------------------------------------
Class S (assuming
redemption at end of
period)
1 year................. $ 68 $ -- $ 57
3 years................ $ 86 $ -- $ 82
5 years................ $117 $ -- $100
10 years............... $191 $ -- $174
- ------------------------------------------------------------------------------------------
Class S (assuming no
redemption)
1 year................. $ 18 $ -- $ 17
3 years................ $ 56 $ -- $ 52
5 years................ $ 97 $ -- $ 90
10 years............... $191 $ -- $174
- ------------------------------------------------------------------------------------------
</TABLE>
* Certain investors who purchase class A shares at net asset value may be sub-
ject to a contingent deferred sales charge of 1.00% or .50% on redemptions
of these shares during the first or second year after purchase, respective-
ly.
The above examples should not be considered a representation of past or fu-
ture expenses or performance. Actual expenses may be greater or less than
those shown. Federal regulations require the examples to assume a 5% annual
return, but actual annual return will vary.
23
<PAGE>
- -------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSEQUENCES
Except in the case of the Mergers of the Sierra Global Money Fund and the Si-
erra Government Money Fund, for federal income tax purposes no gain or loss
will be recognized by an Acquired Fund or its shareholders as a result of the
Merger, and the tax basis of the Merger Shares received by each Acquired Fund
shareholder will be the same as the tax basis of the shareholder's Acquired
Fund shares. In the case of the Mergers of the Sierra Global Money Fund and
the Sierra Government Money Fund, shareholders may recognize gain or loss as a
result of the Merger; however, because these Funds attempt to maintain a sta-
ble net asset value of $1.00 per share, the amount of any such gain or loss is
expected to be negligible. See "Information about the Mergers--Federal Income
Tax Consequences."
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Each Acquiring Fund has investment objectives that are substantially similar
to those of the corresponding Acquired Fund. The investment objectives, poli-
cies and restrictions of the Acquired Funds and the Acquiring Funds, and cer-
tain differences between them, are summarized below. For a more detailed de-
scription of the investment techniques used by the Acquired Funds and the Ac-
quiring Funds, please see Appendix C to this Prospectus/Proxy Statement, the
Merger SAI, the Composite Prospectuses and the Composite SAIs (regarding the
Acquiring Funds) and the Sierra Prospectuses and the Sierra SAI (regarding the
Acquired Funds). Please refer to Appendix C for a detailed description of the
pending changes to the fundamental investment restrictions of the Acquiring
Funds and the risks involved in the investments contemplated thereby.
Sierra Government Fund vs. Composite Government Fund
The Composite Government Fund and the Sierra Government Fund have substan-
tially similar investment objectives. The Sierra Government Fund attempts to
maximize total rate of return while providing a high level of current income,
consistent with reasonable safety of principal. The Composite Government Fund
seeks to maintain a high level of current income, consistent with safety and
liquidity. However, unlike the Sierra Government Fund, the Composite Govern-
ment Fund does not attempt to provide a constant dividend level and, there-
fore, dividends may vary from month to month. The total return for the Compos-
ite Government Fund and the Sierra Government Fund is set forth in the chart
below. Because of the different management styles, however, the relative con-
tributions of the two components of total return (i.e., current income and
capital appreciation) varied between the Components Government Fund and the
Sierra Government Fund. The yield (calculated in accordance with SEC regula-
tions) of the Composite Government Fund was versus for the Sierra Gov-
ernment Fund during the 30-day period ended and averaged and , re-
spectively, over the 12-month period ended .
TOTAL RETURN COMPARISON
AS OF [6/30/97]*
<TABLE>
<CAPTION>
3 YEARS 5 YEARS
1 YEAR ANNUALIZED ANNUALIZED
------ ---------- ----------
<S> <C> <C> <C>
Composite Government Fund......................... [8.01]% [8.11]% [6.05]%
Sierra Government Fund............................ [8.74]% [7.72]% [5.36]%
</TABLE>
* Performance is for Class A Shares of both Funds. Fund performance data is
after all ex-
24
<PAGE>
penses. No competitive performance information is shown for a 10 year period
because the Sierra Government Fund did not commence operations until ,
19 . For further information about the Composite Government Fund's perfor-
mance, see Appendix C.
The Composite Government Fund is required to invest at least 80% of its as-
sets in obligations guaranteed by the U.S. Government, or in repurchase agree-
ments or collateralized mortgage obligations ("CMOs") secured by these obliga-
tions. It is a fundamental investment policy of the Composite Government Fund
to invest, under normal market conditions, only in obligations issued or guar-
anteed by the full faith and credit of the U.S. Government, including certifi-
cates of the Government National Mortgage Association ("GNMA") of the modified
pass-through type, CMOs and real estate mortgage investment conduits which
represent ownership in underlying GNMA certificates or mortgages insured by
GNMA, and repurchase agreements which are secured by the obligations identi-
fied above. See "Risk Factors--Market Risk."
The Sierra Government Fund must invest at least 65% of its assets in interme-
diate- and long-term securities of the U.S. Government, including its agen-
cies, instrumentalities and political subdivisions. In addition to obligations
issued or guaranteed by the U.S. Government, the Sierra Government Fund may
invest in securities issued or guaranteed by the Federal National Mortgage As-
sociation and the Federal Home Loan Mortgage Corporation as well as other gov-
ernment agencies and instrumentalities. These obligations are not backed by
the full faith and credit of the United States. See "Risk Factors--Market
Risk."
It is expected that, subject to the approval of shareholders of the Composite
Government Fund, certain of the fundamental investment restrictions currently
in effect for the Composite Government Fund will be modified or eliminated
prior to the Merger. If these changes are approved, the Composite Government
Fund will be permitted to invest in securities issued by agencies or instru-
mentalities of the U.S. Government like the Sierra Government Fund. Such secu-
rities may not be supported by the full faith and credit of the U.S. Govern-
ment.
The Sierra Government Fund may also invest up to 35% of its total assets in
corporate bonds, preferred stock, convertible corporate bonds, convertible
preferred stock, government stripped mortgage-backed securities, asset-backed
securities, interests in lease obligations, floating rate, inverse floating
rate and variable rate obligations, and commercial mortgage-backed securities.
A substantial portion of the Sierra Government Fund's assets at any time may
consist of mortgage-backed securities. Under normal market conditions, the Si-
erra Government Fund will limit its investment in money market instruments
consisting of short-term U.S. Government securities and repurchase agreements
with respect to such U.S. Government securities to 20% of its net assets, al-
though for temporary defensive purposes, either Fund may invest in these in-
struments without limitation. The Sierra Government Fund may also pledge, hy-
pothecate or otherwise encumber up to 30% of its total assets. The Sierra Gov-
ernment Fund may invest up to 33 1/3% of its total assets in dollar rolls or
"covered rolls" but may not borrow money or enter into reverse repurchase
agreements or dollar roll transactions in the aggregate in excess of 33 1/3%
of the Fund's total assets (after giving effect to such borrowing). The Com-
posite Government Fund, if the changes to certain fundamental investment re-
strictions are approved, may invest in dollar rolls, subject to such limits as
may be imposed from time to time by polices adopted by the Board of Trustees,
and may invest in securities that are eligible for resale only to "qualified
institutional buyers" pursuant to Rule 144A under the Securities Act. See
"Risk Factors--Illiquid Securities."
The Sierra Government Fund may utilize various other investment strategies
involving derivatives, including exchange-listed and over-the-
25
<PAGE>
counter put and call options on securities, equity and fixed-income indices
and other financial instruments, financial futures contracts and options
thereon, and interest rate transactions such as swaps, caps, floors and col-
lars to hedge various market risks, to manage the effective maturity or dura-
tion of fixed-income securities, or to seek potentially higher returns. The
Composite Government Fund's policies do not permit these uses of derivatives.
The Sierra Government Fund does not currently contemplate entering into such
transactions that are in aggregate principal amount in excess of 15% of its
net assets, excluding for these purposes "covered" transactions and those en-
tered into for "bona fide hedging" purposes. See "Risk Factors--Derivative In-
struments."
Both the Composite Government Fund and the Sierra Government Fund may pur-
chase securities on a "when-issued" or "delayed-delivery" basis. However, the
Composite Government Fund may only purchase such securities if the scheduled
delivery is no more than 120 days in the future and only to the extent of 20%
of the market value of its net assets.
Neither the Composite Government Fund nor the Sierra Government Fund may in-
vest in securities of foreign issuers, depository receipts, real estate in-
vestment trusts, securities of other investment companies, lower rated securi-
ties or engage in foreign currency transactions.
Gary J. Pokrzywinski, CFA, Vice President and Senior Portfolio Manager of
CRM, is primarily responsible for the management of the Composite Government
Fund. The day-to-day management of the Sierra Government Fund's portfolio is
the responsibility of a committee composed of officers of BlackRock, super-
vised by Keith Anderson and Andrew J. Phillips, Managing Director and Vice
President, respectively, of BlackRock.
Sierra Income Fund vs. Composite Income Fund
The Composite Income Fund and the Sierra Income Fund have substantially iden-
tical investment objectives. Both funds seek to provide a high level of cur-
rent income, consistent with preservation of capital. However, unlike the Si-
erra Income Fund, the Composite Income Fund does not attempt to provide a con-
stant dividend level and, therefore, dividends may vary from month to month.
The total return for the Composite Income Fund and the Sierra Income Fund is
set forth in the chart below. Because of the different management styles, how-
ever, the relative contributions of the two components of total return (i.e.,
current income and capital appreciation) varied between the Composite Income
Fund and the Sierra Income Fund. The yield (calculated in accordance with SEC
regulations) of the Composite Income Fund was versus for the Sierra
Income Fund during the 30-day period ended and averaged and , re-
spectively, over the 12-month period ended .
TOTAL RETURN COMPARISON
AS OF [6/30/97]*
<TABLE>
<CAPTION>
3 YEARS 5 YEARS
1 YEAR ANNUALIZED ANNUALIZED
------- ---------- ----------
<S> <C> <C> <C>
Composite Income Fund............................ [10.01]% [9.47]% [7.49]%
Sierra Income Fund............................... [9.22]% [9.43]% [7.67]%
</TABLE>
* Performance is for Class A Shares of both Funds. Fund performance data is
after all expenses. No competitive performance information is shown for a 10
year period because the Sierra Income Fund did not commence operations until
, 19 . For further information about the Composite Income Fund's perfor-
mance, see Appendix C.
The Composite Income Fund may invest in U.S. dollar-denominated debt and con-
vertible debt securities rated within the four highest grades as determined by
Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc.
("Moody's"). In addition, up to 20% of the Composite Income Fund's total as-
sets may be invested in debt securities, convertible debt securities, pre-
26
<PAGE>
ferred stocks and convertible preferred stocks rated below the four highest
grades by S&P or Moody's and in unrated securities judged to be of comparable
quality. In addition, it may hold up to 10% of its total assets in common
stocks acquired either by conversion of fixed-income securities or by the ex-
ercise of warrants or rights attached thereto. See "Risk Factors--Lower-rated
Securities."
It is expected that, subject to the approval of shareholders of the Composite
Income Fund, certain of the fundamental investment restrictions currently in
effect for the Composite Income Fund will be modified or eliminated prior to
the Merger. If these changes are approved, the Composite Income Fund will be
permitted to increase investment from 20% to 35% of its assets in securities
rated at the time of purchase below BBB by S&P or Baa by Moody's and in
unrated securities determined to be of comparable quality. See "Risk Factors--
Lower-rated Securities." In addition, the Composite Income Fund may, if such
changes are approved, invest up to 10% of its assets in securities denominated
in foreign currencies and engage in foreign currency exchange transactions in
connection therewith. These changes, if approved, would also permit the Com-
posite Income Fund to invest (i) in interest rate futures contracts, subject
to such limits as may be imposed from time to time by the Board of Trustees;
(ii) up to 10% of its assets in securities issued by real estate investment
trusts; (iii) in dollar rolls, subject to such limits as may be imposed from
time to time by policies adopted by the Board of Trustees; and (iv) in securi-
ties that are eligible for resale only to "qualified institutional buyers"
pursuant to Rule 144A under the Securities Act.
The Sierra Income Fund invests primarily in investment-grade corporate bonds
of U.S. issuers, with at least 65% of the corporate bonds having remaining ma-
turities of 10 years or more at the date of purchase. The Sierra Income Fund
may also invest in common stocks, preferred stocks, and corporate bonds or
preferred stocks that are convertible into or that carry the right to buy com-
mon stock. See "Risk Factors--Market Risk."
Both the Composite Income Fund and the Sierra Income Fund may purchase secu-
rities on a "when-issued" or "delayed-delivery" basis. However, the Composite
Income Fund may only invest up to 20% of its net assets in such securities.
The Composite Income Fund may lend its portfolio securities to member firms of
the New York Stock Exchange. It is intended that the value of portfolio secu-
rities loaned will not exceed 50% of total assets and that payments received
on such loans, including amounts received during the existence of such a loan
on account of interest and dividends on the securities loaned, will not exceed
10% of the Fund's annual gross income. The Sierra Income Fund may lend up to
20% of its total assets to brokers and other financial institutions. See "Risk
Factors--Lending of Portfolio Securities."
The Composite Income Fund may also invest: (i) up to 25% of its assets in
U.S. dollar-denominated securities of foreign issuers; (ii) in U.S. government
securities including mortgage backed securities; (iii) up to 25% of total
assets in obligations of U.S. banks that are members of the federal reserve
system; and (iv) in commercial paper rated the highest grade by S&P or
Moody's. See "Risk Factors--Investment in Foreign Issuers" and "--Prepayment
Risk."
The Sierra Income Fund may also invest: (i) in U.S. Government securities
(including government stripped mortgage-backed securities); (ii) in asset-
backed securities; (iii) up to 20% of its assets in interests in lease obliga-
tions for which payment of interest and principal is unconditionally guaran-
teed by companies with debt rated at least investment-grade; (iv) in floating
rate, inverse floating rate and variable rate obligations, including partici-
pations interests therein; (v) up to 20% of its assets in bonds issued by for-
eign governments or corporations, provided that no more than 5% of its assets
will be invested in such bonds denominated in any one currency; (vi) up to 33
1/3% of
27
<PAGE>
its total assets in dollar rolls, "covered rolls" or reverse repurchase agree-
ments, provided that the Sierra Income Fund will not purchase any additional
securities whenever borrowing exceeds 5% of the value of total assets; (vii)
in American depository receipts; (viii) in bank obligations provided that not
more than $100,000 is invested with banks having less than $1 billion in as-
sets; (ix) up to 5% of its assets in securities of issuers which have been in
continuous operation for less than three years; and (x) in repurchase agree-
ments. See "Risk Factors--Prepayment Risk," "--Investment in Foreign Securi-
ties," "--Repurchase Agreements," and "--Reverse Repurchase Agreements and
Borrowings."
The Sierra Income Fund may utilize various other investment strategies in-
volving derivatives. Specifically, the Sierra Income Fund may purchase, write
and sell covered puts and call options on securities and invest in futures and
options on futures, forward foreign currency exchange contracts and securities
which are indexed to certain specific foreign currency exchange rates. The Si-
erra Income Fund may not write (sell) put options with respect to more than
50% of total assets and no more than 10% of the Fund's total assets may be
used to purchase put options and no more than 10% of the Fund's assets may be
used to purchase call options. The Sierra Income Fund may also invest in
futures and options contracts provided that no more than 5% of the fair market
value of the Fund's assets may be used for initial margin deposits and premi-
ums paid for unexpired options entered into for purposes other than bona fide
hedging. See "Risk Factors--Derivative Instruments." The Composite Income
Fund's policies do not permit the uses of derivatives described above.
Gary J. Pokrzywinski, CFA, Vice President and Senior Portfolio Manager of
CRM, is primarily responsible for the management of the Composite Income Fund.
The day-to-day management of the Sierra Income Fund's portfolio is the respon-
sibility of James M. Goldberg, Managing Director of TCW.
Sierra Growth & Income Fund vs. Composite Growth & Income Fund
The Composite Growth & Income Fund and the Sierra Growth & Income Fund have
similar investment objectives. The Sierra Growth & Income Fund attempts to
provide long-term capital growth and current income consistent with reasonable
investment risk. The Composite Growth & Income Fund's primary objective is
long-term capital growth with current income being a secondary consideration.
Under normal market conditions, the Composite Growth & Income Fund intends to
invest in common stock, preferred stock, treasury bills, certificates of de-
posit, debt securities of any maturity, and mortgage-backed securities. The
Sierra Growth & Income Fund invests primarily in dividend-paying common stocks
of large and medium-sized companies included in the Standard & Poor's 500 Com-
posite Stock Price Index, which investments may include up to 10% of the
fund's total assets in asset-backed securities. See "Risk Factors--Market
Risk."
Both the Composite Growth & Income Fund and the Sierra Growth & Income Fund
may: (i) invest in mortgage-backed securities; (ii) lend securities to bro-
kers, dealers or other financial institutions provided that the loans are se-
cured (the Composite Growth & Income Fund may not lend securities in excess of
33% of the market value of the fund's total assets whereas the Sierra Growth &
Income Fund is limited to 20% of total assets); (iii) invest in repurchase
agreements; and (iv) purchase securities on a "when-issued" or "delayed-deliv-
ery" basis (the Composite Growth & Income Fund requires that no more then 20%
of its net assets be included in such securities). See "Risk Factors--Prepay-
ment Risk," "Lending of Portfolio Securities," and "Repurchase Agreements."
It is expected that, subject to the approval of shareholders of the Composite
Growth & Income Fund, certain of the fundamental investment re-
28
<PAGE>
strictions currently in effect for the Composite Growth & Income Fund will be
modified or removed prior to the Merger. If these changes are approved, the
policy prohibiting purchases of restricted securities will be modified to per-
mit the Composite Growth & Income Fund to invest in securities that are eligi-
ble for resale only to "qualified institutional buyers" pursuant to Rule 144A
under the Securities Act. See "Risk Factors--Illiquid Securities."
The Sierra Growth & Income Fund may: (i) invest in securities of foreign is-
suers; (ii) invest up to 10% of its assets in American depository receipts;
(iii) invest in exchange rate related securities; (iv) invest in money market
instruments, including U.S. government securities; (v) invest in short term
bank obligations rated in one of the two highest categories by S&P or Moody's,
provided that not more than $100,000 may be invested in banks with less than
$1 billion in assets; (vi) invest in commercial paper and corporate obliga-
tions rated in the highest two categories by S&P or Moody's; (vii) invest in
foreign currency exchange transactions; and (ix) borrow solely for temporary
defensive purposes but not in amounts exceeding 30% of total assets (including
investments in reverse repurchase agreements). See "Risk Factors--Investment
in Foreign Securities."
In addition to the investment restrictions described above, the Composite
Growth & Income Fund may not: (i) invest more than 20% of total assets in for-
ward commitments; (ii) buy or sell options except for covered call options
which are limited to 20% of total assets; (iii) buy or sell futures-related
securities; (iv) invest more than 25% of total assets in foreign securities
and then only in U.S. dollar-denominated foreign securities; or (v) invest
more than 35% of its assets in debt securities rated lower than investment
grade. See "Risk Factors--Investment in Foreign Securities."
The Sierra Growth & Income Fund, unlike the Composite Growth & Income Fund,
may utilize various other investment strategies involving derivatives.
Specifically, the Sierra Growth & Income Fund may purchase and sell covered
put and call options on securities and may purchase and sell put and call
options on stock indexes and on foreign stock indexes listed on foreign and
domestic stock exchanges for hedging purposes. Up to 10% of the Sierra Growth
& Income Fund's assets may be used to purchase put options on securities and
up to 10% of the Sierra Growth & Income Fund's assets may be used to purchase
call options on securities. The Sierra Growth & Income Fund may not sell put
options with respect to more than 50% of its total assets. The Sierra Growth &
Income Fund may invest in futures and options on futures and forward foreign
currency exchange contracts provided that the initial margin deposits and
premiums paid on contracts entered into for purposes other than bona fide
hedging may not exceed 5% of the fair market value of the Sierra Growth &
Income Fund's assets. The Sierra Growth & Income Fund does not currently
intend to enter into these transactions, excluding transactions that are
covered or are for bona fide hedging purposes, in excess of 15% of net assets.
See "Risk Factors--Derivative Instruments." The Composite Growth & Income
Fund's policies do not permit the uses of derivatives described above.
Philip M. Foreman, CFA, Vice President and Senior Portfolio Manager of CRM,
is primarily responsible for the management of the Composite Growth & Income
Fund. The day-to-day management of the Sierra Growth & Income Fund's portfolio
is the responsibility of Henry D. Cavanna, Managing Director of J.P. Morgan,
and William M. Riegel, Vice President of J.P. Morgan.
Sierra Global Money Fund vs. Composite Money Fund
The Sierra Global Money Fund and the Composite Money Fund have substantially
identical investment objectives. Both Funds attempt to provide maximum current
income while preserving capital and maintaining liquidity. As "money mar-
29
<PAGE>
ket funds" both seek to maintain a constant per share net asset value of
$1.00.
The Sierra Global Money Fund and the Composite Money Fund seek to achieve
their investment objectives by investing in U.S. dollar-denominated, high-
quality money market securities that present minimal credit risks and mature
within 397 days from the time of purchase. Both funds may invest in the fol-
lowing: (i) obligations issued or guaranteed by the U.S. government or any
agency or instrumentality thereof; (ii) repurchase agreements with respect to
U.S. government securities; (iii) obligations of U.S. and foreign banks with
assets of more that $500 million; (iv) commercial paper consisting of direct
obligations which, at the time of their purchase, are rated in the two highest
ratings by S&P or Moody's. See "Risk Factors--Repurchase Agreements." Although
the Sierra Global Money Fund is authorized to invest up to 50% of its assets
in any one country (other than the United States), the Sierra Global Money
Fund normally will include in its portfolio securities of issuers collectively
having their principal place of business in at least three countries, includ-
ing the United States.
The Composite Money Fund, unlike the Sierra Global Money Fund, may invest in
commercial paper issued by companies having an outstanding unsecured debt is-
sue currently rated A or better by S&P or Moody's; and in short-term corporate
obligations which at the time of investment are rated A or better by S&P or
Moody's.
It is expected that, subject to the approval of the shareholders of the Com-
posite Money Fund, certain of the fundamental investment restrictions cur-
rently in effect for the Composite Money Fund will be modified or eliminated
prior to the Merger. If these changes are approved, the Composite Money Fund
will be permitted to invest in asset-backed securities that meet the credit
quality limitations on its investments in commercial paper. See "Risk Fac-
tors--Prepayment." In addition, the Composite Money Fund may, if such changes
are approved, invest in securities issued by foreign governments, their agen-
cies and instrumentalities, and supranational entities such as the World Bank,
provided securities meet the credit requirements applicable to the fund's in-
vestments in securities of U.S. corporate issuers, as well as securities of
foreign financial institutions, including brokerage, finance and insurance
companies. See "Risk Factors--Investment in Foreign Securities." Additionally,
if such changes are approved, the Composite Money Fund may also purchase secu-
rities issued by non-profit corporations, municipalities and institutions
which issue taxable debt.
Unlike the Composite Money Fund, the Sierra Global Money Fund may invest in
corporate obligations of U.S. and foreign issuers that are unrated but are de-
termined to be of comparable quality to securities rated in one of the two
highest categories for short-term debt by S&P or Moody's. The Sierra Global
Money Fund may invest no more than 5% of its total assets in securities rated
in the second highest rating category by S&P or Moody's. Unlike the Composite
Money Fund which limits investment in bank obligations to less than 25% of as-
sets, the Sierra Global Money Fund will invest at least 25% of total assets in
bank obligations, except during temporary defensive periods.
The value of the securities held in the portfolios of the Composite Money
Fund and the Sierra Global Money Fund will generally vary inversely with
changes in interest rates. Although each Fund's investment policies are de-
signed to minimize these changes and to maintain a net asset value of $1.00
per share, there is no assurance that these policies will be successful.
Sierra Government Money Fund vs. Composite Money Fund
The Sierra Government Money Fund and the Composite Money Fund have substan-
tially identical investment objectives. Both funds attempt to provide maximum
current income while preserving capital and maintaining liquidity. As "money
30
<PAGE>
funds" both seek to maintain a constant per share net asset value of $1.00.
The Sierra Government Money Fund and the Composite Money Fund seek to achieve
their investment objectives by investing in U.S. dollar-denominated, high-
quality money market securities that present minimal credit risks and mature
within 397 days from the time of purchase. Both funds may invest in obliga-
tions issued or guaranteed by the U.S. government or any agency or instrumen-
tality thereof and repurchase agreements with respect to U.S. government secu-
rities. See "Risk Factors--Repurchase Agreements."
The Composite Money Fund may also invest in (i) obligations of U.S. and for-
eign banks with assets of more that $500 million; (ii) commercial paper con-
sisting of direct obligations which, at the time of their purchase, are (a)
rated in the two highest ratings by S&P or Moody's, or (b) issued by companies
having an outstanding unsecured debt issue currently rated A or better by S&P
or Moody's; and (ii) short-term corporate obligations which at the date of in-
vestment are rated A or better by S&P or Moody's.
It is expected that, subject to the approval of the shareholders of the Com-
posite Money Fund, certain of the fundamental investment restrictions cur-
rently in effect for the Composite Money Fund will be modified or eliminated
prior to the Merger. If these changes are approved, the Composite Money Fund
will be permitted to invest in asset-backed securities that meet the credit
quality limitations on its investments in commercial paper. See "Risk Fac-
tors--Prepayment Risk." In addition, the Composite Money Fund may, if such
changes are approved, invest in securities issued by foreign governments,
their agencies and instrumentalities, and supranational entities such as the
World Bank, provided securities meet the credit requirements applicable to the
fund's investments in securities of U.S. corporate issuers, as well as securi-
ties of foreign financial institutions, including brokerage, finance and in-
surance companies. See "Risk Factors--Investment in Foreign Securities." Addi-
tionally, if such changes are approved, the Composite Money Fund may also pur-
chase securities issued by non-profit corporations, municipalities and insti-
tutions which issue taxable debt.
The value of the securities held in the portfolios of the Composite Money
Fund and the Sierra Government Money Fund will generally vary inversely with
changes in interest rates. Although each Fund's investment policies are de-
signed to minimize these changes and to maintain a net asset value of $1.00
per share, there is no assurance that these policies will be successful.
Sierra Municipal Fund vs. Composite Tax-Exempt Fund
The Composite Tax-Exempt Fund and the Sierra Municipal Fund have substan-
tially similar investment objectives. The Sierra Municipal Fund attempts to
provide a high level of current income which is exempt from federal tax, con-
sistent with preservation of capital. The Composite Tax-Exempt Fund is de-
signed to provide a high level of federal tax-exempt income while at the same
time protecting investors' capital. However, unlike the Sierra Municipal Fund,
the Composite Tax-Exempt Fund does not attempt to provide a constant dividend
level and, therefore, dividends may vary from month to month. The total return
for the Composite Tax-Exempt Fund and the Sierra Municipal Fund is set forth
in the chart below. Because of the different management styles, however, the
relative contributions of the two components of total return (i.e., current
income and capital appreciation) varied between the Composite Tax-Exempt Fund
and the Sierra Municipal Fund. The yield (calculated in accordance with SEC
regulations) of the Composite Tax-Exempt Fund was versus for the Sierra
Municipal Fund during the 30-day period ended and averaged and ,
respectively, over the 12-month period ended .
31
<PAGE>
TOTAL RETURN COMPARISON
AS OF [6/30/97]*
<TABLE>
<CAPTION>
3 YEARS 5 YEARS
1 YEAR ANNUALIZED ANNUALIZED
------ ---------- ----------
<S> <C> <C> <C>
Composite Tax-Exempt Fund......................... [7.11]% [7.25]% [6.56]%
Sierra Municipal Fund............................. [8.91]% [7.21]% [6.73]%
</TABLE>
* Performance is for Class A Shares of both Funds. Fund performance data is
after all expenses. No competitive performance information is shown for a 10
year period because the Sierra Municipal Fund did not commence operations un-
til , 19 . For further information about the Composite Tax-Exempt Fund's
performance, see Appendix C.
Under normal market conditions, at least 80% of the each fund's assets will
be invested in debt securities issued by or on behalf of states, territories
and possessions of the United States and the District of Columbia and their
political subdivisions, the interest on which is tax-exempt. In the case of
the Sierra Municipal Fund, such securities will be intermediate- and long-term
obligations, and will generally be limited to obligations that receive one of
the four highest ratings from S&P or Moody's. See "Risk Factors--Market Risk."
The Composite Tax-Exempt Fund may also invest: (i) up to 25% of its assets in
securities rated at the time of purchase below BBB by S&P or Baa by Moody's
and unrated securities of comparable quality; (ii) up to 10% of total assets
in other investment companies which invest in tax-exempt securities; and (iii)
in municipal notes backed by the federal government. Both the Composite Tax-
Exempt Fund and the Sierra Municipal Fund may purchase securities on a "when-
issued" or "delayed-delivery" basis to the extent of 20% of the market value
of each fund's net assets. See "Risk Factors--Lower-rated Securities."
It is expected that, subject to the approval of shareholders of the Composite
Tax-Exempt Fund, certain of the fundamental investment restrictions currently
in effect for the Composite Tax-Exempt Fund will be modified or eliminated
prior to the Merger. If these changes are approved by the Composite Tax-Exempt
Fund shareholders, the Composite Tax-Exempt Fund will be permitted to invest
up to 35% of its assets in securities rated at the time of purchase below BBB
by S&P or Baa by Moody's and unrated securities determined to be of comparable
quality. See "Risk Factors--Lower-rated Securities." In addition, if such
changes are approved, the Composite Tax-Exempt Fund may purchase and sell in-
terest rate futures contracts, subject to such limits as may be imposed from
time to time by the Board of Trustees, and may also invest in securities that
are eligible for resale only to "qualified institutional buyers" pursuant to
Rule 144A under the Securities Act. See "Risk Factors--Illiquid Securities."
The Sierra Municipal Fund may also invest in: (i) floating rate, inverse
floating rate and variable rate obligations, including participation interests
therein; (ii) participations in lease obligations or installment purchase con-
tract obligations of municipal authorities or entities, provided that no more
than 5% of total assets is invested in lease obligations containing non-appro-
priation clauses and no more than 25% of total assets is invested in municipal
securities the interest on which is paid from revenues from similar-type pro-
jects; (iii) in alternative-minimum-tax-subject bonds issued to finance cer-
tain private activities; (iv) in repurchase agreements; (v) in reverse repur-
chase agreements; (vi) mortgage-backed securities; (vii) bond index futures
and options thereon for bona fide hedging purposes, See "Risk Factors--Deriva-
tive Instruments"; (viii) stand-by commitments with respect to municipal secu-
rities held in the Sierra Municipal Fund's portfolio; and (ix) bank obliga-
tions, provided that not more than $100,000 will be invested with a bank that
has less than $1 billion in assets. The Sierra Municipal Fund may also lend up
to 20% of its total assets to brokers and other financial organizations. See
"Risk Factors--Prepayment Risk," "--Repurchase
32
<PAGE>
Agreements," and "--Reverse Repurchase Agreements and Borrowings." Addition-
ally, the Sierra Municipal Fund may invest in futures and options on futures
and forward currency exchange contracts if the aggregate initial margin depos-
its and premiums on contracts entered into other than for bona fide hedging
purposes does not exceed 5% of the fair market value of the Sierra Municipal
Fund's assets.
Brian L. Placzek, CFA, Vice President Senior Portfolio Manager of CRM, is
primarily responsible for the management of the Composite Tax-Exempt Fund. The
day-to-day management of the Sierra Municipal Fund's portfolio is the respon-
sibility of David C. Johnson, Senior Vice President of Van Kampen.
COMPARISON OF DISTRIBUTION POLICIES AND PURCHASE, EXCHANGE AND REDEMPTION
PROCEDURES
Each Acquired Fund and each Acquiring Fund declares dividends daily and pays
them monthly, except that the Sierra Growth & Income Fund and the Composite
Growth & Income Fund declare and pay dividends quarterly. Each Acquired Fund
and each Acquiring Fund distributes any net realized capital gains annually.
The Acquired Funds and the Acquiring Funds have substantially the same proce-
dures for purchasing shares. The Funds offer four classes of shares, Classes
A, B, I and S. Class I shares are sold exclusively to the various investment
portfolios of Sierra Asset Management Portfolios (the "SAM Portfolios"), a se-
ries investment company managed by Sierra, and are not available for direct
purchase by investors. Class S shares are sold only to investors who select or
have previously selected the Sierra Asset Management service offered by Sier-
ra. Class A and Class B shares (and, for eligible investors, Class S shares)
of the Acquired Funds may be purchased at their net asset value next deter-
mined, plus applicable sales charges in the case of Class A shares, from Si-
erra Investment Services Corporation ("Sierra Services"), the principal under-
writer of the Acquired Funds as well as the other mutual funds in the Sierra
Funds family. Class A and Class B shares (and, for eligible investors, Class S
shares) of the Acquiring Funds may be purchased at their net asset value next
determined, plus applicable sales charges in the case of Class A shares, from
WM Financial Services, Inc. ("WMFS"), a broker-dealer affiliated with Compos-
ite Funds Distributor, Inc. ("CFDI"), the principal underwriter of the Acquir-
ing Funds. In addition, shares of the Acquired Funds and the Acquiring Funds
may be purchased through other broker-dealers that have dealer agreements with
Sierra Services or CFDI, as the case may be.
Shares of each Acquired Fund can be exchanged for shares of the same class of
any other fund offered by the Sierra Trust, SAM Portfolios or Sierra Prime In-
come Fund ("SPIF"), a closed-end investment company advised by Sierra. Shares
of the Acquiring Funds can be exchanged for shares of the same class of any
fund advised by CRM, as well as shares of the same class of any fund offered
by the Sierra Trust, SAM Portfolios or SPIF. In addition, Class B shares of
the Acquired Funds and the Acquiring Funds can, under certain circumstances,
be exchanged for Class S shares of the same Fund or any other Fund offered by
the Sierra Trust, SAM Portfolios of SPIF or (in the case of exchanges from the
Acquiring Funds) advised by CRM, and Class S shares of the Acquired Funds and
the Acquiring Funds can be exchanged, under certain circumstances, for Class B
shares of the SAM Portfolios.
The availability of the exchange privilege with respect to shares of SPIF is
subject to the availability of shares of SPIF for exchange purposes as stated
in the prospectus and statement of additional information ("SAI") of SPIF. Al-
so, although shares of SPIF may be exchanged for shares of the Funds, such ex-
changes of SPIF shares for shares of the Funds are permitted approximately
once every calendar quarter so long as SPIF makes a repur-
33
<PAGE>
- -------------------------------------------------------------------------------
chase offer for its shares in such quarter and so long as the SPIF repurchase
offer is sufficiently large to include the SPIF shares tendered for exchange.
See the prospectus and SAI of SPIF for additional information regarding the
exchange privilege applicable to SPIF shares and the availability of such ex-
change privilege.
Redemption procedures for the Acquired Funds and the Acquiring Funds are
[substantially] similar. Shares of a Fund may be redeemed at their net asset
value next determined after receipt of the redemption request, less any appli-
cable CDSC, on any day the New York Stock Exchange is open. Shares can be re-
deemed from Sierra Services, in the case of the Acquired Funds, or WMFS or
Murphey Favre Securities Services, Inc., the Acquiring Funds' transfer agent,
in the case of the Acquiring Funds, or in either case, from the dealer through
which the shares were purchased, by mail, by telephone or by other means of
wire communication.
See Appendix C to this Prospectus/Proxy Statement for further information re-
garding the Acquiring Funds' distribution policies and purchase, exchange and
redemption procedures.
INTEREST RATE RISK. The Acquired Funds and the Acquiring Funds share similar
risks for investment in fixed income securities, including U.S. Government se-
curities. U.S. Government securities are considered among the safest of fixed-
income investments, but their values, like those of other debt securities,
will fluctuate with changes in interest rates. Thus, a decrease in interest
rates will generally result an increase in the value of an Acquiring Fund's
holdings of fixed income securities, including U.S. government securities.
Conversely, during periods of rising interest rates, the value of an Acquiring
Fund's holdings of fixed income securities will generally decline.
PREPAYMENT RISK. The Acquired Funds and the Acquiring Funds share similar
risks for investment in mortgage-backed securities. Certain of the Acquiring
Funds may invest in mortgage-backed securities. Prepayment on mortgage-backed
or asset-backed securities may require reinvestment of principal under less
attractive terms. Prepayments may also significantly shorten the effective ma-
turities of these securities, especially during periods of declining interest
rates. Conversely, during periods of rising interest rates, a reduction in
prepayments may increase the effective maturities of these securities. Prepay-
ments may cause losses in securities purchased at a premium. Prepayments could
re-
RISK FACTORS
Certain risks associated with an investment in the Acquiring Funds are summa-
rized below. Because each Acquiring Fund shares similar investment objectives
and policies with the corresponding Acquired Fund and because both the Acquir-
ing Fund and the corresponding Acquired Fund share certain policies described
more fully above under "Overview of Mergers--Comparison of Investment Objec-
tives, Policies and Restrictions", many of the risks of an investment in the
Acquiring Fund are substantially similar to the risks of an investment in the
corresponding Acquired Fund. A more detailed description of certain of the
risks associated with an investment in the Acquiring Funds may be found in the
Composite Prospectuses under the caption "Investment Practices and Risk Fac-
tors" and in the Composite SAIs under the caption "Investment Practices."
The values of all securities and other instruments held by the Acquiring
Funds vary from time to time in response to a wide variety of market factors.
Consequently, the net asset value per share of the Acquiring Funds will vary.
The net asset value per share of an Acquiring Fund may be less at the time of
redemption than it was at the time of investment.
34
<PAGE>
sult in losses on stripped mortgage-backed or asset-backed securities. The
yield-to-maturity on an interest-only class of stripped mortgage-backed or as-
set-backed securities is extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including prepay-
ments) on the underlying assets. Because of the foregoing characteristics,
mortgage-backed securities may be more volatile than other fixed income secu-
rities.
REPURCHASE AGREEMENTS. Investing in repurchase agreements subjects the Ac-
quiring Funds, like the Acquired Funds, to the risk that the default or bank-
ruptcy of the other party to the repurchase agreement could subject the fund
to expenses, delays and risk of loss on the securities subject thereto. Com-
posite funds limit their investments in repurchase agreements maturing in more
than seven days to no more than 10% of total assets.
REVERSE REPURCHASE AGREEMENTS AND BORROWINGS. The Acquiring Funds may not en-
gage in reverse repurchase agreements. Reverse repurchase agreements and
borrowings subject the Acquired Funds to the risk that changes in the value of
a Fund's portfolio securities may amplify changes in the Fund's net asset
value per share and also may cause the Fund to liquidate portfolio positions
when it would not be advantageous to do so.
ILLIQUID SECURITIES. The Acquired Funds and the Acquiring Funds share similar
risks for investment in illiquid securities--specifically, higher transaction
costs. Each Acquired Fund and each Acquiring Fund may invest up to 15% of its
net asset value in illiquid securities, except for the Composite Money Fund,
the Sierra Global Money Fund and the Sierra Government Money Fund, which are
limited to 10% of net assets.
LOWER-RATED SECURITIES. Certain of the Acquired Funds and certain of the Ac-
quiring Funds share similar risks for investment in lower-rated securities.
Risks of high-yield securities include: (i) limited liquidity and secondary
market support; (ii) substantial market price volatility resulting from
changes in prevailing interest rates; (iii) subordination to the prior claims
of banks and other senior lenders; (iv) the operation of mandatory sinking
fund or call/redemption provisions during periods of declining interest rates
whereby the fund may reinvest premature redemption proceeds in lower yielding
portfolio securities; (v) the possibility that earnings of the issuer may be
insufficient to meet its debt service; and (vi) the issuer's low creditworthi-
ness and potential for insolvency during periods of rising interest rates and
economic downturn.
INVESTMENT IN FOREIGN SECURITIES. Certain of the Acquired Funds and certain
of the Acquiring Funds share similar risks for investment in foreign securi-
ties. Investment in foreign securities involves the risk of potentially re-
duced domestic marketability of such securities, the lower reserve require-
ments generally mandated for overseas banking operations, the possible impact
of interruptions in the flow of international currency transactions, potential
political and social instability or expropriation, imposition of foreign tax-
es, less government supervision of issuers, difficulty in enforcing contrac-
tual obligations, and lack of uniform accounting standards.
LENDING OF PORTFOLIO SECURITIES. The Acquired Funds and the Acquiring Funds
may incur similar risks from lending their securities. As with other exten-
sions of credit, there are risks of delay in recovery or even loss of rights
in the collateral should the borrower of the securities fail financially.
DERIVATIVE INSTRUMENTS. As noted above, a number of the Acquired Funds may
enter into options and futures contracts for hedging purposes or as a part of
their investment strategies and may engage in swap agreements. Use of deriva-
tive instruments may involve certain costs and risks, including the risk that
the Fund could not close out a position when it would be most advantageous to
do so due to an illiquid market, the risk of an imperfect correlation between
the value of the se-
35
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
curities being hedged and the value of the particular derivative instrument,
the risk of bankruptcy or default of counterparties, and the risk that unex-
pected changes in interest rates or other market movements may adversely af-
fect the value of the Fund's investments in particular derivative instruments.
Except as described above, in general the Acquiring Funds' policies do not
currently permit the use of derivatives.
MARKET RISK. In the case of equity securities owned by an Acquiring Fund or
an Acquired Fund, there can be no assurance of capital appreciation and there
is a risk of market decline.
SPECIAL MEETING OF SHAREHOLDERS
This Prospectus/Proxy Statement is furnished in connection with a Special
Meeting of Shareholders to be held on December , 1997 or at such later time
made necessary by adjournment (the "Meeting") and the solicitation of proxies
by and on behalf of the Trustees of the Sierra Trust for use at the Meeting.
The Meeting is being held to consider the election of Trustees of the Sierra
Trust (Proposal 1) and the proposed Mergers of each Acquired Fund with the
corresponding Acquiring Fund by the transfer of all of the Acquired Fund's as-
sets and liabilities to the Acquiring Fund (Proposals 2 through 7). This
Prospectus/Proxy Statement and the enclosed form of proxy are being mailed to
shareholders on or about November , 1997.
The Trustees of the Trust know of no matters other than those set forth
herein to be brought before the Meeting. If, however, any other matters prop-
erly come before the Meeting, it is the Trustees' intention that proxies will
be voted on such matters in accordance with the judgment of the persons named
in the enclosed form of proxy.
PROPOSAL 1:
ELECTION OF TRUSTEES
At the Meeting, it is proposed that thirteen Trustees of the Sierra Trust be
elected to hold office until their successors are duly elected and qualified.
The persons named in the accompanying proxy intend, in the absence of contrary
instructions, to vote all proxies on behalf of the shareholders for the elec-
tion of David E. Anderson, Wayne L. Attwood, M.D., Arthur H. Bernstein,
Kristianne Blake, Edmond R. Davis, John W. English, Anne V. Farrell, Michael
K. Murphy, Alfred E. Osborne Jr., William G. Papesh, Daniel L. Pavelich, Jay
Rockey and Richard C. Yancey (each a "Nominee" and collectively, the "Nomi-
nees"). Messrs. Anderson, Bernstein, Davis, English and Osborne are currently
members of the Sierra Trust's Board of Trustees. Messrs. Attwood, Murphy,
Papesh, Pavelich, Rockey and Yancey and Mses. Blake and Farrell are all direc-
tors of the mutual funds advised by CRM (the "Composite Funds"), but have not
previously served on the Sierra Trust's Board of Trustees.
Shareholders of the Acquired Funds, along with the shareholders of each other
series of the Sierra Trust, are entitled to vote in the election of the Sierra
Trust's Trustees. However, if the proposed Merger for any Acquired Fund is
consummated, the Acquired Fund's separate existence would be terminated and
its shareholders would become shareholders of the corresponding Acquiring
Fund, which is not part of the Sierra Trust and
36
<PAGE>
would not be governed by the Sierra Trust's Board of Trustees.
The proposal to elect the Board of Trustees is being presented for share-
holder approval pursuant to requirements under the Investment Company Act of
1940 (the "1940 Act"). Under the 1940 Act, Trustees may not fill vacancies un-
less at least two-thirds of the Trustees holding office after such vacancies
are filled have been elected by the shareholders. Approval of this proposal
will provide a combined Board of Trustees consisting of the current Sierra
Trust Trustees and the Composite Directors. Approval of this proposal will
provide a combined Board of Trustees consisting of the current Sierra Trust
Trustees and the Composite Directors.
Each of the Nominees has consented to being named in this Prospectus/Proxy
Statement and to serving as a Trustee if elected. The Sierra Trust knows of no
reason why any Nominee would be unable or unwilling to serve if elected.
The Sierra Trust is organized as a business trust under the laws of the Com-
monwealth of Massachusetts. Under Massachusetts law, the Trust is not required
to hold annual meetings. The Trust has availed itself of this provision and
achieves cost savings by eliminating printing costs, mailing charges and other
expenses involved in routine annual meetings. Because the Trust does not hold
regular annual shareholder meetings, each Nominee, if elected, will hold of-
fice until his or her successor is elected and qualified.
Even with the elimination of routine annual meetings, the Board of Trustees
may call special meetings of shareholders for action by shareholder vote as
may be required by the 1940 Act, or as required or permitted by the Sierra
Trust's Master Trust Agreement. Shareholder meetings will be held, in compli-
ance with the 1940 Act, to elect Trustees under certain circumstances. Share-
holder meetings may also be held by the Trust for other purposes, including to
approve investment policy changes, a new investment advisory agreement or
other matters requiring shareholder action under the 1940 Act.
A meeting may also be called by shareholders holding at least 10% of the
shares entitled to vote at the meeting for the purpose of voting upon the re-
moval of Trustees, in which case shareholders may receive assistance in commu-
nicating with other shareholders as if the provisions contained in Section
16(c) of the 1940 Act applied.
INFORMATION REGARDING NOMINEES
The following information is provided for each Nominee. It includes his or
her name, position with the Sierra Trust, if any, tenure in office, length of
directorship, age, principal occupations or employment during the past five
years, directorships with other companies which file reports periodically with
the SEC, number of directorships/trusteeships with the registered investment
companies which hold themselves out to investors as related companies for pur-
poses of investment and investor services to which Sierra or an affiliated
person of Sierra provides investment advisory or administration services (col-
lectively, the "Fund Complex"), number of shares of the funds of the Sierra
Trust beneficially owned and percentage of shares of the funds of the Sierra
Trust beneficially owned. As of July 1, 1997, the Nominees as a group benefi-
cially owned an aggregate of less than 1% of the shares of each fund of the
Sierra Trust and the Trustees and officers of the Trust as a group benefi-
cially owned an aggregate of less than 1% of the shares of each fund of the
Trust.
37
<PAGE>
<TABLE>
<CAPTION>
ADDRESS AND BUSINESS EXPERIENCE SHARES BENEFICIALLY PERCENTAGE OF
NAME, AGE AND POSITION DURING THE PAST FIVE YEARS OWNED AS OF OUTSTANDING
WITH THE FUND (INCLUDING ALL DIRECTORSHIPS) , 1997** SHARES
---------------------- ------------------------------- ------------------------ -------------
<C> <S> <C> <C>
Arthur H. Bernstein, Esq. (72) 11661 San Vincente Blvd. Global Money Fund 50,790 ***
Chairman of the Board Suite 701, California Money Fund
and Trustee since 1989. Los Angeles, CA 90049. 15,937.49
President, Bancorp Corporate Income Fund
Capital Group, Inc., 1988 19,550
to present; President, California Municipal
Bancorp Venture Capital, Fund 10,756 Growth and
Inc., 1988 to present. Income Fund 6,078.511
Trustee of 4 funds in the
Fund Complex.
David E. Anderson (70) California Municipal ***
Trustee since 1989. 17960 Seabreeze Drive, Fund 1236
Pacific Palisades, CA California Insured
90272. Intermediate
Retired. Formerly, Municipal Fund 492
President and Chief International Growth
Executive Officer, GTE Fund 1261
California, Inc., 1979 to Short-Term Global
1988. Trustee of 4 funds Government Fund 3942
in the Fund Complex. Growth Fund 1277
Edmond R. Davis, Esq. (69) 550 South Hope Street, California Money Fund ***
Trustee since 1989. 21st Floor, 98,492.18
Los Angeles, CA 90071.
Partner, Brobeck, Phleger
& Harrison (law firm)
1987 to present. Trustee
of 4 funds in the Fund
Complex.
John W. English (64) 50 H New England Ave. Growth and Income
Trustee since 1994. PO Box 640, 12,079.48
Summit, NJ 07902-0640 . International Growth
Retired. Formerly, Vice Fund 8,490.88
President and Chief
Investment Officer, Ford
Foundation, 19 to 19 .
Chairman of the Board and
Director, The China Fund,
Inc. (a closed-end mutual
fund), 19 to present;
Trustee, Retail Property
Trust (a company
providing management
services for shopping
centers), 19 to present;
Director, The Northern
Trust Company's Benchmark
Funds (open-end mutual
funds), 19 to present.
Trustee of 4 funds in the
Fund Complex.
Alfred E. Osborne, Jr. Ph.D. (52) 110 Westwood Plaza, Suite Global Money Fund 997.88
Trustee since 1996. C305 Corporate Income Fund
Los Angeles, CA 90095- 615.097
1481. Growth and Income Fund
Professor, The Anderson 286.178
School and Director, The International Growth
Harold Price Center for Fund 668.656
Entrepreneurial Studies Short Term Global
at University of Government Fund 149.053
California at Los Angeles
1972 to present;
Independent general
partner, Technology
Funding Venture Partners
V, 19 to present.
Formerly, Governor,
National Association of
Securities Dealers, Inc.,
19 to 19 ; Director,
NASD Regulation, 19 to
19 . Director, Times
Mirror Company, 19 to
present; Director, United
States Filter
Corporation, 19 to
present; Director,
Nordstrom, Inc., 19 to
present; Director, Seda
Specialty Packing
Corporation, 19 to
present; Director,
Greyhound Lines, Inc.,
19 to present. Trustee
of funds in the Fund
Complex.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
ADDRESS AND BUSINESS EXPERIENCE SHARES BENEFICIALLY PERCENTAGE OF
NAME, AGE AND POSITION DURING THE PAST FIVE YEARS OWNED AS OF OUTSTANDING
WITH THE FUND (INCLUDING ALL DIRECTORSHIPS) JULY 1, 1997** SHARES
---------------------- ------------------------------- --------------------- -------------
<S> <C> <C> <C>
Wayne L. Attwood, M.D. 2931 S. Howard None ***
(68) Spokane, WA 99203.
Nominee Retired. Formerly, Doctor
of internal medicine and
gastroenterology.
Kristianne Blake (43) 705 W. 7th, Suite D, None ***
Nominee Spokane, WA 99203.
President, Kristianne
Gates Blake, PS
Anne V. Farrell (62) 425 Pike Street, Suite None ***
Nominee 510,
Seattle, WA 98101.
President and Chief
Executive Officer, The
Seattle Foundation.
Director, Washington
Mutual, Inc.
Michael K. Murphy (60) P.O. Box 3366 None ***
Nominee Spokane, WA 99220.
Chairman and Chief
Executive Officer, CPM
Development Corporation.
Director, Washington
Mutual, Inc.
*William G. Papesh (54) 601 W. Main Avenue None ***
Nominee Suite 300
Spokane, WA 99201.
President and Director,
Advisor and Transfer
Agent; an executive vice
president and Director,
Distributor.
Daniel L. Pavelich (53) Two Prudential Plaza None ***
Nominee 180 North Stetson Avenue
Suite 4300
Chicago, IL 60601.
Chairman and Chief
Executive Office, BDO
Seidman.
Jay Rockey (69) 2121 Fifth Avenue None ***
Nominee Seattle, WA 98121.
Chairman and Chief
Executive Officer, The
Rockey Company
Richard C. Yancey (71) 535 Madison Avenue None ***
Nominee New York, NY 10022.
Senior Advisor, Dillon,
Read & Co., Inc.
</TABLE>
* Denotes an individual who is an "interested person" as defined in the 1940
Act.
** This information has been provided by each Nominee.
*** As of June 30, 1997, the Nominees as a group beneficially owned an aggre-
gate of less than 1% of the shares of each fund of the Trust.
+ [Represents shares not beneficially owned, but held by funds in the Fund
Complex as of [June 25, 1997,] as designated by the Nominee pursuant to the
Fund Complex's Deferred Compensation Plan.]
39
<PAGE>
COMPENSATION OF DIRECTORS
Each Trustee who is not an "interested person" receives an aggregate annual
fee (plus reimbursement for reasonable out-of-pocket expenses incurred in con-
nection with his or her attendance at Board and committee meetings) from the
Sierra Trust and all of the trusts in the Fund Complex for which he or she
serves. The Sierra Trust pays each Trustee who is not a director, officer or
employee of Washington Mutual, Inc., Sierra Investment Services Corporation,
Sierra Investment Advisors Corporation, the sub-advisors to the Trust or First
Data Investor Services Group, Inc., or any of their affiliates, $7,500 per an-
num plus $1,500 per board meeting attended, $1,000 per audit and/or nominating
committee meeting attended and reimbursement for travel and out-of-pocket ex-
penses. Since December 1996, the Chairman has been receiving one and a half
times the normal Trustee's compensation. The Chairman of the Audit Committee
receives $1,500 per audit committee meeting attended. Officers of the Trust
receive no direct remuneration in such capacity from the Trust. Officers of
the Trust who are employees of Sierra or its affiliates may be considered to
have received remuneration indirectly.
Pursuant to an exemptive order granted by the SEC, the Trust's eligible
Trustees may participate in a deferred compensation plan (the "Plan") which
may be terminated at any time. Under the Plan, Trustees may elect to defer re-
ceipt of all or a portion of their fees which, in accordance with the Plan,
are invested in mutual fund shares. Upon termination of the Plan, Trustees
that have deferred accounts under the Plan will be paid benefits no later than
the time the payments would otherwise have been made without regard to such
termination. All benefits provided under these plans are funded and any pay-
ments to plan participants are paid solely out of the Trust's assets.
The aggregate compensation payable by the Trust to each of the Trust's Trust-
ees serving during the fiscal year ended June 30, 1997 is set forth in the
compensation table below. The aggregate compensation payable to such Trustees
during the fiscal year ended June 30, 1997, by the Fund Complex is also set
forth in the compensation table below.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
AGGREGATE RETIREMENT TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS FROM THE FUND
PAYABLE PART OF FUND AND FUND COMPLEX
NAME AND POSITION FROM THE FUND EXPENSES PAYABLE TO DIRECTORS
----------------- ------------- ------------------- -------------------------------
<S> <C> <C> <C>
Arthur H. Bernstein*,
Trustee................ $ 22,938 $ 0 $54,063 for service on 4 boards
David E. Anderson,
Trustee................ 18,000 0 42,000 for service on 4 boards
Edmond R. Davis,
Trustee................ 18,000 0 42,000 for service on 4 boards
John W. English,
Trustee................ 18,000 0 42,000 for service on 4 boards
Alfred E. Osborne, Jr.,
Trustee................ 18,000 0 42,000 for service on 4 Boards
- ------------------------------------------------------------------------------------------
</TABLE>
* Mr. Bernstein was paid $1,500 for the Audit Committee Meeting held by the
Company and SVT.
40
<PAGE>
MEETINGS AND COMMITTEES OF THE BOARD OF TRUSTEES
There were eight meetings of the Board of Trustees held during the fiscal
year ended June 30, 1997. In such fiscal year, all Trustees attended at least
75% of the meetings of the Board of Trustees.
The Board of Trustees has an Audit Committee. The Audit Committee makes rec-
ommendations to the full Board of Trustees with respect to the engagement of
independent accountants and reviews, with the independent accountants, the re-
sults of the audit engagement and matters having a material effect on the
Funds' financial operations. The members of the Audit Committee during the
fiscal year ended June 30, 1997, were Messrs. Anderson, Davis, Bernstein, En-
glish and Osborne, each of whom is not an "interested person" within the mean-
ing of the 1940 Act. The Audit Committee met once during the fiscal year ended
June 30, 1997 and all members attended the meeting. The Chairman of the Audit
Committee receives $1,500 for each Audit Committee meeting attended.
The Board of Trustees has a Nominating Committee. The Nominating Committee
makes recommendations to the full Board of Trustees with respect to candidates
for the Board of Trustees. The members of the Nominating Committee during the
fiscal year ended June 30, 1997, were Messrs. Cerini (Mr. Cerini resigned as a
Trustee of the Trust May 29,1997), Anderson, Bernstein, Davis and English,
each of whom, with the exception of Mr. Cerini, is not an "interested person"
within the meaning of the 1940 Act. The Nominating Committee did not meet dur-
ing the fiscal year ended June 30, 1997.
BOARD APPROVAL OF THE ELECTION OF TRUSTEES
At a meeting of the Board of Trustees held October 27, 1997, the Board of
Trustees recommended that shareholders vote FOR each of the Nominees for
Trustee named herein. In recommending that shareholders elect the Nominees as
Trustees of the Fund, the Board considered the Nominees' experience and quali-
fications.
SHAREHOLDER APPROVAL OF THE ELECTION OF TRUSTEES
The Election of the Trustees requires the affirmative vote of a [plurality]
of all votes cast at the Special Meeting, provided that a majority of the
shares entitled to vote are present in person or by Proxy at the Special Meet-
ing. If your shares are represented at the meeting but you give no voting in-
structions, your shares will be voted FOR all Nominees named herein. If the
Trustees are not approved by shareholders of the Trust, the Board of Trustees
will consider alternative nominations.
THE BOARD OF TRUSTEES OF THE SIERRA TRUST RECOMMENDS THAT THE SHAREHOLDERS OF
THE ACQUIRED FUNDS VOTE FOR THE ELECTION OF THE NOMINEES AS TRUSTEES OF THE
SIERRA TRUST.
- -------------------------------------------------------------------------------
PROPOSALS 2, 3, 4, 5, 6 AND 7:
APPROVAL OR DISAPPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION
The shareholders of the Sierra Government Fund are being asked to approve or
disapprove a Merger between the Sierra Government Fund and the Composite Gov-
ernment Fund (Proposal 2); the shareholders of the Sierra Income Fund are be-
ing asked to approve or disapprove a Merger between the Sierra Income Fund and
the Composite Income Fund (Proposal 3); the shareholders of the Sierra Growth
& Income Fund are being asked to approve or disapprove a Merger between the
41
<PAGE>
Sierra Growth & Income Fund and the Composite Growth & Income Fund (Proposal
4); the shareholders of the Sierra Global Money Fund are being asked to ap-
prove or disapprove a Merger between the Sierra Global Money Fund and the Com-
posite Money Fund (Proposal 5); the shareholders of the Sierra Government
Money Fund are being asked to approve or disapprove a Merger between the Si-
erra Government Money Fund and the Composite Money Fund (Proposal 6); and the
shareholders of the Sierra Municipal Fund are being asked to approve or disap-
prove a Merger between the Sierra Municipal Fund and the Composite Tax-Exempt
Fund (Proposal 7). Each Merger is proposed to take place pursuant to an Agree-
ment and Plan of Reorganization between the Acquired Fund and the Acquiring
Fund, [dated as of October , 1997] (the "Agreement"), each of which is in the
form attached to this Prospectus/Proxy Statement as Appendix A.
Each Agreement provides, among other things, for the transfer of all of the
assets of the Acquired Fund to the Acquiring Fund in exchange for (i) the as-
sumption by the Acquiring Fund of all of the liabilities of the Acquired Fund
and (ii) the issuance to the Acquired Fund of the Class A, Class B, Class I
and Class S Merger Shares, the number of which will be calculated based on the
value of the net assets attributable to the Class A, Class B, Class I and
Class S shares, respectively, of the Acquired Fund acquired by the Acquiring
Fund and the net asset value per Class A, Class B, Class I and Class S share
of the Acquiring Fund, all as more fully described below under "Information
About the Mergers."
After receipt of the Merger Shares, the Acquired Fund will cause the Class A
Merger Shares to be distributed to its Class A shareholders, the Class B
Merger Shares to be distributed to its Class B shareholders, the Class I
Merger Shares to be distributed to its Class I shareholders and the Class S
Merger Shares to be distributed to its Class S shareholders, in complete liq-
uidation of the Acquired Fund. Each shareholder of the Acquired Fund will re-
ceive a number of full and fractional Class A, Class B, Class I or Class S
Merger Shares equal in value at the date of the exchange to the aggregate
value of the shareholder's Class A, Class B, Class I or Class S Acquired Fund
shares, as the case may be.
TRUSTEES' RECOMMENDATIONS. THE TRUSTEES OF THE SIERRA TRUST HAVE VOTED UNANI-
MOUSLY TO APPROVE EACH PROPOSED MERGER AND TO RECOMMEND THAT SHAREHOLDERS OF
EACH ACQUIRED FUND ALSO APPROVE THE MERGER FOR SUCH FUND.
REQUIRED SHAREHOLDER VOTE. Approval of each proposed Merger for each Acquired
Fund will require the affirmative vote of the lesser of (A) 67% or more of the
Class A, Class B, Class I and Class S shares of the relevant Acquired Fund
present or represented at the Meeting, voting together as a single class, if
the holders of more than 50% of the outstanding Class A, Class B, Class I and
Class S shares are present or represented by proxy at the Meeting, or (B) more
than 50% of the outstanding Class A, Class B, Class I and Class S shares of
the relevant Acquired Fund, voting together as a single class.
A shareholder of an Acquired Fund objecting to the proposed Merger is not en-
titled under either Massachusetts law or the Sierra Trust's Master Trust
Agreement (the "Sierra Declaration of Trust") to demand payment for or an ap-
praisal of his or her Acquired Fund shares if the Merger is consummated over
his or her objection. Shareholders may, however, redeem their shares at any
time prior to the Merger, and if the Merger is consummated, shareholders will
still be free at any time to redeem their Merger Shares, in each case for cash
at net asset value at the time of such redemption, less any applicable CDSC,
or to exchange their Merger Shares for shares of the same class of certain
other funds offered by the Composite Trust, the Sierra Trust, SAM Portfolios
or SPIF, at net asset value at the time of such exchange. See "Exchange Privi-
lege" in Appendix C.
42
<PAGE>
Each proposed Merger is subject to both the approval of the shareholders of
the relevant Acquired Fund and the approval by the shareholders of the corre-
sponding Acquiring Fund of the Reorganization of the Acquiring Fund, which is
a condition to the consummation of each Merger. A meeting of shareholders of
the Acquiring Funds will be held on or about December , 1997 to vote on the
approval of the Reorganization of the Acquiring Funds and other matters. In
the event that such Reorganization is not approved by the shareholders of an
Acquiring Fund or a Merger is not approved by the shareholders of the Acquired
Fund, or a Merger is not completed for any other reason, the Acquired Fund
will continue to be managed as a separate series of the Sierra Trust in accor-
dance with its current investment objective and policies, and the Sierra
Trust's Trustees may consider such alternatives as may be in the best inter-
ests of shareholders.
BACKGROUND AND REASONS FOR THE PROPOSED MERGERS
The Trustees of the Sierra Trust, including the Trustees who are not "inter-
ested persons" of the Sierra Trust (the "Independent Trustees"), have deter-
mined that each Merger would be in the best interests of the relevant Acquired
Fund, and that the interests of the Acquired Fund's shareholders would not be
diluted as a result of effecting the Merger. At a meeting held on October 27
and 28, 1997, the Trustees unanimously approved each proposed Merger and rec-
ommended its approval by shareholders. Before reaching its conclusions, the
Sierra Trust's Board of Trustees conducted an extensive "due diligence" re-
view. Among other things, the Board examined CRM's (and its affiliates') in-
vestment, distribution and administration capabilities, met with the Directors
and the portfolio managers of the Acquiring Funds, met with officers of CRM,
and received reports from counsel and experts hired to evaluate the Mergers.
In addition to the reasons for recommending the Mergers described below, the
Trustees took into account the fact that [CRM will be bearing] [the Acquired
Funds [and, indirectly, the Acquiring Funds] will be bearing a portion of] the
expenses associated with the Mergers, including those described under "Infor-
mation about the Mergers." The Trustees also took into account the depth and
strength of staffing of investment professionals and administrative personnel
at CRM, the portfolio managers of the Acquiring Funds and the other service
providers to the Acquiring Funds, as well as Washington Mutual's and CRM's
plans for distribution of the Acquiring Funds and the other Composite/Sierra
Mutual Funds following the Merger. In addition, the Trustees took into account
the relative historical investment performance of accounts managed by CRM, on
the one hand, and Sierra and the Acquired Funds' subadvisers, on the other
hand. Furthermore, Trustees took into account the capital loss carry-forwards
for each Acquired Fund and each Acquiring Fund, and the unrealized capital ap-
preciation in each Acquired Fund and in the corresponding Acquiring Fund, in
each case as a percentage of the Fund's total net assets. Those percentages as
of June 30, 1997 were as follows:
43
<PAGE>
<TABLE>
<CAPTION>
CAPITAL LOSS UNREALIZED CAPITAL
CARRY-FORWARDS (AS A APPRECIATION (DEPRECIATION)
PERCENTAGE OF TOTAL NET ASSETS) (AS A PERCENTAGE OF TOTAL NET
FUND ON JUNE 30, 1997 ASSETS) ON JUNE 30, 1997
---- ------------------------------- -----------------------------
<S> <C> <C>
Sierra Government Fund.. 19.87% 0.78%
Composite Government
Fund................... 6.20% (0.49%)
Sierra Income Fund...... 14.74% 4.24%
Composite Income Fund... 15.91% 1.78%
Sierra Growth & Income
Fund................... * 8.57%
Composite Growth & In-
come Fund.............. * 23.02%
Sierra Global Money
Fund................... * *
Composite Money Fund.... * *
Sierra Government Money
Fund................... * *
Composite Money Fund.... * *
Sierra Municipal Fund... 4.18% 8.56%
Composite Tax-Exempt
Fund................... 0.78% 7.40%
</TABLE>
* Less than $50,000 or less than 0.01% of net assets.
The principal reasons why the Trustees are recommending the Mergers, and the
overall restructuring of the Composite/Sierra Mutual Funds of which the Merg-
ers are a part, are as follows:
(i) ECONOMIES OF SCALE AT FUND LEVEL. The Trustees have determined that it
is in the best interests of each Acquired Fund's shareholders to combine the
Acquired Fund with the corresponding Acquiring Fund in order to increase the
asset base over which the Acquired Fund's expenses will be spread. As de-
scribed more fully in the Overview under "Operating Expenses," fees for most
Acquired Funds are expected to decline following the Mergers. Of course,
there can be no assurance that the Mergers will continue to result in savings
in operating expenses to shareholders.
(ii) EXPERIENCED LEADERSHIP AND A HERITAGE SINCE 1939. The Composite Bond &
Stock Fund (a balanced fund) was among the first fifty funds in the United
States. CRM's leadership has extensive mutual fund experience with the four
senior executives having an average of over 23 years in the financial serv-
ices industry. Washington Mutual was a pioneer in bank distribution of mutual
funds when it acquired Murphey Favre, Inc. (the predecessor to WMFS) in 1982.
(iii) APPROPRIATE INVESTMENT OBJECTIVES, DIVERSIFICATION, ETC. The invest-
ment objective, policies, and restrictions of each Acquiring Fund are sub-
stantially similar to those of the corresponding Acquired Fund, and the
Trustees believe that an investment in shares of the Acquiring Fund (whose
portfolio will have been combined with that of the Acquired Fund) will pro-
vide shareholders with an investment opportunity comparable to that currently
afforded by the Acquired Fund, with the potential for reduced investment risk
because of the opportunities for additional diversification of portfolio in-
vestments through increased Fund assets.
(iv) CONTINUED INVESTMENT IN A MUTUAL FUND WITHOUT RECOGNITION OF GAIN OR
LOSS FOR FEDERAL INCOME TAX PURPOSES. The proposed reorganization will permit
Acquired Fund shareholders to keep their investment in an open-end mutual
fund, without recognition of gain or loss for
44
<PAGE>
federal income tax purposes. If the Acquired Funds were to liquidate and
shareholders were to receive the net asset value of their shares in liquidat-
ing distributions, gain or loss would be recognized for federal income tax
purposes. (The Mergers of the Sierra Global Money Fund and the Sierra Govern-
ment Money Fund could result in the recognition of a nominal capital gain (or
loss) by shareholders for federal income tax purposes. See "Information About
the Mergers--Federal Income Tax Consequences" below.)
(v) LARGER, MORE INTEGRATED FUND COMPLEX. The restructuring of the
Composite/Sierra Mutual Funds (which is subject to satisfaction of a number
of conditions, including shareholder approval of the Mergers) should reduce
confusion for shareholders between funds within the same family with similar
names and/or investment objectives. It will also give shareholders broader
exchange privileges among Funds.
INFORMATION ABOUT THE MERGERS
AGREEMENT AND PLAN OF REORGANIZATION. Each proposed Agreement and Plan of Re-
organization provides that the relevant Acquiring Fund will acquire all of the
assets of the corresponding Acquired Fund in exchange for the assumption by
the Acquiring Fund of all of the liabilities of the Acquired Fund and for the
issuance of the Class A, Class B, Class I and Class S Merger Shares, all as of
the Exchange Date (defined in each Agreement to be December [31], 1997 or such
other date as may be agreed upon by the Acquiring Fund and the Acquired Fund).
The following discussion of the Agreements is qualified in its entirety by the
full text of each Agreement, the form of which is attached as Appendix A to
this Prospectus/Proxy Statement.
Each Acquired Fund will sell all of its assets to the corresponding Acquiring
Fund, and, in exchange, the Acquiring Fund will assume all of the liabilities
of the Acquired Fund and deliver to the Acquired Fund (i) a number of full and
fractional Class A Merger Shares having an aggregate net asset value equal to
the value of the assets of the Acquired Fund attributable to its Class A
shares, less the value of the liabilities of the Acquired Fund assumed by the
Acquiring Fund attributable to the Class A shares of the Acquired Fund, (ii) a
number of full and fractional Class B Merger Shares having an aggregate net
asset value equal to the value of assets of the Acquired Fund attributable to
its Class B shares, less the value of the liabilities of the Acquired Fund as-
sumed by the Acquiring Fund attributable to the Class B shares of the Acquired
Fund, (iii) a number of full and factional Class I Merger Shares having an ag-
gregate net asset value equal to the value of the assets of the Acquired Fund
attributable to its Class I shares, less the value of the liabilities of the
Acquired Fund assumed by the Acquiring Fund attributable to the Class I shares
of the Acquired Fund and (iv) a number of full and fractional Class S Merger
Shares having an aggregate net asset value equal to the value of assets of the
Acquired Fund attributable to its Class S shares, less the value of the lia-
bilities of the Acquired Fund assumed by the Acquiring Fund attributable to
the Class S shares of the Acquired Fund.
Immediately following the Exchange Date, each Acquired Fund will distribute
pro rata to its shareholders of record as of the close of business on the Ex-
change Date the full and fractional Merger Shares received by the Acquired
Fund, with Class A Merger Shares being distributed to holders of Class A
shares of the Acquired Fund, Class B Merger Shares being distributed to hold-
ers of Class B shares of the Acquired Fund, Class I Merger Shares being dis-
tributed to holders of Class I shares of the Acquired Fund and Class S Merger
Shares being distributed to holders of Class S shares of the Acquired Fund. As
a result of the proposed transaction, each holder of Class A,
45
<PAGE>
Class B, Class I and Class S shares of the Acquired Fund will receive a number
of Class A, Class B, Class I and Class S Merger Shares equal in aggregate
value at the Exchange Date to the value of the Class A, Class B, Class I and
Class S shares, respectively, of the Acquired Fund held by the shareholder.
This distribution will be accomplished by the establishment of accounts on the
share records of the corresponding Acquiring Fund in the names of the Acquired
Fund shareholders, each account representing the respective number of full and
fractional Class A, Class B, Class I and Class S Merger Shares due such share-
holder. New certificates for Merger Shares will not be issued.
The consummation of each Merger is subject to the conditions set forth in the
Agreement, any of which may be waived. The Agreement may be terminated and the
Merger abandoned at any time, before or after approval by the shareholders of
each Acquired Fund, prior to the Exchange Date, by mutual consent of the rele-
vant Funds or, if any condition set forth in the Agreement has not been ful-
filled and has not been waived by the party entitled to its benefits, by such
party.
All legal and accounting fees and expenses, printing and other fees and ex-
penses (other than portfolio transfer taxes (if any), brokerage and other sim-
ilar expenses, all of which will be borne by the relevant Fund) incurred in
connection with the consummation of the transactions contemplated by the
Agreement will be [borne by CRM and/or Washington Mutual] [allocated in accor-
dance with the following: First, the costs of the overall restructuring of the
Composite/Sierra Mutual Funds referred to in the Overview under "Proposed
Transactions," including the costs of the Mergers and this Prospectus/Proxy
Statement, are being preliminarily allocated on a basis approved by the Trust-
ees, including the Independent Trustees, of the Sierra Trust as well as by the
Trustees of the Composite Trust, including the Trustees who are not "inter-
ested persons" thereof, and Directors of the Acquiring Funds, including the
Directors who are not "interested persons" thereof. CRM and/or Sierra will
bear any and all expenses preliminarily allocated to the Acquiring Fund and
CRM and/or Sierra will also bear any and all expenses allocated to the Ac-
quired Fund to the extent that they would otherwise exceed the respective ex-
pense caps (the "Relevant Expense Caps") set forth below. The Acquired Funds
have agreed to pay the expenses preliminarily allocated to them but not, how-
ever, in an amount exceeding the Relevant Expense Caps. The Relevant Expense
Caps represent a percentage (approximately 50%) of the projected aggregate
savings for shareholders of the Acquired Funds for the first year following
the Mergers. The currently estimated expenses to be borne by the Funds and the
Relevant Expense Caps are as follows:
<TABLE>
<CAPTION>
CURRENT EXPENSE RELEVANT
NAME OF FUND ESTIMATE EXPENSE CAP]
- ------------ --------------- ------------
<S> <C> <C>
</TABLE>
Notwithstanding any of the foregoing, expenses will in any event be paid by
the party directly incurring such expenses if and to the extent that the
payment by any other party of such expenses would result in the
disqualification of the first party as a "regulated investment company" within
the meaning of Section 851 of the Internal Revenue Code of 1986, as amended
(the "Code").
DESCRIPTION OF THE MERGER SHARES. Full and fractional Merger Shares will be
issued to each Acquired Fund's shareholders in accordance with the procedure
under the Agreement as described above. The Merger Shares are Class A, Class
B, Class I and Class S shares of the Acquiring Fund, which have characteris-
tics substantially similar to those of the corresponding class of Acquired
Fund shares with respect to sales charges, CDSCs, conversion and 12b-1 servic-
ing and distribution fees. Investors purchasing Class A shares of the Acquir-
ing Funds generally pay a sales charge of up to 5.75% at the time of purchase,
but Acquired
46
<PAGE>
Funds shareholders receiving Class A Merger Shares in the Merger will not pay
a sales charge on such shares. Class A shares of the Acquiring Funds are gen-
erally not subject to redemption fees, except that certain purchases of Class
A shares of the Acquiring Funds which are not subject to a front-end sales
load are subject to a CDSC of up to 1% if redeemed within two years after pur-
chase. Class A shares of the Acquiring Funds (except for the Composite Money
Fund) are generally subject to a 12b-1 servicing fee at the annual rate of
0.25% of the net assets attributable to the Fund's Class A shares. Class B and
Class S shares of the Acquiring Funds are sold without a front end sales
charge, but are subject to a CDSC of up to 5% if redeemed within six years of
original purchase. Class B and Class S shares of the Acquiring Funds are also
subject to 12b-1 distribution and servicing fees at the annual rates of 0.75%
and 0.25%, respectively, of the Fund's average daily net assets attributable
to Class B or Class S shares. Class B and Class S shares of the Acquiring
Funds will convert automatically into Class A shares after they have been held
for approximately eight years. Class I shares of the Acquiring Funds (which
are available for purchase only by the SAM Portfolios and are not sold di-
rectly to investors) are sold without a front-end sales load or CDSC, are not
subject to 12b-1 fees and do not convert into any other class of shares. For
purposes of determining the CDSC payable on redemption of Class A, Class B or
Class S Merger Shares received by holders of Class A, Class B or Class S
shares of the Acquired Fund, as well as the conversion date of Class B and
Class S Merger Shares, such shares will be treated as having been acquired as
of the dates that, and for the prices at which, such shareholders originally
acquired their Class A, Class B or Class S shares, as the case may be, of the
Acquired Fund, and the CDSC will be applied at the same rate as was in effect
for the Acquiring Fund at the time the shares of the Acquired Fund were origi-
nally purchased. See "Alternative Purchase Arrangements" in Appendix C for
more information about the characteristics of Class A, Class B, Class I and
Class S shares of the Acquiring Funds.
CERTAIN PAYMENTS BY THE DISTRIBUTOR. In connection with the sale of Class B
and Class S shares of the Acquired Funds, Sierra Services pays commissions to
broker-dealers from its own assets that it expects to recover over time
through the receipt of distribution fees in connection with the Acquired
Funds' Class B and Class S shares and the receipt of any CDSC on Class B and
Class S shares. The total amount of such commissions paid by Sierra Services
with respect to the Acquired Funds before the consummation of the proposed
Mergers will likely exceed the amounts recovered by Sierra Services by that
time. Such unrecovered amounts do not represent a liability of the Acquired
Funds and, consequently, the Acquiring Funds will not assume any such liabil-
ity in connection with the consummation of the Mergers. However, to the extent
Sierra Services has not fully recovered such commissions before the consumma-
tion of the proposed Mergers, it is anticipated that the Composite Trust's
Trustees will consider such unrecovered amounts, among other factors, in de-
termining whether to continue payments of distribution fees in the future with
respect to Class B and Class S shares of the Acquiring Funds.
As of June 30, 1997, the expenses incurred by Sierra Services in distributing
shares of the Sierra Trust were approximately $ in excess of payments under
the Sierra Trust's Distribution and Servicing Plan with respect to Class B
shares and $ in excess of payments under the Sierra Trust's Distribution and
Servicing Plan with respect to Class S shares.
DECLARATION OF TRUST. Each of the Merger Shares will be fully paid and nonas-
sessable by the Composite Trust when issued, will be transferable without re-
striction, and will have no preemptive or conversion rights, except that Class
B and Class S Merger Shares convert automatically into Class A shares as de-
scribed above. The Composite Trust's Agreement and Declaration of Trust (the
47
<PAGE>
"Composite Declaration of Trust") permits the Composite Trust to divide its
shares, without shareholder approval, into two or more series of shares repre-
senting separate investment portfolios and to further divide any such series,
without shareholder approval, into two or more classes of shares having such
preferences and special or relative rights and privileges as the Trustees may
determine. Each Acquiring Fund's shares are currently divided into four clas-
ses: Class A, Class B, Class I and Class S.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for the obliga-
tions of the trust. However, the Composite Declaration of Trust disclaims
shareholder liability for acts or obligations of the Composite Trust and/or
the Acquiring Funds and requires that notice of such disclaimer be given in
each agreement, undertaking, or obligation entered into or executed by the
Composite Trust, the Acquiring Funds or the Composite Trust's Trustees. The
Composite Declaration of Trust provides for indemnification out of Acquiring
Fund property for all loss and expense of any shareholder held personally lia-
ble for the obligations of the Acquiring Fund. Thus, the risk of a sharehold-
er's incurring financial loss from shareholder liability is limited to circum-
stances in which the Acquiring Fund would be unable to meet its obligations.
The likelihood of such a circumstance is considered remote. The shareholders
of each Acquired Fund are currently subject to substantially the same risk of
shareholder liability, under Massachusetts law and the Sierra Declaration of
Trust.
Except as otherwise noted below, the provisions of the Composite Declaration
of Trust are substantially similar to those of the Sierra Declaration of
Trust. The Composite Declaration of Trust provides that Trustees may be re-
moved by a majority of the Trustees, whereas the Sierra Declaration of Trust
provides that Trustees may be removed by two-thirds vote of the Trustees or by
vote of shareholders holding at least two-thirds of the outstanding shares of
the Sierra Trust. In addition, the Sierra Declaration of Trust provides that
shareholders holding 10% or more of the outstanding shares of the Sierra Trust
may call a meeting of shareholders to consider the removal of any Trustee. The
Composite Declaration of Trust specifies no minimum number of Trustees, while
the Sierra Declaration of Trust specifies a minimum of two Trustees.
Unlike the Composite Declaration of Trust, the Sierra Declaration of Trust
provides that the liquidation of any fund requires the approval not only of a
majority of the Trustees, but also of a "majority of the outstanding voting
securities" of the fund, as defined in the 1940 Act, which means the lesser of
(A) 67% or more of the shares of the fund present at a meeting, if the holders
of more than 50% of the outstanding shares of the fund are present or repre-
sented by proxy, or (B) more than 50% of the outstanding shares of the fund.
The Composite Declaration of Trust requires only the vote of a majority of the
Trustees for the liquidation of any Fund. The Composite Declaration of Trust
provides that the Composite Trust may be terminated by vote of at least 50% of
the shares of each fund entitled to vote (voting separately by fund) or by a
majority of the Trustees by written notice to shareholders, whereas the Sierra
Declaration of Trust provides that the Sierra Trust may be terminated only by
both the vote of a majority of the outstanding voting securities of each fund
and the vote of a majority of the Trustees.
The Composite Declaration of Trust provides that a quorum for a meeting of
shareholders is 10% of the shares entitled to vote at the meeting, while the
Sierra Declaration of Trust provides that a quorum for a meeting of sharehold-
ers is a majority of the shares entitled to vote at the meeting.
BOARD OF TRUSTEES. The Composite Trust's Board of Trustees currently consists
of each Director of the Acquiring Funds. It is proposed that, prior to the
completion of the Mergers, each
48
<PAGE>
Trustee of the Sierra Trust will be added to the Board of Trustees of the Com-
posite Trust, subject to the approval of the shareholders of the Acquiring
Funds and the other mutual funds currently managed by CRM. Pursuant to Pro-
posal 1, each Director of the Acquiring Funds has been nominated to serve as a
Trustee of the Sierra Trust, subject to the approval of the Sierra Trust's
shareholders. The members of the Composite Trust's Board of Trustees, who are
responsible for overseeing the affairs of the Acquiring Funds, are currently
Wayne L. Attwood, M.D., Kristianne Blake, Anne V. Farrell, Michael K. Murphy,
William G. Papesh, Daniel L. Pavelich, Jay Rockey and Richard C. Yancey, and
they have recommended that the shareholders of the Acquiring Funds vote to
elect the following Trustees of the Sierra Trust to the Acquiring Funds'
Boards of Directors and that such persons be added to the Composite Trust's
Board of Trustees immediately prior to the Mergers: Arthur H. Bernstein, David
E. Anderson, Edmond R. Davis, John W. English and Alfred E. Osborne, Jr. See
Proposal 1 above for further information.
FEDERAL INCOME TAX CONSEQUENCES. Except in the case of the Mergers of the Si-
erra Global Money Fund and the Sierra Government Money Fund with the Composite
Money Fund, as a condition to each Acquired Fund's obligation to consummate
the Merger, the Acquired Fund will receive an opinion from Ropes & Gray, spe-
cial counsel to the Composite Trust, to the effect that, on the basis of the
existing provisions of the Code, current administrative rules and court deci-
sions, for federal income tax purposes: (i) under Section 361 of the Code, no
gain or loss will be recognized by the Acquired Fund as a result of the reor-
ganization; (ii) under Section 354 of the Code, no gain or loss will be recog-
nized by shareholders of the Acquired Fund on the distribution of Merger
Shares to them in exchange for their shares of the Acquired Fund; (iii) under
Section 358 of the Code, the tax basis of the Merger Shares that the Acquired
Fund's shareholders receive in place of their Acquired Fund shares will be the
same as the basis of the Acquired Fund shares; (iv) under Section 1223(1) of
the Code, a shareholder's holding period for the Merger Shares received pursu-
ant to the Agreement will be determined by including the holding period for
the Acquired Fund shares exchanged for the Merger Shares, provided that the
shareholder held the Acquired Fund shares as a capital asset; (v) under Sec-
tion 1032 of the Code, no gain or loss will be recognized by the Acquiring
Fund as a result of the reorganization; (vi) under Section 362(b) of the Code,
the Acquiring Fund's tax basis in the assets that the Acquiring Fund receives
from the Acquired Fund will be the same as the Acquired Fund's basis in such
assets; and (vii) under Section 1223(2) of the Code, the Acquiring Fund's
holding period in such assets will include the Acquired Fund's holding period
in such assets. The opinion will be based on certain factual certifications
made by officers of the Sierra Trust, the Composite Trust and the Acquiring
Funds and will also be based on customary assumptions.
Prior to the Exchange Date, each Acquired Fund will declare a distribution to
shareholders which, together with all previous distributions, will have the
effect of distributing to shareholders all of its investment company taxable
income (computed without regard to the deduction for dividends paid) and net
realized capital gains, if any, through the Exchange Date.
In the case of the Mergers of the Sierra Global Money Fund and the Sierra
Government Money Fund with the Composite Money Fund, such Mergers may, depend-
ing on the level of redemptions experienced by these Acquired Funds prior to
their Mergers, result in shareholders of such Acquired Funds recognizing a
capital gain or loss for federal income tax purposes to the extent that the
fair market value of the Acquiring Fund shares received in the Merger is
greater or less than the adjusted basis of the Acquired Fund shares held by
such shareholder. Because these Funds attempt to
49
<PAGE>
maintain a stable net asset value of $1.00 per share, however, the amount of
any such capital gain or loss is expected to be negligible.
CAPITALIZATION. The following tables show the capitalization of each Acquir-
ing Fund and each Acquired Fund as of June 30, 1997 and of each Acquiring Fund
on a pro forma basis as of that date, giving effect to the proposed acquisi-
tion by the Acquiring Fund of the assets and liabilities of the Acquired Fund
at net asset value:
CAPITALIZATION TABLES
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIERRA COMPOSITE PRO FORMA
GOVERNMENT FUND GOVERNMENT FUND COMBINED
--------------- --------------- ---------
<S> <C> <C> <C>
JUNE 30, 1997
- --------------------------------------------------------------------------------
Net Assets (000's omitted)
Class A............................. $258,553 $119,431 $377,984
Class B............................. 20,370 2,898 23,267
Class S............................. 9,088 -- 9,088
Class I............................. 81,920 -- 81,920
- --------------------------------------------------------------------------------
Shares Outstanding (000's omitted)
Class A............................. 27,040 11,437 36,205
Class B............................. 2,130 278 2,229
Class S............................. 951 -- 870
Class I............................. 8,567 -- 7,847
- --------------------------------------------------------------------------------
Net asset value per share
Class A............................. $9.56 $10.44 $10.44
Class B............................. 9.56 10.44 10.44
Class S............................. 9.56 -- 10.44
Class I............................. 9.56 -- 10.44
- --------------------------------------------------------------------------------
<CAPTION>
SIERRA COMPOSITE PRO FORMA
INCOME FUND INCOME FUND COMBINED
--------------- --------------- ---------
<S> <C> <C> <C>
JUNE 30, 1997
- --------------------------------------------------------------------------------
Net Assets (000's omitted)
Class A............................. $195,531 $80,302 $275,833
Class B............................. 20,982 7,303 28,285
Class S............................. 2,121 -- 2,121
Class I............................. 7,278 -- 7,278
- --------------------------------------------------------------------------------
Shares Outstanding (000's omitted)
Class A............................. 18,967 8,734 30,015
Class B............................. 2,035 793 3,072
Class S............................. 206 -- 231
Class I............................. 706 -- 792
- --------------------------------------------------------------------------------
Net asset value per share
Class A............................. $10.31 $9.19 $9.19
Class B............................. 10.31 9.21 9.21
Class S............................. 10.31 -- 9.19
Class I............................. 10.31 -- 9.19
- --------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
SIERRA GROWTH COMPOSITE GROWTH PRO FORMA
& INCOME FUND & INCOME FUND COMBINED
------------- ---------------- ---------
<S> <C> <C> <C>
JUNE 30, 1997
- --------------------------------------------------------------------------------
Net Assets (000's omitted)
Class A.............................. $162,818 $215,534 $378,352
Class B.............................. 35,454 34,362 69,816
Class S.............................. 12,965 -- 12,965
Class I.............................. 132,507 -- 132,507
- --------------------------------------------------------------------------------
Shares Outstanding (000's omitted)
Class A.............................. 11,210 12,010 21,078
Class B.............................. 2,465 1,926 3,913
Class S.............................. 902 -- 722
Class I.............................. 9,112 -- 7,382
- --------------------------------------------------------------------------------
Net asset value per share
Class A.............................. $14.52 $17.95 $17.95
Class B.............................. 14.38 17.84 17.84
Class S.............................. 14.38 -- 17.95
Class I.............................. 14.54 -- 17.95
- --------------------------------------------------------------------------------
<CAPTION>
SIERRA GLOBAL COMPOSITE PRO FORMA
MONEY FUND MONEY FUND COMBINED
------------- ---------------- ---------
<S> <C> <C> <C>
JUNE 30, 1997
- --------------------------------------------------------------------------------
Net Assets (000's omitted)
Class A.............................. $104,302 $256,222 $360,524
Class B.............................. 1,314 217 1,531
Class S.............................. 6,909 -- 6,909
Class I.............................. 79,002 -- 79,002
- --------------------------------------------------------------------------------
Shares Outstanding (000's omitted)
Class A.............................. 104,654 256,222 360,523
Class B.............................. 1,309 217 1,531
Class S.............................. 6,880 -- 6,908
Class I.............................. 78,668 -- 79,002
- --------------------------------------------------------------------------------
Net asset value per share
Class A.............................. $1.00 $1.00 $1.00
Class B.............................. 1.00 1.00 1.00
Class S.............................. 1.00 -- 1.00
Class I.............................. 1.00 -- 1.00
- --------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
SIERRA
GOVERNMENT COMPOSITE PRO FORMA
MONEY FUND MONEY FUND COMBINED
-------------- -------------- ---------
<S> <C> <C> <C>
JUNE 30, 1997
- --------------------------------------------------------------------------------
Net Assets (000's omitted)
Class A............................... $30,518 $256,222 $286,740
Class B............................... 1,801 217 2,018
Class S............................... 346 -- 346
Class I............................... 1 -- 1
- --------------------------------------------------------------------------------
Shares Outstanding (000's omitted)
Class A............................... 30,529 256,222 286,740
Class B............................... 1,802 217 2,018
Class S............................... 346 -- 346
Class I............................... 1 -- 1
- --------------------------------------------------------------------------------
Net asset value per share
Class A............................... $1.00 $1.00 $1.00
Class B............................... 1.00 1.00 1.00
Class S............................... 1.00 -- 1.00
Class I............................... 1.00 -- 1.00
- --------------------------------------------------------------------------------
<CAPTION>
SIERRA COMPOSITE TAX- PRO FORMA
MUNICIPAL FUND EXEMPT FUND COMBINED
-------------- -------------- ---------
<S> <C> <C> <C>
JUNE 30, 1997
- --------------------------------------------------------------------------------
Net Assets (000's omitted)
Class A............................... $182,262 $192,465 $374,727
Class B............................... 6,001 6,664 12,665
Class S............................... 1 -- 1
Class I............................... 1 -- 1
- --------------------------------------------------------------------------------
Shares Outstanding (000's omitted)
Class A............................... 16,333 24,540 47,797
Class B............................... 538 850 1,615
Class S............................... 0.1 -- 0.2
Class I............................... 0.1 -- 0.1
- --------------------------------------------------------------------------------
Net asset value per share
Class A............................... $11.16 $7.84 $7.84
Class B............................... 11.16 7.84 7.84
Class S............................... 11.16 -- 7.84
Class I............................... 11.16 -- 7.84
- --------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Pro forma financial statements of the Acquiring Funds as of and for the fis-
cal year ended December 31, 1996 (October 31, 1996 in the case of the Compos-
ite Growth & Income Fund) [and as of and for the six months ended June 30,
1997 (April 30, 1997 in the case of the Composite Growth & Income Fund)] are
included in the Merger SAI. Because each Agreement provides that the Acquiring
Fund will be the surviving Fund following the reorganization and because the
Acquiring Fund's investment objective and policies will remain unchanged, the
pro forma financial statements reflect the transfer of the assets and liabili-
ties of the Acquired Fund to the Acquiring Fund as contemplated by the Agree-
ment.
INFORMATION ABOUT THE ACQUIRED FUNDS
Other information regarding the Acquired Funds, including information with
respect to the Acquired Funds' investment objectives, policies and restric-
tions and financial history may be found in the Merger SAI, the Sierra Pro-
spectuses, the Sierra SAI and the Sierra Annual Report, which are available
upon request by calling 1-800-222-5852.
Proxy materials, reports, proxy and information statements and other informa-
tion filed by the Sierra Trust with respect to the Acquired Funds can
INFORMATION ABOUT THE ACQUIRING FUNDS
Other information relating to the Acquiring Funds, including information in
respect of their investment objectives, policies and restrictions and finan-
cial history may be found in Appendix C to this Prospectus/Proxy Statement, as
well as in the Merger SAI, the Composite Prospectuses, the Composite SAIs, the
Composite Annual Reports and the Composite Semi-Annual Reports, which are
available upon request by calling 1-800-543-8072. To the extent that any in-
formation in respect of the Acquiring Funds found in any such document is in-
consistent with the information contained in this Prospectus/Proxy Statement,
this Prospectus/Proxy Statement should be deemed to supersede such other docu-
ment. Certain information and commentary from the Composite Annual Reports re-
lating to the Acquiring Funds' recent investment performance is set forth in
Appendix B to this Prospectus/Proxy Statement.
Proxy materials, reports, proxy and information statements and other informa-
tion filed by the Acquiring Funds can be inspected and copied at the Public
Reference Facilities maintained by the Securities and Exchange Commission at
450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, Suite
1300, New York, New York 10048; and 500 West Madison Street, Suite 1400, Chi-
cago, Illinois 60661. Copies of such material can also be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549 at prescribed
rates.
be inspected and copied at the Public Reference Facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549; 7 World Trade Center, Suite 1300, New York, New York 10048; and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such mate-
rial can also be obtained from the Public Reference Branch, Office of Consumer
Affairs and Information Services, Securities and Exchange Commission, Washing-
ton, D.C. 20549 at prescribed rates.
53
<PAGE>
VOTING INFORMATION
RECORD DATE, QUORUM AND METHOD OF TABULATION. Shareholders of record of each
Acquired Fund at the close of business on October , 1997 (the "Record Date")
will be entitled to notice of and to vote at the Meeting or any adjournment
thereof. The holders of a majority of the Class A, Class B, Class I and Class
S shares of each Acquired Fund outstanding at the close of business on the
Record Date present in person or represented by proxy will constitute a quorum
for the Meeting with respect to that Fund. Shareholders are entitled to one
vote for each share held, with fractional shares voting proportionally. Class
A, Class B, Class I and Class S shareholders of each Acquired Fund vote to-
gether as a single class in connection with the approval or disapproval of the
Mergers. Shareholders of each Acquired Fund will vote only on the approval or
disapproval of that Fund's Merger. Shareholders of all Acquired Funds, along
with the shareholders of the other funds in the Sierra Trust, will vote to-
gether as a single class on the election of the Sierra Trust's Board of Trust-
ees. As noted above, if the nominees are elected and if the individuals al-
ready serving on the Sierra Trust's Board are elected Trustees of the Compos-
ite Trust, the Sierra Trust and the Composite Trust will have identical Boards
of Trustees.
Votes cast by proxy or in person at the Meeting will be counted by persons
appointed by the Sierra Trust as tellers for the Meeting. The tellers will
count the total number of votes cast "for" approval of the proposal for pur-
poses of determining whether sufficient affirmative votes have been cast. The
tellers will count shares represented by proxies that reflect abstentions and
"broker non-votes" (i.e., shares held by brokers or nominees as to which (i)
instructions have not been received from the beneficial owners or the persons
entitled to vote and (ii) the broker or nominee does not have the discretion-
ary voting power on a particular matter) as shares that are present and enti-
tled to vote on the matter for purposes of determining the presence of a quo-
rum. So long as a quorum is present, abstentions and broker non-votes have the
effect of negative votes on the proposals relating to the Mergers, and no ef-
fect on the election of Trustees. Class I shares of the Acquired Funds which
are held by the SAM Portfolios are required to be voted for, voted against or
withheld from voting on each Proposal in the same proportion as are the other
outstanding shares of the Acquiring Funds.
The Acquiring Funds will use procedures similar to those described in the
foregoing paragraph at the meeting of shareholders of the Acquiring Funds to
be held on or about December , 1997 to vote on the approval of disapproval of
the Reorganizations of the Acquiring Funds (which is a condition to the Merg-
ers) and the election of the Sierra Trust's Trustees as Directors of the Ac-
quiring Funds (and, indirectly, as Trustees of the Composite Trust), as well
as other matters, including certain changes to fundamental investment restric-
tions. Shareholders of record of each Acquiring Fund as of October , 1997 will
be entitled to notice of and to vote at such meeting. Approval of the Reorga-
nization of each Acquiring Fund will require the affirmative vote of two-
thirds of the outstanding shares of such Acquiring Fund, voting together as a
single class.
SHARES OUTSTANDING AND BENEFICIAL OWNERSHIP. As of the Record Date, as shown
on the books of the Sierra Trust, there were issued and outstanding the fol-
lowing number of shares of beneficial interest of each class of each Acquired
Fund:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS I CLASS S
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sierra Government Fund..........................
Sierra Income Fund..............................
Sierra Growth & Income Fund.....................
Sierra Global Money Fund........................
Sierra Government Money Fund....................
Sierra Municipal Fund...........................
</TABLE>
54
<PAGE>
As of the Record Date, the officers and Trustees of the Sierra Trust and the
Composite Trust and the officers and Directors of the Acquiring Funds as a
group beneficially owned [less than 1%] of the outstanding shares of each
class of each Acquired Fund. As of the Record Date, to the best of the knowl-
edge of the Sierra Trust, the following persons owned of record or benefi-
cially 5% or more of the outstanding shares of the indicated classes of the
Acquired Funds and the Acquiring Funds:
[insert list of 5% shareholders and pro forma ownership of the 5% sharehold-
ers following Mergers]
SOLICITATION OF PROXIES. Solicitation of proxies by personal interview, mail,
and telephone, may be made by officers and Trustees of the Sierra Trust and
the Composite Trust, officers and Directors of the Acquiring Funds and employ-
ees of Sierra and CRM and their affiliates. In addition, the firm of has
been retained to assist in the solicitation of proxies. The costs for solici-
tation of proxies, like the other costs associated with the general restruc-
turing of the Composite/Sierra Mutual Funds, will be [borne by CRM] [only par-
tially borne by the Funds]. See "Information About the Mergers."
REVOCATION OF PROXIES. Any shareholder giving a proxy has the power to revoke
it by mail (addressed to the Sierra Trust's Secretary at the principal office
of the Sierra Trust at P.O. Box 5118, Westboro, Massachusetts 01581) or in
person at the Meeting, by executing a superseding proxy, or by submitting a
notice of revocation to the Secretary of the Sierra Trust. All properly exe-
cuted proxies received in time for the Meeting will be voted as specified in
the proxy, or, if no specification is made, FOR the election of all of the
nominees to the Sierra Trust's Board of Trustees (set forth in Proposal 1 of
the Notice of Meeting) and FOR the proposal (set forth in Proposals 2, 3, 4,
5, 6 and 7 of the Notice of Meeting) to implement the Merger with respect to
the relevant Acquired Fund.
SHAREHOLDER PROPOSALS AT FUTURE MEETINGS OF SHAREHOLDERS. The Sierra Declara-
tion of Trust does not provide for annual meetings of shareholders and the Si-
erra Trust does not currently intend to hold such a meeting for shareholders
of the Acquired Funds in 1997 or 1998. Shareholder proposals for inclusion in
a proxy statement for any subsequent meeting of the Acquired Funds' sharehold-
ers must be received by the Sierra Trust a reasonable period of time prior to
any such meeting. If the Mergers are consummated, the Acquired Funds' exist-
ence will terminate in December 1997 or shortly thereafter, after which there
would be no meetings of the shareholders of the Acquired Funds.
ADJOURNMENT. If sufficient votes in favor of any proposal are not received by
the time scheduled for the Meeting, the persons named as proxies may propose
one or more adjournments of the Meeting to permit further solicitation of
proxies. Any adjournment will require the affirmative vote of a plurality of
the votes cast on the question in person or by proxy at the session of the
Meeting to be adjourned. If the Meeting is adjourned only with respect to one
proposal, any other proposal may still be acted upon by the shareholders. The
persons named as proxies will vote in favor of such adjournment those proxies
which they are entitled to vote in favor of the proposal. They will vote
against any such adjournment those proxies required to be voted against the
proposal. The Acquired Funds will pay the costs of any additional solicitation
and of any adjourned session.
October , 1997
55
<PAGE>
APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
October , 1997 in , , by and between the Sierra Trust Funds, a Massa-
chusetts business trust (the "Sierra Trust"), on behalf of its Fund se-
ries (the "Acquired Fund") and The Composite Funds, a Massachusetts business
trust (the "Composite Trust"), on behalf of its Composite Fund series (the
"Acquiring Fund").
PLAN OF REORGANIZATION
(a) Pursuant to an Agreement and Plan of Reorganization dated as of October
, 1997 by and between the Composite Trust, on behalf of the Acquiring Fund,
and Composite Fund, Inc., an open-end, diversified management investment
company incorporated under the laws of the State of Washington (the "Existing
Composite Fund"), the Acquiring Fund will, subject to the conditions set forth
in such Agreement and Plan of Reorganization, acquire substantially all of the
assets and properties of the Existing Composite Fund in exchange for which the
Acquiring Fund will assume all of the liabilities of the Existing Composite
Fund and will deliver to the Existing Composite Fund Class A and Class B
shares of beneficial interest of the Acquiring Fund having the same aggregate
net asset value as the outstanding Class A and Class B shares of the Existing
Composite Fund. In connection with the foregoing, the Existing Composite Fund
will distribute its shares in complete liquidation of the Existing Composite
Fund. (The foregoing transaction is hereafter referred to as the "Composite
Reorganization".)
(b) Immediately following the Composite Reorganization, the Acquired Fund
will sell, assign, convey, transfer and deliver to the Acquiring Fund on the
Exchange Date (as defined in Section 6) all of its properties and assets. In
consideration therefor, the Acquiring Fund shall, on the Exchange Date, assume
all of the liabilities of the Acquired Fund existing at the Valuation Time (as
defined in Section 3(c)) and deliver to the Acquired Fund (i) a number of full
and fractional Class A shares of beneficial interest of the Acquiring Fund
(the "Class A Merger Shares") having an aggregate net asset value equal to the
value of the assets of the Acquired Fund attributable to Class A shares of the
Acquired Fund transferred to the Acquiring Fund on such date less the value of
the liabilities of the Acquired Fund attributable to Class A shares of the Ac-
quired Fund assumed by the Acquiring Fund on that date, (ii) a number of full
and fractional Class B shares of beneficial interest of the Acquiring Fund
(the "Class B Merger Shares") having an aggregate net asset value equal to the
value of the assets of the Acquired Fund attributable to Class B shares of the
Acquired Fund transferred to the Acquiring Fund on such date less the value of
the liabilities of the Acquired Fund attributable to Class B shares of the Ac-
quired Fund assumed by the Acquiring Fund on that date, (iii) a number of full
and fractional Class I shares of beneficial interest of the Acquiring Fund
(the "Class I Merger Shares") having an aggregate net asset value equal to the
value of the assets of the Acquired Fund attributable to Class I shares of the
Acquired Fund transferred to the Acquiring Fund on such date less the value of
the liabilities of the Acquired Fund attributable to Class I shares of the Ac-
quired Fund assumed by the Acquiring Fund on that date, and (iv) a number of
full and fractional Class S shares of beneficial interest of the Acquiring
Fund (the "Class S Merger Shares") having an aggregate net asset value equal
to the value of the assets of the Acquired Fund attributable to Class S shares
of the Acquired Fund transferred to the Acquiring Fund on such date less the
value of the liabilities of the Acquired Fund attributable to Class S shares
of the Acquired Fund assumed by the Acquiring Fund on that date. (The Class A
Merger Shares, the Class B Merger Shares, the Class I Merger Shares, and the
Class S Merger
A-1
<PAGE>
Shares shall be referred to collectively as the "Merger Shares.") It is in-
tended that the reorganization described in this Agreement shall be a reorga-
nization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
(c) Upon consummation of the transactions described in paragraph (b) of this
Agreement, the Acquired Fund shall distribute in complete liquidation to its
Class A, Class B, Class I and Class S shareholders of record as of the Ex-
change Date the Class A, Class B, Class I and Class S Merger Shares of the Ac-
quiring Fund, each such shareholder being entitled to receive that proportion
of such Class A, Class B, Class I and Class S Merger Shares which the number
of Class A, Class B, Class I and Class S shares of beneficial interest of the
Acquired Fund held by such shareholder bears to the number of Class A, Class
B, Class I and Class S shares of the Acquired Fund outstanding on such date.
Certificates representing the Merger Shares will not be issued. All issued and
outstanding shares of the Acquired Fund will simultaneously be canceled on the
books of the Acquired Fund.
(d) As promptly as practicable after the liquidation of the Acquired Fund as
aforesaid, the Acquired Fund shall be dissolved pursuant to the provisions of
the Declaration of Trust of the Sierra Trust, as amended, and applicable law,
and its legal existence terminated. Any reporting responsibility of the Ac-
quired Fund is and shall remain the responsibility of the Acquired Fund up to
and including the Exchange Date and, if applicable, such later date on which
the Acquired Fund is liquidated.
AGREEMENT
The Acquiring Fund and the Acquired Fund agree as follows:
1. Representations, Warranties and Agreements of the Acquiring Fund. The Ac-
quiring Fund represents and warrants to and agrees with the Acquired Fund
that:
a. The Acquiring Fund is a series of shares of the Composite Trust, a Massa-
chusetts business trust duly established and validly existing under the laws
of The Commonwealth of Massachusetts, and has power to own all of its proper-
ties and assets and to carry out its obligations under this Agreement. The
Composite Trust is qualified as a foreign association in every jurisdiction
where required, except to the extent that failure to so qualify would not
have a material adverse effect on the Composite Trust. Each of the Composite
Trust and the Acquiring Fund has all necessary federal, state and local au-
thorizations to carry on its business as now being conducted and to carry out
this Agreement.
b. Each of the Existing Composite Fund and the Composite Trust is registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as an
open-end management investment company, and such registration has not been
revoked or rescinded and is in full force and effect.
c. A statement of assets and liabilities, statements of operations, state-
ments of changes in net assets and a schedule of investments (indicating
their market values) of the Existing Composite Fund as of and for the year
ended December [Growth & Income: October] 31, 1996 and as of and for the six
months ended June [April] 30, 1997 have been furnished to the Acquired Fund.
Such statements of assets and liabilities and schedules fairly present the
financial positions of the Existing Composite Fund as of the their dates and
said statements of operations and changes in net assets fairly reflect the
results of its operations and changes in net assets for the periods covered
thereby in conformity with generally accepted accounting principles.
d. The prospectus and statement of additional information of the Existing
Composite
A-2
<PAGE>
Fund, each dated April 30 [February 28], 1997 (collectively, the "Composite
Prospectus"), previously furnished to the Acquired Fund, did not as of such
date and does not contain as of the date hereof, with respect to the Existing
Composite Fund, any untrue statements of a material fact or omit to state a
material fact required to be stated therein or necessary to make the state-
ments therein not misleading.
e. There are no material legal, administrative or other proceedings pending
or, to the knowledge of the Composite Trust or the Acquiring Fund, threatened
against the Existing Composite Fund, the Composite Trust or the Acquiring
Fund, which assert liability on the part of the Existing Composite Fund, the
Composite Trust or the Acquiring Fund. The Acquiring Fund knows of no facts
which might form the basis for the institution of such proceedings and is not
a party to or subject to the provisions of any order, decree or judgment of
any court or governmental body which materially and adversely affects its
business or its ability to consummate the transactions herein contemplated.
f. The Acquiring Fund has no known liabilities of a material nature, contin-
gent or otherwise, other than liabilities to be assumed pursuant to the Com-
posite Reorganization. The Existing Composite Fund has no known liabilities
of a material nature, contingent or otherwise, other than those shown belong-
ing to it on its statement of assets and liabilities as of June [April] 30,
1997 and those incurred in the ordinary course of its business as an invest-
ment company since June [April] 30, 1997. Prior to the Exchange Date, the Ex-
isting Composite Fund will endeavor to quantify and to reflect on its balance
sheet all of its material known liabilities and will advise the Acquired Fund
of all material liabilities, contingent or otherwise, incurred by it subse-
quent to June [April] 30, 1997, whether or not incurred in the ordinary
course of business.
g. As of the Exchange Date, the Existing Composite Fund and the Acquiring
Fund will have filed all federal and other tax returns and reports which, to
the knowledge of the Composite Trust's officers, are required to be filed by
the Existing Composite Fund or the Acquiring Fund and have paid or will pay
all federal and other taxes shown to be due on said returns or on any assess-
ments received by the Existing Composite Fund or the Acquiring Fund. All tax
liabilities of the Existing Composite Fund or the Acquiring Fund have been
adequately provided for on its books, and no tax deficiency or liability of
the Existing Composite Fund or the Acquiring Fund has been asserted, and no
question with respect thereto has been raised or is under audit, by the In-
ternal Revenue Service or by any state or local tax authority for taxes in
excess of those already paid.
h. No consent, approval, authorization or order of any court or governmental
authority is required for the consummation by the Acquiring Fund of the
transactions contemplated by this Agreement, except such as may be required
under the Securities Act of 1933, as amended (the "1933 Act"), the Securities
Exchange Act of 1934, as amended (the "1934 Act"), the 1940 Act and state se-
curities or blue sky laws (which term as used herein shall include the laws
of the District of Columbia and of Puerto Rico).
i. The registration statement (the "Registration Statement") filed with the
Securities and Exchange Commission (the "Commission") by the Composite Trust
on Form N-14 on behalf of the Acquiring Fund and relating to the Merger
Shares issuable hereunder and the proxy statement of the Acquired Fund relat-
ing to the meeting of the Acquired Fund shareholders referred to in Section
7(a) herein (together with the documents incorporated therein by reference,
the "Acquired Fund Proxy Statement"), on the effective date of the Registra-
tion Statement, (i) will comply in all material respects
A-3
<PAGE>
with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the
rules and regulations thereunder and (ii) will not contain any untrue state-
ment of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
and at the time of the shareholders meeting referred to in Section 7(a) and
on the Exchange Date, the prospectus which is contained in the Registration
Statement, as amended or supplemented by any amendments or supplements filed
with the Commission by the Composite Trust, and the Acquired Fund Proxy
Statement will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that none of the repre-
sentations and warranties in this subsection shall apply to statements in or
omissions from the Registration Statement or the Acquired Fund Proxy State-
ment made in reliance upon and in conformity with information furnished in
writing by the Acquired Fund to the Acquiring Fund or the Composite Trust
specifically for use in the Registration Statement or the Acquired Fund Proxy
Statement.
j. There are no material contracts outstanding to which the Existing Compos-
ite Fund or the Acquiring Fund is a party, other than as are or will be dis-
closed in the Composite Prospectus, the Registration Statement or the Ac-
quired Fund Proxy Statement.
k. The Acquiring Fund has no shares of beneficial interest issued and out-
standing. All of the issued and outstanding shares of beneficial interest of
the Existing Composite Fund have been offered for sale and sold in conformity
with all applicable federal and state securities laws (including any applica-
ble exemptions therefrom), or the Existing Composite Fund has taken any ac-
tion necessary to remedy any prior failure to have offered for sale and sold
such shares in conformity with such laws.
l. The Acquiring Fund was established by the Trustees of the Composite Trust
in order to effect the transactions described in this Agreement. It has not
yet filed its first federal income tax return, and, thus, has not yet elected
to be treated as a "regulated investment company" for federal income tax pur-
poses. However, upon filing its first income tax return at the completion of
its first taxable year, the Acquiring Fund will elect to be a "regulated in-
vestment company" and until such time will take all steps necessary to ensure
that it qualifies for taxation as a "regulated investment company" under Sec-
tions 851 and 852 of the Code. The Existing Composite Fund qualifies and will
at all times through the Exchange Date qualify for taxation as a "regulated
investment company" under Sections 851 and 852 of the Code.
m. The issuance of the Merger Shares pursuant to this Agreement will be in
compliance with all applicable federal and state securities laws.
n. The Merger Shares to be issued to the Acquired Fund have been duly autho-
rized and, when issued and delivered pursuant to this Agreement, will be le-
gally and validly issued and will be fully paid and non-assessable by the Ac-
quiring Fund, and no shareholder of the Acquiring Fund will have any preemp-
tive right of subscription or purchase in respect thereof.
o. All issued and outstanding shares of the Existing Composite Fund are, and
at the Exchange Date all issued and outstanding shares of the Existing Com-
posite Fund and the Acquiring Fund will be, will be duly authorized, validly
issued, fully paid and non-assessable by the Existing Composite Fund. Neither
the Existing Composite Fund nor the Acquiring Fund has outstanding any op-
tions, warrants or other rights to subscribe for or purchase any Existing
A-4
<PAGE>
Composite Fund or Acquiring Fund shares, nor is there outstanding any secu-
rity convertible into any Existing Composite Fund or Acquiring Fund shares.
2. Representations, Warranties and Agreements of the Acquired Fund. The Ac-
quired Fund represents and warrants to and agrees with the Acquiring Fund
that:
a. The Acquired Fund is a series of shares of the Sierra Trust, a Massachu-
setts business trust duly established and validly existing under the laws of
The Commonwealth of Massachusetts, and has power to own all of its properties
and assets and to carry out this Agreement. The Sierra Trust is qualified as
a foreign association in every jurisdiction where required, except to the ex-
tent that failure to so qualify would not have a material adverse effect on
the Sierra Trust. Each of the Sierra Trust and the Acquired Fund has all nec-
essary federal, state and local authorizations to own all of its properties
and assets and to carry on its business as now being conducted and to carry
out this Agreement.
b. The Sierra Trust is registered under the 1940 Act as an open-end manage-
ment investment company, and such registration has not been revoked or re-
scinded and is in full force and effect.
c. A statement of assets and liabilities, statements of operations, state-
ments of changes in net assets and a schedule of investments (indicating
their market values) of the Acquired Fund as of and for the year ended June
30, 1997 have been furnished to the Acquiring Fund. Such statement of assets
and liabilities and schedule fairly present the financial position of the Ac-
quired Fund as of their date, and such statements of operations and changes
in net assets fairly reflect the results of its operations and changes in net
assets for the periods covered thereby, in conformity with generally accepted
accounting principles.
d. The current prospectus and statement of additional information of the Si-
erra Trust, each dated October , 1997 (collectively, the "Sierra Prospec-
tus"), which has been previously furnished to the Acquiring Fund, did not
contain as of such dates and does not contain, with respect to the Sierra
Trust and the Acquired Fund, any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading.
e. There are no material legal, administrative or other proceedings pending
or, to the knowledge of the Sierra Trust or the Acquired Fund, threatened
against the Sierra Trust or the Acquired Fund, which assert liability on the
part of the Sierra Trust or the Acquired Fund. The Acquired Fund knows of no
facts which might form the basis for the institution of such proceedings and
is not a party to or subject to the provisions of any order, decree or judg-
ment of any court or governmental body which materially and adversely affects
its business or its ability to consummate the transactions herein contemplat-
ed.
f. There are no material contracts outstanding to which the Acquired Fund is
a party, other than as are disclosed in the Sierra Trust's registration
statement on Form N-1A or the Sierra Prospectus.
g. The Acquired Fund has no known liabilities of a material nature, contin-
gent or otherwise, other than those shown on the Acquired Fund's statement of
assets and liabilities as of June 30, 1997 referred to above and those in-
curred in the ordinary course of its business as an investment company since
such date. Prior to the Exchange Date, the Acquired Fund will endeavor to
quantify and to reflect on its balance sheet all of its material known lia-
bilities and will advise the Acquiring Fund of all material liabilities, con-
tingent or otherwise, incurred
A-5
<PAGE>
by it subsequent to June 30, 1997, whether or not incurred in the ordinary
course of business.
h. As of the Exchange Date, the Acquired Fund will have filed all federal
and other tax returns and reports which, to the knowledge of the Sierra
Trust's officers, are required to be filed by the Acquired Fund and has paid
or will pay all federal and other taxes shown to be due on said returns or on
any assessments received by the Acquired Fund. All tax liabilities of the Ac-
quired Fund have been adequately provided for on its books, and no tax defi-
ciency or liability of the Acquired Fund has been asserted, and no question
with respect thereto has been raised or is under audit, by the Internal Reve-
nue Service or by any state or local tax authority for taxes in excess of
those already paid.
i. At the Exchange Date, the Sierra Trust, on behalf of the Acquired Fund,
will have full right, power and authority to sell, assign, transfer and de-
liver the Investments (as defined below) and any other assets and liabilities
of the Acquired Fund to be transferred to the Acquiring Fund pursuant to this
Agreement. At the Exchange Date, subject only to the delivery of the Invest-
ments and any such other assets and liabilities as contemplated by this
Agreement, the Acquiring Fund will acquire the Investments and any such other
assets and liabilities subject to no encumbrances, liens or security inter-
ests whatsoever and without any restrictions upon the transfer thereof. As
used in this Agreement, the term "Investments" shall mean the Acquired Fund's
investments shown on the schedule of its investments as of June 30, 1997 re-
ferred to in Section 2(c) hereof, as supplemented with such changes in the
portfolio as the Acquired Fund shall make, and changes resulting from stock
dividends, stock split-ups, mergers and similar corporate actions through the
Exchange Date.
j. No registration under the 1933 Act of any of the Investments would be re-
quired if they were, as of the time of such transfer, the subject of a public
distribution by either of the Acquiring Fund or the Acquired Fund, except as
previously disclosed to the Acquiring Fund by the Acquired Fund.
k. No consent, approval, authorization or order of any court or governmental
authority is required for the consummation by the Acquired Fund of the trans-
actions contemplated by this Agreement, except such as may be required under
the 1933 Act, 1934 Act, the 1940 Act or state securities or blue sky laws.
l. The Registration Statement and the Acquired Fund Proxy Statement, on the
effective date of the Registration Statement, (i) will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act
and the rules and regulations thereunder and (ii) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
and at the time of the shareholders meeting referred to in Section 7(a) and
on the Exchange Date, the Acquired Fund Proxy Statement and the Registration
Statement will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that none of the repre-
sentations and warranties in this subsection shall apply to statements in or
omissions from the Registration Statement or the Acquired Fund Proxy State-
ment made in reliance upon and in conformity with information furnished in
writing by the Acquiring Fund to the Acquired Fund or the Sierra Trust spe-
cifically for use in the Registration Statement or the Acquired Fund Proxy
Statement.
m. The Acquired Fund qualifies and will at all times through the Exchange
Date qualify for taxation as a "regulated investment company" under Section
851 and 852 of the Code.
A-6
<PAGE>
n. At the Exchange Date, the Acquired Fund will have sold such of its as-
sets, if any, as are necessary to assure that, after giving effect to the ac-
quisition of the assets of the Acquired Fund pursuant to this Agreement, the
Acquiring Fund will remain a "diversified company" within the meaning of Sec-
tion 5(b)(1) of the 1940 Act and in compliance with such other mandatory in-
vestment restrictions as are set forth in the Sierra Prospectus, as amended
through the Exchange Date.
o. All of the issued and outstanding shares of beneficial interest of the
Acquired Fund shall have been offered for sale and sold in conformity with
all applicable federal and state securities laws (including any applicable
exemptions therefrom), or the Acquired Fund has taken any action necessary to
remedy any prior failure to have offered for sale and sold such shares in
conformity with such laws.
p. All issued and outstanding shares of the Acquired Fund are, and at the
Exchange Date will be, duly authorized, validly issued, fully paid and non-
assessable by the Acquired Fund. The Acquired Fund does not have outstanding
any options, warrants or other rights to subscribe for or purchase any of the
Acquired Fund shares, nor is there outstanding any security convertible into
any of the Acquired Fund shares.
3. Reorganization.
a. Subject to the requisite approval of the shareholders of the Acquired
Fund and the consummation of the Composite Reorganization and to the other
terms and conditions contained herein (including the Acquired Fund's obliga-
tion to distribute to its shareholders all of its investment company taxable
income and net capital gain as described in Section 8(m)), the Acquired Fund
agrees to sell, assign, convey, transfer and deliver to the Acquiring Fund,
and the Acquiring Fund agrees to acquire from the Acquired Fund, on the Ex-
change Date all of the Investments and all of the cash and other properties
and assets of the Acquired Fund, whether accrued or contingent (including
cash received by the Acquired Fund upon the liquidation by the Acquired Fund
of any investments purchased by the Acquired Fund after June 30, 1997 and
designated by the Acquiring Fund as being unsuitable for it to acquire), in
exchange for that number of shares of beneficial interest of the Acquiring
Fund provided for in Section 4 and the assumption by the Acquiring Fund of
all of the liabilities of the Acquired Fund, whether accrued or contingent,
existing at the Valuation Time except for the Acquired Fund's liabilities, if
any, arising in connection with this Agreement. Pursuant to this Agreement,
the Acquired Fund will, as soon as practicable after the Exchange Date, dis-
tribute all of the Merger Shares received by it to the shareholders of the
Acquired Fund in exchange for their Class A, Class B, Class I, and Class S
shares of the Acquired Fund.
b. The Acquired Fund will pay or cause to be paid to the Acquiring Fund any
interest, cash or such dividends, rights and other payments received by it on
or after the Exchange Date with respect to the Investments and other proper-
ties and assets of the Acquired Fund, whether accrued or contingent, received
by it on or after the Exchange Date. Any such distribution shall be deemed
included in the assets transferred to the Acquiring Fund at the Exchange Date
and shall not be separately valued unless the securities in respect of which
such distribution is made shall have gone "ex" such distribution prior to the
Valuation Time, in which case any such distribution which remains unpaid at
the Exchange Date shall be included in the determination of the value of the
assets of the Acquired Fund acquired by the Acquiring Fund.
c. The Valuation Time shall be 4:00 p.m. Eastern time on [the Exchange Date]
or such
A-7
<PAGE>
earlier or later day as may be mutually agreed upon in writing by the parties
hereto (the "Valuation Time").
4. Exchange Date: Valuation Time. On the Exchange Date, the Acquiring Fund
will deliver to the Acquired Fund (i) a number of full and fractional Class A
Merger Shares having an aggregate net asset value equal to the value of the
assets of the Acquired Fund attributable to Class A shares of the Acquired
Fund transferred to the Acquiring Fund on such date less the value of the lia-
bilities of the Acquired Fund attributable to Class A shares of the Acquired
Fund assumed by the Acquiring Fund on that date, (ii) a number of full and
fractional Class B Merger Shares having an aggregate net asset value equal to
the value of the assets of the Acquired Fund attributable to Class B shares of
the Acquired Fund transferred to the Acquiring Fund on such date less the
value of the liabilities of the Acquired Fund attributable to Class B shares
of the Acquired Fund assumed by the Acquiring Fund on that date, (iii) a num-
ber of full and fractional Class I Merger Shares having an aggregate net asset
value equal to the value of the assets of the Acquired Fund attributable to
Class I shares of the Acquired Fund transferred to the Acquiring Fund on such
date less the value of the liabilities of the Acquired Fund attributable to
Class I shares of the Acquired Fund assumed by the Acquiring Fund on that
date, and (iv) a number of full and fractional Class S Merger Shares having an
aggregate net asset value equal to the value of the assets of the Acquired
Fund attributable to Class S shares of the Acquired Fund transferred to the
Acquiring Fund on such date less the value of the liabilities of the Acquired
Fund attributable to Class S shares of the Acquired Fund assumed by the Ac-
quiring Fund on that date, determined as hereinafter provided in this Section
4.
a. The net asset value of the Merger Shares to be delivered to the Acquired
Fund, the value of the assets attributable to the shares of the Acquired
Fund, and the value of the liabilities attributable to the Class A, Class B,
Class I, and Class S shares of the Acquired Fund to be assumed by the Acquir-
ing Fund, shall in each case be determined as of the Valuation Time.
b. The net asset value of the Class A, Class B, Class I, and Class S Merger
Shares shall be computed in the manner set forth in the Composite Prospectus.
The value of the assets and liabilities of the Class A, Class B, Class I, and
Class S shares of the Acquired Fund shall be determined by the Acquiring
Fund, in cooperation with the Acquired Fund, pursuant to procedures which the
Acquiring Fund would use in determining the fair market value of the Acquir-
ing Fund's assets and liabilities.
c. No adjustment shall be made in the net asset value of either the Acquired
Fund or the Acquiring Fund to take into account differences in realized and
unrealized gains and losses.
d. The Acquiring Fund shall issue the Merger Shares to the Acquired Fund in
four certificates registered in the name of the Acquired Fund, one represent-
ing Class A Merger Shares, one representing Class B Merger Shares, one repre-
senting Class I Merger Shares, and one representing Class S Merger Shares.
The Acquired Fund shall distribute the Class A Merger Shares to the Class A
shareholders of the Acquired Fund by redelivering such certificate to the Ac-
quiring Fund's transfer agent, which will as soon as practicable set up open
accounts for each Class A Acquired Fund shareholder in accordance with writ-
ten instructions furnished by the Acquired Fund. The Acquired Fund shall dis-
tribute the Class B Merger Shares to the Class B shareholders of the Acquired
Fund by redelivering such certificate to the Acquiring Fund's transfer agent,
which will as soon as practicable set up open accounts for each Class B Ac-
quired Fund shareholder in accordance with written instructions furnished by
the Acquired Fund. The Acquired Fund shall distribute the Class I Merger
Shares to the Class I shareholders of the
A-8
<PAGE>
Acquired Fund by redelivering such certificate to the Acquiring Fund's trans-
fer agent, which will as soon as practicable set up open accounts for each
Class I Acquired Fund shareholder in accordance with written instructions
furnished by the Acquired Fund. The Acquired Fund shall distribute the Class
S Merger Shares to the Class S shareholders of the Acquired Fund by redeliv-
ering such certificate to the Acquiring Fund's transfer agent, which will as
soon as practicable set up open accounts for each Class S Acquired Fund
shareholder in accordance with written instructions furnished by the Acquired
Fund. [With respect to any Acquired Fund shareholder holding share certifi-
cates as of the Exchange Date, such certificates will from and after the Ex-
change Date be deemed to be certificates for the Merger Shares issued to each
shareholder in respect of the Acquired Fund shares represented by such cer-
tificates; certificates representing the Merger Shares will not be issued to
Acquired Fund shareholders.]
e. The Acquiring Fund shall assume all liabilities of the Acquired Fund,
whether accrued or contingent, in connection with the acquisition of assets
and subsequent dissolution of the Acquired Fund or otherwise, except for the
Acquired Fund's liabilities, if any, pursuant to this Agreement.
5. Expenses, Fees, etc.
a. The parties hereto understand and agree that the transactions contem-
plated by this Agreement are being undertaken contemporaneously with a gen-
eral restructuring and consolidation of certain of the registered investment
companies advised by Composite Research & Management Company and Sierra In-
vestment Advisors Corporation and their affiliates; and that in connection
therewith the costs of all such transactions are being [borne by Composite
Research & Management Company] [preliminarily allocated on a basis approved,
inter alia, by the Trustees of the Composite Trust. Each of the Acquired Fund
and the Acquiring Fund agrees to pay the expenses preliminarily allocated to
it but not, however, in an amount exceeding $ and $ , respectively (the
"Relevant Expense Cap"). Composite Research & Management Company will bear
any and all expenses (1) preliminarily allocated to Acquiring Fund and (2)
preliminarily allocated to the Acquired Fund, in each case to the extent that
they would otherwise exceed the Relevant Expense Cap.] Notwithstanding any of
the foregoing, expenses will in any event be paid by the party directly in-
curring such expenses if and to the extent that the payment by the other
party of such expenses would result in the disqualification of such party as
a "regulated investment company" within the meaning of Section 851 of the
Code.
b. In the event the transactions contemplated by this Agreement are not con-
summated by reason of the Acquiring Fund's being either unwilling or unable
to go forward other than by reason of the nonfulfillment or failure of any
condition to the Acquiring Fund's obligations referred to in Section 7(a) or
Section 8, the Acquiring Fund shall pay directly all reasonable fees and ex-
penses incurred by the Acquired Fund in connection with such transactions,
including, without limitation, legal, accounting and filing fees.
c. In the event the transactions contemplated by this Agreement are not con-
summated by reason of the Acquired Fund's being either unwilling or unable to
go forward other than by reason of the nonfulfillment or failure of any con-
dition to the Acquired Fund's obligations referred to in Section 7(a) or Sec-
tion 9, the Acquired Fund shall pay directly all reasonable fees and expenses
incurred by the Acquiring Fund in connection with such transactions, includ-
ing, without limitation, legal, accounting and filings fees.
A-9
<PAGE>
d. In the event the transactions contemplated by this Agreement are not con-
summated for any reason other than (i) the Acquiring Fund's or the Acquired
Fund's being either unwilling or unable to go forward or (ii) the nonfulfill-
ment or failure of any condition to the Acquiring Fund's or the Acquired
Fund's obligations referred to in Section 7(a), Section 8 or Section 9 of
this Agreement, then each of the Acquiring Fund and the Acquired Fund shall
bear all of its own expenses incurred in connection with such transactions.
e. Notwithstanding any other provisions of this Agreement, if for any reason
the transactions contemplated by this Agreement are not consummated, no party
shall be liable to the other party for any damages resulting therefrom, in-
cluding, without limitation, consequential damages, except as specifically
set forth above.
6. Exchange Date. Delivery of the assets of the Acquired Fund to be trans-
ferred, assumption of the liabilities of the Acquired Fund to be assumed, and
the delivery of the Merger Shares to be issued shall be made at [place] at
[time] as of December [31], 1997, or at such other time and date agreed to by
the Acquiring Fund and the Acquired Fund, the date and time upon which such
delivery is to take place being referred to herein as the "Exchange Date."
7. Meetings of Shareholders; Dissolution.
a. The Sierra Trust, on behalf of the Acquired Fund, agrees to call a meet-
ing of the Acquired Fund's shareholders as soon as is practicable after the
effective date of the Registration Statement for the purpose of considering
the sale of all of its assets to and the assumption of all of its liabilities
by the Acquiring Fund as herein provided, adopting this Agreement, and autho-
rizing the liquidation and dissolution of the Acquired Fund.
b. The Acquired Fund agrees that the liquidation and dissolution of the Ac-
quired Fund will be effected in the manner provided in the Sierra Trust's
Declaration of Trust in accordance with applicable law and that on and after
the Exchange Date, the Acquired Fund shall not conduct any business except in
connection with its liquidation and dissolution.
c. The Acquiring Fund has, in consultation with the Acquired Fund and based
in part on information furnished by the Acquired Fund, filed the Registration
Statement with the Commission. Each of the Acquired Fund and the Acquiring
Fund will cooperate with the other, and each will furnish to the other the
information relating to itself required by the 1933 Act, the 1934 Act and the
1940 Act and the rules and regulations thereunder to be set forth in the Reg-
istration Statement.
8. Conditions to the Acquiring Fund's Obligations. The obligations of the Ac-
quiring Fund hereunder shall be subject to the following conditions:
a. That this Agreement shall have been adopted and the transactions contem-
plated hereby shall have been approved by the requisite votes of the holders
of the outstanding shares of beneficial interest of the Acquired Fund enti-
tled to vote.
b. That the Acquired Fund shall have furnished to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities, with values deter-
mined as provided in Section 4 of this Agreement, together with a list of In-
vestments with their respective tax costs, all as of the Valuation Time, cer-
tified on the Acquired Fund's behalf by the Sierra Trust's President (or any
Vice President) and Treasurer (or any Assistant Treasurer), and a certificate
of both such officers, dated the Exchange Date, that there has been no mate-
rial adverse change in the financial position of the Acquired Fund since June
30, 1997 other than changes in the Investments and
A-10
<PAGE>
other assets and properties since that date or changes in the market value of
the Investments and other assets of the Acquired Fund, or changes due to div-
idends paid or losses from operations.
c. That the Acquired Fund shall have furnished to the Acquiring Fund a
statement, dated the Exchange Date, signed by the Sierra Trust's President
(or any Vice President) and Treasurer (or any Assistant Treasurer) certifying
that as of the Valuation Time and as of the Exchange Date all representations
and warranties of the Acquired Fund made in this Agreement are true and cor-
rect in all material respects as if made at and as of such dates and the Ac-
quired Fund has complied with all the agreements and satisfied all the condi-
tions on its part to be performed or satisfied at or prior to such dates.
d. [That the Acquired Fund shall have delivered to the Acquiring Fund a let-
ter from [Price Waterhouse LLP] dated the Exchange Date stating that such
firm has employed certain procedures whereby it has obtained schedules of the
tax provisions and qualifying tests for regulated investment companies as
prepared for the fiscal year ended June 30, 1997 and the period July 1, 1997
to the Exchange Date (the latter period being based on unaudited data) and
that, in the course of such procedures, nothing came to their attention which
caused them to believe that the Acquired Fund (i) would not qualify as a reg-
ulated investment company for federal, state, or local income tax purposes or
(ii) would owe any federal, state or local income tax or excise tax, for the
tax year ended June 30, 1997, and for the period from July 1, 1997 to the Ex-
change Date.]
e. That there shall not be any material litigation pending with respect to
the matters contemplated by this Agreement.
f. That the Acquiring Fund shall have received an opinion of counsel to the
Acquired Fund, in form satisfactory to counsel to the Acquiring Fund, and
dated the Exchange Date, to the effect that (i) the Sierra Trust is a Massa-
chusetts business trust duly formed and is validly existing under the laws of
The Commonwealth of Massachusetts and has the power to own all its properties
and to carry on its business as presently conducted; (ii) this Agreement has
been duly authorized, executed and delivered by the Sierra Trust on behalf of
the Acquired Fund and, assuming that the Registration Statement, the Compos-
ite Prospectus and the Acquired Fund Proxy Statement comply with the 1933
Act, the 1934 Act and the 1940 Act and assuming due authorization, execution
and delivery of this Agreement by the Composite Trust on behalf of the Ac-
quiring Fund, is a valid and binding obligation of the Sierra Trust and the
Acquired Fund; (iii) the Sierra Trust, on behalf of the Acquired Fund, has
power to sell, assign, convey, transfer and deliver the assets contemplated
hereby and, upon consummation of the transactions contemplated hereby in ac-
cordance with the terms of this Agreement, the Acquired Fund will have duly
sold, assigned, conveyed, transferred and delivered such assets to the Ac-
quiring Fund; (iv) the execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, violate
the Sierra Trust's Declaration of Trust or By-Laws or any provision of any
agreement known to such counsel to which the Sierra Trust or the Acquired
Fund is a party or by which it is bound; and (v) no consent, approval, autho-
rization or order of any court or governmental authority is required for the
consummation by the Sierra Trust on behalf of the Acquired Fund of the trans-
actions contemplated hereby, except such as have been obtained under the 1933
Act, the 1934 Act and the 1940 Act and such as may be required under state
securities or blue sky laws.
A-11
<PAGE>
g. [Non-money market Funds only:] That the Acquiring Fund shall have re-
ceived an opinion of Ropes & Gray (which opinion would be based upon certain
factual representations and subject to certain qualifications), dated the Ex-
change Date, in form satisfactory to the Acquiring Fund and its counsel, with
respect to the matters specified in Section 9(f) of this Agreement.
h. [Non-money market Funds only:] That the Acquiring Fund shall have re-
ceived an opinion of Ropes & Gray (which opinion would be based upon certain
factual representations and subject to certain qualifications), dated the Ex-
change Date, in form satisfactory to the Acquiring Fund and its counsel, to
the effect that, on the basis of the existing provisions of the Code, current
administrative rules, and court decisions, for federal income tax purposes
(i) no gain or loss will be recognized by the Acquiring Fund upon receipt of
the Investments transferred to the Acquiring Fund pursuant to this Agreement
in exchange for the Merger Shares; (ii) the basis to the Acquiring Fund of
the Investments will be the same as the basis of the Investments in the hands
of the Acquired Fund immediately prior to such exchange; and (iii) the Ac-
quiring Fund's holding periods with respect to the Investments will include
the respective periods for which the Investments were held by the Acquired
Fund.
i. That the assets of the Acquired Fund to be acquired by the Acquiring Fund
will include no assets which the Acquiring Fund, by reason of charter limita-
tions or of investment restrictions disclosed in the Registration Statement
in effect on the Exchange Date, may not properly acquire.
j. That the Registration Statement shall have become effective under the
1933 Act, and no stop order suspending such effectiveness shall have been in-
stituted or, to the knowledge of the Composite Trust or the Acquiring Fund,
threatened by the Commission.
k. That the Sierra Trust and the Composite Trust shall have received from
the Commission and any relevant state securities administrator such order or
orders as are reasonably necessary or desirable under the 1933 Act, the 1934
Act, the 1940 Act, and any applicable state securities or blue sky laws in
connection with the transactions contemplated hereby, and that all such or-
ders shall be in full force and effect.
l. That all actions taken by the Sierra Trust on behalf of the Acquired Fund
in connection with the transactions contemplated by this Agreement and all
documents incidental thereto shall be satisfactory in form and substance to
the Acquiring Fund and its counsel.
m. [That, prior to the Exchange Date, the Acquired Fund shall have declared
a dividend or dividends which, together with all previous such dividends,
shall have the effect of distributing to the shareholders of the Acquired
Fund (i) all of the excess of (x) the Acquired Fund's investment income ex-
cludable from gross income under Section 103(a) of the Code over (y) the Ac-
quired Fund's deductions disallowed under Sections 265 and 171(a)(2) of the
Code, (ii) all of the Acquired Fund's investment company taxable income (as
defined in Section 852 of the Code) for its taxable years ending on or after
June 30, 1997 and on or prior to the Exchange Date (computed in each case
without regard to any deduction for dividends paid), and (iii) all of the Ac-
quired Fund's net capital gain realized (after reduction for any capital loss
carryover), in each case for both the taxable year ending on June 30, 1997
and the short taxable period beginning on July 1, 1997 and ending on the Ex-
change Date.]
n. That the Acquired Fund shall have furnished to the Acquiring Fund a cer-
tificate, signed by the President (or any Vice President)
A-12
<PAGE>
and the Treasurer (or any Assistant Treasurer) of the Sierra Trust, as to the
tax cost to the Acquired Fund of the securities delivered to the Acquiring
Fund pursuant to this Agreement, together with any such other evidence as to
such tax cost as the Acquiring Fund may reasonably request.
o. That the Acquired Fund's custodian shall have delivered to the Acquiring
Fund a certificate identifying all of the assets of the Acquired Fund held or
maintained by such custodian as of the Valuation Time.
p. That the Acquired Fund's transfer agent shall have provided to the Ac-
quiring Fund (i) the originals or true copies of all of the records of the
Acquired Fund in the possession of such transfer agent as of the Exchange
Date, (ii) a certificate setting forth the number of shares of the Acquired
Fund outstanding as of the Valuation Time, and (iii) the name and address of
each holder of record of any shares and the number of shares held of record
by each such shareholder.
q. That all of the issued and outstanding shares of beneficial interest of
the Acquired Fund shall have been offered for sale and sold in conformity
with all applicable state securities or blue sky laws (including any applica-
ble exemptions therefrom) and, to the extent that any audit of the records of
the Acquired Fund or its transfer agent by the Acquiring Fund or its agents
shall have revealed otherwise, either (i) the Acquired Fund shall have taken
all actions that in the opinion of the Acquiring Fund or its counsel are nec-
essary to remedy any prior failure on the part of the Acquired Fund to have
offered for sale and sold such shares in conformity with such laws or (ii)
the Acquired Fund shall have furnished (or caused to be furnished) surety, or
deposited (or caused to be deposited) assets in escrow, for the benefit of
the Acquiring Fund in amounts sufficient and upon terms satisfactory, in the
opinion of the Acquiring Fund or its counsel, to indemnify the Acquiring Fund
against any expense, loss, claim, damage or liability whatsoever that may be
asserted or threatened by reason of such failure on the part of the Acquired
Fund to have offered and sold such shares in conformity with such laws.
r. [That the Acquiring Fund shall have received from [Price Waterhouse LLP]
a letter addressed to the Acquiring Fund dated as of the Exchange Date satis-
factory in form and substance to the Acquiring Fund to the effect that, on
the basis of limited procedures agreed upon by the Acquiring Fund and de-
scribed in such letter (but not an examination in accordance with generally
accepted auditing standards), as of the Valuation Time the value of the as-
sets and liabilities of the Acquired Fund to be exchanged for the Merger
Shares has been determined in accordance with the provisions of the Composite
Trust's Declaration of Trust, pursuant to the procedures customarily utilized
by the Acquiring Fund in valuing its assets and issuing its shares.]
s. That the Composite Reorganization shall have been consummated.
9. Conditions to the Acquired Fund's Obligations. The obligations of the Ac-
quired Fund hereunder shall be subject to the following conditions:
a. That this Agreement shall have been adopted and the transactions contem-
plated hereby shall have been approved by the requisite votes of the holders
of the outstanding shares of beneficial interest of the Acquired Fund enti-
tled to vote.
b. That the Composite Trust, on behalf of the Acquiring Fund, shall have ex-
ecuted and delivered to the Acquired Fund an Assumption of Liabilities dated
as of the Exchange Date pursuant to which the Acquiring Fund will assume all
of the liabilities of the Acquired Fund existing at the Valuation Time in
connection with the transactions contemplated by this Agreement,
A-13
<PAGE>
other than liabilities arising pursuant to this Agreement.
c. That the Acquiring Fund shall have furnished to the Acquired Fund a
statement, dated the Exchange Date, signed by the Composite Trust's President
(or any Vice President) and Treasurer (or any Assistant Treasurer) certifying
that as of the Valuation Time and as of the Exchange Date all representations
and warranties of the Acquiring Fund made in this Agreement are true and cor-
rect in all material respects as if made at and as of such dates, and that
the Acquiring Fund has complied with all of the agreements and satisfied all
of the conditions on its part to be performed or satisfied at or prior to
each of such dates.
d. That there shall not be any material litigation pending or threatened
with respect to the matters contemplated by this Agreement.
e. That the Acquired Fund shall have received an opinion of counsel to the
Acquiring Fund, in form satisfactory to counsel to the Acquired Fund, and
dated the Exchange Date, to the effect that (i) the Composite Trust is a Mas-
sachusetts business trust duly formed and is validly existing under the laws
of The Commonwealth of Massachusetts and has the power to own all its proper-
ties and to carry on its business as presently conducted; (ii) the Merger
Shares to be delivered to the Acquired Fund as provided for by this Agreement
are duly authorized and upon such delivery will be validly issued and will be
fully paid and non-assessable by the Composite Trust and the Acquiring Fund
and no shareholder of the Acquiring Fund has any preemptive right to sub-
scription or purchase in respect thereof; (iii) this Agreement has been duly
authorized, executed and delivered by the Composite Trust on behalf of the
Acquiring Fund and, assuming that the Composite Prospectus, the Registration
Statement and the Acquired Fund Proxy Statement comply with the 1933 Act, the
1934 Act and the 1940 Act and assuming due authorization, execution and de-
livery of this Agreement by the Sierra Trust on behalf of the Acquired Fund,
is a valid and binding obligation of the Composite Trust and the Acquiring
Fund; (iv) the execution and delivery of this Agreement did not, and the con-
summation of the transactions contemplated hereby will not, violate the Com-
posite Trust's Declaration of Trust or By-Laws, or any provision of any
agreement known to such counsel to which the Composite Trust or the Acquiring
Fund is a party or by which it is bound; (v) no consent, approval, authoriza-
tion or order of any court or governmental authority is required for the con-
summation by the Composite Trust on behalf of the Acquiring Fund of the
transactions contemplated herein, except such as have been obtained under the
1933 Act, the 1934 Act and the 1940 Act and such as may be required under
state securities or blue sky laws; and (vi) the Registration Statement has
become effective under the 1933 Act, and to best of the knowledge of such
counsel, no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been in-
stituted or are pending or contemplated under the 1933 Act.
f. [Non-money market Funds only:] That the Acquired Fund shall have received
an opinion of Ropes & Gray, dated the Exchange Date (which opinion would be
based upon certain factual representations and subject to certain qualifica-
tions), in form satisfactory to the Acquired Fund and its counsel, to the ef-
fect that, on the basis of the existing provisions of the Code, current ad-
ministrative rules, and court decisions, for federal income tax purposes: (i)
no gain or loss will be recognized by the Acquired Fund as a result of the
reorganization; (ii) no gain or loss will be recognized by shareholders of
the Acquired Fund on the distribution of Merger Shares to them in exchange
for their shares of the Acquired Fund; (iii) the tax basis of the
A-14
<PAGE>
Merger Shares that the Acquired Fund's shareholders receive in place of their
Acquired Fund shares will be the same as the basis of the Acquired Fund
shares; and (iv) a shareholder's holding period for the Merger Shares re-
ceived pursuant to the Agreement will be determined by including the holding
period for the Acquired Fund shares exchanged for the Merger Shares, provided
that the shareholder held the Acquired Fund shares as a capital asset.
g. That all actions taken by the Composite Trust on behalf of the Acquiring
Fund in connection with the transactions contemplated by this Agreement and
all documents incidental thereto shall be satisfactory in form and substance
to the Acquired Fund and its counsel.
h. That the Registration Statement shall have become effective under the
1933 Act, and no stop order suspending such effectiveness shall have been in-
stituted or, to the knowledge of the Composite Trust or the Acquiring Fund,
threatened by the Commission.
i. That the Composite Trust shall have received from the Commission and any
relevant state securities administrator such order or orders as are reasona-
bly necessary or desirable under the 1933 Act, the 1934 Act, the 1940 Act,
and any applicable state securities or blue sky laws in connection with the
transactions contemplated hereby, and that all such orders shall be in full
force and effect.
j. That the Composite Reorganization shall have been consummated.
10. Indemnification.
a. The Acquired Fund will indemnify and hold harmless, out of the assets of
the Acquired Fund (which shall be deemed to include the assets of the Acquir-
ing Fund represented by the Merger Shares following the Exchange Date) but no
other assets, the trustees and officers of the Composite Trust (for purposes
of this subparagraph, the "Indemnified Parties") against any and all ex-
penses, losses, claims, damages and liabilities at any time imposed upon or
reasonably incurred by any one or more of the Indemnified Parties in connec-
tion with, arising out of, or resulting from any claim, action, suit or pro-
ceeding in which any one or more of the Indemnified Parties may be involved
or with which any one or more of the Indemnified Parties may be threatened by
reason of any untrue statement or alleged untrue statement of a material fact
relating to the Sierra Trust or the Acquired Fund contained in the Registra-
tion Statement or the Sierra Prospectus, the Acquired Fund Proxy Statement or
any amendment or supplement to any of the foregoing, or arising out of or
based upon the omission or alleged omission to state in any of the foregoing
a material fact relating to the Sierra Trust or the Acquired Fund required to
be stated therein or necessary to make the statements relating to the Sierra
Trust or the Acquired Fund therein not misleading, including, without limita-
tion, any amounts paid by any one or more of the Indemnified Parties in a
reasonable compromise or settlement of any such claim, action, suit or pro-
ceeding, or threatened claim, action, suit or proceeding made with the con-
sent of the Sierra Trust or the Acquired Fund. The Indemnified Parties will
notify the Sierra Trust and the Acquired Fund in writing within ten days af-
ter the receipt by any one or more of the Indemnified Parties of any notice
of legal process or any suit brought against or claim made against such In-
demnified Party as to any matters covered by this Section 10(a). The Acquired
Fund shall be entitled to participate at its own expense in the defense of
any claim, action, suit or proceeding covered by this Section 10(a), or, if
it so elects, to assume at its expense by counsel satisfactory to the Indem-
nified Parties the defense of any such claim, action, suit or proceeding, and
if the Acquired Fund elects to assume such defense, the Indemnified Parties
shall be entitled to participate in the defense of any such claim, action,
suit or
A-15
<PAGE>
proceeding at their expense. The Acquired Fund's obligation under Section
10(a) to indemnify and hold harmless the Indemnified parties shall constitute
a guarantee of payment so that the Acquired Fund will pay in the first in-
stance any expenses, losses, claims, damages and liabilities required to be
paid by it under this Section 10(a) without the necessity of the Indemnified
Parties' first paying the same.
b. The Acquiring Fund will indemnify and hold harmless, out of the assets of
the Acquiring Fund but no other assets, the trustees and officers of the Si-
erra Trust (for purposes of this subparagraph, the "Indemnified Parties")
against any and all expenses, losses, claims, damages and liabilities at any
time imposed upon or reasonably incurred by any one or more of the Indemni-
fied Parties in connection with, arising out of, or resulting from any claim,
action, suit or proceeding in which any one or more of the Indemnified Par-
ties may be involved or with which any one or more of the Indemnified Parties
may be threatened by reason of any untrue statement or alleged untrue state-
ment of a material fact relating to the Acquiring Fund contained in the Reg-
istration Statement, the Composite Prospectus, the Acquired Fund Proxy State-
ment or any amendment or supplement to any of the foregoing, or arising out
of or based upon, the omission or alleged omission to state in any of the
foregoing a material fact relating to the Existing Composite Fund, the Com-
posite Trust or the Acquiring Fund required to be stated therein or necessary
to make the statements relating to the Existing Composite Fund, the Composite
Trust or the Acquiring Fund therein not misleading, including, without limi-
tation, any amounts paid by any one or more of the Indemnified Parties in a
reasonable compromise or settlement of any such claim, action, suit or pro-
ceeding, or threatened claim, action, suit or proceeding made with the con-
sent of the Composite Trust or the Acquiring Fund. The Indemnified Parties
will notify the Composite Trust and the Acquiring Fund in writing within ten
days after the receipt by any one or more of the Indemnified parties of any
notice of legal process or any suit brought against or claim made against
such Indemnified Party as to any matters covered by this Section 10(b). The
Acquiring Fund shall be entitled to participate at its own expense in the de-
fense of any claim, action, suit or proceeding covered by this Section 10(b),
or, if it so elects, to assume at its expense by counsel satisfactory to the
Indemnified Parties the defense of any such claim, action, suit or proceed-
ing, and, if the Acquiring Fund elects to assume such defense, the Indemni-
fied Parties shall be entitled to participate in the defense of any such
claim, action, suit or proceeding at their own expense. The Acquiring Fund's
obligation under this Section 10(b) to indemnify and hold harmless the Indem-
nified Parties shall constitute a guarantee of payment so that the Acquiring
Fund will pay in the first instance any expenses, losses, claims, damages and
liabilities required to be paid by it under this Section 10(b) without the
necessity of the Indemnified Parties' first paying the same.
11. No Broker, etc. Each of the Acquired Fund and the Acquiring Fund repre-
sents that there is no person who has dealt with it, the Composite Trust or
the Sierra Trust who by reason of such dealings is entitled to any broker's or
finder's or other similar fee or commission arising out of the transactions
contemplated by this Agreement.
12. Termination. The Acquired Fund and the Acquiring Fund may, by mutual con-
sent of the trustees of the Sierra Trust and the Composite Trust on behalf of
each Fund, terminate this Agreement, and the Acquired Fund or the Acquiring
Fund, after consultation with counsel and by consent of their respective
trustees or an officer authorized by such trustees, may waive any condition to
their respective obligations hereunder. If the transactions contemplated by
this Agreement
A-16
<PAGE>
have not been substantially completed by [ , 1998], this Agreement shall au-
tomatically terminate on that date unless a later date is agreed to by the Ac-
quired Fund and the Acquiring Fund.
13. Rule 145. Pursuant to Rule 145 under the 1933 Act, the Acquiring Fund
will, in connection with the issuance of any Merger Shares to any person who
at the time of the transaction contemplated hereby is deemed to be an affili-
ate of a party to the transaction pursuant to Rule 145(c), cause to be affixed
upon the certificates issued to such person (if any) a legend as follows:
"THESE SHARES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO [ACQUIRING
FUND] OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION STATEMENT WITH
RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
(II) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND SUCH REG-
ISTRATION IS NOT REQUIRED."
and, further, the Acquiring Fund will issue stop transfer instructions to the
Acquiring Fund's transfer agent with respect to such shares. The Acquired Fund
will provide the Acquiring Fund on the Exchange Date with the name of any Ac-
quired Fund shareholder who is to the knowledge of the Acquired Fund an affil-
iate of the Acquired Fund on such date.
14. Covenants, etc. Deemed Material. All covenants, agreements, representa-
tions and warranties made under this Agreement and any certificates delivered
pursuant to this Agreement shall be deemed to have been material and relied
upon by each of the parties, notwithstanding an investigation made by them or
on their behalf.
15. Sole Agreement; Amendments. This Agreement supersedes all previous corre-
spondence and oral communications between the parties regarding the subject
matter hereof, constitutes the only understanding with respect to such subject
matter, may not be changed except by a letter of agreement signed by each
party hereto, and shall be construed in accordance with and governed by the
laws of The Commonwealth of Massachusetts.
16. Declaration of Trust.
a. A copy of the Declaration of Trust of the Sierra Trust is on file with
the Secretary of State of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the trustees of
the Sierra Trust on behalf of the Acquired Fund, as trustees and not individ-
ually and that the obligations of this instrument are not binding upon any of
the trustees, officers or shareholders of the Sierra Trust individually but
are binding only upon the assets and property of the Acquired Fund.
b. A copy of the Declaration of Trust of the Composite Trust is on file with
the Secretary of State of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the trustees of
the Composite Trust on behalf of the Acquiring Fund, as trustees and not in-
dividually and that the obligations of this instrument are not binding upon
any of the trustees, officers or shareholders of the Composite Trust individ-
ually but are binding only upon the assets and property of the Acquiring
Fund.
SIERRA TRUST FUNDS,
on behalf of its Fund series
By: ________________________________________________________________
Name:
Title:
THE COMPOSITE FUNDS,
on behalf of its Fund series
By: ________________________________________________________________
Name:
Title:
A-17
<PAGE>
APPENDIX B
EXCERPTS FROM COMPOSITE FUNDS ANNUAL REPORTS
<PAGE>
PORTFOLIO COMPOSITION
PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 1996
COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
SOLE ISSUER
Invests exclusively in obligations issued or guaranteed by the U.S. government
and investments secured by such obligations.
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
ASSET ALLOCATION
<S> <C>
Mortgage Pass Throughs 43%
Treasuries 25%
Collateralized Mortgage Obligations 21%
Mortgage, Adjustable Rate 9%
Cash and Other 2%
COMPOSITE INCOME FUND TOP TEN ISSUERS
U.S. Treasury 14%
Government National Mortgage Association 13%
Weyerhaeuser 1982 - C FHA Putable 3%
United Mexican States, Series A and B 3%
Time Warner, Inc. 2%
Loral Corporation 2%
Dart & Kraft Finance NV 2%
Franchise Finance Corporation 2%
Continental Corporation 2%
Niagara Mohawk Power 2%
</TABLE>
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
ASSET ALLOCATION
<S> <C>
Corporate 48%
Mortgages 24%
Treasuries 14%
Cash and Other 10%
Foreign Obligations 4%
COMPOSITE TAX-EXEMPT BOND FUND TOP TEN STATES
Washington 21%
Illinois 12%
California 8%
Florida 5%
Nebraska 5%
New York 4%
Arizona 4%
Hawaii 4%
Texas 4%
Oregon 4%
</TABLE>
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
ASSET ALLOCATION
<S> <C>
Utility 24%
Industiral Development/Pollution Control 15%
Local General Obligation 15%
Prerefunded 15%
State General Obligation 11%
Other Revenue 11%
Cash and Other 6%
Education 3%
</TABLE>
<PAGE>
FUND HIGHLIGHTS
COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
KEY IMPACTS ON 1996 PERFORMANCE
The economy grew at a faster pace than expected in 1996, which caused
interest rates to rise for most of the year and, therefore, limited returns to
investors in fixed-income securities. For the year, rates on
intermediate-maturity securities rose 0.85%. Although these returns were
relatively minor, it should be remembered that inflation remained low and,
because of that, the average fixed-income investor generally kept pace with cost
of living increases.
The Fund's portfolio consisted of a substantial amount of mortgage-backed
securities, which performed well in 1996. A favorable prepayment environment the
result of relatively subdued interest rate volatility - was the primary factor
supporting this sector's strong relative performance.
WHAT'S AHEAD
We look for mortgage-backed securities to perform well again in 1997. As a
general rule, the best environment for mortgages is when prepayment expectations
are relatively stable. We believe this type of environment will exist because of
our view that 1997 interest rates will not be significantly higher nor lower
than last year.
Although we do not expect major shifts in interest rates, we do believe
that rates at today's levels represent good value.
KEY INVESTMENT STRATEGIES
The Fund's objective is to provide a high level of current income that is
consistent with safety and liquidity. We accomplish this by selecting
investments with an intermediate-maturity profile, by investing in a combination
of mortgage-backed and treasury securities which are obligations of, or have
collateral guaranteed by, the U.S. government. By taking advantage of changing
fundamentals between different segments of the mortgage market and by
anticipating broad changes in interest rates, we feel we can add additional
income to the Fund while clearly meeting the safety and liquidity objective.
INVESTMENT PERFORMANCE CHART:
INVESTMENT PERFORMANCE - COMPOSITE U.S. GOVERNMENT SECURITIES
- -------------------------------------------------------------
COMPARATIVE ENDING VALUES OF $10,000 INVESTED ON 12/31/86
KEY: FUND CLASS A SHARES $20,119
LGB (GOV'T. BONDS) $21,841
CPI (INFLATION) $14,353
PAST PERFORMANCE CANNOT PREDICT FUTURE RESULTS.
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
WITH WITHOUT
CLASS A SALES SALES
SHARES CHARGE CHARGE
- --------- ------- --------
<S> <C> <C>
ONE YEAR -1.60% 2.48%
FIVE YEARS 5.09% 5.96%
TEN YEARS 7.24% 7.68%
CLASS B
SHARES
- ---------
ONE YEAR -2.28% 1.58%
SINCE
3/30/94 5.57% 6.22%
<CAPTION>
- ---------------------------------
30-DAY CURRENT YIELDS
<S> <C>
Class A Shares 5.71%
Class B Shares 5.08%
- ---------------------------------
</TABLE>
See footnote following charts for additional information.
<TABLE>
<CAPTION>
COMPOSITE U.S. GOVERNMENT
SECURITIES LGB (GOV'T. BONDS) CPI (INFLATION)
- ------------------------- ------------------------ ---------------------
<S> <C> <C> <C>
12/31/86 $9,600 $10,000 $10,000
3/31/87 $9,712 $10,117 $10,145
6/30/87 $9,534 $9,941 $10,271
9/30/87 $9,338 $9,673 $10,407
12/31/87 $9,867 $10,220 $10,443
3/31/88 $10,267 $10,557 $10,543
6/30/88 $10,409 $10,656 $10,679
9/30/88 $10,553 $10,836 $10,842
12/31/88 $10,589 $10,938 $10,905
3/31/89 $10,661 $11,054 $11,068
6/30/89 $11,477 $11,943 $11,231
9/31/89 $11,577 $12,042 $11,312
12/31/89 $11,997 $12,494 $11,412
3/31/90 $11,945 $12,339 $11,647
6/30/90 $12,307 $12,770 $11,756
9/30/90 $12,536 $12,876 $12,009
12/31/90 $13,132 $13,583 $12,109
3/31/91 $13,458 $13,878 $12,217
6/30/91 $13,673 $14,065 $12,308
9/30/91 $14,391 $14,867 $12,416
12/31/91 $15,065 $15,664 $12,480
3/31/92 $14,857 $15,390 $12,606
6/30/92 $15,431 $15,998 $12,688
9/30/92 $15,937 $16,788 $12,787
12/31/92 $15,987 $16,796 $12,842
3/31/93 $16,534 $17,554 $12,995
6/30/93 $16,957 $18,062 $13,068
9/30/93 $17,294 $18,649 $13,131
12/31/93 $17,285 $18,586 $13,195
3/31/94 $16,648 $18,027 $13,321
6/30/94 $16,379 $17,821 $13,394
9/30/94 $16,384 $17,896 $13,520
12/31/94 $16,435 $17,958 $13,548
3/31/95 $17,375 $18,804 $13,701
6/31/95 $18,501 $19,970 $13,801
9/30/95 $18,812 $20,324 $13,864
12/31/95 $19,632 $21,252 $13,891
3/31/96 $19,095 $20,772 $14,090
6/30/96 $19,161 $20,871 $14,181
9/30/96 $19,475 $21,222 $14,281
12/31/96 $20,119 $21,841 $14,353
</TABLE>
<PAGE>
COMPOSITE INCOME FUND
KEY IMPACTS ON 1996 PERFORMANCE
Fixed-income returns, although modest in 1996, still outpaced inflation.
Despite interest rates generally being low by recent historical standards,
inflation remained even lower. This translated into positive returns for Fund
shareholders, over and above their cost of living.
As it became apparent that the economy was growing faster than expected,
interest rates rose for most of the year, limiting returns to investors in
fixed-income securities. For the year, rates on intermediate-maturity securities
rose 0.85%.
Performance in 1996 was enhanced by the Fund's investments in corporate
bonds, which make up more than 50% of the portfolio. A slow, steadily growing
economy and subdued inflation produced very favorable conditions for corporate
America. In the long run, the Fund benefited from the extra yield associated
with corporate securities AND from the companies' growing financial strength.
WHAT'S AHEAD
We feel that continued investments in corporate securities and
mortgage-backed securities should prove rewarding again in 1997.
As for corporate bonds, we believe investments should be concentrated in
the non-cyclical portions of the economy, such as defense, health care and
media. This is because those sectors produce stable credit measures, even if the
economy begins to slow.
We are not looking for substantially higher or lower interest rates in
1997. Because of that, mortgage-backed securities should not be burdened with a
changing prepayment pattern. Consequently, they should continue to provide
investors with extra yield throughout the year.
Interest rates are likely to be centered around today's levels, with a
tendency to drift down during the next few years. A more detailed discussion
about this is included in this report's opening message.
KEY INVESTMENT STRATEGIES
The Fund's objective is to provide a high level of current income that is
consistent with the protection of capital. We accomplish this by selecting
investments with an intermediate-maturity profile and by investing in a
combination of corporate, mortgage-backed and treasury securities.
INVESTMENT PERFORMANCE CHART:
INVESTMENT PERFORMANCE - COMPOSITE INCOME FUND
- -------------------------------------------------------------
COMPARATIVE ENDING VALUES OF $10,000 INVESTED ON 12/31/86
KEY: FUND CLASS A SHARES $21,036
LGCB (GOV'T./CORP. BONDS) $22,356
CPI (INFLATION) $14,353
PAST PERFORMANCE CANNOT PREDICT FUTURE RESULTS.
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
WITH WITHOUT
CLASS A SALES SALES
SHARES CHARGE CHARGE
- --------- ------- --------
<S> <C> <C>
ONE YEAR -0.64% 3.46%
FIVE YEARS 6.47% 7.34%
TEN YEARS 7.72% 8.16%
CLASS B
SHARES
- ---------
ONE YEAR -1.28% 2.59%
SINCE
3/30/94 6.76% 7.40%
<CAPTION>
- ---------------------------------
30-DAY CURRENT YIELDS
<S> <C>
Class A Shares 5.95%
Class B Shares 5.34%
- ---------------------------------
</TABLE>
See footnote following charts for additional information.
<TABLE>
<CAPTION>
COMPOSITE INCOME FUND LGB (GOV'T./CORP. BONDS) CPI (INFLATION)
- ------------------------- ------------------------ ---------------------
<S> <C> <C> <C>
12/31/86 $ 9,600 $10,000 $10,000
3/31/87 $ 9,946 $10,148 $10,145
6/30/87 $ 9,939 $ 9,956 $10,271
9/30/87 $ 9,959 $ 9,665 $10,407
12/31/87 $10,180 $10,229 $10,443
3/31/88 $10,542 $10,595 $10,543
6/30/88 $10,704 $10,700 $10,679
9/30/88 $10,857 $10,900 $10,842
12/31/88 $10,898 $11,005 $10,905
3/31/89 $11,009 $11,126 $11,068
6/30/89 $11,405 $12,021 $11,231
9/31/89 $11,571 $12,133 $11,312
12/31/89 $11,634 $12,572 $11,412
3/31/90 $11,568 $12,427 $11,647
6/30/90 $11,986 $12,875 $11,756
9/30/90 $12,071 $12,953 $12,009
12/31/90 $12,589 $13,613 $12,109
3/31/91 $13,031 $13,980 $12,217
6/30/91 $13,272 $14,191 $12,308
9/30/91 $13,994 $15,007 $12,416
12/31/91 $14,766 $15,808 $12,480
3/31/92 $14,604 $15,571 $12,606
6/30/92 $15,210 $16,201 $12,688
9/30/92 $15,893 $16,993 $12,787
12/31/92 $15,856 $17,006 $12,842
3/31/93 $16,587 $17,797 $12,995
6/30/93 $17,011 $18,331 $13,068
9/30/93 $17,639 $18,938 $13,131
12/31/93 $17,572 $18,882 $13,195
3/31/94 $16,878 $18,291 $13,321
6/30/94 $16,638 $18,064 $13,394
9/30/94 $16,677 $18,153 $13,520
12/31/94 $16,724 $18,220 $13,548
3/31/95 $17,590 $19,128 $13,701
6/30/95 $19,004 $20,369 $13,801
9/30/95 $19,395 $20,759 $13,864
12/31/95 $20,332 $21,726 $13,891
3/31/96 $19,761 $21,217 $14,090
6/30/96 $19,841 $21,317 $14,181
9/30/96 $20,262 $21,693 $14,281
12/31/96 $21,036 $22,356 $14,353
</TABLE>
<PAGE>
COMPOSITE TAX-EXEMPT BOND FUND
KEY IMPACTS ON 1996 PERFORMANCE
The year of 1996 did not match 1995's unusually high double-digit total
return but, after a roller coaster ride, municipal bond investors ended with a
positive return. Municipal bonds began the year weighted down by worries that
radical tax reform would eliminate some of the tax benefits enjoyed by municipal
bondholders. However, municipal yields dropped to a year's low of 5.34% in
February as fears of such far-reaching changes faded and as investors' demand
confronted a drop in the supply of municipal bonds. Then, yields took a hard
turn and rose to a high of 6.27% in June as it became evident that the economy
was growing faster than expected. Finally, municipal yields eased down and ended
the year at 5.64% as economic growth moderated and inflation appeared to be
under control.
WHAT'S AHEAD
In early 1997, there may be a seasonal contraction in the supply of
municipal bonds. This condition would result in better performance of municipal
bonds relative to treasuries. However, such a contraction is unlikely to be of
the magnitude experienced in early 1996.
KEY INVESTMENT STRATEGIES
The Fund's objectives are to provide a high level of current income exempt
from federal taxes and to protect investors' capital. In pursuing these
objectives, we target a longer maturity range and a high average quality
currently averaging 12.5 years in maturity and an Aa rating by Moody's.
With the economy currently operating at its upper range, interest rates
have the potential at some time to move lower. To protect against having to
reinvest called bonds at lower interest rates, we currently have approximately
50% of the portfolio in noncallable bonds. We seek to exploit opportunities in
different market sectors and individual issues while avoiding their pitfalls.
INVESTMENT PERFORMANCE CHART:
INVESTMENT PERFORMANCE - COMPOSITE TAX-EXEMPT BOND FUND
- -------------------------------------------------------------
COMPARATIVE ENDING VALUES OF $10,000 INVESTED ON 12/31/86
KEY: FUND CLASS A SHARES $19,205
LMB (MUNI BONDS) $21,218
CPI (INFLATION) $14,353
PAST PERFORMANCE CANNOT PREDICT FUTURE RESULTS.
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
WITH WITHOUT
CLASS A SALES SALES
SHARES CHARGE CHARGE
- --------- ------- --------
<S> <C> <C>
ONE YEAR -1.53% 2.52%
FIVE YEARS 5.94% 6.81%
TEN YEARS 6.74% 7.18%
CLASS B
SHARES
- ---------
ONE YEAR -2.29% 1.61%
SINCE
3/30/94 5.34% 6.00%
<CAPTION>
- ---------------------------------
30-DAY CURRENT YIELDS
<S> <C>
Class A Shares 4.28%
Class B Shares 3.56%
- ---------------------------------
</TABLE>
See footnote on page 2 for additional information.
<TABLE>
<CAPTION>
COMPOSITE TAX-EXEMPT BOND FUND LMB (Muni-bonds) CPI (INFLATION)
- ------------------------------ ------------------------ ---------------------
<S> <C> <C> <C>
12/31/86 $ 9,600 $10,000 $10,000
3/31/87 $ 9,897 $10,328 $10,145
6/30/87 $ 9,564 $10,075 $10,271
9/30/87 $ 9,342 $10,107 $10,407
12/31/87 $ 9,714 $10,316 $10,443
3/31/88 $10,080 $10,625 $10,543
6/30/88 $10,313 $10,767 $10,679
9/30/88 $10,534 $11,030 $10,842
12/31/88 $10,750 $11,120 $10,905
3/31/89 $10,834 $11,221 $11,068
6/30/89 $11,284 $11,802 $11,231
9/31/89 $11,288 $11,846 $11,312
12/31/89 $11,619 $12,307 $11,412
3/31/90 $11,616 $12,342 $11,647
6/30/90 $11,912 $12,644 $11,756
9/30/90 $11,890 $12,637 $12,009
12/31/90 $12,400 $13,210 $12,109
3/31/91 $12,643 $13,537 $12,217
6/30/91 $12,842 $13,810 $12,308
9/30/91 $13,368 $14,361 $12,416
12/31/91 $13,812 $14,809 $12,480
3/31/92 $13,803 $14,797 $12,606
6/30/92 $14,341 $15,374 $12,688
9/30/92 $14,673 $15,821 $12,787
12/31/92 $15,054 $16,131 $12,842
3/31/93 $15,653 $16,756 $12,995
6/30/93 $16,198 $17,309 $13,068
9/30/93 $16,790 $17,929 $13,131
12/31/93 $16,949 $18,190 $13,195
3/31/94 $15,877 $17,226 $13,321
6/30/94 $15,977 $17,479 $13,394
9/30/94 $16,014 $17,601 $13,520
12/31/94 $15,842 $17,322 $13,548
3/31/95 $16,996 $18,521 $13,701
6/31/95 $17,415 $19,012 $13,801
9/30/95 $17,815 $19,680 $13,864
12/31/95 $18,732 $20,296 $13,891
3/31/96 $18,344 $20,163 $14,090
6/30/96 $18,401 $20,227 $14,181
9/30/96 $18,796 $20,632 $14,281
12/31/96 $19,205 $21,218 $14,353
</TABLE>
FOOTNOTE TO INVESTMENT PERFORMANCE CHARTS ON PAGES B-1 to B-4.
INVESTMENT RETURNS AND PRINCIPAL VALUES OF FUND SHARES WILL FLUCTUATE SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FUND SHARES ARE NOT GUARANTEED BY ANY AGENCY OF THE U.S.
GOVERNMENT.
COMPARISONS TO FUND PERFORMANCE ON THE FOLLOWING PAGES INCLUDE THE CONSUMER
PRICE INDEX (CPI), AS A MEASURE OF CHANGE IN CONSUMER PRICES, AND THE LEHMAN
BROTHERS GOVERNMENT (LBG), GOVERNMENT/CORPORATE (LGCB), AND MUNICIPAL BOND (LMB)
INDICES, WHICH ARE CONSIDERED REPRESENTATIVE OF THE U.S. GOVERNMENT, U.S.
GOVERNMENT AND CORPORATE, AND MUNICIPAL BOND MARKETS.
THESE INDICES ARE UNMANAGED AND DO NOT REFLECT ACTUAL INVESTMENT-RELATED
EXPENSES INCURRED BY THE FUNDS WITH WHICH THEY ARE COMPARED. FUND VALUES
PRESENTED IN THE GRAPHS ARE FOR CLASS A SHARES. CLASS B PERFORMANCE WOULD VARY
DUE TO DIFFERENT EXPENSES. AVERAGE ANNUAL TOTAL RETURNS AND GRAPH VALUES INCLUDE
CHANGES IN SHARE PRICE AND REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. UNLESS
OTHERWISE INDICATED, ALL FUND PERFORMANCE IS CALCULATED AFTER DEDUCTING THE
MAXIMUM 4% SALES CHARGE FOR CLASS A SHARES AND FOR CLASS B SHARES A CONTINGENT
DEFERRED SALES CHARGE OF 4% FOR ONE YEAR OR 2% SINCE 3/30/94. CLASS B YIELDS DO
NOT REFLECT CONTINGENT DEFERRED SALES CHARGES. THE YIELDS WOULD BE LOWER IF THEY
WERE REFLECTED. CLASS B INFORMATION IS PRESENTED SINCE 3/30/94, THE COMMENCEMENT
OF THEIR OFFERING.
<PAGE>
MONEY MARKET FUNDS' BENEFITS
PROVE ATTRACTIVE TO INVESTORS
In 1996, many investors found Composite Cash Management Co. to be an
attractive option for keeping a portion of their net worth where they could earn
a solid return, avoid market uncertainties and maintain liquidity.
Total assets of the portfolios rose 29% during the past 12 months - an
increase of $59 million - and reached the highest level in several years.
WHAT WERE THE MAIN IMPACTS ON 1996 PERFORMANCE?
In January 1996, the Federal Reserve cut its target for short-term interest
rates from 5.50% to 5.25%. Shortly thereafter, the three-month treasury bill
traded at yields significantly below this.
The market - concerned about a possible recession - anticipated further
cuts. However, these concerns proved to be unfounded as strong unemployment
numbers led the three-month treasury bill to trade at yields above the targeted
rate. Then, rates eased as the economy slowed and inflation remained in check.
All through this, the Federal Reserve kept a steady hand on the tiller, holding
the target for the short-term interest rate at 5.25%.
As of December 31, 1996, the seven-day simple yield for Class A shares of
the Money Market Portfolio was 4.87%, or 4.99% on a compounded annual basis.*
The securities in this Portfolio had a weighted average maturity of 18 days.
The Tax-Exempt Portfolio Class A shares produced a seven-day simple yield
of 3.42%, or 3.48% on a compounded annual basis.* The weighted average maturity
was 64 days.
A portion of both portfolios' expenses were waived or reimbursed by the
Fund's Adviser, Distributor, and Transfer Agent. Absent waivers and
reimbursements, the Class A share seven-day simple yield at year end would have
been 4.79% for the Money Market Portfolio and 3.29% for the Tax-Exempt
Portfolio.
WHAT'S AHEAD?
Looking ahead, we believe the current level of interest rates represents
fair value. We feel those rates will continue to be restrained by five forces we
expect are likely to limit growth and inflation. These include high levels of
consumer debt, worldwide fiscal austerity, increased global competition, U.S.
monetary policies targeting low inflation, and favorable demographic trends.
Additionally, in the global marketplace the United States is a major
competitor, thanks to intensive use of technologies, an efficient labor force,
and comparatively less intrusive federal government than in most other
countries. These factors have helped us achieve a stable economic environment,
low unemployment and low interest rates.
WHAT ARE COMPOSITE'S KEY INVESTMENT STRATEGIES?
Our primary objective for the portfolios is to preserve capital and
maintain liquidity. In pursuit of this, we invest only in securities that have a
top-tier ranking by a national rating agency.
More importantly, we evaluate the credit quality of each investment and
assign a more selective internal ranking that is intended to guard against
worst-case scenarios. Within this framework, we seek to enhance shareholder
returns by anticipating the general direction in interest rates and by using our
credit research to take advantage of neglected issues we feel are attractive for
the portfolios.
IMPORTANT CHANGES IN THE BOARD OF DIRECTORS
An on-going strength of the Composite Group of Funds has been the counsel
and leadership provided by members of our Board of Directors. After more than 21
years as a director and a source of valuable guidance, Edwin J. McWilliams
retired from our Board in December 1996. We are deeply appreciative for all he
has done for Composite.
Elected to succeed Mr. McWilliams was Daniel L. Pavelich, chairman and CEO
of BDO Seidman, the nation's seventh largest accounting firm. Mr. Pavelich has
national and international perspectives, as well as an intimate knowledge of our
Pacific Northwest region, having spent 27 years with Seidman in Spokane. He
moved recently to the firm's headquarters in Chicago. We are pleased to have Dan
join our Board.
YOUR CONFIDENCE IN COMPOSITE IS APPRECIATED
In closing, I would like to express our gratitude to those of you who
invest in our Composite money market portfolios. If you have longer-term
investment goals, we invite you to speak with your investment representative
about our other Composite funds.
We appreciate your continued confidence and we will do our utmost to help
support your financial goals.
/s/
WILLIAM G. PAPESH
PRESIDENT
- --------------------------------------------------------------------------------
* ALL YIELD INFORMATION REPRESENTS PAST PERFORMANCE, WHICH CANNOT GUARANTEE
FUTURE RESULTS. PRINCIPAL IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
AND YIELDS WILL FLUCTUATE DEPENDING ON MARKET CONDITIONS. THERE IS NO
ASSURANCE THAT THE $1.00 PER SHARE NET ASSET VALUE (NAV) WILL BE MAINTAINED.
CLASS B SHARES ARE AVAILABLE ONLY BY EXCHANGING B SHARES FROM OTHER COMPOSITE
GROUP FUNDS AND ARE INTENDED AS TEMPORARY INVESTMENTS. THE CLASS B SHARES'
SEVEN-DAY SIMPLE YIELD THROUGH DECEMBER 31, 1996, WAS 3.99% FOR THE MONEY
MARKET PORTFOLIO AND 2.48% FOR THE TAX-EXEMPT PORTFOLIO AFTER EXPENSE
REIMBURSEMENTS. THE ALTERNATIVE MINIMUM TAX, AS WELL AS STATE AND LOCAL TAXES,
MAY APPLY TO INCOME DISTRIBUTED BY THE TAX-EXEMPT PORTFOLIO.
<PAGE>
COMPOSITE GROWTH & INCOME FUND
INDUSTRY ALLOCATION
[PIE CHART LOCATED TO THE RIGHT OF THE FOLLOWING ALLOCATIONS]
<TABLE>
<CAPTION>
TOP TEN HOLDINGS
<S> <C> <C> <C>
Dun & Bradstreet Corporation - 2.88% [ ] BANKING & FINANCIAL 15%
Lockheed Martin Corporation - 2.49% [ ] CAPITAL GOODS & AEROSPACE 13%
Wells Fargo & Company - 2.46% [ ] TECHNOLOGY & ELECTRONICS 13%
Intel Corporation - 2.24% [ ] CONSUMER STAPLES 12%
General Electric Company - 2.14% [ ] HEALTH CARE 12%
Abbott Laboratories - 2.14% [ ] CONSUMER CYCLICALS 9%
Microsoft Corporation - 2.05% [ ] OIL & GAS 7%
Johnson & Johnson - 2.01% [ ] UTILITIES & REAL ESTATE INVESTMENT TRUSTS 7%
Emerson Electric Company - 2.00% [ ] CASH & OTHER 6%
Expeditor's International of Washington, Inc. - 1.97% [ ] BASIC INDUSTRY & RESOURCES 6%
</TABLE>
<PAGE>
COMPOSITE GROWTH & INCOME FUND
KEY IMPACTS ON 1996 PERFORMANCE
The stock market performed well in 1996. The market was driven higher by
news of mergers and acquisitions, low inflation, and solid corporate earnings.
Composite Growth & Income Fund benefited from this positive equity environment
and posted excellent returns. In particular, two of our holdings were taken over
at prices substantially higher than their trading prices (FHP Corporation and
Loral Corporation) which helped produce the positive 1996 performance.
WHAT'S AHEAD
We anticipate that mergers and acquisitions, along with the low inflation
environment, are likely to continue. However, corporate earnings, especially in
the consumer sector, are unlikely to be as strong in 1997 as in 1996. Therefore,
we are cautious when investing in the consumer durable area.
We also believe that a narrow group of stocks has been the primary force
driving the stock market. We intend to capitalize on this condition by
purchasing stocks of desirable companies that have not participated in the
market rise.
KEY INVESTMENT STRATEGIES
Our basic strategy, as always, is to buy stocks of good businesses when
they are at "sale prices." Good businesses generate a high return on investment,
have a competitive advantage and have barriers to entry. We currently are
finding good equities in the movie and content area. Improved means of
distributing their products, which include direct television, Internet and cable
modem transmissions, should provide increased revenue opportunities for these
companies.
The semiconductor group also is providing bargains, as we see oversupply
concerns coming to an end. The demand for semiconductors continues to run
strong, assisted by Pentium Pro and Window N.T. product cycles and
telecommunications deregulation.
Finally, spinoff situations are offering excellent value in the
marketplace. Many of these former subsidiaries of larger companies are excellent
businesses where management owns considerable stock.
<TABLE>
<CAPTION>
[GRAPH APPEARS HERE]
INVESTMENT PERFORMANCE * COMPOSITE GROWTH & INCOME FUND AVERAGE ANNUAL
- --------------------------------------------------------- TOTAL RETURNS
COMPARATIVE ENDING VALUES OF $10,000 INVESTED ON 10/31/86
<S> <C> <C> <C> <C>
WITH WITHOUT
CLASS A SALES SALES
$45,000 [Legend] SHARES CHARGE CHARGE
Fund Class A Shares $27,920 ------- -------- -------
40,000 S&P 500 (Stocks) $39,268 ONE YEAR 18.05% 23.61%
CPI (Inflation) $14,353 FIVE YEARS 13.59% 14.64%
35,000 TEN YEARS 10.82% 11.33%
30,000 CLASS B
SHARES
25,000 -------
ONE YEAR 18.55% 22.55%
20,000 SINCE
3/30/94 18.13% 18.72%
15,000 -----------------------------
SEE FOOTNOTES ON PAGE 2 FOR
10,000 ADDITIONAL INFORMATION
5,000
10/31/86 10/31/88 10/31/90 10/31/92 10/31/94 10/31/96
</TABLE>
<TABLE>
<CAPTION>
Investment Performance - Composite Growth & Income Fund
Comparative Ending Value of $10,000 Invested on 10/31/86
Composite
Growth & Income Fund S&P 500 CPI
-------------------- ------- -------
<S> <C> <C> <C>
10/31/86 $9,550 $10,000 $10,000
$9,565 $10,644 $10,453
10/31/88 $11,226 $12,227 $10,898
$12,685 $15,440 $11,387
10/31/90 $10,623 $14,301 $12,103
$14,096 $19,065 $12,457
10/31/92 $15,498 $20,962 $12,856
$17,214 $24,095 $13,209
10/31/94 $18,686 $25,027 $13,554
$22,587 $31,644 $13,935
10/31/96 $27,920 $39,268 $14,353
</TABLE>
FOOTNOTES TO INVESTMENT PERFORMANCE CHARTS ON PAGES
INVESTMENT RETURNS AND PRINCIPAL VALUES OF FUND SHARES WILL FLUCTUATE SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
COMPARISONS TO FUND PERFORMANCE ON THE FOLLOWING PAGES INCLUDE THE CONSUMER
PRICE INDEX (CPI), AS A MEASURE OF CHANGE IN CONSUMER PRICES AS DETERMINED BY
THE U.S. BUREAU OF LABOR STATISTICS; THE S&P 500 STOCK INDEX (S&P 500), WHICH IS
CONSIDERED GENERALLY REPRESENTATIVE OF THE U.S. STOCK MARKET; AND THE LEHMAN
GOVERNMENT/CORPORATE BOND INDEX (LGCB), WHICH IS CONSIDERED REPRESENTATIVE OF
THE U.S. GOVERNMENT AND CORPORATE BOND MARKETS.
THESE INDICES ARE UNMANAGED AND DO NOT REFLECT ACTUAL INVESTMENT-RELATED
EXPENSES INCURRED BY THE FUNDS WITH WHICH THEY ARE COMPARED. FUND VALUES
PRESENTED IN THE GRAPHS ARE FOR CLASS A SHARES. CLASS B SHARE PERFORMANCE WOULD
VARY DUE TO DIFFERENT EXPENSES. EXCEPT AS NOTED, PERFORMANCE IS CALCULATED AFTER
THE 4.5% MAXIMUM SALES CHARGE FOR CLASS A SHARES AND FOR CLASS B SHARES, A
CONTINGENT DEFERRED SALES CHARGE OF 4% FOR ONE YEAR OR 2% SINCE 3/30/94.
COMPOSITE NORTHWEST CLASS A INFORMATION IS PRESENTED SINCE INCEPTION ON 11/24/86
AND ALL FUNDS' CLASS B INFORMATION IS PRESENTED SINCE 3/30/94, THE COMMENCEMENT
OF OFFERING OF CLASS B SHARES.
<PAGE>
APPENDIX C
ADDITIONAL INFORMATION ABOUT THE ACQUIRING FUNDS
The Composite Trust is an open-end series management investment company, or-
ganized as a Massachusetts business trust, consisting of eight separate in-
vestment portfolios, among which are the Acquiring Funds. Each Acquiring Fund
has its own investment objectives and policies. The Composite Trust is de-
signed to provide access to the professional investment management services
offered by CRM, which serves as investment adviser (the "Adviser") to the Ac-
quiring Funds.
Each Acquiring Fund offers its shares in four classes: Class A, Class B,
Class I and Class S. This Prospectus/Proxy Statement describes these classes
of shares to be received by shareholders of the Acquired Funds in the Mergers.
The Acquiring Funds are sometimes referred to in this Appendix C as the
"Funds," and the Composite Trust is sometimes referred to in this Appendix C
as the "Trust."
FINANCIAL HIGHLIGHTS
The tables on the following pages present selected financial information
about the Acquiring Funds, including per share data, expense ratios and other
data based on average net assets. This information has been audited by
LeMaster & Daniels PLLC, the Funds' independent auditors, whose reports appear
in the Composite Annual Reports which are incorporated by reference into this
Prospectus/Proxy Statement.
C-1
<PAGE>
FINANCIAL HIGHLIGHTS____________________________________________________________
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
COMPOSITE GROWTH & INCOME FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
APR. 30,
1997
--------
<S> <C>
Net Asset Value,
Beginning of Year...... $ 17.26
--------
Income From Investment
Operations
Net Investment
Income............... 0.07
Net Gains (Losses) on
Securities (both
realized and
unrealized)........... 1.92
--------
Total From Investment
Operations............ 1.99
--------
Less Distributions
Dividends (from net
investment income).... (0.09)
Distributions (from
capital gains)........ (1.21)
--------
Total Distributions... (1.30)
--------
Net Asset Value, End of
Period $ 17.95
========
Total Return(/1/)...... 5.45%
Ratios/Supplemental
Data
Net Assets, End of
Year ($1,000's)....... $215,534
Ratio of Expenses to
Average Net
Assets(/2/)........... 1.09%(/4/)
Ratio of Net Income to
Average Net Assets.... 0.82%(/4/)
Portfolio Turnover
Rate................. 59%(/4/)
Average Commission
Paid(/3/)............. $ 0.0600
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $ 14.65 $ 12.71 $ 12.81 $ 12.02 $ 11.86 $ 9.18 $ 12.17 $ 11.10 $ 9.77 $ 11.57
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
Income From Investment
Operations
Net Investment
Income............... 0.20 0.22 0.18 0.21 0.29 0.29 0.35 0.46 0.35 0.44
Net Gains (Losses) on
Securities (both
realized and
unrealized)........... 3.16 2.31 0.85 1.10 0.80 2.69 (2.19) 0.96 1.32 (0.45)
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations............ 3.36 2.53 1.03 1.31 1.09 2.98 (1.84) 1.42 1.67 (0.01)
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
Less Distributions
Dividends (from net
investment income).... (0.21) (0.19) (0.18) (0.21) (0.34) (0.30) (0.50) (0.35) (0.29) (0.55)
Distributions (from
capital gains)........ (0.54) (0.40) (0.95) (0.31) (0.59) 0.00 (0.65) 0.00 (0.05) (1.24)
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
Total Distributions... (0.75) (0.59) (1.13) (0.52) (0.93) (0.30) (1.15) (0.35) (0.34) (1.79)
--------- --------- --------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period $ 17.26 $ 14.65 $ 12.71 $ 12.81 $ 12.02 $ 11.86 $ 9.18 $ 12.17 $ 11.10 $ 9.77
========= ========= ========= ======== ======== ======== ======== ======== ======== ========
Total Return(/1/)...... 23.61% 20.87% 8.55% 11.06% 9.94% 32.69% -16.25% 13.00% 17.36% 0.20%
Ratios/Supplemental
Data
Net Assets, End of
Year ($1,000's)....... $178,331 $130,630 $102,837 $95,229 $81,102 $69,365 $68,297 $72,642 $69,117 $67,933
Ratio of Expenses to
Average Net
Assets(/2/)........... 1.03% 1.07% 1.10% 1.17% 1.10% 1.12% 1.17% 1.06% 0.89% 0.90%
Ratio of Net Income to
Average Net Assets.... 1.26% 1.62% 1.45% 1.67% 2.37% 2.73% 3.33% 3.88% 3.33% 3.70%
Portfolio Turnover
Rate................. 52% 39% 34% 54% 18% 26% 37% 37% 45% 71%
Average Commission
Paid(/3/)............. $ 0.0654 -- -- -- -- -- -- -- -- --
</TABLE>
(/1/Total)returns do not reflect a sales charge.
(/2/Ratio)of expenses to average net assets include expenses paid indirectly
beginning in fiscal 1995.
(/3/Average)commission paid disclosure beginning in fiscal 1996.
(/4/Annualized.)
C-2
<PAGE>
FINANCIAL HIGHLIGHTS____________________________________________________________
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
COMPOSITE GROWTH & INCOME FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED MARCH 30
ENDED APRIL 30, OCTOBER 31, TO
--------------- --------------- OCT. 31,
1997 1996 1995 1994(/4/)
--------------- ------- ------ ---------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period...................... $ 14.59 $12.68 $12.00
------- ------ ------
Income From Investment
Operations
Net Investment Income....... 0.06 0.11 0.05
Net Gains on Securities
(both realized and
unrealized)................ $ 1.90 3.14 2.31 0.69
------- ------- ------ ------
Total From Investment
Operations................. 1.90 3.20 2.42 0.74
------- ------- ------ ------
Less Distributions
Dividends (from net
investment income)......... (0.02) (0.08) (0.11) (0.06)
Distributions (from capital
gains)..................... (1.21) (0.54) (0.40) 0.00
------- ------- ------ ------
Total Distributions......... (1.23) (0.62) (0.51) (0.06)
------- ------- ------ ------
Net Asset Value, End of
Period...................... $ 17.84 $ 17.17 $14.59 $12.68
======= ======= ====== ======
Total Return(/1/)............ 5.11% 22.55% 19.95% 6.14%
Ratios/Supplemental Data
Net Assets, End of Period
($1,000's)................. $34,362 $22,851 $8,871 $2,082
Ratio of Expenses to Average
Net Assets(/2/)............ 1.93%(/5/) 1.94% 1.91% 1.85%(/5/)
Ratio of Net Income to
Average Net Assets......... -0.02%(/5/) 0.34% 0.69% 0.65%(/5/)
Portfolio Turnover Rate..... 59%(/5/) 52% 39% 34%
Average Commission
Paid(/3/).................. $0.0600 $0.0664 -- --
</TABLE>
(/1/Total)returns do not reflect a sales charge and are not annualized.
(/2/Ratio)of expenses to average net assets include expenses paid indirectly
beginning in fiscal 1995.
(/3/Average)commission paid disclosure beginning in fiscal 1996.
(/4/From)the commencement of offering of Class B shares.
(/5/Annualized.)
C-3
<PAGE>
FINANCIAL HIGHLIGHTS____________________________________________________________
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
COMPOSITE GOVERNMENT FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
SIX
MONTHS YEARS ENDED TEN
ENDED DECEMBER 31, MONTHS
JUNE 30, -------------------------------------- ENDED
1997 1996 1995 1994 1993 1992(/3/)
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period............ $ 10.46 $ 10.84 $ 9.64 $ 10.79 $ 10.63 $ 10.17
-------- -------- -------- -------- -------- --------
Income from
Investment
Operations
Net Investment
Income.......... 0.31 0.63 0.63 0.63 0.69 0.62
Net Gains
(Losses) on
Securities (both
realized and
unrealized)...... (0.02) (0.38) 1.20 (1.15) 0.16 0.10
-------- -------- -------- -------- -------- --------
Total From
Investment
Operations....... 0.29 0.25 1.83 (0.52) 0.85 0.72
-------- -------- -------- -------- -------- --------
Less
Distributions
Dividends (from
net investment
income).......... (0.31) (0.63) (0.63) (0.63) (0.69) (0.62)
-------- -------- -------- -------- -------- --------
Net Asset Value,
End of Period..... $ 10.44 $ 10.46 $ 10.84 $ 9.64 $ 10.79 $ 10.63
======== ======== ======== ======== ======== ========
Total
Return(/1/)...... 2.87% 2.48% 19.45% -4.91% 8.12% 7.03%
Ratios/
Supplemental Data
Net Assets, End
of Period (in
thousands)....... $119,431 $139,159 $177,310 $188,068 $268,112 $207,501
Ratio of Expenses
to Average Net
Assets(/2/)...... 1.02%(/4/) .97% 1.01% 0.97% 0.99% 0.99%(/4/)
Ratio of Net
Income to Average
Net Assets....... 6.09%(/4/) 6.01% 6.08% 6.19% 6.29% 6.98%(/4/)
Portfolio
Turnover Rate.... 10%(/4/) 16% 8% 34% 51% 11%(/4/)
<CAPTION>
YEARS ENDED
---------------------------------------------
1992 1991 1990 1989 1988
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period............ $ 10.17 $ 9.90 $ 9.63 $ 10.25 $ 10.61
--------- -------- -------- -------- --------
Income from
Investment
Operations
Net Investment
Income.......... 0.79 0.82 0.88 0.91 0.91
Net Gains
(Losses) on
Securities (both
realized and
unrealized)...... 0.36 0.27 0.27 (0.62) (0.36)
--------- -------- -------- -------- --------
Total From
Investment
Operations....... 1.15 1.11 1.15 0.29 0.55
--------- -------- -------- -------- --------
Less
Distributions
Dividends (from
net investment
income).......... (0.79) (0.84) (0.88) (0.91) (0.91)
--------- -------- -------- -------- --------
Net Asset Value,
End of Period..... $ 10.53 $ 10.17 $ 9.90 $ 9.63 $ 10.25
========= ======== ======== ======== ========
Total
Return(/1/)...... 11.72% 11.72% 12.31% 2.94% 6.63%
Ratios/
Supplemental Data
Net Assets, End
of Period (in
thousands)....... $141,377 $92,293 $83,360 $79,920 $89,385
Ratio of Expenses
to Average Net
Assets(/2/)...... 1.01% 1.03% 0.99% 0.88% 0.88%
Ratio of Net
Income to Average
Net Assets....... 7.63% 8.43% 8.86% 9.14% 9.03%
Portfolio
Turnover Rate.... 17% 66% 19% 41% 43%
</TABLE>
(/1/Total)returns do not reflect a sales charge and are not annualized.
(/2/Ratio)of expenses to average net assets include expenses paid indirectly
beginning in fiscal 1995.
(/3/Change)in Fund's fiscal year end.
(/4/Annualized.)
C-4
<PAGE>
FINANCIAL HIGHLIGHTS____________________________________________________________
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
COMPOSITE INCOME FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
SIX THREE
MONTHS MONTHS
ENDED YEARS ENDED OCTOBER 31, ENDED
APRIL 30, ----------------------------------- DECEMBER 31,
1997 1996 1995 1994 1993 1992(/3/)
--------- ------- ------- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period............ $ 9.15 $ 9.44 $ 8.29 $ 9.33 $ 8.99 $ 9.17
------- ------- ------- ------- -------- -------
Income From
Investment
Operations
Net Investment
Income.......... 0.30 0.59 0.59 0.60 0.61 0.16
Net Gains or
Losses on
Securities (both
realized and
unrealized)...... 0.04 (0.29) 1.15 (1.04) 0.34 (0.18)
------- ------- ------- ------- -------- -------
Total From
Investment
Operations....... 0.34 0.30 1.74 (0.44) 0.95 (0.02)
------- ------- ------- ------- -------- -------
Less
Distributions
Dividends (from
net investment
income).......... (0.30) (0.59) (0.59) (0.60) (0.61) (0.16)
Net Asset Value,
End of Period..... $ 9.19 $ 9.15 $ 9.44 $ 8.29 $ 9.33 $ 8.99
======= ======= ======= ======= ======== =======
Total
Return(/1/)...... 3.76% 3.46% 21.58% -4.82% 10.82% -0.23%
Ratios/
Supplemental Data
Net Assets, End
of Period (in
thousands)....... $80,302 $86,657 $97,534 $88,102 $104,876 $86,425
Ratio of Expenses
to Average Net
Assets(/2/)...... 1.06%(/4/) 1.03% 1.08% 1.04% 1.08% 0.95%(/4/)
Ratio of Net
Income to Average
Net Assets....... 6.57%(/4/) 6.52% 6.59% 6.83% 6.58% 6.94%(/4/)
Portfolio
Turnover Rate.... 19%(/4/) 42% 43% 26% 51% 87%(/4/)
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------------
1992 1991 1990 1989 1988
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period............ $ 8.68 $ 8.12 $ 8.51 $ 8.87 $ 9.04
-------- -------- -------- --------- ---------
Income From
Investment
Operations
Net Investment
Income.......... 0.65 0.68 0.74 0.91 0.95
Net Gains or
Losses on
Securities (both
realized and
unrealized)...... 0.49 0.56 (0.39) (0.36) (0.17)
-------- -------- -------- --------- ---------
Total From
Investment
Operations....... 1.14 1.24 0.35 0.55 0.78
-------- -------- -------- --------- ---------
Less
Distributions
Dividends (from
net investment
income).......... (0.65) (0.68) (0.74) (0.91) (0.95)
Net Asset Value,
End of Period..... $ 9.17 $ 8.68 $ 8.12 $ 8.51 $ 8.87
======== ======== ======== ========= =========
Total
Return(/1/)...... 13.57% 15.93% 4.32% 6.58% 9.02%
Ratios/
Supplemental Data
Net Assets, End
of Period (in
thousands)....... $84,995 $73,342 $66,648 $126,088 $162,956
Ratio of Expenses
to Average Net
Assets(/2/)...... 1.05% 1.04% 1.04% 0.96% 1.01%
Ratio of Net
Income to Average
Net Assets....... 7.26% 8.16% 8.97% 10.53% 10.56%
Portfolio
Turnover Rate.... 47% 106% 64% 37% 47%
</TABLE>
(/1/Total)returns do not reflect a sales charge and are not annualized.
(/2/Ratio)of expenses to average net assets includes expenses paid indirectly
beginning in fiscal year 1995.
(/3/Change)in Fund's fiscal year end.
(/4/Annualized.)
C-5
<PAGE>
FINANCIAL HIGHLIGHTS____________________________________________________________
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
COMPOSITE TAX-EXEMPT FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED YEARS ENDED DECEMBER 31,
JUNE 30, ------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---------- -------- -------- -------- -------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets Value,
Beginning of Year.. $ 7.83 $ 8.02 $ 7.13 $ 8.04 $ 7.58 $ 7.42 $ 7.16 $ 7.17 $ 7.20 $ 7.02 $ 7.56
---------- -------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Income From
Investment
Operations
Net Investment
Income........... 0.19 0.38 0.38 0.39 0.40 0.42 0.45 0.47 0.50 0.52 0.54
Net Gains (Losses)
on Securities
(both realized and
unrealized)....... 0.01 (0.19) 0.89 (0.91) 0.54 0.23 0.34 (0.01) 0.07 0.20 (0.45)
---------- -------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Total From
Investment
Operations........ 0.20 0.19 1.27 (0.52 0.94 0.65 0.79 0.46 0.57 0.72 0.09
---------- -------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Less Distributions
Dividends
(from net
investment
income)........... (0.19) (0.38) (0.38) (0.39) (0.40) (0.42) (0.45) (0.47) (0.50) (0.52) (0.53)
---------- -------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Distributions
(from capital
gains)............ -- -- -- -- (0.08) (0.07) (0.08) -- (0.10) (0.02) (0.10)
---------- -------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Total
distributions.... (0.19) (0.38) (0.38) (0.39) (0.48) (0.49) (0.53) (0.47) (0.60) (0.63) (0.63)
---------- -------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Net Assets Value,
End of Year........ $ 7.84 $ 7.83 $ 8.02 $ 7.13 $ 8.04 $ 7.58 $ 7.42 $ 7.16 $ 7.17 $ 7.20 $ 7.02
========== ======== ======== ======== ======== ======== ======== ======== ======== ======= =======
Total Return(/1/).. 2.62% 2.52% 18.25% -6.53% 12.54% 9.00% 11.36% 6.71% 8.08% 10.66% 1.25%
Ratios/Supplemental
Data
Net Assets, End of
Year (in
thousands)........ $192,465 $203,606 $230,055 $215,438 $259,045 $186,861 $140,154 $111,462 $104,208 $94,156 $83,057
Ratio of Expenses
to Average Net
Assets(/2/)....... 0.79%(/3/) 0.75% 0.81% 0.79% 0.81% 0.78% 0.77% 0.77% 0.80% 0.80% 0.85%
Ratio of Net
Income to Average
Net Assets........ 4.97%(/3/) 4.90% 5.03% 5.23% 4.97% 5.56% 6.16% 6.65% 6.85% 7.34% 7.36%
Portfolio
Turnover Rate..... 17%(/3/) 22% 8% 12% 19% 30% 83% 115% 104% 47% 49%
</TABLE>
(/1/Total)returns do not reflect a sales charge and are not annualized.
(/2/Ratio)of expenses to average net assets include expenses paid indirectly
beginning in fiscal 1995.
(/3/Annualized.)
C-6
<PAGE>
FINANCIAL HIGHLIGHTS____________________________________________________________
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CLASS B SHARES
<TABLE>
<CAPTION>
COMPOSITE GOVERNMENT FUND COMPOSITE INCOME FUND
-------------------------------------- --------------------------------------
SIX SIX
MONTHS YEARS ENDED MARCH 30, MONTHS YEARS ENDED MARCH 30,
ENDED DECEMBER 31, 1994 TO ENDED DECEMBER 31, 1994 TO
APR. 30, -------------- DEC. 31, APR. 30, -------------- DEC. 31,
1997 1996 1995 1994(/2/) 1997 1996 1995 1994(/2/)
-------- ------ ------ --------- -------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period........... $10.46 $10.84 $ 9.64 $10.24 $ 9.17 $ 9.46 $ 8.30 $ 8.85
------ ------ ------ ------ ------ ------ ------ ------
Income From
Investment
Operations
Net Investment
Income.......... 0.27 0.54 0.54 0.41 0.26 0.52 0.51 0.40
Net Gains or
Losses on
Securities (both
realized and
unrealized)..... (0.02) (0.38) 1.20 (0.60) 0.04 (0.29) 1.16 (0.55)
------ ------ ------ ------ ------ ------ ------ ------
Total From
Investment
Operations...... 0.25 0.16 1.74 (0.19) 0.30 0.23 1.67 (0.15)
------ ------ ------ ------ ------ ------ ------ ------
Less
Distributions
Dividends (from
net investment
income)......... (0.27) (0.54) (0.54) (0.41) (0.26) (0.52) (0.51) (0.40)
Net Asset Value,
End of Period.... $10.44 $10.46 $10.84 $ 9.64 $ 9.21 $ 9.17 $ 9.46 $ 8.30
====== ====== ====== ====== ====== ====== ====== ======
Total
Return(/1/)..... 2.43% 1.58% 18.48% -1.86% 3.34% 2.59% 20.70% -1.67%
Ratios/Supplemental
Data
Net Assets, End
of Period
($1,000's)...... $2,898 $2,963 $2,206 $1,063 $7,303 $7,122 $4,452 $2,299
Ratio of
Expenses to
Average Net
Assets(/3/)..... 1.85%(/4/) 1.85% 1.84% 1.76%(/4/) 1.88%(/4/) 1.89% 1.91% 1.80%(/4/)
Ratio of Net
Income to
Average Net
Assets.......... 5.24%(/4/) 5.14% 5.20% 5.43%(/4/) 5.74%(/4/) 5.69% 5.73% 6.25%(/4/)
Portfolio
Turnover Rate... 10%(/4/) 16% 8% 34% 19%(/4/) 42% 43% 26%
<CAPTION>
COMPOSITE TAX-EXEMPT FUND
------------------------------------------
SIX
MONTHS YEARS ENDED MARCH 30,
ENDED DECEMBER 31, 1994 TO
APR. 30, --------------- DEC. 31
1997 1996 1995 1994(/2/)
------------ ------- ------- -------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period........... $ 7.83 $ 8.02 $ 7.13 $ 7.49
------------ ------- ------- -------------
Income From
Investment
Operations
Net Investment
Income.......... 0.16 0.31 0.32 0.25
Net Gains or
Losses on
Securities (both
realized and
unrealized)..... 0.01 (0.19) 0.89 (0.36)
------------ ------- ------- -------------
Total From
Investment
Operations...... 0.17 0.12 1.21 (0.11)
------------ ------- ------- -------------
Less
Distributions
Dividends (from
net investment
income)......... (0.16) (0.31) (0.32) (0.25)
Net Asset Value,
End of Period.... $ 7.84 $ 7.83 $ 8.02 $ 7.13
============ ======= ======= =============
Total
Return(/1/)..... 2.19% 1.61% 17.30% -1.46%
Ratios/Supplemental
Data
Net Assets, End
of Period
($1,000's)...... $6,664 $5,266 $2,682 $1,258
Ratio of
Expenses to
Average Net
Assets(/3/)..... 1.63%(/4/) 1.65% 1.62% 1.58%(/4/)
Ratio of Net
Income to
Average Net
Assets.......... 4.11%(/4/) 4.01% 4.18% 4.53%(/4/)
Portfolio
Turnover Rate... 17%(/4/) 22% 8% 12%
</TABLE>
(/1/)Total returns do not reflect a sales charge and are not annualized.
(/2/)From the commencement of offering Class B shares.
(/3/)Ratio of expenses to average net assets include expenses paid indirectly
beginning in fiscal 1995.
(/4/)Annualized.
C-7
<PAGE>
FINANCIAL HIGHLIGHTS____________________________________________________________
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
COMPOSITE MONEY FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
APRIL 30,
1997
----------
<S> <C>
Net Asset Value,
Beginning of
Year............. $ 1.000
--------
Income From
Investment
Operations
Net Investment
Income.......... 0.239
Total From
Investment
Operations...... 0.239
--------
Less
Distributions
Dividends (from
net investment
income)......... (0.0239)
Total
Distributions... (0.0239)
--------
Net Asset Value,
End of Year...... $ 1.0000
========
Total Return..... 4.95%(/2/)
Ratios/
Supplemental Data
Net Assets, End
of Year (in
thousands)...... $256,222
Ratio of
Expenses to
Average Net
Assets(/1/)..... 0.78%(/2/)
Ratio of Net
Income to
Average Net
Assets.......... 4.83%(/2/)
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Year............. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Income From
Investment
Operations
Net Investment
Income.......... 0.0476 0.0519 0.0341 0.0238 0.0302 0.0526 0.0733 0.0826 0.0668 0.0588
Total From
Investment
Operations...... 0.0476 0.0519 0.0341 0.0238 0.0302 0.0526 0.0733 0.0826 0.0668 0.0588
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Less
Distributions
Dividends (from
net investment
income)......... (0.0476) (0.0519) (0.0341) (0.0238) (0.0302) (0.0526) (0.0733) (0.0826) (0.0668) (0.0588)
Total
Distributions... (0.0476) (0.0159) (0.0341) (0.0238) (0.0302) (0.0526) (0.0733) (0.0826) (0.0688) (0.0588)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net Asset Value,
End of Year...... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Total Return..... 4.88% 5.33% 3.47% 2.41% 3.07% 5.41% 7.61% 8.60% 6.85% 5.97%
Ratios/
Supplemental Data
Net Assets, End
of Year (in
thousands)...... $229,355 $171,225 $125,651 $135,187 $141,193 $178,741 $252,051 $256,017 $180,130 $137,737
Ratio of
Expenses to
Average Net
Assets(/1/)..... 0.79% 0.92% 0.95% 0.97% 0.88% 0.93% 0.97% 1.06% 1.01% 1.05%
Ratio of Net
Income to
Average Net
Assets.......... 4.77% 5.19% 3.39% 2.38% 3.04% 5.33% 7.33% 8.26% 6.68% 5.88%
</TABLE>
(/1/Ratios)of expenses to average net assets include expenses paid indirectly
beginning in fiscal year 1995. The ratios before voluntary waiver of cer-
tain fees incurred by the Portfolio and expense reimbursements were .89% in
1996, 1.04% in 1995, and 1.04% in 1994, and 1.03% for 1993.
(/2/Annualized.)
C-8
<PAGE>
FINANCIAL HIGHLIGHTS____________________________________________________________
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
COMPOSITE TAX EXEMPT FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED
ENDED DECEMBER 31, MAY 2, TO
JUNE 30, ---------------- DEC. 31,
1997 1996 1995 1994
---------- ------- ------- ---------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- -------
Income From Investment
Operations
Net Investment Income........... 0.0090 0.0199 0.0226 0.0097
Net Gains on Securities (both
realize and unrealized)........ -- -- 0.0054 --
------- ------- ------- -------
Total From Investment
Operations..................... 0.0090 0.0199 0.0280 0.0097
------- ------- ------- -------
Less Distributions
Dividends (from net investment
income)........................ (0.0090) (0.0199) (0.0226) (0.0097)
Distributions (from capital
gains)......................... -- -- (0.0054) --
------- ------- ------- -------
Total Distributions............. (0.0090) (0.0199) (0.0280) (0.0097)
------- ------- ------- -------
Net Asset Value, End of Period... $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= =======
Total Return..................... 2.24%(/3/) 2.01% 2.83% 1.45%(/3/)
Ratios/Supplemental Data.........
Net Assets, End of Period (in
thousands)..................... $12 $2 $1 $1
Ratio of Expenses to Average Net
Assets(/1/).................... 1.50%(/3/) 1.53% 1.73% 1.66%(/3/)
Ratio of Net Income to Average
Net Assets..................... 2.47%(/3/) 1.99% 2.12% 1.38%(/3/)
</TABLE>
(/1/Ratio)of expenses to average net assets includes expenses paid indirectly
beginning in fiscal 1995. The ratios before voluntary waiver of certain
fees incurred by the Portfolio and expense reimbursements were 1.90% in
1996, 2.10% in 1995 and 2.62% in 1994.
(/2/From)the commencement of offering of Class B shares.
(/3/Annualized.)
C-9
<PAGE>
THE ACQUIRING FUNDS' OBJECTIVES, PRACTICES AND RISK FACTORS
The investment objectives and general investment policies of each Acquiring
Fund are described below. These objectives are fundamental and, therefore,
cannot be changed without a majority vote of each Acquiring Fund's outstanding
shares. Because the market value of each Acquiring Fund's investments will
change, the net asset value per share of each Acquiring Fund (except the Com-
posite Money Fund) also will vary. Specific portfolio securities eligible for
purchase by the Acquiring Funds, investment techniques that may be used and
risks associated with these securities and techniques are described more fully
in the Composite SAI (the "SAI").
Composite Growth & Income Fund
The primary objective of the Composite Growth & Income Fund is to provide
long-term capital growth by investing in common stocks and other securities.
Current income is a secondary consideration. Equity investments are selected
from high-quality companies with solid business fundamentals that the Adviser
believes have a competitive advantage. Securities may be purchased on a recog-
nized exchange, over-the-counter, or through the NASDAQ system. In addition,
the Fund may invest in the following investment instruments:
1) Money market instruments. Investment in money market instruments may be for
temporary or defensive purposes. The money market investments permitted in-
clude obligations of the U.S. government and its agencies and instrumental-
ities; short-term corporate-debt securities; commercial paper, including
bank obligations; certificates of deposit; and repurchase agreements.
2) Repurchase agreements. The Fund may temporarily invest cash reserves in re-
purchase agreements. In a repurchase agreement, a fund buys a security at
one price and agrees to sell it back at a higher price. If the seller de-
faults on its agreement to repurchase the security, the Fund may suffer a
loss because of a decline in the value of the underlying debt security.
Repurchase agreements will be entered into only with brokers, dealers or
banks that meet credit guidelines adopted by the Fund's Board of Directors.
To limit risk, repurchase agreements maturing in more than seven days will
not exceed 10% of the Fund's total assets.
3) Real estate investment trusts. The Fund may invest up to 25% of its assets
in real estate investment trusts ("REITs"). Factors influencing the invest-
ment performance of REITs include the profitable operation of properties
owned, financial condition of lessees and mortgagors, underlying value of
the real property and mortgages owned, amount of financial leverage, and
amount of cash flow generated and paid out.
4) Fixed-income securities. The Fund may invest in bonds of any maturity, in-
cluding mortgage-backed securities. All fixed-income securities are subject
to credit risk, which is dependent on the issuer's ability to maintain
timely interest and principal payments. During periods of low interest
rates, mortgage-backed securities may be subject to accelerated prepayment
and possible reinvestment in securities bearing lower rates of interest.
The Fund may also invest in below-investment-grade bonds (sometimes called
junk bonds). Any investment of this type may be considered speculative and
involve greater risk of default or price change because of changes in the is-
suer's creditworthiness. The market price of these securities may fluctuate
more than higher-rated securities. They also may decline significantly in pe-
riods of general economic difficulty, which may follow periods of rising in-
terest rates.
C-10
<PAGE>
5) When-issued and delayed-delivery securities. The Fund may purchase or sell
U.S. government securities or collateralized mortgage obligations on what
is called a "when-issued" or "delayed-delivery" basis. This is done to ob-
tain what is considered to be an advantageous yield or price at the time of
the transaction. The Fund may purchase securities in these transactions if
payment and delivery are scheduled to take place no more than 120 days in
the future.
The payment obligation and interest rates to be received are fixed at the
time the Fund enters into the commitment. It is possible that the market
value at the time of settlement could be higher or lower than the purchase
price if the general level of interest rates has changed. No interest will
accrue to the Fund until settlement.
The Fund is prohibited from entering into when-issued or delayed-delivery
commitments that, in total, exceed 20% of the market value of its total as-
sets minus total liabilities (except for the obligations created by these
commitments).
6) Covered call options. The Fund may write (sell) covered call options. A
call option is "covered" if the Fund owns the security underlying the op-
tion it has written or it maintains enough cash, cash equivalents or liquid
securities to purchase the underlying security. If the Fund sells a covered
call option, it becomes obligated to deliver the securities underlying the
option if the purchaser chooses to exercise the option before its termina-
tion date. In return the Fund receives a premium from the purchaser which
it keeps, regardless of whether the option is exercised. During the option
period, the Fund gives up any possible capital appreciation above the
agreed-upon price if the market price of the underlying security rises.
7) Foreign Securities. The Fund may invest up to 25% of its assets in U.S.
dollar-denominated securities of foreign issuers.
Investments in foreign securities may involve somewhat different risks, in-
cluding incomplete or inaccurate financial information, foreign taxes and re-
strictions, illiquidity, and fluctuations in currency values.
The Fund's net asset value per share will fluctuate as the values of the se-
curities it owns change. There are many factors that influence fluctuations in
the market value of securities owned by the Fund. These include economic
trends, government actions and regulations, and international monetary condi-
tions. An individual stock'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. The Fund attempts to limit risk by diver-
sifying investments and by carefully researching securities before they are
purchased. Market risks are inherent in all investments.
Composite Government Fund
The primary objective of the Composite Government Fund is to maintain a high
level of current income, consistent with safety and liquidity. It invests in
obligations issued or guaranteed by the full faith and credit of the U.S. Gov-
ernment, and in repurchase agreements and collateralized mortgage obligations
that are secured by these types of obligations. It is the fundamental policy
of the Fund to invest only in the following securities:
1) U.S. government obligations issued by the Treasury, including bills, cer-
tificates of indebtedness, notes, and bonds.
2) Obligations secured by the full faith and credit of the U.S. government or
its instrumentalities.
3) Certificates of the Government National Mortgage Association ("GNMA"),
which are debt securities representing an undivided ownership interest in
a pool of mortgages. The mortgages backing these securities include con-
ventional 30-year fixed-rate mortgages, 15-year fixed-rate
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<PAGE>
mortgages, graduated payment mortgages, and adjustable-rate mortgages. The
U.S. government guarantees the timely payment of interest and principal for
these securities through the GNMA, which is a wholly owned U.S. government
corporation within the Department of Housing and Urban Development. The GNMA
is authorized to make such a guarantee, with the full faith and credit of the
U.S. government, on securities issued by institutions and backed by pools of
FHA-insured or VA-insured mortgages. However, the guarantees do not extend to
the securities' yield or value, which are likely to vary inversely with fluc-
tuations in interest rates, nor do the guarantees extend to the yield or value
of the Fund's shares.
4) Collateralized mortgage obligations which are fully collateralized by GNMA
certificates or by mortgages insured by GNMA.
5) Repurchase agreements which are secured by obligations identified in 1, 2,
and 3 above.
For proposed changes to the limitations on the instruments in which the Fund
may invest, see "Proposed Changes to Investment Restrictions."
Composite Income Fund
The Composite Income Fund seeks to provide a high level of current income that
is consistent with protection of shareholders' capital. It plans to achieve its
objective by investing in debt issues and obligations that offer high current
yields and are consistent with a low degree of risk. To meet these objectives,
the Composite Income Fund invests most of its assets in the following:
1) Debt and convertible debt securities that enjoy the four highest ratings of
Standard & Poor's ("S&P") or Moody's Investors Service, Inc. ("Moody's").
The Fund may invest up to 20% of its assets in lower-rated securities
(sometimes called junk bonds). See the SAI for a detailed description of
ratings.
2) Debts of the U.S. government and its agencies, including mortgage-backed se-
curities issued by the GNMA, Federal National Mortgage Association, and Fed-
eral Home Loan Mortgage Corporation or similar government agencies.
3) Obligations of U.S. banks that belong to the Federal Reserve System. The
Fund may not invest more than 25% of its total assets in these issues.
4) Preferred stocks and convertible preferred stocks that enjoy the four high-
est ratings of S&P or Moody's.
5) The highest grade commercial paper as rated by S&P or Moody's.
6) Deposits in U.S. banks. Unless these deposits are liquid, they may not ex-
ceed 10% of the Fund's total assets.
For proposed changes to the limitations on the instruments in which the Fund
may invest, see "Proposed Changes to Investment Restrictions."
Composite Tax-Exempt Fund
The Composite Tax-Exempt Fund's primary objective is to maintain a high level
of federal tax-exempt income while protecting investors' capital. Investments
are made in a carefully selected portfolio of bonds issued by states, counties,
cities and other governmental bodies whose bonds generate income that is exempt
from federal income tax. The two principal classifications of municipal bonds
are "general obligation" and "revenue" bonds.
General obligation bonds are secured by the issuer's pledge of its full faith
and credit, with either limited or unlimited taxing power for the payment of
principal and interest.
Revenue bonds are not supported by the issuer's full taxing authority. Gener-
ally, they are payable only from the revenues of a particular facility, a class
of facilities, or the proceeds of another specific revenue source.
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<PAGE>
In normal markets, the Fund will invest at least 80%, and possibly all, of its
portfolio in tax-exempt securities issued by or on behalf of the states, terri-
tories and possessions of the United States and the District of Columbia and
their political subdivisions, agencies or instrumentalities. It specifically
limits these investments to:
1) Municipal bonds enjoying the four highest ratings of S&P or Moody's. The
Fund may invest up to 25% of its assets in lower-rated securities (some-
times called junk bonds). See the Composite SAI for a detailed description
of ratings.
2) Municipal notes backed by the federal government.
3) Notes from issuers who already have issued outstanding municipal bonds en-
joying the four highest ratings of S&P or Moody's.
4) Securities of other tax-exempt mutual funds as temporary investments of
cash reserves.
In adverse markets, the Fund may seek to protect its investment position by
investing up to 50% of its portfolio in short-term investments. Interest income
from these short-term investments, when it is distributed by the Fund, may re-
sult in a tax liability to investors. These investments are limited to:
1) Obligations of the U.S. government and its agencies and instrumentalities.
These investments, limited to short maturities as temporary investments,
would not be made routinely nor made to any significant extent.
2) Commercial paper rated in the highest grade by either S&P or Moody's.
3) Obligations of U.S. banks belonging to the Federal Reserve System.
4) Time or demand deposits in U.S. banks.
5) Municipal bonds or any of the previously mentioned investments subject to
short-term repurchase agreements.
For proposed changes to the limitations on the instruments in which the Fund
may invest, see "Proposed Changes to Investment Restrictions."
General Fixed-Income Funds
The Composite Government Fund, the Composite Income Fund and the Composite
Tax-Exempt Fund's (the "Fixed-Income Funds") net asset values per share will
fluctuate as the value of securities they own change. As with all fixed-income
investments, the Fixed-Income Funds' securities are subject to market and
credit risks.
Market risk relates to several factors. Among these are the price fluctuation
of a fixed-income security, overall interest-rate conditions, the credit rating
of the issuer, and the maturity length of the security. Generally, when inter-
est rates increase, the prices of existing fixed-income securities decrease.
Credit risk refers to the likelihood that a security's issuer can maintain
timely interest and principal payments. The Funds each diversifies its holdings
to reduce the effect of credit risk.
The Funds do not have any restrictions on the maturities of securities in
which they may invest. They seek to invest in securities having maturities
that, in the Adviser's judgment, are consistent with that Funds' investment ob-
jective.
Composite Money Fund
The Composite Money Fund seeks to provide maximum current income while pre-
serving capital and maintaining liquidity. It pursues this objective through
investment in high-quality money market instruments. The Adviser intends to
achieve this objective by purchasing high-quality investment which mature in
397 days or less with an average maturity of no more than 90 days. The Fund in-
vests solely in the money market instruments selected from the following five
general categories:
1) Obligations issued or guaranteed by the U.S. government, its agencies, or
its instrumentalities.
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INVESTMENT RESTRICTIONS
2) Obligations of U.S. and foreign banks with assets of more than $500 million.
3) Short-term commercial notes issued directly by businesses and banking insti-
tutions to finance short-term cash needs. The Fund may only purchase notes
which have the two highest ratings by Moody's Investors Service, Inc.
("Moody's"), or by Standard & Poor's ("S&P"); or those issued by companies
whose unsecured debt is rated A or better by Moody's or S&P.
4) Short-term corporate obligations rated A or better by Moody's or S&P.
5) Short-term repurchase agreements.
The Fund invests in some relatively complex financial instruments. Because it
invests in securities backed by banks and other financial institutions, changes
in the credit quality of these institutions could cause losses to the Fund and
affect its share price.
For proposed changes to the limitations on the instruments in which the Fund
may invest, see "Proposed Changes to Investment Restrictions."
Although many of the Adviser's decisions depend on flexibility, there are cer-
tain principles so fundamental to the Acquiring Funds that they may not be
changed without a vote of a majority of the outstanding shares of that Acquir-
ing Fund.
In addition to other restrictions listed in the SAI and the Merger SAI, the
Composite Growth & Income Fund, the Composite Government Fund, the Composite
Income Fund and the Composite Tax-Exempt Fund may not:
1) Invest more than 5%* of its total assets in securities of any single issuer
other than U.S. government securities, except that up to 25% of a Fund's as-
sets may be invested without regard to this 5% limitation.
2) Acquire more than 10%* of the voting securities of any one company.
3) Borrow money for investment purposes, although it may borrow up to 5% of its
total net assets for emergency, non-investment purposes.
The Composite Money Fund may not:
1) Invest in common stocks or other equity securities.
2) Borrow money for investment purposes, except that it may borrow up to 5% of
its total assets in emergencies and that it may borrow up to 33 1/3% of such
assets to meet redemption requests that would otherwise result in the un-
timely liquidation of vital parts of its portfolio.
3) Invest more than 5%* of its total assets in securities of any single issuer,
except for the U.S. government, its agencies or its instrumentalities.
None of the Acquiring Funds may invest more than 25%* of their total assets in
securities of issuers in any single industry.
* Percent at time investment is made.
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<PAGE>
PROPOSED CHANGES TO INVESTMENT RESTRICTIONS
It is expected that, subject to approval by shareholders, there will be cer-
tain changes in the fundamental investment restrictions of the Composite In-
come Fund, the Composite Government Fund, the Composite Tax-Exempt Fund and
the Composite Money Fund. Such changes, if approved, would take effect at or
shortly after the time of the Mergers although the Composite Trust's Board may
delay such implementation.
In addition, each Fund would be permitted to invest in securities that are
eligible for resale in accordance with the provisions of Rule 144A.
The Composite Government Fund and the Income Fund
The Composite Government Fund would be permitted to invest in debt securities
issued by U.S. government agencies. The Composite Income Fund and the Compos-
ite Government Fund would be permitted, with respect to up to 33% of its as-
sets, simultaneously be obligated with respect to forward commitments (con-
tracts to purchase or sell securities in the future) and may sell a portfolio
security or enter into a forward commitment sale contract (a "dollar-roll
transaction") that is coupled with an agreement by the Fund (including a for-
ward commitment) to repurchase the security at a later date. Forward commit-
ments involve a risk of loss if the value of the securities declines prior to
the settlement date, which risk is in addition to the risk of decline in the
value of the Fund's other assets. No income accrues to the purchaser of such
securities prior to delivery.
The Composite Income Fund
The Composite Income Fund would also be permitted to engage in foreign cur-
rency exchange transactions for hedging purposes in connection with the pur-
chase and sale of foreign securities or to protect against changes in the
value of specific securities held by the Fund. The Fund would also be permit-
ted to purchase and sell currencies on a spot (a cash) basis, may enter into
forward contracts to purchase or sell foreign currencies at a future date, and
may buy and sell foreign currency futures contracts and put and call options
on foreign currency futures contracts and foreign currencies.
The Fund may invest up to 10% of its assets in securities issued by REITs.
Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general (such as, for
example, possible declines in the value of real estate, lack of availability
of mortgage funds or extended vacancies of property). Equity REITs may be af-
fected by changes in the value of the underlying property owned by the REITs,
while mortgage REITs may be affected 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.
Investing 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 than larger company securities.
The Composite Tax-Exempt Fund and the Composite Income Fund
The Composite Tax-Exempt Fund and the Composite Income Fund would be permit-
ted to invest in up to 35% in below investment grade or nonrated securities.
Securities rated below investment grade, as well as unrated securities, usu-
ally entail greater risk (including the possibility of de-
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<PAGE>
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ADVISER
fault or bankruptcy of the issuers), and generally involve greater price vola-
tility and risk of principal and income, and may be less liquid, than securi-
ties in higher rated categories. Both price volatility and illiquidity may
make it difficult for the Fund to value certain of these securities at certain
times and these securities may be difficult to sell under certain market con-
ditions. Prices for non-investment grade debt securities may be affected by
legislative and regulatory developments.
The Composite Tax-Exempt Fund
The Fund would be allowed to invest in interest rate futures. Interest rate
futures are entered into to hedge the Fund against the effects of changes in
the value of the portfolio securities due to changes in interest rates and
market conditions without necessarily buying or selling the securities. A risk
associated with investing in interest rate futures is that there can be no as-
surance that there will be a correlation between price movements in the under-
lying securities and price movements in the securities which are the subject
of the hedge.
The Composite Money Fund
The Fund would be permitted to invest in asset-backed securities within the
definition of commercial paper, subject to the same credit quality information
and rating levels set for commercial paper. Asset-backed securities represent
an interest in a pool of assets such as motor vehicle installment purchase ob-
ligations, credit card receivables and home equity loans. The Fund will not
invest more than 10% of its total assets in asset-backed securities. The Fund
will purchase asset-backed securities only if the security or the issuer with
respect to the comparable securities is: (i) rated by at least two nationally
recognized statistical rating organizations ("NRSROs"), such as S&P or
Moody's, in one of the two highest rating categories for short-term securi-
ties, (ii) is rated in one of the two highest categories for short-term debt
by the only NRSRO that has issued a rating, or (iii) if not so rated, the se-
curity is determined to be of comparable quality.
In addition, the Fund would be permitted to invest in securities offered by
foreign governments, their agencies and instrumentalities, and supranationals
like The World Bank, and in obligations of foreign financial institutions, in-
cluding brokerage, finance and insurance companies. These securities involve
certain risks, including those resulting from (i) fluctuations in currency ex-
change rates, (ii) devaluation of currencies, (iii) future political or eco-
nomic developments and the possible imposition of currency exchange blockages
or other foreign governmental laws or restrictions, and (iv) reduced avail-
ability of public information concerning issuers.
The Adviser has been in the business of investment management since 1944. It
currently manages more than $2.3 billion for mutual funds and institutional
advisory accounts, including more than $1.4 billion within the Composite Group
of Funds (the "Funds"), which are all registered investment companies for
which CRM serves as Adviser other than the series of [Sierra] Variable Trust
that serve as underlying funding vehicles for variable insurance contracts.
The investment management agreements are renewable each year, subject to the
approval of each of the Acquiring Funds' Board of Directors or the sharehold-
ers themselves.
The Adviser advises the Acquiring Funds on investment policies and specific
investments. Subject to supervision by each Acquiring Fund's Board of Direc-
tors, the Adviser determines which securities are to be bought and sold. These
decisions are based on analyses of the economy, sectors of in-
C-16
<PAGE>
dustry and specific institutions. They are compiled from extensive data pro-
vided by some of the country's largest investment firms, in addition to the
Adviser's own research.
William G. Papesh is the President of each Acquiring Fund, the Composite
Trust and the Adviser. A team of the Adviser's investment professionals
manages each Acquiring Fund, under supervision of the Adviser's investment
committee. The team responsible for the Composite Growth & Income Fund
consists of Philip M. Foreman, chartered financial analyst ("CFA"); Jeffrey D.
Huffman, CFA; and David W. Simpson, CFA. Mr. Huffman has 12 years of
continuous investment experience and has been employed by the Adviser since
January 1995. Mr. Foreman has been employed by the Adviser since November 1991
and also has 12 years of continuous investment experience. Mr. Simpson has
been employed by the Adviser since March 1993 and has 11 years of continuous
investment experience. Mr. Foreman is primarily responsible for the Composite
Growth & Income Fund. The primary manager for the Composite Tax-Exempt Fund is
Brian L. Placzek, CFA. Mr. Placzek has 12 years of continuous experience in
investment and financial analysis and has been employed by the Adviser since
July 1990. Mr. Gary J. Pokrzywinski, CFA, is the primary manager for the
Composite Income Fund and Government Securities Fund. Mr. Pokrzywinski has
been employed by the Adviser since July 1992 and also has 12 years of
continuous experience in fixed-income and financial market analysis. Audrey
Quaye, CPA, Assistance Vice President of CRM, is the primary manager of the
Money Fund. The Adviser's address is Composite Research & Management Co., 1201
Third Avenue, Suite 1400, Seattle, WA 98101-3015.
ADVISORY FEES
A fee based on a percentage of average daily net assets is paid to the Ad-
viser for its services. This includes investment management and administrative
services and the Adviser's function as an agent for each Acquiring Fund when
paying a portion of the fee to the Distributor and Transfer Agent for their
services.
Advisory fees are calculated daily and paid monthly.
The Composite Growth & Income Fund pays advisory fees equal to an annual rate
of .625% of its average daily net assets. Fees are reduced to .50% of average
daily net assets in excess of $250 million.
The Composite Government Fund and the Composite Income Fund pay advisory fees
equal to an annual rate of .625% of the first $250 million of each Fund's re-
spective average daily net assets plus .50% on net assets in excess of $250
million. For the Composite Tax-Exempt Fund, advisory fees are equal to an an-
nual rate of .50% of the first $250 million of average daily net assets plus
.40% on net assets in excess of $250 million.
The Composite Money Fund pays advisory fees equal to an annual rate of .45%
of the average daily net assets. If the average daily net assets grow to more
than $1 billion, the rate will decrease to .40%.
DISTRIBUTOR
Composite Funds Distributor, Inc. is the "Distributor" for the Acquiring
Funds. The Distributor is not a bank. Securities and annuities offered by it
are not deposits nor bank obligations, and they are not guaranteed by a bank
nor insured by the FDIC. The value of investments may fluctuate, return on in-
vestments is not guaranteed, and loss of principal is possible. The Distribu-
tor's address is Composite Funds Distributor, 601 W. Main, Suite 300, Spokane,
WA 99201.
TRANSFER AGENT
Murphey Favre Securities Services, Inc., which serves as the "Transfer
Agent," acts as the Funds'
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<PAGE>
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DISTRIBUTION PLANS
shareholder servicing and dividend disbursing agent.
The Adviser, Distributor and the Transfer Agent are affiliates of WM Finan-
cial, Inc. Washington Mutual Bank and Washington Mutual Bank fsb. They are
also subsidiaries of Washington Mutual, Inc.
CLASSES OF SHARES
Each of the Acquiring Funds offers four classes of shares, as described in
"How to buy shares."
The shares do not have preemptive rights, and none has preference as to con-
version, exchange, dividends, retirement, liquidation, redemption, or any
other feature, except as described in "How to buy shares." The Funds do not
normally hold annual shareholder meetings. They may hold shareholder meetings
from time to time on important matters. Shares have equal voting rights on
corporate matters submitted for shareholder approval, except that each class
may vote separately on any matter that relates solely to that class.
The Board of Trustees for the Composite Trust has approved and monitors
distribution plans that meet the provisions of Rule 12b-1 under the Investment
Company Act of 1940. Each plan is intended to benefit shareholders by
stimulating interest in purchasing shares of the respective Acquiring Fund
and, thus, providing a consistent flow of investment capital. This allows
larger and more diversified holdings as well as economies of scale.
CLASS A SHARES. As currently in effect, the plans authorize each Acquiring
Fund to reimburse the Distributor for direct costs of marketing, selling and
distributing Class A shares of that Fund, subject to directors' approval.
These costs include service fees, sales literature and prospectuses (other
than those provided to current shareholders), and other costs of sales and
marketing, including state business and occupation tax assessed on the reim-
bursements.
For all the Acquiring Funds except the Composite Money Fund, costs also in-
clude compensation to sales people. In addition, the Distributor pays autho-
rized dealers service fees in consideration for account maintenance and other
shareholder services. The fees are equal to an annual rate of .25% of the av-
erage daily value of shares in the accounts of the dealer or its customers.
Reimbursements are not to exceed annual limits of .25% of the Fund's average
daily net assets attributable to Class A shares. Unreimbursed expenses which
have not been accrued in the current fiscal year may not be recovered in fu-
ture periods.
It is expected that, subject to approval by shareholders, the Trust will
adopt a distribution plan that authorizes each Fund (excluding the Composite
Money Fund) to pay the Distributor a distribution fee at an annual rate of
.25% of the Fund's average net assets attributable to Class A shares, regard-
less of the Distributor's expenses.
For the Composite Money Fund, there are no service fees paid to dealers for
Class A shares. The distribution plan for this Fund authorizes reimbursement
for actual Class A distribution costs, not to exceed annual limits of .15% of
the Fund's average daily net assets attributable to Class A shares.
CLASS B SHARES. Class B shares of the Composite Money Fund only are available
only by exchange of Class B shares from other funds within the Funds, the [Si-
erra Trust, SAM and SPIF]. The distribution plans authorize each Acquiring
Fund to pay the Distributor a distribution fee at an annual
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<PAGE>
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THE VALUE OF A SINGLE SHARE
rate of .75% of each Fund's average daily net assets attributable to Class B
shares and a service fee at an annual rate of .25% of such assets. The distri-
bution fee is designed to permit investors to purchase Class B shares without
a front-end sales charge. At the same time, this allows compensation to the
Distributor in connection with the sale of Class B shares. The service fee
covers account maintenance and other shareholder services.
The Distributor pays authorized dealers service fees at an annual rate of
.25% of the average daily value of Class B shares in the accounts of the
dealer or its customers.
CLASS I SHARES. Class I shares do not pay any distribution fees.
CLASS S SHARES. The plans authorize each Fund to pay the Distributor a dis-
tribution fee at an annual rate of 1.00% of each Fund's average daily net as-
sets attributable to Class S shares. The distribution fee of .75% is designed
to permit investors purchasing shares through a [SAM] account to purchase
Class S shares without a front-end sales charge, while compensating the Dis-
tributor in connection with sales of Class S shares. The service fee is .25%
of each Funds' average daily net asset attributable to Class S shares.
GENERAL. Because the distribution fee for Class B shares, the distribution
fee for Class S shares and distribution fee under the proposed distribution
plan for Class A shares are not tied directly to the Distributor's expenses,
the amount of compensation may be more or less than its actual expenses. For
this reason, the Class B distribution plan is of the type characterized by the
staff of the Securities and Exchange Commission as being a "compensation"
plan -- in contrast to the existing Class A "reimbursement" plan. The Acquir-
ing Funds are not liable for any expenses incurred by the Distributor in ex-
cess of the amount of compensation it receives.
TOTAL EXPENSES
Other operating expenses include fees of directors not employed by the Advis-
er, transfer agent fees, custodial fees, auditing and legal fees, taxes, costs
of issuing and redeeming shares, publishing of reports to shareholders, corpo-
rate meetings, and other normal costs of running a business.
The transfer agent fees are for shareholder servicing and dividend disbursing
services. Shareholders may be required to pay a separate fee if they need spe-
cial services such as producing and mailing of historical account transcripts.
Each Acquiring Fund calculates the value of its shares 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 value is determined separately for each class by
adding the value of its securities and other assets, subtracting its liabili-
ties, and dividing the resulting figure by the number of shares of the class
outstanding. This number is the net asset value ("NAV") per share.
For all the Acquiring Funds except the Composite Money Fund, security valua-
tions are provided by independent pricing sources approved by the New Compos-
ite Trust's Board of Trustees. When such valuations are not available, the
Board of Trustees will determine how they are to be priced at fair value.
For the Composite Money Fund, the securities are valued using the amortized
cost method by adjusting the cost of each security for amortization of dis-
count or premium and accrued interest (unless circumstances indicate another
method of determining fair value should be considered by the Trust's Board of
Trustees). The NAV per share of most mutual funds fluctuates with the value of
the portfolio. However, many money market funds, including the Composite Money
Fund, attempt to
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<PAGE>
HOW TO BUY SHARES
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ALTERNATIVE SALES ARRANGEMENT
maintain the NAV at a constant $1.00 per share. Fund shares are not guaranteed
nor insured by the U.S. government, and there is no assurance that the $1.00
per share NAV will be maintained.
For all the Acquiring Funds except the Composite Money Fund, shares are of-
fered at the next NAV that is calculated, plus a sales charge for Class A
shares.
Class A shares of the Composite Money Fund are offered continuously at NAV on
any regular business day. There is no initial or deferred sales charge on
Class A share purchases. See "Exchanges for other Composite funds."
Shares of the Acquiring Fund may be purchased through the Distributor, or
through selected securities dealers. The Acquiring Funds may not be available
in all states. With certain exceptions, the minimum initial purchase in a Com-
posite fund is $1,000. IRA accounts may make initial purchases of $500 in any
of the Acquiring Funds. Subsequent investments should be at least $50.
SYSTEMATIC INVESTMENT PROGRAM. For the convenience of investors, the Acquir-
ing Funds offer a systematic investment program where monthly purchases are
automatically deducted from an investor's checking account. The minimum ini-
tial and monthly investments in this program are $50. This program can be ar-
ranged at the time of application or any time later by contacting an invest-
ment representative or the Acquiring Funds.
EFFECTIVE DATE OF PURCHASE. An order to purchase shares will be entered on
the day it is received, if it is received prior to 1:00 p.m. Pacific time.
Otherwise it will be entered on the following business day. Purchase orders
are effective when payment is received in federal funds or converted to fed-
eral funds by the Transfer Agent. This generally occurs within one to two
business days; however, checks drawn on banks that are not members of the Fed-
eral Reserve System may take longer to convert into federal funds. The invest-
ment will earn income starting the day following its effective date.
OTHER INFORMATION
The Acquiring Funds and the Distributor reserve the right to refuse an order
to buy shares.
Each of the Acquiring Fund (except the Composite Money Fund) offers four
classes of shares which represent interests in the same portfolio of invest-
ments:
1) Class A shares are sold to investors who pay a sales charge at the time of
purchase and who pay ongoing distribution expenses.
2) Class B shares are sold to investors who do not pay a sales charge at the
time of purchase. Instead, they pay higher ongoing distribution expenses
for eight years. They also may pay a "contingent deferred sales charge" if
they redeem their shares within six years of purchase. Class B shares con-
vert to Class A shares after eight years.
3) Class I shares are sold exclusively to the various investment portfolios
of Sierra Asset Management Portfolios. Class I shares are sold without an
initial or contingent deferred sales charge and pay no ongoing distribu-
tion expenses.
4) Class S shares are sold exclusively to investors who, at the time of pur-
chase, already maintain Class S accounts. Class S shares are sold without
an initial sales charge, but pay ongoing distribution and service fees
that are higher than Class A shares for eight years and may be subject to
a contingent deferred sales charge if redeemed within six years of pur-
chase. Class S shares convert to Class A shares after eight years.
C-20
<PAGE>
The net income attributable to, and the dividends payable to, shares that pay
ongoing distribution expenses will be lower because of the higher expenses.
Likewise, NAVs and performance of the four classes may vary.
Shares of the Funds may be exchanged only for shares of the same class or
other Composite funds. See "Exchanges for other Composite funds."
Sales personnel of broker-dealers distributing the Funds' shares may receive
differing compensation for selling or servicing different classes of shares.
When purchasing shares, investors are encouraged to choose the class of
shares that will be best for them. Factors to consider include the scope of
investment advisory services sought, the purchase amount, the length of time
shares are expected to be held, and other individual circumstances.
INVESTMENT IN FUNDS THROUGH A [SAM] ACCOUNT. In addition to the diversifica-
tion among individual securities you receive by investing in a particular
Fund, you may be able to further reduce 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] in-
vestment adviser, that allocates your investments across a combination of ei-
ther 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 in-
vestment 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 in-
vested in the respective Class A or Class S shares of each to implement your
[SAM] investment strategy. In addition, your [SAM] account will be periodi-
cally 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 di-
rectly 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 Serv-
ices]. These transactions will affect the Funds, since Funds that experience
redemptions as a result of reallocations or rebalancings may have to sell
portfolio securities and Funds that receive additional cash will have to in-
vest it. While it is impossible to predict the overall impact of these trans-
actions over time, there could be adverse effects on portfolio management to
the extent that Funds may be required to sell securities or invest cash at
times when they would not otherwise do so. These transactions could also have
tax consequences if sales of securities resulted in gains and could also in-
crease transaction costs. The Adviser, representing the interests of the
Funds, is committed to minimizing the impact of [SAM] account transactions on
the Funds; [Sierra Services], representing the interest of the [SAM] accounts,
is also committed to minimizing such impact on the Funds to the extent it is
consistent with pursuing the investment objective of the [SAM] accounts. The
Adviser and [Si-
C-21
<PAGE>
erra Services] will nevertheless face conflicts in fulfilling their respective
responsibilities because they are affiliates and employ some of the same pro-
fessionals. The Adviser will monitor the impact of [SAM] account transactions
on the Funds.
BUYING CLASS A SHARES
The offering price for Class A shares is the next calculated NAV, after re-
ceipt of a properly completed purchase order, plus, except for the Composite
Money Fund, an initial sales charge shown in the table below. There is no ini-
tial sales charge on purchases of Class A shares of the Composite Money Fund.
Investors also may be entitled to reduced or waived sales charges as discussed
following the table. The final column in the table indicates what dealers re-
ceive for selling Class A shares.
COMPOSITE GROWTH & INCOME FUND
<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 5.75% 6.10% 5.00%
$50,000 to $100,000 4.75 4.99 4.00
$100,000 to $250,000 3.75 3.90 3.00
$250,000 to $500,000 2.75 2.83 2.25
$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" below.
Example: An investor considers putting $1,000 into a Fund's Class A shares.
Based on the first column in the above table, the investor would see that 5.75%
of the $1,000 would pay for a sales charge. The charge would be $57.50, which
is 6.10% of the net investment of $942.50, as the next column shows. The dealer
selling the shares would be paid $50 of the $57.50 which is 5.00% of $1,000, as
the last column shows.
COMPOSITE GOVERNMENT FUND
COMPOSITE INCOME FUND
COMPOSITE TAX-EXEMPT FUND
<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% -- --
$50,000 to $100,000 4.00 -- --
$100,000 to $250,000 3.50 -- --
$250,000 to $500,000 3.00 -- --
$500,000 to $1,000,000 2.00 -- --
$1,000,000 and above None None None
</TABLE>
CUMULATIVE DISCOUNT. This allows current purchases to qualify for the forego-
ing discounts by including the value of existing Composite Group investments
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 trust-
ees 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 Ac-
quiring Funds. For more information about this discount, please contact the Ac-
quiring Funds 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 pur-
chases of $1 million or more for the Composite Growth & Income Fund,
C-22
<PAGE>
the Composite Government Fund, the Composite Income Fund and the Composite
Tax-Exempt Fund, but such shares may be subject to a contingent sales charge
of 1.00% of .50%, if redeemed during the first or second year after purchase,
respectively.
Qualified employee benefit plans (including SEPs and SIMPLEs) that have more
than 100 participants or that have more than $50,000 invested in those Funds
may purchase shares without an initial sales charge. However, a contingent de-
ferred 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 Funds, the named
fiduciary of the plan withdraws the plan from investing in the Funds in a man-
ner 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 distributions, including
distributions arising out of the death or disability of a shareholder (includ-
ing one who owns the shares as joint tenant).
Class A shares may be purchased at NAV, and in any amount, by officers, di-
rectors and employees of the Adviser or its affiliates, or companies which
have entered into selling agreements with the Distributor, and to certain fam-
ily members of such individuals. The purchase must be for investment purposes
only and may not be resold other than through redemption by the Funds. The
Funds may also offer their shares at net asset value to investors who use the
sales proceeds from mutual funds outside the Funds (excluding money market
funds); to certain retirement plans; and to brokers, dealers or registered in-
vestment advisers who have entered into arrangements with the Distributor pro-
viding specifically for the shares to be used in particular investment prod-
ucts 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 SAIs.
YOU MUST NOTIFY THE FUND WHENEVER A REDUCED SALES CHARGE OR NET ASSET VALUE
PURCHASE APPLIES TO ENSURE THAT YOU RECEIVE THE SALES CHARGE REDUCTION OR
WAIVER.
BUYING CLASS B SHARES
Class B 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 selected. Class B shares have
higher distribution expenses than Class A shares for eight years. If Class B
shares are redeemed within six years of purchase, a contingent deferred sales
charge generally must be paid.
Those charges and fees help make it possible for the Acquiring Funds to sell
Class B shares without sales charges at the time of purchase.
The proceeds from any contingent deferred sales charges are paid to the Dis-
tributor to defray expenses for providing distribution services for Class B
shares. Examples of such expenses include compensation to sales people and se-
lected 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 shares redeemed within six years of
purchase are subject to a contingent deferred sales charge according to the
following 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. Class B shares purchased by exchange will be sub-
ject to a contingent deferred sales charge using the schedule of the shares
initially purchased.
C-23
<PAGE>
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
EDEMPTIONR DEFERRED
AFER PURCHASET SALES CHARGE
- -------------- ------------
<S> <C>
First............................................................. 5.00%
Second............................................................ 4.00%
Third............................................................. 3.00%
Fourth............................................................ 3.00%
Fifth............................................................. 2.00%
Sixth............................................................. 1.00%
Seventh........................................................... 0%
Eighth............................................................ 0%
</TABLE>
Class B shares purchased prior to December , 1997, may be subject to a dif-
ferent contingent deferred sales charge schedule, which is shown in the Compos-
ite SAIs.
The contingent deferred sales charge is calculated by applying the above per-
centages to whichever of the following is less:
1) The NAV of the redeemed shares at the time they were purchased; or
2) The NAV of the redeemed shares at the time of redemption.
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. In view of that, they
will be redeemed in this order:
1) Shares from reinvested dividends or capital gain distributions.
2) Shares from the earliest 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 reinvest-
ment.
At that time, the investor decides to make the first redemption. The transac-
tion 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 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 Composite Funds' 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 estab-
lished.
4) As a result of the right of the Fund to liquidate a shareholder's account
as described under "How to sell shares."
REINVESTMENT. Investors may reinvest in Class B shares within 120 days of re-
demption and receive reimbursement credited to their account for any contingent
deferred sales charge you previously paid. The reinvested shares will be sub-
ject to the holding period of the shares which were originally purchased. This
holding period determines any contingent deferred sales charges on subsequent
redemptions of the reinvested shares or their conversion to Class A shares as
described in the following section. Shares purchased in accounts that have sys-
tematic investment programs or systematic withdrawal plans are not eligible for
this privilege.
INVESTORS ARE RESPONSIBLE FOR NOTIFYING THE ACQUIRED FUNDS WHENEVER THEY ARE
ENTITLED TO A CONTINGENT DEFERRED SALES CHARGE WAIVER OR REIMBURSEMENT.
C-24
<PAGE>
CLASS B CONVERSION FEATURE. Class B 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 of the two classes 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 Class B shares acquired through the reinvestment of div-
idends and capital gain distributions also will convert to Class A shares.
The conversion of Class B shares to Class A shares is subject to the continu-
ing availability of a favorable ruling from the Internal Revenue Service or
the continuing availability 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 purchased prior to December , 1997, will
generally convert to Class A shares six years after they were initially pur-
chased.
Class B shares of the Funds, 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
Funds, 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 invest-
ment minimum for such [SAM] account.
BUYING CLASS I SHARES
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.
BUYING CLASS S SHARES.
Class S shares are sold exclusively to an investor who at the time of pur-
chase, already maintains a Class S account, 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 selected.
However, Class S shares have higher distribution expenses than Class A shares
for eight years. Also, if Class S shares are redeemed within six years of pur-
chase, a contingent deferred sales charge generally must be paid.
Those charges and fees help make it possible for the Funds to sell Class S
shares without sales charges at the time of purchase.
The proceeds from any contingent deferred sales charges are paid to the Dis-
tributor to defray expenses for providing distribution services for Class S
shares. Examples of such expenses include compensation to sales people and se-
lected dealers. [The Distributor currently pays authorized dealers commissions
of 4.00% of the price of shares sold by them.]
CONTINGENT DEFERRED SALES CHARGE. Class S shares redeemed within six years of
purchase are subject to a contingent deferred sales charge according to the
following schedule. Class S Shares purchased by exchange will be subject to a
contingent deferred sales charge using the schedule of any Composite Fund into
or from which the shares were exchanged that would result in the highest con-
tingent deferred sales charge. Shares purchased through reinvestment of divi-
dends or capital gain distributions are not subject to a contingent deferred
sales charge.
C-25
<PAGE>
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
EDEMPTIONR DEFERRED
AFER PURCHASET SALES CHARGE
- -------------- ------------
<S> <C>
First............................................................. 5.00%
Second............................................................ 4.00%
Third............................................................. 3.00%
Fourth............................................................ 3.00%
Fifth............................................................. 2.00%
Sixth............................................................. 1.00%
Seventh........................................................... 0%
Eighth............................................................ 0%
</TABLE>
The contingent deferred sales charge is calculated by applying the above per-
centages to whichever of the following is less:
1) The NAV of the redeemed shares at the time they were purchased; or
2) The NAV of the redeemed shares at the time of redemption.
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 in this order:
1) Shares from reinvested dividends or capital gain distributions.
2) Shares from the earliest purchase.
The contingent deferred sales charge may be waived for redemptions of Class S
shares under these circumstances:
1) Following the death or 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% an-
nually of the value of the Fund account at the time the plan is
established; and
4) As a result of the right of the Fund to liquidate a shareholder's account
as described under "How to sell shares."
REINVESTMENT. You may reinvest in Class S shares within 120 days of redemption
and receive reimbursement credited to your account for any contingent deferred
sales charge you previously paid. The reinvested shares will be subject to the
holding period of the shares which were originally purchased. This holding pe-
riod determines any contingent deferred sales charges on subsequent redemptions
of the reinvested shares or their conversion to Class A shares as described in
the following section.
TO MAKE SURE YOU RECEIVE WAIVER OR REIMBURSEMENT OF CONTINGENT DEFERRED SALES
CHARGES, YOU MUST NOTIFY THE FUND WHENEVER YOU ARE SO ENTITLED.
CLASS S CONVERSION FEATURE. 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 of the two classes 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 Class S shares acquired through the reinvestment of divi-
dends and capital gain distributions also will convert to Class A shares.
The conversion of Class S shares to Class A shares is subject to the continu-
ing availability of a favorable ruling from the Internal Revenue Service or 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 S 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.
If the investor's [SAM] account is closed, the investor is not required to re-
deem his or her Class S shares, but may continue to hold Class S shares and may
exchange Class S shares of one Fund for Class S shares of any other Composite
Fund without paying a sales charge at the time of the exchange.
C-26
<PAGE>
DISTRIBUTION OF INCOME AND CAPITAL GAINS
The Acquiring Funds (except for the Composite Money Fund) distribute dividends
from net investment income (which is essentially interest and dividends from
securities held), minus expenses. They also make capital gain distributions if
realized gains from the sale of securities exceed realized losses. The Compos-
ite Growth & Income Fund normally declares and pays dividends near the end of
each calendar quarter, when available. The Composite Government Fund, the Com-
posite Income Fund and the Composite Tax-Exempt Fund declare dividends daily
and pay monthly, when available. The Composite Money Fund declares and com-
pounds dividends daily. Dividends, if declared, begin accruing on the day fol-
lowing payment for purchase. Any capital gain distributions normally will be
paid in December.
Investors have four choices regarding dividends and capital gain distribu-
tions. You can make your choice at the time of your initial purchase or by con-
tacting the Funds' offices or your investment representative. The options in-
clude:
AUTOMATIC REINVESTMENT. Most shareholders elect this procedure. It is automat-
ically effective unless another option is chosen. All dividends and capital
gain distributions are reinvested into additional shares of the respective
Fund. Automatic reinvestments generally provide the most capital growth.
REINVEST DIVIDENDS IN ANOTHER COMPOSITE FUND. Income dividends may be automat-
ically invested in the same class of shares of another Composite fund provided
that fund is available for sale in the investor's state of residence.
CASH PAYMENT OF INCOME AND REINVESTMENT OF ANY CAPITAL GAINS. With this op-
tion, dividends are deposited to the investor's 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. Dividends and capital gain distributions
are deposited into a pre-authorized bank account or paid by check.
OTHER INFORMATION. Reinvestments of income dividends and capital gain distri-
butions are made at the closing NAV on the day dividends or distributions are
deducted from the Fund's assets.
If the investor has chosen to receive dividends or capital gain distributions
in cash and the U.S. Postal Service cannot deliver the check, the Funds reserve
the right to reinvest the check at the then-current NAV and to automatically
reinvest subsequent dividends and capital gain distributions in the investor's
account. The Funds may also automatically reinvest dividends or distributions
of $10 or less.
C-27
<PAGE>
INCOME TAXES ON DIVIDENDS AND CAPITAL GAINS
Investors are responsible for federal income tax (and state and local income
taxes, if applicable) on dividends and capital gain distributions. This is
true whether investors are paid in cash or reinvested in additional shares.
Investors will be advised annually as to the tax status of these dividends and
distributions.
Generally, dividends paid by the Acquiring Funds from interest, dividends, or
net short-term capital gains will be taxed as ordinary income. Distributions
of net long-term capital gains are taxable as long-term capital gains, regard-
less of how long the investor has held the shares. If the shares are in an IRA
or another qualified retirement plan, taxes are not paid on the reinvested
amount until funds are withdrawn.
Each of the Acquiring Funds complies with provisions of the Internal Revenue
Code applicable to regulated investment companies and distributes its taxable
income accordingly. Because of this, the Acquiring Funds do not anticipate be-
ing subject to federal income or excise taxes on earnings they distribute to
shareholders.
Tax-exempt interest earned by the Composite Tax-Exempt Fund retains its tax-
advantaged status when it is distributed to investors. However, a portion of
the interest may be subject to federal alternative minimum tax and/or state
and local taxes. Investors should consult a tax preparer who is familiar with
local law. Interest income earned by the Composite Tax-Exempt Fund from any
investments that are not tax-exempt will be taxable to shareholders, as will
income from short-term and long-term capital gains from those investments.
Because of tax law requirements, investors must provide the Funds an accurate
Social Security number or taxpayer identification number or make certain cer-
tifications to avoid the 31% "back-up" withholding tax.
- -------------------------------------------------------------------------------
EXCHANGES FOR OTHER COMPOSITE FUNDS
You may exchange shares of any of the Acquiring Funds for the same class of
shares of any of the Funds. In addition to the Funds described in this Pro-
spectus, there are Composite Funds that invest in other types of securities,
including: income-generating securities, tax-exempt bonds, U.S. government se-
curities, and money market instruments.
Contact your investment representative or the Fund offices to request a pro-
spectus for the Composite funds that interest you.
Exchanges are made at the prevailing NAV 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 Composite Money Fund, Composite Tax-Exempt Fund or [Sierra] California
Money Fund will be subject to the acquired fund's sales charge unless the
shares given in exchange were previously exchanged from a Composite fund that
imposes an initial or contingent deferred sales charge. The availability of
the exchange privilege with respect to shares of [Sierra Prime Income] Fund is
subject to the availability of shares of [Sierra Prime Income] Fund for ex-
change purposes as stated in the SAI of [Sierra Prime Income] Fund. Also, al-
though shares of [Sierra Prime Income] Fund may be exchanged for shares of the
Funds, such exchanges are permitted approxi-
C-28
<PAGE>
- -------------------------------------------------------------------------------
mately 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 Com-
posite fund being acquired and to its availability for sale in your state of
residence. You may arrange for automatic monthly exchanges. The Funds reserve
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 a Fund and, consequently, may be disal-
lowed. Exchanges of shares are sales and may result in a gain or loss for fed-
eral and state income tax purposes. [Shares exchanged from the Money Fund will
be subject to the acquired fund's sales charge unless the shares given in ex-
change were previously exchanged from a Composite fund that imposes an initial
or contingent deferred sales charge.]
HOW TO SELL SHARES
Shareholders may redeem shares at any time. The price paid per share will be
the next NAV that is calculated for all the Acquiring Funds. For the Composite
Growth & Income Fund, the Composite Government Fund, the Composite Tax-Exempt
Fund and the Composite Income Fund 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. Contingent deferred sales charges, if applicable, will
be deducted upon redemption.
TELEPHONE. Investors may authorize telephone transactions when they sign the
Fund account application.
Provided the shareholder has pre-authorized these transactions, shares may be
redeemed or exchanged by telephoning 1-800-543-8072. Shareholders may also re-
quest these transactions through an investment representative. Proceeds may be
directed to a pre-authorized bank or broker account or to the address of rec-
ord for the account. Exchanges also may be made by telephone.
It may be difficult to reach the Fund offices by telephone during periods of
unusual economic or market activity. The Transfer Agent is committed to ex-
tending its availability beyond regular 7 a.m. to 6 p.m. (Pacific time) cus-
tomer service hours during such periods. 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 protection, all telephone instructions are verified. This is done by re-
questing 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 the investor's broker to initiate telephone redemptions of $25,000 or
more that are not directed to a pre-authorized bank or broker account. If rea-
sonable procedures are used, neither the Transfer Agent nor the Funds will be
liable for following telephone instructions which they reasonably believe to
be genuine. Shareholders assume the risk of any losses in such cases. However,
the Transfer Agent or the Funds
C-29
<PAGE>
- -------------------------------------------------------------------------------
may be liable for any losses because of unauthorized or fraudulent telephone
instructions if reasonable procedures are not followed.
WRITTEN REQUEST. Redemptions also may be requested by writing the Acquiring
Funds' offices. Written requests may require a signature guarantee, as dis-
cussed below, and the return of any outstanding share certificates. Changes in
pre-authorized redemption instructions or shareholder account registration
also require signature guarantees. For shareholder protection, the signa-
ture(s) must be guaranteed by an entity acceptable to the Acquiring Funds.
PROMPT PAYMENT. Payment normally will be made on the next business day after
the transaction, but no later than seven days after the transaction unless the
investor recently purchased Fund shares by check. In that case, redemption
proceeds may be delayed until the Transfer Agent verifies collection of the
check. Generally this occurs within 14 days. Redemption proceeds will be sent
by check or Automated Clearing House transfer to the investor's bank account
without charge. Wire redemption proceeds may be subject to a $10 fee. The re-
ceiving 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 es-
tablish a systematic withdrawal plan in an Acquiring Fund account. Shares of
the Acquiring Fund will be redeemed to provide the requested payment. Class B
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 advance, 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 re-
deemed 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 bal-
ance above the minimum during the 90-day grace period.
IRAS AND OTHER TAX-SHELTERED RETIREMENT PLANS
Shares in the Composite Growth & Income Fund, the Composite Government Fund
and the Composite Income Fund are particularly appropriate for many retirement
plans, including IRAs, while shares in the Composite Money Fund may be appro-
priate for many retirement plans. Retirement plan contributions are tax de-
ductible in some cases, and earnings compound on a tax-deferred basis until
withdrawn.
From time to time, Composite Funds Distributor, Inc. or its affiliates may
offer IRA bonuses on IRA rollovers and transfers to IRA accounts maintained by
them. The Acquiring Funds do not pay any portion of these bonuses. The prod-
ucts purchased through these rollovers and transfers may include the Funds.
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 Acquiring Fund offices or your investment representative.
C-30
<PAGE>
PERFORMANCE INFORMATION
While past results are not necessarily indicative of future performance.
Among the factors that influence the Acquiring Funds' performance are the type
and quality of investments, operating expenses, and the net amount of new
money coming into the Acquiring Funds.
Pertinent information follows:
AVERAGE ANNUAL TOTAL RETURN. "Average annual total return" shows the change
in value of an investment in a Fund over a stated period as a steady compound
rate of return. The calculation assumes reinvestment of dividends and capital
gain distributions and payment of the maximum initial sales charge for Class A
shares or the applicable contingent deferred sales charge for Class B or Class
S shares.
NON-STANDARDIZED TOTAL RETURNS. These "non-standardized total returns" differ
from average annual total returns for the following reasons: First, they may
relate to non-standard periods; second, they may represent cumulative (rather
than average) total return and third, sales charges may not be deducted.
YIELD. The Composite Government Fund, the Composite Income Fund and the Com-
posite Tax-Exempt Fund calculate their current "yields" by dividing annualized
net investment income per share for a stated 30-day period by the maximum of-
fering price on the last day of the period. The result then is shown as a per-
centage of the total investment.
The Composite Money Fund defines yield as the income generated by the Fund
over a seven-day period that is identified in the advertisement. The income is
then annualized and shown as a percentage of the total investment.
Yields are calculated separately for each class of shares. Because yield ac-
counting methods differ from the methods used for other accounting purposes,
the Composite Government Fund, the Composite Income Fund and the Composite
Tax-Exempt Fund's yields may not equal the income paid to the shareholder's
account or the income reported in the Funds' financial statements.
EFFECTIVE YIELD. The Composite Money Fund calculates the effective yield by
assuming that the income is reinvested when annualizing the seven-day yield.
The effective yield will be higher than the yield because of the assumed com-
pounding.
DISTRIBUTION RATE. The Composite Government Fund, the Composite Income Fund
and the Composite Tax-Exempt Fund's distribution rates are calculated by di-
viding the actual ordinary income dividends per share (annualized) over a one-
month or 12-month period by the maximum offering price at the end of the peri-
od.
TAXABLE-EQUIVALENT YIELD. The taxable-equivalent yield is the yield that an
investor requires from a taxable investment to reach the same earnings level
as a tax-exempt fund. The taxable-equivalent yield is calculated by: 1) Sub-
tracting the investor's income tax rate from 1.0, and then 2) Dividing the
Tax-Exempt Fund's stated yield by the answer to the first step.
For example: To calculate a taxable-equivalent yield at a 36% tax rate, sub-
tract .36 from 1.0, and divide the taxable fund's yield by the resulting .64.
AVERAGE ANNUAL TOTAL RETURN. "Average annual total return" is the change in
value of an investment in a Fund over a stated period as a steady compound
rate of return. This calculation assumes reinvestment of dividends and capital
gain distributions and payment of the maximum initial sales charge for Class A
shares or the applicable contingent deferred sales charge for Class B or Class
S shares.
OTHER INFORMATION. Management has included a discussion of the Acquiring
Funds' performance in their annual report, which is available upon request and
without charge by calling the Fund offices.
C-31
<PAGE>
- -------------------------------------------------------------------------------
The Acquiring Funds may quote performance results from recognized services
and publications that monitor the performance of mutual funds. Included, too,
may be comparisons of their performance with various published, historical in-
dices.
THE FUNDS' PERFORMANCE IS NOT FIXED NOR IS THE PRINCIPAL GUARANTEED. ASSET
VALUES FLUCTUATE DAILY SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PAST PERFORMANCE SHOULD NOT BE
INTERPRETED AS AN INDICATION OF A FUNDS' ACTUAL PERFORMANCE IN THE FUTURE.
REPORTS TO SHAREHOLDERS
Shareholders receive semiannual and annual reports. The financial statements
in the annual reports are audited by independent accountants.
Shareholders whose accounts are directly with the Acquiring Funds receive
statements at least quarterly. These statements show account transactions, the
total number of shares owned, and any dividends or distributions paid. Share-
holders also receive written confirmation soon after each transaction which is
not a dividend reinvestment, systematic investment program purchase, or sys-
tematic withdrawal plan redemption.
C-32
<PAGE>
[OUTSIDE BACK COVER]
THE COMPOSITE FUNDS
PROSPECTUS/PROXY STATEMENT
OCTOBER , 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
OVERVIEW OF MERG-
ERS.............
RISK FACTORS.....
SPECIAL MEETING
OF SHAREHOLD-
ERS.............
PROPOSAL 1: ELEC-
TION OF TRUST-
EES.............
PROPOSALS 2, 3,
4, 5, 6 and 7:
APPROVAL OR DIS-
APPROVAL OF
AGREEMENT AND
PLAN OF REORGA-
NIZATION........
INFORMATION ABOUT
THE ACQUIRED
FUNDS...........
INFORMATION ABOUT
THE ACQUIRING
FUNDS...........
VOTING INFORMA-
TION............
APPENDIX A: FORM
OF AGREEMENT AND
PLAN OF REORGA-
NIZATION........
APPENDIX B: EX-
CERPTS FROM COM-
POSITE FUNDS AN-
NUAL REPORT.....
APPENDIX C: ADDI-
TIONAL INFORMA-
TION ABOUT THE
ACQUIRING
FUNDS...........
</TABLE>
<PAGE>
_________________ FUND
A SERIES OF SIERRA TRUST FUNDS
PROXY SOLICITED BY THE BOARD OF TRUSTEES
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS -- DECEMBER __, 1997
The undersigned hereby appoints William G. Papesh, Monte D. Calvin and John
T. West, and each of them separately, proxies with power of substitution to
each, and hereby authorizes them to represent and to vote, as designated below,
at the Special Meeting of Shareholders of the Fund indicated above, a series of
Sierra Trust Funds, on December __, 1997 at [ ], and at any
adjournment thereof, all of the shares of the Fund which the undersigned would
be entitled to vote if personally present.
NOTE: Please sign exactly as your name
appears on this proxy card. All joint
owners should sign. When signing as
executor, administrator, attorney,
trustee or guardian or as custodian for
a minor, please give full title as such.
If a corporation, please sign in full
corporate name and indicate the signer's
office. If a partner, sign in the
partnership name.
----------------------------
Signature
----------------------------
Signature (if held jointly)
----------------------------
Date
<PAGE>
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR EACH PROPOSAL.
In their discretion, the proxies are authorized to vote upon such other business
as may properly come before the Meeting. The Trustees recommend a vote FOR the
proposals.
I. Proposal to elect thirteen For electing all the Withhold authority to
Trustees. The nominees for nominees (except as vote for all nominees
Trustees are: marked to the contrary
David E. Anderson, Wayne L. below)
Attwood, M.D., Arthur H.
Bernstein, Kristianne Blake,
Edmond R. Davis, John W. [_] [_]
English, Anne V. Farrell,
Michael K. Murphy, Alfred E.
Osborne, Jr., William G.
Papesh, Daniel L. Pavelich,
Jay Rockey, and
Richard C. Yancey.
To withhold authority to vote for one or more of the nominees, write those
nominees' names below:
- -------------------------------------------
II. Proposal to approve the Merger For Against Abstain
of the Fund named on the reverse [_] [_] [_]
side of this card, as described in
the Prospectus/Proxy Statement and
the relevant Agreement and Plan of
Reorganization.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
-2-
<PAGE>
THE COMPOSITE FUNDS
FORM N-14
PART B
STATEMENT OF ADDITIONAL INFORMATION
October __, 1997
This Statement of Additional Information ("the SAI") relates to proposed
mergers (the "Mergers") of the U.S. Government Fund (the "Sierra Government
Fund"), the Corporate Income Fund (the "Sierra Income Fund"), the Growth and
Income Fund (the "Sierra Growth & Income Fund"), the Global Money Fund (the
"Sierra Global Money Fund"), the U.S. Government Money Fund (the "Sierra
Government Money Fund") and the National Municipal Fund (the "Sierra Municipal
Fund") (each an "Acquired Fund"), series of the Sierra Trust Funds (the "Sierra
Trust"), a Massachusetts business trust, into, respectively, the Composite U.S.
Government Securities Fund (the "Composite Government Fund"), the Composite
Income Fund, the Composite Growth & Income Fund (the "Composite Growth & Income
Fund"), the Composite Money Market Fund (the "Composite Money Fund"), the
Composite Money Fund and the Composite Tax-Exempt Bond Fund (the "Composite Tax-
Exempt Bond Fund") (each an "Acquiring Fund"), series of The Composite Funds
(the "Composite Trust"), a Massachusetts business trust.
This Statement of Additional Information contains information which may be
of interest to shareholders but which is not included in the Prospectus/Proxy
Statement dated October __, 1997 (the "Prospectus/Proxy Statement") of the New
Composite Trust which relates to the Mergers. As described in the
Prospectus/Proxy Statement, the Mergers would involve the transfer of all the
assets of each Acquired Fund in exchange for shares of the corresponding
Acquiring Fund and the assumption of all the liabilities of the Acquired Fund.
Each Acquired Fund would distribute the Acquiring Fund shares it receives to its
shareholders in complete liquidation of the Acquired Fund.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus/Proxy Statement. The Prospectus/Proxy
Statement has been filed with the Securities and Exchange Commission and is
available upon request and without charge by writing The Composite Funds, 601
West Main Avenue, Suite 300, Spokane, Washington 99201 or by calling 1-800-543-
8072.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
I. Additional Information about Acquiring and Acquired Funds...............
II. Financial Statements....................................................
</TABLE>
<PAGE>
I. Additional Information about Acquiring and Acquired Funds.
This Statement of Additional Information is accompanied by the Prospectus
and Statement of Additional Information of the Sierra Trust, each dated October
31, 1997, which provides further information relating to the Acquired Funds.
As described in the Prospectus/Proxy Statement, the Composite U.S.
Government Securities Fund, Composite Income Fund, Composite Growth & Income
Fund, Composite Money Fund and Composite Tax-Exempt Bond Fund will, immediately
prior to and as a condition to the Mergers, acquire the assets and liabilities
of and succeed to the business of, respectively, Composite U.S. Government
Securities, Inc., Composite Income Fund, Inc., Composite Growth & Income Fund (a
portfolio of Composite Equity Series, Inc.), Composite Cash Management Company:
Money Market Portfolio and Composite Tax-Exempt Bond Fund, Inc., each an
investment company (or a series of an investment company) incorporated under the
laws of the State of Washington. The term "Acquiring Funds" as used in this SAI
refers to such Funds and their predecessors (i.e., both before and after the
Reorganization as series of the Composite Trust).
This Statement of Additional Information is accompanied by the Prospectus
dated April 30, 1997 and the Statement of Additional Information dated April 30,
1997, as revised June 18, 1997, of the Composite Government Fund, the Composite
Income Fund and the Composite Tax-Exempt Bond Fund, the Prospectus dated
February 28, 1997 and the Statement of Additional Information dated February 28,
1997, as revised March 24, 1997 and June 18, 1997, of the Composite Growth &
Income Fund, and the Prospectus dated February 28, 1997 and the Statement of
Additional Information, dated April 30, 1997, as revised June 18, 1997, of the
Composite Money Fund which provide further information about the Acquiring
Funds, including information in respect of their investment objectives, policies
and financial history.
The following documents, which have previously been filed with the
Securities and Exchange Commission, have been incorporated by reference into
Part A of this Registration Statement:
(1) Prospectuses of the Sierra Trust dated October 31, 1996 (filed on October
30, 1996 pursuant to Rule 497 under the Securities Act of 1933)
(Registration Nos. 33-27489 and 811-5775)
(2) Supplement dated September 1, 1997 to Prospectuses of the Sierra Trust
(filed on September 15, 1997 pursuant to Rule 497 under the Securities Act
of 1933) (Registration Nos. 33-27489 and 811-5775)
<PAGE>
(3) Statement of Additional Information of the Sierra Trust dated October 31,
1996 (filed on October 30, 1996 pursuant to Rule 497 under the Securities
Act of 1933) (Registration Nos. 33-27489 and 811-5775)
(4) Prospectus of the Composite Government Fund, Composite Income Fund, Inc.
and Composite Tax-Exempt Bond Fund, Inc. (the "Composite Bond Funds") dated
April 30, 1997 (filed on April 25, 1997 pursuant to Rule 497 under the
Securities Act of 1933) (Registration Nos. 002-76643 and 811-3426, 002-
54998 and 811-2604 and 002-57530 and 811-2681)
(5) Statement of Additional Information of the Composite Bond Funds dated April
30, 1997, as revised June 18, 1997 (filed on June 18, 1997 pursuant to Rule
497 under the Securities Act of 1933) (Registration Nos. 002-76643 and 811-
3426, 002-54998 and 811-2604 and 002-57530 and 811-2681)
(6) Prospectus of the Composite Growth & Income Fund dated February 28, 1997
(filed on February 25, 1997 pursuant to Rule 497 under the Securities Act
of 1933) (Registration Nos. 002-11380 and 811-565)
(7) Statement of Additional Information of the Composite Growth & Income Fund
dated February 28, 1997, as revised March 24, 1997 and June 18, 1997 (filed
on June 18, 1997 pursuant to Rule 497 under the Securities Act of 1933),
(Registration Nos. 002-11380 and 811-565)
(8) Prospectus of the Composite Money Fund dated April 30, 1997 (filed on April
24, 1997 pursuant to Rule 497 under the Securities Act of 1933)
(Registration Nos. 002-65242 and 811-2941)
(9) Statement of Additional Information of the Composite Money Fund dated April
30, 1997, as revised June 18, 1997 (filed on June 18, 1997 pursuant to Rule
497 under the Securities Act of 1933) (Registration Nos. 002-65242 and 811-
2941)
(10) Annual Report of the Sierra Trust dated June 30, 1997 (filed on September
5, 1997) (Registration Nos. 33-27489 and 811-5775)
(11) Annual Report of the Composite Bond Funds dated December 31, 1996 (filed on
February 19, 1997) (Registration Nos. 002-76643 and 811-3426, 002-54998 and
811-2604 and 002-57530 and 811-2681)
(12) Semi-Annual Report of the Composite Bond Funds dated June 30, 1997 (filed
on August 27, 1997) (Registration Nos. 002-76643 and 811-3426, 002-54998
and 811-2604 and 002-57530 and 811-2681)
<PAGE>
(13) Annual Report of the Composite Growth & Income Fund dated October 31, 1996
(filed on December 23, 1996) (Registration Nos. 002-11380 and 811-565)
(14) Semi-Annual Report of Composite Growth & Income Fund dated April 30, 1997
(filed on June 26, 1997) (Registration Nos. 002-11380 and 811-565)
(15) Annual Report of Composite Cash Management Company dated December 31, 1996
(filed on February 14, 1997) (Registration Nos. 002-65242 and 811-2941)
(16) Semi-Annual Report of Composite Cash Management Company dated June 30, 1997
(filed on August 26, 1997) (Registration Nos. 002-65242 and 811-2941)
II. Financial Statements.
This Statement of Additional Information is accompanied by the Annual
Report of the Sierra Government Fund, Sierra Income Fund, Sierra Growth & Income
Fund, Sierra Global Money Fund, Sierra Government Money Fund and Sierra
Municipal Fund for the year ended June 30, 1997, each of which contains
historical financial information regarding such funds; the Semi-Annual Reports
for the six-month period ended June 30, 1997 and the Annual Reports for the year
ended December 31, 1996 of the Composite Government Fund, Composite Income Fund,
Composite Money Fund, Composite Tax-Exempt Bond Fund, which each respectively
contain historical financial information regarding such funds, and the Annual
Report for the period ended October 31, 1996 and the Semi-Annual Report for the
period ended April 30, 1997 of the Composite Growth & Income Fund which contain
historical financial information regarding such fund. Such reports have been
filed with the Securities and Exchange Commission and are incorporated herein by
reference.
Pro forma financial statements are provided on the following pages for each
of the Acquiring Funds.
<PAGE>
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES AT JUNE 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Composite
Sierra U.S. U.S. Government Pro Forma Pro Forma
Government Fund Securities Fund Adjustments Combined
--------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value, (cost $474,836,318, $ 478,326,512 $ 121,557,004 $599,883,516
$122,152,209, and $596,988,527
Cash, receivables, and other assets 34,093,977 1,123,832 35,217,809
--------------- --------------- ------------
Total Assets 512,420,489 122,680,836 635,101,325
--------------- --------------- ------------
LIABILITIES:
Reverse repurchase agreements * 91,789,563 91,789,563
Accrued expenses and other liabilities 2,037,204 352,583 2,389,787
Payable for investment securities purchased 48,661,707 48,661,707
--------------- --------------- ------------
Total Liabilities 142,488,474 352,583 142,841,057
--------------- --------------- ------------
Net Assets $ 369,932,015 $ 122,328,253 $492,260,268
--------------- --------------- ------------
Outstanding Shares
- ------------------
Class A 27,040,300 11,437,387 (2,272,281) 36,205,406
--------------- --------------- ------------
Class B 2,130,374 277,515 (179,222) 2,228,667
--------------- --------------- ------------
Class S 950,480 - (79,954) 870,526
--------------- --------------- ------------
Class I 8,567,415 - (720,648) 7,846,767
--------------- --------------- ------------
Net Asset Value
- ---------------
Class A $ 258,553,449 $ 119,430,672 $377,984,121
--------------- --------------- ------------
Class B $ 20,370,022 $ 2,897,581 $ 23,267,603
--------------- --------------- ------------
Class S $ 9,088,294 - $ 9,088,294
--------------- --------------- ------------
Class I $ 81,920,250 - $ 81,920,250
--------------- --------------- ------------
Net Asset Value
Per Share
- ---------------
Class A $ 9.56 $ 10.44 $ 10.44
--------------- --------------- ------------
Class B $ 9.56 $ 10.44 $ 10.44
--------------- --------------- ------------
Class S $ 9.56 - $ 10.44
--------------- --------------- ------------
Class I $ 9.56 - $ 10.44
--------------- --------------- ------------
* As reorganized, the Fund will not be allowed to engage in reverse repurchase agreements. Accordingly, this position
will have to be settled prior to consummation of the reorganization.
See accompanying notes to pro forma financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996 (Unaudited)
Composite
Sierra U.S. U.S. Government Pro Forma Pro Forma
Government Fund Securities Fund Adjustments Combined
--------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and Other $38,316,798 $10,992,841 $ 0 $49,309,639
----------- ----------- ----------- -----------
EXPENSES:
Management fees 2,587,377 984,485 (560,063) 3,011,799
Administration fees 1,646,513 0 (1,646,513) 0
Transfer agent fees 0 146,145 544,600 690,745
Distribution fees
Class A Shares 1,023,196 218,510 78,759 1,320,465
Class B Shares 225,764 26,484 0 252,248
Class S Shares 261,672 0 0 261,672
All other expenses 974,522 172,981 (331,168) 816,335
Expense reimbursement (1,931,111) 0 1,931,111 0
----------- ----------- ----------- -----------
Subtotal 4,787,933 1,548,605 16,726 6,353,264
----------- ----------- ----------- -----------
Fees paid indirectly (32,587) (3,182) 0 (35,769)
----------- ----------- ----------- -----------
Total Expenses 4,755,346 1,545,423 16,726 6,317,495
----------- ----------- ----------- -----------
NET INVESTMENT INCOME 33,561,452 9,447,418 (16,726) 42,922,144
----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) From:
Security Transactions (5,210,094) (386,962) 0 (5,597,056)
Future contracts (2,376,021) 0 0 (2,376,021)
Net Unrealized Appreciation (Depreciation) of:
Securities (9,099,308) 0 0 (9,099,308)
Foreign currency, written options, futures
contracts and other assets and liabilities 125,950 (6,198,006) 0 (6,072,056)
----------- ----------- ----------- -----------
Net Realized and Unrealized Gain (Loss) on Investments (16,559,473) (6,584,968) 0 (23,144,441)
----------- ----------- ----------- -----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $17,001,979 $ 2,862,450 $ (16,726) $19,847,703
=========== =========== =========== ===========
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997(Unaudited)
Composite
Sierra U.S. U.S. Government Pro Forma Pro Forma
Government Fund Securities Fund Adjustments Combined
------------------ ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and Other $16,846,906 $4,610,844 $0 $21,457,750
------------------ ----------------- ------------- ---------------
EXPENSES:
Management fees 1,107,156 405,280 (197,852) 1,314,584
Administration fees 704,553 (704,553) 0
Registration fees 10,480 10,714 0 21,194
Transfer agent fees 0 58,718 234,042 292,760
Postage, printing, and office expense 134,262 38,042 (85,660) 86,644
Audit and legal fees 23,513 6,241 0 29,754
Custodian fees 31,563 19,161 0 50,724
Director and trustee fees 1,650 5,057 0 6,707
Distribution fees
Class A Shares 356,411 115,176 893 472,480
Class B Shares 106,160 14,439 (108,965) 11,634
Class S Shares 50,257 0 (45,713) 4,544
Other 875,875* 2,278 0 878,153
Expense reimbursement (782,669) 782,669 0
Fees paid indirectly (5,613) (889) 0 (6,502)
------------------ ----------------- ------------- ---------------
Total Expenses 2,613,598 674,217 (125,139) 3,162,676
------------------ ----------------- ------------- ---------------
NET INVESTMENT INCOME 14,233,308 3,936,627 125,139 18,295,074
------------------ ----------------- ------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) From Security Transactions 206,839 (747,914) 0 (541,075)
(excluding short term securities)
Net Unrealized Appreciation (Depreciation) of Investments (1,443,597) 326,683 0 (1,116,914)
------------------ ----------------- ------------- ---------------
Net Realized and Unrealized Gain (Loss) on Investments (1,236,758) (421,231) 0 (1,657,989)
------------------ ----------------- ------------- ---------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,996,550 $3,515,396 $125,139 $16,637,085
================== ================= ============= ===============
</TABLE>
* Include interest of $780,416.
See accompanying notes to pro forma financial statements.
<PAGE>
COMPOSITE U.S. GOVERNMENT SECURITIES FUND (1) and SIERRA U.S. GOVERNMENT FUND
Combined Portfolio of Investments
June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ------------ ------------
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS - 27.86%
$ 1,000,000 U.S. Treasury Bond, 5.625% due 2/15/2006 ** $ 939,376
18,250,000 U.S. Treasury Bond, 7.25% due 5/15/2016, 08/15/2022 ** 19,039,706
6,500,000 U.S. Treasury Bond, 7.50% due 11/15/2016 ** 6,948,910
5,000,000 U.S. Treasury Bond, 6.25% due 8/15/2024 ** 4,628,130
500,000 U.S. Treasury Bond, 6.50% due 11/15/2026 ** 479,375
25,570,000 U.S. Treasury Bond, 6.50% due 11/15/2026* 24,523,165
20,000,000 U.S. Treasury Bond, 6.625% due 02/15/2027* 19,568,800
5,500,000 U.S. Treasury Note, 6.25% due 03/31/1999* 5,518,920
3,700,000 U.S. Treasury Note, 6.375% due 05/15/2000 3,713,283
21,400,000 U.S. Treasury Note, 6.375% due 09/30/2001* 21,403,424
42,600,000 U.S. Treasury Note, 6.625% due 05/15/2007* 42,952,728
17,838,259 U.S. Treasury Inflation Index Bond, 3.375% due 01/15/2007 17,409,070
------------
TOTAL U.S. TREASURY OBLIGATIONS (COST $167,254,413) 167,124,867
------------
MORTGAGE BACKED SECURITIES - 71.85%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) - 26.99%
4,907,768 6.00% due 04/20/2026 ** 4,533,565
21,843,195 6.50% due 08/15/2023 to 04/15/2026 ** 20,908,087
2,594,064 6.875% due 12/20/2022 ** 2,663,219
19,204,665 7.00% due 07/15/2008 to 08/15/2023 ** 19,010,415
7,495,594 7.125% due 05/20/2022 to 09/20/2022 ** 7,720,648
1,577,897 8.00% due 04/15/2022 ** 1,613,894
1,782,200 8.50% due 05/15/2022 ** 1,852,932
3,038,238 9.50% due 07/15/2016 to 09/15/2020 ** 3,278,451
16,100 11.50% due 07/15/2015 ** 18,173
43,128 13.50% due 09/15/2014 to 12/15/2014 ** 50,150
40,211 14.00% due 06/15/2011 ** 46,859
7,804,082 7.00% due 01/15/2024 to 05/15/2026 7,662,836
77,568,492 7.50% due 12/15/2022 to 12/15/2023 78,144,230
8,476,674 9.00% due 10/15/2008 to 06/15/2022 9,060,610
4,894,157 9.50% due 04/15/2016 to 11/15/2017 5,308,363
1,249,343 9.50% due 02/20/2017 to 03/20/2021 1,342,549
------------
162,214,961
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - 3.75%
39,698 5.50% due 02/01/2009 37,992
15,465,681 7.00% due 06/01/2010 to 06/01/2012 15,444,158
5,409,647 8.00% due 05/01/2022 to 01/01/2025 5,576,593
850,585 8.50% due 02/01/2023 to 09/01/2025 888,062
516,573 9.00% due 06/01/2016 to 06/01/2021 550,507
------------
22,497,312
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (FMLMC) - 32.19%
25,532,203 6.50% due 02/01/2011 to 10/01/2025 24,999,381
2,214,362 7.00% due 07/01/2024 to 12/01/2026 2,184,982
134,064,871 7.50% due 05/01/2010 to 06/01/2027 135,926,367
3,856,148 8.50% due 04/01/2019 4,046,526
</TABLE>
<PAGE>
COMPOSITE U.S. GOVERNMENT SECURITIES FUND (3) and SIERRA U.S. GOVERNMENT FUND
Combined Portfolio of Investments (continued)
June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ----------- ------------
<S> <C> <C>
$ 1,161,849 8.75% due 01/01/2013 $ 1,215,096
1,978,160 9.00% due 12/01/2008 to 08/01/2022 2,104,158
741,900 9.50% due 06/01/2016 to 05/01/2017 797,577
21,500,000 TBA, GOLD, 7.50% due 04/01/2012# 21,822,500
------------
193,996,587
------------
COLLATERALIZED MORTGAGE OBLIGATIONS - GNMA BACKED - 8.70%
1,950,000 Federal National Mortgage Association, 7.50% due 8/25/2001 ** 1,990,790
943,584 Federal National Mortgage Association - ACES, 6.783% due 1/17/2003 ** 945,943
6,408,000 Federal National Mortgage Association, 8.00% due 6/25/2005 ** 6,510,970
2,230,000 Federal National Mortgage Association, 6.00% due 8/25/2007 ** 2,185,868
95,053 Federal National Mortgage Association, 8.50% due 2/25/2018 ** 95,695
Federal National Mortgage Association, REMIC, Pass-through certificates:
4,000,000 Trust 89-18, Class C, 9.50% due 04/25/2004 4,300,000
27,420 Trust 90-133, Class K, (I/O), 1009.50% due 11/25/2020 835,635
1,417,625 Trust 92-83, Class X, 7.00% due 02/25/2022 1,284,269
5,690,515 Trust 93-162, Class E, 6.00% due 08/25/2023 5,165,906
16,696,334 Federal National Mortgage Association,Trust 96-274, Class 1, (P/O),
Zero coupon due 10/01/2025 12,209,925
8,500,000 Federal Home Loan Mortgage Corporation, 6.85% due 7/25/2018 ** 8,485,380
2,500,000 Federal Home Loan Mortgage Corporation, REMIC, Pass-through certificates,
Series 1288, Class HA, 5.50% due 11/15/2020 2,328,900
4,900,000 Merrill Lynch, 6.50% due 8/27/2015 ** 4,785,776
1,053,442 Mortgage Capital Trust, 9.25% due 6/01/2017 ** 1,085,692
------------
52,210,749
------------
TOTAL MORTGAGE-BACKED SECURITIES (cost $427,995,114) 431,029,629
------------
SHORT-TERM INVESTMENT - 0.29%
1,739,000 Repurchase agreement with Goldman Sachs, collateralized
by a U.S. Treasury Note, in a joint trading account at 5.75%
dated 06/30/97, due 07/01/97 with a maturity value of
$1,739,278 (cost $1,739,000) ** 1,739,000
------------
TOTAL INVESTMENTS (cost $596,988,527) $589,883,516
============
</TABLE>
GLOSSARY OF TERMS
GOLD=Payments are on an recalculated 45-day payment cycle instead of 75-day
cycle
I/O = Interest Only
P/O = Principal Only
REMIC = Real Estate Mortgage Investment Conduit
* A portion or all of these securities are pledged as collateral for reverse
repurchase agreements.
# Security purchased on a when-issued basis.
** Security held by the Composite Fund. Other securities were held by the Sierra
Fund.
(1) Formerly Composite U.S. Government Securities, Inc.
<PAGE>
Composite U.S. Government Securities Fund and Sierra U.S. Government Fund
Notes to Pro Forma Financial Statements (unaudited)
1. Basis of Combination
The pro forma combined financial statements reflect the combined financial
position of Composite U.S. Government Securities Fund (formerly Composite
U.S. Government Securities, Inc.) and Sierra U.S. Government Fund at June
30, 1997, and the pro forma combined results of operations for the year
ended December 31, 1996 and the six month period ended June 30, 1997 as
though the reorganization had occurred on January 1, 1996.
The pro forma combined financial statements are presented for the
information of the reader and may not necessarily be representative of how
the pro forma combined financial statements would have appeared had the
reorganization actually occurred.
The Pro Forma Combined Portfolio of Investments, Statement of Assets and
Liabilities, and the Statement of Operations should be read in conjunction
with the historical financial statements of the funds incorporated by
reference in the Statement of Additional Information.
The pro forma statements give effect to the proposed transfer of the assets
and stated liabilities of the Sierra U.S. Government Fund in exchange for
shares of Composite U.S. Government Securities Fund. Under generally
accepted accounting principles, the historical cost of investment
securities will be carried forward to the surviving entity.
The pro forma statements do not reflect the expenses of either fund in
carrying out its obligations under the proposed Agreement and Plan of
Reorganization.
2. Pro Forma Combined Portfolio of Investments
Securities held by the two funds have been combined in the accompanying
Combined Portfolio of Investments. Securities marked "**" are those
securities held by the Composite Fund. Those not marked are held by the
Sierra Fund. Securities are stated at market value as determined by the
Funds as of June 30, 1997. Historical cost amounts represent the combined
cost basis of the securities.
<PAGE>
Composite U.S. Government Securities Fund and Sierra U.S. Government Fund
Notes to Pro Forma Financial Statements (unaudited) (continued)
3. Pro Forma Statements of Assets and Liabilities
Shares outstanding have been adjusted to reflect the conversion of Sierra
shares into Composite shares based upon the net asset value of Composite
shares at June 30, 1997.
4. Pro Forma Statements of Operations
The pro forma statements of operations reflect the following adjustments:
A. A decrease in management fees to reflect the new fee structure. Fees
are based on .50% of average daily net assets up to $500,000,000 and
.40% of average daily net assets over that amount. In addition, the
previous management fee waiver for Sierra will no longer be in effect.
B. An elimination of the Sierra administration fees, now incorporated in
the management fee structure. Also, expenses of the Fund will no longer
be reimbursed. Shareholder servicing and distribution expenses have
been adjusted to reflect a rate of .25% (an increase of .05% for
Composite shareholders) of average daily net assets. Other expenses
have been adjusted based on an overall estimated expense ratio of .97%.
<PAGE>
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES AT JUNE 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Sierra Corporate Composite Pro Forma Pro Forma
Income Fund Income Fund Adjustments Combined
---------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value, (cost $240,671,845,
$84,833,119, and $325,504,964) $250,239,423 $86,394,037 $338,633,460
Cash, receivables, and other assets 5,684,055 1,551,864 7,235,919
------------ ----------- ------------
Total Assets 255,923,478 87,945,901 343,869,379
------------ ----------- ------------
LIABILITIES:
Accrued expenses and other liabilities 1,263,569 341,451 1,605,020
Payable for dollar roll transactions 28,747,979 28,747,979
------------ ----------- ------------
Total Liabilities 30,011,548 341,451 30,352,999
------------ ----------- ------------
Net Assets $225,911,930 $87,604,450 $313,516,380
============ =========== ============
Outstanding Shares
- ------------------
Class A 18,966,729 8,734,395 2,312,948 30,014,072
============ =========== ============
Class B 2,035,268 793,230 242,884 3,071,382
============ =========== ============
Class S 205,775 - 25,062 230,837
============ =========== ============
Class I 705,975 - 85,998 791,973
============ =========== ============
Net Asset Value
- ------------------
Class A $195,530,521 $80,301,577 $275,832,098
============ =========== ============
Class B $20,981,782 $7,302,873 $28,284,655
============ =========== ============
Class S $2,121,394 - $2,121,394
============ =========== ============
Class I $7,278,233 - $7,278,233
============ =========== ============
Net Asset Value
Per Share
- ------------------
Class A $10.31 $9.19 $9.19
============ =========== ============
Class B $10.31 $9.21 $9.21
============ =========== ============
Class S $10.31 - $9.19
============ =========== ============
Class I $10.31 - $9.19
============ =========== ============
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Sierra Corporate Composite Pro Forma Pro Forma
Income Fund Income Fund Adjustments Combined
---------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and Other $28,440,951 $7,234,241 $ 0 $ 35,675,192
----------- ---------- ----------- ------------
EXPENSES:
Management fees 2,200,890 599,008 (315,199) 2,484,699
Administration fees 1,185,095 0 (1,185,095) 0
Transfer agent fees 0 114,258 407,070 521,328
Distribution fees
Class A Shares 751,597 133,640 47,921 933,158
Class B Shares 239,489 57,828 0 297,317
Class S Shares 99,931 0 0 99,931
All other expenses 469,819 131,792 50,049 651,660
Expense reimbursement (990,489) 0 990,489 0
----------- ---------- ----------- ------------
Subtotal 3,956,332 1,036,526 (4,765) 4,988,093
----------- ---------- ----------- ------------
Fees paid indirectly (1,455) (7,838) 0 (9,293)
----------- ---------- ----------- ------------
Total Expenses 3,954,877 1,028,688 (4,765) 4,978,800
----------- ---------- ----------- ------------
NET INVESTMENT INCOME 24,486,074 6,205,553 4,765 30,696,392
----------- ---------- ----------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) From Security Transactions (557,759) 1,098,430 0 540,671
(excluding short term securities)
Net Unrealized Appreciation (Depreciation) of Investments (24,938,702) (4,354,365) 0 (29,293,067)
----------- ---------- ----------- ------------
Net Realized and Unrealized Gain (Loss) on Investments (25,496,461) (3,255,935) 0 (28,752,396)
----------- ---------- ----------- ------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ($1,010,387) $2,949,618 $ 4,765 $ 1,943,996
=========== ========== =========== ============
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Sierra Corporate Composite Pro Forma Pro Forma
Income Fund Income Fund Adjustments Combined
--------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and Other $11,259,253 $3,382,296 $ 0 $14,641,549
----------- ---------- ----------- -----------
EXPENSES:
Management fees 852,050 277,115 (95,800) 1,033,365
Administration fees 458,796 0 (458,796) 0
Transfer agent fees 0 50,322 160,186 210,508
Distribution fees
Class A Shares 270,763 74,059 22,169 366,991
Class B Shares 109,794 35,477 0 145,271
Class S Shares 14,141 0 0 14,141
All other expenses 199,219 61,677 (32,846) 228,050
Expense reimbursement (358,866) 0 358,866 0
----------- ---------- ----------- -----------
Subtotal 1,545,897 498,650 (46,221) 1,998,326
----------- ---------- ----------- -----------
Fees paid indirectly 0 (807) 0 (807)
----------- ---------- ----------- -----------
Total Expenses 1,545,897 497,843 (46,221) 1,997,519
----------- ---------- ----------- -----------
NET INVESTMENT INCOME 9,713,356 2,884,453 46,221 12,644,030
----------- ---------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) From Security Transactions (505,087) 639,526 0 134,439
(excluding short term securities)
Net Unrealized Appreciation (Depreciation) of Investments (3,391,336) (328,204) 0 (3,719,540)
----------- ---------- ----------- -----------
Net Realized and Unrealized Gain (Loss) on Investments (3,896,423) 311,322 0 (3,585,101)
----------- ---------- ----------- -----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,816,933 $3,195,775 $ 46,221 $ 9,058,929
=========== ========== =========== ===========
See accompanying notes to pro forma financial statements.
</TABLE>
<PAGE>
COMPOSITE INCOME FUND (1) and SIERRA CORPORATE INCOME FUND
COMBINED PORTFOLIO OF INVESTMENTS
June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT U.S. TREASURY OBLIGATIONS - 7.07% VALUE
- ----------- -----------
<S> <C> <C> <C>
$ 5,225,000 U.S. Treasury Bond, 7.25% due 08/15/2022 ** $ 5,453,599
6,325,000 U.S. Treasury Bond, 6.25% due 08/15/2023 ** 5,854,584
1,250,000 U.S. Treasury Bond, 6.50% due 11/15/2026 ** 1,198,439
5,000,000 U.S. Treasury Bond, 13.75% due 08/15/2004 7,038,450
1,000,000 U.S. Treasury Note, 9.00% due 05/15/1998 ** 1,027,501
1,000,000 U.S. Treasury Note, 7.75% due 01/31/2000 ** 1,036,563
1,000,000 U.S. Treasury Note, 6.25% due 10/31/2001 ** 995,938
1,250,000 U.S. Treasury Note, 5.875% due 11/15/2005 ** 1,196,485
-----------
TOTAL U.S. TREASURY OBLIGATIONS (cost $23,546,875) 23,801,559
-----------
MORTGAGE-BACKED SECURITIES - 16.01%
GOVERNMENT AGENCY - 13.66%
238,498 Federal Home Loan Mortgage Corporation, 9.00% due 12/01/2004 ** 247,815
14,000,000 Federal Home Loan Mortgage Corporation, Commitment to Purchase, 8.00% due 01/01/2027 14,310,625
1,875,918 Federal Home Loan Mortgage Corporation, GOLD #C00362, 9.00% due 06/01/2024 1,983,784
988,121 Federal Home Loan Mortgage Corporation, GOLD #C80253, 9.00% due 01/01/2025 1,044,938
1,707,367 Federal National Mortgage Association, 8.00% due 12/01/2026 ** 1,746,317
14,000,000 Government National Mortgage Association, Commitment to Purchase, GOLD, 8.00% due 01/01/2027 14,306,250
2,528,679 Government National Mortgage Association, 6.00% due 02/15/2024 ** 2,351,679
8,908,907 Government National Mortgage Association, 6.50% due 08/15/2023
to 04/15/2026 ** 8,527,517
1,504,354 Government National Mortgage Association, 7.00% due 07/15/2023 ** 1,478,502
-----------
45,997,427
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS -
GOVERNMENT AGENCY BACKED 1.4%
705,322 Federal Home Loan Mortgage Corporation, 8.75% due 06/15/2005 ** 720,083
1,000,000 Federal Home Loan Mortgage Corporation, 7.50% due 07/15/2020 ** 1,014,036
2,918,692 Weyerhaeuser 1982-C FHA Putable, 7.43% due 06/01/2022 ** 2,967,747
-----------
4,701,866
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.95%
1,750,000 Donaldson, Lufkin & Jenrette, 7.35% due 12/18/2003 ** 1,743,865
862,557 Resolution Trust Corporation - 1991-M2 - A-2, 7.55% due 09/25/2020 ** 654,924
850,000 Ryland Mortgage Securities Corporation - 1992-12A, 6.50%
due 09/25/2023 ** 801,448
-----------
3,200,237
-----------
TOTAL MORTGAGE-BACKED SECURITIES (cost $53,357,461) 53,899,530
-----------
CORPORATE BONDS & NOTES - 72.20%
1,000,000 Aetna Services, Inc., 7.625% due 08/15/2026 ** 996,825
2,000,000 American General Corporation, 9.625% due 02/01/2018 2,120,000
850,000 American Home Products Corporation, 7.25% due 03/01/2023 ** 831,880
1,000,000 AMR Corporation, 9.75% due 03/15/2000 ** 1,076,115
400,000 Banc One Corporation, Sub. Note, 10.00% due 08/15/2010 490,500
1,000,000 Bank of New York, 7.875% due 11/15/2002 ** 1,042,813
1,000,000 Barclays North American Capital Corporation, Capital Note, 10.50% due 12/15/2017* 1,066,250
9,000,000 Barclays North American Capital Corporation, Capital Note, 9.75% due 05/15/2021* 10,181,250
1,000,000 Barnett Banks, Florida, Inc., Sub. Note, 10.875% due 03/15/2003 1,181,250
1,000,000 Boeing Company, 8.75% due 08/15/2021 ** 1,163,085
4,000,000 Boeing Company, 8.75% due 08/15/2021* 4,660,000
2,850,000 BP America Inc., Guaranteed Deb., (British Petroleum Company), 10.00% due 07/01/2018 3,049,500
1,500,000 Burlington Northern, 8.75%, due 02/25/2022 ** 1,668,647
1,600,000 Burlington Resources, 9.125% due 10/01/2021 ** 1,870,570
5,000,000 Caterpillar Inc., Sinking fund Deb., 9.75% due 06/01/2019* 5,468,750
750,000 Conagra, Inc., 9.75% due 03/01/2021 ** 920,309
6,030,000 Conrail Inc., Deb., 9.75% due 06/15/2020 7,401,825
2,000,000 Continental Corporation, 7.25% due 03/01/2003 ** 2,011,354
500,000 Crane Company, 8.50% due 03/15/2004 ** 539,596
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPOSITE INCOME FUND (1) and SIERRA CORPORATE INCOME FUND
COMBINED PORTFOLIO OF INVESTMENTS (continued)
June 30, 1997
(Unaudited)
PRINCIPAL MARKET
AMOUNT VALUE
- -------------- -------------
<S> <C> <C> <C>
$2,000,000 Dart & Kraft Finance NV, 7.75% due 11/30/1998 ** $2,033,882
500,000 Developers Diversified Realty, 6.58% due 02/06/2001 ** 490,174
5,000,000 du Pont (E.I.) de Nemours & Company, Deb., 8.25% due 01/15/2022* 5,162,500
3,010,000 Federal Paper Board Company, Deb., 10.00% due 04/15/2011 3,698,537
1,250,000 FHP International, 7.00% due 09/15/2003 ** 1,238,041
1,100,000 First Interstate Bancorp, Sub. Note, 9.125% due 02/01/2004 1,222,375
1,000,000 First Nationwide, 10.00% due 10/01/2006 ** 1,149,191
1,000,000 Fleming Companies, Inc., 5.77% due 08/06/1998 ** 954,506
2,000,000 Ford Holdings, Inc., Deb., 9.375% due 03/01/2020* 2,367,500
3,750,000 Ford Motor Company, Deb., 8.875% due 01/15/2022 4,293,750
900,000 Franchise Finance Corporation, 7.00% due 11/30/2000 ** 902,890
1,100,000 Franchise Finance Corporation, 7.875% due 11/30/2005 ** 1,139,030
1,000,000 GATX Leasing Corporation, MTN, 10.00% due 03/21/2001 1,100,000
8,000,000 General Motors Corporation, Deb., 9.40% due 07/15/2021 9,480,000
850,000 Golden Books Publishing, 7.65% due 09/15/2002 ** 805,375
250,000 GTE Corporation, Deb., 10.30% due 11/15/2017 265,625
1,000,000 GTE Corporation, Sinking Fund Deb., 10.75% due 09/15/2017 1,057,500
1,300,000 Hartford Life Insurance Company, 7.65% due 06/15/2027 1,295,125
1,450,000 Integon Corporation, 8.00% due 08/15/1999 ** 1,463,713
6,000,000 James River Corporation, Deb., 9.25% due 11/15/2021 6,690,000
1,250,000 Kemper Corporation, 6.875% due 09/15/2003 ** 1,243,249
1,000,000 Loral Corporation, 8.375% due 6/15/2024 ** 1,094,546
1,000,000 Loral Corporation, 7.625% due 6/15/2025 ** 1,012,056
5,000,000 Louisiana Power & Light Company, First Mortgage, 8.50% due 07/01/2022 5,025,000
1,000,000 Manufacturers and Traders Trust Company, 8.125% due 12/01/2002 ** 1,050,083
1,500,000 May Department Stores Company, Deb., 9.875% due 06/15/2021* 1,704,375
5,100,000 May Department Stores Company, Deb., 8.375% due 10/01/2022* 5,240,250
1,000,000 Mellon Financial Company, Sub. Deb., 9.75% due 06/15/2001 1,101,250
500,000 Mercantile Bank, 7.625% due 10/15/2002 ** 515,709
5,000,000 Mississippi Power & Light Company, First and Refundable Mortgage,
8.65% due 01/15/2023 5,325,000
8,125,000 NCNB Corporation, Sub. Note, 10.20% due 07/15/2015* 10,176,562
1,000,000 Niagara Mohawk Power, 9.75% due 11/01/2005 ** 1,093,328
1,445,000 Niagara Mohawk Power, 8.77% due 01/01/2018 ** 1,489,672
3,800,000 Norfolk Southern Corporation, 7.80% due 05/15/2027 3,895,000
1,000,000 Norwest Corporation, 6.65% due 10/15/2023 ** 894,630
8,700,000 Occidental Petroleum Corporation, Sr. Deb., 11.125% due 08/01/2010 11,233,875
6,500,000 Ogden Corporation, Deb., 9.25% due 03/01/2022 7,304,375
1,000,000 Pacific Gas and Electric, 9.08% due 12/15/1997 ** 1,014,265
2,500,000 Panhandle Eastern Pipe Line Company, Deb., 8.625% due 04/15/2025 2,662,500
8,500,000 Petro-Canada, Deb., 9.25% due 10/15/2021 10,136,250
2,000,000 Philadelphia Electric Company, First and Refundable Mortgage,
8.25% due 09/01/2022 2,100,000
5,950,000 Phillips Petroleum Company, Deb., 9.180% due 09/15/2021* 6,500,375
6,860,000 Praxair, Inc., Deb., 8.70% due 07/15/2022 7,400,225
1,400,000 Riviera Holdings Corporation, 11.00% due 12/31/2002 ** 1,477,000
500,000 Summit Bancorp, 8.625% due 12/10/2002 ** 535,380
1,200,000 Texas Utilities Electric, 9.50% due 08/01/1999 ** 1,263,511
1,200,000 Texas Utilities Electric Company, First Mortgage, 8.875% due 02/01/2022 1,269,000
3,000,000 Texas Utilities Electric Company, First Mortgage, 8.75% due 11/01/2023 3,255,000
7,800,000 Textron Inc., Deb., 8.75%, due 07/01/2022 8,453,250
5,750,000 Trans-Canada Pipeline Corporation, Deb., 8.50% due 03/20/2023 6,073,438
8,260,000 Time Warner, Inc., Deb., 9.15% due 02/01/2023 9,098,980
8,450,000 Tyco Laboratories, Inc., Deb., 9.50% due 05/01/2022 9,717,500
5,000,000 United Air Lines Inc., Equipment Trust certificates, 10.85% due 07/05/2014 6,237,500
3,000,000 United Air Lines Inc., Pass-through certificates, 9.080% due 10/26/2015 3,266,250
5,500,000 United Air Lines Inc., Pass-through certificates, 9.560% due 10/19/2018 6,283,750
300,000 U S West Capital Funding, Inc., 6.95% due 01/15/2037 ** 297,514
1,000,000 V.F. Corporation, Note, 9.50% due05/01/2001 1,091,250
1,000,000 Weyerhaeuser Corporation, 7.125% due 07/15/2023 ** 959,691
-------------
TOTAL NON-CONVERTIBLE CORPORATE BONDS & NOTES (cost $233,636,353) 243,041,822
-------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPOSITE INCOME FUND (1) and SIERRA CORPORATE INCOME FUND
COMBINED PORTFOLIO OF INVESTMENTS (continued)
June 30, 1997
(Unaudited)
PRINCIPAL MARKET
AMOUNT VALUE
- ---------- ------------
CONVERTIBLE CORPORATE BONDS - 1.34%
<S> <C> <C> <C>
$250,000 Battle Mountain Gold Company, 6.00% due 01/04/2005 ** $201,875
1,000,000 CII Financial, 7.50% due 09/15/2001 ** 945,000
200,000 First State Bancorporation, 7.50% due 04/30/2017 ** 216,750
1,400,000 Integrated Device Technology, Inc., 5.50% due 06/01/2002 ** 1,195,250
350,000 Jumbosports, Inc., 4.25% due 11/01/2000 ** 242,375
750,000 Spectrum Holobyte, Inc., 6.50% due 09/15/2002 ** 544,688
1,200,000 Veterinary Centers of America, 5.25% due 05/01/2006 ** 838,500
------------
TOTAL CONVERTIBLE CORPORATE BONDS (cost $4,103,142) 4,184,435
------------
U.S. DOLLAR FOREIGN OBLIGATIONS - 0.72%
1,000,000 Province of Alberta, 9.25% due 04/01/2000 ** 1,073,010
1,750,000 United Mexican States, Series B, 6.25% due 12/31/2019 ** 1,356,250
------------
TOTAL FOREIGN OBLIGATIONS (cost $2,048,522) 2,429,260
------------
SHARES
- ----------
PREFERRED STOCKS - 0.95%
2,000 California Federal Bank, Series B ** 220,500
4,700 Equity Residential Properties Trust, Series E (Convertible) ** 125,138
15,100 First Industrial Realty Trust, Series A ** 396,375
17,500 Integon Corporation (Convertible) ** 1,161,562
13,000 Microsoft Corporation (Convertible) ** 1,131,000
5,500 Pacificare Health Systems, Inc., Series A (Convertible) ** 147,712
------------
TOTAL PREFERRED STOCK (cost $2,718,147) ????????????
------------
SHARES
- ----------
INVESTMENT COMPANY SECURITY - 1.58%
5,305,464 Lehman Provident Tempfund (cost $5,305,464) 5,305,464
------------
PRINCIPAL
AMOUNT
- ----------
REPURCHASE AGREEMENT - 0.23%
$789,000 Repurchase agreement with Goldman Sachs, collateralized by a
U.S. Treasury Note, in a joint trading account at 5.75%, dated
06/30/1997, due 07/01/1997, with a maturity value of $789,126
(cost $789,000) ** 789,000
------------
TOTAL INVESTMENTS (cost $325,504,964) ???????????
============
* Security to pledged as collateral for dollar roll transactions.
**Security held by the Composite Fund. Other securities were held by the
Sierra fund,
GOLD = Payments are made on an accelerated 45-day payment cycle instead of 75-day cycle
MTN = Medium Term Note
(1) Formerly Composite Income Fund, Inc.
</TABLE>
<PAGE>
Composite Income Fund and Sierra Corporate Income Fund
Notes to Pro Forma Financial Statements (unaudited)
1. Basis of Combination
The pro forma combined financial statements reflect the combined financial
position of Composite Income Fund (formerly Composite Income Fund, Inc.)
and Sierra Corporate Income Fund at June 30, 1997, and the pro forma
combined results of operations for the year ended December 31, 1996 and the
six month period ended June 30, 1997 as though the reorganization had
occurred on January 1, 1996.
The pro forma combined financial statements are presented for the
information of the reader and may not necessarily be representative of how
the pro forma combined financial statements would have appeared had the
reorganization actually occurred.
The Pro Forma Combined Portfolio of Investments, Statement of Assets and
Liabilities, and the Statement of Operations should be read in conjunction
with the historical financial statements of the funds incorporated by
reference in the Statement of Additional Information.
The pro forma statements give effect to the proposed transfer of the assets
and stated liabilities of the Sierra Corporate Income Fund in exchange for
shares of Composite Income Fund. Under generally accepted accounting
principles, the historical cost of investment securities will be carried
forward to the surviving entity.
The pro forma statements do not reflect the expenses of either fund in
carrying out its obligations under the proposed Agreement and Plan of
Reorganization.
2. Pro Forma Combined Portfolio of Investments
Securities held by the two funds have been combined in the accompanying
Combined Portfolio of Investments. Securities marked "**" are those
securities held by the Composite Fund. Those not marked are held by the
Sierra Fund. Securities are stated at market value as determined by the
Funds as of June 30, 1997. Historical cost amounts represent the combined
cost basis of the securities.
<PAGE>
Composite Income Fund and Sierra Corporate Income Fund
Notes to Pro Forma Financial Statements (unaudited) (continued)
3. Pro Forma Statements of Assets and Liabilities
Shares outstanding have been adjusted to reflect the conversion of Sierra
shares into Composite shares based upon the net asset value of Composite
shares at June 30, 1997.
4. Pro Forma Statements of Operations
The pro forma statements of operations reflect the following adjustments:
A. A decrease in management fees to reflect the new fee structure. Fees
are based on .625% of average daily net assets up to $250,000,000 and
.50% of average daily net assets over that amount.
B. An elimination of the Sierra administration fees, now incorporated in
the management fee structure. Also, expenses of the Fund will no longer
be reimbursed. Shareholder servicing and distribution expenses have
been adjusted to reflect a rate of .25% of average daily net assets.
Other expenses have been adjusted based on an overall estimated expense
ratio of 1.09%.
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996 (Unaudited)
Sierra Global Composite Money Pro Forma Pro Forma
Money Fund Market Fund Adjustments Combined
-------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and Other $ 9,296,450 $ 11,252,565 $ 0 $20,549,015
-------------- --------------- ----------- ------------
EXPENSES:
Management fees 681,261 916,867 (101,874) 1,496,254
Administration fees 510,947 0 (510,947) 0
Transfer agent fees 0 411,078 561,487 972,565
Distribution fees
Class A Shares 364,959 20,720 (385,679) 0
Class B Shares 5,001 1,270 0 6,271
Class S Shares 174,336 0 0 174,336
All other expenses 306,506 460,353 (93,545) 673,314
Expense reimbursement (809,156) (202,612) 824,736 (187,032)
-------------- --------------- ----------- --------------
Subtotal 1,233,854 1,607,676 294,178 3,135,708
-------------- --------------- ----------- --------------
Fees paid indirectly (6,667) (66,693) 0 (73,360)
-------------- --------------- ----------- --------------
Total Expenses 1,227,187 1,540,983 294,178 3,062,348
-------------- --------------- ----------- --------------
NET INVESTMENT INCOME 8,069,263 9,711,582 (294,178) 17,486,667
-------------- --------------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) From Security Transactions 10,818 0 0 10,818
(excluding short term securities)
Net Unrealized Appreciation (Depreciation) of Investments 0 0 0 0
-------------- --------------- ----------- -----------
Net Realized and Unrealized Gain (Loss) on Investments 10,818 0 0 10,818
-------------- --------------- ----------- -----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 8,080,081 $ 9,711,582 ($294,178) $17,497,485
============== =============== =========== ===========
See accompanying notes to pro forma financial statements.
</TABLE>
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Sierra Global Composite Money Pro Forma Pro Forma
Money Fund Market Fund Adjustments Combined
------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and Other $4,909,540 $6,747,798 $ 0 $11,657,338
---------- ---------- --------- -----------
EXPENSES:
Management fees 351,058 543,906 (60,434) 834,530
Administration fees 263,293 0 (263,293) 0
Transfer agent fees 0 247,317 295,128 542,445
Distribution fees
Class A Shares 136,340 11,581 (147,921) 0
Class B Shares 5,220 614 0 5,834
Class S Shares 34,868 0 0 34,868
All Other Expenses 218,633 249,286 (92,380) (375,539)
Expense reimbursement (301,660) (113,150) 310,494 (104,316)
---------- ---------- --------- -----------
Subtotal 707,752 939,554 41,594 1,688,900
---------- ---------- --------- -----------
Fees paid indirectly (4,893) (29,327) 0 (34,220)
---------- ---------- --------- -----------
Total Expenses 702,859 910,227 41,594 1,654,680
---------- ---------- --------- -----------
NET INVESTMENT INCOME 4,206,681 5,837,571 (41,594) 10,002,658
---------- ---------- --------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) From Security Transactions 8,702 0 0 8,702
(excluding short term securities)
Net Unrealized Appreciation (Depreciation) of Investments 0 0 0 0
---------- ---------- --------- -----------
Net Realized and Unrealized Gain (Loss) on Investments 8,702 0 0 8,702
---------- ---------- --------- -----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,215,383 $5,837,571 ($41,594) $10,011,360
========== ========== =========== ===========
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
COMPOSITE MONEY MARKET FUND (1) and SIERRA GLOBAL MONEY FUND
Combined Portfolio of Investments
June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SHORT-TERM INVESTMENTS VALUE
--------- -----------
<S> <C> <C>
BANKERS ACCEPTANCES - 1.32%
$3,000,000 Chase Manhattan Bank NA New York, 5.56% due 07/14/1997 ** $ 2,993,977
3,000,000 Chase Manhattan Bank NA New York, 5.60% due 08/19/1997 ** 2,977,133
-----------
TOTAL BANKERS ACCEPTANCE (cost $5,971,110) 5,971,110
-----------
CERTIFICATES OF DEPOSIT - DOMESTIC - 5.77%
3,000,000 Bank of America, 5.57% due 11/07/1997 2,999,481
3,000,000 Bank of America, 5.85% due 11/03/1997 3,000,000
8,000,000 Bankers Trust Corporation, 5.70% due 07/10/1997 8,000,000
5,000,000 Bankers Trust New York Corporation, 5.70% due 07/10/1997 ** 5,000,019
7,000,000 NationsBank Corporation, 5.54% due 07/15/1997 7,000,000
-----------
TOTAL CERTIFICATES OF DEPOSIT - DOMESTIC (cost $25,999,500) 26,999,500
-----------
CERTIFICATES OF DEPOSIT - FOREIGN - 18.33%
5,000,000 Australia & New Zealand Bank, 5.70% due 07/07/1997 ** 5,000,005
5,000,000 Banque Nationale de Paris, 5.70% due 08/04/1997 5,000,000
3,000,000 Barclays Bank Plc, 5.94% due 06/19/1998 2,998,725
8,000,000 Dai-Ichi Kangyo Bank Ltd., 5.81% due 07/10/1997* 8,000,019
2,000,000 Deutsche Bank, 5.56% due 07/21/1997 2,000,011
2,000,000 Deutsche Bank, 5.69% due 10/28/1997 1,999,688
5,000,000 Deutsche Bank, 5.70% due 02/06/1998 4,998,845
6,000,000 Industrial Bank of Japan, 5.67% due 07/11/1997 6,000,017
2,500,000 Industrial Bank of Japan, 5.84% due 08/18/1997 2,500,033
2,000,000 Rabobank Nederland, 5.99% due 03/24/1998 1,999,304
9,200,000 Sanwa Bank Ltd., 5.65% due 07/07/1997 9,199,969
7,000,000 Societe Generale, New York, 5.72% due 08/06/1997 7,000,069
2,000,000 Societe Generale, New York, 5.84% due 10/06/1997 1,999,847
5,000,000 Societe Generale New York Branch, 5.50% due 08/07/1997 ** 5,000,050
5,000,000 Sumitomo Bank Ltd., 5.66% due 07/03/1997 5,000,011
2,000,000 Sumitomo Bank Ltd., 5.75% due 08/19/1997 2,000,000
5,000,000 Swiss Bank Corporation, 5.98% due 03/19/1998 4,999,317
7,000,000 Westdeutsche Landesbank Girozentrale, 5.52% due 07/07/1997 ** 7,000,118
-----------
TOTAL CERTIFICATES OF DEPOSIT - FOREIGN (cost $82,696,028) 82,696,028
-----------
COMMERCIAL PAPER - DOMESTIC - 37.50%
5,000,000 American Express Credit Corporation, 5.54% due 08/04/1997 ** 4,973,839
5,000,000 Associates Corporation of North America, 5.635% due 07/15/1997 * 4,989,247
4,000,000 Associates Corporation of North America, 5.653% due 07/24/1997 * 3,985,817
8,000,000 Banc One Corporation, 5.631% due 07/01/1997 * 8,000,000
8,000,000 BBL-North America, Inc., 5.78% due 07/01/1997 * 8,000,000
5,000,000 BT Securities Corporation, 5.65% due 07/11/1997 ** 4,992,153
5,000,000 Bank of New York Company, Inc., 5.535% due 07/22/1997 ** 4,983,856
5,000,000 Bear Stearns Company, Inc., 5.60% due 08/11/1997 ** 4,968,111
5,000,000 Bear Stearns Company, Inc., 5.60% due 08/15/1997 ** 4,965,000
5,000,000 Beneficial Corporation, 5.61% due 07/01/1997 ** 5,000,000
2,500,000 Beneficial Corporation, 5.56% due 07/28/1997 ** 2,489,575
5,000,000 Chrysler Financial Corporation, 5.58% due 08/12/1997 ** 4,967,450
5,000,000 John Deere Capital Corporation, 5.61% due 07/07/1997 ** 4,995,325
5,000,000 Ford Motor Credit Company, 5.60% due 07/08/1997 ** 4,994,556
4,000,000 Ford Motor Credit Company, 5.55% due 08/25/1997 ** 3,966,083
9,000,000 Ford Motor Credit Company, 5.884% due 12/02/1997 * 8,782,860
5,000,000 General Electric Capital Corporation, 5.62% due 07/07/1997 ** 4,995,317
5,000,000 General Electric Capital Corporation, 5.63% due 07/07/1997 ** 4,995,308
3,000,000 General Electric Capital Corporation, 6.00% due 01/23/1998 * 2,902,150
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
COMPOSITE MONEY MARKET FUND (1) and SIERRA GLOBAL MONEY FUND
Combined Portfolio of Investments (continued)
June 30, 1997
(Unaudited)
PRINCIPAL MARKET
AMOUNT VALUE
- ------------- -------------
<S> <C> <C> <C>
$3,000,000 General Motors Acceptance Corporation, 5.59% due 07/03/1997 ** $2,999,068
4,500,000 General Motors Acceptance Corporation, 5.44% due 07/14/1997 ** 4,491,160
4,000,000 Goldman Sachs Group L.P., 6.15% due 07/01/1997 ** 4,000,000
5,000,000 Goldman Sachs Group L.P., 5.60% due 09/03/1997 ** 4,950,222
3,000,000 IBM Corporation, 5.56% due 08/05/1997 ** 2,983,783
5,000,000 IBM Corporation, 5.55% due 08/25/1997 ** 4,957,604
4,300,000 International Lease Finance Corporation, 5.55% due 08/11/1997 ** 4,272,820
2,600,000 International Lease Finance Corporation, 5.58% due 09/03/1997 ** 2,574,208
1,979,000 Koch Industries, 6.165% due 07/01/1997 * 1,979,000
4,000,000 Merrill Lynch and Company, 5.58% due 07/16/1997 ** 3,990,700
5,000,000 Merrill Lynch and Company, 5.58% due 08/08/1997 ** 4,970,550
2,000,000 Merrill Lynch and Company, 5.62% due 08/08/1997 ** 1,988,136
5,000,000 Morgan Stanley Group Inc., 5.57% due 07/21/1997 ** 4,984,528
5,000,000 Morgan Stanley Group Inc., 5.61% due 08/25/1997 ** 4,957,146
2,114,000 Nebraska Higher Education Loan Program, 5.55% due 07/24/1997 ** 2,106,504
5,000,000 Oyster Creek Fuel Corporation, 5.55% due 07/09/1997 ** 4,993,833
5,000,000 Sears Roebuck Acceptance Corporation, 5.63% due 07/07/1997 ** 4,995,308
5,000,000 Sears Roebuck Acceptance Corporation, 5.58% due 07/23/1997 ** 4,982,950
-------------
TOTAL COMMERCIAL PAPER - DOMESTIC (cost $169,124,167) 169,124,167
-------------
COMMERCIAL PAPER - FOREIGN - 21.58%
3,000,000 Abbey National North America Corporation, 5.771% due 08/01/1997* 2,985,508
2,000,000 Abbey National North America Corporation, 5.522% due 08/11/1997* 1,987,928
5,000,000 ABN Amro Bank, N.V., 5.776% due 08/19/1997 * 4,961,787
5,000,000 American Honda Finance Corporation, Inc., 5.57% due 7/21/1997 ** 4,984,528
2,500,000 American Honda Finance Corporation, Inc., 5.57% due 7/25/1997 ** 2,490,717
5,000,000 Barclays U.S. Funding Corporation, 5.825% due 08/22/1997* 4,959,122
4,000,000 BHP Finance (USA) Inc., 5.55% due 07/08/1997 ** 3,995,683
1,700,000 BHP Finance (USA) Inc., 5.55% due 07/09/1997 ** 1,697,903
8,000,000 Den Danske Corporation, 5.789% due 07/02/1997 * 7,998,749
5,000,000 Eksportfinans A/S, 5.56% due 07/31/1997 ** 4,976,833
2,500,000 Eksportfinans A/S, 5.60% due 08/21/1997 ** 2,480,167
6,000,000 Hitachi America, Limited, 5.55% due 08/18/1997 ** 5,955,600
5,000,000 Hitachi America, Limited, 5.57% due 10/16/1997 ** 4,917,224
5,000,000 Pemex Capital, Inc. - Series B, 5.55% due 09/17/1997 ** 4,939,875
5,000,000 Rank Xerox Capital (Europe) PLC, 5.55% due 07/17/1997 ** 4,987,667
2,000,000 Sharp Electronics Corporation, 5.60% due 07/03/1997 ** 1,999,378
5,000,000 Sharp Electronics Corporation, 5.55% due 08/15/1997 ** 4,965,313
1,100,000 Toshiba Capital (Asia) Limited, 5.63% due 08/14/1997 ** 1,092,431
4,625,000 Toshiba International Finance (UK) PLC, 5.72% due 08/04/1997 ** 4,600,015
4,000,000 Toshiba International Finance (UK) PLC, 5.76% due 08/28/1997 ** 3,962,880
2,500,000 Toshiba International Finance (UK) PLC, 5.60% due 10/07/1997 ** 2,461,889
5,000,000 Toyota Motor Credit Corporation, 5.54% due 09/16/1997 ** 4,940,753
9,000,000 UBS Finance, Inc., 6.135% due 07/01/1997 * 9,000,000
------------
TOTAL COMMERCIAL PAPER - FOREIGN (cost $97,341,950) 97,341,950
------------
CORPORATE NOTES AND BONDS - 5.24%
5,000,000 American Express Centurian Bank, 5.6575% due 07/03/1998* ** 5,000,000
3,500,000 Caterpillar Financial Services Corporation, 7.24% due 12/15/1997** 3,520,155
2,000,000 Dean Witter Discover Company, 5.6375% due 07/16/1997* ** 2,000,000
2,000,000 General Motors Acceptance Corporation, 5.62% due 07/01/1997* ** 2,000,732
1,000,000 General Motors Acceptance Corporation, 6.75% due 07/10/1997 ** 1,000,262
1,500,000 General Motors Acceptance Corporation, 5.75% due 10/08/1997 ** 1,498,835
1,400,000 Household Finance Corporation, 6.70% due 08/08/1997 ** 1,401,388
</TABLE>
<PAGE>
COMPOSITE MONEY MARKET FUND (1) and SIERRA GLOBAL MONEY FUND
Combined Portfolio of Investments (continued)
June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ------------- --------------
<S> <C> <C>
$4,200,000 IBM Corporation, 6.375% due 11/01/1997 ** $4,210,012
1,000,000 Tonkin Building Associates LLC, 5.64% due 07/02/1997* ** 1,000,000
2,000,000 Watts Brothers Frozen Foods LLC, 5.64% due 07/02/1997* ** 2,000,000
--------------
TOTAL CORPORATE NOTES AND BONDS (cost $23,631,384) 27,631,384
--------------
FEDERAL AGENCY OBLIGATIONS - 2.55%
2,500,000 Federal Farm Credit Bank, 5.4975% due 7/17/1997* ** 2,499,185
1,000,000 Federal Home Loan Bank, 5.528% due 07/19/1997* ** 999,674
1,000,000 Federal Home Loan Bank, 5.528% due 07/28/1997* ** 999,900
4,000,000 Federal Home Loan Bank, 5.67% due 03/05/1998 ** 4,000,000
3,000,000 Federal Home Loan Bank, 5.91% due 03/24/1998 ** 3,000,000
--------------
TOTAL FEDERAL AGENCY OBLIGATIONS (cost $11,498,759) 11,498,759
--------------
MEDIUM-TERM NOTES - 7.31%
3,000,000 Abbey National Treasury Services, 5.64% due 11/03/1997 2,999,602
9,000,000 Bayerische Landesbank, 5.558% due 06/26/1998 # 8,993,095
5,000,000 CoreStates Bank, 5.648% due 03/16/1998 # 5,000,000
5,000,000 John Deere Capital, 5.85% due 07/03/1997 4,999,981
6,000,000 Korea Development Bank, 5.843% due 06/16/1998 # 5,998,884
5,000,000 Society National Bank, 5.58% due 07/08/1997 # 4,999,935
--------------
TOTAL MEDIUM-TERM NOTES (cost $32,991,497) 32,991,497
--------------
REPURCHASE AGREEMENT - .40%
1,783,000 Repurchase agreement with Goldman Sachs and Company, collateralized by a U.S.
Treasury Note, in a joint trading account at 5.75%, dated 06/30/1997, due 07/01/1997
with a maturity value of $1,783,285 (cost $1,783,000) ** 1,783,000
--------------
TOTAL INVESTMENTS (cost $451,037,395) $451,037,395
==============
*Floating Rate Note. The interest rate, is subject to change periodically, based on a market interest rate
index.
**Security held by the Composite Fund. Other securities were held by the Sierra Fund.
# Variable rate security. The interest rate shown reflects the rate currently in effect.
Rate represents annualized yield at date of purchase (unaudited).
(1) Formerly Composite Cash Management Company Money Market Portfolio.
</TABLE>
<PAGE>
Composite Money Market Fund and Sierra Global Money Fund
Notes to Pro Forma Financial Statements (unaudited)
1. Basis of Combination
The pro forma combined financial statements reflect the combined financial
position of Composite Money Market Fund (formerly Composite Cash Management
Company Money Market Portfolio) and Sierra Global Money Fund at June 30,
1997, and the pro forma combined results of operations for the year ended
December 31, 1996 and the six month period ended June 30, 1997 as though
the reorganization had occurred on January 1, 1996.
The pro forma combined financial statements are presented for the
information of the reader and may not necessarily be representative of how
the pro forma combined financial statements would have appeared had the
reorganization actually occurred.
The Pro Forma Combined Portfolio of Investments, Statement of Assets and
Liabilities, and the Statement of Operations should be read in conjunction
with the historical financial statements of the funds incorporated by
reference in the Statement of Additional Information.
The pro forma statements give effect to the proposed transfer of the assets
and stated liabilities of the Sierra Global Money Fund in exchange for
shares of Composite Money Market Fund. Under generally accepted accounting
principles, the historical cost of investment securities will be carried
forward to the surviving entity.
The pro forma statements do not reflect the expenses of either fund in
carrying out its obligations under the proposed Agreement and Plan of
Reorganization.
2. Pro Forma Combined Portfolio of Investments
Securities held by the two funds have been combined in the accompanying
Combined Portfolio of Investments. Securities marked "**" are those
securities held by the Composite Fund. Those not marked are held by the
Sierra Fund. Securities are stated at market value which approximates
fair value. Historical cost amounts represent the combined cost basis of
the securities.
<PAGE>
Composite Money Market Fund and Sierra Global Money Fund
Notes to Pro Forma Financial Statements (unaudited) (continued)
3. Pro Forma Statements of Assets and Liabilities
Shares outstanding have been adjusted to reflect the conversion of Sierra
shares into Composite shares based upon the net asset value of Composite
shares at June 30, 1997.
4. Pro Forma Statements of Operations
The pro forma statements of operations reflect the following adjustments:
A. A decrease in management fees to reflect the new fee structure. Fees
are based on .40% of average daily net assets.
B. An elimination of administration fees, now incorporated in the
management fee structure. Expenses of the Fund will be reimbursed at a
rate of .0005% of average daily net assets and have been adjusted
accordingly. Shareholder servicing and distribution expenses have been
adjusted to reflect the elimination of 12b-1 fees. Postage, printing,
office expense, and other has been adjusted based on an overall
estimated expense ratio of .79%.
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES AT JUNE 30, 1997 (unaudited)
Sierra U.S.
Government Composite Money Pro Forma Pro Forma
Money Fund Market Fund Adjustments Combined
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value, (cost $33,653,549,
$260,818,394, and $294,471,943) $33,653,549 $260,818,394 $294,471,943
Cash, receivables, and other assets 677,491 3,787,156 4,464,647
-------------- ---------------- ---------------
Total Assets 34,331,040 264,605,550 298,936,590
-------------- ---------------- ---------------
LIABILITIES:
Accrued expenses and other liabilities 1,664,297 8,167,003 7,029,379,500
-------------- ---------------- ---------------
Total Liabilities 1,664,297 8,167,003 9,831,300
-------------- ---------------- ---------------
Net Assets $32,666,743 $256,438,547 $289,105,290
============== ================ ===============
Outstanding Shares
- ------------------
Class A 30,529,135 256,221,535 (10,562) 286,740,108
============== ================ ===============
Class B 1,802,096 217,012 (624) 2,018,484
============== ================ ===============
Class S 345,772 - (120) 345,652
============== ================ ===============
Class I 1,045 - 1 1,046
============== ================ ===============
Net Asset Value
- ---------------
Class A $30,518,573 $256,221,535 $286,740,108
============== ================ ===============
Class B $1,801,472 $217,012 $2,018,484
============== ================ ===============
Class S $345,652 - $345,652
============== ================ ===============
Class I $1,046 - $1,046
============== ================ ===============
Net Asset Value
Per Share
- ---------------
Class A $1.00 $1.00 $1.00
============== ================ ===============
Class B $1.00 $1.00 $1.00
=============== ================ ===============
Class S $1.00 - $1.00
============== ================ ===============
Class I $1.00 - $1.00
============== ================ ===============
See accompanying notes to pro forma financial statements.
</TABLE>
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Sierra
U.S. Government Composite Money Pro Forma Pro Forma
Money Fund Market Fund Adjustments Combined
--------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and Other $ 2,228,818 $ 11,252,565 $ 0 $ 13,481,383
--------------- --------------- ----------- ------------
EXPENSES:
Management fees 166,799 916,867 (101,874) 981,792
Administration fees 125,100 0 (125,100) 0
Transfer agent fees 0 411,078 227,087 638,165
Distribution fees
Class A Shares 102,819 20,720 (123,539) 0
Class B Shares 2,317 1,270 0 3,587
Class S Shares 3,403 0 0 3,403
All other expenses 96,365 460,353 (237,636) 319,082
Expense reimbursement (138,032) (202,612) 217,920 (122,724)
--------------- --------------- ----------- ------------
Subtotal 358,771 1,607,676 (143,142) 1,823,305
Fees paid indirectly (600) (66,693) 0 (67,293)
--------------- --------------- ----------- ------------
Total Expenses 358,171 1,540,983 (143,142) 1,756,012
--------------- --------------- ----------- ------------
NET INVESTMENT INCOME 1,870,647 9,711,582 143,142 11,725,371
--------------- --------------- ----------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) From Security Transactions (2,881) 0 0 (2,881)
(excluding short term securities)
Net Unrealized Appreciation (Depreciation) of Investments 0 0 0 0
--------------- --------------- ----------- ------------
Net Realized and Unrealized Gain (Loss) on Investments (2,881) 0 0 (2,881)
--------------- --------------- ----------- ------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,867,766 $ 9,711,582 $ 143,142 $ 11,722,490
=============== =============== =========== ============
See accompanying notes to pro forma financial statements.
</TABLE>
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Composite
Sierra U.S. U.S. Government Pro Forma Pro Forma
Government Fund Securities Fund Adjustments Combined
---------------- ------------------ ------------- -----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and Other $16,846,906 $4,610,844 $0 $21,457,750
----------------- ------------------ ------------- -----------------
EXPENSES:
Management fees 1,107,156 405,280 (197,852) 1,314,584
Administration fees 704,553 0 (704,553) 0
Transfer agent fees 0 58,718 234,042 292,760
Distribution fees 0
Class A Shares 356,411 115,176 32,422 504,009
Class B Shares 106,160 14,439 0 120,599
Class S Shares 50,257 0 0 50,257
All other expenses 1,077,343* 81,493 (59,045) 1,099,791
Expense reimbursement (782,669) 0 782,669 0
----------------- ------------------ ------------- -----------------
Subtotal 2,619,211 675,106 87,683 3,382,000
----------------- ------------------ ------------- -----------------
Fees paid indirectly (5,613) (889) 0 (6,502)
----------------- ------------------ ------------- -----------------
Total Expenses 2,613,598 674,217 87,683 3,375,498
----------------- ------------------ ------------- -----------------
NET INVESTMENT INCOME 14,233,308 3,936,627 (87,683) 18,082,252
----------------- ------------------ ------------- -----------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net Realized Gain (Loss) From:
Security transactions 246,980 (747,914) 0 (500,934)
Futures Contracts (178,813) 0 0 (178,813)
Written options 138,672 0 0 138,672
Net Unrealized Appreciation (Depreciation) of:
Securities (846,298) 0 0 (846,298)
Foreign currency, written options,
futures contracts and other assets
and liabilities (597,299) 326,683 0 (270,616)
----------------- ------------------ ------------- -----------------
Net Realized and Unrealized Gain (Loss)
on Investments (1,236,758) (421,231) 0 (1,657,989)
----------------- ------------------ ------------- -----------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,996,550 $3,515,396 ($87,683) $16,424,263
================= ================== ============= =================
</TABLE>
* Includes interest expense of $780,416 related to reverse repurchase
agreements. Composite Government Fund does not engage in such agreements.
See accompanying notes to pro forma financial statements.
<PAGE>
COMPOSITE MONEY MARKET FUND (1) and SIERRA U.S. GOVERNMENT MONEY FUND
Combined Portfolio of Investments
June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT SHORT-TERM INVESTMENTS VALUE
- ---------------- -------------
<S> <C> <C> <C>
BANKERS ACCEPTANCES - 2.03%
$3,000,000 Chase Manhattan Bank NA New York, 5.56% due 07/14/1997 ** $2,993,977
3,000,000 Chase Manhattan Bank NA New York, 5.60% due 08/19/1997 ** 2,977,133
-------------
TOTAL BANKERS ACCEPTANCE (cost $5,971,110) 5,971,110
-------------
CERTIFICATES OF DEPOSIT - DOMESTIC - 1.70%
5,000,000 Bankers Trust New York Corporation, 5.70% due 07/10/1997 ** 5,000,019
-------------
TOTAL CERTIFICATES OF DEPOSIT - DOMESTIC (cost $5,000,019) 5,000,019
-------------
CERTIFICATES OF DEPOSIT - FOREIGN - 5.78%
5,000,000 Australia & New Zealand Bank, 5.70% due 07/07/1997 ** 5,000,005
5,000,000 Societe Generale New York Branch, 5.50% due 08/07/1997 ** 5,000,050
7,000,000 Westdeutsche Landesbank Girozentrale, 5.52% due 07/07/1997 ** 7,000,118
-------------
TOTAL CERTIFICATES OF DEPOSIT - FOREIGN (cost $17,000,173) 17,000,173
-------------
COMMERCIAL PAPER - DOMESTIC - 44.31%
5,000,000 American Express Credit Corporation, 5.54% due 08/04/1997 ** 4,973,839
5,000,000 BT Securities Corporation, 5.65% due 07/11/1997 ** 4,992,153
5,000,000 Bank of New York Company, Inc., 5.535% due 07/22/1997 ** 4,983,856
5,000,000 Bear Stearns Company, Inc., 5.60% due 08/11/1997 ** 4,968,111
5,000,000 Bear Stearns Company, Inc., 5.60% due 08/15/1997 ** 4,965,000
5,000,000 Beneficial Corporation, 5.61% due 07/01/1997 ** 5,000,000
2,500,000 Beneficial Corporation, 5.56% due 07/28/1997 ** 2,489,575
5,000,000 Chrysler Financial Corporation, 5.58% due 08/12/1997 ** 4,967,450
5,000,000 John Deere Capital Corporation, 5.61% due 07/07/1997 ** 4,995,325
5,000,000 Ford Motor Credit Company, 5.60% due 07/08/1997 ** 4,994,556
4,000,000 Ford Motor Credit Company, 5.55% due 08/25/1997 ** 3,966,083
5,000,000 General Electric Capital Corporation, 5.62% due 07/07/1997 ** 4,995,317
5,000,000 General Electric Capital Corporation, 5.63% due 07/07/1997 ** 4,995,308
3,000,000 General Motors Acceptance Corporation, 5.59% due 07/03/1997 ** 2,999,068
4,500,000 General Motors Acceptance Corporation, 5.44% due 07/14/1997 ** 4,491,160
4,000,000 Goldman Sachs Group L.P., 6.15% due 07/01/1997 ** 4,000,000
5,000,000 Goldman Sachs Group L.P., 5.60% due 09/03/1997 ** 4,950,222
3,000,000 IBM Corporation, 5.56% due 08/05/1997 ** 2,983,783
5,000,000 IBM Corporation, 5.55% due 08/25/1997 ** 4,957,604
4,300,000 International Lease Finance Corporation, 5.55% due 08/11/1997 ** 4,272,820
2,600,000 International Lease Finance Corporation, 5.58% due 09/03/1997 ** 2,574,208
4,000,000 Merrill Lynch and Company, 5.58% due 07/16/1997 ** 3,990,700
5,000,000 Merrill Lynch and Company, 5.58% due 08/08/1997 ** 4,970,550
2,000,000 Merrill Lynch and Company, 5.62% due 08/08/1997 ** 1,988,136
5,000,000 Morgan Stanley Group Inc., 5.57% due 07/21/1997 ** 4,984,528
5,000,000 Morgan Stanley Group Inc., 5.61% due 08/25/1997 ** 4,957,146
2,114,000 Nebraska Higher Education Loan Program, 5.55% due 07/24/1997 ** 2,106,504
5,000,000 Oyster Creek Fuel Corporation, 5.55% due 07/09/1997 ** 4,993,833
5,000,000 Sears Roebuck Acceptance Corporation, 5.63% due 07/07/1997 ** 4,995,308
5,000,000 Sears Roebuck Acceptance Corporation, 5.58% due 07/23/1997 ** 4,982,950
-------------
TOTAL COMMERCIAL PAPER - DOMESTIC (cost $130,485,093) 130,485,093
=============
COMMERCIAL PAPER - FOREIGN - 22.23%
5,000,000 American Honda Finance Corporation, Inc., 5.57% due 7/21/1997 ** 4,984,528
2,500,000 American Honda Finance Corporation, Inc., 5.57% due 7/25/1997 ** 2,490,717
4,000,000 BHP Finance (USA) Inc., 5.55% due 07/08/1997 ** 3,995,683
1,700,000 BHP Finance (USA) Inc., 5.55% due 07/09/1997 ** 1,697,903
5,000,000 Eksportfinans A/S, 5.56% due 07/31/1997 ** 4,976,833
2,500,000 Eksportfinans A/S, 5.60% due 08/21/1997 ** 2,480,167
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPOSITE MONEY MARKET FUND (1) and SIERRA U.S. GOVERNMENT MONEY FUND
Combined Portfolio of Investments (continued)
(Unaudited)
PRINCIPAL MARKET
AMOUNT VALUE
- -------------- -------------
<S> <C> <C>
$6,000,000 Hitachi America, Limited, 5.55% due 08/18/1997 **$ 5,955,600
5,000,000 Hitachi America, Limited, 5.57% due 10/16/1997 ** 4,917,224
5,000,000 Pemex Capital, Inc. - Series B, 5.55% due 09/17/1997 ** 4,939,875
5,000,000 Rank Xerox Capital (Europe) PLC, 5.55% due 07/17/1997 ** 4,987,667
2,000,000 Sharp Electronics Corporation, 5.60% due 07/03/1997 ** 1,999,378
5,000,000 Sharp Electronics Corporation, 5.55% due 08/15/1997 ** 4,965,313
1,100,000 Toshiba Capital (Asia) Limited, 5.63% due 08/14/1997 ** 1,092,431
4,625,000 Toshiba International Finance (UK) PLC, 5.72% due 08/04/1997 ** 4,600,015
4,000,000 Toshiba International Finance (UK) PLC, 5.76% due 08/28/1997 ** 3,962,880
2,500,000 Toshiba International Finance (UK) PLC, 5.60% due 10/07/1997 ** 2,461,889
5,000,000 Toyota Motor Credit Corporation, 5.54% due 09/16/1997 ** 4,940,753
-----------
TOTAL COMMERCIAL PAPER - FOREIGN (cost $65,448,856) 65,448,856
===========
CORPORATE NOTES AND BONDS - 8.02%
5,000,000 American Express Centurian Bank, 5.6575% due 07/03/1998* ** 5,000,000
3,500,000 Caterpillar Financial Services Corporation, 7.24% due 12/15/1997 ** 3,520,155
2,000,000 Dean Witter Discover Company, 5.6375% due 07/16/1997* ** 2,000,000
2,000,000 General Motors Acceptance Corporation, 5.62% due 07/01/1997* ** 2,000,732
1,000,000 General Motors Acceptance Corporation, 6.75% due 07/10/1997 ** 1,000,262
1,500,000 General Motors Acceptance Corporation, 5.75% due 10/08/1997 ** 1,498,835
1,400,000 Household Finance Corporation, 6.70% due 08/08/1997 ** 1,401,388
4,200,000 IBM Corporation, 6.375% due 11/01/1997 ** 4,210,012
1,000,000 Tonkin Building Associates LLC, 5.64% due 07/02/1997* ** 1,000,000
2,000,000 Watts Brothers Frozen Foods LLC, 5.64% due 07/02/1997* ** 2,000,000
-----------
TOTAL CORPORATE NOTES AND BONDS (cost $23,631,384) 23,631,384
===========
FEDERAL AGENCY OBLIGATIONS - 3.90%
2,500,000 Federal Farm Credit Bank, 5.4975% due 7/17/1997* ** 2,499,185
1,000,000 Federal Home Loan Bank, 5.528% due 07/19/1997* ** 999,674
1,000,000 Federal Home Loan Bank, 5.528% due 07/28/1997* ** 999,900
4,000,000 Federal Home Loan Bank, 5.67% due 03/05/1998 ** 4,000,000
3,000,000 Federal Home Loan Bank, 5.91% due 03/24/1998 ** 3,000,000
-----------
TOTAL FEDERAL AGENCY OBLIGATIONS (cost $11,498,759) 11,498,759
===========
U.S. GOVERNMENT AGENCY OBLIGATIONS - 11.43%
3,000,000 Federal National Mortgage Association (FNMA), Discount Note, 5.604% due 07/08/1997* 2,996,779
1,480,000 Federal National Mortgage Association (FNMA), Discount Note, 5.538% due 07/10/1997* 1,477,986
900,000 Federal National Mortgage Association (FNMA), Discount Note, 5.659% due 07/18/1997* 897,658
2,530,000 Federal National Mortgage Association (FNMA), Discount Note, 5.599% due 07/21/1997* 2,522,270
2,430,000 Federal National Mortgage Association (FNMA), Discount Note, 5.545% due 07/23/1997* 2,421,907
1,000,000 Federal National Mortgage Association (FNMA), Discount Note, 5.529% due 08/04/1997* 994,881
2,000,000 Federal National Mortgage Association (FNMA), Discount Note, 5.576% due 09/16/1997* 1,976,772
1,200,000 Federal Home Loan Mortgage Corporation (FHLMC), Discount Note, 5.527% due 07/07/1997* 1,198,914
3,000,000 Federal Home Loan Mortgage Corporation (FHLMC), Discount Note, 5.604% due 07/09/1997* 2,996,320
985,000 Federal Home Loan Mortgage Corporation (FHLMC), Discount Note, 5.649% due 07/15/1997* 982,893
325,000 Federal Home Loan Mortgage Corporation (FHLMC), Discount Note, 5.631% due 07/24/1997* 323,854
730,000 Federal Home Loan Mortgage Corporation (FHLMC), Discount Note, 5.558% due 07/25/1997* 727,348
300,000 Federal Home Loan Mortgage Corporation (FHLMC), Discount Note, 5.683% due 08/01/1997* 298,571
2,000,000 Federal Home Loan Mortgage Corporation (FHLMC), Discount Note, 5.683% due 08/07/1997* 1,988,633
445,000 Federal Home Loan Mortgage Corporation (FHLMC), Discount Note, 5.638% due 08/15/1997* 441,941
700,000 Federal Home Loan Mortgage Corporation (FHLMC), Discount Note, 5.582% due 09/18/1997* 691,659
1,645,000 Federal Farm Credit Bank (FFCB), Discount Note, 5.512% due 07/02/1997* 1,644,752
1,605,000 Federal Farm Credit Bank (FFCB), Discount Note, 5.538% due 07/02/1997* 1,604,758
2,000,000 Federal Farm Credit Bank (FFCB), Discount Note, 5.519% due 07/22/1997* 1,993,677
1,800,000 Federal Farm Credit Bank (FFCB), Discount Note, 5.526% due 07/31/1997* 1,791,870
710,000 Federal Home Loan Bank (FHLB), Discount Note, 5.675% due 07/08/1997* 709,238
</TABLE>
<PAGE>
COMPOSITE MONEY MARKET FUND (1) and SIERRA U.S. GOVERNMENT MONEY FUND
Combined Portfolio of Investments (continued)
June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ----------- ------------
<S> <C> <C>
$305,000 Federal Home Loan Bank (FHLB), Discount Note, 5.666% due 07/18/1997* $304,205
375,000 Federal Home Loan Bank (FHLB), Discount Note, 5.671% due 07/24/1997* 373,678
295,000 Federal Home Loan Bank (FHLB), Discount Note, 5.677% due 07/30/1997* 293,688
2,000,000 Federal Home Loan Bank (FHLB), Floating Rate Note, 5.623% due 12/04/1997# 1,999,297
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (Cost $33,653,549) $ 33,653,549
------------
REPURCHASE AGREEMENT - .60%
1,783,000 Repurchase agreement with Goldman Sachs and Company, collateralized by a U.S.
Treasury Note, in a joint trading account at 5.75%, dated 06/30/1997, due 07/01/1997
with a maturity value of $1,783,285 (cost $1,783,000) ** 1,783,000
------------
TOTAL INVESTMENTS (cost $294,471,943) $294,471,943
============
</TABLE>
*Floating Rate Note. The interest rate, is subject to change
periodically, based on a market interest rate index.
**Security held by the Composite Fund. Other securities were held
by the Sierra Fund.
Rate represents annualized yield at date of purchase
# Variable rate securities payable upon not more than seven
calendar days' notice. The interest rate shown reflects the
rate currently in effect.
(1) Formerly Composite Cash Management Company Money Market
Portfolio.
Page 3
<PAGE>
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES AT JUNE 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Sierra Global Composite Money Pro Forma Pro Forma
Money Fund Market Fund Adjustments Combined
------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value, (cost $190,219,001, $190,219,001 $280,610,394 $451,037,395
$260,818,394, and $451,037,395)
Cash, receivables, and other assets 2,809,686 3,787,156 6,596,842
------------- ------------ ------------
Total Assets 193,028,687 264,605,550 457,634,237
------------- ------------ ------------
LIABILITIES:
Accrued expenses and other liabilities 1,501,118 8,167,003 9,668,121
------------- ------------ ------------
Total Liabilities 1,501,118 8,167,003 9,668,121
------------- ------------ ------------
Net Assets $191,527,569 $256,438,547 $447,966,116
============ ============ ============
Outstanding Shares
- ------------------
Class A 104,654,469 256,221,535 (352,565) 360,523,439
============ ============ ============
Class B 1,308,787 217,012 5,562 1,531,361
============ ============ ============
Class S 6,879,685 - 29,236 6,908,921
============ ============ ============
Class I 78,668,083 - 334,312 79,002,395
============ ============ ============
Net Asset Value
- ---------------
Class A $104,301,904 $256,221,535 $360,523,439
============ ============ ============
Class B $1,314,349 $217,012 $1,531,361
============ ============ ============
Class S $6,908,921 - $6,908,921
============ ============ ============
Class I $79,002,395 - $79,002,395
============ ============ ============
Net Asset Value
Per Share
- ---------------
Class A $1.00 $1.00 $1.00
============ ============ ============
Class B $1.00 $1.00 $1.00
============ ============ ============
Class S $1.00 - $1.00
============ ============ ============
Class I $1.00 - $1.00
============ ============ ============
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
Composite Money Market Fund and Sierra U.S. Government Money Fund
Notes to Pro Forma Financial Statements (unaudited)
1. Basis of Combination
The pro forma combined financial statements reflect the combined financial
position of Composite Money Market Fund (formerly Composite Cash Management
Company Money Market Portfolio) and Sierra U.S. Government Money Fund at
June 30, 1997, and the pro forma combined results of operations for the
year ended December 31, 1996 and the six month period ended June 30, 1997
as though the reorganization had occurred on January 1, 1996.
The pro forma combined financial statements are presented for the
information of the reader and may not necessarily be representative of how
the pro forma combined financial statements would have appeared had the
reorganization actually occurred.
The Pro Forma Combined Portfolio of Investments, Statement of Assets and
Liabilities, and the Statement of Operations should be read in conjunction
with the historical financial statements of the funds incorporated by
reference in the Statement of Additional Information.
The pro forma statements give effect to the proposed transfer of the assets
and stated liabilities of the Sierra U.S. Government Money Fund in exchange
for shares of Composite Money Market Fund. Under generally accepted
accounting principles, the historical cost of investment securities will be
carried forward to the surviving entity.
The pro forma statements do not reflect the expenses of either fund in
carrying out its obligations under the proposed Agreement and Plan of
Reorganization.
2. Pro Forma Combined Portfolio of Investments
Securities held by the two funds have been combined in the accompanying
Combined Portfolio of Investments. Securities marked "**" are those
securities held by the Composite Fund. Those not marked are held by the
Sierra Fund. Securities are stated at market value as determined by the
Funds as of June 30, 1997. Historical cost amounts represent the combined
cost basis of the securities.
<PAGE>
Composite Money Market Fund and Sierra U.S. Government Money Fund
Notes to Pro Forma Financial Statements (unaudited) (continued)
3. Pro Forma Statements of Assets and Liabilities
Shares outstanding have been adjusted to reflect the conversion of Sierra
shares into Composite shares based upon the net asset value of Composite
shares at June 30, 1997.
4. Pro Forma Statements of Operations
The pro forma statements of operations reflect the following adjustments:
A. A decrease in management fees to reflect the new fee structure. Fees
are based on .40% of average daily net assets.
B. An elimination of the Sierra administration fees, now incorporated in
the management fee structure. Expenses of the Fund will be reimbursed
at a rate of .0005% of average daily net assets and have been adjusted
accordingly. Shareholder servicing and distribution expenses have been
adjusted to reflect the elimination of 12b-1 fees. Other expenses have
been adjusted based on an overall estimated expense ratio of .74%.
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES AT JUNE 30, 1997 (unaudited)
Sierra National Composite Tax Pro Forma Pro Forma
Municipal Fund Exempt Bond Fund Adjustments Combined
--------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value, (cost $166,933,787,
$182,228,123, and $349,161,910) $ 183,056,048 $ 196,962,283 $ 380,018,331
Cash, receivables, and other assets 5,857,373 3,154,779 9,012,152
--------------- ---------------- --------------
Total Assets 188,913,421 200,117,062 389,030,483
--------------- ---------------- --------------
LIABILITIES:
Accrued expenses and other liabilities 647,675 987,691 1,635,366
--------------- ---------------- --------------
Total Liabilities 647,675 987,691 1,635,366
--------------- ---------------- --------------
Net Assets $ 188,265,746 $ 199,129,371 $ 387,395,117
=============== ================ ==============
Outstanding Shares
- ------------------
Class A 16,332,950 24,539,546 6,924,773 47,797,269
=============== ================ ==============
Class B 537,751 849,640 227,671 1,615,062
=============== ================ ==============
Class S 120 - 51 171
=============== ================ ==============
Class I 98 - 42 140
=============== ================ ==============
Net Asset Value
- ---------------
Class A $ 182,262,402 $ 192,464,935 $ 374,727,337
=============== ================ ==============
Class B $ 6,000,911 $ 6,664,436 $ 12,665,347
=============== ================ ==============
Class S $ 1,339 - $ 1,339
=============== ================ ==============
Class I $ 1,094 - $ 1,094
=============== ================ ==============
Net Asset Value
Per Share
- ---------------
Class A $ 11.16 $ 7.84 $ 7.84
=============== ================ ==============
Class B $ 11.16 $ 7.84 $ 7.84
=============== ================ ==============
Class S $ 11.16 - $ 7.84
=============== ================ ==============
Class I $ 11.16 - $ 7.84
=============== ================ ==============
See accompanying notes to pro forma financial statements.
</TABLE>
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Sierra National Composite Tax Pro Forma Pro Forma
Municipal Fund Exempt Bond Fund Adjustments Combined
--------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and Other $15,931,490 $12,265,409 $ 0 $28,196,899
----------- ----------- --------- -----------
EXPENSES:
Management fees 1,315,584 1,065,379 (321,871) 2,059,092
Administration fees 837,190 0 (837,190) 0
Transfer agent fees 0 102,716 78,193 180,909
Distribution fees
Class A Shares 581,129 315,034 106,538 1,002,701
Class B Shares 67,338 40,939 0 108,277
Class S Shares 113 0 0 113
All other expenses 353,838 136,126 (37,691) 452,273
Expense reimbursement (499,178) 0 499,178 0
----------- ----------- --------- -----------
Subtotal 2,656,014 1,660,194 (512,843) 3,803,365
----------- ----------- --------- -----------
Fees paid indirectly (3,651) (3,437) 0 (7,088)
----------- ----------- --------- -----------
Total Expenses 2,652,363 1,656,757 (512,843) 3,796,277
----------- ----------- --------- -----------
NET INVESTMENT INCOME 13,279,127 10,608,652 512,843 24,400,622
----------- ----------- --------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) From:
Security Transactions 2,961,185 (1,336,656) 0 1,624,529
Future contracts (212,390) 0 0 (212,390)
Written options 51,255 0 0 51,255
Net Unrealized Appreciation (Depreciation) of
Securities (6,902,081) 0 0 (6,902,081)
Foreign currency, written options, futures
Contracts and other assets and liabilities 161,873 (4,335,561) 0 (4,173,688)
Net Realized and Unrealized Gain (Loss) on Investments (3,940,158) (5,672,217) 0 (9,612,375)
----------- ----------- --------- -----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 9,338,969 $ 4,936,435 $ 512,843 $14,788,247
=========== =========== ========= ===========
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997 (Unaudited)
Sierra National Composite Tax Pro Forma Pro Forma
Municipal Fund Exempt Bond Fund Adjustments Combined
---------------- ---------------- ------------ ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest and Other $6,524,830 $5,805,302 $0 $12,330,132
---------- ---------- -------- -----------
EXPENSES:
Management fees 549,352 496,566 (124,136) 921,782
Administration fees 349,587 0 (349,587) 0
Transfer agent fees 0 45,168 34,510 79,678
Distribution fees
Class A Shares 241,607 180,466 49,657 471,730
Class B Shares 32,372 29,073 0 61,445
Class S Shares 13 0 0 13
All other expenses 105,157 66,295 27,743 199,195
Expense reimbursement (291,786) 0 291,786 0
---------- ---------- -------- -----------
Subtotal 986,302 817,568 (70,027) 1,733,843
---------- ---------- -------- -----------
Fees paid indirectly (545) (1,179) 0 (1,724)
---------- ---------- -------- -----------
Total Expenses 985,757 816,389 (70,027) 1,732,119
---------- ---------- -------- ------------
NET INVESTMENT INCOME 5,539,073 4,988,913 70,027 10,598,013
---------- ---------- -------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) From:
Security Transactions 1,951,225 445,364 0 2,396,589
Futures Contracts 76,396 0 0 76,396
Net Unrealized Appreciation (Depreciation) of:
Securities (832,642) 0 0 (832,642)
Foreign currency, written options, futures contracts
and other assets and liabilities 13,304 (183,704) 0 (170,400)
---------- ---------- -------- -----------
Net Realized and Unrealized Gain (Loss) on Investments 1,208,283 261,660 0 1,469,943
---------- ---------- -------- -----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,747,356 $5,250,573 $ 70,027 $12,067,956
---------- ---------- -------- -----------
See accompanying notes to pro forma financial statements.
</TABLE>
<PAGE>
COMPOSITE TAX-EXEMPT BOND FUND (1) and SIERRA NATIONAL MUNICIPAL FUND
Combined Portfolio of Investments
June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- --------- -----------
<S> <C> <C> <C>
LONG - TERM MUNICIPAL OBLIGATIONS - 97.44%
EDUCATION FACILITIES REVENUE - 1.28%
$1,300,000 Purdue University, Series E, 4.15% due 07/01/2011 * $ 1,300,000
785,000 University of Washington University, MBIA, 7.00%, due 12/01/2021 ** 864,575
2,750,000 Washington State Higher Education Facilities, Pacific Lutheran
University Project, (CONNIE LEE), 5.70% due 11/02/2026 ** 2,697,888
-----------
4,862,463
-----------
GENERAL OBLIGATION - 19.78%
5,000,000 California State General Obligation, FGIC, 5.625%, due 10/01/2023 ** 4,999,500
Cook County, Community High School, Number 217, (AMBAC Insured):
1,090,000 6.40% due 12/01/2003 1,170,387
1,130,000 6.50% due 12/01/2004 1,213,337
1,370,000 6.60% due 12/01/2005 1,471,037
Cook County, School District, Number 026, (MBIA Insured):
1,445,000 Zero coupon due 12/01/2003 1,049,431
1,020,000 Zero coupon due 12/01/2004 701,250
5,000,000 Cook County Illinois, (FGIC), 5.875%, due 11/15/2022 ** 5,065,850
750,000 Commonwealth of Massachusetts, Consolidated Loan, Series A, GO,
7.625% due 06/01/2008 848,438
5,000,000 Georgia State, 6.30% due 03/01/2009 ** 5,604,300
5,555,000 Hawaii State, 6.40% due 03/01/2009 ** 6,227,988
2,000,000 Honolulu City & County, 6.00% due 01/01/2012 ** 2,133,120
4,000,000 King County Washington Ref-Sewer Series C, 5.25% due 1/01/2021 ** 3,861,320
4,500,000 King County Washington School District #415 Kent,
Series C, 6.30% due 12/01/2008 ** 4,993,740
4,500,000 Meridian Metropolitan District, GO, 7.50% due 12/01/2011 4,933,125
New York, GO:
995,000 Series A, 8.00% due 08/15/2020 1,140,519
1,000,000 Series B, (FSA Insured), 7.00% due 06/01/2014 1,098,750
5,200,000 Series C, 6.50% due 08/01/2005 5,570,500
160,000 Series F, Unrefunded, 8.25% due 11/15/2018 182,000
10,000,000 Orleans Parish, Louisiana, School Board Revenue, (FGIC Insured),
Zero coupon due 02/01/2015 3,712,500
6,230,000 Washington County, Oregon (Criminal Justice Facilities)
6.00%, due 12/01/2012 ** 6,550,845
7,570,000 Washington State, Series B, 5.00% due 5/01/2017 ** 7,146,383
4,900,000 Washington State, Series B, 6.40% due 6/01/2017 ** 5,502,847
-----------
75,177,167
-----------
HOSPITAL, HEALTH, & NURSING HOME REVENUE 15.31%
Allegheny County, Hospital Development Revenue, (OHIO Valley General Hospital):
700,000 5.10% due 04/01/2001 700,000
735,000 5.30% due 04/01/2002 736,837
625,000 5.40% due 04/01/2003 625,781
Commonwealth of Massachusetts, Health and Educational Facilities Authority:
500,000 Framingham Union Hospital, Series B, 8.50% due 07/01/2010 565,625
2,000,000 Saint Memorial Medical Center, Series A, 6.00%, due 10/01/2023 1,795,000
1,000,000 Decatur, Hospital Revenue, (Decatur Memorial Hospital), Series B,
(MBIA Insured), 6.85% due 10/01/2016 1,107,500
2,000,000 Idaho Health Facilities Authority Revenue, (Inverse Floater),
7.82% due 02/15/2021 * 2,217,500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPOSITE TAX-EXEMPT BOND FUND (1) and SIERRA NATIONAL MUNICIPAL FUND
Combined Portfolio of Investments (continued)
June 30, 1997
(unaudited)
PRINCIPAL MARKET
AMOUNT VALUE
- --------- ------------
<S> <C> <C>
Illinois Health Facilities Authority Revenue, Glenoak Medical Center, Series D:
$ 270,000 Unrefunded,9.50% due 11/15/2015 $ 315,225
4,675,000 Hindsdale Hospital, Series B, 9.00% due11/15/2015 5,387,937
5,000,000 Sister Services Hospital, Residual Interest Bond, (MBIA Insured), 9.207%
due 06/19/2015 5,800,000
300,000 Riverside Senior Living Center Project, 7.50% due 11/01/2020 333,000
1,230,000 Servantcor, Series A, 8.00% due 08/15/2021 1,409,887
3,000,000 Rush Presbyterian - St. Luke's Medical, Residual Interest Bond, (MBIA Insured)
9.615% due 10/01/2024 3,457,500
3,000,000 Jefferson County, Hospital Revenue, Residual Interest Bond, (MBIA Insured),
8.496% due 10/09/2008 3,461,250
600,000 Lehigh County, General Purpose Authority, Muhlenberg Hospital Center, Series A,
8.10% due 07/15/2010 633,000
1,240,000 Lorain County, Hospital Revenue, Series B, Humility of Mary Health Care,
7.20% due 12/15/2011 1,446,150
500,000 McKean County, Hospital Authority Revenue, Bradford Hospital, Pottstown Memorial
Medical Center, 8.875% due 10/01/2020 574,375
1,500,000 Michigan State Hospital Finance Authority Revenue, Detroit Medical, Series A,
7.50% due 08/15/2011 1,625,625
1,000,000 Minnesota Agriculture and Economic Development Board, Health Care Systems,
(Fairview Hospital Project), Series A, (MBIA Insured), 5.750% due 11/15/2026 1,007,500
1,000,000 Missouri State, Health and Educational Facilities Authority Revenue,
Bethesda Eye Institute, 6.80% due 11/01/2016 1,111,250
1,250,000 Montgomery County, Higher Education Revenue, 6.875% due 11/15/2020 1,309,375
Pennsylvania State Higher Education Revenue, Student Loan Revenue, Residual
Interest Bond, AMT:
Medical College of Pennsylvania:
3,000,000 (AMBAC Insured), 9.317% due 09/01/2026 3,378,750
3,000,000 Series A, 7.25%, due 03/01/2011 3,326,250
1,890,000 Series B, 7.25%, due 03/01/2005 2,095,538
1,000,000 Philadelphia, Water and Sewer Revenue, 7.50% due 08/01/2010 1,128,750
2,000,000 Rhode Island State Health and Education Revenue, Residual Interest Bond,
(FGIC Insured), 9.487% due 08/15/2021 2,385,000
5,000,000 University of Colorado, Hospital Authority Revenue, Series A,
(AMBAC Insured), 6.25% due 11/15/2012 5,337,500
1,750,000 Washington Health Care Facilities Authority,
Fred Hutchinson Cancer Center, LOC, 7.20% due 01/01/2007 ** 1,903,230
1,750,000 Washington Health Care Facilities Authority,
Fred Hutchinson Cancer Center, LOC 7.375% due 01/01/2018 ** 1,910,598
1,000,000 Wisconsin Health & Education Facility Authority,
Waukesha Memorial Hospital Series A, (AMBAC), 7.125% due 08/15/2007 ** 1,085,570
------------
58,171,503
------------
HOUSING REVENUE - 2.48%
365,000 Illinois Housing Development Authority, Series A, AMT, 7.35% due 08/01/2010 387,356
930,000 State of Maryland, Community Development Administration, Department of Housing,
Single Family Project, AMT, 7.45% due 04/01/2032 973,012
650,000 Nebraska Investment Finance Authority, SFHR, Residual Interest Bond, AMT,
(GNMA Insured), 9.312% due 09/15/2024 727,188
2,000,000 New York State, Housing Finance Agency Revenue, Multi-family Housing Revenue,
Second Mortgage, Series F, AMT, 6.625% due 08/15/2012 2,107,500
3,000,000 Housing of New York Corporation Revenue, 5.00% due 11/01/2013 2,808,750
Vermont Housing Finance Agency, Single Family, Series 1, AMT:
140,000 6.80% due 05/01/2025 143,325
220,000 8.15% due 05/01/2025 227,425
1,855,000 Oklahoma Housing and Finance Authority, SFHR, Series B, AMT, (GNMA Insured),
7.997% due 08/01/2018 2,072,963
------------
9,447,519
------------
</TABLE>
<PAGE>
COMPOSITE TAX-EXEMPT BOND FUND (1) and SIERRA NATIONAL MUNICIPAL FUND
Combined Portfolio of Investments (continued)
June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ------------- --------------
<S> <C> <C>
INDUSTRY DEVELOPMENT/POLLUTION CONTROL REVENUE- 17.70%
$5,000,000 Mayor & City Council of Baltimore Port Facility (DuPont),
6.50% due 10/01/2011 ** $5,403,100
Beaver County, IDR, PCR, (Edison Project), Series A:
300,000 7.75% due 09/01/2024 317,250
3,675,000 (FGIC Insured), 7.00% due 06/01/2021 3,955,219
3,665,000 Chicago Gas Supply (Peoples Gas), 6.875%, due 03/01/2015 ** 3,959,666
4,000,000 Clark County, IDR, Series A, Nevada Power Company, AMT, (FGIC Insured),
6.70% due 06/01/2022 4,275,000
4,000,000 Courtland, Industrial Development Board of Solid Waste, (Champion International
Corporation Project), Disposal Revenue, AMT, 7.75% due 01/01/2020 4,290,000
1,000,000 Forsyth, PCR, Series B, AMT, Puget Sound Power & Light, (AMBAC Insured),
7.25% due 08/01/2021 1,103,750
2,500,000 Harrison County, Solid Waste Disposal, (Monongahelea Power), Series A, AMT,
6.875% due 04/15/2022 2,671,875
150,000 Kanawha County, IDR, (Union Carbide Project), Series A, AMT,
8.00% due 08/01/2020 163,313
300,000 Lancaster County, Solid Waste Authority, Series A, AMT, 8.375% due 12/15/2004 314,418
1,500,000 Lordsburg Pollution Control (Phelps Dodge), 6.50%,
due 04/01/2013 ** 1,596,690
4,000,000 Lowndes County Solid Waste Disposal & Pollution Control
(Weyerhaeuser), 6.80% due 04/01/2022 ** 4,660,880
5,000,000 Lowndes County, Solid Waste Disposal, PCR, Residual Interest Bond,
(Weyerhaeuser Company), Floating Rate Note, 7.82% due 04/01/2022 5,718,750
1,000,000 Madison, IDR, (Madison Gas & Electric Company), (Project A), AMT,
6.75% due 04/01/2027 1,055,000
4,370,000 Mercer County Pollution Control (Otter Tail Power)
6.90% due 02/01/2019 ** 4,647,145
1,000,000 Mobile, Industrial Development Board, Solid Waste Disposal Revenue,
6.95% due 01/01/2020 1,067,500
5,000,000 Monroe, PCR, (Oglethorpe Power Company) 6.70% due 01/01/2009 5,612,500
3,410,000 Monroe, PCR, (Oglethorpe Power Company) 6.75% due 01/01/2010 3,849,038
6,000,000 San Diego Industrial Development (San Diego Gas &
Electric), Series A, (AMBAC), 5.90% due 06/01/2018 ** 6,130,860
750,000 South Charleston, IDR, (Union Carbide Project), Series A, AMT,
8.00% due 08/01/2020 816,562
5,000,000 Valdez Marine Term (Mobil Alaska Pipeline), 5.75%, due 11/01/2028 ** 4,910,500
200,000 Warren County, Solid Waste Disposal Revenue, (International Paper Project),
Series A, AMT, 7.70% due 11/15/2009 213,500
500,000 West Side Calhoun County, Solid Waste Revenue Bond, (Union Carbide Project),
AMT, 8.20% due 03/15/2021 553,750
--------------
67,286,266
--------------
LEASE RENTAL/MUNICIPAL LEASE-2.51%
1,250,000 California State Public Works Board Lease, Department of Corrections,
State Prison, Series E, 5.50%, due 6/01/2015 ** 1,244,300
1,150,000 District of Columbia, COP, 6.875% due 01/01/2003 1,210,375
550,000 Los Angeles, Regional Airport Improvement, Series A, AMT
6.70% due 01/01/2022 570,625
3,000,000 Orange County Recovery Certificate of Participation, Series A, (MBIA)
6.00% due 07/01/2026 ** 3,116,310
1,000,000 Philadelphia, Municipal Authority Revenue, Series B, (FGIC Insured), 7.125%
due 11/15/2018 1,121,250
1,000,000 Plymouth County, COP, Series A, 7.00% due 04/01/2022 1,096,250
1,173,000 Sacramento California Certificate of Participation, 5.55%, due 9/15/20** 1,172,132
--------------
9,531,242
--------------
</TABLE>
<PAGE>
COMPOSITE TAX-EXEMPT BOND FUND (1) and SIERRA NATIONAL MUNICIPAL FUND
Combined Portfolio of Investments (continued)
June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ------------ ------------
<S> <C> <C>
OTHER REVENUE - 4.45%
$445,000 Brazos, Higher Educational Facilities Authority, Series C-2, AMT, 7.10%
due 11/01/2004 $ 477,262
669,000 Texas State, Higher Education Coordinating Board, Student Loan, AMT,
7.70% due 10/01/2025 704,959
22,520,000 Dade County, Guaranteed Entitlement Revenue, Capital Appreciation, Series A,
(MBIA Insured), Zero coupon due 02/01/2018 6,812,300
1,420,000 District of Columbia, Land Redevelopment Agency, Washington D.C. Sports
Arena, Special Tax, 5.625% due 11/01/2010 1,395,150
2,000,000 Indianapolis, Public Improvement Board, Series D, (LOC INB National Bank),
6.50% due 02/01/2022 2,018,920
2,000,000 Mashantucket Western Pequot Tribe, Special Revenue, Series A,
6.50% due 09/01/2005 ## 2,137,500
3,000,000 St Louis, Parking Facilities Revenue, 6.625%, due 12/15/2021 3,348,750
------------
16,894,841
------------
PUBLIC FACILITIES REVENUE - 1.86%
4,000,000 Metropolitan Pier and Exposition Authority Dedicated
State Tax, (FGIC), Zero coupon, due 06/15/2008 ** 2,259,640
6,000,000 Metropolitan Pier and Exposition Authority Dedicated
State Tax, (FGIC), Zero coupon, due 06/15/2009 ** 3,180,060
1,500,000 Santa Fe County New Mexico Correctional System
(FSA), 6.00%, due 2/01/2027 ** 1,612,350
------------
7,052,050
------------
PREREFUNDED - 9.56%
4,000,000 Chicago Wastewater Transmission Revenue, 6.75%, due 11/15/2020 ** 4,377,160
2,225,000 Colorado Springs Utilities System Revenue, 6.75%, due 11/15/2021 ** 2,470,017
250,000 Commonwealth of Massachusetts, GO, Pre-refunded, 7.50% due 12/01/2007 279,063
210,000 Illinois Health Facilities Authority Revenue, Glenoak Medical Center, Series D,
Pre-refunded, 9.50% due 11/15/2015 246,750
5,000,000 Illinois State Sales Tax Revenue Series N, 7.00%, due 06/15/2020 ** 5,558,350
1,500,000 Louisiana Public Facility Authority Revenue, Series B, ETM
Zero coupon due 12/01/2019 418,125
1,845,000 New York, GO, Series F, Pre-refunded, 8.25% due 11/15/2018 2,147,119
275,000 New York State Medical Care Facilities, Finance Agency Revenue, Pre-refunded,
7.75% due 08/15/2011 308,488
7,000,000 Omaha Public Power District Electric, Series B, 6.15%, due 02/01/20 ** 7,642,810
2,750,000 Snohomish County School District #2-Everett General Obligation,
7.20% due 12/01/2020 ** 3,024,835
2,000,000 Spokane County Water District #3 Revenue, 7.60%, due 01/01/2008 ** 2,101,460
3,500,000 University of Washington University Revenue Bond,
MBIA, 7.00% due 12/01/2021 ** 3,812,590
3,500,000 Washington Public Power Supply System Nuclear Project
Number 2 Revenue, Series C, 7.625% due 07/01/2010 ** 3,930,745
------------
36,317,512
------------
TRANSPORTATION FACILITIES REVENUE - 10.56%
1,000,000 Atlanta, Airport Facilities Revenue, AMT, 7.25% due 01/01/2017 1,078,750
Chicago, O'Hare Airport Supplemental Facilities AMT:
6,000,000 International Term (MBIA Insured), 6.75% due 01/01/2012 6,427,500
700,000 American Airlines, Special Series A, 7.875% due 11/01/2025 760,375
615,000 United Airlines, 8.40% due 05/01/2004 671,119
775,000 United Airlines, 8.95% due 05/01/2018 873,812
400,000 City of New York, IDR, Industrial Development Agency, Supplemental Facilities,
American Airlines, AMT, 8.00% due 07/01/2020 422,500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPOSITE TAX-EXEMPT BOND FUND (1) and SIERRA NATIONAL MUNICIPAL FUND
Combined Portfolio of Investments (continued)
June 30, 1997
(unaudited)
PRINCIPAL MARKET
AMOUNT VALUE
- ------------- ------------
<S> <C> <C> <C>
$ 425,000 Dade County, Seaport Authority, Refunding, (MBIA Insured), 6.500% due 10/01/2008 $481,844
5,000,000 Dallas-Fort Worth International Airport, (Facility Improvement Corporate Revenue),
(American Airlines), AMT, 7.50% due 11/01/2025 5,393,750
Denver City and County, Airport Revenue, AMT, Series A:
2,000,000 8.875% due 11/15/2012 2,335,000
1,140,000 8.50% due 11/15/2023 1,285,350
2,000,000 8.00% due 11/15/2025 2,225,000
1,920,000 Denver City and County, Airport Revenue, AMT, Series C,
6.60% due 11/15/2004 2,071,200
3,000,000 Massachusetts Bay Transportation Authority Revenue, FSA,
5.25%, due 3/01/2026 ** 2,861,010
1,500,000 Metropolitan District, Washington D.C., Airport Authority, General
Airport Revenue, Series A, AMT, (MBIA Insured), 6.625% due 10/01/2019 1,620,000
1,265,000 Metropolitan Transportation Authority Revenue, Service Contract
Transportation Facilities, Series 7, 4.750% due 07/01/2019 1,097,388
5,000,000 San Francisco California City & County Airport Commission
International Airport, (FGIC), 5.625% due 5/01/2021 ** 4,999,550
4,500,000 Texas State Turnpike Authority, Dallas Northway, President George Bush
Turnpike, FGIC, 5.25%, due 1/01/2023 ** 4,308,075
740,000 Tucson, Airport Authority Inc., Supplemental Facilities Revenue, AMT
8.70% due 09/01/2019 833,425
200,000 Tulsa, Municipal Airport Revenue, American Airlines Project, AMT,
7.60% due 12/01/2030 217,500
150,000 United Airlines, Special Series B, 8.50% due 05/01/2018 164,062
------------
40,127,210
------------
UTILITY REVENUE - 11.87%
1,235,000 Anchorage Electric Utility, (MBIA), 6.50% due 12/01/2013 ** 1,396,822
2,775,000 Colorado Springs Utilities System, 6.75% due 11/15/2021 ** 3,037,515
6,000,000 Indiana Municipal Power Agency, Series A, (MBIA), 6.125%
due 01/01/2013 ** 6,522,180
5,000,000 Memphis Electric System, 5.625% due 01/01/2002 ** 5,236,300
2,285,000 Municipal Electric Authority, Sub Series A, (AMBAC Insured),
5.375% due 01/01/2013 2,273,575
5,000,000 North Carolina Eastern Municipal Power Agency, Series B, 7.00% due 01/01/20 ** 5,575,400
5,000,000 North Carolina Eastern Municipal Power Agency, Power Systems Revenue,
Series A, (MBIA Insured), 5.70% due 01/01/2013 5,131,250
2,000,000 Omaha Public Power District Electric, Series C, 5.50%. due 02/01/2014 ** 2,051,460
5,000,000 Orlando Utilities Commission Water & Electric, 6.00% due 10/01/2010 ** 5,431,700
5,000,000 Salt River Project Agricultural Improvement & Power District
Electrical System, Series C, 6.25% due 01/01/2019 ** 5,259,800
3,000,000 Salt River Project Agriculture, Series A, 5.75% due 01/01/2009 ** 3,207,210
------------
45,123,212
------------
WATER/SEWER REVENUE - .08%
300,000 East Baton Rouge, Sewer Commission Revenue, 9.125% due 09/01/2006 311,439
------------
TOTAL LONG-TERM MUNICIPAL OBLIGATIONS 370,302,424
------------
SHORT-TERM MUNICIPAL OBLIGATIONS - 1.90%
2,200,000 Ascension Parish LA Pollution Control Revenue, Variable Rate Demand
Obligation, 4.15%*, due 12/01/2009 ** 2,200,000
500,000 Garfield County, Oklahoma Industrial Authority, Pollution Control Revenue,
Variable Rate Demand Obligation, 4.20%*, due 01/01/2025 ** 500,000
1,500,000 Huntington Beach, California Multifamily Housing Revenue,
Variable Rate Demand Obligation, 4.00%*, due 07/01/2014 ** 1,500,000
</TABLE>
<PAGE>
COMPOSITE TAX-EXEMPT BOND FUND (1) and SIERRA NATIONAL MUNICIPAL FUND
Combined Portfolio of Investments (continued)
June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
---------- -----------
<S> <C> <C> <C>
$ 400,000 L.A. California Regional Airports, Improvement Corporate Lease Revenue,
Variable Rate Demand Obligation, 4.10%*, due 12/01/2024 ** $ 400,000
1,100,000 Mansfield Texas Industrial Development,
Variable Rate Demand Obligation, 4.20%*, due 11/01/2026 ** 1,100,000
1,500,000 Wilmington Hospital Revenue, Franciscan Health, Series A,
Variable Rate Demand Obligation, 4.10%*, due 07/01/2011 ** 1,500,000
------------
TOTAL SHORT-TERM MUNICIPAL OBLIGATIONS 7,200,000
------------
OTHER INVESTMENT - 0.66%
2,515,907 Nuveen Tax Exempt Money Market Fund, 3.56% ** 2,515,907
------------
TOTAL INVESTMENTS (Cost $349,161,910) $380,018,331
============
</TABLE>
*Variable Rate Demand Obligations are payable on demand and are secured by
letters of credit or other credit support. The interest rate, which is subject
to change periodically, is based on an index of market interest rates.
**Security held by the Composite Fund. Other securities were held by the
Sierra Fund.
* Floating rate security. The interest rate shown reflects the rate currently
in effect.
## Security exempt from registration under Rule 144A of the Securities Act of
1933. This security may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
AMBAC = AMBAC Indemnity Corporation; American Municipal Bond Assurance
AMT = Alternative Minimum Tax
COP = Certificates of Participation
CONNIE LEE = College Construction Loan Insurance Association
ETM = Escrowed to Maturity
FGIC = Financial Guaranty Insurance Company
FSA = Financial Security Assurance
GNMA = Government National Mortgage Association
GO = General Obligation Bonds
IDR = Industrial Development Revenue
LOC = Letter of Credit
MBIA = Municipal Bond Insurance Association
PCR = Pollution Control Revenue
SFHR = Single Family Housing Revenue
(1) Formerly Composite Tax-Exempt Bond Fund, Inc.
<PAGE>
Composite Tax-Exempt Bond Fund and Sierra National Municipal Fund
Notes to Pro Forma Financial Statements (unaudited)
1. Basis of Combination
The pro forma combined financial statements reflect the combined financial
position of Composite Tax-Exempt Bond Fund (formerly Composite Tax-Exempt
Bond Fund, Inc.) and Sierra National Municipal Fund at June 30, 1997, and
the pro forma combined results of operations for the year ended December
31, 1996 and the six month period ended June 30, 1997 as though the
reorganization had occurred on January 1, 1996.
The pro forma combined financial statements are presented for the
information of the reader and may not necessarily be representative of how
the pro forma combined financial statements would have appeared had the
reorganization actually occurred.
The Pro Forma Combined Portfolio of Investments, Statement of Assets and
Liabilities, and the Statement of Operations should be read in conjunction
with the historical financial statements of the funds incorporated by
reference in the Statement of Additional Information.
The pro forma statements give effect to the proposed transfer of the assets
and stated liabilities of the Sierra National Municipal Fund in exchange
for shares of Composite Tax-Exempt Bond Fund. Under generally accepted
accounting principles, the historical cost of investment securities will be
carried forward to the surviving entity.
The pro forma statements do not reflect the expenses of either fund in
carrying out its obligations under the proposed Agreement and Plan of
Reorganization.
2. Pro Forma Combined Portfolio of Investments
Securities held by the two funds have been combined in the accompanying
Combined Portfolio of Investments. Securities marked "**" are those
securities held by the Composite Fund. Those not marked are held by the
Sierra Fund. Securities are stated at market value as determined by the
Funds as of June 30, 1997. Historical cost amounts represent the combined
cost basis of the securities.
Composite Tax-Exempt Bond Fund and Sierra National Municipal Fund
Notes to Pro Forma Financial Statements (unaudited) (continued)
3. Pro Forma Statements of Assets and Liabilities
Shares outstanding have been adjusted to reflect the conversion of Sierra
shares into Composite shares based upon the net asset value of Composite
shares at June 30, 1997.
4. Pro Forma Statements of Operations
The pro forma statements of operations reflect the following adjustments:
A. A decrease in management fees for Sierra shareholders to reflect the new
fee structure. Fees are based on .50% of average daily net assets up to
$250,000,000 and .40% of average daily net assets over that amount.
B. An elimination of the Sierra administration fees, now incorporated in
the management fee structure. Also, expenses of the Fund will no longer
be reimbursed. Shareholder servicing and distribution expense have been
adjusted to reflect a rate of .25% of average daily net assets. Other
expenses have been adjusted based on an overall estimated expense ratio
of .85%.
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended October 31, 1996 (Unaudited)
Sierra Growth and Composite Growth Pro Forma Pro Forma
Income Fund & Income Fund Adjustments Combined
----------------- ---------------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends and other $ 4,981,675 $ 3,911,498 $ 0 $ 8,893,173
----------- ----------- ---------- -----------
EXPENSES:
Management fees 1,905,672 1,065,507 (552,542) 2,418,637
Administration fees 800,136 0 (800,136) 0
Transfer agent fees 0 193,784 269,566 463,350
Distribution fees
Class A Shares 480,543 265,579 0 746,122
Class B Shares 200,416 151,222 0 351,638
Class S Shares 319,298 0 0 319,298
All Other Expenses 396,265 224,706 10,870 631,841
Expense reimbursement 0 0 0 0
----------- ----------- ----------- -----------
Subtotal 4,102,330 1,900,798 (1,072,242) 4,930,886
----------- ----------- ----------- -----------
Fees paid indirectly (3,272) (5,368) 0 (8,640)
----------- ----------- ----------- -----------
Total Expenses 4,099,058 1,895,430 (1,072,242) 4,922,246
----------- ----------- ----------- -----------
NET INVESTMENT INCOME 882,617 2,016,068 1,072,242 3,970,927
----------- ----------- ---------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) From Security Transactions 36,418,818 14,044,609 0 50,463,427
(excluding short term securities)
Net Unrealized Appreciation (Depreciation) of Investments 9,169,501 18,741,419 0 27,910,920
----------- ----------- ---------- -----------
Net Realized and Unrealized Gain (Loss) on Investments 45,588,319 32,786,028 0 78,374,347
----------- ----------- ---------- -----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $46,470,936 $34,802,096 $1,072,242 $82,345,274
=========== =========== ========== ===========
See accompanying notes to pro forma financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF OPERATIONS
For the Six Months Ended April 30, 1997 (Unaudited)
Sierra Growth and Composite Growth Pro Forma Pro Forma
Income Fund & Income Fund Adjustments Combined
----------------- ----------------- ----------- ---------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends and other $ 2,496,031 $ 2,178,401 $ 0 $4,674,432
----------- ----------- --------- ----------
EXPENSES:
Management fees 1,050,403 714,834 (346,065) 1,419,172
Administration fees 488,073 0 (488,073) 0
Transfer agent fees 0 119,805 158,038 277,843
Distribution fees
Class A Shares 201,894 240,047 0 441,941
Class B Shares 159,069 144,236 0 303,305
Class S Shares 67,868 0 0 67,868
All other expenses 246,652 145,380 12,103 404,135
Expense reimbursement 0 0 0 0
----------- ----------- --------- ----------
Subtotal 2,213,959 1,364,302 (663,997) 2,914,264
----------- ----------- --------- ----------
Fees paid indirectly (1,398) (4,155) 0 (5,553)
----------- ----------- --------- ----------
Total Expenses 2,212,561 1,360,147 (663,997) 2,908,711
----------- ----------- --------- ----------
NET INVESTMENT INCOME 283,470 818,254 663,997 1,765,721
----------- ----------- --------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) From Security Transactions 30,211,418 15,241,364 0 45,452,782
(excluding short term securities)
Net Unrealized Appreciation (Depreciation) of Investments 7,604,505 8,457,148 0 16,061,653
----------- ----------- --------- ----------
Net Realized and Unrealized Gain (Loss) on Investments 37,815,923 23,698,512 0 61,514,435
----------- ----------- --------- ----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $38,099,393 $24,516,766 $ 663,997 $63,280,156
=========== =========== ========= ===========
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
COMPOSITE GROWTH & INCOME FUND and SIERRA GROWTH AND INCOME FUND
Combined Portfolio of Investments
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Market
Shares Value
- ------- -----------
<C> <S> <C> <C> <C> <C>
COMMON STOCKS 91.12%
AEROSPACE/DEFENSE 3.55%
82,700 Boeing Company $ 8,156,287
90,700 Coltec Industries 1,836,675
73,902 Lockheed Martin Corporation ** 6,614,229
40,000 Northrop Grumman Corporation ** 3,340,000
52,040 Raytheon Company ** 2,270,245
-----------
22,217,436
-----------
BANKS/SAVINGS & LOANS 6.62%
68,000 Bank of New York Company, Inc. ** 2,686,000
119,700 Dime Bancorp Inc 1,930,163
58,200 Fleet Financial Group Inc 3,550,200
100,600 First Chicago NBD 5,658,750
103,400 First Hawaiian Inc 3,179,550
26,500 Mellon Bank Corporation ** 2,202,812
134,599 Nationsbank Corp 8,126,430
74,962 Norwest Corporation ** 3,738,730
56,300 Signet Banking Corporation ** 1,738,262
95,150 Washington Federal, Inc. ** 2,283,600
35,000 Washington Mutual Savings Bank 1,728,125
17,300 Wells Fargo & Company ** 4,614,775
-----------
41,437,397
-----------
BASIC INDUSTRY 4.22%
3,900 Albemarle Corp 68,737
336,900 Alleghent Teledyne Inc 8,969,962
48,900 Aluminum Company of America 3,410,775
138,500 Cooper Inds Inc 6,371,000
10,600 USG Corp Com New 363,050
247,200 WMX Technologies, Inc. ** 7,261,500
-----------
28,445,024
-----------
BEVERAGES 0.82%
104,900 PepsiCo, Inc. ** 3,658,387
65,000 Seagram Company, Ltd. ** 2,486,250
-----------
6,144,537
-----------
CAPITAL GOODS 0.52%
94,624 Donaldson Company, Inc. ** 3,240,872
-----------
CHEMICALS 1.95%
35,500 Du Pont E I De Nemours & Co 3,767,437
113,200 Millenium Chemicals, Inc. * ** 2,009,300
128,400 Union Carbide Corp 6,403,950
-----------
12,150,687
-----------
COMPUTER SOFTWARE 5.47%
176,600 Autodesk, Inc. ** 6,269,300
100,100 Barra, Inc. * ** 2,602,600
62,300 Computer Associates International, Inc. ** 3,239,600
45,900 First Data Corp 1,583,550
216,200 Mentor Graphics ** 1,526,913
53,700 Microsoft Corporation* ** 6,524,550
-----------
21,746,512
-----------
COMPUTER SYSTEMS 6.10%
207,300 Bay Networks Inc 3,679,575
39,600 Cabletron Systems * ** 1,366,200
61,200 Cisco Systems, Inc. ** 3,167,100
65,010 Electronic Data Systems Corporation ** 2,169,709
202,600 EMC Corp Nass 7,369,575
46,800 Hewlett-Packard Company ** 2,457,000
108,200 Input/Output Inc 1,514,800
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item 6a
COMPOSITE GROWTH & INCOME FUND and SIERRA GROWTH AND INCOME FUND
Combined Portfolio of Investments (continued)
April 30, 1997
(Unaudited)
Market
Shares Value
- ------------ -------------
<S> <C> <C> <C>
31,200 Intl Business Machines Corp $5,015,400
5,237 NCR Corporation 151,873
52,200 Perkin Elmer Corporation 3,791,025
35,500 Quantum Corp 1,479,906
237,800 Sensormatic Electronics Corp 3,567,000
85,600 Sun Microsystems Inc. 2,466,350
-------------
38,195,513
-------------
CONSUMER DURABLES 2.61%
59,400 Black & Decker Corporation ** 1,989,900
141,083 Castle & Cooke, Inc. * ** 1,939,891
43,500 General Motors - Class H 2,338,125
58,900 General Motors Corp 3,408,837
85,800 Johnson Controls Inc 3,292,575
121,441 Mattel, Inc. ** 3,385,168
-------------
16,354,496
-------------
ELECTRICAL EQUIPMENT 2.97%
99,500 Allied Signal Corporation 7,188,875
77,550 Emerson Electric Company ** 3,935,662
44,500 General Electric Company ** 4,933,938
33,900 Grainger NW Inc 2,555,213
-------------
18,813,588
-------------
ELECTRONICS/GENERAL 1.86%
75,000 Anixter International Inc 1,068,750
138,000 DSC Communications Corporation* ** 2,811,750
239,100 General Inst Corp New 5,588,963
149,950 Loral Space & Communications * ** 2,193,019
-------------
11,662,482
-------------
ELECTRONICS-SEMICONDUCTORS/COMPONENTS 2.77%
188,100 Cypress Semiconductor 2,609,888
29,500 Integrated Device Technology, Inc. ** 346,625
23,500 Intel Corporation ** 3,598,438
95,300 Motorola, Inc. ** 5,455,925
60,000 Texas Instruments, Inc 5,355,000
-------------
17,265,876
-------------
FINANCIAL SERVICES 3.56%
73,300 Advanta Corp Class B 1,630,925
59,100 AMBAC Inc 3,826,725
3,700,000 Berkshire Hathaway Conv. 1.00% due 12/03/2001 3,635,250
185,500 Federal Home Loan Mortgage Corporation ** 5,912,812
4,100 First USA Paymentech 98,913
103,900 First USA Inc 5,000,187
48,052 Legg Mason, Inc. ** 2,282,470
-------------
23,387,562
-------------
FOODS & FOOD RETAILERS 3.42%
46,000 Campbell Soup Company ** 2,351,750
39,400 Dole Food Company ** 1,605,550
111,000 General Mills Inc 6,882,000
58,400 Ralston Purina Co - Ralston Group 4,810,700
49,700 Supervalu, Inc. ** 1,522,063
21,700 Unilever NV ADR 4,258,625
-------------
21,430,698
-------------
HEALTHCARE PRODUCTS 6.20%
75,100 Abbott Laboratories ** 4,581,100
126,100 Alza Corp Com 3,688,425
63,300 Bausch & Lomb Inc 2,555,738
151,900 Forest Laboratories* ** 5,183,587
43,791 Gensia Sicor Inc 153,269
103,550 Johnson & Johnson ** 6,342,438
38,925 Merck and Company, Inc. ** 3,522,712
48,500 Schering-Plough Corp 3,880,000
90,700 Warner Lambert Co 8,888,600
-------------
38,795,863
-------------
</TABLE>
<PAGE>
COMPOSITE GROWTH & INCOME FUND and SIERRA GROWTH AND INCOME FUND
Combined Portfolio of Investments (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Market
Shares Value
- ------- -----------
<S> <C> <C> <C> <C>
HEALTHCARE SERVICES 3.70%
86,000 Cognizant Corporation ** $ 2,805,750
266,100 Humana Inc 5,787,675
93,200 Manor Care, Inc. ** 2,178,550
169,301 Medpartners, Inc. * ** 3,089,743
31,233 Pacificare Health Systems - Class A * ** 2,397,133
6,024 Talbert Medical Management Corporation Stock Rights* ** 105,420
139,900 United Healthcare Corp 6,802,638
-----------
23,166,809
-----------
HOUSEHOLD PRODUCTS 3.73%
42,100 Alberto Culver Company, Class A ** 1,041,975
160,000 Kimberly Clark De Mexico, American Depository Receipt ** 2,980,000
106,700 Proctor and Gamble Company ** 13,417,525
30,000 Unilever Group ** 5,887,500
-----------
23,327,000
-----------
INSURANCE 2.66%
28,332 American International Group, Inc. ** 3,640,662
80,100 Integon Corporation ** 811,013
119,100 Providian LLC 6,878,025
79,100 TIG Holdings, Inc. ** 2,195,025
56,316 Travelers Group, Inc. ** 3,118,499
-----------
16,643,224
-----------
LODGING & RESTAURANTS 0.97%
149,515 Choice Hotels Holdings, Inc. ** 2,093,210
165,800 Circus Circus Enterprises Inc 3,999,925
400 WHG Resorts and Casinos Inc 3,750
-----------
6,096,385
-----------
MACHINERY 1.71%
100,050 Crane Company ** 3,739,369
59,000 Deere & Company ** 2,714,000
268,300 International Game Tech 4,259,263
-----------
10,712,632
-----------
MEDIA 5.10%
151,133 ACNielson Corporation ** 2,266,995
100,000 Dun & Bradstreet Corporation ** 2,462,500
167,900 TCI Satellite Entertainment Inc, Class A 1,259,250
715,700 Tele Communication CL A New 9,885,606
286,000 Time Warner, Inc. ** 12,870,000
118,850 Viacom Incorporated, Class A * ** 3,164,381
-----------
31,908,732
-----------
OILS & GAS 6.46%
50,800 Anadarko Pete Company 2,787,650
218,160 Exxon Corporation ** 12,353,309
24,500 Mobil Corporation ** 3,185,000
128,900 Occidental Petroleum Corporation ** 2,851,913
15,500 Royal Dutch Petroleum Company ** 2,793,875
28,100 Royal Dutch Petroleum Co ADR 5,065,025
24,000 Texaco, Inc. ** 2,532,000
156,700 Tosco Corporation 4,642,237
59,984 Ultra Diamond Shamrock 1,926,986
83,700 Union Pacific Resources Group ** 2,270,363
-----------
40,406,653
-----------
OIL SERVICES 0.01%
1,200 Cooper Cameron Corp 85,500
-----------
PAPER AND FOREST PRODUCTS 1.20%
124,000 Asia Pulp & Paper Company, Ltd. ** 1,658,500
29,000 Boise Cascade Corporation ** 964,250
59,800 Temple Inland Inc 3,318,900
45,500 Weyerhaeuser Company ** 2,081,625
-----------
8,023,275
-----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPOSITE GROWTH & INCOME FUND and SIERRA GROWTH AND INCOME FUND
Combined Portfolio of Investments (continued)
April 30, 1997
(Unaudited)
Market
Shares Value
- ----------- --------------
<S> <C> <C> <C>
REAL ESTATE INVESTMENT TRUSTS 0.62%
62,826 Bank of America Realty ** $1,476,411
41,000 Health Care Property Investors, Inc. ** 1,358,125
35,600 Wellsford Residential Property Trust ** 1,054,650
--------------
3,889,186
--------------
RETAIL SALES 3.71%
91,800 Circuit City Stores- Carmax 1,377,000
149,300 Circuit City Stores- Circuit City Group 5,916,012
76,000 Intimate Brands, Inc. ** 1,415,500
64,700 Fred Meyer, Inc., Class A * ** 2,660,788
226,900 Toys R Us Inc 6,466,650
191,300 Wal Mart Stores Inc 5,404,225
--------------
23,240,175
--------------
TOBACCO 1.42%
225,600 Phillip Morris Companies, Inc. ** 8,882,999
--------------
TRANSPORTATION SERVICES & EQUIPMENT 2.41%
56,150 Consolidated Freightways Corp 617,650
112,600 CSX Corp 5,249,975
14,500 CNF Transportation 431,375
159,500 Expeditors International of Washington, Inc. ** 3,987,500
62,050 Sabre Group Holdings, Inc. ** 1,590,031
50,300 Union Pacific Corporation ** 3,206,625
--------------
15,083,156
--------------
UTILITIES - GAS AND ELECTRIC 2.13%
114,200 Enron Corporation ** 4,296,775
72,900 Duke Energy Corp 3,198,487
141,500 PG & E Corp 3,396,000
41,900 Pinnacle West Capital 1,194,150
31,900 Portland General Corporation ** 1,164,350
--------------
13,249,762
--------------
UTILITIES - TELECOMMUNICATIONS 4.39%
90,850 AT&T Corporation ** 3,043,475
130,000 Aliant Communications, Inc. ** 2,031,250
48,500 Bell Atlantic Corp 3,285,875
10,400 Frontier Corporation ** 165,100
51,000 GTE Corporation ** 2,339,625
96,600 MCI Communications Corp 3,682,875
97,700 SBC Communications 5,422,350
111,000 US West Inc 3,898,875
148,400 Worldcom Inc 3,561,600
--------------
27,431,025
--------------
TOTAL COMMON STOCKS (cost $483,089,797) 570,367,278
--------------
CONVERTIBLE PREFERRED STOCKS 1.83%
*
37,200 Integon Corporation ** 1,450,800
10,000 Microsoft Preferred ** 856,250
36,500 Owens-Corning Fiberglass CNV PFD 1,998,375
75,800 Pacificare Health Systems, Inc. ** 2,368,750
40,100 Penncorp Financial Group ** 3,208,000
268,400 RJR Nabisco Holding Company, Series C ** 1,576,850
*
--------------
TOTAL CONVERTIBLE PREFERRED STOCK (cost $11,800,239) 11,459,025
--------------
Principal
Amount
- ------------
CONVERTIBLE BOND 0.23%
$925,000 Alberto Culver Corporation, 5.50%, 06/30/2005 (cost $1,419,468) ** 1,437,219
--------------
</TABLE>
<PAGE>
COMPOSITE GROWTH & INCOME FUND and SIERRA GROWTH AND INCOME FUND
Combined Portfolio of Investments (continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ----------- ---------------
<S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES 6.72%
$5,550,000 U.S. Treasury Bond, 6.50% due 11/15/2026 ** $ 5,208,331
37,387,000 U.S. Treasury Bill, Zero Coupon due 08/07/1997 36,857,503
---------------
TOTAL U.S. GOVERNMENT SECURITIES (cost $42,015,177) 42,065,834
---------------
REPURCHASE AGREEMENT 0.10%
621,000 Repurchase agreement with Goldman Sachs, collateralized
by a U.S. Treasury Note, in a joint trading account at 5.15%,
dated 04/30/97, due 05/01/97 with a maturity value of
$621,089 (cost $621,000) ** 621,000
---------------
TOTAL INVESTMENTS (cost $538,945,681) $625,950,356
===============
* Non-income producing security
** Security held by the Composite Fund. Other securities were held
by the Sierra fund.
</TABLE>
<PAGE>
Composite Growth & Income Fund and Sierra Growth and Income Fund
Notes to Pro Forma Financial Statements (unaudited)
1. Basis of Combination
The pro forma combined financial statements reflect the combined financial
position of Composite Growth & Income Fund and Sierra Growth and Income
Fund at April 30, 1997, and the pro forma combined results of operations
for the year ended October 31, 1996 and the six month period ended April
30, 1997 as though the reorganization had occurred on November 1, 1995.
The pro forma combined financial statements are presented for the
information of the reader and may not necessarily be representative of how
the pro forma combined financial statements would have appeared had the
reorganization actually occurred.
The Pro Forma Combined Portfolio of Investments, Statement of Assets and
Liabilities, and the Statement of Operations should be read in conjunction
with the historical financial statements of the funds incorporated by
reference in the Statement of Additional Information.
The pro forma statements give effect to the proposed transfer of the assets
and stated liabilities of the Sierra Growth and Income Fund in exchange for
shares of Composite Growth & Income Fund. Under generally accepted
accounting principles, the historical cost of investment securities will be
carried forward to the surviving entity.
The pro forma statements do not reflect the expenses of either fund in
carrying out its obligations under the proposed Agreement and Plan of
Reorganization.
2. Pro Forma Combined Portfolio of Investments
Securities held by the two funds have been combined in the accompanying
Combined Portfolio of Investments. Securities marked "**" are those
securities held by the Composite Fund. Those not marked are held by the
Sierra Fund. Securities are stated at market value as determined by the
Funds as of April 30, 1997. Historical cost amounts represent the combined
cost basis of the securities.
<PAGE>
Composite Growth & Income Fund and Sierra Growth and Income Fund
Notes to Pro Forma Financial Statements (unaudited) (continued)
3. Pro Forma Statements of Assets and Liabilities
Shares outstanding have been adjusted to reflect the conversion of Sierra
shares into Composite shares based upon the net asset value of Composite
shares at April 30, 1997.
4. Pro Forma Statements of Operations
The pro forma statements of operations reflect the following adjustments:
A. A decrease in management fees for Sierra shareholders to reflect the new
fee structure. Fees are based on .625% of average daily net assets up
to $250,000,000 and .50% of average daily net assets over that amount.
B. An elimination of the Sierra fees, now incorporated in the management
fee structure. Shareholder servicing and distribution expenses have
been adjusted to reflect a rate of .25% of average daily net assets.
Other expenses have been adjusted based on an overall estimated expense
ratio of 1.08%.
<PAGE>
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES AT APRIL 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Sierra Growth Composite Growth Pro Forma Pro Forma
and Income Fund & Income Fund Adjustments Combined
--------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value,
(cost $346,407,780,
$192,537,901, and
$53,894,568 $375,883,210 $250,067,148 $625,950,356
Cash, receivables, and
other assets 5,636,256 1,205,373 6,841,629
------------ ------------ ------------
381,519,466 251,272,519 632,791,985
------------ ------------ ------------
LIABILITIES:
Accrued expenses
and other liabilities 37,775,568 1,376,650 39,152,218
------------ ------------ ------------
Total Liabilities 37,775,568 1,376,650 39,152,218
------------ ------------ ------------
Net Assets $343,743,898 $249,895,869 $593,639,767
============ ============ ============
Outstanding Shares
- ------------------
Class A 11,210,122 12,009,817 (2,141,683) 21,078,256
============ ============ ============
Class B 2,465,101 1,925,896 (477,758) 3,913,239
============ ============ ============
Class S 901,377 - (179,060) 722,317
============ ============ ============
Class I 9,111,681 - (1,729,658) 7,382,023
============ ============ ============
Net Asset Value
- ---------------
Class A $162,817,801 $215,533,980 $378,351,781
============ ============ ============
Class B $35,454,192 $34,361,888 $69,816,080
============ ============ ============
Class S $12,964,595 - $12,964,595
============ ============ ============
Class I $132,507,310 - $132,507,310
============ ============ ============
Net Asset Value
Per Share
--------------
Class A $14.52 $17.95 $17.95
============ ============ ============
Class B $14.38 $17.84 $17.84
============ ============ ============
Class S $14.38 - $17.95
============ ============ ============
Class I $14.54 _ $17.95
============ ============ ============
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
THE COMPOSITE FUNDS
Form N-14
PART C
OTHER INFORMATION
Item 15. 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 Composite Funds (the "Registrant")(1).
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 16. Exhibits.
(1) Form of Amended and Restated Agreement and Declaration of Trust dated
as of September 22, 1997(1)
(2) By-Laws(1)
(3) None
(4) Form of Agreement and Plan of Reorganization - filed as Appendix A to
Part A hereof
<PAGE>
(5) (a) Article III (Shares), Article V (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.(1)
(b) Article 10 (Provisions Relating to the Conduct of the Trust's
Business) and Article 11 (Shareholders' Voting Powers and
Meetings) of the By-Laws(1)
(6) (a) Form of Investment Advisory Agreement with Composite Research
& Management Company(1)
(7) (a) Form of Distribution Agreement with Funds Distributor ,
Composite Inc.(1)
(b) Specimen Selling Agreement(1)
(8) None
(9) Form of Custody Agreement with Investors Fiduciary Trust Company(1)
(10) (a) Form of Existing Distribution Plan for Class A shares(1)
(b) Form of Proposed Distribution Plan for Class A shares(1)
(c) Form of Distribution Plan for Class B shares(1)
(d) Form of Distribution Plan for Class S shares(1)
(e) Shareholders Service Contract(1)
(f) Multi-Class Plan adopted pursuant to Rule 18f-3(1)
(11) Opinion and consent of counsel as to legality of securities being
registered is filed herewith
(12) Opinion of counsel as to tax matters -- to be filed by post-effective
amendment
(14) (a) Consent of Price Waterhouse LLP is filed herewith
-2-
<PAGE>
(b) Consent of LeMaster & Daniels PLLC is filed herewith
(15) None
(16) Powers of Attorney for Messrs. Attwood, Murphy, Pavelich, Rockey and
Yancey and Mses. Blake and Farrell and Mr. Papesh are filed herewith
(17) Copy of Registrant's Declaration under Rule 24f-2(1)
- -----------------------------------------------------------
(1) Incorporated by reference to Post-Effective Amendment No. 67 to Composite
Bond & Stock Fund, Inc.'s Registration Statement on Form N-1A (Registration
Nos. 002-10766 and 811-123), filed by Registrant on September 30, 1997
pursuant to Rule 414 under the Securities Act of 1933.
Item 17. Undertakings.
(a) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is
a part of this Registration Statement by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c) under
the Securities Act of 1933, the reoffering prospectus will contain the
information called for by the applicable registration form for the
reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(b) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (a) above will be filed as a part of an amendment to
this Registration Statement and will not be used until the amendment
is effective, and that, in determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed
to be a new Registration Statement for the securities offered therein,
and the offering of the securities at that time shall be deemed to be
the initial bona fide offering of them.
(c) The undersigned Registrant agrees to file, by post-effective
amendment, an opinion of counsel or a copy of an Internal Revenue
Service ruling supporting the tax consequences of the proposed mergers
described in this Registration Statement within a reasonable time
after receipt of such opinion or ruling.
-3-
<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 Spokane in the State of
Washington on the 23rd day of September, 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 September 23, 1997
- --------------------- Trustee
William G. Papesh
/s/ Monte D. Calvin Vice President and
- --------------------- Treasurer September 23, 1997
Monte D. Calvin
WAYNE L. ATTWOOD, M.D.* Trustee September 23, 1997
- -----------------------
Wayne L. Attwood, M.D.
KRISTIANNE BLAKE* Trustee September 23, 1997
- ------------------------
Kristianne Blake
-4-
<PAGE>
ANNE V. FARRELL* Trustee September 23, 1997
- ------------------------
Anne V. Farrell
Trustee
- ------------------------
Michael K. Murphy
DANIEL PAVELICH* Trustee September 23, 1997
- ------------------------
Daniel Pavelich
JAY ROCKEY* Trustee September 23, 1997
- ------------------------
Jay Rockey
RICHARD C. YANCEY* Trustee September 23, 1997
- ------------------------
Richard C. Yancey
*By: /s/ Monte D. Calvin
----------------------------
Monte D. Calvin
Attorney-in-Fact
Pursuant to Power of Attorney filed herewith
-5-
<PAGE>
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Exhibit Name
- ----------- ------------
<S> <C>
11 Opinion and Consent of Counsel regarding legality of securities
being registered
14(a) Consent of Price Waterhouse LLP
14(b) Consent of LeMaster & Daniels PLLC
16 Powers of Attorney
</TABLE>
-6-
<PAGE>
EXHIBIT 11
ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110-2624
(617) 951-7000
FAX: (617) 951-7050
September 30, 1997
The Composite Funds
601 West Main Avenue
Spokane, Washington 99201
Ladies and Gentlemen:
You have informed us that you propose to register under the Securities Act
of 1933, as amended (the "Act"), on Form N-14 and offer and sell shares of
beneficial interest, without par value, of your Composite U.S. Government
Securities Fund, Composite Income Fund, Composite Growth & Income Fund,
Composite Money Market Fund and Composite Tax-Exempt Bond Fund (the "Shares"),
at not less than net asset value.
We have examined an executed copy of your Agreement and Declaration of
Trust dated September 22, 1997 (the "Declaration of Trust"), and certified
copies of resolutions adopted by your trustees to authorize the issue and sale
to the public from time to time of authorized and unissued Shares. We have
further examined a copy of your By-Laws and such other documents and records as
we have deemed necessary for the purpose of this opinion.
Based upon the foregoing, we are of the opinion that the beneficial
interest in each of your series is divided into an unlimited number of Shares
and the issue and sale of the authorized but unissued Shares has been duly
authorized under Massachusetts law. Upon the original issue and sale of any
such authorized but unissued Shares and upon receipt of the authorized
consideration therefor in an amount not less than the applicable net asset
value, the Shares so issued will be validly issued, fully paid and nonassessable
by the Trust.
The Composite Funds (the "Trust") is an entity of the type commonly known
as a "Massachusetts business trust." Under Massachusetts law, shareholders
could, under certain circumstances, be held personally liable for the
obligations of the Trust. However, the Declaration of Trust disclaims
shareholder liability for acts or obligations of the Trust and requires that
notice of such disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Trust or its trustees. The Declaration of Trust
provides for
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The Composite Funds -2- September 30, 1997
indemnification out of the property of each series of the Trust (the "Series")
for all loss and expense of any shareholder of the Series held personally liable
solely by reason of his or her being or having been such a shareholder. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Series itself would be unable
to meet its obligations.
We understand that this opinion is to be used in connection with the
registration of an indefinite number of shares for offering and sale pursuant to
the Act. We consent to the filing of this opinion with and as part of your
Registration Statement on Form N-14 relating to such offering and sale.
Very truly yours,
Ropes & Gray
<PAGE>
EXHIBIT 14(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus/Proxy
Statement and Statement of Additional Information constituting parts of this
registration statement on Form N-14 (the "Registration Statement") of our re-
port dated August 12, 1997, relating to the financial statements and financial
highlights of U.S. Government Fund, Corporate Income Fund, Growth and Income
Fund, Global Money Fund, U.S. Government Money Fund and National Municipal
Fund, each a portfolio constituting part of Sierra Trust Funds, which are also
incorporated by reference in the Registration Statement. We also consent the
reference to us under the heading "Prospectus/Proxy Statement" in such Regis-
tration Statement.
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 29, 1997
<PAGE>
EXHIBIT 14(b)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference of our reports dated January
24, 1997, relating to the financial statements and financial highlights
appearing in the Annual Reports to Shareholders dated December 31, 1996 of
Composite U.S. Government Securities, Inc., Composite Income Fund, Inc.,
Composite Cash Management Company: Money Market Portfolio, and Composite
Tax-Exempt Bond Fund, Inc., and our report dated November 20, 1996, relating to
the financial statements and financial highlights appearing in the annual report
to shareholders dated October 31, 1996 of Composite Growth & Income Fund, into
the registration statement on Form N-14 of The Composite Funds relating to the
issuance of shares of the Composite U.S. Government Securities Fund, the
Composite Income Fund, the Composite Money Market Fund, the Composite Tax-Exempt
Fund, and the Composite Growth & Income Fund (the "Funds"), series of The
Composite Funds, in connection with the acquisition of assets of the U.S.
Government Fund, the Corporate Income Fund, and the Global Money Fund, the U.S.
Government Government Money Fund, the National Municipal Fund, and the Growth
and Income Fund, series of the Sierra Trust Funds. We also consent to the
references to our Firm under the heading "Financial Highlights" in the
Prospectus and under the heading "Independent Public Accountants" in the
Statements of Additional Information of the Funds dated April 30, 1997 or
February 28, 1997, as the case may be, as subsequently revised and supplemented,
each of which is also incorporated by reference into such registration statement
on Form N-14 of The Composite Funds.
LeMASTER & DANIELS, PLLC
Spokane, Washington
September 25, 1997
<PAGE>
EXHIBIT 16
POWER OF ATTORNEY
We, the undersigned Trustees of the The Composite Funds (the "Trust"),
hereby severally constitute and appoint William G. Papesh, Monte D. Calvin and
John T. West, and each of them singly, our true and lawful attorneys, with full
power to them and each of them, to sign for us, and in our name and in the
capacities indicated below, the Registration Statement on Form N-14 of the Trust
and any and all amendments (including post-effective amendments) to said
Registration Statement and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
with the securities commissioner of any state, or with other regulatory
authorities, granting unto them, and each of them acting alone, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in the premises, as fully to all intents and purposes as he or she
might or could do in person, and hereby ratify and confirm all that said
attorneys or any of them may lawfully do or cause to be done by virtue thereof.
WITNESS my hand on the date set forth below.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Wayne L. Attwood
- ---------------------------- Trustee September 23, 1997
Wayne L. Attwood, M.D.
/s/ Kristianne Blake
- ---------------------------- Trustee September 23, 1997
Kristianne Blake
/s/ Anne V. Farrell
- ---------------------------- Trustee September 23, 1997
Anne V. Farrell
- ---------------------------- Trustee September __, 1997
Michael K. Murphy
/s/ Daniel L. Pavelich
- ---------------------------- Trustee September 23, 1997
Daniel L. Pavelich
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Jay Rockey
- ---------------------------- Trustee September 23, 1997
Jay Rockey
/s/ Richard C. Yancey
- ---------------------------- Trustee September 23, 1997
Richard C. Yancey
</TABLE>
-2-
<PAGE>
POWER OF ATTORNEY
I, the undersigned President and Trustee of The Composite Funds (the
"Trust"), hereby severally constitute and appoint Monte D. Calvin and John T.
West, and each of them singly, my true and lawful attorneys, with full power to
them and each of them, to sign for me, and in my name and in the capacities
indicated below, the Registration Statement on Form N-14 of the Trust and any
and all amendments (including post-effective amendments) to said Registration
Statement and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, with the
securities commissioner of any state, or with other regulatory authorities,
granting unto them, and each of them acting alone, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
the premises, as fully to all intents and purposes as he or she might or could
do in person, and hereby ratify and confirm all that said attorneys or any of
them may lawfully do or cause to be done by virtue thereof.
WITNESS my hand on the date set forth below.
Signature Title Date
--------- ----- ----
/s/ William G. Papesh
- ------------------------- President and Trustee September 23, 1997
William G. Papesh
-3-
